<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1998
-----------------------------
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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 changes since last report)
Indicate by check 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 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 9,157,226
------------------------------------ ----------------------------
(Class) (Shares Outstanding of July 31, 1998)
===============================================================================
<PAGE> 2
D&N FINANCIAL CORPORATION
INDEX
Page No.
PART I Consolidated statements of condition -
June 30, 1998 and December 31, 1997 3
Consolidated statements of income -
three months ended June 30, 1998 and 1997
six months ended June 30, 1998 and 1997 4
Consolidated statements of cash flows
six months ended June 30, 1998 and 1997 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
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<PAGE> 3
D&N FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
----------------------------------
(IN THOUSANDS)
----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,882 $ 16,239
Federal funds sold 4,500 300
Interest-bearing deposits in other banks 9,002 3,958
-----------------------------------
Total cash and cash equivalents 25,384 20,497
Investment securities
(market value of $58,949,000 in 1998 and $56,594,000 in 1997) 58,917 56,524
Investment securities available for sale (at market value) 36,937 46,112
Mortgage-backed securities
(market value $240,635,000 in 1998 and $199,525,000 in 1997) 239,444 198,050
Mortgage-backed securities available for sale (at market value) 225,552 160,246
Loans receivable (including loans held for sale of $10,630,000 in 1998
and $5,275,000 in 1997) 1,286,996 1,311,508
Allowance for loan losses (10,733) (10,549)
-----------------------------------
Net loans receivable 1,276,263 1,300,959
Other real estate owned, net 1,295 1,474
Federal income taxes 1,062 1,129
Office properties and equipment, net 17,234 16,621
Other assets 15,916 13,703
-----------------------------------
$ 1,898,004 $ 1,815,315
===================================
LIABILITIES
Checking and NOW accounts $ 126,882 $ 119,412
Money market accounts 98,136 92,314
Savings deposits 189,942 163,119
Time deposits 664,131 667,204
Accrued interest 1,045 1,118
-----------------------------------
Total deposits 1,080,136 1,043,167
Securities sold under agreements
to repurchase 133,481 149,092
FHLB advances and other borrowed money 523,605 470,431
Advance payments by borrowers and
investors held in escrow 19,677 17,585
Other liabilities 6,657 8,239
-----------------------------------
Total liabilities 1,763,556 1,688,514
PREFERRED STOCK OF SUBSIDIARY 28,719 28,719
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share (1,000,000 shares authorized;
none issued) -- --
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 9,197,224 in 1998 and 1997) 92 92
Additional paid-in capital 75,946 77,025
-----------------------------------
Total paid-in capital 76,038 77,117
Retained earnings - substantially restricted 28,769 21,042
Less: Cost of treasury stock (39,998 shares in 1998 and 98,129 in 1997) (549) (1,581)
Unrealized holding gains on debt securities available for sale,
net of tax 1,471 1,504
-----------------------------------
Total stockholders' equity 105,729 98,082
-----------------------------------
$ 1,898,004 $ 1,815,315
===================================
</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,
1998 1997 1998 1997
--------------------------------------------------
(In thousands, except per share)
--------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 26,831 $ 23,598 $ 53,660 $ 45,535
Mortgage-backed securities 6,047 4,625 12,192 9,061
Investments and deposits 1,490 2,070 3,063 4,032
------------------------- ----------------------
TOTAL INTEREST INCOME 34,368 30,293 68,915 58,628
INTEREST EXPENSE
Deposits 11,997 11,987 23,982 23,275
Securities sold under agreements to repurchase 1,316 1,147 3,307 1,906
FHLB advances and other borrowed money 7,736 5,350 15,102 10,303
------------------------- ----------------------
TOTAL INTEREST EXPENSE 21,049 18,484 42,391 35,484
------------------------- ----------------------
NET INTEREST INCOME 13,319 11,809 26,524 23,144
Provision for loan losses 550 300 1,075 600
========================= ======================
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,769 11,509 25,449 22,544
Noninterest income:
Loan administrative fees 454 516 989 1,037
Deposit related fees 1,083 918 2,128 1,839
Gain on sale of loans held for sale 1,146 189 2,031 220
Other income 207 183 943 318
========================= ======================
