<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [NO FEE REQUIRED]
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 Number)
400 Quincy Street, Hancock, Michigan 49930
----------------------------------------- --------------------
(Address of Principal Executive Offices (Zip Code)
Registrant's telephone number, including area code (906) 482-2700
-------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X . NO .
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of March 10, 1998, there were issued and outstanding 9,120,324 shares of
the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock at March
10, 1998, was $208,862,000. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K - Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1997.
PART III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held in 1998.
==========================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
D&N Financial Corporation ("D&N" or the "Company") is a financial
services holding company organized under the laws of the state of Delaware. The
Company's principal subsidiary is D&N Bank (the "Bank"), a federally chartered
stock savings bank headquartered in Hancock, Michigan.
The Bank was founded in 1889 and operated as a state-chartered mutual
savings and loan association until February 1984, when it converted to a federal
charter. In 1985, the Bank converted to a stock association, and in 1986,
converted to a federal savings bank. The Bank adopted a holding company
structure in July 1988. With total assets of $1.82 billion at December 31, 1997,
D&N is one of the largest savings institutions headquartered in Michigan.
D&N's primary business consists of attracting deposits from the general
public and making real estate loans, business loans, and consumer loans and
other types of investments. The Company conducts its business through a network
of 37 full-service community banking offices, including its main office in
Hancock, Michigan, seven savings agency offices which provide depository
services and four mortgage banking offices. The Bank's deposits are insured up
to the maximum extent permitted by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
The Bank is subject to supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the FDIC.
The executive office of the Company is located at 400 Quincy Street,
Hancock, Michigan 49930, telephone (906) 482-2700.
Like many financial institutions, the operations of the Company's
subsidiary are materially affected by general economic conditions, the monetary
and fiscal policies of the federal government and the policies of the various
regulatory authorities, including the OTS, the FDIC and the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board"). Its results of
operations are largely dependent upon its net interest income which is the
difference between the interest it receives on its loans and investment
securities, and the interest it pays on its liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset/Liability Management."
FORWARD LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or
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<PAGE> 3
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaim any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
LENDING ACTIVITIES
GENERAL. The Bank, has concentrated its lending activities on first
mortgage conventional loans secured by residential and commercial real estate
and both installment and revolving consumer and business loans. Approximately
$411.9 million or 50% of the Bank's total loans, excluding loans held for sale,
secured by real estate as of December 31, 1997, permit periodic interest rate
adjustments.
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of D&N's loan portfolio in dollar amounts and
percentages, by type of loan.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
REAL ESTATE
One to four family
Permanent $ 703,580 54.08% $ 600,923 56.91% $ 597,892 62.78% $ 526,572 64.07% $ 387,252 59.89%
Construction 13,864 1.07 13,201 1.25 19,982 2.10 2,159 0.26 2,083 0.32
Income producing property
Permanent 81,830 6.29 85,619 8.11 89,176 9.36 115,162 14.01 131,372 20.31
Construction 42,582 3.27 26,472 2.51 21,074 2.21 17,741 2.16 10,475 1.62
----------- ------ --------- ------ -------- ------ --------- ------ --------- ------
Total real estate loans 841,856 64.71 726,215 68.78 728,124 76.45 661,634 80.50 531,182 82.14
</TABLE>
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<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSUMER LOANS
Automobile loans 198,505 15.26 141,056 13.36 81,885 8.60 46,711 5.68
Home equity 99,122 7.62 82,305 7.79 60,003 6.30 39,939 4.86
Home improvement 47,845 3.68 46,545 4.41 41,542 4.36 39,279 4.78
Mobile home loans 213 0.02 289 0.03 417 0.04 619 0.08
Unsecured 12,395 0.95 15,172 1.44 19,637 2.06 22,197 2.70
Other 91,471 7.03 53,901 5.10 35,975 3.78 22,194 2.70
---------- ------ ---------- ------ -------- ------- -------- ------
Total consumer loans 449,551 34.56 339,268 32.13 239,459 25.14 170,939 20.80
COMMERCIAL LOANS
Revolving business loans 11,363 0.87 2,363 0.22 1,119 0.12 -- --
Term business loans 27,072 2.08 9,982 0.95 6,650 0.70 4,748 0.58
---------- ------ ---------- ------ -------- ------- -------- ------
Total commercial loans 38,435 2.95 12,345 1.17 7,769 0.82 4,748 0.58
---------- ------ ---------- ------ -------- ------- -------- ------
Loans receivable, gross 1,329,842 102.22 1,077,828 102.08 975,352 102.41 837,321 101.88
Less:
Discounts (premiums)
on loans purchased (2,356) (0.18) (2,035) (0.19) (1,709) (0.18) 999 0.12
Allowance for losses 10,549 0.81 11,042 1.05 10.081 1.06 8,349 1.02
Undisbursed portion
of loan proceeds 20,315 1.56 12,085 1.14 13,198 1.38 4,213 0.51
Deferred income 375 0.03 860 0.08 1,423 0.15 1,885 0.23
----------- ------ ---------- ------ -------- ------ -------- ------
28,883 2.22 21,952 2.08 22,993 2.41 15,446 1.88
----------- ------ ---------- ------ -------- ------ -------- ------
Loans receivable, net $ 1,300,959 100.00% $1,055,876 100.00% $952,359 100.00% $821,875 100.00%
=========== ======= ========== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<S> <C> <C>
CONSUMER LOANS
Automobile loans 34,220 5.29
Home equity 23,058 3.57
Home improvement 40,017 6.19
Mobile home loans 776 0.12
Unsecured 20,328 3.14
Other 16,245 2.51
-------- -------
Total consumer loans 134,644 20.82
COMMERCIAL LOANS
Revolving business loans -- --
Term business loans -- --
-------- -------
Total commercial loans -- --
-------- -------
Loans receivable, gross 665,826 102.96
Less:
Discount (premiums)
on loans purchased 2,896 0.45
Allowance for losses 11,570 1.79
Undisbursed portion
of loan proceeds 2,750 0.43
Deferred income 1,901 0.29
-------- -------
19,117 2.96
-------- -------
Loans receivable, net $646,709 100.00%
======== =======
</TABLE>
LOAN MATURITIES. The following schedule illustrates the maturity
structure of the Company's loan portfolio at December 31, 1997. Loans are shown
as maturing in the period in which payment is due. This schedule does not
reflect the effects of possible prepayments or enforcement of due-on-sale
clauses.
<TABLE>
<CAPTION>
Residential
Commercial and Real Estate
Business Income Producing Construction
Property Property Loans Consumer Loans Total
Amounts ----------------- ------------------ ------------------ ------------------ ----------------
Due in
Years Weighted Weighted Weighted Weighted Weighted
Ending Average Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------ ------- -------- ------ -------- ------- --------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $ 13,973 9.53% $ 12,441 8.70% $ 28,177 9.24% $ 87,562 9.17% $ 142,153 9.18%
1999 4,218 9.20 17,641 8.51 4,981 9.84 89,431 8.99 116,271 8.96
2000 5,135 9.32 44,017 7.65 10,083 9.87 86,825 9.03 146,060 8.68
2001-2002 10,363 9.39 55,478 8.42 10,038 10.30 139,265 9.17 215,144 9.04
2003-2007 3,803 9.43 57,255 7.99 1,903 9.24 35,091 9.13 98,052 8.48
2008-2012 571 8.79 91,861 7.86 833 9.32 8,743 8.24 102,008 7.91
Thereafter 101 8.87 502,650 7.77 -- -- 165 8.03 502,916 7.76
-------- -------- -------- ---------- ----------
Total $ 38,164 9.40% $781,343 7.86% $ 56,015 9.60% $ 447,082 9.08% $1,322,604 8.39%
======== ======== ======== =========
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
Plus:
Accrued interest receivable,
net of reserve for uncollected
interest 7,311
Deferred income and premiums 1,908
Less:
Loans in process 20,315
Loss and valuation allowances 10,549
----------
$1,300,959
==========
</TABLE>
The total amount of loans, excluding loans held for sale, due after
December 31, 1998 which have fixed interest rates is $403.8 million, while the
amount of loans due after such date having floating or adjustable rates is
$771.3 million.
LOAN ORIGINATIONS, PURCHASES AND SALES. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. D&N has originated residential mortgage loans
secured by property both within and outside the State of Michigan. D&N has also
purchased residential mortgage loans secured by property located in various
states. In addition, the Company has originated income producing property loans
secured by real estate located in the State of Michigan and has purchased such
loans secured by property located in Michigan and elsewhere. Since 1990, the
Bank has chosen to focus the activities of its community banking offices on loan
originations in their market areas. At December 31, 1997, 73% of D&N's real
estate loans receivable (excluding government agency insured or guaranteed
mortgage-backed and derivative products) were secured by real estate located in
Michigan.
The following table presents information regarding the geographic
location of the properties securing D&N's residential mortgage and income
producing property loans at December 31, 1997. See "- Classified Assets, Loan
Delinquencies and Defaults" for a discussion of other real estate owned.
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1997
--------------------
(In thousands)
<S> <C>
MICHIGAN
One- to four-family residential.................... $506,959
Apartments......................................... 14,803
Mini warehouse, storage ........................... 1,440
Mobile home parks.................................. 2,063
Motels/hotels ..................................... 11,160
Shopping centers and retail ....................... 17,195
Office buildings .................................. 7,304
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1997
-------------------
(In thousands)
<S> <C>
Industrial ................................................. 4,788
Condominiums and land development .......................... 31,694
Other ...................................................... 17,785
-------
615,191
CALIFORNIA ................................................... .
One- to four-family residential ............................ 23,466
Apartments ................................................. 6,325
Mobile home parks .......................................... 55
Shopping centers & retail .................................. 3,482
Office buildings ........................................... 681
Industrial ................................................. 372
Other ...................................................... 93
-------
34,474
MASSACHUSETTS
One- to four-family residential ............................ 19,889
-------
19,889
NEW YORK
One- to four-family residential ............................ 4,958
Apartments ................................................. 805
-------
5,763
NORTH CAROLINA
One- to four-family residential ............................ 7,514
-------
7,514
TEXAS
One- to four-family residential ............................ 12,110
-------
12,110
PENNSYLVANIA
One- to four-family residential ............................ 5,652
Apartments ................................................. 241
Industrial ................................................. 114
Other ...................................................... 50
-------
6,057
FLORIDA
One-to four-family residential ............................... 5,192
-------
5,192
OTHER (31 STATES)
One- to four-family residential ............................ 123,812
Apartments ................................................. 138
Motels/hotels .............................................. 331
Shopping centers and retail ................................ 1,951
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1997
--------------------
(In thousands)
<S> <C>
Office buildings ............................................ 66
Other ....................................................... 250
---------
126,548
Rated conventional residential
participation certificates ................................... 4,621
---------
Total ......................................................... 837,359
Plus:
Loan control and clearing ................................... 298
Accrued interest receivable, net of reserve for
uncollected interest .................................... 4,199
Less:
Deferred income, discounts and premiums .................... (1,131)
Loans in process ........................................... 20,315
Loss and valuation allowances .............................. 5,955
---------
Total .................................................... $ 816,717
=========
</TABLE>
Residential loan originations are attributable to direct marketing
efforts of the Bank and of the Bank's subsidiary, D&N Mortgage Corporation, as
well as to referrals from real estate brokers and builders. Income producing
property loans are originated through the Bank's direct marketing efforts and
through referrals by existing customers. In 1997, total loan originations
increased $120.2 million, or 24% as a result of a significant increase in
consumer lending activity. Consumer loan originations alone increased $52.1
million, or 19%.
D&N Bank has sold loans and loan participations in the secondary
market, generally without recourse. Loans held for sale are recorded at the
lower of cost or market value. At December 31, 1997, the Bank had $5.3 million
of net loans held for sale consisting of 15 and 30 year fixed rate loans. These
sales have provided additional funds for loan originations and investments and
also generated income. The Bank generally continues, after the sale, to service
the loans and loan participations sold. Loan sales are made on a yield basis
with a portion of the difference between the yield to the purchaser and the
amount paid by the borrower constituting servicing income to D&N. On occasion,
the Bank also purchased mortgage loan servicing rights from others in order to
maintain its loan servicing portfolio economies of scale.
The weighted average servicing fee for loans serviced for others was
.31% at December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Noninterest Income." At
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<PAGE> 8
December 31, 1997, D&N serviced for others approximately $519 million in
loans and loan participations. See also Note A of Notes to Consolidated
Financial Statements "Summary of Significant Accounting Policies - Mortgage
Servicing Rights".
The Bank's investment in mortgage servicing rights ("MSRs") totaled
$2.1 million at December 31, 1997. The following table details the value of the
Bank's investment in MSRs.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1996 1995
------------ -------------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,443 $ 1,113 $ 968
Additions:
Capitalized servicing 1,236 630 621
Reductions:
Scheduled amortization 321 267 169
Additional amortization due to
changes in prepayment assumptions 222 33 71
Impairment -- -- 234
Sales -- -- --
Transfers to loan portfolio under
recourse and other provisions -- -- 2
------- ------- -------
Total 543 300 476
------- ------- -------
Balance at end of year $ 2,136 $ 1,443 $ 1,113
======= ======= =======
Fair market value at end of year $ 2,389 $ 1,770 $ 1,161
======= ======= =======
</TABLE>
The following table shows origination, purchase, sale and repayment
activities of D&N Bank, including mortgage-backed securities, for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- ----------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
ORIGINATIONS
Real estate:
One- to four-family residential ..... $215,452 $194,357 $182,800 $ 81,279 $147,246
Income producing property ........... 45,594 33,816 17,614 17,350 13,014
Non-real estate:
Consumer ............................ 323,676 271,622 195,109 132,836 95,129
Commercial .......................... 46,708 11,437 3,739 4,748 --
---------- -------- -------- -------- --------
Total originations................. 631,430 511,232 399,262 236,213 255,389
PURCHASES
Real estate:
One- to four-family residential...... 234,886 148,405 103,524 188,481 72,125
Income producing property............ -- -- -- 1,852 --
Mortgage-backed securities........... 107,400 58,892 -- 68,391 108,749
--------- --------- -------- -------- --------
Total purchases ................... 342,286 207,297 103,524 258,724 180,874
--------- --------- -------- -------- --------
Total additions.................... 973,716 718,529 502,786 494,937 436,263
</TABLE>
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<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C> <C>
SALES
Real estate:
One- to four-family residential...... 85,778 68,024 107,080 45,311 106,167
Mortgage-backed securities(1)........ 23,555 -- 4,210 50,658 126,932
Non-real estate:
Consumer loans....................... 2,383 2,810 2,976 2,894 2,229
-------- -------- --------- --------- -------
Total sales........................ 111,716 70,834 114,266 98,863 235,328
Principal repayments................... 504,972 426,291 288,485 239,816 316,624
-------- -------- --------- --------- ---------
Total reductions................... 616,688 497,125 402,751 338,679 551,952
Transfers to other real estate owned... (961) (3,373) (1,936) (2,861) (9,380)
Increase (decrease) in other items, net (3,944) 9,033 8,801 1,079 (19,622)
-------- -------- --------- --------- ---------
Net increase (decrease)............ $352,123 $227,064 $ 106,900 $ 154,476 ($144,691)
======== ======== ========= ========= =========
</TABLE>
(1) Includes sales of CMO residuals which were carried at the lower of cost or
market.
Outstanding loan commitments of the Bank at December 31, 1997
amounted to $38.6 million for one- to four-family residential real estate loans
and $40.1 million for commercial real estate loans. See "Regulation - Federal
Savings Association Regulation."
RESIDENTIAL MORTGAGE LOANS. At December 31, 1997, the Bank had $717.4
million in residential mortgage loans representing 55.1% of the Bank's total
loan portfolio. This amount represents a 16.8% increase in the dollar value of
the residential loan portfolio. However, it also represents a 3.1% decrease in
the percentage of the Bank's portfolio consisting of residential real estate
loans as the Bank shifted its focus to emphasize the origination of consumer
loans.
The original contractual loan payment period for residential loans
originated by D&N Bank normally ranges from 15 to 30 years. Because borrowers
may refinance or prepay their loans, however, such loans often remain
outstanding for a substantially shorter period of time.
Prior to 1992, most of the Bank's residential mortgage loans were
originated by its mortgage banking subsidiary. The mortgage banking subsidiary
originated loans in southeastern Michigan, Illinois, Arizona, Texas and North
Carolina. The Bank now originates loans primarily in its Michigan market area
through its community banking and mortgage banking offices. Substantially all of
the residential loans being originated by the Bank are in a form which permits
their sale in the secondary market.
The Bank's first mortgages customarily include "due-on-sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid. In general, the Bank enforces due-on-sale clauses in its first
mortgages.
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<PAGE> 10
In the case of conventional mortgage loans intended for sale, the
Bank's policy is to lend a maximum of 95% of the appraised value of
single-family residences. The Bank generally does not lend more than 90% of the
appraised value of the property on those loans it intends to hold. Private
mortgage insurance is required if the loan amount exceeds 80% of the appraised
value, in an amount sufficient to reduce the Bank's exposure to 75% or less of
the appraised value of the property. Property securing real estate loans made by
the Bank is appraised by independent appraisers selected by the Bank and whose
appraisals are reviewed by D&N personnel or other independent appraisers.
Loans up to the maximum limits for single family homes of the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA") may be approved by qualified loan officers of the Bank. The
Bank's Residential Loan Committee has single-family lending authority up to
$500,000, if two members approve. Loans in excess of $500,000 must be approved
by the Bank's Loan Committee (comprised of Messrs. Butvilas, Krupka, Janson,
West and Sliwinski). Loans in excess of $2 million must also be approved by the
Bank's Board of Directors.
Title, fire and casualty insurance as well as surveys are generally
required on all mortgage loans.
D&N Bank also offers a variety of Adjustable Rate Mortgages, ("ARM")
loans which offer adjustable rates of interest, payments, loan balances or terms
to maturity which vary according to specified indices. The Bank's ARMs generally
have a loan term of 30 years with rate adjustments every year or every three
years during the term of the loan. ARMs currently originated by the Bank contain
a 2% limit as to the maximum amount of change in the interest rate at any
adjustment period and a 6% limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. At December 31, 1997, residential ARMs
totaled $328 million, or 47% of the Bank's total residential one- to four-family
mortgage loan portfolio. Of this total ARM portfolio, $197 million or 60% were
purchased from others. Due to consumer demand, residential loans originated
during 1997 were predominately fixed rate loans.
Despite the benefits of ARMs to the Bank's asset/liability management
program, such loans also pose potential additional risks, primarily because as
interest rates rise, the underlying payment by the borrower rises, increasing
the potential for default. At the same time, marketability of the underlying
property may be adversely affected by higher interest rates.
MORTGAGE-BACKED SECURITIES. The Bank on occasion purchases
mortgage-backed securities to supplement residential loan production. The types
of securities purchased are based upon the Bank's asset/liability management
strategy and balance sheet objectives. In 1997, the Company
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<PAGE> 11
purchased $107.5 million of fixed rate Collateralized Mortgage Obligations
("CMO") with expected average lives of 2.7 to 4.3 years. CMOs are
securitiesderived by reallocating cash flows from mortgage pass-through
securities or pools of mortgage loans held by a trust. The CMO securities
purchased by the Bank in 1997 are backed by pass-through securities of either
FHLMC, FNMA or Government National Mortgage Association ("GNMA").
The Bank has in the past invested in interest only strip securities
("IOs") and principal only strip securities ("POs") as part of its
asset/liability management strategy. At December 31, 1997, D&N had IOs with a
book value and a market value of $1.4 million, and had no POs at that date.
The following table sets forth information concerning the composition
of D&N's mortgage-backed securities portfolio in dollar amounts and percentages,
by type of security. See also Note F of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
MORTGAGE-BACKED ---------------- --------------- --------------- ---------------- ------------------
SECURITIES Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- --------------------------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF SECURITY
One- to four-family:
Mortgage-backed
securities ........ $ 356,079 99.38% $ 249,186 99.18% $ 125,264 98.09% 147,988 97.81% $166,284 96.69%
Interest only
certificates ...... 1,456 0.41 2,070 0.82 2,456 1.92 3,886 2.57 4,321 2.51
--------- ----- --------- ------ --------- ------ -------- ------ -------- ------
Mortgage-backed
securities, gross.. 357,535 99.79 251,256 100.00 127,720 100.01 151,874 100.38 170,605 99.20
Net (discounts)
premiums .......... 761 0.21 -- -- (11) (0.01) (581) (0.38) 1,378 0.80
--------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed
securities, net ... $ 358,296 100.00% $ 251,256 100.00% $127,709 100.00% $151,293 $100.00% $171,983 100.00%
========= ====== ========= ====== ======== ====== ======== ======= ======== ======
</TABLE>
INCOME PRODUCING PROPERTY LOANS. The Bank has historically originated
and purchased both permanent and, to a substantially lesser extent, construction
loans secured by income producing property and land development loans.
Essentially all permanent income producing property loans originated by the Bank
to date have been secured by real property located in Michigan.
