<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to _____________
Commission file number 0-17137
D&N FINANCIAL CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-2790646
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Quincy Street, Hancock, Michigan 49930
-------------------------------------------------------
(Address of principal executive offices)
(906) 482-2700
-------------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $0.01 par value 6,740,967
----------------------------- --------------------
(Class) (Shares Outstanding
as of November 3, 1995)
</TABLE>
================================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
Page No.
<TABLE>
<CAPTION>
PART I Financial Information
<S> <C> <C>
Consolidated statements of condition -
September 30, 1995 and December 31, 1994 3
Consolidated statements of income -
three months ended September 30, 1995 and 1994
nine months ended September 30, 1995 and 1994 4
Consolidated statements of cash flows -
nine months ended September 30, 1995 and 1994 5
Notes to consolidated financial statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II Other Information 17
</TABLE>
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<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------------------
(In thousands )
----------------------------
ASSETS
- - ------
<S> <C> <C>
Cash and due from banks $ 2,950 $ 9,174
Interest-bearing deposits in other banks 3,703 18,950
------------------------
Total cash and cash equivalents 6,653 28,124
Investment securities (market value of
$57,194,000 in 1995 and $19,775,000 in 1994) 57,001 19,775
Investment securities available for sale
(at market value) 35,601 61,536
Mortgage-backed securities (market value of
$73,085,000 in 1995 and $77,153,000 in 1994) 72,510 79,616
Mortgage-backed securities available for
sale (at market value) 59,045 67,030
Loans receivable (including loans held
for sale of $10,322,000 in 1995) 917,032 809,447
Allowance for loan losses (9,200) (8,199)
------------------------
Net loans receivable 907,832 801,248
Other real estate owned, net 1,127 6,190
Federal income taxes 3,580 4,505
Office properties and equipment, net 14,450 14,223
Excess of cost over net assets of
association acquired 83 384
Other assets 7,304 6,062
------------------------
$1,165,186 $1,088,693
========================
LIABILITIES
- - -----------
Checking and NOW accounts $ 84,914 $ 91,484
Money market accounts 82,372 94,543
Savings deposits 138,754 125,399
Time deposits 530,376 471,392
Accrued interest 1,372 1,257
------------------------
Total deposits 837,788 784,075
Securities sold under agreements
to repurchase 41,346 28,627
FHLB advances and other borrowed money 207,487 198,230
Advance payments by borrowers and
investors held in escrow 10,587 15,288
Other liabilities 5,908 9,850
------------------------
Total liabilities 1,103,116 1,036,070
STOCKHOLDERS' EQUITY
- - --------------------
Preferred stock (1,000,000 shares
authorized; none issued) -- --
Common stock, $.01 par value per share (shares
authorized - 10,000,000; shares outstanding -
6,750,521 in 1995 and 6,742,329 in 1994) 68 67
Additional paid-in capital 48,001 47,987
------------------------
Total paid-in capital 48,069 48,054
Retained earnings - substantially restricted 12,762 5,906
Less cost of treasury stock (21,456 shares
in 1995 and 1994) (213) (213)
Unrealized holding gains (losses) on debt
securities available for sale, less tax
effect 1,452 (1,124)
------------------------
Total stockholders' equity 62,070 52,623
------------------------
$1,165,186 $1,088,693
========================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------------------------------------
(In thousands except per share)
---------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 18,195 $ 14,746 $ 51,718 $ 41,162
Mortgage-backed securities 2,508 1,746 7,893 4,997
Investments and deposits 1,702 1,042 5,070 3,669
---------------------------------------------------
TOTAL INTEREST INCOME 22,405 17,534 64,681 49,828
Interest expense:
Deposits 9,739 6,992 26,524 20,957
Securities sold under agreements
to repurchase 206 149 1,204 442
FHLB advances and other borrowed money 3,700 2,022 10,200 4,762
Interest rate instruments 212 2,304 2,421 8,313
---------------------------------------------------
TOTAL INTEREST EXPENSE 13,857 11,467 40,349 34,474
---------------------------------------------------
NET INTEREST INCOME 8,548 6,067 24,332 15,354
Provision for loan losses 500 -- 1,500 --
---------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,048 6,067 22,832 15,354
Noninterest income:
Loan servicing and administrative fees, net 598 611 1,607 1,708
Deposit related fees 818 900 2,310 2,271
Gain on loans held for sale 571 2 583 230
Other income 43 642 132 1,166
---------------------------------------------------
2,030 2,155 4,632 5,375
Gain (loss) on investment securities -- -- ( 120) --
Gain on loans and mortgage-backed securities -- 34 899 843
Gain on sale of loan servicing rights -- 140 -- 140
