<PAGE> 1
Pursuant to Rule 424(b)3
Registration No. 033-65429
PROSPECTUS/PROXY STATEMENT
D&N FINANCIAL CORPORATION MACOMB FEDERAL SAVINGS BANK
400 Quincy Street 23505 Greater Mack Avenue
Hancock, Michigan 49930 St. Clair Shores, Michigan 48080
(906) 482-2700 (810) 771-2500
PROSPECTUS PROXY STATEMENT
Up to 965,572 Shares of for the Special Meeting
D&N Financial Corporation of Shareholders
Common Stock to be held April 9, 1996
This Prospectus/Proxy Statement is a proxy statement furnished at the
direction of the Board of Directors of Macomb Federal Savings Bank ("MFSB") in
connection with the solicitation of proxies from its shareholders to be voted
at the Special Meeting of Shareholders of MFSB to be held on April 9, 1996 (the
"Special Meeting"), and at any adjournment thereof, for the purpose of
considering and voting upon approval of the Agreement and Plan of
Reorganization dated as of November 8, 1995, among D&N Financial Corporation
("D&N"), D&N Bank, a Federal Savings Bank ("D&N Bank") and MFSB, (the "Merger
Agreement"). This Prospectus/Proxy Statement is first being released to the
MFSB shareholders on or about March 11, 1996.
This Prospectus/Proxy Statement is a prospectus of D&N relating to its
offering of shares of its Common Stock, $.01 par value ("D&N Common Stock"), to
the holders of the Common Stock of MFSB, $1.00 par value ("MFSB Common Stock"),
in connection with the proposed merger of MFSB into D&N Bank (the "Merger").
If the Merger Agreement is approved by the requisite vote of MFSB shareholders
and if, following satisfaction of certain conditions, the transactions
contemplated by the Merger Agreement are consummated, issued and outstanding
shares of MFSB Common Stock will be converted into and exchanged for shares of
D&N Common Stock, as described herein and in the Merger Agreement. Upon
effectiveness of the Merger, each issued and outstanding share of MFSB Common
Stock will be converted into and exchanged for the number of shares rounded to
the nearest ten thousandth of a share of D&N Common Stock equal to $48.00
divided by the average of the means between the high and low transaction prices
of D&N Common Stock as quoted on Nasdaq during the last fifteen trading days on
which reportable sales of D&N Common Stock takes place immediately prior to,
but not including, the third calendar day prior to the effectiveness of the
Merger; provided, however, that such exchange ratio will not be below 3.5555 or
above 5.0526.
The affirmative vote of two-thirds (66-2/3 percent) of the outstanding
MFSB Common Stock is required to approve the Merger. Directors of MFSB have
agreed to vote their shares, which represent 56.12% of the outstanding Common
Stock, for the Merger. In the event that sufficient proxies are not obtained
to approve the Merger Agreement, the persons named as proxies in the enclosed
form of proxy intend to propose and vote for one or more adjournments or
postponements of the Special Meeting to permit further solicitation of proxies
voting in favor of the Merger Agreement. No proxy which is voted against the
proposal to approve and adopt the Merger Agreement may be voted in favor of any
such adjournment or postponement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON. THIS PROSPECTUS/PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT IN ANY
STATE OR TO ANY PERSON IN WHICH OR TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT AT ANY
TIME DOES NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF D&N OR MFSB
SINCE THE DATE HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Proxy Statement is March 11, 1996.
<PAGE> 2
AVAILABLE INFORMATION
D&N and MFSB are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, D&N files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission") and MFSB files
reports and other information with the Office of Thrift Supervision (the
"OTS"). D&N also files these reports and other information with the National
Association of Securities Dealers, Inc. ("NASD"). D&N's reports, proxy and
information statements, and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at certain of its regional
offices located at 7 World Trade Center, 12th Floor, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. In addition, material filed by D&N can be inspected at
the offices of the NASD, 1735 K Street, N.W., Washington D.C. 20006. The
reports, proxy and information statements, and other information filed by MFSB
with the OTS can be inspected and copied at the OTS at 1700 G Street, N.W.,
Washington D.C. 20552, and certain of these documents can also be inspected at
the OTS, Central Regional Office, 200 W. Madison Street, Suite 1300, Chicago,
IL 60606.
D&N has filed with the Commission a registration statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the D&N Common Stock issuable in the
Merger. This Prospectus/Proxy Statement does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. The Registration
Statement, including the exhibits filed or incorporated by reference as a part
thereof, can be inspected at the public reference facilities of the Commission
set forth above, and copies can be obtained from the Public Reference Section
of the Commission at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission by D&N (File No.
0-17137) pursuant to the Exchange Act, are incorporated herein by reference:
(1) D&N's Annual Report on Form 10-K for the year ended December 31,
1994 including those portions thereof incorporated therein by
reference to the portions of (a) D&N's definitive Proxy Statement
dated March 27, 1995, used in connection with the annual meeting of
stockholders of D&N held on April 25, 1995, under the captions
"Election of Directors," "Compensation of Executive Officers" (except
for information contained under the captions "Compensation Committee
Report on Executive Compensation" and "Stockholder Return Performance
Presentation"), "Voting Securities and Certain Holders Thereof" and
"Certain Transactions," and (b) D&N's 1994 Annual Report to
Stockholders under the captions "Shareholder Information" on page 44,
"Selected Financial Highlights" on page 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operation" on pages
6 through 14, and the financial statements and notes thereto and the
accompanying independent auditor's report on pages 15 through 39;
(2) D&N's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1995, June 30, 1995 and September 30, 1995;
(3) D&N's Current Report on Form 8-K dated December 20, 1995 includes
the following documents filed with the OTS by MFSB which are also
incorporated herein by reference:
(a) MFSB's Annual Report on Form 10-K for the year ended June
30, 1995 including those portions thereof incorporated therein
by reference to the portions of (i) MFSB's definitive Proxy
Statement dated September 25, 1995 used in connection with the
annual meeting of shareholders of MFSB held on October 26, 1995
under the captions "Election of Directors," "Executive
Compensation" except for the Performance Graph; and (ii) MFSB's
1995 Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and
2
<PAGE> 3
Result of Operations" on pages 6 through 22, and the financial
statements, the notes thereto and the accompanying independent
auditor's report on pages 23 through 41 thereof; and
(b) MFSB's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(4) D&N's Current Report on Form 8-K dated February 28, 1996 includes
MFSB's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995 filed with the OTS by MFSB and incorporated herein by
reference.
All documents filed by D&N pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Prospectus/Proxy Statement and
before the Special Meeting are hereby incorporated by reference, and such
documents are deemed to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be modified or superseded for the
purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not, except as so
modified or superseded, constitute a part of this Prospectus/Proxy Statement.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE
DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE WITHOUT CHARGE
ON WRITTEN OR ORAL REQUEST OF ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED, FROM JOANN CADWELL, D&N
FINANCIAL CORPORATION, 400 QUINCY STREET, HANCOCK, MICHIGAN 49930 (906)
487-6225. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY APRIL 1, 1996.
3
<PAGE> 4
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARY OF THE PROSPECTUS/PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consideration to be Received in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . 7
Interests of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
D&N Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Market for D&N and MFSB Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Abandonment, Termination, Modification, Amendment and Waiver . . . . . . . . . . . . . . . . 9
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . 15
NOTES TO HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA . . . . . . . . . . . . . . . . . . . . 16
THE SPECIAL MEETING, PROXIES, AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Parties to the Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Related Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Reasons for Merger and Affiliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consideration to be Received in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . 19
Fairness Opinion to MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interests of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Recommendation of MFSB Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 24
Rights of Dissenting Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Business of MFSB Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Abandonment, Termination, Modification, Amendment and Waiver . . . . . . . . . . . . . . . . 27
Effectiveness of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Surrender of Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Resale of the D&N Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
DESCRIPTION AND COMPARISON OF
D&N CAPITAL STOCK AND MFSB CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
D&N Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
D&N Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
D&N Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
MFSB Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
MFSB Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
COMPARISON OF CERTAIN PROVISIONS OF
D&N'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
MFSB'S FEDERAL STOCK CHARTER AND BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Action By Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Supermajority Approval of Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . 32
Amendment or Repeal of Certain Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Possible Effects of D&N Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
COMPARISON OF THE DELAWARE BUSINESS CORPORATION ACT
AND THE HOME OWNERS LOAN ACT AND OTS REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Rights of Dissenting Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Supermajority Voting Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Transactions with Interested Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
INFORMATION ABOUT D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Incorporation of Certain Information by Reference . . . . . . . . . . . . . . . . . . . . . . 44
INFORMATION ABOUT MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Incorporation of Certain Information by Reference. . . . . . . . . . . . . . . . . . . . . . . 44
REGULATION OF D&N AND MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Savings Bank Holding Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Savings Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Prompt Corrective Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Standards for Safety and Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Other Limitations Based on Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Audit and Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Reserve Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Deposit Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Dividend Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Monetary Policy and Economic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Sources of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C> <C>
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
EXHIBIT A
Opinion of Roney & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B
Agreement and Plan of Reorganization among D&N Financial Corporation, D&N Bank, a Federal
Savings Bank, and Macomb Federal Savings Bank dated as of November 8, 1995 . . . . . . . B-1
EXHIBIT C
Section 552.14, Title 12, Code of Federal Regulations. . . . . . . . . . . . . . . . . . C-1
EXHIBIT D
Excerpts from D&N Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
EXHIBIT E
Excerpts from Macomb Federal Savings Bank's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
</TABLE>
6
<PAGE> 7
SUMMARY OF THE PROSPECTUS/PROXY STATEMENT
This Prospectus/Proxy Statement contains information about the Special
Meeting, the Merger, D&N Common Stock, MFSB Common Stock, D&N and MFSB. The
following summary does not purport to be complete and is qualified in its
entirety by the specific provisions of the full text of this Prospectus/Proxy
Statement, the documents incorporated herein by reference and the exhibits
attached hereto.
THE PARTIES. D&N is a Delaware corporation, and a savings and loan
holding company under the federal Home Owners Loan Act of 1933, as amended
("HOLA"). Its corporate headquarters are located at 400 Quincy Street, Hancock,
Michigan 49930. Its telephone number is (906) 482-2700. D&N's sole subsidiary
is D&N Bank, a federally chartered stock savings bank headquartered in Hancock,
Michigan. D&N Bank operates 45 financial service offices which includes a
network of 35 full-service community banking offices, 3 mortgage company
offices and 7 agency offices serving southeast Michigan, mid-Michigan,
Michigan's upper peninsula, and northern Wisconsin. At September 30, 1995, the
consolidated assets of D&N totaled $1.165 billion. See "Information About
D&N."
MFSB is a federally chartered stock savings bank under HOLA with its
headquarters in Michigan. Its headquarters are located at 23505 Greater Mack
Avenue, St. Clair Shores, Michigan 48080. Its telephone number is (810)
771-2500. At December 31, 1995, MFSB's assets totaled $42.6 million. See
"Information About MFSB."
THE MERGER. The Merger Agreement provides that the affiliation of
MFSB with D&N is to be effected by the merger of MFSB into D&N Bank. On the
effective date of the Merger, D&N will continue its existing business and MFSB
will be merged with and into D&N Bank and cease to exist. The offices of MFSB
will be maintained as a retail office of D&N Bank. See "The Merger--Merger."
CONSIDERATION TO BE RECEIVED IN THE MERGER. The Merger Agreement
provides that upon effectiveness of the Merger, each issued and outstanding
share of MFSB Common Stock will be converted into and exchanged for the number
of shares rounded to the nearest ten thousandth of a share of D&N Common Stock
equal to $48.00 (the "Exchange Price") divided by the average of the means
between the high and low transaction prices of D&N Common Stock as quoted on
the NASD Automated Quotation System ("Nasdaq") during the last fifteen trading
days on which reportable sales of D&N Common Stock take place on the Nasdaq
immediately prior to, but not including, the third calendar day prior to the
effectiveness of the Merger (the "Average Price") (the quotient of the Exchange
Price divided by the Average Price is referred to as the "Exchange Ratio");
provided, however, the Exchange Ratio will not be below 3.5555 or above 5.0526.
The Exchange Ratio was determined through the parties' negotiation of
the Merger Agreement (see "The Merger--Background of the Merger"). These terms
reflect D&N's and MFSB's judgments as to the value of the shares of MFSB Common
Stock relative to the historical and anticipated market price of D&N Common
Stock.
INTERESTS OF MANAGEMENT. As of March 11, 1996 all directors and
executive officers of MFSB as a group beneficially owned 109,580 shares of MFSB
Common Stock (or 57.34 percent of the outstanding shares). Certain members of
the management and the Board of Directors of MFSB have certain interests in the
Merger that are in addition to their interests as stockholders of MFSB
generally. These persons are Stanley A. Jacobson, director, President and
Chief Executive Officer, Jeffrey I. Kopelman, Executive Vice President and
Chief Operating Officer, and Esther Mason, a director, Executive Vice President
and Treasurer, and their personal interests include, among others, provisions
in the Merger Agreement relating to employment arrangements. Mr. Jacobson and
Mr. Kopelman have employment agreements with MFSB under which they have the
right to terminate their employment upon a change in ownership or control and
receive certain payments. The Merger constitutes a change in control for
purposes of their employment agreements. In addition, under the Merger
Agreement, D&N has agreed to amend Mr. Kopelman's employment agreement and to
enter into an employment agreement with Ms. Mason. The estimated aggregate
value of the benefits to be received by Mr. Jacobson, Mr. Kopelman, and Ms.
Mason is $261,078. The Merger Agreement also provides that after consummation
of the Merger, D&N will appoint to its board of directors one individual
designated by the Chairman of MFSB, subject to the approval of D&N (which
approval shall not be unreasonably withheld). Although the decision has not
yet been finalized, it is anticipated that
7
<PAGE> 8
Stanley A. Jacobson will be designated by the Chairman of MFSB to be added to
the D&N Board of Directors. Finally, pursuant to the Merger Agreement, D&N
will terminate the MFSB Directors' and Executives' Deferred Compensation Plans
and pay the benefit that each participant will have accrued under these plans
as of the date the Merger becomes effective. The anticipated aggregate value
of the amounts to be paid under these plans is $1,819,570. These payments will
not be additional benefits payable solely as a result of the Merger or a change
in control. See "The Merger--Interests of Management."
BACKGROUND OF THE MERGER. MFSB, through its financial advisor, Roney
& Co., solicited and received indications of interest concerning the
acquisition of MFSB from D&N and other financial institutions. Preliminary
discussions between D&N and MFSB commenced in September of 1995. Negotiations
between D&N and MFSB were commenced in October of 1995. After consulting with
Roney & Co. and legal counsel, MFSB negotiated a letter agreement with D&N
setting forth the terms of a proposal for affiliation. An agreement in
principal was announced on October 20, 1995 and the definitive Merger Agreement
was fully executed on November 8, 1995. See "The Merger--Background of the
Merger".
D&N COMMON STOCK. Subject to the rights of the holders of any D&N
preferred stock (the "D&N Preferred Stock") if and when issued and outstanding
(of which there currently is none) to vote in event of dividend arrearage and
when specifically required by the Delaware General Corporation Law, as amended
(the "Delaware Law"), holders of D&N Common Stock have exclusive voting rights.
Holders of D&N Common Stock elect approximately one-third of the Board of
Directors for a three year term at each annual meeting. Subject to the prior
rights of the holders of D&N Preferred Stock if and when outstanding, holders
of D&N Common Stock are entitled to receive dividends if and when declared by
D&N's Board of Directors out of any funds legally available therefor. Subject
to the rights of the holders of D&N Preferred Stock if and when outstanding,
holders of D&N Common Stock are entitled to receive pro rata upon liquidation
all of the assets of D&N remaining after provision for the payment of
creditors. Holders of D&N Common Stock have no preemptive rights to subscribe
to any additional shares which D&N may issue. Under the Delaware Law, holders
of D&N Common Stock generally have no dissenters' rights of appraisal because
D&N Common Stock is designated as a Nasdaq National Market Security and is held
of record by more than 2,000 persons. See "Description and Comparison of D&N
Capital Stock and MFSB Capital Stock--D&N Common Stock."
Certain provisions of D&N's Certificate of Incorporation and Bylaws
may have the effect of rendering more difficult or discouraging a merger
proposal involving D&N, a tender offer for the voting stock of D&N, or a proxy
contest for control of D&N's Board of Directors. MFSB's federal stock charter
and Bylaws generally contain provisions that may have similar anti-takeover
effects. Neither D&N nor MFSB have a shareholder rights plan. See "Comparison
of Certain Provisions of D&N's Certificate of Incorporation and Bylaws and
MFSB's Federal Stock Charter and Bylaws" and "Description and Comparison of D&N
Capital Stock and MFSB Capital Stock."
MARKET FOR D&N AND MFSB COMMON STOCK. D&N Common Stock is traded
over-the-counter with price quotations furnished by the Nasdaq National Market
System ("NMS") under the (symbol DNFC). The high, low, and last sales prices
for D&N Common Stock on March 7, 1996 were $13.5, $13.375 and $13.375,
respectively. On October 19, 1995 the last full trading day before public
announcement of the Merger, the high, low, and last sales prices were $12.625,
$12.25 and $12.50 respectively.
MFSB Common Stock is traded over-the-counter, although there is no
established public trading market for MFSB Common Stock. MFSB management is
aware of the following transactions involving MFSB Common Stock. In February
1995, pursuant to a tender offer, Mark T. Jacobson, Chairman of the Board of
Directors of MFSB, and Stanley A. Jacobson, President of MFSB, purchased 455
and 1,225 shares, respectively, each at a price of $26 per share. See
"Description and Comparison of D&N Capital Stock and MFSB Capital Stock--D&N
Common Stock,--MFSB Common Stock."
SHAREHOLDER APPROVAL. At the Special Meeting, MFSB shareholders will
vote on approval of the Merger Agreement. Under the provisions of HOLA and the
regulations promulgated thereunder, the affirmative vote of two-thirds of the
holders of the outstanding shares of MFSB Common Stock is required for approval
of the Merger Agreement. As of March 11, 1996, the record date for the Special
Meeting, there were 186,604 shares of MFSB
8
<PAGE> 9
Common Stock outstanding and entitled to vote at the Special Meeting which are
held by 48 holders of record. Therefore, the affirmative vote of holders of
124,403 shares of MFSB Common Stock is required for approval of the Merger
Agreement. As of March 11, 1996 all directors and executive officers of MFSB
as a group beneficially owned 109,580 shares of MFSB Common Stock (or 57.34
percent of the outstanding shares). 4,500 of the shares held by directors and
executive officers are represented by stock options which have not been
exercised and are, therefore, not entitled to vote. Each of MFSB's directors
has agreed with MFSB and D&N to vote his or her shares in favor of the Merger
Agreement. An affirmative vote of 19,323 of the shares of MFSB Common Stock
(or 10.36 percent) of the outstanding shares held by those other than directors
or executive officers is needed to approve the Merger. Two of the MFSB
directors, in making their recommendations that shareholders vote in favor of
the proposed Merger, may have a conflict of interest in view of the personal
benefits (aggregating an estimated $153,078) they may derive in connection with
the Merger. Stanley A. Jacobson has an agreement with MFSB under which certain
payment and benefits totalling $125,580 are triggered by a change in control
such as the Merger. Further, the Merger Agreement provides as a condition to
the Merger that D&N shall have entered into an employment agreement with Esther
Mason, a director, and Executive Vice President and Treasurer of MFSB. MFSB
estimates the total value of payments under this agreement to be $27,498. See
"The Merger -- Interests of Management." Shareholders who give their proxies
may subsequently revoke them by executing and delivering to MFSB a proxy
bearing a later date, by giving MFSB written notice of revocation before the
proxy is voted, or by attending the Special Meeting and voting in person.
Attendance at the meeting will not in and of itself constitute the revocation
of a proxy. See "The Merger--Shareholder Approval."
ACCOUNTING TREATMENT. The parties anticipate accounting for the
Merger as a pooling of interests and it is a condition to D&N's obligation to
consummate the Merger that D&N have received an opinion from its accountant,
dated as of the closing date, that the Merger be accounted for as a pooling of
interests. Neither party is currently aware of any circumstances which would
preclude the Merger from being treated as a pooling of interests.
FEDERAL INCOME TAX CONSEQUENCES. The Merger Agreement provides, as a
condition to the parties' obligations to consummate the Merger, that the
parties shall have received an opinion from counsel to D&N that the Merger will
qualify as a tax-free reorganization under the Internal Revenue Code of 1986,
as amended (the "Code"), and, except with respect to any cash received in lieu
of fractional shares, no gain or loss will be recognized by the holders of MFSB
Common Stock upon receipt of shares of D&N Common Stock in exchange for their
shares. See "The Merger--Federal Income Tax Consequences."
REGULATORY APPROVALS. Consummation of the Merger is conditioned upon
obtaining the prior approval of the OTS. D&N has submitted to the OTS an
application for approval of the Merger. On February 7, 1996, the regional
office of the OTS notified D&N that it, by delegated authority, has approved
D&N's application. See "The Merger--Regulatory Approvals".
OTHER CONDITIONS. Under the Merger Agreement, consummation of the
Merger is also subject to other conditions including, without limitation, the
absence of any material adverse change in the capitalization, business,
properties or financial condition of the parties. See "The Merger--Conditions
to the Merger, Business of MFSB Pending the Merger."
ABANDONMENT, TERMINATION, MODIFICATION, AMENDMENT AND WAIVER. The
Merger Agreement may be terminated and the Merger abandoned before the
effectiveness of the Merger as follows: (1) by written agreement among the
parties authorized by a majority of the entire Board of Directors of each; (2)
by either of the parties if any condition to effectiveness of the Merger is not
fulfilled or not waived by the party adversely affected or shall have become
impossible to fulfill; (3) by either of the parties in the event of a material
breach by the opposite party of any representation, warranty, covenant, or
agreement contained in the Merger Agreement which has not been cured within 30
days after written notice has been given to the breaching party; (4) by either
of the parties if the Merger is not consummated on or before April 30, 1996; or
(5) by either of the parties in the event that the Average Price is less than
$9.50 or greater than $14.50. In the event that the Merger Agreement is
terminated after April 30, 1996 and MFSB is not in default of its obligations
and has satisfied all of its conditions
9
<PAGE> 10
and if the Average Price is $9.50 or greater and is not more than $14.50, then
D&N is required to pay MFSB a termination fee of $250,000 in satisfaction of
any obligation of D&N to MFSB.
At any time before effectiveness of the Merger (including the time
after stockholder approval of the Merger Agreement), the time for performance
may be extended and the covenants, agreements, and conditions of the Merger
Agreement may be modified, amended, or waived by the appropriate officers or
directors of D&N and MFSB; provided, however, that any such modification,
extension, amendment or waiver shall not (i) change the amount or kind of
consideration to be received; or (ii) change any term or condition which would
materially and adversely affect MFSB's stockholders once the Merger Agreement
has been approved by MFSB's stockholders.
10
<PAGE> 11
SELECTED FINANCIAL INFORMATION
The following tables present selected consolidated historical
financial data for D&N and selected historical financial data for MFSB and pro
forma combined amounts reflecting the Merger. The pro forma amounts assume
that the Merger had been effective during the periods presented. The data
presented is derived from the consolidated financial statements of D&N and the
financial statements of MFSB and should be read in conjunction with the more
detailed information and financial statements included herein or incorporated
by reference in this Prospectus/Proxy Statement and with the unaudited pro
forma financial statements included elsewhere in this Prospectus/Proxy
Statement.
D&N FINANCIAL CORPORATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
----------------------------- ---------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $24,332 $15,354 $ 22,614 $ 20,130 $ 28,690 $29,976 $40,862
Provision for loan losses 1,500 --- 100 --- --- 10,150 14,782
Noninterest income (loss) 5,411 6,358 7,424 (21,718) 13,362 24,743 (7,240)
Net income (loss) 6,856 2,190 3,091 (67,020)(1) 3,773 3,573 (15,770)
Earnings (loss) per share .96 .33 0.46 (18.00) 1.01 0.96 (4.24)
Weighted average shares
outstanding 6,722,514 6,719,753 6,720,011 3,724,264 3,708,418 3,708,418 3,702,091
Dividends per share --- --- --- --- --- --- 0.375
Stock price range 7 1/4-13 1/2 6 5/8-10 6 5/8-10 6 1/2-12 1/2 4 3/4-8 1/2 2 1/2-5 1/2 2 3/4-12
<CAPTION>
AS OF SEPTEMBER 30 AS OF DECEMBER 31
----------------------------- ---------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets 1,165,186 $1,066,512 $1,088,693 $1,041,950 $1,212,196 $1,518,930 $1,868,295
Net loans receivable 907,832 788,214 801,248 627,605 707,570 845,576 1,122,473
Nonperforming assets 15,560 32,091 24,515 43,557 55,890 66,951 71,404
Mortgage-backed securities 131,555 111,025 142,760 163,356 208,062 295,246 356,663
Mortgage derivative
products 2,844 3,758 3,886 4,321 27,075 69,994 170,856
Excess of cost over net
assets of association
acquired 83 510 384 845 36,380 38,320 40,260
Capitalized loan servicing
rights 1,217 1,025 968 9,870 29,198 8,992 10,544
Deposits 837,788 778,214 784,075 811,510 881,424 979,583 1,104,811
Borrowings 248,833 196,850 226,857 101,513 174,061 373,851 598,162
Stockholders' equity 62,070 53,061 52,623 51,454 96,770 92,997 89,424
Per share 9.22 7.90 7.83 7.66 26.10 25.08 24.11
Tangible stockholders'
equity 62,032 53,019 52,562 51,616 62,304 58,386 54,162
Per share 9.22 7.89 7.82 7.68 16.80 15.74 14.61
Number of offices 43 40 40 37 39 46 50
</TABLE>
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000) or ($9.33) per share.
11
<PAGE> 12
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
----------------- ------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED RATIOS (%):
Return on average assets .82 .28 0.30 (5.68) 0.27 0.21 (0.80)
Return on average equity 15.93 5.77 6.04 (80.13) 3.98 3.90 (14.92)
Average equity to average assets 5.12 4.92 4.92 7.09 6.79 5.49 5.39
Net interest margin 3.05 2.10 2.28 1.91 2.26 1.95 2.22
General and administrative expenses
to average assets 2.39 2.51 2.50 2.32 1.82 1.73 1.73
Nonperforming assets to total assets 1.34 3.01 2.25 4.18 4.61 4.41 3.82
Allowance for loan losses
to nonperforming loans 64.79 32.15 45.56 37.76 34.59 33.71 33.06
Allowance for loan losses
to total loans 1.00 1.02 1.01 1.79 2.14 2.16 1.61
Net loan charge-offs to
average loans .08 .60 0.44 0.61 0.44 0.99 0.79
Dividend payout ratio NM NM NM NM NM NM NM
Tangible capital ratio 4.99 4.58 4.71 4.56 4.04 3.36 2.51
Core capital ratio 4.99 4.63 4.75 4.64 5.04 4.86 4.01
Risk-based capital ratio 9.64 8.95 9.34 9.47 9.93 9.66 7.41
</TABLE>
12
<PAGE> 13
SELECTED FINANCIAL INFORMATION
MACOMB FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31 YEARS ENDED JUNE 30
----------------------- ---------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income $1,443,086 $1,293,467 $ 2,695,728 $2,385,882 $ 2,671,692 $ 3,105,356 $ 3,259,858
Interest expense 897,110 707,698 1,539,422 1,263,522 1,505,763 1,989,941 2,415,798
---------- ---------- ----------- ---------- ----------- ----------- -----------
Net interest income $545,976 $585,769 $ 1,156,306 $1,122,360 $ 1,165,929 $ 1,115,415 $ 844,060
Provision (reduction) for
losses on loans 0 0 0 0 0 121,291 18,709
---------- ---------- ----------- ---------- ----------- ----------- -----------
Net interest income after provision
(reduction) for losses on loans $545,976 $585,769 $1,156,306 $1,122,360 $ 1,165,929 $ 994,124 $ 825,351
Other income 12,864 11,989 24,209 26,513 31,282 35,159 35,728
Other expenses 393,183 390,588 762,025 663,885 812,571 604,888 538,849
---------- ---------- ----------- ---------- ------------ ----------- -----------
Income before provision for federal
income tax $165,657 $207,170 $ 418,490 $ 484,988 $ 384,640 $ 424,395 $322,230
Provision for federal income tax,
current 42,136 58,504 118,488 119,908 109,486 135,620 134,777
---------- ---------- ----------- ---------- ------------ ----------- -----------
Net income $123,521 $148,666 $ 300,002 $ 365,080 $ 275,154 $ 288,775 $ 187,453
========== ========== =========== ========== ============ ============ ===========
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
----------------------------- ---------------------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $42,585,006 $40,819,621 $41,876,070 $39,593,160 $40,299,275 $39,964,408 $39,084,300
Loans receivable, net 21,062,573 20,521,840 21,270,129 20,604,942 17,256,933 20,222,361 16,712,966
Certificates of deposit 1,084,000 1,383,000 2,550,000 495,000 1,276,798 8,377,078 20,224,455
Interest bearing deposits
in FHLB of Indianapolis 5,419,000 3,705,000 2,128,526 8,037,457 14,236,016 6,013,993 600,629
Investment securities 505,394 407,722 451,043 206,059 204,159 195,159 183,759
Deposits 35,063,737 33,599,416 34,256,150 32,438,750 33,538,648 35,063,304 34,840,243
Retained earnings
substantially restricted 4,526,851 4,361,569 4,403,330 4,103,328 3,738,248 3,463,094 3,174,319
Number of full service
banking offices 1 1 1 1 1 1 1
</TABLE>
13
<PAGE> 14
MACOMB FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31 YEARS ENDED JUNE 30
----------------- ---------------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED RATIOS (%):
Average yield on all interest-earning
assets 6.92 6.80 6.99 6.30 6.87 7.55 8.82
Average cost of all interest-bearing
liabilities 5.36 4.34 4.57 3.89 4.50 5.02 7.15
Interest rate spread 1.56 2.46 2.42 2.41 2.37 2.53 1.67
Retained earnings as a percent of
assets 11.07 10.68 10.88 10.36 9.28 8.67 8.12
Return on assets (net income divided
by average total assets) .58 .73 .74 .91 .69 .73 .49
Return on equity (net income divided
by average total equity) 4.94 7.10 6.8 9.3 7.6 8.7 6.1
Equity-to-assets ratio (average total
equity divided by average total
assets) 10.7 10.6 10.8 9.8 9.0 8.4 8.1
Tangible capital ratio 14.7 14.4 14.18 14.14 12.89 8.67 8.12
Core capital ratio 14.3 14.4 14.18 14.14 12.89 8.67 8.12
Risk-based capital ratio 42.0 44.1 42.03 39.40 37.18 24.10 24.12
</TABLE>
14
<PAGE> 15
HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA
The following table presents historical and pro forma per share data
for D&N, and historical and equivalent pro forma per share data of MFSB giving
effect to the Merger using the pooling-of-interests method of accounting. Pro
forma financial presentations provide information on the impact of the Merger
by showing how it might have affected historical financial statements if it had
been consummated at an earlier time. The data presented below is not
necessarily indicative of the results which would have actually been attained
if the Merger had been consummated in the past or what may be attained in the
future.
The per share data included in the following table should be read in
conjunction with the consolidated financial statements of D&N incorporated by
reference herein and the financial statements of MFSB included herein.
<TABLE>
<CAPTION>
MFSB
D&N D&N MFSB Pro Forma
Historical Pro Forma (a) Historical Equivalent (b) (c)
---------- ------------- ---------- ------------------
<S> <C> <C> <C> <C>
Income Before Extraordinary Items and
Cumulative Effect of Accounting Changes
Per Primary Share (d)
Nine months ended September 30, 1995 $ 1.02 $ .94 $ 1.20 $ 4.05
Year ended December 31, 1994 .46 .46 2.01 1.98
Year ended December 31, 1993 (8.44) (6.97) 1.82 (30.00)
Year ended December 31, 1992 1.43 1.25 N.A.(e) 5.38
Income Before Extraordinary Items and
Cumulative Effect of Accounting Changes
Per Fully Diluted Share (d)
Nine months ended September 30, 1995 .96 .89 1.20 3.83
Year ended December 31, 1994 .46 .46 2.01 1.98
Year ended December 31, 1993 (8.44) (6.97) 1.82 (30.00)
Year ended December 31, 1992 1.43 1.25 N.A.(e) 5.38
Market value per common share: (F)
March 7, 1996 $13.375
October 19, 1995 $12.50
Book value:
September 30, 1995 9.22 8.98 33.03 38.65
December 31, 1994 7.83 7.70 31.47 33.14
Cash dividends declared per share:
Nine months ended September 30, 1995 .00 .00 .00 .00
Year ended December 31, 1994 .00 .00 .00 .00
Year ended December 31, 1993 .00 .00 .00 .00
Year ended December 31, 1992 .00 .00 .00 .00
</TABLE>
15
<PAGE> 16
NOTES TO HISTORICAL, PRO FORMA AND EQUIVALENT PER SHARE DATA
(a) Pro forma amounts per share assume that MFSB Common Stock will be converted
and exchanged for D&N Common Stock based on an Exchange Ratio of 4.3041
which is the mid-point of the range of the Exchange Ratio.
(b) Pro forma equivalent amounts are computed by multiplying the D&N pro forma
amounts by an assumed Exchange Ratio of 4.3041 which is the mid-point of
the range of the Exchange Ratio. See "The Merger--Consideration to be
Received on the Merger."
(c) Pro forma equivalent per share information based on the minimum and maximum
Exchange Ratios follows:
<TABLE>
<CAPTION>
Maximum Minimum
Exchange Ratio Exchange Ratio
5.0526 3.5555
---------------- ----------------
<S> <C> <C>
Pro forma book value:
September 30, 1995 $45.37 $ 31.93
December 31, 1994 38.91 27.38
Pro forma cash dividends declared:
Nine months ended September 30, 1995 .00 .00
Year ended December 31, 1994 .00 .00
Year ended December 31, 1993 .00 .00
Year ended December 31, 1992 .00 .00
Pro forma fully diluted earnings per
share:
Nine months ended September 30, 1995 4.50 3.16
Year ended December 31, 1994 6.32 4.44
Year ended December 31, 1993 (35.22) (24.78)
Year ended December 31, 1992 2.32 1.64
Pro forma shares of D&N Common Stock 965,572 679,470
to be issued in the Merger:
</TABLE>
(d) Per share amounts for D&N exclude extraordinary items for prepayment
penalties of $(.52) and $(.42) for the years ended December 31, 1993 and
1992, respectively, and the cumulative effect of changes in accounting
principles of $(9.04) for the year ended December 31, 1993.
(e) Income per share amounts for MFSB for the year ended December 31, 1992 are
not applicable as MFSB converted to a stock savings bank in August, 1992.
(f) The market values per share of D&N Common Stock (Historical) represent the
last sale prices on Nasdaq on the dates noted. There is no established
public trading market for MFSB Common Stock. MFSB management is aware of
the following transactions involving MFSB Common Stock. In February 1995,
pursuant to a tender offer, Mark T. Jacobson, Chairman of the Board of
Directors of MFSB, and Stanley A. Jacobson, President of MFSB, purchased
455 and 1,225 shares, respectively, each at a price of $26 per share.
16
<PAGE> 17
THE SPECIAL MEETING, PROXIES, AND VOTING
THE SPECIAL MEETING. The Special Meeting will be held at MFSB's office
located at 23505 Greater Mack Avenue, St. Clair Shores, Michigan, on April 9,
1996, at 4:00 p.m., local time. Holders of MFSB Common Stock will vote on
approval of the Merger Agreement.
PROXIES. Proxies are solicited on behalf of the Board of Directors of MFSB
in connection with the Special Meeting and any adjournment thereof. Shares of
MFSB Common Stock represented at the Special Meeting by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions made in such proxies. If no instructions are
made, such shares will be voted for approval of the Merger Agreement. If any
other matter is properly presented at the Special Meeting for action, the
persons named in the proxies and acting thereunder will have discretion to vote
on such matter in accordance with their best judgment as to the best interests
of MFSB and its shareholders. A shareholder may revoke his or her proxy by
executing and delivering to MFSB a proxy bearing a later date, by giving MFSB
written notice of revocation before such proxy is voted, or by attending the
Special Meeting and voting in person. Attendance at the Special Meeting will
not in and of itself constitute the revocation of a proxy. The cost of
soliciting proxies will be borne by MFSB. Proxies may be solicited by mail, in
person, or by telephone by directors, officers and regular employees of MFSB.
These persons will not be specially compensated for soliciting proxies.
VOTING. The record date for determining shareholders entitled to notice of
and to vote at the Special Meeting has been fixed as of the close of business
on March 11, 1996. At the close of business on that date, there were 186,604
shares of MFSB Common Stock outstanding and entitled to vote at the Special
Meeting. Each share of MFSB Common Stock is entitled to one vote. Under the
Merger Agreement, the favorable vote of the holders of 124,403 shares of MFSB
Common Stock is required for approval. See "The Merger -- Shareholder
Approval."
The presence, in person or by proxy, of a majority of the outstanding
shares of MFSB Common Stock entitled to vote is necessary to constitute a
quorum of the shareholders in order to take action at the Special Meeting. For
these purposes, shares of MFSB Common Stock which are present, or represented
by proxy, at the Special Meeting will be counted for quorum purposes regardless
of whether the holder of the shares or proxy fails to vote on the Merger
Agreement. Once a quorum is established, approval of the Merger Agreement
requires the affirmative vote of holders of two-thirds of the outstanding
shares of MFSB Common Stock. Therefore, for voting purposes, abstentions will
have the same effect as votes against the Merger. In the event that sufficient
proxies are not obtained to approve the Merger Agreement, the persons named as
proxies in the enclosed form of proxy intend to propose and vote for one or
more adjournments or postponements of the Special Meeting to permit further
solicitation of proxies voting in favor of the Merger Agreement. No proxy
which is voted against the proposal to approve and adopt the Merger Agreement
may be voted in favor of any such adjournment or postponement.
THE MERGER
GENERAL. The following is a summary of the material features of the Merger
Agreement and the Merger. The Merger Agreement contains all the terms of and
conditions to consummation of the Merger including the manner and basis for
converting and exchanging the outstanding shares of MFSB Common Stock into and
for D&N Common Stock. This description of the Merger and the Merger Agreement
and all other references herein are qualified in their entirety by provisions
of the Merger Agreement, which is incorporated herein by reference, and a copy
of which is attached to this Prospectus/Proxy Statement as Exhibit B.
PARTIES TO THE MERGER AGREEMENT. D&N is a Delaware corporation and a
savings and loan holding company with its corporate headquarters located in
Hancock, Michigan. At September 30, 1995, D&N had consolidated assets of $1.165
billion, total deposits of $837.8 million, and consolidated stockholders'
equity of $62.1 million.
MFSB is a federally chartered stock savings bank located in St. Clair
Shores, Michigan. At December 31, 1995, MFSB's assets totaled $42.6 million.
By voting in favor of the Merger, shareholders of MFSB will be voting for a
Merger where MFSB shall provide approximately 3.5 percent of the assets and 9.1
percent of the equity to the combined institution. In addition, as of December
31, 1995, MFSB's tangible, core, and risk-based capital ratios were 14.7%,
14.3% and 42.0%, respectively. In comparison, D&N's tangible, core, and
risk-based capital ratios as of September 30, 1995 were 4.99%, 4.99% and 9.64%,
respectively. If the Merger had taken place as of September 30, 1995, the
proforma tangible, core, and risk-based capital ratios for the combined
institutions would have been 5.27%, 5.27% and 10.23%, respectively.
MERGER. The Merger Agreement provides that the affiliation of MFSB with
D&N is to be effected by the merger of MFSB into D&N Bank, with D&N Bank
designated as the resulting association. Upon effectiveness of the Merger, the
corporate existence of MFSB shall cease and D&N Bank will remain a wholly owned
subsidiary of D&N. The offices of MFSB will be maintained as a retail office
of D&N Bank.
17
<PAGE> 18
BACKGROUND OF THE MERGER. In April, 1995, the MFSB Board began to evaluate
alternative methods of maximizing shareholder value, including the possibility
of selling or merging MFSB with a larger financial institution. Management had
become increasingly aware of the intensely competitive environment in which
MFSB was operating. The attractive southeast Michigan market was continuing to
attract larger and more sophisticated competitors. As a result of
consolidation within the local banking industry, MFSB's existing competitors
were becoming larger and more technologically advanced. MFSB's management
realized that in order to compete in this increasingly competitive environment,
MFSB would have to make substantial capital investments in technology, grow
through acquisition itself, or affiliate with a larger, more sophisticated
institution. Realizing its limited opportunity for expansion through
acquisition itself, MFSB's management decided to explore possibly affiliating
with a larger institution. After discussing with legal counsel the
considerations involved in selling the company, MFSB engaged Roney & Co. in
May, 1995 to act as its financial advisor in a possible sale transaction
involving MFSB and authorized Roney & Co. to seek indications of interest on
MFSB's behalf. In July, 1995 Roney & Co. began to prepare a confidential
selling memorandum, which was distributed to potential buyers in August, 1995.
These potential buyers were identified through the collaboration of MFSB and
Roney & Co to select financial institutions believed to have the means to
successfully complete a transaction. On September 1, 1995, MFSB through Roney
& Co. received preliminary indications of interest from various potential
buyers, including D&N, and a number of those potential buyers (including D&N)
were invited to conduct additional due diligence on MFSB.
At a meeting of MFSB's Board of Directors held on October 26, 1995, which
was attended by Roney & Co. and MFSB's legal counsel, senior management
reviewed the five acquisition proposals received and focused particular
attention on the offers of D&N and one other potential buyer. Based on such
review and, among other things, Roney & Co.'s conclusion that, as of October
26, 1995, the proposal made by D&N was superior (based on, among other things,
the fact that D&N's offer was the highest and the consideration consisted
solely of D&N Common Stock) to any other pending acquisition proposal, MFSB
entered into a letter agreement with D&N setting forth the terms of a proposal
for affiliation (the "Letter Agreement"). MFSB's Board of Directors reviewed
Roney & Co.'s analysis and assumptions, including the financial information,
and relied on it in ratifying the Letter Agreement. The Letter Agreement
included terms negotiated by D&N and MFSB relating to the Exchange Ratio,
adjustments for fluctuations in D&N Common Stock, agreements relative to
outstanding extraordinary expenses, director seats, liquidated damages in the
event the Merger failed with MFSB having satisfied its conditions of merger,
timing of closure, due diligence reviews and other appropriate matters common
in acquisition negotiations. Thereafter, MFSB's management proceeded to
negotiate a definitive merger agreement with D&N.
