-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K2zOkxl4mPZStoUOTLabsEZQ0Q2b3fnQL85Pji3+3e2jm8EpXyaB6MKA9ELOPmIj +q+SUzutajuGTlaZSHz4Iw== 0001067312-00-000119.txt : 20000327 0001067312-00-000119.hdr.sgml : 20000327 ACCESSION NUMBER: 0001067312-00-000119 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: D&N CAPITAL CORP CENTRAL INDEX KEY: 0001036263 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22767 FILM NUMBER: 577351 BUSINESS ADDRESS: STREET 1: 400 QUINCY STREET CITY: HANCOCK STATE: MI ZIP: 49930 BUSINESS PHONE: 9064822700 MAIL ADDRESS: STREET 1: 400 QUINCY STREET CITY: HANCOCK STATE: MI ZIP: 49930 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1999 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 Identification Number) Incorporation or Organization) 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: Name of Each Exchange on Title of Each Class Which Registered - ------------------------------------ ------------------------ 9.00% Noncumulative Preferred Stock Series A (Par Value --$25 Per share) NASDAQ Securities Registered Pursuant to Section 12(g) of the Act: None Number of Shares of Common Stock outstanding on December 31, 1999: 31,781 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] All shares of Common Stock were held by D&N Bank at December 31, 1999; therefore, no Common Stock is held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ FORM 10-K PAGE NO. PART I Item 1 Business 2 Item 2 Properties 4 Item 3 Legal Proceedings 4 Item 4 Submission of Matters to a Vote of Security Holders 4 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 5 Item 6 Selected Financial Data 7 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A Quantitative and Qualitative Disclosures about Market Risk 13 Item 8 Financial Statements and Supplementary Data 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III Item 10 Directors and Executive Officers of the Registrant 25 Item 11 Executive Compensation 27 Item 12 Security Ownership of Certain Beneficial Owners and Management 27 Item 13 Certain Relationships and Related Transactions 27 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 28 Signatures 29 1 PART I ITEM 1. BUSINESS 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 is a wholly-owned subsidiary of D&N Bank ("D&N"), a state chartered savings bank, which itself became wholly owned by Republic Bancorp Inc., a Michigan bank holding company, on May 17, 1999. The principal business of the Company is to acquire and hold residential and commercial mortgage loans that will generate net income for distribution to stockholders. The Company intends to acquire all its loans from D&N 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. Residential mortgage loans consist of adjustable rate mortgages ("ARMs"), and fixed rate mortgages ("FRMs"). The commercial mortgage loans consist of fixed and variable rate loans, a majority of which have balloon payments. On July 17, 1997, the Company offered to the public and sold 1,210,000 shares of the Company's 9.00% noncumulative preferred stock, Series A, $25 par value, totaling $30,250,000 ("preferred stock"), and sold to D&N, 31,781 shares of the Company's common stock, $300 par value ($1,000 cost) per share, net of offering costs, totaling $30,250,000 ("common stock"). All shares of common stock are held by D&N Bank. The Company's preferred stock is traded on The Nasdaq Stock Market(R) under the symbol "DNFCP". The Company used the net proceeds raised from the initial public offering of the preferred stock and the sale of the common stock to purchase from D&N the Company's initial $60,524,000 portfolio of residential and commercial mortgage loans ("mortgage loans") at their estimated fair values. Reinvestments in mortgage loans are made to maintain a ratio of approximately 90% residential and 10% commercial mortgage loans in the portfolio. All mortgage loans are purchased from D&N Bank on a fair value basis. In order to preserve its status as a real estate investment trust ("REIT") for federal income tax purposes, the Company must distribute annually at least 95% of its "REIT taxable income" (excluding capital gains) to stockholders and meet certain capital ownership and administrative tests. The Company must also annually satisfy two gross income requirements. First, at least 75% of the Company's gross income for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (as interest on obligations secured by mortgages on real property, certain "rents from real property" or as gain on the sale or exchange of such property and certain fees with respect to agreements to make or acquire mortgage loans), from certain types of temporary investments or certain other types of gross income. Second, at least 95% of the Company's gross income for each taxable year must be derived from the above described real property investments and from dividends, interest, and gain from the sale or other disposition of stock or securities and certain other types of gross income (or from any combination of the foregoing). 2 The Company must also satisfy three tests relating to the nature of its assets at the close of each quarter of its taxable year. First, at least 75% of the value of the Company's total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year that were purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of the Company), cash, cash items, and government securities. Second, not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities. The Company does not anticipate that it will engage in the business of originating mortgage loans and does not expect to compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring its mortgage loans. As noted above, the Company anticipates that all mortgage loans purchased by it, in addition to those in the initial portfolio, and purchased to date, will be purchased from D&N Bank. The Company does not have any employees, since it has retained D&N Bank to perform certain functions pursuant to the Advisory Agreement described below. All of the officers of the Company are also officers or employees of D&N, their affiliates, or Republic Bancorp Inc. The Company has entered into an Advisory Agreement (the "Advisory Agreement") with D&N Bank (the "Advisor") requiring an annual payment of $125,000. D&N