<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,1996
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17137
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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
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(Address of principal executive offices)
(906) 482-2700
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(Registrant's telephone number, including area code)
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(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 7,593,475
----------------------------- ---------------------------
(Class) (Shares Outstanding as of
October 31, 1996)
================================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
Page No.
PART I Financial Information
Consolidated statements of condition -
September 30, 1996 and December 31, 1995 3
Consolidated statements of income -
three months ended September 30, 1996 and 1995
nine months ended September 30, 1996 and 1995 4
Consolidated statements of cash flows -
nine months ended September 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 16
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<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------------------------
(In thousands)
-------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,738 $ 9,264
Interest-bearing deposits in other bank 4,532 13,176
---------------------------
Total cash and cash equivalents 10,270 22,440
Investment securities (market value of
$72,984,000 in 1996 and $55,840,000 in 1995) 73,347 55,537
Investment securities available for sale
(at market value) 30,757 40,899
Mortgage-backed securities (market value of
$127,242,000 in 1996 and $73,647,000 in 1995) 128,254 72,668
Mortgage-backed securities available for sale
(At market value) 41,642 55,041
Loans receivable (including loans held for
sale of $2,567,000 in 1996 and $21,610,000
in 1995) 1,100,094 962,440
Allowance for loan losses ( 10,390) ( 10,081)
--------------------------
Net loans receivable 1,089,704 952,359
Other real estate owned, net 1,268 1,319
Federal income taxes 7,595 5,374
Office properties and equipment, net 15,625 14,850
Other assets 9,669 8,010
---------------------------
$1,408,131 $ 1,228,497
============================
LIABILITIES
Checking and NOW accounts $ 98,668 $ 91,621
Money market accounts 91,387 86,080
Savings deposits 154,764 149,728
Time deposits 598,892 594,044
Accrued interest 1,022 1,459
---------------------------
Total deposits 944,733 922,932
Securities sold under agreements
to repurchase 61,690 --
FHLB advances and other borrowed money 300,529 216,295
Advance payments by borrowers and
investors held in escrow 10,384 11,329
Other liabilities 12,646 5,962
----------------------------
Total liabilities 1,329,982 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 7,608,909 in 1996 and
7,497,305 in 1995) 76 75
Additional paid-in capital 50,729 49,892
----------------------------
Total paid in capital 50,805 49,967
Retained earnings - substantially restricted 26,337 20,573
Less cost of treasury stock (21,456 shares
in 1996 and 1995) ( 213) ( 213)
Less leveraged ESOP stock -- ( 63)
Unrealized holding gains on debt securities
available for sale, net of tax 1,220 1,715
----------------------------
Total stockholders' equity 78,149 71,979
----------------------------
$ 1,408,131 $ 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-----------------------------------------
(In thousands, except per share)
-----------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 22,466 $ 18,633 $ 63,881 $ 53,021
Mortgage-backed securities 2,646 2,573 7,399 8,085
Investments and deposits 1,993 1,919 5,251 5,696
----------------------------------------
TOTAL INTEREST INCOME 27,105 23,125 76,531 66,802
Interest expense:
Deposits 10,917 10,180 32,823 27,797
Securities sold under agreements
to repurchase 704 206 1,396 1,204
FHLB advances and other borrowed money 4,242 3,700 10,848 10,200
Interest rate instruments -- 212 -- 2,421
----------------------------------------
TOTAL INTEREST EXPENSE 15,863 14,298 45,067 41,622
----------------------------------------
NET INTEREST INCOME 11,242 8,827 31,464 25,180
Provision for loan losses 300 500 900 1,500
----------------------------------------
TOTAL NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,942 8,327 30,564 23,680
Noninterest income:
Loan servicing and administrative fees 398 602 1,424 1,623
Deposit related fees 996 818 2,695 2,310
Gain on sale of loans held for sale 204 572 842 583
Other income 82 57 314 174
