<PAGE>
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, 1998
[ ] 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 9, 1999, there were issued and outstanding 9,392,073 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 9,
1999, was $200,791,443. (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, 1998.
PART III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999.
==========================================================================
<PAGE>
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 $2.02 billion at December 31,
1998, 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 41 full-service community banking offices, including its main office in
Hancock, Michigan, seven savings agency offices which provide depository
services and five 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."
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<PAGE>
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
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 disclaims 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 $297.0 million or 39% of the Bank's total loans, excluding
loans held for sale, secured by real estate as of December 31, 1998, 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
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- -------------------------------------------------------------------------------------
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 $ 650,502 48.94% $ 703,580 54.08% $ 600,923 56.91% $ 597,892 62.78% $ 526,572 64.07%
Construction 15,998 1.20 13,864 1.07 13,201 1.25 19,982 2.10 2,159 0.26
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income producing property
Permanent 94,552 7.12 81,830 6.29 85,619 8.11 89,176 9.36 115,162 14.01
Construction 39,324 2.96 42,582 3.27 26,472 2.51 21,074 2.21 17,741 2.16
--------------------------------------------------------------------------------------------------------
Total real estate loans 800,376 60.22 841,856 64.71 726.215 68.78 728,124 76.45 661,634 80.50
CONSUMER LOANS
Automobile loans 243,393 18.31 198,505 15.26 141,056 13.36 81,885 8.60 46,711 5.68
Home equity 94,057 7.08 99,122 7.62 82,305 7.79 60,003 6.30 39,939 4.86
Home improvement 41,237 3.10 47,845 3.68 46,545 4.41 41,542 4.36 39,279 4.78
Mobile home loans 145 0.01 213 0.02 289 0.03 417 0.04 619 0.08
Unsecured 11,514 0.87 12,395 0.95 15,172 1.44 19,637 2.06 22,197 2.70
Other 113,723 8.56 91,471 7.03 53,901 5.10 35,975 3.78 22,194 2.70
--------------------------------------------------------------------------------------------------------
Total consumer loans 504,069 37.93 449,551 34.56 339,268 32.13 239,459 25.14 170,939 20.80
COMMERCIAL LOANS
Revolving business loans 23,026 1.73 11,363 0.87 2,363 0.22 1,119 0.12 -- --
Term business loans 28,293 2.13 27,072 2.08 9,982 0.95 6,650 0.70 4,748 0.58
--------------------------------------------------------------------------------------------------------
Total commercial loans 51,319 3.86 38,435 2.95 12,345 1.17 7,769 0.82 4,748 0.58
--------------------------------------------------------------------------------------------------------
Loans receivable, gross 1,355,764 102.01 1,329,842 102.22 1,077,828 102.08 975,352 102.41 837,321 101.88
Less:
Discounts (premiums)
on loans purchased (2,312) (0.17) (2,356) (0.18) (2,035) (0.19) (1,709) (0.18) 999 0.12
Allowance for losses 10,995 0.83 10,549 0.81 11,042 1.05 10,081 1.06 8,349 1.02
Undisbursed portion
of loan proceeds 17,679 1.33 20,315 1.56 12,085 1.14 13,198 1.38 4,213 0.51
Deferred income 254 0.02 375 0.03 860 0.08 1,423 0.15 1,885 0.23
--------------------------------------------------------------------------------------------------------
26,616 2.01 28,883 2.22 21,952 2.08 22,993 2.41 15,446 1.88
--------------------------------------------------------------------------------------------------------
Loans receivable, net $1,329,148 100.00% $1,300,959 100.00% $1,055,876 100.00% $952,359 100.00% $821,875 100.00%
========================================================================================================
</TABLE>
LOAN MATURITIES. The following schedule illustrates the maturity
structure of the Company's loan portfolio at December 31, 1998. 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
-------------------------- ----------------------- ---------------------------
Amounts
Due in
Years Weighted Weighted Weighted
Ending Average Average Average
December 31, Amount Rate Amount Rate Amount Rate
------------------------------------------- -------- ---------- -------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1999 $ 24,754 8.56% $ 13,496 8.75% $ 33,658 8.34%
2000 9,329 8.73 20,573 8.08 10,959 9.15
2001 6,175 8.73 22,920 8.16 2,265 8.73
2002-2003 8,286 9.06 48,381 8.51 8,296 8.51
2004-2008 1,661 8.45 60,924 7.52 -- --
2009-2013 741 8.89 89,750 7.31 60 8.54
Thereafter 76 8.39 485,941 7.49 -- --
---------- ---------- ----------
Total $ 51,022 8.69% $ 741,985 7.60% $ 55,238 8.54%
========== ========== ==========
<CAPTION>
Consumer Loans Total
------------------------ -----------------------
Amounts
Due in
Years Weighted Weighted
Ending Average Average
December 31, Amount Rate Amount Rate
------------- --------- -------- ---------- --------
<S> <C> <C> <C> <C>
1999 $104,539 8.97% $ 176,447 8.77%
2000 102,098 8.93 142,959 8.81
2001 100,289 8.85 131,649 8.72
2002-2003 137,611 8.78 202,574 8.72
2004-2008 44,985 8.83 107,570 8.08
2009-2013 10,841 8.24 101,392 7.42
Thereafter 107 7.94 486,124 7.49
-------- ----------
Total $500,470 8.86% $1,348,715 8.14%
========
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
Plus:
Accrued interest receivable,
net of reserve for uncollected
interest 7,023
Deferred income and premiums 2,084
Less:
Loans in process 17,679
Loss and valuation allowances 10,995
----------
$1,329,148
==========
</TABLE>
The total amount of loans, excluding loans held for sale, due after
December 31, 1999 which have fixed interest rates is $459.7 million, while
the amount of loans due after such date having floating or adjustable rates
is $703.8 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 origination in their
market areas. At December 31, 1998, 81% 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, 1998. See "- Classified Assets,
Loan Delinquencies and Defaults" for a discussion of other real estate
owned.
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1998
--------------------------
(In thousands)
<S> <C>
MICHIGAN
One- to four-family residential.... $523,810
Apartments........................ 8,183
Mini warehouse, storage........... 1,518
Mobile home parks................. 4,262
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1998
-----------------
(In thousands)
<S> <C>
Motels/hotels...................... 11,005
Shopping centers and retail........ 23,707
Office buildings.................. 21,440
Nursing Homes...................... 9,900
Industrial......................... 6,734
Condominiums and land development.. 26,243
Other.............................. 11,577
--------
648,379
CALIFORNIA
One- to four-family residential.... 19,936
Apartments......................... 3,897
Shopping centers & retail.......... 1,823
Office buildings................... 461
Nursing homes...................... 80
--------
26,197
MASSACHUSETTS
One- to four-family residential.... 13,185
--------
13,185
NEW YORK
One- to four-family residential.... 2,775
--------
2,775
NORTH CAROLINA
One- to four-family residential.... 5,195
--------
5,195
TEXAS
One- to four-family residential.... 8,258
--------
8,258
PENNSYLVANIA
One- to four-family residential.... 3,662
Apartments 118
Industrial......................... 96
Other.............................. 27
--------
3,903
FLORIDA
One-to four-family residential...... 3,389
--------
3,389
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Outstanding Balance
at
December 31, 1998
-----------------
(In thousands)
<S> <C>
OTHER (31 STATES)
One- to four-family residential.................. 79,920
Apartments....................................... 40
Motels/hotels.................................... 265
Shopping centers and retail...................... 2,016
Office buildings................................. 31
Nursing homes.................................... 104
Other............................................ 34
--------
82,410
Rated conventional residential
participation certificates........................ 3,532
--------
Total.............................................. 797,223
Plus:
Loan control and clearing........................ (565)
Accrued interest receivable, net of reserve for
uncollected interest ........................ 3,719
Less:
Deferred income, discounts and premiums........ (1,107)
Loans in process............................... 17,679
Loss and valuation allowances.................. 6,442
--------
Total $777,363
========
</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 1998, total loan originations increased
$174.6 million, or 28% as a result of a significant increase in consumer lending
activity. Consumer loan originations alone increased $20.4 million, or 6%.
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, 1998, the Bank had $8.8 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
-7-
<PAGE>
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 .30%
at December 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Noninterest Income." At December 31, 1998,
D&N serviced for others approximately $576 million in loans and loan
participations. See also Note A of Notes to Consolidated Financial Statements
"Summary of Significant Accounting Policies - Capitalized Mortgage Servicing
Rights".
The Bank's investment in mortgage servicing rights ("MSRs") totaled $4.8
million at December 31, 1998. The following table details the value of the
Bank's investment in MSRs.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1998 1997 1996
--------- ------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,136 $ 1,443 $ 1,113
Additions:
Capitalized servicing 4,552 1,236 630
Reductions:
Scheduled amortization 605 321 267
Additional amortization due to
changes in prepayment assumptions 1,018 222 33
Impairment -- -- --
Sales 243 -- --
-------- ------- --------
Total 1,866 543 300
-------- ------- --------
Balance at end of year $ 4,822 $ 2,136 $ 1,443
======== ======= ========
Fair market value at end of year $ 4,897 $ 2,389 $ 1,770
======== ======= ========
</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
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ORIGINATIONS
Real estate:
One- to four-family residential................................. $ 315,760 $215,452 $194,357 $182,800 $ 81,279
Income producing property....................................... 57,365 45,594 33,816 17,614 17,350
Non-real estate:
Consumer........................................................... 344,061 323,676 271,622 195,109 132,836
Commercial...................................................... 88,866 46,708 11,437 3,739 4,748
-----------------------------------------------------------
Total originations............................................ 806,052 631,430 511,232 399,262 236,213
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PURCHASES
Real estate:
One- to four-family residential 193,779 234,886 148,405 103,524 188,481
Income producing property....................................... -- -- -- -- 1,852
Mortgage-backed securities...................................... 337,029 107,400 58,892 -- 68,391
-----------------------------------------------------------
Total purchases............................................... 530,808 342,286 207,297 103,524 258,724
-----------------------------------------------------------
Total additions............................................... 1,336,860 973,716 718,529 502,786 494,937
SALES
Real estate:
One- to four-family residential................................. 226,506 85,778 68,024 107,080 45,311
Mortgage-backed securities(1)................................... 109,338 23,555 -- 4,210 50,658
Non-real estate:
Consumer loans.................................................. 1,070 2,383 2,810 2,976 2,894
-----------------------------------------------------------
Total sales................................................... 336,914 111,716 70,834 114,266 98,863
Principal repayments.............................................. 853,519 504,972 426,291 288,485 239,816
-----------------------------------------------------------
Total reductions.............................................. 1,190,433 616,688 497,125 402,751 338,679
Transfers to other real estate owned.............................. (284) (961) (3,373) (1,936) (2,861)
Increase (decrease) in other items, net........................... 17,962 (3,944) 9,033 8,801 1,079
-----------------------------------------------------------
Net increase (decrease)........................................ $ 164,105 $352,123 $227,064 $106,900 $154,476
===========================================================
</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, 1998 amounted to
$56.0 million for one- to four-family residential real estate loans and $26.1
million for commercial real estate loans. See "Regulation - Federal Regulation."
RESIDENTIAL MORTGAGE LOANS. At December 31, 1998 the Bank had $666.5
million in residential mortgage loans representing 50.1% of the Bank's total
loan portfolio. This amount represents a 7.1% decrease in the dollar value of
the residential loan portfolio. However, it also represents a 5% 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, correspondent lending, and
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<PAGE>
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.
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 typically 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 Donnelly). 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, 1998, residential ARMs
totaled $224 million, or 36% of the Bank's total residential one- to four-family
mortgage loan portfolio. Of this total ARM
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<PAGE>
portfolio, $123 million or 55% were purchased from others. Due to consumer
demand, residential loans originated during 1998 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 1998, the Company purchased $338.8 million of
fixed rate Collateralized Mortgage Obligations ("CMO") with expected average
lives of 1.2 to 4.9 years. CMOs are securities derived 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 1998 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") as part of its asset/liability management strategy. At December 31,
1998, D&N had IOs with a book value and market value of $620,000, 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
--------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED 1998 1997 1996 1995 1994
----------------- ------------------- ------------------ ----------------- ------------------
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......... $492,085 99.57% $356,079 99.38% $249,186 99.18% $125,264 98.09% $147,988 97.81%
Interest only
certificates......... 635 0.13 1,456 0.41 2,070 0.82 2,456 1.92 3,886 2.57
------------------------------------------------------------------------------------------------------
Mortgage-backed
securities, gross.. 492,720 99.70 357,535 99.79 251,256 100.00 127,720 100.01 151,874 100.38
Net (discounts)
premiums............ 1,492 0.30 761 0.21 -- -- (11) (0.01) (581) (0.38)
------------------------------------------------------------------------------------------------------
Mortgage-backed
securities, net.... $494,212 100.00% $358,296 100.00% $251,256 100.00% $127,709 100.00% $151,293 100.00%
======================================================================================================
</TABLE>
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<PAGE>
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, 1998, $9.6 million of D&N's portfolio of income
producing property loans were purchased loans.
The following table shows the composition of the Bank's income producing
property and land development loans at December 31, 1998. 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 $ 12,267 10.61% $ 145
Other income producing property:
Motels/hotels 11,297 9.78 3,396
Offices 18,398 15.92 --
Mobile home parks 4,272 3.70 75
Shopping centers 24,077 20.84 436
Industrial 6,846 5.92 --
Nursing homes 9,520 8.24 --
Condominium development 6,961 6.02 --
Other 592 0.51 2
-------- -------- -------
Total 94,230 81.54 4,054
Land development loans and other 39,646 34.31 880
-------- -------- -------
Total 133,876 115.85 $ 4,934
=======
Allowance for losses (6,099) (5.28)
Loans in process, deferred income and
other miscellaneous credits (12,212) (10.57)
-------- -------
Total $115,565 100.00%
======== =======
</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
-12-
<PAGE>
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 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, 1998, consumer
loans totaled $504.1 million or 38% of the Bank's loan portfolio, an increase of
$54.5 million or 12% from December 31, 1997.
During 1998, net consumer loan charge-offs were $1,776,000 compared to
$1,276,000 in 1997, $926,000 in 1996, $642,000 in 1995 and $411,000 in 1994.
Indirect loan originations totaled $205.9 million in 1998. Indirect
receivables amounted to $307.5 million at December 31, 1998 and make up 61% 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
-13-
<PAGE>
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, 1998, the Bank's loans to one borrower limit was
approximately $21.3 million. See "Regulation - Federal Regulation". At December
31, 1998, 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
-14-
<PAGE>
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, 1998. 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 2 $27 83 $2,944 2 $ 74 740 $6,012
60 - 89 days - --- 24 950 -- -- 248 1,730
90 days and over 2 39 44 1,430 8 5,020 219 1,378
-----------------------------------------------------------
Total delinquent loans 4 $66 151 $5,324 10 $5,094 1,207 $9,120
===========================================================
</TABLE>
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, 1998, $11.9 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 $2.4 million of classified assets and
apartments account for $477,000. The balance of classified assets consists of
loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans.
-15-
<PAGE>
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, including other real estate owned, increased to $9.2
million at December 31, 1998 compared to $5.3 million at December 31, 1997. The
ratio of nonperforming assets to total assets was 0.46% at December 31, 1998
compared to 0.29% at December 31, 1997. Allowances for losses represented 119%
of nonperforming assets at December 31, 1998.
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 1998, the Bank would have recorded interest income of $668,000 if
nonaccrual and restructured loans had performed in accordance with their
original terms. The Bank recognized zero interest income on these loans in 1998.
The following table sets forth the amounts and categories of risk elements
in the Bank's loan portfolio:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997 1996 1995 1994
-------- --------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans $ 7,867 $ 3,162 $ 6,429 $ 8,133 $17,949
Accruing loans delinquent
more than 90 days -- 274 -- 24 5
Restructured loans -- -- -- -- --
------- ------- ------- ------- -------
Total nonperforming loans 7,867 3,436 6,429 8,157 17,954
Other real estate owned (OREO)
and other repossessed assets 1,372 1,864 1,662 1,544 6,566
------- ------- ------- ------- -------
Total nonperforming assets $ 9,239 $ 5,300 $ 8,091 $ 9,701 $24,520
======= ======= ======= ======= =======
Nonperforming loans as a
percentage of total loans 0.59% 0.26% 0.60% 0.85% 2.16%
Nonperforming assets as a
percentage of total assets 0.46% 0.29% 0.55% 0.79% 2.17%
Allowance for loan losses as a
percentage of nonperforming loans 139.76% 307.01% 171.75% 123.59% 46.50%
Allowances for loan and OREO losses
as a percentage of
nonperforming assets 119.01% 199.04% 136.47% 105.29% 35.40%
</TABLE>
-16-
<PAGE>
OTHER REAL ESTATE OWNED
Other real estate owned, net of reserves, totaled $857,000 at December 31,
1998, versus $1.5 million at December 31, 1997. Other real estate owned
consisted of single family homes, and multi-family dwelling units. 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 Michigan. This asset had a carrying value of approximately $456,000
at December 31, 1998.
OTHER LOANS OF CONCERN
In addition to nonperforming assets, the Bank has other loans of concern
aggregating $16.7 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the Company's loan portfolio that
have been incurred as of the balance sheet date. The allowance for loan losses
is maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on
the application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends , economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all non-
accrual and restructured loans (with the exception of residential mortgage and
consumer installment loans) are impaired. An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed on non-
accrual status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan. All impaired loans were evaluated using
the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial
prospects of borrowers may result in abrupt changes to the estimates, appraisals
or evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs increased $218,000 to $2.4 million in 1998, compared to
$2.2 million in 1997 and $1.5 million in 1996. The ratio of net loan charge-
offs to average loans, including loans held for sale, was 0.15% for 1998 and
1997, compared to 0.01% for 1996. Commercial loan net charge-offs as a
percentage of average commercial loans was 0.03% for 1998, compared to 0% for
1997 and 1996. Residential real estate mortgage loan net charge-offs as a
percentage of average residential mortgage loans, including loans held for sale,
was 0.03% for 1998, 0.04% for 1997 and 0.05% for 1996. Mortgages on income
producing property net charge-offs as a percentage of average mortgages on
income producing property was 0.03% for 1998, compared to 0.24% for 1997 and,
due to recoveries on properties previously written down, was (1.00)% for 1996.
