10-Q 1 d10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2001 Commission file number 0-22767 D&N CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 31-1517665 (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) (906) 482-2700 (Registrant's telephone number) Indicate by check whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding as of October 31, 2001: Common Stock, $300 par value.............. 31,781 shares D&N CAPITAL CORPORATION INDEX Page No. -------- PART I Financial Information Item 1. Financial Statements (Unaudited) Statements of Condition as of September 30, 2001 and December 31, 2000 2 Statements of Income for the three and nine months ended September 30, 2001 and 2000 3 Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 4 Notes to Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 9 PART II Other Information 10 Signatures 11 Exhibits 12 - 13 1 D&N CAPITAL CORPORATION STATEMENTS OF CONDITION (UNAUDITED) (In thousands, except share data) September 30, December 31, 2001 2000 ------------- ------------ Assets: Loans receivable: Residential mortgage loans $ 52,439 $ 53,039 Commercial mortgage loans 2,837 5,710 -------- -------- Net loans receivable 55,276 58,749 Cash 14 11 Due from Parent 5,957 1,581 Other assets -- 6 Accrued interest receivable 385 405 -------- -------- Total assets $ 61,632 $ 60,752 ======== ======== Liabilities: Other liabilities $ 57 $ 41 -------- -------- Total liabilities 57 41 Stockholders' Equity: Preferred stock, $25 par value; 2,500,000 shares authorized, 1,210,000 shares issued and outstanding 30,250 30,250 Common stock, $300 par value; 250,000 shares authorized, 31,781 shares issued and outstanding 9,534 9,534 Additional paid-in capital 20,716 20,716 Retained earnings 1,075 211 -------- -------- Total stockholders' equity 61,575 60,711 -------- -------- Total liabilities and stockholders' equity $ 61,632 $ 60,752 ======== ======== See Notes to Financial Statements. 2 D&N CAPITAL CORPORATION STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------- ------- ------- ------- Interest income: Loans: Residential mortgage loans $ 901 $ 873 $ 2,694 $ 2,634 Commercial mortgage loans 64 110 272 359 ------- ------- ------- ------- Total loan interest income 965 983 2,966 2,993 Intercompany interest 58 43 127 71 ------- ------- ------- ------- Total interest income 1,023 1,026 3,093 3,064 Noninterest expense: Advisory fees 32 32 105 94 Other expenses 28 28 82 97 ------- ------- ------- ------- Total noninterest expense 60 60 187 191 Net income 963 966 2,906 2,873 Preferred stock dividend requirements 681 681 2,042 2,042 ------- ------- ------- ------- Net income applicable to common shares $ 282 $ 285 $ 864 $ 831 ======= ======= ======= ======= Net income per common share $ 8.87 $ 8.97 $ 27.19 $ 26.15 ======= ======= ======= ======= Weighted average common shares outstanding 31,781 31,781 31,781 31,781 ======= ======= ======= =======
See Notes to Financial Statements. 3 D&N CAPITAL CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended September 30, 2001 2000 -------- -------- Operating activities Net Income $ 2,906 $ 2,873 Adjustments to reconcile net income to net cash provided by operating activities: Net change in: Accrued interest receivable 20 7 Amortization of premiums 244 231 Due from Parent (4,376) (2,680) Other assets 6 (7) Other liabilities 16 (16) -------- -------- Net cash (used in) provided by operating activities (1,184) 408 -------- -------- Investing activities: Purchase of mortgage loans (15,360) (8,046) Principal payments and loan payoffs received 18,589 9,678 -------- -------- Net cash provided by investing activities 3,229 1,632 -------- -------- Financing activities: Preferred stock dividends paid (2,042) (2,042) Common stock dividends paid -- -- -------- -------- Net cash used by financing activities (2,042) (2,042) -------- -------- Net increase (decrease) in cash 3 (2) Cash at beginning of period 11 12 -------- -------- Cash at end of period $ 14 $ 10 ======== ========
See Notes to Financial Statements. 4 D&N CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION D&N Capital Corporation (the "Company"), is a Delaware corporation incorporated on March 18, 1997 and created for the purpose of acquiring and holding real estate assets. The Company was a wholly-owned subsidiary of D&N Bank ("D&N"), a state chartered savings bank, which became wholly-owned by Republic Bancorp Inc. on May 17, 1999 through the acquisition of D&N Financial Corporation. On December 1, 2000, the Company became a wholly-owned subsidiary of Republic Bank ("Republic"), a state chartered bank which is wholly owned by Republic Bancorp Inc., when D&N Bank merged into Republic Bank. All shares of common stock are held by Republic Bank. The Company's preferred stock is traded on The Nasdaq Stock Market(R) under the symbol "DNFCP". The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of results have been included. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report of Form 10-K for the year ended December 31, 2000. