<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -------------
Commission file number 0-17137
-----------------------------------------
D&N FINANCIAL CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-2790646
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Quincy Street, Hancock, Michigan 49930
--------------------------------------------------------
(Address of principal executive offices)
(906) 482-2700
--------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $0.01 par value 7,572,354
--------------------------------------------------------
(Class) (Shares Outstanding
as of July 31, 1996)
===============================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I Financial Information
Consolidated statements of condition -
June 30, 1996 and December 31, 1995 3
Consolidated statements of income -
three months ended June 30, 1996 and 1995
six months ended June 30, 1996 and 1995 4
Consolidated statements of cash flows -
six months ended June 30, 1996 and 1995 5
Notes to consolidated financial statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II Other Information 17
</TABLE>
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<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------------------
(In thousands )
--------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,512 $ 9,264
Interest-bearing deposits in other banks 938 13,176
-------------------------
Total cash and cash equivalents 13,450 22,440
Investment securities (market value of
$58,606,000 in 1996 and $55,376,000 in 1995) 58,635 55,239
Investment securities available for sale
(at market value) 25,469 41,197
Mortgage-backed securities (market value of
$93,629,000 in 1996 and $73,681,000 in 1995) 93,653 72,668
Mortgage-backed securities available for
sale (at market value) 45,067 55,041
Loans receivable (including loans held
for sale of $716,000 in 1996 and
$21,610,000 in 1995) 1,105,958 962,440
Allowance for loan losses ( 10,150) ( 10,081)
-------------------------
Net loans receivable 1,095,808 952,359
Other real estate owned, net 746 1,319
Federal income taxes 7,164 5,374
Office properties and equipment, net 15,676 14,850
Other assets 8,356 8,010
-------------------------
$1,364,024 $1,228,497
=========================
LIABILITIES
Checking and NOW accounts $ 98,109 $ 91,623
Money market accounts 89,047 86,080
Savings deposits 155,639 149,727
Time deposits 590,573 594,046
Accrued interest 1,463 1,456
-------------------------
Total deposits 934,831 922,932
Securities sold under agreements
to repurchase 46,852 --
FHLB advances and other borrowed money 285,244 216,295
Advance payments by borrowers and
investors held in escrow 12,381 11,329
Other liabilities 5,762 5,962
-------------------------
Total liabilities 1,285,070 1,156,518
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-
7,586,186 in 1996 and 7,497,305 in 1995) 76 75
Additional paid-in capital 50,550 49,892
-------------------------
Total paid-in capital 50,626 49,967
Retained earnings - substantially restricted 27,422 20,573
Less cost of treasury stock (21,456 shares
in 1996 and 1995) ( 213) ( 213)
Less leveraged ESOP stock ( 45) ( 63)
Unrealized holding gains on debt securities
available for sale, net of tax 1,164 1,715
-------------------------
Total stockholders' equity 78,954 71,979
-------------------------
$1,364,024 $1,228,497
=========================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---------------------------------------------------------------
(In thousands except per share)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $21,435 $18,059 $41,415 $34,388
Mortgage-backed securities 2,477 2,748 4,753 5,512
Investments and deposits 1,514 2,046 3,258 3,777
---------------------------------------------------------------
TOTAL INTEREST INCOME 25,426 22,853 49,426 43,677
Interest expense:
Deposits 10,856 9,282 21,906 17,617
Securities sold under agreements to repurchase 597 633 692 998
FHLB advances and other borrowed money 3,433 3,328 6,606 6,500
Interest rate instruments -- 882 -- 2,209
---------------------------------------------------------------
TOTAL INTEREST EXPENSE 14,886 14,125 29,204 27,324
---------------------------------------------------------------
NET INTEREST INCOME 10,540 8,728 20,222 16,353
Provision for loan losses 300 800 600 1,000
---------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,240 7,928 19,622 15,353
Noninterest income:
Loan servicing and administrative fees, net 703 431 1,026 1,021
Deposit related fees 879 763 1,699 1,492
Gain on loans held for sale 146 8 638 11
Other income 136 57 232 117
Gain (loss) on sale of investment securities 188 ( 120) 188 ( 120)
Gain on sale of loans and mortgage-backed
securities -- 899 -- 899
---------------------------------------------------------------