---------------------------------------------------
TOTAL NONINTEREST INCOME 2,030 2,329 5,411 6,358
Noninterest expense:
Compensation and benefits 3,407 3,545 10,886 10,459
Occupancy 567 480 1,602 1,469
Other expense 2,691 2,404 7,575 7,459
---------------------------------------------------
General and administrative expense 6,665 6,429 20,063 19,387
Other real estate owned, net ( 239) ( 128) ( 704) ( 2,138)
Amortization of intangibles 77 151 290 326
Federal deposit insurance premiums 579 616 1,738 1,947
---------------------------------------------------
TOTAL NONINTEREST EXPENSE 7,082 7,068 21,387 19,522
---------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,996 1,328 6,856 2,190
Federal income tax expense -- -- -- --
---------------------------------------------------
NET INCOME $ 2,996 $ 1,328 $ 6,856 $ 2,190
===================================================
Earnings per share:
PRIMARY $ 0.45 $ 0.20 $ 1.02 $ 0.33
===================================================
FULLY DILUTED $ 0.41 $ 0.20 $ 0.96 $ 0.33
===================================================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
--------------------------
(In thousands)
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,856 $ 2,190
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,500 --
Depreciation and amortization of
office properties and equipment 1,348 1,383
Amortization of net premiums (discounts) on
purchased loans and securities (2,676) 71
Originations and purchases of loans held for sale (52,966) (15,432)
Proceeds from sales of loans held for sale 44,041 43,691
Loss on investment securities 120 --
Gain on sale of loans and mortgage-backed securities (899) (843)
Gain on sale of loan servicing rights -- (140)
Amortization and writedowns of loan servicing rights 207 1,680
Other (5,504) 7,326
-----------------------
Net cash provided (used) by operating activities (7,973) 39,926
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 10,070 --
Proceeds from maturities of investment
securities 22,000 138,024
Purchases of investment securities (42,658) (101,736)
Proceeds from sales of mortgage-backed securities
available for sale 4,477 51,502
Principal collected on mortgage-backed securities 13,519 33,278
Mortgage-backed securities purchased -- (28,913)
Proceeds from sales of loans 35,218 --
Loans purchased (78,130) (165,089)
Net change in loans receivable (52,206) (27,361)
Decrease in other real estate owned 5,063 6,411
Sales of loan servicing rights -- 140
Purchases of office properties and equipment (1,559) (515)
-----------------------
Net cash used by investing activities (84,206) (94,259)
FINANCING ACTIVITIES
Net change in time deposits 58,984 (14,279)
Net change in other deposits (5,385) (18,382)
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 795,982 441,213
Payments on maturity of notes payable, securities
sold under agreements to repurchase and other
borrowed money (774,187) (346,179)
Net change in advance payments by borrowers
and investors held in escrow (4,701) (39,359)
Proceeds from issuance of stock 59 9
Purchase of stock warrants (44) --
------------------------
Net cash provided by financing activities 70,708 23,023
------------------------
Decrease in cash and cash equivalents (21,471) (31,310)
Cash and cash equivalents at beginning of period 28,124 79,508
------------------------
Cash and cash equivalents at end of period $ 6,653 $ 48,198
========================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
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
the three and nine month periods ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the full year.
NOTE 2: EARNINGS PER SHARE
Per share data is based on the weighted average number of shares outstanding
for the periods presented. The weighted average number of common and common
equivalent shares used in computing primary earnings per share was 6,724,687
and 6,720,152 for the three months ended September 30, 1995 and September 30,
1994, respectively, and 6,722,514 and 6,719,753 for the nine months ended
September 30, 1995 and September 30, 1994, respectively. The weighted average
number of common and common equivalent shares used in computing fully diluted
earnings per share was 7,180,733 and 6,720,152 for the three months ended
September 30, 1995 and September 30, 1994, respectively, and 7,178,560 and
6,719,753 for the nine months ended September 30, 1995 and September 30, 1994,
respectively.
NOTE 3: ALLOWANCE FOR LOAN LOSSES
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from specific assets that
have been identified as having greater than a normal risk of loss as well as
losses from the remainder of the portfolio. Management's determination of the
adequacy of the allowance is based upon evaluation of the portfolio, past
experience, current economic conditions, size and composition of the portfolio,
collateral location and values, cash flow positions, industry concentrations,
delinquencies, and other relevant factors. The allowance is increased by a
provision for losses charged against income.