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mortgage Loans: Mortgage loans are carried at the principal amount outstanding, plus premium or discount, upon purchase. Interest income is recognized using the interest method, which approximates a level rate of return over the term of the loan. Allowance for Loan Losses: The allowance for possible losses on loans is maintained at a level believed adequate by management to absorb potential losses from impaired loans as well as from the remainder of the portfolio. Management's determination of the level of the allowance is based upon an evaluation of the portfolio, past experience, current economic conditions, size and composition of the portfolio, collateral location and values, cash flow positions, industry concentrations, delinquencies and other relevant factors. At September 30, 2001 and December 31, 2000, there was no allowance for loan losses. Due from Parent: Due from parent represents principal and interest payments due the Company from Republic Bank, partially offset by prior amounts due Republic Bank by the Company. 5 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: The Company has elected to be treated as a Real Estate Investment Trust ("REIT") pursuant to provisions of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company will not be subject to federal income tax on its taxable income to the extent it distributes at least 95% of its taxable income to its shareholders and it meets certain other requirements as defined in the Code. The Company intends to maintain its qualification as a REIT for federal income tax purposes. The Company intends to make qualifying dividends (for federal income tax purposes) of all of its taxable income to its common and preferred stock shareholders, a portion of which may be in the form of "consent" dividends, as defined under the Code. As a result, the Company has made no provision for federal income taxes in the accompanying financial statements. Dividends: Preferred Stock: Dividends on preferred stock are noncumulative from issuance (July 17, 1997) and are payable quarterly on the last day of March, June, September and December at a rate of 9.00% per annum of the liquidation preference ($25.00 per share). Common Stock: Republic Bank, as sole common shareholder, is entitled to receive dividends when, as and if declared by the Board of Directors from funds legally available after all preferred dividends have been paid. Earnings Per Common Share: Earnings per share is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding. There are no outstanding dilutive securities. NOTE 3: DIVIDENDS For each of the three month periods ended September 30, 2001 and 2000, the Company paid dividends on Series A Preferred Shares in the amount of $680,625. For each of the nine month periods ended September 30, 2001 and 2000, the Company paid dividends on Series A Preferred Shares in the amount of $2,041,875. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The principal business of the Company is to acquire and hold residential and commercial mortgage loans ("mortgage loans") that will generate net income for distribution to stockholders. The Company intends to acquire all its loans from Republic Bank. These loans consist of whole loans secured by first mortgages or deeds of trust on single-family residential real estate properties or on commercial real estate properties. Republic Bank administers the day-to-day activities of the Company in its role as Advisor under the Advisory Agreement. Republic Bank also services the Company's mortgage loans under each of the Servicing Agreements. It is the intention of the Company and Republic Bank that any agreements and transactions between the Company and Republic Bank are consistent with market terms, including the price paid and received for mortgage loans, upon their acquisition or disposition by the Company, or in connection with the servicing of such mortgage loans. RESULTS OF OPERATIONS The Company reported total interest income for the quarter ended September 30, 2001 of $1,023,000, compared to $1,026,000 for the third quarter of 2000. Interest income from residential and commercial mortgage loans was $901,000 and $64,000, respectively, for the third quarter of 2001, compared to $873,000 and $110,000, respectively for the third quarter of 2000. After a deduction of $32,000 in advisory fees and $28,000 in other administrative expenses, the Company reported net income of $963,000 for the quarter ended September 30, 2001, compared to $966,000 for the quarter ended September 30, 2000. The Company reported total interest income for the nine months ended September 30, 2001 of $3,093,000, compared to $3,064,000 for the same period of 2000. Interest income from residential and commercial mortgage loans was $2,694,000 and $272,000, respectively, for the nine months ended September 30, 2001, compared to $2,634,000 and $359,000, respectively for the nine months ended September 30, 2000. After a deduction of $105,000 in advisory fees and $82,000 in other administrative expenses, the Company reported net income of $2,906,000 for the first nine months of 2001, compared to $2,873,000 for 2000. For the quarters ended September 30, 2001 and 2000, the Company reported net income per common share of $8.87 and $8.97, respectively. For the nine months ended September 30, 2001 and 2000, the Company reported net income per common share of $27.19 and $26.15, respectively. For the three and nine month periods ended September 30, the Company paid $680,625 and $2,041,875, respectively, in preferred stock dividends for 2001 and 2000. Dividends on the common stock are paid to Republic Bank when and if declared by the Board of Directors of the Company out of funds available. The Company expects to pay common stock dividends at least annually in amounts necessary to continue to preserve its status as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). 