<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from ____________ to____________________
Commission File Number 0-17137
D & N FINANCIAL CORPORATION
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(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 Number)
400 Quincy Street, Hancock, Michigan 49930
------------------------------------------ ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (906) 482-2700
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X . NO .
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. /X/
As of March 15, 1996, there were issued and outstanding 6,829,068 shares of
the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock at
March 15, 1996, was $84,388,000. (The exclusion from such amount of the market
value of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K - Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1995.
PART III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held in 1996.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
D&N Financial Corporation ("D&N" or the "Company") is a financial
services holding company organized under the laws of the state of Delaware.
The Company's principal subsidiary is D&N Bank (the "Bank"), a federally
chartered stock savings bank headquartered in Hancock, Michigan.
The Bank was founded in 1889 and operated as a state-chartered mutual
savings and loan association until February 1984, when it converted to a
federal charter. In 1985, the Bank converted to a stock association, and in
1986, converted to a federal savings bank. The Bank adopted a holding company
structure in July 1988. With total assets of $1.19 billion at December 31,
1995, D&N is the largest financial institution headquartered in Michigan's
Upper Peninsula and the second largest savings institution headquartered in
Michigan.
D&N's primary business consists of attracting deposits from the general
public and making real estate loans and consumer loans and other types of
investments. The Company conducts its business through a network of 35
full-service community banking offices, including its main office in Hancock,
Michigan, seven savings agency offices which provide depository services and
three mortgage banking offices. The Bank's deposits are insured up to the
maximum extent permitted by law by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
The Bank is subject to supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the FDIC.
In December 1993, the Company raised an additional $20.9 million of
capital in a shareholder rights offering and began to implement growth and
expansion strategies. At December 31, 1995, the Bank was in compliance with
its regulatory capital requirements.
The executive office of the Company is located at 400 Quincy Street,
Hancock, Michigan 49930, telephone (906) 482-2700.
Like many savings institutions, the operations of the Company's
subsidiary are materially affected by general economic conditions, the monetary
and fiscal policies of the federal government and the policies of the various
regulatory authorities, including the OTS, the FDIC and the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board"). Its results of
operations are largely dependent upon its net interest income which is the
difference between the interest it receives on its loans and investment
securities, and the interest it pays on its liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset/Liability Management."
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<PAGE> 3
LENDING ACTIVITIES
GENERAL. The Bank, like most other savings institutions, has traditionally
concentrated its lending activities on first mortgage conventional loans
secured by residential real estate and, to a lesser extent, consumer loans and
income producing property. Approximately $395.1 million or 59% of the Bank's
total loans, excluding loans held for sale, secured by real estate as of
December 31, 1995, permit periodic interest rate adjustments.
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of D&N's loan portfolio in dollar amounts and
percentages, by type of loan.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate
One to four family
Permanent $ 576,461 61.92% $ 505,690 63.11% $ 367,944 58.64% $ 438,068 61.92% $ 534,111 63.17%
Construction 19,982 2.15 2,159 0.27 2,083 0.33 1,289 0.18 7,821 0.92
Income producing
property
Permanent 89,176 9.58 115,162 14.37 131,372 20.93 173,122 24.47 217,129 25.68
Construction 21,074 2.26 17,741 2.22 10,475 1.67 933 0.13 4,143 0.49
--------- ------ --------- ------ --------- ------ --------- ----- --------- ------
Total real estate
loans 706,693 75.91 640,752 79.97 511,874 81.57 613,412 86.70 763,204 90.26
Consumer loans
Automobile loans 81,885 8.79 46,711 5.83 34,220 5.45 32,494 4.59 29,328 3.47
Home equity loans 60,003 6.44 39,939 4.98 23,058 3.67 18,702 2.64 18,976 2.24
Home improvement 41,542 4.46 39,279 4.90 40,017 6.38 46,368 6.55 46,878 5.54
Mobile home loans 417 0.04 619 0.08 776 0.12 1,170 0.17 1,505 0.18
Unsecured 19,637 2.11 22,197 2.77 20,328 3.24 8,539 1.21 7,679 0.91
Other 35,913 3.86 22,120 2.76 16,130 2.57 12,084 1.71 12,082 1.43
--------- ------ --------- ------ --------- ------ --------- ----- --------- ------
Total consumer loans 239,397 25.70 170,865 21.32 134,529 21.43 119,357 16.87 116,448 13.77
Commercial loans
Revolving business
loans 1,119 0.12 -- -- -- -- -- -- -- --
Term business loans 6,650 0.71 4,748 0.59 -- -- -- -- -- --
---------- ------- --------- ------- --------- ------- -------- ------- --------- -------
Total commercial loans 7,769 0.83 4,748 0.59 -- -- -- -- -- --
---------- ------- --------- ------- --------- ------- -------- ------- --------- -------
Loans receivable, gross 953,859 102.44 816,365 101.88 646,403 103.00 732,769 103.57 879,652 104.03
Less:
Discounts(premiums)
on loans purchased (1,709) (0.18) 999 0.12 2,896 0.46 5,448 0.77 8,385 0.99
Allowance for losses 9,931 1.07 8,199 1.02 11,420 1.82 15,461 2.19 18,693 2.21
Undisbursed portion of
loan proceeds 13,198 1.42 4,213 0.53 2,750 0.44 404 0.06 1,434 0.17
Deferred income 1,251 0.13 1,706 0.21 1,731 0.28 3,842 0.54 5,550 0.66
Unearned income on
consumer loans -- -- -- -- 1 -- 44 0.01 14 --
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
2,671 2.44 15,117 1.88 18,798 3.00 25,199 3.57 34,076 4.03
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Loans receivable, net $ 931,188 100.00% $ 801,248 100.00% $ 627,605 100.00% $ 707,570 100.00% $ 845,576 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
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<PAGE> 4
LOAN MATURITIES. The following schedule illustrates the maturity
structure of the Company's loan portfolio at December 31, 1995. Loans are
shown as maturing in the period in which payment is due. This schedule does
not reflect the effects of possible prepayments or enforcements of due-on-sale
clauses.
<TABLE>
<CAPTION>
Residential
and Real Estate
Commercial Income Producing Construction
Loans Property Loan Consumer Loans Total
------------------ ------------------ ----------------- -------------------- -------------------
Amounts
Due in Years Weighted Weighted Weighted Weighted Weighted
Ending Average Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------- --------- -------- --------- -------- --------- ------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 2,356 9.77% $ 12,880 9.55% $ 26,225 8.31% $ 49,647 9.41% $ 91,108 9.12%
1997 1,094 9.47 26,296 8.88 8,832 9.80 43,073 9.39 79,295 9.27
1998 1,206 9.44 9,869 9.00 5,488 10.02 44,905 9.48 61,468 9.45
1999-2000 2,416 9.49 28,447 9.38 337 9.20 87,869 9.15 119,069 9.21
2001-2005 307 9.13 54,047 8.17 -- -- 11,178 10.32 65,532 8.54
2006-2010 170 9.64 84,240 7.91 -- -- 1,083 10.24 85,493 7.94
Thereafter 168 9.18 446,192 7.45 -- -- 55 10.00 446,415 7.45
-------- --------- --------- --------- ---------
Total $ 7,717 9.55% $ 661,971 7.77% $ 40,882 8.87% $ 237,810 9.37% $ 948,380 8.23%
======== ========= ========= =========
Plus:
Accrued interest receivable,
net of reserve for uncollected
interest 5,479
Deferred income and premiums 458
Less:
Loans in process 13,198
Loss and valuation allowances 9,931
---------
$ 931,188
=========
</TABLE>
The total amount of loans, excluding loans held for sale, due after
December 31, 1996 which have fixed interest rates is $262.3 million, while the
amount of loans due after such date having floating or adjustable rates is
$573.3 million.
LOAN ORIGINATIONS, PURCHASES AND SALES. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. D&N has originated residential mortgage loans
secured by property both within and outside the State of Michigan. D&N has also
purchased residential mortgage loans secured by property located in various
states. In addition, the Company has originated income producing property
loans secured by real estate located in the State of Michigan and has purchased
such loans secured by property located in Michigan and elsewhere. Since 1990,
the Bank has chosen to focus the activities of its community banking offices on
loan originations in their market areas. At December 31, 1995, 68% of D&N's
real estate loans receivable (excluding government agency insured or guaranteed
mortgage-backed and derivative products) were secured by real estate located in
Michigan.
At December 31, 1995, 6% of D&N's real estate loans receivable (excluding
government agency insured or guaranteed mortgage-backed securities) was
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<PAGE> 5
secured by real estate located in California. At December 31, 1995, $1.4
million, or 3.4%, of real estate loans located in California were
nonperforming.
The following table presents information regarding the geographic location
of the properties securing D&N's residential mortgage and income producing
property loans at December 31, 1995. See "- Classified Assets, Loan
Delinquencies and Defaults" for a discussion of other real estate owned.
<TABLE>
<CAPTION>
Outstanding
Balance at
December 31, 1995
-----------------
(In thousands)
<S> <C>
Michigan
One- to four-family residential. . . . . . $ 392,587
Apartments . . . . . . . . . . . . . . . . 14,911
Mini warehouse, storage. . . . . . . . . . 573
Mobile home parks. . . . . . . . . . . . . 2,780
Motels/hotels. . . . . . . . . . . . . . . 13,680
Shopping centers and retail. . . . . . . . 13,593
Office buildings . . . . . . . . . . . . . 7,812
Industrial . . . . . . . . . . . . . . . . 5,884
Condominiums and land development. . . . . 17,078
Other. . . . . . . . . . . . . . . . . . . 7,815
----------
476,713
California
One- to four-family residential. . . . . . 28,187
Apartments . . . . . . . . . . . . . . . . 6,532
Mobile home parks. . . . . . . . . . . . . 203
Shopping centers and retail. . . . . . . . 4,186
Office buildings . . . . . . . . . . . . . 766
Industrial . . . . . . . . . . . . . . . . 404
Other. . . . . . . . . . . . . . . . . . . 111
----------
40,389
Massachusetts
One- to four-family residential. . . . . . 28,132
----------
28,132
New York
One- to four-family residential. . . . . . 9,722
Apartments . . . . . . . . . . . . . . . . 3,413
----------
13,135
North Carolina
One- to four-family residential. . . . . . 6,234
----------
6,234
Texas
One- to four-family residential. . . . . . 11,915
----------
11,915
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
Outstanding
Balance at
December 31, 1995
-------------------
(In thousands)
<S> <C>
Pennsylvania
One- to four-family residential. . . . . . 8,168
Apartments . . . . . . . . . . . . . . . . 943
Office buildings . . . . . . . . . . . . . 37
Industrial . . . . . . . . . . . . . . . . 145
Other. . . . . . . . . . . . . . . . . . . 271
----------
9,564
Florida
One- to four-family residential. . . . . . 6,323
----------
6,323
Other (31 states)
One- to four-family residential. . . . . . 94,000
Apartments . . . . . . . . . . . . . . . . 3,537
Mobile home parks. . . . . . . . . . . . . 798
Motels/hotels. . . . . . . . . . . . . . . 425
Shopping centers and retail. . . . . . . . 2,444
Office buildings . . . . . . . . . . . . . 84
Industrial . . . . . . . . . . . . . . . . 151
Other. . . . . . . . . . . . . . . . . . . 884
----------
102,323
Rated conventional residential
participation certificates. . . . . . . . . 8,125
----------
Total . . . . . . . . . . . . . . . . . 702,853
Plus
Accrued interest receivable, net of
reserve for uncollected interest . . . . 3,840
Less
Deferred income, discounts and
premiums, net. . . . . . . . . . . . . . (325)
Loans in process . . . . . . . . . . . . . 13,198
Loss allowances. . . . . . . . . . . . . . 7,135
----------
Total. . . . . . . . . . . . . . . . . $ 686,685
==========
</TABLE>
Residential loan originations are attributable primarily to referrals
from real estate brokers and builders, as well as walk-in customers.
Construction loan originations have been obtained primarily by direct
solicitation of builders and continued business from builders who have
previously borrowed from the Company. Income producing property loans have
been obtained from mortgage broker referrals, previous borrowers and direct
contacts with the Company.
D&N has sold loans and loan participations in the secondary market,
generally without recourse. Loans held for sale are recorded at the lower of
cost or market value. At December 31, 1995, the Company had $21.6 million of
net loans held for sale consisting of 15- and 30-year fixed rate loans.
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<PAGE> 7
These sales have provided additional funds for loan originations and
investments and also generated income. The Company generally continues, after
the sale, to service the loans and loan participations sold. Loan sales are
made on a yield basis with a portion of the difference between the yield to the
purchaser and the amount paid by the borrower constituting servicing income to
D&N. On occasion, the Bank also purchased mortgage loan servicing rights from
others in order to maintain its loan servicing portfolio economies of scale.
During 1994, the Company decided to sell the majority of its portfolio of
purchased mortgage loan servicing rights in order to reduce the Bank's interest
rate risk and balance sheet volatility. The scale of loan servicing operations
has been reduced as the Company concentrates its loan servicing activities on
originated loans. The weighted average servicing fee for loans serviced for
others was .33% at December 31, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Noninterest
Income." At December 31, 1995, D&N serviced for others approximately $278
million in loans and loan participations. See also Note A of Notes to
Consolidated Financial Statements "Summary of Significant Accounting Policies -
Mortgage Servicing Rights".
The Company's investment in mortgage servicing rights (MSRs) totaled
$1.1 million at December 31, 1995. The following table details the value of the
Company's investment in MSRs.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 968 $ 9,870 $ 29,198
Additions:
Capitalized servicing 621 -- --
Purchased servicing -- -- 53
------- ------- --------
Total 621 -- 53
Reductions:
Scheduled amortization 169 1,315 4,326
Additional amortization due to
changes in prepayment assumptions 71 421 331
Impairment 234 -- 14,628
Sales -- 7,148 --
Transfers to loan portfolio under
recourse and other provisions 2 18 96
------- -------- --------
Total 476 8,902 19,381
------- -------- --------
Balance at end of year $ 1,113 $ 968 $ 9,870
======= ======== ========
Fair market value at end of year $ 1,161 $ 912 $ 9,795
======= ======== ========
</TABLE>
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<PAGE> 8
The following table shows origination, purchase, sale and repayment
activities of D&N, including mortgage-backed securities, for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
ORIGINATIONS
Real estate:
One- to four-family residential. . . $ 182,800 $ 81,279 $ 147,246 $ 121,468 $ 280,425
Income producing property. . . . . . 17,614 17,350 13,014 2,711 6,136
Non-real estate:
Consumer . . . . . . . . . . . . . . 195,109 132,824 95,036 85,215 66,892
Commercial . . . . . . . . . . . . . 3,739 4,748 -- -- --
-----------------------------------------------------------------
Total originations 399,262 236,201 255,296 209,394 353,453
PURCHASES
Real estate:
One- to four-family residential . . . 99,917 183,110 65,333 -- 57,751
Income producing property . . . . . . -- 1,852 -- -- --
Mortgage-backed securities. . . . . . -- 66,922 107,975 86,464 --
-----------------------------------------------------------------
Total purchases. . . . . . . . . 99,917 251,884 173,308 86,464 57,751
-----------------------------------------------------------------
Total additions. . . . . . . . . 499,179 488,085 428,604 295,858 411,204
SALES
Real estate:
One- to four-family residential (1) . 107,080 45,287 106,167 40,610 340,522
Mortgage-backed securities(2) . . . . 4,210 50,658 126,932 110,737 170,240
Non-real estate:
Consumer loans. . . . . . . . . . . . 2,976 2,894 2,229 2,934 2,536
-----------------------------------------------------------------
Total sales . . . . . . . . . . . . 114,266 98,839 235,328 154,281 513,298
Principal repayments. . . . . . . . . . 285,009 234,852 307,541 395,345 311,494
-----------------------------------------------------------------
Total reductions. . . . . . . . . . 399,275 333,691 542,869 549,626 824,792
Transfers to other real estate owned. . (1,936) (2,861) (9,380) (6,259) (28,524)
Increase (decrease) in other items, net 8,801 1,079 (19,622) 3,877 (3,701)
-----------------------------------------------------------------
Net increase (decrease) . . . . . . $ 106,769 $ 152,612 $(143,267) $(256,150) $(445,813)
=================================================================
</TABLE>
(1) Prior to 1993, consisted primarily of sales of loans originated by the
Bank's mortgage banking subsidiary.
(2) Includes sales of mortgage derivative products which were carried at the
lower of cost or market.
Outstanding loan commitments of the Company at December 31, 1995 amounted
to $46.3 million for one- to four-family residential real estate loans and
$15.4 million for commercial real estate loans. See "Regulation - Federal
Savings Association Regulation."
RESIDENTIAL MORTGAGE LOANS. The original contractual loan payment period
for residential loans originated by D&N normally ranges from 15 to 30 years.
Because borrowers may refinance or prepay their loans, however, such loans
often remain outstanding for a substantially shorter period of time.
Prior to 1992, most of the Bank's residential mortgage loans were
originated by its mortgage banking subsidiary. The mortgage banking
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<PAGE> 9
subsidiary originated loans in southeastern Michigan, Illinois, Arizona, Texas
and North Carolina. The Bank now originates loans primarily in its Michigan
market area through its community banking and mortgage banking offices.
Substantially all of the residential loans being originated by the Bank are in
a form which permits their sale in the secondary market.
The Bank's first mortgages customarily include "due-on-sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid. In general, the Bank enforces due-on-sale clauses in its first
mortgages.
In the case of conventional mortgage loans intended for sale, the
Company's policy is to lend a maximum of 95% of the appraised value of
single-family residences. The Company generally does not lend more than 90% of
the appraised value of the property on those loans it intends to hold. Private
mortgage insurance is required if the loan amount exceeds 80% of the appraised
value, in an amount sufficient to reduce the Bank's exposure to 75% or less of
the appraised value of the property. Property securing real estate loans made
by the Bank is appraised by independent appraisers selected by the Bank and
whose appraisals are reviewed by D&N personnel or other independent appraisers.
Loans up to the maximum limits for single family homes of the Federal
Home Loan Mortgage Corporation ("FHLMC") (currently $207,000) and the Federal
National Mortgage Association ("FNMA") (currently $203,150) may be approved by
qualified loan officers of the Bank. The Bank's Residential Loan Committee has
single-family lending authority up to $500,000, if two members approve. Loans
of $500,000 to $2 million must be approved by the Bank's Loan Committee
(comprised of Messrs. Butvilas, Donnelly, Janson, Hofstad, West and Sliwinski).
Loans in excess of $2 million must be approved by the Board of Directors.
Title, fire and casualty insurance as well as surveys are generally
required on all mortgage loans.
D&N also offers a variety of ARM loans which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 30 years with
rate adjustments every year or every three years during the term of the loan.
ARMs currently originated by the Bank contain a 2% limit as to the maximum
amount of change in the interest rate at any adjustment period and a 6% limit
over the life of the loan. The Bank generally originates ARMs to hold in its
portfolio. At December 31, 1995, residential ARMs totaled $314 million, or 56%
of the Bank's total residential one- to four-family mortgage loan portfolio.
Of this total ARM portfolio, $184 million or 59% were purchased from others.
Due to consumer demand, residential loans originated during 1995 were
predominately fixed rate loans.
Despite the benefits of ARMs to the Bank's asset/liability management
program, such loans also pose potential additional risks, primarily because as
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<PAGE> 10
interest rates rise, the underlying payment by the borrower rises, increasing
the potential for default. At the same time, marketability of the underlying
property may be adversely affected by higher interest rates.
MORTGAGE-BACKED SECURITIES. The Bank on occasion purchases
mortgage-backed securities to supplement residential loan production. The
types of securities purchased are based upon the Bank's asset/liability
management strategy and balance sheet objectives. No purchases were made
during 1995.
The Bank has in the past invested in interest only strip securities (IOs)
and principal only strip securities (POs) as part of its asset/liability
management strategy. At December 31, 1995, D&N had IOs with a book value and a
market value of $2.4 million, and had no POs at that date. For a discussion of
the risks and performance characteristics of these securities, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Noninterest Income," "- Asset/Liability Management" and Note D of
Notes to Consolidated Financial Statements.
The following table sets forth information concerning the composition of
D&N's mortgage-backed securities portfolio in dollar amounts and percentages,
by type of security. See also Note D of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------
Mortgage-Backed 1995 1994 1993 1992 1991
Securities Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------------- ----------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF SECURITY
One- to four-family:
Mortgage-backed securities. . . $120,993 97.99% $143,298 97.72% $161,957 96.59% $206,749 87.93% $295,751 80.98%
Interest only certificates. . . 2,456 1.99 3,886 2.65 4,321 2.58 27,075 11.51 48,741 13.34
Principal only certificates -- -- -- -- -- -- -- -- 21,253 5.82
------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed securities, gross 123,449 99.98 147,184 100.37 166,278 99.17 233,824 99.44 365,745 100.14
Net (discounts) premiums 26 0.02 (538) (0.37) 1,399 0.83 1,313 0.56 (505) (0.14)
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------
Mortgage-backed securities, net $123,475 100.00% $146,646 100.00% $167,677 100.00% $235,137 100.00% $365,240 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
INCOME PRODUCING PROPERTY LOANS. The Company has historically originated
and purchased both permanent and, to a substantially lesser extent,
construction loans secured by income producing property and land development
loans. Essentially all permanent income producing property loans originated by
the Company to date have been secured by real property located in Michigan.
To a substantially lesser extent, the Company has also purchased income
producing property loans and participation interests in these loans outside of
Michigan. These loans may be in the form of mortgage-backed securities, may
have fixed or variable interest rates and most have been outstanding for three
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<PAGE> 11
to twelve years. At December 31, 1995, $27.7 million of D&N's portfolio of
income producing property loans were purchased loans.
During 1990, the Company ceased all origination and purchase activity
involving income producing and land development loans. Although the Company
was not originating new loans until 1993, it provided financing to facilitate
the sale of real estate it had acquired through foreclosure or in settlement of
loans. Some of this property is in a distressed condition and difficult to
market. To make a sale possible, the Company may be required to provide
financing at rates and terms which are not reflective of true market
conditions. When this occurs, the company reduces the carrying value of the
below market loan by discounting the expected cash flows to a present value
using a market rate of interest. Since 1993, the Company has resumed
originating income producing property loans secured by real estate but only in
its community banking market areas.
The following table shows the composition of the Company's income
producing property and land development loans at December 31, 1995. See
"Non-Performing Assets and Risk Elements."
