<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, 1997
------------------------
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
-----------------------------------------
D&N Financial Corporation
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(Exact name of registrant as specified in its charter)
Delaware 38-2790646
------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 8,191,748
----------------------------- ----------------------------------------
(Class) (Shares Outstanding as of July 31, 1997)
================================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
Page No.
--------
PART I Consolidated statements of condition -
June 30, 1997 and December 31, 1996 3
Consolidated statements of income -
three months ended June 30, 1997 and 1996
six months ended June 30, 1997 and 1996 4
Consolidated statements of cash flows
six months ended June 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
- 2 -
<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
-----------------------------
(In thousands)
-----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,363 $ 2,847
Federal funds sold 800 8,600
Interest-bearing deposits in other banks 3,883 1,342
-----------------------------
Total cash and cash equivalents 12,046 12,789
Investment securities
(market value of $102,997,000 in 1997 and $60,783,000 in 1996) 102,935 60,739
Investment securities available for sale (at market value) 46,079 59,038
Mortgage-backed securities
(market value $226,482,000 in 1997 and $213,304,000 in 1996) 227,765 214,690
Mortgage-backed securities available for sale (at market value) 16,784 36,566
Loans receivable (including loans held for sale of $2,595,000 in 1997 and
$5,218,000 in 1996) 1,184,271 1,066,918
Allowance for loan losses (10,978) (11,042)
-----------------------------
Net loans receivable 1,173,293 1,055,876
Other real estate owned, net 1,536 1,470
Federal income taxes 1,484 6,002
Office properties and equipment, net 16,094 15,764
Other assets 10,821 10,120
----------------------------
$1,608,837 $1,473,054
============================
LIABILITIES
Checking and Now accounts $ 109,648 $ 107,550
Money market accounts 92,287 89,321
Savings deposits 151,989 149,226
Time deposits 665,414 617,102
Accrued interest 974 934
----------------------------
Total deposits $1,020,312 964,133
Securities sold under agreements to repurchase 88,840 58,040
FHLB advances and other borrowed money 390,177 345,997
Advance payments by borrowers and investors held in escrow 13,859 11,808
Other liabilities 5,922 6,955
----------------------------
Total liabilities 1,519,110 1,386,933
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 55,383 55,452
----------------------------
Total paid-in capital 55,467 55,536
Retained earnings - substantially restricted 36,441 29,568
Less: Cost of treasury stock (179,079 shares in 1997 and 22,339 in 1996) (3,063) (226)
Unrealized holding gains on debt securities
available for sale, net of tax 882 1,243
----------------------------
Total stockholders' equity 89,727 86,121
----------------------------
$1,608,837 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------
(In thousands, except per share)
----------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans $ 23,598 $ 21,435 $ 45,535 $ 41,415
Mortgage-backed securities 4,625 2,477 9,061 4,753
Investments and deposits 2,070 1,514 4,032 3,258
---------------------------------------------------
TOTAL INTEREST INCOME 30,293 24,426 58,628 49,426
INTEREST EXPENSE
Deposits 11,987 10,856 23,275 21,906
Securities sold under agreements to repurchase 1,147 597 1,906 692
FHLB advances and other borrowed money 5,350 3,433 10,303 6,606
---------------------------------------------------
TOTAL INTEREST EXPENSE 18,484 14,886 35,484 29,204
---------------------------------------------------
NET INTEREST INCOME 11,809 10,540 23,144 20,222
Provision for loan losses 300 300 600 600
---------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,509 10,240 22,544 19,622
NONINTEREST INCOME
Loan administrative fees 516 703 1,037 1,026
Deposit related fees 918 879 1,839 1,699
Gain on sale of loans held for sale 189 146 220 638
Other income 183 136 318 232
---------------------------------------------------
TOTAL OPERATING NONINTEREST INCOME 1,806 1,864 3,414 3,595
Gain on investment securities -- 188 -- 188
Gain on loans and mortgage-backed securities 539 -- 539 --
---------------------------------------------------
TOTAL NONINTEREST INCOME 2,345 2,052 3,953 3,783
NONINTEREST EXPENSE
Compensation and benefits 4,301 4,903 8,368 8,984
Occupancy 745 685 1,525 1,397
Other expense 3,133 3,184 5,700 6,139
---------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSE 8,179 8,772 15,593 16,520
Other real estate owned, net 11 22 (11) 62
FDIC insurance 159 674 335 1,310
---------------------------------------------------
TOTAL NONINTEREST EXPENSE 8,349 9,468 15,917 17,892
---------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 5,505 2,824 10,580 5,513
Federal income tax expense (credit) 1,926 (537) 3,707 (1,336)
---------------------------------------------------
NET INCOME $ 3,579 $ 3,361 $ 6,873 $ 6,849
===================================================
Earnings per common and common equivalent share:
PRIMARY $ 0.42 $ 0.42 $ 0.80 $ 0.85
===================================================
FULLY DILUTED $ 0.42 $ 0.41 $ 0.80 $ 0.84
===================================================
</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,
1997 1996
---------------------------
(In thousands)