TOTAL NONINTEREST INCOME 2,052 2,038 3,783 3,420
Noninterest expense:
Compensation and benefits 4,903 3,890 8,984 7,733
Occupancy 685 491 1,397 1,043
Other expense 3,184 2,678 6,139 4,981
---------------------------------------------------------------
General and administrative expense 8,772 7,059 16,520 13,757
Other real estate owned, net 22 ( 389) 62 ( 465)
Amortization of intangibles -- 79 -- 213
Federal deposit insurance premiums 674 598 1,310 1,197
---------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 9,468 7,347 17,892 14,702
---------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE (CREDIT) 2,824 2,619 5,513 4,071
---------------------------------------------------------------
Federal income tax expense (credit) ( 537) 30 ( 1,336) 58
---------------------------------------------------------------
NET INCOME $ 3,361 $ 2,589 $ 6,849 $ 4,013
===============================================================
Earnings per common and common equivalent share:
PRIMARY $ 0.42 $ 0.35 $ 0.85 $ 0.54
===============================================================
FULLY DILUTED $ 0.41 $ 0.33 $ 0.84 $ 0.52
===============================================================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------------------------------
(In thousands)
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,849 $ 4,013
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 600 1,000
Depreciation and amortization of
office properties and equipment 985 892
Amortization of net discounts on
purchased loans and securities ( 670) ( 2,386)
Originations and purchases of loans held for sale ( 12,282) ( 1,002)
Proceeds from sales of loans held for sale 43,264 2,820
Realized and unrealized investment
security (gains)losses ( 188) 120
Realized and unrealized (gain)loss on loans and
mortgage-backed securities -- ( 897)
Amortization and writedown of loan servicing rights 78 151
Other ( 2,967) ( 3,433)
-------------------------------
Net cash provided by operating activities 35,669 1,278
INVESTING ACTIVITIES
Proceeds from sales of investment securities 298 10,069
Proceeds from maturities of investment securities 74,995 26,038
Purchases of investment securities ( 62,858) ( 47,529)
Proceeds from sales of mortgage-backed securities -- 4,478
Proceeds from sales of loans -- 35,218
Principal collected on mortgage-backed securities 22,949 6,548
Mortgage-backed securities purchased ( 34,634) --
Purchases of loans ( 131,769) ( 40,824)
Net change in loans receivable ( 41,734) ( 54,341)
(Increase)decrease in other real estate owned 573 1,257
Purchases of premises and equipment ( 1,797) ( 345)
-------------------------------
Net cash used by investing activities ( 173,977) ( 59,431)
FINANCING ACTIVITIES
Net change in time deposits ( 6,289) 37,593
Net change in other deposits 18,181 ( 6,631)
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 181,852 149,000
Payments on maturity of notes payable, securities
sold under agreements to repurchase and other
borrowed money ( 66,155) ( 130,427)
Net activity in advance payments by borrowers
and investors held in escrow 1,052 ( 3,582)
Proceeds from issuance of stock 659 12
Reduction of leverage ESOP stock 18 18
-------------------------------
Net cash provided by financing activities 129,318 45,983
-------------------------------
Increase (decrease) in cash and cash equivalents ( 8,990) ( 12,170)
Cash and cash equivalents at beginning of period 22,440 33,896
-------------------------------
Cash and cash equivalents at end of period $13,450 $21,726
===============================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
D&N FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six month periods ended June 30, 1996 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 8,070,809
and 7,421,063 for the three months ended June 30, 1996 and June 30, 1995,
respectively, and 8,042,065 and 7,420,821 for the six months ended June 30,
1996 and June 30, 1995, respectively. The weighted average number of common
and common equivalent shares used in computing fully diluted earnings per
share was 8,149,139 and 7,777,050 for the three months ended June 30, 1996 and
June 30, 1995, respectively, and 8,122,669 and 7,776,808 for the six months
ended June 30, 1996 and June 30, 1995, 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 impaired loans as well
as losses from the remainder of the portfolio. Management's determination of
the level of the allowance is based upon evaluation of the portfolio, past
experience, current economic conditions, size and composition of the portfolio,
collateral location and values, cash flow positions, industry concentrations,
delinquencies, and other relevant factors. The allowance is increased by a
provision for losses charged against income.