<TABLE>
<CAPTION>
Amount Non-
Loans Percentage Performing or
Outstanding of Total of Concern
----------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Apartments and multi-family residences $ 29,549 29.97 % $ 4,309
Other income producing property:
Motels/hotels 14,207 14.41 4,598
Offices 8,761 8.88 590
Mobile home parks 3,808 3.86 120
Shopping centers 20,378 20.67 2,439
Industrial 6,632 6.72 --
Other 5,795 5.88 100
--------- -------- ----------
Total 89,130 90.39 12,156
Land development loans and other 21,120 21.42 --
--------- -------- ----------
Total 110,250 111.81 $ 12,156
==========
Allowance for losses (6,115) (6.20)
Loans in process, deferred income and
other miscellaneous credits (5,533) (5.61)
--------- --------
Total $ 98,602 100.00 %
========= =========
</TABLE>
CONSUMER LENDING. Federal regulations permit federal savings institutions
to make secured and unsecured consumer loans, together with investments in
commercial paper and corporate debt securities, in an amount up to 35% of the
institution's assets. In addition, a federal savings institution has lending
authority above the 35% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and deposit account
secured loans.
Consumer loans originated by the Company are offered at fixed and
adjustable rates of interest. The underwriting standards employed by the
Company for consumer loans include a determination of the applicant's payment
- 11 -
<PAGE> 12
history on other debts and an assessment of ability to meet existing
obligations and payments on the proposed loan. The stability of the
applicant's monthly income may be determined by verification of gross monthly
income from primary employment, and additionally from any verifiable secondary
income. Although creditworthiness of the applicant is of primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
The Company has established programs to originate consumer loans including
automobile loans, home improvement loans, home equity loans, student loans
under various guaranteed student loan programs, loans to depositors secured by
pledges of their deposit accounts and unsecured loans. Although consumer loans
involve a higher level of risk than one- to four-family residential mortgage
loans, they generally carry higher yields and have shorter terms to maturity.
The Company has increased its origination of consumer loans during the past
several years, and is continuing to emphasize these types of loans. At
December 31, 1995, consumer loans totaled $239.4 million or 26% of the
Company's loan portfolio.
During 1995, net consumer loan charge-offs were $642,000 compared to
$411,000 in 1994, $354,000 in 1993, $744,000 in 1992 and $1.4 million in 1991.
Indirect loan originations totaled $65.5 million in 1995. Indirect
receivables amounted to $69.8 million at December 31, 1995 and make up 29% of
the consumer loan portfolio. Indirect loans are underwritten according to the
same guidelines as direct loans, and the maximum dollar exposure to any one
dealer is typically limited to $5 million.
Home equity loans and home equity credit lines are extended at fixed or
variable rates of interest and normally do not exceed 75% of the property's
appraised value less the amount owing, if any, on a first mortgage. Home
equity loans are repaid according to fixed monthly payments over a maximum term
of ten years. Home equity credit lines require a monthly interest payment
based upon the outstanding balance. A minimum monthly payment is required on
outstanding balances. Home equity credit lines generally have five-year terms
at which time the Bank may require payment in full or renew the loan for
another five-year term. Amounts repaid are available for subsequent borrowing,
subject to satisfactory loan performance.
Home improvement loans are generally treated as home equity loans with a
first or second mortgage lien securing the loan. A small number of home
improvement loans are written as unsecured loans.
The Company has increased its emphasis in recent years on unsecured loans.
These loans are underwritten according to stricter guidelines than secured
loans, and loan officers have lower approval limits for unsecured loans than
for secured loans.
D&N is subject to various state and federal limitations on the maximum
rates of interest it may charge on consumer and certain other loans. These
limitations have not had a significant effect on D&N's consumer loan
activities.
- 12 -
<PAGE> 13
LOANS TO ONE BORROWER
Under federal law, the aggregate amount of loans that the Company is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus. At December 31, 1995, the Company's loans to one borrower
limit was approximately $10.8 million. See "Regulation - Federal Savings
Association Regulation". At December 31, 1995, the Company had no loans in
excess of its lending limit to one borrower.
CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
The Company's collection procedures provide that when a residential
mortgage loan is 15 days past due, the borrower is contacted by mail and
payment is requested. For loans secured by income producing property, the
borrower is contacted by telephone when the loan is 15 days past due. If the
delinquency continues, subsequent efforts by telephone and by mail are made to
contact the delinquent borrower. In certain instances, the Company may modify
the loan or grant a limited moratorium on loan payments to enable the borrower
to reorganize his financial affairs. If the loan continues in a delinquent
status for 90 days or more, the Company generally initiates foreclosure
proceedings.
The process of non-judicial foreclosure in Michigan takes approximately six
weeks. A sheriff's sale is then held at which the Bank normally bids for the
purchase of the property. A conditional sheriff's deed is then awarded to the
higher bidder, usually the Bank, and the customer is given six months (or in
certain circumstances, one year) to redeem the conditional deed by repaying the
bid amount in full. During this redemption period, the borrower may occupy and
use the property as he sees fit. If he fails to redeem the sheriff's deed,
then the Company acquires clear title to the real estate and subsequently sells
it to recover its investment. In most cases, it is not economical to obtain a
deficiency judgment against the borrower if the property is sold for less than
the unpaid balance of the loan.
The following table sets forth information concerning delinquent mortgage
and other loans at December 31, 1995. The amounts presented represent the
total remaining principal balances of the related loans (before reserves for
losses), rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------
Income Producing
Commercial Residential Property Consumer
------------------- ------------------ --------------------- -------------------
Number Amount Number Amount Number Amount Number Amount
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days. . . . -- $ -- 104 $ 3,959 1 $ 708 456 $ 2,358
60 - 89 days. . . . -- -- 24 978 1 80 137 539
90 days and over. . -- -- 71 4,108 3 5,945 74 446
----- ------- ----- -------- ----- -------- ----- --------
Total. . . . . . -- -- 199 $ 9,045 5 $ 6,733 667 $ 3,343
===== ======= ===== ======== ===== ======== ===== ========
</TABLE>
- 13 -
<PAGE> 14
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser credit
quality as "substandard," "doubtful" or "loss" assets. The regulation requires
insured institutions to classify their own assets and to establish prudent
general allowances for loan losses for assets classified "substandard" or
"doubtful." For the portion of assets classified as "loss", an institution is
required to either establish specific allowances for loan losses for assets of
100% of the amount classified or charge off such amount. Assets which do not
currently expose the insured institution to sufficient credit risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are required to be designated "special mention" by management. In
addition, the OTS may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general credit quality of the asset portfolio of an institution. At
December 31, 1995, $12.2 million of the Company's assets were classified as
"substandard" while $11.9 million were classified as "special mention". As of
such date $45,000 of such assets were classified as "doubtful" and none were
classified as "loss". The Company's classification of assets is consistent with
OTS examination classifications.
The largest item in classified assets is a commercial real estate loan
secured by a hotel in Michigan. This asset has a total carrying value of $3.3
million at December 31, 1995.
Hotels and motels account for $4.6 million of classified assets and
apartments account for $4.8 million. The balance of classified assets consists
of loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans. Classified assets amounting to
$5.0 million, or 21% of total classified assets, are secured by real estate
located in the state of California.
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, including other real estate owned, decreased to $9.6
million at December 31, 1995 compared to $24.5 million at December 31, 1994.
The ratio of nonperforming assets to total assets was 0.81% at December 31,
1995 compared to 2.25% at December 31, 1994, as several nonperforming loans
were paid off or restored to accrual status and as the Company was able to sell
several repossessed properties during the year. Allowances for losses
represented 105% of nonperforming assets at December 31, 1995.
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, the Company had accruing loans delinquent more than 90
days which were loans that were in the process of collection and that the
Company considered to be well secured. For 1995, the Company would have
recorded interest income of $1.1 million if nonaccrual and restructured loans
had performed in accordance with their original terms. The Company recognized
$344,000 of interest income on these loans in 1995.
- 14 -
<PAGE> 15
The following table sets forth the amounts and categories of risk elements
in the Company's loan portfolio:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 8,172 $ 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 8,172 17,995 30,245 44,704 55,452
Other real estate owned (OREO) 1,452 6,520 13,312 11,186 11,499
---------- --------- ---------- ---------- ----------
Total nonperforming assets $ 9,624 $ 24,515 $ 43,557 $ 55,890 $ 66,951
========== ========= ========== ========== ==========
Nonperforming loans as a percentage of total loans 0.87% 2.22% 4.73% 6.18% 6.42%
========== ========= ========== ========== ==========
Nonperforming assets as a percentage of total assets 0.81% 2.25% 4.18% 4.61% 4.41%
========== ========= ========== ========== ==========
Allowance for loan losses as a percentage of
nonperforming loans 121.53% 45.56% 37.76% 34.59% 33.71%
========== ========= ========== ========== ==========
Allowances for loan and OREO losses as a
percentage of nonperforming assets 104.57% 34.79% 27.71% 29.90% 28.67%
========== ========= ========== ========== ==========
</TABLE>
OTHER REAL ESTATE OWNED
Other real estate owned, net of reserves, totaled $1.3 million at December
31, 1995, compared with $6.2 million at December 31, 1994. Other real estate
owned consisted of single family homes, multi-family dwelling units and
commercial real estate. At foreclosure, real estate is valued at the lower of
the loan balance or estimated fair value less disposal costs. Any difference
is charged to the allowance for loan losses. The carrying value is
subsequently adjusted to the extent it exceeds estimated fair value.
The largest asset in other real estate owned is a 41-unit apartment
building located in California. This asset has a carrying value of $486,000 at
December 31, 1995.
OTHER LOANS OF CONCERN
In addition to nonperforming assets, the Company has other loans of concern
aggregating $14.5 million. These are loans which are currently performing but
which demonstrate a specific weakness or weaknesses which, if not corrected,
could cause failure of the borrower and default. These loans are closely
monitored by management, and as the weaknesses are corrected, may be
reclassified as acceptable loans.
Included in other loans of concern at December 31, 1995, are five purchased
income producing property loans totaling $6.6 million that have all paid as
agreed but, for various reasons, indicate potential payment concerns.
- 15 -
<PAGE> 16
ALLOWANCE FOR LOAN LOSSES
Loss allowances are established at levels considered appropriate based on
management's judgment of potential losses in residential, income producing and
consumer loan portfolios. The loan portfolios are reviewed at least quarterly
for changes in performance, collateral value and overall quality. Allocated
allowances are established for problem loans with expected losses, and in
addition, allowances are established for unidentified potential losses.
Regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
A $2.4 million provision for potential loan losses was made in 1995, compared
to $100,000 in 1994 and none in 1993. Management's judgment in determining the
level of the allowance for loan losses is influenced by several factors during
the quarterly reviews. These factors include, but are not limited to, past
loan performance and loss experience, current economic and market conditions,
collateral location and market values, industry and geographic concentrations
and delinquency statistics and ratios. Management also considers the different
levels of risk between income producing property loans, installment loans and
one-to four-family residential loans. In addition, management considers the
level of nonperforming assets and classified assets, the level of lending
activity and the overall size of the loan portfolio.
Income-producing property charge-offs were primarily due to writedowns of
loans to estimated fair value. Installment loan charge-offs increased
somewhat, but charge-off ratios decreased as the installment loan portfolio
grew at a faster rate. See "Lending Activities" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
- 16 -
<PAGE> 17
The following table sets forth an analysis of the Bank's allowance for loan
losses:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year . . . $ 8,199 $11,420 $15,461 $18,693 $18,315
Charge-offs:
Single family. . . . . . . . . . 169 110 1,111 311 117
Income producing property. . . . 1,019 3,109 2,584 2,180 8,936
Installment. . . . . . . . . . . 999 773 681 1,000 1,555
Commercial . . . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
2,187 3,992 4,376 3,491 10,608
Recoveries:
Single family. . . . . . . . . . 917 9 -- -- 280
Income producing property. . . . 245 300 8 3 365
Installment. . . . . . . . . . . 357 362 327 256 191
Commercial . . . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
1,519 671 335 259 836
------- ------- ------- ------- -------
Net charge-offs. . . . . . . . . . 668 3,321 4,041 3,232 9,772
Provision charged to operations 2,400 100 -- -- 10,150
------- ------- ------- ------- -------
Balance at end of year . . . . . . $ 9,931 $ 8,199 $11,420 $15,461 $18,693
======= ======= ======= ======= =======
Net charge-offs as a percentage
of average loans . . . . . . . . 0.08% 0.44% 0.61% 0.44% 0.99%
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of total loans. . . . 1.06% 1.01% 1.79% 2.14% 2.16%
======== ======== ======== ======== ========
</TABLE>
The following table summarizes the allocation of the allowance for loan
losses by major categories at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- --------------- ------------------ ---------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
------ -------- ------ --------- ------ -------- ------- -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single family . . . . . . . $ 1,020 62% $ 663 62% $ 279 57% $ 230 60% $ 130 62%
Income producing property . 6,115 12 6,423 17 9,617 22 13,353 24 16,590 25
Commercial. . . . . . . . . 400 1 -- -- -- -- -- -- -- --
Installment . . . . . . . . 2,396 25 1,113 21 1,524 21 1,878 16 1,973 13
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total. . . . . . . . . $ 9,931 100% $ 8,199 100% $11,420 100% $15,461 100% $18,693 100%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
INVESTMENT ACTIVITIES
Federal savings institutions have authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of various
federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Federal savings institutions are also permitted
to invest in any account at a federally insured institution.
- 17 -
<PAGE> 18
Federal savings institutions may also invest a portion of their assets
in certain commercial paper and corporate debt securities. They are also
authorized to invest in mutual funds whose assets conform to the type of
investment that a federal savings institution is authorized to make directly.
There are various restrictions on the foregoing investments. For example, the
commercial paper must be appropriately rated by at least two national
investment rating services and the corporate debt securities must be
appropriately rated in one of the two highest rating categories by at least one
such service. In addition, the commercial paper must mature within nine months
of issuance. Moreover, a federal savings institution's total investment in the
commercial paper and corporate debt securities of any one issuer may not exceed
the loans to one borrower limitation applicable to the savings institution,
except that a federal savings institution may invest up to 5% of its assets in
the shares of any appropriate mutual fund. At December 31, 1995, the Bank was
in compliance with all such requirements.
The Company has invested in various securities which are acquired in the
capital markets. These investments consist of loans, mortgage-backed
securities, corporate debt securities and derivative mortgage instruments.
Investments were funded with advances from the FHLB and short-term borrowings,
primarily in the form of reverse repurchase agreements, and retail deposits.
Various combinations of techniques and instruments, including interest rate
exchange agreements, interest rate caps, interest rate floors, collateralized
mortgage obligation residuals, interest only stripped mortgage-backed
securities and principal only stripped mortgage-backed securities, have been
used in an attempt to provide adequate and relatively stable returns over a
variety of interest rate environments. The investments and financings are
structured based upon forecasts of mortgage loan repayments for loans and
mortgage-backed securities. If mortgage loan repayments differ significantly
from the level upon which the investment was made, the interest rate spread and
market value may be reduced. This was a major negative factor in D&N's results
of operations in past years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of these
investments and the risks associated therewith.
As a member of the FHLB System, the Bank must maintain minimum levels of
liquid assets specified by federal regulations which vary from time to time.
See "Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to return on loans.
Historically, the Bank has maintained liquid assets above the minimum
requirements imposed by federal regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1995, the Bank's
average liquidity ratio (liquid assets as a percentage of net withdrawable
deposits and current borrowings) was 8.3%, which was in excess of regulatory
requirements.
- 18 -
<PAGE> 19
The following table sets forth information concerning the Company's
investment securities at the dates indicated. See also Note C of Notes to
Consolidated Financial Statements for additional information regarding the
contractual maturities and weighted average yields of the Company's investment
securities.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
--------- --------- --------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government
agencies and corporations . . . . . . . $ 27,151 $ 27,288 $ -- $ -- $ -- $ --
U.S. Treasury available for sale. . . . . 40,655 40,899 61,979 61,536 74,939 74,885
Commercial paper available for sale . . . -- -- -- -- 19,972 19,971
Valuation allowance . . . . . . . . . . . 244 -- ( 443) -- (55) --
-------- -------- -------- ------- ------- --------
68,050 68,187 61,536 61,536 94,856 94,856
Investment in Federal Home Loan
Bank stock. . . . . . . . . . . . . . . 19,745 19,745 19,745 19,745 19,745 19,745
Other equity securities . . . . . . . . . 29 29 30 30 54 54
-------- -------- -------- -------- -------- --------
$ 87,824 $ 87,961 $ 81,311 $ 81,311 $114,655 $114,655
======== ======== ======== ======== ======== ========
</TABLE>
The book value and market value of investment securities at December 31,
1995, by maturity ranges, were as follows:
<TABLE>
<CAPTION>
Weighted
Book Market Average
Value Value Yield
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury and government agencies
and corporate securities maturing:
In one year or less:. . . . . . . . . . . $ 67,806 $ 68,187 6.96%
Valuation allowance. . . . . . . . . . . . . 244 -- --
--------- --------- ------
68,050 68,187 6.96
Equity securities. . . . . . . . . . . . . . 19,774 19,774 8.00
-------- -------- -----
$ 87,824 $ 87,961 7.20%
======== ======== ======
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are an important source of the Company's funds for
use in lending and for other general business purposes. In addition to
deposits, the Company derives funds from loan repayments, advances from the
FHLB of Indianapolis and other borrowings, and at times has derived funds from
reverse repurchase agreements and loan and securities sales. Scheduled loan
repayments are a relatively stable source of funds, while loan prepayments and
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used to compensate for
reductions in normal sources of funds, such as deposit inflows at less than
projected levels or deposit outflows, or to support expanded activities.
Historically, the Company has borrowed primarily from the FHLB of Indianapolis,
through institutional reverse repurchase agreements and, to a lesser extent,
from other sources.
- 19 -
<PAGE> 20
DEPOSIT ACTIVITIES. The Company attracts both short-term and long-term
deposits from the general public by offering a wide assortment of accounts and
rates. In recent years, market conditions have required the Company to rely
increasingly on short-term accounts that are more responsive to market interest
rates. The Company offers regular savings accounts, checking accounts, various
money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate certificates of deposit of $100,000 or above
("Jumbo CDs") and individual retirement accounts.
The composition of the Company's deposits at the end of recent periods
is set forth in Note H of Notes to Consolidated Financial Statements. At
December 31, 1995, the Company had no brokered deposits. See " -- Investment
Activities" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In addition, the Company believes that, based on
its experience over the past five years, its savings accounts are relatively
stable sources of deposits.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regular Accounts:
Savings accounts, 2.25% - 5.07%. . $145,241 16.36% $125,399 15.99% $135,286 16.67%
Checking and NOW accounts,
0.00% - 2.00% . . . . . . . . . 91,621 10.32 91,484 11.67 92,124 11.35
Money market accounts, variable. . 85,287 9.60 94,543 12.06 114,951 14.17
-------- ------ -------- ------ -------- ------
Total regular accounts . . . . . 322,149 36.28 311,426 39.72 342,361 42.19
Certificates:
0.00 - 2.99% . . . . . . . . . . . 6,218 0.70 15,697 2.00 49,424 6.09
3.00 - 4.99% . . . . . . . . . . . 66,471 7.49 239,459 30.54 276,388 34.06
5.00 - 6.99% . . . . . . . . . . . 415,698 46.82 148,606 18.95 58,936 7.26
7.00 - 8.99% . . . . . . . . . . . 59,592 6.71 50,509 6.44 61,858 7.62
9.00 - 10.99%. . . . . . . . . . . 16,310 1.84 16,671 2.13 18,780 2.31
11.00 - 12.99%. . . . . . . . . . . -- -- 450 0.06 1,741 0.22
-------- ------ -------- ----- -------- ------
Total certificates . . . . . . . 564,289 63.56 471,392 60.12 467,127 57.56
Accrued interest . . . . . . . . . . 1,431 0.16 1,257 0.16 2,022 0.25
-------- ------ -------- ------ -------- ------
Total deposits . . . . . . . . . $887,869 100.00% $784,075 100.00% $811,510 100.00%
======== ======= ======== ======= ======== =======
</TABLE>
The variety of deposit accounts offered by the Company has allowed it to
be competitive in obtaining funds and has allowed it to respond with
flexibility (by paying rates of interest more closely approximating market
rates of interest) to, although not eliminate the threat of, disintermediation
(the flow of funds away from depository institutions such as savings
institutions into direct investment vehicles such as government and corporate
securities). In addition, the Company has become much more subject to
short-term fluctuations in deposit flows. The ability of the Company to
attract and maintain deposits, and its cost of funds, have been, and will
continue to be, significantly affected by money market conditions.
- 20 -
<PAGE> 21
The following table sets forth the deposit flows at D&N during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
------------ ----------- ------------
(In thousands)
<S> <C> <C> <C>
Opening balance . . . . . $ 784,075 $ 811,510 $ 881,424
Deposits. . . . . . . . . 1,925,415 1,676,642 1,653,439
Withdrawals . . . . . . . (1,854,870) (1,729,637) (1,751,440)
Interest credited . . . . 33,075 26,325 28,242
Change in accrued
interest . . . . . . . . 174 (765) (155)
------------ ----------- -----------
Ending balance . . . . . $ 887,869 $ 784,075 $ 811,510
============ =========== ===========
</TABLE>
The following table sets forth the change in dollar amount of deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
------------ ------------ -----------
(In thousands)
<S> <C> <C> <C>
Savings accounts. . . . . . . . . . $ 19,842 $ (9,887) $ 10,633
Checking and NOW accounts . . . . . 137 (640) (12,047)
Money market accounts . . . . . . . (9,256) (20,408) 1,825
Certificates with maturities:
7 to 91 days . . . . . . . . . . (1,929) (1,996) 2,120
92 days to 6 months. . . . . . . 12,027 (32,073) 81,202
6 months to 1 year . . . . . . . 20,089 (11,279) (43,876)
1 year to 1 1/2 years. . . . . . 14,364 7,118 (70,432)
1 1/2 years to 3 years . . . . . 35,309 43,146 (8,790)
3 years to 10 years. . . . . . . 7,917 (2,742) (22,744)
Other fixed rate certificates . . . -- -- (3,695)
Negotiable rate certificates. . . . 5,120 2,091 (3,955)
------------ ----------- -----------
Increase (decrease). . . . . . . 103,620 (26,670) (69,759)
Change in accrued interest. . . . . 174 (765) (155)
------------ ----------- -----------
Total increase (decrease). . . . $ 103,794 $ (27,435) $ (69,914)
============ =========== ===========
</TABLE>
- 21 -
<PAGE> 22
The following table shows rate and maturity information for the
Company's deposits as of December 31, 1995.