----------------------------------------
1,680 2,049 5,275 4,690
Gain (loss) on sale of investment securities -- -- 188 ( 120)
Gain on sale of loans and mortgage-backed
securities -- -- -- 899
----------------------------------------
TOTAL NONINTEREST INCOME 1,680 2,049 5,463 5,469
Noninterest expense:
Compensation and benefits 4,232 3,530 13,216 11,263
Occupancy 706 572 2,103 1,615
Other expenses 2,669 2,753 8,808 7,734
----------------------------------------
Total general and administrative expense 7,607 6,855 24,127 20,612
Other real estate owned, net 6 ( 239) 68 ( 704)
Amortization of intangibles -- 77 -- 290
Federal deposit insurance premiums 6,136 599 7,446 1,796
----------------------------------------
TOTAL NONINTEREST EXPENSE 13,749 7,292 31,641 21,994
----------------------------------------
INCOME(LOSS)BEFORE INCOME TAX EXPENSE (CREDIT) ( 1,127) 3,084 4,386 7,155
----------------------------------------
Federal income tax expense (credit) ( 42) 26 ( 1,378) 84
----------------------------------------
NET INCOME(LOSS) ($ 1,085) $ 3,058 $ 5,764 $ 7,071
========================================
Earnings per common and common equivalent share:
PRIMARY ($ 0.13) $ 0.39 $ 0.72 $ 0.92
========================================
FULLY DILUTED ($ 0.13) $ 0.39 $ 0.71 $ 0.90
========================================
</TABLE>
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<PAGE> 5
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------------------
(In thousands)
---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,764 $ 7,071
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 900 1,500
Depreciation and amortization of
office properties and equipment 1,462 1,352
Amortization of net discount on
purchased loans and securities (203) (2,676)
Originations and purchases of loans held for sale (12,755) (52,978)
Proceeds from sales of loans held for sale 58,156 44,041
(Gain)loss on investment securities (188) 120
(Gain)on loans and mortgage-backed securities -- (899)
Amortization and writedown of loan servicing rights 191 207
Other 1,627 (5,462)
-----------------------
Net cash provided by (used in) operating activities 54,954 (7,724)
INVESTING ACTIVITIES
Proceeds from sales of investment securities 298 10,070
Proceeds from maturities of investment securities 83,991 33,040
Purchases of investment securities (91,674) (55,200)
Proceeds from sales of mortgage-backed securities -- 4,477
Proceeds from sales of loans -- 34,772
Principal collected on mortgage-backed securities 38,417 13,809
Mortgage-backed securities purchased (34,634) --
Purchases of loans (130,790) (81,221)
Net change in loans receivable (98,533) (49,468)
Decrease in other real estate owned 51 5,063
Purchases of premises and equipment (2,221) (1,559)
-----------------------
Net cash used in investing activities (235,095) (86,217)
FINANCING ACTIVITIES
Net change in time deposits 4,848 59,964
Net change in other deposits 17,387 (5,505)
Proceeds from notes payable, securities sold
under agreements to repurchase, FHLB advances
and other borrowed money 266,690 183,700
Payments on maturity of notes payable, securities
sold under agreement to repurchase, FHLB advances
and other borrowed money (120,910) (161,905)
Net change in advance payments by borrowers
and investors held in escrow (945) (4,604)
Proceeds from issuance of stock 838 59
Purchase of treasury stock/warrants -- (44)
Reduction of leverage ESOP stock 63 27
-----------------------
Net cash provided by financing activities 167,971 71,692
-----------------------
DECREASE IN CASH AND CASH EQUIVALENTS (12,170) (22,249)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,440 33,896
-----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,270 $ 11,647
=======================
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
D&N FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine month periods ended September 30, 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 8,119,258
and 7,820,768 for the three months ended September 30, 1996 and September 30,
1995, respectively, and 8,058,047 and 7,646,108 for the nine months ended
September 30, 1996 and September 30, 1995, respectively. The weighted average
number of common and common equivalent shares used in computing fully diluted
earnings per share was 8,202,564 and 7,881,373 for the three months ended
September 30, 1996 and September 30, 1995, respectively, and 8,167,211 and
7,879,200 for the nine months ended September 30, 1996 and September 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------------------- -----------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,150 $ 9,052 $ 10,081 $ 8,349