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<PAGE> 7
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------- ------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 8,902 $ 9,931 $ 8,199 $ 11,420
Charge-offs:
Single family 49 32 145 104
Income producing property -- 1,665 225 2,910
Installment 242 207 666 580
--------------------- -----------------------
Total 291 1,904 1,036 3,594
Recoveries:
Single family -- -- 2 9
Income producing property -- -- 245 --
Installment 89 78 290 270
--------------------- -----------------------
Total 89 78 537 279
--------------------- -----------------------
Net charge-offs 202 1,826 499 3,315
Provision charged to operations 500 -- 1,500 --
--------------------- -----------------------
Balance at end of period $ 9,200 $ 8,105 $ 9,200 $ 8,105
===================== =======================
</TABLE>
NOTE 4: FEDERAL INCOME TAXES
The liability method is used in accounting for federal income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
No federal income tax expense was recorded in any of the reporting periods as
the Company offset taxes ordinarily payable by a realization, through a
reduction in the valuation allowance previously provided, of prior years' net
operating loss carryforwards.
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights". SFAS 122 requires that the rights
to service mortgage loans, however those servicing rights are acquired, be
recognized as separate assets. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should 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 to be
assessed for impairment based on the fair value of those rights.
- 7 -
<PAGE> 8
SFAS 122 applies prospectively in fiscal years beginning after December 15,
1995 with earlier application encouraged. The Company adopted SFAS 122 as of
July 1, 1995. The effect of adopting SFAS 122 was to increase net income for
the three months and nine months ended September 30, 1995 by $458,000 or $.07
per share ($.06 per fully diluted share).
NOTE 6: RECLASSIFICATIONS
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform with the current period presentation.
- 8 -
<PAGE> 9
D&N FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding
D&N Financial Corporation's (D&N or the Company) financial condition and
results of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994. Ratios for the three-month and nine-month periods
are stated on an annualized basis. Results of operations for the 1995 periods
are not necessarily indicative of results which may be expected for the entire
year. This discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-Q.
RESULTS OF OPERATIONS
NET INCOME
The Company recorded net income for the third quarter ended September
30, 1995 of $3.0 million, compared to net income of $1.3 million in the third
quarter of 1994. Return on assets and return on equity were 1.04% and 19.97%,
respectively, during the quarter ended September 30, 1995, compared to 0.51%
and 10.13%, respectively, during the quarter ended September 30, 1994. The
increase in net income was due primarily to an increase in net interest income
reduced somewhat by an increase in the provision for loan losses and lower
gains on sales of assets.
For the nine months ended September 30, 1995, the Company recorded net
income of $6.9 million, compared to net income of $2.2 million for the nine
months ended September 30, 1994. Return on assets and return on equity were
0.82% and 15.93%, respectively, during the nine months ended September 30,
1995, compared to 0.28% and 5.77%, respectively, during the nine months ended
September 30, 1994. The increase in net income was due to an increase in net
interest income reduced somewhat by decreases in gains on sales of assets and
gains on sales of other real estate owned and increases in the provision for
loan losses and operating expenses.
NET INTEREST INCOME
Net interest income, or the difference between interest earned on
interest earning assets such as loans and investment securities and interest
paid on sources of funds such as deposits and borrowings, is a significant
component of the Company's earnings. Net interest income is affected by
changes in both the balance of and the rates on interest earning assets and
interest bearing liabilities and the amount of interest earning assets funded
with non-interest or low-interest bearing funds.
- 9 -
<PAGE> 10
Net interest income increased $2.5 million to $8.5 million for the
quarter ended September 30, 1995 compared to $6.0 million for the quarter ended
September 30, 1994. The increase was due to increased volume and improved
yields on variable rate and short lived assets and to lower net expense on the
Company's interest rate exchange agreements due to maturities and repricing,
partially offset by increases in interest paid on FHLB advances and deposits
due to higher volumes and general increases in market interest rates.
Similarly, net interest income increased $9.0 million to $24.3 million
for the nine months ended September 30, 1995 from $15.3 million for the nine
months ended September 30, 1994. The same factors that explained the third
quarter comparison were present during the year-to-date comparative periods.