To a substantially lesser extent, the Bank has also purchased income
producing property loans and participation interests in these loans outside of
Michigan. These loans may be in the form of mortgage-backed securities, may have
fixed or variable interest rates and most have been outstanding for three to
twelve years. At December 31, 1997, $16.5 million of D&N's portfolio of income
producing property loans were purchased loans.
- 11 -
<PAGE> 12
The following table shows the composition of the Bank's income producing
property and land development loans at December 31, 1997. See "Non-
Performing Assets and Risk Elements."
<TABLE>
<CAPTION>
Amount Non-
Loans Percentage Performing or
Outstanding of Total of Concern
----------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Apartments and multi-family residences $ 20,111 19.54% $ 207
Other income producing property:
Motels/hotels 11,605 11.27 --
Offices 6,974 6.78 --
Mobile home parks 2,139 2.08 103
Shopping centers 22,406 21.77 184
Industrial 4,822 4.68 --
Nursing homes 5,344 5.19 18
Condominium development 4,282 4.16 --
Other 4,431 4.30 --
--------- ------ -------
Total 82,114 79.77 512
Land development loans and other 42,298 41.09 --
--------- ------ -------
Total 124,412 120.86 $ 512
=======
Allowance for losses (5,387) (5.23)
Loans in process, deferred income and
other miscellaneous credits (16,091) (15.63)
--------- ------
Total $ 102,934 100.00%
========= ======
</TABLE>
CONSUMER LENDING. Federal regulations permit federal savings
institutions to make secured and unsecured consumer loans, together with
investments in commercial paper and corporate debt securities, in an amount up
to 35% of the institution's assets. In addition, a federal savings institution
has lending authority above the 35% category for certain consumer loans, such as
home equity loans, property improvement loans, mobile home loans and deposit
account secured loans.
Consumer loans originated by the Bank are offered at fixed and
adjustable rates of interest. The underwriting standards employed by the Bank
for consumer loans include a determination of the applicant's payment history on
other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
The Bank has established programs to originate consumer loans including
automobile loans, home improvement loans, home equity loans, student loans under
various guaranteed student loan programs, loans to depositors secured by pledges
of their deposit accounts and unsecured loans. Although consumer loans involve a
higher level of risk than one- to four-family
- 12 -
<PAGE> 13
residential mortgage loans, they generally carry higher yields and have shorter
terms to maturity. The Bank has increased its origination of consumer loans
during the past several years, and is continuing to emphasize these types of
loans. At December 31, 1997, consumer loans totaled $449.6 million or 35% of the
Bank's loan portfolio, an increase of $110.3 million or 33% from December 31,
1996.
During 1997, net consumer loan charge-offs were $1,276,000 compared to
$926,000 in 1996, $642,000 in 1995, $411,000 in 1994 and $354,000 in 1993.
Indirect loan originations totaled $172.3 million in 1997. Indirect
receivables amounted to $235.2 million at December 31, 1997 and make up 53% of
the consumer loan portfolio. Indirect loans are underwritten according to the
same guidelines as direct loans, and the maximum dollar exposure to any one
dealer is typically limited to $5 million.
Home equity loans and home equity credit lines are extended at fixed or
variable rates of interest and normally do not exceed 80% of the property's
appraised value less the amount owing, if any, on a first mortgage. Home equity
loans are repaid according to fixed monthly payments over a maximum term of ten
years. Home equity credit lines require a monthly interest payment based upon
the outstanding balance. Home equity credit lines generally have five-year terms
at which time the Bank may require payment in full or renew the loan for another
five-year term. Amounts repaid are available for subsequent borrowing, subject
to satisfactory loan performance.
Home improvement loans are generally treated as home equity loans with
a first or second mortgage lien securing the loan. A small number of home
improvement loans are written as unsecured loans.
The Bank has increased its emphasis in recent years on unsecured loans.
These loans are underwritten according to strict guidelines, and loan officers
generally have lower approval limits for unsecured loans than for secured loans.
D&N Bank is subject to various state and federal limitations on the
maximum rates of interest it may charge on consumer and certain other loans.
These limitations have not had a significant effect on D&N's consumer loan
activities.
LOANS TO ONE BORROWER
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus. At December 31, 1997, the Bank's loans to
- 13 -
<PAGE> 14
one borrower limit was approximately $19.8 million. See "Regulation - Federal
Regulation". At December 31, 1997, the Bank had no loans to one borrower in
excess of its lending limit.
CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
The Bank's collection procedures provide that when a residential
mortgage loan is 15 days past due, the borrower is contacted by mail and payment
is requested. For loans secured by income producing property, the borrower is
contacted by telephone when the loan is 15 days past due. If the delinquency
continues, subsequent efforts are made by telephone and mail to contact the
delinquent borrower. In certain instances, the Bank may modify the loan or grant
a limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs. If the loan continues in a delinquent status for 90 days or
more, the Bank generally initiates foreclosure proceedings.
The process of non-judicial foreclosure in Michigan takes approximately
six weeks. A sheriff's sale is then held at which the Bank normally bids for the
purchase of the property. A conditional sheriff's deed is then awarded to the
highest bidder, usually the Bank, and the customer is given six months (or in
certain circumstances, one year) to redeem the conditional deed by repaying the
bid amount in full. During this redemption period, the borrower may occupy and
use the property as he sees fit. If he fails to redeem the sheriff's deed, then
the Bank acquires clear title to the real estate and subsequently sells it to
recover its investment. In most cases, it is not economical to obtain a
deficiency judgment against the borrower if residential property is sold for
less than the unpaid balance of the loan.
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1997. The amounts presented represent
the total remaining principal balances of the related loans (before reserves for
losses), rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------
Income Producing
Commercial Residential Property Consumer
---------------- ---------------- ----------------- -------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 5 $ 298 90 $4,283 5 $ 7,301 562 $ 3,963
60 - 89 days 1 145 18 765 1 68 219 1,186
90 days and over 2 72 44 2,110 5 512 153 804
------- ------- ---- ------ ----- ------- ---- -------
Total delinquent loans 8 $ 515 152 $7,158 11 $ 7,881 934 $ 5,953
======= ======= ==== ====== ====== ======= ==== =======
</TABLE>
- 14 -
<PAGE> 15
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser credit
quality as "substandard," "doubtful" or "loss" assets. The regulation requires
insured institutions to classify their own assets and to establish prudent
general allowances for loan losses for assets classified "substandard" or
"doubtful." For the portion of assets classified as "loss", an institution is
required to either establish specific allowances for loan losses for assets of
100% of the amount classified or charge off such amount. The OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general credit quality of the asset
portfolio of an institution. At December 31, 1997, $8.5 million of the Bank's
assets were classified as "substandard", none of such assets were classified as
"doubtful" or as "loss". The Bank's classification of assets is consistent with
OTS examination classifications.
Hotels and motels account for $3.4 million of classified assets and
apartments account for $2.0 million. The balance of classified assets consists
of loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans. Classified assets amounting to $2.0
million, or 10% of total classified assets, are secured by real estate located
in the state of California.
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, including other real estate owned, decreased to
$5.3 million at December 31, 1997 compared to $8.1 million at December 31, 1996.
The ratio of nonperforming assets to total assets was 0.29% at December 31, 1997
compared to 0.55% at December 31, 1996. Allowances for losses represented 199%
of nonperforming assets at December 31, 1997.
Loans are placed on nonaccrual status when the collection of principal
and/or interest becomes doubtful. In addition, residential mortgage loans and
income producing property loans are placed on nonaccrual status when the loan
becomes 90 days or more contractually delinquent. All consumer loans more than
90 days delinquent are charged against the consumer loan allowance for loan
losses. For 1997, the Bank would have recorded interest income of $369,000 if
nonaccrual and restructured loans had performed in accordance with their
original terms. The Bank recognized $52,000 of interest income on these loans in
1997.
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio:
- 15 -
<PAGE> 16
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 3,552 $ 6,621 $ 8,225 $17,995 $30,102
Accruing loans delinquent
more than 90 days 274 -- 24 5 13
Restructured loans -- -- -- -- 166
------- ------- ------- ------- -------
Total nonperforming loans 3,826 6,621 8,249 18,000 30,281
Other real estate owned (OREO) 1,474 1,470 1,452 6,520 13,312
------- ------- ------- ------- -------
Total nonperforming assets $ 5,300 $ 8,091 $ 9,701 $24,520 $43,593
======= ======= ======= ======= =======
Nonperforming loans as a
percentage of total loans 0.29% 0.62% 0.86% 2.17% 4.60%
======= ======= ======= ======= =======
Nonperforming assets as a
percentage of total assets 0.29% 0.55% 0.79% 2.17% 4.04%
======= ======= ======= ======= =======
Allowance for loan losses as a
percentage of nonperforming loans 275.72% 166.77% 122.21% 46.38% 38.21%
======= ======= ======= ======= =======
Allowances for loan and OREO losses
as a percentage of
nonperforming assets 199.04% 136.47% 105.29% 35.40% 28.03%
======= ======= ======= ======= =======
</TABLE>
OTHER REAL ESTATE OWNED
Other real estate owned, net of reserves, totaled $1.5 million at
December 31, 1997, the same as at December 31, 1996. Other real estate owned
consisted of single family homes, multi-family dwelling units and commercial
real estate. At foreclosure, real estate is recorded at estimated fair value
less disposal costs. Any difference between estimated fair value and the loan
balance is charged to the allowance for loan losses.
The largest asset in other real estate owned is a residential property
located in Indiana. This asset had a carrying value of approximately $314,000 at
December 31, 1997.
OTHER LOANS OF CONCERN
In addition to nonperforming assets, the Bank has other loans of
concern aggregating $14.1 million. These are loans which are currently
performing but which demonstrate a specific weakness or weaknesses which, if not
corrected, could cause failure of the borrower and default. These loans are
closely monitored by management, and as the weaknesses are corrected, may be
reclassified as acceptable loans.
- 16 -
<PAGE> 17
Included in other loans of concern at December 31, 1997, are two income
producing property loans located in California and one in Michigan totaling $4.8
million that have all paid as agreed but, for various reasons, indicate
potential payment concerns.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established at levels considered
appropriate based on management's judgment of potential losses in residential,
income producing and consumer loan portfolios. The loan portfolios are reviewed
at least quarterly for changes in performance, collateral value and overall
quality. Allocated allowances are established for problem loans with expected
losses, and in addition, allowances are established for unidentified potential
losses. Regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
A $1.4 million provision for potential loan losses was made in 1997, compared to
$1.1 million in 1996 and $2.4 million in 1995. Management's judgment in
determining the level of the allowance for loan losses is influenced by several
factors during the quarterly reviews. These factors include, but are not limited
to, past loan performance and loss experience, current economic and market
conditions, collateral location and market values, industry and geographic
concentrations and delinquency statistics and ratios. Management also considers
the different levels of risk between income producing property loans,
installment loans and one- to four-family residential loans. In addition,
management considers the level of nonperforming assets and classified assets,
the level of lending activity and the overall size of the loan portfolio.
Income-producing property charge-offs were primarily due to writedowns
of loans to estimated fair value. Consumer loan charge-offs increased somewhat,
but charge-off ratios decreased as the consumer loan portfolio grew at a faster
rate. See "Lending Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following table sets forth an analysis of the Bank's allowance for
loan losses:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................ $11,042 $10,081 $ 8,349 $11,570 $15,611
Charge-offs:
Residential mortgages..................... 290 314 169 110 1,136
Mortgages on income producing property.... 277 -- 1,019 3,109 2,584
Consumer loans............................ 1,616 1,216 999 773 681
-------------------------------------------------------------------
2,183 1,530 2,187 3,992 4,401
</TABLE>
- 17 -
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C>
Recoveries:
Residential mortgages.............................. -- 3 917 9 25
Mortgages on income producing property............. -- 1,098 245 300 8
Consumer loans..................................... 340 290 357 362 327
------------------------------------------------------------------------
340 1,391 1,519 671 360
------------------------------------------------------------------------
Net charge-offs...................................... 1,843 139 668 3,321 4,041
Provision charged to operations...................... 1,350 1,100 2,400 100 --
------------------------------------------------------------------------
Balance at end of year............................... $10,549 $11,042 $10,081 $ 8,349 $11,570
========================================================================
Net charge-offs as a percentage
of average loans................................... 0.15% 0.01% 0.07% 0.43% 0.59%
========================================================================
Allowance for loan losses as a
percentage of total loans.......................... 0.80% 1.03% 1.05% 1.01% 1.76%
========================================================================
</TABLE>
The following table summarizes the allocation of the allowance for
loan losses by major categories at the dates indicated:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ----------------------- -------------------- --------------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
------ ---------- ------ ----------- ------ ---------- ------ ----------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages $ 569 54% $ 859 57% $ 1,170 63% $ 813 63% $ 429 60%
Mortgages on income
producing property 5,386 9 6,314 10 6,115 11 6,423 17 9,617 19
Commercial loans 400 3 400 1 400 1 -- -- -- --
Consumer loans 4,194 34 3,469 32 2,396 25 1,113 20 1,524 21
---------------------------------------------------------------------------------------------------------
Total $10,549 100% $11,042 100% $10,081 100% $ 8,349 100% $11,570 100%
================== ==================== ================== ================ ==================
</TABLE>
INVESTMENT ACTIVITIES
As a member of the FHLB System, the Bank must maintain minimum levels
of liquid assets specified by federal regulations which vary from time to time.
See "Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to return on loans.
Historically, the Bank has maintained liquid assets above the minimum
requirements imposed by federal regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1997, the Bank's average
liquidity ratio (liquid assets as a percentage of net withdrawable deposits and
current borrowings) was 13.9%, which was in excess of regulatory requirements.
- 18 -
<PAGE> 19
The following table sets forth information concerning the Bank's
investment securities at the dates indicated. See also Note E of Notes to
Consolidated Financial Statements for additional information regarding the
contractual maturities and weighted average yields of the Bank's investment
securities.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government
agencies and corporations................ $ 33,299 $ 33,369 $ 40,757 $ 40,801 $ 35,100 $ 35,229
U.S. Treasury available for sale............ 44,764 44,860 57,996 58,000 40,656 40,899
Valuation allowance......................... 96 -- 4 -- 244 --
--------------------------------------------------------------------
78,159 78,229 98,757 98,801 76,000 76,128
Investment in Federal Home Loan
Bank stock............................... 23,200 23,200 19,959 19,959 19,953 19,953
Other equity securities..................... 25 25 23 23 186 186
Other equity securities available
for sale................................. 1,236 1,252 1,032 1,038 110 298
Valuation allowance......................... 16 -- 6 -- 187 --
--------------------------------------------------------------------
$102,636 $102,706 $119,777 $119,821 $ 96,436 $ 96,565
====================================================================
</TABLE>
The book value and market value of investment securities at December 31,
1997, by maturity ranges, were as follows:
<TABLE>
<CAPTION>
Weighted
Market Average
Book Value Value Yield
-----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
U. S. Treasury and government agencies
and corporate securities maturing:
In one year or less................................... $ 67,859 $ 67,987 5.95%
After one year through five years..................... 10,204 10,242 6.04
Valuation allowance........................................ 96 -- --
-----------------------------------------
78,159 78,229 5.95
Equity securities.......................................... 24,461 24,477 7.85
Valuation allowance........................................ 16 -- --
-----------------------------------------
$102,636 $ 102,706 6.40%
========================================
</TABLE>
SOURCE OF FUNDS
GENERAL. Deposits are an important source of the Bank's funds for use
in lending and for other general business purposes. In addition to deposits, the
Bank derives funds from loan repayments, advances from the FHLB of Indianapolis,
other borrowings, reverse repurchase agreements, and at times has derived funds
from loan and securities sales. Scheduled loan repayments are a relatively
stable source of funds, while loan prepayments and deposit inflows and outflows
are significantly influenced by general interest rates and money market
conditions. Borrowings may be used to compensate for reductions in normal
sources of funds, such as deposit inflows at less than
- 19 -
<PAGE> 20
projected levels or deposit outflows, or to support expanded activities.
Historically, the Bank has borrowed primarily from the FHLB of Indianapolis,
through institutional reverse repurchase agreements and, to a lesser extent,
from other sources.
DEPOSIT ACTIVITIES. The Bank attracts both short-term and long-term
deposits from the general public by offering a wide assortment of accounts and
rates. In recent years, market conditions have required the Company to rely
increasingly on short-term accounts that are more responsive to market interest
rates. The Bank offers regular savings accounts, checking accounts, various
money market accounts, fixed interest rate certificates with varying maturities,
negotiated rate certificates of deposit of $100,000 or above ("Jumbo CDs") and
individual retirement accounts.
The composition of the Bank's deposits at the end of recent periods is
set forth in Note J of Notes to Consolidated Financial Statements. At December
31, 1997, the Company had no brokered deposits. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, the
Bank believes that, based on its experience over the past five years, its
savings accounts are stable sources of deposits.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regular Accounts:
Savings accounts,
1.75% - 5.07% ................. $ 163,119 15.64% $149,226 15.48% $149,728 16.22%
Checking and NOW accounts,
0.00% - 2.50%.................... 119,412 11.45 107,550 11.16 91,621 9.93
Money market accounts,
variable......................... 92,314 8.85 89,321 9.26 86,080 9.33
------------------------------------------------------------------------
Total regular accounts....... 374,845 35.94 346,097 35.90 327,429 35.48
Certificates:
0.00 - 2.99%..................... 8,100 0.78 9,864 1.02 6,218 0.67
3.00 - 4.99%..................... 19,955 1.91 74,620 7.74 67,887 7.36
5.00 - 6.99%..................... 600,035 57.52 476,651 49.44 443,782 48.08
7.00 - 8.99%..................... 35,368 3.39 52,073 5.40 59,847 6.48
9.00 - 10.99%.................... 3,746 0.36 3,894 0.40 16,310 1.77
-------------------------------------------------------------------------
Total certificates........... 667,204 63.96 617,102 64.00 594,044 64.36
Accrued interest..................... 1,118 0.10 934 0.10 1,459 0.16
-------------------------------------------------------------------------
Total deposits................ $ 1,043,167 100.00% $964,133 100.00% $922,932 100.00%
=========================================================================
</TABLE>
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and has allowed it to respond with
flexibility (by paying rates of interest more closely approximating market
rates of interest) to, although not eliminate the threat of, disintermediation
(the flow of funds away
- 20 -
<PAGE> 21
from depository institutions such as savings institutions into direct investment
vehicles such as government and corporate securities). In addition, the Bank has
become much more subject to short-term fluctuations in deposit flows. The
ability of the Bank to attract and maintain deposits, and its cost of funds,
have been, and will continue to be, significantly affected by money market
conditions.
The following table sets forth the deposit flows at D&N Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Opening balance.............................. $ 964,133 $ 922,932 $ 817,674
Deposits..................................... 3,111,891 2,425,493 1,992,613
Withdrawals.................................. (3,075,490) (2,422,882) (1,922,325)
Interest credited............................ 42,449 39,115 34,801
Accrued interest............................. 184 (525) 169
------------ ------------ ------------
Ending balance............................... $ 1,043,167 $ 964,133 $ 922,932
============ ============ ============
</TABLE>
The following table sets forth the change in dollar amount of deposits
in the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Savings accounts................................... $ 13,893 $ (502) $ 19,431
Checking and NOW accounts........................... 11,862 15,929 137
Money market accounts............................... 2,993 3,241 (9,493)
Certificates with maturities:
7 to 91 days..................................... (76) 8,319 (2,162)
92 days to 6 months.............................. 9,211 1,133 12,448
6 months to 1 year............................... 55,669 33,200 21,925
1 year to 1 1/2 years............................ 22,838 16,156 15,004
1 1/2 years to 3 years........................... (38,039) (15,179) 34,840
3 years to 10 years.............................. (6,105) (26,232) 7,655
Negotiable rate certificates........................ 6,604 5,661 5,304
-------------------------------------------------
Increase (decrease).............................. 78,850 41,726 105,089
Change in accrued interest.......................... 184 (525) 169
-------------------------------------------------
Total increase (decrease)........................ $ 79,034 $ 41,201 $ 105,258
=================================================
</TABLE>
- 21 -
<PAGE> 22
The following table shows rate and maturity information for the Bank's
deposits as of December 31, 1997.
