<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, 1997
------------------------
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 8,248,325
----------------------------- -------------------------
(Class) (Shares Outstanding as of
October 31, 1997)
================================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
<TABLE>
Page No.
--------
<S> <C>
PART I Consolidated statements of condition -
September 30, 1997 and December 31, 1996 3
Consolidated statements of income -
three months ended September 30, 1997 and 1996
nine months ended September 30, 1997 and 1996 4
Consolidated statements of cash flows -
nine months ended September 30, 1997 and 1996 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>
- 2 -
<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1997 1996
------------------------------------
(In thousands)
------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,050 $ 2,847
Federal funds sold -- 8,600
Interest-bearing deposits in other banks 40 1,342
-------------------------------------
Total cash and cash equivalents 7,090 12,789
Investment securities
(market value of $89,409,000 in 1997 and $60,783,000 in 1996) 89,288 60,739
Investment securities available for sale (at market value) 46,023 59,038
Mortgage-backed securities
(market value $215,247,000 in 1997 and $213,304,000 in 1996) 214,136 214,690
Mortgage-backed securities available for sale (at market value) 61,483 36,566
Loans receivable (including loans held for sale
of $8,754,000 in 1997 and $5,218,000 in 1996) 1,314,797 1,066,918
Allowance for loan losses (10,850) (11,042)
------------------------------------
Net loans receivable 1,303,947 1,055,876
Other real estate owned, net 1,713 1,470
Federal income taxes 1,580 6,002
Office properties and equipment, net 16,465 15,764
Other assets 12,344 10,120
------------------------------------
$ 1,754,069 $ 1,473,054
====================================
LIABILITIES
Checking and Now accounts $ 110,740 $ 107,550
Money market accounts 90,299 89,321
Savings deposits 156,726 149,226
Time deposits 674,056 617,102
Accrued interest 1,020 934
------------------------------------
Total deposits 1,032,841 964,133
Securities sold under agreements to repurchase 156,276 58,040
FHLB advances and other borrowed money 421,573 345,997
Advance payments by borrowers and investors held in escrow 12,638 11,808
Other liabilities 8,347 6,955
------------------------------------
Total liabilities 1,631,675 1,386,933
PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY 28,719 --
STOCKHOLDERS' EQUITY
Preferred stock (1,000,000 shares authorized; none issued)
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 8,370,494 in 1997 and 1996) 84 84
Additional paid-in capital 54,876 55,452
------------------------------------
Total paid-in capital 54,960 55,536
Retained earnings - substantially restricted 39,752 29,568
Less: Cost of treasury stock (126,231 shares in 1997 and 22,339 in 1996) (2,076) (226)
Unrealized holding gains on debt securities
available for sale, net of tax 1,039 1,243
------------------------------------
Total stockholders' equity 93,675 86,121
------------------------------------
$ 1,754,069 $ 1,473,054
====================================
</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,
1997 1996 1997 1996
---------------------------------------------------
(In thousands, except per share)
---------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 25,453 $ 22,466 $ 70,988 $ 63,881
Mortgage-backed securities 4,631 2,646 13,692 7,399
Investments and deposits 2,058 1,993 6,090 5,251
---------------------------------------------------
TOTAL INTEREST INCOME 32,142 27,105 90,770 76,531
INTEREST EXPENSE
Deposits 12,279 10,917 35,554 32,823
Securities sold under agreements to repurchase 1,296 704 3,202 1,396
FHLB advances and other borrowed money 6,051 4,242 16,354 10,848
---------------------------------------------------
TOTAL INTEREST EXPENSE 19,626 15,863 55,110 45,067
---------------------------------------------------
NET INTEREST INCOME 12,516 11,242 35,660 31,464
Provision for loan losses 300 300 900 900
---------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,216 10,942 34,760 30,564
NONINTEREST INCOME
Loan administrative fees 460 398 1,497 1,424
Deposit related fees 1,102 996 2,941 2,695
Gain on sale of loans held for sale 642 204 862 842
Other income 145 82 463 314
---------------------------------------------------
TOTAL OPERATING NONINTEREST INCOME 2,349 1,680 5,763 5,275