Bank provides advice to the Board of Directors and manages the operations of the Company as defined in the Agreement. The Agreement has an initial term of five years commencing on July 21, 1997 and automatically renews for additional five year periods, unless the Company delivers a notice of nonrenewal to the Advisor as defined in the Advisory Agreement. The Company also entered into two servicing agreements with D&N for the servicing of the commercial and residential mortgage loans. D&N in its role as servicer under the terms of the servicing agreements is herein referred to as the "Servicer". Pursuant to each servicing agreement, D&N performs the servicing of the mortgage loans held by the Company, in accordance with normal industry practice. The Servicing Agreements can be terminated without cause upon a thirty day advance notice given to the Servicer. The servicing fee is 0.375% of the outstanding principal balance for the residential mortgage loans and commercial mortgage loans. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company may, under certain circumstances, purchase shares of its preferred stock and other shares of its capital stock in the open market or otherwise, provided, however, that the Company will not redeem or repurchase any shares of its common stock for so long as any preferred stock are outstanding without the approval of a majority of the Independent Directors (as defined in the Certificate of Designation relating to the Series A Preferred Shares). The Company has no present intention of repurchasing any shares of its capital stock, and any such action would be taken only in conformity with applicable federal and state laws and the regulations and the requirements for qualifying as a REIT. The Company has no foreign operations. 3 ITEM 2: PROPERTIES The principal executive offices of the Company are located at 400 Quincy Street, Hancock, Michigan 49930, telephone number (906) 482-2700. ITEM 3: LEGAL PROCEEDINGS The Company is not the subject of any material litigation. Neither the Company, D&N Bank, or any of its affiliates is currently involved in nor, to the Company's knowledge, currently threatened with any material litigation with respect to the mortgage loans included in the portfolio, which litigation would have a material adverse effect on the business or operations of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. 4 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company is authorized to issue up to 250,000 shares of common stock and 2,500,000 shares of preferred stock, $25 par value per share ("preferred stock"), of which 1,210,000 shares have been issued. D&N Bank owns 100% of the Company's 31,781 shares of common stock outstanding at December 31, 1999 and, accordingly, there is no trading market for the Company's common stock. In addition, D&N Bank intends that, as long as any preferred shares are outstanding, it will maintain ownership of the outstanding common stock of the Company. Subject to the rights, if any, of the holders of the preferred stock, all voting rights are vested in the common stock. The holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends when, as and if declared by the Board of Directors of the Company out of funds legally available therefore, provided that, so long as any shares of preferred stock are outstanding, no dividends or other distributions (including redemption's and purchases) may be made with respect to the common stock unless full dividends on the shares of the preferred stock have been paid. The Company must distribute annually at least 95% of its annual "REIT taxable income" (not including capital gains) to stockholders. In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after there have been paid or set aside for the holders of all series of preferred stock the full preferential amounts to which such holders are entitled, the holders of common stock will be entitled to share equally and ratably in any assets remaining after the payment of all debts and liabilities. RESTRICTIONS ON OWNERSHIP AND TRANSFER: The Company's Certificate of Incorporation contains certain restrictions on the number of shares of common stock and preferred stock that individual stockholders may own. For the Company to qualify as a REIT for federal income tax purposes, no more than 50% in number or value of its outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year) or during a proportionate part of a shorter taxable year (the "Five or Fewer Test"). The capital stock of the Company must also be beneficially owned by 100 or more persons during at least 335 days of a taxable year or during a proportionate part of a shorter taxable year (the "One Hundred Person Test"). The ownership by D&N Bank of 100% of the shares of common stock of the REIT will not adversely affect the Company's REIT qualification because each stockholder of Republic Bancorp Inc. (the sole stockholder of D&N Bank) counts as a separate beneficial owner for purposes of the Five or Fewer Test and the capital stock of Republic Bancorp Inc. is widely held. Further, the Certificate of Incorporation of the Company contains restrictions on the acquisition of preferred stock intended to ensure compliance with the One Hundred Person Test. Such provisions include a restriction that if any transfer of shares of capital stock of the Company would cause the Company to be beneficially owned by fewer than 100 persons, such transfer shall be null and void and the intended transferee will acquire no rights to the stock. 5 COMMON STOCK There is no established public trading market in the Company's common stock. As of March 22, 2000, there were 31,781 issued and outstanding shares of Common Stock held by one stockholder, D&N Bank. The total common stock dividends paid by the Company were $903,000, $1,150,000, and $600,000 for the years ended December 31, 1999, 1998 and 1997, respectively. PREFERRED STOCK The Company's preferred stock is traded on The Nasdaq Stock Market(R) under the symbol "DNFCP". As of March 20, 2000, there were 1,210,000 issued and outstanding series A preferred shares held by approximately 2,400 shareholders. The following table reflects the quarterly high and low sales prices and dividends paid for the preferred stock during 1999 and 1998.