In recent years, the Company experienced a significant decrease in
earnings on loans receivable as rate sensitive portions of the portfolio
repriced at lower interest levels, as several commercial real estate loans
reached a nonperforming status and were transferred to other real estate owned,
and as commercial real estate lending was temporarily curtailed. Additionally,
the Company realized lower earnings on its portfolio of mortgage derivative
products due to lower balances, attributed to sales and amortization, plus
lower yields compared to prior years. To varying degrees, offsetting these
factors was a reduction in interest bearing liabilities as the Company,
consistent with plans to shrink its balance sheet and increase its capital
ratios, experienced deposit outflows and reduced its reliance on wholesale
borrowings. More recently, after raising additional capital in December 1993
and due to an increase in market interest rates, the Company has begun to
increase its net interest earning assets and to realize increased net yields.
In addition, the Company has incurred significantly lower interest expense on
interest rate instruments as $157 million notional amount of these instruments
have matured since January 1, 1994, with the remaining $17 million scheduled to
mature during the fourth quarter of 1995. The result of these factors is that
net interest margin has steadily improved during recent quarters. Net interest
margin was 3.06% for the third quarter of 1995, compared to 2.48% for the third
quarter of 1994. For the first nine months of 1995, net interest margin was
3.05%, compared to 2.10% for the first nine months of 1994.
PROVISION FOR LOAN LOSSES
A provision for loan losses is charged to income based on the size and
quality of the loan portfolio measured against prevailing economic conditions.
This process is accomplished through a formal review analysis. The provision
is recorded in sufficient amounts to maintain the allowance for possible loan
losses at a level in excess of that expected by management to be required to
cover specific exposures in the portfolio.
- 10 -
<PAGE> 11
In light of the significant growth of the loan portfolio the Company
recorded a $500,000 provision for loan losses during the quarter ended
September 30, 1995 and $1.5 million during the nine months ended September 30,
1995. No provision for loan losses was recorded during either the three months
or the nine months ended September 30, 1994.
NONINTEREST INCOME
Total noninterest income decreased to $2.0 million during the quarter
ended September 30, 1995, from $2.3 million recorded in the third quarter of
1994. As discussed in Note 5 of Notes to Consolidated Financial Statements,
the adoption of SFAS 122 resulted in an increase in noninterest income of
$458,000 during the current year quarter. Offsetting this increase was the
fact that, during the prior year quarter, the Company sold its investment in a
residential real estate development joint venture and realized a gain of
$662,000. Additionally, during the prior year quarter, the Company sold most
of its portfolio of purchased mortgage servicing rights (PMSRs) which resulted
in a gain of $140,000.
Total noninterest income decreased to $5.4 million during the nine
months ended September 30, 1995, from $6.4 million recorded during the nine
months ended September 30, 1994. In addition to the items described in the
quarterly comparison, the Company also realized lower gains on sales of loans
and securities and a decrease in other income. Other income decreased as the
prior year period included realization of income from transactions on which
income had been previously deferred.
NONINTEREST EXPENSE
Total noninterest expense incurred during the quarter ended September
30, 1995 was largely unchanged from that recorded during the quarter ended
September 30, 1994, $7.1 million during both periods. Compensation and
benefits decreased due to an adjustment in accounting for post-retirement
medical benefits, and the net cost of other real estate owned (OREO) decreased
due to the sale of two commercial OREO properties during the quarter.
Offsetting the decreases were normal anticipated increases in occupancy and
other general and administrative expenses.
Total noninterest expense increased $1.9 million to $21.4 million
during the nine months ended September 30, 1995, compared to $19.5 million
during the nine months ended September 30, 1994. The most significant factor
was a decrease of $1.4 million in net gains from OREO as several more
commercial OREO properties were
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<PAGE> 12
disposed of in the prior year period compared to the current year-to-date
period. Additionally, general and administrative expense increased $676,000
due to general salary and wage increases and increased marketing efforts. A
reduction of $209,000 in noninterest expense was realized from a reduction in
the Company's federal deposit insurance assessment rate.
FEDERAL INCOME TAX EXPENSE
No federal income tax expense was recorded in any of the reporting
periods as the Company had significant tax basis net operating loss
carryforwards.