<TABLE>
<CAPTION>
Interest Rate Range -- Certificates
----------------------------------------------------------
0.00 3.00 5.00 7.00 9.00
Percent to to to to to
Amount of Total 2.99% 4.99% 6.99% 8.99% 10.99%
-------------------- ----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Savings accounts................... $ 163,119 15.64% $ -- $ -- $ -- $ -- $ --
Checking and NOW accounts.......... 119,412 11.45 -- -- -- -- --
Money market accounts.............. 92,314 8.85 -- -- -- -- --
--------------------------------------------------------------------------------
374,845 35.94 -- -- -- -- --
Certificate accounts
maturing in quarter ending:
03/31/98........................... 185,397 17.77 702 5,405 171,969 7,220 101
06/30/98........................... 152,006 14.57 2,630 3,696 139,056 6,498 126
09/30/98........................... 105,222 10.09 1,787 4,306 95,950 3,070 109
12/31/98........................... 89,006 8.53 1,781 2,765 80,540 3,729 191
03/31/99........................... 34,083 3.27 408 1,291 27,004 3,789 1,591
06/30/99........................... 26,515 2.54 171 793 20,983 3,037 1,531
09/30/99........................... 9,997 0.96 -- 522 8,984 374 97
12/31/99........................... 7,236 0.69 4 210 6,739 283 --
03/31/2000......................... 7,204 0.69 180 229 4,785 2,010 --
06/30/2000......................... 9,282 0.89 120 226 6,028 2,908 --
09/30/2000......................... 6,092 0.58 189 138 5,699 66 --
12/31/2000......................... 3,677 0.35 -- 26 3,438 213 --
Maturity over 3 years ............. 31,507 3.02 128 348 28,860 2,171 --
--------------------- ----------------------------------------------------
Total........................... $ 667,204 63.95 $ 8,100 $19,955 $600,035 $35,368 $3,746
====================================================
Interest accrued................... 1,118 0.10
---------------------
Total deposits.................. $ 1,043,167 100.00%
=====================
</TABLE>
The following table shows the scheduled maturities of certificates of
deposit of $100,000 or greater as of December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1997
-----------------
(In thousands)
<S> <C>
Certificates with maturities:
Three months or less............................. $ 39,016
Over three through six months.................... 20,366
Over six through twelve months................... 21,915
Over twelve months............................... 12,836
--------
Total...................................... $ 94,133
========
</TABLE>
BORROWINGS. The FHLB of Indianapolis functions as a central reserve
bank, providing credit for savings institutions within its assigned region. As a
member of the FHLB of Indianapolis, D&N Bank is required to own capital stock in
the FHLB of Indianapolis and is authorized to apply for advances on the security
of such stock and certain of its residential mortgage loans and
- 22 -
<PAGE> 23
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. See "Regulation -- Federal Home Loan Bank System." FHLB advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. The FHLB of Indianapolis
prescribes the acceptable uses to which the advances pursuant to each program
may be made as well as limitations on the size of advances. Depending on the
program limitations, the amount of advances are generally based on the FHLB of
Indianapolis' assessment of the institution's creditworthiness. The FHLB of
Indianapolis is required to review its credit limitations and standards at least
once every six months. The Bank utilizes borrowings, in part, to fund increases
in loan demand.
The Bank has entered into reverse repurchase agreements with major
investment bankers utilizing government securities or various mortgage
instruments as collateral. These reverse repurchase agreements are generally
utilized in connection with the Bank's investments. See "Investment Activities"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The following table sets forth the maximum month-end and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1996 1995
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Maximum Balance:
Advances from FHLB.................................. $464,003 $338,003 $226,003
Securities sold under
agreements to repurchase.......................... 181,055 74,621 52,579
Other borrowings.................................... 14,643 13,385 12,368
Average Balance:.......................................
Advances from FHLB.................................. 381,787 259,694 200,770
Securities sold under
agreements to repurchase.......................... 98,471 40,095 24,020
Other borrowings.................................... 7,993 9,720 11,504
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances, securities sold under agreements to repurchase and other
borrowings at the dates indicated. See also Note L of Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
At December 31
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from FHLB.................................. $464,003 $338,003 $226,003
</TABLE>
- 23 -
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
Securities sold under agreements
to repurchase..................................... 149,092 58,040 --
Other borrowings....................................... 6,428 7,994 10,292
-------------------------------------
Total borrowings.................................. $619,523 $404,037 $216,295
=====================================
Weighted average interest
rate of advances from FHLB........................... 5.91% 5.59% 5.82%
Weighted average interest rate
of securities sold under agreements
to repurchase........................................ 5.80 5.66 --
Weighted average interest
rate of other borrowings ............................ 10.04 9.76 9.59
Weighted average interest
rate of total borrowings............................. 5.93 5.68 6.00
</TABLE>
The following table sets forth the Bank's maturity and rate structure
of FHLB advances as of December 31, 1997.
<TABLE>
<CAPTION>
Weighted
Average
Rate Amount
-------------------------------
(Dollars in thousands)
<S> <C> <C>
Matures within:
One year..................................... 5.85% $214,000(1)
Two years.................................... 5.99 179,000
Three years.................................. 5.92 70,000
Four years................................... -- --
Thereafter................................... 4.00 1,003
-------------------------
Total FHLB advances....................... 5.91% $464,003
=========================
</TABLE>
(1) Includes variable rate advances which adjust quarterly.
SERVICE CORPORATION ACTIVITIES
The Bank is permitted to invest an amount equal to 2% of its assets
(excluding those of its subsidiaries) in its service corporations. Up to an
additional 1% of assets may be invested in service corporations provided that
such amount is used for certain types of community development projects. In
addition, federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance subsidiaries) in
which the institution owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the institution's total capital as defined below.
- 24 -
<PAGE> 25
As of December 31, 1997, the Bank's investment in stock of and loans to its
subsidiaries (other than its special-purpose finance subsidiary and its Real
Estate Investment Trust) was in compliance with the regulations and totaled $5.6
million. A federal institution may also invest up to 30% of its assets in
special-purpose finance subsidiaries established and operated in accordance with
federal regulations. The Bank's investment in its special purpose finance
subsidiary, D&N Funding I Corp., was in compliance with these regulations at
December 31, 1997. Federal law imposes special capitalization requirements on
savings institutions such as the Bank which are engaged in activities through a
subsidiary that are not permissible for national banks. See "Regulation --
Regulatory Capital Requirements." The following is a description of the Bank's
service corporations.
D&N Enterprises, Inc. ("Enterprises") was formed in 1972 for the
purpose of developing real estate through joint venture arrangements. At
December 31, 1997, the Company had a $300,000 investment in Enterprises and
loans totaling approximately $1.5 million to the subsidiary.
Enterprises entered into the Northside Joint Venture in March 1989 to
acquire and develop commercial sites in Shelby Township, Michigan. Enterprises
is in the process of marketing this property in its entirety.
D&N Holdings, Inc. ("Holdings") was formed in 1985 and is involved in
the sale of mortgage life insurance through its investment in Minnesota Mutual
Life Insurance Company ("MIMLIC") and also offers insurance products and annuity
contracts through Quincy Insurance Agency, Inc., a subsidiary of Holdings formed
in 1995. In Michigan, MIMLIC's mortgage life insurance policies are marketed and
sold primarily through Michigan savings institutions. At December 31, 1997, D&N
Bank's investment in Holdings totaled approximately $200,000.
MORTGAGE BANKING. On May 1, 1984, D&N Bank established a mortgage
banking operation through a subsidiary, D&N Mortgage Corporation ("DNMC"). This
subsidiary was relatively dormant from 1992 until 1995. Since restarting
operations, D&N Mortgage Corporation has originated loans mainly for the Bank's
portfolio. D&N Mortgage Corporation currently has four origination offices
located in Michigan's lower peninsula in the cities of Grand Rapids, Hastings,
West Bloomfield and St. Joseph. At December 31, 1997, the Bank had $2.4 million
invested in this subsidiary.
FINANCE SUBSIDIARY. In 1986, D&N Bank incorporated a special-purpose
finance subsidiary, D&N Funding I Corp. ("Funding"). Funding was established
solely for the purpose of issuing collateralized mortgage obligations ("CMOs").
In August 1986, Funding pledged $61.5 million in principal amount of FHLMC
participation certificates to collateralize the issuance and sale of the CMOs
from which the Bank received $56.4 million in net proceeds. The CMOs were sold
through a third party conduit and were secured by the pledge of the
- 25 -
<PAGE> 26
participation certificates. D&N Bank reinvested the proceeds from the sale of
the CMOs in residential and commercial mortgage loans.
NEW BANK SUBSIDIARY
D&N Capital Corporation ("D&N Capital") is a Delaware corporation
incorporated on March 18, 1997 for the purpose of acquiring and holding real
estate assets and is a Real Estate Investment Trust ("REIT"). All shares of
common stock of D&N Capital are owned by D&N Bank.
On July 17,1997, D&N Capital 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). The Series A Preferred Shares are generally
not redeemable prior to July 1, 2002. On or after July 1, 2002, the Series A
Preferred Shares may be redeemed for cash at the option of the Bank, in whole or
in part, at a redemption price of $25.00 per share. As part of this transaction,
D&N Capital received $28,719,000 in net proceeds, after offering costs of
$1,531,000. The net proceeds, along with the proceeds received from the sale of
D&N Capital common stock to D&N Bank, were used to purchase $60,524,000 of
mortgage loans from D&N Bank. The interest on these loans is being used to fund
the dividends on D&N Capital's preferred and common stock.
The preferred shares are treated as Tier-1 Capital by the Bank, and are
traded on Nasdaq as DNFCP. During 1997, D&N Capital declared and paid preferred
dividends totaling $1,217,563.
COMPETITION
At December 31, 1997, the Bank ranked second among all savings
institutions headquartered in the State of Michigan with respect to total
assets.
D&N Bank experiences substantial competition in attracting and
retaining deposits and in lending funds. The primary factors in competing for
deposits are the ability to offer attractive rates, the availability of
convenient office locations and the range and quality of services offered.
Direct competition for deposits comes from other savings institutions,
credit unions and commercial banks. Additional significant competition for
deposits comes from money market mutual funds and corporate and government
securities. The primary factors in competing for loans are interest rates, loan
origination fees and the range of services offered. Competition for origination
of real estate loans and consumer loans normally comes from other
- 26 -
<PAGE> 27
savings institutions, credit unions, commercial banks, mortgage bankers,
mortgage brokers and insurance companies.
The deposit programs of savings institutions such as the Bank compete
with government securities, money market mutual funds and other investment
alternatives. Legislative and regulatory action has increased competition
between savings institutions and other financial institutions, such as
commercial banks, by expanding the ranges of financial services that may be
offered by savings institutions such as interest bearing checking accounts,
trust services and consumer loan products, while reducing or eliminating the
difference between savings institutions and commercial banks with respect to
long-term lending authority, taxation and maximum rates of interest that may be
paid on savings deposits.
EMPLOYEES
At December 31, 1997, the Bank had 513 employees, including 94
part-time employees. Management considers its relations with its employees to be
satisfactory. The Bank's employees are not represented by any collective
bargaining group.
The Bank currently maintains a comprehensive employee benefit program
providing, among other benefits, a 401(k) plan with an Employee Stock Ownership
Program, hospitalization and major medical insurance, paid sick leave, long-term
disability insurance and life insurance.
EXECUTIVE OFFICERS
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company or its
wholly owned subsidiary, other than the Chief Executive Officer, who do not
serve on the Company's Board of Directors. Executive officers are elected
annually to serve until their successors are elected or until they resign or are
removed by the Board of Directors. There are no arrangements or understandings
between the persons named and any other person pursuant to which such officers
were elected.
George J. Butvilas, age 52. Joining D&N as President in May 1990, Mr.
Butvilas was named Chief Executive Officer of the Bank in 1991 and Chief
Executive Officer of the Company in 1992. He brought with him over 16 years
experience as a commercial and community banker. Mr. Butvilas was formerly
Executive Vice President and Director of Boulevard Bancorp, Inc. of Chicago,
Illinois.
- 27 -
<PAGE> 28
Frank R. Donnelly, age 57, is Senior Vice President/Commercial Lending
of the Bank. He has been employed by the Bank in various capacities since 1965
and is presently responsible for the business and commercial real estate loan
development for the Bank.
Daniel D. Greenlee, age 45, is Senior Vice President/Controller of the
Bank. He has been with D&N Bank in various capacities since 1984 and is
presently responsible for the accounting, financial and regulatory reporting,
financial analysis, tax and risk management functions of the Bank.
Kenneth R. Janson, age 46, is Executive Vice President/Chief Financial
Officer and Treasurer of the Company and the Bank. Prior to joining the Bank in
May 1988 as Vice President/Financial Analysis, he was affiliated with various
universities, the last six years as Associate Professor of Accounting at
Michigan Technological University. Mr. Janson is responsible for directing the
Bank's accounting, investment and investor relations functions.
Robert J. Krupka, age 36, is Senior Vice President/Chief Credit
Officer of the Bank. Prior to joining D&N Bank in March 1997, he was
Commercial Loan Officer and Credit Manager with Old Kent Bank. Mr. Krupka is
responsible for the commercial loan credit analysis and operations functions.
Peter L. Lemmer, age 40, is Senior Vice President/General Counsel of
the Company and the Bank. Prior to joining D&N Bank in October 1990, he held
various positions involving legal services, the last five years as Senior Vice
President/Compliance and Vice President, Associate General Counsel/Compliance
Officer with Cal America Savings, later known as Columbus Savings, and American
Federal Bank, respectively. Mr. Lemmer is responsible for the legal and
regulatory functions of the Bank.
Donald W. Schulze, age 47, is Senior Vice President/Human Resources of
the Bank. He has been with D&N Bank in various capacities since 1986 and is
presently responsible for the training and development, facilities management
and human resources functions of the Bank.
Alfred J. Sliwinski, age 51, is Executive Vice President/Community
Banking. He has been employed by D&N Bank in various community banking
capacities since May 1977 and is presently responsible for the community banking
function of the Bank.
Richard E. West, age 51, is Executive Vice President/Wholesale Lending.
Prior to joining D&N Bank in January 1990, he was Servicing Manager for 20 years
with Rothschild Financial Corporation and Valley National Bank of Arizona. Mr.
West is responsible for directing the loan servicing, residential lending,
consumer lending, bank operations and information systems functions of the Bank.
- 28 -
<PAGE> 29
REGULATION
GENERAL
The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all operations. The Bank is a member of FHLB of
Indianapolis and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
institutions. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank. Certain of
these regulatory requirements and restrictions are discussed below or elsewhere
in this document.
FEDERAL REGULATION
The OTS has extensive authority over the operations of savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of June 30, 1997.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the near future. When these examinations are conducted by the
OTS or the FDIC, the examiners may require the Bank to provide for higher
general or specific loan loss reserves.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1997, the Bank's lending limit under this restriction was $19.8
million. The Bank is in compliance with the loans-to-one-borrower limitation.
.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC- insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a
- 29 -
<PAGE> 30
serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-
based system under which all insured institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
D&N Bank, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's bond obligation of 6.5 cents per $100
of deposits while BIF insured institutions will pay 1.3 cents per $100 of
deposits until the year 2000 when the assessment will be imposed at the same
rate on all FDIC insured institutions.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
- 30 -
<PAGE> 31
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of mortgage servicing rights
(MSRs) must be deducted from tangible capital. At December 31, 1997, the Bank
had $2,136,000 of unamortized MSRs, none of which was required to be deducted
from tangible capital.
At December 31, 1997, the Bank had tangible capital of $119.5 million,
or 6.55% of adjusted total assets, which is approximately $92.1 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings institution
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio.
At December 31, 1997, the Bank had core capital equal to $119.5
million, or 6.55% of adjusted total assets, which is $64.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1997 the Bank had
$10.4 million of general loss reserves which could be counted as supplementary
capital.
On December 31, 1997, the Bank had total capital of $129.9 million
(including $119.5 million in core capital and $10.4 million in qualifying
supplementary capital) and risk-weighted assets of $1.08 billion (including
$48.0 million in converted off-balance sheet assets); or total capital of 11.98%
of risk-weighted assets. This amount was $43.1 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against institutions that fail to meet their
- 31 -
<PAGE> 32
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized institution" (generally defined to be one
with less than either a 4% core ratio, a 4% Tier 1 risk-based capital ratio or
an 8% risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized institutions. On December 31, 1997,
the Bank had a Tier 1 risk-based capital ratio of 11.02%.
Any savings institution that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of conservator or a receiver.
If the OTS determines that an institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice, it is authorized to
reclassify a well-capitalized institution as an adequately capitalized
institution and if the institution is adequately capitalized, to impose the
restrictions applicable to an undercapitalized institution. If the institution
is undercapitalized, the OTS is authorized to impose the restrictions applicable
to a significantly undercapitalized institution.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. The Company's stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on institutions with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an institution from declaring or paying any
dividends or
- 32 -
<PAGE> 33
from repurchasing any of its stock if, as a result, the regulatory capital of
the institution would be reduced below the amount required to be maintained for
the liquidation account established in connection with its mutual to stock
conversion.
Generally, institutions such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or 75% of its net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings institutions that will meet their current minimum capital
requirement following a proposed capital distribution need only submit written
notice to the OTS 30 days prior to such distribution. The OTS may object to the
distribution during the 30-day period based on safety and soundness concerns.
See "Regulatory Capital Requirements."
LIQUIDITY
All savings institutions, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. At the present time,
the minimum liquid asset ratio is 4%, as changed during 1997.
During 1997, the OTS lowered the minimum liquid asset ratio from 5% to
4%, and changed the definition of "liquid assets" to include obligations of the
United States which have a remaining life greater than five years. This allows
the Bank to use substantially all of its investment security and mortgage-backed
security portfolios, which are not otherwise encumbered. The OTS also
discontinued the 1% short-term liquid asset requirement.
At December 31, 1997, the Bank was in compliance with the liquidity
ratio requirement, with a liquid asset ratio of 13.9%.
- 33 -
<PAGE> 34
ACCOUNTING
An OTS policy statement applicable to all savings institutions
clarifies and reemphasizes that the investment activities of a savings
institution must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment,
available for sale or trading) with appropriate documentation. The Bank is in
compliance with these rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP, to require that transactions be reported
in a manner that best reflects their underlying economic substance and inherent
risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets as defined by regulation in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments. At
December 31, 1997, the Bank met the test and has always met the test since its
inception.
Any savings institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If the institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an institution that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings institution and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the institution is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any institution that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "Holding Company Regulation."
- 34 -
<PAGE> 35
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1995 and received a rating of "Satisfactory".
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings institution subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings institution as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings institution)
would become subject to such restrictions unless such other institutions each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
- 35 -
<PAGE> 36
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured institution. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings institutions in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1997, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administer the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1997, the Bank had $23.2 million in FHLB
stock, which was in compliance with this requirement. In past years,
- 36 -
<PAGE> 37
the Bank has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 7.56% and were 7.99% for
calendar year 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderate priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1997, the dividends paid by the FHLB of
Indianapolis to the Bank totaled $1.6 million. The $447,000 dividend received
for the quarter ended December 31, 1997 reflects an annualized rate of 8.00%.
FEDERAL AND STATE TAXATION
D&N and its subsidiaries file a consolidated federal income tax return
on a calendar year basis using the accrual method of accounting.
Savings institutions, such as the Bank, were permitted to establish
reserves for bad debts and make annual additions thereto which could be taken as
a deduction in computing taxable income for federal income tax purposes. This
tax bad debt reserve method available to thrifts institutions was repealed for
tax years beginning after 1995. As a result, the Bank was required to change
from the reserve method to the specific charge-off method to compute its bad
debt deduction. Basically, repeal of the thrift bad debt reserve method puts
large thrifts, such as the Bank, on the tax method used by large commercial
banks.
Upon repeal, the Bank is required to recapture into income the portion
of its bad debt reserves (other than the supplemental reserve) that exceeds its
base year reserves (i.e. its tax reserves for the last tax year beginning before
1988). The recapture amount resulting from the change in the Bank's method of
accounting for its bad debt reserves is taken into taxable income ratably (on a
straight-line basis) over a six-year period.
The base year reserve is frozen, not forgiven. Certain events can still
trigger a recapture of the base year reserve. For example, while the base year
reserve will not be recaptured if the thrift converts to a bank charter or is
merged into a bank, it will be recaptured if the thrift ceases to qualify as a
bank for federal income tax purposes. The base year reserves also remain
- 37 -
<PAGE> 38
subject to income tax penalty provisions which, in general, require recapture
upon certain stock redemptions of, and excess distributions to, shareholders.
In addition to the regular income tax, corporations, such as the
Company, generally are subject to a minimum tax. An alternative minimum tax is
imposed at a minimum tax rate of 20% on alternative minimum income, which is the
sum of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income.
D&N and its consolidated subsidiaries have been audited or their books
closed without audit by the IRS with respect to consolidated federal income tax
returns through December 31, 1993. With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management, any
examination of open returns (including returns of subsidiaries and predecessors
of, or entities merged into, D&N) would not result in a deficiency which could
have a material adverse effect on the financial condition of D&N and its
consolidated subsidiaries. See Note M of Notes to Consolidated Financial
Statements.
During the third quarter of 1996, the Bank recognized an adjustment to
its balance of deferred tax assets following the enactment in August of federal
legislation which resolved the recapture status of previously allowed
accelerated deductions for bad debts. Thrift institutions such as the Bank had
been permitted to deduct a portion of their income as bad debt allowances. This
practice was more advantageous than the specific-loss method of deduction which
was mandated for other classes of financial institutions. The opportunity to use
the percentage-of-income method expired in 1995, but the status of previously
accelerated deductions remained in question until the 1996 legislation was
enacted. The presence of unresolved prior deductions was felt to be hindrance to
evolution and consolidation of the financial services industry because thrift
institutions that had recorded such accelerated deductions were required to
repay them before charter conversions or acquisitions by non-thrift institutions
could be approved. The new legislation required that accelerated deductions
recorded after 1987 would have to be repaid, but forgave that portion of
institutions' accelerated loan loss deductions that were recorded before 1988.