Between October 26, 1995, the date the Letter Agreement was ratified, and
November 8, 1995, the date the definitive Merger Agreement was approved by the
MFSB Board of Directors, drafts of the merger agreement were prepared. Each of
the parties reviewed and discussed the details of such drafts with their
respective counsels until a draft acceptable to each of the parties was agreed
upon. This draft was the version which was ultimately approved by MFSB's Board
of Directors on November 8, 1995. Following an in-depth analysis, review and
discussion of the proposed definitive merger agreement with MFSB's legal
counsel, its management and its Board of Directors, MFSB approved the Merger
Agreement on November 8, 1995, as being in the best interest of MFSB and its
shareholders. On December 21, 1995 Roney & Co. delivered its written fairness
opinion to MFSB's Board of Directors concluding that as of the date thereof,
the consideration to be received by the shareholders of MFSB is fair from a
financial point of view. At the December 21, 1995 meeting of the MFSB Board of
Directors, MFSB's Board of Directors reviewed and accepted Roney & Co.'s
written fairness opinion and the analysis, assumptions, and projections
supporting Roney & Co.'s conclusion that the consideration to be received by
the shareholders of MFSB, as proposed by the Merger Agreement, is fair from a
financial point of view.
RELATED AGREEMENTS. In connection with execution of the Merger Agreement,
the directors of MFSB, who own 56.12 percent of the outstanding Common Stock,
entered into an "Approval and Agreement of Directors," whereby those directors
agreed: (1) to exchange all shares of MFSB Common Stock, now or hereafter
beneficially owned by each of them, in accordance with the terms of the Merger
Agreement; (2) to vote said shares, in person or by proxy, at any meeting of
shareholders of MFSB and all adjournments thereof, in favor of approval of the
Merger Agreement; and (3) to unanimously recommend acceptance and approval of
the Merger Agreement by MFSB shareholders. (See page B-47 to Exhibit B
attached hereto). No consideration was paid to any director in connection with
such director's agreement to enter into the Approval and Agreement of
Directors.
REASONS FOR MERGER AND AFFILIATION. The MFSB Board of Directors, with the
assistance of outside financial and legal advisors, has evaluated the
financial, legal and market considerations bearing on the decision to recommend
the Merger. The terms of the Merger, including the purchase price, are a
result of arms-length negotiations between representatives of MFSB and D&N. In
reaching its determination that the Merger Agreement is fair to, and in the
best interest of, MFSB and the holders of MFSB Common Stock, the MFSB Board of
Directors considered a number of factors, including, without limitation, the
following: (1) MFSB Board of Directors' familiarity with and review of MFSB's
business, financial condition, results of operations, management and prospects,
including, but not limited to, its potential growth, development, productivity
and profitability; (2) the current and prospective environment in which MFSB
operates, including national and local economic conditions,
18
<PAGE> 19
the competitive environment for savings bank and other financial institutions
generally and the trend toward consolidation in the financial services
industry; (3) information concerning the business, financial condition, results
of operations and prospects of D&N, including D&N's plan to continue expansion
efforts in the southeast Michigan market, as well as, the performance of D&N
Common Stock; (4) the value to be received by the holders of MFSB Common Stock
pursuant to the Merger in relation to the historical book value of MFSB Common
Stock; (5) the financial and other significant terms of the D&N offer compared
to other offers and, in particular, the fact that based on the analysis of its
financial advisor, D&N's offer was the highest at that time; (6) the potential
upside value offered in connection with the D&N offer compared to other offers,
and downside protection associated with the D&N offer compared to other offers;
(7) the review by the MFSB Board of Directors with its legal and financial
advisors of the provisions of the proposed Merger Agreement; (8) MFSB Board of
Directors' belief that the terms of the proposed form of Merger Agreement with
D&N were attractive in that it would allow MFSB's shareholders to receive stock
in the Merger thus permitting shareholders to defer any tax liability
associated with the increase in the value of their stock as a result of the
Merger; (9) the expectation that D&N will continue to provide quality service
to the community and customers served by MFSB; and (10) the compatibility of
the respective business and management philosophies of MFSB and D&N. Although
the importance of these factors relative to one another cannot precisely be
determined or stated herein, MFSB's decision was most influenced by the
intensely competitive environment in which it operates, its limited
opportunities for expansion through acquisition itself, the business, financial
condition and prospects of D&N, and the higher price offered by D&N.
Accordingly, the MFSB Board of Directors has unanimously approved the Merger
Agreement and unanimously recommends that MFSB shareholders vote for approval
of the Merger Agreement.
CONSIDERATION TO BE RECEIVED IN THE MERGER. The Merger Agreement provides
that upon effectiveness of the Merger, each issued and outstanding share of
MFSB Common Stock will be converted into and exchanged for the number of shares
rounded to the nearest ten thousandth of a share of D&N Common Stock equal to
$48.00 divided by the average of the means between the high and low transaction
prices of D&N Common Stock as quoted on the Nasdaq the last fifteen trading
days on which reportable sales of D&N Common Stock takes place on the Nasdaq
immediately prior to, but not including, the third calendar day prior to the
effectiveness of the Merger; provided, however, the Exchange Ratio will not be
below 3.5555 or be above 5.0526.
The following table shows a range of hypothetical Average Prices and the
Exchange Ratios corresponding to those Average Prices.
<TABLE>
<CAPTION>
Average Price Exchange Ratio
--------------------------- -------------------
<S> <C> <C>
At or above $13.50 3.5555
13.00 3.6923
12.00 4.0000
11.00 4.3636
10.00 4.8000
At or below 9.50 5.0526
</TABLE>
The following table shows the mean of the high and low transaction prices
of D&N Common Stock on the dates shown and the corresponding Exchange Ratio
that would apply if those prices as shown were the Average Price.
<TABLE>
<CAPTION>
Mean of the High and
Low Transaction
Date Prices Exchange Ratio (2)
--------------------------------- ------------------------- -----------------------
<S> <C> <C>
October 19, 1995 (1) $12.4375 3.8593
March 7, 1996 $13.4375 3.5721
</TABLE>
(1) The last trading day before public announcement of the Merger Agreement.
(2) Assuming the mean of the high and low transaction prices shown is the
Average Price.
The maximum and minimum Exchange Ratios were negotiated at arms-length by
the parties, and reflect the managements' of D&N and MFSB respective judgments
as to the value of their respective shares in relation to each others' shares
and the appropriate range within which fluctuations in D&N's stock price should
not change the amount of consideration paid by D&N or received by MFSB
shareholders.
FAIRNESS OPINION TO MFSB. MFSB's Board of Directors has engaged Roney &
Co. ("Roney") to act as MFSB's financial advisor. In this capacity, Roney was
asked to: advise the Board of Directors, as to the likely value of MFSB shares
if MFSB were to be affiliated with or acquired by a third party; attend and
participate in meetings of MFSB's Board of Directors at which Roney's opinion
was discussed; advise the Board with respect to the feasibility and relative
value of various alternatives; and provide an opinion to the fairness, from a
financial point of view, of any proposed affiliation.
19
<PAGE> 20
Roney is a regional investment banking firm of recognized standing. As
part of its investment banking services, it is regularly engaged in the
valuation of banks, savings banks and other corporate entities in connection
with public offerings, mergers and acquisition transactions. Its research
analysts publish regular reports on individual banks, savings and loan
associations as well as other financial institutions. Roney makes principal
markets in various financial institution stocks, and has managed public
offerings for banks and thrifts as well as other financial institutions. The
MFSB Board of Directors selected Roney based in part on the recommendation of
management after presentations by and interviews with several qualified
investment banking firms. Roney was chosen on the basis if its familiarity
with the financial services industry generally and in the relevant area, and
its qualifications, ability, previous experience, and reputation. No
limitations were imposed by the MFSB Board of Directors upon Roney with respect
to the investigations made or procedures followed by Roney in rendering its
opinion.
The Merger Agreement provides that as a condition precedent to MFSB's and
D&N's respective obligations to consummate the Merger, MFSB shall have received
an opinion from Roney to the effect that the consideration to be received by
MFSB shareholders pursuant to the Merger Agreement is fair. Roney has rendered
a written opinion to the MFSB Board of Directors dated December 21, 1995, to
the effect that, as of that date, the consideration to be received by the
shareholders of MFSB is fair, from a financial point of view, to the
shareholders of MFSB. Such opinion describes the assumptions made, matters
considered and the scope of the review undertaken and procedures followed by
Roney. Roney's opinion is included in this Proxy Statement/Prospectus as
Exhibit A. SHAREHOLDERS ARE ENCOURAGED TO READ RONEY'S OPINION IN ITS
ENTIRETY. Roney's opinion addresses the consideration to be received, but does
not constitute a recommendation to any MFSB shareholder as to how such
shareholder should vote at the Special Meeting.
The consideration to be received by the shareholders of MFSB was determined
through negotiation between MFSB and D&N. (See "THE MERGER-- Background of the
Merger.") Roney did not recommend the amount of consideration to be paid.
In arriving at its opinion, and in connection with its review of the
proposed transaction, Roney, among other things:
- Reviewed MFSB's Annual Reports on Form 10-K and related financial
information since it became a public company up to December 31, 1994
and MFSB's Quarterly Reports on Form 10-Q as filed with the OTS
covering through the quarter ended September 30, 1995;
- Reviewed the historical stock price and trading activity for the
common stock of MFSB and D&N;
- Reviewed the then most recent draft of the Prospectus/Proxy Statement;
- Compared certain financial characteristics of MFSB and D&N with other
Michigan and Midwestern financial institutions Roney deemed to be
comparable;
- Compared the proposed terms of the offer contemplated in the Merger
Agreement with the financial terms of certain other mergers and
acquisitions in the financial services industry which Roney deemed to
be relevant;
- Conducted discussions with members of senior management of both MFSB
and D&N concerning their respective businesses and prospects;
- Prepared a discounted cash flow analysis on MFSB and an estimate of
the difference in value of MFSB depending whether it was sold
currently or remains independent (such analysis performed by Roney was
intended only to facilitate MFSB's Board's evaluation of the
appropriate timing of a sale of MFSB and was not intended to
determine, and the results obtained were not necessarily indicative
of, the actual value of MFSB Common Stock, which may be significantly
more or less favorable than suggested by such analysis);
In preparing its opinion, Roney relied upon the accuracy and completeness
of all financial and other information supplied or otherwise made available to
it by MFSB and D&N and did not independently verify such information or
undertake an independent audit, evaluation or appraisal. In connection with
its written opinion dated as of the date of this Proxy Statement/Prospectus,
Roney performed procedures to update certain of its analyses and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith.
20
<PAGE> 21
COMPARISON WITH SELECTED COMPANIES:
Roney compared selected financial ratios for MFSB and D&N to the
corresponding ratios for a Comparable Michigan Banks peer group and a
Comparable Midwest Thrifts peer group. Each of these banks had assets of less
than $350 million as of September 30, 1995. The Comparable Michigan Thrifts
peer group consisted of: Bank West Financial Corporation of Grand Rapids; FSB
Financial Corporation of Kalamazoo; MSB Financial, Inc. of Marshall; SJS
Bancorp, Inc. of St. Joseph; and Three Rivers Financial Corp. of Three Rivers.
ANALYSIS OF RECENT ACQUISITION TRANSACTIONS.
Roney analyzed certain other bank merger and acquisition transactions
involving a sample of 5 completed transactions between April 1995, through
September 1995. Roney compared the multiples produced by the D&N offer under
the Merger Agreement with the average price to book value and average price to
latest 12-month earnings for the 5 completed transactions. For the compared
transactions the average price to book was 1.42 times book and the average
price to earnings ratio was 20.1. The Target/Buyers were: United Financial
Bancorp/National City Bncs; PSB Holdings Corp,/CitiFed Bancorp, Inc.; Plains
Spirit Financial/Mercantile Bancorp; First Southern Bancorp/Centura Banks;
Olympus Capital/Washington Mutual Bank. In comparison, based on the Exchange
Price of $48.00, the price to book value ratio for the Merger would be 1.45 and
the price to earnings ratio would be 29.81 (based on MFSB's book value and its
last twelve month's earnings per share as of September 30, 1995).
ANALYSIS OF PENDING ACQUISITION TRANSACTIONS THROUGH OCTOBER 1995.
Roney analyzed certain other bank merger and acquisition transactions
involving a sample of 13 pending transactions between September, 1994, through
October 1995. Roney compared the multiples produced by the D&N offer (1.45 and
29.81, as described above) with the average price to book value and average
price to latest 12-month earnings. The average price to book for the compared
transactions was 1.43 times book and the average price to earnings ratio was
15.5. The Target/Buyers were: Bank of Braintree/Co-op Bank Concord; CF
Bancorp/First Midwest Bancorp; FSB Financial Corp/Standard Federal Bank; First
Financial-Polk City/Barnett Banks, Inc.; First Kent Financial Corp/Security
First Corp; First United Savings Bank; Old National Bancorp; Great Country
Bank/Center Financial Corp; Harvest Financial Corp/Firstar Corp; Iowa Bancorp,
Inc./First Midwest Financial; Kirksville Bancshares/Roosevelt Financial; Rock
Financial Corp/First Fed Cap. Corp; Seaboard Bancorp/Life Bancorp; Shelton
Bancorp/Webster Financial Corp.
ANALYSIS OF RECENT MICHIGAN MERGERS & ACQUISITIONS.
Roney analyzed certain other Thrift mergers and acquisition transactions
involving a sample of 10 completed mergers within the State of Michigan. Roney
compared the multiples produced by the D&N offer (1.45 and 29.81, as described
above) with the average price to book value and average price to latest
12-month earnings for the 10 completed transactions. For the compared
transactions the average price to book ratio for the 10 transactions was 1.63
with a range of 1.22 to 2.28 times book. The average price to earnings ratio
was 23.66 with a range of 8.65 to 60.26 times earnings. The Target/Buyers
were: Horizon Financial/Republic Bancorp; Inter First Bkorp/Standard Federal
Bank; Heritage Bankcorp/Standard Federal; Central Holding Co/Standard Federal;
Security Savings Bank/First Security SB; Mackinac Financial Corp/Standard
Federal Bank; Great Lakes Bancorp/TCF Financial; Firstfed Michigan/Charter One
Fin'l; AmeriBank FSB/Ottawa Fin'l Corp; and FSB Financial Corp/Standard Federal
Bank.
None of the analyses performed by Roney was assigned a greater significance
than any other.
Although the material analyses performed by Roney in rendering its opinion
have been summarized above, the summary does not purport to be a complete
description of the analyses performed by Roney. Roney's analyses and the
summary set forth above must be considered as a whole. Selecting portions of
Roney's analyses, without considering all factors and analyses, may create an
incomplete view of the process underlying the analyses by which Roney reached
its opinion. In addition, Roney may have given various analyses more or less
weight than any other analyses. Also, Roney may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Roney's view of the actual value of MFSB or the combined companies.
The preparation of a fairness opinion is to a large degree judgmental and is
not necessarily susceptible to partial analysis or summary description.
In performing its analyses, Roney made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of MFSB and D&N. The analyses
performed by Roney are not necessarily indicative of actual value or actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Roney's analysis of the fairness, from a financial point of view, of the
consideration to be received by MFSB shareholders. The analyses do not purport
to be appraisals or to reflect the prices at which a company might
21
<PAGE> 22
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. Roney used in its analyses various
projections of future performance based on assumptions deemed reasonable by
MFSB management. The projections are based on numerous variables and
assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those assumed in the projections and any related analyses.
Roney's fairness opinion does not address the relative merits of the Merger
as compared to any alternative business strategies that might exist for MFSB or
the effect of any other business combination in which MFSB might engage. In
addition, as described above, Roney's opinion to the MFSB Board of Directors
was only one of many factors taken into consideration to adopt the Merger
Agreement.
Pursuant to a letter agreement, dated May 12, 1995 (the "Engagement
Letter"), MFSB has agreed to pay Roney for its services a success fee which
becomes payable if a sale of MFSB is accomplished. Under the Engagement
Letter, the success fee will be based on the total per share consideration paid
in such transaction as follows: (i) a flat fee of $80,000 if the total
consideration is between $0 and $52.00 per share; and (ii) a bonus fee ranging
from 3 to 5 percent on amounts over $52.00. Accordingly, upon consummation of
the Merger, a success fee of $80,000 will be payable by MFSB to Roney pursuant
to the Engagement Letter. MFSB also agreed to pay Roney a non-refundable
advisory fee of $20,000 and to reimburse Roney for Roney's reasonable
out-of-pocket expenses up to a maximum aggregate reimbursement of $2,500 and to
indemnify Roney against certain liabilities.
Roney has performed various investment banking services for D&N from time
to time, including acting as dealer-manager of a public offering of units
consisting of D&N Common Stock and warrants to purchase D&N Common Stock in
November, 1993. D&N paid Roney $50,000 in December, 1995 in connection with
financial advice provided by Roney in D&N's acquisition (purchase of certain
assets and assumption of certain liabilities) of branch offices from another
financial institution.
Roney may, in the ordinary course of its business, trade securities of D&N
for its own account or for the accounts of customers and thus may hold long or
short positions in such securities at any time. Roney makes a market in D&N
securities and may in the future be considered or employed by MFSB or D&N to
provide investment banking and securities brokerage services. These
relationships are considered by MFSB and D&N respectively, to be in the
ordinary course of business and to be immaterial to Roney's engagement relative
to the Merger.
INTERESTS OF MANAGEMENT. At March 11, 1996, all directors and executive
officers of MFSB as a group beneficially owned 109,580 shares or 57.34 percent
of the outstanding shares of MFSB Common Stock. No director or any executive
officer of MFSB owns any D&N Common Stock. None of D&N's executive officers or
directors owns any shares of MFSB Common Stock.
Certain members of MFSB's management and the MFSB Board of Directors may be
deemed to have certain interests in the Merger that are in addition to their
interests as stockholders of MFSB generally. MFSB has entered into employment
agreements with Stanley A. Jacobson, President and Chief Executive Officer of
MFSB and Jeffrey I. Kopelman, Executive Vice President and Chief Operating
Officer of MFSB, under which the Merger will constitute a change in control
triggering additional compensation or benefits. The Jacobson and Kopelman
Agreements are the only employment arrangements of MFSB employees under which
additional compensation or other benefits are triggered by a change in control,
such as the Merger.
Mr. Jacobson's agreement (the "Jacobson Agreement") is for a term of three
years that began August 13, 1995, and requires him to devote a minimum of
one-third of his time or an average of twelve hours per week each year to the
business and affairs of MFSB. Mr. Jacobson receives an annual base salary of
not less than $42,000 subject to annual review and such upward adjustments as
deemed appropriate by the Board of Directors of MFSB, and an annual cost of
living increase. In addition, Mr. Jacobson is entitled to participate in
MFSB's bonus program, incentive compensation programs, and retirement, stock
option and stock purchase plans as may be in effect, as well as such other
fringe benefits as deemed appropriate by the Board or otherwise made available
to executive officers. If Mr. Jacobson becomes disabled during the term of his
employment, MFSB will continue to compensate him for the greater of the
remaining term of the Jacobson Agreement or two years.
The Jacobson Agreement provides that, in the event of a change in ownership
or control of MFSB (or a substantial portion of its assets), Mr. Jacobson will
have the right to terminate his employment upon five day's written notice to
the Board, which notice must be delivered during the 180-day period following
the change in ownership or control. The Merger will constitute a change in
ownership or control for purposes of the Jacobson Agreement. If Mr. Jacobson
exercises his right to terminate employment, or if he is terminated by D&N
without cause on or before the first anniversary date of the Merger, he will be
entitled to receive within 60 days of termination, a lump sum payment equal to
2.99 times his base salary, or $125,580.
22
<PAGE> 23
Mr. Kopelman's employment agreement (the "Kopelman Agreement") is for a
term of two years. Mr. Kopelman receives a base salary of $75,000, that began
September 1, 1995, and an automobile and health insurance allowance. In
addition, he is entitled to participate in any incentive compensation,
retirement plans, stock options plans and stock purchase plans and bonus
programs made available to executive officers. If Mr. Kopelman becomes
disabled during the term of his employment, MFSB will continue to compensate
him for the lesser of two years or the remaining term of the Kopelman
agreement.
The Kopelman Agreement provides that, in the event of a change in ownership
or control of MFSB (or a substantial portion of its assets), Mr. Kopelman will
have the right to terminate his employment upon five day's written notice to
the Board, which notice must be delivered during the 180-day period following
the change in ownership or control. The Merger will constitute a change in
ownership or control for purposes of the Kopelman Agreement. If Mr. Kopelman
exercises his right to terminate employment, he will be entitled to receive the
greater of the compensation remaining under the agreement, or a minimum of one
year's compensation from the date of termination, payable 20 days from the
termination date of employment.
Pursuant to the Merger Agreement, D&N and Mr. Kopelman have agreed to amend
the Kopelman Agreement to provide that (1) before November 1, 1996, Mr.
Kopelman will not exercise his rights to terminate his employment and receive
severance payments; (2) D&N shall continue to employ Mr. Kopelman until
November 1, 1996; (3) the time period for Mr. Kopelman to exercise his right to
terminate employment and receive severance benefits shall not expire until
November 5, 1996; and (4) Mr. Kopelman shall be paid a salary of $9,000 per
month from the effective date of the Merger through October 31, 1996, such
salary being in part consideration for the reduction in severance payments that
Mr. Kopelman would receive if he were to terminate his employment after
November 1, 1996, rather than immediately following the Merger, and in part
consideration for the services Mr. Kopelman will perform from the date of the
Merger until his termination of employment. MFSB estimates the value of
severance payments as of November 1, 1996, to be $108,000.
Under the Merger Agreement, D&N has also agreed to enter into an employment
agreement with Esther Mason, Executive Vice President and Treasurer of MFSB
prior to the effectiveness of the Merger, which shall provide for an employment
term of not less than six months commencing with the effectiveness of the
Merger. Such agreement shall not require Ms. Mason to work more than three
days per week. It is expected that the agreement will provide for salary
payments of $4,583 per month. MFSB estimates the total value of payments under
this agreement to be $27,498.
MFSB maintains the Macomb Federal Savings Bank Employee Stock Ownership
Plan (the "ESOP"), for its employees. The ESOP purchased 18,000 shares of MFSB
Common Stock with funds borrowed from Manufacturers Bank, N.A., now known as
Comerica Bank. Shares purchased with loan proceeds are held unallocated in a
suspense account and released for allocation among participants as the loan is
repaid. In the event of a change in control, such as the Merger, Comerica has
the right to accelerate the ESOP loan. If Comerica exercises this right, any
unallocated Common Stock held by the ESOP will be allocated to MFSB employees
who are employed by D&N on June 30, 1996. MFSB estimates that if Comerica
accelerates payment of the ESOP loan, 7,449 shares of MFSB Common Stock would
be allocated to ESOP participants. Assuming an Exchange Ratio of 4.3041 (the
mid-point of the maximum and minimum Exchange Ratio under the Merger
Agreement), such shares would have been converted to 32,061 shares of D&N
Common Stock. Pursuant to the Merger Agreement, MFSB and D&N have agreed that
no action shall be taken by either to alter the terms of the ESOP, the ESOP
loan or any collateral agreements. Neither MFSB's management nor D&N's
management can anticipate whether Comerica will exercise its right to
accelerate the ESOP loan.
Pursuant to the Merger Agreement, D&N will terminate the MFSB Directors'
and Executives' Deferred Compensation Plans and pay the benefit that each
participant will have accrued under the plans as of the date the Merger becomes
effective. MFSB and D&N anticipate that lump-sum payments shall be made in the
amount of $34,887 to Paul Andrews, $153,400 to Jon M. Fox, $180,299 to James H.
Hudnut, $252,849 to Mark T. Jacobson, $233,931 to Stanley A. Jacobson,
$833,640 to Esther Mason, and $130,564 to Steven E. Zack. The MFSB Board of
Directors was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby.
The Merger Agreement provides that after consummation of the Merger, D&N
will appoint to its board of directors one individual designated by the
Chairman of MFSB, subject to the approval of D&N (which approval shall not be
unreasonably withheld). Although the decision has not yet been finalized, it
is anticipated that Stanley A. Jacobson will be designated by the Chairman of
MFSB to be added to D&N's Board of Directors. It is further anticipated that
Mr. Jacobson will be asked to serve as a director for D&N Bank and to remain on
with D&N as a Business Development Officer.
SHAREHOLDER APPROVAL. At the Special Meeting, MFSB shareholders will vote
on approval of the Merger Agreement. Under the Merger Agreement, the
affirmative vote of holders of two-thirds of outstanding shares of
23
<PAGE> 24
MFSB Common Stock entitled to vote is required for approval of the Merger
Agreement. At March 11, 1996, the record date for the Special Meeting, there
were 186,604 shares of MFSB Common Stock outstanding and entitled to vote at
the Special Meeting which were held by 48 holders of record. Therefore, the
affirmative vote of holders of 124,403 shares of MFSB Common Stock is required
for approval of the Merger Agreement. A failure to return a properly executed
proxy card or an abstention from voting at the Special Meeting will have the
same effect as a vote against the Merger Agreement. As of March 11, 1996, all
directors and executive officers of MFSB as a group beneficially owned 109,580
shares of MFSB Common Stock (or 57.34 percent of the outstanding shares).
4,500 of the shares held by directors and executive officers are represented by
stock options which have not been exercised and are, therefore, not entitled to
vote. Each of MFSB's directors has agreed with MFSB and D&N to vote his or her
shares in favor of the Merger Agreement. An affirmative vote of 19,323 of the
shares of MFSB Common Stock (or 10.36 percent) of the outstanding shares held
by those other than directors or executive officers is needed to approve the
Merger.
RECOMMENDATION OF MFSB BOARD OF DIRECTORS. On November 8, 1995, the MFSB
Board of Directors unanimously approved the Merger Agreement and unanimously
recommends that MFSB shareholders vote for approval of the Merger Agreement.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS. Any holder of MFSB Common
Stock who objects to the Merger may demand payment of the appraised value of
his or her shares in cash pursuant to applicable OTS regulations, 12 C.F.R.
Section 552.14 ("Section 552.14"). Any holder of MFSB Common Stock
contemplating the exercise of his or her dissenter's rights of appraisal should
carefully review the provisions of Section 552.14, which are described below
and set forth in their entirety as Exhibit C to this Prospectus/Proxy
Statement. The following discussion is not complete and is qualified in its
entirety by reference to Section 552.14, which is incorporated herein by
reference.
Holders of record of MFSB Common Stock who desire to exercise their
appraisal rights must satisfy all of the following conditions. A writing
identifying the stockholder and stating the stockholder's intention to demand
appraisal of shares must be delivered to MFSB before the taking of the vote on
approval of the Merger Agreement. A stockholder who desires to exercise his or
her appraisal rights must, among other things, vote against the proposal. A
holder of MFSB Common Stock who votes his or her shares of MFSB Common Stock
against the Merger, by proxy or otherwise, will not thereby fulfill the demand
for appraisal requirement under Section 552.14. If shareholders representing
more than 10 percent of the shares of MFSB Common Stock outstanding elect to
exercise appraisal rights, the Merger may not be accounted for as a pooling of
interests. It has not been determined whether the parties would elect to
proceed with the Merger if the Merger could not be accounted for as a pooling
of interests. Such a decision would be made, if necessary, at a later time.
A stockholder who elects to exercise appraisal rights must mail or deliver
his or her written demand to:
Macomb Federal Savings Bank
Attention: Secretary
23505 Greater Mack Avenue
St. Clair Shores, Michigan 48080
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares owned, and that the stockholder is
thereby demanding appraisal of his or her shares.
Within ten days after effectiveness of the Merger, MFSB will do the
following: (1) provide notice of the effectiveness of the Merger to all
stockholders who have complied with Section 552.14; (2) make a written offer to
each such stockholder to pay for their shares at a specified price deemed by
MFSB to be the fair value thereof; and (3) inform such stockholders that within
60 days of the effectiveness of the Merger, they must, as more fully described
below, petition the OTS for a determination of the fair market value of their
shares and submit their stock certificates to the transfer agent for the shares
for notation thereon of the pending appraisal proceedings.
If within 60 days of the effective date of the Merger the fair value of the
shares is agreed upon between MFSB and any stockholder who has complied with
Section 552.14, payment therefor shall be made within 90 days of the effective
date of the Merger.
If within 60 days of the effective date of the Merger, MFSB and any
stockholder who has complied with Section 552.14 do not agree as to the fair
value of the shares, then any such stockholder may file a petition with the
OTS, with a copy by registered or certified mail to MFSB, demanding a
determination of the fair market value of the stock of all such stockholders.
A stockholder entitled to file a petition who fails to file such petition
within 60 days of the effective date of the Merger shall be deemed to have
accepted the terms offered under the Merger Agreement.
24
<PAGE> 25
Within 60 days of the effective date of the Merger, each stockholder
demanding appraisal and payment shall submit to the transfer agent his or her
stock certificates for notation thereon that appraisal and payment have been
demanded with respect to such stock and that appraisal proceedings are pending.
Any stockholder who fails to submit his or her stock certificates for such
notation shall no longer be entitled to appraisal rights under Section 552.14
and shall be deemed to have accepted the terms offered under the Merger
Agreement.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the Merger, any stockholder shall have the right to withdraw
his or her demand for appraisal and to accept the terms offered under the
Merger Agreement.
Upon the petition of a dissenting stockholder as described above, the OTS
may either appoint one or more independent persons or direct appropriate staff
to appraise the shares to determine their fair market value as of the effective
date of the Merger, exclusive of any element of value arising from the
accomplishment or expectation of the Merger. The OTS will review appraisals
prepared by independent persons as to the suitability of the appraisal
methodology and the adequacy of the analysis and supportive data. The OTS
after consideration of the appraisal report and the advice of the appropriate
staff shall, if it concurs in the valuation of the shares, direct payment by
the resulting association of the appraised fair market value of the shares,
upon surrender of the certificates representing such stock. Payment shall be
made, together with interest from the effective date of the Merger, at a rate
deemed equitable by the OTS.
The costs and expenses of any proceeding under Section 552.14 may be
apportioned and assessed by the OTS as it may deem equitable against all or
some of the parties. In making this determination the OTS will consider
whether any party has acted arbitrarily, vexatiously, or not in good faith in
respect to the rights provided by Section 552.14.
Any stockholder who has demanded appraisal rights as provided in Section
552.14 shall thereafter neither be entitled to vote such stock for any purpose
nor be entitled to the payment of dividends or other distributions on the stock
(except dividends or other distributions payable to, or a vote to be taken by,
stockholders of record at a date which is on or prior to, the effective date of
the Merger); provided, that if any stockholder becomes unentitled to appraisal
and payment of appraised value with respect to such stock and accepts or is
deemed to have accepted the terms offered under the Merger Agreement, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
REGULATORY APPROVALS. Consummation of the Merger is contingent upon
obtaining the prior approval of the Merger by the OTS, without any conditions,
which, in the reasonable opinion of D&N, or in certain cases of MFSB, are
materially adverse. D&N has submitted an application for approval of the Merger
to the OTS. On February 7, 1996, the regional office of the OTS notified D&N
that it, by delegated authority, has approved D&N's application.
FEDERAL INCOME TAX CONSEQUENCES. The Merger Agreement provides, as a
condition to the parties' obligations to consummate the Merger, that the
parties shall have received an opinion from counsel to D&N that the Merger will
qualify as a tax-free reorganization under the Code and, except with respect to
any cash received in lieu of fractional shares, no gain or loss will be
recognized by the holder of MFSB Common Stock upon receipt of shares of D&N
Common Stock in exchange for their shares.
D&N has been advised by letter from its counsel, Howard & Howard Attorneys,
P.C. ("Howard & Howard") that in its opinion the Merger would yield the federal
income tax consequences described above. Howard & Howard's opinion also states
that the Merger would yield the following federal income tax consequences.
No gain or loss will be recognized to MFSB shareholders who receive D&N
Common Stock in exchange for their MFSB Common Stock. The basis of the D&N
Common Stock received by MFSB shareholders will be the same as the basis of the
MFSB Common Stock surrendered in exchange therefor. The holding period of the
D&N Common Stock received by MFSB shareholders will include the period during
which the MFSB Common Stock surrendered in exchange therefor was held, provided
that the MFSB Common Stock surrendered was held as a capital asset at the time
of the exchange. The payment of cash to MFSB shareholders in lieu of fractional
shares of D&N Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and redeemed by D&N. Provided that the MFSB
Common Stock surrendered in the exchange was held as a capital asset at the
time of the exchange, capital gain or loss will be realized and recognized to
such shareholder measured by the difference between the redemption price and
the adjusted basis of the D&N Common Stock redeemed.
Howard & Howard's opinion letter is dated December 27, 1995, and is based
on facts, laws, regulations, and interpretations as of that date. Therefore,
receipt of an additional opinion of Howard & Howard as of a date more proximate
to effectiveness of the Merger may be required to satisfy the condition to the
parties' obligations to consummate the Merger.
25
<PAGE> 26
THE TAX CONSEQUENCES OF THE MERGER WILL VARY DEPENDING ON THE CIRCUMSTANCES
OF THE INDIVIDUAL SHAREHOLDER. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL TAX LAWS.
CONDITIONS TO THE MERGER. The Merger Agreement provides that consummation
of the Merger is subject to the satisfaction of certain conditions, or the
waiver of such conditions by the party or parties entitled to do so, at or
before the effective time. Each of the parties' obligations under the Merger
Agreement is subject to the following conditions: (1) the Merger Agreement
shall have been approved, confirmed and ratified by the requisite affirmative
vote of the shareholders of MFSB; (2) the Merger shall have received all
required regulatory approvals without any conditions which in the reasonable
opinion of D&N or MFSB are materially adverse and such approvals shall not have
been withdrawn or stayed (see "The Merger - Regulatory Approvals"); (3) an
opinion shall have been delivered by counsel to D&N in form and substance
reasonably satisfactory to D&N and MFSB as to the tax consequences of the
Merger (see "The Merger - Federal Income Tax Consequences"); (4) the
Registration Statement shall have become effective and no stop-order
proceedings with respect thereto shall be pending or threatened; (5) D&N shall
have obtained all material blue sky permits, authorizations, consents or
approvals required for the issuance of D&N Common Stock in the Merger; (6) all
actions, consents or approvals, governmental or otherwise, which are, or in the
opinion of counsel for D&N may be, necessary to permit or enable it to
consummate the Merger and to continue the business of MFSB shall have been
obtained without any conditions which in the reasonable opinion of D&N are
materially adverse and shall not have been withdrawn or stayed; (7)
consummation of the transactions contemplated by the Merger Agreement shall not
violate any order, decree or judgment of any court or governmental body having
jurisdiction; (8) any consents or approvals required to be secured by a party
or otherwise reasonably necessary to consummate the transactions contemplated
by the Merger Agreement shall have been obtained and shall be satisfactory to
D&N; (9) MFSB shall have terminated its deferred compensation plan for
directors and D&N Bank shall have agreed to honor and/or modify certain
employment agreements of MFSB; and (10) D&N and MFSB shall have each reasonably
cooperated with the other to complete matters with respect to MFSB's profit
sharing plan and ESOP loan.
In addition to the foregoing conditions, the obligations of MFSB under the
Merger Agreement are conditioned upon the following: (1) D&N shall have in all
material respects complied with its obligations under the Merger Agreement at
or prior to the effective time and the representations and warranties made by
D&N in the Merger Agreement shall be true and correct in all material respects
at the effective time (except for those which specifically relate to another
time or times, which shall be true and correct at such time or times, and for
changes permitted by the Merger Agreement); (2) all documentation relating to
the Merger shall be reasonably satisfactory to counsel to MFSB; (3) counsel to
D&N shall have delivered an opinion to MFSB with respect to certain matters;
(4) D&N shall have delivered to MFSB a certificate signed by certain officers,
dated the effective date, certifying to his or her respective knowledge or
belief that D&N has met and fully complied with all conditions necessary to
make the Merger Agreement effective as to D&N; (5) there shall have been no
material adverse change in the consolidated capitalization, business,
properties or financial condition of D&N from the date of the Merger Agreement
to the effective time; (6) any consents or approvals required to be secured by
a party pursuant to the terms of the Merger Agreement shall have been obtained
and shall be satisfactory to MFSB; (7) no action, suit, proceeding or claim
shall have been instituted, made or threatened by any person relating to the
Merger or the validity or propriety of the transactions contemplated by the
Merger Agreement; and (8) financial statements furnished, or to be furnished by
D&N to MFSB, shall not be inaccurate in any material respect.
In addition to the foregoing conditions, the obligations of D&N under the
Merger Agreement are conditioned upon the following: (1) MFSB shall have in
all material respects complied with their obligations under the Merger
Agreement at or prior to the effective time and the representations and
warranties made by MFSB in the Merger Agreement shall be true and correct in
all material respects at the effective time (except for those which
specifically relate to another time or times, which shall be true and correct
at such time or times, and for changes permitted by the Merger Agreement); (2)
all documentation relating to the Merger shall be reasonably satisfactory to
counsel to D&N; (3) counsel to MFSB shall have delivered an opinion to D&N with
respect to certain matters; (4) MFSB shall have delivered to D&N a certificate
signed by certain officers, dated the effective date, certifying to their
respective knowledge or belief that MFSB has met and fully complied with all
conditions necessary to make the Merger Agreement effective as to MFSB; (5)
there shall have been no material adverse change in the consolidated
capitalization, business, properties or financial condition of MFSB from the
date of the Merger Agreement to the effective time; and (6) no action, suit,
proceeding or claim shall have been instituted, made or threatened by any
person relating to the Merger or the validity or propriety of the transactions
contemplated by the Merger Agreement which would make consummation of the
Merger inadvisable in the reasonable opinion of D&N; (7) the Agreement and Plan
of Merger shall have been executed and all terms and conditions thereto
satisfied; (8) D&N shall have received an opinion dated as of the closing date
from its accountant that the Merger shall be accounted for as a pooling of
interests; (8) financial statements provided, or to be provided, by MFSB to D&N
shall not be inaccurate
26
<PAGE> 27
in any material respect; (9) all option rights for the purchase of MFSB Common
Stock shall have been exercised; and (10) certain employment agreements with
MFSB employees shall have been entered into and/or modified according to the
Merger Agreement.
BUSINESS OF MFSB PENDING THE MERGER. The Merger Agreement provides that
from the date of the Merger Agreement to effectiveness of the Merger, MFSB
will: (1) conduct its business in the ordinary course; (2) conduct its
business and operate only in accordance with sound banking and business
practices, including charging off all loans required to be charged off by
banking regulators and regulations, statutes and sound banking practices; (3)
remain in good standing with all applicable banking regulatory authorities; (4)
maintain a provision for loan losses at an adequate level based on past loan
loss reserve practices; (5) use its best efforts to retain the services of such
of its officers and employees that its goodwill and business relationships with
customers and others are not materially and adversely affected; (6) maintain
insurance covering the performance of their duties by its directors, officers
and employees; (7) consult with D&N prior to acquiring any interest in real
property other than mortgage foreclosures in the ordinary course of business.
Additional terms of the Merger Agreement provide that from the date of the
Merger Agreement to effectiveness of the Merger, subject to certain exceptions
for contemplated transactions, MFSB will not, among other things, without the
prior consent of D&N: (1) amend its Federal Stock Charter or Bylaws; (2) issue
or sell any shares of its or their capital stock, issue or grant any stock
options, warrants, rights, calls or commitments of any character calling for or
permitting the issue or sale of its or their capital stock; (3) pay or declare
any cash dividend or other dividend or distribution with respect to MFSB's
capital stock; (4) increase or reduce the number of shares of its capital stock
by split-up, reverse split, reclassification, distribution of stock dividends,
or change of par or stated value; (5) permit the conversion of or otherwise
acquire or transfer for any consideration any outstanding shares of its capital
stock or securities carrying the right to acquire, or convert into or exchange
for such stock; (6) amend or otherwise modify any bonus, pension, profit
sharing, retirement or other compensation plan or enter into any contract of
employment with any officer which is not terminable at will without costs or
other liability; (7) incur any obligations or liabilities except in the
ordinary course of business; (8) mortgage, pledge (except pledges required for
Federal Home Loan advances or pledges of such assets as may be required to
permit MFSB to accept deposits of public funds) or subject to any material lien
(excluding mechanics liens), charge, security interest, or any other
encumbrance, any of its assets or property, except for liens for taxes not yet
due and payable; (9) transfer or lease any of its assets or property except in
the ordinary course of business, or, except for branching commitments already
in effect, open or close any banking office or enter into any agreement to do
so; (10) transfer or grant any rights, under any leases, licenses or
agreements, other than in the ordinary course of business; (11) make or grant
any general or individual wage or salary increase except for general salary and
wage adjustments now in progress, or as part of the conduct of a normal salary
administration program consistent with past practices; (12) other than with
respect to loan transactions and deposits in the ordinary course of business,
make or enter into any material transaction, contract or agreement or incur any
other material commitment which is defined for purposes of this provision as
any transaction, contract, agreement or commitment in excess of $5,000; (13)
incur any indebtedness for borrowed money, except for deposit liabilities and
except for indebtedness incurred in the ordinary course of business the
repayment term of which does not exceed one year; (14) cancel or compromise any
debt or claim which has not previously been charged off, other than in the
ordinary course of business in an aggregate amount which is not materially
adverse; (15) enter into any transaction, contract or agreement which would
permit the sale of investment or similar products by third parties on MFSB's
premises; (16) invite or initiate or, subject to the fiduciary duties of the
Board of Directors of MFSB, engage in discussions or negotiations for the
acquisition or merger of MFSB by or with any corporation or other entity other
than D&N and D&N Bank; (17) take any action which constitutes a breach or
default of its obligations under the Merger Agreement which is reasonably
likely to delay or jeopardize the receipt of any of the regulatory approvals
required thereby or is reasonably likely to preclude the Merger from qualifying
for pooling of interests accounting treatment or cause any of the other
conditions to fail; or (18) take any action which would result in acceleration
of payments on MFSB's ESOP loan.