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<PAGE> 7
Changes in the allowance for loan losses are summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------------ -----------------
(In thousands)
Balance at beginning of period $ 10,141 $ 8,460 $ 10,081 $ 8,349
Charge-offs:
Single family 40 61 89 96
Income producing property -- 25 -- 225
Commercial -- -- -- --
Installment 332 225 589 424
------------------ -----------------
Total 372 311 678 745
Recoveries:
Single family 3 -- 3 2
Income producing property -- -- -- 245
Commercial -- -- -- --
Installment 78 103 144 201
------------------ -----------------
Total 81 103 147 448
------------------ -----------------
Net charge-offs 291 208 531 297
Provision charged to operations 300 800 600 1,000
------------------ -----------------
Balance at end of period $ 10,150 $ 9,052 $ 10,150 $ 9,052
================== =================
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.
A federal income tax credit was recorded in both of the 1996 reporting periods
and no federal income tax expense was recorded in either of the 1995 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. At June 30, 1996, no further
reductions of the valuation allowance are available to offset future tax
expense.
NOTE 5: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into the
Company. The Company issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. At the time of
the merger, Macomb had assets and stockholders' equity (unaudited)of
$41,932,000 and
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<PAGE> 8
$6,268,000, respectively. The merger was accounted for as a
pooling-of-interests, and accordingly, the financial statements, prior to the
merger, have been restated to include the results of Macomb.
Pre-merger amounts of net interest income and net income included in the fiscal
1996 consolidated statement of income are as follows:
<TABLE>
<CAPTION>
Net Interest Net
Income Income(Loss)
----------------------------
(In thousands)
<S> <C> <C>
D&N $ 9,465 $ 3,497
Macomb 217 ( 9)
----------------------------
$ 9,682 $ 3,488
============================
</TABLE>
A reconciliation of consolidated net interest income, net income and earnings
per share, previously reported and restated amounts, follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1995 June 30, 1995
-------------------------------------
(In thousands, except per share)
<S> <C> <C>
Net interest income
Previously reported $8,455 $15,784
As restated $8,728 $16,353
Net income
Previously reported $2,520 $3,860
As restated $2,589 $4,013
Primary earnings per share
Previously reported $0.37 $0.57
As restated $0.35 $0.54
Fully diluted earnings per share
Previously reported $0.35 $0.55
As restated $0.33 $0.52
</TABLE>
NOTE 6: RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have
been reclassified to conform with the current period presentation.
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<PAGE> 9
D&N FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information regarding D&N
Financial Corporation's (D&N or the Company) financial condition and results of
operations for the three-month and six-month periods ended June 30, 1996 and
1995. Ratios for the three-month and six-month periods are stated on an
annualized basis. Results of operations for the 1996 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 second quarter ended June 30, 1996
of $3.4 million, compared to net income of $2.6 million in the second quarter
of 1995. Return on assets and return on equity were 1.02% and 17.53%,
respectively, during the quarter ended June 30, 1996, compared to 0.89% and
16.29%, respectively, during the quarter ended June 30, 1995. The increase in
net income was primarily due to increases in net interest income and loan
servicing income plus decreases in loan loss provision and tax expense,
partially reduced by lower gains on sales of assets and increased operating
expenses.
For the six months ended June 30, 1996, the Company recorded
net income of $6.8 million, compared to net income of $4.0 million for the six
months ended June 30, 1995. Return on assets and return on equity were 1.07%
and 18.24%, respectively, during the six months ended June 30, 1996, compared
to 0.70% and 12.95%, respectively, during the six months ended June 30, 1995.