Charge-offs:
Single family 40 49 129 145
Income producing property -- -- -- 225
Commercial -- -- -- --
Installment 289 242 878 666
------------------- --------------------
Total 329 291 1,007 1,036
Recoveries:
Single family -- -- 3 2
Income producing property 193 -- 193 245
Commercial -- -- -- --
Installment 76 89 220 290
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Total 269 89 416 537
------------------- -------------------
Net charge-offs 60 202 591 499
Provision charged to operations 300 500 900 1,500
------------------- -------------------
Balance at end of period $ 10,390 $ 9,350 $ 10,390 $ 9,350
=================== ===================
</TABLE>
NOTE 4: SAVINGS AND LOAN INSURANCE FUND ASSESSMENT
As of September 30, 1996, the Company accrued a one-time charge of $5.5 million
pretax, ($3.6 million after-tax) as the mandated contribution of its
wholly-owned subsidiary, D&N Bank, to replenish the Federal Deposit Insurance
Corporation's depleted Savings Association Insurance Fund (SAIF). This charge
is the result of federal legislation passed and signed into law on September
30, 1996, which requires all thrifts to pay a one-time assessment to restore
the SAIF fund to it statutory reserve level. The assessment is 65.7 basis
points (b.p.) of the institution's deposits as of March 31, 1995.
NOTE 5: 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 the first two quarters of 1996 as
a result of the elimination of a previously recorded deferred tax valuation
allowance. The third quarter of 1996 reflects a federal income tax credit due
to the net tax effect of the loss resulting from the one-time SAIF charge,
offset by a $500,000 federal income tax charge resulting from a change in the
taxation rules covering thrifts' reserves for losses on loans. This charge
follows the August 1996 enactment of federal legislation which disallowed
recapture of pre-1988 loan loss provision deductions.
- 7 -
<PAGE> 8
No material federal income taxes were recorded in the same 1995 reporting
periods due to reductions of the deferred tax valuation allowance.
NOTE 6: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into the
Company. The Company issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. At the time of
the merger, Macomb had assets and stockholders' equity (unaudited) of
$41,932,000 and $6,268,000, respectively. The merger was accounted for as a
pooling-of-interests, and accordingly, the financial statements, prior to the
merger, have been restated to include the results of Macomb.
A reconciliation of consolidated net interest income, net income and earnings
per share, previously reported and restated amounts, follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1995 September 30, 1995
----------------------------------------
(In thousands, except per share)
<S> <C> <C>
Net interest income
Previously reported $ 8,548 $ 24,332
As restated $ 8,827 $ 25,180
Net income
Previously reported $ 2,996 $ 6,856
As restated $ 3,058 $ 7,071
Primary earnings per share
Previously reported $ 0.45 $ 1.02
As restated $ 0.39 $ 0.92
Fully diluted earnings per share
Previously reported $ 0.42 $ 0.96
As restated $ 0.39 $ 0.90
</TABLE>
NOTE 7: RECLASSIFICATIONS
Certain amounts in the previously issued consolidated financial statements
have been reclassified to conform with the current period presentation.
- 8 -
<PAGE> 9
D&N FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding D&N
Financial Corporation's (D&N or the Company) financial condition and results of
operations for the three-month and nine-month periods ended September 30, 1996
and 1995. Ratios for the three-month and nine-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
D&N Bank, the company's wholly-owned subsidiary, incurred a one-time
after-tax charge of $3.6 million during the quarter as its mandated
contribution to replenish the Federal Deposit Insurance Corporation's depleted
Savings Association Insurance Fund (SAIF). This charge is the result of
federal legislation passed and signed into law on September 30, 1996, which
requires all thrifts to pay a one-time assessment to restore the SAIF fund to
its statutory reserve level. The assessment is 65.7 basis points (b.p.) of an
institution's deposits as of March 31, 1995. The Bank also incurred a $500,000
charge related to federal legislation changing the taxation rules covering
thrifts' reserves for losses on loans. This charge follows the August 1996
enactment of federal legislation which disallowed recapture of pre-1988 loan
loss provision deductions.