Price ----------------- Distribution Period High Low Distributions Date ------ ---- ----- ------------- ------------------ 1999 Fourth quarter 25.00 22.75 $ 680,625 December 31, 1999 Third quarter 25.38 24.56 680,625 September 30, 1999 Second quarter 25.63 24.94 680,625 June 30, 1999 First quarter 26.00 25.13 680,625 March 31, 1999 ---------- Year 26.00 22.75 $2,722,500 ========== 1998 Fourth quarter 26.88 24.50 $ 680,625 December 31, 1998 Third quarter 25.88 24.63 680,625 September 30, 1998 Second quarter 26.50 25.50 680,625 June 30, 1998 First quarter 26.38 25.13 680,625 March 31, 1998 ---------- Year 26.88 24.50 $2,722,500 ==========
During 1999 and 1998, the Company declared and paid quarterly dividends of $0.5625 per preferred share. 6 ITEM 6: SELECTED FINANCIAL DATA FINANCIAL DATA For the Years Ended December 31, 1999 and 1998 and for the Period of Inception (March 18, 1997) through December 31, 1997 (In thousands, except per share and yield data)
1999 1998 1997 -------------------------------------------------- INCOME STATEMENT: Interest income $ 3,962 $ 4,164 $ 1,952 Net income 3,724 3,914 1,852 Net income applicable to common shares 1,001 1,191 634 Income per common share 31.51 37.47 19.94 BALANCE SHEET: Mortgage loans $60,195 $60,259 $60,385 Total assets 60,706 60,645 60,745 Total stockholder's equity 60,646 60,575 60,534 OTHER DATA: Dividends paid on preferred shares $ 2,723 $ 2,723 $ 1,218 Number of preferred shares outstanding 1,210 1,210 1,210 Number of common shares outstanding 32 32 32 Average yield on mortgage loans 7.17% 7.32% 7.57%
7 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On July 17, 1997, the Company offered to the public and sold 1,210,000 shares of the Company's 9.00% Series A Preferred Shares, and sold to D&N Bank 31,781 shares of the Company's common stock. All shares of common stock are held by the D&N Bank. RESULTS OF OPERATIONS The Company reported net interest income for the year ended December 31, 1999 of $3,962,000. Interest income from residential and commercial mortgage loans was $3,344,000 and $568,000, respectively. After a deduction of $125,000 in advisory fees and $113,000 in other administrative expenses, the Company reported net income of $3,724,000 for the year ended December 31, 1999. For the year ended December 31, 1998, the Company reported net interest income of $4,164,000. Interest income from residential and commercial mortgage loans was $3,511,000 and $593,000, respectively. After deductions of $125,000 in advisory fees and $125,000 in other administrative expenses, the Company reported net income of $3,914,000 for the year ended December 31, 1998. For the period from inception, March 18, 1997, through December 31, 1997, the Company reported net interest income of $1,952,000. Interest income from residential and commercial mortgage loans was $1,644,000 and $293,000, respectively. After deductions of $57,000 in advisory fees and $43,000 in other administrative expenses, the Company reported net income of $1,852,000. The Company paid $2,722,500 in preferred stock dividends for both years ended December 31, 1999 and 1998. The reported net income per common share for the years ended December 31, 1999 and 1998 was $31.51 and $37.47, respectively. For the period from inception, March 18, 1997, through December 31, 1997, the Company paid $1,218,000 in prefered stock dividends and reported net income per common share of $19.94. MORTGAGE LOANS As of December 31, 1999, the Company had $60,195,000 invested in mortgage loans. This amount represents the principal amount of mortgage loans purchased with the initial portfolio, plus additional purchases since then to replace runoff. All mortgage loans are purchased from D&N Bank. 8 The following table reflects the composition of interest-earning assets as a percentage of total interest-earning assets.
December 31, 1999 December 31, 1998 ------------------- ------------------- (Dollars in thousands) Amount Percent Amount Percent -------- ------- -------- ------- Interest-Earning Asset Mix: Residential mortgage loans $ 52,133 86.6% $ 52,858 87.7% Commercial mortgage loans 8,062 13.4 7,401 12.3 -------- ------- -------- ------- Total interest-earning assets $ 60,195 100.0% $ 60,259 100.0% ======== ======= ======== =======
There were no delinquent residential loans or commercial mortgage loans, and no residential or commercial mortgage loans in nonaccrual status as of December 31, 1999. The following table illustrates the maturity of the Company's loan portfolio at December 31, 1999. Loans are shown as maturing in the period in which payment is due. This table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Residential mortgage loans Commercial mortgage loans Total Amounts Due -------------------------- ---------------------------- ----------------------- in Years Weighted Weighted Weighted Ending Average Average Average December 31, Amount Rate Amount Rate Amount Rate ------------ ------ ------- ------ ------- ----------------------- (Dollars in thousands) 2000 $ -- --% $ -- --% $ -- --% 2001 126 7.20 2,265 8.42 2,391 8.36 2002 114 7.16 3,460 8.34 3,574 8.30 2003 248 7.18 217 8.23 465 7.67 2004 523 7.15 2,091 7.49 2,614 7.42 Thereafter 50,692 7.17 -- -- 50,692 7.17 -------- -------- ------- -------- Subtotal 51,703 7.17% 8,033 8.27% 59,736 7.32% Plus: premiums 430 29 459 -------- -------- ------- Total $ 52,133 $ 8,062 $60,195 ======== ======== =======
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 the adjustable rate mortgage loans 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. 9 STATIC GAP ANALYSIS D&N Capital Corporation's cumulative gap analysis for December 31, 1999 is as follows: Maturity ------------------------------------------------------------------ 0 to 3 4 to 12 1 to 5 Over 5 Months Months Years Years Total ------ ------- ------ ------ ----- (Dollars in thousands) ASSETS: Net loans receivable $ -- $ -- $ 9,997 $ 50,198 $ 60,195 Cash and due from parent 152 -- -- -- 152 Other assets 5 -- -- -- 5 Accrued interest receivable 354 -- -- -- 354 ------------------------------------------------------------------ Total assets $ 511 $ -- $ 9,997 $ 50,198 $ 60,706 ================================================================== LIABILITIES: Other liabilities $ 60 $ -- $ -- $ -- $ 60 ------------------------------------------------------------------ Total liabilities $ 60 $ -- $ -- $ -- $ 60 ------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred stock $ -- $ -- $ -- $ 30,250 $ 30,250 Common stock -- -- -- 9,534 9,534 Additional paid-in capital -- -- -- 20,716 20,716 Retained earnings -- -- -- 146 146 ------------------------------------------------------------------ Total liabilities and stockholders' equity $ 60 $ -- $ -- $ 60,646 $ 60,706 ================================================================= Reprice difference $ 451 $ -- $ 9,997 $(10,448) Cumulative gap $ 451 $ 451 $10,448 -- % of total assets .74% .74% 17.21% --
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. The Company's balance sheet exposure to geographic concentrations directly affects the credit risk of the mortgage loans within the portfolio. The following table shows the mortgage loan portfolio by geographic area.