Gain on investment securities -- -- -- 188
Gain on loans and mortgage-backed securities -- -- 539 --
---------------------------------------------------
TOTAL NONINTEREST INCOME 2,349 1,680 6,302 5,463
NONINTEREST EXPENSE
Compensation and benefits 4,550 4,232 12,918 13,216
Occupancy 781 706 2,306 2,103
Other expense 2,768 2,669 8,468 8,808
---------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSE 8,099 7,607 23,692 24,127
Other real estate owned, net 44 6 33 68
FDIC insurance 160 6,136 495 7,446
---------------------------------------------------
TOTAL NONINTEREST EXPENSE 8,303 13,749 24,220 31,641
---------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 6,262 (1,127) 16,842 4,386
Federal income tax expense (credit) 2,003 (42) 5,710 (1,378)
---------------------------------------------------
INCOME (LOSS) BEFORE PREFERRED
STOCK DIVIDENDS 4,259 (1,085) 11,132 5,764
Preferred stock dividend of subsidiary 537 -- 537 --
---------------------------------------------------
NET INCOME $ 3,722 $ (1,085) $ 10,595 $ 5,764
===================================================
Earnings per common and common equivalent share:
PRIMARY $ 0.44 $ (0.13) $ 1.24 $ 0.72
===================================================
FULLY DILUTED $ 0.43 $ (0.13) $ 1.23 $ 0.71
===================================================
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 5
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
-------------------------
(In thousands)
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,595 $ 5,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 900
Depreciation and amortization of
office properties and equipment 1,470 1,462
Amortization of net discounts on purchased
loans and securities (496) (203)
Originations and purchases of loans held for sale (32,238) (12,755)
Proceeds from sales of loans held for sale 45,381 58,156
Realized and unrealized investment security (gains) losses -- (188)
Realized and unrealized (gain) loss on loans, mortgage-backed
certificates and mortgage derivative products (539) --
Amortization and writedowns of loan servicing rights 290 191
Other 2,476 1,627
--------------------------
Net cash provided by operating activities 27,839 54,954
INVESTING ACTIVITIES
Proceeds from sales of investment securities 20 298
Proceeds from maturities and payments of
investment securities 137,166 83,991
Purchases of investment securities (152,501) (91,674)
Proceeds from sales of mortgage-backed securities 24,094 --
Principal collected on mortgage-backed securities 44,352 38,417
Purchases of mortgage-backed securities (92,935) (34,634)
Loan purchases (159,797) (130,790)
Net change in loans receivable (100,571) (98,533)
(Increase) decrease in other real estate owned (243) 51
Purchases of office properties and equipment (2,155) (2,221)
--------------------------
Net cash used by investing activities (302,570) (235,095)
FINANCING ACTIVITIES
Net change in time deposits 56,954 4,848
Net change in other deposits 11,668 17,387
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 441,036 266,690
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (267,338) (120,910)
Net activity in advance payments by borrowers
and investors held in escrow 830 (945)
Common stock cash dividend (411) --
Proceeds from issuance of stock 569 838
Purchase/sales of treasury stock/warrants (2,995) --
Proceeds from issuance of subsidiary preferred stock 28,719 --
Reduction of leverage ESOP stock
-- 63
--------------------------
Net cash provided by financing activities 269,032 167,971
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,699) (12,170)
Cash and cash equivalents at beginning of period 12,789 22,440
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,090 $ 10,270
==========================
</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 interim periods ended September 30, 1997 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 8,494,992
and 8,119,258 for the three months ended September 30, 1997 and September 30,
1996, respectively, and 8,532,580 and 8,058,047 for the nine months ended
September 30, 1997 and September 30, 1996, respectively. The weighted average
number of common and common equivalent shares used in computing fully diluted
earnings per share was 8,574,896 and 8,202,564 for the three months ended
September 30, 1997 and September 30, 1996, respectively, and 8,632,081 and
8,167,211 for the nine months ended September 30, 1997 and September 30, 1996,
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.