FINANCIAL CONDITION
Total assets at September 30, 1995 were $1.17 billion, an increase of
$76.5 million from December 31, 1994. Earning assets represented approximately
97% of total assets as of September 30, 1995, substantially the same as at
year-end 1994.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $99.3 million at
September 30, 1995, down $10.2 million from December 31, 1994. During the
period, a significant portion of the Company's liquidity portfolio was used to
partially fund loan demand.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities decreased $15.1 million from year-end 1994
to $131.6 million at September 30, 1995. The decrease was due primarily to
repayments of $13.5 million partially offset by an increase of $2.6 million in
market value recognized through stockholders' equity on mortgage-backed
securities available for sale. Additionally, $4.5 million of low-yielding
mortgage-backed securities were sold from the available-for-sale portfolio and
replaced with higher yielding government-backed securities.
NET LOANS RECEIVABLE
Net loans receivable increased $106.6 million during the period to
$907.8 million at September 30, 1995. Loan originations of $290.4 million and
purchases of $78.1 million exceeded repayments of $183.9 million and sales of
$78.2 million. Loan originations during the nine months ended September 30,
1995 were up compared to to the first nine months of 1994. Consumer loan
originations were $148.7 million compared to $100.4 million, while real estate
and commercial loan originations were $141.7 million compared to $83.8 million.
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<PAGE> 13
NONPERFORMING ASSETS AND RISK ELEMENTS
The following table sets forth the amounts and categories of risk
elements in the Company's loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 14,200 $ 17,995
Accruing loans delinquent more
than 90 days -- --
Restructured loans -- --
--------------------
Total nonperforming loans 14,200 17,995
Other real estate owned (OREO) 1,360 6,520
--------------------
Total nonperforming assets $ 15,560 $ 24,515
===================
Nonperforming loans as a
percentage of total loans 1.55% 2.22%
==================
Nonperforming assets as a
percentage of total assets 1.34% 2.25%
==================
Allowance for loan losses as a
percentage of nonperforming loans 64.79% 45.56%
==================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 60.62% 34.79%
==================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses,
decreased $9.0 million during the period due primarily to the sale of three
repossessed commercial real estate properties and as several residential and
commercial real estate loans either made principal payments or paid off.
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<PAGE> 14
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's investment in MSRs increased during the period to $1.2
million at September 30, 1995. As discussed earlier, the Company adopted SFAS
122, effective July 1, 1995, which allowed the Company to capitalize as
separate assets $458,000 of originated mortgage servcing rights (OMSRs). At
September 30, 1995, the Company also had $759,000 of PMSRs. The following
table details activity in the portfolio for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended December 31,
September 30, 1995 1994
---------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 968 $ 9,870
Additions:
Capitalized servicing 458 --
Purchases -- --
Reductions:
Scheduled amortization 106 1,315
Additional amoritzation due
to changes in prepayment
assumptions 58 421
Impairment 43 --
Sales -- 7,148
Transfers to loan portfolio
under recourse and other
provisions 2 18
--------- ---------
Total 209 8,902
--------- ---------
Balance at end of period $ 1,217 $ 968
========= =========
Fair market value at end of period $ 1,227 $ 912
========= =========
</TABLE>
DEPOSITS
Deposits increased $53.7 million during the period to $837.8 million at
September 30, 1995. An increase of $59.1 million in certificates of deposit
plus an increase of $13.4 million in regular savings accounts exceeded
decreases of $6.6 million in checking accounts and $12.2 million in money
market accounts. The Company's cost of deposits increased to 4.75% at
September 30, 1995, compared to 3.96% at December 31, 1994, as result of a
general increase in market rates of interest.
BORROWINGS
Total borrowings increased $22.0 million during the period to $248.8
million at September 30, 1995 in order to fund anticpated loan demand. The
Company's cost of borrowings was 6.11% at September 30, 1995, compared to 6.35%
at December 31, 1994.
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<PAGE> 15
CAPITAL
According to federal regulations, the Bank must meet certain minimum
capital ratios. As the following table indicates, the Bank's capital ratios at
September 30, 1995 exceeded these requirements.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
--------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual capital $ 58,755 $ 58,755 $ 67,510
Required capital 17,662 35,324 55,998
--------- --------- ---------
Excess capital $ 41,093 $ 23,431 $ 11,512
========= ========= =========
Actual ratio 4.99% 4.99% 9.64%
========= ========= =========
Required ratio 1.50% 3.00% 8.00%
========= ========= =========
</TABLE>
Consolidated stockholders' equity was $62.1 million at September 30,
1995 and represents 5.33% of consolidated assets.
LIQUIDITY
Liquidity is the ability to meet financial obligations when due.