MICHIGAN TAXATION. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings bank
or a savings and loan institution less deposits owed to the federal or Michigan
state governments, their agencies or certain other financial institutions. The
Michigan intangibles tax is being phased out over four years
- 38 -
<PAGE> 39
until the tax is fully repealed effective January 1, 1998. The State of Michigan
also imposes a "Single Business Tax." The Single Business Tax is a value-added
type of tax for the privilege of doing business in the State of Michigan. The
major components of the Single Business Tax are federal taxable income,
compensation and depreciation as increased by net operating loss carryforwards,
if any, utilized in arriving at federal taxable income, and decreased by the
cost of acquisition of tangible assets during the year. The tax rate is 2.30% of
the Michigan adjusted tax base.
DELAWARE TAXATION. As a Delaware business corporation, the Company is
required to file annual returns with and pay annual fees to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by the
State of Delaware based on the number of authorized shares of the Company stock.
ITEM 2. PROPERTIES
At December 31, 1997, the Bank operated through 37 full service
community banking offices, seven savings agency offices and four mortgage
banking offices. The net book value of the land, buildings and leasehold
improvements owned by D&N Bank at that date was $11,686,000, and the net book
value of its office furniture, fixtures and equipment was $4,936,000.
COMPUTER EQUIPMENT. D&N Bank processes all depositor and borrower
customer files and transactions through a third party data services provider
including general ledger accounting and information reporting. The book value of
all computer equipment and software owned by the Bank was $934,000 at December
31, 1997. The Bank also leases an insignificant amount of data processing
hardware and software.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of matters of litigation,
substantially all of which have arisen in the ordinary course of
business. It is the opinion of management that the resulting
liabilities, if any, from these actions will not materially affect
the Consolidated Financial Statements.
D&N Bank is a plaintiff, like approximately 120 other
institutions, in a currently pending claim in the United States
Court of Federal Claims seeking substantial damages as a result of
the 1989 Financial Institutions Reform, Recovery and Enforcement
Act's mandatory phase-out of the regulatory capital treatment of
supervisory goodwill. The ultimate outcome of these matters cannot
be ascertained at this time.
- 39 -
<PAGE> 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the quarter
ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Page 52 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Page 4 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Pages 12 through 23 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS SUPPLEMENTARY DATA
Pages 24 through 49 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24
months prior to the date of the most recent financial statements
reporting a change of accountants and/or reporting disagreements
on any matter of accounting principle or financial statement
disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Executive Officers of the Company is
- 40 -
<PAGE> 41
contained on page 27 herein. Information concerning Directors of
the Company, is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, except for information contained
under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation." A copy of this
Proxy Statement will be filed not later than 120 days after the
close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated
herein by reference from the Company's definitive Proxy Statement
or the Annual Meeting of Stockholders to be held in 1998, except
for information contained under the heading "Compensation
Committee Report" and "Stockholder Return Performance
Presentation." A copy of this Proxy Statement will be filed not
later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, except for information contained
under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation." A copy of this Proxy Statement
will be filed not later than 120 days after the close of the
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related
transactions incorporated herein by reference from the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders
to be held in 1998, except for the information contained under the
heading Compensation Committee Report" and "Stockholder Return
Performance Presentation." A copy of this Proxy Statement will be
filed not later than 120 days after the close of the fiscal year.
- 41 -
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
The following information appearing in the Registrant's Annual Report
to Stockholders for the year ended December 31, 1997, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Annual Report Section Pages in Annual Report
- ------------------------------------------------------ ----------------------
<S> <C>
Selected Financial Data 4
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12 - 23
Report of Independent Auditors 24
Consolidated Statements of Condition 25
Consolidated Statements of Income 26
Consolidated Statements of
Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29 - 49
Stockholder Information 52
</TABLE>
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
- 42 -
<PAGE> 43
(A) (3) EXHIBITS
<TABLE>
<CAPTION>
Reference to Sequential
Prior Filing Page Number
or Exhibit Where Attached/
Regulation Number Located in
S-K Exhibit Attached This Form 10-K
Number Document Hereto Report
- ----------- ---------------------------- ------------- ---------------
<S> <C> <C> <C>
3(I) Articles of Incorporation * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the * Not applicable
rights of security holders,
including debentures
9 Voting Trust Agreement None Not applicable
10 Material Contracts
1993 401(k) Plan & Trust * Not applicable
(1994 Amendment)
1984 Stock Option Plan * Not applicable
(1995 Amendment)
1994 Management * Not applicable
Stock Incentive Plan
(1995 Amendment)
Employment Agreement of
G. Butvilas * Not applicable
11 Statement re: computation Not required Not applicable
of per share earnings
12 Statement re: computation Not required Not applicable
of ratios
13 Annual Report to Security 13 Filed Herewith
Holders
16 Letter re: change in None Not applicable
Certifying Accountant
18 Letter re: change in None Not applicable
accounting principles
21 Subsidiaries of Registrant 21 Filed Herewith
22 Published report regarding None Not applicable
matters submitted to vote
of security holders
23 Consent of Experts and 23 Filed Herewith
Counsel
24 Power of Attorney Not required Not applicable
</TABLE>
- 43 -
<PAGE> 44
<TABLE>
<S> <C> <C> <C>
27.1 Financial Data Schedule 27 Page 104
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule
27.8 Fiancial Data Schedule
27.9 Fiancial Data Schedule
28 Information from reports None Not applicable
furnished to state
insurance regulatory
authorities
99 Additional exhibits None Not applicable
</TABLE>
- --------------------
*Filed as exhibits to the Registrant's registration statement on Form
S-2 (File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
None.
- 44 -
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date March 25, 1998 By: /s/ GEORGE J. BUTVILAS
--------------------------------- ---------------------------
GEORGE J. BUTVILAS
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ GEORGE J. BUTVILAS By: /s/ KENNETH D. SEATON
--------------------------------- ---------------------------
GEORGE J. BUTVILAS KENNETH D. SEATON
Director, President and Director, Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Date March 25, 1998 Date March 25, 1998
--------------------------------- ---------------------------
By: /s/ JOSEPH C. BROMLEY By: /s/ MARY P. CAULEY
--------------------------------- ---------------------------
JOSEPH C. BROMLEY MARY P. CAULEY
Director Director
Date March 25, 1998 Date March 25, 1998
--------------------------------- ---------------------------
By: /s/ STEVEN COLEMAN By: /s/ STANLEY A. JACOBSON
--------------------------------- ---------------------------
STEVEN COLEMAN STANLEY A. JACOBSON
Director Director
Date March 25, 1998 Date March 25, 1998
--------------------------------- ---------------------------
- 45 -
<PAGE> 46
By: /s/ RANDOLPH P. PIPER By: /s/ B. THOMAS M. SMITH, JR.
--------------------------------- ---------------------------
RANDOLPH P. PIPER B. THOMAS M. SMITH, JR.
Director Director
Date March 25, 1998 Date March 25, 1998
--------------------------------- ---------------------------
BY: /s/ PETER VAN PELT By: /s/ STEVEN E. ZACK
--------------------------------- ---------------------------
PETER VAN PELT STEVEN E. ZACK
Director Director
Date March 25, 1998 Date March 25, 1998
--------------------------------- ---------------------------
By: /s/ KENNETH R. JANSON
---------------------------------
KENNETH R. JANSON
Executive Vice President/
Chief Financial Officer
Date March 25, 1998
---------------------------------
- 46 -
<PAGE> 47
<TABLE>
<CAPTION>
Reference to Sequential
Prior Filing Page Number
or Exhibit Where Attached/
Regulation Number Located in
S-K Exhibit Attached This Form 10-K
Number Document Hereto Report
- ----------- ---------------------------- ------------- ---------------
<S> <C> <C> <C>
3(I) Articles of Incorporation * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the * Not applicable
rights of security holders,
including debentures
9 Voting Trust Agreement None Not applicable
10 Material Contracts
1993 401(k) Plan & Trust * Not applicable
(1994 Amendment)
1984 Stock Option Plan * Not applicable
(1995 Amendment)
1994 Management * Not applicable
Stock Incentive Plan
(1995 Amendment)
Employment Agreement of
G. Butvilas * Not applicable
11 Statement re: computation Not required Not applicable
of per share earnings
12 Statement re: computation Not required Not applicable
of ratios
13 Annual Report to Security 13 Filed Herewith
Holders
16 Letter re: change in None Not applicable
Certifying Accountant
18 Letter re: change in None Not applicable
accounting principles
21 Subsidiaries of Registrant 21 Filed Herewith
22 Published report regarding None Not applicable
matters submitted to vote
of security holders
23 Consent of Experts and 23 Filed Herewith
Counsel
24 Power of Attorney Not required Not applicable
</TABLE>
- 43 -
<PAGE> 48
<TABLE>
<S> <C> <C> <C>
27.1 Financial Data Schedule 27 Filed Herewith
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
27.5 Financial Data Schedule
27.6 Financial Data Schedule
27.7 Financial Data Schedule
27.8 Fiancial Data Schedule
27.9 Fiancial Data Schedule
28 Information from reports None Not applicable
furnished to state
insurance regulatory
authorities
99 Additional exhibits None Not applicable
</TABLE>
- --------------------
*Filed as exhibits to the Registrant's registration statement on Form
S-2 (File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
None.
- 44 -
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL HIGHLIGHTS D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
1997 1996(2) 1995(2) 1994(2) 1993(2)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
FOR THE YEAR:
<S> <C> <C> <C> <C> <C>
Net interest income $ 48,939 $ 42,763 $ 34,750 $ 23,786 $ 21,212
Provision for loan losses 1,350 1,100 2,400 100 --
Noninterest income(loss) 8,920 7,224 6,912 7,488 (21,536)
Net income (loss) 14,325 8,995 10,417 3,383 (66,642)(1)
Earnings (loss) per share
Basic 1.58 1.08 1.27 0.41 (13.69)
Diluted 1.53 1.01 1.24 0.41 (13.69)
Shares outstanding:
Basic 9,093,682 8,336,517 8,172,292 8,161,600 4,866,278
Diluted 9,364,874 8,906,109 8,403,028 8,185,146 4,945,579
Stock price range 14 57/64 - 26 3/4 10 29/32-16 9/64 6 19/32 -12 17/64 6 1/64-9 3/32 5 29/32 - 11 23/64
Cash dividends declared
per common share 0.10 -- -- -- --
AT YEAR END:
Total assets 1,815,315 1,473,054 1,228,497 1,128,732 1,080,131
Net loans receivable 1,300,959 1,055,876 952,359 821,875 646,709
Nonperforming assets 5,300 8,091 9,701 24,520 43,593
Mortgage-backed securities 358,296 251,256 127,709 151,293 171,983
Excess of cost over net assets of
association acquired __ -- -- 384 845
Mortgage servicing rights 2,136 1,443 1,113 968 9,870
Deposits 1,043,167 964,133 922,932 817,674 844,012
Borrowings 619,523 404,037 216,295 226,956 101,648
Stockholders' equity 98,082 86,121 71,979 58,325 56,887
Per share 10.78 9.38 8.75 7.15 6.97
Tangible stockholders' equity 97,184 85,110 70,855 58,264 57,049
Per share 10.68 9.27 8.62 7.14 6.99
Number of offices 48 48 46 41 38
SELECTED RATIOS:
Return on average assets 0.88% 0.67% 0.89% 0.31% (5.47)%
Return on average equity 15.75 11.58 16.01 5.97 (74.99)
Average equity to average assets 5.59 5.77 5.53 5.26 7.29
Net interest margin 3.08 3.26 3.04 2.31 1.95
General & administrative expenses
to average assets 2.01 2.34 2.44 2.48 2.30
Nonperforming assets to total assets 0.29 0.55 0.79 2.17 4.04
Allowance for loan losses to
nonperforming loans 275.72 166.77 122.21 46.38 38.21
Allowance for loan losses to total loans 0.80 1.03 1.05 1.01 1.76
Net loan charge-offs to average loans 0.15 0.01 0.07 0.43 0.59
Tangible capital ratio 6.55 5.11 5.41 5.05 4.89
Core capital ratio 6.55 5.11 5.41 5.09 4.97
Risk-based capital ratio 11.98 9.94 10.45 10.08 10.21
</TABLE>
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).
(2) All per share amounts have been restated to include the effects of a 10%
stock dividend and adoption of SFAS 128 in 1997.
4
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
D&N Financial Corporation ("D&N" or "the Company") is a savings bank holding
company whose sole subsidiary is D&N Bank ("the Bank"). D&N's primary focus is
the delivery of retail financial services through its community banking offices
in Michigan and loan origination network in the Upper Midwest. This discussion
highlights important trends and events that have shaped the Company's financial
performance in 1997.
In 1997, D&N reported net income of $14.3 million, or $1.53 per diluted
share. Earnings in 1996, before one-time regulatory charges and the tax benefit
of a previous year's net operating loss, were $10.1 million or $1.14 per
diluted share. In 1995 the Company earned $10.4 million or $1.24 per diluted
share.
On December 31, 1997, the Company's balance sheet included total assets of
$1.82 billion, compared to $1.47 billion at the end of 1996. This 23% growth
reflected primarily the Bank's loan origination success, with $856 million of
new loans funded in 1997. Outstanding loan balances totaled $1.31 billion at
December 31, 1997, an increase of 23% during the year. Mortgage-backed
securities also increased by 43% to $358 million as the Bank securitized $86
million of its residential mortgage loan production with the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac").
Equity and capital support for D&N's robust growth in 1997 came from the
retention of earnings, from the receipt, in December, 1996, of proceeds from
the exercise of warrants to purchase the Company's common stock, and from the
successful creation, in July, 1997, of a new Bank subsidiary, D&N Capital
Corporation ("DNCC"). DNCC is a Real Estate Investment Trust ("REIT") that
invests in residential and commercial real estate mortgages which it acquires
from the Bank. In addition to the $32 million equity investment that the Bank
made in DNCC, outside investors purchased preferred stock of the subsidiary for
$30.25 million. This preferred stock investment is included in the regulatory
capital accounts of D&N Bank.
In 1997, the Company made provisions for loan losses of $1.35 million, after
making provisions of $1.1 million and $2.4 million in 1996 and 1995,
respectively. At December 31, 1997, the allowance for loan losses was $10.5
million, or 0.80% of outstanding loans. D&N's portfolio of nonperforming assets
declined during 1997 by $2.8 million or 34% to $5.3 million. At December 31,
1997, the allowance for loan losses was 276% of the loans deemed to be
nonperforming. This ratio was 167% in 1996 and 122% in 1995.
Noninterest income from operations increased by 19.1% in 1997 after increasing
by 14.7% in 1996. The increases in loan related and deposit related fee income
experienced in 1996 and 1997 reflect the successful implementation of servicing
strategies designed to complement the Company's community banking focus.
D&N Bank incurred a one-time charge in 1996 as a result
of its mandated contribution to replenish the Federal Deposit Insurance
Corporation's ("FDIC") depleted Savings Association Insurance Fund ("SAIF").
The third quarter assessment was $5.5 million before consideration of its
impact on federal taxes, and was expected to reduce the Bank's annual deposit
insurance premiums by approximately $1.6 million.
Also during the third quarter of 1996, the Bank recognized adjustments to its
balance of deferred tax assets following the enactment in August of federal
legislation which resolved the recapture status of previously allowed
accelerated deductions for bad debts. Historically, thrift institutions such as
the Bank had been permitted to deduct a portion of their net income as bad debt
allowances. This practice was more advantageous than the specific-loss method
of deduction which was mandated for other classes of financial institutions.
The opportunity to use the percentage-of-income method expired in 1995,
but the status of previously accelerated deductions remained
12
<PAGE> 3
in question until the 1996 legislation was enacted. Notably, the presence of
unresolved prior deductions was felt to be a hindrance to evolution and
consolidation of the financial services industry because thrift institutions
that had recorded such accelerated deductions were required to repay them
before charter conversions or acquisitions by non-thrift institutions could be
approved. The new legislation required that accelerated deductions recorded
after 1987 would have to be repaid, but forgave that portion of institutions'
accelerated loan loss deductions that were recorded before 1988.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's primary source of earnings is its net interest income, defined as
the difference between the interest earned on its loans and investments and the
interest paid on its deposits and other liabilities. Interest income and
interest expense each increased in 1997 as the average size of the Company's
earning assets grew substantially. Interest income increased by $21.4 million,
or 20.5%, in 1997. The average yield on earning assets decreased by 4 basis
points to 7.91% in 1997, from 7.95% in 1996. In 1995, earning assets yielded
7.93%. Driving the interest income gains in 1997 was D&N's 21.1% increase in
average earning balances, which followed an increase of 14.7% in 1996 and
11.1% in 1995.
Interest expense increased by $15.2 million, or 24.7%, in 1997 as the average
balance of interest-bearing liabilities increased by 20.2%, and the average
rate paid on those liabilities increased by 19 basis points. In 1997,
interest-bearing liabilities had an average cost of 5.12%, compared to 4.93% in
1996 and 5.15% in 1995. Because the average yield on interest-earning assets
decreased and the average cost of interest-bearing liabilities increased in
1997, the Company's interest rate spread decreased from 3.02% in 1996 to 2.79%
in 1997. In 1995 the spread was 2.79%. Similarly, the Bank's net interest
margin, or ratio of net interest income to average interest-earning assets,
decreased from 3.26% in 1996 to 3.08% in 1997. In 1995 the net interest margin
was 3.04%. Average interest-earning assets exceeded average interest-bearing
liabilities by $88.7 million in 1997 compared to $64.5 million in 1996 and
$55.3 million in 1995.
Average balances of loans outstanding were higher in 1997 than 1996, as the
Company's loan originations increased significantly. Average balances of
mortgage-backed securities were also sharply higher reflecting loan
securitization efforts, while the investment securities category increased
modestly. Loans increased by $132 million, or 12%; mortgage-backed securities
increased by $120 million, or 82%; and investment securities increased by $24.2
million, or 23%. Average earning rates on investments and mortgage-backed
securities were lower in 1997 than 1996, while the average earning rate on the
loan portfolio increased. In 1997, loans earned an average yield of 8.25%
compared to 8.11% in 1996. Mortgage-backed securities earned an average of
7.15% in 1997, versus an average rate of 7.46% in 1996. Investment securities
earned 6.28% in 1997, down from 6.96% in 1996. Even though average loan yields
increased from the previous year, overall earning-asset performance decreased
slightly as a greater proportion of the earning-asset portfolio was comprised
of less profitable mortgage-backed security and investment assets in 1997 than
in 1996.
The average balances of loan assets and mortgage-backed securities also
increased from 1995 to 1996. In 1996, average investment balances fell,
reflecting the Company's application of surplus liquidity assets to fund loan
growth.
Average deposit balances increased 7.9% to $1.012 billion in 1997, from $938
million in 1996. The average cost of deposits increased 7 basis points, to
4.74%, in 1997, from 4.67% in 1996. From 1995 to 1996, average deposit balances
increased by $86 million, or 10.1%. In 1995, the average cost of deposits was
4.53%.
The average balance of borrowed funds increased by 57.7%, to $488 million in
1997, from $310 million in 1996. In 1995, the average balance of borrowed funds
was $236 million.
13
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.)
The following tables set forth the extent to which the Company's net interest
income has been affected by changes in average interest rates and average
balances of interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Years Ended December 31, 1997 and 1996
------------------------------------------------------------------------------------------------
Average balance (1) Average rate Interest Variance due to: (2)
------------------------------------------------------------------------------------------------
Increase
1997 1996 1997 1996 1997 1996 (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (3) $1,194,090 $1,062,108 8.25% 8.11% $98,560 $86,151 $12,409 $10,917 $ 1,492
Mortgage-backed securities (4) 267,010 146,560 7.15 7.46 19,085 10,930 8,155 8,627 (472)
Investments and deposits (4) 128,071 103,848 6.28 6.96 8,048 7,228 820 1,562 (742)
------------------------------------------------------------------------------------------------
1,589,171 1,312,516 7.91 7.95 125,693 104,309 21,384 21,106 278
------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 1,012,237 938,484 4.74 4.67 47,961 43,859 4,102 3,469 633
Borrowings 488,251 309,516 5.90 5.71 28,793 17,687 11,106 10,294 812
------------------------------------------------------------------------------------------------
1,500,488 1,248,000 5.12 4.93 76,754 61,546 15,208 13,763 1,445
------------------------------------------------------------------------------------------------
Interest rate spread 2.79 3.02
Excess average earning assets $ 88,683 $64,516 7.91% 7.95%
================================================
Net interest margin 3.08% 3.26% $48,939 $42,763 $6,176 $7,343 $(1,167)
================================================================
<CAPTION>
Years Ended December 31, 1996 and 1995
------------------------------------------------------------------------------------------------
Average balance (1) Average rate Interest Variance due to: (2)
------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 Increase Volume Rate
(Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (3) $1,062,108 $892,364 8.11% 8.13% $86,151 $72,550 $13,601 $13,767 $(166)
Mortgage-backed securities(4) 146,560 140,093 7.46 7.55 10,930 10,577 353 484 (131)
Investments and deposits (4) 103,848 111,476 6.96 6.85 7,228 7,638 (410) (525) 115
-----------------------------------------------------------------------------------------------
1,312,516 1,143,933 7.95 7.93 104,309 90,765 13,544 13,726 (182)
-----------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 938,484 852,382 4.67 4.53 43,859 38,639 5,220 4,020 1,200
Borrowings 309,516 236,242 5.71 6.29 17,687 14,855 2,832 4,283 (1,451)
Interest rate instruments -- -- -- 0.23 -- 2,521 (2,521) -- (2,521)
-----------------------------------------------------------------------------------------------
1,248,000 1,088,624 4.93 5.15 61,546 56,015 5,531 8,303 (2,772)
-----------------------------------------------------------------------------------------------
Interest rate spread 3.02 2.79
Excess average earning assets $ 64,516 $55,309 7.95% 7.93%
================================================
Net interest margin 3.26% 3.04% $42,763 $34,750 $8,013 $5,423 $2,590
===============================================================
</TABLE>
(1) Based on average daily balances.