Consumer loan net charge-offs as a percentage of average consumer loans was
0.37% for 1998 and 1997 compared to 0.33% for 1996.
Allowances for losses on the loan portfolio totaled $11.0 million at December
31, 1998. Losses of $2.4 million were charged off and $347,000 was recovered, as
new provisions for loan losses of $2.5 million were recorded during the year. At
year-end, the allowance for loan losses represented .82% 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
-------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period......................... $10,549 $11,042 $10,081 $ 8,349 $11,570
Charge-offs:
Residential mortgages................................ 226 290 314 169 110
Mortgages on income-producing property............... 38 277 -- 1,019 3,109
Commercial loans..................................... 14 -- -- -- --
Consumer loans....................................... 2,123 1,616 1,216 999 773
-------------------------------------------------
2,401 2,183 1,530 2,187 3,992
Recoveries:
Residential mortgages................................ -- -- 3 917 9
Mortgages on income-producing property............... -- -- 1,098 245 300
Commercial loans..................................... -- -- -- -- --
Consumer loans....................................... 347 340 290 357 362
-------------------------------------------------
347 340 1,391 1,519 671
Net Charge-offs........................................ 2,054 1,843 139 668 3,321
Provision charged to operations........................ 2,500 1,350 1,100 2,400 100
-------------------------------------------------
Balance at end of period............................... $10,995 $10,549 $11,042 $10,081 $ 8,349
=================================================
Net charge-offs as a percentage of average loans....... 0.15% 0.15% 0.01% 0.07% 0.43%
Allowance for loan losses as a percentage of total
loans................................................. 0.82% 0.80% 1.03% 1.05% 1.01%
</TABLE>
The Company's policy for charging off loans varies with respect to the category
of and specific circumstances surrounding each loan under consideration.
Installment loans are generally charged off when deemed to be uncollectible or
180 days past due, whichever comes first. Charge-offs of commercial loans and
residential real estate mortgage loans are made on the basis of management's
ongoing evaluation of non-performing loans.
The following table summarizes the allocation of the allowance for loan losses
for general, specific and unallocated allowances by loan type and the percentage
of each loan type of total portfolio loans. The entire allowance, however, is
available for use against any type of loan loss deemed necessary.
<PAGE>
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount loans Amount loans Amount loans Amount loans Amount loans
to total to total to total to total to total
----------------------------------------------------------------------------------------------
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General allowances:
Residential mortgages.............. $ -- 49% $ -- 54% $ 11 57% $ 642 63% $ 634 63%
Mortgages on income-producing 2,680
property........................... -- 10 767 9 1,275 10 11 4,332 17
Commercial loans................... -- 4 -- 3 -- 1 -- 1 -- --
Consumer loans..................... 4,065 37 3,303 34 2,681 32 1,616 25 810 20
----------------------------------------------------------------------------------------------
Total general allowances........... 4,065 100% 4,070 100% 3,967 100% 4,938 100% 5,776 100%
Specific allowances:
Residential mortgages.............. -- -- -- -- -- -- -- -- -- --
Mortgages on income-producing
property........................... 1,145 -- 145 -- 385 -- -- -- 860 --
Commercial loans................... -- -- -- -- -- -- -- -- -- --
Consumer loans..................... -- -- -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Total specific allowances......... 1,145 145 385 -- 860
Unallocated allowances............. 5,785 6,334 6,690 5,143 1,713
--------------------------------------------------------------------------------------------------
Total allowance for loans....... $10,995 100% $10,549 100% $11,042 100% $10,081 100% $8,349 100%
==================================================================================================
</TABLE>
The following table summarizes the graded loan categories used in the allocation
of the allowance for loan losses among the Company's loans in each of the past
three years.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Graded loan categories:........................
Pass (Superior, High and Satisfactory)......... $1,322,513 $1,292,006 $1,042,541
Special mention................................ 4,579 10,812 13,303
Substandard.................................... 11,906 8,545 10,652
Doubtful....................................... -- -- 37
Loss........................................... 1,145 145 385
----------------------------------------------------
Total loans.................................. $1,340,143 $1,311,508 $1,066,918
====================================================
</TABLE>
Each element of the general allowance for December 31, 1998 was determined as
adequate by applying the following risk percentages to each grade: Pass -
residential: 0%, commercial: 0%, consumer: 0.80%; Special mention - residential:
0%, commercial: 0%, consumer 0.83%; Substandard - residential: 0%, commercial:
0%, consumer: 1.66%; Doubtful - 50%; and loss - 100%. the risk percentages are
developed by the Company in consultation with regulatory authorities, actual
loss experience and peer group loss experience, and are adjusted for current
economic conditions. the risk percentages are considered a prudent measurement
of the risk of the Company's loan portfolio.
The Company periodically reviews each commercial loan and assigns a grade based
on loan type, collateral value, financial condition of the borrower and payment
history. Delinquent residential mortgage and installment loans are reviewed and
assigned a rating based on their payment history, financial condition of the
borrower and collateral values. Specific mortgage and installment loans are
also reviewed in conjunction with the previously described review of any related
commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and reviews the adequacy of the allowance for
loan losses. Management believes this periodic review provides a mechanism that
results in loans being graded in the proper category and accordingly, assigned
the proper risk loss percentage in computing the general and specific reserve.
The provision for loan losses increased to $2.5 million during 1998 from $1.4
million in 1997. Additional provision was necessary as a result of the growth
of $79 million, or 13%, in consumer and business-related loans. In recognition
of this dynamic, the Company increased its loan loss provision for the higher
potential of losses typically associated with these types of loans. In 1997,
the provision for loan losses increased to $1.4 million from $1.1 million, with
the increased volume of consumer and commercial loans being the relevant factor
for the change.
There have been no changes in the Company's adequacy reviews or estimation
methods since 1996.
-17-
<PAGE>
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
-18-
<PAGE>
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1998, the Bank's average
liquidity ratio (liquid assets as a percentage of net withdrawable deposits and
current borrowings) was 36.1%, which was in excess of regulatory requirements.
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
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
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
U.S. Treasury available for sale..... 10,237 10,246 44,764 44,860 57,996 58,000
Commercial paper available for sale.. 89,851 89,851 -- -- -- --
Valuation allowance.................. 9 -- 96 -- 4 --
--------------------------------------------------------------
100,097 100,097 78,159 78,229 98,757 98,801
Investment in Federal Home Loan
Bank stock.......................... 28,651 28,651 23,200 23,200 19,959 19,959
Other equity securities.............. 27 27 25 25 23 23
Other equity securities available
for sale............................ 1,282 1,297 1,236 1,252 1,032 1,038
Valuation allowance.................. 15 -- 16 -- 6 --
--------------------------------------------------------------
$130,072 $130,072 $102,636 $102,706 $119,777 $119,821
==============================================================
</TABLE>
The book value and market value of investment securities at December 31,
1998, 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................... $ 10,237 $ 10,246 6.03%
Commercial paper maturing:
In one year or less................... 89,851 89,851 6.18
Valuation allowance..................... 9 -- --
-------------------------------
100,097 100,097 6.16
Equity securities....................... 29,960 29,975 7.81
Valuation allowance..................... 15 -- --
-------------------------------
$130,072 $130,072 6.54%
===============================
</TABLE>
-19-
<PAGE>
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 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,
1998, 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
---------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
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,
1.50% - 4.98%..................... $ 237,600 18.80% $163,119 15.64% $ 149,226 15.48%
Checking and NOW accounts,
0.00% - 2.50%.................. 166,802 13.19 119,412 11.45 107,550 11.16
Money market accounts,
variable............................ 103,878 8.22 92,314 8.85 89,321 9.26
---------------------------------------------------------------------------
Total regular accounts...... 508,280 40.21 374,845 35.94 346,097 35.90
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Certificates:
0.00 - 2.99%........... 9,318 0.74 8,100 0.78 9,864 1.02
3.00 - 4.99%........... 86,470 6.84 19,955 1.91 74,620 7.74
5.00 - 6.99%........... 640,591 50.67 600,035 57.52 476,651 49.44
7.00 - 8.99%........... 14,567 1.15 35,368 3.39 52,073 5.40
9.00 - 10.99%.......... 3,371 0.27 3,746 0.36 3,894 0.40
-----------------------------------------------------------------
Total certificates............... 754,317 59.67 667,204 63.96 617,102 64.00
Accrued interest................. 1,543 0.12 1,118 0.10 934 0.10
-----------------------------------------------------------------
Total deposits......... $1,264,140 100.00% $1,043,167 100.00% $964,133 100.00%
=================================================================
</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 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
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Opening balance......... $ 1,043,167 $ 964,133 $ 922,932
Deposits................ 4,900,609 3,111,891 2,425,493
Withdrawals............. (4,726,376) (3,075,490) (2,422,882)
Interest credited....... 46,315 42,449 39,115
Accrued interest........ 425 184 (525)
-----------------------------------------------
Ending balance.......... $ 1,264,140 $ 1,043,167 $ 964,133
===============================================
</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
-------------------------------------
1998 1997 1996
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Savings accounts.................... $ 74,481 $ 13,893 $ (502)
Checking and NOW accounts........... 47,390 11,862 15,929
Money market accounts............... 11,564 2,993 3,241
Certificates with maturities:
7 to 91 days...................... 1,639 (76) 8,319
92 days to 6 months............... 39,008 9,211 1,133
6 months to 1 year................ 35,010 55,669 33,200
1 year to 1 1/2 years............. 28,604 22,838 16,156
</TABLE>
-21-
<PAGE>
<TABLE>
<S> <C> <C> <C>
1 1/2 years to 3 years...................... (17,575) (38,039) (15,179)
3 years to 10 years......................... (11,151) (6,105) (26,232)
Negotiable rate certificates................... 11,578 6,604 5,661
------------------------------------------
Increase (decrease)......................... 220,548 78,850 41,726
Change in accrued interest..................... 425 184 (525)
------------------------------------------
Total increase (decrease)................... $ 220,973 $ 79,034 $ 41,201
==========================================
</TABLE>
The following table shows rate and maturity information for the Bank's
deposits as of December 31, 1998.
<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........................ $ 237,600 18.80% -- -- -- -- --
Checking and NOW accounts............... 166,802 13.19 -- -- -- -- --
Money market accounts................... 103,878 8.22 -- -- -- -- --
----------------------------------------------------------------------------
508,280 40.21 -- -- -- -- --
Certificate accounts
maturing in quarter ending:
03/31/99................................ 175,953 13.92 469 15,134 155,117 3,608 1,625
06/30/99................................ 222,861 17.63 2,399 28,707 187,146 2,990 1,619
09/30/99................................ 90,154 7.13 1,162 5,997 82,517 372 106
12/31/99................................ 116,376 9.20 2,001 27,270 86,808 297 --
03/31/00................................ 29,656 2.35 1,500 1,465 24,872 1,819 --
06/30/00................................ 29,685 2.35 175 4,026 22,544 2,940 --
09/30/00................................ 20,815 1.65 464 369 19,915 67 --
12/31/00................................ 11,308 0.89 180 1,123 9,781 224 --
03/31/01................................ 6,599 0.52 322 448 5,717 112 --
06/30/01................................ 5,676 0.45 5 639 5,023 9 --
09/30/01................................ 6,568 0.52 125 153 5,595 695 --
12/31/01................................ 5,958 0.47 32 553 5,151 222 --
Maturity over 3 years................... 32,708 2.59 484 586 30,405 1,212 21
----------------------------------------------------------------------------
Total................................. $ 754,317 59.67 $ 9,318 $ 86,470 $640,591 $ 14,567 $3,371
======================================================
Interest accrued........................ 1,543 0.12
--------------------
Total deposits.......................... $1,264,140 100.00%
====================
</TABLE>
The following table shows the scheduled maturities of certificates of
deposit of $100,000 or greater as of December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
(In thousands)
<S> <C>
Certificates with maturities:
Three months or less........................................ $ 36,943
Over three through six months............................... 46,171
Over six through twelve months.............................. 34,431
Over twelve months.......................................... 17,493
--------
Total................................................... $135,038
========
</TABLE>
-22-
<PAGE>
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 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
-------------------------------
1998 1997 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Maximum Balance:
Advances from FHLB................................... $573,003 $464,003 $338,003
Securities sold under
agreements to repurchase............................ 148,639 181,055 74,621
Other borrowings..................................... 29,979 14,643 13,385
Average Balance:
Advances from FHLB................................... 524,433 381,787 259,694
Securities sold under
agreements to repurchase............................ 80,106 98,471 40,095
Other borrowings..................................... 6,317 7,993 9,720
</TABLE>
-23-
<PAGE>
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
-----------------------------
1998 1997 1996
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances from FHLB.......................................... $530,003 $464,003 $338,003
Securities sold under agreements
to repurchase........................................... 18,153 149,092 58,040
Other borrowings............................................ 29,979 6,428 7,994
-------- -------- --------
Total borrowings........................................ $578,135 $619,523 $404,037
======== ======== ========
Weighted average interest
rate of advances from FHLB 5.80% 5.91% 5.59%
Weighted average interest rate
of securities sold under agreements
to repurchase 5.50 5.80 5.66
Weighted average interest
rate of other borrowings 6.18 10.04 9.76
Weighted average interest
rate of total borrowings 5.81 5.93 5.68
</TABLE>
The following table sets forth the Bank's maturity and rate structure of
FHLB advances as of December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average
Rate Amount
------------------------
(Dollars in thousands)
<S> <C> <C>
Matures within:
One year....................................... 5.99% $179,000
Two years...................................... 5.78 145,000
Three years.................................... 5.64 205,000
Four years..................................... -- --
Thereafter..................................... 4.00 1,003
-------- --------
Total FHLB advances.......................... 5.80% $530,003
======== ========
</TABLE>
-24-
<PAGE>
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.
As of December 31, 1998, 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, 1998. 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, 1998,
the Company had a $300,000 investment in Enterprises and loans totaling
approximately $1.9 million to the subsidiary.
Enterprises entered into a joint venture arrangement, 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.
Quincy Insurance Agency, Inc. ("Quincy") was formed in 1995 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. In Michigan, MIMLIC's mortgage life insurance policies are
marketed and sold primarily through Michigan savings institutions. During 1998,
Quincy's parent D&N Holdings, Inc. was dissolved, leaving a small investment in
Quincy Insurance Agency, Inc.
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
-25-
<PAGE>
restarting operations, D&N Mortgage Corporation has originated loans mainly for
the Bank's portfolio. D&N Mortgage Corporation currently has five origination
offices located in Michigan's lower peninsula in the cities of Grand Rapids,
Hastings, West Bloomfield, St. Joseph, and Ann Arbor. At December 31, 1998, the
Bank had $2.4 million invested in this subsidiary and loans totaling
approximately $1.0 million to the 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 participation
certificates. D&N Bank reinvested the proceeds from the sale of the CMOs in
residential and commercial mortgage loans.
REAL ESTATE INVESTMENT TRUST
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 21, 2002. On or after July 21, 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 1998, D&N Capital declared and paid preferred
dividends totaling $2,722,500.
COMPETITION
At December 31, 1998, the Bank ranked second among all savings institutions
headquartered in the State of Michigan with respect to total assets.
-26-
<PAGE>
D&N is the largest financial institution based in the Upper Peninsula of
Michigan.
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 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, 1998, the Bank had 575 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
-27-
<PAGE>
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 53. 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.
Frank R. Donnelly, age 58, 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 46, 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 47, 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 37, 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 41, 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.
-28-
<PAGE>
Susan D. Obermeyer, age 35, is Assistant Vice President/Assistant Treasurer
of the Bank. Prior to joining the Bank in September of 1992, she was the Cash
Management Specialist and Accountant with Fifth Third Bank. Ms. Obermeyer is
responsible for cash and liquidity management, investments, and wholesale
funding of the Bank.
Donald W. Schulze, age 48, 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 52, was Executive Vice President/Community
Banking. He had been employed by D&N Bank in various community banking
capacities since May 1977 and was most recently responsible for the community
banking function of the Bank. In January 1999, Mr. Sliwinski resigned from the
Bank.
Richard E. West, age 52, 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.
-29-
<PAGE>
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, 1998.
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, 1998, the Bank's lending limit under this restriction was $21.3
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
-30-
<PAGE>
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
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
-31-
<PAGE>
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
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, 1998, the Bank
had $4,822,000 of unamortized MSRs, $415,000 of which was required to be
deducted from tangible capital.
At December 31, 1998, the Bank had tangible capital of $129.5 million, or
6.40% of adjusted total assets, which is approximately $99.2 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, 1998, the Bank had core capital equal to $129.5 million, or
6.40% of adjusted total assets, which is $68.8 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, 1998 the Bank had
$9.9 million of general loss reserves which could be counted as supplementary
capital.
-32-
<PAGE>
On December 31, 1998, the Bank had total capital of $139.4 million
(including $129.5 million in core capital and $9.9 million in qualifying
supplementary capital) and risk-weighted assets of $1.27 billion (including
$51.4 million in converted off-balance sheet assets); or total capital of 10.94%
of risk-weighted assets. This amount was $37.4 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
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,
1998, the Bank had a Tier 1 risk-based capital ratio of 10.17%.
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.
-33-
<PAGE>
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
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
-34-
<PAGE>
conditions and savings flows of all savings institutions. At the present time,
the minimum liquid asset ratio is 4%, as changed during 1997.
At December 31, 1998, the Bank was in compliance with the liquidity ratio
requirement, with an average liquid asset ratio of 36.1%.
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, 1998, 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
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<PAGE>
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."
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 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 1998
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.
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<PAGE>
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
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, 1998, 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.
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<PAGE>
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, 1998, the Bank had $28.7 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 7.49% and were 8.00% for calendar
year 1998.
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, 1998, the dividends paid by the FHLB of
Indianapolis to the Bank totaled $2.1 million. The $578,000 dividend received
for the quarter ended December 31, 1998 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
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<PAGE>
taken as a deduction in computing taxable income for federal income tax
purposes. This tax bad debt reserve method available to thrift 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 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, 1994. 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
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<PAGE>
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 "Single Business Tax",
that 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, 1998, the Bank operated through 41 full service community
banking offices, seven savings agency offices and five mortgage banking offices.