<TABLE>
<CAPTION>
Interest Rate Range -- Certificates
--------------------------------------------
0.00 3.00 5.00 7.00 9.00
Percent to to to to to
Amount of Total 2.99% 4.99% 6.99% 8.99% 10.99%
-------------------- ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Savings accounts. . . . . . . . . . $145,241 16.36% $ -- $ -- $ -- $ -- $ --
Checking and NOW accounts . . . . . 91,621 10.32 -- -- -- -- --
Money market accounts . . . . . . . 85,287 9.60 -- -- -- -- --
-------- ------- ------ ------ -------- ------- -------
322,149 36.28 -- -- -- -- --
Certificate accounts
maturing in quarter ending:
03/31/96. . . . . . . . . . . . . . 101,270 11.41 1,708 16,706 71,113 502 11,241
06/30/96. . . . . . . . . . . . . . 89,592 10.09 1,741 17,434 66,610 2,589 1,218
09/30/96. . . . . . . . . . . . . . 86,973 9.79 651 11,989 56,013 18,174 146
12/31/96. . . . . . . . . . . . . . 93,505 10.53 1,295 6,214 83,645 2,220 131
03/31/97. . . . . . . . . . . . . . 39,772 4.48 259 6,175 32,129 1,203 6
06/30/97. . . . . . . . . . . . . . 26,811 3.02 170 4,369 21,384 870 18
09/30/97. . . . . . . . . . . . . . 18,672 2.10 -- 1,192 16,672 808 --
12/31/97. . . . . . . . . . . . . . 19,333 2.18 27 747 17,259 1,214 86
03/31/98. . . . . . . . . . . . . . 14,670 1.65 -- 340 8,803 5,429 98
06/30/98. . . . . . . . . . . . . . 13,115 1.48 151 421 6,078 6,426 39
09/30/98. . . . . . . . . . . . . . 10,451 1.18 -- 117 7,225 3,005 104
12/31/98. . . . . . . . . . . . . . 10,003 1.13 39 68 6,153 3,582 161
Maturity over 3 years . . . . . . . 40,122 4.52 177 699 22,614 13,570 3,062
-------- ------- ------- -------- -------- ------- -------
Total . . . . . . . . . . . . . $564,289 63.56 $ 6,218 $ 66,471 $415,698 $59,592 $16,310
======= ======== ======== ======= =======
Interest accrued. . . . . . . . . . 1,431 0.16
-------- -------
Total deposits. . . . . . . . . $887,869 100.00%
======== =======
</TABLE>
The following table shows the scheduled maturities of certificates of
deposit of $100,000 or greater as of December 31, 1995.
<TABLE>
<CAPTION>
December 31, 1995
--------------------
(In thousands)
<S> <C>
Certificates with maturities:
Three months or less. . . . . . . . . . . $ 11,380
Over three through six months . . . . . . 9,502
Over six through twelve months . . . . . 13,364
Over twelve months. . . . . . . . . . . . 16,598
---------
Total. . . . . . . . . $ 50,844
=========
</TABLE>
BORROWINGS. The FHLB of Indianapolis functions as a central reserve
bank, providing credit for savings institutions within its assigned region. As
a member of the FHLB of Indianapolis, D&N is required to own capital stock in
the FHLB of Indianapolis and is authorized to apply for advances on the
security of such stock and certain of its residential mortgage loans and other
assets (principally, securities which are obligations of, or guaranteed by,
- 22 -
<PAGE> 23
the United States) provided certain standards related to creditworthiness have
been met. See "Regulation -- Federal Home Loan Bank System." FHLB advances
are made pursuant to several different credit programs. Each credit program
has its own interest rate and range of maturities. The FHLB of Indianapolis
prescribes the acceptable uses to which the advances pursuant to each program
may be made as well as limitations on the size of advances. Depending on the
program limitations, the amount of advances are generally based on the FHLB of
Indianapolis' assessment of the institution's creditworthiness. The FHLB of
Indianapolis is required to review its credit limitations and standards at
least once every six months.
The Company has entered into reverse repurchase agreements with major
investment bankers utilizing government securities or various mortgage
instruments as collateral. These reverse repurchase agreements are generally
utilized in connection with the Company's investments. See " -- Investment
Activities" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
The following table sets forth the maximum month-end and average balance
of FHLB advances, securities sold under agreements to repurchase and other
borrowings as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Maximum Balance:
Advances from FHLB. . . . . . . . $226,003 $186,003 $219,078
Securities sold under
agreements to repurchase. . . . 52,579 54,911 3,075
Other borrowings. . . . . . . . . 12,278 17,087 24,060
Average Balance:
Advances from FHLB. . . . . . . . 200,770 123,710 156,769
Securities sold under
agreements to repurchase. . . . 24,020 17,284 25
Other borrowings. . . . . . . . . 11,426 14,309 20,801
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances, securities sold under agreements to repurchase and other borrowings
at the dates indicated. See also Notes I and J of Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Advances from 6FHLB. . . . . . . . $206,003 $186,003 $ 84,503
Securities sold under agreements
to repurchase. . . . . . . . . . -- 28,627 --
Other borrowings. . . . . . . . . 10,229 12,227 17,010
-------- -------- --------
Total borrowings. . . . . . . . $216,232 $226,857 $101,513
======== ======== ========
</TABLE>
- 23 -
<PAGE> 24
<TABLE>
<CAPTION>
At December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Weighted average interest
rate of advances from FHLB . . . . . 5.82% 6.03% 3.42%
Weighted average interest rate
of securities sold under agreements
to repurchase. . . . . . . . . . . . -- 6.29 --
Weighted average interest
rate of other borrowings . . . . . . 9.60 10.02 11.54
Weighted average interest
rate of total borrowings . . . . . . 6.00 6.28 4.78
</TABLE>
The following table sets forth the Bank's maturity and rate structure of
FHLB advances as of December 31, 1995.
<TABLE>
<CAPTION>
Weighted
Average Rate Amount
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Matures within:
One year. . . . . . . . . . . 5.88% $124,000 (1)
Two years . . . . . . . . . . 5.79 71,000 (1)
Three years . . . . . . . . . 5.47 10,000
Four years. . . . . . . . . . -- --
Thereafter. . . . . . . . . . 4.00 1,003
----- --------
Total FHLB advances. . . . 5.82% $206,003
===== ========
</TABLE>
(1) Includes variable rate advances which adjust quarterly.
SERVICE CORPORATION ACTIVITIES
The Bank is permitted to invest an amount equal to 2% of its assets
(excluding those of its subsidiaries) in its service corporations. Up to an
additional 1% of assets may be invested in service corporations provided that
such amount is used for certain types of community development projects. In
addition, federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance subsidiaries) in
which the institution owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the institution's total capital as defined below. As of
December 31, 1995, the Bank's investment in stock of and loans to its
subsidiaries (other than its special-purpose finance subsidiary) was in
compliance with the regulations and totaled $4.2 million. A federal
institution may also invest up to 30% of its assets in special-purpose finance
subsidiaries established and operated in accordance with federal regulations.
The Bank's investment in its special purpose finance subsidiary, D&N Funding I
Corp., was in compliance with these regulations at December 31, 1995. Federal
law imposes special capitalization requirements on savings institutions such as
the Bank which are engaged in activities through a subsidiary that are not
permissible for national banks. See "Regulation -- Regulatory Capital
Requirements." The following is a description of the Bank's service
corporations.
- 24 -
<PAGE> 25
D&N Enterprises, Inc. ("Enterprises") was formed in 1972 for the purpose
of developing real estate through joint venture arrangements. At December 31,
1995, the Company had a $300,000 investment in Enterprises and loans totaling
approximately $1.3 million to the subsidiary.
Enterprises entered into the Cumberland Joint Venture in February 1989
to acquire land (73 acres) and to develop the land into 168 residential
building sites in Rochester Hills, Michigan. Enterprises sold this property in
two separate transactions in 1993 and 1994 and provided financing to the new
borrowers at market rates and terms. The sales resulted in a total gain of
$662,000 recognized in 1994.
Enterprises entered into the Northside Joint Venture in March 1989 to
acquire and develop commercial sites in Shelby Township, Michigan. Enterprises
is in the process of marketing this property in its entirety.
D&N Holdings, Inc. ("Holdings") was formed in 1985 and is involved in
the sale of mortgage life insurance through its investment in Minnesota Mutual
Life Insurance Company ("MIMLIC") and also offers insurance products and
annuity contracts through Quincy Insurance Agency, Inc., a subsidiary of
Holdings formed in 1995. In Michigan, MIMLIC's mortgage life insurance policies
are marketed and sold primarily through Michigan savings institutions. At
December 31, 1995, D&N's investment in Holdings totaled approximately $200,000.
FINANCE SUBSIDIARY. In 1986, D&N incorporated a special-purpose finance
subsidiary, D&N Funding I Corp. ("Funding"). Funding was established solely
for the purpose of issuing collateralized mortgage obligations ("CMOs"). In
August 1986, Funding pledged $61.5 million in principal amount of FHLMC
participation certificates to collateralize the issuance and sale of the CMOs
from which D&N received $56.4 million in net proceeds. The CMOs were sold
through a third party conduit and were secured by the pledge of the
participation certificates. D&N reinvested the proceeds from the sale of the
CMOs in residential and commercial mortgage loans.
COMPETITION
At December 31, 1995, the Bank ranked second among all savings
institutions headquartered in the State of Michigan with respect to total
assets and is the largest Michigan savings institution based outside the
Detroit Metropolitan area. D&N is the largest financial institution based in
the Upper Peninsula of Michigan.
D&N experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factors in competing for deposits
are the ability to offer attractive rates, the availability of convenient
office locations and the range and quality of services offered.
Direct competition for deposits comes from other savings institutions,
credit unions and commercial banks. Additional significant competition for
deposits comes from money market mutual funds and corporate and government
securities. The primary factors in competing for loans are interest rates,
- 25 -
<PAGE> 26
loan origination fees and the range of services offered. Competition for
origination of real estate loans and consumer loans normally comes from other
savings institutions, credit unions, commercial banks, mortgage bankers,
mortgage brokers and insurance companies.
The deposit programs of savings institutions such as the Bank compete
with government securities, money market mutual funds and other investment
alternatives. Legislative and regulatory action has increased competition
between savings institutions and other financial institutions, such as
commercial banks, by expanding the ranges of financial services that may be
offered by savings institutions such as interest bearing checking accounts,
trust services and consumer loan products, while reducing or eliminating the
difference between savings institutions and commercial banks with respect to
long-term lending authority, taxation and maximum rates of interest that may be
paid on savings deposits.
EMPLOYEES
At December 31, 1995, the Company had 529 employees, including 98
part-time employees. Management considers its relations with its employees to
be satisfactory. The Company's employees are not represented by any collective
bargaining group.
The Company currently maintains a comprehensive employee benefit program
providing, among other benefits, a qualified pension plan, including a 401(k)
plan with an Employee Stock Ownership Program, hospitalization and major
medical insurance, paid sick leave, long-term disability insurance and life
insurance. The Company intends to terminate the pension plan and disburse all
of the assets in 1996. In connection with acquisitions of four savings and
loan institutions in 1980, 1982, 1986 and 1988, employees of these institutions
were made eligible to participate in D&N's sponsored pension and other benefit
programs and were given full credit for all years of service under prior plans
of the acquired institutions.
EXECUTIVE OFFICERS
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company or its
wholly owned subsidiary, other than the Chief Executive Officer, who do not
serve on the Company's Board of Directors. Executive officers are elected
annually to serve until their successors are elected or until they resign or
are removed by the Board of Directors. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were elected.
George J. Butvilas, age 50. Joining D&N as President in May 1990, Mr.
Butvilas was named Chief Executive Officer of the Bank in 1991 and Chief
Executive Officer of the Corporation in 1992. He brought with him over 16
years experience as a commercial and community banker. Mr. Butvilas was
formerly Executive Vice President and Director of Boulevard Bancorp, Inc. of
Chicago, Illinois.
- 26 -
<PAGE> 27
Kenneth R. Janson, age 44, is Executive Vice President/Chief Financial
Officer and Treasurer of the Company and the Bank. Prior to joining D&N in May
1988 as Vice President/Financial Analysis, he was affiliated with various
universities, the last six years as Associate Professor of Accounting at
Michigan Technological University. Mr. Janson is responsible for directing the
Bank's accounting, investment and investor relations functions.
Peter L. Lemmer, age 38, is Senior Vice President/General Counsel of the
Company and the Bank. Prior to joining D&N in October 1990, he held various
positions involving legal services, the last five years as Senior Vice
President/Compliance and Vice President, Associate General Counsel/Compliance
Officer with Cal America Savings, later known as Columbus Savings, and American
Federal Bank, respectively. Mr. Lemmer is responsible for the legal and
regulatory functions of the Bank.
Alfred J. Sliwinski, age 49, is Executive Vice President/Community
Banking. He has been employed by D&N in various branch operation capacities
since May 1977 and is presently responsible for the community banking, bank
operations and information systems functions of the Bank.
Richard E. West, age 49, is Senior Vice President/Wholesale Lending.
Prior to joining D&N in January 1990, he was Servicing Manager for 20 years
with Rothschild Financial Corporation and Valley National Bank of Arizona. Mr.
West is responsible for directing the loan servicing, residential lending and
consumer lending functions of the Bank.
Linda K. Korpela, age 45, is Vice President/Corporate Secretary of the
Company and the Bank. She has been with the Bank since 1969 and served as
Assistant Secretary of the Bank from 1978 to 1990.
Donald W. Schulze, age 45, is Senior Vice President/Human Resources of
the Bank. He has been with D&N in various capacities since 1986 and is
presently responsible for the training and development, facilities management
and human resources functions of the Bank.
Frank R. Donnelly, age 55, is Senior Vice President/Commercial Lending
of the Bank. He has been employed by the Bank in various capacities since 1965
and is presently responsible for the business lending and commercial real
estate lending functions of the Bank.
Leonard M. Bolduc, age 57, is Senior Vice President/Retail Loan
Operations of the Bank, responsible for planning and directing the consumer
lending and consumer and residential loan servicing functions. Prior to
joining D&N in May 1988, he was employed by Citicorp Acceptance Company for
three years, most recently as Regional Credit Center Manager. Mr. Bolduc was
also employed for 19 years in various capacities at ITT Consumer Financial
Corporation, his last position being Vice President/Division Director.
John L. Blissett, age 42, is Senior Vice President/Controller of the
Bank. He has been with D&N since 1983 and has served as Controller since that
time. He is responsible for the accounting, financial and regulatory
reporting, financial analysis, tax and risk management functions of the Bank.
- 27 -
<PAGE> 28
Daniel D. Greenlee, age 43, is Senior Vice President/Portfolio Manager
and Assistant Treasurer of the Bank. He has been with D&N in various
capacities since 1984 and is presently responsible for the cash management,
investment and secondary market functions of the Bank.
- 28 -
<PAGE> 29
REGULATION
GENERAL
The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all operations. The Bank is a member of
FHLB of Indianapolis and is subject to certain limited regulation by the
Federal Reserve Board. As the savings and loan holding company of the Bank,
the Company also is subject to federal regulation and oversight. The purpose
of the regulation of the Company and other holding companies is to protect
subsidiary savings institutions. The Bank is a member of the Savings
Association Insurance Fund ("SAIF"), and the deposits of the Bank are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Bank. Certain of these regulatory requirements and
restrictions are discussed below or elsewhere in this document.
FEDERAL REGULATION
The OTS has extensive authority over the operations of savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of June
30, 1995. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss reserves.
The OTS has established a schedule for the assessment of fees upon all
savings institutions to fund the operations of the OTS. The general
assessment, to be paid on a semi-annual basis, is based upon the savings
institution's total assets as reported in the institution's latest quarterly
thrift financial report. The Bank's OTS assessment for the fiscal year ended
December 31, 1995, was $218,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank
is prescribed by federal laws and regulations, and it is prohibited from
- 29 -
<PAGE> 30
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
institutions in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
institutions are also generally authorized to branch nationwide. The Bank is
in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At December 31, 1995, the Bank's lending limit under this restriction was $10.8
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
safety and soundness standards on matters such as loan underwriting and
documentation, internal controls and audit systems, interest rate risk exposure
and compensation and other employee benefits. Any institution which fails to
comply with these standards must submit a compliance plan. A failure to submit
a plan or to comply with an approved plan will subject the institution to
further enforcement action. The OTS and the other federal banking agencies
have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to the final form of the proposed
regulations.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged or is engaging in unsafe or unsound practices, or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital
and supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial
- 30 -
<PAGE> 31
supervisory concern pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period. For 1995, the assessment schedule for Bank Insurance Fund ("BIF")
members and SAIF members ranged from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as established by
the FDIC. In addition, under FDICIA, the FDIC may impose special assessments
on SAIF members to repay amounts borrowed from the United States Treasury or
for any other reason deemed necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. As a result of the BIF reaching its statutory reserve ratio, the
FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to 0.31% of deposits. The revisions became effective in the
third quarter of 1995. In addition, the BIF rates were further revised,
effective January 1996, to provide a range of 0% to .27% with a minimum annual
assessment of $2,000. The SAIF rates, however, were not adjusted. As a result
of these revisions, BIF members will generally pay lower premiums.
Due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s, the SAIF is not expected to attain the
designated reserve ratio until the year 2002. As a result, SAIF insured
members will generally be subject to higher deposit insurance premiums than BIF
members until, all things being equal, the SAIF attains the required reserve
ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF members to
offer loan and deposit products on more attractive terms than SAIF members due
to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. In order to eliminate this
disparity a number of proposals to recapitalize the SAIF have been recently
considered by the United States Congress. The plan under current consideration
provides for a one-time assessment, anticipated to range from .80% to .90%, to
be imposed on all deposits assessed at the SAIF rates as of March 31, 1995,
including those held by commercial banks, and for BIF deposit insurance
premiums to be used to pay the FICO bond interest on a pro rata basis together
with SAIF premiums. The BIF and SAIF would be merged into one fund as soon as
practicable, but no later than January 1, 1998. There can be no assurance that
any particular proposal will be enacted or that premiums for either BIF or SAIF
members will not be adjusted in the future by the FDIC or by legislative
action.
- 31 -
<PAGE> 32
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights (PMSRs) must be deducted from tangible capital. At December 31, 1995,
the Bank had $599,000 of unamortized PMSRs, $68,000 of which was required to be
deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings institutions that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the capital requirements,
all subsidiaries engaged solely in activities permissible for national banks or
engaged in certain other activities solely as agent for its customers are
"includable" subsidiaries that are consolidated for capital purposes in
proportion to the institution's level of ownership, including the assets of
includable subsidiaries in which the institution has a minority interest that
is not consolidated for GAAP purposes. For excludable subsidiaries the debt
and equity investments in such subsidiaries are deducted from assets and
capital, with a transition period ending on July 1, 1996, for
investments made before April 12, 1989. At December 31, 1995, the Bank had
approximately $1.7 million net investment in subsidiaries that will be excluded
from capital pursuant to this transition rule.
At December 31, 1995, the Bank had tangible capital of $61.1 million, or
5.10% of adjusted total assets, which is approximately $43.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which was phased-out over a five-year period) and up to
25% of other intangibles which meet certain separate salability and market
valuation tests. As a result of the prompt corrective action provisions of
FDICIA discussed below, however, a savings institution must maintain a core
capital ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
At December 31, 1995, the Bank had core capital equal to $61.1 million,
or 5.10% of adjusted total assets, which is $25.1 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
- 32 -
<PAGE> 33
The OTS risk-based requirement requires savings institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent of
core capital. The OTS is also authorized to require a savings institution to
maintain an additional amount of total capital to account for concentration of
credit risk and the risk of non-traditional activities. At December 31, 1995,
the Bank had $9.0 million of general loss reserves which could be counted as
supplementary capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1995.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings institution
with more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings institution, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule will not become effective until the OTS evaluates the process by which
savings institutions may appeal an interest rate risk deduction determination.
The OTS is uncertain as to when this evaluation may be completed. Any savings
institution with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise. The Bank does not expect the new rule to have a significant effect
on its calculation of total capital.
On December 31, 1995, the Bank had total capital of $70.0 million
(including $61.0 million in core capital and $9.0 million in qualifying
supplementary capital) and risk-weighted assets of $715.9 million (including
$31.8 million in converted off-balance sheet assets); or total capital of
- 33 -
<PAGE> 34
9.78% of risk-weighted assets. This amount was $12.8 million above the 8%
requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against institutions that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized institution" (generally defined to be
one with less than either a 4% core ratio, a 4% Tier 1 risk-based capital ratio
or an 8% risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase
its assets, acquire another institution, establish a branch or engage in any
new activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less)
is subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized institutions. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings institution, with certain limited exceptions, within 90
days after it becomes critically undercapitalized. Any undercapitalized
institution is also subject to the general enforcement authority of the OTS and
the FDIC, including the appointment of conservator or a receiver.
If the OTS determines that an institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice, it is authorized to
reclassify a well-capitalized institution as an adequately capitalized
institution and if the institution is adequately capitalized, to impose the
restrictions applicable to an undercapitalized institution. If the institution
is undercapitalized, the OTS is authorized to impose the restrictions
applicable to a significantly undercapitalized institution.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. The Company's stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Company.
- 34 -
<PAGE> 35
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on institutions with respect
to their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an institution from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the institution would be reduced below the amount required to be maintained for
the liquidation account established in connection with its mutual to stock
conversion.
Generally, institutions such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning
of the calendar year, or 75% of its net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings institutions that will meet their current minimum capital
requirement following a proposed capital distribution need only submit written
notice to the OTS 30 days prior to such distribution. The OTS may object to
the distribution during the 30-day period based on safety and soundness
concerns. See " -- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings institution may make
a capital distribution without notice to the OTS (unless it is a subsidiary of
a holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulation) following the proposed distribution.
Savings institutions that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net
income to date during the calendar year. A savings institution may not make a
capital distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
LIQUIDITY
All savings institutions, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of
the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
- 35 -
<PAGE> 36
conditions and savings flows of all savings institutions. At the present time,
the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the institution's
average daily balance of net withdrawable deposit accounts and current
borrowings. Penalties may be imposed upon institutions for violations of
either liquid asset ratio requirement. At December 31, 1995, the Bank was in
compliance with both requirements, with an overall liquid asset ratio of 8.3%
and a short-term liquid asset ratio of 7.5%.
ACCOUNTING
An OTS policy statement applicable to all savings institutions
clarifies and reemphasizes that the investment activities of a savings
institution must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment,
available for sale or trading) with appropriate documentation. The Bank is
in compliance with these rules.
The OTS has adopted an amendment to its accounting regulations,
which may be made more stringent than GAAP, to require that
transactions be reported in a manner that best reflects their underlying
economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of
its portfolio assets as defined by regulation in qualified thrift investments
on a monthly average for nine out of every 12 months on a rolling basis. Such
assets primarily consist of residential housing related loans and investments.