Regulatory authorities require that thrift institutions maintain liquidity
consisting of cash, short-term U. S. Government Securities and other specified
assets, equal to at least 5% of net withdrawable accounts and borrowings
payable in one year or less. At September 30, 1995, the Bank's average
liquidity ratio was 6.11%. At September 30, 1995, unused borrowing capacity as
measured by the Bank's inventory of readily available but unpledged collateral
was approximately $205 million. The Company considers its current liquidity
and other funding sources sufficient to fund its outstanding loan commitments
and scheduled liability maturities.
REGULATORY ISSUES
Deposits of savings institutions such as the Bank are presently
insured by the SAIF, which along with the BIF, is one of the two insurance
funds administered by the FDIC. Financial institutions which are members of
the BIF are likely to experience lower deposit insurance premiums in the future
because the BIF has higher reserves and is expected to be responsible for fewer
troubled institutions than the SAIF. As a result of the BIF achieving its
statutory reserve ratio, the FDIC has proposed that the premium schedule for
BIF members be revised to provide a range of .04% to .31% of insured deposits
(as compared to the current
- 15 -
<PAGE> 16
range of .23% to .31% of insured deposits for BIF and SAIF-insured
institutions), so that well capitalized and healthy BIF members would pay the
lowest premiums. It is not anticipated that SAIF will be adequately
recapitalized until 2002, absent a substantial increase in premium rates or the
imposition of special assessments or other significant developments, such as a
merger of the SAIF and the BIF. As a result of this disparity, SAIF members
could be placed at a significant, competitive disadvantage to BIF members with
respect to pricing of loans and deposits and the ability to achieve lower
operating costs. A recapitalization plan under consideration by the Treasury
Department, the FDIC, the OTS and the Congress reportedly provides for a
special assessment of .85% to .90% to be imposed on all SAIF insured deposits
to eliminate the disparity. No assurance can be given, however, as to whether
the FDIC's proposal or a recapitalization plan will be implemented or as to the
nature or extent of any competitive disadvantage which may be experienced by
SAIF-member institutions.
- 16 -
<PAGE> 17
D&N FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 13, 1995, the Company announced that it
had signed a definitive agreement in its previously-
announced acquisition of Macomb Federal Savings Bank of St.
Clair Shores, Michigan. The transaction will take the form
of a stock swap valued at $48 per share of Macomb Federal
common stock. At June 30, 1995, Macomb had equity capital
of $6.09 million and 186,604 common shares outstanding.
The transaction will be accounted for as a pooling of
interests. The merger is expected to be completed in the
first half of 1996, subject to regulatory and shareholder
approvals. At September 30, 1995, Macomb had $42.0 million
in assets and $34.5 million in deposits.
- 17 -
<PAGE> 18
D&N FINANCIAL CORPORATION
PART II - OTHER INFORMATION - CONTINUED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement re: computation of per share
earnings
(27) Financial Data Schedule
(99) Additional exhibits
i. Interest rate/volume analysis:
quarter ended 9/30/95 vs.
quarter ended 9/30/94 and
nine months ended 9/30/95 vs.
nine months ended 9/30/94
ii. Loan portfolio risk elements
iii. Interest rate exchange agreement
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the
quarter ended September 30, 1995.
- 18 -
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
D&N FINANCIAL CORPORATION
/s/ George J. Butvilas
--------------------------------
George J. Butvilas, President and
Chief Executive Officer
/s/ Kenneth R. Janson
----------------------------------
Kenneth R. Janson,
Executive Vice President/Chief
Financial Officer and Treasurer
Date: November 10, 1995
--------------------
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
No.
- - ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
11 Statement re: Computation of per share earnings
99i Interest rate/volume analysis:
quarter ended 9/30/95 vs. quarter ended 9/30/94 and nine
months ended 9/30/95 vs. nine months ended 9/30/94
99ii Loan portfolio risk elements
99iii Interest rate exchange agreement
</TABLE>
<PAGE> 1
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1995 1994
---------------- ----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income $2,996 $2,996 $1,328 $1,328
====== ====== ====== ======
Average shares
Common 6,725 6,725 6,720 6,720
Common equivalents 144 456 113 113
------ ------ ------ ------
Total 6,869 7,181 6,833 6,833
====== ====== ====== ======
Earnings per common share $ 0.44 $ 0.41 $ 0.19 $ 0.19
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1995 1994
------------------ ----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income $6,856 $6,856 $2,190 $2,190
====== ====== ====== ======
Average shares
Common 6,722 6,722 6,720 6,720
Common equivalents 144 456 20 113
------ ------ ------ ------
Total 6,866 7,178 6,740 6,833
====== ====== ====== ======
Earnings per common share $ 1.00 $ 0.96 $ 0.33 $ 0.32
====== ====== ====== ======
</TABLE>
Common share equivalents assume exercise of stock options and warrants, if
dilutive.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,950
<INT-BEARING-DEPOSITS> 3,703
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,646
<INVESTMENTS-CARRYING> 129,511
<INVESTMENTS-MARKET> 130,279
<LOANS> 917,032
<ALLOWANCE> 9,200
<TOTAL-ASSETS> 1,165,186
<DEPOSITS> 837,788
<SHORT-TERM> 41,346
<LIABILITIES-OTHER> 16,495
<LONG-TERM> 207,487
<COMMON> 48,069
0
0
<OTHER-SE> 14,001
<TOTAL-LIABILITIES-AND-EQUITY> 1,165,186
<INTEREST-LOAN> 18,195
<INTEREST-INVEST> 4,210
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,405
<INTEREST-DEPOSIT> 9,739
<INTEREST-EXPENSE> 13,857
<INTEREST-INCOME-NET> 8,548
<LOAN-LOSSES> 500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,082
<INCOME-PRETAX> 2,996
<INCOME-PRE-EXTRAORDINARY> 2,996
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,996
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 3.06
<LOANS-NON> 14,200
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,353
<ALLOWANCE-OPEN> 8,902
<CHARGE-OFFS> 291
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 9,200
<ALLOWANCE-DOMESTIC> 9,200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT (99)i.
INTEREST RATE/VOLUME ANALYSIS
QUARTER AND NINE MONTHS ENDED 9/30/95 VS. 9/30/94
<TABLE>
<CAPTION>
Average Balance Average Rate Interest Variance due to:
-------------------- ----------------- ----------------------------- ----------------
Increase
Quarter ended 09/30/95 09/30/94 09/30/95 09/30/94 09/30/95 09/30/94 (Decrease) Volume Rate
- - ----------------------------- ---------- -------- -------- -------- -------- -------- ---------- -------- ------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 898,322 $782,227 8.07% 7.53% $18,195 $14,746 $3,449 $2,322 $1,127
Mortgage-backed securities 133,080 111,818 7.54% 6.25% 2,508 1,746 762 365 397
Investments 95,534 93,040 7.07% 4.44% 1,702 1,042 660 29 631
---------- -------- ------ ------ ------ ------- ------ ------ ------
1,126,937 987,085 7.93% 7.09% 22,405 17,534 4,871 2,716 2,155
---------- -------- ------ ------ ------ ------- ------ ------ ------
Interest-bearing liabilities:
Deposits 827,250 779,645 4.67% 3.56% 9,739 6,992 2,747 449 2,298
Borrowings
Securities sold w/repo 13,413 12,521 6.07% 4.72% 206 149 571 11 46
Notes payable 224,699 134,367 5.97% 4.93% 3,428 1,694 1,734 1,321 413
Other borrowed money 11,214 13,553 9.70% 9.68% 272 328 (56) (57) 1
---------- -------- ------ ------ ------ ------- ----- ----- ------
Subtotal - Borrowings 249,326 160,442 6.14% 5.32% 3,906 2,171 1,735 1,276 459
Interest rate instruments n/a n/a 0.08% 0.99% 212 2,304 (2,092) 0 (2,092)
---------- -------- ------ ------ ------ ------- ----- ------ ------
1,076,576 940,087 5.09% 4.85% 13,857 11,467 2,390 1,725 665
---------- -------- ------ ------ ------ ------- ----- ------ ------
Interest rate spread 2.84% 2.25%
Excess average earning assets $ 50,361 $ 46,998
========== ========
Net interest margin 3.06% 2.48% $ 8,548 $ 6,067 $2,481 $ 991 $1,490
======= ====== ====== ====== ======
Net interest margin w/o swaps 3.14% 3.42%
===== ======
<CAPTION>
Average Balance Average Rate Interest Variance due to:
-------------------- ----------------- ----------------------------- ----------------
Increase
Year to date 09/30/95 09/30/94 09/30/95 09/30/94 09/30/95 09/30/94 (Decrease) Volume Rate