(2) Changes to interest income and interest expense attributable to changes in
both rate and volume have been attributed proportionately to the change due
to rate and the change due to volume.
(3) Loans on nonaccrual are included in the average balances shown above. The
variance due to rate includes the effect of such loans because no interest
is earned on such loans.
(4) Average rates on mortgage-backed and investment securities available for
sale are based on historical amortized cost balances.
14
<PAGE> 5
In 1995, D&N's interest expense included the net costs of interest rate hedging
instruments. During 1995, contracts written in the 1980s to exchange fixed
interest payments for variable receipts ("swap contracts") resulted in net
charges to interest expense of $2.5 million. The swap contracts, originally
executed as hedges against rising interest rates, have expired, with the final
contract maturing in November of 1995.
NONINTEREST INCOME
D&N's noninterest income includes recurring fees from loan and deposit-related
activities, recurring income from the marketing of assets that are originated
for sale, and non-recurring gains and losses from events such as securities
sales and sales of non-earning and depreciated assets. D&N's loan and
deposit-related fee income totaled $6.0 million in 1997, up $461,000 or 8.3%
from 1996, reflecting primarily the Bank's growing core deposit base and the
initiation of fees for non-customer usage of the Bank's automatic teller
machine network. In 1997, net loan servicing and administrative fees were
unchanged from 1996 at $1.9 million. Deposit-related fees, on the other hand,
increased by 12.7% in 1997.
Gains on sales of loans totaled $1.7 million in 1997, up from $1.0 million in
1996. In 1997, $103 million of D&N's residential mortgages were sold to
secondary market investors, compared to $66.1 million in 1996. In each year,
D&N Bank retained the rights to service all of these loans. Other income
increased from $470,000 in 1996 to $657,000 in 1997 as D&N Bank's subsidiary,
Quincy Insurance Agency, continued to successfully expand its offerings of
annuities and investment products.
NONINTEREST EXPENSE
General and administrative expenses totaled $32.6 million in 1997. In 1996,
this category included $1.4 million of non-recurring costs associated with the
Bank's merger with Macomb Federal Saving Bank. When merger-related costs are
excluded from the 1996 total, general and administrative expenses were up in
1997 by $2.5 million, or 8.2%, following an increase of $1.5 million, or 5.1%
in 1996. These increases reflect the costs of D&N's expanding retail delivery
network, and the variable-based compensation consequences of sharply higher
loan production levels.
In 1997, net recoveries on sales of other real estate owned ("OREO") exceeded
operating costs for such properties by $81,000. In 1996, noninterest expense
included $71,000 of net operating costs related to OREO. In 1995, net
recoveries on sales of OREO properties exceeded operating costs resulting in a
credit in this category of $1.0 million.
In 1995, D&N's noninterest expense included amortization costs for goodwill
associated with the Company's 1982 merger with First Federal Savings and Loan
Association of Flint, Michigan.
In 1997, D&N's FDIC insurance premium was $658,000, or $1.76 million less than
the adjusted total for 1996. Excluding that year's SAIF recapitalization
assessment of $5.5 million, deposit insurance premiums in 1996 were $2.4
million. Similarly, the 1995 premium was $2.4 million.
INCOME TAXES
The Company's effective income tax rates were 35.09% in 1997, 3.74% in 1996 and
(19.16)% in 1995. The tax rates in 1996 and 1995 were effected by reductions in
each year of a portion of the valuation allowance for deferred tax assets
provided in prior years, when the Company incurred substantial net operating
losses. The valuation allowance was eliminated as of December 31, 1996.
FINANCIAL CONDITION
BALANCE SHEET TRENDS
At December 31, 1997, D&N's assets totaled $1.82 billion, an increase of $342
million, or 23%, from the previous year end. The Company's balance sheet growth
has been fueled by substantial loan production and increased capitalization.
In 1997, net loans receivable increased by $245 million, or 23%, reflecting
continued strong demand for the Company's consumer and commercial loan
products. Balances of mortgage-backed securities increased $107 million, or
43%, as a consequence of the securitization of $86 million of the Bank's
residential mortgage loan production and purchases of collateralized mortgage
obligations ("CMOs"). All of the servicing rights for sold and securitized
mortgages were retained, resulting in an increase in the balances of loans
serviced for others from $415 million to $519 million during the year.
The Company's liabilities increased by 22%, or $302 million, to $1.69 billion
at December 31, 1997, compared to $1.39 billion at the end of 1996. Overall
deposit balances
15
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.)
increased by 8.2%, or $79.0 million, while core deposits experienced an 8.3%
increase from $346.1 million at December 31, 1996, to $374.8 million at year-
end 1997. Borrowed funds increased by 53%, or $215 million, in 1997, while
advance payments by borrowers and investors held in escrow increased from $11.8
million to $17.6 million.
In 1997, D&N's common stockholders' equity rose from $86.1 million to $98.1
million. Profitable operations contributed $14.3 million to the Company's
retained earnings while the proceeds from the exercise of options and
accompanying tax benefits added $1.2 million to the equity accounts. Cash
dividends and purchases of Treasury Stock returned $3.8 million to shareholders
in 1997. An additional source of equity in 1997 was $1.5 million of
market-value in excess of book-value attributable to investment and
mortgage-backed securities held for sale. In accordance with the provisions of
the Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities", unrealized gains such as
these are recorded in the stockholders' equity section of the Company's
Statement of Financial Condition, but are not recognized through the Statement
of Operations.
Under its federal charter, the Bank must maintain adequate levels of capital to
assure the safety and soundness of its operations. At December 31, 1997, the
Bank had a tangible capital ratio of 6.55%, a core capital ratio of 6.55%, and
a risk-based capital ratio of 11.98%. D&N Bank's ratios continue to exceed the
levels specified in the Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA" or "the Act") as minimally acceptable standards. At the close of
1997, those minimum standards were tangible capital of 1.50%, core capital of
3.0% (with a proposed regulation which would raise the core capital requirement
to between 4.00% and 5.00%), and risk-based capital of 8.00%.
The Bank's primary regulator, the Office of Thrift Supervision ("OTS"), prompt
corrective action regulations establish five capital categories for thrift
institutions: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. These categories are
determined for the supervisory purposes of Section 38 of the Federal Deposit
Insurance Act (which establishes a system of mandatory and discretionary
supervisory actions which generally become more severe as capital levels
decline) and may not necessarily constitute an accurate measure of the Bank's
current overall financial condition or its future prospects. A thrift generally
will be considered "well capitalized" if it has a core capital (or leverage)
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and
a total risk-based capital ratio of at least 10.0%. A thrift generally will be
considered "adequately capitalized" if it has a core capital (or leverage)
ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0%, and
a total risk-based capital ratio of at least 8.0%. The Bank's core (or
leverage), Tier 1 risk-based and total risk-based capital ratios at December
31, 1997 of 6.55%, 11.02% and 11.98%, respectively, exceeded the capital ratios
established for "well capitalized" institutions.
The OTS issued rules adding an interest rate risk component to the total
capital that certain rate-sensitive institutions must maintain. The rule
requires the OTS to measure an institution's interest rate risk as the
percentage change in market value of its portfolio resulting from a
hypothetical 200 basis point shift in interest rates. At December 31, 1997,
D&N's level of interest rate risk was such that no additional capital was
required.
LIQUIDITY AND CAPITAL RESOURCES
The OTS also requires that institutions maintain liquid assets in the form of
cash, U.S. Government securities, mortgage-backed securities and other
qualifying assets, in amounts equal to at least 4% of net withdrawable accounts
and borrowed funds payable in one year or less. For the month of December 1997,
the Bank's average
16
<PAGE> 7
liquidity ratio was 13.9%, up from the December 1996 ratio of 6.61%.
Borrowing capacity can be viewed as a supplemental source of liquidity for the
Bank. D&N's government bond and mortgage-backed securities portfolios include
high quality investment securities which are readily acceptable as collateral
for additional borrowed funds, obtainable from either the FHLB system or from
other financial institutions. Also, much of the Bank's residential mortgage
loan portfolio would be acceptable as collateral to support new advances from
the FHLB. In the aggregate, by virtue of its inventory of unpledged security
and mortgage loan collateral, D&N had approximately $187 million of unused
borrowing capacity at December 31, 1997.
Loan Portfolio
The following table categorizes the Bank's loans receivable for the past five
years:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Residential mortgages $ 703,580 $ 600,923 $597,892 $526,572 $387,252
Mortgages on income-producing property 81,830 85,619 89,176 115,162 131,372
Construction loans 56,446 39,673 41,056 19,900 12,558
Consumer loans 449,551 339,268 239,459 170,939 134,644
Commercial loans 38,435 12,345 7,769 4,748 --
Allowance for losses (10,549) (11,042) (10,081) (8,349) (11,570)
Discounts, deferrals and other (18,334) (10,910) (12,912) (7,097) (7,547)
-----------------------------------------------------------
$1,300,959 $1,055,876 $952,359 $821,875 $646,709
===========================================================
</TABLE>
D&N's investment in loans increased by $245 million, or 23%, in 1997. Consumer
loans and commercial loans experienced the most significant percentage
increases, while residential mortgages grew at a more modest rate. The Bank's
investment in mortgages on income-producing properties decreased for the seventh
consecutive year while the year-end balance of construction loans was up
markedly from the previous year. Consumer loans increased by $110 million, or
33% in 1997. Commercial loans increased by $26 million, or 211%, while
residential mortgage loans increased during the year by $103 million, or 17%.
Mortgages on income-producing properties decreased by $3.8 million, or 4.4%,
while construction loan balances increased by $16.8 million, or 42.3%. At the
end of 1997, 47% of the Company's loan balances were in consumer or
business-related loans, compared to a 44% weighting at the end of 1996. D&N
originated $622 million of loans in 1997, up $103 million, or 19.8% from $519
million originated in 1996. Consumer loan production totaled $324 million in
1997, up by $52.1 million, or 19.2%, from 1996. Aggregate mortgage production in
1997 was $261 million, an increase of $33 million, or 14.4%, from 1996.
Construction lending accounted for $54.0 million of this total, up 26% from
$42.9 million in 1996. Supplementing the Company's mortgage production was $235
million of purchased loans in 1997, up from $148 million in 1996.
CREDIT RISK MANAGEMENT AND PROVISION
FOR LOSSES ON LOANS AND OTHER ASSETS
At December 31, 1997, the Company's nonperforming assets totaled $5.3 million,
down from $8.1 million at the end of the previous year and $9.7 million at the
end of 1995. The 1997 balance was comprised of $3.8 million of nonperforming
loans and $1.5 million of other real estate owned ("OREO"). At the end of 1997,
nonperforming loans comprised just 0.29% of the loan portfolio, and the
allowance for loan losses stood at 276% of the total balances of nonperforming
loans.
17
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.)
The following table traces the Company's nonperforming asset experience for the
last five years.
<TABLE>
<CAPTION>
December 31
------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $3,552 $6,621 $8,225 $17,995 $30,102
Accruing loans delinquent more than 90 days 274 -- 24 5 13
Restructured loans -- -- -- -- 166
-------------------------------------------
Total nonperforming loans 3,826 6,621 8,249 18,000 30,281
Other real estate owned (OREO) 1,474 1,470 1,452 6,520 13,312
-------------------------------------------
Total nonperforming assets $5,300 $8,091 $9,701 $24,520 $43,593
===========================================
Nonperforming loans as a percentage
of total loans 0.29% 0.62% 0.86% 2.17% 4.60%
===========================================
Nonperforming assets as a percentage
of total assets 0.29% 0.55% 0.79% 2.17% 4.04%
===========================================
Allowance for loan losses as a percentage of
nonperforming loans 275.72% 166.77% 122.21% 46.38% 38.21%
===========================================
Allowances for loan and OREO losses as a
percentage of nonperforming assets 199.04% 136.47% 105.29% 35.40% 28.03%
===========================================
</TABLE>
Allowances for losses on the loan portfolio totaled $10.5 million at December
31, 1997. Losses of $2.18 million were charged off and $340,000 was recovered,
as new provisions for loan losses of $1.35 million were recorded during
the year. At year-end, the allowance for loan losses represented .80% of the
total outstanding loan portfolio balance.
The following table details the changes in the Company's allowance for loan
losses for the last five years.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $11,042 $10,081 $ 8,349 $11,570 $15,611
Charge-offs:
Residential mortgages 290 314 169 110 1,136
Mortgages on income-producing property 277 -- 1,019 3,109 2,584
Commercial loans -- -- -- -- --
Consumer loans 1,616 1,216 999 773 681
--------------------------------------------
2,183 1,530 2,187 3,992 4,401
Recoveries:
Residential mortgages -- 3 917 9 25
Mortgages on income-producing property -- 1,098 245 300 8
Commercial loans -- -- -- -- --
Consumer loans 340 290 357 362 327
--------------------------------------------
340 1,391 1,519 671 360
Net charge-offs 1,843 139 668 3,321 4,041
Provision charged to operations 1,350 1,100 2,400 100 --
--------------------------------------------
Balance at end of period $10,549 $11,042 $10,081 $ 8,349 $11,570
============================================
Net charge-offs as a percentage of
average loans 0.15% 0.01% 0.07% 0.43% 0.59%
============================================
Allowance for loan losses as a percentage of
total loans 0.80% 1.03% 1.05% 1.01% 1.76%
============================================
</TABLE>
At the end of 1997, $5.4 million of the allowance for loan losses was allocated
to the commercial real estate mortgage portfolio while $4.2 million of the
allowance was allocated to the consumer loan portfolio.
18
<PAGE> 9
The following table summarizes the allocation of the allowance for loan losses
among the Company's assets in each of the past five years.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
Percentage of Percentage of Percentage of
Amount loans to total Amount loans to total Amount loans to total
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages $ 569 54% $ 859 57% $ 1,170 63%
Mortgages on income-producing property 5,386 9% 6,314 10% 6,115 11%
Commercial loans 400 3% 400 1% 400 1%
Consumer loans 4,194 34% 3,469 32% 2,396 25%
-------------------------------------------------------------------------------
$10,549 100% $11,042 100% $10,081 100%
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
1994 1993
----------------------------------------------
Percentage of Percentage of
Amount loans to total Amount loans to total
- --------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 813 63% $ 429 60%
Mortgages on income-producing property 6,423 17% 9,617 19%
Commercial loans -- -- -- --
Consumer loans 1,113 20% 1,524 21%
----------------------------------------------
$8,349 100% $11,570 100%
==============================================
</TABLE>
ANALYSIS OF CASH FLOWS
The Company's balances of cash and cash equivalents increased from $12.8
million to $20.5 million in 1997. During the year, $326 million of cash was
provided from financing activities, primarily from expanded borrowings and
increases in customers' deposit balances. Investing activities utilized $378
million of available cash and cash equivalents as loan purchases,
mortgage-backed security purchases, and purchases of investment securities
exceeded repayments in these categories. Operating activities provided $59.2
million of net cash in 1997.
ASSET/LIABILITY MANAGEMENT
The Company's objectives for the management of assets and liabilities include
achieving and maintaining adequate and stable levels of both net interest
income and market value for the Company's net assets. The level of net interest
income that can be attained is enhanced by assuming credit, liquidity and
interest rate risks and by striving to keep nonearning asset balances to a
minimum. Net interest income and market value of portfolio equity ("MVPE")
stability is enhanced across various interest rate scenarios by properly
matching maturity structures of assets and liabilities.
The Company employs various tools, including gap analysis, duration analysis
and simulation analysis, to assess the sensitivity of its net interest income
and MVPE to changes in interest rates. D&N's cumulative gap analysis for
December 31, 1997 is found on the following page.
19
<PAGE> 10
Management's Discussion And Analysis (cont.)
For each maturity category in the table below, the difference between
interest-earning assets and interest-bearing liabilities reflects an imbalance
between repricing opportunities for the two sides of the balance sheet. The
consequence of a negative cumulative gap at the end of one year suggests that,
if interest rates were to fall, the Company's earnings stream would be enhanced
as more liability balances would reprice to lower rates than would asset
balances. Similarly, the negative cumulative gap suggests that if interest
rates were to rise, liability costs would increase more quickly than asset
yields, placing negative pressure on earnings.
With a cumulative one-year gap of (13.19)%, D&N's balance sheet is liability
sensitive. At year-end, however, 42.0% of the Bank's loan portfolio carried
variable or adjustable interest rates, and a growing proportion of the
fixed-rate loan portfolio was comprised of relatively shorter-term consumer
installment loans.
The balances presented in the table below reflect contractual repricings for
certificates of deposit. Certain demand deposit accounts and regular savings
accounts, however, have been classified as repricing beyond one year. While
these accounts are subject to immediate withdrawal, experience has shown them
to be relatively rate insensitive. If these accounts were included in the 0-3
month category, the gap in that time frame would be negative $376 million and
the cumulative gap at twelve months would be negative $426 million.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks/others $ 20,497 $ -- $ -- $ -- $ 20,497
Investment securities 15,000 52,000 10,000 25,636 102,636
Mortgage-backed certificates 21,835 45,297 174,009 117,155 358,296
Net loans receivable 286,029 385,524 602,582 26,824 1,300,959
Other assets 8,791 1,934 3,831 18,371 32,927
-----------------------------------------------------------
TOTAL ASSETS $ 352,152 $ 484,755 $790,422 $187,986 $1,815,315
===========================================================
Liabilities:
Deposits $ 232,098 $ 430,244 $264,633 $116,192 $1,043,167
FHLB advances and other borrowed money 285,317 128,675 204,528 1,003 619,523
Escrow funds -- -- -- 17,585 17,585
Other liabilities -- -- -- 8,239 8,239
-----------------------------------------------------------
TOTAL LIABILITIES 517,415 558,919 469,161 143,019 1,688,514
===========================================================
Preferred Stock of Subsidiary -- -- -- 28,719 28,719
Stockholders' Equity:
Common stock -- -- -- 92 92
Additional paid-in capital -- -- -- 76,694 76,694
Retained earnings and other -- -- -- 22,877 22,877
Treasury stock -- -- -- (1,581) (1,581)
-----------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 517,415 $ 558,919 $469,161 $269,820 $1,815,315
===========================================================
Reprice difference $(165,263) $ (74,164) $321,261 $(81,834)
Cumulative gap $(165,263) $(239,427) $ 81,834 $ --
Percent of total assets (9.10)% (13.19)% 4.51% --
</TABLE>
20
<PAGE> 11
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------------------------------------
Total
1998 1999 2000 2001 2002 Thereafter Fair Value
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Loans receivable:
Real estate mortgages $ 222,294 $152,151 $130,218 $ 88,281 $ 66,332 $187,366 $ 846,642
Average interest rate 8.15% 8.02% 7.94% 8.00% 8.06% 7.80% 7.99%
Non-real estate commercial 11,580 6,308 7,037 5,956 3,905 2,920 37,706
Average interest rate 9.55% 9.42% 9.38% 9.36% 9.21% 9.16% 9.40%
Consumer 167,875 115,973 77,333 50,261 25,269 12,565 449,276
Average interest rate 9.17% 8.99% 9.03% 9.10% 9.28% 8.95% 9.08%
Mortgage-backed securities 49,301 41,754 36,370 31,796 27,918 170,383 357,522
Average interest rate 7.30% 7.21% 7.26% 7.28% 7.35% 7.09% 7.19%
Investment securities
and interest bearing deposits 61,994 4,040 4 4 -- 39,765 105,807
Average interest rate 5.95% 5.74% 4.80% 4.90% -- 7.85% 6.38%
Mortgage servicing assets 358 305 259 220 187 1,060 2,389
-------------------------------------------------------------------------------------
Total interest sensitive assets $ 513,402 $320,531 $257,221 $176,518 $ 123,611 $414,059 $1,799,342
=====================================================================================
Interest sensitive liabilities:
Deposits:
NOW accounts $ 23,287 $ 12,588 $ 7,553 $ 3,776 $ 3,147 $ 12,588 $ 62,939
Average interest rate 1.51% 1.51% 1.51% 1.51% 1.51% 1.51% 1.51%
Savings deposits 27,694 22,816 16,302 12,229 8,156 75,922 163,119
Average interest rate 2.92% 2.99% 3.04% 3.08% 3.16% 3.33% 3.16%
Money-market accounts 72,928 6,462 3,693 2,769 1,846 4,616 92,314
Average interest rate 4.02% 4.02% 4.02% 4.02% 4.02% 4.02% 4.02%
Certificates of deposit 534,960 78,868 25,766 10,007 8,066 15,647 673,314
Average interest rate 5.86% 6.28% 6.20% 5.93% 6.22% 5.96% 5.93%
Borrowings:
Securities sold under
agreements to repurchase 149,092 -- -- -- -- -- 149,092
Average interest rate 5.80% -- -- -- -- -- 5.80%
FHLB Advances and
Other borrowed money 215,167 180,767 71,231 621 534 4,169 472,489
Average interest rate 5.86% 6.01% 5.96% 10.04% 10.04% 8.75% 5.97%
-------------------------------------------------------------------------------------
Total interest sensitive
liabilities $1,023,128 $301,501 $124,545 $ 29,402 $ 21,749 $112,942 $1,613,267
=====================================================================================
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment assumptions are based on the Company's own historical experience.