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,873 $ 6,849
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 600
Depreciation and amortization of
office properties and equipment 979 985
Amortization of net discounts on purchased
loans and securities (186) (670)
Originations and purchases of loans held for sale (16,671) (12,282)
Proceeds from sales of loans held for sale 19,583 43,264
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 158 78
Other 2,668 (2,967)
----------------------------
Net cash provided by operating activities 13,465 35,669
INVESTING ACTIVITIES
Proceeds from sales of investment securities -- 298
Proceeds from maturities and payments of
investment securities 67,956 74,995
Purchases of investment securities (97,115) (62,858)
Proceeds from sales of mortgage-backed securities 24,094 --
Principal collected on mortgage-backed securities 29,224 22,949
Purchases of mortgage-backed securities (47,184) (34,634)
Loan purchases (65,728) (131,769)
Net change in loans receivable (54,278) (41,734)
(Increase) decrease in other real estate owned (66) 573
Purchases of office properties and equipment (1,296) (1,797)
----------------------------
Net cash used by investing activities (144,393) (173,977)
FINANCING ACTIVITIES
Net change in time deposits 48,312 (6,289)
Net change in other deposits 7,827 18,181
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 282,799 181,852
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (207,898) (66,155)
Net activity in advance payments by borrowers
and investors held in escrow 2,051 1,052
Proceeds from issuance of stock 89 659
Purchase of Treasury stock/warrants (2,995) --
Reduction of leverage ESOP stock -- 18
----------------------------
Net cash provided by financing activities 130,185 129,318
----------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (743) (8,990)
Cash and cash equivalents at beginning of period 12,789 22,440
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,046 $ 13,450
============================
</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 June 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 8,535,697
and 8,070,809 for the three months ended June 30, 1997 and June 30, 1996,
respectively, and 8,574,588 and 8,042,065 for the six months ended June 30,
1997 and June 30, 1996, respectively. The weighted average number of common
and common equivalent shares used in computing fully diluted earnings per share
was 8,596,343 and 8,149,139 for the three months ended June 30, 1997 and June
30, 1996, respectively, and 8,639,457 and 8,122,669 for the six months ended
June 30, 1997 and June 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.
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<PAGE> 7
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------- ---------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,987 $ 10,141 $ 11,042 $ 10,081
Charge-offs:
Single family 12 40 65 89
Income producing property -- -- -- --
Commercial -- -- -- --
Installment 385 332 766 589
-------------------------- -------------------------
Total 397 372 831 678
Recoveries:
Single family -- 3 -- 3
Income producing property -- -- -- --
Commercial -- -- -- --
Installment 88 78 167 144
-------------------------- -------------------------
Total 88 81 167 147
-------------------------- -------------------------
Net charge-offs 309 291 664 531
Provision charged to operations 300 300 600 600
-------------------------- -------------------------
Balance at end of period $ 10,978 $ 10,150 $ 10,978 $ 10,150
========================== =========================
</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:
Three Months
Ended
March 31, 1996
--------------
(In thousands, except per share)
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
NOTE 6: 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 six-month periods ended June 30, 1997 and
1996. Ratios for the three-month periods are stated on an annualized basis.
Results of operations for the three month and six month periods ended June 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 June 30, 1997 of
$3.6 million, compared to net income of $3.4 million in the second quarter of
1996. Return on assets and return on equity were 0.91% and 16.08%,
respectively, during the quarter ended June 30, 1997, compared to 1.02% and
17.52%, respectively, during the quarter ended June 30, 1996. The increase in
net income was primarily due to increases in net interest income of $1.3
million, increased gains on sales of assets of $351,000 and lower operating
expenses. These increases in income were partially offset by an increase in
tax expense of $2.5 million, resulting from a tax credit of $537,000 used in
the 1996 quarter, versus a tax expense of $1.9 million in the 1997 quarter.
For the six months ended June 30, 1997, the Company recorded net income of $6.9
million, compared to net income of $6.8 million for the six months ended June
30, 1996. Return on assets and return on equity were 0.90% and 15.58%,
respectively, during the six months ended June 30, 1997, compared to 1.07% and
18.23%, respectively, during the six months ended June 30, 1996. The increase
in net income was primarily due to increases in net interest income of $2.9
million, increased gains on sales of assets of $351,000 and lower operating
expenses. These increases in income were largely offset by an increase in tax
expense of $5.0 million, resulting from a tax credit of $1.3 million used in
the first half of 1996, versus a tax expense of $3.7 million in the first half
of 1997.