TOTAL OPERATING NONINTEREST INCOME 2,890 1,806 6,091 3,414
Gain on sale of mortgage-backed securities -- 539 -- 539
------------------------- ----------------------
TOTAL NONINTEREST INCOME 2,890 2,345 6,091 3,953
Noninterest expense:
Compensation and benefits 5,026 4,301 9,848 8,368
Occupancy 826 745 1,642 1,525
Other expense 3,257 3,133 6,453 5,700
------------------------- ----------------------
GENERAL AND ADMINISTRATIVE EXPENSE 9,109 8,179 17,943 15,593
Other real estate owned, net (19) 11 (1) (11)
Federal deposit insurance premiums 244 159 487 335
------------------------- ----------------------
TOTAL NONINTEREST EXPENSE 9,334 8,349 18,429 15,917
------------------------- ----------------------
INCOME BEFORE INCOME TAX EXPENSE 6,325 5,505 13,111 10,580
Federal income tax expense 1,663 1,926 3,871 3,707
------------------------- ----------------------
INCOME BEFORE PREFERRED STOCK DIVIDENDS 4,662 3,579 9,240 6,873
Preferred stock dividends of subsidiary 680 -- 1,361 --
------------------------- ----------------------
NET INCOME $ 3,982 $ 3,579 $ 7,879 $ 6,873
========================= ======================
Earnings per share:
BASIC $ 0.44 $ 0.39 $ 0.86 $ 0.75
========================= ======================
DILUTED $ 0.42 $ 0.38 $ 0.83 $ 0.73
========================= ======================
</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,
1998 1997
----------------------------------
(IN THOUSANDS)
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 7,879 $ 6,873
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,075 600
Depreciation and amortization of office properties and equipment 1,114 979
Amortization of net premiums (discounts) on purchased
loans and securities 2,575 (186)
Originations and purchases of loans held for sale (68,958) (16,671)
Proceeds from sales of loans held for sale 143,396 19,583
Gain on loans and mortgage-backed securities available for sale -- (539)
Gain on sale of loan servicing rights (193) --
Amortization and writedowns of mortgage servicing rights 456 158
Other (5,216) 2,668
---------- -----------
Net cash provided by operating activities 82,128 13,465
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 28,972 67,956
Purchases of investment securities to be held to maturity (22,651) (97,115)
Proceeds from sales of mortgage-backed securities -- 24,094
Principal collected on mortgage-backed securities 81,866 29,224
Purchases of mortgage-backed securities (104,292) (47,184)
Loans purchased (89,288) (65,728)
Net change in loans receivable (46,935) (54,278)
(Increase) decrease in other real estate owned 179 (66)
Sales of loan servicing rights 193 --
Purchases of office properties and equipment (1,714) (1,296)
---------- -----------
Net cash used by investing activities (153,670) (144,393)
FINANCING ACTIVITIES
Net change in time deposits (3,073) 48,312
Net change in other deposits 40,115 7,827
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 215,000 282,799
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (177,506) (207,898)
Net change in advance payments by borrowers and investors
held in escrow 2,092 2,051
Common stock cash dividend (915) --
Proceeds from issuance of stock 649 89
Purchases of Treasury stock/warrants (365) (2,995)
Tax benefits on Exercise of Stock options (FAS 109) 432 --
---------- -----------
Net cash provided by financing activities 76,429 130,185
---------- -----------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 4,887 (743)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,497 12,789
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,384 $ 12,046
========== ===========
Noncash Transactions:
Issuance of Treasury Stock on exercise of Stock Options $ 1,397 $ 158
========== ===========
</TABLE>
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<PAGE> 6
D&N FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIC 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 period ended June 30,
1998 are not necessarily indicative of the results that may be expected
for the full year.
NOTE 2: EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") 128, "Earnings per Share", for the year ended December 31,
1997. The earnings per share for three month and six month periods
ended June 30, 1997, have been restated to comply with this standard.
Basic earnings per share is calculated by dividing net income by the
average number of shares outstanding during the applicable period.
The company had stock options which are considered to be potentially
dilutive to common stock. Diluted earnings per share is calculated by
dividing net income by the average number of shares outstanding during
the applicable period adjusted for these potentially dilutive options.