At December 31, 1995, the Bank met the test and has always met the test since
its inception.
Any savings institution that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and thereafter
remains a QTL. If the institution does not requalify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC permits it
to transfer to the Bank Insurance Fund. If an institution that fails the
test has not yet requalified and has not converted to a national bank, its new
investments and activities are limited to those permissible for both a savings
institution and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the institution is immediately
ineligible to receive any new FHLB borrowings and is subject to national
bank limits for payment of dividends. If such institution has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments
- 36 -
<PAGE> 37
and cease all activities not permissible for a national bank. In addition,
it must repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any institution that fails the QTL test is
controlled by a holding company, then within one year after the failure,
the holding company must register as a bank holding company and become
subject to all restrictions on bank holding companies. See " -- Holding
Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe
and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS,
in connection with the examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention being
given to the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank
was examined for CRA compliance in 1995 and received a rating of
"Satisfactory".
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to
the institution as transactions with non-affiliates. In addition, certain of
these transactions are restricted to a percentage of the institution's
capital. Affiliates of the Bank include the Company and any company which is
under common control with the Bank. In addition, a savings institution may
not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. The Bank's
subsidiaries are not deemed affiliates; however, the OTS has the discretion to
treat subsidiaries of savings institutions as affiliates on a case by case
basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among
other things, such loans must be made on terms substantially the same as
for loans to unaffiliated individuals.
- 37 -
<PAGE> 38
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of
another savings institution as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the
Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings institution) would become subject to such restrictions
unless such other institutions each qualify as a QTL and were acquired in a
supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure the Company
must register as, and will become subject to, the restrictions applicable to
bank holding companies. The activities authorized for a bank holding company
are more limited than are the activities authorized for a unitary or
multiple savings and loan holding company. See " -- Qualified Thrift Lender
Test."
The Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured institution. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings institutions in more than one state. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
institution.
FEDERAL SECURITIES LAW
The stock of the Company is registered with the SEC under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
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<PAGE> 39
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking
accounts). At December 31, 1995, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require institutions to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Indianapolis, which is one of
12 regional FHLBs, that administer the home financing credit function of
savings institutions. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to
be fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term advances are required to provide funds for residential
home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1995, the Bank had $19.7 million in
FHLB stock, which was in compliance with this requirement. In past years,
the Bank has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 9.16% and were 7.88% for
calendar year 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderate priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of FHLB dividends paid and could continue to do so in the future.
These contributions could also have an adverse effect on the value of FHLB
stock in the future. A reduction in value of the Bank's FHLB stock may
result in a corresponding reduction in the Bank's capital.
For the year ended December 31, 1995, the dividends paid by the FHLB
of Indianapolis to the Bank totaled $1.6 million, which constitutes a $419,000
increase from the amount of dividends received in calendar year 1994. The
$398,000 dividend received for the quarter ended December 31, 1995 reflects an
annualized rate of 8.00%.
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<PAGE> 40
FEDERAL AND STATE TAXATION
D&N and its subsidiaries file a consolidated federal income tax return
on a calendar year basis using the accrual method of accounting.
Savings institutions, such as the Bank, that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to
establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "nonqualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable
income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings institution over a period of years.
The percentage of specially computed taxable income that is used
to compute a savings institution's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction")
is 8%. The percentage bad debt deduction thus computed is reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permits
qualifying savings institutions to be taxed at a lower effective federal
income tax rate than that applicable to corporations generally (approximately
32.2% assuming the maximum percentage bad debt deduction).
If an institution's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
institution was not eligible to compute its bad debt deduction under the
percentage of taxable income method. At December 31, 1995, approximately 88%
of D&N's total assets were specified assets. No representation can be made as
to whether D&N will meet the 60% test for subsequent taxable years.
Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum
of the loans outstanding at the close of those six years or (ii) the balance
in the reserve account at the close of the last taxable year prior to the
most recent adoption of the experience method or on December 31, 1987,
whichever is later (assuming that the loans outstanding have not declined
since then).
Under the percentage of taxable income method, the percentage bad
debt deduction cannot exceed the amount necessary to increase the balance
in the reserve for "qualifying real property loans" to an amount equal to 6%
of such loans outstanding at the end of the taxable year or the greater of (i)
the
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<PAGE> 41
amount deductible under the experience method or (ii) the amount which
when added to the bad debt deduction for "nonqualifying loans" equals the
amount by which 12% of the amount comprising savings accounts at year-end
exceeds the sum of surplus, undivided profits and reserves at the beginning of
the year. At December 31, 1995, the 6% and 12% limitations did not restrict
the percentage bad debt deduction available to D&N. It is not expected
that these limitations would be a limiting factor in the foreseeable
future.
In addition to the regular income tax, corporations, including
savings institutions such as the Bank, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent
it exceeds the corporation's regular income tax and net operating losses can
offset no more than 90% of alternative minimum taxable income. For
taxable years beginning after 1986 and before 1996, corporations,
including savings institutions such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings institution's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed
under the experience method and to the extent of the institution's
supplemental reserves for losses on loans ("Excess"), such Excess may not,
without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions
on redemption, dissolution or liquidation) or for any other purpose (except
to absorb bad debt losses). As of December 31, 1995, the Bank's Excess for
tax purposes totaled approximately $14.0 million. If utilized other than to
absorb bad debt losses, the tax liability related to the Bank's Excess would
be approximately $4.9 million.
Savings institutions, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing their
percentage bad debt deduction for losses attributable to activities of the
non-savings institution members of the consolidated group that are
functionally related to the activities of the savings institution member.
D&N and its consolidated subsidiaries have been audited or their
books closed without audit by the IRS with respect to consolidated federal
income tax returns through December 31, 1993. With respect to years
examined by the IRS, either all deficiencies have been satisfied or
sufficient reserves have been established to satisfy asserted deficiencies.
In the opinion of management, any examination of still open returns (including
returns of subsidiaries and predecessors of, or entities merged into, D&N)
would not result in a deficiency which could have a material adverse
effect on the financial condition of D&N and its consolidated subsidiaries.
See Note K of Notes to Consolidated Financial Statements.
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<PAGE> 42
MICHIGAN TAXATION. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings
bank or a savings and loan institution less deposits owed to the federal or
Michigan state governments, their agencies or certain other financial
institutions. The Michigan intangibles tax is being phased out over four
years until the tax is fully repealed effective January 1, 1998. The State of
Michigan also imposes a "Single Business Tax." The Single Business Tax is a
value-added type of tax for the privilege of doing business in the
State of Michigan. The major components of the Single Business Tax are
compensation, depreciation and federal taxable income, as increased by net
operating loss carryforwards, if any, utilized in arriving at federal taxable
income, and decreased by the cost of acquisition of tangible assets during
the year. The tax rate is 2.30% of the Michigan adjusted tax base.
DELAWARE TAXATION. As a Delaware business corporation, the Company
is required to file annual returns with and pay annual fees to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by
the State of Delaware based on the number of authorized shares of the Company
stock.
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<PAGE> 43
ITEM 2. PROPERTIES
Offices
The following table sets forth information with respect to D&N offices
as of December 31, 1995.
<TABLE>
<CAPTION>
Owned Lease Date Net
or Expiration Acquired or Book
Office Locations Leased Date Constructed Value
- ---------------------------------------- ------------ ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Main Office:
400 Quincy Street
Hancock, Michigan. . . . . . . . . Owned -- 1972 $2,951,848
Branch Offices:
1000 S. Carpenter Street
Iron Mountain, Michigan. . . . . . Owned -- 1968 185,464
1930 U.S. 41, West
Marquette, Michigan. . . . . . . . Owned -- 1976 1,539,601
2325 Ludington Street
Escanaba, Michigan . . . . . . . . Owned -- 1975 320,146
501 Court Street
Sault Ste. Marie, Michigan . . . . Owned -- 1980 347,762
U.S. 41
Ishpeming, Michigan. . . . . . . . Owned -- 1978 201,620
1015 Tenth Street
Menominee, Michigan. . . . . . . . Owned -- 1976 199,836
100 S. Suffolk Street
Ironwood, Michigan . . . . . . . . Owned -- 1982 267,518
330 Fifth Street
Calumet, Michigan. . . . . . . . . Owned -- 1980 91,667
Festival Foods, 1810 W. Memorial
Houghton, Michigan . . . . . . . . Leased September 30, 1996 1986 5,096
No Options
Pat's Foods, 111 U.S. 41
L'Anse, Michigan . . . . . . . . . Leased December 31, 1997 1992 4,857
No Options
Pat's IGA, 1507 Cleveland Avenue
Marinette, Wisconsin . . . . . . . Leased June 30, 1998 1993 10,858
No Options
901 W. Sharon Avenue, Suite 100
Houghton, Michigan . . . . . . . . Leased May 25, 2000 1995 191,527
Two 5 Yr. Options
141 S. Main Street
Romeo, Michigan. . . . . . . . . . Owned -- 1974 339,693
1305 W. 14 Mile Road
Clawson, Michigan. . . . . . . . . Leased March 31, 1998 1995 3,319
One 3 Yr. Option
363 West Big Beaver, Suite 150
Troy, Michigan . . . . . . . . . . Leased July 31, 2002 1995 334,264
Two 3 Yr. Options
460 S. Saginaw Street
Flint, Michigan. . . . . . . . . . Owned -- 1924 863,083
</TABLE>
- 43 -
<PAGE> 44
<TABLE>
<CAPTION>
Owned Lease Date Net
or Expiration Acquired or Book
Office Locations Leased Date Constructed Value
- ----------------------------------- ----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
300 Fenton Square
Fenton, Michigan . . . . . . . . . Owned -- 1984 194,247
2629 W. Pierson Road
Flint, Michigan. . . . . . . . . . Leased October 4, 2010 1995 --
No Options
3410 S. Dort Highway
Flint, Michigan. . . . . . . . . . Leased October 1, 1996 1961 224
Two 3 Yr. Options
G-4409 Miller Road
Flint, Michigan. . . . . . . . . . Owned -- 1975 431,321
1151 N. Ballenger Highway
Flint, Michigan. . . . . . . . . . Leased August 31, 1996 1975 --
No Options
4400 South Saginaw, Suite 1310
Flint, Michigan. . . . . . . . . . Leased February 28, 1999 1994 59,491
One 5 Yr. Option
12770 S. Saginaw Street
Grand Blanc, Michigan. . . . . . . Owned -- 1981 347,941
727 S. State Road
Davison, Michigan. . . . . . . . . Owned -- 1972 190,829
1559 E. Pierson Road
Flushing, Michigan . . . . . . . . Owned -- 1974 219,888
G-6120 Fenton Road
Flint, Michigan. . . . . . . . . . Owned -- 1979 155,867
3213 Genesee Road
Flint, Michigan. . . . . . . . . . Owned -- 1979 206,598
611 East Grand River
Howell, Michigan . . . . . . . . . Leased January 1, 2002 1967 9,690
Two 5 Yr. Options
9880 East Grand River
Brighton, Michigan . . . . . . . . Leased February 28, 1999 1988 802
Two 5 Yr. Options
419 South Lafayette
South Lyon, Michigan . . . . . . . Leased October 31, 2000 1990 331,903
One 10 Yr. Option
1075 East Main Street
Pinckney, Michigan . . . . . . . . Owned -- 1971 351,516
10590 Highland Road
Hartland, Michigan . . . . . . . . Leased August 1, 2000 1995 82,549
Two 5 Yr. Options
524 West Grand River
Fowlerville, Michigan. . . . . . . Owned -- 1974 61,825
5844 N. Sheldon Road
Canton, Michigan . . . . . . . . . Leased July 31, 1997 1995 835
One 3 Yr. Option
</TABLE>
- 44 -
<PAGE> 45
<TABLE>
<CAPTION>
Owned Lease Date Net
or Expiration Acquired or Book
Office Locations Leased Date Constructed Value
- ---------------------------------- ------------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Other Office Properties:
Troy Commercial Lending
363 W Big Beaver Road, Suite 150
Troy, Michigan . . . . . . . . . . Leased July 31, 2002 1995 32,032
Two 3 Yr. Options
Marquette Residential Lending
309 S. Front Street
Marquette, Michigan. . . . . . . . Leased October 31, 1997 1992 3,916
No Options
Mortgage Corp. Lending Office
3900 Sparks Drive SE, Suite 105
Grand Rapids, Michigan . . . . . . Leased February 28, 1998 1994 --
No Options
Mortgage Corp. Lending Office
2620 S. Cleveland Avenue, Suite 201
St. Joseph, Michigan . . . . . . . Leased October 31, 1996 1994 --
No Options
Mortgage Corp. Lending Office
7071 Orchard Lake Road, Suite 100
West Bloomfield, Michigan. . . . . Leased November 1, 1998 1995 --
435 Building
435 Mesnard Street
Hancock, Michigan. . . . . . . . . Owned -- 1974 305,610
424 Building
424 Hancock Street
Hancock, Michigan. . . . . . . . . Owned -- 1986 503,881
</TABLE>
At December 31, 1995, the net book value of the land, buildings
and leasehold improvements owned by D&N was $11,349,000, and the net book
value of its office furniture, fixtures and equipment was $3,389,000.
COMPUTER EQUIPMENT. D&N processes all depositor and borrower
customer files and transactions through a third party data services provider
including general ledger accounting and information reporting. The book value
of all computer equipment and software owned by the Company was $870,000 at
December 31, 1995. The Company also leases an insignificant amount of data
processing hardware and software.
Item 3. Legal Proceedings
The Company is not involved in any material pending legal
proceedings other than nonmaterial proceedings undertaken in the ordinary
course of its business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1995.
- 45 -
<PAGE> 46
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Page 45 of the attached 1995 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Page 1 of the attached 1995 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Pages 10 through 18 of the attached 1995 Annual Report to
Stockholders are herein incorporated by reference.
Item 8. Financial Statements Supplementary Data
Pages 19 through 41 of the attached 1995 Annual Report to
Stockholders are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
- 46 -
<PAGE> 47
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Executive Officers of the Company is contained on
page 30 herein. Information concerning Directors of the Company, is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 1996, except for
information contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation." A copy of this Proxy Statement
will be filed not later than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1996, except for information contained under the
heading "Compensation Committee Report" and "Stockholder Return Performance
Presentation." A copy of this Proxy Statement will be filed not later than
120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held in
1996, except for information contained under the heading "Compensation
Committee Report" and "Stockholder Return Performance Presentation." A copy
of this Proxy Statement will be filed not later than 120 days after the close
of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1996,
except for the information contained under the heading "Compensation
Committee Report" and "Stockholder Return Performance Presentation." A copy
of this Proxy Statement will be filed not later than 120 days after the close
of the fiscal year.
- 47 -
<PAGE> 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1995, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Annual Report Section Pages in Annual Report
- --------------------------------------- -----------------------
<S> <C>
Selected Financial Data 1
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10 - 18
Consolidated Statements of Condition 19
Consolidated Statements of Operations 20 - 21
Consolidated Statements of
Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23 - 40
Report of Independent Auditors 41
</TABLE>
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
- 48 -
<PAGE> 49
(a) (3) Exhibits
<TABLE>
<CAPTION>
Sequential
Reference to Page Number
Prior Filing Where Attached/
or Exhibit Located in
Regulation Number This
S-K Exhibit Attached Form 10-K
Number Document Hereto Report
- ----------- ----------------------------- ------------- --------------
<S> <C> <C> <C>
3(i) Articles of Incorporation * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the * Not applicable
rights of security holders,
including debentures
9 Voting Trust Agreement None Not applicable
10 Material Contracts
1993 401(k) Plan & Trust * Not applicable
(1994 Amendment)
1984 Stock Option Plan * Not applicable
(1995 Amendment)
1994 Management Stock Incentive * Not applicable
Plan (1995 Amendment)
Employment Agreement of
G. Butvilas * Not applicable
11 Statement re: computation 11 Page 52
of per share earnings
12 Statement re: computation Not required Not applicable
of ratios
13 Annual Report to Security 13 Page 53
Holders
16 Letter re: change in None Not applicable
Certifying Accountant
18 Letter re: change in None Not applicable
accounting principles
21 Subsidiaries of Registrant 21 Page 100
22 Published report regarding None Not applicable
matters submitted to vote
of security holders
23 Consent of Experts and 23 Page 101
Counsel
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27 Page 102
28 Information from reports None Not applicable
furnished to state
insurance regulatory
authorities
99 Additional exhibits None Not applicable
</TABLE>
- 49 -
<PAGE> 50
- ---------------------
*Filed as exhibits to the Registrant's registration statement on Form S-2
(File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description. All of
such previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
Current Reports on Form 8-K were filed on December 28, 1995 and February
28, 1996 as part of a Registration Statement for the acquisition of Macomb
Federal Savings Bank.
- 50 -
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date March 25, 1996 By:/s/ GEORGE J. BUTVILAS
--------------------------- ---------------------------------
GEORGE J. BUTVILAS
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ GEORGE J. BUTVILAS By:/s/ KENNETH D. SEATON
---------------------------- ---------------------------------
GEORGE J. BUTVILAS KENNETH D. SEATON
Director, President and Director, Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Date March 25, 1996 Date March 25, 1996
--------------------------- -------------------------------
By:/s/ JOSEPH C. BROMLEY By:/s/ SHARON A. REESE DALENBERG
----------------------------- -------------------------------
JOSEPH C. BROMLEY SHARON A. REESE DALENBERG
Director Director
Date March 25, 1996 Date March 25, 1996
--------------------------- ------------------------------
By:/s/ RANDOLPH P. PIPER By:/s/ THOMAS J. ST. DENNIS
---------------------------- -------------------------------
RANDOLPH P. PIPER THOMAS J. ST. DENNIS
Director Director
Date March 25, 1996 Date March 25, 1996
--------------------------- ------------------------------
By:/s/ PETER VAN PELT By:/s/ B. THOMAS M. SMITH, JR.
---------------------------- -------------------------------
PETER VAN PELT B. THOMAS M. SMITH, JR.
Director Director
Date March 25, 1996 Date March 25, 1996
--------------------------- ------------------------------
By: /s/ KENNETH R. JANSON
----------------------------
KENNETH R. JANSON
Executive Vice President/
Chief Financial Officer
Date March 25, 1996
---------------------------
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Reference to Page Number
Prior Filing Where Attached/
or Exhibit Located in
Regulation Number This
S-K Exhibit Attached Form 10-K
Number Document Hereto Report
- ----------- ----------------------------- ------------- --------------
<S> <C> <C> <C>
3(i) Articles of Incorporation * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the * Not applicable
rights of security holders,
including debentures
9 Voting Trust Agreement None Not applicable
10 Material Contracts
1993 401(k) Plan & Trust * Not applicable
(1994 Amendment)
1984 Stock Option Plan * Not applicable
(1995 Amendment)
1994 Management Stock Incentive * Not applicable
Plan (1995 Amendment)
Employment Agreement of
G. Butvilas * Not applicable
11 Statement re: computation 11 Page 52
of per share earnings
12 Statement re: computation Not required Not applicable
of ratios
13 Annual Report to Security 13 Page 53
Holders
16 Letter re: change in None Not applicable
Certifying Accountant
18 Letter re: change in None Not applicable
accounting principles
21 Subsidiaries of Registrant 21 Page 100
22 Published report regarding None Not applicable
matters submitted to vote
of security holders
23 Consent of Experts and 23 Page 101
Counsel
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27 Page 102
28 Information from reports None Not applicable
furnished to state
insurance regulatory
authorities
99 Additional exhibits None Not applicable
</TABLE>
- ---------------------
*Filed as exhibits to the Registrant's registration statement on Form
S-2 (File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description. All of
such previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1994 1993
---------------- ------------------ ------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- -------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $10,140 $10,140 $ 3,091 $ 3,091 ($67,020) ($67,020)
======= ======== ======= ======== ======== ========
Average shares
Common 6,730 6,730 6,720 6,720 3,724 3,724
Common equivalents 289 503 26 14 88 15
------- ------- ------- ------- ------- --------
Total 7,019 7,233 6,746 6,734 3,812 3,739
======= ======== ======= ======== ======== ========
Earnings (loss) per
common and common
equivalent share $ 1.45 $ 1.40 $ 0.46 $ 0.46 ($ 17.58) ($ 17.93)
======= ======== ======= ======= ======== ========
</TABLE>
Common share equivalents assume exercise of stock options and warrants, if
dilutive.
- 52 -
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL HIGHLIGHTS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Net interest income ........................... $ 33,632 $ 22,614 $ 20,130 $ 28,690 $ 29,976
Provision for loan losses ..................... 2,400 100 --- --- 10,150
Noninterest income (loss) ..................... 6,834 7,424 (21,718) 13,362 24,743
Net income (loss) ............................. 10,140 3,091 (67,020)(1) 3,773 3,573
Primary earnings (loss) per share ............. 1.45 0.46 (18.00) 1.01 0.96
Weighted average shares (primary) ............. 7,019,075 6,720,011 3,724,264 3,708,418 3,708,418
Fully diluted earnings (loss) per share ....... 1.40 0.46 (18.00) 1.01 0.96
Weighted average shares (fully diluted) ....... 7,232,517 6,720,011 3,724,264 3,708,418 3,708,418
Dividends per share ........................... --- --- --- --- ---
Stock price range ............................. 7 1/4-13 1/2 6 5/8-10 6 1/2-12 1/2 4 3/4-8 1/2 2 1/2-5 1/2
AT YEAR END:
Total assets .................................. 1,186,661 1,088,693 1,041,950 1,212,196 1,518,930
Net loans receivable .......................... 931,188 801,248 627,605 707,570 845,576
Nonperforming assets .......................... 9,624 24,515 43,557 55,890 66,951
Mortgage-backed securities .................... 123,475 146,646 167,677 235,137 365,240
Excess of cost over net assets of
association acquired ........................ --- 384 845 36,380 38,320
Mortgage servicing rights ..................... 1,113 968 9,870 29,198 8,992
Deposits ...................................... 887,869 784,075 811,510 881,424 979,583
Borrowings .................................... 216,232 226,857 101,513 174,061 373,851
Stockholders' equity .......................... 65,711 52,623 51,454 96,770 92,997
Per share ................................... 9.70 7.83 7.66 26.10 25.08
Tangible stockholders' equity ................. 64,587 52,562 51,616 62,304 58,386
Per share ................................... 9.53 7.82 7.68 16.80 15.74
Number of offices ............................. 45 40 37 39 46
SELECTED RATIOS:
Return on average assets ...................... 0.89% 0.30% (5.68)% 0.27% 0.21%
Return on average equity ...................... 17.18 6.04 (80.13) 3.98 3.90
Average equity to average assets .............. 5.20 4.92 7.09 6.79 5.49
Net interest margin ........................... 3.05 2.28 1.91 2.26 1.95
General and administrative expenses
to average assets ........................... 2.47 2.50 2.32 1.82 1.73
Nonperforming assets to total assets .......... 0.81 2.25 4.18 4.61 4.41
Allowance for loan losses to
nonperforming loans ......................... 121.53 45.56 37.76 34.59 33.71
Allowance for loan losses to total loans ...... 1.06 1.01 1.79 2.14 2.16
Net loan charge-offs to average loans ......... 0.08 0.44 0.61 0.44 0.99
Dividend payout ratio ......................... --- --- --- --- ---
Tangible capital ratio ........................ 5.10 4.71 4.56 4.04 3.36
Core capital ratio ............................ 5.10 4.75 4.64 5.04 4.86
Risk-based capital ratio ...................... 9.78 9.34 9.47 9.93 9.66
</TABLE>
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
D&N Financial Corporation (D&N or the Company) is a savings bank holding
company whose sole subsidiary is D&N Bank (the Bank). D&N's primary focus is
the delivery of retail financial services through its network of community
banking offices in Michigan and Wisconsin. This discussion highlights important
trends and events that have shaped the Company's financial performance in 1995.