The net book value of the land, buildings and leasehold improvements owned by
D&N Bank at that date was $12,665,000, and the net book value of its office
furniture, fixtures and equipment was $6,340,000.
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
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<PAGE>
book value of all computer equipment and software owned by the Bank was
$929,000 at December 31, 1998. 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.
Page 11 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference, see "Significant Litigation".
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,
1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 41 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Page 13 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Pages 1 through 12 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS SUPPLEMENTARY DATA
Pages 14 through 40 of the attached 1998 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 change of accountants and/or reporting disagreements
on any matter of accounting principle or financial statement disclosure, within
the prior 24 month period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Executive Officers of the Company is 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 1999, except for
information contained under the heading "Compensation Committee Report"
and "Stock Performance Graph." 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 for the Annual
Meeting of Stockholders to be held in 1999, except for information contained
under the heading "Compensation Committee Report" and "Stock Performance Graph."
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 1999,
except for information contained under the heading "Compensation Committee
Report" and "Stock Performance Graph." A copy of this Proxy Statement will be
filed not later than 120 days after the close of the fiscal year.
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<PAGE>
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 1999, except for the
information contained under the heading Compensation Committee Report" and
"Stock Performance Graph." A copy of this Proxy Statement will be filed not
later than 120 days after the close of the fiscal year.
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, 1998, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------------------------- -----------------------
Selected Financial Highlights 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 1 - 12
Report of Independent Auditors 14
Consolidated Statements of Condition 15
Consolidated Statements of Income 16
Consolidated Statements of
Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19 - 40
Stockholders' Information 41
(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.
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<PAGE>
(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 3(ii) Pages 48 - 64
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 Pages 65 - 105
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 Page 106
22 Published report regarding None Not applicable
matters submitted to vote
of security holders
23 Consent of Experts and 23 Page 107
Counsel
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
24 Power of Attorney Not required Not applicable
27 Financial Data Schedule 27 Page 108
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.
-----
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<PAGE>
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
By: /s/ GEORGE J. BUTVILAS By: /s/ KENNETH R. JANSON
----------------------- ------------------------------
GEORGE J. BUTVILAS KENNETH R. JANSON
(Duly Authorized Representative) (Duly Authorized Representative)
Date March 16, 1999 Date March 16, 1999
---------------------------- ------------------------------
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/ MARY P. CAULEY
----------------------------- ------------------------------
GEORGE J. BUTVILAS MARY P. CAULEY
Director, President and Director
Chief Executive Officer
(Principal Executive Officer)
Date March 16, 1999 Date March 16, 1999
---------------------------- ------------------------------
By: /s/ JOSEPH C. BROMLEY
-----------------------------
JOSEPH C. BROMLEY
Director
Date March 16, 1999
----------------------------
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<PAGE>
By: /s/ STEVEN COLEMAN By: /s/ STEVEN E. ZACK
------------------------------ ------------------------------
STEVEN COLEMAN STEVEN E. ZACK
Director Director
Date March 16, 1999 Date March 16, 1999
------------------------------ ------------------------------
By: /s/ RANDOLPH P. PIPER
------------------------------
RANDOLPH P. PIPER
Director
Date March 16, 1999
-----------------------------
BY: /s/ PETER VAN PELT
------------------------------
PETER VAN PELT
Director
Date March 16, 1999
-----------------------------
By: /s/ KENNETH R. JANSON
------------------------------
KENNETH R. JANSON
Executive Vice President/
Chief Financial Officer
Date March 16, 1999
-----------------------------
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<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------
13 Annual Report
21 Subsidiaries of Registrant
23 Consent of Expert and Counsel
27 Financial Data Schedule
<PAGE>
Exhibit 3(ii)
Effective 10/28/98
BYLAWS
OF
D&N FINANCIAL CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office.
-----------------
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices.
-------------
The Corporation may also have offices at such other places both within and
without the State of Delaware as the board of directors may from time to time
determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings.
-----------------
Meetings of the stockholders for the election of directors or for any other
purpose shall be held at such time and place, either within or without the State
of Delaware, as shall be designated from time to time by the board of directors
and stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual Meetings.
---------------
(a) The annual meetings of stockholders shall be held on such date and at
such time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which meetings the stockholders shall
elect by a plurality vote a board of directors and transact such other business
as may properly be brought before the meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the board of directors or
1
<PAGE>
(ii) by any stockholder of the Corporation who is entitled to vote with respect
thereto and who complies with the notice procedures set forth in this Section
2(b). For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered or mailed to and received at the principal executive offices of the
Corporation not less than sixty (60) days prior to the anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than twenty days, or delayed by
more than sixty days from such anniversary date, notice by the stockholder to be
timely must be so delivered not later than the close of business on the later of
the sixtieth day prior to such annual meeting or the tenth day following the day
on which notice of the date of the annual meeting was mailed or public
announcement of the date of such meeting is first made. A stockholder's notice
to the Secretary shall set forth as to each matter such stockholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder who proposed such business, (iii) the
class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockholder and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be brought before or conducted at an annual meeting
except in accordance with the provisions of this Section 2(b). The officer of
the Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 2(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
Section 3. Special Meetings.
----------------
Unless otherwise prescribed by law or by the Certificate of Incorporation,
special meetings of stockholders, for any purpose or purposes, may be called by
either the chairman of the board or the president and shall be called by the
secretary at the written request of holders of not less than 25% of the
outstanding capital stock of the Corporation entitled to vote at the meeting.
Such request shall state the purpose or purposes of the proposed meeting.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 4. Quorum.
------
Except as otherwise provided by law or by the Certificate of Incorporation,
the holders of a majority of the capital stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed. If the
adjournment is
2
<PAGE>
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder entitled to vote at the meeting.
Section 5. Voting.
------
Except as otherwise required by law, the Certificate of Incorporation or
these bylaws, any question brought before any meeting of stockholders shall be
decided by the vote of the holders of a majority of the stock duly voted on the
question. Each stockholder represented at a meeting of stockholders shall be
entitled to cast one vote for each share of the capital stock entitled to vote
thereat held by such stockholder. Such votes may be cast in person or by proxy.
The board of directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in his discretion, may require that any
votes cast at such meeting shall be cast by written ballot.
Section 6. List of Stockholders Entitled to Vote.
-------------------------------------
The officer of the Corporation who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept open at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
of the Corporation who is present.
Section 7. Stock Ledger.
------------
The stock ledger of the Corporation shall be the only evidence as to who
are the stockholders entitled to examine the stock ledger, the list required by
Section 6 of this Article II, or the books of the Corporation or to vote in
person or by proxy at any meeting of stockholders.
Section 8. Proxies.
-------
At all meetings of stockholders, a stockholder may vote by proxy executed
in writing by the stockholder or his duly authorized attorney in fact. Proxies
solicited on behalf of management shall be voted as directed by the stockholder
or, in the absence of such direction, as determined by a majority of the board
of directors. No proxy shall be valid after eleven months from the date of its
execution except for a proxy coupled with an interest.
Section 9. Voting of Shares in the Name of Two or More Persons.
---------------------------------------------------
When ownership stands in the name of two or more persons, in the absence of
written direction to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to
3
<PAGE>
which such ownership is entitled. In the event an attempt is made to cast
conflicting votes, in person or by proxy, by the several persons in whose names
shares of stock stand, the vote or votes to which those persons are entitled
shall be cast as directed by a majority of those holding such stock and present
in person or by proxy at such meeting, but no votes shall be cast for such stock
if a majority cannot agree.
Section 10. Voting of Shares by Certain Holders.
-----------------------------------
Shares standing in the name of another corporation may be voted by any
officer, agent or proxy as the bylaws of such corporation may prescribe, or in
the absence of such provision, as the board of directors of such corporation may
determine. Shares held by an administrator, executor, guardian or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver without
the transfer thereof into his name if authority to do so is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 11. Inspectors of Election.
----------------------
In advance of any meeting of stockholders, the board of directors may
appoint any persons other than nominees for office as inspectors of election to
act at such meeting or any adjournment thereof. The number of inspectors shall
be either one or three. If the board of directors so appoints either one or
three such inspectors, that appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the chairman of the board or the
president may, and on the request of not less than ten percent of the votes
represented at the meeting shall, make such appointment at the meeting. If
appointed at the meeting, the majority of the voters present shall determine
whether one or three inspectors are to be appointed. In case any person
appointed as inspector fails to appear or fails or refuses to act, the vacancy
may be filled by appointment by the board of directors in advance of the meeting
or at the meeting by the chairman of the board or the president.
Unless otherwise prescribed by law, the duties of such inspectors shall
include: determining the number of shares of stock and the voting power of each
share, the shares of stock represented at the meeting, the existence of a
quorum, the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or
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consents; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all stockholders.
Section 12. Conduct of Meetings.
-------------------
Annual and special meetings shall be conducted in accordance with the most
current edition of Robert's Rules of Order unless otherwise prescribed by law or
these bylaws. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors.
--------------------------------
The number of directors shall be as stated in the Corporation's Certificate
of Incorporation, as may be amended from time to time. The exact number of
directors shall initially be fixed by the Incorporator(s) and thereafter from
time to time by the board of directors. Directors need not be residents of the
State of Delaware.
Section 2. Vacancies.
---------
Vacancies in the board of directors, however caused, shall be filled by a
majority vote of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which he has been chosen
expires and when his successor is elected and qualified.
Section 3. Duties and Powers.
-----------------
The business of the Corporation shall be managed by or under the direction
of the board of directors, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or by the
Certificate of Incorporation or by these bylaws directed or required to be
exercised or done by the stockholders. The board of directors shall annually
elect a chairman of the board and a president from among its members and shall
designate, when present, either the chairman of the board or the president to
preside at its meetings.
Section 4. Meetings.
--------
The board of directors of the Corporation may hold meetings, both regular
and special, either within or without the State of Delaware. The annual regular
meeting of the board of directors shall be held without other notice than this
bylaw immediately after, and at the same place as, the annual meeting of
stockholders. Additional regular meetings of the board of directors may be held
without notice at such time and at such place as may from time to time be
determined by the board of directors. Special meetings of the board of
directors may be called by the chairman, the president or a majority of
directors then in office. Notice thereof stating the
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place, date and hour of the meeting shall be given to each director either
by mail not less than forty-eight hours before the date of the meeting, or
by telephone, telegram, facsimile or other electronic means on twenty-four
hours' notice.
Section 5. Quorum.
------
Except as may be otherwise specifically provided by law, the Certificate of
Incorporation or these bylaws, at all meetings of the board of directors, a
majority of the directors then in office shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 6. Actions of the Board.
--------------------
Unless otherwise provided by the Certificate of Incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors or of any committee thereof may be taken without a meeting, if all
the members of the board of directors or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board of directors or committee.
Section 7. Meetings by Means of Conference Telephone.
-----------------------------------------
Unless otherwise provided by the Certificate of Incorporation or these
bylaws, members of the board of directors of the Corporation, or any committee
designated by the board of directors, may participate in a meeting of the board
of directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
Section 8. Compensation.
------------
The directors may be paid their reasonable expenses, if any, of attendance
at each meeting of the board of directors and may be paid a reasonable fixed sum
for actual attendance at each meeting of the board of directors. Directors, as
such, may receive a stated salary for their services. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 9. Corporate Books.
---------------
The directors may keep the books of the Corporation, except such as are
required by law to be kept within the state, outside of the State of Delaware at
such place or places as they may from time to time determine.
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Section 10. Presumption of Assent.
---------------------
A director of the Corporation who is present at a meeting of the board of
directors at which action on any Corporation matter is taken shall be presumed
to have assented to the action taken unless his dissent or abstention shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretary of the Corporation within five days after the date he receives
a copy of the minutes of the meeting. Such right to dissent shall not apply to
a director who voted in favor of such action.
Section 11. Resignation.
-----------
Any director may resign at any time by sending a written notice of such
resignation to the home office of the Corporation addressed to the chairman of
the board or the president. Unless otherwise specified therein such resignation
shall take effect upon receipt thereof by the chairman of the board or the
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 12. Nominating Committee.
--------------------
Only persons who are nominated in accordance with the procedures set forth
in these Bylaws shall be eligible for election as directors. Nominations of
persons for election to the board of directors of the Corporation may be made at
a meeting of stockholders at which directors are to be elected only (i) by or at
the direction of the board of directors or (ii) by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 12. Such
nominations, other than those made by or at the direction of the board of
directors, shall be made by timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than 60 days prior to the date of the meeting; provided, however, that in the
event that less than 70 days' notice of the date of the meeting is first given
or made to stockholders, by public announcement or mail, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or public announcement was first made. Such
stockholder's notice shall set forth (i) as to each person whom such stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder giving the notice: (x) the name and address, as they appear on the
Corporation's books, of such stockholder and (y) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the board of directors, any person nominated by
the board of directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the provisions of this Section 12. The
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officer of the Corporation or other person presiding at the meeting shall,
if the facts so warrant, determine that a nomination was not made in
accordance with such provisions and, if he or she should so determine, he
or she shall so declare to the meeting and the defective nomination shall
be disregarded.
Section 13. Age Limitation on Directors.
---------------------------
Any director who was elected to the board of directors subsequent to
February 1, 1972, upon reaching seventy years of age, shall retire at the annual
meeting following said director's seventieth birthday; provided, however, that
Joseph C. Bromley shall retire at the annual meeting following his seventy-first
birthday. Any director who was elected prior to February 1, 1972, upon reaching
seventy-five years of age, shall retire at the annual meeting following said
director's seventy-fifth birthday. This age limitation shall not apply to an
advisory director.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment.
-----------
The board of directors, by resolution adopted by a majority of the full
board, may designate the chief executive officer and two or more of the other
directors to constitute an executive committee. The designation of any
committee pursuant to this Article IV and the delegation of authority thereto
shall not operate to relieve the board of directors, or any director, of any
responsibility imposed by law or regulation.
Section 2. Authority.
---------
The executive committee, when the board of directors is not in session,
shall have and may exercise all of the authority of the board of directors
except to the extent, if any, that such authority shall be limited by the
resolution appointing the executive committee; and except also that the
executive committee shall not have the authority of the board of directors with
reference to the declaration of dividends; the amendment of the Certificate of
Incorporation or bylaws of the Corporation, or recommending to the shareholders
a plan of merger or consolidation; the sale, lease or other disposition of all
or substantially all of the property and assets of the Corporation otherwise
than in the usual and regular course of its business; a voluntary dissolution
of the Corporation; a revocation of any of the foregoing; or the approval of a
transaction in which any member of the executive committee, directly or
indirectly, has any material beneficial interest.
Section 3. Tenure.
------
Subject to the provisions of Section 8 of this Article IV, each member of
the executive committee shall hold office until the next annual regular meeting
of the board of directors following his designation and until his successor is
designated as a member of the executive committee.
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Section 4. Meetings.
--------
Regular meetings of the executive committee may be held without notice at
such times and places as the executive committee may fix from time to time by
resolution. Special meetings of the executive committee may be called by any
member thereof upon not less than one day's notice stating the place, date and
hour of the meeting, which notice may be written or oral. Any members of the
executive committee may waive notice of any meeting and no notice of any meeting
need be given to any member thereof who attends in person. The notice of a
meeting of the executive committee need not state the business proposed to be
transacted at the meeting.
Section 5. Quorum.
------
A majority of the members of the executive committee shall constitute a
quorum for the transaction of business at any meeting thereof, and action of the
executive committee must be authorized by the affirmative vote of a majority of
the members present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting.
------------------------
Any action required or permitted to be taken by the executive committee at
a meeting may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the members of the executive
committee.
Section 7. Vacancies.
---------
Any vacancy in the executive committee may be filled by a resolution
adopted by a majority of the full board of directors.
Section 8. Resignations and Removal.
------------------------
Any member of the executive committee may be removed at any time with or
without cause by resolution adopted by a majority of the full board of
directors. Any member of the executive committee may resign from the executive
committee at any time by giving written notice to the president or secretary of
the Corporation. Unless otherwise specified therein, such resignation shall
take effect upon receipt. The acceptance of such resignation shall not be
necessary to make it effective.
Section 9. Procedure.
---------
The executive committee shall elect a presiding officer from its members
and may fix its own rules of procedure which shall not be inconsistent with
these bylaws. It shall keep regular minutes of its proceedings and report the
same to the board of directors for its information at the meeting thereof held
next after the proceedings shall have been taken.
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Section 10. Other Committees.
----------------
The board of directors may by resolution establish an audit committee or
other committees composed of directors as they may determine to be necessary or
appropriate for the conduct of the business of the Corporation and may prescribe
the duties, constitution and procedures thereof.
ARTICLE V
OFFICERS
Section 1. General.
-------
The officers of the Corporation shall be chosen by the board of directors
and shall be a president, a secretary and a treasurer. The chairman of the
board may also be designated as an officer. The board of directors may
designate one or more vice-presidents, assistant secretaries, assistant
treasurers and other officers. The offices of secretary and treasurer may be
held by the same person and a vice-president may also be either the secretary or
the treasurer. Unless otherwise specified to the contrary in the Certificate of
Incorporation or these bylaws, the officers of the Corporation need not be
either stockholders or directors of the Corporation.
Section 2. Election.
--------
The board of directors at its first meeting held after the annual meeting
of stockholders shall elect annually the officers of the Corporation who shall
exercise such powers and perform such duties as shall be set forth in these
bylaws and as determined from time to time by the board of directors; and all
officers of the Corporation shall hold office until their successors are chosen
and qualified, or until their earlier resignation or removal. Any officer
elected by the board of directors may be removed at any time by the affirmative
vote of a majority of the board of directors. Any vacancy occurring in any
office of the Corporation shall be filled by the board of directors. The
salaries of all officers of the Corporation shall be fixed by the board of
directors.
Section 3. Removal.
-------
Any officer may be removed by the board of directors whenever in its
judgment the best interests of the Corporation will be served thereby, but such
removal, other than for cause, shall be without prejudice to the contract
rights, if any, of the person so removed.