7 MORTGAGE LOANS Residential mortgage loans consist of adjustable rate mortgages and fixed rate mortgages. The commercial mortgage loans consist of fixed and variable rate loans, a majority of which have balloon payments. Reinvestments in mortgage loans are made to maintain a ratio of approximately 90% residential and 10% commercial mortgage loans in the portfolio. All loans are purchased from Republic Bank on a fair value basis. For the nine month periods ended September 30, 2001 and 2000, the Company purchased replacement mortgage loans from Republic Bank of $15,360,000 and $8,046,000, respectively. In addition, the Company received $18,589,000 and $9,678,000, respectively, of principal payments and loan payoffs on its portfolio for the nine month periods ended September 30, 2001 and 2000. INTEREST RATE RISK The Company's income consists primarily of interest payments on mortgage loans. Currently, the Company does not use any derivative products to manage interest rate risk. If there is a decline in interest rates (as measured by the indices upon which the interest rates of adjustable rate mortgages are based), then the Company will experience a decrease in income available to be distributed to its shareholders. There can be no assurance that an interest rate environment in which there is a significant decline in interest rates over an extended period of time would not adversely affect the Company's ability to pay dividends on the preferred stock. SIGNIFICANT CONCENTRATION OF CREDIT RISK Concentration of credit risk arises when a number of customers engage in similar business activities, or activities in the same geographical region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Concentration of credit risk indicates the relative sensitivity of the Company's performance to both positive and negative developments affecting a particular industry. Approximately 83% of the Company's total mortgage loan portfolio is secured by residential real estate properties located in Michigan. Consequently, these residential mortgage loans may be subject to a greater risk of default than other comparable residential mortgage loans in the event of adverse economic, political or business developments and natural hazards in Michigan that may affect the ability of residential property owners in Michigan to make payments of principal and interest on the underlying mortgages. In addition, all of the commercial mortgage properties underlying the Company's commercial mortgage loans are located in Michigan. Consequently, these commercial mortgage loans may be subject to greater risk of default than other comparable commercial mortgage loans in the event of adverse economic, political or business developments in Michigan that may affect the ability of businesses in the area to make payments of principal and interest on the underlying mortgages. 8 LIQUIDITY RISK MANAGEMENT The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Company's financial commitments and to capitalize on opportunities for the Company's business expansion. In managing liquidity, the Company takes into account various legal limitations placed on a REIT as discussed on the following page in Other Matters. The Company's principal liquidity needs are to maintain the current portfolio size through the acquisition of additional mortgage loans as mortgage loans currently in the portfolio mature, or prepay, and to pay dividends on the preferred and common stock. The acquisition of additional mortgage loans is intended to be funded with the proceeds obtained from the repayment of principal balances by individual mortgagees. The Company does not have and does not anticipate having any material capital expenditures. OTHER MATTERS As of September 30, 2001, the Company believed that it was in full compliance with the REIT tax rules and that it will continue to quality as a REIT for federal income tax purposes. The Company calculated that (a) its Qualified REIT Assets to be 100% of total assets, compared to the federal tax requirements of 75%; and (b) that 96% of its revenues qualify for the 75% source of income test and 100% of its revenues qualify for the 95% source of income test under the REIT rules. The Company also met all REIT requirements regarding the ownership of its common and preferred stocks and anticipates meeting the 2001 annual distribution and administrative requirements. 9 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 2: CHANGES IN SECURITIES None ITEM 3: DEFAULTS UPON SENIOR SECURITIES None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits is included herein: 12(a) Computation of Ratio of Earnings to Fixed Charges 12(b) Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements (b) Reports to Form 8-K: There were no reports filed on Form 8-K during the third quarter of 2001. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. D&N CAPITAL CORPORATION ----------------------------------------- (Registrant) Date: November 14, 2001 /s/ Leonard M. Bolduc ----------------------------------------- Leonard M. Bolduc, President and Chief Executive Officer /s/ Thomas F. Menacher ----------------------------------------- Thomas F. Menacher, Principal Accounting Officer 11