The assumptions used to present deposit balances are essentially the same as
those used in the gap analysis. The actual maturities of these instruments
could vary substantially if future prepayments differ from the Company's
historical experience.
21
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.)
SIGNIFICANT LITIGATION
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA" or "the Act") was passed, significantly altering the regulatory
environment in which depository institutions in general, and the Company in
particular, would subsequently operate. A provision of the Act provided for the
elimination, over time, of one form of regulatory capital that many
institutions, including D&N Bank, had utilized in their capital structures. The
phased elimination of supervisory goodwill, an intangible asset previously
created when companies such as D&N acquired weaker institutions, resulted in
many of the affected companies experiencing capital shortfalls. In D&N's case,
$42 million of unamortized supervisory goodwill was permitted to be counted as
regulatory capital in 1989 at the time of the Act's passage, while $37 million
remained in 1993 when its phase-out as qualifying capital was complete. The loss
of this significant portion of D&N's regulatory capital base precipitated
drastic changes in the Company's strategic plans, including the 56% shrinkage of
the balance sheet from $2.3 billion in 1988 to $1.0 billion in 1993, the closure
of the Company's national network of mortgage origination offices, the
elimination of many jobs, and the cessation of stockholder dividends.
A number of institutions, including D&N Bank, that were adversely affected by
the FIRREA legislation subsequently initiated legal actions against the United
States Government. The institutions have claimed that the inducements offered
by federal regulatory agencies to acquire weakened or insolvent thrifts
constituted contractual agreements that the goodwill created through the
acquisition transactions would qualify as regulatory capital. FIRREA's mandated
phase-out of regulatory capital treatment for supervisory goodwill, then, has
been alleged to be a breach of a contract right. The United States Court of
Federal Claims has registered approximately 120 similar cases, including D&N's,
which seek damages for such breach.
Early cases were bifurcated into questions of liability and damages, with the
trial courts reasoning that, until the question of the government's liability
was unequivocally established, efforts to determine damages or to develop
damage theories were potentially irrelevant. Three early cases have proceeded
through the Court of Claims, and after consolidation, through the Federal
Circuit of the United States Court of Appeals, and the United States Supreme
Court. In July of 1996, the Supreme Court found generally that the United
States was liable for damages under a theory of contractual breach, and that
claims of governmental immunity were not applicable in these cases. The cases
were remanded to the Court of Claims where arguments concerning the extent of
damages began in 1997.
In consideration of the complexities of the pending litigation, the similarity
of issues in the various cases, and the potential magnitude of the damage
amounts that might ultimately be awarded, the Court of Claims has issued a case
management order on the remaining cases, in essence creating an orderly
procedure for these lawsuits, including D&N's suit, to proceed. Estimation of
potential liability or damages from this action is speculative at this time.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", and SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements. It also requires companies to report selected information
about operating segments in interim financial reports issued to shareholders.
These standards will be adopted effective January 1, 1998 and are not expected
to have any material effect on the Company's financial statements.
22
<PAGE> 13
OTHER ITEMS
D&N utilizes various electronic computer systems for the delivery of its
financial services products such as deposit accounts and loans, 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 deposit accounts,
commercial lending, consumer lending, financial control, and sales platform
support applications provided by M&I Data Services, Inc.; mortgage lending
applications provided by ALLTEL Information Services, Inc. and FiTech, Inc.; and
internally maintained micro-computer and network systems which support
management functions and communications. 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.
D&N has 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.
The operations of D&N Financial Corporation, and the financial services
industry generally, are influenced by many factors, including the interest rate
environment, competition, legislative and regulatory developments and general
economic conditions.
Except for the historical information contained in this
report, certain statements made herein are forward-looking statements that
involve risks and uncertainties and are subject to various factors that could
cause actual results to differ materially from these statements. Factors that
might cause such a difference include, but are not limited to: regional and
national economic conditions, substantial changes in levels of market interest
rates, credit and other risks of lending and investment activities and
competitive and regulatory factors.
23
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
[COOPERS & LYBRAND LETTERHEAD]
BOARD OF DIRECTORS AND STOCKHOLDERS
D&N FINANCIAL CORPORATION
We have audited the Consolidated Statements of Condition of D&N Financial
Corporation and Subsidiary as of December 31, 1997 and 1996, and the related
Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each
of the three years in the period ending December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D&N Financial
Corporation and Subsidiary at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ending December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
January 22, 1998
24
<PAGE> 15
CONSOLIDATED STATEMENTS OF CONDITION
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
December 31
--------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 16,239 $ 2,847
Federal funds sold 300 8,600
Interest-bearing deposits in other banks 3,958 1,342
-------------------------------
Total cash and cash equivalents 20,497 12,789
Investment securities
(market value of $56,594,000 in 1997 and $60,783,000 in 1996) 56,524 60,739
Investment securities available for sale (at market value) 46,112 59,038
Mortgage-backed securities
(market value of $199,525,000 in 1997 and $213,304,000 in 1996) 198,050 214,690
Mortgage-backed securities available for sale (at market value) 160,246 36,566
Loans receivable (including loans held for sale of $5,275,000 in 1997
and $5,218,000 in 1996) 1,311,508 1,066,918
Allowance for loan losses (10,549) (11,042)
-------------------------------
Net loans receivable 1,300,959 1,055,876
Other real estate owned, net 1,474 1,470
Federal income taxes 1,129 6,002
Office properties and equipment, net 16,621 15,764
Other assets 13,703 10,120
-------------------------------
$ 1,815,315 $ 1,473,054
LIABILITIES ===============================
Checking and NOW accounts $ 119,412 $ 107,550
Money market accounts 92,314 89,321
Savings deposits 163,119 149,226
Time deposits 667,204 617,102
Accrued interest 1,118 934
-------------------------------
Total deposits 1,043,167 964,133
Securities sold under agreements to repurchase 149,092 58,040
FHLB advances and other borrowed money 470,431 345,997
Advance payments by borrowers and investors held in escrow 17,585 11,808
Other liabilities 8,239 6,955
-------------------------------
Total liabilities 1,688,514 1,386,933
PREFERRED STOCK OF SUBSIDIARY 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 1997 and 8,370,494 in 1996) 92 84
Additional paid-in capital 77,025 55,452
-------------------------------
Total paid-in capital 77,117 55,536
Retained earnings - substantially restricted 21,042 29,568
Less: Cost of treasury stock (98,129 shares in 1997 and 22,339 in 1996) (1,581) (226)
Unrealized holding gains on debt securities available for sale, net of tax 1,504 1,243
-------------------------------
Total stockholders' equity 98,082 86,121
-------------------------------
$ 1,815,315 $ 1,473,054
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE> 16
CONSOLIDATED STATEMENTS OF CONDITION
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 98,560 $ 86,151 $ 72,550
Mortgage-backed securities 19,085 10,930 10,577
Investments and deposits 8,048 7,228 7,638
--------------------------------------------
Total interest income 125,693 104,309 90,765
INTEREST EXPENSE
Deposits 47,961 43,859 38,639
Securities sold under agreements to repurchase 5,571 2,193 1,450
FHLB advances and other borrowed money 23,222 15,494 13,405
Interest rate instruments -- -- 2,521
--------------------------------------------
Total interest expense 76,754 61,546 56,015
--------------------------------------------
Net interest income 48,939 42,763 34,750
Provision for loan losses 1,350 1,100 2,400
--------------------------------------------
Net interest income after provision for loan losses 47,589 41,663 32,350
NONINTEREST INCOME
Loan servicing and administrative fees, net 1,916 1,914 1,882
Deposit related fees 4,080 3,621 3,147
Gain on sale of loans held for sale 1,728 1,031 882
Other income 657 470 222
--------------------------------------------
8,381 7,036 6,133
Gain (loss) on investment securities available for sale -- 188 (120)
Gain on loans and mortgage-backed securities available for sale 539 -- 899
--------------------------------------------
Total noninterest income 8,920 7,224 6,912
NONINTEREST EXPENSE
Compensation and benefits 17,881 16,881 15,732
Occupancy 3,110 2,834 2,273
Other expense 11,655 11,863 10,713
--------------------------------------------
General and administrative expense 32,646 31,578 28,718
Other real estate owned, net (81) 71 (999)
Amortization of intangibles -- -- 370
FDIC insurance 658 7,894 2,431
--------------------------------------------
Total noninterest expense 33,223 39,543 30,520
--------------------------------------------
Income before income tax expense 23,286 9,344 8,742
Federal income tax expense (credit) 7,743 349 (1,675)
--------------------------------------------
Income before preferred stock dividends 15,543 8,995 10,417
Preferred stock dividend of subsidiary 1,218 -- --
--------------------------------------------
NET INCOME $ 14,325 $ 8,995 $ 10,417
============================================
Earnings per share:
Basic $ 1.58 $ 1.08 $ 1.27
============================================
Diluted $ 1.53 $ 1.01 $ 1.24
============================================
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Unrealized
Holding
Treasury Gains (Losses)
Additional Stock & Leveraged on Securities Total
Common Paid-In Retained Treasury ESOP Available Stockholders'
Stock Capital Earnings Warrants Debt for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 74 $ 49,591 $ 10,156 $ (213) $ (99) $ (1,184) $ 58,325
Net income -- -- 10,417 -- -- -- 10,417
Issuance of common stock
upon exercise of stock options
and warrants - 60,886 shares 1 345 -- -- -- -- 346
Purchase of 11,000 warrants -- -- -- (44) -- -- (44)
Reduction of leveraged ESOP debt -- -- -- -- 36 -- 36
Change in value of securities
available for sale -- -- -- -- -- 2,899 2,899
-------------------------------------------------------------------------------
Balance December 31, 1995 $ 75 $ 49,936 $ 20,573 $ (257) $ (63) $ 1,715 $ 71,979
Net income -- -- 8,995 -- -- -- 8,995
Issuance of common stock upon
exercise of stock options and
warrants - 960,508 shares 9 9,046 -- -- -- -- 9,055
Purchase of treasury stock
and warrants -- -- -- (3,499) -- -- (3,499)
Reissuance of 256,251
treasury shares -- (3,530) -- 3,530 -- -- --
Reduction of leveraged ESOP debt -- -- -- -- 63 -- 63
Change in value of securities
available for sale -- -- -- -- -- (472) (472)
-------------------------------------------------------------------------------
Balance December 31, 1996 $ 84 $ 55,452 $ 29,568 $ (226) $ -- $ 1,243 $ 86,121
Net income -- -- 14,325 -- -- -- 14,325
Cash dividends, common stock
($0.10 per share) -- -- (826) -- -- -- (826)
10% common stock dividend, at
fair market value 8 22,017 (22,025) -- -- -- --
Issuance of common stock upon
exercise of stock options -
98,681 shares -- 1,196 -- -- -- -- 1,196
Purchase of treasury stock -- -- -- (2,995) -- -- (2,995)
Reissuance of 98,681 treasury shares -- (1,640) -- 1,640 -- -- --
Change in value of securities
available for sale -- -- -- -- -- 261 261
-------------------------------------------------------------------------------
Balance December 31, 1997 $ 92 $ 77,025 $ 21,042 $ (1,581) $ -- $ 1,504 $ 98,082
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 18
CONSOLIDATED FINANCIAL STATEMENTS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,325 $ 8,995 $ 10,417
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,350 1,100 2,400
Depreciation & amortization of office properties & equipment . . 1,987 1,954 1,843
Amortization of net discounts on purchased
loans and securities (925) (73) (2,395)
Originations and purchases of loans held for sale (47,928) (56,132) (91,203)
Proceeds from sales of loans held for sale 89,889 73,658 75,928
(Gain)loss on investment securities available for sale -- (188) 120
Gain on loans and mortgage-backed securities available for sale (539) -- (899)
Amortization and writedowns of mortgage servicing rights 543 300 476
Other 519 (2,635) (7,888)
-----------------------------------------
Net cash provided (used) by operating activities 59,221 26,979 (11,201)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 20 298 10,070
Proceeds from maturities of investment securities 202,066 83,970 44,025
Purchases of investment securities to be held to maturity (184,903) (107,012) (60,309)
Proceeds from sales of mortgage-backed securities available for sale 24,094 -- 4,145
Proceeds from sales of loans -- -- 33,535
Principal collected on mortgage-backed securities 64,150 54,951 22,077
Purchases of mortgage-backed securities (107,400) (58,661) --
Loans purchased (234,886) (148,405) (103,524)
Net change in loans receivable (137,882) (94,006) (43,299)
(Increase) decrease in other real estate owned (4) (151) 4,871
Purchases of office properties and equipment (2,824) (2,868) (2,333)
-----------------------------------------
Net cash used by investing activities (377,569) (271,884) (90,742)
FINANCING ACTIVITIES
Increase in time deposits 50,102 23,058 94,581
Increase in other deposits 28,748 18,666 10,510
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 513,052 309,040 203,000
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (297,717) (121,482) (213,851)
Net change in advance payments by borrowers and investors
held in escrow 5,777 479 (4,022)
Common stock cash dividend (826) -- --
Net proceeds from issuance of stock 1,196 9,055 346
Purchases of treasury stock/warrants (2,995) (3,499) (44)
Proceeds from issuance of subsidiary preferred stock 28,719 -- --
Reduction of leveraged ESOP debt -- (63) (36)
-----------------------------------------
Net cash provided by financing activities 326,056 235,254 90,484
-----------------------------------------
Increase (decrease) in cash and cash equivalents 7,708 (9,651) (11,459)
Cash and cash equivalents at beginning of year 12,789 22,440 33,899
-----------------------------------------
Cash and cash equivalents at end of year $ 20,497 $ 12,789 $ 22,440
=========================================
Supplemental disclosures of cash flow information:
Interest paid $ 75,416 $ 61,689 $ 60,222
Income taxes paid $ 2,027 $ 299 $ 397
Noncash investing activities:
Transfer of loans to other real estate owned $ 961 $ 3,373 $ 1,936
Securitization of loans into mortgage-backed securities $ 86,066 $ 119,717 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N FINANCIAL CORPORATION DECEMBER 31, 1997
NOTE A: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
D&N Financial Corporation ("the Company") is a financial services holding
company whose sole subsidiary is D&N Bank ("the Bank"), a federally-chartered
stock savings bank. D&N Financial Corporation's primary business is the delivery
of financial services to consumers and businesses through its network of 48
community banking and financial services offices in Michigan.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts and transactions of the Company and the Bank and the Bank's
wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents represent short-term highly
liquid investments with original maturities of three months or less and include
cash, demand deposits in other banks and interest-bearing deposits in other
banks.
INVESTMENT CLASSIFICATIONS: Securities are classified as either held to maturity
(amortized cost), trading (fair value, with unrealized gains and losses reported
in income), or available for sale (fair value, with unrealized gains and losses
reported directly in equity, net of taxes).
INVESTMENT AND MORTGAGE-BACKED SECURITIES: Investment and mortgage-backed
securities which the Company has the ability and the intent to hold until
maturity are stated at amortized cost. Investment and mortgage-backed securities
available for sale are carried at fair value. Fair value adjustments are
included in stockholders' equity, net of tax. Gains or losses realized on the
sale of investment and mortgage-backed securities are determined by the specific
identification method and are included in securities gains (losses). Interest
income is adjusted using the level-yield method for amortization of premiums and
accretion of discounts.
MORTGAGE DERIVATIVE PRODUCTS: The Bank's interest only certificates are
classified as available for sale and are recorded at fair value. Fair value
adjustments are included in stockholders' equity and are classified on the
Statements of Condition with mortgage-backed securities.
ALLOWANCE FOR LOAN LOSSES: A loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the fair value of the collateral.
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.
MORTGAGE LOANS HELD FOR SALE: The Bank enters into commitments to originate and
does originate mortgage loans for sale to investors and in the secondary market.
Loans held for sale are carried at the lower of cost or market value, determined
on an aggregate basis. Commitment fees are amortized either over the commitment
period or the combined commitment and loan period depending upon the probability
of performance under the commitment.
INTEREST ON LOANS: Interest on loans is credited to income when earned. An
allowance for interest on loans is provided when management considers the
collection of these loans doubtful and the accrual of interest is usually
suspended when a loan becomes more than 90 days past due.
LOAN FEES: Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the lives of the related
loans as an adjustment of the yields using the level-yield method.
29
<PAGE> 20
OTHER REAL ESTATE OWNED: Real estate acquired through foreclosure and similar
proceedings is recorded at estimated fair value of the property, less cost to
dispose of, at the acquisition date. Operating expenses of such properties, net
of any income, are charged to expense.
DEPRECIATION: Provisions for depreciation are computed using the straight-line
method over the estimated useful lives of office properties and equipment, as
follows: buildings - 40 years; leasehold improvements - life of lease; furniture
and fixtures - 15 years; and computers - 3 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into sales of
investment and mortgage-backed securities under agreements to repurchase the
same or essentially identical securities. The agreements are short-term and are
accounted for as secured borrowings. The obligations to repurchase securities
sold are reflected as a liability and the securities which collateralize the
agreements are reflected as an asset in the Consolidated Statements of
Condition.
CAPITALIZED MORTGAGE SERVICING RIGHTS: The Company services mortgage loans for
investors. Fees earned for and in connection with this activity are recognized
as income when the related mortgage payments are received. Mortgage servicing
costs are charged to expense as incurred.
As the Company acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained, it must allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values. Capitalized mortgage servicing
rights are reported in other assets. The capitalized cost of mortgage servicing
rights is amortized in proportion to, and over the period of, estimated net
servicing income (servicing revenue in excess of servicing costs), into
noninterest income.
Capitalized mortgage servicing rights are periodically assessed for impairment
based on the fair value of those rights calculated on a discounted basis. This
assessment is performed on a disaggregate basis, stratified by mortgage type,
term and rate. Identified impairments are recognized through a valuation
allowance.
As permitted by Statement of Financial Accounting Standards ("SFAS") 122,
"Accounting For Mortgage Servicing Rights", the Company adopted the provisions
of the Statement effective July 1, 1995. The effect of adopting SFAS 122 was to
increase net income for the year ended December 31, 1995 by $621,000 or $0.07
per share. The Company later adopted SFAS 125, "Accounting For Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", effective
January 1, 1997, which had no material effect on the financial statements.
INCOME TAXES: The Company uses the liability method in accounting for income
taxes. Under this method, deferred income taxes result from temporary
differences between the tax bases of assets and liabilities and the bases
reported in the consolidated financial statements. The deferred taxes are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
PER SHARE DATA: The Company adopted SFAS 128 "Earnings per Share", for the year
ended December 31, 1997. The earnings per share for the years 1996 and 1995 have
been restated to comply with these standards.
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 and warrants 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 and warrants.
30
<PAGE> 21
The following table sets forth the computation of per share earnings as provided
in SFAS 128, and illustrates the dilutive effect of options and warrants
outstanding.
<TABLE>
<CAPTION>
Year Ending December 31
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
Earnings Earnings Earnings
Shares Per Share Shares Per Share Shares Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share earnings)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS: 9,094 $ 1.58 8,337 $ 1.08 8,172 $ 1.27
Net dilutive effect of:
Stock options outstanding 271 (0.05) 167 (0.02) 134 (0.02)
Warrants outstanding -- -- 402 (0.05) 97 (0.01)
-----------------------------------------------------------------------------
Diluted EPS: 9,365 $ 1.53 8,906 $ 1.01 8,403 $ 1.24
=============================================================================
</TABLE>
Options to purchase 107,800 shares of common stock at $19.26 to $24.37 per share
were outstanding at December 31, 1997. These options were not included in the
computation of diluted earnings per share, because the exercise prices were
greater than the average annual market price of the comon stock in 1997.
RECLASSIFICATIONS: Certain amounts in previously issued consolidated financial
statements have been reclassified to conform with the current year presentation.
All per share amounts have been restated to include the effects of a 10% stock
dividend and adoption of SFAS 128 in 1997.
NOTE B: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into the
Company. The Company issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. At the time of
the merger, Macomb had assets and stockholders' equity (unaudited) of
$41,932,000 and $6,268,000, respectively. The merger was accounted for as a
pooling-of-interests and accordingly, the financial statements have been
restated to include the results of Macomb.