The increase in net income was primarily due to increases in net interest
income and gains on loans held for sale plus decreases in loan loss provision
and tax expense, partially reduced by lower gains on sales of assets and
increased operating expenses.
NET INTEREST INCOME
Net interest income, or the difference between interest earned on interest
earning assets such as loans and investments 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
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<PAGE> 10
on interest earning assets and interest bearing liabilities and the amount of
interest earning assets funded with non-interest or low-interest bearing funds.
Net interest income increased $1.8 million to $10.5 million for the
quarter ended June 30, 1996 compared to $8.7 million for the quarter ended June
30, 1995. The increase was due to increased volume and improved yields on
variable rate and short lived assets and to maturity of the Company's interest
rate exchange agreements. These improvements were partially offset by lower
yields on fixed rate, long term assets and increases in interest paid on
deposits due to higher volumes and general increases in market interest rates.
Similarly, net interest income increased $3.8 million to $20.2 million for
the six months ended June 30, 1996 from $16.4 million for the six months ended
June 30, 1995. The same factors that explained the second quarter comparison
were present during the year-to-date comparative periods.
After raising additional capital in December 1993 and by increasing its
consumer and commercial lending activities, the Company has been able to
increase its net interest earning assets and to realize increased net yields.
The result of these factors is that net interest margin has steadily improved
during recent quarters. Net interest margin was 3.27% for the second quarter
of 1996, compared to 3.08% for the second quarter of 1995. Net interest margin
was 3.23% for the first six months of 1996, compared to 2.94% for the 1995
six-month period.
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 amounts sufficient 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.
The Company recorded a $300,000 provision for loan losses during the
quarter ended June 30, 1996 compared to $800,000 recorded during the quarter
ended June 30, 1995. For the first six months of 1996, the Company's provision
for loan losses was $600,000, compared to $1.0 million for the first six months
of 1995. The allowance for loan losses has been maintained at approximately
1.00% of gross loans even as the loan portfolio has experienced significant
growth over the past several fiscal quarters.
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<PAGE> 11
NONINTEREST INCOME
Total noninterest income was $2.0 million in both the second quarter of
1996 and the second quarter of 1995. Loan servicing fees were up $272,000
largely due to lower rates of amortization on mortgage servicing rights.
Deposit related fees were up $116,000 primarily due to increased ATM network
income. Gain on loans held for sale increased $138,000 due to increased sales
of loans originated or purchased for sale and from the recognition of
originated mortgage servicing rights.
During the current year quarter, the Company sold investment securities
from its available-for-sale portfolio at a gain of $188,000. During the prior
year quarter, the Company sold several low-yielding investment and
mortgage-backed securities from its available-for-sale portfolios and
reinvested the proceeds in higher-yielding securities of a similar nature.
Additionally, the Company sold a $34.6 million package of loans and used the
proceeds to fund loan demand and to reduce short-term debt. These transactions
resulted in net gains of $779,000 in the prior year quarter.
For the six months ended June 30, 1996, total noninterest income increased
to $3.8 million from $3.4 million recorded during the six months ended June 30,
1995. Increases of $834,000 were in the areas of deposit related fees and gain
on loans held for sale due to the same factors as the three-month period. Also
for the same reasons as in the three month period, there was a decrease of
$591,000 in gains on sales of interest-earning assets.
NONINTEREST EXPENSE
Total noninterest expense increased $2.1 million to $9.4 million during
the quarter ended June 30, 1996, from $7.3 million during the prior year
quarter. Compensation and benefits increased due to general wage and benefit
increases, deferred compensation payments and additional staffing at new
banking facilities. Occupancy expense increased primarily because of increased
rental expense and leasehold improvements for new or expanded leased office
locations. The increase in other expense represents the higher cost of doing
business in additional and expanded facilities and locations and the resulting
cost of increased support operations. The primary areas of increase were
general office, data processing, furniture and equipment, marketing, legal and
state tax expense. Additionally, the prior year quarter included gains from
the sale of repossessed commercial real estate properties.