The following table sets forth the computation of per share earnings as
provided in SFAS 128, and illustrates the dilutive effect of options
outstanding.
<TABLE>
<CAPTION>
Three months ended
June 30, 1998 June 30, 1997
--------------------- -------------------
Earnings Earnings
Shares per share Shares per share
------ --------- ------- ---------
(In thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic EPS 9,147 $ 0.44 9,071 $ 0.39
Net dilutive effect of stock
options outstanding 384 (0.02) 271 (0.01)
------ -------- ----- --------
Diluted EPS 9,531 $ 0.42 9,342 $ 0.38
====== ======== ===== ========
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
Six months ended
June 30, 1998 June 30, 1997
------------- -------------
Earnings Earnings
Shares per share Shares per share
------ ----------- -------- ---------
(In thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic EPS 9,130 $ 0.86 9,119 $ 0.75
Net dilutive effect of stock
options outstanding 375 (0.03) 346 (0.02)
----- -------- ----- --------
Diluted EPS 9,505 $ 0.83 9,465 $ 0.73
===== ======== ===== ========
</TABLE>
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 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
flows positions, industry concentrations, delinquencies, and other
relevant factors. The allowance is increased by a provision for losses
charged against income.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------- -------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 10,679 $ 10,987 $ 10,549 $ 11,042
Charge-offs:
Single family 36 12 46 65
Commercial 54 -- 54 --
Installment 518 385 976 766
-------------------------- -------------------------
Total 608 397 1,076 831
Recoveries:
Installment 112 88 185 167
-------------------------- -------------------------
Total 112 88 185 167
-------------------------- -------------------------
Net charge-offs 496 309 891 664
Provision charged to operations 550 300 1,075 600
-------------------------- -------------------------
Balance at end of period $ 10,773 $ 10,978 $ 10,733 $ 10,978
========================== =========================
</TABLE>
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<PAGE> 8
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.
NOTES 5: COMPREHENSIVE INCOME
The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", as of January 1, 1998. SFAS
No. 130 established standards for reporting and display of
comprehensive income and its components. Total Comprehensive Income for
the three month and six month periods ended June 30, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------------ ----------------------
(In thousands) (In thousands)
------------------------ ----------------------
<S> <C> <C> <C> <C>
Net income $ 3,982 $ 3,579 $ 7,879 $ 6,873
Other comprehensive income
Unrealized holding gains and losses
on debt securities available for sale,
net of tax 126 (346) (33) (361)
-------- -------- ------- --------
Total accumulated other
comprehensive income 126 (346) (33) (361)
-------- -------- ------- --------
Total Comprehensive Income $ 4,108 $ 3,233 $ 7,846 $ 6,512
======== ======== ======= ========
</TABLE>
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<PAGE> 9
D&N FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding D&N
Financial Corporation's ("D&N or the Company") financial condition and
results of operations for the three month and six month periods ended June
30, 1998 and 1997. Ratios for the periods are stated on an annualized basis.
Results of operations for three month and six month periods ended June 30,
1998 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, 1998 of $4.0
million, compared to net income of $3.6 million in the second quarter of
1997. Return on assets and return on equity were 0.87% and 15.34%,
respectively, during the quarter ended June 30, 1998, compared to 0.91% and
16.08%, respectively, during the quarter ended June 30, 1997. The increase
in net income was primarily due to increases in net interest income of $1.5
million, increased gains on sales of loans of $957,000 and lower income tax
expense. These increases in income were partially offset by an increase in
the provision for loan losses of $250,000, and increased operating expenses
of $930,000.
For the six months ended June 30, 1998, the Company recorded net income of
$7.9 million, compared to net income of $6.9 million for the six months
ended June 30, 1997. Return on assets and return on equity were 0.86% and
15.44%, respectively, during the six months ended June 30, 1998, compared to
0.90% and 15.58%, respectively, during the six months ended June 30, 1997.
The increase in net income was primarily due to increases in net interest
income of $3.4 million, increased gains on sales of loans of $1.8 million
and increased other income. These increases in income were partially offset
by an increase in operating expenses of $2.3 million and an increase in the
provision for loan losses of $475,000.