- 6 -
<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,
1997 1996 1997 1996
--------------------- ------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,978 $ 10,150 $ 11,042 $ 10,081
Charge-offs:
Single family 135 40 200 129
Income producing property 37 -- 37 --
Commercial -- -- -- --
Installment 351 289 1,117 878
--------------------- ------------------------
Total 523 329 1,354 1,007
Recoveries:
Single family -- -- -- 3
Income producing property -- 193 -- 193
Commercial -- -- -- --
Installment 95 76 262 220
--------------------- ------------------------
Total 95 269 262 416
--------------------- ------------------------
Net charge-offs 428 60 1,092 591
Provision charged to operations 300 300 900 900
--------------------- ------------------------
Balance at end of period $ 10,850 $ 10,390 $ 10,850 $ 10,390
===================== ========================
</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.
A federal income tax credit was recorded in the 1996 reporting period 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: ACQUISITION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb"), a $43 million asset
savings bank, 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. The merger was accounted for as a
pooling-of-interests.
- 7 -
<PAGE> 8
A reconciliation of consolidated net interest income, net income and earnings
per share, previously reported and restated amounts, follows:
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1996
--------------
(In thousands, except per share)
<S> <C>
Net interest income
Previously reported $ 9,465
As restated $ 9,682
Net income
Previously reported $ 3,497
As restated $ 3,488
Primary earnings per share
Previously reported $ 0.48
As restated $ 0.43
Fully diluted earnings per share
Previously reported $ 0.48
As restated $ 0.43
</TABLE>
NOTE 6: CAPITAL
On July 17, 1997 D&N Capital Corporation, ("D&N Capital") a new real estate
investment trust subsidiary of the Bank, sold 1.21 million shares of its 9.0%
noncumulative preferred stock, Series A with a liquidation preference of $25.00
per share (totaling $30,250,000). As part of this transaction, D&N Capital
received $28,719,000 in net proceeds, after offering costs of $1,531,000. As a
result of this transaction, the Bank's capital ratios have been increased,
since the preferred stock issued qualifies for regulatory capital purposes.
NOTE 7: RECLASSIFICATIONS
Certain amounts in the 1996 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,
1997 and 1996. Ratios for the three-month periods are stated on an annualized
basis. Results of operations for the three month and nine month periods ended
September 30, 1997 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 quarter ended September 30, 1997 of
$3.7 million, compared to a net loss of $1.1 million in the third quarter of
1996. Return on assets and return on equity were 0.90% and 16.29%,
respectively, during the quarter ended September 30, 1997, compared to (0.31%)
and (5.44%), respectively, during the quarter ended September 30, 1996. The
increase in net income was primarily due to increases in net interest income of
$1.3 million, and a significant reduction in FDIC insurance, with the SAIF
("SAVINGS ASSOCIATION INSURANCE FUND") assessment of $5.47 million being paid
in the third quarter of 1996. These increases in income were partially offset
by an increase in tax expense of $2.0 million from a tax credit of $42,000 used
in the 1996 quarter, versus a tax expense of $2.0 million in the 1997 quarter.
For the nine months ended September 30, 1997, the Company recorded net income
of $10.6 million, compared to net income of $5.8 million for the nine months
ended September 30, 1996. Return on assets and return on equity were 0.90%
and 15.82%, respectively, during the nine months ended September 30, 1997,
compared to 0.58% and 10.02%, respectively, during the nine months ended
September 30, 1996. The increase in net income was primarily due to increases
in net interest income of $4.2 million, increased gains on sales of assets of
$351,000 and a significant reduction in FDIC insurance, with the SAIF
assessment of $5.47 million being paid in the third quarter of 1996. These
increases in income were largely offset by an increase in tax expense of $7.1
million, resulting from a tax credit of $1.4 million used in the first nine
months of 1996, versus a tax expense of $5.7 million in the first nine months
of 1997.
- 9 -
<PAGE> 10
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 Bank'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.
Net interest income increased $1.3 million to $12.5 million for the quarter
ended September 30, 1997 compared to $11.2 million for the quarter ended
September 30, 1996. The increase was due to increased volume and improved
yields on D&N's loan portfolio and increased volumes in both the mortgage
backed securities and investments portfolios. These improvements were
partially offset by increases in interest paid on deposits and borrowings due
to higher volumes and general increases in market interest rates.