In 1995, D&N reported net income of $10.1 million, or $1.45 per share. On
a fully diluted basis, 1995 earnings were $1.40 per share. These results
compare to net income of $3.1 million, or $0.46 per share, in 1994, and an
aggregate net loss of $67.0 million, or $18.00 per share, in 1993. The 1993
loss consisted of $31.4 million, or $8.44 per share, from operations before
consideration of an extraordinary item and the cumulative effects of changes in
accounting principles, and $35.6 million, or $9.56 per share, from those
nonrecurring items.
On December 31, 1995, the Company's balance sheet included total assets of
$1.19 billion, compared to $1.09 billion at the end of 1994 and $1.04 billion
at the end of 1993. Balance sheet growth in 1994 and 1995 followed several
years of planned shrinkage as the Company refocused its efforts on its
community banking franchise and de-emphasized its commercial real estate and
investment activities. During 1995, the average balance of earning assets grew
to $1.10 billion, up from the $991 million level in 1994 and the $1.05 billion
average of 1993. Net interest income after provision for loan losses in 1995
totaled $31.2 million, compared to $22.5 million in 1994 and $20.1 million in
1993. In both 1995 and 1994, the income statements benefited from the declining
adverse impact of unfavorable interest rate exchange agreements. Net interest
expense attributable to these interest rate swaps totaled $2.5 million in 1995,
down from $9.8 million in 1994 and $15.3 million in 1993.
In 1995, the Company made a $2.4 million provision for loan losses after
making a provision of $100,000 in 1994 and no such provision in 1993. At
December 31, 1995, the allowance for loan losses was $9.9 million, or 1.06% of
outstanding loans. D&N's portfolio of nonperforming assets decreased during
1995 by $14.9 million, or 61%, from $24.5 million to $9.6 million.
Nonperforming assets totaled $43.6 million at year-end 1993.
Noninterest income from operations totaled $6.1 million in 1995, compared
to $6.7 million in 1994 and a $9.7 million loss reported in 1993. The 1993 loss
included a $14.6 million charge to write down D&N's portfolio of purchased
mortgage loan servicing rights. All but a small portion of this portfolio was
sold in 1994 as the Company concentrated its loan servicing activities on
originated loans. A gain of $140,000 was recorded in 1994 on the sale of the
purchased mortgage loan servicing rights, and the scale of the Company's loan
servicing operations was subsequently reduced. Loan servicing and
administrative fee income was smaller in 1995 than 1994, reflecting that
smaller scale. Also, 1994's results included as other income, earnings recorded
at the completion of the Company's participation in a residential real estate
development joint venture.
In 1995, D&N recognized gains totaling $779,000 on sales of
mortgage-backed and investment securities and mortgage loans. In 1994, such
gains totaled $622,000, and in 1993, $12.5 million of net losses were recorded,
primarily the consequence of adopting a held-for-sale accounting convention for
the Company's portfolio of investments in interest- only strip securities
(IOs).
In 1993, the Company reported an extraordinary loss on the early
prepayment of $43.1 million of long-term debt. Net of income tax effects, this
loss totaled $1.9 million. Also in 1993, the Company recorded a $1.1 million
gain from a change in accounting for income taxes and a $34.8 million loss as
the cumulative effect of a change in the accounting treatment accorded
goodwill.
10
<PAGE> 3
RESULTS OF OPERATIONS NET INTEREST INCOME The Company's primary source of
earnings is its net interest income, defined as the difference between the
interest earned on its loans and investments and the interest paid on its
deposits and other liabilities. Interest income and interest expense each
increased in 1995 as the average size of the Company's balance sheet was
increased. Interest income increased by $18.8 million, or 27.2%, as the average
yield on earning assets increased by 99 basis points to 7.96% in 1995 from 6.97%
in 1994. In 1993, earning assets yielded 7.37%. Interest expense increased by
$7.8 million, or 16.7%, in 1995 as the average cost of interest-bearing
liabilities increased by 23 basis points. In 1995, interest-bearing liabilities
had an average cost of 5.15%, compared to 4.92% in 1994 and 5.65% in 1993.
Because the average yield on interest-earning assets increased more than the
average funding cost in 1995, the Company's interest rate spread increased from
2.05% in 1994 to 2.81% in 1995. In 1993, the spread was 1.72%. Similarly, the
Bank's net interest margin, or ratio of net interest income to average
interest-earning assets, increased from 2.28% in 1994 to 3.05% in 1995. In 1993,
the net interest margin was 1.91%. Average interest-earning assets exceeded
average interest-bearing liabilities by $50.1 million in 1995 compared to $47.0
million in 1994 and $36.0 million in 1993.
The improvement in spread and margin in 1995 reflects primarily the
decreasing burden of interest rate exchange agreements on interest expense, as
the burden of those instruments declined from 104 basis points in 1994 to 24
basis points in 1995.
Average balances of loans outstanding were higher in 1995 than 1994, as the
Company's loan originations increased significantly. Average balances of
mortgage-backed securities were slightly higher, while the investment securities
category declined. Loans increased by $121.5 million, or 16.2%; mortgage-backed
securities increased by $4.5 million, or 3.5%; and investment securities
declined by $13.2 million, or 11.9%. Average earnings rates on the loan,
mortgage-backed securities and investment portfolios were higher in 1995 than
1994. In 1995, loans earned an average yield of 8.13% compared to 7.56% in 1994.
Mortgage-backed securities earned an average of 7.61% in 1995, versus an average
rate of 5.81% in 1994. Investment securities earned 6.96% in 1995, up from 4.40%
in 1994.
Average balances of loans also increased from 1993 to 1994 as the Company
renewed its community banking strategy after restructuring its balance sheet in
1993. Average balances of mortgage-backed securities and investment securities
fell significantly from 1993 to 1994 as D&N deployed surplus liquidity assets to
fund loan growth.
Average deposit balances increased 3.7%, to $818 million in 1995, from $789
million in 1994. The average cost of deposits increased 90 basis points, to
4.51% in 1995, from 3.61% in 1994, as the increasing short term rates of 1993
worked their way through the deposit file. From 1993 to 1994, average deposit
balances fell by $50.5 million. In 1993, the average cost of deposits was 3.87%.
The average balance of borrowed funds increased by 52.1%, to $236 million
in 1995, from $155 million in 1994. In 1993, the average balance of borrowed
funds was $178 million.
11
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following tables set forth the extent to which the Company's net
interest income has been affected by changes in average interest rates and
average balances of interest-earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------------
Increase
1995 1994 1995 1994 1995 1994 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(3) $ 871,032 $749,486 8.13% 7.56% $70,815 $ 56,634 $ 14,181 $ 9,651 $ 4,530
Mortgage-backed securities(4) 135,614 131,084 7.61 5.81 10,314 7,610 2,704 70 2,634
Investments and deposits(4) 97,652 110,894 6.96 4.40 6,792 4,883 1,909 (641) 2,550
----------------------------------------------------------------------------------------------------
1,104,298 991,464 7.96 6.97 87,921 69,127 18,794 9,080 9,714
----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 817,994 789,176 4.51 3.61 36,913 28,494 8,419 1,075 7,344
Borrowings 236,216 155,303 6.29 5.28 14,855 8,207 6,648 4,871 1,777
Interest rate instruments -- -- 0.24 1.04 2,521 9,812 (7,291) -- (7,291)
----------------------------------------------------------------------------------------------------
1,054,210 944,479 5.15 4.92 54,289 46,513 7,776 5,946 1,830
----------------------------------------------------------------------------------------------------
Interest rate spread 2.81 2.05
Excess average earning assets $ 50,088 $ 46,985 7.96 6.97
===========================================
Net interest margin 3.05% 2.28% $33,632 $ 22,614 $ 11,018 $ 3,134 $ 7,884
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
--------------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------
Increase
1994 1993 1994 1993 1994 1993 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(3) $ 749,486 $ 662,235 7.56 8.65 $56,634 $ 57,278 $ (644) $ 7,066 $ (7,710)
Mortgage-backed securities(4) 131,084 221,758 5.81 5.70 7,610 12,649 (5,039) (4,629) (410)
Investments and deposits(4) 110,894 169,343 4.40 4.56 4,883 7,728 (2,845) (2,582) (263)
-------------------------------------------------------------------------------------------------
991,464 1,053,336 6.97 7.37 69,127 77,655 (8,528) (145) (8,383)
-------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 789,176 839,716 3.61 3.87 28,494 32,478 (3,984) (1,892) (2,092)
Borrowings 155,303 177,595 5.28 5.48 8,207 9,738 (1,531) (1,198) (333)
Interest rate instruments -- -- 1.04 1.50 9,812 15,309 (5,497) -- (5,497)
-------------------------------------------------------------------------------------------------
944,479 1,017,311 4.92 5.65 46,513 57,525 (11,012) (3,090) (7,922)
-------------------------------------------------------------------------------------------------
Interest rate spread 2.05 1.72
Excess average earning assets $ 46,985 $ 36,025 6.97 7.37
=========================================
Net interest margin 2.28% 1.91% $22,614 $ 20,130 $ 2,484 $ 2,945 $ (461)
=====================================================================
</TABLE>
(1) Based on average daily balances
(2) Changes in interest income and interest expense attributable to changes in
both rate and volume have been attributed proportionately to the change due
to rate and the change due to volume
(3) Loans on nonaccrual are included in the average balances shown above. The
variance due to rate includes the effect of such loans because no interest
is earned on such loans.
(4) Average rates on mortgage-backed and investment securities available for
sale are based on historical amortized cost balances.
D&N's interest expense includes the net costs of interest
rate hedging instruments. In 1995, contracts written in the 1980s to
exchange fixed interest payments for variable receipts ("interest rate
swaps") resulted in net charges to interest expense of $2.5 million. This
swap expense was $9.8 million in 1994 and, along with the costs of now
expired interest rate cap contracts, totaled $15.3 million in 1993. The
swap contracts, originally executed as hedges against rising interest
rates, have now expired, with the final contract maturing in November of
1995. The final cap contract expired on March 31, 1993.
12
<PAGE> 5
Noninterest Income
D&N's noninterest income includes recurring fees from loan and
deposit-related activities, recurring income from the marketing of assets that
are originated for sale, and nonrecurring gains and losses from events such as
securities sales and write-downs of depreciated assets.
In 1995, net loan servicing and administrative fees were $1.9 million, down
from 1994's level of $2.2 million primarily due to the sale in mid-1993 of a
substantial portion of the Bank's portfolio of purchased mortgage loan servicing
rights (PMSRs). Deposit-related fees were $3.1 million in 1995, up slightly from
the 1994 level. Gains, losses and other income totaled $1.8 million in 1995. Net
gains on sales of investment securities, mortgage-backed securities and
purchased loans totaled $779,000 during the year, while net funding gains and
gains from the capitalization of servicing rights for mortgage loans originated
and then sold by the Bank amounted to $882,000. In 1994, these items totaled
$1.4 million, including in the other income category a $662,000 gain realized on
the completion of a Bank subsidiary's investment in a real estate development
joint venture. Nonrecurring gains from the sale of investment assets and loan
servicing rights totaled $762,000 in 1994.
In 1993, the noninterest income category was dominated by two nonrecurring
items. The first was the recognition of market value depreciation that had been
present in the Company's portfolio of IO strip securities but previously
deferred because of the securities' status as hedge instruments. The second was
the recognition of impairment of value in the Company's portfolio of PMSRs.
Together, these two adjustments required charges of $33.1 million, resulting in
an aggregate loss of $21.7 million in the noninterest income category for 1993.
Noninterest Expense
General and administrative expenses increased in 1995 by $2.0 million, or
7.7%, following a decrease of $1.4 million, or 5.2%, in 1994. Compensation
expense increased during the year by $1.1 million, or 8.0%, following an
increase of $1.0 million, or 8.0%, in 1994. In 1993, the Company began to
rebuild its community banking infrastructure in anticipation of the
recapitalization that was affected late that year. Occupancy costs totaled $2.3
million in 1995 and $2.0 million each of the years 1994 and 1993.
In 1995, noninterest expense included a credit of $999,000 related to other
real estate owned (OREO). This category includes net operating expenses of
$10,000 and net recoveries on sales of OREO of $989,000. In 1994, OREO items
contributed net revenue of $2.1 million, while net OREO expenses totaled $3.3
million in 1993.
In 1993, D&N adopted Statement of Financial Accounting Standards (SFAS) No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, for
its 1982 acquisition of First Federal Savings and Loan Association of Flint,
Michigan. As a consequence, the Company's 1993 Statement of Operations contains
a $34.8 million charge for the cumulative effect of this change in accounting
principle for goodwill. While the Company's amortization expense associated with
goodwill was $2.0 million in 1992 computed on a straight line basis, for 1993
and subsequent years, the amortization expense was based upon the rate of
discount accretion on loans acquired in the 1982 merger. For 1993, goodwill
amortization was $777,000, with the ending balance at $845,000. Amortization
charges of $461,000 in 1994 and $384,000 in 1995 exhausted the goodwill account
by year end 1995.
Deposit insurance premiums from the Federal Deposit Insurance Corporation
(FDIC) were $2.4 million in 1995, compared to $2.6 million in 1994 and $2.2
million in 1993.
13
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERAIONS (CONTINUED)
FINANCIAL CONDITION
Balance Sheet Trends
At December 31, 1995, D&N's assets totaled $1.19 billion, an increase of
$98 million, or 9.0%, from the previous year end.
In 1995, net loans receivable increased by $129.9 million, or 16.2%, as
the Company continued to enjoy strong demand for its consumer loan products.
Balances of mortgage-backed securities declined by $23.2 million, or 15.8% in
1995, while investment securities balances increased by $6.5 million, or 8.0%.
The Company's liabilities increased by 8.2%, or $84.9 million, to $1.12
billion at December 31, 1995, compared to $1.04 billion at the end of 1994.
Overall deposit balances increased by 13.2%, or $103.8 million, while core
deposits experienced an increase from $311.4 million at December 31, 1994 to
$322.1 million at year end 1995. Borrowed funds decreased by 4.7%, or $10.6
million, in 1995, while advance payments by borrowers and investors held in
escrow, declined from $15.3 million to $11.1 million.
In 1995, D&N's stockholders' equity rose from $52.6 million to $65.7
million. Profitable operations contributed $10.1 million to the Company's
retained earnings, and net capital contributions, primarily from the exercise
of options and warrants, were $297,000. An additional source of equity in 1995
was $2.7 million of market value appreciation in the Company's portfolios of
held-for-sale securities. In accordance with the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," unrealized
gains such as these are recorded in the stockholders' equity section of the
Company's Statement of Financial Condition, but are not recognized through the
Statement of Operations.
Under its federal charter, the Bank must maintain adequate levels of
capital to assure the safety and soundness of its operations. At December 31,
1995, the Bank had a tangible capital ratio of 5.10%, a core capital ratio of
5.10%, and a risk-based capital ratio of 9.78%. D&N's ratios continue to exceed
the levels specified in the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA) as minimally acceptable standards. At the close of
1995, those minimum standards were tangible capital of 1.50%, core capital of
3.00% (with a proposed regulation which would raise the core capital
requirement to between 4.00% and 5.00%), and risk-based capital of 8.00%.
The Bank's primary regulator, the Office of Thrift Supervision (OTS), has
issued its final rules adding an interest rate risk component to the total
capital that certain rate-sensitive institutions must hold. The rule requires
the OTS to measure an institution's interest rate risk as the percentage change
in market value of its portfolio resulting from a hypothetical 200 basis point
shift in interest rates. At December 31, 1995, D&N's level of interest rate
risk was such that no additional capital was required.
Liquidity and Capital Resources
The OTS also requires that institutions maintain liquid assets in the form
of cash, short-term U.S. Government securities and other qualifying assets, in
amounts equal to at least 5% of net withdrawable accounts and borrowed funds
payable in one year or less. For the month of December 1995, the Bank's average
liquidity ratio was 8.3%, down from the December 1994 ratio of 8.8%. Borrowing
capacity can be viewed as a supplemental source of liquidity for the Bank. D&N's
government bond and mortgage-backed securities portfolios include high quality
investment securities which are readily acceptable as collateral for additional
borrowed funds, obtainable from either the FHLB system or from other financial
institutions. Also, much of the Bank's mortgage loan portfolio would be
acceptable as collateral to support new advances from the FHLB. In the
aggregate, by virtue of its inventory of unpledged collateral, D&N had
approximately $242 million of unused borrowing capacity at December 31, 1995.
14
<PAGE> 7
Loan Portfolio
The following table categorizes the Bank's loans receivable for the past five
years:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Single family ........................... $576,461 $505,690 $367,944 $438,068 $534,111
Income-producing property ............... 89,176 115,162 131,372 173,122 217,129
Construction ............................ 41,056 19,900 12,558 2,222 11,964
Installment ............................. 239,397 170,865 134,529 119,357 116,448
Commercial .............................. 7,769 4,748 -- -- --
Allowance for losses .................... (9,931) (8,199) (11,420) (15,461) (18,693)
Discounts, deferrals and other .......... (12,740) (6,918) (7,378) (9,738) (15,383)
----------------------------------------------------------------------
$931,188 $801,248 $627,605 $707,570 $845,576
======================================================================
</TABLE>
D&N's investment in loans increased by $129.9 million, or 16.2%, in
1995. Consumer installment loans and construction loans experienced
significant percentage increases, while single family mortgage loans increased
at a more modest rate. The Bank's investment in mortgages on income-producing
property decreased for the fifth consecutive year, but the loan portfolio
included, for the first time, a significant quantity of D&N originated business
and commercial loans. Installment consumer loans increased by $68.5 million, or
40.1% in 1995, while construction loans increased by $21.2 million, or 106%.
Single family residential loans increased during the year by $70.8 million, or
14.0%, as commercial mortgages declined by $26.0 million, or 22.6%. Business
and commercial loans totaled $7.8 million at December 31, 1995.
D&N originated $399.3 million of loans in 1995, up significantly from
$236.2 million originated in 1994. Aggregate mortgage loan production was
$200.4 million, an increase of $101.8 million, or 103.2%, from 1994.
Construction lending accounted for $39.5 million of this total, up 153.1% from
$15.6 million in 1994. Consumer loan production totaled $195.1 million in 1995,
up by $62.3 million, or 46.9%, from 1994. Within the consumer category, home
equity credit line (HECL) production was again strong, increasing by $16.4
million, or 42.6%, over 1994.
Credit Risk Management and Provision for Losses on Loans and Other Assets
At December 31, 1995, the Company's nonperforming assets totaled $9.6
million, down from $24.5 million at the end of the previous year and $43.6
million at the end of 1993. The 1995 balance was comprised of $8.2 million of
nonperforming loans and $1.4 million of other real estate owned (OREO). The
following table traces the Company's nonperforming asset experience for the
last five years:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans ........................... $ 8,172 $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 ................. 8,172 17,995 30,245 44,704 55,452
Other real estate owned (OREO) .............. 1,452 6,520 13,312 11,186 11,499
----------------------------------------------------------------------
Total nonperforming assets ................ $ 9,624 $24,515 $43,557 $55,890 $66,951
======================================================================
Nonperforming loans as a percentage of
total loans ............................... 0.87% 2.22% 4.73% 6.18% 6.42%
======================================================================
Nonperforming assets as a percentage of
total assets .............................. 0.81% 2.25% 4.18% 4.61% 4.41%
======================================================================
Allowance for loan losses as a percentage
of nonperforming loans .................... 121.53% 45.56% 37.76% 34.59% 33.71%
======================================================================
Allowances for loan and OREO losses as a
percentage of nonperforming assets ........ 104.57% 34.79% 27.71% 29.90% 28.67%
======================================================================
</TABLE>
15
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Allowances for losses on the loan portfolio increased by $1 .7
million in 1995, as $2.2 million was charged off and $1.5 million was
recovered, primarily on consumer mortgages and installment loans.
Provisions for loan losses of $2.4 million were recorded in 1995.
The Company believes that its reserve positions for possible credit
losses continue to be adequate.
The following table sets forth an analysis of the Company's
allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ............. $8,199 $11,420 $15,461 $18,693 $18,315
Charge-offs:
Single family ............................ 169 110 1,111 311 117
Income-producing property ................ 1,019 3,109 2,584 2,180 8,936
Commercial ............................... -- -- -- -- --
Installment .............................. 999 773 681 1,000 1,555
--------------------------------------------------------------------
2,187 3,992 4,376 3,491 10,608
Recoveries:
Single family ............................ 917 9 -- -- 280
Income-producing property ................ 245 300 8 3 365
Commercial ............................... -- -- -- -- --
Installment .............................. 357 362 327 256 191
--------------------------------------------------------------------
1,519 671 335 259 836
--------------------------------------------------------------------
Net charge-offs ............................ 668 3,321 4,041 3,232 9,772
Provision charged to operations ............ 2,400 100 -- -- 10,150
--------------------------------------------------------------------
Balance at end of period ................... $9,931 $ 8,199 $11,420 $15,461 $18,693
====================================================================
Net charge-offs as a percentage
of average loans ......................... 0.08% 0.44% 0.61% 0.44% 0.99%
====================================================================
Allowance for loan losses as a percentage
of total loans ........................... 1.06% 1.01% 1.79% 2.14% 2.16%
====================================================================
</TABLE>
At the end of 1995, loan loss reserves totaled $9.9 million,
with the majority of the allowance allocated to the income-producing
property category.