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
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<PAGE> 10
sources of funds such as deposits and borrowings, is a significant
component of the Company's earnings. Net interest income is affected
by changes in both the balance of and the rates on interest earning
assets and interest bearing liabilities and the amount of interest
earning assets funded with non-interest or low-interest bearing funds.
Net interest income increased $1.5 million to $13.3 million for the
quarter ended June 30, 1998 compared to $11.8 million for the quarter
ended June 30, 1997. The increase was due to increased volume on D&N's
loan portfolio and increased volume in the mortgage backed securities
portfolio. These improvements were partially offset by increases in
interest paid on deposits, FHLB advances, and other borrowings, as the
Company utilized the increased borrowing to fund loan demand.
Similarly, net interest income increased $3.4 million to $26.5 million
for the six months ended June 30, 1998 from $23.1 for the six months
ended June 30, 1997. 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 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 exposure in
the portfolio.
The Company recorded a $550,000 provision for loan losses during the
quarter ended June 30, 1998 and $300,000 during the quarter ended June
30, 1997. For each of the first six months in 1998 and 1997, the
Company's provision for loan losses was $1.1 million, and $600,000,
respectively.
NONINTEREST INCOME
Total noninterest income increased to $2.9 million during the second
quarter of 1998, from $2.3 million recorded during the second quarter
of 1997. The majority of this increase was due to an increase in gain
on sale of
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<PAGE> 11
loans of $957,000, increases in deposit related fees 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 $539,000 decrease in gain on sale of
mortgage-backed securities.
During the prior year quarter, the Company sold mortgage backed
securities totaling $23.7 million from its available-for-sale portfolio
at a gain of $539,000. The proceeds from the prior year sale were used
to fund loan demand and to reduce short-term debt.
For the six months ended June 30, 1998, total noninterest income
increased to $6.1 million from $4.0 million recorded during the six
months ended June 30, 1997. The majority of this increase was due to a
$1.8 million increase in gain on sale of loans available for sale.
Deposit related fees also increased by $289,000 during the six month
period, primarily due to increased ATM surcharge income. Other income
increased by $625,000 due to a sale of mortgage servicing rights, and a
recovery on a previously written-off investment. Offsetting these
increases was a decrease in the gain on sale of mortgage-backed
securities of $539,000.
NONINTEREST EXPENSE
Total noninterest expense increased $1.0 million to $9.3 million during
the quarter ended June 30, 1998, from $8.3 million during the prior
year quarter. Compensation and benefits increased $725,000 reflecting
staffing levels to handle increased loan volumes and incentives paid on
those increased volumes. Other expense increased $124,000 with the
greatest increases being office administration, data processing, ATM
expenses and legal fees.
For the six months ended June 30, 1998, total noninterest expense
increased $2.5 million to $18.4 million, compared to $15.9 million
recorded during the six months ended June 30, 1997. The factors
contributing to the year-to-date period were essentially the same as
those for the quarterly period.
FEDERAL INCOME TAXES
The second quarter and first half of 1998 reflect a federal tax refund
of $385,000 that was received in June, 1998. This refund was the result
of a credit for prior years corporate minimum tax. The second quarter
and first half of 1997 reflect customary provisions for income taxes.
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<PAGE> 12
FINANCIAL CONDITION
Total assets at June 30, 1998 were $1.90 billion, an increase of $82.7
million from December 31, 1997. Earning assets represented
approximately 98% of total assets as of June 30, 1998, substantially
the same as at year-end 1997.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $121.2 million at June
30, 1998, down $1.9 million from December 31, 1997. This decrease was
due to maturities in D&N's non-mortgage liquidity portfolio of
approximately $29.5 million in U.S. Treasury Securities, partially
offset by increases of $20.0 million in commercial paper, $4.9 million
in cash and cash equivalents, and $2.7 million in FHLB stock.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities increased $106.7 million to $465.0 million
at June 30, 1998 compared to $358.3 million at December 31, 1997.