Similarly, net interest income increased $4.2 million to $35.7 million for the
nine months ended September 30, 1997 from $31.5 million for the nine months
ended September 30, 1996. The same factors that explained the third quarter
comparison were present during the year-to-date comparative periods.
By increasing its consumer and commercial lending activities, the Company has
been able to increase its net interest earnings and to realize increased net
yields. The result of these factors is that net interest income has steadily
improved in recent quarters.
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 quarters
ended September 30, 1997 and September 30, 1996. For each of the first nine
months in both 1997 and 1996, the Company's provision for loan losses was
$900,000.
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<PAGE> 11
NONINTEREST INCOME
Total noninterest income increased to $2.3 million during the third quarter of
1997, from $1.7 million during the third quarter of 1996. The majority of this
increase was due to an increase in gain on sale of loans held for sale of
$438,000 and increases in deposit related fees and loan fees.
For the nine months ended September 30, 1997, total noninterest income
increased to $6.3 million from $5.5 million recorded during the nine months
ended September 30, 1996. Increases of $746,000 were in the areas of (i)
deposit related fees, (ii) insurance products, (iii) annuity contracts, and
(iv) gain on sale of assets during the period.
NONINTEREST EXPENSE
Total noninterest expense decreased $5.4 million to $8.3 million during the
quarter ended September 30, 1997, from $13.7 million during the prior year
quarter. Federal deposit insurance premiums paid decreased $6.0 million
reflecting the reduction due to a replenished SAIF and an upgrade in D&N's risk
classification versus the prior year. The decrease in noninterest expense was
partially offset by an increase of $318,000 in compensation and benefits.
For the nine months ended September 30, 1997, total noninterest expense
decreased $7.4 million to $24.2 million, compared to $31.6 million recorded
during the nine months ended September 30, 1996. The decrease was primarily
attributable to a $7.0 million decrease in FDIC insurance, due to a replenished
SAIF and an upgrade in D&N's risk classification.
FEDERAL INCOME TAXES
The third quarter and first nine months of 1997 reflect customary provisions
for income taxes versus federal income tax credits of $42,000 and $1.4 million
being recorded during the three months and nine months ended September 30,
1996, respectively.
PREFERRED STOCK DIVIDEND
Unique to this reporting period is a $537,000 deductible stock dividend
attributable to D&N's newly formed real estate investment trust subsidiary,
D&N Capital Corporation.
- 11 -
<PAGE> 12
FINANCIAL CONDITION
Total assets at September 30, 1997 were $1.75 billion, an increase of $281.0
million from December 31, 1996. Earning assets represented approximately 98%
of total assets as of September 30, 1997, substantially the same as at year-end
1996.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $142.4 million at September 30,
1997, up $9.8 million from December 31, 1996. The majority of this increase
was the result of additions to D&N's liquidity portfolio of approximately $20.0
million in commercial paper, offset by net maturities of U.S. treasury
securities of $5.4 million, and a decrease in cash and cash equivalents of
approximately $5.7 million.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities increased $24.4 million to $275.6 million at
September 30, 1997 compared to December 31, 1996. During the period, the
Company purchased $93.0 million of government agency collateralized mortgage
obligations, with a weighted average yield of 7.03% and a weighted average life
of 3.6 years. The Company also sold $23.7 million of government agency
mortgage-backed securities with a weighted average yield of 6.99%, realizing a
gain on sale of approximately $539,000. The entire mortgage-backed securities
portfolio experienced repayments and amortization during the period of $44.3
million, less a net increase of $30,000 in market value recognized through
stockholders' equity on mortgage-backed securities available for sale.
NET LOANS RECEIVABLE
Net loans receivable increased $248.1 million during the period to $1.30
billion at September 30, 1997, reflecting the Company's increased emphasis on
building its consumer loan portfolio. Loan originations of $435.6 million and
purchases of $159.8 million exceeded repayments of $302.1 million and sales of
$45.4 million. Loan originations and purchases during the nine months ended
September 30, 1997 were $237.4 million for consumer loans, while residential
mortgage loans and commercial loans were $296.2 million and $61.4 million,
respectively.