The following table summarizes the allocation of the loan loss
allowance among the Company's assets in each of the past five years.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------------------------------
Percent Of Percent Of Percent Of
Amount Loans To Total Amount Loans To Total Amount Loans To Total
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family ............. $ 1,020 62% $ 663 62% $ 279 57%
Income-producing property . 6,115 12 6,423 17 9,617 22
Commercial ................ 400 1 -- -- -- --
Installment ............... 2,396 25 1,113 21 1,524 21
-----------------------------------------------------------------------------------------------------
$ 9,931 100% $ 8,199 100% $11,420 100%
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1992 1991
----------------------------------------------------------------
Percent of Percent of
Amount loans to total Amount loans to total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Single family ............. $ 230 60% $ 130 62%
Income-producing property . 13,353 24 16,590 25
Commercial ................ -- -- -- --
Installment ............... 1,878 16 1,973 13
-----------------------------------------------------------------
$15,461 100% $18,693 100%
=================================================================
</TABLE>
16
<PAGE> 9
D&N's carrying balance for OREO, stated net of reserves, decreased from
$6.2 million at the end of 1994 to $1.3 million at the end of 1995, a reduction
of 78.7%. This significant decrease reflects the Company's continuing progress
to resolve its troubled commercial real estate loan portfolio.
Asset/Liability Management
The Company's objective for the management of assets and liabilities is
to achieve and maintain adequate and stable levels of both net interest income
and market value for the Company's net assets. The level of net interest income
is enhanced by prudently assuming credit, liquidity and interest rate risks and
by striving to keep nonearning asset balances to a minimum. Net interest income
and market value of portfolio equity (MVPE) stability may be achieved across
various interest rate scenarios by properly matching maturity structures of
assets and liabilities and, when appropriate, employing hedging instruments.
The Company employs various tools, including gap analysis, duration
analysis and simulation analysis, to assess the sensitivities of its net
interest income and MVPE to changes in interest rates. D&N's cumulative gap
analysis for December 31, 1995 is presented in the following table:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
------------------------------------------------------------------------------
0 to 3 Months 4 to 12 Months 1 to 5 Years Over 5 Years Total
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments and deposits ....... $ 39,631 $ 33,828 $ -- $ 19,774 $ 93,233
Mortgage-backed securities ..... 13,944 56,023 46,819 3,110 119,896
Loans receivable ............... 221,882 286,989 348,015 78,754 935,640
------------------------------------------------------------------------
275,457 376,840 394,834 101,638 1,148,769
------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits ....................... 317,865 323,894 212,963 31,716 886,438
FHLB advances and other
borrowed money ............... 185,435 1,304 28,490 1,003 216,232
------------------------------------------------------------------------
503,300 325,198 241,453 32,719 1,102,670
------------------------------------------------------------------------
Interest-earning assets minus
interest-bearing liabilities (gap) $(227,843) $ 51,642 $ 153,381 $ 68,919 $ 46,099
========================================================================
Cumulative gap ................... $(227,843) $(176,201) $ (22,820) $ 46,099
=========================================================
Cumulative gap as a percent of
total assets ................... (19.20)% (14.85)% (1.92)% 3.88%
=========================================================
</TABLE>
The preceding table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1995.
The Company's interest rate sensitivity "gap" is defined as the amount by which
assets repricing within the respective periods exceed liabilities repricing
within such periods. One-to-four family fixed-rate mortgage loans are assumed to
prepay at an annual rate of 17% for the first five years and from 12% to 17% per
year during the subsequent periods, depending on the stated interest rate.
Adjustable rate mortgage loans are assumed to prepay at a rate of 12% per year.
Second mortgage loans and all other loans are assumed to prepay at annual rates
of 15% and 17%, respectively. Savings and money market deposit accounts are
assumed to reprice within the first year.
With a cumulative one year GAP of -14.9%, the Company's balance sheet
is somewhat liability sensitive. At year end, however, 51.6% of the Bank's loan
portfolio and 45.8% of total interest-earning assets carried variable or
adjustable interest rates, mitigating much of the Company's exposure to rising
interest rates.
In the past, D&N has relied on both assets and off-balance sheet hedges
to control its interest rate risk, but as its synthetic hedge instruments have
matured, the Company has utilized more traditional methods of asset/liability
management to support its community banking strategy. Notably, the last of D&N's
long-term interest rate exchange agreements matured in 1995, and the Company has
no plans to employ such instruments again in the foreseeable future.
17
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
Regulatory Environment
In May 1991, the Company and the Bank entered into respective voluntary
cease and desist orders with the OTS. Pursuant to the orders, the operations of
the Bank and the Company were significantly restricted, and the Company was
required to evaluate the desirability of marketing the Bank to a potential
acquirer or merger partner. The OTS notified the Bank and Company in connection
with its October 1992 regulatory examination, that the Bank and Company are in
substantial compliance with the requirements of the voluntary cease and desist
orders.
In March 1993, the OTS agreed to modify the voluntary orders in order to
eliminate the requirement that the Company evaluate the desirability of selling
the Bank, to eliminate a number of policy and procedural requirements which had
been satisfied, and to permit the Bank to engage in a limited amount of
commercial real estate lending.
In October 1994, the OTS removed the voluntary orders entirely and since
that time, neither the Bank nor the Company have operated under more than normal
levels of regulatory scrutiny.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." Under the provisions of SFAS 123, the
Company is encouraged, but not required, to measure compensation costs related
to its employee stock compensation plans based on the fair value of awards, as
defined by SFAS 123. If the Company elects not to recognize compensation expense
under this method, it is required to disclose the pro forma net income and
earnings per share effects, based on the fair value methodology, in the notes to
financial statements. The Company will implement the requirements of SFAS 123 in
1996 and will only adopt the disclosure provisions of this statement;
accordingly, this statement will have no impact on financial position or results
of operations when adopted.
18
<PAGE> 11
CONSOLIDATED STATEMENTS OF CONDITION
D&N Financial Corporation
<TABLE>
<CAPTION>
December 31
--------------------------
1995 1994
--------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks........................................................... $ 8,923 $ 9,174
Interest-bearing deposits in other banks.......................................... 6,636 18,950
--------------------------
Total cash and cash equivalents............................................. 15,559 28,124
Investment securities
(market value of $47,062,000 in 1995 and $19,775,000 in 1994).................. 46,925 19,775
Investment securities available for sale (at market value)........................ 40,899 61,536
Mortgage-backed securities
(market value of $69,447,000 in 1995 and $77,153,000 in 1994).................. 68,434 79,616
Mortgage-backed securities available for sale (at market value)................... 55,041 67,030
Loans receivable (including net loans held for sale of $21,610,000 in 1995) ...... 941,119 809,447
Allowance for loan losses ........................................................ (9,931) (8,199)
--------------------------
Net loans receivable ....................................................... 931,188 801,248
Other real estate owned, net ..................................................... 1,319 6,190
Federal income taxes ............................................................. 5,380 4,505
Office properties and equipment, net ............................................. 14,738 14,223
Excess of cost over net assets of association acquired ........................... -- 384
Other assets...................................................................... 7,178 6,062
--------------------------
$1,186,661 $1,088,693
==========================
LIABILITIES
Checking and NOW accounts ........................................................ $ 91,621 $ 91,484
Money market accounts ............................................................ 85,287 94,543
Savings deposits ................................................................. 145,241 125,399
Time deposits .................................................................... 564,289 471,392
Accrued interest ................................................................. 1,431 1,257
--------------------------
Total deposits ............................................................. 887,869 784,075
Securities sold under agreements to repurchase ................................... -- 28,627
FHLB advances and other borrowed money ........................................... 216,232 198,230
Advance payments by borrowers and investors held in escrow ....................... 11,093 15,288
Other liabilities 5,756 9,850
--------------------------
Total liabilities .......................................................... 1,120,950 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 - 6,797,680 in 1995
and 6,742,329 in 1994) ......................................................... 68 67
Additional paid-in capital ....................................................... 48,283 47,987
--------------------------
Total paid-in capital ...................................................... 48,351 48,054
Retained earnings - substantially restricted ..................................... 16,046 5,906
Less cost of treasury stock (21,456 shares in 1995 and 1994) ..................... (213) (213)
Unrealized holding gains (losses) on securities available for sale,
net of income taxes of $822,000 in 1995 ......................................... 1,527 (1,124)
--------------------------
Total stockholders' equity ................................................. 65,711 52,623
--------------------------
$1,186,661 $1,088,693
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 12
CONSOLIDATED STATEMENTS OF OPERATIONS
D&N Financial Corporation
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1994 1993
-------------------------------------------
(In thousands, except per share)
<S> <C> <C> <C>
INTEREST INCOME:
Loans ......................................................................... $70,815 $56,634 $ 57,278
Mortgage-backed securities .................................................... 10,314 7,610 12,649
Investments and deposits ...................................................... 6,792 4,883 7,728
-------------------------------------------
Total interest income ................................................... 87,921 69,127 77,655
INTEREST EXPENSE:
Deposits ...................................................................... 36,913 28,494 32,478
Securities sold under agreements to repurchase ................................ 1,450 808 1
FHLB advances and other borrowed money ........................................ 13,405 7,399 9,737
Interest rate instruments ..................................................... 2,521 9,812 15,309
-------------------------------------------
Total interest expense .................................................. 54,289 46,513 57,525
-------------------------------------------
Net interest income ..................................................... 33,632 22,614 20,130
Provision for loan losses ....................................................... 2,400 100 --
-------------------------------------------
Net interest income after provision for loan losses ..................... 31,232 22,514 20,130
NONINTEREST INCOME (LOSS):
Loan servicing and administrative fees, net ................................... 1,860 2,208 637
Writedown of purchased loan servicing rights .................................. -- -- (14,628)
Deposit related fees .......................................................... 3,147 3,098 3,002
Gain (loss) on loans held for sale ............................................ 882 227 777
Other income ................................................................. 166 1,129 552
-------------------------------------------
6,055 6,662 (9,660)
Gain (loss) on investment securities .......................................... (120) (221) 472
Gain (loss) on loans and mortgage-backed securities ........................... 899 843 (13,005)
Gain on sale of loan servicing rights ......................................... -- 140 475
-------------------------------------------
Total noninterest income (loss) ......................................... 6,834 7,424 (21,718)
NONINTEREST EXPENSE:
Compensation and benefits ..................................................... 15,199 14,073 13,031
Occupancy ..................................................................... 2,256 1,971 2,027
Other expense ................................................................. 10,522 9,928 12,331
-------------------------------------------
General and administrative expense ......................................... 27,977 25,972 27,389
Other real estate owned, net .................................................. (999) (2,136) 3,277
Amortization of intangibles ................................................... 370 448 777
Federal deposit insurance premiums ............................................ 2,353 2,563 2,217
-------------------------------------------
Total noninterest expense .................................................. 29,701 26,847 33,660
-------------------------------------------
Income (loss) before income tax expense (credit) ........................... 8,365 3,091 (35,248)
Federal income tax expense (credit) ............................................ (1,775) -- (3,803)
-------------------------------------------
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles ................................. 10,140 3,091 (31,445)
Extraordinary item-prepayment penalty for early
repayment of FHLB advances, net of tax ........................................ -- -- (1,921)
Cumulative effect of change in accounting for goodwill .......................... -- -- (34,754)
Cumulative effect of change in accounting for income taxes ...................... -- -- 1,100
-------------------------------------------
Net income (loss) ......................................................... $10,140 $ 3,091 $(67,020)
===========================================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles ................................. $ 1.45 $ 0.46 $ (8.44)
Extraordinary item ............................................................ -- -- (0.52)
Cumulative effect of change in accounting for goodwill ........................ -- -- (9.33)
Cumulative effect of change in accounting for income taxes .................... -- -- 0.29
-------------------------------------------
Net income (loss) .......................................................... $ 1.45 $ 0.46 $ (18.00)
===========================================
</TABLE>
20
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share)
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles .................................. $1.40 $0.46 $(8.44)
Extraordinary item ........................................................... -- -- (0.52)
Cumulative effect of change in accounting for goodwill ....................... -- -- (9.33)
Cumulative effect of change in accounting for income taxes ................... -- -- 0.29
----------------------------------
Net income (loss) ....................................................... $1.40 $0.46 $(18.00)
==================================
PRO FORMA AMOUNTS ASSUMING THE NEW GOODWILL
AMORTIZATION METHOD IS APPLIED RETROACTIVELY:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles .............................. $(31,445)
Earnings (loss) per common share ............................................ $ (8.44)
Net income (loss) ........................................................... $(32,266)
Earnings (loss) per common share ............................................ $ (8.67)
</TABLE>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Unrealized
Holding
Gains(Losses)
Additional on Securities Total
Common Paid-In Retained Treasury Available Stockholders'
Stock Capital Earnings Stock For Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 ................ $ 37 $27,111 $ 69,835 $(213) $ -- $ 96,770
Net loss ................................ -- -- (67,020) -- -- (67,020)
Issuance of common stock -
3,011,065 shares ...................... 30 20,866 -- -- -- 20,896
Cumulative effect of change in
accounting for debt and equity
securities available for sale ......... -- -- -- -- 808 808
-------------------------------------------------------------------------------
Balance December 31, 1993 ................ 67 47,977 2,815 (213) 808 51,454
Net income .............................. -- -- 3,091 -- -- 3,091
Issuance of common stock upon
exercise of stock options and
warrants-1,390 shares ................. -- 10 -- -- -- 10
Change in value of securities
available for sale .................... -- -- -- -- (1,932) (1,932)
-------------------------------------------------------------------------------
Balance December 31, 1994 ................ 67 47,987 5,906 (213) (1,124) 52,623
Net income .............................. -- -- 10,140 -- -- 10,140
Issuance of common stock upon
exercise of stock options
and warrants - 55,351
shares ................................ 1 340 -- -- -- 341
Purchase of 10,000 stock
warrants .............................. -- (44) -- -- -- (44)
Change in value of
securities available for sale ......... -- -- -- -- 2,651 2,651
-------------------------------------------------------------------------------
Balance December 31, 1995 ................ $ 68 $48,283 $ 16,046 $(213) $ 1,527 $ 65,711
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N Financial Corporation
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1995 1994 1993
------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................................... $ 10,140 $ 3,091 $ (67,020)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Extraordinary item ............................................................... -- -- 1,921
Cumulative effect of changes in accounting principles ............................ -- -- 33,654
Provision for loan losses ........................................................ 2,400 100 --
Provision for losses on other real estate owned .................................. -- -- 3,467
Depreciation and amortization of office properties and equipment ................. 1,838 1,837 2,142
Amortization of net premiums (discounts) on purchased loans and securities ....... (2,305) 1,132 (621)
Originations and purchases of loans held for sale ................................ (91,203) (15,432) (101,442)
Proceeds from sales of loans held for sale ....................................... 75,928 48,181 108,396
Investment security (gains) losses ............................................... 120 221 (472)
(Gain) loss on loans and mortgage-backed securities .............................. (899) (843) 13,005
Gain on sale of loan servicing rights ............................................ -- (140) (475)
Amortization and writedowns of mortgage servicing rights ......................... 476 1,754 19,381
Other ............................................................................ (7,928) 2,581 9,475
------------------------------------
Net cash provided (used) by operating activities .............................. (11,433) 42,482 21,411
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale ..................... 10,070 20,779 31,470
Proceeds from maturities of investment securities ................................... 27,000 136,024 497,868
Purchases of investment securities to be held to maturity ........................... (42,662) (124,441) (520,999)
Proceeds from sales of mortgage-backed securities available for sale ................ 4,145 52,348 131,041
Principal collected on mortgage-backed securities ................................... 21,649 38,519 87,295
Mortgage-backed securities purchased ................................................ -- (66,922) (107,975)
Proceeds from sales of loans ........................................................ 33,535 -- --
Loans purchased ..................................................................... (99,917) (184,962) (65,333)
Net change in loans receivable ...................................................... (46,361) (24,779) 79,095
(Increase) decrease in other real estate owned ...................................... 4,871 6,472 (2,036)
Proceeds from sales of loan servicing rights ........................................ -- 7,288 475
Purchases of office properties and equipment ........................................ (2,333) (776) (1,701)
------------------------------------
Net cash provided (used) by investing activities .............................. (90,003) (140,450) 129,200
FINANCING ACTIVITIES
Net change in time deposits ......................................................... 92,897 4,265 (70,170)
Net change in other deposits ........................................................ 10,723 (30,935) 410
Proceeds from notes payable, securities sold under agreements .......................
to repurchase and other borrowed money ........................................... 203,000 255,627 78,075
Payments on maturity of notes payable, securities sold under ........................
agreements to repurchase and other borrowed money ................................ (213,851) (130,652) (153,282)
Net change in advance payments by borrowers and investors held in escrow ............ (4,195) (51,731) 21,963
Purchase of stock warrants .......................................................... (44) -- --
Proceeds from issuance of stock ..................................................... 341 010 20,896
------------------------------------
Net cash provided (used) by financing activities .............................. 88,871 46,584 (102,108)
------------------------------------
Increase (decrease) in cash and cash equivalents .............................. (12,565) (51,384) 48,503
Cash and cash equivalents at beginning of year ........................................ 28,124 79,508 31,005
------------------------------------
Cash and cash equivalents at end of year ...................................... $ 15,559 $ 28,124 $ 79,508
====================================
Supplemental disclosures of cash flow information:
Interest paid ....................................................................... $ 58,489 $ 48,605 $ 62,798
Income taxes paid (refunded) ........................................................ $ 320 $ (4,771) $ (5,551)
Noncash investing activities:
Transfer of loans to other real estate owned ........................................ $ 1,936 $ 2,861 $ 9,380
Loans to facilitate sale of other real estate owned ................................. $ -- $ 782 $ 2,371
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N Financial Corporation, December 31, 1995
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 retail financial services to consumers and businesses through its
network of 45 community banking and financial services offices in Michigan and
Wisconsin.
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.
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: In May 1993, the Financial Accounting
Standards Board issued SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under SFAS 115, the accounting for
securities depends on the classification of such securities 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). As permitted under
SFAS 115, the Company elected to adopt the provisions of the new standard as of
December 31, 1993. In accordance with SFAS 115, prior period financial
statements were not restated to reflect the change in accounting principle.
There was no cumulative effect of adopting SFAS 115 to 1993 results of
operations. The December 31, 1993 balance of stockholders' equity was increased
by $808,000 (net of $417,000 in deferred income taxes) to reflect the net
unrealized holding gain on securities classified as available for sale
previously carried at amortized cost.
Investment and Mortgage-Backed Securities: Investment and mortgage-backed
securities which the Company has the intent and ability to hold until maturity
are stated at cost. Investment and mortgage-backed securities available for
sale are carried at fair value. Fair value adjustments are included in
stockholders' equity. 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 by
the level-yield method for amortization of premiums and accretion of discounts.
Mortgage Derivative Products: Mortgage derivative products (interest only
certificates) available for sale are recorded at fair value. Fair value
adjustments are included in stockholders' equity. Mortgage derivative products
are classified on the Statement of Condition with mortgage-backed securities.
Management evaluates each mortgage derivative product investment
separately to determine whether expected future discounted cash flows, using a
risk-free rate of return, are adequate to recover the recorded investment
balance. If the recorded investment balance is greater than the discounted
estimated future cash flows, the investment balance is written down to fair
value by a charge to income. Writedowns establish a new cost basis, which then
is used for purposes of calculating effective yields in subsequent periods.
Allowance for Loan Losses: The Company adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS 118, as of January 1,
1994. Under this standard, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement
23
<PAGE> 16
of impaired loans is generally based on the present value of expected future
cash flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. The adoption of SFAS 114 did not result in any additional
provision for loan losses as of January 1, 1994.
The allowance for possible losses on loans is maintained at a level
believed adequate by management to absorb potential losses from impaired loans
as well as losses from the remainder of the portfolio. Management's
determination of the level 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.
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 suspended
for loans that pass 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 the lower of the related loan balance or
estimated fair value of the property at the acquisition date. Subsequent to the
acquisition date, properties are carried at no more than their fair value, less
cost to sell. 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.
Excess of Cost Over Net Assets of Association Acquired: The excess of
cost over net assets of the association acquired ("goodwill") arose from a
business combination which has been accounted for using the purchase method.
Effective January 1, 1993, the Company adopted SFAS 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", which changed the
accounting method used to amortize goodwill. Management believes this is a
preferable accounting method. Previously, goodwill was amortized by the
straight-line method over a 25-year period. Under the new method, goodwill is
amortized using the interest method over the estimated remaining lives of the
long-term interest-bearing assets acquired. The Company continually evaluates
the period of amortization to determine if events and circumstances warrant
revised estimates of the useful lives. The effect of the change in 1993 was to
decrease the loss before extraordinary item by $1,160,000, or $0.31 per share.
The cumulative effect of this change was a charge to income of $34,754,000. The
pro forma amounts shown on the Statement of Operations have been adjusted for
the effect of retroactive application on goodwill amortization.
Securities Sold Under Agreements to Repurchase: The Company enters into
sales of investment and mortgage-backed securities under agreements to
repurchase the same or substantially 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 in the Statement of
Condition, and the securities which collateralize the agreements are reflected
in the corresponding asset accounts.
24
<PAGE> 17
Interest Rate Instruments: Interest rate instruments are used to adjust
the maturity structure of liabilities and assets to manage the Company's
exposure to fluctuating interest rates. These instruments include interest rate
exchange agreements and interest rate floors and caps. These instruments are
used only to hedge specifically identified assets and liabilities and not for
speculative purposes. Fees associated with swaps, floors and caps are amortized
to expense on a straight-line basis over the lives of the agreements. Gains or
losses upon termination of these instruments are deferred and amortized over
the shorter of the remaining term to maturity of the related hedged asset or
liability or the remaining life of the instrument. Interest paid or received
associated with interest rate swap, floor or cap agreements, is reflected as a
component of net interest margin.
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.
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights," which requires the Company to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. 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. 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).
Capitalized mortgage servicing rights are periodically assessed for
impairment based on the fair value of those rights calculated on a discounted
basis. This assessment is performed on a disaggregate basis, stratified by
mortgage type, term and rate. Identified impairments are recognized through a
valuation allowance.
As permitted by SFAS 122, the Company adopted the provisions of the
Statement effective July 1, 1995. The effect of adopting SFAS 122 was to
increase net income for the year ended December 31, 1995 by $621,000 or $0.09
per share.
Income Taxes: Effective January 1, 1993, the Company adopted SFAS 109,
"Accounting for Income Taxes." Under SFAS 109, the liability method is used 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 and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The effect of the change on income from
operations for the year ended December 31, 1993, was not material. However, the
cumulative effect of the change on periods prior to January 1, 1993, increased
1993 net income by $1,100,000, or $0.29 per share.