During the period, the Company purchased $104.6 million of government
agency collateralized mortgage obligations, with a weighted average
yield of 6.43% and a weighted average life of 4.3 years. The Company
also securitized 15 and 30 year fixed-rate mortgage loans with FNMA,
adding $83.8 million to D&N's mortgage-backed securities portfolio.
The entire mortgage-backed securities portfolio experienced repayments
and amortization during the period of $81.8 million, plus a net
increase of $19,000 in market value, recognized through stockholders'
equity on mortgage-backed securities available for sale.
NET LOANS RECEIVABLE
Net loans receivable decreased $24.7 million during the period to
$1.28 billion at June 30, 1998. Loan originations of $434.0 million
and purchases of $88.1 million were less than repayments of $322.6
million and sales (including securitizations) of $224.2 million. Loan
originations and purchases during the six months ended June 30, 1998
were $179.0 million for consumer loans, while residential mortgage
loans and commercial loans were $281.1 million and $62.0 million,
respectively.
NONPERFORMING ASSETS AND RISK ELEMENTS
The following table sets forth the amounts and categories of
risk elements in the Bank's loan portfolio.
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<PAGE> 13
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 8,173 $ 3,552
Accruing loans delinquent more
than 90 days -- 274
============================
Total nonperforming loans 8,173 3,826
Other real estate owned (OREO) 1,295 1,474
----------------------------
Total nonperforming assets $ 9,468 5,300
============================
Nonperforming loans as a
percentage of total loans 0.64% 0.29%
============================
Nonperforming assets a a
percentage of total assets 0.50% 0.29%
============================
Allowance for loan losses as a
percentage of nonperforming loans 131.33% 275.72%
============================
Allowance for loan and OREO
losses as a percentage of
nonperforming assets 113.37% 199.04%
============================
</TABLE>
Nonperforming assets, before allowances for loans and OREO losses,
increased $4.2 million during the period, primarily as three
commercial real estate loans were downgraded.
MORTGAGE SERVICING RIGHTS (MSRS)
The Company's net investment in MSRs increased during the
period to $3.4 million at June 30, 1998. The following table details
activity in the portfolio for the periods indicated.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1998 December 31, 1997
---------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 2,136 $ 1,443
Additions:
Capitalized servicing 1,880 1,236
Total -------- --------
1,880 1,236
Reductions:
Scheduled amortization 225 321
Additional amortization due
to changes in prepayment
assumptions 144 222
Sale of servicing 243 --
-------- --------
Total 612 543
-------- --------
Balance at end of period $ 3,404 $ 2,136
======== ========
Fair market $ 3,676 $ 2,389
======== ========
</TABLE>
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<PAGE> 14
DEPOSITS
Deposits increased $37.0 million during the period to $1.08
billion at June 30, 1998. Certificates of deposit decreased $3.1
million and savings deposits increased $26.8 million, while checking
accounts increased $7.5 million and money market accounts increased
$5.8 million. The Company's cost of deposits decreased to 4.61% at
June 30, 1998, compared to 4.74% at December 31, 1997, reflecting
general decreases in market rates of interest.
BORROWINGS
Total borrowings increased $37.6 million during the period to $657.1
million at June 30, 1998 in order to fund loan demand. The Company's
cost of borrowings was 5.83% at June 30, 1998, compared to 5.94% at
December 31, 1997.
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, 1998 exceeded these requirements.
<TABLE>
<CAPTION>
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
-------- ------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Actual capital $ 127,807 $ 127,807 $ 138,396 $ 127,807
Required capital 28,701 57,402 92,244 46,122
---------- --------- ---------- ---------
Excess capital $ 99,106 $ 70,405 $ 46,152 $ 81,685
========== ========= ========= =========
Actual ratio 6.68% 6.68% 12.00% 11.08%
========== ========= ========= =========
Required ratio 1.50% 3.00% 8.00% 4.00%
========== ========= ========= =========
</TABLE>
Consolidated stockholders' equity was $105.7 million at June 30,
1998 and represents 5.57% 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, U.S. Government Securities and other
specified assets, equal to at least 4% of net withdrawable accounts
and to borrowings payable in one year or less. For June 1998, the
Bank's average liquidity ratio was 19.4%. At June 30, 1998, unused
borrowing capacity as measured by the Bank's inventory of
- 14 -
<PAGE> 15
readily available but unpledged collateral was approximately $193
million. The Company considers its current liquidity and other funding
sources sufficient to fund its outstanding loan commitments and
scheduled liability maturities.