During the quarter, the Company incurred merger-related expenses in
connection with its acquisition of Macomb (see Note 5 of Notes to Consolidated
Financial Statements). These expenses accounted for $1.4 million of the $2.1
million increase in
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<PAGE> 12
noninterest expense experienced during the period.
For the six months ended June 30, 1996, total noninterest expense
increased $3.2 million to $17.9 million, compared to $14.7 million recorded
during the six months ended June 30, 1995. The factors contributing to the
year-to-date increase were the same as those for the quarterly variance.
FEDERAL INCOME TAXES
Federal income tax credits of $537,000 and $1.3 million were recorded
during the three months ended June 30, 1996 and the six months ended June 30,
1996, respectively, compared to essentially no federal income tax recorded in
either of the 1995 periods. 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. Beginning in the
third quarter of 1996, the Company expects to record normal provisions for
federal income tax expense.
FINANCIAL CONDITION
Total assets at June 30, 1996 were $1.36 billion, an increase of $135.5
million from December 31, 1995. Earning assets represented approximately 98%
of total assets as of June 30, 1996, substantially the same as at year-end
1995.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $97.6 million at June 30,
1996, down $21.3 million from December 31, 1995. 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 increased $11.0 million to $138.7 million at
June 30, 1996. During the period, the Company purchased $34.3 million of
government agency collateralized mortgage obligations with a weighted average
yield of 6.90% and a weighted average life of 2.5 years. The portfolio
experienced repayments and amortization during the period of $23.3 million plus
a decrease of $313,000 in market value recognized through stockholders' equity
on mortgage-backed securities available for sale.
NET LOANS RECEIVABLE
Net loans receivable increased $143.4 million during the period to $1.1
billion at June 30, 1996. Loan originations of $266.6 million and purchases of
$110.6 million exceeded repayments of $190.5 million and sales of $43.3
million. Loan originations
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<PAGE> 13
during the six months ended June 30, 1996 were substantially higher compared to
the first six months of 1995. Consumer loan
originations were $128.1 million compared to $95.7 million, while real estate
and commercial loan originations were $138.5 million compared to $73.7 million.
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>
June 30, December 31,
1996 1995
-------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 6,626 $ 8,225
Accruing loans delinquent more
than 90 days 2,425 24
Restructured loans -- --
-----------------------
Total nonperforming loans 9,051 8,249
Other real estate owned (OREO) 745 1,452
--------- ---------
Total nonperforming assets $ 9,796 $ 9,701
=======================
Nonperforming loans as a
percentage of total loans 0.82% 0.86%
=======================
Nonperforming assets as a
percentage of total assets 0.72% 0.79%
=======================
Allowance for loan losses as a
percentage of nonperforming loans 112.14% 122.21%
=======================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 103.61% 105.29%
=======================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses,
experienced a slight increase during the period. Nonaccruing loans decreased
as a large commercial real estate loan secured by a hotel was restored to
accrual status after several months of performance in accordance with the loan
contract terms. OREO decreased primarily due to the sale of a repossessed
apartment complex. However, accruing loans delinquent more than 90 days
increased as payments on a $2.4 million loan secured by a shopping center in
Mississippi continued to be delinquent. Subsequent to the reporting date, the
Company began foreclosure proceedings.
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<PAGE> 14
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's net investment in MSRs increased during the period to $1.4
million at June 30, 1996. The following table details activity in the
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1996 December 31, 1995
----------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,113 $ 968
Additions:
Capitalized servicing 351 621
Purchased servicing -- --
--------- --------
Total 351 621
Reductions:
Scheduled amortization 138 169
Additional amortization due
to changes in prepayment
assumptions 51 71
Impairment (recovery) ( 112) 234
Sales -- --
Transfers to loan portfolio under
recourse and other provisions -- 2
--------- --------
Total 77 476
--------- --------
Balance at end of period $ 1,387 $ 1,113
========= ========
Fair market value at end of period $ 1,640 $ 1,161
========= ========
</TABLE>
DEPOSITS
Deposits increased $11.9 million during the period to $934.8
million at June 30, 1996. Certificates of deposit decreased $3.5 million while
savings deposits increased $5.9 million, checking accounts increased $6.5
million and money market accounts increased $2.9 million. The Company's cost
of deposits decreased to 4.61% at June 30, 1996, compared to 4.80% at December
31, 1995, as a result of a general decrease in market rates of interest coupled
with the increase in lower cost core deposits and the decrease in higher cost
time deposits.