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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 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 $11.8 million for the quarter
ended June 30, 1997 compared to $10.5 million for the quarter ended June 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 $2.9 million to $23.1 million for the
six months ended June 30, 1997 from $20.2 for the six months ended June 30,
1996. The same factors that explained the second 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 June 30, 1997 and June 30, 1996. For each of the first six months in
both 1997 and 1996, the Company's provision for loan losses was $600,000. 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 increased to $2.3 million during the second quarter of
1997, from $2.1 million during the second quarter of 1996. The majority of
this increase was due to an increase in gain on sale of assets of $351,000 and
increases in deposit related fees, gain on sale of loans available for sale and
increased revenue from the sale of insurance products and annuity contracts
through the Bank's subsidiary, Quincy Insurance Agency, Incorporated.
Offsetting these increases was a $187,000 decrease in loan administrative fees.
During the current year quarter, the Company sold mortgage backed securities
totaling $23.7 million from its available-for-sale portfolio at a gain of
$539,000. During the prior year quarter, the Company sold investment
securities from its available-for-sale portfolio at a gain of $188,000. The
proceeds from the current year sale were used to fund loan demand and to reduce
short-term debt.
For the six months ended June 30, 1997, total noninterest income increased to
$4.0 million from $3.8 million recorded during the six months ended June 30,
1996. Increases of $577,000 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. Offsetting these increases was a decrease in the
gain on sale of loans available for sale of $418,000.
NONINTEREST EXPENSE
Total noninterest expense decreased $1.2 million to $8.3 million during the
quarter ended June 30, 1997, from $9.5 million during the prior year quarter.
Compensation and benefits decreased $602,000 during the quarter, due to
merger-related expenses in connection with the acquisition of Macomb (see Note
5 of Notes to Financial Statements) in the second quarter of 1996. Federal
deposit insurance premiums paid also decreased $515,000 reflecting the
reduction due to a replenished SAIF and an upgrade in D&N's risk classification
versus the prior year.
For the six months ended June 30, 1997, total noninterest expense decreased
$2.0 million to $15.9 million, compared to $17.9 million recorded during the
six months ended June 30, 1996. The factors contributing to the year-to-date
period were the same as those for the quarterly variance.
FEDERAL INCOME TAXES
The second quarter and first half of 1997 reflect customary provisions for
income taxes versus federal income tax credits of $537,000 and $1.3 million
being recorded during the three months and six months ended June 30, 1996,
respectively.
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<PAGE> 12
FINANCIAL CONDITION
Total assets at June 30, 1997 were $1.61 billion, an increase of $135.8 million
from December 31, 1996. Earning assets represented approximately 98% of total
assets as of June 30, 1997, substantially the same as at year-end 1996.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $161.1 million at June 30, 1997,
up $28.5 million from December 31, 1996. The majority of this increase was the
result of additions to D&N's liquidity portfolio of approximately $34.4 million
in commercial paper, offset by net maturities of $5.7 million of U.S. treasury
securities, and a decrease in cash and cash equivalents of approximately
$700,000.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities decreased $6.7 million to $244.6 million at June 30,
1997 compared to December 31, 1996. During the period, the Company purchased
$47.2 million of government agency collateralized mortgage obligations, with a
weighted average yield of 7.09% and a weighted average life of 3.5 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 $29.2 million,
plus a net decrease of $203,000 in market value recognized through
stockholders' equity on mortgage-backed securities available for sale.
NET LOANS RECEIVABLE
Net loans receivable increased $117.4 million during the period to $1.17
billion at June 30, 1997. Loan originations of $259.0 million and purchases of
$65.6 million exceeded repayments of $187.4 million and sales of $19.6 million.
Loan originations and purchases during the six months ended June 30, 1997 were
$149.2 million for consumer loans, while residential mortgage loans and
commercial loans were $147.0 million and $28.4 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>
June 30, December 31,
1997 1996
-----------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 4,006 $ 6,621
Accruing loans delinquent more
than 90 days -- --
Restructured loans -- --
-----------------------------
Total nonperforming loans 4,006 6,621
Other real estate owned (OREO) 1,536 1,470
-----------------------------
Total nonperforming assets $ 5,542 $ 8,091
=============================
Nonperforming loans as a
percentage of total loans 0.34% 0.62%
=============================
Nonperforming assets as a
percentage of total assets 0.34% 0.55%
=============================
Allowance for loan losses as a
percentage of nonperforming loans 274.04% 166.77%
=============================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 198.09% 136.47%
=============================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses, decreased
$2.6 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.