Section 4. Voting Securities Owned by the Corporation.
------------------------------------------
Powers of attorney, proxies, waivers of notice of meeting, consents and
other instruments relating to securities owned by the Corporation may be
executed in the name of and on behalf of the Corporation by the president or any
vice-president, and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation of
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and
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all rights and powers incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The board of directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 5. Chairman of the Board and President.
-----------------------------------
The chief executive officer shall be a director of the Corporation. The
chairman of the board or the president, as designated by the board of directors,
shall be the chief executive officer. The chairman of the board or the
president shall, subject to the control of the board of directors, have general
supervision of the business of the Corporation and shall see that all orders and
resolutions of the board of directors are carried into effect. The president
shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except that
the other officers of the Corporation may sign and execute documents when so
authorized by these bylaws, the board of directors, the chairman of the board or
the president. If so designated by the board of directors, the chairman of the
board or the president shall preside at the annual meetings and special meetings
of the stockholders. The chairman of the board or the president shall also
perform such other duties and may exercise such other powers as from time to
time assigned to him by these bylaws or by the board of directors.
Section 6. Vice-President.
--------------
At the request of the president or in his absence or in the event of his
inability or refusal to act, the vice-president or the vice-presidents if there
is more than one (in the order designated by the board of directors) shall
perform the duties of the president, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the president. Each vice-
president shall perform such other duties and have such other powers as the
board of directors from time to time may prescribe. The board of directors may
designate one or more vice-presidents as executive vice-president or senior
vice-president. If there be no vice-president, the board of directors shall
designate the officer of the Corporation who, in the absence of the president or
in the event of the inability or refusal of the president to act, shall perform
the duties of the president, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the president.
Section 7. Secretary.
---------
The secretary shall attend all meetings of the board of directors and all
meetings of stockholders and record all the proceedings thereat in a book or
books to be kept for that purpose; the secretary shall also perform like duties
for the standing committees when required. The secretary shall give, or cause
to be given, notice of all meetings of the stockholders and special meetings of
the board of directors, and shall perform such other duties as may be prescribed
by the board of directors, chairman of the board or president, under whose
supervision he shall be. If the secretary shall be unable or shall refuse to
cause to be given notice of all meetings of the stockholders and special
meetings of the board of directors, and if there be no assistant secretary, then
either the board of directors or the president may choose another officer to
cause such notice to be given. The secretary shall have custody of the seal of
the Corporation and the secretary or any assistant secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the secretary or by the
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signature of any such assistant secretary. The board of directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The secretary shall see that all
books, reports, statements, certificates and other documents and records
required by law to be kept or filed are properly kept or filed, as the case
may be.
Section 8. Treasurer.
---------
The treasurer shall have the custody of the corporate funds and securities
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the board of directors. The treasurer shall disburse the
funds of the Corporation as may be ordered by the board of directors, taking
proper vouchers for such disbursements, and shall render to the president and
the board of directors, at its regular meetings, or when the board of directors
so requires, an account of all his transactions as treasurer and of the
financial condition of the Corporation. If required by the board of directors,
the treasurer shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the board of directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 9. Assistant Secretaries.
---------------------
Except as may be otherwise provided in these bylaws, assistant secretaries,
if there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the board of directors, the president, any vice-
president, if there be one, or the secretary, and in the absence of the
secretary or in the event of his inability or refusal to act, shall perform the
duties of the secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the secretary.
Section 10. Assistant Treasurers.
--------------------
Assistant treasurers, if there be any, shall perform such duties and have
such powers as from time to time may be assigned to them by the board of
directors, the president, any vice-president, if there be one, or the treasurer,
and in the absence of the treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the treasurer. If
required by the board of directors, an assistant treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 11. Other Officers.
--------------
Such other officers as the board of directors may choose shall perform such
duties and have such powers as from time to time may be assigned to them by the
board of directors. The
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board of directors may delegate to any other officer of the Corporation the
power to choose such other officers and to prescribe their respective
duties and powers.
ARTICLE VI
STOCK
Section 1. Form of Certificates.
--------------------
Every holder of stock in the Corporation shall be entitled to have a
certificate signed, in the name of the Corporation (i) by the chairman of the
board of directors, the president or a vice-president and (ii) by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
Section 2. Signatures.
----------
Where a certificate is countersigned by (i) a transfer agent other than the
Corporation or its employee, or (ii) a registrar other than the Corporation or
its employee, any other signature on the certificate may be a facsimile. In
case any officer whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer before such certificate is issued it may be
issued by the Corporation with the same effect as if he were such officer at the
date of issue.
Section 3. Lost Certificates.
-----------------
The board of directors may direct a new certificate to be issued in place
of any certificate theretofore issued by the Corporation alleged to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as the board of directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers.
---------
Stock of the Corporation shall be transferable in the manner prescribed by
law and in these bylaws. Transfers of stock shall be made on the books of the
Corporation only by the person named in the certificate or by his attorney
lawfully constituted in writing and upon the surrender of the certificate
therefor, which shall be cancelled before a new certificate shall be issued.
Section 5. Record Date.
-----------
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in
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respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than sixty days nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners.
-----------------
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VII
NOTICES
Section 1. Notices.
-------
Whenever written notice is required by law, the Certificate of
Incorporation or these bylaws, to be given to any director, member of a
committee or stockholder, such notice may be given by mail, addressed to such
director, member of a committee or stockholder, at his address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
telex or cable. Notice of the annual meeting of stockholders may also be given
by public announcement, as long as written notice as set forth above is also
given at least 10 days prior to the date of the annual meeting.
Section 2. Waivers of Notice.
-----------------
Whenever any notice is required by law, the Certificate of Incorporation or
these bylaws, to be given to any director, member of a committee or stockholder,
a waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
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ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends.
---------
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation if any, may be declared by the
board of directors at any regular or special meeting, and may be paid in cash,
in property, or in shares of the capital stock.
Section 2. Disbursements.
-------------
All checks or demands for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the board
of directors may from time to time designate.
Section 3. Fiscal Year.
-----------
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors.
Section 4. Corporate Seal.
--------------
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE IX
AMENDMENTS
Section 1. Amendments of Bylaws.
--------------------
These bylaws may be altered, amended or repealed, in whole or in part, or
new bylaws may be adopted by the stockholders or by the board of directors,
provided, however, that notice of such alteration, amendment, repeal or adoption
of new bylaws be contained in the notice of such meeting of stockholders or
board of directors as the case may be. All such amendments must be approved by
either the holders of at least a majority of the votes eligible to be cast by
stockholders of the Corporation or by at least a majority of the entire board of
directors then in office.
Section 2. Entire Board of Directors.
-------------------------
As used in this Article IX and in these bylaws generally, the term "entire
board of directors" means the total number of directors which the Corporation
would have if there were no vacancies.
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ARTICLE X
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, TRUSTEES AND AGENTS
Section 1. Scope of Indemnification - Proceedings in General.
-------------------------------------------------
(a) Every person who is or was a director, officer or employee of the
Corporation or a wholly-owned direct or indirect subsidiary of the Corporation,
or is or was, at the request or direction of the Corporation, a director,
officer or employee of any other corporation, partnership, trust, venture, or
other entity or enterprise, including any employee benefit plan, shall be
indemnified by the Corporation against any and all liabilities, judgments, fines
and reasonable settlements, costs, expenses and attorneys' fees incurred in any
actual, threatened or potential proceeding, whether civil, criminal,
administrative or investigative, including any appeal, review, rehearing or
related proceeding, except to the extent that such indemnification is limited by
Delaware law and the limitations of such law cannot be varied by contract or
bylaw.
(b) Every person who is or was a trustee, agent or advisor of the
Corporation or a wholly-owned direct or indirect subsidiary of the Corporation,
and who is not also a director, officer or employee of the Corporation or a
wholly-owned direct or indirect subsidiary of the Corporation, may, in the
discretion of the board of directors, be indemnified by the Corporation against
any and all liabilities, judgments, fines and reasonable settlements, costs,
expenses and attorneys' fees incurred in any actual, threatened or potential
proceeding, whether civil, criminal, administrative or investigative, including
any appeal, review, rehearing or related proceeding, except to the extent that
such indemnification is limited by Delaware law and the limitations of such law
cannot be varied by contract or bylaw.
Section 2. Advance of Expenses.
-------------------
(a) Prior to the final disposition of a proceeding, the Corporation shall
promptly indemnify a person for expenses, including attorneys' fees, incurred in
connection with the proceeding where it reasonably appears to the board of
directors that the person satisfies, or will satisfy, the conditions expressed
in Section 1(a) of this Article, provided that the person makes a written
request for such indemnification and agrees to repay such amount if such payment
is unlawful under Delaware law and the limitations of such law cannot be
modified by contract or bylaw.
(b) If a person satisfies the conditions of the above Section 2(a) except
that such person's eligibility for indemnification is dependent on Section 1(b)
of this Article rather than Section 1(a) of this Article, the Corporation may,
in the discretion of the board of directors, advance expenses, including
attorneys' fees, to such person as provided in Section 2(a) of this Article in
connection with a proceeding prior to the final disposition of such proceeding.
16
<PAGE>
Section 3. Miscellaneous.
-------------
In the event of the death of any person having a right of indemnification
under the provisions of this Article, such right shall inure to the benefit of
the heirs, executors, administrators and personal representatives of such
person. If any part of this Article should be found to be invalid or
ineffective in any proceeding, the validity and effect of the remaining
provisions shall not thereby be affected.
Section 4. Indemnification Not Exclusive.
-----------------------------
The foregoing right of indemnification shall not be exclusive of any other
right to which those indemnified may be entitled, and the Corporation may
provide additional indemnity and rights to its directors, officers, employees,
trustees or agents.
Section 5. Insurance.
---------
The Corporation may, as the board of directors may direct, purchase and
maintain insurance on behalf of any person who is or at any time has been, at
the request or direction of the Corporation, a director, officer, employee,
trustee or agent of the Corporation or of any other corporation, partnership,
trust, venture, or other entity or enterprise, including any employee benefit
plan, against any liability asserted against and incurred by such person in any
such capacity or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Article.
17
<PAGE>
Exhibit 13
------- --
[D&N LOGO]
1998 Annual Report
<PAGE>
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 1998.
In 1998, D&N reported net income of $16.1 million, or $1.69 per diluted share.
Earnings in 1997 were $14.3 million or $1.53 per diluted share. In 1996, before
one-time regulatory charges and the tax benefit of a previous year's net
operating loss, earnings were $10.1 million or $1.14 per diluted share.
On December 31, 1998, the Company's balance sheet included total assets of $2.02
billion, compared to $1.82 billion at the end of 1997. This 11% growth reflected
primarily the Bank's loan origination success, with $1.02 billion of new loans
funded in 1998. Outstanding loan balances totaled $1.34 billion at December 31,
1998, an increase of 2% during the year. Mortgage-backed securities also
increased by 38% to $494 million as the Bank securitized $83 million of its
residential mortgage loan production with the Federal National Mortgage
Association ("Fannie Mae").
In 1998, the Company made provisions for loan losses of $2.5 million, after
making provisions of $1.35 million and $1.1 million in 1997 and 1996,
respectively. At December 31, 1998, the allowance for loan losses was $11.0
million, or 0.82% of outstanding loans.
Noninterest income increased by 54.9% in 1998 after increasing by 23.5% in 1997.
The 1998 increase includes an 8% improvement in deposit-related fees and an
increase of $4.08 million in gains from the sale of loans and mortgage-backed
securities.
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 1998 as the average size of the Company's
earning assets grew 16.1% during the year. Interest income increased by $14.3
million, or 11.4%, in 1998. The average yield on earning assets decreased by 32
basis points to 7.59% in 1998, from 7.91% in 1997. In 1996, earning assets
yielded 7.95%. Driving the interest income gains in 1998 was D&N's 16.1%
increase in the average balance of earning assets, which followed an increase of
21.1% in 1997 and 14.7% in 1996.
Interest expense increased by $10.5 million, or 13.7%, in 1998 as the average
balance of interest-bearing liabilities increased by 15.0%, which more than
offset the 6 basis point decrease paid on those liabilities. In 1998, interest-
bearing liabilities had an average cost of 5.06%, compared to 5.12% in 1997 and
4.93% in 1996. The decrease of the average yield on interest-earning assets
combined with the 16% increase in their average balance resulted in a decrease
of the interest rate spread from 2.79% in 1997 to 2.53% in 1998. In 1996 the
spread was 3.02%. Similarly, the Bank's net interest margin, or ratio of net
interest income to average interest-earning assets, decreased from 3.08% in 1997
to 2.86% in 1998. In 1996 the net interest margin was 3.26%. Average interest-
earning assets exceeded average interest-bearing liabilities by $119.4 million
in 1998 compared to $88.7 million in 1997 and $64.5 million in 1996.
Average balances of loans outstanding were higher in 1998 than 1997, as the
Company's loan originations increased significantly. Average balances of
mortgage-backed securities were also higher reflecting loan securitization
efforts, while the investment securities category decreased. Loans increased by
$130 million, or 11%; mortgage-backed securities increased by $151 million, or
56%; and investment securities decreased by $25.1 million, or 20%. Average
earning rates on loans and mortgage-backed securities were lower in 1998 than
1997, while the average earning rate on investment securities increased. In
1998, loans earned an average yield of 7.99% compared to 8.25% in 1997.
Mortgage-backed securities earned an average of 6.60% in 1998, versus an average
rate of 7.15% in 1997. Investment securities earned 6.44% in 1998, an increase
from 6.28% in 1997.
The average balances of all interest-earning asset categories increased from
1996 to 1997.
Average deposit balances increased 10.0% to $1.11 billion in 1998, from $1.01
billion in 1997. Approximately 81% of this growth was from the Bank's continuing
operations, with the remainder attributable to the purchase, in September, 1998,
of $72 million in deposits. The average cost of deposits decreased 14 basis
points, to 4.60%, in 1998. From 1996 to 1997, average deposit balances
increased by $74 million, or 7.9%. In 1996, the average cost of deposits was
4.67%.
1
<PAGE>
The average balance of borrowed funds increased by 25.1%, to $611 million in
1998, from $488 million in 1997. In 1996, the average balance of borrowed funds
was $310 million.
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, 1998 and 1997
--------------------------------------------------------------------------------------------------------------------
Average balance (1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans (3)................... $1,323,767 $1,194,090 7.99% 8.25% $105,777 $ 98,560 $ 7,217 $10,452 $(3,235)
Mortgage-backed securities(4) 417,508 267,010 6.60 7.15 27,568 19,085 8,483 10,035 (1,552)
Investments and deposits (4) 102,933 128,071 6.44 6.28 6,629 8,048 (1,419) (1,615) 196
-----------------------------------------------------------------------------------------------------
1,844,208 1,589,171 7.59 7.91 139,974 125,693 14,281 18,872 (4,591)
-----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits..................... 1,113,999 1,012,237 4.60 4.74 51,206 47,961 3,245 4,711 (1,466)
Borrowings................... 610,856 488,251 5.91 5.90 36,079 28,793 7,286 7,228 58
-----------------------------------------------------------------------------------------------------
1,724,855 1,500,488 5.06 5.12 87,285 76,754 10,531 11,939 (1,408)
-----------------------------------------------------------------------------------------------------
Interest rate spread........... 2.53 2.79
Excess average earning assets $119,353 $88,683 7.59% 7.91%
============================================
Net interest margin............ 2.86% 3.08% $52,689 $48,939 $3,750 $6,933 $(3,183)
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1997 and 1996
--------------------------------------------------------------------------------------------------------------------
Average balance (1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
1997 1996 1997 1996 1997 1996 (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
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)
========================================================================
</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 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 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 cost balances.
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 nonrecurring gains and losses from events such as sales of non-
earning and depreciated assets. D&N's loan and deposit-related fee income
totaled $6.2 million in 1998, up $243,000 or 4.1% from 1997, reflecting
primarily the Bank's
2
<PAGE>
growing core deposit base and the initiation of fees for non-customer usage of
the Bank's automatic teller machine network. In 1998, net loan servicing and
administrative fees decreased slightly from 1997 to $1.9 million. Deposit-
related fees increased by 7.6% to $4.4 million in 1998.
Gains on sales of loans and mortgage-backed securities totaled $6.4 million in
1998, up from $2.3 million in 1997. In 1998, $227 million of D&N's residential
mortgages were sold to secondary market investors, compared to $103 million in
1997. Other income increased from $657,000 in 1997 to $1.23 million in 1998
mainly due to D&N Bank's subsidiary, Quincy Insurance Agency, offering
annuities and investment products, and one-time income from the sale of
purchased mortgage servicing rights and the recovery of a previously written-off
investment.
NONINTEREST EXPENSE
General and administrative expenses totaled $36.4 million in 1998, an increase
of $3.7 million compared to 1997. The increase reflects the costs of D&N's
expanding retail delivery network, and the variable-based compensation
consequences of higher loan production levels.
Operating costs of other real estate owned ("OREO") exceeded net recoveries on
sales for such properties by $167,000 in 1998. In 1997, net recoveries on sales
of 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 1998, D&N's Federal Deposit Insurance Corporation insurance premium was
$794,000, compared to $658,000 in 1997. The premium was $2.4 million in 1996,
excluding that year's Savings Association Insurance Fund recapitalization
assessment of $5.5 million.
INCOME TAXES
The Company's effective income tax rates were 32.97% in 1998, 35.09% in 1997 and
3.74% in 1996. The tax rate in 1996 was effected by reductions in a portion of
the valuation allowance for deferred tax assets provided in prior years, when
the Company incurred substantial net operating losses.
FINANCIAL CONDITION
- -------------------
BALANCE SHEET TRENDS
At December 31, 1998, D&N's assets totaled $2.02 billion, an increase of $203
million, or 11%, from the previous year end. The Company's balance sheet growth
has been fueled by substantial loan production.
At year end 1998, net loans receivable were $1.33 billion, a modest increase
from December 31, 1997. The Company sold $227 million of residential mortgage
loans during 1998. Balances of mortgage-backed securities increased $136
million, or 38%, as a consequence of the securitization of $83 million of the
Bank's residential mortgage loan production and purchases of collateralized
mortgage obligations ("CMOS"). The balance of loans serviced for others
increased from $519 million to $576 million during 1998.