December 31, 1999 December 31, 1998 -------------------- ------------------- Amount Percent Amount Percent ------- ------- ------- -------- Loans (Dollars in thousands) - ----- Residential Mortgage Loans: Michigan $48,135 80.0% $49,348 81.9% Ohio 2,442 4.1 1,911 3.2 Wisconsin 410 0.6 365 0.6 Other (no state has more than 1%) 1,146 1.9 1,234 2.0 ------------------ ------------------- Total Residential Mortgage Loans 52,133 86.6% 52,858 87.7% Commercial Mortgage Loans: Michigan (all Commercial Mortgage Loans) 8,062 13.4 7,401 12.3 ------------------ ------------------- Total Mortgage Loan Portfolio $60,195 100.0% $60,259 100.0% ================== ===================
10 Approximately 80% of the Company's total residential mortgage loan portfolio are loans 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. 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. In managing liquidity, the Company takes into account various legal limitations placed on a REIT as discussed below in REIT Qualification. 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 stock and common stock. The acquisition of additional mortgage loans is intended to be funded with the proceeds obtained from repayment of principal balances by the individual mortgagees. The Company does not have and does not anticipate having any material capital expenditures. To the extent that the Board of Directors determines that additional funding is required, the Company may raise such funds through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Code requiring the distribution by a REIT of at least 95% of its "REIT taxable income" and taking into account taxes that would be imposed on undistributed income), or a combination of these methods. The organizational documents of the Company do not contain any limitation on the amount or percentage of debt, funded or otherwise, the Company might incur. Notwithstanding the foregoing, the Company may not, without the approval of a majority of the Independent Directors, incur debt for borrowed money other than debt not in excess of 20% of the aggregate amount of net proceeds received from the sale of the preferred stock and common stock of the Company. Any such debt incurred may include intercompany advances made by D&N Bank to the Company. The Company may also issue additional series of preferred stock. However, the Company may not issue additional shares of preferred stock senior to the series A preferred shares without the consent of holders of at least 66 2/3% of the shares of preferred stock outstanding at that time, including the series A preferred shares, and the Company may not issue additional shares of preferred stock on a parity with the series A preferred shares without the approval of a majority of the Company's Independent Directors. 11 REIT QUALIFICATION As of December 31, 1999, the Company believed that it was in full compliance with the REIT tax rules and that it will continue to qualify as a REIT for federal income tax purposes. The Company calculated (a) its Qualified REIT Assets to be 100% of total assets, compared to the federal tax requirements of 75%; and (b) that 99% 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 the 1999 and 1998 annual distribution and administrative requirements. YEAR 2000 COMPLIANCE D&N utilizes various electronic computer systems for the delivery of its financial services products, for the maintenance of its financial and other business records, and for general management purposes. D&N did not experience any problems related to the year 2000 issue. There were no costs incurred during fiscal year 1999 related to the year 2000 compliance issue. During 1998, the Company incurred $26,000 related to the year 2000 compliance for the review and testing of third parties including governmental applications. 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 reclassified based on the entity's ability and intent to hold those investments. This standard was adopted effective January 1, 1999 and did not have any material effect on the Company's financial statements. OTHER MATTERS On May 17, 1999, D&N merged with Republic Bancorp Inc. (Nasdaq:RBNC), whereby Republic Bancorp Inc. was the surviving corporation. The combined company created the fourth largest bank holding company with headquarters in Michigan with over $4 billion in assets. The merger constitutes a tax-free reorganization and has been accounted for as a pooling of interest. The operations of Republic Bancorp Inc., 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. From time to time, the Company may publish forward-looking statements relating to such matters as possible or assumed future results of our operations, anticipated financial performance, business prospects, new products, and similar matters. These forward-looking statements are subject to risks and uncertainties. Also, when we use any of the words "believes," "expects," "plans," "anticipates," "estimates" or similar expressions we are making forward-looking statements. 12 We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. We believe that our forward-looking statements are reasonable. You should not place undue reliance on any such forward-looking statements, which speak only as of the date made. You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K, in our press releases, and in our public documents to which we refer, could affect our future results and performance. This could cause those results to differ materially from those expressed in our forward-looking statements. Factors that might cause such a difference include the following: - inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; - general economic conditions, either nationally or in our market areas, that are worse than expected; - adverse changes in the securities markets; - legislative or regulatory changes that adversely affect our business; - effect of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; - changes in consumer spending, borrowing and savings habits; - effect of changes in accounting policies and practices, as may be adopted by regulatory agencies and the Financial Accounting Standards Board; - costs and effects of litigation and unexpected or adverse outcomes in such litigation; and - our success and managing risks involved in the foregoing. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is set forth in the section entitled "Interest Rate Risk" included under Item 7 of this document and is incorporated herein by reference. 