Per Share Data: Per share amounts are based on the weighted average
number of shares outstanding during the year. For 1995, 1994 and 1993 there
were 7,019,075, 6,720,011 and 3,724,264 average shares outstanding,
respectively, used in computing primary earnings per share. For 1995, 1994 and
1993 there were 7,232,517, 6,720,011 and 3,724,264 average shares outstanding,
respectively, used in computing fully diluted earnings per share.
Reclassifications: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with the current year
presentation.
NOTE B: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES
The Company is required to maintain reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1995 was $491,000, with no reserve balance required at year-end.
The average amount of those reserve balances for the year ended December 31,
1994 was $587,000, with no reserve balance required at year-end.
25
<PAGE> 18
NOTE C: INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------
Book Market Book Market
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury ..................................... $27,151 $27,288 $ -- $ --
Investment in Federal Home Loan Bank stock ........ 19,745 19,745 19,745 19,745
Other equity securities ........................... 29 29 30 30
---------------------------------------------------------------------
Held to maturity ............................... 46,925 47,062 19,775 19,775
U.S. Treasury ..................................... 40,655 40,899 61,979 61,536
Valuation allowance ............................... 244 -- (443) --
---------------------------------------------------------------------
Available for sale ............................. 40,899 40,899 61,536 61,536
---------------------------------------------------------------------
$87,824 $87,961 $81,311 $81,311
=====================================================================
An analysis of gross unrealized gains and losses is as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
1995 1994
-------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity
U. S. Treasury
Equity securities .................. $ 137 $ -- $ -- $ --
----------------------------------------------------
137 -- -- --
Available for sale
U.S. Treasury ...................... 244 -- 7 (450)
----------------------------------------------------
$ 381 $ -- $ 7 $ (450)
====================================================
</TABLE>
The book value and market value of debt securities at December
31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Less than one year Greater than one year
--------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury held to maturity ................ $ 27,151 $ 27,288 6.72% $ -- $ -- --%
U.S. Treasury available for sale .............. 40,655 40,899 7.12 -- -- --
---------------------------------------------------------------------
$ 67,806 $ 68,187 6.96% $ -- $ -- --%
=====================================================================
</TABLE>
Proceeds from sales of debt securities available for sale
during 1995 were $10,070,000. Gross losses of $120,000 were realized
on those sales. Proceeds from sales of debt securities available for
sale during 1994 were $20,779,000. Gross losses of $221,000 were
realized on those sales. Proceeds from sales of debt securities
during 1993 were $31,470,000. Gross gains of $472,000 were realized
on those sales.
26
<PAGE> 19
NOTE D: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------
1995 1994
--------------------------------------------------------
Book Market Book Market
Value Value Value Value
--------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Government agency securities .................... $ 12,149 $ 12,451 $ 14,643 $ 14,149
Collateralized mortgage obligations ............. 56,052 56,368 65,109 62,256
Accrued interest receivable ..................... 628 628 748 748
Net discounts ................................... (395) -- (884) --
--------------------------------------------------------
Held to maturity .............................. 68,434 69,447 79,616 77,153
Government agency securities .................... 28,324 29,135 37,901 36,402
Collateralized mortgage obligations ............. 22,810 23,110 27,374 26,363
Interest-only certificates ...................... 984 2,400 1,644 3,819
Accrued interest receivable ..................... 396 396 446 446
Net premiums .................................... 421 -- 346 --
Valuation allowances ............................ 2,106 -- (681) --
--------------------------------------------------------
Available for sale............................. 55,041 55,041 67,030 67,030
--------------------------------------------------------
$123,475 $124,488 $146,646 $144,183
========================================================
</TABLE>
Mortgage-backed securities with a carrying value of
$22,967,000 are pledged as collateral for FHLB advances and other
borrowings.
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------
1995 1994
--------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
--------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Government agency securities .................... $ 302 $ -- $ -- $ (494)
Collateralized mortgage obligations ............. 711 -- -- (1,969)
--------------------------------------------------------
Held to maturity ............................. 1,013 -- -- (2,463)
Government agency securities ................... 425 (16) 214 (2,017)
Collateralized mortgage obligations ............ 314 (33) -- (1,053)
Interest-only certificates ..................... 1,416 -- 2,175 --
--------------------------------------------------------
Available for sale ........................... 2,155 (49) 2,389 (3,070)
--------------------------------------------------------
$ 3,168 $ (49) $ 2,389 $ (5,533)
========================================================
</TABLE>
27
<PAGE> 20
The book value and market value of mortgage-backed securities
at December 31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------------------------------------------------------
Average Average
Book Value Market Value Yield Book Value Market Value Yield
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Government agency securities
Less than one year ........................ $ -- $ -- --% $ -- $ -- --%
One to five years ......................... -- -- -- -- -- --
Five to ten years ......................... 2,340 2,355 6.77 -- -- --
After ten years ........................... 9,809 10,096 8.02 28,726 29,135 7.37
----------------------------------------------------------------------------
12,149 12,451 7.77 28,726 29,135 7.37
Collateralized mortgage obligations
Less than one year ........................ 48,790 49,370 7.31 9,210 9,238 7.13
One to five years ......................... 6,867 6,998 8.74 4,738 4,712 6.51
Five to ten years ......................... -- -- -- -- -- --
After ten years ........................... -- -- -- 8,881 9,160 7.36
----------------------------------------------------------------------------
55,657 56,368 7.49 22,829 23,110 7.09
Interest-only certificates
Less than one year ........................ -- -- -- -- -- --
One to five years ......................... -- -- -- -- -- --
Five to ten years ......................... -- -- -- 009 021 77.40
After ten years ........................... -- -- -- 975 2,379 70.05
----------------------------------------------------------------------------
-- -- -- 984 2,400 70.12
----------------------------------------------------------------------------
$67,806 $68,819 7.54% $52,539 $54,645 8.42%
============================================================================
</TABLE>
The aggregate book value and aggregate market value of the
securities of any one issuer, other than U.S. Government securities,
did not exceed 10% of stockholders' equity.
Proceeds from sales of mortgage-backed securities available for
sale during 1995 were $4,145,000. Gross gains of $267,000 were
realized on those sales. Proceeds from sales of mortgage-backed
securities available for sale during 1994 were $52,348,000. Gross
gains of $865,000 and gross losses of $22,000 were realized on those
sales. Proceeds from sales of mortgage-backed securities during 1993
were $131,041,000. Gross gains of $5,424,000 were realized on those
sales.
NOTE E: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable
consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1995 1994
-----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Single family ................................ $551,767 $549,379 $503,158 $481,170
Single family held for sale .................. 21,713 21,963 -- --
Income-producing property .................... 88,491 79,985 114,395 102,146
Construction ................................. 40,882 37,160 19,772 19,385
Installment .................................. 237,810 235,494 169,797 164,485
Commercial ................................... 7,717 7,298 4,748 4,294
Accrued interest receivable .................. 5,479 5,479 4,495 4,495
-----------------------------------------------------------------
953,859 936,758 816,365 775,975
Less:
Discounts (premiums) on purchased loans ... (1,709) -- 999 --
Allowance for loan losses ................. 9,931 -- 8,199 --
Undisbursed portion of loan proceeds ...... 13,198 -- 4,213 --
Deferred income ........................... 1,251 -- 1,706 --
-----------------------------------------------------------------
$931,188 $936,758 $801,248 $775,975
=================================================================
</TABLE>
28
<PAGE> 21
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year ................................ $8,199 $11,420 $15,461
Provision for loan losses ................................... 2,400 100 --
Net charge-offs ............................................. (668) (3,321) (4,041)
--------------------------------------------
Balance at end of year ...................................... $9,931 $ 8,199 $11,420
============================================
</TABLE>
Changes in capitalized mortgage servicing rights are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 968 $ 9,870 $29,198
Originations and acquisitions............................... 621 -- 053
Amortization, sales and impairment.......................... (476) (8,902) (19,381)
--------------------------------------------
Balance at end of year...................................... $1,113 $ 968 $ 9,870
============================================
</TABLE>
At December 31, 1995, the fair value of purchased and capitalized
originated mortgage servicing rights was $1,161,000.
Loans serviced for others amounted to $278,051,000, $243,834,000, and
$1,189,627,000 at December 31, 1995, 1994 and 1993, respectively.
Loans with a carrying value of of approximately $477,698,000 are pledged as
collateral for current and future FHLB advances and other borrowed money.
The balance of nonaccrual loans was $8,172,000 and $17,995,000 at December
31, 1995 and 1994, respectively.
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
-----------------------
1995 1994
-----------------------
(In thousands)
<S> <C> <C>
Multi-family apartments ........... $29,337 $ 37,142
Motels/hotels ..................... 14,105 20,515
Shopping centers .................. 20,232 20,367
Mobile home parks ................. 3,781 8,226
Offices ........................... 8,698 11,928
Industrial ........................ 6,584 5,609
Other ............................. 5,754 10,608
-----------------------
$88,491 $114,395
=======================
</TABLE>
Loans collateralized by income-producing property categorized by state
are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1995 1994
-----------------------
(In thousands)
<S> <C> <C>
Michigan ......................... $67,048 $ 80,721
California ....................... 12,202 20,300
New York ......................... 3,413 4,769
Pennsylvania ..................... 1,396 1,751
Other ............................ 4,432 6,854
-----------------------
$88,491 $114,395
=======================
</TABLE>
At December 31, 1995 and 1994, the total recorded investment in impaired
loans, as defined by SFAS 114, was $8,619,000 and $19,646,000, respectively.
None of the impaired loans required a specific allowance for loan losses to be
recorded. Interest income on impaired loans is recognized primarily on a cash
basis. During 1995 and 1994, the amount of interest income recognized on
impaired loans was insignificant.
29
<PAGE> 22
NOTE F: OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------
1995 1994
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Real estate acquired through foreclosure ..................... $1,226 $6,359
Real estate in judgment ...................................... 226 161
---------------
1,452 6,520
Less allowance for losses .................................... 133 330
---------------
$1,319 $6,190
===============
Changes in the allowance for possible losses on OREO are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year.......................... $ 330 $ 650 $ 1,251
Provision for losses ................................. 150 -- 3,467
Net charge-offs ...................................... (347) (320) (4,068)
----------------------------------
Balance at end of year ............................... $ 133 $ 330 $ 650
==================================
</TABLE>
The Company recognized gains on sales of OREO amounting to
$1,139,000, $2,407,000 and $1,127,000 during 1995, 1994 and 1993,
respectively.
NOTE G: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1995 1994
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cost:
Land .................................................. $ 2,603 $ 2,603
Buildings and improvements ............................ 16,129 15,229
Furniture and equipment ............................... 15,713 14,464
-----------------------
34,445 32,296
Less accumulated depreciation .......................... 19,707 18,073
-----------------------
$14,738 $14,223
=======================
</TABLE>
Depreciation and amortization expense was $1,850,000,
$1,837,000 and $2,142,000 in 1995, 1994 and 1993, respectively.
Rental expense for leased properties and equipment was
$643,000, $488,000 and $486,000 in 1995, 1994 and 1993,
respectively. The aggregate minimum annual rental commitments under
these leases are approximately $814,000 in 1996, $705,000 in 1997,
$533,000 in 1998, $412,000 in 1999, $367,000 in 2000 and $734,000
thereafter.
NOTE H: DEPOSITS
The carrying amounts and fair values of deposits and the
nominal rate of interest paid were as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------------------
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 ........... $ 37,939 $ 37,939 --% $ 40,485 $ 40,485 --%
NOW accounts ................ 53,682 53,682 1.52 50,999 50,999 1.55
Money market accounts ....... 85,287 85,287 4.19 94,543 94,543 3.86
Savings deposits ............ 145,241 145,241 2.92 125,399 125,399 2.25
Certificates of deposit ..... 564,289 568,113 6.01 471,392 462,746 5.03
Accrued interest ............ 1,431 1,431 -- 1,257 1,257 --
----------------------------------------------------------------------------------
$887,869 $891,693 4.80% $784,075 $775,429 3.96%
==================================================================================
</TABLE>
30
<PAGE> 23
Included in deposits are $73,098,000 and $47,542,000 of
deposit accounts with balances in excess of $100,000 as of December
31, 1995 and 1994, respectively.
Certificates of deposit had the following maturities at December 31, 1995:
<TABLE>
<CAPTION>
Weighted
Average
Amount Rate
- ------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
1996 ................................. $371,340 5.84%
1997 ................................. 104,587 5.90
1998 ................................. 48,240 6.76
1999 ................................. 15,973 7.71
2000 and beyond ...................... 24,149 6.47
--------------------
$564,289 6.01%
====================
</TABLE>
The average balance, interest expense and average rate on deposits was
as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts ........... $ 36,886 $ -- --% $ 36,138 $ -- --%
NOW and money market ........
accounts ................. 136,954 4,233 3.09 131,879 3,177 2.41
Savings deposits ............ 134,981 3,600 2.67 167,920 4,066 2.42
Certificates of deposit ..... 509,173 29,080 5.71 453,240 21,251 4.69
------------------------------------------------------------------------------------
$817,994 $36,913 4.51% $789,177 $28,494 3.61%
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------
Average Interest Average
Balance Expense Rate
-----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Checking accounts ........... $ 19,917 $ -- --%
NOW and money market ........
accounts ................. 152,885 3,490 2.28
Savings deposits ............ 140,658 3,810 2.71
Certificates of deposit ..... 526,256 25,178 4.78
----------------------------------
$839,716 $32,478 3.87%
==================================
</TABLE>
NOTE I: 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
------------------------------------------------
1995 1994
------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Collateral pledged:
Mortgage-backed securities with a book
value including accrued interest of
$31,045,000 and a market value of
$29,085,000 .......................................... $ -- $ -- $ 28,627 $ 28,627
==================================================
</TABLE>
Securities sold under agreements to repurchase averaged
$24,020,000 and $17,284,000 during 1995 and 1994, respectively, and
the maximum amounts outstanding at any month-end during 1995 and
1994 were $52,579,000 and $54,911,000, respectively.
The mortgage-backed 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 identical
securities at the maturities of the agreements.
31
<PAGE> 24
NOTE J: FHLB ADVANCES AND OTHER BORROWED MONEY
The carrying amounts and fair values of FHLB advances and other
borrowed money consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1995 1994 1995 1994
--------------------------------------------------------------------
Year of Weighted Carrying Fair Carrying Fair
Maturity Average Rate Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Advances from Federal Home
Loan Bank of Indianapolis:
Variable rate of interest:
5.98% ............... 1995 --% 5.98% $ -- $ -- $ 34,000 $ 33,956
5.81 - 6.38 ................ 1996 5.86 6.38 124,000 124,065 35,000 35,011
5.63 - 6.31 ................ 1997 5.86 5.92 61,000 61,027 51,000 50,981
Fixed rate of interest:
5.69 - 6.40% ............... 1995 -- 6.08 -- -- 65,000 64,984
5.42 ................ 1997 5.42 -- 10,000 9,977 -- --
5.47 ................ 1998 5.47 -- 10,000 9,965 -- --
4.00 ................ 2005 4.00 4.00 1,003 857 1,003 643
------------------------------------------------------------------
206,003 205,891 186,003 185,575
Other borrowed money:
Collateralized mortgage
obligations ................. 10,229 11,187 12,227 12,764
-----------------------------------------
$216,232 $217,078 $198,230 $198,339
=========================================
</TABLE>
The Company is required to maintain qualifying loans and
mortgage-backed securities with a market value of at least 125% of
outstanding amounts as collateral for the FHLB advances. FHLB stock
is also pledged as collateral for these 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 $11,709,000 and $14,262,000 at December 31, 1995 and 1994,
respectively. The notes underlying the obligations bear interest,
payable quarterly, at rates varying from 7.27% to 7.33%, with
contractual maturity dates ranging from 2008 to 2010.
NOTE K: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current ................................................... $ -- $ -- $(3,803)
Deferred .................................................. 3,959 1,199 (9,812)
Change in valuation allowance for deferred tax assets ..... (5,734) (1,199) 9,812
------------------------------------
$(1,775) $ -- $(3,803)
====================================
</TABLE>
Deferred income tax expense included in stockholders' equity
related to unrealized holding gains (losses) on securities available
for sale for 1995, 1994 and 1993 amounted to $822,000, $-0- and
$417,000, respectively.
The 1993 extraordinary item related to the early repayment of
FHLB advances is net of an income tax credit of $989,000.
A reconciliation of the statutory federal income tax rate to
the effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate .............................................. 35.00 % 35.00 % (35.00) %
Effect of:
Change in valuation allowance for deferred tax assets ......... (68.54) (38.79) 27.84
Adjustment to net operating loss carryforward ................. 12.46 -- --
Other items, net .............................................. (0.14) 3.79 (3.63)
----------------------------------------------------------
Effective tax rate .............................................. (21.22)% -- % (10.79) %
==========================================================
</TABLE>
32
<PAGE> 25
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
-------------------------
1995 1994
-------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserves not previously deducted ............................... $ 3,545 $ 2,800
Net deferral required by SFAS 91 ........................................ 400 411
Pension and other benefit obligations ................................... 580 585
Tax effect of net operating loss carryforward ........................... 6,307 12,184
Other items, net ........................................................ 422 459
------------------------
Total deferred tax assets ........................................ 11,254 16,439
Valuation allowance for deferred tax assets ............................ (2,879) (8,613)
------------------------
Total deferred tax assets less valuation allowance ............... 8,375 7,826
Deferred tax liabilities:
Securities marked to market for tax purposes* .......................... 433 1,229
Tax over book depreciation ............................................. 723 821
FHLB stock dividends ................................................... 1,075 551
Valuation adjustment on CMO residuals .................................. 1,333 1,331
Excess general valuation allowances over base year reserves ............ 448 439
Other items, net 092 137
------------------------
Total deferred tax liabilities ................................... 4,104 4,508
------------------------
Total net deferred tax assets ............................................ 4,271 3,318
Current income tax receivable due to net operating loss ..................
carrybacks and other overpayments ....................................... 1,109 1,187
Total net federal income tax assets ...................................... $ 5,380 $ 4,505
========================
</TABLE>
* The amount shown is net of the $822,000 tax effect of SFAS 115 unrealized
holding gains at December 31, 1995.
As of December 31, 1995, the Company had a net operating loss
carryforward for income tax purposes of $18,019,000, which expires
on December 31, 2009.
The Bank has qualified under provisions of the Internal
Revenue Code that permit federal income taxes to be computed after
the deduction of additions to loan loss reserves. Accordingly,
retained earnings includes approximately $13,964,000 for which no
provision for federal income taxes has been made. If in the future
this amount is used for any purpose other than to absorb losses on
loans, federal income taxes may be imposed at the then prevailing
rates.
NOTE L: 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 3,009,657 shares of
common stock and 1,003,219 warrants in a shareholder rights
offering in which the Company issued rights entitling the holder to
purchase units for $22.75 each. Each unit consisted of three shares
of common stock and one warrant. Each warrant entitles 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. The net
proceeds of $20,888,000 were used to provide additional working
capital, improve the regulatory capital ratios of the Bank and for
general corporate purposes. The Company also issued 1,408 shares of
common stock in 1993, with proceeds of $8,000, in connection with
its stock option plan. During 1994, the Company issued 1,000 shares
of common stock in connection with its stock option plan and 390
shares of common stock upon the exercise of warrants. Total
proceeds from these transactions amounted to $10,000. During 1995,
the Company issued
33
<PAGE> 26
52,798 shares upon the exercise of stock options and 2,553 shares upon the
exercise of warrants, resulting in total proceeds of $341,000. Additionally, the
Company purchased 10,000 stock warrants at a cost of $44,000. See Note N.
The FDIC Improvement Act of 1992 (FDICIA) requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to this requirement, the OTS adopted final rules,
effective December 19, 1993, 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 total risk-based
capital ratio is 10% or greater, its ratio of core capital to risk-based assets
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, 1995, the
Bank was considered adequately capitalized.
On December 7, 1989, new capital standards were imposed on the thrift
industry as a result of FIRREA. Regulatory standards 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, 1995, the Bank exceeded all regulatory capital standards.
The table below summarizes, as of December 31, 1995, 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 ... $57,274 8.00% $70,033 9.78%
Core capital ......... 35,959 3.00 61,072 5.10
Tangible capital ..... 17,979 1.50 61,072 5.10
</TABLE>
NOTE M: EMPLOYEE BENEFIT PLANS
The Company sponsors a non-contributory defined benefit retirement plan
covering substantially all of its employees. The benefits are based on years of
service and the employee's compensation during the last five years of
employment. The plan was curtailed in 1995, and no additional benefits will
accumulate. The Company's funding policy has been to contribute amounts to the
plan sufficient to meet the minimum funding requirements set forth in the
Employees Retirement Income Security Act of 1974, plus such amounts as the
Company may determine to be appropriate from time to time. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future. The Company intends to terminate
the plan in 1996. All assets of the plan will be disbursed, and no gain or loss
will be recorded. An application has been made to the Internal Revenue Service
for an advance determination as to whether the plan meets the qualification
requirements of section 401(a) of the Internal Revenue Code of 1954, with
respect to the plan's termination.
The following table sets forth the plan's funded status and amounts
recognized in the Company's Consolidated Statement of Condition:
<TABLE>
<CAPTION>
December 31
--------------------
1995 1994
--------------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $14,812,000 in 1995 and $10,110,000 in 1994 .................... $(14,812) $(10,773)
====================
Projected benefit obligation for service rendered to date ............. $(14,812) $(13,319)
Plan assets at fair value, primarily participation in common
trust funds ......................................................... 18,292 17,025
--------------------
Plan assets greater than projected benefit obligation ................. 3,480 3,706
Unrecognized net asset ................................................ (569) (654)
Unrecognized prior service cost ....................................... -- 368
Unrecognized net gains ................................................ (3,301) (3,637)
--------------------
Accrued pension cost .................................................. $ (390) $ (217)
====================
</TABLE>
34
<PAGE> 27
Pension expense included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period ........... $ 620 $ 728 $ 606
Interest cost on projected benefit obligation ............ 1,071 1,055 914
Return on plan assets .................................... (2,030) (362) (1,351)
Net amortization ......................................... 512 (1,046) (80)
-----------------------------------
$ 173 $ 375 $ 89
===================================
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of projected
benefit obligation were 6.25% and 5.40%, respectively, in 1995 and 8.25% and
5.40%, respectively, in 1994. The expected long-term rate of return on plan
assets was 8.00% in 1995, 1994 and 1993.
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 15% or less of their salary pursuant of Section 401(k) of
the Internal Revenue Code. Employee contributions are matched by the Company at
the rate of 50 cents per dollar, up to 6% of the employee's salary. Employees
vest immediately in their own contributions and over a six-year period in the
Company's contributions. Employee contributions may be invested in the Company's
common stock, a guaranteed interest account, a bond and mortgage account,
independent equity accounts or a combination thereof. Company contributions are
invested in the Company's common stock. The Company's contributions to the plan
were $273,000, $193,000 and $157,000 in 1995, 1994 and 1993, respectively.