The Company's liabilities increased by 11%, or $185 million, to $1.87 billion at
December 31, 1998, compared to $1.69 billion at the end of 1997. Overall deposit
balances increased by 21%, or $221 million, while core deposits experienced a
36% increase from $375 million at December 31, 1997, to $508 million at year-end
1998. in September, 1998, the Company purchased approximately $72 million in
deposits. Excluding those balances, total and core deposits increased 14% and
24%, respectively, during 1998. Borrowed funds decreased by 6.7%, or $41
million, in 1998, while advance payments by borrowers and investors held in
escrow increased from $17.6 million to $25.4 million.
In 1998, D&N's common stockholders' equity rose from $98.1 million to $115.5
million. Profitable operations contributed $16.1 million to the Company's
retained earnings while the proceeds from the exercise of options and
accompanying tax benefits added $3.3 million to the equity accounts. Cash
dividends and purchases of treasury stock through an oddlot repurchase program
returned $2.2 million to shareholders in 1998. An additional source of equity in
1998 was $1.7 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, 1998, the
Bank had a tangible capital ratio of 6.40%, a core capital ratio of 6.40%, and a
risk-based capital ratio of 10.94%. D&N Bank's ratios continue to exceed the
levels specified in the Financial Institutions Reform, Recovery and Enforcement
Act
3
<PAGE>
("FIRREA" or "the Act") as minimally acceptable standards. at the close of
1998, 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, 1998 of
6.40%, 10.17% and 10.94%, respectively, exceeded the minimum 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, 1998, 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 1998,
the Bank's average liquidity ratio was 36.1%, up from the December 1997 ratio of
13.9%.
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 $344 million of unused borrowing
capacity at December 31, 1998.
LOAN PORTFOLIO
The following table categorizes the Bank's loans receivable for the past five
years.
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Residential mortgages.......................... $ 650,502 $ 703,580 $ 600,923 $597,892 $526,572
Mortgages on income-producing property......... 94,552 81,830 85,619 89,176 115,162
Construction loans............................. 55,322 56,446 39,673 41,056 19,900
Consumer loans................................. 504,069 449,551 339,268 239,459 170,939
Commercial loans............................... 51,319 38,435 12,345 7,769 4,748
Allowance for losses........................... (10,995) (10,549) (11,042) (10,081) (8,349)
Discounts, deferrals and other................. (15,621) (18,334) (10,910) (12,912) (7,097)
-------------------------------------------------------------
$1,329,148 $1,300,959 $1,055,876 $952,359 $821,875
=============================================================
</TABLE>
D&N's investment in loans increased by $28 million, or 2%, in 1998. Consumer and
commercial loans increased, while investment in residential mortgages declined
by 8%. The decline in the residential mortgage portfolio reflects the sale and
securitization of residential mortgages as one component of the Bank's strategy
to manage interest rate risk. Consumer loans increased by $55 million, or 12% in
1998. Commercial loans increased by $13 million. Mortgages on income-producing
properties increased by $13 million, or 16%, while construction loan balances
decreased by $1.1 million, or 2%. At the end of 1998, 52% of the Company's loan
balances were in consumer or business-related loans, compared to a 47%
weighting at the end of 1997. D&N originated $825 million of loans in 1998, up
$203 million, or 32.6% from $622 million originated in 1997. Consumer loan
production totaled $344 million in 1998, up by $20.4 million, or 6.3%, from
1997. Aggregate mortgage production in 1998 was $373 million, an increase of
$112 million, or 42.9%, from 1997. Construction lending accounted for $49.6
million, down slightly from $54.0 million in 1997. Supplementing the Company's
mortgage production was $192 million of purchased loans in 1998, down from $235
million in 1997.
4
<PAGE>
CREDIT RISK MANAGEMENT AND PROVISION FOR LOSSES ON LOANS AND OTHER ASSETS
At December 31, 1998, the Company's nonperforming assets totaled $9.2 million,
up from $5.3 million at the end of the previous year and $8.1 million at the end
of 1996. The 1998 balance was comprised of $7.9 million of nonperforming loans
and $1.4 million of other real estate owned ("OREO"). At the end of 1998,
nonperforming loans comprised 0.59% of the loan portfolio, and the allowance
for loan losses stood at 140% of the total balances of nonperforming loans.
The following table traces the Company's nonperforming asset experience for the
last five years.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Nonaccruing loans....................................... $ 7,867 $ 3,162 $ 6,429 $ 8,133 $17,949
Accruing loans delinquent more than 90 days............. -- 274 -- 24 5
------------------------------------------------------
Total nonperforming loans.......................... 7,867 3,436 6,429 8,157 17,954
Other real estate owned (OREO) and other repossessed
assets................................................... 1,372 1,864 1,662 1,544 6,566
------------------------------------------------------
Total nonperforming assets......................... $ 9,239 $ 5,300 $ 8,091 $ 9,701 $24,520
======================================================
Nonperforming loans as a percentage of total loans...... 0.59% 0.26% 0.60% 0.85% 2.16%
Nonperforming assets as a percentage of total assets.... 0.46% 0.29% 0.55% 0.79% 2.17%
Allowance for loan losses as a percentage of
nonperforming loans..................................... 139.76% 307.01% 171.75% 123.59% 46.50%
Allowances for loan and OREO losses as a percentage of
nonperforming assets.................................... 119.01% 199.04% 136.47% 105.29% 35.40%
</TABLE>
Provision and Allowance for Loan Losses
- ---------------------------------------
The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the Company's loan portfolio that
have been incurred as of the balance sheet date. The allowance for loan losses
is maintained at an adequate level through additions to the provision for loan
losses. An appropriate level of the general allowance is determined based on
the application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends , economic
conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement. Consistent with this definition, all non-
accrual and restructured loans (with the exception of residential mortgage and
consumer installment loans) are impaired. An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed on non-
accrual status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan. All impaired loans were evaluated using
the fair value of the underlying collateral as the measurement method.
It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial
prospects of borrowers may result in abrupt changes to the estimates, appraisals
or evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Gross loan charge-offs increased $218,000 to $2.4 million in 1998, compared to
$2.2 million in 1997 and $1.5 million in 1996. The ratio of net loan charge-
offs to average loans, including loans held for sale, was 0.15% for 1998 and
1997, compared to 0.01% for 1996. Commercial loan net charge-offs as a
percentage of average commercial loans was 0.03% for 1998, compared to 0% for
1997 and 1996. Residential real estate mortgage loan net charge-offs as a
percentage of average residential mortgage loans, including loans held for sale,
was 0.03% for 1998, 0.04% for 1997 and 0.05% for 1996. Mortgages on income
producing property net charge-offs as a percentage of average mortgages on
income producing property was 0.03% for 1998, compared to 0.24% for 1997 and,
due to recoveries on properties
5
<PAGE>
previously written down, was (1.00)% for 1996. Consumer loan net charge-offs as
a percentage of average consumer loans was 0.37% for 1998 and 1997 compared to
0.33% for 1996.
Allowances for losses on the loan portfolio totaled $11.0 million at December
31, 1998. Losses of $2.4 million were charged off and $347,000 was recovered, as
new provisions for loan losses of $2.5 million were recorded during the year. At
year-end, the allowance for loan losses represented .82% 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
-------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period......................... $10,549 $11,042 $10,081 $ 8,349 $11,570
Charge-offs:
Residential mortgages................................ 226 290 314 169 110
Mortgages on income-producing property............... 38 277 -- 1,019 3,109
Commercial loans..................................... 14 -- -- -- --
Consumer loans....................................... 2,123 1,616 1,216 999 773
-------------------------------------------------
2,401 2,183 1,530 2,187 3,992
Recoveries:
Residential mortgages................................ -- -- 3 917 9
Mortgages on income-producing property............... -- -- 1,098 245 300
Commercial loans..................................... -- -- -- -- --
Consumer loans....................................... 347 340 290 357 362
-------------------------------------------------
347 340 1,391 1,519 671
Net Charge-offs........................................ 2,054 1,843 139 668 3,321
Provision charged to operations........................ 2,500 1,350 1,100 2,400 100
-------------------------------------------------
Balance at end of period............................... $10,995 $10,549 $11,042 $10,081 $ 8,349
=================================================
Net charge-offs as a percentage of average loans....... 0.15% 0.15% 0.01% 0.07% 0.43%
Allowance for loan losses as a percentage of total
loans................................................. 0.82% 0.80% 1.03% 1.05% 1.01%
</TABLE>
The Company's policy for charging off loans varies with respect to the category
of and specific circumstances surrounding each loan under consideration.
Installment loans are generally charged off when deemed to be uncollectible or
180 days past due, whichever comes first. Charge-offs of commercial loans and
residential real estate mortgage loans are made on the basis of management's
ongoing evaluation of non-performing loans.
The following table summarizes the allocation of the allowance for loan losses
for general, specific and unallocated allowances by loan type and the percentage
of each loan type of total portfolio loans. The entire allowance, however, is
available for use against any type of loan loss deemed necessary.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount loans Amount loans Amount loans Amount loans Amount loans
to total to total to total to total to total
----------------------------------------------------------------------------------------------
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General allowances:
Residential mortgages.............. $ -- 49% $ -- 54% $ 11 57% $ 642 63% $ 634 63%
Mortgages on income-producing 2,680
property........................... -- 10 767 9 1,275 10 11 4,332 17
Commercial loans................... -- 4 -- 3 -- 1 -- 1 -- --
Consumer loans..................... 4,065 37 3,303 34 2,681 32 1,616 25 810 20
----------------------------------------------------------------------------------------------
Total general allowances........... 4,065 100% 4,070 100% 3,967 100% 4,938 100% 5,776 100%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount loans Amount loans Amount loans Amount loans Amount loans
to total to total to total to total to total
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific allowances:
Residential mortgages.............. -- -- -- -- -- -- -- -- -- --
Mortgages on income-producing
property........................... 1,145 -- 145 -- 385 -- -- -- 860 --
Commercial loans................... -- -- -- -- -- -- -- -- -- --
Consumer loans..................... -- -- -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Total specific allowances......... 1,145 145 385 -- 860
Unallocated allowances............. 5,785 6,334 6,690 5,143 1,713
--------------------------------------------------------------------------------------------------
Total allowance for loans....... $10,995 100% $10,549 100% $11,042 100% $10,081 100% $8,349 100%
==================================================================================================
</TABLE>
The following table summarizes the graded loan categories used in the allocation
of the allowance for loan losses among the Company's loans in each of the past
three years.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Graded loan categories:........................
Pass (Superior, High and Satisfactory)......... $1,322,513 $1,292,006 $1,042,541
Special mention................................ 4,579 10,812 13,303
Substandard.................................... 11,906 8,545 10,652
Doubtful....................................... -- -- 37
Loss........................................... 1,145 145 385
----------------------------------------------------
Total loans.................................. $1,340,143 $1,311,508 $1,066,918
====================================================
</TABLE>
Each element of the general allowance for December 31, 1998 was determined as
adequate by applying the following risk percentages to each grade: Pass -
residential: 0%, commercial: 0%, consumer: 0.80%; Special mention - residential:
0%, commercial: 0%, consumer 0.83%; Substandard - residential: 0%, commercial:
0%, consumer: 1.66%; Doubtful - 50%; and loss - 100%. The risk percentages are
developed by the Company in consultation with regulatory authorities, actual
loss experience and peer group loss experience, and are adjusted for current
economic conditions. The risk percentages are considered a prudent measurement
of the risk of the Company's loan portfolio.
The Company periodically reviews each commercial loan and assigns a grade based
on loan type, collateral value, financial condition of the borrower and payment
history. Delinquent residential mortgage and installment loans are reviewed and
assigned a rating based on their payment history, financial condition of the
borrower and collateral values. Specific mortgage and installment loans are
also reviewed in conjunction with the previously described review of any related
commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and reviews the adequacy of the allowance for
loan losses. Management believes this periodic review provides a mechanism that
results in loans being graded in the proper category and accordingly, assigned
the proper risk loss percentage in computing the general and specific reserve.
The provision for loan losses increased to $2.5 million during 1998 from $1.4
million in 1997. Additional provision was necessary as a result of the growth
of $79 million, or 13%, in consumer and business-related loans. In recognition
of this dynamic, the Company increased its loan loss provision for the higher
potential of losses typically associated with these types of loans. In 1997,
the provision for loan losses increased to $1.4 million from $1.1 million, with
the increased volume of consumer and commercial loans being the relevant factor
for the change.
There have been no changes in the Company's adequacy reviews or estimation
methods since 1996.
7
<PAGE>
ANALYSIS OF CASH FLOWS
The Company's balances of cash and cash equivalents decreased from $20.5 million
to $16.0 million in 1998. During the year, $188 million of cash was provided
from financing activities, primarily from expanded borrowings and increases in
customers' deposit balances. Investing activities utilized $320 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 $128 million of net cash in 1998.
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.
Interest Rate Risk Management
- -----------------------------
The Company's Asset/Liability Committee ("ALCO"), which meets monthly, is
responsible for reviewing the interest rate sensitivity position of the Company
and establishing policies to monitor and limit exposure to interest rate risk.
Senior management at the Bank is responsible for ensuring that the Bank's asset
and liability management procedures adhere to corporate policies.
During 1998, short-term and long-term interest rates decreased fairly
significantly. The three-month treasury bill decreased 88 basis points from
December 31, 1997 to December 31, 1998, while the 30-year treasury bond
decreased 83 basis points and the prime lending rate decreased 75 basis points
during 1998. As a result of these rate decreases, the demand for residential
loans increased significantly during 1998. Commercial lending was also
positively affected by the decrease in interest rates.
The Company employs various tools, including static gap analysis, interest rate
sensitivity analysis and simulation analysis, to assess the sensitivity of its
net interest income and MVPE to changes in interest rates.
Static Gap Analysis
- -------------------
D&N's cumulative gap analysis for December 31, 1998 is found in the table below.
<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..... $ 15,979 -- -- -- $ 15,979
Investment securities.............. 101,254 5 15 28,798 130,072
Mortgage-backed certificates....... 39,601 102,238 267,017 85,356 494,212
Net loans receivable............... 269,097 363,534 566,425 130,092 1,329,148
Other assets....................... 10,649 2,273 13,238 22,583 48,743
-----------------------------------------------------------------------
TOTAL ASSETS $436,580 $468,050 $846,695 $266,829 $2,018,154
=======================================================================
Liabilities:
Deposits........................... $233,468 $536,149 $310,581 $183,942 $1,264,140
FHLB advances and other borrowed
money.............................. 204,673 88,704 283,755 1,003 578,135
Escrow funds....................... -- -- -- 25,416 25,416
Other liabilities.................. -- -- -- 6,284 6,284
-----------------------------------------------------------------------
TOTAL LIABILITIES $438,141 $624,853 $594,336 $216,645 $1,873,975
=======================================================================
Preferred Stock of Subsidiary........... -- -- -- 28,719 28,719
Stockholders Equity:
Common stock....................... -- -- -- 93 93
Additional paid-in capital......... -- -- -- 78,375 78,375
Retained earnings and other........ -- -- -- 36,992 36,992
Treasury stock..................... -- -- -- -- --
-----------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $438,141 $624,853 $594,336 $360,824 $2,018,154
=======================================================================
</TABLE>
8
<PAGE>
<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>
Reprice difference................. $(1,561) $(156,803) $252,359 $(93,995)
Cumulative gap..................... $(1,561) $(158,364) $ 93,995 --
Percent of total assets............ (0.08)% (7.85)% 4.66% --
</TABLE>
For each maturity category in the table above, 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 (7.85)%, D&N's balance sheet is liability
sensitive. At year-end, however, 32.9% 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 above 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 $306 million and the
cumulative gap at twelve months would be negative $427 million.
Analysis of Interest Sensitive Assets and Liabilities
- -----------------------------------------------------
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, 1998.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------------------------
Total
1999 2000 2001 2002 2003 Thereafter Fair Value
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Loans receivable:
Real estate mortgages.... $216,111 $149,553 $108,606 $ 83,773 $ 61,384 $181,335 $ 800,762
Average interest rate.... 7.91% 7.77% 7.65% 7.69% 7.52% 7.34% 7.66%
Non-real estate
commercial............... 30,593 10,158 5,161 3,357 913 637 50,819
Average interest rate.... 8.66% 8.78% 8.77% 9.03% 8.01% 7.68% 8.69%
Consumer................. 192,625 130,600 86,951 49,972 25,287 15,773 501,208
Average interest rate.... 8.94% 8.89% 8.81% 8.79% 8.55% 8.50% 8.84%
Mortgage-backed securities......... 137,263 106,311 72,781 50,206 34,797 90,655 492,013
Average interest rate.... 6.62% 6.52% 6.45% 6.41% 6.30% 6.28% 6.47%
Investment securities
and interest bearing
deposits................. 99,959 5 5 -- -- 29,895 129,864
Average interest rate.... 6.16% 4.80% 4.90% -- -- 7.81% 6.54%
Mortgage servicing assets 735 624 531 451 383 2,173 4,897
--------------------------------------------------------------------------------
Total interest sensitive assets $677,286 $397,251 $274,035 $187,759 $122,764 $320,468 $1,979,563
================================================================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------------------------------------------
Total
1999 2000 2001 2002 2003 Thereafter Fair Value
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive liabilities:
Deposits:
NOW accounts.............. $ 32,333 $ 17,477 $ 10,486 $ 5,243 $ 4,369 $ 17,479 $ 87,387
Average interest rate..... 1.66% 1.66% 1.66% 1.66% 1.66% 1.66% 1.66%
Savings deposits.......... 40,339 33,234 23,746 17,813 11,880 110,588 237,600
Average interest rate..... 2.91% 2.98% 3.03% 3.07% 3.15% 3.31% 3.14%
Money-market accounts..... 82,064 7,271 4,155 3,116 2,078 5,194 103,878
Average interest rate..... 3.27% 3.27% 3.27% 3.27% 3.27% 3.27% 3.27%
Certificates of deposit... 612,856 92,759 25,239 10,021 4,411 19,298 764,584
Average interst rate...... 5.52% 5.63% 5.68% 6.06% 5.47% 5.83% 5.55%
Borrowings:
Securities sold under
agreements to repurchase.. 18,153 -- -- -- -- -- 18,153
Average interest rate...... 5.50% -- -- -- -- -- 5.50%
FHLB Advances and
Other borrowed money...... 205,815 147,235 208,370 464 399 3,374 565,657
Average interest rate..... 5.93% 5.80% 5.65% 9.95% 9.95% 8.32% 5.81%
------------------------------------------------------------------------------------------------
Total interest sensitive
liabilities.................... $991,560 $297,976 $271,996 $ 36,657 $ 23,137 $155,933 $1,777,259
================================================================================================
</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.