BORROWINGS
Total borrowings increased $115.8 million during the period to $332.1
million at June 30, 1996 in order to fund actual and further anticipated loan
growth. The Company's cost of borrowings was 5.64% at June 30, 1996, compared
to 6.09% at December 31, 1995.
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<PAGE> 15
CAPITAL
According to federal regulations, the Bank must meet certain minimum
capital ratios. As the following table indicates, the Bank's capital ratios at
June 30, 1996 exceeded these requirements.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual capital $ 72,710 $ 72,710 $ 82,715
Required capital 20,668 41,336 67,224
--------- --------- ---------
Excess capital $ 52,042 $ 31,374 $ 15,491
========= ========= =========
Actual ratio 5.28% 5.28% 9.84%
========= ========= =========
Required ratio 1.50% 3.00% 8.00%
========= ========= =========
</TABLE>
Consolidated stockholders' equity was $79.0 million at June 30, 1996 and
represents 5.79% 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 June 30, 1996, the Bank's average liquidity
ratio was 6.24%. At June 30, 1996, unused borrowing capacity as measured by
the Bank's inventory of readily available but unpledged collateral was
approximately $168 million. The Company considers its current liquidity and
other funding sources sufficient to fund its outstanding loan commitments and
scheduled liability maturities.
REGULATORY DEVELOPMENTS
The Bank is a member of the Savings Association Insurance Fund ("SAIF"),
which is administered by the FDIC. The FDIC is authorized to increase
assessment rates, on a semi-annual basis, if it determines that the reserve
ratio of the SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits.
As in the case with SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the Bank Insurance Fund (the "BIF")
of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF
insured deposits. The FDIC revised the premium schedule for BIF insured
institutions to provide a range of 0.04% to 0.31% of deposits in anticipation
of the BIF reaching the required reserve ratio. The revisions became effective
in the third quarter of 1995.
- 15 -
<PAGE> 16
The FDIC also noted that the SAIF is not expected to attain the designated
reserve ratio until the year 2002 due to the shrinking deposit base of SAIF
assessments and the requirement that SAIF premiums be used to make the interest
payments on bonds issued by the Financing Corporation ("FICO") in order to
finance the costs of resolving thrift failures in the 1980s. As a result, SAIF
insured members will generally be subject to higher deposit premiums than banks
until, all things being equal, the SAIF attains the required reserve ratio.
The effect of this potential disparity on the Bank and other SAIF members
is uncertain at this time. It may have the effect of permitting BIF-insured
banks to offer loan and deposit products on more attractive terms than SAIF
members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage. Proposed
legislation currently under consideration in the Congress provides for a
one-time assessment of 0.85% to 0.90% to be imposed on all SAIF insured
deposits as of March 31, 1995, including those held by commercial banks, and
BIF deposit insured premiums to be used to pay the FICO bond interest on a
pro-rata basis together with SAIF premiums. Based upon the Bank's deposits at
March 31, 1995 (the date currently utilized in the proposed legislation) and
assuming the legislation is adopted as proposed, the Bank's assessment would be
approximately $7.8 million.
- 16 -
<PAGE> 17
D&N FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement re: computation of per share
earnings
(27) Financial Data Schedule
(99) Additional exhibits
i. Interest rate/volume analysis:
quarter ended 6/30/96 vs.
quarter ended 6/30/95 and
six months ended 6/30/96 vs.
six months ended 6/30/95
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during
the quarter ended June 30, 1996.