ABANDONMENT, TERMINATION, MODIFICATION, AMENDMENT AND WAIVER. The Merger
Agreement may be terminated and the Merger abandoned before the effectiveness
of the Merger as follows: (1) by written agreement among the parties
authorized by a majority of the entire Board of Directors of each; (2) by
either of the parties if any condition to effectiveness of the Merger is not
fulfilled or not waived by the party adversely affected or shall have become
impossible to fulfill; (3) by either of the parties in the event of a material
breach by the opposite party of any representation, warranty, covenant, or
agreement contained in the Merger Agreement which has not been cured within 30
days after written notice has been given to the breaching party; (4) by either
of the parties if the Merger is not consummated on or before April 30, 1996; or
(5) by either of the parties in the event that the Average Price is less than
$9.50 or greater than $14.50. In the event that the Merger Agreement is
terminated after April 30, 1996 and MFSB is not in default of its obligations
and has satisfied all of its conditions and if the Average Price is $9.50 or
greater and is not more than $14.50, then D&N is required to pay MFSB a
termination fee of $250,000 in satisfaction of any obligation of D&N to MFSB.
27
<PAGE> 28
At any time before effectiveness of the Merger (including the time after
stockholder approval of the Merger Agreement), the time for performance may be
extended and the covenants, agreements, and conditions of the Merger Agreement
may be modified, amended, or waived by the appropriate officers or directors of
D&N and MFSB; provided, however, that any such modification, extension,
amendment or waiver shall not (i) change the amount or kind of consideration to
be received; or (ii) change any term or condition which would materially and
adversely affect MFSB's stockholders once the Merger Agreement has been
approved by MFSB's stockholders.
EFFECTIVENESS OF THE MERGER. No specific effective date for the Merger is
provided by the Merger Agreement. If the Merger Agreement is approved by MFSB
shareholders, it is expected that the Merger will be consummated as soon as
practicable after the requisite regulatory approvals (see "The
Merger--Regulatory Approvals") have been received. The Merger Agreement may be
terminated and the Merger abandoned before the effectiveness of the Merger if
the Merger is not consummated on or before April 30, 1996.
ACCOUNTING TREATMENT. The parties anticipate accounting for the Merger as
a pooling of interests and it is a condition to D&N's obligation to consummate
the Merger that D&N have received an opinion from its accountant, dated as of
the closing date, that the Merger be accounted for as a pooling of interests.
Neither party is aware of any circumstances which would preclude the Merger
from being treated as a pooling of interests.
SURRENDER OF STOCK CERTIFICATES. After effectiveness of the Merger, each
holder of certificates theretofore representing validly issued and outstanding
shares of MFSB Common Stock will surrender his or her certificates to the
Illinois Stock Transfer Company, the exchange agent for such shares, and each
holder will be entitled upon surrender to receive a certificate representing
the whole number of shares of D&N Common Stock into which his or her shares of
MFSB Common Stock will have been converted and cash (without interest thereon)
in lieu of fractional shares of D&N Common Stock. Following effectiveness of
the Merger and until surrendered, each outstanding certificate representing
MFSB Common Stock will be deemed for all corporate purposes, other than payment
of dividends previously declared and unpaid or uncollected, to evidence
ownership of only the right to receive the D&N Common Stock (and cash in lieu
of fractional shares) into which shares of MFSB Common Stock will have been
converted in the Merger. Unless and until any such certificate is surrendered,
the holder thereof will not have any right to receive D&N Common Stock (and
cash in lieu of fractional shares) or any dividends otherwise payable on D&N
Common Stock. Following surrender, there will be paid to the record holder of
any MFSB Common Stock the amount of any dividends (without interest thereon)
otherwise payable except for failure to surrender.
RESALE OF THE D&N COMMON STOCK. Shares of D&N Common Stock issued to
shareholders of MFSB will be transferable without restriction upon disposition,
except shares issued to any person who may be considered an "affiliate" of
MFSB, as defined by the rules and regulations of the Commission under the
Securities Act. MFSB has agreed in the Merger Agreement to furnish at or before
the effective date of the Merger an agreement from each such "affiliate" that
such person will not make a "distribution" within the meaning of the
Commission's Rule 145 of D&N Common Stock received in the Merger and that such
stock will be held subject to all applicable provisions of the Securities Act
and the rules and regulations of the Commission thereunder. In addition, such
agreements will contain prohibitions upon dispositions by affiliates which
would prevent the Merger from being accounted for as a pooling of interest.
(See "The Merger--Accounting Treatment").
DESCRIPTION AND COMPARISON OF
D&N CAPITAL STOCK AND MFSB CAPITAL STOCK
Holders of MFSB Common Stock will, upon consummation of the Merger, become
holders of D&N Common Stock. The rights of holders of D&N Common Stock differ
in some respects from the rights of holders of MFSB Common Stock. These
differences are due to differences between the provisions of D&N's Certificate
of Incorporation and Bylaws and MFSB's Federal Stock Charter and Bylaws and
differences between the Delaware Law, under which D&N is incorporated, and HOLA
and certain OTS regulations, under which MFSB is chartered. By voting in favor
of the Merger, MFSB shareholders will be giving up their rights to be
shareholders in a Federally chartered and regulated financial institution and
shall be accepting shares in a less-regulated state chartered holding company
free to conduct a wide array of businesses. The following discussion describes
and compares the material differences between the rights of holders of D&N
Common Stock and MFSB Common Stock.
D&N COMMON STOCK. D&N is authorized to issue shares of D&N Common Stock,
par value $.01 per share. At September 30, 1995, there were 6,750,521 shares of
D&N Common Stock outstanding, 21,456 of which were held as treasury shares. As
of that date, there were approximately 4,850 holders of record.
Subject to the rights of the holders of any D&N Preferred Stock if and when
outstanding (as described below and of which there currently is none), holders
of D&N Common Stock are entitled to receive dividends if and when declared by
the Board of Directors out of any funds legally available therefor. Subject to
the rights of holders of
28
<PAGE> 29
any D&N Preferred Stock if and when outstanding, holders of D&N Common Stock
are entitled to receive pro rata upon liquidation, dissolution, or winding up
all of the assets of D&N remaining after provision for the payment of
creditors. Subject to the rights of holders of any D&N Preferred Stock if and
when outstanding to elect additional directors in the case of dividend
arrearage, holders of D&N Common Stock are vested with exclusive voting rights,
each share being entitled to one vote. Holders of D&N Common Stock have no
cumulative voting rights in electing directors. Holders of D&N Common Stock
have no preemptive rights to subscribe for any additional shares of capital
stock which D&N may issue. D&N Common Stock is neither convertible nor
redeemable. All outstanding shares of D&N Common Stock are fully paid and
nonassessable and have tandem shareholder rights as described below.
D&N Common Stock is traded on the Nasdaq NMS (symbol DNFC). The high, low,
and last sales prices for D&N Common Stock on March 7, 1996, were $13.5,
$13.375 and $13.375, respectively. On October 19, 1995, the last full trading
day before public announcement of the Merger, the high, low, and last sales
prices were $12.625, $12.25 and $12.50, respectively. With respect to the D&N
Common Stock issuable following consummation of the Merger, D&N expects that
price quotations for D&N Common Stock will continue to be provided on the
Nasdaq NMS.
D&N PREFERRED STOCK. D&N's Certificate of Incorporation authorizes
1,000,000 shares of preferred stock $.01 par value. D&N is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law. The Board of Directors, without stockholder approval, is
authorized to fix the designations, powers, preferences, and relative,
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights, that could adversely affect the voting power of the holders of D&N
Common Stock. In the event of a proposed merger, tender offer or other attempt
to gain control of D&N of which management does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that could impede the completion of
such a transaction. The Board of Directors could also issue a series of
preferred stock that may have the effect of deterring a future takeover
attempt.
D&N WARRANTS. As of September 30, 1995, there were outstanding warrants
("Warrants") to purchase 1,001,912 shares of D&N Common Stock. Each Warrant
entitles the holder thereof to purchase one share of D&N Common Stock at an
exercise price of $8.25 at any time prior to 5:00 p.m., Eastern Time on
December 31, 1996. The number of shares purchasable upon exercise of the
Warrants and the exercise price is subject to customary anti-dilution
provisions for adjustment to reflect among other things, stock dividends on or
stock splits of D&N Common Stock or reclassification of its shares of D&N
Common Stock. In such situation, the number of shares purchasable upon
exercise will be adjusted so that the Warrant holder shall be entitled to
receive the kind and number of shares which the holder thereof would have owned
or been entitled to receive after the occurrence of any of such events if the
Warrants had been exercised prior thereto. The exercise price will be adjusted
accordingly. The Warrants trade over the counter with price quotations
furnished on the Nasdaq NMS under the symbol "DNFCW." The Warrants have no
value other than as the right to acquire D&N Common Stock at the exercise
price. The Warrants do not confer upon the holders thereof any of the rights
or privileges of a stockholder. Accordingly, the Warrants do not entitle
holders thereof to receive any dividends, to vote, to call meetings or to
receive any distribution upon a liquidation of D&N. D&N has authorized and
reserved for issuance a number of shares of Common Stock sufficient to provide
for the exercise of the rights represented by the Warrants. Shares issued upon
exercise of the Warrants will be fully paid and nonassessable. Warrants not
exercised prior to 5:00 p.m. Eastern Time, on December 31, 1996 shall become
null and void.
MFSB COMMON STOCK. MFSB is authorized to issue 3,000,000 shares of MFSB
Common Stock, $1.00 par value. At December 31, 1995, there were 186,604 shares
of MFSB Common Stock outstanding, held of record by 48 holders and outstanding
options for the purchase of 4,500 shares of MFSB Common Stock with an exercise
price of $21.00 per share granted to certain employees of MFSB pursuant to
MFSB's 1994 Incentive Stock Option Plan. Under the Merger Agreement holders of
the options are required to convert such options into MFSB Common Stock prior
to the effective date. MFSB Common Stock is traded over-the-counter although
there is no established public trading market for the stock.
Holders of MFSB Common Stock are entitled to receive dividends when, as,
and if declared by the MFSB Board of Directors out of any funds legally
available therefor. In the event of liquidation, holders of MFSB Common Stock
are entitled, after payment of the claims of creditors, to receive pro rata the
net assets of MFSB. Holders of MFSB Common Stock are vested with all voting
power of MFSB and are entitled to one vote for each share held. MFSB's
shareholders have no cumulative voting rights with respect to the election of
directors. Holders of MFSB Common Stock do not have any preemptive rights to
subscribe for additional shares of capital stock of MFSB. MFSB Common Stock is
neither convertible nor redeemable. All outstanding shares of MFSB Common Stock
are fully paid and nonassessable.
29
<PAGE> 30
MFSB PREFERRED STOCK. MFSB is authorized to issue 2,000,000 shares of
preferred stock, $1.00 par value ("MFSB Preferred Stock"). Shares of MFSB
Preferred Stock are issuable in series with designation, powers, relative
rights and preferences as prescribed by MFSB's Board of Directors in the
resolution providing for the issuance thereof. There are currently no shares
of MFSB Preferred Stock outstanding.
30
<PAGE> 31
COMPARISON OF CERTAIN PROVISIONS OF
D&N'S CERTIFICATE OF INCORPORATION AND BYLAWS AND
MFSB'S FEDERAL STOCK CHARTER AND BYLAWS
The following discussion describes provisions of D&N's Certificate of
Incorporation ("Certificate") and Bylaws and MFSB's Federal Stock Charter and
Bylaws relating to the topics indicated by the captions and then compares the
provisions. The discussion is intended to show the similarities and differences
in the rights of holders of D&N Common Stock and MFSB Common Stock and
illustrate the effect of the Merger on MFSB shareholders who become D&N
shareholders.
BOARD OF DIRECTORS.
D&N. D&N's Certificate provides that no member of the board may be removed
except for cause (as defined in 12 C.F.R. Section 563.99), and then only by
the affirmative vote of (1) not less than a majority of the directors then in
office and (2) the holders of not less than a majority of the then outstanding
shares of D&N's capital stock entitled to vote. In addition, at least 20 days
before a meeting of stockholders called for purposes of considering removal,
written notice must be sent to the director or directors whose removal is
sought. D&N's Certificate provides that the board of directors shall consist
of not less than 7 nor more than 15 directors, the exact number of which shall
be fixed from time to time by the board of directors. The board of directors
is to be divided into three classes, as equal in number as possible. The
members of each class are elected for a three-year term with one class being
elected annually. No decrease in the number of directors may affect the term
of any director then in office. Vacancies in the board of directors may be
filled only by a majority vote of the directors then in office, whether or not
a quorum exists. Directors need not be residents of the State of Delaware.
MFSB. MFSB's Bylaws provide that a director may be removed from the
Board of Directors with cause pursuant to the affirmative vote of the holders
of a majority of the shares then entitled to vote at an election of directors.
MFSB's Bylaws provide that the Board of Directors shall consist of 7 members
and shall be divided into three classes as nearly equal in number as possible.
The members of each class are elected for a three-year term with one class
being elected annually. Each director is required at all times to be a
beneficial owner of not less than 100 shares of MFSB Common Stock unless MFSB
becomes a wholly-owned subsidiary of a holding company.
COMPARISON. D&N's and MFSB's provisions regarding the election and removal
of directors are similar. These provisions could have the effect of making
removal of incumbent management more difficult, and, therefore, may discourage
accumulation of a substantial block of common stock by a shareholder and
discourage assumption of control by such a shareholder.
ACTION BY SHAREHOLDERS.
D&N. D&N's Certificate does not permit action to be taken by stockholders
by written consent. As a result, D&N stockholders may not act by written
consent. Special meetings called by holders for any purpose other than
considering a change in control or amendments to the Certificate may be called
by holders of not less than one-tenth of the outstanding voting stock, and such
meetings require not less than 10 nor more than 60 days prior notice stating
the purposes of the meeting. Special meetings for the purpose of considering a
change in control or amendments to D&N's Certificate may be called only by the
Chairman of the Board, the President, or either at the written request of a
majority of the directors then in office.
MFSB. MFSB's Bylaws provide that an action required or permitted to be
taken at a meeting of the shareholders may be taken without a meeting, and
without a vote, if all of the shareholders entitled to vote thereon consent
thereto in writing. Pursuant to MFSB's Bylaws, special meetings of the
shareholders shall be held when directed by the Chairman of the Board, the
President, a majority of the Board of Directors, or when requested in writing
by the holders of not less than 10 percent of all the shares entitled to vote
at the meeting.
COMPARISON. D&N's Certificate does not permit action by stockholders by
unanimous written consent without a meeting. MFSB's Bylaws do permit action by
unanimous written consent. D&N's Certificate makes calling special stockholder
meetings more difficult than does MFSB's Bylaws. The D&N provisions may have
the effect of assisting incumbent management in retaining their positions and
discouraging business combination transactions, such as a merger, which
management does not first approve.
31
<PAGE> 32
SUPERMAJORITY APPROVAL OF CERTAIN TRANSACTIONS.
D&N. D&N's Certificate requires the affirmative vote of the holders of 75
percent or more of the outstanding voting stock to approve any "Business
Combination" (as defined below) unless either of the two following conditions
exist: (1) the Business Combination was approved by the board of directors by
the affirmative vote of 75 percent of the directors who were directors prior to
a "Related Person" acquiring more than ten percent of its shares (such a
director is referred to as a "Continuing Director"); or (2) the aggregate
amount of consideration to be received by D&N's stockholders is not less than
the greater of (i) the highest price per share paid by the Related Person in
acquiring any of the stock previously; (ii) the highest per share market value
reached within the twelve-month period immediately preceding the date the
proposal for such Business Combination was first publicly announced; or (3) the
book value per share of the stock as of the last day of the month immediately
preceding the date the proposal for the Business Combination was first publicly
announced.
A "Business Combination" is defined generally to include any merger,
consolidation, sale of assets, issuance, recapitalization or other transaction
with, or on behalf of, a Related Person or which transaction which has the
effect of increasing the Related Person's voting power. A "Related Person"
generally means a corporation, partnership, trust, or other entity which
acquires or owns (beneficially or directly) 10 percent or more of the D&N's
outstanding voting stock.
MFSB. Under MFSB's Federal Stock Charter, any action to be taken by the
shareholders of MFSB requires the affirmative approval of a majority of the
holders of the outstanding MFSB Common Stock entitled to vote. Under OTS
regulations, the affirmative vote of two-thirds of the outstanding voting stock
of MFSB is required to approve the Merger.
COMPARISON. D&N's Certificate and OTS Regulations applicable to MFSB
contain certain supermajority voting provisions. D&N's Certificate discourages
business combination transactions, such as a merger, between D&N and a holder
of a substantial block of D&N voting stock, unless management approves the
transaction. Thus, the D&N provisions may have the effect of giving a minority
shareholder or group of shareholders, including management, the ability to
defeat a transaction which may be desired by or viewed as beneficial to other
stockholders.
AMENDMENT OR REPEAL OF CERTAIN PROVISIONS.
D&N. The provisions of D&N's Certificate described herein may be amended or
repealed only if first proposed by the Board of Directors upon the affirmative
vote of two-thirds of the members at a duly constituted meeting and then by the
affirmative vote of at least 75 percent of the total votes eligible to vote at
a meeting of D&N's stockholders. D&N's Bylaws may be amended or repealed by
the affirmative vote of at least a majority vote of D&N's stockholders or a
majority of D&N's full Board of Directors.
MFSB. The provisions of MFSB's Federal Stock Charter may be amended or
repealed only if first proposed by the Board of Directors, then preliminarily
approved by the OTS, and thereafter approved by a majority of the shares
entitled to vote. MFSB's Bylaws may be added to, amended, or repealed by
either a majority of the shareholders at any lawfully conducted meeting or a
majority of the full Board of Directors.
COMPARISON. MFSB's Federal Stock Charter and Bylaws are, with respect to
provisions discussed in this section, easier to amend than D&N's Certificate
and Bylaws.
APPROVAL OF ACQUISITIONS OF CONTROL.
D&N. D&N's Certificate prohibits any person (whether an individual,
company or group acting in concert) from acquiring beneficial ownership of 10
percent or more of D&N's voting stock, unless the acquisition has received the
prior approval of all required federal regulatory authorities. This provision
does not apply to the purchase of shares by underwriters in connection with a
public offering, and the provisions remain effective only so long as D&N Bank
is a majority-owned subsidiary of D&N. Shares acquired in excess of this
limitation are not entitled to vote or take other stockholder action or be
counted in determining the total number of outstanding shares
32
<PAGE> 33
of voting stock in connection with any matter involving stockholder action.
This limitation on purchases does not apply to D&N Bank's Employee Stock
Ownership Plan or other employee benefit plans.
MFSB. MFSB's Federal Stock Charter and Bylaws contain no similar
provision.
POSSIBLE EFFECTS OF D&N PROVISIONS.
D&N's Certificate and Bylaws generally contain provisions that may have the
effect of discouraging, delaying, deterring or preventing a change in control
of D&N, through a business combination transaction or otherwise. These
provisions may also have the effect of making D&N's incumbent management more
difficult to remove and may discourage accumulation of significant blocks of
D&N Common Stock. However, D&N's intent in implementing the provisions
described above was not to discourage proposals involving a change in control
of D&N, but to encourage the makers of such proposals to negotiate with D&N's
management and Board of Directors so that they can act in the best interest of
stockholders.
COMPARISON OF THE DELAWARE BUSINESS CORPORATION ACT
AND THE HOME OWNERS LOAN ACT AND OTS REGULATIONS
If the Merger is consummated, MFSB shareholders will become stockholders of
D&N. D&N is a Delaware corporation incorporated under the Delaware Law. MFSB
is a federally chartered stock savings bank which operates pursuant to HOLA and
regulations promulgated by the OTS thereunder (collectively, the "OTS
Regulations"). The following discussion summarizes material differences
between the Delaware Law and the OTS Regulations with respect to rights of
shareholders.
RIGHTS OF DISSENTING SHAREHOLDERS.
Under the Delaware Law and OTS Regulations, stockholders and shareholders,
respectively, who do not vote in favor of certain corporate actions have the
right to receive cash in exchange for their stock. This right is known as
"dissenter and appraisal rights" under OTS Regulations and "appraisal rights"
under the Delaware Law.
DELAWARE LAW. Under the Delaware Law, dissenters' appraisal rights are
available for the shares of stock of a constituent corporation in certain
mergers. Unless the corporation's certificate of incorporation otherwise
provides, dissenters' appraisal rights are not available under the Delaware Law
as a result of an amendment to a corporation's certificate of incorporation or
the sale of all or substantially all of the assets of the corporation. Under
the Delaware Law, no dissenters' appraisal rights are available for the shares
of any stock which, at the record date fixed to determine the stockholder
entitled to receive notice of and to vote at the meeting of stockholders to act
upon the agreement of merger or consolidation, were listed on a national
securities exchange, designated as a Nasdaq NMS or held of record by more than
2,000 stockholders. Notwithstanding the foregoing, dissenter appraisal rights
are available for the shares of any class of stock of a constituent corporation
if the holders thereof are required by the terms of an agreement of merger or
consolidation to accept in exchange anything except (1) shares of stock of the
corporation surviving or resulting from such merger or consolidation; (2)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities
exchange, designated as a Nasdaq NMS or held of record by more than 2,000
stockholders; (3) cash in lieu of fractional shares of the corporations
described in the foregoing clauses (1) and (2); or (4) any combination of the
foregoing.
OTS REGULATIONS. Generally speaking, under OTS Regulations, any
stockholder of a federal stock association which is merging or consolidating
with another depository institution has the right to demand payment of the fair
or appraised value of his or her stock, provided such stockholder has not voted
in favor of the merger and otherwise complies with OTS Regulations. However, a
stockholder may not demand payment of the stock's fair or appraised value if
(1) the stock was listed on a national securities exchange or quoted on the
Nasdaq system on the date of the meeting at which the merger was acted upon;
or (2) stockholder action is not required for the merger; and the stockholder is
required to accept only cash, shares of stock listed on a national exchange or
quoted on the Nasdaq
33
<PAGE> 34
system, or any combination thereof in exchange for his or her stock. MFSB
stockholders have dissenters' rights with respect to the Merger. See "The
Merger--Rights of Dissenting Stockholders."
SUPERMAJORITY VOTING PROVISIONS.
DELAWARE LAW. Under the Delaware Law, supermajority voting provisions
(which require a vote greater than that required by statute in order to take
certain actions) may be included in a corporation's certificate of
incorporation. Adding a supermajority voting provision to the certificate of
incorporation requires a simple majority vote by stockholders. Changing or
eliminating a supermajority voting provision requires the same simple majority
stockholder approval unless the certificate of incorporation specifically
requires a higher vote.
OTS REGULATIONS. The OTS Regulations provide that a federally chartered
stock savings bank may amend its charter to add provisions, such as a
supermajority voting provision, not set forth in the OTS Regulations, provided
that, in addition to the required OTS and shareholder approvals, independent
legal counsel opines that the proposed charter provision would be permitted to
be adopted by a corporation chartered by the state in which the principal
office of the federally chartered stock savings bank is located. Since MFSB's
principal office is in Michigan, Michigan's Business Corporation Act (the
"MBCA") would apply. Supermajority provisions are generally permitted under
the MBCA, however, any amendment which changes or deletes such a provision must
be authorized by the same votes as would be required to take action under the
provision.
ACTION WITHOUT A MEETING.
DELAWARE LAW. Under the Delaware Law, unless the certificate of
incorporation otherwise provides (as does D&N's Certificate of Incorporation),
an action required by law to be taken at an annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if the holders of outstanding shares having the minimum number of votes
that would be necessary to take the action at a meeting have consented in
writing to the action.
OTS REGULATIONS. The OTS Regulations do not provide for action by
shareholders without a meeting and a vote, although a federally chartered stock
savings bank may include in its bylaws (as do MFSB's Bylaws) a provision
allowing action by unanimous consent of shareholders without a meeting.
TRANSACTIONS WITH INTERESTED SHAREHOLDERS.
DELAWARE LAW. The Delaware Law provides that if a person acquires 15
percent or more of a Delaware corporation's voting stock (thereby becoming an
"interested stockholder"), such stockholder may not engage for three years
after such acquisition in certain enumerated transactions with the corporation
(a "business combination") unless one of three exceptions is satisfied: (1)
prior to the date such person became an interested shareholder, the board of
directors approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction which resulted in such person becoming an
interested stockholder, such person owned at least 85 percent of the
corporation's voting stock outstanding at the time the transaction commenced
(excluding shares owned by directors who are also officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer);
or (3) the business combination is approved by the board and authorized by the
affirmative vote of a stockholder's meeting (a written consent cannot be used
for this purpose) of at least 66-2/3 percent of the outstanding voting stock
not owned by the interested stockholder.
OTS REGULATIONS. The OTS Regulations do not contain any provision similar
to those of the Delaware Law with respect to transactions with interested
shareholders.
34
<PAGE> 35
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following pro forma combined condensed balance sheet as of September
30, 1995, and the pro forma combined condensed statements of income for the
nine-month periods ended September 30, 1995 and 1994 and each of the years in
the three-year period ended December 31, 1994, give effect to the Merger based
on the historical consolidated financial statements of D&N and its subsidiaries
and the historical financial statements of MFSB under the assumptions and
adjustments set forth in the accompanying notes to the pro forma financial
statements.
The pro forma financial statements have been prepared by the managements of
D&N and MFSB based upon their respective financial statements. These pro forma
statements, which include results of operations as if the Merger had been
consummated at the beginning of each period presented, may not be indicative of
the results that actually would have occurred if the Merger had been in effect
on the dates indicated or which may be obtained in the future. The pro forma
financial statements should be read in conjunction with the historical
consolidated financial statements and notes thereto of D&N and the historical
financial statements and notes thereto of MFSB incorporated by reference
herein.
The following pro forma combined condensed balance sheet and condensed
statements of income include:
a) D&N Financial Corporation's historical consolidated financial
information, which has been designated herein as "D&N".
b) Macomb Federal Savings Bank's historical financial information, which
has been designated herein as "MFSB".
c) The combined statements of D&N and Macomb, which have been designated
herein as "Pro Forma Combined".
d) D&N has entered into a definitive agreement, dated November 8, 1995,
to acquire, for shares of D&N Common Stock, all of the issued and
outstanding common stock of MFSB. The proposed transaction would be
accounted for as a pooling of interests; accordingly, historical
financial data for MFSB is included for all periods presented. There
can be no assurance at this stage of the process that the transaction
will be completed. The pro forma financial information of MFSB, the
fiscal year-end of which is June 30, has been restated to conform with
D&N's fiscal year-end of December 31 by adding the results of MFSB for
the six-month period ended December 31 to the most recent fiscal
year-end information and deducting the results of MFSB for the
six-month period ended December 31 of the preceding fiscal year.
35
<PAGE> 36
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF CONDITION
AS OF SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma Pro Forma
(as reported) (as reported) Adjustment Combined
<S> <C> <C> <C>
ASSETS
Cash and due from banks $2,950 $2,778 $5,728
Interest-bearing deposits in other banks 3,703 2,452 6,155
Investment securities 57,001 9,095 66,096
Investment securities available for sale 35,601 246 35,847
Mortgage-backed securities 72,510 4,353 76,863
Mortgage-backed securities available for sale 59,045 0 59,045
Loans receivable, net 907,832 21,317 929,149
Other real estate owed 1,127 0 1,127
Federal income taxes 3,580 178 3,758
Property and equipment, net 14,450 81 14,531
Excess of cost over net assets of association acquired 83 0 83
Other assets 7,304 1,547 8,851
---------- ------- ----------
Total assets $1,165,186 $42,047 $ 0 $1,207,233
========== ======= ===== ==========
LIABILITIES
Deposits $837,788 $34,534 $872,322
Securities sold under agreements to repurchase 41,346 0 41,346
FHLB advances and other borrowed money 207,487 72 207,559
Advances from borrowers and investors held in escrow 10,587 311 10,898
Other liabilities 5,908 966 560 (g) 7,434
---------- ------- ---- ----------
Total liabilities $1,103,116 $35,883 $560 $1,139,559
---------- ------- ---- ----------
STOCKHOLDERS' EQUITY
Common Stock $68 $187 $(187)(d) 76
8 (d)
Additional paid-in capital 48,001 1,430 (1,430)(d) 49,610
1,609 (d)
Retained earnings 12,762 4,466 (560)(g) 16,668
Unrealized holding gains (losses) on available-for-
sale securities 1,452 153 1,605
Less cost of treasury stock (213) (213)
Less unearned E.S.O.P. shares (72) (72)
Total stockholders' equity $62,070 $6,164 ($560) $67,674
---------- ------- ----- ---------
Total liabilities and stockholders' equity $1,165,186 $42,047 $ 0 $1,207,233
========== ======= ======== ==========
Tangible Capital Ratio 4.99% 14.3% 5.27%
Core Capital Ratio 4.99% 14.3% 5.27%
Risk-Based Capital Ratio 9.64% 42.4% 10.23%
</TABLE>
36
<PAGE> 37
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For Nine Months ended September 30, For Year Ended December 31,
1995 1994 1994 1993 1992
----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 53,021 $ 42,388 $ 58,275 $ 58,907 $ 72,729
Mortgage backed securities 8,084 5,195 7,875 12,938 32,056
Investments and deposits 5,697 4,067 5,462 8,234 12,765
------ ------ ------ ---------- ------
Total 66,802 51,650 71,612 80,079 117,550
INTEREST EXPENSE
Deposits 27,793 21,903 29,807 33,815 46,619
Securities sold under
agreements to repurchase 1,204 442 808 1 159
FHLB advances and other
borrowed money 10,205 4,769 7,407 9,748 21,992
Interest rate instruments 2,421 8,313 9,812 15,309 18,776
------ ------ ------ --------- ------
Total 41,623 35,427 47,834 58,873 87,646
NET INTEREST INCOME 25,179 16,223 23,778 21,206 29,904
Provision for net losses 1,500 0 100 0 59
------ -------- ------- ----------- -------
Net interest income after
provision for loan losses 23,679 16,223 23,678 21,206 29,845
NONINTEREST INCOME
Charges and fees 3,935 3,996 5,329 3,669 6,789
Gain (loss) on loans held for
sale 583 230 227 777 (44)
Gain (loss) on securities,
investments, loans, servicing
rights, real estate owned 1,484 3,122 2,899 (29,917) 2,981
Other income 132 1,166 1,129 552 723
------ ------ ------ ---------- -------
Total 6,134 8,514 9,584 (24,919) 10,449
NONINTEREST EXPENSE
Compensation and benefits 11,232 10,727 14,513 13,504 12,813
Occupancy 1,619 1,487 1,994 2,053 2,122
Deposit insurance 1,831 2,036 2,655 2,285 2,294
Amortization of intangibles 290 326 448 777 1,950
Other expense 7,686 7,583 10,076 12,510 11,223
------ ------ ------ --------- ------
Total 22,658 22,159 29,686 31,129 30,402
INCOME BEFORE INCOME TAXES 7,155 2,578 3,576 (34,842) 9,892
Applicable income taxes 85 103 127 (3,709) 4,260
------- ------- ------- ---------- ------
INCOME BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECTS
OF ACCOUNTING CHARGES $7,070 $2,475 $3,449 ($31,133) $5,632
====== ====== ====== ========= ======
COMMON SHARE DATA
Income before extraordinary
items and cumulative effects
of accounting changes
Primary $0.94 $0.33 $0.46 ($6.97) $1.25
Fully diluted .89 .33 .46 (6.97) 1.25
Weighted average shares
Primary 7,488.2 7,485.5 7,485.7 4,464.6 4,511.6
Fully diluted 7,944.3 7,485.5 7,485.7 4,464.6 4,511.6
</TABLE>
37
<PAGE> 38
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma
(as reported) (as reported) Combined
<S> <C> <C> <C>
INTEREST INCOME
Loans $51,718 $1,303 $53,021
Mortgage backed securities 7,893 191 8,084
Investments and deposits 5,070 627 5,697
------ ---- ------
Total 64,681 2,121 66,802
INTEREST EXPENSE
Deposits 26,524 1,269 27,793
Securities sold under agreements to repurchase 1,204 0 1,204
FHLB advances and other borrowed money 10,200 5 10,205
Interest rate instruments 2,421 0 2,421
------ ----- ------
Total 40,349 1,274 41,623
NET INTEREST INCOME 24,332 847 25,179
Provision for loan losses 1,500 0 1,500
------ ----- ------
Net interest income after provision for loan losses 22,832 847 23,679
NONINTEREST INCOME
Charges and fees 3,917 18 3,935
Gain (loss) on loans held for sale 583 0 583
Gain (loss) on securities, investments,
loans, servicing rights, real estate owned 1,483 1 1,484
Other income 132 0 132
------ ----- -------
Total 6,115 19 6,134
NONINTEREST EXPENSE
Compensation and benefits 10,886 346 11,232
Occupancy 1,602 17 1,619
Deposit insurance 1,738 93 1,831
Amortization of intangibles 290 0 290
Other expense 7,575 111 7,686
------ ---- ------
Total 22,091 567 22,658
INCOME BEFORE INCOME TAXES 6,856 299 7,155
Applicable income taxes 0 85 85
------ ----- -------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $6,856 $214 $7,070
====== ==== ======
COMMON SHARE DATA
Income before extraordinary items and
cumulative effects of accounting change
Primary $1.02 $1.20 $0.94
Fully diluted 0.96 1.20 0.89
Weighted average shares
Primary 6,722.5 177.9 7,488.2
Fully diluted 7,178.6 177.9 7,944.3
</TABLE>
38
<PAGE> 39
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma
(as reported) (as reported) Combined
<S> <C> <C> <C>
INTEREST INCOME
Loans 41,162 $1,226 $42,388
Mortgage backed securities 4,997 198 5,195
Investments and deposits 3,669 398 4,067
------ ---- ------
Total 49,828 1,822 51,650
INTEREST EXPENSE
Deposits 20,957 946 21,903
Securities sold under agreements to repurchase 442 0 442
FHLB advances and other borrowed money 4,762 7 4,769
Interest rate instruments 8,313 0 8,313
------ ----- ------
Total 34,474 953 35,427
NET INTEREST INCOME 15,354 869 16,223
Provision for loan losses 0 0 0
------ ----- -------
Net interest income after provision for loan losses 15,354 869 16,223
NONINTEREST INCOME
Charges and fees 3,979 17 3,996
Gain (loss) on loans held for sale 230 0 230
Gain (loss) on securities, investments,
loans, servicing rights, real estate owned 3,121 1 3,122
Other income 1,166 0 1,166
------ ----- ------
Total 8,496 18 8,514
NONINTEREST EXPENSE
Compensation and benefits 10,459 268 10,727
Occupancy 1,469 18 1,487
Deposit insurance 1,947 89 2,036
Amortization of intangibles 326 0 326
Other expense 7,459 124 7,583
------ ---- ------
Total 21,660 499 22,159
INCOME BEFORE INCOME TAXES 2,190 388 2,578
Applicable income taxes 0 103 103
-------- ---- -------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $2,190 $285 $2,475
====== ==== ======
COMMON SHARE DATA
Income before extraordinary items and
cumulative effects of accounting changes
Primary $0.33 $1.60 $0.33
Fully diluted .33 1.60 .33
Weighted average shares
Primary 6,719.8 177.9 7,485.5
Fully diluted 6,719.8 177.9 7,485.5
</TABLE>
39
<PAGE> 40
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma
(as reported) (as reported) Combined
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 56,634 $ 1,641 $ 58,275
Mortgage backed securities 7,610 265 7,875
Investments and deposits 4,883 579 5,462
--------- --------- ---------
Total 69,127 2,485 71,612
INTEREST EXPENSE
Deposits 28,494 1,313 29,807
Securities sold under agreements to repurchase 808 0 808
FHLB advances and other borrowed money 7,399 8 7,407
Interest rate instruments 9,812 0 9,812
--------- --------- ---------
Total 46,513 1,321 47,834
NET INTEREST INCOME 22,614 1,164 23,778
Provision for loan losses 100 0 100
--------- --------- ---------
Net interest income after provision for loan losses 22,514 1,164 23,678
NONINTEREST INCOME
Charges and fees 5,306 23 5,329
Gain (loss) on loans held for sale 227 0 227
Gain (loss) on securities, investments, loans,
servicing rights, real estate owned 2,898 1 2,899
Other income 1,129 0 1,129
--------- --------- ---------
Total 9,560 24 9,584
NONINTEREST EXPENSE
Compensation and benefits 14,073 440 14,513
Occupancy 1,971 23 1,994
Deposit insurance 2,563 92 2,655
Amortization of intangibles 448 0 448
Other expense 9,928 148 10,076
--------- --------- ---------
Total 28,983 703 29,686
INCOME BEFORE TAXES 3,091 485 3,576
Applicable income taxes 0 127 127
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF ACCOUNTING CHARGES $ 3,091 $ 358 $ 3,449
========= ========= =========
COMMON SHARE DATA
Net Income
Primary $0.46 $2.01 $0.46
Fully diluted .46 2.01 .46
Weighted average shares
Primary 6,720.0 177.9 7,485.7
Fully diluted 6,720.0 177.9 7,485.7
</TABLE>
40
<PAGE> 41
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma
(as reported) (as reported) Combined
<S> <C> <C> <C>
INTEREST INCOME
Loans $57,278 $1,629 $58,907
Mortgage backed securities 12,649 289 12,938
Investments and deposits 7,728 506 8,234
--------- ---- ---------
Total 77,655 2,424 80,079
INTEREST EXPENSE
Deposits 32,478 1,337 33,815
Securities sold under agreements to repurchase 1 0 1
FHLB advances and other borrowed money 9,737 11 9,748
Interest rate instructions 15,309 0 15,309
--------- ----- ---------
Total 57,525 1,348 58,873
NET INTEREST INCOME 20,130 1,076 21,206
Provision for loan losses 0 0 0
--------- ----- ---------
Net interest income after provision for loan losses 20,130 1,076 21,206
NONINTEREST INCOME
Charges and fees 3,639 30 3,669
Gain (loss) on loans held for sale 777 0 777
Gain (loss) on securities, investments, loans,
servicing rights, real estate owned (29,963) 46 (29,917)
Other income 552 0 552
--------- ---- ---------
Total (24,995) 76 (24,919)
NONINTEREST EXPENSE
Compensation and benefits 13,031 473 13,504
Occupancy 2,027 26 2,053
Deposit insurance 2,217 68 2,285
Amortization of intangibles 777 0 777
Other expense 12,331 179 12,510
--------- ---- ---------
Total 30,383 746 31,129
INCOME BEFORE INCOME TAXES (35,248) 406 (34,842)
Applicable income taxes (3,803) 94 (3,709)
--------- ---- ---------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF ACCOUNTING CHARGES $(31,445) $312 $(31,133)
========= ==== =========
COMMON SHARE DATA
Income before extraordinary items and
cumulative effects of accounting changes
Primary ($8.44) $1.82 ($6.97)
Fully diluted (8.44) $1.82 ($6.97)
Weighted average shares
Primary 3,724.3 172.0 4,464.6
Fully diluted 3,724.3 172.0 4,464.6
</TABLE>
41
<PAGE> 42
D&N FINANCIAL CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DNFC MFSB Pro Forma
(as reported) (as reported) Combined
<S> <C> <C> <C>
INTEREST INCOME
Loans $70,877 $1,852 $72,729
Mortgage backed securities 31,878 178 32,056
Investment and deposits 11,847 918 12,765
------ ---- ------
Total 114,602 2,948 117,550
INTEREST EXPENSE
Deposits 44,891 1,728 46,619
Securities sold under agreement to repurchase 159 0 159
FHLB advances and other borrowed money 21,986 6 21,992
Interest rate instruments 18,876 0 18,876
------ ---- ------
Total 85,912 1,734 87,646
NET INTEREST INCOME 28,690 1,214 29,904
Provision for loan losses 0 59 59
------ ---- ------
Net interest income after provision for loan losses 28,690 1,155 29,845
NONINTEREST INCOME
Charges and fees 6,756 33 6,789
Gain (loss) on loans held for sale (44) 0 (44)
Gain (loss) on securities, investments,
loans, servicing rights, real estate owned 3,007 (26) 2,981
Other income 725 (2) 723
------ ---- ------
Total 10,444 5 10,449
NONINTEREST EXPENSE
Compensation and benefits 12,363 450 12,813
Occupancy 2,095 27 2,122
Deposit insurance 2,207 87 2,294
Amortization of intangibles 1,950 0 1,950
Other expenses 11,035 188 11,223
------ ---- ------
Total 29,650 752 30,402
INCOME BEFORE INCOME TAXES 9,484 408 9,892
Applicable income taxes 4,139 121 4,260
------ ---- ------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $5,345 $287 $5,632
====== ==== ======
COMMON SHARE DATA
Income before extraordinary items and
cumulative effects of accounting changes
Primary $1.43 N/A $1.25
Fully diluted 1.43 N/A 1.25
Weighted average shares
Primary 3,708.4 N/A 4,511.6
Fully diluted 3,708.4 N/A 4,511.6
</TABLE>
42
<PAGE> 43
NOTES TO PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
a) The pro forma information presented is not necessarily indicative of
results of operations or the combined financial position that would have
resulted had the Merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
It is anticipated that the Merger will be consummated by April 30, 1996.
b) D&N and MFSB are still in the process of reviewing their respective
accounting policies in light of those employed by the other entity. As a
result of this review, it might be necessary to restate MFSB's financial
statements to conform to the accounting policies of D&N. No restatements
of prior periods have been included in the proforma condensed combined
financial statements. At this time it is not expected that conformance of
such accounting policies will have a material impact on the pro forma
condensed financial statements.
c) Certain reclassifications have been included in the unaudited pro forma
condensed balance sheet and statements of income to conform statement
presentations. Any transactions conducted in the ordinary course of
business between the two companies are immaterial, and accordingly, have
not been eliminated.
d) Pro forma adjustments to common shares and additional paid-in-capital at
September 30, 1995, reflect the Merger accounted for as a "pooling of
interests", through the exchange of 803,162 shares of Common Stock of the
combined company (using the exchange ratio of 4.3041) for the 186,604
outstanding shares of MFSB Common Stock. See "Notes to Historical Pro
Forma and Equivalent Per Share Data -- Note(c)."