Effective January 1, 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which established
new accounting standards for such benefits. It significantly changed the
practice of accounting for postretirement benefits on a pay-as-you-go (cash)
basis by requiring accrual, during the years the employee renders the necessary
service, of the expected cost of providing those benefits to an employee and the
employee's beneficiaries and covered dependents. The Company has a benefit plan
which provides postretirement medical benefits to certain employees who have
attained the age of 55 and have at least five years of service. The plan is
contributory, and the Company has no plan assets attributable under SFAS 106.
The Company's SFAS 106 liability at January 1, 1993 was approximately
$2,256,000, and the Company is recognizing its SFAS 106 liability (accumulated
postretirement benefit obligation) over a prospective 20-year period. During
1994, the plan was changed to provide certain caps on benefits for existing
retirees and eliminate benefits for future retirees. The effect of the plan
change was to reduce the accumulated postretirement benefit obligation by
approximately $1,425,000.
The following table sets forth the plan's status and amounts recognized in
the Company's Consolidated Statement of Condition:
<TABLE>
<CAPTION>
December 31
---------------
1995 1994
---------------
<S> <C> <C>
(In thousands)
Accumulated postretirement benefit obligation ....................... $1,322 $1,261
Unrecognized net loss ............................................... (178) (87)
Unrecognized transition obligation .................................. (877) (926)
---------------
Accrued postretirement benefit cost ................................. $ 267 $ 248
===============
</TABLE>
Postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost ...................................................... $ -- $ 44 $ 79
Interest cost ..................................................... 99 132 173
Amortization of transition obligation ............................. 49 80 107
---------------------------------
$ 148 $ 256 $ 359
=================================
</TABLE>
35
<PAGE> 28
A weighted average discount rate of 7.00% in 1995 and 8.25% in 1994 was
used in determining the SFAS 106 liability. The 1995 health care trend rate was
projected to be 12.8% 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.
NOTE N: STOCK OPTION PLAN
The Company has stock option plans in which 1,340,000 shares of common
stock have been reserved for issuance as of December 31, 1995. 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 date on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors, and the term on any options may not exceed ten years from the date of
grant.
The following table sets forth changes in options outstanding:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C>
Shares under option:
Outstanding at beginning of year ......... 621,730 664,180 432,086
Granted .................................. 74,880 50,298 236,202
Forfeited ................................ (4,029) (91,748) (2,700)
Cancelled ................................ (62,150) -- --
Exercised ................................ (52,798) (1,000) (1,408)
----------------------------------------------------------
Outstanding at end of year ............... 577,633 621,730 664,180
==========================================================
Exercisable at end of year ............... 495,190 455,475 299,478
==========================================================
Option price per share ................... $6.00--$16.063 $4.563--$16.063 $4.563--$16.063
</TABLE>
NOTE O: LITIGATION
The Company is involved 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 and
other pending claims will not materially affect the Consolidated Financial
Statements.
NOTE P: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate or purchase loans,
standby letters of credit, recourse arrangements on sold assets, interest rate
exchange agreements 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 Statement of Condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
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
interest rate exchange agreements and forward commitments, the contract or
notional amounts do not represent exposure to credit loss. The Company controls
the credit risk of those instruments through credit approvals, limits and
monitoring procedures.
36
<PAGE> 29
The following table sets forth financial instruments with off-balance sheet
risk and their contract or notional amounts and their fair values:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1995 1995 1994 1994
---------------------------------------
Fair Fair
Value Value
---------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate
and purchase loans ..................................... $60,443 $(604) $ 18,489 $ (185)
Unused lines of credit .................................... 56,867 (569) 36,357 (364)
Standby letters of credit ................................. 1,210 (12) 1,554 (16)
Loans sold with recourse .................................. 3,563 (178) 3,823 (191)
Financial instruments whose notional ........................
or contract amounts exceed the amount .......................
of credit risk:
Notional amounts underlying ...............................
obligations to pay fixed rates ......................... $ -- $ -- $104,000 $(6,223)
Forward commitments to sell
loans and securities ................................... -- -- -- --
</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 upon, 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 credit evaluation of the borrower.
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, 1995 of $1,769,000 and
$1,794,000, respectively. The maximum amount of loss that the Company is subject
to under the recourse provisions is $1,948,000 at December 31, 1995. Management
does not believe the recourse provisions subject the Company to any material
risk of loss. This credit risk is considered to be no different than that
existing on similar loans in the Company's loan portfolio.
The Company has entered into interest rate exchange agreements in managing
its interest rate exposure. These instruments generally involve the exchange of
fixed and floating interest payment obligations without the exchange of the
underlying principal amounts. Entering into these instruments involves not only
the risk of default by the other party, but also the interest rate risk if
positions are not matched. The amounts potentially subject to credit risk are
the streams of payments under the agreements and not the notional principal
amounts used to express the volume of these transactions.
Forward commitments to sell loans are contracts the Company enters into for
the purpose of reducing the market risk associated with holding loans originated
for sale. In order to fulfill a forward commitment, the Company typically
exchanges its current production of loans for mortgage-backed securities through
FNMA, FHLMC or GNMA, 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.
37
<PAGE> 30
NOTE Q: 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.
The amounts in the table are presented net of amounts offset in accordance with
FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts".
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1995 1994
------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 15,559 $ 15,559 $ 28,124 $ 28,124
Investment securities (Note C) ........ 87,824 87,961 81,311 81,311
Mortgage-backed securities (Note D) ... 123,475 124,488 146,646 144,183
Loans receivable (Note E) ............. 931,188 936,758 801,248 775,975
Deposits (Note H) ..................... (887,869) (891,693) (784,075) (775,429)
Debt (Notes I and J) .................. (216,232) (217,078) (226,857) (226,966)
Derivatives relating to:
Loans ............................... -- (604) -- (185)
Debt ................................ -- -- 45 (6,223)
</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 calculation using the rates currently offered for deposits with similar
remaining maturities.
The fair values of 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 (interest rate
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.
38
<PAGE> 31
NOTE R: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Gain (Loss) on Income Before Income Tax
Interest Interest Net Interest Provision for Securities and Income Tax Expense
Income Expense Income Loan Losses Other Assets Expense (Credit) (Credit) Net Income
---------------------------------------------------------------------------------------------------------------------
(In thousands)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter
1995 $20,139 $12,810 $ 7,329 $ 200 $ -- $1,340 $ -- $ 1,340
1994 15,889 11,586 4,303 -- 620 230 -- 230
2nd Quarter
1995 22,137 13,682 8,455 800 779 2,520 -- 2,520
1994 16,405 11,421 4,984 -- 189 632 -- 632
3rd Quarter
1995 22,405 13,857 8,548 500 -- 2,996 -- 2,996(1)
1994 17,534 11,467 6,067 -- 174 1,328 -- 1,328
4th Quarter
1995 23,240 13,940 9,300 900 -- 1,509 (1,775) 3,284(1)
1994 19,299 12,039 7,260 100 (221) 901 -- 901
Year
1995 87,921 54,289 33,632 2,400 779 8,365 (1,775) 10,140(1)
1994 69,127 46,513 22,614 100 762 3,091 -- 3,091
</TABLE>
<TABLE>
<CAPTION>
Earnings Per Share Stock Price Range
------------------ -----------------
Fully
Primary Diluted High Low
--------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
1st Quarter
1995 $0.20 $0.20 9 1/8 7 1/4
1994 0.03 0.03 8 1/8 6 7/8
2nd Quarter
1995 0.37 0.35 10 1/2 8 3/8
1994 0.10 0.10 9 6 5/8
3rd Quarter
1995 0.45 0.41 13 1/2 10 1/8
1994 0.20 0.20 10 8 1/2
4th Quarter
1995 0.46 0.45 12 3/4 11 3/16
1994 0.13 0.13 9 1/8 6 7/8
Year
1995 1.45 1.40 13 1/2 7 1/4
1994 0.46 0.46 10 6 5/8
</TABLE>
(1) Includes income of $458,000, $163,000 and $621,000 in the third quarter of
1995, fourth quarter of 1995 and year 1995, respectively, resulting from
the adoption of SFAS 122.
<TABLE>
<CAPTION>
NOTE S: D&N FINANCIAL CORPORATION - PARENT COMPANY ONLY -
FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION
December 31
-----------
1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
ASSETS
Cash and due from banks ........................... $ 2 $ 2
Amounts receivable from subsidiary ................ 879 777
Investment in subsidiary .......................... 64,840 51,848
-----------------------
$65,721 $52,627
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ................................. $ 10 $ 4
Stockholders' equity .............................. 65,711 52,623
-----------------------
$65,721 $52,627
=======================
</TABLE>
39
<PAGE> 32
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31
------------------------------------
1995 1994 1993
------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest income from subsidiary ............................. $ 40 $ 47 $ 20
Fee income from subsidiary .................................. -- -- 900
Equity in undistributed net income (loss) of subsidiary ..... 10,341 3,273 (67,437)
Noninterest expense:
Compensation and benefits ................................ 9 9 141
Other .................................................... 232 220 292
----------------------------------
Total noninterest expense ............................. 241 229 433
----------------------------------
Income (loss) before income tax expense ............ 10,140 3,091 (66,950)
Federal income tax expense .................................. -- -- 70
----------------------------------
Net income (loss) ..................................... $10,140 $3,091 $(67,020)
==================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------------------
1995 1994 1993
--------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................... $ 10,140 $ 3,091 $(67,020)
Items not affecting cash:
Equity in undistributed net (income) loss of subsidiary .. (10,341) (3,273) 67,437
Other .................................................... 201 182 (417)
------------------------------------
Net cash provided by operating activities ............. -- -- --
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>
40
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
[COOPERS & LYBRAND LETTERHEAD]
BOARD OF DIRECTORS AND STOCKHOLDERS
D&N FINANCIAL CORPORATION
We have audited the Consolidated Statements of Condition of D&N Financial
Corporation and Subsidiary as of December 31, 1995 and 1994, and the related
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
each of the three years in the period ending December 31, 1995. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D&N Financial
Corporation and Subsidiary at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ending December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the Consolidated Financial Statements, D&N Financial
Corporation changed its methods of accounting for goodwill, income taxes and
investments in debt and equity securities in 1993.
Coopers and Lybrand L.L.P.
Detroit, Michigan
January 22, 1996
41
<PAGE> 34
BOARD OF DIRECTORS
JOSEPH C. BROMLEY is Executive Vice President-Treasurer of Churchill
Transportation, Inc. of Detroit, Michigan, a 48-state truck load carrier. Prior
to that, he was Director, President and CEO of Regency Motor Freight, Inc. of
Detroit, a common carrier trucking firm.
GEORGE J. BUTVILAS joined D&N as President in May 1990. He was named CEO of D&N
Bank in 1991 and of D&N Financial Corp. in 1992. Prior to that, he served most
recently as Executive Vice President and Director of Boulevard Bancorp, Inc. of
Chicago, Illinois.
RANDOLPH P. PIPER has been an attorney at law in Flint, Michigan, for more than
22 years.
SHARON A. REESE DALENBERG is founder and president of The Astor Group, a
management consulting firm. She also heads Abbott Smith Associates, an
executive recruiting firm, and Continental Courier Ltd., a courier service
provider headquartered in Chicago.
KENNETH D. SEATON has been Chairman of the Corporation since its formation in
1988. He joined the Bank in 1957 and retired from active management in 1992.
B. THOMAS M. SMITH, JR. has been a consultant for ITT Corporation, a
multi-national conglomerate headquartered in New York since January 1996. Prior
to that, he served as Vice President and Director of Corporate Purchasing for
ITT.
THOMAS J. ST. DENNIS is an attorney and President of St. Dennis Development,
Inc., a home building and land development corporation. He also holds a real
estate broker's license and is managing officer of Independent Realty Group.
PETER VAN PELT is manager of The Museum Shop, a retail book and gift store in
Eagle Harbor, Michigan. From 1990 to 1993, he was self-employed as a management
consultant. Prior to that, he was President of Runzheimer International, a
specialized management consulting firm.
LINDA K. KORPELA is Vice President/Corporate Secretary of D&N Bank and D&N
Financial Corporation. She has been with the Bank since 1969 and served as
Assistant Secretary of the Bank from 1978 to 1990.
FRONT ROW (L TO R):
Thomas J. St. Dennis
Kenneth D. Seaton
George J. Butvilas
Linda K. Korpela
Randolph P. Piper
BACK ROW (L TO R):
Joseph C. Bromley
Peter Van Pelt
B. Thomas M. Smith, Jr.
Sharon A. Reese Dalenberg
42
<PAGE> 35
D&N BANK OFFICERS
EXECUTIVE MANAGEMENT TEAM
George J. Butvilas
President and Chief Executive Officer
Alfred J. Sliwinski
Executive Vice President/Community Banking
Richard E. West
Senior Vice President/Wholesale Banking
Kenneth R. Janson
Executive Vice President/Chief Financial Officer and Treasurer
Donald W. Schulze
Senior Vice President/Human Resources
Peter L. Lemmer
Senior Vice President/General Counsel
SENIOR OFFICERS
John L. Blissett
Senior Vice President/Controller
Leonard M. Bolduc
Senior Vice President/Retail Loan Operations
Thomas R. Burns
Senior Vice President/Operations
Frank R. Donnelly
Senior Vice President/Commercial Lending
Daniel D. Greenlee
Senior Vice President/Portfolio Manager
Eugene W. Riggs
Senior Vice President/Mortgage and Indirect Lending
D&N MORTAGE CORPORATION
George J. Butvilas, Chairman
Richard E. West, President and CEO
Directors
George J. Butvilas
Kenneth R. Janson
Alfred J. Sliwinski
Richard E. West
QUINCY INSURANCE AGENCY INC.
Brian A. Zinser, President
Directors
John R. Clemmer
Mark W. Gilmer
James L. Murdey
Ralph H. Schaller
Alfred J. Sliwinski
Brian A. Zinser
43
<PAGE> 36
D&N BANK OFFICES
D&N BANK OF LIVINGSTON
MARK W. GILMER, PRESIDENT
611 E. Grand River, Howell+#
9880 E. Grand River, Brighton+#
300 Fenton Square, Fenton+#
524 W. Grand River, Fowlerville#
10490 Highland Road, Hartland#
1075 E. Main St., Pinckney+#
5844 N. Sheldon Road, Canton
D&N BANK OF FLINT
JOHN R. CLEMMER, PRESIDENT
460 S. Saginaw St., Flint
1151 N. Ballenger Hwy., Flint+#
3410 S. Dort Hwy., Flint+#
3213 Genesee Road, Flint+#
2629 W. Pierson Rd., Flint+
G-4409 Miller Road, Flint+
Great Lakes Technology Centre, Flint+
12770 S. Saginaw St., Grand Blanc+#
G-6120 Fenton Road, Flint+#
Genesee Valley Mall Drive-up, Flint+#
Lincor Park, 4495 Corunna Rd., Flint@
University of Michigan Pavilion, Flint*
Courtland Mall, Flint*
D&N BANK OF TROY
PETER W. SMITH, PRESIDENT
363 W. Big Beaver, Ste. 150, Troy#
1304 W. 13-Mile Road, Clawson
3005 University, Auburn Hills@
D&N BANK OF MACOMB COUNTY
DOUGLAS C. MARSHALL, PRESIDENT
141 S. Main St., Romeo+#
23505 Greater Mack Ave., St. Clair Shores%
D&N BANK OF SOUTH LYON
JOHN R. MACLACHLAN, JR., PRESIDENT
419 S. Lafayette, South Lyon+#
D&N BANK OF DAVISON
Dale N. Smallidge, President
727 S. State Road, Davison+#
D&N BANK OF FLUSHING
William E. O'Connor, President
1559 E. Pierson Road, Flushing#
Bueche Mall, Flushing*
D&N BANK OF THE COPPER COUNTRY
Ralph H. Schaller, President
400 Quincy Street, Hancock+#
901 W. Sharon Ave., Houghton+#
Festival Foods Store, Houghton+
111 U.S. 41, L'Anse
Michigan Tech University, Houghton*
D&N BANK OF IRON MOUNTAIN
James P. Benbow, President
1000 S. Carpenter Ave., Iron Mountain+#
D&N BANK OF MARQUETTE
James L. Murdey, President
1930 U.S. 41, Marquette+#
662 Palms Ave., Ishpeming#
D&N BANK OF ESCANABA
Carol D. Shiplett, President
2325 Ludington St., Escanaba#
1015 Tenth Ave., Menominee#
1507 Cleveland Ave., Marinette, Wisconsin+
Holiday Station Store, Escanaba*
D&N BANK OF SAULT STE. MARIE
William J. McLeod, President
501 Court St., Sault Ste. Marie+#
D&N BANK OF IRONWOOD
Cynthia J. Rosen, President
100 S. Suffolk St., Ironwood+#
D&N BANK OF CALUMET
Daniel L. Dalquist, President
330 Fifth Street, Calumet#
Holiday Station Store, Calumet*
AGENT OFFICES
Bessemer Newberry
Crystal Falls Ontonagon
Manistique White Pine
Munising
D&N MORTGAGE CORP. OFFICES
3900 Sparks Dr. SE, Ste. 105, Grand Rapids
2620 S. Cleveland, Ste. 201, St. Joseph
7071 Orchard Lake Rd., Ste. 100, West Bloomfield
COMMERCIAL LENDING DIVISION
363 W. Big Beaver, Ste. 150, Troy
RESIDENTIAL LENDING PRODUCTION AND UNDERWRITING OFFICE
309 S. Front St., Marquette
+ Offices with D&N Cash Machine
# Offices with Drive-up Banking
* ATM-only location
@ Scheduled to open Spring, 1996
% Acquisition pending, scheduled for completion in April, 1996
44
<PAGE> 37
STOCKHOLDER INFORMATION
D&N FINANCIAL CORPORATION
400 Quincy Street 363 W. Big Beaver, Ste. 100
Hancock, Michigan 49930 Troy, Michigan 48084
(906) 482-2700 (810) 528-0704
COMMON STOCK
D&N's Common Stock is listed on the NASDAQ Stock Market under the symbol DNFC.
The stock quotations appear in major daily newspapers under the listing D&N
Fncl. At December 31, 1995, there were approximately 8,900 holders of D&N
Common Stock.
WARRANTS
D&N's Warrants are listed on the NASDAQ Stock Market under the symbol DNFCW.
The Warrants have an exercise price of $8.25, are not callable, and expire on
December 31, 1996. D&N's Warrant Agent is Illinois Stock Transfer Company,
Chicago.
TRANSFER AGENT
Stockholders with questions concerning stock transfer, lost certificates,
warrant exercises or other transfer related issues should contact the transfer
agent listed below:
Illinois Stock Transfer Company
223 West Jackson Blvd., Suite 1210
Chicago, Illinois 60606
1-800-757-5755
FORM 10-K
The 1995 Annual Report on Form 10-K is available to stockholders at no cost
upon written request to the Company at the address above.
INVESTOR RELATIONS CONTACT
Analysts, investment professionals, stockholders and others seeking financial
information should contact:
Joann C. Cadwell
Director of Investor Relations
(906) 487-6225
jccadwell @aol.com
ON-LINE ACCESS
Stockholders or professional investors with questions about the Company can
contact the CEO directly on-line at [email protected]. For more information on D&N
Bank, including real-time loan rates, visit our Internet home page at
http://www.dn.portup.com.
ANNUAL MEETING
The 1996 Annual Meeting of Stockholders will be held Tuesday, April 23, 1996 at
2:00 p.m., Eastern time. The meeting will be held at the Franklin Square Inn in
Houghton, Michigan.
INDEPENDENT AUDITORS
Coopers & Lybrand, L.L.P., Detroit, Michigan
DIRECT INVESTMENT PLAN
Registered holders of D&N Financial Corporation Common Stock are eligible to
participate in the Company's Direct Investment Plan. The Plan provides a
convenient method for making direct cash investments toward the purchase of
additional shares of D&N stock without fees or commissions. Purchases are made
on or about the first working day of each month on the open market. The minimum
investment is $25; the maximum is $12,000 annually. Cash investments must be
received by Illinois Stock Transfer Company no less than five working days
prior to month end to be included in the monthly purchase.
For more information, please contact the Transfer Agent or D&N's Investor
Relations Department.
45
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
- --------------------------- ------------------- --------- ---------------
<S> <C> <C> <C>
D&N Financial Corporation D&N Bank 100% Federal
D&N Bank D&N Enterprises, Inc. 100% Michigan
D&N Bank D&N Holdings, Inc. 100% Michigan
D&N Bank D&N Funding I Corp. 100% Delaware
D&N Bank D&N Mortgage Corporation 100% Michigan
</TABLE>
- 100 -
<PAGE> 1
[COOPERS & LYBRAND LETTERHEAD] EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
D&N Financial Corporation
400 Quincy Street
Hancock, MI 49930
Gentlemen:
We consent to the incorporation by reference in the Registration Statement of
D&N Financial Corporation on Form S-8 of our report dated January 22, 1996 on
our audits of the financial statements of D&N Financial Corporation and
Subsidiary as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995, which report is incorporated by reference
in this Annual Report on Form 10-K of D&N Financial Corporation for the year
ended December 31, 1995.
Coopers & Lybrand
Detroit, Michigan
March 26, 1996
-101-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,923
<INT-BEARING-DEPOSITS> 6,636
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,940
<INVESTMENTS-CARRYING> 115,359
<INVESTMENTS-MARKET> 116,509
<LOANS> 941,119
<ALLOWANCE> 9,931
<TOTAL-ASSETS> 1,186,661
<DEPOSITS> 887,869
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,849
<LONG-TERM> 216,232
48,351
0
<COMMON> 0
<OTHER-SE> 17,360
<TOTAL-LIABILITIES-AND-EQUITY> 1,186,661
<INTEREST-LOAN> 70,815
<INTEREST-INVEST> 17,106
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 87,921
<INTEREST-DEPOSIT> 36,913
<INTEREST-EXPENSE> 54,289
<INTEREST-INCOME-NET> 33,632
<LOAN-LOSSES> 2,400
<SECURITIES-GAINS> 147
<EXPENSE-OTHER> 29,701
<INCOME-PRETAX> 8,365
<INCOME-PRE-EXTRAORDINARY> 8,365
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,140
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 3.05
<LOANS-NON> 8,172
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 14,462
<ALLOWANCE-OPEN> 8,199
<CHARGE-OFFS> 2,187
<RECOVERIES> 1,519
<ALLOWANCE-CLOSE> 9,931
<ALLOWANCE-DOMESTIC> 9,931
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