Including the one-time charges, the Company recorded a net loss for the
quarter ended September 30, 1996 of $1.1 million, compared to net income of
$3.1 million in the third quarter of 1995. Return on assets and return on
equity were (0.31)% and (5.44)%, respectively, during the quarter ended
September 30, 1996, compared to 1.02% and 18.50%, respectively, during the
quarter ended September 30, 1995. The decrease in net income was primarily due
to the one-time SAIF charge, the disallowed loan loss recapture, higher
operating costs and reduction in both loan servicing income and gain on sale of
loans held for sale, partially offset by higher net interest income and higher
deposit related fees.
For the nine months ended September 30, 1996, the Company recorded net
income of $5.8 million, compared to net income of $7.1 million for the nine
months ended September 30, 1995. Return on assets and return on equity were
0.58% and 10.02%, respectively, during the nine months ended September 30,
1996, compared to 0.81% and 14.88%, respectively, during the nine months ended
September 30, 1995. The same factors that explained the third quarter
comparison were present during the year-to-date comparative periods.
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<PAGE> 10
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 of 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 $2.4 million to $11.2 million for the
quarter ended September 30, 1996 compared to $8.8 million for the quarter ended
September 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
increased interest paid on FHLB advances and borrowings under agreements to
repurchase along with increases in interest paid on deposits due to a higher
volume of deposits for the period.
Similarly, net interest income increased $6.3 million to $31.5 million
for the nine months ended September 30, 1996 from $25.2 million for the nine
months ended September 30, 1995. The same factors that explained the third
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 3.37% for the third quarter of
1996, compared to 3.05% for the third quarter of 1995. Net interest margin was
3.28% for the first nine months of 1996, compared to 3.05% for the 1995
nine-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 September 30, 1996 compared to a $500,000 provision recorded
during the quarter ended September 30, 1995. For the first nine months of
1996, the Company's provision for loan losses was $900,000, compared to $1.5
million for the first nine months of 1995. The allowance for possible loan
losses has been maintained at approximately 1.00% of gross loans even as the
loan portfolio has experienced significant growth over the past nine months.
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<PAGE> 11
NONINTEREST INCOME
Total noninterest income was $1.7 million for the third quarter of 1996,
versus $2.0 million for the third quarter of 1995. Loan servicing fees were
down $204,000 largely due to higher rates of amortization on mortgage
servicing rights. Deposit related fees were up $178,000 primarily due to
increased ATM network income. Gain on sale of loans held for sale decreased
$368,000 due to decreased sales of loans originated or purchased for sale.
The adoption of SFAS 122 in the prior year quarter also resulted in an
increase in income by a recognition of servicing rights created back to July 1,
1995. This increased income in the prior year quarter by $458,000.
For the nine months ended September 30, 1996 and September 30, 1995,
total noninterest income was $5.5 million, in each period. Increases of
$644,000 occurred in the areas of deposit related fees and gain on loans held
for sale. Also during the current year, the Company sold investment securities
from its available-for-sale portfolio at a gain of $188,000. During the prior
year, 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 period. For the above reasons, there was a decrease
of $591,000 in gain on sales of interest-earning assets.
NONINTEREST EXPENSE
Total noninterest expense increased $6.4 million to $13.7 million during
the quarter ended September 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 prior year's quarter included sales of two commercial OREO
properties, resulting in a decrease of the net cost effect that quarter. FDIC
insurance rose to $6.1 million for the current quarter versus $599,000 for the
prior year's quarter, due to a one-time charge in the current quarter of
approximately $5.5 million to replenish the SAIF, see "Regulatory Developments".