The pro forma entry is displayed below (in thousands):
Debit Common Stock (MFSB) $ 187
Debit Additional paid-in-capital (MFSB) 1,430
Credit Common Stock (Combined company) $ 8
Credit Additional paid-in-capital (Combined company) 1,609
e) Income per share data has been computed based on the combined historical
income from continuing operations applicable to common shareholders of D&N
and MFSB using the historical weighted average number of outstanding shares
of D&N Common Stock, and the historical weighted average number of
outstanding shares of MFSB Common Stock adjusted to equivalent shares of
Common Stock of the combined company, except that, for the period prior to
its initial public offering of Common Stock in 1992, MFSB's results are
reflected in the combined statements as if their initial offering of
186,604 common shares had been outstanding.
f) There is currently legislation pending in Congress which would correct the
FDIC premium disparity which currently exists between BIF and SAIF insured
deposits. If the legislation is passed, D&N could have an after-tax charge
of $4.5 to $5.5 million for fiscal year 1996, with a corresponding drop in
deposit insurance premiums of approximately $1.5 million after-tax
annually.
g) A liability of $850 thousand has been recorded in the unaudited pro forma
condensed balance sheet to reflect D&N's and MFSB's current estimate of
merger related charges. This resulted in a $560 thousand after-tax charge
to retained earnings in this unaudited pro forma condensed combined balance
sheet.
The pro forma entry is displayed below (in thousands):
Debit Retained Earnings $560
Debit Other liabilities-taxes payable 290
Credit Other liabilities-reserve $850
This charge has been excluded from the pro forma condensed combined income
statements due to its nonrecurring nature.
h) Per share amounts for D&N exclude extraordinary items for prepayment
penalties of $(.52) and $(.42) for the years ended December 31, 1993 and
1992, respectively, and the cumulative effect of changes in accounting
principles of $(9.04) for the year ended December 31, 1993.
i) Income per share amounts for MFSB for the year ended December 31, 1992 are
not applicable as MFSB converted to a stock savings bank in August, 1992.
43
<PAGE> 44
INFORMATION ABOUT D&N
GENERAL. D&N is a savings bank holding company organized under the laws of
the state of Delaware. D&N's sole subsidiary is D&N Bank, a Federal Savings
Bank, a federally chartered stock savings bank headquartered in Hancock,
Michigan.
D&N Bank was founded in 1889 and operated as a state-chartered mutual
savings and loan association until 1984, when it converted to a federal
charter. In 1985, D&N Bank converted to a stock association, and in 1986
converted to a federal savings bank. D&N Bank adopted a holding company
structure in 1988 and became wholly owned by D&N. D&N had total assets of
$1.165 billion as of September 30, 1995.
D&N's primary business consists of attracting deposits from the general
public and making real estate and consumer loans and other types of
investments. D&N conducts its business through a network of 35 full-service
community banking offices located in southeast Michigan, mid- Michigan, and
Michigan's upper peninsula and northern Wisconsin, including its main office in
Hancock, Michigan, three mortgage company offices and seven savings agency
offices which provide depository services.
RECENT DEVELOPMENTS. On January 23, 1996, D&N announced net income for
1995 of $10.1 million, or $1.45 per share ($1.40 fully diluted), compared to
net income of $3.1 million or $0.46 per share, for 1994. For the fourth
quarter of 1995, D&N earned $3.3 million, or $0.46 per share ($0.45 fully
diluted), compared with net income of $901,000, or $0.13 per share, for the
1994 fourth quarter.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE. Delivered with this
Prospectus/Proxy Statement is a copy of D&N's 1994 Annual Report to
Stockholders which contains certain financial and additional information about
D&N. Other information about D&N is contained in the reports and other filings
made by D&N with the Commission and included in a report of MFSB filed with the
OTS. See "Incorporation of Certain Documents by Reference." Financial
Statements and other information as of September 30, 1995 are attached to this
Prospectus/Proxy Statement as Exhibit D.
INFORMATION ABOUT MFSB
GENERAL. MFSB, a federally chartered stock savings bank, was founded in
1956 and chartered by the Financial Institutions Bureau of the Michigan
Department of Commerce (the "Bureau") that same year as Macomb Savings and Loan
Association (the "Association"). Effective August 13, 1992, the Association
converted to federal stock form, chartered by the OTS. MFSB is a member of the
FHLB of Indianapolis, and its savings accounts are insured up to the applicable
limits by the FDIC. MFSB maintains its principal office in St. Clair Shores,
situated in Macomb County, Michigan.
The principal business of MFSB is the acceptance of deposits from the
general public, the purchase of residential mortgage loans and, on occasion,
the origination of residential mortgage and consumer loans. MFSB's income is
primarily interest and fees derived from its lending activities and interest
and dividends earned on its investment securities. Its chief expenses include
interest paid on deposits and operating expenses.
MFSB offers a select range of consumer financial services. These services
include: regular and term savings accounts and savings certificates;
residential real estate loans; and consumer loans secured by deposits. MFSB
has historically concentrated its business activities in Macomb, Wayne, and
Oakland Counties, Michigan.
As required by OTS regulations, MFSB established a liquidation account at
the time of its conversion from a mutual savings bank to a stock savings bank
in an amount equal to approximately $3,378,000. Each eligible account holder
would be entitled to a proportionate share of this account in the event of
complete liquidation of MFSB, and only in such an event. The account holders'
shares will be eliminated if the account is closed. The liquidation account
may never be increased despite any increase after conversion in the qualifying
deposits of an eligible or supplemental eligible account holder. MFSB's
liquidation account shall be maintained by D&N, as required, if the Merger is
approved.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE. Delivered with this
Prospectus/Proxy Statement is a copy of MFSB's 1995 Annual Report to
Shareholders which contains certain financial and additional information about
MFSB. Other information about MFSB is contained in the reports and other
filings made by MFSB with the OTS. See "Incorporation of Certain Documents by
Performance." Financial Statements and other information as of December 31,
1995 are attached to this Prospectus/Proxy Statement as Exhibit E.
44
<PAGE> 45
REGULATION OF D&N AND MFSB
D&N Bank and MFSB (collective, the "Banks") are federally chartered savings
banks, the deposits of which are federally insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the FDIC. The Banks are
subject to broad federal regulation and oversight by the OTS. The Banks are
members of the FHLB of Indianapolis and are subject to certain limited
regulation by the Federal Reserve Board. As the savings bank holding company
of D&N Bank, D&N also is subject to federal regulation and oversight. The
purpose of the regulation of D&N and other holding companies is to protect
subsidiary savings institutions.
The following is a summary of certain statutes and regulations affecting
D&N, D&N Bank, and MFSB. This summary is qualified in its entirety by such
statutes and regulations, which are subject to change based on pending and
future legislation and action by regulatory agencies.
SAVINGS BANK HOLDING COMPANIES. D&N is a savings bank holding company and
is subject to the jurisdiction of the OTS with regard to certain matters.
Among other things, a savings bank holding company is required to: (1) file and
cause all of its subsidiaries which are not savings associations to file such
periodic reports as may be required by the OTS; (2) maintain books and records
as prescribed by the OTS; and (3) be subject to examination by the OTS.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the OTS is granted broad power to impose restrictions on
savings bank holding company activities if the OTS determines there is
reasonable cause to believe that the continuation by the holding company of any
activity constitutes a serious risk to the financial safety, soundness or
stability of a subsidiary savings association. The restrictions, issued in the
form of a directive, may limit: (1) the payment of dividends by the savings
association to the holding company; (2) transactions between the savings
association, the holding company, and the subsidiaries or affiliates of either;
and (3) any activities of the savings association that might create a serious
risk that the liabilities of the holding company or its other affiliates may be
imposed on the savings association.
Finally, a savings bank holding company must obtain prior written approval
from the OTS before acquiring substantially all the assets of any savings
association or savings and loan holding company or any ownership or control of
any voting shares of any savings association or savings and loan holding
company if, after such acquisition, it would own or control, directly or
indirectly, more than 5 percent of the voting shares of such savings
association or savings and loan holding company.
SAVINGS BANKS. D&N Bank and MFSB are federally chartered stock savings
banks subject to extensive regulation, supervision and regular examination by
the OTS and to the provisions of the HOLA as amended by FIRREA, and the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and other
federal laws including the Federal Deposit Insurance Act. Federal law governs,
among other things, the scope of the savings association's reserves, the
investments a savings association may make, the loans a savings association may
make, and transactions with affiliates. Deposits held by D&N Bank and MFSB are
insured, to the extent permitted by law, by SAIF.
TRANSACTIONS WITH AFFILIATES. Sections 23A and 23B of the Federal Reserve
Act generally apply to savings associations in the same manner and to the same
extent as they apply to Federal Reserve Member banks. Sections 23A and 23B of
the Federal Reserve Act impose certain restrictions on loans and extensions of
credit by a Federal Reserve Member bank to its affiliates, on investments by a
bank in the stock or securities of its affiliates, on acceptance of such stock
or securities as collateral for loans by the bank to any borrower and on leases
and services and other contracts between a bank and its affiliates.
Notwithstanding Sections 23A and 23B, HOLA provides that savings
associations may not make any loan or extension of credit to any affiliate
unless the affiliate is engaged only in permissible bank holding company
activities. Further, savings associations are barred from investing in the
securities of an affiliate other than a subsidiary of the savings association.
The affiliates of a savings association include its holding company and all
other companies (including banks and other savings associations) controlled by
the holding company. Transactions between banks that are at least 80 percent
owned by the same holding company are exempt from certain of the restrictions
of Sections 23A and 23B of the Federal Reserve Act under the so-called "sister
bank" exemption.
45
<PAGE> 46
Savings associations are also subject to Section 22(h) of the Federal
Reserve Act, which places limitations on loans to insiders. Under Section
22(h), a savings association may extend credit to its or its affiliates'
executive officers, directors and principal shareholders or their related
interests only if the loan is made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with non-insiders and if credit underwriting standards are
followed that are no less stringent than those applicable to comparable
transactions with non-insiders. Also, loans to insiders must not involve more
than the normal risk of repayment or present other unfavorable features and
must, in certain circumstances, be approved in advance by a majority of the
entire board of directors of the lending institution. The aggregate amount
that can be lent to all insiders is limited to the institution's unimpaired
capital and surplus. No insider shall knowingly receive any extension of
credit not authorized under Section 22(h). Savings associations also are
subject to Section 22(g) of the Federal Reserve Act which imposes additional
restrictions on loans to executive officers.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: (i) "tangible capital" in an
amount not less than 1.5 percent of adjusted total assets; (ii) "core capital"
in an amount not less than 3 percent of adjusted total assets; and (iii)
"risk-based capital" of at least 8 percent of risk-weighted assets. Savings
institutions must meet all of the standards in order to comply with the capital
requirements.
The capital regulations require tangible capital of at least 1.5 percent of
adjusted total assets. Tangible capital includes common stockholders' equity
and retained earnings, noncumulative perpetual preferred stock and related
income. In addition, certain intangible assets and mortgage servicing rights
in excess of limitations set forth in the regulations must be deducted from
tangible capital.
Consistent with Financial Accounting Standards No. 122 adopted in May 1995,
the OTS adopted an Interim Rule on August 1, 1995 providing that mortgage
servicing rights, both originated and purchased, may be included in a savings
association's capital. The maximum amount of mortgage servicing rights,
together with other qualifying intangible assets that can be included in
capital, is the lesser of (i) 50 percent of core capital computed before the
deduction of any disallowed qualifying intangible assets or mortgage servicing
rights, or (ii) the value of such qualifying intangible assets and mortgage
servicing rights, which is the lesser of 90 percent of their fair market value
or 100 percent of their remaining unamortized book value.
The OTS regulations also 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 five-year transition period beginning on July 1, 1990, for
investments made before April 12, 1989.
The capital standards also require core capital equal to at least 3 percent
of adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including supervisory goodwill (which was
phased-out over a five-year period) and purchased credit card relationships.
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings institutions
rated a composite one (the highest rating) under the CAMEL rating system for
savings institutions will be permitted to operate at or near the regulatory
minimum leverage ratio of 3 percent. All other savings institutions will be
required to maintain a minimum leverage ratio of 4 percent to 5 percent. The
OTS will assess each individual savings institution through the supervisory
process on a case-by-case basis to determine the applicable requirement. No
assurance can be given as to the final form of any such regulation or the date
of its effectiveness.
Each savings institution also must maintain total capital equal to at least
8 percent of risk-weighted assets. Total capital consists of the sum of core
and supplementary capital, provided that supplementary capital cannot exceed
core capital, as defined above. Supplementary capital includes permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, maturing
capital instruments such as subordinated debt, intermediate-term preferred
stock and mandatory redeemable preferred stock, subject to an amortization
schedule, and general valuation loan and lease loss allowances up to 1.25
percent of risk-weighted assets. In computing the risk-based capital ratio,
the portion of land loans and non-residential construction loans in excess of
an 80 percent loan-to-value ratio, and equity investments must be deducted from
both
46
<PAGE> 47
risk-weighted assets and total capital. In addition, OTS regulations require
that an institution with a greater than "normal" level of interest rate risk
exposure will be subject to a deduction from total capital for purposes of
calculating the risk-based capital requirement.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of five risk categories based on the amount of
credit risk associated with that particular class of asset. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The risk categories range from 0 percent for cash and
United States government securities that are backed by the full faith and
credit of the United States government to 100 percent for repossessed assets or
assets more than 90 days past due (except residential real estate loans more
than 90 days past due) and certain equity investments that have the same risk
characteristics as real estate owned as determined by the OTS. Qualifying
residential mortgage loans (including certain multi-family mortgage loans) are
assigned a 50 percent risk-weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100 percent risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans which do not exceed an 80 percent
loan-to-value ratio.
PROMPT CORRECTIVE ACTION. In addition to the existing capital requirements
discussed above, FDICIA created a new approach to supervision of insured
savings associations that requires, or in some cases permits, federal
regulatory agencies to take certain actions based on an institution's capital
level. This "prompt corrective action" framework addresses capital deficiencies
and supervisory concerns of institutions with the intent of resolving problems
of institutions at the least possible long-term costs to SAIF. FDICIA and
prompt corrective action regulations adopted by the federal regulatory agencies
create five capital categories. Each insured depository institution will be
categorized based on its level of capital as measured by specified ratios. An
institution's capital category determines what regulatory restrictions and
supervisory actions, if any, must, or in some cases may, be taken by federal
regulators. These provisions became effective December 19, 1992.
The five capital categories are well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. The specified capital ratios for determining the capital
category of all but critically undercapitalized institutions are: (1) the ratio
of total capital to risk-weighted assets (total risk based ratio); (2) the
ratio of Tier 1 or core capital to risk-weighted assets (Tier 1 risk based
ratio); and (3) the ratio of Tier 1 or core capital to total average assets
(Tier 1 leverage ratio). The sole capital measure for defining critically
undercapitalized institutions is the ratio of tangible equity to total assets.
The required ratios for each of the five capital categories are summarized in
the following table:
<TABLE>
<CAPTION>
TIER 1
TOTAL RISK TIER 1 RISK LEVERAGE
CATEGORY BASED RATIO BASED RATIO RATIO OTHER
- ------------------- --------------- ---------------- ------------ --------------------------
<S> <C> <C> <C> <C>
Well-capitalized 10% or 6% or 5% or Not subject to a
above above above directive to meet a
specific level for any
capital measure
Adequately 8% or above 4% or 4% or Does not meet
capitalized above above(1) definition of well-
capitalized
Undercapitalized Under 8% Under 4% Under
4%(2)
Significantly Under 6% Under 3% Under 3%
undercapitalized
Critically Ratio of tangible
undercapitalized equity to total assets
of 2% or under.
- -------------------------
</TABLE>
(1) 3% or above for institutions rated CAMEL 1 or MACRO 1 in most recent
examination by federal regulators.
(2) Under 3% for institutions rated CAMEL 1 or MACRO 1 in most recent
examination by federal regulators.
FDICIA also provides that a well-capitalized institution may be
reclassified as adequately capitalized and that an adequately capitalized or
undercapitalized institution may be required to comply with restrictions and be
subjected to supervisory actions as if it were in the next lower capital
category, if the appropriate federal regulatory agency determines, after notice
and opportunity for an informal hearing, that the institution is in an unsafe
or unsound condition or is deemed to be engaging in an unsafe or unsound
practice. An institution may be deemed to be engaged in an unsafe or unsound
practice if it received a less-than-satisfactory rating in its most recent
examination. Although no restrictions apply automatically and regulatory
agencies are not required to take other supervisory action as a result of
reclassification, such a reclassification permits an institution's regulatory
agency to impose various restrictions and to take supervisory action to deal
with the institution's deficiencies.
47
<PAGE> 48
D&N Bank is adequately capitalized. D&N currently has no reason to believe
or otherwise anticipate that D&N Bank will be reclassified to a lower capital
category. MFSB is well capitalized. MFSB currently has no reason to believe
or otherwise anticipate that it will be reclassified to a lower capital
category.
FDICIA and the prompt corrective action regulations specifically impose
certain restrictions on and require regulators to take certain supervisory
actions with respect to less than adequately capitalized institutions. The
imposition of other restrictions and supervisory actions are left to the
regulatory agencies' discretion. Certain of the more significant provisions are
generally described below. Among the mandatory provisions are the following.
Under FDICIA all institutions are prohibited from making a capital distribution
or paying a management fee to a controlling person that would leave the
institution undercapitalized. All institutions which are undercapitalized or
worse are subject to increased monitoring and capital restoration requirements.
Significant additional restrictions apply to significantly and critically
undercapitalized institutions. In addition to these mandatory supervisory
actions, if an institution is undercapitalized or worse, the institution's
federal regulatory agency has the authority to, among other things, restrict
the institution's activities, growth and affiliate relationships.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires each federal banking
agency, including the OTS, to prescribe for all insured depository institutions
and their holding companies standards relating to internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, and compensation, fees and benefits
and such other operational and managerial standards as the agency deems
appropriate. In addition, the federal banking regulatory agencies, including
the OTS, are required to prescribe by regulation standards specifying: (1) a
maximum ratio of classified assets to capital; (2) minimum earnings sufficient
to absorb losses without impairing capital; (3) to the extent feasible, a
minimum ratio of market value to book value for publicly traded shares of
depository institutions or the depository institution holding companies; and
(4) such other standards relating to asset quality, earnings and valuation as
the agency deems appropriate. Finally, each federal banking agency, including
the OTS, is required to prescribe standards for employment contracts and other
compensation arrangements of executive officers, employees, directors and
principal stockholders of insured depository institutions that would prohibit
compensation and benefits and arrangements that are excessive or that could
lead to a material financial loss for the institution. If an insured
depository institution or its holding company fails to meet any of the
standards described above, it will be required to submit to the appropriate
federal banking agency a plan specifying the steps that will be taken to cure
the deficiency. If an institution fails to submit an acceptable plan or fails
to implement the plan, the appropriate federal banking agency will require the
institution or holding company to correct the deficiency and, until corrected,
may impose restrictions on the institution or company, including any of the
restrictions applicable under the prompt corrective action provisions of
FDICIA.
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "RCDRIA") was enacted. The RCDRIA amended Section
39 of the Federal Deposit Insurance Act: (1) to authorize the federal bank
regulators to establish safety and soundness standards by regulation or by
guideline for all insured depository institutions; (2) to give the regulators
greater flexibility in prescribing asset quality and earnings standards; and
(3) to eliminate the requirement that standards prescribed under Section 39
apply to depository institution holding companies. Further, under the RCDRIA,
if a regulator determines an institution fails to meet any standard established
guideline, the institution may be required to submit an acceptable plan to
achieve compliance with the standard.
On July 10, 1995, federal regulators adopted Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans. Federal bank regulators are authorized, but
not required, to request a compliance plan for failure to satisfy the safety
and soundness standards set out in the Guidelines. An institution must file a
compliance plan within 30 days of a request to do so from the institution's
primary federal regulator. Regulators expect to request a compliance plan from
an institution whose failure to meet one or more of the standards is of such
severity that it could threaten the safe and sound operation of the
institution.
With respect to operational and managerial standards, the Guidelines focus
on an institution's general practices, and permit regulators to evaluate
overall performance. The Guidelines provide that matters such as internal
controls and information systems will be evaluated in terms of the
effectiveness of the function they perform (e.g. effective risk assessment)
rather than compliance with a prescribed organizational structure. Each
institution is required to have an internal audit system that provides for
adequate testing and review of internal controls and information systems.
48
<PAGE> 49
Additional operational matters addressed in the Guidelines include: loan
documentation (prescribes evaluation based on substantive criteria such as
whether loan documents support legally enforceable claims against a borrower);
credit underwriting (establishes general parameters based on key considerations
such as borrower financial condition); interest rate exposure (generally
permits institutions to manage interest rate risk in a manner appropriate to
the size of the institutions and complexity of its assets and liabilities);
asset growth (does not impose a quantitative limit, but requires growth to be
based on plan considering source of funds, increase in credit or interest rate
risk accompanying growth, and effect of growth on capital); and compensation
issues (rule dovetails operational standard with excessive compensation
concerns discussed below).
With respect to compensation issues, the Guidelines provide that
compensation would be considered excessive if it were unreasonable or
disproportionate to the services actually performed by the individual being
compensated. In making this determination, agencies will consider a variety of
factors, including compensation history, financial condition of the
institution, and compensation practices at comparable institutions.
The final rule does not set forth any standards related to asset quality
and earnings. Federal regulators intend to add revised asset quality and
earnings standards to the Guidelines after receiving comments and finalizing
such standards. The federal regulators also concluded that establishing stock
valuation standards for publicly traded institutions is not appropriate.
Regulators intend to continue the existing practice of monitoring
publicly-traded institutions through the review of stock price changes, market
price to book value ratios, bond ratings and other indicators of the market's
assessment of an institution's performance.
D&N Bank and MFSB both believe that their respective operational and
managerial standards substantially comply with the standards set forth in the
Guidelines and that compliance with the Guidelines will, therefore, not impose
a significant burden on their respective operations.
OTHER LIMITATIONS BASED ON CAPITAL. FDICIA and implementing regulations
place certain limitations, based on an institution's capital categorization, on
the acceptance of brokered deposits, interest rates on deposits, and deposit
insurance coverage. Only well-capitalized institutions may accept brokered
deposits without limitation. Adequately capitalized institutions may accept
brokered deposits only upon obtaining a waiver from the FDIC. Further, an
adequately capitalized institution may not offer rates of interest on deposits
that are significantly more than relevant local or national rates.
Undercapitalized institutions may not accept brokered deposits.
AUDIT AND REPORTING REQUIREMENTS. FDICIA added a section to the Federal
Deposit Insurance Act, the purpose of which is to facilitate early
identification of problems in financial institutions' management through annual
independent audits, more stringent reporting requirements, and the
establishment and maintenance of internal control structures and procedures.
Under FDICIA and implementing regulations of the FDIC, the requirements apply
to institutions with assets of $500 million or more, with certain exceptions
for subsidiaries of holding companies, and are effective for fiscal years
beginning after December 31, 1992.
The audit and reporting requirements under FDICIA generally required are as
follows. Each insured depository institution (or its holding company, as
discussed below) must submit to its primary regulatory agency and make publicly
available an annual report including the following: (1) financial statements
audited by an independent public accounting firm; (2) a report by the
institution's management, which acknowledges responsibility for the financial
statements and compliance with safety and soundness laws and regulations and
assesses the institution's internal controls; and (3) an attestation and report
by the independent public accountant on management's assertions on internal
control structure and procedures for financial reporting. In addition, a
nonpublic issued statement by the independent public accountant related to the
findings on compliance with laws and regulations relating to insider loans and
dividends should be filed. Additionally, each institution (or its holding
company) must have an independent audit committee comprised entirely of outside
directors and subject to duties specified by FDICIA and FDIC regulations.
D&N Bank is subject to the requirements described above. It is currently
anticipated that the independent audit requirement will be satisfied by the
audit at the holding company level.
RESERVE REQUIREMENTS. FRB regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and demand accounts). The FRB regulations currently require
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $52 million or less (subject to adjustment by the FRB)
the reserve requirement is 3 percent or approximately $1.56 million. Net
transaction accounts in excess of $52 million currently are subject to a 10
percent reserve requirement which
49
<PAGE> 50
is subject to adjustment by the FRB between 8 percent and 14 percent. The
first $4.3 million of otherwise reservable balances (subject to adjustments by
the FRB) are exempted from the reserve requirements.
DEPOSIT INSURANCE. Savings associations are insured by the FDIC. Under
FIRREA, separate funds have been established for banks and savings
associations, with the Bank Insurance Fund ("BIF") generally covering banks and
SAIF generally covering savings associations. A minimum designated reserve
ratio, i.e., the ratio of the insurance fund's reserves to total estimated
insured deposits of 1.25 percent of insured deposits has been established for
both BIF and SAIF. However, the FDIC may set a higher designated reserve ratio
for either fund if circumstances raise a significant risk of substantial future
losses to the fund. Assessment rates will be established sufficient to
maintain reserves at the designated reserve ratio or, if the reserve ratio is
less than the designated reserve ratio, to increase the reserve ratio to the
designated reserve ratio within a reasonable period of time. The FDIC is
authorized to impose special assessments as it deems necessary. The rates on
regular assessments may be changed by the FDIC semi-annually for each fund
independent of the other. All insured financial institutions are assessed on a
semi-annual basis.
Under FDICIA, the FDIC has established a system of risk based deposit
insurance premiums effective January 1, 1994. Under a risk based assessment
system, each institution's semi-annual assessment will be based on the
probability that the insurance fund will incur a loss related to that
institution, the likely amount of the loss and the revenue needs of the deposit
insurance fund. To arrive at a risk based assessment for each insured
institution for each semi-annual period, the FDIC places it in one of nine
assessment risk classifications using a two-step analysis based first on
capital ratios and then on supervisory risk factors.
Three capital categories are used, well-capitalized, adequately capitalized
and undercapitalized, which are identical to those adopted for prompt
corrective action purposes, except the deposit insurance premium rule excludes
references to supervisory evaluations and directives included under the prompt
corrective action rule (see "Regulation of D&N and MFSB - Prompt Corrective
Action"). Each institution also is assigned to one of three supervisory risk
subgroups based on consideration of supervisory evaluations by the
institution's primary regulatory agency and other information relevant to the
institution's financial condition and the risk of loss to the insurance fund
posed by the institution. Subgroup A is for financially sound institutions with
only a few minor weaknesses. Subgroup B is for institutions that demonstrate
weakness that, if not corrected, could result in significant deterioration.
Subgroup C is for institutions that pose a substantial probability of loss to
the insurance fund unless effective corrective action is taken. These
supervisory subgroups will modify premium rates within each of the three
capital categories.
The FDIC notifies institutions of their assessment risk classification for
each semi-annual period by the first day of the month preceding each
semi-annual period (June 1 for the period beginning July 1 and December 1 for
the period beginning January 1). An institution may submit a written request
for review of its assessment risk classification. Under the current schedule
applicable to SAIF member institutions, there is an eight basis point spread
between the highest and lowest assessment rates. Institutions classified as
strongest by the FDIC are subject to an annual rate of $0.23 per hundred
dollars of deposits, and institutions classified as the lowest are subject to a
rate of $0.31 per hundred dollars of deposits. D&N Bank and MFSB are covered
by SAIF and are subject to assessments at the SAIF rates.
The recent history of deposit insurance fund assessment rate determination
has been characterized by efforts to recapitalize the insurance funds following
the savings and loan crisis of the 1980's. When the former Federal Savings and
Loan Insurance Corporation ("FSLIC") was declared bankrupt as of year end 1986,
Congress passed the Competitive Equality Banking Act of 1987 ("CEBA"),
authorizing funds to assist the recapitalization of the FSLIC. Under CEBA,
Congress authorized the Financing Corp. ("FICO") to issue bonds, the proceeds
of which were to be used to purchase the capital stock of the FSLIC. The funds
provided by CEBA were not sufficient and additional efforts at recapitalization
were undertaken in FIRREA, wherein a statutory assessment rate schedule was
imposed. FIRREA abolished the FSLIC and transferred the FSLIC's deposit
insurance activities to the FDIC. FIRREA also established designated reserve
ratios for the deposit insurance funds, specifying that the funds should
maintain cash reserves equalling 1.25 percent of insured deposits.
The FDIC may increase assessment rates for either BIF or SAIF if necessary
to restore a fund's ratio of reserves to insured deposits to its target level.
If the FDIC determines to increase the assessment rate for all SAIF member
institutions, institutions in all risk categories could be affected. While an
increase in premiums for D&N could have an adverse effect on earnings, a
decrease in premiums could have a positive impact on earnings.
50
<PAGE> 51
The FICO bond obligations are imposed on the SAIF. For this reason, the
SAIF's ability to recapitalize in order to reach the prescribed reserve ratio
has been hindered. While the BIF reached the target reserve ratio at the end
of May 1995, SAIF is not projected to reach the required level until early next
decade.
The BIF and SAIF assessment rate schedules had been identical. However,
the FDIC recently adopted modified assessment rate schedules for SAIF and BIF
member institutions. While the assessments for SAIF members continue to range
from 0.23 percent to 0.31 percent of deposits, a new assessment rate schedule
for BIF members ranges from 0 percent to 0.27 percent of deposits. As a result
of the newly-adopted assessment rate schedule, BIF member institutions will
benefit from reduced deposit insurance premiums and SAIF member institutions
will be placed at a competitive disadvantage based on higher deposit insurance
premium obligations. Until the competitive effect of the regulations can be
ascertained, the consequences of a deposit insurance premium differential and
the possible impact on D&N's operations cannot be predicted.
An additional burden that is borne by the SAIF is the responsibility for
resolution of failed SAIF insured thrifts after June 30, 1995. The authority
for taking failed thrift institutions into conservatorship or receivership, or
otherwise resolving thrift failures, had previously been exercised by the
Resolution Trust Corporation. However, the Resolution Trust Corporation's case
resolution authority expired as of June 30, 1995, and the SAIF assumed
jurisdiction over all subsequent resolution of troubled thrifts. Given the
responsibility for troubled thrift resolution, the continuing FICO bond
obligations, and the discrepancy between the SAIF and the BIF fund with regard
to their respective capitalization levels, several legislative initiatives have
been undertaken in order to address the foregoing matters.
One legislative proposal contained in the Balanced Budget Act of 1995,
which passed both the Senate and the House of Representatives but was vetoed by
President Clinton, included a plan for addressing issues related to the current
status of the SAIF. This proposed plan calls for a special one-time assessment
on SAIF insured deposits to assist with recapitalization of the SAIF. The
second part of the proposal also provides for all BIF and SAIF insured
institutions to assist in paying the FICO bond obligations. In addition, the
deposit insurance funds would be merged on January 1, 1998 if no insured
depository institution is a savings association. It is anticipated that these
or other similar provisions will be included in subsequent legislation. Based
on a one-time charge of between 60 and 85 basis points and an estimated drop in
deposit premiums to 4 basis points, D&N estimates that it could have an
after-tax charge of $4.5 to $5.5 million for fiscal year 1996, with a
corresponding drop in deposit insurance premiums of approximately $1.5 million
after-tax annually.
Until Congress enacts legislation concerning the foregoing matters, neither
D&N nor MFSB can determine what impact any legislation concerning deposit fund
insurance issues may have on their respective operations.
SAIF members are generally prohibited from converting to the status of
members of the BIF, also administered by the FDIC, or merging with or
transferring assets to a BIF member until such time as the SAIF's ratio of
reserved to insured deposits equals 1.25 percent. The FDIC, however, may
approve such a transaction in the case of a SAIF member in default or if the
transaction involves an insubstantial portion of the deposits of each
participant. In addition, mergers, transfers of assets and assumptions of
liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to SAIF and an entrance
fee to BIF. A savings institution is not prohibited from adopting a commercial
bank or state savings bank charter while the prohibition on insurance fund
conversions remains in effect, provided that the resulting bank remains a SAIF
member.
FDIC regulations provide that any insured depository institution with a
ratio of Tier 1 capital to total assets of less than 2 percent will be deemed
to be operating in an unsafe or unsound condition, which would constitute
grounds for the initiation of termination of deposit insurance proceedings.
The FDIC, however, will not initiate termination of insurance proceedings if
the depository institution has entered into and is in compliance with a written
agreement with its primary regulator, and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such a level as the FDIC deems appropriate.
Tier 1 capital is defined as the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2 percent of total assets may also be deemed
to be operating in an unsafe or unsound condition notwithstanding such capital
level. Management of D&N does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
51
<PAGE> 52
On October 5, 1994 the FDIC issued an "Advanced Notice of Proposed
Rulemaking" pursuant to which the FDIC is soliciting comments on whether the
deposit-insurance assessment base currently provided for in the FDIC's
assessment regulations should be redefined. As a result of the recent
transition to a risk-based deposit insurance system, effective January 1, 1994,
the assessment base, which had been determined by statute pursuant to the
Federal Deposit Insurance Act, is now determined by the FDIC by regulation. At
present, however, the FDIC's assessment base regulations continue to be based
on the statutory provisions under the Federal Deposit Insurance Act. Under
current law, insurance premiums paid to the FDIC are calculated by multiplying
the institution's assessment base (which equals total domestic deposits, as
adjusted for certain elements) by its assessment rate.
Based on the change to the new deposit insurance system, developments in
the financial services industry, changes in the activities of depository
institutions and other factors, the FDIC seeks comments on whether the
assessment base should be redefined. The FDIC has stated that review of the
definition of "assessment base" does not signal any intent to change the total
dollar amount of assessments collected, but that such redefinition may impact
the assessments paid on an institution-by-institution basis. Until final
regulations are adopted affecting the definition of an institution's assessment
base, neither D&N Bank nor MFSB can predict what impact such regulation may
have on their respective operations.
DIVIDEND REGULATION. A savings bank holding company which controls an
institution that is classified as undercapitalized or worse for prompt
corrective action purposes (see "Regulation of D&N and MFSB - Prompt Corrective
Action") may be prohibited from making any capital distribution, including a
dividend payment, without prior approval of the OTS. In addition, the ability
of a savings bank holding company to obtain funds for the payment of dividends
to its shareholders and for other cash requirements is largely dependent on the
amount of dividends which may be declared by its subsidiary savings bank.
Federal statutes and regulations restrict the payment of dividends by savings
associations. Certain of these statutes and regulations affect D&N and D&N
Bank.
Under FDICIA, no insured depository institution may declare any dividend
if, following the payment of such dividend, the institution would be
undercapitalized (see "Regulation of D&N and MFSB -- Prompt Corrective
Action").
OTS regulations impose various restrictions or requirements on savings
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit a savings association 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.
The OTS utilizes a three-tiered approach to permit savings associations,
based on their capital level and supervisory condition, to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, and other transactions charged to the capital account.
Generally, Tier 1 institutions, which are institutions that before and
after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100 percent of net income for the year-to-date plus 50 percent
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 the
amount authorized for a Tier 2 institution. However, a Tier 1 savings
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. Tier 2 institutions, which are institutions that before and
after the proposed distribution meet or exceed their current minimum capital
requirements, may make capital distributions up to 75 percent of their net
income for the most recent four quarter period.
Tier 3 savings associations (which are institutions that do not meet
current minimum capital requirements) that propose to make any capital
distribution and Tier 2 savings associations that propose to make a capital
distribution in excess of the noted safe harbor level must obtain OTS approval
prior to making such distribution. Tier 2 savings associations proposing to
make any capital distribution within the safe harbor provisions and Tier 1
savings associations proposing to make any capital distributions 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.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe harbor percentage limitations. Under the proposal, a
savings
52
<PAGE> 53
association 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 in troubled condition and would remain adequately capitalized
(as defined in the OTS prompt corrective action regulation) following the
proposed distribution. Savings associations 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 capital
distributions that do not exceed 50 percent of the savings association's excess
regulatory capital plus net income to date during the calendar year. A savings
association 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. A savings association will be considered in troubled condition
if it has a CAMEL rating of 4 or 5, is subject to an enforcement action
relating to its safety and soundness or financial viability or has been
informed in writing by the OTS that it is in troubled condition. 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.
During 1994 and 1995, D&N Bank paid no cash dividends to D&N.
QUALIFIED THRIFT LENDER REQUIREMENT
In order for D&N Bank and MFSB to exercise the powers granted to
SAIF-insured institutions and maintain full access to FHLB advances, each must
qualify as a qualified thrift lender ("QTL"). Under HOLA, as modified by
FDICIA, savings institutions are required to maintain a level of qualified
thrift investments equal to at least 65 percent of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20 percent of total
assets, (ii) intangibles, including goodwill, and (iii) the value of property
used to conduct business) on a monthly basis for nine out of twelve months per
calendar year. Qualified thrift investments for purposes of the QTL test
consist primarily of residential mortgages and related investments, including
mortgage-backed securities. At September 30, 1995, D&N Bank maintained 87.47
percent of its portfolio assets in qualified thrift investments and therefore
meets the QTL test. At the same period, MFSB maintained 78.17 percent of its
portfolio assets in qualified thrift investments and therefore meets the QTL
test.
A savings institution that fails to become or remain a QTL shall either
become a national bank or be subject to restrictions specified in the HOLA. A
savings institution that fails to meet the QTL test and does not convert to a
national bank will be: prohibited from making any new investment or engaging in
activities that would not be permissible for national banks; prohibited from
establishing any new branch office where a national bank located in the savings
institution's home state would not be able to establish a branch office;
ineligible to obtain new advances from any FHLB; and subject to limitations on
the payment of dividends comparable to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a qualified thrift
lender, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. A savings
institution may requalify as a QTL if it thereafter complies with the QTL test.
MONETARY POLICY AND ECONOMIC CONDITIONS. The business of savings
associations is affected by the monetary and fiscal policies of various
regulatory agencies, including the OTS and the FRB. Among the regulatory
techniques available to the FRB are open market operations in United States
government securities, changing the discount rate for member bank borrowings,
and imposing and changing the reserve requirements applicable to savings
association deposits and to certain borrowings by savings associations and
their affiliates (including parent companies). These policies influence to a
significant extent the overall growth and distribution of loans, investments,
and deposits, and the interest rates charged on loans, as well as the interest
rates paid on savings and time deposits.
The monetary policies of the FRB have had a significant effect on the
operating results of savings associations in the past and are expected to
continue to do so in the future. In view of constantly changing conditions in
the national economy and the money market, as well as the effect of acts by
monetary and fiscal authorities, including the FRB, no definitive predictions
can be made by D&N or MFSB as to future changes in interest rates, credit
availability, or deposit levels or the effect of any such changes on D&N's or
MFSB's financial condition.
OTHER MATTERS
FEES AND EXPENSES. MFSB and D&N will each pay its own fees and expenses
incident to the negotiation and performance of the Merger Agreement including
the fees and expenses of counsel, accountants, and other experts, whether or
not the Merger is consummated.
53
<PAGE> 54
SOURCES OF INFORMATION. All information about MFSB included in this
Prospectus/Proxy Statement has been prepared from information furnished by MFSB
for inclusion herein, and all information about D&N has been furnished by D&N.
LEGAL MATTERS
Legal matters in connection with the Merger, including issuance of D&N
Common Stock, will be passed upon for D&N by Howard & Howard Attorneys, P.C.,
Kalamazoo, Michigan.
Legal matters in connection with the Merger will be passed upon for MFSB by
Bodman, Longley & Dahling, L.L.P., Detroit, Michigan.
EXPERTS
The financial statements of MFSB as of June 30, 1995 and 1994, and for each
of the three years in the period ended June 30, 1995 included and incorporated
by reference in this Prospectus/Proxy Statement have been audited by Kelman,
Rosenbaum, Rollins & Quayhackx, P.C., independent auditors, as stated in their
report appearing herein, and are incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of D&N as of December 31, 1994 and
1993, and for the years ended December 31, 1994 and December 31, 1993,
incorporated by reference herein and elsewhere in the Registration Statement
have been incorporated by reference herein and in the Registration Statement in
reliance upon the report of Coopers & Lybrand LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of D&N Financial Corporation for the
year ended December 31, 1992 incorporated by reference in the Prospectus of D&N
Financial Corporation, which is referred to and made a part of this
Prospectus/Proxy Statement and the Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report
incorporated by reference herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
54
<PAGE> 55
EXHIBIT A
Opinion of Roney & Co.
<PAGE> 56
EXHIBIT A
(313) 963-6700
December 21, 1995
Board of Directors
Macomb Federal Savings Bank
23505 Greater Mack Avenue
St. Clair Shores, Michigan 48080
Gentlemen:
We understand that Macomb Federal Savings Bank ("Macomb" or the "Company")
intends to be acquired by D&N Financial Corporation ("D&N") pursuant to the
Agreement and Plan of Merger dated November 8, 1995 (referred to as the
"Agreement"). D & N proposes that the affiliation be effected by a merger of
Macomb with and into D&N Bank, a subsidiary of D&N. Under the proposed terms
contained in the Agreement, based on assumed fully diluted Macomb shares
outstanding of 191,104, the proposed acquisition would be fixed at $48 for each
share of Macomb. Each share of the Company would be exchanged into that number
of shares of D & N equivalent to $48 per share based on the average price of D
& N as defined in the Agreement. You have requested that Roney & Co. render an
opinion as to whether the consideration to be received under the Agreement is
fair, from a financial point of view, to the shareholders of the Company.