- 17 -
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
D&N FINANCIAL CORPORATION
\s\ George J. Butvilas
----------------------------------
George J. Butvilas, President and
Chief Executive Officer
\s\ Kenneth R. Janson
----------------------------------
Kenneth R. Janson,
Executive Vice President/Chief
Financial Officer and Treasurer
Date: August 12, 1996
-----------------------
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
11 Statement Re: Computation of Per Share Earnings
99(i) D&N Financial Corporation's Rate/Volume Analysis
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1996 1995
--------------- ----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income $3,361 $3,361 $2,589 $2,589
====== ====== ====== ======
Average shares
Common 7,550 7,550 7,421 7,421
Common equivalents 521 599 208 356
------ ------ ------ ------
Total 8,071 8,149 7,629 7,777
====== ====== ====== ======
Earnings per common share $ 0.42 $ 0.41 $ 0.35 $ 0.33
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1996 1995
--------------- ----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income $6,849 $6,849 $4,013 $4,013
====== ====== ====== ======
Average shares
Common 7,524 7,524 7,421 7,421
Common equivalents 518 599 108 356
------ ------ ------ ------
Total 8,042 8,123 7,529 7,777
====== ====== ====== ======
Earnings per common share $ 0.85 $ 0.84 $ 0.54 $ 0.52
====== ====== ====== ======
</TABLE>
Common share equivalents assume exercise of stock options and warrants,
if dilutive.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,512
<INT-BEARING-DEPOSITS> 938
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,536
<INVESTMENTS-CARRYING> 152,288
<INVESTMENTS-MARKET> 152,235
<LOANS> 1,105,958
<ALLOWANCE> (10,150)
<TOTAL-ASSETS> 1,095,808
<DEPOSITS> 934,831
<SHORT-TERM> 46,852
<LIABILITIES-OTHER> 18,143
<LONG-TERM> 285,244
0
0
<COMMON> 50,626
<OTHER-SE> 28,328
<TOTAL-LIABILITIES-AND-EQUITY> 1,364,024
<INTEREST-LOAN> 21,435
<INTEREST-INVEST> 3,991
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,426
<INTEREST-DEPOSIT> 10,856
<INTEREST-EXPENSE> 14,886
<INTEREST-INCOME-NET> 10,540
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 188
<EXPENSE-OTHER> 9,468
<INCOME-PRETAX> 2,824
<INCOME-PRE-EXTRAORDINARY> 3,361
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,361
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 3.27
<LOANS-NON> 6,626
<LOANS-PAST> 2,425
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 18,119
<ALLOWANCE-OPEN> 10,141
<CHARGE-OFFS> 372
<RECOVERIES> 81
<ALLOWANCE-CLOSE> 10,150
<ALLOWANCE-DOMESTIC> 10,150
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT (99)i.
RATE / VOLUME ANALYSIS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST
-------------------- ---------------- -----------------------
OPERATING MARGIN FOR
QUARTER ENDED 06/30/96 06/30/95 06/30/96 06/30/95 06/30/96 06/30/95
- ------------------------- ---------- ---------- -------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $1,068,877 $875,063 8.02% 8.25% $21,435 $18,059
Mortgage-backed securities 126,516 144,233 7.83% 7.62% 2,477 2,748
Investments 91,421 115,994 6.66% 7.07% 1,514 2,046
---------- ---------- -------- -------- -------- --------
1,286,814 1,135,291 7.91% 8.05% 25,426 22,853
---------- ---------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits 933,294 830,741 4.68% 4.48% 10,856 9,282
Borrowings
Securities sold w/repo 43,998 41,655 5.37% 6.10% 597 633
Notes payable 234,629 194,684 5.39% 6.18% 3,198 3,040
Other borrowed money 9,822 11,718 9.57% 9.83% 235 288