Earnings Simulation
- -------------------
On a monthly basis, the earnings simulation model is used to quantify the
effects of various hypothetical changes in interest rates on the Company's
projected net interest income over the ensuing twelve-month period. The model
permits management to evaluate the effects of various parallel shifts of the
U.S. Treasury yield curve, upward and downward, on net interest income expected
in a stable interest rate environment (i.e. base net interest income).
As of December 31, 1998, the earnings simulation model projects net interest
income would decrease by 7.9% of base net interest income for 1999, assuming an
immediate parallel shift upward in market interest rates by 300 basis points.
If market interest rates fall by 300 basis points, the model projects net
interest income would decrease by 7.0%. These projected levels are well within
the Company's policy limits. The earnings simulation model assumes that current
balance sheet totals remain constant and all maturities and prepayments of
interest-earning assets and interest-bearing liabilities are reinvested at
current market rates.
Impact of Interest Rate Fluctuations and Inflation on Earnings
- --------------------------------------------------------------
Unlike most industrial companies, substantially all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rate
fluctuations generally have a more significant and direct impact on a financial
institution's performance than do the effects of inflation. To the extent
inflation affects interest rates, real estate values and other costs, the
Company's lending activities may be adversely impacted. Significant increases
in interest rates make it more difficult for potential borrowers to purchase
residential property and to qualify for mortgage loans. As a result, the
Company's volume of loans originated may be reduced and the potential reduction
in the related interest income may be much larger than would be implied by a
simple linear extrapolation of the results generated by the earnings simulation
model. Significant decreases in interest rates typically result in higher loan
prepayment activity, which reduces interest income and causes the Company's
mortgage servicing rights to decrease in value. However, a lower interest rate
environment
10
<PAGE>
would enable more potential borrowers to reduce their mortgage interest rate and
qualify for relatively higher mortgage loan balances, therefore resulting in
higher mortgage loan production activity as well as interest income.
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 October 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". When SFAS 134 is initially applied, an enterprise may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. Those securities and other interests
shall be classified based on the entity's ability and intent to hold those
investments. This standard will be adopted effective January 1, 1999 and is not
expected to have any material effect on the Company's financial statements.
YEAR 2000
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's Year 2000 project is progressing on schedule. The project is addressing
computer hardware, software, procedures, large borrowers and facilities. This
project began in October 1996 and is scheduled for completion by June 1999.
To date all at-risk computer hardware has been tested and confirmed Year 2000
compliant.
11
<PAGE>
The four primary business applications (deposit account processing, installment
loan account processing, general ledger and mortgage loan processing) have been
certified Year 2000 compliant. The remaining application systems are being
tested and contingency plans have been developed to mitigate business
operational risk.
D&N's 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.
All newly acquired software is being tested for Year 2000 compliance before
acceptance. Software testing has been done to verify date changes from 1999 to
2000, the identification and correct processing of leap years, along with
numerous date projections from 1999 through the next millennium using day, month
and year increments.
Manual procedures have been reviewed and scheduled for change where date
specific actions occur. Necessary changes to supporting forms to properly
record dates in the new millennium have been identified and are being made.
Large commercial borrowers have been reviewed for their Year 2000 readiness and,
where necessary, their progress is being monitored for corrective action, their
business continuation and ability to repay their loans. New loan customers are
also being assessed for Year 2000 risk.
The building facilities owned and leased by the Bank have been reviewed for Year
2000 associated issues such as device controllers used for HVAC, elevators,
alarms and vaults. Where necessary, corrective actions have been taken.
Costs associated with addressing the Year 2000 issue as it affects D&N's third
party applications is implicitly included in the contractual arrangements for
those applications. D&N's total Year 2000 estimated project cost, which is
based upon currently available information, includes expenses for the review and
testing of third parties including governmental applications. However, there
can be no guarantee that the hardware, software and systems of such third
parties will be without unfavorable Year 2000 issues and therefore not present a
material adverse impact upon the Bank.
Year 2000 compliance costs incurred during fiscal 1998 totaled approximately
$26,000. This figure does not include the implicit costs associated with the
reallocation of internal staff hours to Year 2000 project related efforts. At
this time, management currently estimates Year 2000 compliance costs will not
exceed $100,000. This estimate does not include normal ongoing costs for
computer hardware, software, terminals and related devices that would be
replaced with the Company's ongoing programs for updating its delivery
infrastructure without the presence of the Year 2000 issue. The aforementioned
Year 2000 project cost estimate may change as the Bank progresses in its Year
2000 programs and obtains additional information associated with, and conducts
further testing concerning third parties. At this time no significant projects
have been delayed as a result of D&N's Year 2000 effort.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, under the most
reasonably likely worst case scenario, the Company would be required to process
certain transactions manually, which may effect customer service. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. The Company could be
subject to litigation for equipment shutdown or failure to properly date
customer records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
OTHER ITEMS
On December 1, 1998, the Company announced that it had entered into a definitive
agreement to merge with Republic Bancorp Inc. (Nasdaq:RBNC), whereby Republic
Bancorp will be the surviving corporation. The combined company will create the
fourth largest bank holding company with headquarters in Michigan with over $4
billion in assets. The merger is subject to shareholder and regulatory
approvals, and is expected to be completed in the second quarter 1999.
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.
12
<PAGE>
SELECTED FINANCIAL HIGHLIGHTS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Net interest income $ 52,689 $ 48,939 $ 42,763 $ 34,750 $ 23,786
Provision for loan losses 2,500 1,350 1,100 2,400 100
Noninterest income 13,820 8,920 7,224 6,912 7,488
Net income 16,062 14,325 8,995 10,417 3,383
Earnings per share
Basic 1.75 1.58 1.08 1.27 0.41
Diluted 1.69 1.53 1.01 1.24 0.41
Shares outstanding:
Basic 9,157,923 9,093,682 8,336,517 8,172,292 8,161,600
Diluted 9,507,130 9,364,874 8,906,109 8,403,028 8,185,146
Stock price range 15 1/4 - 29 3/4 14 57/64 - 26 3/4 10 29/32 - 16 9/64 6 19/32 - 12 17/64 6 1/64 - 9 3/32
Cash dividends declared,
per common share $ 0.20 $ 0.10 -- -- --
AT YEAR END:
Total assets 2,018,154 1,815,315 1,473,054 1,228,497 1,128,732
Net loans receivable 1,329,148 1,300,959 1,055,876 952,359 821,875
Nonperforming assets 9,238 5,300 8,091 9,701 24,520
Mortgage-backed securities 494,212 358,296 251,256 127,709 151,293
Excess of cost over net assets of
association acquired -- -- -- -- 384
Capitalized mortgage servicing rights 4,822 2,136 1,443 1,113 968
Deposits 1,264,140 1, 043,167 964,133 922,932 817,674
Borrowings 578,135 619,523 404,037 216,295 226,956
Stockholders' equity 115,460 98,082 86,121 71,979 58,325
Per share 12.39 10.78 9.38 8.75 7.15
Tangible stockholders' equity 107,771 97,184 85,110 70,855 58,264
Per share 11.57 10.68 9.27 8.62 7.14
Number of offices 53 48 48 46 41
SELECTED RATIOS:
Return on average assets 0.85% 0.88% 0.67% 0.89% 0.31%
Return on average equity 15.11 15.75 11.58 16.01 5.97
Average equity to average assets 5.61 5.59 5.77 5.53 5.26
Net interest margin 2.87 3.08 3.26 3.04 2.31
General & administrative expenses to
average assets 1.92 2.01 2.34 2.44 2.48
Nonperforming assets to total assets 0.46 0.29 0.55 0.79 2.17
Allowance for loan losses to
nonperforming loans 139.78 275.72 166.77 122.21 46.38
Allowance for loan losses to total
loans 0.82 0.80 1.03 1.05 1.01
Net loan charge-offs to average loans 0.15 0.15 0.01 0.07 0.43
Tangible capital ratio 6.40 6.55 5.11 5.41 5.05
Core capital ratio 6.40 6.55 5.11 5.41 5.09
Risk-based capital ratio 10.94 11.98 9.94 10.45 10.08
</TABLE>
All per share amounts have been restated to include the effects of a 10% stock
dividend and adoption of SFAS 128, in 1997.
13
<PAGE>
[PRICEWATERHOUSECOOPERS LETTERHEAD]
Report of Independent Auditors
To the Board of Directors and Stockholders of
D&N Financial Corporation:
In our opinion, the accompanying Consolidated Statements of Condition and the
related Consolidated Statements of Operations, Stockholders' Equity and of Cash
Flows present fairly, in all material respects, the financial position of D&N
Financial Corporation and its Subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 21, 1999
14
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
December 31
-------------------------
1998 1997
----------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,945 $ 16,239
Federal funds sold -- 300
Interest-bearing deposits in other banks 34 3,958
---------- ----------
Total cash and cash equivalents 15,979 20,497
Investment securities
(market value of $28,678,000 in 1998 and $56,594,000 in 1997) 28,678 56,524
Investment securities available for sale (at market value) 101,394 46,112
Mortgage-backed securities
(market value of $42,025,000 in 1998 and $199,525,000 in 1997) 41,446 198,050
Mortgage-backed securities available for sale (at market value) 452,766 160,246
Loans receivable (including loans held for sale of $8,801,000 in 1998
and $5,275,000 in 1997) 1,340,143 1,311,508
Allowance for loan losses (10,995) (10,549)
---------- ----------
Net loans receivable 1,329,148 1,300,959
Other real estate owned, net 857 1,474
Federal income taxes 2,721 1,129
Office properties and equipment, net 19,005 16,621
Other assets 26,160 13,703
---------- ----------
$2,018,154 $1,815,315
========== ==========
LIABILITIES
Checking and NOW accounts $ 166,802 $ 119,412
Money market accounts 103,878 92,314
Savings deposits 237,600 163,119
Time deposits 754,317 667,204
Accrued interest 1,543 1,118
---------- ----------
Total deposits 1,264,140 1,043,167
Securities sold under agreements to repurchase 18,153 149,092
FHLB advances and other borrowed money 559,982 470,431
Advance payments by borrowers and investors held in escrow 25,416 17,585
Other liabilities 6,284 8,239
---------- ----------
Total liabilities 1,873,975 1,688,514
PREFERRED STOCK OF SUBSIDIARY 28,719 28,719
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share (1,000,000 shares authorized;
none issued) -- --
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 9,318,089 in 1998 and 9,197,224 in 1997) 93 92
Additional paid-in capital 78,375 77,025
---------- ----------
Total paid-in capital 78,468 77,117
Retained earnings - substantially restricted 35,265 21,042
Less: Cost of treasury stock (none in 1998 and 98,129 in 1997) -- (1,581)
Accumulated other comprehensive income 1,727 1,504
---------- ----------
Total stockholders' equity 115,460 98,082
---------- ----------
$2,018,154 $1,815,315
========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
D&N Financial Corporation
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-------------------------------------------------
(Dollars in thousands, except earnings per share)
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 105,777 $ 98,560 $ 86,151
Mortgage-backed securities 27,568 19,085 10,930
Investments and deposits 6,629 8,048 7,228
-------- -------- --------
Total interest income 139,974 125,693 104,309
INTEREST EXPENSE
Deposits 51,206 47,961 43,859
Securities sold under agreements to repurchase 4,521 5,571 2,193
FHLB advances and other borrowed money 31,558 23,222 15,494
-------- -------- --------
Total interest expense 87,285 76,754 61,546
-------- -------- --------
Net interest income 52,689 48,939 42,763
Provision for loan losses 2,500 1,350 1,100
-------- -------- --------
Net interest income after provision for loan
losses 50,189 47,589 41,663
NONINTEREST INCOME
Loan administrative fees 1,850 1,916 1,914
Deposit related fees 4,389 4,080 3,621
Gain on sale of loans held for sale 3,521 1,728 1,031
Gain on sale of securities available for sale 2,830 539 188
Other income 1,230 657 470
-------- -------- --------
Total noninterest income 13,820 8,920 7,224
NONINTEREST EXPENSE
Compensation and benefits 19,643 17,881 16,881
Occupancy 3,362 3,110 2,834
Other expense 13,357 11,655 11,863
-------- -------- --------
General and administrative expense 36,362 32,646 31,578
Other real estate owned, net 167 (81) 71
FDIC insurance 794 658 7,894
-------- -------- --------
Total noninterest expense 37,323 33,223 39,543
-------- -------- --------
Income before income tax expense 26,686 23,286 9,344
Federal income tax expense 7,901 7,743 349
-------- -------- --------
Income before preferred stock dividends 18,785 15,543 8,995
Preferred stock dividend of subsidiary 2,723 1,218 --
-------- -------- --------
NET INCOME $ 16,062 $ 14,325 $ 8,995
======== ======== ========
Earnings per share:
Basic $ 1.75 $ 1.58 $ 1.08
======== ======== ========
Diluted $ 1.69 $ 1.53 $ 1.01
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N Financial Corporation
<TABLE>
<CAPTION>
Treasury Accumulated
Additional Stock & Leveraged Other Total
Common Paid-in Retained Treasury ESOP Comprehensive Stockholders'
Stock Capital Earnings Warrants Debt Income Equity
---------- --------- ---------- --------- -------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $ 75 $ 49,936 $ 20,573 $ (257) $ (63) $ 1,715 $ 71,979
Comprehensive Income:
Net income -- -- 8,995 -- -- -- 8,995
Change in value of securities
available for sale -- -- -- -- -- (472) (472)
------
Total comprehensive income 8,523
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) -- 3,350 -- -- --
Reduction of leveraged ESOP debt -- -- -- -- 63 -- 63
---------- ------- --------- -------- ----- ------------- --------
Balance December 31, 1996 $ 84 $ 55,452 $ 29,568 $ (226) $ -- $ 1,243 $ 86,121
Comprehensive Income:
Net income -- -- 14,325 -- -- -- 14,325
Change in value of securities
available for sale -- -- -- -- -- 261 261
--------
Total comprehensive income 14,586
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 96,681 treasury shares -- (1,640) -- 1,640 -- -- --
---------- ------- --------- -------- ----- ------------- --------
Balance December 31, 1997 $ 92 $ 77,025 $ 21,042 $ (1,581) $ -- $ 1,504 $ 98,082
Comprehensive Income:
Net income -- -- 16,062 -- -- -- 16,062
SFAS 133 transition adjustment -- -- -- -- -- 2,432 2,432
Change in value of securities
available for sale -- -- -- -- -- (2,209) (2,209)
--------
Total comprehensive income 16,285
Cash dividends, common stock
($0.20 per share) -- -- (1,839) -- -- -- (1,839)
Issuance of common stock upon
exercise of stock options -
235,224 shares 1 3,314 -- -- -- -- 3,315
Purchase of treasury stock -- -- -- (383) -- -- (383)
Reissuance of 114,359 treasury shares -- (1,964) -- 1,964 -- -- --
---------- ------- --------- -------- ----- ------------- ------------
Balance December 31, 1998 $ 93 $ 78,375 $ 35,265 $ -- $ -- $ 1,727 $115,460
========== ========= ========= ======== ===== ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,062 $ 14,325 $ 8,995
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,500 1,350 1,100
Depreciation and amortization of office properties and equipment 2,323 1,987 1,954
Amortization of net premiums (discounts) on purchased
loans and securities (520) (925) (73)
Originations and purchases of loans held for sale (106,167) (47,928) (56,132)
Proceeds from sales of loans held for sale 231,097 89,889 73,658
Gain on securities available for sale (2,830) (539) (188)
Gain on sale of loan servicing rights (207) -- --
Amortization and writedowns of mortgage servicing rights 1,866 543 300
Increase in originated mortgage servicing rights (4,554) (1,236) (543)
(Increase) decrease in income taxes deferred (1,367) 5,357 (662)
Increase in prepaid dealer reserves (2,635) (3,223) (1,918)
(Increase) decrease in core deposit intangible (6,791) 113 113
Other (1,026) (37) 635
--------- --------- ---------
Net cash provided by operating activities 127,751 59,676 27,239
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale -- 20 298
Proceeds from maturities of investment securities 231,353 202,066 83,970
Purchases of investment securities to be held to maturity (259,044) (184,903) (107,012)
Proceeds from sales of mortgage-backed securities available for sale 112,168 24,094 --
Principal collected on mortgage-backed securities 175,549 64,150 54,951
Purchases of mortgage-backed securities (337,029) (107,400) (58,661)
Loans purchased (193,778) (234,886) (148,405)
Net change in loans receivable (45,029) (137,882) (94,006)
(Increase) decrease in other real estate owned 617 (4) (151)
Sales of loan servicing rights 207 -- --
Purchases of office properties and equipment (5,229) (3,279) (3,128)
--------- --------- ---------
Net cash used by investing activities (320,215) (378,024) (272,144)
FINANCING ACTIVITIES
Increase in time deposits 87,113 50,102 23,058
Increase in other deposits 133,435 28,748 18,666
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 340,285 513,052 309,040
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (381,811) (297,717) (121,482)
Net change in advance payments by borrowers and investors
held in escrow 7,831 5,777 479
Common stock cash dividend (1,839) (826) --
Net proceeds from issuance of stock 3,315 1,196 9,055
Purchases of treasury stock/warrants (383) (2,995) (3,499)
Proceeds from issuance of subsidiary preferred stock -- 28,719 --
Reduction of leveraged ESOP debt -- -- (63)
--------- --------- ---------
Net cash used by investing activities 187,946 326,056 235,254
Increase (Decrease) in cash and cash equivalents (4,518) 7,708 (9,651)
Cash and cash equivalents at beginning of year 20,497 12,789 22,440
--------- --------- ---------
Cash and cash equivalents at end of year $ 15,979 $ 20,497 $ 12,789
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 87,487 $ 75,416 $ 61,689
Income taxes paid $ 8,740 $ 2,027 $ 299
Noncash investing activities:
Transfer of loans to other real estate owned $ 359 $ 961 $ 3,373
Securitization of loans into mortgage-backed securities $ 82,856 $ 86,066 $ 119,717
See Notes to Consolidated Financial Statements.