13 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of D&N Capital Corporation We have audited the statement of condition of D&N Capital Corporation as of December 31, 1999, and the related statements of income, stockholders' equity, and cash flows for the year then ended. 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 audit. The financial statements of D&N Capital Corporation for the years ended December 31, 1998 and December 31, 1997, were audited by other auditors whose report dated January 21, 1999, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of D&N Capital Corporation at December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan March 20, 2000 14 Report of Independent Accountants To the Board of Directors and Stockholders of D&N Capital Corporation: In our opinion, the balance sheet as of December 31, 1998 and the related statements of income, stockholders' equity, and cash flows for the year ended December 31, 1998 and the period from inception (March 18, 1997) through December 31, 1997 of D&N Capital Corporation present fairly, in all material respects, the financial position, results of operations and cash flows of D&N Capital Corporation at December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998 and the period from inception (March 18, 1997) through December 31, 1997, in conformity with accounting principles generally accepted in the United States. 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 financial statements in accordance with auditing standards generally accepted in the United States, 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. We have not audited the financial statements of D&N Capital Corporation for any period subsequent to December 31, 1998. /s/ PricewaterhouseCoopers LLP Detroit, Michigan January 21, 1999 15 D&N CAPITAL CORPORATION STATEMENTS OF CONDITION
December 31, 1999 1998 ------------------------------ ASSETS: (Dollars in thousands) Loans receivable: Residential mortgage loans $52,133 $52,858 Commercial mortgage loans 8,062 7,401 ------------------------------ Net loans receivable 60,195 60,259 Cash 2 2 Due from parent 150 21 Other assets 5 5 Accrued interest receivable 354 358 ------------------------------ TOTAL ASSETS $60,706 $60,645 ============================== LIABILITIES: Other liabilities $ 60 $ 70 ------------------------------ TOTAL LIABILITIES 60 70 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 ------------------------------ Total paid-in capital 60,500 60,500 Retained earnings 146 75 ------------------------------ TOTAL STOCKHOLDERS' EQUITY 60,646 60,575 ------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,706 $60,645 ==============================
See Notes to Financial Statements. 16 D&N CAPITAL CORPORATION STATEMENTS OF INCOME
Year Ended Year Ended December 31, December 31, 1999 1998 1997* ---------------------------------------- (In thousands, except per share data) INTEREST INCOME: Loans: Residential mortgage loans $ 3,344 $ 3,511 $ 1,644 Commercial mortgage loans 568 593 293 ------- ------- ------- Total loan interest income 3,912 4,104 1,937 Intercompany interest 50 60 15 ------- ------- ------- TOTAL INTEREST INCOME 3,962 4,164 1,952 NONINTEREST EXPENSE: Advisory fees 125 125 57 Other expense 113 125 43 ------- ------- ------- TOTAL NONINTEREST EXPENSE 238 250 100 NET INCOME 3,724 3,914 1,852 Preferred stock dividends paid 2,723 2,723 1,218 ------- ------- ------- Net income applicable to common shares 1,001 1,191 634 Common stock dividends paid 930 1,150 600 ------- ------- ------- RETAINED EARNINGS INCREASE $ 71 $ 41 $ 34 ======= ======= ======= BASIC AND DILUTIVE EARNINGS PER COMMON SHARE $ 31.51 $ 37.47 $ 19.94 ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,781 31,781 31,781 ======= ======= =======
*The 1997 period is from inception, (March 18, 1997), through December 31, 1997. See Notes to Financial Statements. 17 D&N CAPITAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended Year Ended December 31, December 31, 1999 1998 1997* ------------------------------------------- (Dollars In Thousands) PREFERRED STOCK: Balance at beginning of period $ 30,250 $ 30,250 $ -- Issuance of preferred stock -- -- 30,250 -------- -------- -------- Balance at end of period 30,250 30,250 30,250 -------- -------- -------- COMMON STOCK: Balance at beginning of period 9,534 9,534 -- Issuance of common stock -- -- 9,534 -------- -------- -------- Balance at end of period 9,534 9,534 9,534 -------- -------- -------- ADDITIONAL PAID IN CAPITAL: Balance at beginning of period 20,716 20,716 -- Issuance of common stock -- -- 22,247 Less: preferred stock offering costs -- -- 1,531 -------- -------- -------- Balance at end of period 20,716 20,716 20,716 -------- -------- -------- RETAINED EARNINGS: Balance of beginning of period 75 34 -- Net income 3,724 3,914 1,852 Preferred stock dividends ($2.25 per share in 1999 and 1998 and $1.01 per share in 1997) (2,723) (2,723) (1,218) Common stock dividends ($29.26, $36.19 and $18.88 per share in 1999, 1998 and 1997, respectively) (930) (1,150) (600) -------- -------- -------- Balance at end of period 146 75 34 -------- -------- -------- TOTAL STOCKHOLDERS' EQUITY $ 60,646 $ 60,575 $ 60,534 ======== ======== ========
*The 1997 period is from inception, (March 18, 1997), through December 31, 1997. See Notes to Financial Statements 18 D&N CAPITAL CORPORATION STATEMENTS OF CASH FLOWS
Year Ended Year Ended December 31, December 31, 1999 1998 1997* ------------------------------------------ (Dollars In Thousands) OPERATING ACTIVITIES: Net income $ 3,724 $ 3,914 $ 1,852 Adjustments to reconcile net income to net cash provided by operating activities: Net change in: Accrued interest receivable 4 -- (358) Due to or from Parent (128) (223) 202 Other assets -- (5) -- Accounts payable (11) 61 9 -------- -------- -------- Net cash provided by operating activities 3,589 3,747 1,705 -------- -------- -------- INVESTING ACTIVITIES: Purchase of mortgage loans (20,818) (30,098) (67,218) Principal payments received 20,882 30,224 6,833 -------- -------- -------- Net cash provided/(used) by investing activities 64 126 (60,385) -------- -------- -------- FINANCING ACTIVITIES: Proceeds from common stock issued -- -- 31,781 Proceeds from preferred stock issued -- -- 30,250 Origination and underwriting costs -- -- (1,531) Preferred stock dividends paid (2,723) (2,723) (1,218) Common stock dividends paid (930) (1,150) (600) -------- -------- -------- Net cash (used)/provided by financing activities (3,653) (3,873) 58,682 -------- -------- -------- NET INCREASE IN CASH -- -- 2 CASH AT BEGINNING OF YEAR 2 2 -- -------- -------- -------- CASH AT END OF YEAR $ 2 $ 2 $ 2 ======== ======== ========