REGULATORY INSURANCE
The deposits of savings associations, such as D&N Bank, are presently
insured by the SAIF ("Savings Association Insurance Fund"), which
together with the BIF ("Bank Insurance Fund"), are the two insurance
funds administered by the FDIC. The assessment for SAIF insured
institutions is 6.5 cents per $100 of deposits while BIF insured
institutions 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.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requiries that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Statement will be adopted effective January 1, 2000 and is not
expected to have any material effect on the Company's financial
statements.
YEAR 2000 COMPLIANCE
D&N utilizes various electronic computer systems for the delivery of
its financial services products, for the maintenance of its financial
and other business records, and for general management purposes. Some
of these systems include legacy procedures that may have been designed
and historic data that may have been stored in such a manner that
inconsistencies or failures might occur when dates from the new
millennium are considered. Commonly known as the Year 2000 problem, a
myriad of related potential computing difficulties face entities that
rely extensively upon computer systems. D&N's major computer systems
include financial control applications provided by M&I Data Services,
Inc.; mortgage lending application provided by ALLTEL Information
Services, Inc. and FiTech, Inc.; and internally maintained
micro-computer and network systems which support management functions
and communication. D&N is working closely with its data services
vendors to ascertain that their applications, upon which the Bank
relies, will be certifiable as compliant by the end of 1998.
- 15 -
<PAGE> 16
D&N had determined that its internally maintained systems, consisting
primarily of a Lotus Notes server array and various workstation-based
business suite software are Year 2000 compliant as currently
installed.
Costs associated with addressing the Year 2000 issue as it affects
D&N's externally vended applications, is implicitly included in the
contractual arrangements for those applications. Accordingly, D&N's
duty is to monitor the progress of its vendors toward the attainment
of compliance and to test for compliance. Where progress is acceptable
and timely compliance is deemed likely, no material costs of
addressing the Year 2000 issue are imputable to D&N. At this time, D&N
deems the progress attained by each of its service bureau vendors to
achieve Year 2000 compliance in a timely fashion to be acceptable.
Accordingly, the potential cost of addressing the Year 2000 issue is
not expected to be material to D&N's business, operations or financial
condition.
- 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:
(27) Financial Data Schedule
(99) Additional exhibits
I. Interest rate/volume analysis:
quarter ended 6/30/98 vs.
quarter ended 6/30/97
six months ended 6/30/98 vs.
six months ended 6/30/97
(b) Reports on Form 8-K:
No reports on Form 8-K have been
filed during the quarter ended June
30, 1998.
-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 13, 1998
-----------------------------
<PAGE> 19
Exhibit Index
-------------
Exhibit No. Description
- ------------ -----------
27 Financial Data Schedule
99.I Operating Marginand Rate Volume Analysis
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,882
<INT-BEARING-DEPOSITS> 9,002
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 262,489
<INVESTMENTS-CARRYING> 298,361
<INVESTMENTS-MARKET> 299,584
<LOANS> 1,286,996
<ALLOWANCE> 10,733
<TOTAL-ASSETS> 1,898,004
<DEPOSITS> 1,080,136
<SHORT-TERM> 133,481
<LIABILITIES-OTHER> 26,324
<LONG-TERM> 523,605
0
28,719
<COMMON> 76,038
<OTHER-SE> 29,691
<TOTAL-LIABILITIES-AND-EQUITY> 1,898,004