A reconciliation of previously reported net interest income and net income is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C>
Net interest income (as previously reported) $ 9,465 $ 33,632
Macomb Federal Savings Bank - net interest income 217 1,118
---------------------------------------
Total net interest income $ 9,682 $ 34,750
=======================================
Net income (as previously reported) 3,497 10,140
Macomb Federal Savings Bank - net income (9) 277
---------------------------------------
Total net income $ 3,488 $ 10,417
=======================================
</TABLE>
A reconciliation of per share income is as follows:
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic earnings per share:
Net income (as previously reported) $ 0.47 $ 1.37
Macomb Federal Savings Bank (0.05) (0.10)
---------------------------------------
Basic earnings per share $ 0.42 $ 1.27
Diluted earnings per share: =======================================
Net income (as previously reported) $ 0.44 $ 1.33
Macomb Federal Savings Bank (0.04) (0.09)
---------------------------------------
Diluted earnings per share $ 0.40 $ 1.24
=======================================
</TABLE>
31
<PAGE> 22
NOTE C: NEW BANK SUBSIDIARY
D&N Capital Corporation ("D&N Capital") is a Delaware corporation incorporated
on March 18, 1997 for the purpose of acquiring and holding real estate assets
and is a Real Estate Investment Trust ("REIT"). All shares of common stock of
D&N Capital are owned by D&N Bank.
On July 17, 1997, D&N Capital 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. The Series A
Preferred Shares are generally not redeemable prior to July 1, 2002. On or after
July 1, 2002, the Series A Preferred Shares may be redeemed for cash at the
option of the Bank, in whole or in part, at a redemption price of $25.00 per
share.
The preferred shares are treated as Tier-1 Capital by the Bank, and are traded
on Nasdaq as DNFCP. During 1997, D&N Capital declared and paid preferred
dividends totaling $1,217,563.
NOTE E: INVESTMENT SECURITIES
Investment securities consisted of the following:
NOTE D: RESTRICTIONS ON CASH AND
NONINTEREST-BEARING BALANCES
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average amounts of those reserve balances for the years ended December
31, 1997 and December 31, 1996 were $452,000 and $418,000, respectively.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1997 1996
--------------------------------------------------------------
Book Market Book Market
Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 33,299 $ 33,369 $ 40,737 $ 40,781
Investment in Federal Home Loan Bank stock 23,200 23,200 19,959 19,959
Other securities 25 25 43 43
--------------------------------------------------------------
Held to maturity 56,524 56,594 60,739 60,783
U.S. Treasury securities 44,764 44,860 57,996 58,000
Municipal bonds 148 148 -- --
Other securities 1,088 1,104 1,032 1,038
Valuation allowances 112 -- 10 --
--------------------------------------------------------------
Available for sale 46,112 46,112 59,038 59,038
--------------------------------------------------------------
$102,636 $102,706 $119,777 $119,821
==============================================================
</TABLE>
32
<PAGE> 23
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Held to maturity
U.S. Treasury securities $ 70 $ -- $ 79 $ (35)
------------------------------------------------------------------
70 -- 79 (35)
Available for sale
U.S. Treasury securities 97 (1) 31 (27)
Other securities 16 -- 6 --
------------------------------------------------------------------
113 (1) 37 (27)
------------------------------------------------------------------
$ 183 $ (1) $ 116 $ (62)
==================================================================
</TABLE>
There were no sales of investment securities during 1997. Proceeds from sales of
investment securities available for sale during 1996 were $298,000. Gross gains
of $188,000 were realized on those sales. Proceeds from sales of investment
securities available for sale during 1995 were $10,070,000. Gross losses of
$120,000 were realized on those sales.
The book value and market value of investment securities at December 31, 1997,
by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Less than one year 1 - 5 Years
------------------------------------------------------------------------
Book Market Avg. Book Market Avg.
Value Value Yield Value Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities held to maturity $33,299 $33,369 5.95% $ -- $ -- --%
U.S. Treasury securities available for sale 34,560 34,618 5.94 10,204 10,242 6.04
-------------------------------------------------------------------------
$67,859 $67,987 5.95% $10,204 $ 10,242 6.04%
==========================================================================
</TABLE>
NOTE F: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
Book Market Book Market
Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 112,156 $ 113,253 $ 127,677 $ 126,576
Collateralized mortgage obligations 84,788 84,987 85,755 85,311
Accrued interest receivable 1,285 1,285 1,417 1,417
Net discounts (179) -- (159) --
--------------------------------------------------------------------
Held to maturity 198,050 199,525 214,690 213,304
Government agency securities 86,658 88,145 18,815 19,255
Collateralized mortgage obligations 69,104 69,715 14,767 15,005
Interest-only certificates 378 1,422 639 2,023
Accrued interest receivable 964 964 283 283
Net premiums 940 -- 160 --
Valuation allowances 2,202 -- 1,902 --
--------------------------------------------------------------------
Available for sale 160,246 160,246 36,566 36,566
--------------------------------------------------------------------
$ 358,296 $ 359,771 $ 251,256 $ 249,870
====================================================================
</TABLE>
Mortgage-backed securities with a carrying value of $20,851,000 are specifically
pledged as collateral for advances from the Federal Home Loan Bank of
Indianapolis and other borrowings.
33
<PAGE> 24
(Note F: continued...)
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 1,238 $ (368) $ 764 $(2,119)
Collateralized mortgage obligations 675 (70) 294 (325)
-----------------------------------------------------------------
Held to maturity 1,913 (438) 1,058 (2,444)
Government agency securities 743 (1) 287 (11)
Collateralized mortgage obligations 424 (8) 270 (28)
Interest only certificates 1,044 -- 1,384 --
-----------------------------------------------------------------
Available for sale 2,211 (9) 1,941 (39)
-----------------------------------------------------------------
$ 4,124 $ (447) $ 2,999 $(2,483)
=================================================================
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale during 1997
were $30,154,000. Gross gains of $543,000 and gross losses of $4,000 were
realized on those sales. There were no sales of mortgage-backed securities
during 1996. Proceeds from sales of mortgage-backed securities available for
sale during 1995 were $4,145,000. Gross gains of $267,000 were realized on those
sales, and there were no losses.
The book value and market value of mortgage-backed securities at December 31,
1997, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Held to Maturity Available For Sale
----------------------------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Government agency securities
Less than one year $ -- $ -- --% $ -- $ -- -- %
One to five years 731 737 7.00 -- -- --
Five to ten years 1,530 1,542 7.14 -- -- --
After ten years 110,121 110,974 7.04 87,403 88,145 7.08
----------------------------------------------------------------------------------------
112,382 113,253 7.04 87,403 88,145 7.08
Collateralized mortgage obligations
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years -- -- -- -- -- --
After ten years 84,383 84,987 6.98 69,298 69,715 6.95
----------------------------------------------------------------------------------------
84,383 84,987 6.98 69,298 69,715 6.95
Interest-only certificates
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years -- -- -- 3 12 139.66
After ten years -- -- -- 375 1,410 132.90
----------------------------------------------------------------------------------------
-- -- -- 378 1,422 132.96
----------------------------------------------------------------------------------------
$ 196,765 $198,240 7.02% $157,079 $ 159,282 7.33%
========================================================================================
</TABLE>
Mortgage-backed securities will mature according to the repayment
characteristics of the underlying mortgage loans which collateralize the
securities. Expected maturities for the mortgage-backed securities will differ
from contractual maturities because borrowers have the right to prepay.
The aggregate book value and aggregate market value of the securities of any one
issuer, other than U.S. Government agencies, did not exceed 10% of stockholders'
equity at December 31, 1997 or 1996.
34
<PAGE> 25
NOTE G: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 694,902 $ 706,459 $ 592,712 $ 598,390
Residential mortgages held for sale 5,275 5,275 5,218 5,218
Mortgages on income producing property 81,304 79,007 84,983 79,704
Construction loans 56,176 55,901 39,535 39,404
Consumer loans 446,710 449,276 337,178 338,180
Commercial loans 38,164 37,706 12,262 11,959
Accrued interest receivable 7,311 7,311 5,940 5,940
----------------------------------------------------------------------
1,329,842 1,340,935 1,077,828 1,078,795
Less:
Discounts on purchased loans (2,356) -- (2,035) --
Allowance for loan losses 10,549 -- 11,042 --
Undisbursed portion of loan proceeds 20,315 -- 12,085 --
Deferred income 375 -- 860 --
----------------------------------------------------------------------
$ 1,300,959 $ 1,340,935 $ 1,055,876 $ 1,078,795
======================================================================
</TABLE>
Credit is extended based on evaluation of the borrower's financial condition,
the value of the collateral and, in the case of income producing property, the
sufficiency of net cash flows from the property's operation to service the debt.
When loans are made to businesses, personal guarantees may also be required of
owners or partners.
Loans collateralized by income producing property are categorized as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1996
- -------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Shopping centers $22,185 $23,582
Multi-family apartments 19,913 25,404
Motels/hotels 11,491 13,540
Offices 6,905 6,667
Nursing homes 5,291 5,528
Industrial 4,774 4,565
Condominium development 4,240 1,826
Mobile home parks 2,118 3,625
Other 4,387 246
-----------------------
$81,304 $84,983
=======================
</TABLE>
35
<PAGE> 26
(Note G: continued...)
Loans collateralized by income producing property categorized by state are as
follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
- ----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Michigan $65,697 $65,645
California 11,008 11,738
New York 805 2,037
Pennsylvania 405 607
Other 3,389 4,956
-------------------------
$81,304 $84,983
=========================
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 11,042 $ 10,081 $ 8,349
Provisions for loan losses 1,350 1,100 2,400
Net charge-offs (1,843) (139) (668)
-------------------------------------
Balance at end of year $ 10,549 $ 11,042 $ 10,081
=====================================
</TABLE>
At December 31, 1997 and 1996, the total recorded investment in impaired loans,
as defined by SFAS 114 "Accounting by Creditors for Impairment of a Loan", was
$4,779,000 and $7,241,000, respectively. In 1997 and 1996 the amount of the
recorded investment for which there is a related allowance for loan losses is
$145,000, and the amount of the recorded investment for which there is no
related allowance for loan losses is $4,634,000 and $7,096,000, respectively.
Interest income on impaired loans is recognized primarily on a cash basis.
During 1997 and 1996, the amount of interest income recognized on impaired loans
was insignificant.
Changes in capitalized mortgage servicing rights, included in other assets in
the Consolidated Statements of Condition, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,443 $ 1,113 $ 968
Originations and acquisitions 1,236 630 621
Amortizations, sales, and writedowns (543) (300) (476)
-----------------------------------------
Balance at end of year $ 2,136 $ 1,443 $ 1,113
=========================================
</TABLE>
Changes in the valuation allowance for mortgage servicing rights are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $221 $291 $ --
Additions:
Purchased mortgage servicing rights 38 151 222
Originated mortgage servicing rights 154 55 77
--------------------------------------
Total additions 192 206 299
Reductions:
Purchased mortgage servicing rights 69 158 8
Originated mortgage servicing rights 23 118 --
--------------------------------------
Total reductions 92 276 8
--------------------------------------
Balance at end of year $321 $221 $291
======================================
</TABLE>
36
<PAGE> 27
At December 31, 1997, and 1996, the fair value of capitalized mortgage servicing
rights were $2,389,000 and $1,770,000, respectively. Loans serviced for others
amounted to $518,877,000, $415,156,000, and $278,051,000 at December 31, 1997,
1996 and 1995, respectively.
NOTE H: OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1996
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Real estate acquired through foreclosure $ 742 $1,365
Real estate in judgment 732 105
-------------------
$1,474 $1,470
===================
</TABLE>
Changes in the allowance for possible losses on OREO are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $-- $ 133 $ 330
Provision for losses -- -- 150
Net charge-offs -- (133) (347)
------------------------------
Balance at end of year $-- $ -- $ 133
==============================
</TABLE>
The Company recorded writedowns of other real estate owned amounting to $75,000
during 1996. The Company did not record any writedowns of other real estate
owned in 1997 or 1995.
The Company recognized net gains on sale of OREO amounting to $132,000, $164,000
and $1,139,000 during 1997, 1996 and 1995, respectively.
NOTE I: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1997 1996
- -----------------------------------------------------------------------
(Dollars in thousands)
Cost:
<S> <C> <C>
Land $ 2,565 $ 2,634
Buildings and improvements 17,653 17,174
Furniture and equipment 18,749 16,839
------------------------
38,967 36,647
Less accumulated depreciation 22,346 20,883
------------------------
$ 16,621 $ 15,764
========================
</TABLE>
Depreciation and amortization expense was $1,987,000, $1,954,000 and $1,843,000
in 1997, 1996 and 1995, respectively.
Rental expense for leased properties and equipment was $1,150,000, $938,000 and
$643,000 in 1997, 1996 and 1995, respectively. The aggregate minimum annual
rental commitments under these leases are approximately $1,105,000 in 1998,
$955,000 in 1999, $877,000 in 2000, $787,000 in 2001, $605,000 in 2002 and
$1,266,000 thereafter.
37
<PAGE> 28
NOTE J: DEPOSITS
The carrying amounts and fair values of deposits and the nominal rate of
interest paid were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------------
Weighted Weighted
Carrying Fair Average Carrying Fair Average
Amount Value Rate Amount Value Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 56,473 $ 56,473 --% $ 46,882 $ 46,882 --%
NOW accounts 62,939 62,939 1.51 60,668 60,668 1.52
Money market accounts 92,314 92,314 4.02 89,321 89,321 4.01
Savings deposits 163,119 163,119 3.16 149,226 149,226 2.82
Certificates of deposit 667,204 673,314 5.93 617,102 622,040 5.79
Accrued interest 1,118 1,118 -- 934 934 --
---------------------------------------------------------------------------------------
$1,043,167 $1,049,277 4.74% $ 964,133 $ 969,071 4.61%
=======================================================================================
</TABLE>
Included in deposits are $144,426,000 and $107,386,000 of deposit accounts with
balances in excess of $100,000 as of December 31, 1997 and 1996, respectively.
Certificates of deposit had the following maturities at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
- ----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
1998 $531,631 5.86%
1999 77,811 6.28
2000 25,230 6.20
2001 9,698 5.93
2002 and beyond 22,834 6.05
----------------------------------------
$667,204 5.93%
========================================
</TABLE>
The average balance, interest expense and average rate on deposits were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------
Average Interest Avg. Average Interest Avg. Average Interest Avg.
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts $ 47,680 $ -- --% $ 40,349 $ -- --% $ 36,886 $ -- --%
NOW and money
market accounts 152,615 4,547 2.98 146,863 4,490 3.06 137,867 4,261 3.09
Savings deposits 154,541 4,623 2.99 153,701 4,446 2.89 139,685 3,723 2.67
Certificates of deposit 657,401 38,791 5.90 597,571 34,923 5.84 537,944 30,655 5.70
----------------------------------------------------------------------------------------------
$1,012,237 $ 47,961 4.74% $938,484 $ 43,859 4.67% $ 852,382 $ 38,639 4.53%
==============================================================================================
</TABLE>
38
<PAGE> 29
NOTE K: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, in which the Company will
repurchase identical securities, consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1997 1996
----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Collateral pledged:
Mortgage-backed securities and Treasury notes with a book value including
accrued interest of $151,761,000 and a market value of $152,766,000 in
1997, and a book value including accrued interest of $59,835,000
and a market value of $59,750,000 in 1996. $149,092 $149,092 $58,040 $58,040
=====================================================
</TABLE>
Securities sold under agreements to repurchase averaged $98,471,000 and
$40,095,000 during 1997 and 1996, respectively, and the maximum amounts
outstanding at any month-end during 1997 and 1996 were $181,055,000 and
$74,621,000, respectively.
The securities underlying the agreements were delivered to the dealers who
arranged the transactions. The dealers may have sold, loaned or otherwise
disposed of such securities to other parties in the normal course of their
operations, and have agreed to resell to the Company essentially identical
securities at the maturities of the agreements.
Agreements to repurchase as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Broker Borrowing Average Rate Maturity Date
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Bear Stearns $ 26,755 5.80% January 1998
Federal National Mortgage Association 49,955 5.75 January 1998
Merrill Lynch 36,805 5.82 January 1998
Morgan Stanley 35,577 5.88 January 1998
--------------------------
$149,092 5.80%
==========================
</TABLE>
NOTE L: FHLB ADVANCES AND OTHER BORROWED MONEY
The carrying amounts and fair values of Federal Home Loan Bank of Indianapolis
("FHLB") advances and other borrowed money consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------
1997 1996 1997 1996
-----------------------------------------------------------------------------------
Year of Weighted Weighted Carrying Fair Carrying Fair
Maturity Avg. Rate Avg. Rate Amount Value Amount Value
-------- --------- ------------------ ----- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Advances from FHLB:
Variable rate of interest:
5.47 - 6.80% 1997 --% 5.58% $ -- $ -- $206,000 $206,047
5.69 - 5.88 1998 5.76 -- 61,000 61,001 -- --
Fixed rate of interest:
5.20 - 5.42% 1997 -- 5.25 -- -- 45,000 44,977
5.47 - 5.98 1998 5.88 5.77 153,000 153,190 43,000 42,566
5.81 - 6.20 1999 5.99 5.84 179,000 179,927 43,000 42,233
5.85 - 5.97 2000 5.92 -- 70,000 70,509 -- --
4.00 2005 4.00 4.00 1,003 888 1,003 802
-----------------------------------------------------------------------------------
464,003 465,515 338,003 336,625
Other borrowed money:
Collateralized mortgage obligation 6,428 6,974 7,994 8,606
------------------------------------------
$ 470,431 $472,489 $345,997 $345,231
==========================================
</TABLE>
39
<PAGE> 30
(Note L: continued...)
The Company is required to maintain qualifying loans, investments and
mortgage-backed securities as collateral for the FHLB advances.
The collateralized mortgage obligation ("CMO") was issued through a special
purpose finance subsidiary established in 1986. The CMO is secured by
mortgage-backed securities with unpaid principal balances of $7,154,000 and
$9,160,000 at December 31, 1997 and December 31, 1996, respectively. The notes
underlying the obligations bear interest, payable quarterly, at rates varying
from 7.27% to 7.33%, with contractual maturity dates ranging from 2008 to 2010.
NOTE M: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current $4,634 $ -- $ 100
Deferred 3,109 3,228 3,959
Change in valuation allowance
for deferred tax assets -- (2,879) (5,734)
------------------------------------
$7,743 $ 349 $ (1,675)
====================================
</TABLE>
Deferred income tax expense (credit) included in stockholders' equity related to
the change in unrealized holding gains (losses) on securities available for sale
for 1997, 1996 and 1995 amounted to $141,000, $(181,000), and $850,000,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Effect of:
Change in valuation allowance
for deferred tax assets -- (30.8) (68.5)
Adjustment to net operating loss
carryforward -- -- 12.5
Other, net 0.1 (0.5) 1.9
-----------------------------------
Effective tax rate 35.1% 3.7% (19.1)%
===================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred and other tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,086 $ 3,036
Net deferral required by SFAS 91 79 229
Pension and other benefit obligations 700 695
Tax effect of net of operating loss carryforward -- 3,258
Other, net 398 381
------------------------------
Total deferred tax assets 4,263 7,599
Deferred tax liabilities:
Securities marked to market for tax purposes* (13) 289
Fixed assets 588 662
FHLB stock 1,075 1,075
Valuation adjustment on CMO residuals 1,431 1,408
Other, net 53 68
------------------------------
Total deferred tax liabilities 3,134 3,502
------------------------------
Total net deferred tax assets 1,129 4,097
Current income tax receivable due to net operating loss
carrybacks and other overpayments -- 1,905
------------------------------
Total net federal income tax assets $ 1,129 $ 6,002
==============================
</TABLE>
* The amount shown is net of the $810,000 and $669,000 tax effect of SFAS 115
unrealized holding gains at December 31, 1997 and December 31, 1996,
respectively.
40
<PAGE> 31
NOTE N: STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
OTS regulations governing the payment of dividends by savings institutions
provide that an institution may only pay dividends with regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its stockholders. However, the source of future
dividends may depend upon the payment of dividends from the Bank to the Company.
In December 1993, the Company issued 1,003,219 units in the shareholder rights
offering. Each unit consisted of three shares of common stock and one warrant.
Each warrant entitled the holder thereof to purchase one share of common stock
at an exercise price of $8.25 at any time no later than December 31, 1996.
During 1996, 1995 and 1994, 996,369, 2,553 and 390 warrants were exercised,
respectively. The warrant period ended with 3,907 warrants unexercised.
During 1996, the Company paid a one-time charge of $5.5 million pretax, ($3.6
million after tax) as the mandated contribution of D&N Bank, to replenish the
Federal Deposit Insurance Corporation's depleted Savings Association Insurance
Fund ("SAIF"). This charge is the result of federal legislation passed and
signed into law on September 30, 1996, which required all thrifts to pay a
one-time assessment to restore the SAIF fund to its statutory reserve level. The
assessment was 65.7 basis points (b.p.) of the institution's deposits as of
March 31, 1995.
Macomb had a leveraged Employee Stock Ownership Plan ("ESOP"), which was
terminated subsequent to the merger with the Company. The related ESOP debt was
paid in full in 1996.