---------- ---------- -------- -------- -------- --------
SUBTOTAL - BORROWINGS 288,449 248,057 5.53% 6.34% 4,030 3,961
Interest rate instruments n/a n/a -- 0.33% -- 882
---------- ---------- -------- -------- -------- --------
1,221,743 1,078,798 4.88% 5.23% 14,886 14,125
---------- ---------- -------- -------- -------- --------
INTEREST RATE SPREAD 3.03% 2.82%
======== ========
EXCESS AVERAGE EARNING ASSETS $65,070 $56,493
========== ==========
NET INTEREST MARGIN 3.27% 3.08% $10,540 $8,728
======== ======= ========== ========
<CAPTION>
VARIANCE DUE TO:
----------------
OPERATING MARGIN FOR INCREASE
QUARTER ENDED (DECREASE) VOLUME RATE
- ------------------------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $ 3,376 $ 3,890 ($514)
Mortgage-backed securities (271) (345) 74
Investments (532) (417) (115)
-------- -------- --------
2,573 3,128 (555)
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits 1,574 1,161 413
Borrowings
Securities sold w/repo (36) 37 (73)
Notes payable 158 575 (417)
Other borrowed money (53) (46) (7)
-------- -------- --------
SUBTOTAL - BORROWINGS 69 566 (497)
Interest rate instruments (882) -- (882)
-------- -------- --------
761 1,727 (966)
-------- -------- --------
INTEREST RATE SPREAD
EXCESS AVERAGE EARNING ASSETS
NET INTEREST MARGIN $ 1,812 $ 1,401 $ 411
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST
-------------------------- --------------------- --------------------
OPERATING MARGIN FOR INCREASE
YEAR TO DATE 06/30/96 06/30/95 06/30/96 06/30/95 06/30/96 06/30/95 (DECREASE)
- --------------------------------- ---------- ---------- -------- -------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $1,029,146 $851,823 8.05% 8.08% $41,415 $34,388 $7,027
Mortgage-backed securities 123,449 146,749 7.70% 7.51% 4,753 5,512 (759)
Investments 96,879 112,830 6.76% 6.75% 3,258 3,777 (519)
---------- ---------- ----- ---- ------- ------- -------
1,249,474 1,111,403 7.91% 7.87% 49,426 43,677 5,749
---------- ---------- ----- ---- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits 930,673 823,889 4.73% 4.31% 21,906 17,617 4,289
Borrowings
Securities sold w/repo 25,459 33,190 5.38% 6.06% 692 998 (306)
Notes payable 220,316 190,589 5.49% 6.17% 6,117 5,915 202
Other borrowed money 10,079 11,870 9.70% 9.86% 489 585 (96)
---------- ---------- ----- ---- ------- ------- -------
SUBTOTAL - BORROWINGS 255,854 235,649 5.65% 6.34% 7,298 7,498 (200)
Interest rate instruments n/a n/a -- 0.41% -- 2,209 (2,209)
---------- ---------- ----- ---- ------- ------- -------
1,186,527 1,059,538 4.93% 5.17% 29,204 27,324 1,880
---------- ---------- ----- ---- ------- ------- -------
INTEREST RATE SPREAD 2.98% 2.70%
===== ====
EXCESS AVERAGE EARNING ASSETS $62,947 $51,865
========== ==========
NET INTEREST MARGIN 3.23% 2.94% $20,222 $16,353 $3,869
===== ==== ======= ======= =======
<CAPTION>
VARIANCE DUE TO:
---------------------
OPERATING MARGIN FOR
YEAR TO DATE VOLUME RATE
- --------------------------------- -------- ---------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $ 7,167 ($140)
Mortgage-backed securities (894) 135
Investments (526) 7
-------- --------
5,747 2
-------- --------
INTEREST-BEARING LIABILITIES:
Deposits 2,489 1,800
Borrowings
Securities sold w/repo (204) (102)
Notes payable 895 (693)
Other borrowed money (87) (9)
-------- --------
SUBTOTAL - BORROWINGS 604 (804)
Interest rate instruments -- (2,209)
-------- --------
3,093 (1,213)
-------- --------
INTEREST RATE SPREAD
EXCESS AVERAGE EARNING ASSETS
NET INTEREST MARGIN $ 2,654 $ 1,215
======== ========
</TABLE>