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N FINANCIAL CORPORATION, DECEMBER 31, 1998
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 53 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.
Allowance for Loan Losses: The allowance for loan losses represents the
Company's estimate of probable credit losses related to specifically identified
loans as well as probable credit losses inherent in the remainder of the
Company's loan portfolio that have been incurred as of the balance sheet date.
The allowance for loan loss is maintained at an adequate level through additions
to the provision for loan losses. An appropriate level of the general allowance
is determined based on the application of projected risk percentages to graded
loans by categories. In addition, specific reserves are established for
individual loans when deemed necessary by management. Management also considers
other factors when determining the unallocated allowance, including loan
quality, changes in the size and character of the loan portfolio, consultation
with regulatory authorities, amount of nonperforming loans, delinquency trends,
economic conditions and industry trends.
SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as
amended by SFAS No. 118, considers a loan impaired when it is probable that
payment of principal and interest will not be collected in accordance with the
contractual terms of the original loan agreement. Consistent with this
definition, all non-accrual and restructured loans (with the exception of
residential mortgage and consumer installment loans) are impaired. An impaired
loan for which it is deemed necessary to record a specific allowance is,
typically, written down to the fair value of the underlying collateral at the
time it is placed on non-accrual status via a direct charge-off against the
allowance for loan losses. Consequently, those impaired loans not requiring a
specific allowance represent loans for which the fair value of the underlying
collateral equaled or exceeded the recorded investment in the loan. All impaired
loans were evaluated using the fair value of the underlying collateral as the
measurement method.
It must be understood, however, that inherent risks and uncertainties
related to the operation of a financial institution require management to depend
on estimates, appraisals and evaluations of loans to prepare the Company's
financial statements. Changes in economic conditions and the financial
prospects of borrowers may result in abrupt changes to the estimates, appraisals
or evaluations used. In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.
Each element of the general allowance for December 31, 1998 was determined
as adequate by applying the following risk percentages to each grade: Pass -
residential: 0%, commercial: 0%, consumer: 0.80%; Special mention - residential:
0%, commercial:
19
<PAGE>
0%, consumer: 0.83%; Substandard - residential: 0%, commercial: 0%, consumer:
1.66%; Doubtful - 50%; and Loss - 100%. The risk percentages are developed by
the Company in consultation with regulatory authorities, actual loss experience
and peer group loss experience, and are adjusted for current economic
conditions. The risk percentages are considered a prudent measurement of the
risk of the Company's loan portfolio. The general allowances for December 31,
1997 and December 31, 1996 were determined as adequate based on this same rating
system, using different risk percentages.
The Company periodically reviews each commercial loan and assigns a grade
based on loan type, collateral value, financial condition of the borrower and
payment history. Delinquent residential mortgage and installment loans are
reviewed and assigned a rating based on their payment history, financial
condition of the borrower and collateral values. Specific mortgage and
installment loans are also reviewed in conjunction with the previously described
review of any related commercial loan.
Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and computes the allowance for loan losses.
Management believes this periodic review provides a mechanism that results in
loans being graded in the proper category and accordingly, assigned the proper
risk loss percentage in computing the general or specific reserve.
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.
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 on a disaggregate basis,
stratified by mortgage type, term and rate. Identified impairments are
recognized through a valuation allowance.
20
<PAGE>
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 year 1996 has been
restated to comply with this standard.
Basic earnings per share is calculated by dividing net income by the
average number of shares outstanding during the applicable period.
The Company has issued 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.
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
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
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: 9,158 $ 1.75 9,094 $ 1.58 8,337 $ 1.08
Net dilutive effect of:
Stock options outstanding 349 (0.06) 271 (0.05) 167 (0.02)
Warrants outstanding -- -- -- -- 402 (0.05)
----- ------ ----- ------ ----- ------
Diluted EPS: 9,507 $ 1.69 9,365 $ 1.53 8,906 $ 1.01
===== ====== ===== ====== ===== ======
</TABLE>
Options to purchase 170,234 shares of common stock at $24.38 to $25.50 per
share were outstanding at December 31, 1998. 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 common stock in 1998 and 1997, respectively.
Reclassifications: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with the current year
presentation.
Comprehensive Income: The Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, as of January 1,
1998. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components. The Company displays comprehensive
income in the statement of stockholders' equity and has reclassified all prior
periods as required.
Segment Reporting: In 1998, the Company adopted SFAS 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS 131 supersedes SFAS 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach which designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosure about products and services, geographic areas,
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see "Segment Information" Note W).
Accounting for Derivative Instruments and Hedging Activities: The Company
elected to adopt Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, on July 1, 1998, which
constituted early adoption. In accordance with the transition provision of SFAS
133, the Company reclassified $163.4 million of "held-to-maturity" securities as
"available-for-sale". This reclassification resulted in a net-of-tax cumulative-
effect-type adjustment of approximately $2.4 million in other comprehensive
income. Under the provision of SFAS 133, such reclassification does not call
into question the Company's intent to hold current or future debt securities to
their maturity.
21
<PAGE>
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
March 31, 1996
-----------------------
(Dollars in thousands)
<S> <C>
Net interest income (as previously reported) $9,465
Macomb Federal Savings Bank - net interest income 217
------
Total net interest income $9,682
======
Net income (as previously reported) $3,497
Macomb Federal Savings Bank - net income (9)
------
Total net income $3,488
======
A reconciliation of per share income is as follows:
Three Months Ended
March 31, 1996
----------------------
Basic earnings per share
Net income (as previously reported) $ 0.47
Macomb Federal Savings Bank (0.05)
------
Basic earnings per share $ 0.42
======
Diluted earnings per share
Net income (as previously reported) $ 0.44
Macomb Federal Savings Bank (0.04)
------
Diluted earnings per share $ 0.40
======
</TABLE>
NOTE C: REAL ESTATE INVESTMENT TRUST
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 21, 2002.
On or after July 21, 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 1998 and 1997, D&N Capital declared and paid
preferred dividends totaling $2,722,500 and $1,217,563, respectively.
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, 1998 and December 31, 1997 were $1,235,000 and $452,000,
respectively.
22
<PAGE>
NOTE E: INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
Book Market Book Market
Value Value Value Value
---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ -- $ -- $ 33,299 $ 33,369
Investment in Federal Home Loan Bank stock 28,651 28,651 23,200 23,200
Other equity securities 27 27 25 25
-------- -------- -------- --------
Held to maturity 28,678 28,678 56,524 56,594
U.S. Treasury securities 10,237 10,246 44,764 44,860
Commercial paper 89,851 89,851 -- --
Municipal bonds 141 141 148 148
Other securities 1,141 1,156 1,088 1,104
Valuation allowances 24 -- 112 --
-------- -------- -------- --------
Available for sale 101,394 101,394 46,112 46,112
-------- -------- -------- --------
$130,072 $130,072 $102,636 $102,706
======== ======== ======== ========
An analysis of gross unrealized gains and losses is as follows:
1998 1997
-----------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity $ -- $ -- $ 70 $ --
-------- -------- -------- --------
U.S. Treasury securities -- -- 70 --
Available for sale 9 -- 97 (1)
U.S. Treasury securities 15 -- 16 --
-------- -------- -------- --------
Other securities 24 -- 113 (1)
-------- -------- -------- --------
$ 24 $ -- $ 183 $ (1)
======== ======== ======== ========
</TABLE>
There were no sales of investment securities during 1998 or 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.
The book value, market value and average yield of U. S. Treasury securities
available for sale with contractual maturities under one year available for sale
at December 31, 1998 were $10,237,000, $10,246,000 and 6.03% respectively.
23
<PAGE>
NOTE F: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1998 1997
--------------------- ---------------------
Book Market Book Market
Value Value Value Value
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 5,528 $ 5,694 $112,156 $113,253
Collateralized mortgage obligations 35,824 35,992 84,788 84,987
Accrued interest receivable 339 339 1,285 1,285
Net discounts (245) -- (179) --
-------- -------- -------- --------
Held to maturity 41,446 42,025 198,050 199,525
December 31
-------------------------------------------
1998 1997
--------------------- ---------------------
Book Market Book Market
Value Value Value Value
---------- --------- ---------- ---------
(Dollars in thousands)
Government agency securities 95,590 96,652 86,658 88,145
Collateralized mortgage obligations 350,213 353,055 69,104 69,715
Interest-only certificates 153 620 378 1,422
Accrued interest receivable 2,439 2,439 964 964
Net premiums 1,738 -- 940 --
Valuation allowances 2,633 -- 2,202 --
-------- -------- -------- --------
Available for sale 452,766 452,766 160,246 160,246
-------- -------- -------- --------
$494,212 $494,791 $358,296 $359,771
======== ======== ======== ========
</TABLE>
Mortgage-backed securities with a carrying value of $109,125,000 are
specifically pledged as collateral for advances from the Federal Home Loan Bank
of Indianapolis and other borrowings.
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997
---------- ----------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 167 $ -- $1,238 $(368)
Collateralized mortgage obligations 422 (8) 675 (70)
------ ----- ------ -----
Held to maturity 589 (8) 1,913 (438)
Government agency securities 1,027 -- 743 (1)
Collateralized mortgage obligations 1,342 (203) 424 (8)
Interest only certificates 467 -- 1,044 --
------ ----- ------
Available for sale 2,836 (203) 2,211 (9)
------ ----- ------ -----
$3,425 $(211) $4,124 $(447)
====== ===== ====== =====
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale
during 1998 were $112,557,000. Gross gains of $2,830,000 were realized on
those sales. 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.
24
<PAGE>
The book value and market value of mortgage-backed securities at December 31,
1998, 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 835 843 6.76 -- -- --
Five to ten years 679 695 7.55 -- -- --
After ten years 4,014 4,156 7.54 95,625 96,652 6.40
------- ------- ----- -------- -------- --------
5,528 5,694 7.42 95,625 96,652 6.40
Collateralized mortgage obligations
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years 3,996 4,039 6.82 -- -- --
After ten years 31,583 31,953 7.00 351,916 353,055 6.33
------- ------- ----- -------- -------- --------
35,579 35,992 6.98 351,916 353,055 6.33
Interest-only certificates
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years -- -- -- 2 10 1411.67
After ten years -- -- -- 151 610 143.30
------- ------- ----- -------- -------- --------
-- -- -- 153 620 168.18
------- ------- ----- -------- -------- --------
$41,107 $41,686 7.04% $447,694 $450,327 6.40%
======= ======= ===== ======== ======== ========
</TABLE>
Mortgage-backed securities will mature according to the repayment
characteristics of the underlying mortgage loans which collateralize the
securities. Expected maturities for 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, 1998 or 1997.
NOTE G: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997
---------- ----------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 638,725 $ 643,103 $ 694,902 $ 706,459
Residential mortgages held for sale 8,801 8,804 5,275 5,275
Mortgages on income producing property 94,009 93,869 81,304 79,007
Construction loans 55,122 54,986 56,176 55,901
Consumer loans 501,062 501,208 446,710 449,276
Commercial loans 51,022 50,819 38,164 37,706
Accrued interest receivable 7,023 7,023 7,311 7,311
---------- ---------- ---------- ----------
1,355,764 1,359,812 1,329,842 1,340,935
Less:
Discounts on purchased loans (2,312) -- (2,356) --
Allowance for loan losses 10,995 -- 10,549 --
Undisbursed portion of loan proceeds 17,679 -- 20,315 --
Deferred income 254 -- 375 --
---------- ---------- ---------- ----------
$1,329,148 $1,359,812 $1,300,959 $1,340,935
========== ========== ========== ==========
</TABLE>
25
<PAGE>
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
-------------------------------
1998 1997
------------------------------
(Dollars in thousands)
<S> <C> <C>
Shopping centers $24,020 $22,185
Offices 18,355 6,905
Multi-family apartments 12,238 19,913
Motels/hotels 11,270 11,491
Nursing Homes 9,498 5,291
Condominium Development 6,945 4,240
Industrial 6,830 4,774
Mobile home parks 4,262 2,118
Other 591 4,387
----------------------------
$94,009 $81,304
============================
</TABLE>
Loans collateralized by income producing property categorized by state are
as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
-------------------------
(Dollars in thousands)
<S> <C> <C>
Michigan $85,017 $65,697
California 6,261 11,008
New York -- 805
Pennsylvania 241 405
Other 2,490 3,389
-------------------------
$94,009 $81,304
=========================
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $10,549 $11,042 $10,081
Provisions for loan losses 2,500 1,350 1,100
Net charge-offs (2,054) (1,843) (139)
-----------------------------
Balance at end of year $10,995 $10,549 $11,042
=============================
</TABLE>
At December 31, 1998 and 1997, the total recorded investment in impaired
loans, as defined by SFAS 114 "Accounting by Creditors for Impairment of a
Loan", was $9,667,000 and $4,779,000, respectively. In 1998 and 1997 the amount
of the recorded investment for which there is a related allowance for loan
losses is $1,145,000 and $145,000, respectively, and the amount of the recorded
investment for which there is no related allowance for loan losses is $8,522,000
and $4,634,000, respectively. Interest income on impaired loans is recognized
primarily on a cash basis. During 1998 and 1997, 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>
1998 1997 1996
----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,136 $1,443 $1,113
Originations and acquisitions 4,552 1,236 630
Amortizations, sales, and writedowns (1,866) (543) (300)
---------------------------
Balance at end of year $ 4,822 $2,136 $1,443
===========================
</TABLE>
26
<PAGE>
Changes in the valuation allowance for mortgage servicing rights are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 321 $ 221 $ 291
Additions:
Purchased mortgage servicing right -- 38 151
Originated mortgage servicing rights 464 154 55
---------------------------
Total additions 464 192 206
Reductions:
Purchased mortgage servicing rights 177 69 158
Originated mortgage servicing rights 99 23 118
---------------------------
Total reductions 276 92 276
---------------------------
Balance at end of year $ 509 $ 321 $ 221
===========================
</TABLE>
At December 31, 1998 and 1997, the fair value of capitalized mortgage
servicing rights was $4,897,000 and $2,389,000, respectively.
Loans serviced for others amounted to $575,818,000, $518,877,000, and
$415,156,000 at December 31, 1998, 1997 and 1996, respectively.
NOTE H: OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
--------------------
(Dollars in thousands)
<S> <C> <C>
Real estate acquired through foreclosure $ 680 $ 742
Real estate in judgment 177 732
---------------
$ 857 $1,474
===============
</TABLE>
Changes in the allowance for possible losses on OREO are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ 133
Provision for losses -- -- --
Net charge-offs -- -- --
-------------------------
Balance at end of year $ -- $ -- $ 133
=========================
</TABLE>
The Company recorded writedowns of other real estate owned amounting to
$61,000 during 1998 and $75,000 during 1996. The Company did not record any
writedowns of other real estate owned in 1997.
The Company recognized net gains on sale of OREO amounting to $68,000,
$132,000 and $164,000 during 1998, 1997 and 1996, respectively.
27
<PAGE>
NOTE I: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Cost:
Land $ 2,651 $ 2,565
Buildings and improvements 19,348 17,653
Furniture and equipment 17,214 18,749
-------------------
39,213 38,967
Less accumulated depreciation 20,208 22,346
-------------------
$19,005 $16,621
===================
</TABLE>
Depreciation and amortization expense was $2,323,000, $1,987,000 and
$1,954,000 in 1998, 1997 and 1996, respectively.
Rental expense for leased properties and equipment was $1,424,000,
$1,150,000 and $938,000 in 1998, 1997 and 1996, respectively. The aggregate
minimum annual rental commitments under these leases are approximately
$1,323,000 in 1999, $1,208,000 in 2000, $1,082,000 in 2001, $837,000 in 2002,
$539,000 in 2003 and $2,422,000 thereafter.
NOTE J: DEPOSITS
The carrying amounts and fair values of deposits and the nominal rates of
interest paid were as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
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 $ 79,415 $ 79,415 --% $ 56,473 $ 56,473 --
NOW accounts 87,387 87,387 1.66 62,939 62,939 1.51
Money market accounts 103,878 103,878 3.27 92,314 92,314 4.02
Savings deposits 237,600 237,600 3.14 163,119 163,119 3.16
Certificates of deposit 754,317 764,584 5.55 667,204 673,314 5.93
Accrued interest 1,543 1,543 -- 1,118 1,118 --
---------------------------------------------------------------------
$1,264,140 $1,274,407 4.29% $1,043,167 $1,049,277 4.74%
=====================================================================
</TABLE>
Included in deposits are $228,468,000 and $144,426,000 of deposit accounts
with balances in excess of $100,000 as of December 31, 1998 and 1997,
respectively.
Certificates of deposit had the following maturities at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
---------------------------
(Dollars in thousands)
<S> <C> <C>
1999 $605,344 5.52%
2000 91,464 5.63
2001 24,801 5.68
2002 9,737 6.06
2003 and beyond 22,971 5.76
----------------------
$754,317 5.55%
======================
</TABLE>
28
<PAGE>
The average balance, interest expense and average rate on deposits were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts $ 62,935 $ -- -- % $ 47,680 $ -- -- % $ 40,349 $ -- $ --
NOW and money
market accounts 168,545 4,841 2.87 152,615 4,547 2.98 146,863 4,490 3.06
Savings deposits 196,502 6,581 3.35 154,541 4,623 2.99 153,701 4,446 2.89
Certificates of deposit 686,017 39,784 5.80 657,401 38,791 5.90 597,571 34,923 5.84
------------------------------------------------------------------------------------------------------
$1,113,999 $ 51,206 4.60% $1,012,237 $ 47,961 4.74% $ 938,484 $ 43,859 4.67%
======================================================================================================
</TABLE>
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
-------------------------------------
1998 1997
-------------------------------------
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 $18,715,000 and a market value
of $18,997,000 in 1998, and a book value
including accrued interest of $151,761,000
and a market value of $152,766,000 in 1997. $18,153 $18,153 $149,092 $149,092
=====================================
</TABLE>
Securities sold under agreements to repurchase averaged $80,106,000 and
$98,471,000 during 1998 and 1997, respectively, and the maximum amounts
outstanding at any month-end during 1998 and 1997 were $148,639,000 and
$181,055,000, 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.