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<PAGE> 14
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's net investment in MSRs increased during the period to $1.5
million at June 30, 1997. The following table details activity in the
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1997 December 31, 1996
----------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,443 $ 1,113
Additions:
Capitalized servicing 197 630
Reductions:
Scheduled amortization (140) (267)
Additional amortization due
to changes in prepayment
assumptions (17) (33)
----------------- ---------------
Total (157) (300)
----------------- ---------------
Balance at end of period $ 1,483 $ 1,443
================= ===============
Fair market value at end of period $ 1,911 $ 1,770
================= ===============
</TABLE>
DEPOSITS
Deposits increased $56.2 million during the period to $1.02 billion at June 30,
1997. Certificates of deposit increased $48.3 million and savings deposits
increased $2.8 million, while checking accounts increased $2.1 million and money
market accounts increased approximately $3.0 million. The Company's cost of
deposits increased to 4.76% at June 30, 1997, compared to 4.61% at December 31,
1996, reflecting general increases in market rates of interest.
BORROWINGS
Total borrowings increased $75.0 million during the period to $479.0 million at
June 30, 1997 in order to fund loan demand. The Company's cost of borrowings
was 5.90% at June 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 June
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 $ 82,901 $ 82,901 $ 93,457 $ 82,901
Required capital 24,273 48,546 78,950 39,475
--------- --------- --------- ---------
Excess capital $ 58,628 $ 34,355 $ 14,507 $ 43,426
========= ========= ========= =========
Actual ratio 5.12% 5.12% 9.47% 8.40%
========= ========= ========= =========
Required ratio 1.50% 3.00% 8.00% 4.00%
========= ========= ========= =========
</TABLE>
Consolidated stockholders' equity was $89.7 million at June 30, 1997 and
represents 5.58% 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 1.2 million shares of its 9.0%
noncumulative preferred stock, Series A with a liquidation preference of $25.00
per share. As part of this transaction, D&N Capital received $29.1 million in
net proceeds and acquired from the Bank $60.5 million in real estate mortgage
assets. As a result of this transaction, the Bank's tangible, core,
risk-based and tier 1 risked-based capital ratios have been increased to
approximately 6.71%, 6.71%, 12.09% and 11.03%, respectively.
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 June 30, 1997, the Bank's average liquidity ratio was 7.56%. At
June 30, 1997, unused borrowing capacity as measured by the Bank's inventory of
readily available but unpledged collateral was approximately $118 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 6/30/97 vs.
quarter ended 6/30/96 and
six months ended 6/30/97 vs.
six months ended 6/30/96
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the
quarter Ended June 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: August 12, 1997
---------------
<PAGE> 19
EXHIBIT INDEX
Exhibit
No. Description Page
- -------- ----------- ----
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
99 Operating Margin and Rate Volume Analysis
<PAGE> 1
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1997 1996
---- ----
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 3,579 $ 3,579 $ 3,361 $ 3,361
========= ========= ========= =========
Average Shares:
Common 8,247 8,247 7,550 7,550
Common equivalents 289 349 521 599
--------- --------- --------- ---------
Total $ 8,536 $ 8,596 $ 8,071 $ 8,149
========= ========= ========= =========
Earnings per common share $ 0.42 $ 0.42 $ 0.42 $ 0.41
========= ========= ========= =========
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 6,873 $ 6,873 $ 6,849 $ 6,849
========= ========= ========= =========
Average Shares:
Common 8,290 8,290 7,524 7,524
Common equivalents 285 349 518 599
--------- --------- --------- ---------
Total $ 8,575 $ 8,639 $ 8,042 $ 8,123
========= ========= ========= =========
Earnings per common share $ 0.80 $ 0.80 $ 0.85 $ 0.84