*The 1997 period is from inception, (March 18, 1997), through December 31, 1997. See Notes to Financial Statements. 19 NOTES TO FINANCIAL STATEMENTS 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 is a wholly-owned subsidiary of D&N Bank ("D&N"), a state chartered savings bank, which itself became wholly owned by Republic Bancorp Inc., a Michigan bank holding company, on May 17, 1999. On July 17, 1997, the Company offered to the public and sold 1,210,000 shares of the Company's 9.00% noncumulative preferred stock, Series A, $25 par value, totaling $30,250,000 ("preferred stock"), and sold to D&N, 31,781 shares of the Company's common stock, $300 par value ($1,000 cost) per share, net of offering costs, totaling $30,250,000 ("common stock"). All shares of common stock are held by D&N Bank. The Company's preferred stock is traded on on The Nasdaq Stock Market(R) under the symbol "DNFCP". The Company used the net proceeds raised from the initial public offering of the preferred stock and the sale of the common stock to purchase from D&N the Company's initial $60,524,000 portfolio of residential and commercial mortgage loans ("mortgage loans") at their estimated fair values. The accounting and financial reporting policies of the Company conform to generally accepted accounting principles and prevailing industry practices. 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 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 losses from the remainder of the portfolio. Management's determination of the level of the allowance is based upon evaluation of the portfolio, past experience, current economic conditions, size and composition of the portfolio, collateral location and values, cash flow positions, industry concentrations, delinquencies and other relevant factors. At December 31, 1999 and 1998, there was no allowance for losses on loans. Due from Parent: Accounts Receivable from parent represents principal and interest payments due the Company from D&N Bank, partially offset by prior amounts due D&N Bank by the Company. Offering Costs: Costs incurred in connection with the raising of capital through the sale of preferred stock were charged against stockholders' equity upon the issuance of common stock to D&N Bank. 20 NOTES TO FINANCIAL STATEMENTS 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: D&N 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 - MORTGAGE LOANS Mortgage loans consist of both residential and commercial mortgage loans. Residential mortgage loans consist of adjustable rate mortgages ("ARMs") and fixed rate mortgages ("FRMs"). The commercial mortgage loans consist of fixed and variable rate loans, a majority of which have balloon payments. The following represents the mortgage loan portfolio:
December 31, December 31, 1999 1998 ------------ ------------ (In thousands) Residential mortgage loans $ 52,133 $ 52,858 Commercial mortgage loans 8,062 7,401 ------------ ------------ Total $ 60,195 $ 60,259 ============ ============
Each of the mortgage loans are secured by a mortgage, deed of trust or other security instrument which created a first lien on the residential dwellings and/or commercial property. 21 NOTES TO FINANCIAL STATEMENTS NOTE 4 - DIVIDENDS For both years ended December 31, 1999 and 1998, the Company paid dividends on preferred stock of $2,722,500 and dividends on common stock of $930,000 and $1,150,000 respectively. For the period from inception (March 18, 1997) through December 31, 1997, the Company paid dividends on preferred stock of $1,217,563 and dividends on common stock of $600,000. NOTE 5 - RELATED PARTY TRANSACTION The Company has entered into an Advisory Agreement (the "Advisory Agreement") with D&N Bank (the "Advisor") requiring an annual payment of $125,000. The Advisor provides advice to the Board of Directors and manages the operations of the Company as defined in the Agreement. The Agreement has an initial term of five years commencing on September 9, 1997 and automatically renews for additional five year periods, unless the Company delivers a notice of nonrenewal to the Advisor as defined in the Advisory Agreement. Advisory fees totaled $125,000 for the each of years ended December 31, 1999 and 1998, and $57,000 for the period from inception (March 18, 1997) through December 31, 1997. The Company also entered into two servicing agreements with D&N Bank for the servicing of the commercial and residential mortgage loans. Pursuant to each servicing agreement, D&N performs the servicing of the mortgage loans owned by the Company, in accordance with normal industry practice. The Servicing Agreements can be terminated without cause upon a thirty day advance notice given to the Servicer. The servicing fee is 0.375% of the outstanding principal balance for the residential mortgage loans and commercial mortgage loans. The servicing fees of $225,000, $217,000 and $94,000 for 1999, 1998 and 1997, respectively, are netted out of loan interest income, prior to remittance by the Bank to the Company. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, entitled "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires companies to disclose fair value information about financial instruments for which it is practicable to estimate values, whether or not such financial instruments are recognized on the balance sheet. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists. The calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. 