<INTEREST-LOAN> 26,831
<INTEREST-INVEST> 7,537
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34,368
<INTEREST-DEPOSIT> 11,997
<INTEREST-EXPENSE> 21,049
<INTEREST-INCOME-NET> 13,319
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,334
<INCOME-PRETAX> 5,645
<INCOME-PRE-EXTRAORDINARY> 3,982
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,982
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 3.01
<LOANS-NON> 8,173
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,822
<ALLOWANCE-OPEN> 10,679
<CHARGE-OFFS> 608
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 10,773
<ALLOWANCE-DOMESTIC> 10,773
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT (99)I
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 1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate
------------------------------------------------------------------------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS RECEIVABLE $1,340,256 $1,143,747 8.01% 8.25% $26,831 $23,598 $3,233 $3,955 ($722)
MORTGAGE-BACKED SECURITIES 352,964 256,940 6.85% 7.20% 6,047 4,625 1,422 1,655 (233)
INVESTMENTS 86,875 13,460 6.88% 6.36% 1,490 2,070 (580) (738) 158
---------- ---------- ---- ---- ------- ------- -------- ------ -----
1,780,095 1,531,147 7.72% 7.91% 34,368 30,293 4,075 4,872 (797)
---------- ---------- ---- ---- ------- ------- -------- ------ -----
INTEREST-BEARING LIABILITIES:
DEPOSIT $1,045,860 1,013,886 4.60% 4.74% 11,987 11,987 10 372 (362)
BORROWINGS
SECURITIES SOLD W/REPO 93,975 81,428 5.54% 5.57% 1,316 1,147 169 176 (7)
NOTES PAYABLE 513,772 352,948 5.83% 5.78% 7,577 5,161 2,416 2,371 45
OTHER BORROWED MONEY 6,729 8,219 9.45% 9.20% 159 189 (30) (35) 5
---------- --------- ---- ---- ------- ------- -------- ------ -----
SUBTOTAL - BORROWINGS 614 ,476 442,595 5.83% 5.81% 9,052 6,497 2,555 2,512 43
---------- --------- ---- ---- ------- ------- -------- ------ -----
1,660,336 1,456,481 5.06% 5.07% 21,049 18,484 2,565 2,884 (319)
---------- --------- ---- ---- ------- ------- -------- ------ -----
INTEREST RATE SPREAD 2.67% 2.85%
==== ====
EXCESS AVERAGE EARNING ASSETS $119,759 $74,666
======== =======
NET INTEREST MARGIN 3.01% 3.09% $13,319 $11,809 $ 1,510 $1,987 ($477)
==== ==== ======= ======= ======== ====== =====
</TABLE>
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO:
OPERATING MARGIN FOR June 30, June 30, June 30, Increase
Year to Date 1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
LOANS RECEIVABLE $1,337,575 $1,105,052 8.04% 8.26% $53,660 $45,535 $8,125 $9,353 ($1,228)
MORTGAGE-BACKED SECURITIES 355,904 252,013 6.85% 7.19% 12,192 9,061 3,131 3,577 (446)
INVESTMENT 92,824 130,032 6.65% 6.25% 3,063 4,032 (969) (1,218) 249
---------- ---------- ---- ---- ------- ------- ------ ------- -------
1,786,303 1,487,097 7.73% 7.90% 68,915 58,628 10,287 11,712 (1,425)
---------- ---------- ---- ---- ------- ------- ------ ------- -------
INTEREST-BEARING LIABILITIES:
DEPOSIT $1,041,063 994,116 4.65% 4.72% 23,982 23,275 707 1,086 (379)
BORROWINGS
SECURITIES SOLD W/REPO 118,246 68,968 5.56% 5.50% 3,307 1,906 1,401 1,378 23
NOTES PAYABLE 502,838 345,517 5.84% 5.71% 14,774 9,918 4,856 4,617 239
OTHER BORROWED MONEY 7,182 8,203 9.13% 9.39% 328 385 (57) (47) (10)
---------- ---------- ---- ---- ------- ------- ------ ------- -------
(10)
SUBTOTAL - BORROWINGS 628,266 422,688 5.83% 5.75% 18,409 12,209 6,200 5,948 252
---------- ---------- ---- ---- ------- ------- ------ ------- -------
1,669,329 1,416,804 5.09% 5.03% 42,391 35,484 6,907 7,034 (127)
---------- ---------- ---- ---- ------- ------- ------ ------- -------
INTEREST RATE SPREAD 2.64% 2.87%
==== ====
EXCESS AVERAGE EARNING ASSETS $ 116,974 $70,293
========== ==========
NET INTEREST MARGIN 2.98% 3.11% $26,524 $23,144 $3,380 $4,678 ($1,298)
===============================================================
</TABLE>