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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 Bank's loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 4,097 $ 6,621
Accruing loans delinquent more
than 90 days 280 --
Restructured loans -- --
--------------------------
Total nonperforming loans 4,377 6,621
Other real estate owned (OREO) 1,713 1,470
--------------------------
Total nonperforming assets $ 6,090 $ 8,091
==========================
Nonperforming loans as a
percentage of total loans 0.33% 0.62%
==========================
Nonperforming assets as a
percentage of total assets 0.35% 0.55%
==========================
Allowance for loan losses as a
percentage of nonperforming loans 247.89% 166.77%
==========================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 178.16% 136.47%
==========================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses, decreased
$2.0 million during the period, primarily because a large commercial real
estate loan secured by a shopping center was restored to accrual status after
sale of the property.
- 13 -
<PAGE> 14
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's net investment in MSRs increased during the period to $1.8
million at September 30, 1997. The following table details activity in the
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, 1997 December 31, 1996
------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,443 $ 1,113
Additions:
Capitalized servicing 655 630
Reductions:
Scheduled amortization (220) (267)
Additional amortization due
to changes in prepayment
assumptions (69) (33)
------------ ------------
Total (289) (300)
------------ ------------
Balance at end of period $ 1,809 $ 1,443
============ ============
Fair market value at end of period $ 2,147 $ 1,770
============ ============
</TABLE>
DEPOSITS
Deposits increased $68.7 million during the period to $1.03 billion at
September 30, 1997. Certificates of deposit increased $57.0 million and
savings deposits increased $7.1 million, while checking accounts increased $3.2
million and money market accounts increased approximately $1.0 million. The
Company's cost of deposits increased to 4.78% at September 30, 1997, compared
to 4.61% at December 31, 1996, reflecting general increases in market rates of
interest.
BORROWINGS
Total borrowings increased $173.8 million during the period to $577.8 million
at September 30, 1997 in order to fund loan demand. The Company's cost of
borrowings was 5.87% at September 30, 1997, compared to 5.73% at December 31,
1996.
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, 1997 exceeded these requirements.
- 14 -
<PAGE> 15
<TABLE>
<CAPTION>
Tier 1
Tangible Core Risk-Based Risk-based
Capital Capital Capital Capital
--------- --------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Actual capital $113,484 $113,484 $123,951 $113,484
Required capital 26,508 53,016 85,243 42,622
-------- -------- -------- --------
Excess capital $ 86,976 $ 60,468 $ 38,708 $ 70,862
======== ======== ======== ========
Actual ratio 6.42% 6.42% 11.63% 10.65%
======== ======== ======== ========
Required ratio 1.50% 3.00% 8.00% 4.00%
======== ======== ======== ========
</TABLE>
Consolidated stockholders' equity was $93.7 million at September 30, 1997 and
represents 5.34% of consolidated assets.
On July 17, 1997 D&N Capital Corporation, ("D&N Capital") a new real estate
investment trust subsidiary of the Bank, sold 1.21 million shares of its 9.0%
noncumulative preferred stock, Series A with a liquidation preference of $25.00
per share (totaling $30,250,000). As part of this transaction, D&N Capital
received $28,719,000 in net proceeds, after offering costs of $1,531,000. As a
result of this transaction, the Bank's capital ratios have been increased,
since the preferred stock issued qualifies for regulatory capital purposes.
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. For September 1997, the Bank's average liquidity ratio was 6.83%.
At September 30, 1997, unused borrowing capacity as measured by the Bank's
inventory of readily available but unpledged collateral was approximately $78
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 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. On September 30, 1996, federal
legislation was enacted that required the SAIF to be recapitalized with a
one-time assessment on virtually all SAIF-insured institutions.
- 15 -
<PAGE> 16
The legislation required 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.
As a result of the SAIF recapitalization, the FDIC has amended its regulation
concerning the insurance premiums payable by SAIF-insured institutions. For
the period October 1, 1996 through December 31, 1996, the SAIF insurance
premium for all SAIF-insured institutions that are required to pay the
Financing Corporation ("FICO") obligation, such as the Bank, was reduced to a
range of 18 to 27 basis points from 23 to 31 basis points per $100 of domestic
deposits. The FDIC further reduced the SAIF insurance premium to a range of 0
to 27 basis points per $100 of domestic deposits, effective January 1, 1997.