Roney & Co. is a regional investment banking firm of recognized standing. As
part of our investment banking services, we are regularly engaged in the
valuation of corporate entities in connection with public offerings and merger
and acquisition transactions. Our research analysts publish regular reports on
individual banks and thrifts as well as other financial institutions. Our firm
makes principal markets in various financial institution stocks, and, as you
are aware, we have managed public offerings for banks and thrifts as well as
other companies.
In arriving at the opinion as set forth below, we have, among other things:
* Reviewed the Company's Annual Reports on Form 10-K and related
financial information since it became a public company up to
December 31, 1994 and the Company's Quarterly Reports on Form
10-Q as filed with the Securities and Exchange Commission up
to September 30, 1995;
* Reviewed the historical stock price and trading activity for
the common stock of the Company and D&N;
* Reviewed the most recent draft of the Prospectus/Proxy
Statement;
* Compared certain financial characteristics of the Company and
D & N with other Michigan and Midwestern financial
institutions we deemed to be comparable;
A-1
<PAGE> 57
Macomb Federal Savings Bank
December 21, 1995
Page 2 of 2
* Compared the proposed terms of the offer contemplated in the
Agreement with the financial terms of certain other mergers
and acquisitions in the financial services industry which we
deemed to be relevant;
* Conducted discussions with members of senior management of
both the Company and D & N concerning their respective
business and prospects;
* Prepared a discounted cash flow analysis on the Company and an
estimate of the difference in value of the Company depending
whether it was sold currently or remains independent;
* Reviewed such other financial data and performed such other
analysis and took into account such other matters as we deemed
necessary.
In preparing our opinion, we have relied upon the accuracy and completeness of
all of the above information and all other financial and other information
supplied or otherwise made available to us by the Company and D & N and we have
not independently verified such information or undertaken an independent
evaluation or appraisal of the assets or liabilities of the Company or D & N,
and have not been furnished any such evaluation or appraisal.
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by the shareholders of
Macomb Federal Savings Bank, as proposed by the Agreement, is fair to the
shareholders of Macomb, from a financial point of view.
We consent to the inclusion of this opinion as an exhibit to the
Prospectus/Proxy Statement. Further, we consent to the use of our firm's name
and references to this opinion in such Prospectus/Proxy Statement, with such
uses and references being subject to our prior approval.
Sincerely,
RONEY & CO.
A-2
<PAGE> 58
EXHIBIT B
Agreement and Plan of Reorganization among D&N Financial Corporation, D&N
Bank, a Federal Savings Bank, and Macomb Federal Savings Bank dated as of
November 8, 1995.
<PAGE> 59
EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
D&N FINANCIAL CORPORATION,
D&N BANK, A FEDERAL SAVINGS BANK
AND
MACOMB FEDERAL SAVINGS BANK
DATED AS OF NOVEMBER 8, 1995
B-1
<PAGE> 60
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE ONE
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Manner of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.03 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.01 Organization; Qualification; Good Standing; Corporate Power . . . . . . . . . . . . . . . . . . . . . . . 3
2.02 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.03 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.04 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.05 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.06 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.07 No Violation, Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.09 Taxes, Returns and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.10 Corporate Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.11 Brokerage Commissions, Fees, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.12 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.13 Compliance With ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.14 Shares to be Issued in Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.15 Orders, Injunctions, Decrees, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.16 Ownership of MFSB Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.17 Community Reinvestment Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.18 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.19 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.20 Advice of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.01 Organization; Qualification; Good Standing; Corporate Power . . . . . . . . . . . . . . . . . . . . . . . 10
3.02 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.03 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.04 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.05 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.06 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.07 No Violation, Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
B-2
<PAGE> 61
<TABLE>
<S> <C>
3.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.09 Taxes, Returns and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.10 Corporate Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.11 Obligations to Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.12 Brokerage Commissions, Fees, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.13 Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.14 Charter, Bylaws, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.15 Orders, Injunctions, Decrees, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.16 Stockholders of MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.17 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.18 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.19 Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.20 Fiduciary Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.21 Compliance With Environmental and Safety Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.22 Insider Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.23 No Sensitive Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.24 Community Reinvestment Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.25 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.26 Qualified Thrift Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.27 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.28 Advice of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE FOUR
COVENANTS OF D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.01 Conduct Of Business; Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.02 SEC Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.03 Authorization and Reservation of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.04 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.05 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.06 Required Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.07 Board of Directors of D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.08 Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.09 Information, Access Thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE FIVE
COVENANTS OF MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.01 Stockholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.02 Conduct Of Business; Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.03 Affiliate Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.04 Information, Access Thereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.05 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.06 Recommendation of Merger to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
B-3
<PAGE> 62
<TABLE>
<S> <C>
5.07 Litigation Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.08 Larger Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE SIX
CONDITIONS TO OBLIGATIONS OF EACH OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.01 Approval by Affirmative Vote of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.02 Approval by OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.03 Approval of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.04 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.05 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.06 Blue Sky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.07 Other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.08 Orders, Decrees and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.09 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.10 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.11 Contracts Terminated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.12 ESOP and Profit Sharing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE SEVEN
FURTHER CONDITIONS TO THE OBLIGATIONS OF MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.01 Compliance by D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.02 Sufficiency of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.03 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.04 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.05 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.06 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.07 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.08 Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE EIGHT
FURTHER CONDITIONS TO THE OBLIGATIONS OF D&N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.01 Compliance by MFSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.02 Sufficiency of Documents, Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.03 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.04 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.05 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.07 Transfer by Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.08 Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.09 Pooling of Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.10 Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
B-4
<PAGE> 63
<TABLE>
<S> <C>
8.11 Employee Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.12 Exercise of Option Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE NINE
ABANDONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.01 Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.02 Effect of Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE TEN
MODIFICATIONS, AMENDMENTS AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.01 Modifications, Amendments and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE ELEVEN
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.01 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.02 Merger Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.03 Procurement of Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.04 Further Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.05 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.06 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.07 Nonsurvival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.08 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.09 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.10 Binding Effect and Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.13 Severability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.14 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.15 Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
EXHIBIT B
AFFILIATE LETTER
B-5
<PAGE> 64
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") by and among D&N
FINANCIAL CORPORATION, a Delaware corporation ("D&N"), D&N BANK, A FEDERAL
SAVINGS BANK, a federally chartered stock savings association and a wholly
owned subsidiary of D&N ("D&N BANK") and MACOMB FEDERAL SAVINGS BANK, a
federally chartered stock savings association ("MFSB").
W I T N E S S E T H:
WHEREAS, D&N BANK is a wholly owned subsidiary of D&N, and D&N and MFSB
desire that MFSB shall be merged with D&N BANK in accordance with the
applicable statutes of the United States and in accordance with an Agreement
and Plan of Merger (the "Plan of Merger") substantially on the terms and in the
form attached hereto as Exhibit A (the merger provided for therein being herein
called the "Merger");
NOW, THEREFORE, in consideration of the premises and the mutual and
dependent promises hereinafter contained, the parties do represent, warrant,
covenant and agree as follows:
ARTICLE ONE
THE MERGER
1.01 Plan of Merger. D&N BANK, MFSB and D&N agree to execute and adopt
the Plan of Merger substantially on the terms and in the form attached hereto
as Exhibit A.
1.02 Manner of Merger. At the Effective Time, as hereinafter defined,
MFSB shall be merged into D&N BANK, under the Charter of D&N BANK as the
resulting association, pursuant to the terms of this Agreement and with the
effect of the Home Owners Loan Act ("HOLA"). The "Effective Time" shall be the
date on which the Merger is consummated by D&N BANK and MFSB or such later date
specified in the Articles of Combination by the Secretary of the Office of
Thrift Supervision (the "OTS").
At the Effective Time, the corporate existence of MFSB shall cease, and the
corporate existence of D&N BANK, with all its purposes, objects, rights,
privileges, powers and franchises, shall continue unaffected and unimpaired by
the Merger.
1.03 Effect of Merger. Upon the Merger becoming effective:
(a) Charter: Bylaws: Offices. Upon the Merger becoming effective, the
name of the resulting association (herein called the "Resulting Association"
whenever reference
B-6
<PAGE> 65
is made to it as of the Effective Time or thereafter) shall be "D&N BANK, A
FEDERAL SAVINGS BANK." The Charter of the Resulting Association shall be
the Charter of D&N BANK in effect immediately prior to the Effective Time.
The Bylaws of the Resulting Association shall be those of D&N BANK as in
existence immediately before the Effective Time. The home office of the
Resulting Association shall be the home office of D&N BANK. All branches
of MFSB and D&N BANK which were in lawful operation immediately before the
Effective Time or whose establishment has been approved before the Merger
shall be retained and operated or established and operated as branches of
the Resulting Association.
(b) Effect of Merger. Upon the Merger becoming effective, the
corporate existence of D&N BANK and MFSB shall be merged into and continued
in D&N BANK as the Resulting Association, and all assets and property
(real, personal, and mixed, tangible and intangible, choses in action,
rights, and credits) then owned by each of D&N BANK and MFSB or which would
inure to any of them, shall immediately by operation of law and without any
conveyance, transfer or further action, become the property of D&N BANK as
the Resulting Association. The Resulting Association shall be deemed to be
a continuation of the entity of each of D&N BANK and MFSB. All rights and
obligations of D&N BANK and MFSB shall remain unimpaired, and D&N BANK as
the Resulting Association shall, as of the Effective Time, succeed to all
those rights and obligations. Savings accounts shall be deemed issued in
the name of D&N BANK as the Resulting Association in accordance with
applicable OTS regulations.
(c) Additional Actions. If, at any time after the Effective Time, the
Resulting Association shall consider or be advised that any further
assignments or assurances in law or any other acts are necessary or
desirable to (a) vest, perfect or confirm, of record or otherwise, in the
Resulting Association its rights, title or interest in, to or under any of
the rights, properties or assets of MFSB acquired or to be acquired by the
Resulting Association as a result of, or in connection with, the Merger, or
(b) otherwise carry out the purposes of this Agreement or the Plan of
Merger, MFSB and its proper officers and directors shall be deemed to have
granted to the Resulting Association an irrevocable power of attorney to
execute and deliver all such proper deeds, assignments and assurances in
law and to do all acts necessary or proper to vest, perfect or confirm
title to and possession of such rights, properties or assets in the
Resulting Association and otherwise to carry out the purposes of this
Agreement and the Plan of Merger; and the proper officers and directors of
the Resulting Association are fully authorized in the name of MFSB or
otherwise to take any and all such action. The Resulting Association shall
defend, hold harmless and indemnify the former officers and directors of
MFSB from any liability or claim of liability with respect to any action
taken by the Resulting Association pursuant to or under authority of this
Section 1.03(c).
B-7
<PAGE> 66
(d) Each issued and outstanding share of MFSB Common Stock (the "MFSB
Shares") shall be exchanged for and represent the right to receive such
number of shares (rounded to the nearest ten thousandth of a share) of D&N
Common Stock as shall be equal to (i) $48.00 divided by (ii) the average of
the means between the high and low transaction prices of D&N Common Stock
as quoted on NASDAQ (the "Average Price") during the last fifteen trading
days on which reportable sales of D&N Common Stock took place (the
"Valuation Period") immediately prior to, but not including, the third
calendar day prior to the Effective Time (the "Exchange Ratio"). The
Exchange Ratio will increase proportionately if the Average Price decreases
and the Exchange Ratio will decrease proportionately if the Average Price
increases; provided, however, the Exchange Ratio will not be decreased
below 3.5555 or be increased above 5.0526.
(e) All Option Rights (as hereinafter defined) outstanding immediately
prior to the Effective Time shall be exercised by the holders thereof prior
to the Effective Time and converted into shares of MFSB Common Stock in
accordance with the terms thereof such that no Option Rights will remain
outstanding at the Effective Time and the shares of MFSB Common Stock
issued upon exercise thereof shall be exchanged for and represent the right
to receive D&N Common Stock as provided in Section 1.03(d) hereof.
(f) No certificates or scrip for fractional shares of D&N Common Stock
will be issued. In lieu thereof, D&N will pay the value of such fractional
shares in cash on the basis of the Average Price, subject to the limits
described in Section 1.03(d) above.
(g) In the event of any extraordinary dividend distribution to the
holders of D&N Common Stock or in the event of any increase or reduction in
the number of shares of D&N Common Stock issued and outstanding caused by
split-up, reverse split, reclassification, reorganization,
recapitalization, merger, consolidation, distribution of stock dividends or
change of par or stated value, the parties agree to amend the Plan of
Merger to cause a proportionate adjustment to be made to the Exchange
Ratio.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES OF D&N
D&N represents and warrants to MFSB as follows:
2.01 Organization; Qualification; Good Standing; Corporate Power.
(a) D&N is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified to
do business and is in good standing in each jurisdiction in which the
nature of the business conducted or the properties or assets owned or
leased by it makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on D&N'S
consolidated financial condition, business or operations or the ability to
consummate the
B-8
<PAGE> 67
transactions contemplated by this Agreement. D&N is a registered savings
association holding company under HOLA. D&N has the corporate power and
authority to carry on its business as it is now conducted, to own, lease
and operate its properties, to execute and deliver this Agreement and the
Plan of Merger and the power to consummate the transactions contemplated
hereby and thereby.
(b) D&N BANK is a federally chartered stock savings association duly
organized, validly existing and in good standing under the laws of the
United States. D&N BANK has the corporate power and authority to carry on
its business as it is now conducted and to own, lease and operate its
properties, and is duly qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted or the
properties or assets owned or leased by it makes such qualification
necessary, except where the failure to be so qualified would not have a
material adverse effect on D&N BANK'S consolidated financial condition,
business or operations or the ability to consummate the transactions
contemplated by this Agreement.
(c) D&N and D&N BANK hold all licenses, certificates, permits,
franchises and rights from all appropriate federal, state or other public
authorities necessary for the conduct of its and their businesses, except
where failure to do so would have a material adverse effect on the
consolidated financial condition, business or operations of D&N. D&N and
D&N BANK have each conducted its business so as to comply in all material
respects with all applicable statutes, ordinances, regulations or rules,
and neither D&N nor D&N BANK is presently charged with, or, to D&N'S
knowledge, under governmental investigation with respect to, any actual or
alleged material violations of any statute, ordinance, regulation or rule;
and neither D&N nor D&N BANK is the subject of any pending or, to D&N'S
knowledge, threatened material proceeding by any regulatory authority
having jurisdiction over its business, properties or operations.
2.02 Authorization. The execution, delivery and performance of this
Agreement and the Plan of Merger by each of D&N and D&N BANK have been duly
authorized and approved by all necessary corporate action, and this Agreement
and the Plan of Merger are legally binding on and enforceable against each of
D&N and D&N BANK in accordance with their terms, subject to the receipt of all
required regulatory or other governmental approvals and except as
enforceability may be limited by bankruptcy laws, insolvency laws or other laws
affecting creditors' rights generally. The execution and delivery of this
Agreement and the Plan of Merger do not, and the consummation of the Merger
will not, violate the provisions of D&N'S or D&N BANK'S respective Articles of
Incorporation, as amended, Charter, as amended, or Bylaws, as amended.
2.03 Capitalization. As of September 30, 1995, the authorized
capitalization of D&N consisted of 10,000,000 shares of D&N Common Stock, par
value .01 per share, of which 6,750,521 shares were outstanding and of which
21,456 shares were held as treasury shares by D&N; 1,000,000 shares of
Preferred Stock, without par value, of which none were issued and outstanding.
Except incident to D&N'S management stock incentive plans, and except with
B-9
<PAGE> 68
respect to warrants to acquire 1,001,915 shares of D&N Common Stock on or
before December 31, 1996, at a price of $8.25 per share, there were, as of
September 30, 1995, no outstanding warrants, options, rights, calls, or other
commitments of any nature relating to the authorized but unissued shares of D&N
Common Stock or D&N Preferred Stock or concerning the authorization, issuance
or sale of any other class of equity securities of D&N. The number of shares
set forth above is subject to change before the Effective Time by purchase,
sale, issuance, redemption, conversion, distribution or other transaction. A
vote of the shares set forth above is not required to approve this Agreement or
the Plan of Merger. All of the outstanding shares set forth above are validly
issued, fully paid, and nonassessable and none of such shares has been issued
in violation of the preemptive rights of any person, firm or entity.
2.04 Financial Statements.
(a) D&N has furnished to MFSB true, correct and complete copies of:
(i) the audited Consolidated Statements of Condition of D&N as of December
31, 1992, December 31, 1993 and December 31, 1994, and the related
Consolidated Statements of Operations, Consolidated Statements of
Changes in Stockholders' Equity and the Consolidated Statements of Cash
Flows for each of the three years ended December 31, 1994, including the
respective notes thereto, together with the reports of Coopers & Lybrand,
L.L.P. relating thereto; and (ii) the unaudited Consolidated Statement of
Condition as of June 30, 1995, and the related unaudited Consolidated
Statement of Operations for the period then ended (the "D&N Financial
Statements"). Subject to such changes which may result from an audit which
includes the period of the unaudited Financial Statements as of and for the
six months ended June 30, 1995 (which changes, in the aggregate, will not
be material), such Financial Statements fairly present the consolidated
financial position of D&N as of and for the periods ended on their
respective dates and the consolidated operating results and changes in
financial position of D&N for the indicated periods in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) D&N will furnish MFSB with copies of its audited and unaudited
Consolidated Balance Sheets, and related reports, for each annual and
quarterly period subsequent to June 30, 1995, until the Effective Time (the
"Subsequent D&N Financial Statements").
(c) Subject to such changes which may result from an audit of the June
30, 1995 D&N Financial Statements or of any Subsequent D&N Financial
Statements (which changes, in the aggregate, will not be material), all of
the aforesaid D&N Financial Statements have been, and, with respect to the
Subsequent D&N Financial Statements, will be, prepared in accordance with
generally accepted accounting principles, utilizing accounting practices
consistent with prior years except as otherwise disclosed. None of the
aforesaid D&N Financial Statements contain, and none of the Subsequent D&N
Financial Statements will contain, any material undisclosed extraordinary
or prior period items or fail to disclose any material items that should be
disclosed. All of the aforesaid
B-10
<PAGE> 69
D&N Financial Statements present fairly, and all of the Subsequent D&N
Financial Statements will present fairly, the consolidated financial
position of D&N and the results of its operations and changes in its
financial position as of and for the periods ending on their respective
dates. Subject to such changes which may result from an audit of the June
30, 1995, D&N Financial Statements or of any Subsequent D&N Financial
Statements (which changes, in the aggregate, will not be material), the
allowance for loan losses in such D&N Financial Statements is, and with
respect to the Subsequent D&N Financial Statements will be, adequate under
the standards applied by the OTS and based on past loan loss experiences
and potential losses in current portfolios to cover all known or
anticipated loan losses. There are, and with respect to the Subsequent D&N
Financial Statements will be, no agreements, contracts or other instruments
to which D&N is a party or by which it or (to the knowledge of D&N) any
of the officers, directors, employees or stockholders of D&N have rights
which would have a materially adverse effect on the consolidated financial
condition, business or operations of D&N which are not reflected in the
D&N Financial Statements and the Subsequent D&N Financial Statements.
2.05 Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the D&N Financial Statements or the Subsequent
D&N Financial Statements, neither D&N nor D&N BANK has, and with respect to the
Subsequent D&N Financial Statements will not have, any liabilities or
obligations, of any nature, secured or unsecured (whether accrued, absolute,
contingent or otherwise) including, without limitation, any tax liabilities due
or to become due, which would have a materially adverse effect on the
consolidated financial condition, business or operations of D&N.
2.06 Material Adverse Change. Since June 30, 1995, there has been no
material adverse change in, and no event, occurrence or development in, the
business of D&N or D&N BANK that, taken together with other events, occurrences
and developments with respect to such business, would have or would reasonably
be expected to have a material adverse effect on D&N'S consolidated financial
condition, business or operations (other than changes in banking laws or
regulations, changes in generally accepted accounting principles or
interpretations thereof that affect the savings association industry generally
or changes in general economic conditions that uniformly affect the savings
association industry on a nationwide basis, including changes in the general
level of interest rates).
2.07 No Violation, Consents. Neither the execution and delivery of
this Agreement and the Plan of Merger nor the consummation of the transactions
contemplated hereby and thereby, with or without the giving of notice or the
lapse of time, or both, will: (i) violate, conflict with, result in the breach
or termination of, constitute a default under, accelerate the performance
required by, or result in the creation of any material lien, charge or
encumbrance upon any of the properties or assets of D&N or D&N BANK taken as a
whole, pursuant to any indenture, mortgage, deed of trust or other agreement
(including borrowing agreements) or instrument to which either D&N or D&N BANK
is a party or by which it or any of its properties or assets may be bound; or
(ii) violate any statute, rule or regulation applicable to D&N or D&N BANK
which
B-11
<PAGE> 70
would have a material adverse effect on D&N'S consolidated financial condition,
business or operations. No consent, approval, authorization, order,
registration or qualification of or with any court, regulatory authority or
other governmental body, or of any lender or purchaser under any borrowing
agreement, other than as specifically contemplated by this Agreement, is
required for the consummation by D&N and D&N BANK of the transactions
contemplated by this Agreement.
2.08 Litigation. There are no legal, quasi-judicial, administrative,
or other actions, suits, proceedings or investigations of any kind or nature
pending or, to the knowledge of D&N, threatened against D&N or D&N BANK that
challenge the validity or propriety of the transactions contemplated by this
Agreement or which would have a material adverse effect on D&N'S consolidated
financial condition, business or operations. Neither D&N nor D&N BANK is
subject to, or in default with respect to, nor are any of their assets subject
to, any outstanding judgment, order or decree of any court or of any
governmental agency or instrumentality which would have a material adverse
effect on D&N'S consolidated financial condition, business or operations.
2.09 Taxes, Returns and Reports. D&N has duly filed all tax returns
required to be filed. The reserve for taxes in D&N'S June 30, 1995,
Consolidated Statement of Condition is adequate to cover all of its tax
liabilities (including, without limitation, income taxes and franchise fees)
that may become payable in future years in respect to any transactions
consummated prior to June 30, 1995. D&N has not had and, to the best of D&N'S
knowledge, will not have any material liability for taxes of any nature for or
in respect of the operation of its business or ownership of its assets from
June 30, 1995, up to and including the Effective Time, or on the Subsequent D&N
Financial Statements or otherwise reflected in the books and records of D&N for
the period following its then most recent Subsequent D&N Financial Statements,
or otherwise reflected in the books and records of D&N for the period following
the then most recent Subsequent D&N Financial Statements.
2.10 Corporate Properties. No proceedings to take all or any part of
the properties of D&N (whether leased or owned) by condemnation or right of
eminent domain are pending or, to D&N'S knowledge, threatened. D&N owns 100%
of the issued and outstanding shares of D&N BANK.
2.11 Brokerage Commissions, Fees, Etc. All negotiations relating to
this Agreement and the Plan of Merger and the transactions contemplated herein
and therein have been and will be carried on by D&N directly with MFSB, its
counsel, accountants and other representatives in such a manner as not to give
rise to any claim against MFSB for any brokerage commission, finder's fee,
investment advisor's fee or other like payment.
2.12 Regulatory Filings. D&N and D&N BANK have filed and will continue
to file in a timely manner all required filings with (i) the Securities and
Exchange Commission ("SEC"), including all reports on Form 10-K, Form 10-Q,
Form 8-K and proxy statements and will furnish MFSB with copies of all such SEC
filings made subsequent to the date hereof until the Effective Time; (ii) the
OTS; (iii) the Federal Deposit Insurance Corporation (the "FDIC"); and (iv) any
B-12
<PAGE> 71
other federal or state regulatory authority having jurisdiction over it or
them, where failure to do so would have a material adverse impact on D&N'S
consolidated financial condition, business or operations, and, to the best
knowledge of D&N, all such filings were complete and accurate in all material
respects as of the dates of the filings, and no such SEC filing made any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements made, in the light of the circumstances under
which they were made, not misleading. Except for normal examinations conducted
by the Internal Revenue Service or the OTS or the FDIC in the regular course of
the business of the D&N and D&N BANK, no federal, state or local governmental
agency, commission or other entity has initiated any proceeding or, to the best
of the knowledge and belief of the D&N, investigation into the business or
operations of the D&N and D&N BANK within the past three years which would have
a material adverse effect on the consolidated financial condition, business or
operations of D&N. To D&N'S knowledge, there is no unresolved violation,
criticism or exception of a material nature by the SEC or the OTS or the FDIC
or any other authority or other agency, commission or entity with respect to
any report or statement referred to herein. Since the date of any such filings
there has been no material change in D&N'S consolidated financial condition,
business or operations, such that had such change occurred prior to any such
filing, such change would have been required to be disclosed or described
therein.
2.13 Compliance With ERISA. All employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"))
established or maintained by D&N or to which D&N contributes ("D&N Employee
Plans") are in compliance in all material respects with all applicable
requirements of ERISA, and are in compliance in all material respects with all
applicable requirements (including qualification and nondiscrimination
requirements in effect as of the Effective Time) of the Internal Revenue Code
of 1986, as amended (the "Code"), for obtaining the tax benefits the Code
thereupon permits with respect to such D&N Employee Plans. No D&N Employee
Plan has, or as of the Effective Time will have, any amount of unfunded benefit
liabilities (as defined in Section 4001(a)(18) of ERISA) for which D&N would be
liable to any person under Title IV of ERISA if the D&N Employee Plans were
terminated as of the Effective Time, which amounts would be material to D&N.
The D&N Employee Plans are funded in accordance with Section 412 of the Code
(if applicable). There would be no obligations which would be material to D&N
under Title IV of ERISA relating to any Employee Plan that is a multi-employer
plan if any such plan were terminated or if D&N or D&N BANK withdrew from any
such plan as of the Effective Time.
2.14 Shares to be Issued in Merger. The D&N Common Stock which the
stockholders of MFSB will be entitled to receive upon consummation of the
Merger pursuant to the Plan of Merger will, at the Effective Time, be duly
authorized and will, when issued pursuant to the Plan of Merger, be validly
issued, fully paid and nonassessable, and will not have been issued in
violation of the preemptive rights of any person, and will have been registered
under the Securities Act of 1933, as amended (the "Securities Act") and all
applicable state securities or blue sky laws.
B-13
<PAGE> 72
2.15 Orders, Injunctions, Decrees, Etc. D&N is not subject to any
order, injunction, or decree of any governmental body or court, or in violation
of any order, injunction, or decree, or any other requirement of any
governmental body or court, which would have a material adverse effect on the
condition (financial or otherwise), business, properties, assets, operations,
or liabilities of D&N on a consolidated basis.
2.16 Ownership of MFSB Stock. As of the date of this Agreement,
neither D&N nor D&N BANK owns any shares of any class of the capital stock of
MFSB.
2.17 Community Reinvestment Act Compliance. D&N BANK is in substantial
compliance with the applicable provisions of the Community Reinvestment Act of
1977 and the regulations promulgated thereunder. As of the date of this
Agreement, D&N has not been advised of the existence of any fact or
circumstance or set of facts or circumstances which, if true, would cause D&N
BANK to fail to be in substantial compliance with such provisions. D&N BANK
has not received a CRA rating from the OTS which is less than "satisfactory".
2.18 Approvals. D&N knows of no reason why all regulatory approvals
necessary to permit it to consummate the transactions contemplated hereby in
the manner provided herein should not be obtained or why the opinion letter
referred to in Section 8.09 hereof cannot be obtained.
2.19 Other Information. No representation or warranty by D&N contained
in this Agreement, no certificate or other instrument or document furnished or
to be furnished by or on behalf of D&N or D&N BANK pursuant to this Agreement
and no information furnished or to be furnished by D&N or D&N BANK for use in
the Prospectus/Proxy Statement (as hereinafter defined) or the Registration
Statement (as hereinafter defined) or the regulatory filings described in
Section 4.06 hereof contains or will contain any untrue statement of material
fact or omits or will omit to state any material fact required to be stated
herein or therein which is necessary to make the statements contained herein or
therein, in light of the circumstances in which they are or were made, not
misleading in any material respect.
2.20 Advice of Changes. Between the date hereof and the Effective
Time, D&N shall promptly advise MFSB in writing of any fact which, if existing
or known at the date hereof, would have been required to be set forth or
disclosed in or pursuant to this Agreement or of any fact which, if existing or
known at the date hereof, would have made any of the representations contained
herein materially untrue.
B-14
<PAGE> 73
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF MFSB
MFSB represents and warrants to D&N as follows: (For purposes of this
Article Three a "MFSB Schedule" is defined as a schedule prepared and executed
by an Officer of MFSB and delivered to D&N and dated on or before the date of
the execution of this Agreement).
3.01 Organization; Qualification; Good Standing; Corporate Power.
(a) MFSB is a federally chartered stock savings association duly
organized, validly existing and in good standing under the laws of the
United States and is duly qualified to do business and is in good standing
in Michigan and in each other jurisdiction in which the nature of the
business conducted or the properties or assets owned or leased by it makes
such qualification necessary. MFSB has the corporate power and authority
to carry on its business as it is now conducted, to own, lease and operate
its properties, to execute and deliver this Agreement and the Plan of
Merger and the power to consummate the transactions contemplated hereby and
thereby.
(b) MFSB holds all licenses, certificates, permits, franchises and
rights from all appropriate federal, state or other public authorities
necessary for the conduct of its business and where failure to do so would
have a material adverse effect on the financial condition, business or
operations of MFSB. MFSB has conducted its business so as to comply in all
material respects with all applicable federal, state and local statutes,
ordinances, regulations or rules, and MFSB is not presently charged with,
or, to MFSB'S knowledge, under governmental investigation with respect to,
any actual or alleged material violations of any statute, ordinance,
regulation or rule; and MFSB is not the subject of any pending or, to
MFSB'S knowledge, threatened proceeding by any regulatory authority having
jurisdiction over its business, properties or operations.
3.02 Authorization. The execution, delivery and performance of this
Agreement and the Plan of Merger by MFSB have been duly authorized and approved
by all necessary corporate action, and this Agreement and the Plan of Merger
are legally binding on and enforceable against MFSB in accordance with their
terms, subject in each case to the approval of the stockholders of MFSB and
subject to the receipt of all required regulatory and other government
approvals and except as enforceability may be limited by bankruptcy laws,
insolvency laws or other laws affecting creditors' rights generally. The
execution and delivery of this Agreement and of the Plan of Merger do not, and
the consummation of the Merger will not violate MFSB'S Charter, as amended, or
Bylaws, as amended.
B-15
<PAGE> 74
3.03 Capitalization.
(a) As of the date of this Agreement, the authorized capitalization of
MFSB consists of (i) 3,000,000 shares of MFSB Common Stock, $1.00 par
value, of which 186,604 shares are issued and outstanding. MFSB has no
other class of stock and there are, and as of the Effective Time there will
be, no fractional shares of MFSB Common Stock issued or outstanding. In
addition, as of the date of this Agreement, there are outstanding options
for the purchase of 4,500 shares of MFSB Common Stock (which have an
exercise price of Twenty-One and 00/100 Dollars ($21.00) per share (the
"Option Price")) granted to certain employees of MFSB pursuant to MFSB'S
1994 Incentive Stock Option Plan (the "Stock Option Plan"). Option rights
granted pursuant to the Stock Option Plan are sometimes collectively
referred to herein as the "Option Rights". All Option Rights have been
granted as "Incentive Options" as that term is used in the Stock Option
Plan. In addition, 18,000 shares of MFSB Common Stock (the "ESOP Shares")
are owned by the Macomb Federal Savings Bank Employee Stock Ownership Plan
(the "ESOP"). 10,551 shares in the ESOP are allocated to participant's
accounts as of the date hereof. MFSB makes quarterly payments of $9,000
plus interest to Comerica Bank to repay a loan (the "ESOP Loan") made to
the ESOP to enable it to purchase the ESOP Shares. Such payments are due
at the beginning of each calendar quarter. Unallocated ESOP Shares are
pledged as collateral with regard to the ESOP Loan. All ESOP Shares are
issued and outstanding as of the date hereof. Except with respect to the
Option Rights, MFSB has not granted any outstanding warrants, options,
rights, calls, agreements, understandings or other commitments of any
nature relating to the authorization, issuance, sale or repurchase of any
equity securities of MFSB. Except in connection with the exercise of the
Option Rights, the number of shares set forth above is not subject to
change before the Effective Time. Assuming the exercise of all of the
Option Rights prior to the Effective Time, at the Effective Time the
number of shares of MFSB Common Stock which will be issued and outstanding
will not exceed 191,104. All of the issued and outstanding shares of MFSB
Common Stock will be entitled to vote to approve this Agreement and the
Plan of Merger. All of the outstanding shares set forth above are validly
issued, fully paid, and nonassessable and none of such shares has been
issued in violation of the preemptive rights of any person, firm or entity.
(b) MFSB does not own directly or indirectly any equity or other
proprietary interest in any other corporation, joint venture, partnership,
entity, association or other business.
(c) All of the outstanding shares of MFSB are validly issued, fully
paid and nonassessable and, in the case of the shares of any subsidiary,
are owned free and clear of all liens, charges or encumbrances.
3.04 Financial Statements.
B-16
<PAGE> 75
(a) MFSB has furnished to D&N true, correct and complete copies of:
(i) the audited Balance Sheets of MFSB and the related Statements of
Operations, Statements of Changes in Stockholders' Equity and Statements of
Cash Flows for each of the two years ended June 30, 1995, including the
respective notes thereto, together with the reports of Kelman, Rosenbaum,
Rollins & Quayhackx, P.C. relating thereto ("MFSB Financial Statements").
Such MFSB Financial Statements fairly present the financial position of
MFSB as of and for the periods ended on their respective dates and the
operating results of MFSB for the indicated periods in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) MFSB will furnish D&N with copies of its audited and unaudited
Consolidated Balance Sheets, and related reports, for each annual and
quarterly period, and each financial report filed by it with the OTS,
subsequent to June 30, 1995, until the Effective Time ("Subsequent MFSB
Financial Statements").
(c) Subject to such changes which may result from an audit which
includes Subsequent MFSB Financial Statements (which changes in the
aggregate will not be material), all of the aforesaid MFSB Financial
Statements have been, and, with respect to the Subsequent MFSB Financial
Statements, will be, prepared in accordance with generally accepted
accounting principles (except with respect to reports filed with
the OTS which have, and will have, in each case, been prepared in
accordance with OTS requirements), utilizing accounting practices
consistent with prior years except as otherwise disclosed. None of the
aforesaid MFSB Financial Statements contain, and none of the Subsequent
MFSB Financial Statements will contain, any material undisclosed
extraordinary or prior period items or fail to disclose any material items
that should be disclosed. All of the aforesaid MFSB Financial Statements
present fairly, and all of the Subsequent MFSB Financial Statements will
present fairly, the financial position of MFSB and the results of its
operations and changes in its financial position as of and for the periods
ending on their respective dates. Subject to such changes which may result
from an audit of any Subsequent MFSB Financial Statements (which changes in
the aggregate will not be material), the provision for loan losses in such
MFSB Financial Statements is, and, with respect to the Subsequent MFSB
Financial Statements will be, adequate under the standards applied by the
OTS and based on past loan loss experiences and potential losses in current
portfolios to cover all known or anticipated loan losses. There are, and
with respect to the Subsequent MFSB Financial Statements will be, no
agreements, contracts or other instruments to which MFSB is a party or by
which it or they or (to the knowledge of MFSB) any of the officers,
directors, employees or stockholders of MFSB have rights which would have a
materially adverse effect on the financial condition, business or
operations of MFSB which are not disclosed herein or reflected in the MFSB
Financial Statements and the Subsequent MFSB Financial Statements.
3.05 Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the MFSB Financial Statements or the
Subsequent MFSB Financial
B-17
<PAGE> 76
Statements, MFSB did not have and with respect to the Subsequent MFSB Financial
Statements will not have, any liabilities or obligations, of any nature,
secured or unsecured, (whether accrued, absolute, contingent or otherwise)
including, without limitation, any tax liabilities due or to become due, which
would have a materially adverse effect on the financial condition, business or
operations of MFSB.
3.06 Material Adverse Change. Since June 30, 1995, there has been no
material adverse change in, and no event, occurrence or development in, the
business of MFSB that, taken together with other events, occurrences and
developments with respect to such business, would have or would reasonably be
expected to have a material adverse effect on the financial condition, business
or operations of MFSB (other than changes in banking laws or regulations,
changes in generally accepted accounting principles or interpretations thereof
that affect the savings association industry generally or changes in general
economic conditions that uniformly affect the savings association industry on a
nationwide basis, including changes in the general level of interest rates).
3.07 No Violation, Consents. Neither the execution and delivery of
this Agreement and the Plan of Merger nor, subject to the approval of this
Agreement and the Plan of Merger by the stockholders of MFSB, the consummation
of the transactions contemplated hereby and thereby, with or without the giving
of notice or the lapse of time, or both, will: (i) violate, conflict with,
result in the breach or termination of, constitute a default under, accelerate
the performance required by, or result in the creation of any material lien,
charge or encumbrance upon any of the properties or assets of MFSB pursuant to
any indenture, any mortgage, deed of trust, or other material agreement
(including borrowing agreements) or instrument to which MFSB is a party or by
which it or any of its properties or assets may be bound, except for the ESOP
Loan, and, as identified in MFSB Schedule 3.11, certain employment contracts
and the officers and directors deferred compensation plan; or (ii) violate any
statute, rule or regulation applicable to MFSB which would have a material
adverse effect on the financial condition, business or operations of MFSB.
Other than as specifically contemplated by this Agreement, no consent,
approval, authorization, order, registration or qualification of or with any
court, regulatory authority or other governmental body, or of any lender or
purchaser under any borrowing agreement, is required for the consummation by
MFSB of the transactions contemplated by this Agreement.
3.08 Litigation. There are no legal, quasi-judicial, administrative,
or other actions, suits, proceedings, or investigations of any kind or nature
pending or, to the knowledge of MFSB, threatened against MFSB that challenge
the validity or legality of the transactions contemplated by this Agreement or
which would have a material adverse effect on the financial condition, business
or operations of MFSB. There is no litigation which is pending or, to the
knowledge of MFSB, threatened against MFSB as of the date hereof. MFSB is not
subject to or in default with respect to, nor are any of its assets subject to,
any outstanding judgment, order or decree of any court or of any governmental
agency or instrumentality which would have a material adverse effect on the
financial condition, business or operations of MFSB.
B-18
<PAGE> 77
3.09 Taxes, Returns and Reports. MFSB has duly filed all tax returns
required to be filed. The reserve for taxes in MFSB June 30, 1995 Balance
Sheet is adequate to cover all tax liabilities of MFSB (including, without
limitation, income taxes and franchise fees) that may become payable in future
years in respect to any transactions consummated prior to June 30, 1995. MFSB
has no and to the best of MFSB'S knowledge, will have no material liability for
taxes of any nature for or in respect of the operation of its business or
ownership of its assets from June 30, 1995, up to and including the Effective
Time, except to the extent reflected in MFSB'S Balance Sheet as of June 30,
1995, or the Subsequent MFSB Financial Statements, or otherwise reflected in
the books and records of MFSB for the period following the then most recent
Subsequent MFSB Financial Statements.
3.10 Corporate Properties.
(a) MFSB Schedule 3.10 accurately identifies: (i) all real property
owned or leased by MFSB, including a brief description of any buildings
located thereon; and (ii) all known copyrights, patents, trademarks, trade
names, franchises, and related applications and all other similar
intangible assets owned by MFSB. Except as set forth in said MFSB Schedule,
all of MFSB'S properties, leasehold improvements, and equipment are in
reasonable operating condition, free from any known defects, except defects
which in the aggregate do not materially and adversely affect the financial
condition, business or operations of MFSB, and all known copyrights,
patents, trademarks, trade names, franchises, and related applications are
valid and in full force and effect in accordance with their terms. No
complaints have been received by MFSB, and, to the best of MFSB'S
knowledge, none are threatened that MFSB is in violation of applicable
building, zoning, environmental, safety, or similar laws, ordinances, or
regulations in respect of its buildings or equipment, or the operation
thereof, and to the best of MFSB'S knowledge, MFSB is not in material
violation of any such law, ordinance, or regulation, except as disclosed in
said MFSB Schedule. To the knowledge of MFSB, no proceedings to take all
or any part of the properties of MFSB (whether leased or owned) by
condemnation or right of eminent domain are pending or threatened.
(b) MFSB has good and marketable title to all of its real and personal
property, free, clear, and discharged of, and from, any and all liens,
charges, encumbrances, security interests, and/or equities.
3.11 Obligations to Employees. Except as required under the agreements
set forth in MFSB Schedule 3.11 or as otherwise disclosed in MFSB Schedule
3.11, all material obligations of MFSB, whether arising by operation of law or
by contract, for payments to trusts or other funds or to any governmental
agency or to any individual director, officer, employee or agent (or his or her
heirs, legatees or legal representatives) with respect to unemployment
compensation benefits, profit sharing, deferred compensation, pension or
retirement benefits or social security benefits have been paid, or adequate
actuarial accruals for such payments have been and are being made, by MFSB.
All material obligations of MFSB, whether arising by operation of law or by
contract, for bonuses and other forms of compensation which are or may become
payable to their
B-19
<PAGE> 78
directors, officers, employees or agents have been paid, or adequate accruals
for payment therefor have been and are being made to the extent required in
accordance with generally accepted accounting principles, all of which accruals
are reflected in the books and records of MFSB. MFSB Schedule 3.11 includes a
list of all of MFSB'S pension, profit sharing, health, accident, welfare, life
insurance, employee stock ownership and other employee benefit plans within the
meaning of Section 3(3) of ERISA ("MFSB Employee Plans"). All such MFSB
Employee Plans established or maintained by MFSB or to which MFSB contributes
are in compliance in all material respects with all applicable requirements of
ERISA, and are in compliance in all material respects with all applicable
requirements (including qualification and nondiscrimination requirements in
effect as of the Effective Time) of the Code, for obtaining the tax benefits
the Code thereupon permits with respect to such MFSB Employee Plans. No MFSB
Employee Plan has any amount of unfunded benefit liabilities (as defined in
Section 4001(a)(18) of ERISA) for which MFSB would be liable to any person
under Title IV of ERISA if any MFSB Employee Plans were terminated as of the
Effective Time, which amounts would be material to MFSB. The MFSB Employee
Plans are funded in accordance with Section 412 of the Code (if applicable).