22 NOTES TO FINANCIAL STATEMENTS NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Certain financial instruments and all nonfinancial instruments are excluded from the scope of SFAS 107. Accordingly, the fair value disclosures required by SFAS 107 may provide only a partial estimate of the fair value of the Company. Fair values among REIT's are not comparable due to the wide-range of limited valuation techniques and numerous estimates which must be made. This lack of an objective valuation standard, introduces a great degree of subjectivity to these derived or estimated fair values. Therefore, readers are cautioned against using this information for purposes of evaluating the financial condition of the Company compared with other REIT's. Loans were valued using methodologies suitable for each loan type. These methodologies and the key assumptions made are discussed below. The fair value of the Company's commercial loans was estimated by assessing the two main risk components: credit risk and interest rate risk. The estimated cash flows were discounted, using rates appropriate for each maturity that incorporates the effects of interest rate changes. For residential mortgage loans for which market rates for comparable loans are readily available, the fair value was estimated by discounting expected cash flows, adjusted for prepayments. The discount rates used for residential mortgages were secondary market yields for comparable mortgage-backed securities, adjusted for risk. These discount rates incorporated the effects of interest rate changes only, since the estimated cash flows were previously adjusted for credit risk. The book value and fair value of mortgage loans at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ------------------------------------------------------ Book Value Fair Value Book Value Fair Value ------------------------------------------------------ Residential Mortgage Loans $52,133 $52,096 $52,858 $52,821 Commercial Mortgage Loans 8,062 8,088 7,401 7,416 ------------------------------------------------------ Total Portfolio $60,195 $60,184 $60,259 $60,237 ======================================================
The carrying values of certain financial assets and liabilities, including cash, accrued interest receivable, due-to-parent and other liabilities, are considered to approximate their respective fair value due to their short-term nature and negligible exposure to credit losses. 23 QUARTERLY DATA (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended 1999 and 1998.
- -------------------------------------------------------------------------------------------------------- FULL (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1Q 2Q 3Q 4Q YEAR - ---------------------------------------------------------------------------------------------------------- 1999 Earnings Summary Interest income $ 968 $ 990 $ 995 $ 1,009 $ 3,962 Non-interest expense 64 58 60 56 238 Net income 904 932 935 953 3,724 Net income applicable to common shares 223 251 254 273 1,001 Earnings per common share $ 7.01 $ 7.90 $ 8.00 $ 8.60 $ 31.51 - ---------------------------------------------------------------------------------------------------------- 1998 Earnings Summary Interest income $1,042 $1,071 $1,038 $ 1,013 $ 4,164 Non-interest expense 39 48 45 118 250 Net income 1,003 1,023 993 895 3,914 Net income applicable to common shares 322 342 312 215 1,191 Earnings per common share $10.14 $10.77 $ 9.81 $ 6.75 $ 37.47 - ----------------------------------------------------------------------------------------------------------
24 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required by this Item relating to a change in accountans was previously reported in the Company's Form 8-K dated March 10, 2000 filed with the Securities and Exchange Commission. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION The persons who are directors and executive officers of the Company are as follows:
Name Position and Office Held - ------------------ ----------------------------------------------- George J. Butvilas Director and Chairman Richard E. West Director, President and Chief Executive Officer James Bogan Director Kenneth R. Janson Director William J. McGarry Director Gail A. Mroz Director Peter L. Lemmer Secretary Thomas F. Menacher Principal Accounting Officer
The following is a summary of the experience of the executive officers and directors of the Company: George J. Butvilas, age 54, Director and Chairman; joined D&N Bank as President in May 1990. He served as President and Chief Executive Officer of D&N Bank from May 1991 to February 2000. In February 2000, he was appointed Vice Chairman of D&N Bank. Prior to joining D&N, he served most recently as Executive Vice President and Director of Boulevard Bancorp, Inc. of Chicago, Illinois. A graduate of the U.S. Naval Academy, he has an M.B.A. degree from the Illinois Institute of Technology and graduated from the Advanced Management Program of the Harvard University Graduate School of Business. Richard E. West, age 53, Director, President and Chief Executive Officer; is also Executive Vice President, Wholesale Banking of D&N Bank. Prior to joining D&N Bank in January 1990, he was Servicing Manager for 20 years with Rothchild Financial Corporation and Valley National Bank of Arizona. Mr. West is responsible for directing the loan servicing, indirect lending, consumer lending, bank operations, loss prevention and information systems functions of D&N Bank. Kenneth R. Janson, age 48, Director; was Executive Vice President, Chief Financial Officer and Treasurer of D&N Bank until June 1999. Prior to joining D&N 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. James Bogan, age 48, Director; is Chief Executive Officer of Portage Health System, Hancock, Michigan. Prior to joining the Health System in June 1989, he held various positions involving health care management, the last three years as Chief Operating Officer of Trinity Medical Center, Minot, North Dakota. Mr. Bogan is responsible for directing the affairs of Portage Health System, which include a 30 bed acute care unit, a 30 bed nursing home unit, a medical group including 22 physicians, a home health agency, and two retail pharmacies. 