The Bank qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a FICO assessment on SAIF-assessable
deposits for the first semi-annual period of 1997 equal to 6.48 basis points
per $100 of domestic deposits, as compared to a FICO assessment on
BIF-assessable deposits for that same period equal to 1.30 basis points per
$100 of domestic deposits.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for the subject matter based on consistent application of a financial
component's approach that focuses on control. The standard was adopted
effective January 1, 1997 and did not have any material effect on the financial
statements.
In March 1997, the FASB issued SFAS 128, "Earnings Per Share". SFAS 128
supersedes APB 15, "Earnings Per Share", and simplifies the computation of
earnings per share ("EPS") by replacing the "primary" EPS requirements of APB
15 with a "basic" EPS computation based upon weighted shares outstanding. The
new standard requires a dual presentation of basic and diluted EPS. Diluted
EPS is similar to "fully diluted" EPS required under APB 15. The Company will
adopt the provisions of this statement, as required in 1997. The adoption is
not expected to have a material impact on earnings per share.
- 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 9/30/97 vs.
quarter ended 9/30/96 and
nine months ended 9/30/97 vs.
nine months ended 9/30/96
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
ended September 30, 1997.
- 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: November 12, 1997
-------------------------
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
EX-11 STATEMENT RE: COMPUTATION OF PER SHARE EARNING
EX-27 FINANCIAL DATA SCHEDULE
EX-99 ADDITIONAL EXHIBITS
</TABLE>
<PAGE> 1
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
(In thousands, except per share)
1997 1996
---- ----
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 3,722 $ 3,722 $ (1,085) $ (1,085)
======== ======== ========= ========
Average Shares:
Common 8,211 8,211 7,576 7,576
Common equivalents 284 364 543 627
-------- -------- --------- --------
Total $ 8,495 $ 8,575 $ 8,119 $ 8,203
======== ======== ========= ========
Earnings per common share $ 0.44 $ 0.43 $ (0.13) $ (0.13)
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(In thousands except per share)
1997 1996
---- ----
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 10,595 $10,595 $ 5,764 $ 5,764
======== ======= ========= =======
Average Shares:
Common 8,268 8,268 7,540 7,540
Common equivalents 265 364 518 627
-------- ------- --------- -------
Total $ 8,533 $ 8,632 $ 8,058 $ 8,167
======== ======= ========= =======
Earnings per common share $ 1.24 $ 1.23 $ 0.72 $ 0.71
======== ======= ========= =======
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,050
<INT-BEARING-DEPOSITS> 40
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,506
<INVESTMENTS-CARRYING> 303,424
<INVESTMENTS-MARKET> 304,656
<LOANS> 1,314,797
<ALLOWANCE> 10,850
<TOTAL-ASSETS> 1,754,069
<DEPOSITS> 1,032,841
<SHORT-TERM> 156,276
<LIABILITIES-OTHER> 20,985
<LONG-TERM> 421,573
0
28,719
<COMMON> 54,960
<OTHER-SE> 38,715
<TOTAL-LIABILITIES-AND-EQUITY> 1,754,069
<INTEREST-LOAN> 25,453
<INTEREST-INVEST> 6,689
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,142
<INTEREST-DEPOSIT> 12,279
<INTEREST-EXPENSE> 19,626
<INTEREST-INCOME-NET> 12,516
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,303
<INCOME-PRETAX> 6,262
<INCOME-PRE-EXTRAORDINARY> 3,722
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,722
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 3.13
<LOANS-NON> 3,872
<LOANS-PAST> 280
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,691
<ALLOWANCE-OPEN> 10,978
<CHARGE-OFFS> 524