As of December 31, 1998, the only agreement to repurchase was with Bear
Stearns in the amount of $18,153,000 at an interest rate of 5.50%, with a
maturity date of January 8, 1999.
29
<PAGE>
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
--------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ----------------- -------------------
Year of Weighted Carrying Fair Carrying Fair
Maturity Average Rate Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Advances from FHLB:
Variable rate of interest:
5.69 - 5.88% 1998 --% 5.76% $ -- $ -- $ 61,000 $ 61,001
Fixed rate of interest:
5.47 - 5.98% 1998 -- 5.88 -- -- 153,000 153,190
5.81 - 6.20 1999 5.99 5.99 179,000 179,801 179,000 179,927
5.35 - 5.97 2000 5.78 5.92 145,000 146,608 70,000 70,509
5.21 - 5.94 2001 5.64 -- 205,000 207,831 -- --
4.00 2005 4.00 4.00 1,003 925 1,003 888
-------------------------------------------------------------------
530,003 535,165 464,003 465,515
Other borrowed money:
Overnight funds 5.36 -- 25,285 25,285 -- --
Collateralized mortgage obligation. 10.60 10.04 4,694 5,207 6,428 6,974
--------------------------------------------------------
$559,982 $565,657 $470,431 $472,489
======================================
</TABLE>
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 $5,241,000 and $7,154,000 at
December 31, 1998 and December 31, 1997, respectively. The note underlying the
obligations bears interest, payable quarterly, at a rate of 7.27%, with a
contractual maturity date of 2010.
NOTE M: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current $7,138 $4,634 $ --
Deferred 763 3,109 3,228
Change in valuation allowance
for deferred tax assets -- -- (2,879)
------------------------
$7,901 $7,743 $ 349
========================
</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 1998, 1997 and 1996 amounted to $262,000, $141,000, and
$(181,000), respectively.
30
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
<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)
Other, net (2.0) 0.1 (0.5)
--------------------
Effective tax rate 33.0% 35.1% 3.7%
====================
</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
----------------------
1998 1997
----------------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $3,031 $3,086
Net deferral required by SFAS 91 17 79
Pension and other benefit obligations 676 700
Other, net 281 398
------------------
Total deferred tax assets 4,005 4,263
Deferred tax liabilities:
Securities marked to market for tax purposes* 147 (13)
Fixed assets 644 588
FHLB stock 1,075 1,075
Valuation adjustment on CMO residuals 1,459 1,431
Other, net 52 53
------------------
Total deferred tax liabilities 3,377 3,134
------------------
Total net deferred tax assets 628 1,129
Current income tax receivable due to overpayments 2,093 --
------------------
Total net federal income tax assets $2,721 $1,129
==================
</TABLE>
* The amount shown is net of the $930,000 and $810,000 tax effect of SFAS 115
unrealized holding gains at December 31, 1998 and December 31, 1997,
respectively.
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 a 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.
31
<PAGE>
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.
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, 1998, 100% 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.
During 1998, the Company declared and paid a $0.05 per share cash dividend,
quarterly. The fourth quarter's dividend was paid on January 12, 1999, to
holders of record December 23, 1998. The liability for the cash dividend is
shown in Other Liabilities on the accompanying financial statements.
Regulatory standards, as dictated by the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") 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, 1998, the Bank exceeded all regulatory capital standards.
The table below summarizes as of December 31, 1998, 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 $101,933 8.00% $139,380 10.94%
Tier 1 risk-based capital 76,450 6.00 129,530 10.17
Core capital 60,720 3.00 129,530 6.40
Tangible capital 30,360 1.50 129,530 6.40
</TABLE>
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 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. At December 31, 1998, 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 19% 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
32
<PAGE>
Company's common stock and 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 $688,000, $653,000 and $621,000 in
1998, 1997, and 1996, 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.
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 change in accumulated postretirement
benefit obligation for the years ended 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-----------------------
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation,
beginning of year $1,187 $1,241
Interest cost 95 84
Employee contribution 27 20
Benefits paid (183) (180)
Actuarial loss 303 22
-------------------
Accumulated postretirement benefit obligation,
end of year $1,429 $1,187
===================
</TABLE>
The following table sets forth the plan's status and amounts recognized in
the Company's Consolidated Statements of Condition:
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------
(Dollars in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation $1,429 - $1,187
Unrecognized net loss (418) (141)
Unrecognized transition obligation (732) (780)
-----------------------
Accrued postretirement benefit cost $ 279 $ 266
=======================
</TABLE>
Postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 95 84 97
Amortization of transition obligation 48 48 48
-------------------
$ 143 $ 132 $ 145
===================
</TABLE>
A weighted average discount rate of 6.50% in 1998 and 7.25% in 1997 was
used in determining the accumulated post retirement benefit obligation. The
1998 health care trend rate was projected to be 8.5% 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.
33
<PAGE>
NOTE Q: STOCK OPTION PLAN
The Company has stock option plans in which 1,214,000 shares of common
stock have been reserved for issuance as of December 31, 1998. 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 1998, 1997 and 1996 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>
1998 1997 1996
--------------------------------------------------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C>
Net income (as reported) $16,062 $14,325 $8,995
Stock option compensation cost (994) (761) (396)
------------------------------------------
Pro forma net income $15,068 $13,564 $8,599
==========================================
Basic earnings per share (as reported) $ 1.75 $ 1.58 $ 1.08
Stock option compensation cost (0.10) (0.08) (0.05)
------------------------------------------
Pro forma basic earnings per share $ 1.65 $ 1.50 $ 1.03
==========================================
Diluted earnings per share (as reported) $ 1.69 $ 1.53 $ 1.01
Stock option compensation cost (0.10) (0.08) (0.04)
------------------------------------------
Pro forma diluted earnings per share $ 1.59 $ 1.45 $ 0.97
==========================================
</TABLE>
The fair value of each option grant in 1998, 1997 and 1996 was estimated
using the Black-Scholes option pricing model with the following assumptions
used:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Estimated weighted average fair value
per share of options granted $11.19 $ 7.63 $ 4.61
Assumptions:
Annualized dividend yield .9% .8% --
Common-stock price volatility 37.4% 32.5% 25.1%
Weighted average risk
free rate of return 5.7% 6.5% 5.9%
Weighted average
expected option term (in years) 7 5 5
</TABLE>
The following table sets forth changes in options outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------
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 949,346 $12.07 820,943 $ 9.31 653,956 $ 7.56
Granted 77,834 25.41 261,087 19.55 315,929 12.26
Forfeited (8,253) 21.90 (34,003) 12.27 (21,836) 9.45
Canceled -- -- -- -- (6,353) 14.60
Exercised (227,852) 9.15 (98,681) 9.05 (120,753) 7.22
----------------------------------------------------------------------------
Outstanding at end of
year 791,075 14.14 949,346 12.07 820,943 9.31
----------------------------------------------------------------------------
Exercisable at end of
year 661,620 $12.61 738,092 $11.25 590,858 $ 8.40
----------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth details of options outstanding at December 31, 1998:
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 - 7.62 226,212 4.9 Years $ 6.98 226,212 $ 6.98
10.17 - 12.05 199,147 6.4 Years 11.47 199,147 11.47
12.95 - 14.04 55,186 7.9 Years 14.03 55,186 14.03
16.36 - 25.50 310,530 8.7 Years 21.08 181,075 20.46
- -----------------------------------------------------------------------------------------------------
$ 5.45 - 25.50 791,075 7.0 Years $14.14 661,620 $12.61
======================================================================================================
</TABLE>
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 this matter as it
relates to D&N, cannot be determined 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.
35
<PAGE>
The following table sets forth financial instruments with off-balance sheet
risk and their contract amounts and fair values:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1998 1997
---------------------------------------
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 $ 82,029 $ (820) $78,710 $(787)
Unused lines of credit 107,087 (1,071) 93,709 (937)
Standby letters of credit 4,922 (49) 3,907 (39)
Loans sold with recourse 921 (46) 2,155 (108)
Financial instruments whose contract amounts
exceed the amount of credit risk:
Forward commitments to sell loans 14,200 (71) 6,400 (64)
</TABLE>
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, 1998 of $921,000 and
none, respectively. These balances as of December 31, 1997 were $1,310,000 and
$845,000, respectively. The maximum amount of loss to which the Company is
subject, under the recourse provisions, is $921,000 at December 31, 1998.
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.
36
<PAGE>
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1998 1997
------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,979 $ 15,979 $ 20,497 $ 20,497
Investment securities (Note E) 130,072 130,072 102,636 102,706
Mortgage-backed securities (Note F) 494,212 494,791 358,296 359,771
Loans receivable (Note G) 1,329,148 1,359,812 1,300,959 1,340,935
Deposits (Note J) (1,264,140) (1,274,407) (1,043,167) (1,049,277)
Securities sold under agreement
to repurchase (Note K) (18,153) (18,153) (149,092) (149,092)
Debt (Note L) (559,982) (565,657) (470,431) (472,489)
Commitments to originate and
purchase loans (Note S) -- (820) -- (787)
Unused lines of credit (Note S) -- (1,071) -- (937)
Standby letters of credit (Note S) -- (49) -- (39)
Loans sold with recourse (Note S) -- (46) -- (108)
Forward commitments to sell loans (Note S) -- (71) -- (64)
</TABLE>
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: SEGMENT INFORMATION
D&N Financial Corporation's two reportable segments are Community Banking
and Wholesale Banking. Community Banking includes our network of full service
banking offices and provides a full range of deposit products and residential,
commercial and consumer loans. Wholesale Banking includes residential and
consumer loan servicing and underwriting operations, mortgage lending through
correspondents, and D&N Mortgage Corporation, and the origination of consumer
installment loans through automobile and other durable goods dealers. All
Other includes the Bank's insurance subsidiary, a seasoned portfolio of out-of-
market purchased
37
<PAGE>
commercial real estate loans, and the treasury which facilitates inter-segment
funds transfers and manages the corporation's external borrowing and
interest-rate-risk management activities.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. D&N Financial Corporation
evaluates performance based on average balances and net profit or loss including
income taxes. The performance evaluation is completed on a full allocation
basis and therefore corresponds to the Corporation's consolidated net income.
Inter-segment income and expense items are charged at either the current market
rate or an estimate of actual expense incurred to provide a service to other
business lines.
The measurement of the performance of the business segments is based on
the management structure of the Corporation and is not necessarily comparable
with similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
The following table sets forth the reportable segments for the years ending
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Community Banking Wholesale Banking
1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest
income 37,709 34,994 30,675 14,076 10.578 7,893
Provision for
loan losses 994 1,056 1,579 1,506 348 563
Noninterest income:
From external
customers 10,176 6,618 5,377 2,491 1,539 1,272
Inter-segment 5 4 172 0 0 0
Inter-segment
noninterest expense 2,407 2,887 1,877 (1,598) (1,936) (1,878)
Depreciation and
amortization 2,060 1,627 1,590 2,150 914 558
Federal income tax 6,275 4,909 1,642 2,297 2,149 833
Segment profit
(loss) 12,676 8,918 6,627 4,579 3,903 3,358
============================================================================
Segment average
assets 1,182,677 997,991 794,567 665,809 539,307 452,951
============================================================================
Capital
expenditures 4,449 2,279 2,465 701 888 468
============================================================================
<CAPTION>
All Other Total
1998 1997 1996 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income 904 3,367 4,195 52,689 48,939 42,763
Provision for
loan losses 0 (54) (1,042) 2,500 1,350 1,100
Noninterest income:
From external
customers 1,221 895 787 13,888 9,052 7,436
Inter-segment (5) (4) (172) 0 0 0
Inter-segment
noninterest expense (809) (951) 1 0 0 0
Depreciation and
amortization 96 90 198 4,306 2,631 2,346
Federal income tax (671) 685 (2,126) 7,901 7,743 349
Segment profit
(loss) (1,193) 1,504 (990) 16,062 14.325 8,995
============================================================================
Segment average
assets 57,547 88,924 86,718 1,906,033 1,626,222 1,334,236
============================================================================
Capital
expenditures 79 112 194 5,229 3,279 3,128
============================================================================
</TABLE>
38
<PAGE>
NOTE V: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Income
Before
Net Provision Income Income
Interest Interest Interest For Loan Gain on Tax Tax Net Earnings Per Share
Income Expense Income Losses Securities Expense Expense Income Basic Diluted
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share and stock price)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st
Quarter
1998 $ 34,547 $ 21,342 $ 13,205 $ 525 $ -- $ 6,786 $ 2,208 $ 3,897 $ 0.43 $ 0.41
1997 28,335 17,000 11,335 300 -- 5,075 1,781 3,294 0.36 0.35
2nd
Quarter
1998 34,368 21,049 13,319 550 -- 6,325 1,663 3,982 0.44 0.42
1997 30,293 18,484 11,809 300 539 5,505 1,926 3,579 0.39 0.38
3rd
Quarter
1998 35,588 22,416 13,172 650 1,360 6,889 2,160 4,048 0.44 0.43
1997 32,142 19,626 12,516 300 -- 6,262 2,003 3,722 0.41 0.40
4th
Quarter
1998 35,471 22,478 12,993 775 1,470 6,686 1,870 4,135 0.45 0.43
1997 34,923 21,644 13,279 450 -- 6,444 2,033 3,730 0.41 0.40
Year
1998 139,974 87,285 52,689 2,500 2,830 26,686 7,901 16,062 1.75 1.69
1997 125,693 76,754 48,939 1,350 539 23,286 7,743 14,325 1.58 1.53
<CAPTION>
Stock Price
Range
High Low
--------------------
<S> <C> <C>
1st
Quarter
1998 $ 28 1/2 23 1/2
1997 16 15/16 14 57/64
2nd
Quarter
1998 29 3/4 25 1/4
1997 17 1/2 15 33/64
3rd
Quarter
1998 27 1/4 15 1/4
1997 19 49/64 16 13/16
4th
Quarter
1998 29 16
1997 26 3/4 19 13/64
Year
1998 29 3/4 15 1/4
1997 26 3/4 14 57/64
</TABLE>
39
<PAGE>
NOTE W: D&N FINANCIAL CORPORATION - PARENT COMPANY ONLY
FINANCIAL INFORMATION CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
------------------------------
1998 1997
------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2 $ 2
Amounts receivable from subsidiary 3,289 3,523
Investments in subsidiary 112,654 94,994
---------------------------
$115,945 $98,519
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 466 $ 414
Other liabilities 19 23
Stockholders' equity 115,460 98,082
---------------------------
$115,945 $98,519
===========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1998 1997 1996
-----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income from subsidiary $ 135 $ 228 $ 64
Equity in undistributed net income of subsidiary 16,272 14,388 9,378
Noninterest expense:
Compensation and benefits 12 10 13
Other 333 281 434
-------------------------------
Total noninterest expense 345 291 447
-------------------------------
Income before income tax expense 16,062 14,325 8,995
Federal income tax expense -- -- --
-------------------------------
Net income $ 16,062 $ 14,325 $ 8,995
===============================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1998 1997 1996
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 16,062 $ 14,325 $ 8,995
Items not affecting cash:
Equity in undistributed net income of subsidiary (16,272) (14,388) (9,378)
Other 47 438 115
-------------------------------
Net cash provided (used) by operating activities (163) 375 (268)
Investing activities
Change in intercompany receivable 234 2,581 (5,225)
Financing activities
Proceeds from exercise of stock options 2,151 865 9,055
Purchases of treasury stock (383) (2,995) (3,499)
Common stock cash dividends (1,839) (826) --
Payment of ESOP debt -- -- (63)
-------------------------------
Net cash provided (used) by financing activities (71) (2,956) 5,493
-------------------------------
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>
40
<PAGE>
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, 1998 there were approximately 7,600 holders of D&N common
stock.
FORM 10-K
The 1998 Annual Report and Form 10-K are available to shareholders at no cost
upon written request to the Company at the address above.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, Detroit, MI
41
<PAGE>
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 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 Bank Quincy Insurance Co. 100% Michigan
</TABLE>
-106-
<PAGE>
EXHIBIT 23
----------
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 21, 1999 on our audits of the financial statements of D&N
Financial Corporation and Subsidiary as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, 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, 1998.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 16, 1999
-107-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,945
<INT-BEARING-DEPOSITS> 34
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 554,160
<INVESTMENTS-CARRYING> 70,124
<INVESTMENTS-MARKET> 70,703
<LOANS> 1,340,143
<ALLOWANCE> 10,995
<TOTAL-ASSETS> 2,018,154
<DEPOSITS> 1,264,140
<SHORT-TERM> 18,153
<LIABILITIES-OTHER> 31,700
<LONG-TERM> 559,982
0
28,719
<COMMON> 78,468
<OTHER-SE> 36,992
<TOTAL-LIABILITIES-AND-EQUITY> 2,018,154
<INTEREST-LOAN> 105,777
<INTEREST-INVEST> 34,197
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 139,974
<INTEREST-DEPOSIT> 51,206
<INTEREST-EXPENSE> 87,285
<INTEREST-INCOME-NET> 52,689
<LOAN-LOSSES> 2,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 37,323
<INCOME-PRETAX> 26,686
<INCOME-PRE-EXTRAORDINARY> 16,062
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,062
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.69
<YIELD-ACTUAL> 2.87
<LOANS-NON> 7,867
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16,668
<ALLOWANCE-OPEN> 10,549
<CHARGE-OFFS> 2,401
<RECOVERIES> 347
<ALLOWANCE-CLOSE> 10,995
<ALLOWANCE-DOMESTIC> 5,210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,785
</TABLE>