For the nine months ended September 30, 1996, total noninterest expense
increased $9.6 million to $31.6 million, compared to $22.0 million recorded
during the nine months ended September 30, 1995. Similar factors contributed
to the increase in noninterest expense for the nine month period as contributed
to the three month period.
In addition to items described in the quarterly comparison, the Company
also incurred merger-related expenses in connection with its acquisition of
Macomb (see Note 6 of Notes to Consolidated Financial Statements). These
expenses accounted for approximately $1.5 million of the $9.6 million increase
in the year versus prior year noninterest expense.
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<PAGE> 12
FEDERAL INCOME TAXES
Federal income tax credits of $42,000 and $1.4 million were recorded
during the three months and nine months ended September 30, 1996, respectively,
compared to no material federal income tax recorded in either of the 1995
periods. The federal income tax credit in the third quarter was primarily due
to the net tax effect of the one-time SAIF charge in excess of third quarter
pre-tax income. During the fourth quarter of 1996, the Company expects to
record normal provisions for federal income tax expense.
FINANCIAL CONDITION
Total assets at September 30, 1996 were $1.41 billion, an increase of
$180 million from December 31, 1995. Earning assets represented approximately
98% of total assets as of September 30, 1996, substantially the same as at
year-end 1995.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $114.4 million at
September 30, 1996, down $4.5 million from December 31, 1995. During the
period, a portion of the Company's liquidity portfolio was used to partially
fund loan demand.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities increased $42.2 million to $169.9 million at
September 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 and in a separate
transaction, exchanged $46.7 million in fixed-rate mortgage loans for FNMA
mortgage-backed securities. The FNMA mortgage-backed securities have a
weighted average coupon of 6.82% and a weighted average maturity of 12 years.
No gain or loss was recorded in this exchange transaction. The entire
mortgage-backed securities portfolio experienced repayments and amortization
during the period of $38.4 million plus a decrease of $281,000 in market value
recognized through stockholders' equity on mortgage-backed securities available
for sale.
NET LOANS RECEIVABLE
Net loans receivable increased $137.3 million during the period to $1.1
billion at September 30, 1996. Loan originations of $393.5 million and
purchases of $130.4 million exceeded repayments of $280.8 million and sales
(and exchanges) of $104.9 million. Loan originations during the nine months
ended September 30, 1996 were substantially higher compared to the first nine
months of 1995. Consumer loan originations were $208.7 million compared to
$148.7 million, while real estate and commercial loan originations were $184.8
million compared to $144.5 million.
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<PAGE> 13
NONPERFORMING ASSETS AND RISK ELEMENTS
The following table sets forth the amounts and categories of risk
elements in the Company's loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 7,962 $ 8,225
Accruing loans delinquent more
than 90 days -- 24
Restructured loans -- --
-------------------------
Total nonperforming loans 7,962 8,249
Other real estate owned (OREO) 1,268 1,452
-------------------------
Total nonperforming assets $ 9,230 $ 9,701
=========================
Nonperforming loans as a
percentage of total loans 0.72% 0.86%
=========================
Nonperforming assets as a
percentage of total assets 0.66% 0.79%
=========================
Allowance for loan losses as a
percentage of nonperforming loans 130.49% 122.21%
=========================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 112.57% 105.29%
=========================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses,
experienced a slight decrease during the period. OREO decreased primarily due
to the sale of a repossessed apartment complex, offset partially by increased
OREO on purchased residential properties.
MORTGAGE SERVICING RIGHTS (MSRs)
The Company's net investment in MSRs increased during the period to $1.4
million at September 30, 1996. The following table details activity in the
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, 1993 December 31, 1995
----------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,113 $ 968
Additions:
Capitalized servicing 486 621
Purchased servicing -- --
-------- -------
Total 486 621
Reductions:
Scheduled amortization 200 169
Additional amortization due
to changes in prepayment
assumptions 78 71
Impairment (recovery) ( 88) 234
Sales -- --
Transfers to loan portfolio under
recourse and other provisions -- 2
-------- -------
Total 190 476
-------- -------
Balance at end of period $ 1,409 $ 1,113
======== =======
Fair market value at end of period $ 1,778 $ 1,161
======== =======
</TABLE>
- 13 -
<PAGE> 14
DEPOSITS
Deposits increased $21.8 million during the period to $944.7 million at
September 30, 1996. Certificates of deposit increased $4.8 million while
savings deposits increased $5.0 million, checking accounts increased $7.0
million and money market accounts increased $5.3 million. The Company's cost
of deposits decreased to 4.59% at September 30, 1996, compared to 4.82% 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.