There would be no obligations which would be material to MFSB under Title IV of
ERISA relating to any MFSB Employee Plan that is a multi-employer plan if any
such plan were terminated or if MFSB withdrew from any such plan as of the
Effective Time.
3.12 Brokerage Commissions, Fees, Etc. All negotiations relating to
this Agreement and the Plan of Merger and the transactions contemplated herein
and therein have been and will be carried on by MFSB directly with D&N, its
counsel, accountants and other representatives in such a manner as not to give
rise to any claim against D&N or MFSB for any brokerage commission, finder's
fee, investment advisor's fee or other like payment, except that MFSB has
agreed to make payment to Roney & Co. for services rendered as financial
advisor in connection with the transactions contemplated pursuant to that
certain letter agreement dated May 15, 1995, between MFSB and Roney & Co., a
copy of which has been provided to D&N by MFSB.
MFSB has fee agreements with all outside attorneys, accountants, and other
independent experts and advisors it has used or plans to use in connection with
the transactions contemplated in this Agreement, which provide that such
attorneys, accountants, and other independent experts and advisors will be
compensated only at their normal hourly or per diem rates plus reasonable
out-of-pocket expenses.
3.13 Certain Agreements. MFSB Schedule 3.13 accurately identifies all
of the following agreements, contracts, or other instruments written or, to the
knowledge of MFSB, oral, to which MFSB is a party or by which it is bound or
affected or, to the knowledge of MFSB, by which any of the stock, properties,
or assets of MFSB is bound or affected, or under which any of its officers,
directors, employees, or stockholders have rights: (a) all material leases of
real property under which MFSB is either lessor, sublessor, lessee, or
sublessee; (b) all insurance policies held by MFSB relating to its properties
or operations, including but not limited to those covering their leasehold
improvements, properties, equipment, furniture, fixtures, lives of, or
performance of their duties by their directors, officers, and employees (all
such policies of insurance, including blanket bonds and director and officer
liability insurance, are in force as of
B-20
<PAGE> 79
the date hereof and, until the Effective Time, MFSB will cause all such
policies to continue in force or to obtain substitute policies acceptable to
D&N with comparable coverage in amounts deemed by D&N to be sufficient;
provided that insurance policies maintained incident to the deferred
compensation plans, identified in MFSB Schedule 3.11 may be terminated upon
termination of such plans); (c) to the extent not disclosed in MFSB Schedule
3.11, all employment contracts, pension, retirement, stock option, stock
purchase, deferred compensation, savings, profit sharing, deferred
compensation, consultant, incentive, bonus, noncompetition, or collective
bargaining agreements, group insurance contracts, or other incentive, benefit,
or welfare plans or arrangements of MFSB, including any trust or comparable
agreement or instrument relating thereto, and including for each plan the
latest actuary's report on the condition of the plan and any determination
letters issued by the Internal Revenue Service (except as otherwise disclosed
in said MFSB Schedule, all such contracts, plans, practices, or arrangements
are terminable at the will of the employer without liability on not more than
60 days' notice to any affected employee); and (d) except as entered into with
respect to loan transactions or work outs in the ordinary course of business by
MFSB, any other agreement, instrument, or understanding of MFSB, whether or not
made in the ordinary and regular course of business. MFSB has delivered to D&N
true, complete, and correct copies of all of the plans, written agreements,
contracts, or other instruments, and written descriptions of the material
details of any oral agreements or instruments identified in said MFSB Schedule
3.11 or MFSB Schedule 3.13. Except as otherwise specifically disclosed in said
MFSB Schedule 3.11 or MFSB Schedule 3.13, all such agreements, contracts, or
other instruments are in full force and effect and MFSB is not in material
default under any such agreement, contract, or other instrument to which it is
a party or by which it may be bound.
3.14 Charter, Bylaws, Etc. MFSB Schedule 3.14 includes complete and
correct copies of the following: (a) the Charter, and all amendments thereto,
of MFSB; (b) the Bylaws of MFSB, as amended to date; and (c) a specimen
certificate for each type of outstanding security of MFSB.
3.15 Orders, Injunctions, Decrees, Etc. MFSB is not subject to any
order, injunction or decree of any governmental body or court, and is not in
violation of any order, injunction, or decree, or any other requirement of any
governmental body or court, which would have a material adverse effect on the
financial condition, business, or operations of MFSB.
3.16 Stockholders of MFSB. MFSB Schedule 3.16 accurately identifies
the names and addresses of all of the stockholders who, to MFSB'S knowledge,
beneficially own more than 5% of MFSB Common Stock and the number of shares of
stock of MFSB held by each such stockholder and by each director and senior
officer of MFSB. From the date hereof until the Effective Time, MFSB shall,
upon request, provide D&N with a complete list of all of its stockholders,
including the names, addresses and number of shares of MFSB Common Stock held
by each stockholder. Without the advance written consent of MFSB, D&N will not
disclose or make use of the information provided by MFSB pursuant hereto except
as may be required in connection with regulatory or other filings permitted by
this Agreement, the mailing of the
B-21
<PAGE> 80
Prospectus/Proxy Statement (as hereinafter defined) or as is otherwise
specifically permitted by this Agreement.
3.17 Regulatory Filings. MFSB has filed and will continue to file in a
timely manner all required filings with (i) the SEC (and will furnish D&N with
copies of all such filings made subsequent to the date hereof until the
Effective Time); (ii) the OTS; (iii) the FDIC; and (iv) any other federal or
state regulatory authority having jurisdiction over it, and to the best
knowledge of MFSB, all such filings were true, complete and accurate in all
material respects as of the dates of the filings, and no such filing made any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. Except for normal
examinations conducted by the Internal Revenue Service or the OTS or the FDIC
in the regular course of the business of MFSB, no federal, state or local
governmental agency, commission or other entity has initiated any proceeding
or, to the best of the knowledge and belief of MFSB, investigation into the
business or operations of MFSB within the past three years which would have a
material adverse effect on the financial condition, business or operations of
MFSB. To MFSB'S knowledge, there is no unresolved violation, criticism or
exception of a material nature by the SEC or the OTS or the FDIC or other
agency, commission or entity with respect to any report or statement referred
to herein. Since the date of any such filings there has been no material
change in the financial condition, business or operations of MFSB such that,
had such change occurred prior to any such filing, such change would have been
required to be disclosed or described therein.
3.18 Loans. All loans and loan commitments extended by MFSB (the
"Loans") have been made in accordance with MFSB'S customary lending standards
in the ordinary course of business. The Loans are evidenced by appropriate and
sufficient documentation and constitute valid and binding obligations of the
borrowers enforceable in accordance with their terms, except as limited by
applicable bankruptcy, insolvency, or other similar laws affecting the
enforcement of creditors' rights and remedies generally from time to time in
effect and by applicable law which may affect the availability of equitable
remedies. All such Loans are, and at the Effective Time will be, free and
clear of any security interest, lien, encumbrance or other charge, except for
rights of participating financial institutions pursuant to participation
agreements entered into in the ordinary course of business, and MFSB has
complied, and at the Effective Time will have complied, in all material
respects with all laws and regulations relating to such Loans. The Loans are
not subject to any material offsets, or to the knowledge of MFSB, claims of
material offset, or claims of other material liability on the part of MFSB,
except in each case, claims of offset or liability which in the aggregate would
not have a material adverse effect on the financial condition, business or
operations of MFSB.
3.19 Conduct. Between June 30, 1995, and the date hereof, MFSB has
not: (i) conducted its business or entered into any transaction other than in
the ordinary course, or incurred or become subject to any liabilities or
obligations except liabilities incurred in the ordinary course of business;
(ii) suffered any labor trouble; (iii) discharged or satisfied any material
lien or encumbrance or paid any material obligation or liability other than
those presented in MFSB Financial Statements or incurred after the date thereof
in the ordinary course
B-22
<PAGE> 81
of business; (iv) mortgaged, pledged, or subjected to lien, charge or other
encumbrance any material part of its assets, or sold or transferred any such
assets, except in the ordinary course of business; (v) made or permitted an
amendment or termination of any material contract to which it is a party except
in the ordinary course of business; (vi) issued, agreed to issue or sold
any of its capital stock or corporate debt obligations (whether authorized and
unissued or held in the treasury); (vii) granted any options, warrants or other
rights for the purchase of its capital stock; (viii) declared, agreed to
declare, set aside or paid any dividend or other distribution in respect of its
capital stock or, directly or indirectly purchased, redeemed, or otherwise
acquired or agreed to purchase or redeem or otherwise acquire any shares of
such stock; (ix) entered into any employment contract with any officer or
salaried employee, made any accrual or arrangement for or payment of bonuses or
special compensation of any kind or any severance or termination pay to any of
its present officers or employees, increased the rate of compensation payable
or to become payable by them to any of its officers or employees, or instituted
or made any material increase in any employee welfare, retirement or similar
plan or arrangement, in each case other than in the ordinary course of
business; or (x) entered into any other material transaction other than in the
ordinary course of business.
3.20 Fiduciary Responsibilities. To the best of MFSB'S knowledge, MFSB
has performed all of its duties in its capacity as trustee, executor,
administrator, registrar, guardian, custodian, escrow agent, receiver or any
other fiduciary capacity in a manner which complies in all material respects
with all applicable laws, regulations, orders, agreements, wills, instruments
and common law standards.
3.21 Compliance With Environmental and Safety Laws.
(a) To the best knowledge of MFSB'S officers and directors, MFSB'S
operations have complied in all material respects with all applicable
federal, state, and local environmental statutes and regulations; none of
MFSB'S operations are subject to any judicial or administrative proceedings
alleging the violation of any federal, state or local environmental, health
or safety statute or regulation; none of MFSB'S operations are the subject
of a federal, state or local investigation evaluating whether any remedial
action is needed to respond to a release of any hazardous or toxic waste,
substance or constituent, or any other substance into the environment; MFSB
has not generated hazardous waste in its operations; MFSB has not
transported hazardous waste for treatment, storage or disposal; and MFSB
has not reported and has not had any legal duty to report a spill or
release of a hazardous or toxic waste, substance or constituent or any
other substance in the environment due to its operations.
(b) To the best knowledge of MFSB'S officers and directors, all real
estate owned or leased by MFSB has complied in all material respects with
all applicable federal, state, and local environmental statutes and
regulations; such real estate is not subject to any judicial or
administrative proceedings alleging the violation of any federal, state or
local environmental, health or safety statute or regulation; such real
estate is not the subject of a federal, state or local investigation
evaluating whether any remedial action
B-23
<PAGE> 82
is needed to respond to a release of any hazardous or toxic waste,
substance or constituent, or any other substance into the environment;
MFSB has not generated any hazardous material on such real estate; and MFSB
has not transported any hazardous material from such real estate to any
waste treatment, storage or disposal facility.
3.22 Insider Interests. All loans, extensions of credit, and other
contractual arrangements (including deposit relationships) between MFSB and any
officer or director of MFSB, or any affiliate of any such officer or director,
conform to applicable rules and regulations and requirements of all applicable
regulatory agencies. No officer or director of MFSB has any material interest
in any property, real or personal, tangible or intangible, used in or
pertaining to the business of MFSB.
3.23 No Sensitive Transactions. Within the past five (5) years,
neither MFSB nor, to MFSB'S knowledge, any director, employee, or agent of
MFSB, has directly or indirectly used funds or other assets of MFSB for (a)
illegal contributions, gifts, entertainment, or other expenses related to
political activities; (b) payments to or for the benefit of any governmental
official or employee, other than payments required or permitted by law; (c)
illegal payments to or for the benefit of any person, firm, corporation, or
other entity, or any officer, employee, agent, or representative thereof; or
(d) the establishment or maintenance of a secret or unrecorded fund.
3.24 Community Reinvestment Act Compliance. MFSB is in substantial
compliance with the applicable provisions of the Community Reinvestment Act of
1977 and the regulations promulgated thereunder. As of the date of this
Agreement, MFSB has not been advised of the existence of any act or
circumstance or set of facts or circumstances which, if true, would cause MFSB
to fail to be in substantial compliance with such provisions. MFSB has not
received a CRA rating from the OTS which is less than "satisfactory."
3.25 Approvals. MFSB knows of no reason why all regulatory approvals
necessary to permit D&N to consummate the transactions contemplated hereby in
the manner provided herein should not be obtained.
3.26 Qualified Thrift Lender. MFSB is a "Qualified Thrift Lender" as
defined under Section 10(m) of HOLA, 12 USC 1467a(m).
3.27 Other Information. No representation or warranty by MFSB
contained in this Agreement, or disclosure in any MFSB Schedule, certificate or
other instrument or document furnished or to be furnished by or on behalf of
MFSB pursuant to this Agreement and no information furnished or to be furnished
by MFSB for use in the Prospectus/Proxy Statement (as hereinafter defined) or
the Registration Statement (as hereinafter defined) or the regulatory filings
described in Section 4.06 hereof contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact required to
be stated herein or therein which is necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made,
not misleading in any material respect.
B-24
<PAGE> 83
3.28 Advice of Changes. Between the date hereof and the Closing Date,
MFSB shall promptly advise D&N in writing of any fact which, if existing or
known as of the date hereof, would have been required to be set forth or
disclosed in or pursuant to this Agreement or of any fact which, if existing or
known as of the date hereof, would have made any of the representations
contained herein materially untrue.
ARTICLE FOUR
COVENANTS OF D&N
D&N hereby covenants and agrees with MFSB as follows:
4.01 Conduct Of Business; Certain Covenants. From and after the
execution and delivery of this Agreement and until the Effective Time, D&N and
D&N BANK will:
(a) conduct its and their business and operate only in the usual
ordinary course of business and maintain its and their properties, books,
contracts, business, operations, commitments, records, loans, investments
and any trust operations in accordance with generally accepted accounting
principles;
(b) conduct its and their business and operate only in accordance with
sound banking and business practices;
(c) remain in good standing with all applicable banking regulatory
authorities.
(d) not take any action which constitutes a breach or default of its
obligations under this Agreement or the Plan of Merger or which is
reasonably likely to delay or jeopardize the receipt of any of the
regulatory approvals required hereby or is reasonably likely, to the best
of D&N'S knowledge, to preclude the Merger from qualifying for "pooling of
interests" accounting treatment or cause any of the other conditions set
forth in Articles Six, Seven or Eight hereof to fail.
4.02 SEC Registration. D&N shall file with the SEC as soon as
practicable after the execution of this Agreement, a registration statement on
an appropriate form under the Securities Act covering the D&N Common Stock to
be issued pursuant to the Plan of Merger and shall use its best efforts to
cause the same to become effective and thereafter, until the Effective Time or
termination of this Agreement, to keep the same effective and, if necessary, to
amend and supplement the same. Such registration statement and any amendments
and supplements thereto are referred to herein as the "Registration Statement."
The Registration Statement shall include a prospectus/proxy statement thereto
("the Prospectus/Proxy Statement"), prepared for use in connection with the
meeting of stockholders of MFSB referred to in Section 5.01 of this Agreement,
all in accordance with the rules and regulations of the SEC. D&N shall, as
soon as practicable after the execution of this Agreement, make all filings
required to obtain all material
B-25
<PAGE> 84
Blue Sky permits, authorizations, consents or approvals required for the
issuance of the D&N Common Stock.
4.03 Authorization and Reservation of Common Stock. By appropriate
resolution, a certified copy of which shall be provided to MFSB, the Board of
Directors of D&N shall, prior to the Effective Time, authorize and reserve the
required number of shares of D&N Common Stock to be issued pursuant to the Plan
of Merger.
4.04 Confidentiality. D&N will cause all internal, nonpublic financial
and business information obtained by it from MFSB to be treated confidentially
(exercising the same degree of care as it uses to preserve and safeguard its
own confidential information); provided, however, that notwithstanding the
foregoing, nothing contained herein shall prevent or restrict D&N from making
such disclosure thereof as may be required by law in connection with purchases
or sales of securities or as may be required in the performance of this
Agreement. If the Merger shall not take place, all nonpublic financial
statements, documents and materials and all copies thereof shall be returned to
MFSB, or destroyed by D&N, and shall not be used by D&N in any way detrimental
to MFSB.
4.05 Indemnification. D&N agrees that it will honor all rights to
indemnification, including rights to payments of advances for indemnification
obligations, existing in favor of the employees, directors, and officers of
MFSB as provided in MFSB'S Charter or Bylaws.
4.06 Required Approvals. As soon as practicable after the execution of
this Agreement, D&N will submit: (a) an application with the OTS for the
acquisition by D&N of MFSB; (b) an application with the OTS to permit the
Merger (collectively, with any amendments or supplements thereto, the
"Applications"). D&N will use its best efforts to cause the Applications to be
approved and to obtain such other regulatory consents and approvals as may be
necessary to facilitate the Merger. D&N will provide MFSB with copies of the
Applications as soon as is reasonably practicable prior to the filing and
copies of all final Applications and related correspondence.
4.07 Board of Directors of D&N. D&N will take such action as may be
necessary so that the number of Directors of D&N shall be increased by one (1)
subsequent to the Effective Time. One individual designated by the Chairman of
the Board of Directors of MFSB within 30 days prior to the Effective Time
(subject to the approval of D&N which shall not be unreasonably withheld) shall
be added to the Board of Directors of D&N subsequent to the Effective Time.
Such individual shall be added to the class of Directors whose terms expire not
less than two (2), nor more than three (3), years from the date of the annual
meeting of stockholders of D&N immediately preceding the Effective Time. Such
individual shall hold office for the term which shall coincide with the
remaining term of the class to which such person is added.
4.08 Retirement Plans. For purposes of crediting periods of service
for eligibility and vesting, but not for benefit accruals, under the D&N BANK
401k Plan and Trust (the "D&N 401k
B-26
<PAGE> 85
Plan"), and for purposes of crediting periods of service for eligibility and
vesting for other employee benefits provided to employees of D&N and its
affiliates, employees of MFSB who otherwise would be eligible to
participate in such plans and benefit programs after the Effective Time shall
be given credit for service with MFSB prior to the Effective Time. After the
Effective Time, D&N will take such action as is reasonably required to complete
the transactions contemplated by Section 6.12 of this Agreement in the manner
described therein.
4.09 Information, Access Thereto. MFSB, its representatives and agents
shall, at all times during normal business hours prior to the Effective Time,
have full and continuing access to the facilities, operations, records and
properties of D&N and D&N BANK. MFSB, its representatives and agents may,
prior to the Effective Time, make or cause to be made such investigation of the
operations, records and properties of D&N and D&N BANK, and of its and their
financial and legal condition as MFSB shall deem necessary or advisable to
familiarize itself with such records, properties and other matters. Upon
request, D&N and its subsidiaries will furnish MFSB or its representatives or
agents, its and their attorneys' responses to auditors requests for information
and such financial and operating data and other information requested by MFSB
developed by D&N and D&N BANK, its and their auditors, accountants or
attorneys, and will permit MFSB, its representatives or agents to discuss such
information directly with any individual or firm performing auditing or
accounting functions for D&N or D&N BANK, and such auditors and accountants
shall be directed to furnish copies of any reports or financial information as
developed to MFSB or its representatives or agents. No investigation by MFSB
shall affect the representations and warranties made by D&N herein. No
investigation or access provided hereunder shall interfere with the normal
operations of D&N or D&N BANK.
ARTICLE FIVE
COVENANTS OF MFSB
MFSB hereby covenants and agrees with D&N as follows:
5.01 Stockholders' Meeting. MFSB shall cause a meeting of its
stockholders to be held at the earliest practicable date after the execution of
this Agreement and availability of the Prospectus/Proxy Statement for the
purpose of acting upon this Agreement and the Plan of Merger, and in connection
therewith shall distribute the Prospectus/Proxy Statement and any amendments or
supplements thereto and shall solicit proxies from its stockholders in
accordance with the rules and regulations of the SEC.
B-27
<PAGE> 86
5.02 Conduct Of Business; Certain Covenants.
(a) From and after the execution and delivery of this Agreement and
until the Effective Time, MFSB will:
(i) conduct its business and operate only in the usual ordinary
course of business and maintain its properties, books, contracts,
business, operations, commitments, records, loans, investments and any
trust operations in accordance with generally accepted accounting
principles;
(ii) conduct its business and operate only in accordance with
sound banking and business practices, including charging off all loans
required to be charged off by bank regulators and regulations,
statutes and sound banking practices;
(iii) maintain a provision for loan losses at a level based on
past loan loss reserve practices;
(iv) remain in good standing with all applicable banking
regulatory authorities and preserve each of its existing banking
locations;
(v) use its best efforts to retain the services of such of its
present officers and employees that its goodwill and business
relationships with customers and others are not materially and
adversely affected;
(vi) maintain insurance covering the performance of its duties by
its and their directors, officers and employees; and
(vii) consult with D&N prior to acquiring any interest in real
property other than mortgage foreclosures in the ordinary course of
business.
(b) From and after the execution and delivery of this Agreement and
until the Effective Time, MFSB will not, without the prior written consent
of D&N:
(i) amend its Charter or Bylaws;
(ii) except in connection with the exercise of Option Rights,
issue or sell any shares of its capital stock or issue or grant any
stock options, warrants, rights, calls or commitments of any character
calling for or permitting the issue or sale of its capital stock (or
securities convertible into or exchangeable, with or without
additional consideration, for shares of such capital stock);
(iii) pay or declare any cash dividend or other dividend or
distribution with respect to MFSB'S capital stock.
B-28
<PAGE> 87
(iv) increase or reduce the number of shares of its capital
stock by split-up, reverse split, reclassification, distribution of
stock dividends, or change of par or stated value;
(v) except in connection with the exercise of Option Rights,
permit the conversion of or otherwise acquire or transfer for any
consideration any outstanding shares of its or their capital stock or
securities carrying the right to acquire, or convert into or exchange
for such stock, with or without additional consideration;
(vi) except as contemplated by Sections 6.11 and 6.12 hereof,
amend or otherwise modify any bonus, pension, profit sharing,
retirement or other compensation plan or enter into any contract of
employment with any officer which is not terminable at will without
cost or other liability (other than benefits accrued as of the date of
such termination), except as herein provided and except as may be
required by applicable law or regulation, including revenue laws or
regulations;
(vii) incur any obligations or liabilities except in the
ordinary course of business;
(viii) mortgage, pledge (except pledges required for existing
Federal Home Loan Bank advances or pledges of such assets as may be
required to permit MFSB to accept deposits of public funds) or subject
to any material lien (excluding mechanics liens), charge, security
interest, or any other encumbrance, any of its assets or property,
except for liens for taxes not yet due and payable;
(ix) transfer or lease any of its assets or property except in
the ordinary course of business, or, except for branching commitments
in effect on the date hereof which are disclosed in a MFSB Schedule,
open or close any banking office or enter into any agreement to do so;
(x) transfer or grant any rights, under any leases, licenses or
agreements, other than in the ordinary course of business;
(xi) make or grant any general or individual wage or salary
increase except for general salary and wage adjustments now in
progress, or as part of the conduct of a normal salary administration
program consistent with past practices;
(xii) except as provided in Section 5.08 hereof and other than
with respect to (x) transactions affecting existing loans and (y)
deposits in the ordinary course of business, make or enter into any
material transaction, contract or agreement or incur any other
material commitment, which is defined for purposes
B-29
<PAGE> 88
of this provision as any transaction, contract, agreement or
commitment in excess of $5,000.00;
(xiii) incur any indebtedness for borrowed money, except for
deposit liabilities and except for indebtedness incurred in the
ordinary course of business the repayment term of which does not
exceed one year;
(xiv) cancel or compromise any debt or claim, which has not
previously been charged off, other than in the ordinary course of
business in an aggregate amount which is not materially adverse;
(xv) enter into any transaction, contract or agreement which
would permit the sale of investment or similar products by third
parties on MFSB premises;
(xvi) take any action which would result in acceleration of
payments on the ESOP Loan;
(xvii) invite or initiate, or, subject to the fiduciary duties of
the Board of Directors of MFSB in each case as determined after
consultation with counsel, engage in discussions or negotiations for
the acquisition or merger of MFSB by or with any corporation or other
entity other than D&N and D&N BANK; and
(xviii) take any action which constitutes a breach or default of
its obligations under this Agreement or the Plan of Merger which is
reasonably likely to delay or jeopardize the receipt of any of the
regulatory approvals required hereby or is reasonably likely to
preclude the Merger from qualifying for "pooling of interests"
accounting treatment or cause any of the other conditions set forth
in Articles Six, Seven, or Eight hereof to fail.
5.03 Affiliate Agreements. Within five (5) business days after the
execution of this Agreement, MFSB shall use its best efforts to furnish to D&N
an agreement in the form set forth in Exhibit B, executed by each person, other
than D&N and any of its affiliates, who is an affiliate of MFSB, as such term
is defined in Rule 144 under the Securities Act.
5.04 Information, Access Thereto. D&N, its representatives and agents
shall, at all times during normal business hours prior to the Effective Time,
have full and continuing access to the employees, facilities, operations,
records and properties of MFSB. D&N, its representatives and agents may, prior
to the Effective Time, make or cause to be made such investigation of the
operations, records and properties of MFSB, and of its financial and legal
condition as D&N shall deem necessary or advisable to familiarize itself with
such records, properties and other matters. Upon request, MFSB will furnish
D&N or its representatives or agents, its attorneys' responses to auditors
requests for information and such financial and operating data and other
information requested by D&N developed by MFSB, its auditors,
B-30
<PAGE> 89
accountants or attorneys, and will permit D&N, its representatives or agents to
discuss such information directly with any individual or firm performing
auditing or accounting functions for MFSB, and such auditors and accountants
shall be directed to furnish copies of any reports or financial information as
developed to D&N or its representatives or agents. D&N and D&N'S agents,
contractors and environmental consultants shall also have the right of access
to the real estate owned, beneficially or otherwise, or controlled by MFSB,
before the Effective Time for the purpose of undertaking such environmental
investigation and testing as D&N deems necessary or appropriate. D&N and D&N'S
agents, contractors and environmental consultants shall also have the right of
access to MFSB'S records or employees for the purpose of carrying out necessary
investigation and testing. No investigation by D&N shall affect the
representations and warranties made by MFSB herein. No investigation or access
provided hereunder shall interfere with the normal operations of MFSB.
5.05 Confidentiality. MFSB will cause all materials and other
internal, nonpublic financial and business information obtained by it from D&N
or D&N BANK to be treated confidentially (exercising the same degree of care as
it uses to preserve and safeguard its own confidential information); provided,
however, that notwithstanding the foregoing, nothing contained herein shall
prevent or restrict MFSB from making such disclosure thereof as may be required
by law in connection with purchases or sales of securities or as may be
required in the performance of this Agreement. If the Merger shall not be
consummated, all nonpublic financial statements, documents and material and all
copies thereof shall be returned to D&N, or destroyed by MFSB, and shall not be
used by MFSB in any way detrimental to D&N or D&N BANK.
5.06 Recommendation of Merger to Stockholders. The Board of Directors
of MFSB will unanimously recommend in the Prospectus/Proxy Statement approval
of the Merger by all stockholders of MFSB entitled to vote thereon.
5.07 Litigation Matters. MFSB will consult with D&N about any proposed
settlement or lack thereof or any disposition of any litigation matter in which
it is or becomes involved.
5.08 Larger Expenses. At or before the Effective Time, MFSB shall have
the right to incur and pay or accrue expense for items such as investment
banking, legal, and accounting fees, and for items duly earned for senior
management termination charges, and charges applicable to the termination of
deferred compensation benefits for officers and directors of MFSB in excess of
$10,000 so long as the total costs related to such items do not in the
aggregate exceed $1,096,520 plus the amount of the cash surrender value at the
Effective Time of certain life insurance policies owned by MFSB which had a
value of $1,300,800 on June 30, 1995.
B-31
<PAGE> 90
ARTICLE SIX
CONDITIONS TO OBLIGATIONS OF EACH OF THE PARTIES
The obligation of each of the parties hereto to consummate the transactions
contemplated by this Agreement are subject to the satisfaction of the following
conditions at or prior to the Effective Time:
6.01 Approval by Affirmative Vote of Stockholders. This Agreement and
the Plan of Merger shall have been duly approved, confirmed and ratified by the
requisite vote of the stockholders of MFSB.
6.02 Approval by OTS. Prior approval shall have been received from the
OTS of the acquisition by D&N of MFSB without any conditions which in the
reasonable opinion of D&N or MFSB are materially adverse and such approval
shall not have been withdrawn or stayed.
6.03 Approval of Merger. Prior approval shall have been received from
the OTS for the Merger in the manner set forth herein and in the Plan of Merger
without any conditions which in the reasonable opinion of D&N or MFSB are
materially adverse and such approval shall not have been withdrawn or stayed.
6.04 Tax Opinion. An opinion shall have been delivered by Howard &
Howard Attorneys, P.C. in form and substance reasonably satisfactory to D&N and
MFSB and to its counsel, that (i) the Merger will qualify as a tax-free
reorganization under the Code, (ii) except with regard to cash received in
exchange for fractional shares, that no gain or loss will be recognized by the
holders of MFSB Common Stock upon receipt of shares of D&N Common Stock in
exchange for their shares of MFSB Common Stock, (iii) the basis of such D&N
Common Stock will equal the basis of MFSB Common Stock for which it is
exchanged, and (iv) the holding period of such D&N Common Stock will include
the holding period of MFSB Common Stock for which it is exchanged, assuming
that such stock is a capital asset in the hands of the holder thereof at the
Effective Time.
6.05 Registration Statement. The Registration Statement filed by D&N
with the SEC with respect to the D&N Common Stock to be issued pursuant to this
Agreement and the Plan of Merger shall have become effective and no stop order
proceedings with respect thereto shall be pending or threatened.
6.06 Blue Sky. D&N shall have obtained any and all material Blue Sky
permits, authorizations, consents or approvals required for the issuance of the
D&N Common Stock and no stop order proceedings with respect thereto shall be
pending or threatened.
6.07 Other Approvals. All actions, consents or approvals, governmental
or otherwise, which are, or in the opinion of counsel for D&N may be, necessary
to permit or enable D&N BANK, upon and after the Merger, to conduct all or any
part of the business of MFSB in the
B-32
<PAGE> 91
manner in which such activities and businesses are conducted up to the
Effective Time, shall have been obtained without any conditions which in the
reasonable opinion of D&N are materially adverse, and shall not have been
withdrawn or stayed.
6.08 Orders, Decrees and Judgments. Consummation of the transactions
contemplated by this Agreement shall not violate any order, decree or judgment
of any court or governmental body having competent jurisdiction.
6.09 Fairness Opinion. An opinion shall have been received by MFSB
from Roney & Co., prior to distribution of the Prospectus/Proxy Statement to
the stockholders of MFSB as required by Section 5.01 of this Agreement, to the
effect that the consideration to be received by MFSB'S stockholders pursuant to
this Agreement is fair to the stockholders of MFSB from a financial point of
view and such opinion shall not have been withdrawn or materially modified
prior to the vote of the stockholders.
6.10 Consents and Approvals. Any consents or approvals required to be
secured by either party by the terms of this Agreement or the Plan of Merger or
otherwise reasonably necessary in the opinion of D&N or MFSB to consummate the
transactions contemplated by this Agreement or the Plan of Merger shall have
been obtained and shall not contain any conditions which in the reasonable
opinion of D&N or MFSB are materially adverse.
6.11 Contracts Terminated. The deferred compensation plan for
directors identified in MFSB Schedule 3.11 shall have been terminated and D&N
BANK shall have agreed to honor the employment contracts referred to in MFSB
Schedule 3.11 after the Effective Time, subject to the amendment to the Jeffrey
I. Kopelman employment contract referred to in Section 8.11 hereof. .
6.12 ESOP and Profit Sharing Plan. It is anticipated that as soon
after the Effective Time as is reasonably practicable, D&N will cause the
Macomb Federal Savings & Loan Association Restated Profit Sharing Plan and
Trust (the "Profit Sharing Plan") to be terminated. Further, it is anticipated
that on or after May 1, 1996, D&N will cause the ESOP to be merged with the D&N
401k Plan. D&N and MFSB shall have each reasonably cooperated with the other
to complete such matters as are reasonably required to be completed prior to
the Effective Time with respect thereto and D&N and MFSB each agree that no
action shall be taken by either to alter the terms of the ESOP, the ESOP Loan
or any agreements collateral thereto, including, but not limited to, the
request or acceptance of any waiver with respect to any obligation under the
terms of or enforcement of such agreements.
ARTICLE SEVEN
FURTHER CONDITIONS TO THE OBLIGATIONS OF MFSB
B-33
<PAGE> 92
The obligation of MFSB to consummate the transactions contemplated by this
Agreement is further subject to the satisfaction of the following conditions:
7.01 Compliance by D&N. (a) All the terms, covenants and conditions of
this Agreement required to be complied with and satisfied by D&N or D&N BANK at
or prior to the Effective Time shall have been duly complied with and satisfied
in all material respects, and (b) the representations and warranties made by
D&N shall be true and correct in all material respects at and as of the
Effective Time, except for those specifically relating to a time or times other
than the Effective Time (which shall be true and correct in all material
respects at such time or times) and except for changes permitted by this
Agreement and the Plan of Merger, with the same force and effect as if made at
and as of the Effective Time.
7.02 Sufficiency of Documents. All documents and proceedings of D&N in
connection with the Registration Statement, the Prospectus/Proxy Statement,
regulatory filings and the Closing (as hereinafter defined) contemplated by
this Agreement and the Plan of Merger shall be reasonably satisfactory to legal
counsel to MFSB.
7.03 Opinion of Counsel. There shall have been delivered and
addressed to MFSB an opinion of Howard & Howard Attorneys, P.C., legal counsel
to D&N and D&N BANK, in form and substance reasonably satisfactory to Bodman,
Longley & Dahling, LLP, legal counsel to MFSB, dated the Closing Date (as
hereinafter defined) to the effect that:
(a) D&N is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and D&N BANK is a
federally chartered stock savings association duly organized, validly
existing and in good standing under the laws of the United States;
(b) D&N has the corporate power and authority to carry on its business
as now conducted, to own, lease and operate its properties and to
consummate the transactions contemplated by this Agreement and the Plan of
Merger;
(c) this Agreement and the Plan of Merger have been duly authorized,
executed and delivered by D&N and D&N BANK and constitute the valid and
binding obligation of D&N and D&N BANK;
(d) as of the close of business on the date hereof, the capitalization
of D&N was as set forth in Section 2.03 hereof;
(e) all corporate acts and other proceedings required to be taken by
or on the part of D&N or D&N BANK to consummate the transactions
contemplated by this Agreement and the Plan of Merger have been properly
taken; neither the execution and delivery of this Agreement or the Plan of
Merger, nor the consummation of the transactions contemplated hereby and
thereby, with or without the giving of notice or the lapse of time, or
both, will (x) violate any provision of the Articles of Incorporation or
Charter or Bylaws of D&N or D&N BANK, or (y) to the knowledge of such
counsel, violate, conflict with, result in the breach or termination of,
constitute a default under, accelerate the performance required by, or
result in the creation of any material lien, charge or
B-34
<PAGE> 93
encumbrance upon any of the properties or assets of D&N and D&N BANK
pursuant to any indenture, mortgage, deed of trust, or other agreement or
instrument to which it is a party or by which it or any of its properties
or assets may be bound, or violate any statute, rule or regulation
applicable to D&N which would have a material adverse effect on D&N'S
consolidated financial condition, business or operations; to the knowledge
of such counsel, no consent, approval, authorization, order, registration
or qualification of or with any court, regulatory authority or other
governmental body, other than as specifically contemplated by this
Agreement, is required for the consummation by D&N of the transactions
contemplated by this Agreement or the Plan of Merger;
(f) the D&N Common Stock to be issued in exchange for MFSB Common
Stock has been duly authorized and, when such D&N Common Stock is issued
and delivered as contemplated by this Agreement and the Plan of Merger, all
such D&N Common Stock will have been validly issued, fully paid and
nonassessable;
(g) the Registration Statement has been declared effective by the SEC
or has become effective and, to the knowledge of such counsel, no stop
order proceedings are pending or threatened with respect thereto by the SEC
or state securities authorities;
(h) except as disclosed in such opinion, to the knowledge of such
counsel there are no actions, suits, proceedings or investigations of any
nature pending or threatened that challenge the validity or propriety of
the transactions contemplated by this Agreement or the Plan of Merger or
which seek or threaten to restrain, enjoin or prohibit or to obtain
substantial damages in connection with the consummation of such
transactions; and
(i) the Prospectus/Proxy Statement as of the date thereof and as
amended or supplemented prior to the date of the meeting of MFSB'S
stockholders referred to in Section 5.01 (except as to financial statements
and other financial data contained therein, upon which such counsel need
express no opinion) complies as to form in all material respects with the
requirements of the Securities Act and the rules and regulations
thereunder; such counsel has participated in the preparation of the
Prospectus/Proxy Statement, and although such counsel has not independently
verified the information contained therein, nothing has come to the
attention of such counsel to lead such counsel to believe that the
Prospectus/Proxy Statement, as of the date thereof and as amended and
supplemented prior to the date of the meeting of MFSB'S stockholders
referred to in Section 5.01, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading (except that such counsel need express no opinion
with respect to financial statements and other financial data contained
therein or with respect to matters relating to MFSB or its business,
properties, management, or securities), and such counsel does not know of
any contracts or other documents relating to D&N of a character required to
be filed with the Prospectus/Proxy Statement as of such dates, or of any
documents, other contracts, statutes or legal or governmental proceedings
B-35
<PAGE> 94
relating to D&N required to be described therein which are not filed or
described as required.
7.04 Officers' Certificate. D&N shall deliver to MFSB a certificate
signed by its President and Chief Executive Officer and attested to by its
Secretary or Assistant Secretary, dated the Closing Date, certifying to his
best knowledge and belief, that D&N has met and fully complied with all
conditions necessary to make this Agreement and the Plan of Merger effective as
to it. D&N shall have delivered all such other certificates and documents with
respect to D&N as may reasonably have been requested by MFSB.
7.05 Absence of Certain Changes or Events. From the date hereof to the
Effective Time, there shall be and have been no material adverse change in the
consolidated capitalization, business, properties or financial condition of
D&N. Any one-time or similar assessment on SAIF insured deposits which may be
announced or implemented by the FDIC on or before the Effective Time shall not
constitute a material adverse change for purposes of this Section 7.05.
7.06 Consents and Approvals. Any consents or approvals required to be
secured by either party by the terms of this Agreement or the Plan of Merger or
otherwise reasonably necessary in the opinion of MFSB to consummate the
transactions contemplated by this Agreement or the Plan of Merger shall have
been obtained and shall be satisfactory to MFSB.
7.07 Litigation. No action, suit, proceeding or claim shall have been
instituted, made or threatened by any person relating to the Merger or the
validity or propriety of the transactions contemplated by this Agreement or the
Plan of Merger.
7.08 Accuracy of Financial Statements. The D&N Financial Statements
and the Subsequent D&N Financial Statements heretofore or hereafter furnished
by D&N to MFSB shall not be inaccurate in any material respect.
ARTICLE EIGHT
FURTHER CONDITIONS TO THE OBLIGATIONS OF D&N
The obligations of D&N and D&N BANK to consummate the transactions
contemplated by this Agreement and the Plan of Merger are further subject to
satisfaction of the following conditions:
8.01 Compliance by MFSB. (a) All the terms, covenants and conditions
of this Agreement required to be complied with and satisfied by MFSB at or
prior to the Effective Time shall have been duly complied with and satisfied in
all material respects, and (b) the representations and warranties made by MFSB
shall be true and correct in all material respects at and as of the Effective
Time, except for those specifically relating to a time or times other than
B-36
<PAGE> 95
the Effective Time (which shall be true and correct in all material respects at
such time or times) and except for changes permitted by this Agreement and the
Plan of Merger, with the same force and effect as if made at and as of the
Effective Time.
8.02 Sufficiency of Documents, Proceedings. All documents delivered by
and proceedings of MFSB in connection with the transactions contemplated by
this Agreement and the Plan of Merger shall be reasonably satisfactory to
Howard & Howard, Attorneys, P.C.
8.03 Opinion of Counsel. There shall have been delivered to D&N an
opinion of Bodman, Longley & Dahling, LLP, legal counsel to MFSB, in form and
substance reasonably satisfactory to Howard & Howard Attorneys, P.C., dated the
Closing Date, to the effect that:
(a) MFSB is a federally chartered stock savings association duly
organized, validly existing and in good standing under the laws of the
United States;
(b) MFSB has the corporate power and authority to carry on its
business as described in the Prospectus/Proxy Statement, to own, lease and
operate its properties and to consummate the transactions contemplated by
this Agreement and the Plan of Merger;
(c) this Agreement and the Plan of Merger have been duly authorized
and approved by MFSB and this Agreement and the Plan of Merger have been
approved by MFSB'S stockholders and duly authorized, executed and delivered
by MFSB and this Agreement and the Plan of Merger constitute the valid and
binding obligation of MFSB;
(d) the authorized capitalization of MFSB is as set forth in Section
3.03 hereof;
(e) all corporate acts and other proceedings required to be taken by
or on the part of MFSB, including the adoption of this Agreement and the
Plan of Merger by the stockholders of MFSB, to consummate the transactions
contemplated by this Agreement and the Plan of Merger have been properly
taken; neither the execution and delivery of this Agreement and the Plan of
Merger nor the consummation of the transactions contemplated hereby and
thereby, with or without the giving of notice or the lapse of time, or
both, will (i) violate any provision of the Charter or Bylaws of MFSB; or
(ii) to the knowledge of such counsel, violate, conflict with, result in
the material breach or termination of, constitute a material default under,
accelerate the performance required by, or result in the creation of any
material lien, charge or encumbrance upon any of the properties or assets
of MFSB pursuant to any indenture, mortgage, deed of trust, or other
agreement or instrument to which MFSB is a party or by which it or any of
its properties or assets may be bound, or violate any statute, rule or
regulation applicable to MFSB which would have a material adverse effect on
the financial condition, business or operations of MFSB; to the knowledge
of such counsel, no consent, approval, authorization, order, registration
or qualification of or with any court, regulatory authority or other
governmental body, other than as specifically contemplated by this
Agreement
B-37
<PAGE> 96
and the Plan of Merger, is required for the consummation by MFSB of the
transactions contemplated by this Agreement or the Plan of Merger;
(f) to the knowledge of such counsel, since June 30, 1995, MFSB has
not granted any options, warrants, calls, agreements or commitments of any
character relating to any of the shares of MFSB, nor has MFSB granted any
other rights to purchase or otherwise acquire from MFSB any shares of
MFSB'S capital stock;
(g) except as disclosed in such opinion, to the knowledge of such
counsel there are no actions, suits, proceedings or investigations of any
nature pending or threatened that challenge the validity or legality of the
transactions contemplated by this Agreement or the Plan of Merger or which
seek or threaten to restrain, enjoin or prohibit (or obtain substantial
damages in connection with) the consummation of such transactions; and
(h) except as disclosed in said opinion, such counsel does not know of
any litigation, appraisal or other proceeding or governmental investigation
pending or threatened against or relating to the business or property of
MFSB which would have a materially adverse effect on the financial
condition of MFSB or of any legal impediment to the continued operation of
the properties and business of MFSB in the ordinary course after the
consummation of the transactions contemplated by this Agreement and the
Plan of Merger.