On December 7, 1989, new capital standards were imposed on the thrift
industry as a result of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"). Regulatory standards impose the following
capital requirements: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted
assets, and a tangible capital ratio expressed as a percent of total adjusted
assets. As of December 31, 1997, the Bank exceeded all regulatory capital
standards.
In December, 1996, D&N Financial Corporation's Board of Directors authorized a
program to acquire up to 440,000 shares of D&N Financial Corporation common
stock for the Company's treasury. In 1996, 257,222 shares were acquired and
256,251 were reissued as holders of D&N Financial Corporation Warrants (issued
in 1993) presented their maturing warrants for conversion to common stock. In
1997, the authorized program was completed when an additional 182,050 shares
were acquired for general corporate purposes, including the satisfaction of its
obligation to issue shares upon the exercise of employees' and directors' stock
options. By December 31, 1997, 98,681 of these shares had been reissued upon the
exercise of stock options.
On December 10, 1997, the Company declared a $.05 per share cash dividend and a
10% stock dividend. Both were paid on January 13, 1998, to holders of record on
December 23, 1997. The liability for the cash dividend is shown in Other
Liabilities on the accompanying financial statements. All per share data have
been adjusted to include the effect of the stock dividend.
The table below summarizes as of December 31, 1997, the Bank's capital
requirements under FIRREA and its actual capital ratios at that date.
<TABLE>
<CAPTION>
Regulatory Bank Actual
Requirements Capital
-----------------------------------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Risk-based capital $86,758 8.00% $129,878 11.98%
Core capital 54,742 3.00 119,474 6.55
Tangible capital 27,371 1.50 119,474 6.55
</TABLE>
41
<PAGE> 32
(Note N: continued...)
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking agency
to implement prompt corrective actions for institutions that it regulates. The
OTS has adopted rules, based upon FDICIA's five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Under FDICIA, the OTS is required to take
supervisory action against institutions that are not deemed either "well
capitalized" or "adequately capitalized".
The rules generally provide that a savings institution is "well capitalized" if
its total risk-based capital ratio is 10% or greater, its ratio of core capital
to risk-based assets ("tier 1 risk-based capital") is 6% or greater, its core
capital ("leverage") ratio is 5% or greater, and the institution is not subject
to a capital directive. The Bank's tier 1 risk-based capital ratio at December
31, 1997 was 11.02%. At December 31, 1997, the Bank was considered well
capitalized.
NOTE O: EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings and investment plan in which all
employees may participate after completing a minimum of 1,000 hours in an
eligibility period. The plan allows participants to make contributions by salary
deductions equal to 15% or less of their salary pursuant to Section 401(k) of
the Internal Revenue Code. Employee contributions are matched by the Company at
the rate of 100 cents per dollar, up to 6% of the employee's salary. Employees
vest immediately in their own contributions and over a five-year period in the
Company's contributions. Employee contributions may be invested in a variety of
instruments, including the Company's common stock and the preferred stock of D&N
Capital Corporation. The Company's matching contribution is invested at the
direction of the participant. The Company's contributions to the plan were
$653,000, $621,000 and $273,000 in 1997, 1996, and 1995, respectively.
The Company terminated its noncontributory defined benefit retirement plan
during 1996, with all assets being distributed to participants. No gain or loss
was recorded on this transaction.
The following table sets forth the market value of assets and distribution
thereof on December 16, 1996 the date of distribution.
<TABLE>
<CAPTION>
Before Effect of After
Termination Termination Termination
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets and obligations:
Accumulated benefit obligation $ (8,419) $ 8,419 $ --
Plan assets at fair value 11,238 (11,238) --
---------------------------------------------------
Excess assets $ 2,819 $ (2,819) $ --
===================================================
</TABLE>
Benefits under the plan were based on years of service and the employee's
compensation during the last five years of employment.
Pension expense included the following components:
<TABLE>
<CAPTION>
1997* 1996* 1995*
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ -- $ -- $ 620
Interest cost on projected benefit obligation -- -- 1,071
Return on plan assets -- -- (2,030)
Net amortization -- -- 512
--------------------------------------------------
$ -- $ -- $ 173
==================================================
</TABLE>
*Benefits were frozen as of September 30, 1995; therefore, no cost or
amortization was subsequently recorded.
42
<PAGE> 33
NOTE P: POSTRETIREMENT BENEFITS
The Company has a contributory unfunded benefit plan which provides
postretirement medical benefits to certain employees who have retired prior to
September 30, 1995. The Company is recognizing its accumulated postretirement
benefit obligation over a prospective 20-year period.
The following table sets forth the plan's status and amounts recognized in the
Company's Consolidated Statement of Condition.
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
- -------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation $ 1,187 $ 1,358
Unrecognized net loss (141) (233)
Unrecognized transition obligation (780) (829)
-----------------------------
Accrued postretirement benefit cost $ 266 $ 296
=============================
</TABLE>
Postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 84 97 99
Amortization of transition obligation 48 48 49
---------------------------------
$132 $ 145 $ 148
=================================
</TABLE>
A weighted average discount rate of 7.25% in 1997 and 7.00% in 1996 was used in
determining the accumulated postretirement benefit obligation. The 1997 health
care trend rate was projected to be 9.0% for participants under the age of 65,
and this rate is assumed to trend downward until it reaches 5.5% and remains at
that level thereafter. This trend rate assumption does not have a significant
effect on the plan; therefore, a one percent change in the trend rate is not
material in the determination of the accumulated postretirement benefit
obligation or the ongoing expense.
43
<PAGE> 34
NOTE Q: STOCK OPTION PLAN
The Company has stock option plans in which 1,487,000 shares of common stock
have been reserved for issuance as of December 31, 1997. Under the plans, the
exercise price of any option will not be less than the fair market value of the
common stock on the date of grant. The dates on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors and have generally vested over a two year period from the date of
grant. The term on any option may not exceed ten years from the date of grant.
The Company has elected to continue to measure compensation cost using the
intrinsic value method, in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, since
all options are granted at a fixed price not less than the fair market value of
the Company's common stock on the date of grant, no compensation cost has been
recognized for its stock option plans. Had stock option costs of these plans
been determined based on the fair value at the 1997, 1996 and 1995 grant dates
for awards under those plans consistent with the methodology of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation", the pro forma effects on the Company's net income and earnings
per share would be as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C>
Net income (as reported) $ 14,325 $ 8,995 $10,417
Stock option compensation cost (761) (396) (74)
-----------------------------------------
Pro forma net income $ 13,564 $ 8,599 $10,343
=========================================
Basic earnings per share (as reported) $ 1.58 $ 1.08 $ 1.27
Stock option compensation cost (0.08) (0.05) (0.00)
-----------------------------------------
Pro forma basic earnings per share $ 1.50 $ 1.03 $ 1.27
=========================================
Diluted earnings per share (as reported) $ 1.53 $ 1.01 $ 1.24
Stock option compensation cost (0.08) (0.04) (0.01)
-----------------------------------------
Pro forma diluted earnings per share $ 1.45 $ 0.97 $ 1.23
=========================================
</TABLE>
The fair value of each option grant in 1997, 1996 and 1995 was estimated
using the Black-Scholes option pricing model with the following assumptions
used:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Estimated weighted average fair value
per share of options granted $ 7.63 $ 4.61 $ 2.63
Assumptions:
Annualized dividend yield 0.8% -- --
Common-stock price volatility 32.5% 25.1% 25.1%
Weighted average risk-free rate of return 6.5% 5.9% 7.4%
Weighted average expected option term (in years) 5 5 4
</TABLE>
44
<PAGE> 35
The following table sets forth changes in options outstanding.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Amount Avg. Price Amount Avg. Price Amount Avg. Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of year 820,943 $ 9.31 653,956 $ 7.56 702,463 $7.43
Granted 261,087 19.55 315,929 12.26 82,368 7.28
Forfeited (34,003) 12.27 (21,836) 9.45 (4,432) 7.15
Canceled -- -- (6,353) 14.60 (68,365) 7.73
Exercised (98,681) 9.05 (120,753) 7.22 (58,078) 5.51
----------------------------------------------------------------------------------
Outstanding at end of year 949,346 12.07 820,943 9.31 653,956 7.56
----------------------------------------------------------------------------------
Exercisable at end of year 738,092 $ 11.25 590,858 $ 8.40 563,268 $7.64
----------------------------------------------------------------------------------
</TABLE>
The following table sets forth details of options outstanding at December 31,
1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.45 - 7.62 366,737 5.2 Years $ 6.99 357,937 $ 7.03
10.17 - 12.05 262,122 7.0 Years 11.38 193,082 11.26
12.95 - 14.04 67,650 8.1 Years 13.92 52,250 13.89
16.36 - 24.38 252,837 9.5 Years 19.65 134,824 21.42
- ----------------------------------------------------------------------------------------------------------
$ 5.45 - 24.38 949,346 7.0 Years $ 11.82 738,093 $ 11.25
==========================================================================================================
</TABLE>
45
<PAGE> 36
NOTE R: LITIGATION
The Company is a defendant in a number of matters of litigation, substantially
all of which have arisen in the ordinary course of business. It is the opinion
of management that the resulting liabilities, if any, from these actions will
not materially affect the Consolidated Financial Statements.
D&N Bank is a plaintiff, like approximately 120 other institutions, in a
currently pending claim in the United States Court of Federal Claims seeking
substantial damages as a result of the 1989 Financial Institutions Reform,
Recovery and Enforcement Act's mandatory phase-out of the regulatory capital
treatment of supervisory goodwill. The ultimate outcome of these matters cannot
be ascertained at this time.
NOTE S: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk (in
the normal course of its business) to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments may include commitments to originate or purchase loans,
standby letters of credit, recourse arrangements on sold assets, and forward
commitments. The instruments involve, to varying degrees, elements of credit and
interest rate risk in addition to the amounts recognized in the Consolidated
Statements of Condition. The contract amounts of those instruments reflect the
extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as for on-balance sheet instruments. For
forward commitments, the contract amounts do not represent exposure to credit
loss. The Company controls the credit risk of those instruments through credit
approvals, limits and monitoring procedures.
The following table sets forth financial instruments with off-balance sheet risk
and their contract amounts and fair values.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
1997 1996
---------------------------------------------------
Contract Fair Contract Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate and purchase loans $78,710 $(787) $69,383 $(694)
Unused lines of credit 93,709 (937) 78,303 (783)
Standby letters of credit 3,907 (39) 367 (4)
Loans sold with recourse 2,155 (108) 3,004 (150)
Financial instruments whose contract amounts
exceed the amount of credit risk:
Forward commitments to sell loans 6,400 (64) 4,000 (40)
</TABLE>
46
<PAGE> 37
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn on, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's evaluation of the borrower's creditworthiness.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Additionally, the Company has
retained credit risk on certain residential and commercial mortgage loans sold
with recourse with outstanding balances at December 31, 1997 of $1,310,000 and
$845,000, respectively. These balances as of December 31, 1996 were $1,430,000
and $1,574,000, respectively. The maximum amount of loss to which the Company is
subject, under the recourse provisions, is $1,395,000 at December 31, 1997.
Management does not believe the recourse provisions subject the Company to any
material risk of loss. This credit risk is considered to be no more onerous than
that existing on similar loans in the Company's loan portfolio.
Forward commitments to sell loans are contracts the Company negotiates for the
purpose of reducing the market risk associated with rate lock agreements with
customers for new loan applications that have not yet been closed. In order to
fulfill a forward commitment, the Company typically exchanges through FNMA,
FHLMC or GNMA, its current production of loans for mortgage-backed securities
which are then delivered to a national securities firm at a future date at
prices or yields specified by the contracts. Risks may arise from the possible
inability of the Company to originate loans to fulfill the contracts, in which
case the Company would normally purchase securities in the open market to
deliver against the contracts.
NOTE T: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and
fair values of financial instruments at the dates indicated. SFAS 107,
"Disclosures about Fair Value of Financial Instruments", defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 20,497 $ 20,497 $ 12,789 $ 12,789
Investment securities (Note E) 102,636 102,706 119,777 119,821
Mortgage-backed securities (Note F) 358,296 359,771 251,256 249,870
Loans receivable (Note G) 1,300,959 1,340,935 1,055,876 1,078,795
Deposits (Note J) (1,043,167) (1,049,277) (964,133) (969,071)
Securities sold under agreement
to repurchase (Note K) (149,092) (149,092) (58,040) (58,040)
Debt (Note L) (470,431) (472,489) (345,997) (345,231)
Commitments to originate and
purchase loans (Note S) -- (787) -- (694)
Unused lines of credit (Note S) -- (937) -- (783)
Standby letters of credit (Note S) -- (39) -- (4)
Loans sold with recourse (Note S) -- (108) -- (150)
Forward commitments to sell loans (Note S) -- (64) -- (40)
</TABLE>
47
<PAGE> 38
(Note T: continued...)
ESTIMATION OF FAIR VALUES:
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the Statement of Condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statement of Condition for cash and cash
equivalents approximate those assets' fair value. Fair values for investment
securities and mortgage-backed securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. Fair values for the
Company's loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest approximates
its fair value.
The fair values of checking and NOW accounts, money market accounts and savings
deposits are the amounts payable on demand at the reporting date. The fair value
for fixed-maturity time deposits is estimated using a discounted cash flow
analyses using the rates currently offered for deposits with similar remaining
maturities. The fair values of securities sold under agreement to repurchase and
the Company's debt are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for debt with similar terms
and remaining maturities. Fair values for the Company's off-balance sheet
instruments (guarantees and credit commitments) are based on current settlement
or termination values and on fees currently charged to enter into similar
agreements, given the remaining terms of the agreements and the counterparties'
credit standing.
NOTE U: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Income
(Loss)
Before
Gain on Income Income
Net Provision Securities Tax Tax Net Stock Price
Interest Interest Interest For Loan & Other Expense Expense Income Earnings Per Share(2) Range(2)
Income Expense Income Losses Assets (Credit) (Credit) (Loss) Basic Diluted High Low
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share and stock price)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter
1997 $ 28,335 $17,000 $11,335 $ 300 $ -- $ 5,075 $1,781 $ 3,294 $0.36 $0.35 16 15/16 14 57/64
1996 24,000 14,318 9,682 300 -- 2,689 (799) 3,488 0.42 0.40 12 1/2 10 29/32
2nd Quarter
1997 30,293 18,484 11,809 300 539 5,505 1,926 3,579 0.39 0.38 17 1/2 15 33/64
1996 25,426 14,886 10,540 300 188 2,824 (537) 3,361 0.40 0.38 12 47/64 10 29/32
3rd Quarter
1997 32,142 19,626 12,516 300 -- 6,262 2,003 3,722 0.41 0.40 19 49/64 16 13/16
1996 27,105 15,863 11,242 300 -- (1,127)(1) (42) (1,085)(1) (0.13) (0.12) 12 61/64 11 9/64
4th Quarter
1997 34,923 21,644 13,279 450 -- 6,444 2,033 3,730 0.41 0.40 26 3/4 19 13/64
1996 27,778 16,479 11,299 200 -- 4,958 1,727 3,231 0.38 0.36 16 9/64 12 1/2
Year
1997 125,693 76,754 48,939 1,350 539 23,286 7,743 14,325 1.58 1.53 26 3/4 14 57/64
1996 104,309 61,546 42,763 1,100 188 9,344 349 8,995 1.08 1.01 16 9/64 10 29/32
</TABLE>
(1)Included in this loss is the one-time charge of $5.5 million to replenish the
Federal Deposit Insurance Corporation's Savings Association Insurance Fund
(see Note N).
(2)All per share amounts have been adjusted to include the effect of the 10%
stock dividend in 1997.
48
<PAGE> 39
NOTE V: D&N FINANCIAL CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2 $ 2
Amounts receivable from subsidiary 3,523 6,104
Investments in subsidiary 94,994 80,014
Other assets -- 65
--------------------------
$ 98,519 $ 86,185
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 414 $ --
Other liabilities 23 64
Stockholders' equity 98,082 86,121
--------------------------
$ 98,519 $ 86,185
==========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income from subsidiary $ 228 $ 64 $ 40
Equity in undistributed net income of subsidiary 14,388 9,378 10,618
Noninterest expense:
Compensation and benefits 10 13 9
Other 281 434 232
----------------------------------------
Total noninterest expense 291 447 241
----------------------------------------
Income before income tax expense 14,325 8,995 10,417
Federal income tax expense -- -- --
----------------------------------------
Net income $ 14,325 $ 8,995 $ 10,417
========================================
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 14,325 $ 8,995 $ 10,417
Items not affecting cash:
Equity in undistributed net income of subsidiary (14,388) (9,378) (10,618)
Other 438 115 37
--------------------------------------
Net cash provided (used) by operating activities 375 (268) (164)
Investing activities
Change in intercompany receivable 2,581 (5,225) (102)
Financing activities
Proceeds from exercise of stock options 865 9,055 346
Purchases of treasury stock (2,995) (3,499) (44)
Common stock cash dividends (826) -- --
Payment of ESOP debt -- (63) (36)
--------------------------------------
Net cash provided (used) by financing activities (2,956) 5,493 266
Net change in cash and cash equivalents -- -- --
Cash and cash equivalents at beginning of year 2 2 2
--------------------------------------
Cash and cash equivalents at end of year $ 2 $ 2 $ 2
======================================
</TABLE>
49
<PAGE> 40
STOCKHOLDER INFORMATION
D&N FINANCIAL CORPORATION
400 Quincy Street
Hancock, Michigan 49930
(906) 482-2700
363 W. Big Beaver, Ste. 100
Troy, Michigan 48084
(248) 528-0704
COMMON STOCK
D&N's common stock is listed on The Nasdaq Stock Market under the symbol DNFC.
The stock quotations appear in major daily newspapers under the listing
D&N Fncl. At December 31, 1997, there were approximately 7,100 holders of
D&N common stock.
SHAREHOLDER ASSISTANCE
Shareholders with questions concerning their records, change of name, address
or ownership of stock and lost or stolen certificates may contact the transfer
agent:
Illinois Stock Transfer Company
223 West Jackson Blvd., Suite 1210
Chicago, Illinois 60606
(800) 757-5755
DIRECT INVESTMENT PLAN
Registered holders of D&N Financial Corporation common stock are eligible to
participate in the Company's Direct Investment Plan. The Plan provides a
convenient method for making direct cash investments for the purchase of
additional shares of D&N stock without fees or commissions. Purchases are made
on or about the first working day of each month on the open market. The minimum
investment is $25; the maximum is $12,000 annually. Cash investments must be
received by the transfer agent no less than five working days prior to month
end to be included in the monthly purchase.
FORM 10-K
The 1997 Annual Report and Form 10-K are available to shareholders at no
cost upon written request to the Company at the address above.
INVESTOR RELATIONS CONTACT
Analysts, investment professionals, shareholders and others seeking information
about the Company should contact Mary Jo Kristapovich, Director of
Investor Relations. She may be reached at the address above, by phone at (906)
487-6225 or by e-mail at [email protected].
ANNUAL MEETING
The 1998 Annual Meeting of Stockholders will be held on April 30, 1998 at 2
p.m. Eastern Daylight Time at the Franklin Square Inn in Houghton, Michigan.
OTHER COMPANY INFORMATION
To find out more about D&N--its history, management, products and
services--visit our web site at http://www.dn.portup.com.
INDEPENDENT AUDITORS
Coopers & Lybrand, L.L.P., Detroit, Michigan
52
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
- -------------------------- -------------------------- ---------- ---------------
<S> <C> <C> <C>
D&N Financial Corporation D&N Bank 100% Federal
D&N Bank D&N Enterprises, Inc. 100% Michigan
D&N Bank D&N Holdings, Inc. 100% Michigan
D&N Bank D&N Funding I Corp. 100% Delaware
D&N Bank D&N Mortgage Corporation 100% Michigan
D&N Bank D&N Capital Corporation 100% Delaware
D&N Holdings, Inc. Quincy Insurance Co. 100% Michigan
</TABLE>
<PAGE> 1
EXHIBIT 23
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
D&N Financial Corporation
400 Quincy Street
Hancock, MI 49930
Gentlemen:
We consent to the incorporation by reference in the Registration Statement of
D&N Financial Corporation on Form S-8 (Registration No. 33-94076) of our report
dated January 22, 1998 on our audits of the financial statements of D&N
Financial Corporation and Subsidiary as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, which report is
incorporated by reference in this Annual Report on Form 10-K of D&N Financial
Corporation for the year ended December 31, 1997.
COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Detroit, Michigan
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,239
<INT-BEARING-DEPOSITS> 3,958
<FED-FUNDS-SOLD> 300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 206,358
<INVESTMENTS-CARRYING> 254,574
<INVESTMENTS-MARKET> 256,119
<LOANS> 1,311,508
<ALLOWANCE> 10,549
<TOTAL-ASSETS> 1,815,315
<DEPOSITS> 1,043,167
<SHORT-TERM> 149,092
<LIABILITIES-OTHER> 25,824
<LONG-TERM> 470,431
0
28,719
<COMMON> 77,117
<OTHER-SE> 20,965
<TOTAL-LIABILITIES-AND-EQUITY> 1,815,315
<INTEREST-LOAN> 98,560
<INTEREST-INVEST> 27,133
<INTEREST-OTHER> 0
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