BORROWINGS
Total borrowings increased $145.9 million during the period to $362.2
million at September 30, 1996 in order to fund actual and future anticipated
loan growth. The Company's cost of borrowings was 5.72% at September 30, 1996,
compared to 6.09% at December 31, 1995.
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, 1996 exceeded these requirements.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Actual capital $ 71,010 $ 71,010 $ 81,255
Required capital 21,278 42,556 68,799
-------- -------- --------
Excess capital $ 49,732 $ 28,454 $ 12,456
======== ======== ========
Actual ratio 5.01% 5.01% 9.45%
======== ======== ========
Required ratio 1.50% 3.00% 8.00%
======== ======== ========
</TABLE>
Consolidated stockholders' equity was $78.1 million at September 30, 1996
and represents 5.55% 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, 1996, the Bank's average
liquidity ratio was 5.87%. At September 30, 1996, unused borrowing capacity as
measured by the Bank's inventory of readily available but unpledged collateral
was approximately $154 million. The Company considers its current liquidity
and other funding sources sufficient to fund its outstanding loan commitments
and scheduled liability maturities.
- 14 -
<PAGE> 15
REGULATORY DEVELOPMENTS
The deposits of savings associations, such as D&N Bank, are presently
insured by the SAIF, which together with the BIF (Bank Insurance Fund), are the
two insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. In order to help eliminate
this disparity and any competitive disadvantage due to disparate deposit
insurance premium schedules, legislation to recapitalize the SAIF was enacted
on September 30, 1996.
The legislation requires a special one-time assessment of approximately
65.7 cents per $100 of SAIF deposits held by the Bank at March 31, 1995.
Management recognized the one-time special assessment in a tax affected charge
to earnings of approximately $3.6 million during the quarter ended September
30, 1996. The legislation is intended to fully recapitalize the SAIF fund so
that commercial bank and thrift deposits will be charged FDIC premiums at the
same rate beginning October 1, 1996.
D&N Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation (FICO) bond obligation. It is
anticipated that the FICO assessment for SAIF insured institutions will be 6.5
cents per $100 of deposits while BIF insured institutions will pay 1.3 cents
per $100 of deposits until the year 2000 when the assessment will be imposed at
the same rate on all FDIC insured institutions. Accordingly, as result of the
reduction of the SAIF assessment and the resulting FICO assessment, the annual
before tax decrease in assessment costs is expected to be approximately $1.6
million based upon a September 30, 1996 assessment base.
- 15 -
<PAGE> 16
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 9/30/96 vs.
quarter ended 9/30/95 and
nine months ended 9/30/96 vs.
nine months ended 9/30/95
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
ended September 30, 1996.