8.04 Officers' Certificate. MFSB shall deliver to D&N a certificate
signed by its President and Chief Executive Officer and attested to by its
Secretary, dated the Effective Date, certifying to his best knowledge and
belief that MFSB has met and fully complied with all conditions necessary to
make this Agreement and the Plan of Merger effective as to MFSB. MFSB shall
have delivered all such other certificates and documents with respect to MFSB
as may reasonably have been requested by D&N.
8.05 Absence of Certain Changes or Events. From the date hereof to the
Effective Time, there shall be and have been no material adverse change in the
capitalization or in the business, properties or financial condition of MFSB.
For purposes of determining whether there has been a material adverse change,
payments made pursuant to Section 5.08 shall not be considered. Any one-time or
similar assessment on SAIF insured deposits which may be announced or
implemented by the FDIC on or before the Effective Time shall not constitute a
material adverse change for purposes of this Section 8.05.
8.06 Litigation. MFSB shall not be made a party to, or threatened by,
any actions, suits, proceedings, litigation or legal proceedings which, in the
reasonable opinion of D&N, have or are likely to have a material adverse effect
on the assets, properties, business, operations or condition, financial or
otherwise, of MFSB, nor shall any director or officer or employee or former
director or officer of employee of MFSB be made a party to, or threatened by,
any actions, suits, proceedings, litigation or legal proceedings relating to
their performance or nonperformance of their legal or fiduciary duties as
directors and officers of MFSB which in the
B-38
<PAGE> 97
reasonable opinion of D&N is likely to have a material adverse effect on MFSB.
No action, suit, proceeding or claim shall have been instituted, made or
threatened by any person relating to the Merger or the validity or propriety of
the transactions contemplated by this Agreement or the Plan of Merger which
would make consummation of the Merger inadvisable in the reasonable opinion of
D&N.
8.07 Transfer by Affiliates. Each of the affiliates of MFSB shall have
executed the affiliate agreements referred to in Section 5.03 and MFSB shall
have delivered such agreements to D&N.
8.08 Plan of Merger. The Plan of Merger shall have been duly executed
and the other terms and conditions of the Plan of Merger shall have been
satisfied so as to permit the Merger to be consummated as contemplated thereby.
8.09 Pooling of Interests. D&N shall have received an opinion, dated
as of the Closing Date, from Coopers & Lybrand, L.L.P. that the Merger shall be
accounted for as a pooling of interests.
8.10 Accuracy of Financial Statements. The MFSB Financial Statements,
Schedules and Subsequent MFSB Financial Statements heretofore or hereafter
furnished to D&N shall not be inaccurate in any material respect.
8.11 Employee Agreements. D&N shall have entered into an agreement
with Esther Mason, on terms and conditions reasonably acceptable to D&N (which
shall not require Ms. Mason to work more than three and one-half (3 1/2) days
per week), to remain employed by D&N BANK for not less than one (1) year
following the Effective Time. The Jeffrey I. Kopelman employment contract
referred to in MFSB Schedule 3.11 shall have been amended to provide (i) Mr.
Kopelman will not exercise his rights under Section 11 of such contract before
November 1, 1996; (ii) D&N BANK shall continue to employ Mr. Kopelman until
such date; (iii) the time period for exercise of Mr. Kopelman's rights pursuant
to Section 11 of such contract shall not expire until November 5, 1996; and
(iv) Mr. Kopelman will be paid a salary of $9,000.00 per month from the
Effective Time through October 31, 1996.
8.12 Exercise of Option Rights. All Option Rights shall have been
exercised in full and all holders thereof shall have made payment to MFSB of
the full amount of the Option Price for each of the Option Rights.
B-39
<PAGE> 98
ARTICLE NINE
ABANDONMENT
9.01 Abandonment. This Agreement may be terminated and the Plan of
Merger abandoned at any time prior to the Effective Time, (whether before or
after approval of this Agreement and the Plan of Merger by the stockholders of
MFSB):
(a) by agreement among D&N, D&N BANK and MFSB authorized by a majority
of the entire Board of Directors of each;
(b) by D&N, D&N BANK or MFSB if adversely affected and if any of the
conditions set forth in Article Six hereof shall not have been fulfilled
and shall not have been waived pursuant to Section 10.01 (b) hereof or
shall become impossible of fulfillment, provided that the failure of such
occurrence shall not be due to the failure of the party seeking to
terminate to perform or observe in any material respect its obligations
under this Agreement.
(c) by MFSB if any of the conditions set forth in Article Seven hereof
shall not have been fulfilled and shall not have been waived pursuant to
Section 10.01 (b) hereof or shall become impossible of fulfillment,
provided that the failure of such occurrence shall not be due to the
failure of MFSB to perform or observe in any material respect its
obligations under this Agreement;
(d) by D&N or D&N BANK if any of the conditions set forth in Article
Eight hereof shall not have been fulfilled and shall have not been waived
pursuant to Section 10.01 (b) hereof or shall become impossible of
fulfillment, provided that the failure of such occurrence shall not be due
to the failure of D&N to perform or observe in any material respect its
obligations under this Agreement.
(e) by D&N, D&N BANK or MFSB in the event of a material breach by the
opposite party of any representation, warranty, covenant or agreement
contained herein which has not been cured within thirty (30) days after
written notice of such breach has been given to the party causing such
breach; or
(f) by D&N, D&N BANK or MFSB in the event the Merger is not
consummated on or before April 30, 1996, provided that the failure of such
occurrence shall not be due to the failure of the party seeking to
terminate to perform or observe in any material respect its obligations
under this Agreement.
(g) by D&N, D&N BANK or MFSB in the event that the Average Price is
less than $9.50 or greater than $14.50.
9.02 Effect of Abandonment. In the event this Agreement is terminated
and the Plan of Merger abandoned as provided in Section 9.01, this Agreement
and the Plan of Merger shall become void and of no further force and effect
without any liability on the part of the terminating party or parties or their
respective stockholders, directors or officers; provided, however, that (i)
Section 4.04 and Section 5.05 of this Agreement shall survive any such
abandonment and (ii) a termination pursuant to Section 9.01 shall not relieve a
party for a willful breach of any covenant, undertaking, representation or
warranty giving rise to such termination; and provided further, in
B-40
<PAGE> 99
the event the Agreement is terminated after April 30, 1996, and MFSB is not in
default of its obligations hereunder and all of the conditions to its
obligations hereunder have been satisfied and if the Average Price is $9.50 or
greater and is not more than $14.50, then D&N shall pay MFSB a termination fee
of $250,000.00 in full satisfaction of any obligation D&N may have to MFSB
hereunder. In the event of termination of this Agreement and abandonment of
the Plan of Merger as provided in Section 9.01, written notice thereof and the
reasons therefor shall be given to the other parties by the terminating party.
ARTICLE TEN
MODIFICATIONS, AMENDMENTS AND WAIVER
10.01 Modifications, Amendments and Waiver. At any time prior to the
Effective Time and before or after approval of this Agreement and the Plan of
Merger by stockholders of MFSB, MFSB, D&N and D&N BANK may, (a) by written
agreement executed by a duly authorized officer of each extend the time for the
performance of any of the obligations or other acts of the parties hereto, (b)
by written notice executed by a duly authorized officer of the party adversely
affected waive compliance in whole or in part with any of the covenants,
agreements or conditions contained in this Agreement or the Plan of Merger, or
(c) by written agreement executed by a duly authorized officer of each, make
any other amendment or modification of this Agreement or the Plan of Merger;
provided, however, that, after approval of this Agreement and the Plan of
Merger by stockholders of MFSB, no such extension, waiver, amendment or
modification shall (i) change the amount or kind of shares, securities, cash,
property, or rights to be received in exchange for or on conversion of any or
all of the shares of any class or series of MFSB; or (ii) change any other
terms and conditions of the Agreement if such change would materially and
adversely affect MFSB or the holders of the shares of any class or series of
MFSB. Any such extension, waiver, amendment or modification shall be
conclusively evidenced by the execution and delivery of the same by the
President and Chief Executive Officer of D&N and D&N BANK and the President and
Chief Executive Officer of MFSB, attested to by the Secretary or Assistant
Secretary of each party. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect such
party's right at a later time to enforce the same. No waiver by any party of
any condition or of the breach of any term contained in this Agreement or the
Plan of Merger, whether by conduct or otherwise, in any one or more instances
shall be deemed to be or construed as a further or continuing waiver of any
such condition or a waiver of any other condition or of the breach of any other
term of this Agreement or the Plan of Merger.
B-41
<PAGE> 100
ARTICLE ELEVEN
MISCELLANEOUS
11.01 Closing. A closing (the "Closing") of the transactions provided
for herein shall take place at the offices of MFSB in St. Clair Shores,
Michigan, on the fifth business day following the day upon which all of the
approvals required hereby and by the Plan of Merger shall have become effective
and all applicable waiting periods shall have expired, or on such later day and
at such other place as the parties may agree (the "Closing Date") provided that
in any event the Closing Date shall not occur more than three (3) days prior to
the Effective Time. In the event the Closing does not take place on the date
referred to in the preceding sentence because any condition to the obligations
of any party under this Agreement and the Plan of Merger is not met on that
date, the other parties to this Agreement may postpone the Closing to any
designated subsequent business day by giving the nonperforming party to this
Agreement notice of the postponed date. At the Closing the parties will
exchange the certificates, opinions, and other documents called for herein.
Subject to the terms and conditions hereof, consummation of the Merger in the
manner described herein shall be accomplished as soon as practicable after the
exchange of the documents at the Closing has been completed.
11.02 Merger Documents. Subject to the provisions of this Agreement, on
the Closing Date, as herein defined, all documents required to be filed with
respect hereto, shall be executed as required by the HOLA or the rules and
regulations promulgated pursuant thereto and duly filed with the OTS.
11.03 Procurement of Approvals. Subject to the terms of this Agreement,
D&N, D&N BANK and MFSB shall each use its best efforts to proceed as
expeditiously as possible and cooperate fully in the procurement of any
required consents and approvals and in the taking of any other action, and the
satisfaction of all other requirements prescribed by law or otherwise,
necessary for the consummation of the Merger on the terms provided herein and
in the Plan of Merger, including, without being limited to, preparation by D&N
and submission of any required application for prior approval of the OTS,
preparation by D&N and submission under the Securities Act of the Registration
Statement, the preparation of the Prospectus/Proxy Statement by MFSB and D&N
and the distribution of the Prospectus/Proxy Statement and the solicitation of
proxies by MFSB.
11.04 Further Acts. Subject to the terms of this Agreement, each of the
parties (a) shall perform such further acts and execute such further documents
as may be reasonably required to effect the Merger (including, without
limitation, the certification, execution, acknowledgement and filing of the
Plan of Merger) and (b) shall use all reasonable efforts to satisfy or obtain
the satisfaction of the conditions set forth in Articles Six, Seven and Eight
hereof.
11.05 Notices. All documents, notices, requests, demands and other
communications that are required or permitted to be delivered or given under
this Agreement and the Plan of Merger shall be in writing and shall be deemed
to have been duly delivered or given upon the delivery
B-42
<PAGE> 101
or mailing thereof, as the case may be, if delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid:
(a) if to MFSB, to:
MACOMB FEDERAL SAVINGS BANK
23505 Greater Mack Avenue
St. Clair Shores, Michigan 48080
ATTENTION: Mr. Stanley A. Jacobson
President and Chief Executive Officer
with a copy to:
Bodman, Longley & Dahling, LLP
34th Floor, 100 Renaissance Center
Detroit, Michigan 48243
ATTENTION: Herold McC. Deason, Esq.
and
James H. Hudnut, Esq.
3250 W. Big Beaver
Suite 124
Troy, Michigan 48084
(b) and if to D&N or D&N BANK to:
D&N FINANCIAL CORPORATION
400 Quincy Street
Hancock, Michigan 49930
ATTENTION: Mr. George J. Butvilas
President and Chief Executive Officer
with a copy to:
Howard & Howard Attorneys, P.C.
Suite 400
107 West Michigan Avenue
Kalamazoo, Michigan 49007
ATTENTION: Joseph B. Hemker, Esq.
or to such other person or address as a party hereto shall specify hereunder.
B-43
<PAGE> 102
11.06 Expenses. MFSB, D&N and D&N BANK shall each pay all of their own
fees and expenses incident to the negotiation, preparation, execution and
performance of this Agreement, stockholders' meetings, including the fees and
expenses of their own counsel, accountants, investment bankers and other
experts, whether or not the transactions contemplated by this Agreement are
consummated; provided, however, in the event this Agreement is terminated by
D&N as a result of a material misrepresentation or a material breach of any
representation, warranty, or covenant contained herein by MFSB, D&N shall be
entitled to recover from MFSB the fees and expenses incurred by D&N incident
hereto. D&N and MFSB each agree to indemnify and hold the other harmless, and
their respective officers, directors and affiliates, against and in respect of
any and all claims made by, and losses incurred with respect to, third parties
that arise out of or are based upon any willful misrepresentation or willful
breach by the indemnifying party of any representation, warranty or covenant
contained herein, including but not limited to, damages, judgments,
settlements, attorneys' fees and costs; provided, however, that neither D&N nor
MFSB shall be held liable for false statements made in the Prospectus/Proxy
Statement, the Registration Statement or any application filed in connection
with this Agreement to the extent such false statement was based upon
information provided in writing by the other.
11.07 Nonsurvival of Representations and Warranties. No representation
or warranty contained in this Agreement or the Plan of Merger (other than
contained in the last sentence of Section 2.14 relating to shares of D&N
Common Stock to be issued pursuant to the Plan of Merger, shall survive the
Merger. Covenants of the parties which relate to periods or activities
subsequent to the Merger shall survive the Merger for the applicable period.
11.08 Entire Agreement. This Agreement, the Plan of Merger and the MFSB
Schedules constitute the entire agreement and understanding of the parties with
respect to the transactions contemplated hereby and thereby, supersede any and
all prior agreements and understandings relating to the subject matter hereof
and thereof and may not be modified, amended or terminated except in writing
signed by each of the parties hereto.
11.09 Governing Law. This Agreement and the Plan of Merger shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Michigan and, to the extent applicable, the laws of the United States.
11.10 Binding Effect and Parties in Interest. This Agreement and the
Plan of Merger may not be assigned by any party hereto without the written
consent of the other parties. This Agreement and the Plan of Merger shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement and the
Plan of Merger.
11.11 Captions. The caption headings of the Articles, Sections and
subsections of this Agreement are for convenience of reference only and are not
intended to be, and should not be construed as, a part of this Agreement or the
Plan of Merger.
B-44
<PAGE> 103
11.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and
all of which together shall constitute a single agreement.
11.13 Severability Clause. If any provision of this Agreement or the
Plan of Merger shall be held invalid, the remainder shall nevertheless, be
deemed valid and effective, and the parties shall negotiate in good faith to
modify this Agreement or the Plan of Merger in order to preserve the
anticipated benefits under this Agreement to each party and any other person
who is specifically conferred rights hereunder.
11.14 Public Statements. D&N and MFSB shall agree with each other as to
the form and substance of any press release related to this Agreement and the
Plan of Merger or the transactions contemplated hereby and thereby; provided,
however, that nothing contained herein shall prohibit either party, following
notification to the other party, from making any disclosure which it determines
in good faith is required by law or regulation.
11.15 Identification. This Agreement may be identified by date of
execution of the last to sign of D&N, D&N BANK and MFSB.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date set forth hereafter.
MACOMB FEDERAL SAVINGS BANK
By: /s/ Stanley A. Jacobson
-------------------------------------
Stanley A. Jacobson
President and Chief Executive Officer
Dated: November 8, 1995
Attest: /s/ James H. Hudnut
-------------------
Secretary
D&N FINANCIAL CORPORATION
By: /s/ George J. Butvilas
-------------------------------------
George J. Butvilas
President and Chief Executive Officer
Dated: November 8, 1995
Attest: Kenneth R. Janson
------------------------
Executive Vice President
B-45
<PAGE> 104
D&N BANK, A FEDERAL SAVINGS BANK
By: /s/ George J. Butvilas
----------------------------------------
George J. Butvilas
President and Chief Executive Officer
Dated: November 8, 1995
Attest: Peter Lemmer
---------------------
Senior Vice President
B-46
<PAGE> 105
APPROVAL AND AGREEMENT OF DIRECTORS
The undersigned, being all of the Directors of MACOMB FEDERAL SAVINGS BANK,
St. Clair Shores, Michigan, do hereby approve the foregoing Agreement and the
basis of exchange set forth therein, and in consideration of the benefits to be
derived from affiliation by MACOMB FEDERAL SAVINGS BANK and its stockholders,
each of us hereby agrees with each of the corporate parties to (i) exchange all
shares of stock in MACOMB FEDERAL SAVINGS BANK, now or hereafter beneficially
owned by each, upon consummation of the Merger in accordance with the terms of
the Agreement and the Plan of Merger, (ii) to vote said shares, in person or by
proxy, at any meeting of stockholders of said MACOMB FEDERAL SAVINGS BANK or
adjournments thereof, in favor of approval of the Agreement and the Plan of
Merger, and (iii) to unanimously recommend acceptance and approval of the
Agreement and the Plan of Merger by stockholders of MACOMB FEDERAL SAVINGS BANK
in the Prospectus/Proxy Statement.
/s/ Paul E. Andrews /s/ Stanley A. Jacobson
- ------------------ -----------------------
Paul E. Andrews Stanley A. Jacobson
/s/ Jon M. Fox /s/ Esther Mason
- ------------------ -----------------------
Jon M. Fox Esther Mason
/s/ James H. Hudnut /s/ Steven E. Zack
- ------------------- -----------------------
James H. Hudnut Steven E. Zack
/s/ Mark T. Jacobson
- --------------------
Mark T. Jacobson
B-47
<PAGE> 106
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Plan of Merger") is made and
entered into as of ___________________, 1995, by and between D & N BANK ("D&N
BANK"), A FEDERAL SAVINGS BANK, a federally chartered stock savings
association, located at 400 Quincy Street, Hancock, Michigan, 49930-1829, and
MACOMB FEDERAL SAVINGS BANK, (the "BANK"), a federally chartered stock savings
association, located at 23505 Greater Mack Avenue, St. Clair Shores, Michigan
48080-1997. D&N BANK and the BANK are hereinafter sometimes collectively
referred to as the "Constituent Banks."
RECITALS
WHEREAS, D&N BANK is duly organized and validly existing under the laws
of the United States having totaled authorized Common Stock of
_______________________ shares, $________________ par value, of which
__________________________ shares are issued and outstanding ("D&N BANK Common
Stock"). D&N BANK has its savings accounts insured by the Savings Association
Insurance Fund; and
WHEREAS, BANK is duly organized and validly existing under the laws of
the United States having total authorized Common Stock of 3,000,000 shares of
common stock, $1.00 par value, of which 186,604 shares are issued and
outstanding ("BANK Common Stock"). The BANK has its savings accounts insured
by the Savings Association Insurance Fund; and
WHEREAS, D&N FINANCIAL CORPORATION ("D&N"), a Delaware corporation and
a Savings and Loan Holding Company under the provisions of the Home Owners'
Loan Act ("HOLA"), is the sole shareholder of all of the outstanding D&N BANK
Common Stock; and
WHEREAS, in accordance with the provisions of Office of Thrift
Supervision ("OTS") regulations promulgated at 12 C.F.R. Part 552.13, directors
of D&N BANK and BANK, in each case constituting not less than a two-thirds
majority of the respective Boards of Directors of D&N BANK and BANK, have
agreed upon this Agreement and Plan of Merger.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto hereby covenant
and agree as follows:
ARTICLE I
1.1 MERGER. At the Effective Time, the BANK shall merge with and into
D&N BANK (the "Merger") under the Charter of D&N BANK as set forth in Section
1.2 hereof pursuant to the applicable provisions of, and with the effect
provided in HOLA and the regulations and requirements thereunder of the OTS.
D&N BANK shall be the "Resulting Association" in the Merger and the BANK shall
be the "Merging Association" in the Merger. The "Effective Time"
B-48
<PAGE> 107
shall be the date on which the Merger is consummated by the Constituent Banks
or such later date specified in the Articles of Combination by the Secretary of
the OTS.
1.2 CHARTER: BYLAWS: OFFICES. Upon the Merger becoming effective, the
name of the Resulting Association (herein called the "Resulting Association"
whenever reference is made to it as of the Effective Time or thereafter) shall
be "D&N BANK, A FEDERAL SAVINGS BANK." The Charter of the Resulting
Association shall be the Charter of D&N BANK in effect immediately prior to the
Effective Time. The Bylaws of the Resulting Association shall be those of D&N
BANK as in existence immediately before the Effective Time. The home office of
the Resulting Association shall be the home office of D&N BANK. All branches
of the BANK and D&N BANK which were in lawful operation immediately before the
Effective Time or whose establishment has been approved before the Merger shall
be retained and operated or established and operated as branches of the
Resulting Association. The location of the home office and the branch offices
of the Resulting Association shall be as set forth in Schedule A hereto.
1.3 EFFECT OF MERGER. Upon the Merger becoming effective, the
corporate existence of D&N BANK and the BANK shall be merged into and continued
in D&N BANK as the Resulting Association, and all assets and property (real,
personal, and mixed, tangible and intangible, choses in action, rights, and
credits) then owned by each Constituent Bank or which would inure to any of
them, shall immediately by operation of law and without any conveyance,
transfer or further action, become the property of D&N BANK as the Resulting
Association. The Resulting Association shall be deemed to be a continuation of
the entity of each Constituent Bank. All rights and obligations of the
Constituent Banks shall remain unimpaired, and D&N BANK as the Resulting
Association shall, as of the Effective Time, succeed to all those rights and
obligations. Savings accounts shall be deemed issued in the name of D&N BANK
as the Resulting Association in accordance with applicable OTS regulations.
1.4 ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Resulting Association shall consider or be advised that any further assignments
or assurances in law or any other acts are necessary or desirable to (a) vest,
perfect or confirm, of record or otherwise, in the Resulting Association its
rights, title or interest in, to or under any of the rights, properties or
assets of the BANK acquired or to be acquired by the Resulting Association as a
result of, or in connection with, the Merger, or (b) otherwise carry out the
purposes of this Plan of Merger, the BANK and its proper officers and directors
shall be deemed to have granted to the Resulting Association an irrevocable
power of attorney to execute and deliver all such proper deeds, assignments and
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Resulting Association and otherwise to carry out the purposes of this Plan of
Merger; and the proper officers and directors of the Resulting Association are
fully authorized in the name of the BANK or otherwise to take any and all such
action.
B-49
<PAGE> 108
ARTICLE II
2.1 MANNER AND BASIS OF CONVERTING SHARES OF BANK COMMON STOCK.
(a) The shares of D&N BANK Common Stock outstanding immediately prior
to the Effective Time shall remain outstanding after the Effective Time without
any change therein. No shares of D&N BANK Common Stock and no securities
convertible into such stock shall be issued or delivered in the Merger.
(b) Any shares of BANK Common Stock or any other class or series of
stock of the BANK held in the treasury of the BANK immediately prior to the
Effective Time shall be retired and cancelled, and no D&N Common Stock shall be
issuable or exchangeable with respect thereto.
(c) At the Effective Time, each issued and outstanding share of BANK
Common Stock, issued and outstanding prior to the Merger shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into and exchanged for a number of shares of D&N Common Stock equal
to (i) $48.00 divided by (ii) the average of the means between the high and low
transaction prices of D&N Common Stock as quoted on the NASDAQ (the "Average
Price") during the last fifteen (15) trading days on which reportable sales of
D&N Common Stock took place (the "Valuation Period") immediately prior to, but
not including, the third calendar day prior to the Effective Time (the
"Exchange Ratio"). The Exchange Ratio will increase proportionately if the
Average Price decreases and will decrease proportionately if the Average Price
increases; provided, however, the Exchange Ratio will not be decreased below
3.5555 or increased above 5.0526. Each certificate representing shares of BANK
Common Stock immediately prior to the Effective Time shall, until surrendered
as provided for in paragraph (d) of this Article II, evidence ownership of the
number of shares of D&N Common Stock into which the shares of BANK theretofore
represented thereby shall have been converted in the Merger.
(d) After the Effective Time, the former holder of shares of BANK
Common Stock which have been converted into shares of D&N Common Stock in the
Merger shall, upon surrender in proper form to D&N for cancellation of the
certificate or certificates which prior to the Effective Time presented such
holder's shares of BANK Common Stock, be entitled to receive one or more
certificates representing the shares of D&N Common Stock into which the shares
of BANK Common Stock previously represented by the surrendered certificates
shall have been so converted.
ARTICLE III
3.1 DIRECTORS OF THE RESULTING ASSOCIATION. After the Effective Time, the
number of Directors of the Resulting Association shall be nine (9). The names
of the Directors of the Resulting Association and their respective terms of
office shall be as follows:
B-50
<PAGE> 109
The residence address of each of the Directors of the Resulting
Association is set forth on Schedule B hereto.
After the Effective Time, the said Directors shall serve until the
expiration of the term shown above and until their successors are elected and
duly qualified.
ARTICLE IV
4.1 COUNTERPARTS. This Plan of Merger may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one agreement.
4.2 GOVERNING LAW. This Plan of Merger shall be governed in all
respects, including, but not limited to, validity, interpretation, effect and
performance, by the laws of the State of Michigan and the laws of the United
States.
4.3 AMENDMENT. Subject to applicable law, this Plan of Merger may be
amended, modified or supplemented only by written agreement of the BANK, D&N
BANK, or by their respective officers thereunto duly authorized, at any time
prior to the Effective Time.
4.4 WAIVER. Any of the terms or conditions of this Plan of Merger may
be waived at any time by whichever of the Constituent Banks is, or the
stockholders of which are, entitled to the benefit thereof by action taken by
the Board of Directors of such Constituent Banks.
4.5 TERMINATION. This Plan of Merger shall terminate upon the
termination of that certain Agreement and Plan of Reorganization among D&N, D&N
BANK and the BANK dated as of November 8, 1995 (the "Agreement and Plan of
Reorganization").
4.6 PROCUREMENT OF APPROVALS. This Plan of Merger shall be submitted
to the stockholders of the Constituent Banks for adoption at a meeting to be
called and held by it in accordance with the applicable provisions of law and
its respective Charters and Bylaws. The Constituent Banks shall proceed
expeditiously and cooperate fully in the procurement of any other consents and
approvals and in the taking of any other action, and the satisfaction of all
other requirements prescribed by law or otherwise necessary for consummation of
the Merger on the terms provided, including, without being limited to, the
preparation and submission of an application to the OTS for approval of the
Merger.
B-51
<PAGE> 110
4.7 CONDITIONS PRECEDENT. The obligations of the parties under this
Plan of Merger shall be subject to: (i) the approval, ratification and
confirmation of this Plan of Merger by two-thirds of the outstanding voting
stock the shareholders of the BANK at a meeting of shareholders duly called and
held; (ii) receipt of approval of the Merger from all governmental and banking
authorities whose approval is required; (iii) receipt of any necessary
regulatory approval to operate the main office of the BANK as a branch of the
Resulting Association; and (iv) the consummation of the transactions
contemplated by the Agreement and Plan of Reorganization on or before the
Effective Time.
IN WITNESS WHEREOF, each of the constituent Banks have caused this
Agreement and Plan of Merger to be executed on their behalf by their officers
hereunto duly authorized and their respective corporate seals to be affixed
hereto, all as of the date first above written.
D&N BANK, A FEDERAL SAVINGS BANK
By:______________________________________
President and Chief Executive Officer (Corporate Seal)
Attest:________________________________
Secretary
MACOMB FEDERAL SAVINGS BANK
By:______________________________________
President and Chief Executive Officer (Corporate Seal)
Attest:_______________________________
Secretary
B-52
<PAGE> 111
EXHIBIT B
D&N FINANCIAL CORPORATION
400 Quincy Street
Hancock, Michigan 49930
Gentlemen:
I have been advised that I may be deemed an "affiliate" within the
meaning of paragraph (c) of Rule 145 of the Rules and Regulations of the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933
(the "Act") of MACOMB FEDERAL SAVINGS BANK, a federally chartered stock savings
association ("MFSB") and may be deemed such at the time of the merger
("Merger") of MFSB with D&N BANK, A FEDERAL SAVINGS BANK, a federally chartered
stock savings association ("D&N BANK") with MFSB. Pursuant to the Merger, I
will acquire shares of the Common Stock ("D&N Common Stock") of D&N FINANCIAL
CORPORATION ("D&N") in exchange for each share of common stock of MFSB ("MFSB
Common Stock") held by me. I agree that I will not make any sale, transfer or
other disposition of the D&N Common Stock or MFSB Common Stock in violation of
the Act or the rules and regulations promulgated thereunder by the SEC.
I have been advised that the issuance of the D&N Common Stock to me
pursuant to the Merger has been registered under the Act by D&N by the filing
of a Registration Statement with the SEC. I have also been advised that such
registration does not apply to any distribution by me of the D&N Common Stock
received by me in the Merger. I have also been advised that, since at the
effective time of the Merger, I may be deemed to have been an "affiliate" of
MFSB, any offering or sale by me of any of the D&N Common Stock will, under
current law, require either (i) the further registration under the Act of the
D&N Common Stock to be sold; (ii) compliance with Rule 145 promulgated under
the Act; or (iii) the availability of another exemption from such registration.
In addition, I have been advised that any transferee in a private offering or
other similar disposition will be subject to the same limitations as those
imposed on me.
I represent and warrant to D&N that:
1. I have carefully read this letter and discussed its requirements and
other applicable limitations upon the sale, transfer or other disposition of
the D&N Common Stock to the extent I felt necessary, with my counsel or counsel
for MFSB.
2. I have been informed by D&N that the D&N Common Stock must be held
by me indefinitely unless (i) any of the D&N Common Stock received by me in the
Merger and to be distributed by me is first registered under the Act other than
by the registration by D&N referred to above; (ii) a sale of the D&N Common
Stock is made in conformity with the volume and other applicable limitations of
paragraph (d) of Rule 145 (which incorporates by reference
B-53
<PAGE> 112
paragraphs (c), (e), (f) and (g) of Rule 144); or (iii) some other exemption
from registration is available with respect to any such proposed sale, transfer
or other disposition of the D&N Common Stock. I will be required to deliver to
D&N evidence of compliance with such requirements in connection with any
proposed sale, transfer or other disposition by me which may include, in the
case of a distribution under some other exemption from registration, an opinion
of counsel satisfactory to counsel for D&N that such exemption is available.
3. I understand that D&N is under no obligation to register the D&N
Common Stock that I may wish to sell, transfer, or otherwise dispose of or to
take any other action necessary in order to make compliance with an exemption
from registration available.
4. If I rely on the exemption from the registration provisions
contained in Section 4 of the Act (other than that contained in Rule 144 or
145), I will obtain and deliver to D&N a copy of a letter from any prospective
transferee which will contain (a) representations reasonably satisfactory to
D&N as to the nondistributive intent, sophistication, ability to bear risk, and
access to information of such transferee; (b) an acknowledgment concerning
restrictions on transfer of the D&N Common Stock; and (c) an assumption of the
obligations of the undersigned under this paragraph 4.
5. I understand that D&N expects that the Merger will be accounted for
as a pooling-of-interests and that Topic 2-E of staff accounting bulletin of
the SEC provides that the risk sharing requirement for the applicability of
pooling-of-interests accounting will have occurred if no affiliate of either
D&N or MFSB sells or in any other way reduces his or her risk relative to (i)
MFSB Common Stock within thirty (30) days prior to the effective time of the
Merger and (ii) any D&N Common Stock received in the Merger until such time as
financial results covering at least 30 days of post-Merger combined operations
have been published. I agree, in order to preserve pooling-of-interests
accounting for the Merger, to make no disposition of (i) any shares of MFSB
Common Stock within thirty (30) days prior to the effective time of the Merger,
which D&N or MFSB shall advise me in writing, and (ii) any shares of D&N Common
Stock received in the Merger, or in any other way reduce my risk relative to
the shares of D&N received in the Merger, until publication by D&N of financial
results covering at least 30 days of post-Merger combined operations in the
form of a Form 10-Q or Form 8-K filing with the SEC, the issuance of a
quarterly earnings report, or any other public issuance which includes combined
net sales and net income. Excluded from the foregoing undertaking shall be
such sales, pledges, transfers or other dispositions of shares of MFSB Common
Stock or D&N Common Stock which, in D&N'S sole judgment, are individually and
in the aggregate de minimus within the meaning of Topic 2-E of the staff
accounting bulletin series of the SEC.
6. I also understand that to enforce the foregoing commitments, stop
transfer instructions will be given to MFSB'S transfer agent with respect to
MFSB Common Stock and to D&N'S transfer agent with respect to the D&N Common
Stock and that there will be placed on the certificates for the D&N Common
Stock, or any substitutions therefor, a legend stating in substance:
B-54
<PAGE> 113
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
EFFECTED ON _________________, 199____, TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") APPLIES, HAVE BEEN DELIVERED IN
RELIANCE UPON THE REPRESENTATION OF THE REGISTERED HOLDER HEREOF THAT THEY HAVE
BEEN ACQUIRED FOR SUCH HOLDER'S ACCOUNT, AND MAY BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF, WHETHER IN WHOLE OR IN PART, ONLY IN COMPLIANCE WITH THE
APPLICABLE REQUIREMENTS OF RULE 145 OR PURSUANT TO A REGISTRATION STATEMENT
UNDER THE ACT OR AN EXEMPTION FROM SUCH REGISTRATION AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNTIL SUCH TIME AS FINANCIAL STATEMENTS OF D&N FINANCIAL
CORPORATION COVERING AT LEAST THIRTY (30) DAYS OF COMBINED OPERATIONS FOLLOWING
THE ACQUISITION OF MACOMB FEDERAL SAVINGS BANK SHALL HAVE BEEN PUBLISHED.
Very truly yours,
B-55
<PAGE> 114
EXHIBIT C
Section 552.14, Title 12, Code of Federal Regulations.
<PAGE> 115
EXHIBIT C
SECTION 552.14, TITLE 12, CODE OF FEDERAL REGULATIONS
Section 552.14 DISSENTER AND APPRAISAL RIGHTS.
(a) Right to demand payment of fair or appraised value. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with Section 552.13 of this part shall have
the right to demand payment of the fair or appraised value of his stock:
Provided, That such stockholder has not voted in favor of the combination and
complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value. If such stock was
listed on a national securities exchange or quoted on the National Association
of Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Section 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure-(1) Notice. Each constituent Federal stock
association shall notify all stockholders entitled to rights under this
section, not less than twenty days prior to the meeting at which the
combination agreement is to be submitted for stockholder approval, of the
right to demand payment of appraised value of shares, and shall include in
such notice a copy of this section. Such written notice shall be mailed to
stockholders of record and may be part of management's proxy solicitation for
such meeting.
(2) Demand for appraisal and payment. Each stockholder electing
to make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying himself
or herself and stating his or her intention thereby to demand appraisal of and
payment for his or her shares. Such demand must be in addition to and
separate from any proxy or vote against the combination by the stockholder.
(3) Notification of effective date and written offer. Within ten
days after the effective date of the combination, the resulting association
shall:
(i) Give written notice by mail to stockholders of constituent
Federal stock associations who have complied with the provisions of paragraph
(c)(2) of this section and have not voted in favor of the combination, of the
effective date of the combination;
C-1
<PAGE> 116
(ii) Make a written offer to each stockholder to pay for dissenting shares
at a specified price deemed by the resulting association to be the fair value
thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (c)(6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
(4) Acceptance of offer. If within sixty days of the effective date of the
combination the fair value is agreed upon between the resulting association and
any stockholder who has complied with the provisions of paragraph (c)(2) of
this section, payment therefor shall be made within ninety days of the
effective date of the combination.
(5) Petition to be filed if offer not accepted. If within sixty days of the
effective date of the combination the resulting association and any stockholder
who has complied with the provisions of paragraph (c)(2) of this section do not
agree as to the fair value, then any such stockholder may file a petition with
the Office, with a copy by registered or certified mail to the resulting
association, demanding a determination of the fair market value of the stock of
all such stockholders. A stockholder entitled to file a petition under this
section who fails to file such petition within sixty days of the effective date
of the combination shall be deemed to have accepted the terms offered under the
combination.
(6) Stock certificates to be noted. Within sixty days of the effective date
of the combination, each stockholder demanding appraisal and payment under this
section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his or her stock certificates for such notation shall no longer
be entitled to appraisal rights under this section and shall be determined to
have accepted the terms offered under the combination.
(7) Withdrawal of demand. Notwithstanding the foregoing, at any time within
sixty days after the effective date of the combination, any stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered upon the combination.
(8) Valuation and payment. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value
arising from the accomplishment or expectation of the combination. Appropriate
staff of the Office shall review and provide an opinion on appraisals prepared
by independent persons as to the suitability of the appraisal methodology and
the adequacy of the analysis and supportive data. The Director after
consideration of the appraisal report shall, if
C-2
<PAGE> 117
he or she concurs in the valuation of the shares, direct payment by the
resulting association of the appraised fair market value of the shares, upon
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the combination, at a rate
deemed equitable by the Director.
(9) Costs and expenses. The costs and expenses of any proceeding under this
section may be apportioned and assessed by the Director as he or she may deem
equitable against all or some of the parties. In making this determination the
Director shall consider whether any party has acted arbitrarily, vexatiously,
or not in good faith in respect to the rights provided by this section.
(10) Voting and distribution. Any stockholder who has demanded appraisal
rights as provided in paragraph (c)(2) of this section shall thereafter neither
be entitled to vote such stock for any purpose nor be entitled to the payment
of dividends or other distributions on the stock (except dividends or other
distribution payable to, or a vote to be taken by stockholders of record at a
date which is on or prior to, the effective date of the combination): Provided,
That if any stockholder becomes unentitled to appraisal and payment of
appraised value with respect to such stock and accepts or is deemed to have
accepted the terms offered upon the combination, such stockholder shall
thereupon be entitled to vote and receive the distributions described above.
(11) Status. Shares of the resulting association into which shares of the
stockholders demanding appraisal rights would have been converted or exchanged,
had they assented to the combination, shall have the status of authorized and
unissued shares of the resulting association.
C-3
<PAGE> 118
EXHIBIT D
EXCERPTS FROM D&N QUARTERLY REPORT
FOR QUARTER ENDED SEPTEMBER 30, 1995
The following unaudited consolidated financial statements and notes thereto,
and Management Discussion and Analysis of Financial Condition and Results of
Operations have been excerpted from D&N's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, which is incorporated by reference into this
Prospectus/Proxy Statement.