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 10,850
<ALLOWANCE-DOMESTIC> 10,850
<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 VARIANCE DUE TO:
------------------------------------------------------------------------------------------------
OPERATING MARGIN FOR SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, INCREASE
QUARTER ENDED 1997 1996 1997 1996 1997 1996 (DECREASE) VOLUME RATE
------------------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
INTEREST-EARNING ASSETS:
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $1,226,453 $1,102,336 8.26% 8.15% $25,453 $22,466 $2,987 $2,690 $297
Mortgage-backed securities 258,813 144,712 7.16% 7.31% 4,631 2,646 1,985 2,043 (58)
Investment 130,255 105,163 6.26% 7.54% 2,058 1,993 65 433 (368)
---------- ---------- ----- ----- ------- ------- ------ ------ -----
1,651,520 1,352,210 7.92% 8.01% 32,142 27,105 5,037 5,166 (129)
---------- ---------- ----- ----- ------- ------- ------ ------ -----
INTEREST-BEARING LIABILITIES:
- ----------------------------
Deposits 1,023,886 941,757 4.76% 4.61% 12,279 10,917 1,362 999 363
Borrowings
Securities sold w/repo 91,119 51,260 5.57% 5.37% 1,296 704 592 566 26
Notes payable 390,927 285,416 5.88% 5.52% 5,871 4,023 1,848 1,570 278
Other borrowed money 7,515 9,355 9.58% 9.36% 180 219 (39) (44) 5
---------- ---------- ----- ----- ------- ------- ------ ------ -----
Subtotal - Borrowings 489,561 346,030 5.88% 5.60% 7,347 4,946 2,401 2,092 309
---------- ---------- ----- ----- ------- ------- ------ ------ -----
1,513,447 1,287,787 5.12% 4.88% 19,626 15,863 3,763 3,091 672
---------- ---------- ----- ----- ------- ------- ------ ------ -----
INTEREST RATE SPREAD 2.80% 3.14%
==== ====
EXCESS AVERAGE EARNING ASSETS $ 102,073 $ 64,423
========== ==========
NET INTEREST MARGIN 3.13% 3.37% $12,516 $11,242 $1,274 $2,076 $(802)
===== ===== ======= ======= ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
------------------------------------------------------------------------------------------------
OPERATING MARGIN FOR SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, INCREASE
YEAR TO DATE 1997 1996 1997 1996 1997 1996 (DECREASE) VOLUME RATE
------------------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
INTEREST-EARNING ASSETS:
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $1,145,964 $1,053,720 8.25% 8.08% $70,988 $63,881 $ 7,107 $ 5,780 $1,327
Mortgage-backed securities 254,305 130,588 7.18% 7.55% 13,692 7,399 6,293 6,678 (385)
Investment 130,107 99,836 6.25% 7.03% 6,090 5,251 839 1,458 (619)
---------- ---------- ----- ----- ------- ------- ------ ------ -----
1,530,376 1,284,145 7.91% 7.95% 90,770 76,531 14,239 13,917 322
---------- ---------- ----- ----- ------- ------- ------- ------- ------
INTEREST-BEARING LIABILITIES:
- -----------------
Deposits 1,004,148 934,395 4.73% 4.69% 35,554 32,823 2,731 2,427 304
Borrowings
Securities sold w/repo 76,433 34,122 5.52% 5.38% 3,202 1,396 1,806 1,766 40
Notes payable 360,820 242,175 5.77% 5.50% 15,789 10,140 5,649 5,133 516
Other borrowed money 7,971 9,836 9.45% 9.60% 565 708 (143) (132) (11)
---------- ---------- ----- ----- -------- ------- ------- ------- ------
Subtotal - Borrowings 445,224 286,132 5.79% 5.63% 19,556 12,244 7,312 6,767 545
---------- ---------- ----- ----- -------- ------- ------- ------- ------
1,449,373 1,220,527 5.06% 4.91% 55,110 45,067 10,043 9,194 849
---------- ---------- ----- ----- ------- ------- ------- ------- ------
INTEREST RATE SPREAD 2.85% 3.04%
===== =====
EXCESS AVERAGE EARNING ASSETS $ 81,003 $ 63,618
========== ==========
NET INTEREST MARGIN 3.11% 3.28% $35,660 $31,464 $ 4,196 $ 4,723 $ (527)
===== ===== ======= ======= ======= ======= ======
</TABLE>