- 16 -
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
D&N FINANCIAL CORPORATION
\s\ George J. Butvilas
------------------------------
George J. Butvilas, President and
Chief Executive Officer
\s\ Kenneth R. Janson
-------------------------------
Kenneth R. Janson,
Executive Vice President/Chief
Financial Officer and Treasurer
Date: November 14, 1996
<PAGE> 18
Exhibit Index
Exhibit No. Description
11 Computation of Per Share Earnings
27 FINANCIAL DATA SCHEDULE
99 Operating Margin And Rate Volume Analysis
D&N Financial Corporation
<PAGE> 1
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------
1996 1995
---------------------- ---------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income ($1,085) ($1,085) $3,058 $3,058
====== ====== ====== ======
Average share
Common 7,576 7,576 7,424 7,424
Common equivalents 543 627 397 457
------ ------ ------ ------
Total 8,119 8,203 7,821 7,881
====== ====== ====== ======
Earnings per common share ($ 0.13) ($ 0.13) $ 0.39 $ 0.39
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------
1996 1995
---------------------- -------------------
Fully Fully
Primary Diluted Primary Diluted
------- -------- ------- -------
(In thousands, except per share)
<S> <C> <C> <C> <C>
Net income $ 5,764 $ 5,764 $ 7,071 $ 7,071
======= ======= ======= =======
Average shares
Common 7,540 7,540 7,422 7,422
Common equivalents 518 627 224 457
------- ------- ------- -------
Total 8,058 8,167 7,646 7,879
======= ======= ======= =======
Earnings per common share $ 0.72 $ 0.71 $ 0.92 $ 0.90
======= ======= ======= =======
</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> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,738
<INT-BEARING-DEPOSITS> 4,532
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,399
<INVESTMENTS-CARRYING> 201,601
<INVESTMENTS-MARKET> 200,226
<LOANS> 1,100,094
<ALLOWANCE> 10,390
<TOTAL-ASSETS> 1,408,131
<DEPOSITS> 944,733
<SHORT-TERM> 61,690
<LIABILITIES-OTHER> 23,030
<LONG-TERM> 300,529
0
0
<COMMON> 50,805
<OTHER-SE> 27,344
<TOTAL-LIABILITIES-AND-EQUITY> 1,408,131
<INTEREST-LOAN> 22,466
<INTEREST-INVEST> 4,639
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27,105
<INTEREST-DEPOSIT> 10,917
<INTEREST-EXPENSE> 15,863
<INTEREST-INCOME-NET> 11,242
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,749
<INCOME-PRETAX> (1,127)
<INCOME-PRE-EXTRAORDINARY> (1,085)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,085)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
<YIELD-ACTUAL> 3.37
<LOANS-NON> 7,962
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,131
<ALLOWANCE-OPEN> 10,150
<CHARGE-OFFS> 329
<RECOVERIES> 269
<ALLOWANCE-CLOSE> 10,390
<ALLOWANCE-DOMESTIC> 10,390
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT (99)
OPERATING MARGIN AND RATE VOLUME ANALYSIS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST
----------------------- ------------------- -----------------------
OPERATING MARGIN FOR
YEAR TO DATE 09/30/96 09/30/95 09/30/96 09/30/95 09/30/96 09/30/95
- ----------------------------------------------- ----------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $ 1,053,720 $ 874,732 8.08% 8.08% $ 63,881 $ 53,021
Mortgage-backed securities 130,588 143,641 7.55% 7.50% 7,399 8,085
Investments 99,836 111,695 7.03% 6.82% 5,251 5,696
----------- ---------- ---- ---- -------- --------
1,284,145 1,130,068 7.95% 7.88% 76,531 66,802
----------- ---------- ---- ---- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits 934,395 836,584 4.69% 4.44% 32,823 27,797
Borrowings
Securities sold w/repo 34,122 26,525 5.38% 6.06% 1,396 1,204
Notes payable 242,175 202,084 5.50% 6.10% 10,140 9,343
Other borrowed money 9,836 11,674 9.60% 9.79% 708 857
----------- ---------- ---- ---- -------- --------
SUBTOTAL - BORROWINGS 286,132 240,283 5.63% 6.27% 12,244 11,404