========= ========= ========= =========
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,363
<INT-BEARING-DEPOSITS> 3,883
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,863
<INVESTMENTS-CARRYING> 330,700
<INVESTMENTS-MARKET> 329,479
<LOANS> 1,184,271
<ALLOWANCE> 10,978
<TOTAL-ASSETS> 1,608,837
<DEPOSITS> 1,020,312
<SHORT-TERM> 88,840
<LIABILITIES-OTHER> 19,781
<LONG-TERM> 390,177
0
0
<COMMON> 55,467
<OTHER-SE> 34,260
<TOTAL-LIABILITIES-AND-EQUITY> 1,608,837
<INTEREST-LOAN> 23,598
<INTEREST-INVEST> 6,695
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,293
<INTEREST-DEPOSIT> 11,987
<INTEREST-EXPENSE> 18,484
<INTEREST-INCOME-NET> 11,809
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 539
<EXPENSE-OTHER> 8,349
<INCOME-PRETAX> 5,505
<INCOME-PRE-EXTRAORDINARY> 3,579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,579
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 3.13
<LOANS-NON> 3,877
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,845
<ALLOWANCE-OPEN> 10,987
<CHARGE-OFFS> 397
<RECOVERIES> 88
<ALLOWANCE-CLOSE> 10,978
<ALLOWANCE-DOMESTIC> 10,978
<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 JUNE 30, JUNE 30, JUNE 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 $ 1,143,747 $1,068,877 8.25% 8.02% $23,598 $21,435 $2,163 $1,561 $602
Mortgage-backed securities 256,940 126,516 7.20% 7.83% 4,625 2,477 2,148 2,363 (215)
Investment 130,460 91,950 6.36% 6.62% 2,070 1,514 556 618 (62)
----------- ----------- ------ ------ -------- -------- ------- ------- -----
1,531,147 1,287,343 7.91% 7.90% 30,293 25,426 4,867 4,542 325
----------- ----------- ------ ------ -------- ------- ------ ------- -----
INTEREST-BEARING LIABILITIES:
- ----------------------------
Deposits 1,013,886 933,294 4.74% 4.68% 11,987 10,856 1,131 977 154
Borrowings
Securities sold w/repo 81,428 43,998 5.57% 5.37% 1,147 597 550 526 24
Notes payable 352,948 234,629 5.78% 5.39% 5,161 3,198 1,963 1,715 248
Other borrowed money 8,219 9,822 9.20% 9.57% 189 235 (46) (37) (9)
----------- ---------- ----- ----- --------- -------- ------- -------- -----
Subtotal - Borrowings 442,595 288,449 5.81% 5.53% 6,497 4,030 2,467 2,205 262
----------- ---------- ----- ----- --------- -------- ------- -------- -----
1,456,481 1,221,743 5.07% 4.88% 18,484 14,886 3,598 3,181 417
----------- --------- ----- ----- ------- ------ ----- ----- -----
INTEREST RATE SPREAD 2.85% 3.02%
===== =====
EXCESS AVERAGE EARNING ASSETS $ 74,666 $ 65,599
=========== ==========
NET INTEREST MARGIN 3.09% 3.27% $11,809 $10,540 $1,269 $1,361 $(92)
===== ===== ======= ======= ====== ====== =====
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
-------------------------------------------------------------------------------------------
OPERATING MARGIN FOR JUNE 30, JUNE 30, JUNE 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 $1,105,052 $1,029,146 8.25% 8.05% $45,535 $41,415 $4,120 $3,088 $1,032
Mortgage-backed securities 252,013 123,449 7.19% 7.70% 9,061 4,753 4,308 4,642 (334)
Investment 130,032 97,144 6.25% 6.74% 4,032 3,258 774 1,026 (252)
---------- ---------- ----- ----- ------- ------- ------ ------ ------
1,487,098 1,249,738 7.90% 7.91% 58,628 49,426 9,202 8,756 446
---------- ---------- ----- ----- ------- ------- ------- ------ ------
INTEREST-BEARING LIABILITIES:
- -----------------
Deposits 994,116 930,673 4.72% 4.73% 23,275 21,906 1,369 1,423 (54)
Borrowings
Securities sold w/repo 68,968 25,459 5.50% 5.38% 1,906 692 1,214 1,198 16
Notes payable 345,517 220,316 5.71% 5.49% 9,918 6,117 3,801 3,551 250
Other borrowed money 8,203 10,079 9.39% 9.70% 385 489 (104) (88) (16)
---------- ---------- ----- ----- ------- ------- ------ ------ ------
Subtotal - Borrowings 422,688 255,854 5.75% 5.65% 12,209 7,298 4,911 4,661 250
---------- ---------- ----- ----- ------- ------- ------ ------ ------
1,416,805 1,186,527 5.03% 4.93% 35,484 29,204 6,280 6,084 196
---------- ---------- ----- ----- ------- ------- ------ ------ ------
INTEREST RATE SPREAD 2.87% 2.98%
===== =====
EXCESS AVERAGE EARNING ASSETS $ 70,293 $ 63,211
========== ==========
NET INTEREST MARGIN 3.11% 3.23% $23,144 $20,222 $2,922 $2,672 $ 250
===== ===== ======= ======= ====== ====== ======
</TABLE>