<PAGE> 119
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------------------
(In thousands )
----------------------------
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 2,950 $ 9,174
Interest-bearing deposits in other banks 3,703 18,950
------------------------
Total cash and cash equivalents 6,653 28,124
Investment securities (market value of
$57,194,000 in 1995 and $19,775,000 in 1994) 57,001 19,775
Investment securities available for sale
(at market value) 35,601 61,536
Mortgage-backed securities (market value of
$73,085,000 in 1995 and $77,153,000 in 1994) 72,510 79,616
Mortgage-backed securities available for
sale (at market value) 59,045 67,030
Loans receivable (including loans held
for sale of $10,322,000 in 1995) 917,032 809,447
Allowance for loan losses (9,200) (8,199)
------------------------
Net loans receivable 907,832 801,248
Other real estate owned, net 1,127 6,190
Federal income taxes 3,580 4,505
Office properties and equipment, net 14,450 14,223
Excess of cost over net assets of
association acquired 83 384
Other assets 7,304 6,062
------------------------
$1,165,186 $1,088,693
========================
LIABILITIES
- -----------
Checking and NOW accounts $ 84,914 $ 91,484
Money market accounts 82,372 94,543
Savings deposits 138,754 125,399
Time deposits 530,376 471,392
Accrued interest 1,372 1,257
------------------------
Total deposits 837,788 784,075
Securities sold under agreements
to repurchase 41,346 28,627
FHLB advances and other borrowed money 207,487 198,230
Advance payments by borrowers and
investors held in escrow 10,587 15,288
Other liabilities 5,908 9,850
------------------------
Total liabilities 1,103,116 1,036,070
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock (1,000,000 shares
authorized; none issued) -- --
Common stock, $.01 par value per share (shares
authorized - 10,000,000; shares outstanding -
6,750,521 in 1995 and 6,742,329 in 1994) 68 67
Additional paid-in capital 48,001 47,987
------------------------
Total paid-in capital 48,069 48,054
Retained earnings - substantially restricted 12,762 5,906
Less cost of treasury stock (21,456 shares
in 1995 and 1994) (213) (213)
Unrealized holding gains (losses) on debt
securities available for sale, less tax
effect 1,452 (1,124)
------------------------
Total stockholders' equity 62,070 52,623
------------------------
$1,165,186 $1,088,693
========================
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE> 120
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------------------------------------
(In thousands except per share)
---------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 18,195 $ 14,746 $ 51,718 $ 41,162
Mortgage-backed securities 2,508 1,746 7,893 4,997
Investments and deposits 1,702 1,042 5,070 3,669
---------------------------------------------------
TOTAL INTEREST INCOME 22,405 17,534 64,681 49,828
Interest expense:
Deposits 9,739 6,992 26,524 20,957
Securities sold under agreements
to repurchase 206 149 1,204 442
FHLB advances and other borrowed money 3,700 2,022 10,200 4,762
Interest rate instruments 212 2,304 2,421 8,313
---------------------------------------------------
TOTAL INTEREST EXPENSE 13,857 11,467 40,349 34,474
---------------------------------------------------
NET INTEREST INCOME 8,548 6,067 24,332 15,354
Provision for loan losses 500 -- 1,500 --
---------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,048 6,067 22,832 15,354
Noninterest income:
Loan servicing and administrative fees, net 598 611 1,607 1,708
Deposit related fees 818 900 2,310 2,271
Gain on loans held for sale 571 2 583 230
Other income 43 642 132 1,166
---------------------------------------------------
2,030 2,155 4,632 5,375
Gain (loss) on investment securities -- -- ( 120) --
Gain on loans and mortgage-backed securities -- 34 899 843
Gain on sale of loan servicing rights -- 140 -- 140
---------------------------------------------------
TOTAL NONINTEREST INCOME 2,030 2,329 5,411 6,358
Noninterest expense:
Compensation and benefits 3,407 3,545 10,886 10,459
Occupancy 567 480 1,602 1,469
Other expense 2,691 2,404 7,575 7,459
---------------------------------------------------
General and administrative expense 6,665 6,429 20,063 19,387
Other real estate owned, net ( 239) ( 128) ( 704) ( 2,138)
Amortization of intangibles 77 151 290 326
Federal deposit insurance premiums 579 616 1,738 1,947
---------------------------------------------------
TOTAL NONINTEREST EXPENSE 7,082 7,068 21,387 19,522
---------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,996 1,328 6,856 2,190
Federal income tax expense -- -- -- --
---------------------------------------------------
NET INCOME $ 2,996 $ 1,328 $ 6,856 $ 2,190
===================================================
Earnings per share:
PRIMARY $ 0.45 $ 0.20 $ 1.02 $ 0.33
===================================================
FULLY DILUTED $ 0.41 $ 0.20 $ 0.96 $ 0.33
===================================================
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE> 121
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
--------------------------
(In thousands)
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,856 $ 2,190
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,500 --
Depreciation and amortization of
office properties and equipment 1,348 1,383
Amortization of net premiums (discounts) on
purchased loans and securities (2,676) 71
Originations and purchases of loans held for sale (52,966) (15,432)
Proceeds from sales of loans held for sale 44,041 43,691
Loss on investment securities 120 --
Gain on sale of loans and mortgage-backed securities (899) (843)
Gain on sale of loan servicing rights -- (140)
Amortization and writedowns of loan servicing rights 207 1,680
Other (5,504) 7,326
-----------------------
Net cash provided (used) by operating activities (7,973) 39,926
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 10,070 --
Proceeds from maturities of investment
securities 22,000 138,024
Purchases of investment securities (42,658) (101,736)
Proceeds from sales of mortgage-backed securities
available for sale 4,477 51,502
Principal collected on mortgage-backed securities 13,519 33,278
Mortgage-backed securities purchased -- (28,913)
Proceeds from sales of loans 35,218 --
Loans purchased (78,130) (165,089)
Net change in loans receivable (52,206) (27,361)
Decrease in other real estate owned 5,063 6,411
Sales of loan servicing rights -- 140
Purchases of office properties and equipment (1,559) (515)
-----------------------
Net cash used by investing activities (84,206) (94,259)
FINANCING ACTIVITIES
Net change in time deposits 58,984 (14,279)
Net change in other deposits (5,385) (18,382)
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 795,982 441,213
Payments on maturity of notes payable, securities
sold under agreements to repurchase and other
borrowed money (774,187) (346,179)
Net change in advance payments by borrowers
and investors held in escrow (4,701) (39,359)
Proceeds from issuance of stock 59 9
Purchase of stock warrants (44) --
------------------------
Net cash provided by financing activities 70,708 23,023
------------------------
Decrease in cash and cash equivalents (21,471) (31,310)
Cash and cash equivalents at beginning of period 28,124 79,508
------------------------
Cash and cash equivalents at end of period $ 6,653 $ 48,198
========================
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE> 122
D&N FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 1995 are not necessarily
indicative of the results that may be expected for the full year.
NOTE 2: EARNINGS PER SHARE
Per share data is based on the weighted average number of shares outstanding
for the periods presented. The weighted average number of common and common
equivalent shares used in computing primary earnings per share was 6,724,687
and 6,720,152 for the three months ended September 30, 1995 and September 30,
1994, respectively, and 6,722,514 and 6,719,753 for the nine months ended
September 30, 1995 and September 30, 1994, respectively. The weighted average
number of common and common equivalent shares used in computing fully diluted
earnings per share was 7,180,733 and 6,720,152 for the three months ended
September 30, 1995 and September 30, 1994, respectively, and 7,178,560 and
6,719,753 for the nine months ended September 30, 1995 and September 30, 1994,
respectively.
NOTE 3: ALLOWANCE FOR LOAN LOSSES
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from specific assets that
have been identified as having greater than a normal risk of loss as well as
losses from the remainder of the portfolio. Management's determination of the
adequacy of the allowance is based upon evaluation of the portfolio, past
experience, current economic conditions, size and composition of the portfolio,
collateral location and values, cash flow positions, industry concentrations,
delinquencies, and other relevant factors. The allowance is increased by a
provision for losses charged against income.
- 6 -
<PAGE> 123
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---------------------- ------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 8,902 $ 9,931 $ 8,199 $ 11,420
Charge-offs:
Single family 49 32 145 104
Income producing property -- 1,665 225 2,910
Installment 242 207 666 580
--------------------- -----------------------
Total 291 1,904 1,036 3,594
Recoveries:
Single family -- -- 2 9
Income producing property -- -- 245 --
Installment 89 78 290 270
--------------------- -----------------------
Total 89 78 537 279
--------------------- -----------------------
Net charge-offs 202 1,826 499 3,315
Provision charged to operations 500 -- 1,500 --
--------------------- -----------------------
Balance at end of period $ 9,200 $ 8,105 $ 9,200 $ 8,105
===================== =======================
</TABLE>
NOTE 4: FEDERAL INCOME TAXES
The liability method is used in accounting for federal income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
No federal income tax expense was recorded in any of the reporting periods as
the Company offset taxes ordinarily payable by a realization, through a
reduction in the valuation allowance previously provided, of prior years' net
operating loss carryforwards.
NOTE 5: RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights". SFAS 122 requires that the rights
to service mortgage loans, however those servicing rights are acquired, be
recognized as separate assets. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. Capitalized mortgage servicing rights are to be
assessed for impairment based on the fair value of those rights.
- 7 -
<PAGE> 124
SFAS 122 applies prospectively in fiscal years beginning after December 15,
1995 with earlier application encouraged. The Company adopted SFAS 122 as of
July 1, 1995. The effect of adopting SFAS 122 was to increase net income for
the three months and nine months ended September 30, 1995 by $458,000 or $.07
per share ($.06 per fully diluted share).
NOTE 6: RECLASSIFICATIONS
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform with the current period presentation.
- 8 -
<PAGE> 125
D&N FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding
D&N Financial Corporation's (D&N or the Company) financial condition and
results of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994. Ratios for the three-month and nine-month periods
are stated on an annualized basis. Results of operations for the 1995 periods
are not necessarily indicative of results which may be expected for the entire
year. This discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-Q.
RESULTS OF OPERATIONS
NET INCOME
The Company recorded net income for the third quarter ended September
30, 1995 of $3.0 million, compared to net income of $1.3 million in the third
quarter of 1994. Return on assets and return on equity were 1.04% and 19.97%,
respectively, during the quarter ended September 30, 1995, compared to 0.51%
and 10.13%, respectively, during the quarter ended September 30, 1994. The
increase in net income was due primarily to an increase in net interest income
reduced somewhat by an increase in the provision for loan losses and lower
gains on sales of assets.
For the nine months ended September 30, 1995, the Company recorded net
income of $6.9 million, compared to net income of $2.2 million for the nine
months ended September 30, 1994. Return on assets and return on equity were
0.82% and 15.93%, respectively, during the nine months ended September 30,
1995, compared to 0.28% and 5.77%, respectively, during the nine months ended
September 30, 1994. The increase in net income was due to an increase in net
interest income reduced somewhat by decreases in gains on sales of assets and
gains on sales of other real estate owned and increases in the provision for
loan losses and operating expenses.
NET INTEREST INCOME
Net interest income, or the difference between interest earned on
interest earning assets such as loans and investment securities and interest
paid on sources of funds such as deposits and borrowings, is a significant
component of the Company's earnings. Net interest income is affected by
changes in both the balance of and the rates on interest earning assets and
interest bearing liabilities and the amount of interest earning assets funded
with non-interest or low-interest bearing funds.
- 9 -
<PAGE> 126
Net interest income increased $2.5 million to $8.5 million for the
quarter ended September 30, 1995 compared to $6.0 million for the quarter ended
September 30, 1994. The increase was due to increased volume and improved
yields on variable rate and short lived assets and to lower net expense on the
Company's interest rate exchange agreements due to maturities and repricing,
partially offset by increases in interest paid on FHLB advances and deposits
due to higher volumes and general increases in market interest rates.
Similarly, net interest income increased $9.0 million to $24.3 million
for the nine months ended September 30, 1995 from $15.3 million for the nine
months ended September 30, 1994. The same factors that explained the third
quarter comparison were present during the year-to-date comparative periods.
In recent years, the Company experienced a significant decrease in
earnings on loans receivable as rate sensitive portions of the portfolio
repriced at lower interest levels, as several commercial real estate loans
reached a nonperforming status and were transferred to other real estate owned,
and as commercial real estate lending was temporarily curtailed. Additionally,
the Company realized lower earnings on its portfolio of mortgage derivative
products due to lower balances, attributed to sales and amortization, plus
lower yields compared to prior years. To varying degrees, offsetting these
factors was a reduction in interest bearing liabilities as the Company,
consistent with plans to shrink its balance sheet and increase its capital
ratios, experienced deposit outflows and reduced its reliance on wholesale
borrowings. More recently, after raising additional capital in December 1993
and due to an increase in market interest rates, the Company has begun to
increase its net interest earning assets and to realize increased net yields.
In addition, the Company has incurred significantly lower interest expense on
interest rate instruments as $157 million notional amount of these instruments
have matured since January 1, 1994, with the remaining $17 million scheduled to
mature during the fourth quarter of 1995. The result of these factors is that
net interest margin has steadily improved during recent quarters. Net interest
margin was 3.06% for the third quarter of 1995, compared to 2.48% for the third
quarter of 1994. For the first nine months of 1995, net interest margin was
3.05%, compared to 2.10% for the first nine months of 1994.
PROVISION FOR LOAN LOSSES
A provision for loan losses is charged to income based on the size and
quality of the loan portfolio measured against prevailing economic conditions.
This process is accomplished through a formal review analysis. The provision
is recorded in sufficient amounts to maintain the allowance for possible loan
losses at a level in excess of that expected by management to be required to
cover specific exposures in the portfolio.
- 10 -
<PAGE> 127
In light of the significant growth of the loan portfolio the Company
recorded a $500,000 provision for loan losses during the quarter ended
September 30, 1995 and $1.5 million during the nine months ended September 30,
1995. No provision for loan losses was recorded during either the three months
or the nine months ended September 30, 1994.
NONINTEREST INCOME
Total noninterest income decreased to $2.0 million during the quarter
ended September 30, 1995, from $2.3 million recorded in the third quarter of
1994. As discussed in Note 5 of Notes to Consolidated Financial Statements,
the adoption of SFAS 122 resulted in an increase in noninterest income of
$458,000 during the current year quarter. Offsetting this increase was the
fact that, during the prior year quarter, the Company sold its investment in a
residential real estate development joint venture and realized a gain of
$662,000. Additionally, during the prior year quarter, the Company sold most
of its portfolio of purchased mortgage servicing rights (PMSRs) which resulted
in a gain of $140,000.
Total noninterest income decreased to $5.4 million during the nine
months ended September 30, 1995, from $6.4 million recorded during the nine
months ended September 30, 1994. In addition to the items described in the
quarterly comparison, the Company also realized lower gains on sales of loans
and securities and a decrease in other income. Other income decreased as the
prior year period included realization of income from transactions on which
income had been previously deferred.
NONINTEREST EXPENSE
Total noninterest expense incurred during the quarter ended September
30, 1995 was largely unchanged from that recorded during the quarter ended
September 30, 1994, $7.1 million during both periods. Compensation and
benefits decreased due to an adjustment in accounting for post-retirement
medical benefits, and the net cost of other real estate owned (OREO) decreased
due to the sale of two commercial OREO properties during the quarter.
Offsetting the decreases were normal anticipated increases in occupancy and
other general and administrative expenses.
Total noninterest expense increased $1.9 million to $21.4 million
during the nine months ended September 30, 1995, compared to $19.5 million
during the nine months ended September 30, 1994. The most significant factor
was a decrease of $1.4 million in net gains from OREO as several more
commercial OREO properties were
- 11 -
<PAGE> 128
disposed of in the prior year period compared to the current year-to-date
period. Additionally, general and administrative expense increased $676,000
due to general salary and wage increases and increased marketing efforts. A
reduction of $209,000 in noninterest expense was realized from a reduction in
the Company's federal deposit insurance assessment rate.
FEDERAL INCOME TAX EXPENSE
No federal income tax expense was recorded in any of the reporting
periods as the Company had significant tax basis net operating loss
carryforwards.
FINANCIAL CONDITION
Total assets at September 30, 1995 were $1.17 billion, an increase of
$76.5 million from December 31, 1994. Earning assets represented approximately
97% of total assets as of September 30, 1995, substantially the same as at
year-end 1994.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $99.3 million at
September 30, 1995, down $10.2 million from December 31, 1994. During the
period, a significant portion of the Company's liquidity portfolio was used to
partially fund loan demand.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities decreased $15.1 million from year-end 1994
to $131.6 million at September 30, 1995. The decrease was due primarily to
repayments of $13.5 million partially offset by an increase of $2.6 million in
market value recognized through stockholders' equity on mortgage-backed
securities available for sale. Additionally, $4.5 million of low-yielding
mortgage-backed securities were sold from the available-for-sale portfolio and
replaced with higher yielding government-backed securities.
NET LOANS RECEIVABLE
Net loans receivable increased $106.6 million during the period to
$907.8 million at September 30, 1995. Loan originations of $290.4 million and
purchases of $78.1 million exceeded repayments of $183.9 million and sales of
$78.2 million. Loan originations during the nine months ended September 30,
1995 were up compared to to the first nine months of 1994. Consumer loan
originations were $148.7 million compared to $100.4 million, while real estate
and commercial loan originations were $141.7 million compared to $83.8 million.
- 12 -
<PAGE> 129
NONPERFORMING ASSETS AND RISK ELEMENTS
The following table sets forth the amounts and categories of risk
elements in the Company's loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 14,200 $ 17,995
Accruing loans delinquent more
than 90 days -- --
Restructured loans -- --
--------------------
Total nonperforming loans 14,200 17,995
Other real estate owned (OREO) 1,360 6,520
--------------------
Total nonperforming assets $ 15,560 $ 24,515
===================
Nonperforming loans as a
percentage of total loans 1.55% 2.22%
==================
Nonperforming assets as a
percentage of total assets 1.34% 2.25%
==================
Allowance for loan losses as a
percentage of nonperforming loans 64.79% 45.56%
==================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 60.62% 34.79%
==================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses,
decreased $9.0 million during the period due primarily to the sale of three
repossessed commercial real estate properties and as several residential and
commercial real estate loans either made principal payments or paid off.
- 13 -
<PAGE> 130
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's investment in MSRs increased during the period to $1.2
million at September 30, 1995. As discussed earlier, the Company adopted SFAS
122, effective July 1, 1995, which allowed the Company to capitalize as
separate assets $458,000 of originated mortgage servcing rights (OMSRs). At
September 30, 1995, the Company also had $759,000 of PMSRs. The following
table details activity in the portfolio for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended December 31,
September 30, 1995 1994
---------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 968 $ 9,870
Additions:
Capitalized servicing 458 --
Purchases -- --
Reductions:
Scheduled amortization 106 1,315
Additional amoritzation due
to changes in prepayment
assumptions 58 421
Impairment 43 --
Sales -- 7,148
Transfers to loan portfolio
under recourse and other
provisions 2 18
--------- ---------
Total 209 8,902
--------- ---------
Balance at end of period $ 1,217 $ 968
========= =========
Fair market value at end of period $ 1,227 $ 912
========= =========
</TABLE>
DEPOSITS
Deposits increased $53.7 million during the period to $837.8 million at
September 30, 1995. An increase of $59.1 million in certificates of deposit
plus an increase of $13.4 million in regular savings accounts exceeded
decreases of $6.6 million in checking accounts and $12.2 million in money
market accounts. The Company's cost of deposits increased to 4.75% at
September 30, 1995, compared to 3.96% at December 31, 1994, as result of a
general increase in market rates of interest.
BORROWINGS
Total borrowings increased $22.0 million during the period to $248.8
million at September 30, 1995 in order to fund anticpated loan demand. The
Company's cost of borrowings was 6.11% at September 30, 1995, compared to 6.35%
at December 31, 1994.
- 14 -
<PAGE> 131
CAPITAL
According to federal regulations, the Bank must meet certain minimum
capital ratios. As the following table indicates, the Bank's capital ratios at
September 30, 1995 exceeded these requirements.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
--------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual capital $ 58,755 $ 58,755 $ 67,510
Required capital 17,662 35,324 55,998
--------- --------- ---------
Excess capital $ 41,093 $ 23,431 $ 11,512
========= ========= =========
Actual ratio 4.99% 4.99% 9.64%
========= ========= =========
Required ratio 1.50% 3.00% 8.00%
========= ========= =========
</TABLE>
Consolidated stockholders' equity was $62.1 million at September 30,
1995 and represents 5.33% of consolidated assets.
LIQUIDITY
Liquidity is the ability to meet financial obligations when due.
Regulatory authorities require that thrift institutions maintain liquidity
consisting of cash, short-term U. S. Government Securities and other specified
assets, equal to at least 5% of net withdrawable accounts and borrowings
payable in one year or less. At September 30, 1995, the Bank's average
liquidity ratio was 6.11%. At September 30, 1995, unused borrowing capacity as
measured by the Bank's inventory of readily available but unpledged collateral
was approximately $205 million. The Company considers its current liquidity
and other funding sources sufficient to fund its outstanding loan commitments
and scheduled liability maturities.
REGULATORY ISSUES
Deposits of savings institutions such as the Bank are presently
insured by the SAIF, which along with the BIF, is one of the two insurance
funds administered by the FDIC. Financial institutions which are members of
the BIF are likely to experience lower deposit insurance premiums in the future
because the BIF has higher reserves and is expected to be responsible for fewer
troubled institutions than the SAIF. As a result of the BIF achieving its
statutory reserve ratio, the FDIC has proposed that the premium schedule for
BIF members be revised to provide a range of .04% to .31% of insured deposits
(as compared to the current
- 15 -
<PAGE> 132
range of .23% to .31% of insured deposits for BIF and SAIF-insured
institutions), so that well capitalized and healthy BIF members would pay the
lowest premiums. It is not anticipated that SAIF will be adequately
recapitalized until 2002, absent a substantial increase in premium rates or the
imposition of special assessments or other significant developments, such as a
merger of the SAIF and the BIF. As a result of this disparity, SAIF members
could be placed at a significant, competitive disadvantage to BIF members with
respect to pricing of loans and deposits and the ability to achieve lower
operating costs. A recapitalization plan under consideration by the Treasury
Department, the FDIC, the OTS and the Congress reportedly provides for a
special assessment of .85% to .90% to be imposed on all SAIF insured deposits
to eliminate the disparity. No assurance can be given, however, as to whether
the FDIC's proposal or a recapitalization plan will be implemented or as to the
nature or extent of any competitive disadvantage which may be experienced by
SAIF-member institutions.
- 16 -
<PAGE> 133
EXHIBIT E
EXCERPTS FROM MFSB'S QUARTERLY REPORT
FOR QUARTER ENDED DECEMBER 31, 1995
The following unaudited consolidated financial statements and notes thereto,
and Management Discussion and Analysis of Financial Condition and Results of
Operations have been excerpted from MFSB's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995, which is incorporated by reference into
this Prospectus/Proxy Statement.
<PAGE> 134
EXHIBIT E
MACOMB FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
As of June 30, 1995 and December 31, 1995
A S S E T S
<TABLE>
<CAPTION>
June 30, December 31,
1995 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Cash and equivalents $ 2,490,204 $ 5,940,661
Certificates of deposit 2,550,000 1,084,000
Loans receivable, net 21,270,129 21,062,573
U.S. Treasury Bills, $ held-to-maturity
(estimated market value of $8,852,109
on June 30, 1995 and $7,942,307 on
December 31, 1995) 8,832,902 7,948,945
Mortgage-backed securities, held-to-
maturity (estimated market value of
$4,413,680 on June 30, 1995 and
$4,182,208 on December 31, 1995) 4,480,111 4,216,440
Accrued interest receivable, net 137,432 141,291
Stock in Federal Home Loan Bank, at cost 207,800 207,800
Stock in Federal Home Loan Mortgage
Corporation, available-for-sale, at
fair value 243,243 297,594
Property and equipment, net 81,828 79,789
Deferred federal income taxes 149,480 149,601
Policy cash value - Officers' and
directors' benefit plan 1,300,800 1,325,983
Other assets 132,141 130,329
------------ ------------
TOTAL ASSETS $ 41,876,070 $ 42,585,006
============ ============
</TABLE>
See accompanying notes to financial statements.
Page 1
<PAGE> 135
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1995 1995
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT-LIABILITIES
Deposits $ 34,256,150 $ 35,063,737
Advances from borrowers for taxes
and insurance 528,766 233,101
E.S.O.P. loan payable - Comerica Bank -
Current portion 36,000 36,000
Employees' and directors' pension
fund payable 854,934 908,251
Other liabilities 65,020 49,324
------------ ------------
Total Current Liabilities $ 35,740,870 $ 36,290,413
------------ ------------
LONG-TERM LIABILITIES
E.S.O.P. loan payable - Comerica Bank 45,000 27,000
------------ ------------
TOTAL LIABILITIES $ 35,785,870 $ 36,317,413
------------ ------------
STOCKHOLDERS' EQUITY
Capital Stock
Authorized 3,000,000 shares common,
issued and outstanding 186,604 shares
at $1 par value $ 186,604 $ 186,604
Additional Paid-in Capital 1,429,939 1,429,939
Retained Earnings (Substantially
restricted) 4,403,330 4,526,851
Not unrealized appreciation on
available-for sale securities, net of
tax of $77,957 as of June 30, 1995
and $96,436 as of December 31, 1995 151,327 187,199
------------ ------------
Totals $ 6,171,200 $ 6,330,593
Less: Unearned E.S.O.P. shares 81,000 63,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 6,090,200 $ 6,267,593
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 41,876,070 $ 42,585,006
============ ============
</TABLE>
See accompanying notes to financial statements.
Page 2
<PAGE> 136
MACOMB FEDERAL SAVINGS BANK
STATEMENTS OF OPERATIONS
Three and Six Month Periods Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1994 1995 1994 1995
----------------------------- -------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 414,783 $ 433,083 $ 825,772 $ 870,689
Interest on investments 4,316 4,179 8,027 10,519
Interest on mortgage-backed
securities 67,466 71,011 137,170 134,755
Other 176,753 216,142 322,498 427,123
--------- --------- ---------- ----------
TOTAL INTEREST INCOME $ 663,318 $ 724,415 $1,293,467 $1,443,086
--------- --------- ---------- ----------
INTEREST EXPENSES
Interest on deposits $ 366,106 $ 453,117 $ 703,790 $ 894,157
Interest on borrowings 1,784 1,583 3,908 2,953
--------- --------- ---------- ----------
TOTAL INTEREST EXPENSE $ 367,890 $ 454,700 $ 707,698 $ 897,110
--------- --------- ---------- ----------
NET INTEREST INCOME $ 295,428 $ 269,715 $ 585,769 $ 545,976
PROVISION FOR LOSSES ON LOANS -- -- -- --
--------- --------- ---------- ----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOSSES ON LOANS $ 295,428 $ 269,715 $ 585,769 $ 545,976
--------- --------- ---------- ----------
OTHER INCOME
Charges and other fees $ 5,888 $ 6,386 $ 11,559 $ 11,569
Net gain on sale of real
estate owned -- -- 428 1,295
Other -- -- 2 --
--------- --------- ---------- ----------
TOTAL OTHER INCOME $ 5,888 $ 6,386 $ 11,989 $ 12,864
--------- --------- ---------- ----------
OTHER EXPENSES
Salaries and benefits $ 162,358 $ 153,226 $ 290,740 $ 272,605
Occupancy 4,455 4,544 10,802 10,885
Insurance 13,281 23,536 26,647 46,741
Legal, audit and
examination fees 13,112 3,773 37,132 27,421
Office supplies and postage 3,893 2,310 6,809 5,525
State intangibles and single
business tax (882) 533 758 13,267
Dues and assessments 6,701 5,858 12,333 9,496
Other 1,794 4,267 5,367 7,243
--------- --------- ---------- ----------
TOTAL OTHER EXPENSES $ 204,712 $ 198,047 $ 390,588 $ 393,183
--------- --------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
Page 3
<PAGE> 137
MACOMB FEDERAL SAVINGS BANK
STATEMENTS OF OPERATIONS (CONTINUED)
Three and Six Month Periods Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1994 1995 1994 1995
---------------------------- -----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCOME BEFORE INCOME TAXES $ 96,604 $ 78,054 $ 207,170 $ 165,657
-------- -------- --------- ---------
FEDERAL INCOME TAX
Current $ 19,307 $ 6,275 $ 52,003 $ 60,736
Deferred 4,240 10,664 6,501 (18,600)
-------- -------- --------- ---------
TOTAL FEDERAL INCOME TAX $ 23,547 $ 16,939 $ 58,504 $ 42,136
-------- -------- --------- ---------
NET INCOME $ 73,057 $ 61,115 $ 148,666 $ 123,521
======== ======== ========= =========
AVERAGE SHARES OUTSTANDING 176,404 180,004 175,954 179,554
======== ======== ========= =========
EARNINGS PER SHARE $ .41 $ .34 $ .84 $ .69
======== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
Page 4
<PAGE> 138
MACOMB FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
Six Month Periods Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Period Ended Period Ended
December 31, 1994 December 31, 1995
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 148,666 $ 123,521
----------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation $ 1,839 $ 3,130
Interest on mortgage-backed securities (3,077) (3,075)
Interest on U.S. Treasury bills -- (264,730)
E.S.O.P. compensation expense 18,000 l8,000
Provision for deferred income taxes 6,501 (18,600)
Interest paid in advance (1,043) 895
(Increase) Decrease in:
Accrued interest receivable (114,952) (3,859)
Prepaid expenses 30,642 1,292
Accounts receivable 517 520
Increase (Decrease) in:
Accrued interest on deposits 9,771 --
Pension fund payable 78,429 53,317
Old outstanding checks and money orders (1,020) --
Accrued expenses and accounts payable (14,997) (28,187)
Federal income tax payable -- 11,596
----------- ----------
Total Adjustments $ 10,610 $ (229,701)
----------- ----------
Net Cash Provided (Used) by
Operating Activities $ 159,276 $ (106,180)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in certificates of deposit $ (888,000) $ 1,466,000
Purchased loans (1,483,000) (1,445,140)
Originated loans -- (19,500)
Principal collections on loans 1,566,102 1,672,196
Purchase of U.S. Treasury bills (5,772,383) (9,851,313)
Proceeds from repayment on
mortgage-backed securities 295,612 266,746
Proceeds from repayment on U.S.
Treasury Bills 1,000,000 11,000,000
Capital expenditures (4,629) (1,091)
Net increase in policy cash value -
Officers' and directors' benefit plan (19,425) (25,183)
----------- -----------
Net Cash Provided (Used) by
Investing Activities $(5,305,723) $ 3,062,715
----------- -----------
</TABLE>
See accompanying notes to financial statements.
Page 5
<PAGE> 139
MACOMB FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS (CONTINUED)
Six Month Periods Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Period Ended Period Ended
December 31, 1994 December 31, 1995
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances by borrowers $ (253,815) $ (295,665)
Payments to E.S.O.P. (18,000) (18,000)
Net increase (decrease) in customer savings 1,150,895 807,587
------------ -----------
Net Cash Provided by
Financing Activities $ 879,080 $ 493,922
------------ -----------
NET INCREASE (DECREASE)
IN CASH AND EQUIVALENTS $ (4,267,367) $ 3,450,457
CASH AND EQUIVALENTS, BEGINNING OF
PERIODS 8,703,457 2,490,204
------------ -----------
CASH AND EQUIVALENTS, END OF PERIODS $ 4,436,090 $ 5,940,661
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Income taxes $ 21,090 $ 3,188
Interest 698,151 911,052
</TABLE>
See accompanying notes to financial statements.
Page 6
<PAGE> 140
MACOMB FEDERAL SAVINGS BANK
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 1995
<TABLE>
<CAPTION>
Retained Net Unrealized
Additional Earnings, Appreciation on Unearned
Common Paid-in Substantially Available-For-Sale ESOP
Stock Capital Restricted Stock in FHLMC Total Shares Total
--------- ----------- ------------- ------------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JULY 1, 1995 $186,604 $ 1,429,939 $ 4,403,330 $ 151,327 $6,171,200 $(81,000) $6,090,200
Net income for -- -- 123,521 -- 123,521 -- 123,521
the period
Net change in
unrealized appreciation
on available-for
-sale stock, net -- -- -- 35,872 35,872 -- 35,872
of $18,479 tax
Value of E.S.O.P. -- -- -- -- -- 18,000 18,000
shares released -------- ----------- ----------- --------- ----------- ---------- ---------
BALANCE, December $186,604 $ 1,429,939 $ 4,526,851 $ 187,199 $ 6,330,593 $ (63,000) $6,267,593
31, 1995 ======== =========== =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 7
<PAGE> 141
MACOMB FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation:
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. The results of operations for the six months ended
December 31, 1995, are not necessarily indicative of the results that may be
expected for the entire year. The interim financial information should be read
in conjunction with the financial statements and notes in the 1995 annual
report of Macomb Federal Savings Bank (The "Bank").
Earnings per Share:
Earnings per share are calculated based on adjusting the weighted average
number of shares outstanding during the period to reflect the unreleased shares
held by the E.S.O.P. As principal payments are made, compensation expense is
recorded and shares become outstanding for earnings per share (EPS)
computations. The weighted average shares outstanding during the three month
period ended December 31, 1994 was 176,404, for the six month period ended
December 31, 1994 was 175,954, for the three month period ended December 31,
1995 was 180,004, and for the six month period ended December 31, 1995 was
179,554.
Provision for Probable Losses:
A provision for probable losses on loans and real estate is charged to
operations based upon management's evaluation of the potential losses in its
loan and real estate portfolios. The major factors considered in evaluating
potential losses are recent loss experience, current economic conditions, and
the overall balance and composition of the loan and real estate portfolios.
The following table sets forth certain information concerning the Bank's
non-performing assets:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1995
-------- -----------
<S> <C> <C>
Accruing loans past due more than
90 days $ 0 $ 24,082
Nonaccrual loans 0 52,484
Real estate held for redemption 0 0
----- --------
Total non-performing assets $ 0 $ 76,566
===== ========
</TABLE>
Income Taxes:
The Bank's provision for federal income taxes, for all the periods presented,
varies from the statutory rates due principally from the recognition of income
and expenses on the cash basis of accounting for income tax purposes.
Page 8
<PAGE> 142
MACOMB FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MORTGAGE-BACKED SECURITIES AND U.S. TREASURY BILLS:
The carrying value and estimated market value of mortgage-backed securities
and U.S. Treasury Bills are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1995
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Held-to-Maturity
Federal Home Loan
Corporation $1,649,891 $ -- $ 26,010 $1,623,881
GNMA Certificates 856,953 -- 30,654 826,299
FNMA Certificates 1,973,267 -- 9,767 1,963,500
----------- ----------- ---------- ----------
Totals $4,480,111 $ -- $ 66,431 $4,413,680
=========== =========== ========== ==========
Held-to-Maturity
U.S. Treasury Bills $8,832,902 $ 19,207 $ -- $8,852,109
=========== =========== ========== ==========
</TABLE>
All maturities are within twelve months.
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Held-to-Maturity
Federal Home Loan
Corporation $1,518,474 $ -- $ 18,131 $1,500,343
GNMA certificates 722,323 -- 22,333 699,990
FNMA certificates 1,975,643 6,232 -- 1,981,875
----------- ----------- ---------- ----------
Totals $4,216,440 $ 6,232 $ 40,464 $4,182,208
=========== =========== ========== ==========
Held-to-Maturity
U.S. Treasury Bills $7,948,945 $ -- $ 6,638 $7,942,307
=========== =========== ========== ==========
</TABLE>
All maturities are within twelve months.
* * * * *
Page 9
<PAGE> 143
MACOMB FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PART I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
its deposits. Operating results are also affected to a lesser extent by the
type of lending, fixed rate versus adjustable or short-term, each of which has
a different rate and fee structure. The Bank's operating expenses principally
consist of employee compensation, occupancy expenses, federal insurance
premiums and other general and administrative expenses. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Management Strategy
The Bank has historically focused its lending activities on traditional
single family residential loans. Because of this focus, and as a result of its
relatively conservative underwriting standards, the Bank experienced minimal
losses on its loans. This lack of diversification in its asset structure does,
however, increase the Bank's portfolio concentration risk by making the value
of the portfolio more susceptible when declines in real estate values occur in
its market area.
Management's strategy has been to maintain profitability and a strong capital
position by growing at a rate that does not exceed its ability to generate
earnings. Although capital does not eliminate the exposure of the Bank's net
interest income to fluctuation in interest rates, it does allow the Bank
greater protection and flexibility when net interest income decreases as a
result of increases in the cost of funds. This strategy has been accomplished
by (i) maintaining a high asset quality, (ii) maintaining a higher level of
interest-earning assets than interest-bearing liabilities, (iii) purchasing
single family residential mortgage loans at competitive rates, either fixed or
adjustable in order to maintain controlled growth, (iv) managing deposit rates
and maintaining a strong deposit base by providing convenient and quality
service, and (v) controlling operating expenses. Since 1984, the Bank has also
sought to reduce its vulnerability to interest rate risk by purchasing ARM
loans and maintaining investments with maturities generally less than five
years. Management intends to continue its conservative lending policies while
strengthening the Bank's position within its community.
Page 10
<PAGE> 144
Consistent with management's strategy discussed above, the Bank concentrates
its lending activities on purchasing, rather than originating mortgage loans.
The size of the Bank, the small number of employees (five full-time and two
part-time employees) and the cost of establishing an origination department
have created a situation in which the purchase of mortgage loans is more
economically advantageous to the Bank than the origination of such loans.
Because of the lower cost to the Bank of purchasing rather than originating
loans, the Bank is better able to generate earnings from its lending
activities.
In recent years, the Bank did not have sufficient high quality mortgage loans
available for purchase to justify extensive investment in the mortgage market.
As a result, 18.7% of the Bank's assets were invested in United States Treasury
obligations and 9.9% of the Bank's assets were invested in mortgage-backed
securities at December 31, 1995.
Interest Rate Sensitivity
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net increase income while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income while a positive gap would tend to adversely affect net interest income.
The Bank has taken steps to reduce or control its gap by maintaining
investments with short terms to maturity and by emphasizing loans that mature
or reprice more rapidly while preserving higher yields, such as shorter term
mortgage loans. In addition, management of the Bank believes that, given the
high level of capital of the Bank and the excess of interest-earning assets
over interest-bearing liabilities, the increased net income resulting from a
mismatch in the maturity of its asset and liability portfolios provides
sufficient returns during periods of declining or stable interest rates to
justify the increased vulnerability to sudden and unexpected increases in
interest rates. Nonetheless, the Bank closely monitors its interest rate risk
as such risk relates to management's strategy.
Page 11
<PAGE> 145
Changes in Financial Condition Over the Six-Month Period Ended December 31,
1995
Total assets increased $.7 million or 1.7% to $42.6 million at December 31,
1995 from $41.9 million at June 30, 1995. This increase was due primarily to a
$3.5 million or 138% increase in cash and equivalents at December 31, 1995.
Total liabilities increased $.5 million or 1.5% to $36.3 million at December
31, 1995 from $35.8 million at June 30, 1995. This increase was primarily due
to a $.8 million or 3.6% increase in deposits from $34.2 million at June 30,
1995 to $35.1 million at December 31, 1995. Stockholders' equity increased $.2
million or 2.9% to $6.3 million or 14.7% of total assets at December 31, 1995.
Comparison of Operating Results for the Three-Months Ended December 31, 1995
and December 31, 1994
General.
Net income for the three-months ended December 31, 1995 was $61,119 as
compared to $73,057 for the three months ended December 31, 1994. A decrease
in net-interest income accounted for the decrease and is more fully explained
below.
Interest Income.
Interest income increased $61,101 to $724,419 for the three-months ended
December 31, 1995 from $663,318 for the three-months ended December 31, 1994.
The increase resulted primarily from the increase in net loans receivable and
from an increase in United States Treasury obligations resulting in higher
yields from the same period in 1994. Interest income from loans increased
$18,304 or 4.4% for the three-month period ended December 31, 1995 from the
same period in 1994 which was due to an increase in average loan balances.
Interest Expense.
Interest expense for the three-months ended December 31, 1995 increased
$86,810 to $454,700. This increase is primarily attributable to an increase in
the average balance of passbook and certificate accounts of $1.5 million or
4.4% to $35.1 million during the three months ended December 31, 1995 from
$33.6 million during the same period in 1994. The average cost of passbook and
certificate accounts increased to 5.39% in the three-month period ended
December 31, 1995 from 4.34% in the same period in 1994 as a result of general
market conditions.
Page 12
<PAGE> 146
Net Interest Income Before Provision for Loan Losses.
Net interest income before provision for loan losses decreased to $269,719,
for the three-months ended December 31, 1995 from $295,428 for the three-months
ended December 31, 1994. The decrease resulted primarily from an increase in
the interest on deposits during the same period in 1994.
Provision for Loan Losses.
No increase in the provision for loan losses was recorded for the three-month
period ended December 31, 1995 and December 31, 1994. Management determined
that the loss reserves were adequate as of December 31, 1995 and December 31,
1994.
Non-Interest Income.
The Bank had substantially no change in non-interest income in the
three-months ended December 31, 1995 over the same period in 1994.
Non-Interest Expense.
Non-interest expense was $198,047 in the three-months ended December 31, 1995
as compared to $204,712 for the same period in 1994. The $6,665 decrease, was
due to a decrease in salaries and benefits at December 31, 1995 as compared to
the same period in 1994.
Income Tax Expense.
Income tax expense for the three-months ended December 31, 1995 decreased by
$6,608 as a result of a decrease in net income as compared to the three-months
ended December 31, 1994.
Liquidity and Capital-Resources
The Bank's primary source of funds are deposits and investments, and proceeds
from principal and interest payments on loans. While maturities and scheduled
amortization of loans and investments are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and most recently, the
restructuring of the thrift industry. The primary investing activity of the
Bank is the purchase of mortgage loans. During the three-month period ended
December 31, 1995, the Bank purchased mortgage loans in the amount of $516,450.
Other investing activities include investing in mortgage-backed securities and
United States Treasury obligations. During the three-month period ended
December 31, 1995, this activity was funded primarily by principal repayments
on loans totalling $773,000.
Page 13
<PAGE> 147
The Bank has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include FHLB of Indianapolis advances
although no such advances were outstanding at December 31, 1995. Other sources
of liquidity can be found in the Bank's balance sheet, such as investments in
certificates of deposit maturing within one year.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio
is currently 5.0%. The Bank's liquidity ratio was 40.70% at December 31, 1995.
The Bank's most liquid assets are cash and cash equivalents, which include
investments in highly liquid short-term investments. The level of these assets
are dependent on the Bank's operating, financing and investing activities
during any given period. At December 31, 1995, cash and cash equivalents
totalled $5,940,661.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. At December 31, 1995, the Bank had commitments to purchase
residential mortgages of $631,000. Customer deposits which are scheduled to
mature in one year or less at December 31, 1995 totalled $19.7 million.
Management believes that a significant portion of such deposits will remain
with the Bank.
The following table, which summarizes the Bank's regulatory capital
requirements versus actual capital, shows that the Bank exceeded all
requirements at December 31, 1995.
<TABLE>
<CAPTION>
Regulatory Required Excess
Capital Capital (Shortage)
------- ------- ----------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $6,268,000 14.7 $ 639,000 1.5 $5,629,000 13.2
Core Leverage Capital $6,081,000 14.3 $1,278,000 3.0 $4,803,000 11.3
Risk-Based Capital $6,231,000 42.0 $1,186,000 8.0 $5,045,000 34.0
</TABLE>
The OTS has issued a final rule adding an interest rate risk component to the
present capital rules. The rule requires the OTS to measure an institution's
interest rate risk as the percentage change in the market value of its
portfolio resulting from a hypothetical 200 basis point shift in interest
rates. The additional capital an institution would be required to maintain
would be calculated as one-half of the difference between the measured risk and
2 percent multiplied by the market value of the institution's assets.
Institutions with less than $300 million in assets and a risk-based capital
ratio in excess of 12 percent are exempt from the OTS' regulations.
Page 14