Interest rate instruments n/a n/a -- 0.22% -- 2,421
----------- ---------- ---- ---- -------- --------
1,220,527 1,076,867 4.91% 5.07% 45,067 41,622
----------- ---------- ---- ---- -------- --------
INTEREST RATE SPREAD 3.04% 2.81%
==== ====
EXCESS AVERAGE EARNING ASSETS $ 63,618 $ 53,200
=========== ==========
NET INTEREST MARGIN 3.28% 3.05% $ 31,464 25,180
======== ========
Net interest margin w/o swaps 3.28% 3.26%
==== ====
</TABLE>
<TABLE>
<CAPTION>
INTEREST VARIANCE DUE TO
------------- ---------------------
OPERATING MARGIN FOR INCREASE
YEAR TO DATE (DECREASE) VOLUME RATE
------------------------------------- ------------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable 10,860 $ 10,825 $ 35
Mortgage-backed securities (686) (739) 53
Investments (445) (610) 165
------ -------- -------
9,729 9,476 253
------ -------- -------
INTEREST-BEARING LIABILITIES:
Deposits 5,026 3,428 1,598
Borrowings
Securities sold w/repo 192 334 (142)
Notes payable 797 1,768 (971)
Other borrowed money (149) (133) (16)
------ -------- -------
SUBTOTAL - BORROWINGS 840 1,969 (1,129)
Interest rate instruments (2,421) -- (2,421)
------- -------- --------
3,445 5,396 (1,951)
------- -------- --------
INTEREST RATE SPREAD
EXCESS AVERAGE EARNING ASSETS
NET INTEREST MARGIN $ 6,284 $ 4,079 $ 2,205
======= ======= =======
Net interest margin w/o swaps
</TABLE>
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST
---------------------- ------------------------ -------------------------
OPERATING MARGIN FOR
QUARTER ENDED 09/30/96 09/30/95 09/30/96 09/30/95 09/30/96 09/30/95
- -------------------------------------------- ------------- ---------- ------------ ----------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $ 1,102,336 $ 919,802 8.15% 8.08% $ 22,466 $ 18,633
Mortgage-backed securities 144,712 137,526 7.31% 7.48% 2,646 2,573
Investments 105,163 109,460 7.54% 6.96% 1,993 1,919
----------- ---------- ---- ---- -------- --------
1,352,210 1,166,788 8.01% 7.90% 27,105 23,125
----------- ---------- ---- ---- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits 941,757 861,560 4.61% 4.69% 10,917 10,180
Borrowings
Securities sold w/repo 51,260 13,413 5.37% 6.07% 704 206
Notes payable 285,416 224,699 5.52% 5.97% 4,023 3,428
Other borrowed money 9,355 11,288 9.36% 9.64% 219 272
----------- ---------- ---- ---- -------- --------
SUBTOTAL - BORROWINGS 346,030 249,399 5.60% 6.14% 4,946 3,906
Interest rate instruments m/a n/a -- 0.08% -- 212
----------- ---------- ---- ---- -------- --------
1,287,787 1,110,960 4.88% 5.09% 15,863 14,298
----------- ---------- ---- ---- -------- --------
INTEREST RATE SPREAD 3.14% 2.81%
==== ====
EXCESS AVERAGE EARNING ASSETS $ 64,423 $ 55,828
=========== ==========
Net interest margin 3.37% 3.05% $ 11,242 $ 8,827
======== ========
Net interest margin w/o swaps 3.37% 3.13%
==== ====
</TABLE>
<TABLE>
<CAPTION>
INTEREST VARIANCE DUE TO:
------------ ----------------------
OPERATING MARGIN FOR INCREASE
QUARTER ENDED (DECREASE) VOLUME RATE
- --------------------------------------------- ------------ -------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable $ 3,833 $ 3,655 $ 178
Mortgage-backed securities 73 132 (59)
Investments 74 (79) 153
------- ------- ------
3,980 3,708 272
------- ------- ------
INTEREST-BEARING LIABILITIES:
Deposits 737 909 (172)
Borrowings
Securities sold w/repo 498 524 (26)
Notes payable 595 871 (276)
Other borrowed money (53) (45) (8)
------- ------- ------
SUBTOTAL - BORROWINGS 1,040 1,350 (310)
Interest rate instruments (212) -- (212)
------- ------- ------
1,565 2,259 (694)
------- ------- ------
INTEREST RATE SPREAD
EXCESS AVERAGE EARNING ASSETS
NET INTEREST MARGIN $ 2,415 $ 1,449 $ 966
======= ======= ======
Net interest margin w/o swaps
</TABLE>