- - ----------------------------- ---------- -------- -------- -------- -------- -------- ---------- -------- ------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 853,560 $732,820 8.07% 7.49% $51,718 $41,162 $10,556 $7,183 $3,373
Mortgage-backed securities 138,915 128,340 7.58% 5.19% 7,893 4,997 2,896 441 2,455
Investments 100,310 116,822 6.76% 4.20% 5,070 3,669 1,401 (578) 1,979
---------- -------- ------ ------ ------- ------- ------- ------ ------
1,092,785 977,982 7.89% 6.80% 64,681 49,828 14,853 7,045 7,808
---------- -------- ------ ------ ------- ------- ------- ------ ------
Interest-bearing liabilities:
Deposits 803,149 791,756 4.42% 3.54% 26,524 20,957 5,567 306 5,261
Borrowings
Securities sold w/repo 27,627 14,248 5.82% 4.15% 1,204 442 762 533 229
Notes payable 202,014 109,585 6.10% 4.34% 9,343 3,606 5,737 3,875 1,862
Other borrowed money 11,499 14,852 9.94% 10.38% 857 1,156 (299) (252) (47)
---------- -------- ------ ------ -------- ------- ------ ------- -------
Subtotal - Borrowings 241,139 138,685 6.25% 4.97% 11,404 5,204 6,200 4,157 2,043
Interest rate instruments n/a n/a 0.23% 1.19% 2,421 8,313 (5,892) (0) ( 5,892)
---------- -------- ------ ------ -------- ------- ------ ------- ------
1,044,289 930,440 5.07% 4.94% 40,349 34,474 5,875 4,462 1,413
---------- -------- ------ ------ -------- ------- ------ ------- ------
Interest rate spread 2.82% 1.86%
Excess average earning assets $ 48,496 $ 47,542
========== ========
Net interest margin 3.05% 2.10% $24,332 $15,354 $8,978 $2,583 $6,395
======= ======= ====== ====== ======
Net interest margin w/o swaps 3.27% 3.23%
====== ======
</TABLE>
<PAGE> 1
EXHIBIT (99)ii.
LOAN PORTFOLIO RISK ELEMENTS
The table below sets forth the amounts and categories of risk
elements in the Company's loan portfolio. Loans are placed on
nonaccrual status when the collection of principal and/or interest
becomes doubtful. In addition, residential mortgage loans and
income-producing property loans are placed on nonaccrual status when
the loan becomes 90 days or more contractually delinquent.
All consumer loans more than 90 days delinquent are charged against the
consumer loan allowance for loan losses. Prior to 1992, accruing loans
delinquent more than 90 days were loans that the Company considered
to be well secured and that were in the process of collection.
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------------------
1995 1994 1993 1992 1991
--------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $14,200 $17,995 $30,079 $44,537 $51,953
Accruing loans delinquent
more than 90 days -- -- -- -- 1,160
Restructured loans -- -- 166 167 2,339
-----------------------------------------------------
Total nonperforming loans 14,200 17,995 30,245 44,704 55,452
Other real estate owned (OREO) 1,360 6,520 13,312 11,186 11,499
-----------------------------------------------------
Total nonperforming assets $15,560 $24,515 $43,557 $55,890 $66,951
=====================================================
Nonperforming loans as a
percentage of total loans 1.55% 2.22% 4.73% 6.18% 6.42%
====================================================
Nonperforming assets as a
percentage of total assets 1.34% 2.25% 4.18% 4.61% 4.41%
====================================================
Allowance for loan losses
as a percentage of
nonperforming loans 64.79% 45.56% 37.76% 34.59% 33.71%
====================================================
Allowances for loan and
OREO losses as a percentage
of nonperforming assets 60.62% 34.79% 27.71% 29.90% 28.67%
=====================================================
</TABLE>
<PAGE> 1
EXHIBIT (99)iii.
INTEREST RATE EXCHANGE AGREEMENT
At September 30, 1995, the Company had an interest rate exchange
agreement outstanding in the notional amount of $17,000,000. Under the terms of
the agreement, the Company's obligation is determined by a fixed rate of
interest established at the time the agreement was consummated. The obligation
of the counterparty is based upon a floating interest rate (LIBOR). The
difference between the fixed and floating interest rate determines the
Company's interest income or expense from this agreement.
<TABLE>
<CAPTION>
Notional Variable
Principal Effective Agreement Fixed Price Change LIBOR Rate as of
Amount Date Termination Rate Frequency Spread 9/30/95
- - --------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
$ 17,000 01/15/86 11/19/95 10.502% Quarterly -- 5.953%
</TABLE>
At September 30, 1995, the fair value of the interest rate exchange
agreement was $(1.5) million including accrued interest payable of $1.4
million.