25 William J. McGarry, age 56, Director; is Treasurer and Vice President of Finance & Administration of Michigan Technological University located in Houghton, Michigan. He was named to his current position at the University in December 1992, after serving two years as a senior associate with Coopers & Lybrand in Boston. Prior to his term with Coopers & Lybrand, Mr. McGarry served as principal consultant with Information Associates of Rochester, New York and was vice president in charge of the large financial services management consulting and systems integration practice of SEI Corporation of Cambridge, Massachusetts. He has also served as Senior Director of Finance and Administration at Rensselaer Polytechnic Institute and as Director of Administrative Systems at Lehigh University. Gail A. Mroz, age 47, Director; is Director of Finance and Operations of the Michigan Tech Fund in Houghton, Michigan. Previous to this, Ms. Mroz was Finance Director and Controller of Copper Country Mental Health, and has also been an instructor for the School of Business and Economics at Michigan Technological University, both of which are in Houghton, Michigan. Peter L. Lemmer, age 42, Secretary; is Senior Vice President, General Counsel of D&N Bank and on January 1, 2000 became General Counsel for Republic Bank. Prior to joining D&N Bank in October 1990, he held various positions involving legal services, including positions as Senior Vice President, Compliance and Vice President, Associate General Counsel,Compliance Officer with Cal America Savings, later known as Columbus Saving, and American Federal Bank, respectively. Mr. Lemmer is responsible for legal and regulatory functions of D&N Bank and Republic Bank. Thomas F. Menacher, age 43, Principal Accounting Officer; is Executive Vice President, Chief Financial Officer and Treasurer of Republic Bancorp Inc. since April 1999, prior to that he was Senior Vice President, Treasurer and Chief Financial Officer since December 1995, and Chief Financial Officer of Republic Bancorp Inc. since 1992. INDEPENDENT DIRECTORS The Company's Certificate of Designation establishing the Series A Preferred Shares requires that, so long as any Series A Preferred Shares are outstanding, certain actions by the Company be approved by a majority of the Independent Directors of the Company. Messrs. Bogan, Janson, McGarry and Ms. Mroz are the Company's Independent Directors. When there are only two Independent Directors, any action that requires the approval of a majority of Independent Directors must be approved by both Independent Directors. If at any time the Company fails to declare and pay a quarterly dividend on the Series A Preferred Shares, the number of directors constituting the Board of Directors of the Company will be increased by two at the Company's next annual meeting and the holders of Series A Preferred Shares, voting together with the holders of any other outstanding series of Preferred Stock as a single class, will be entitled to elect the two additional directors to serve on the Company's Board of Directors. Any member of the Board of Directors elected by holders of the Company's Preferred Stock will be deemed to be an Independent Director for purposes of the actions requiring the approval of a majority of the Independent Directors. 26 AUDIT COMMITTEE The Company's audit committee reviews the engagement and independence of its auditors. The audit committee also reviews the adequacy of the Company's internal accounting controls. The audit committee is comprised of Messrs. Bogan, McGarry and Ms. Mroz. ITEM 11: EXECUTIVE COMPENSATION The Company does not pay any compensation to its officers or to employees of the Bank, or to directors who are not Independent Directors. The Company pays the Independent Directors of the Company fees for their services as directors. The Independent Directors receive a fee of $250 for attendance (in person or by telephone) at each meeting of the Board of Directors and $100 for each meeting of a Committee of the Board. However, multiple fees are not paid for two or more meetings attended on the same day. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT D&N Bank owns 100% of the common stock of the Company. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Set forth below are certain transactions between the Company and its directors and affiliates. Management believes that the transactions with related parties described herein have been conducted on substantially the same terms as similar transactions with unrelated parties. D&N Bank administers the day-to-day operations of the Company and is entitled to receive fees in connection with the Advisory Agreement. Advisory fees paid to D&N Bank for the period ended December 31, 1999 totaled $125,000. D&N Bank services the residential mortgage loans included in the Company's portfolio and is entitled to receive fees in connection with the Servicing Agreement. The Company had cash balances of approximately $2,000 as of December 31, 1999 and 1998, held in a demand deposit account with the Bank. 27 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements of the Company are included in Item 8 of this report: Reports of Independent Auditors Statements of Condition at December 31, 1999 and 1998 Statements of Income for the years ended December 31, 1999, 1998 and 1997 Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Financial Statements (a)(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted. (a)(3) Exhibits: *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 *27 Financial Data Schedule (b) No reports on Form 8-K were issued during the fourth quarter of 1999. - ---------------- * Filed herewith. 28 SIGNATURES Pursuant to the requirements of the section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant as duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. D&N CAPITAL CORPORATION (Registrant) Date: March 10, 2000 By: /s/ THOMAS F. MENACHER --------------- -------------------------------- THOMAS F. MENACHER Principal Accounting Offier (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ GEORGE J. BUTVILAS By: /s/ RICHARD E. WEST --------------------------------- ------------------------ GEORGE J. BUTVILAS RICHARD E. WEST Director, Chairman of the Board Director and President Date March 10, 2000 Date March 10, 2000 -------------------------------- ----------------------- By: /s/ KENNETH R. JANSON By: /s/ JAMES BOGAN --------------------------------- ------------------------ KENNETH R. JANSON JAMES BOGAN Director Director Date March 10, 2000 Date March 10, 2000 -------------------------------- ----------------------- By: /s/ WILLIAM J. MCGARRY By: /s/ GAIL A. MROZ --------------------------------- ------------------------ WILLIAM J. MCGARRY GAIL A. MROZ Director Director Date March 10, 2000 Date March 10, 2000 -------------------------------- ----------------------- 29 EX-12.A 2 EXHIBIT 12(A) EXHIBIT 12(a) D&N CAPITAL CORPORATION Computation of ratio of earnings to fixed charges
1999 1998 ---------------------------- (In thousands, except ratio) Net income $ 3,724 $ 3,914 Fixed charges: Advisory fees 125 125 Total fixed charges 125 125 Earnings before fixed charges $ 3,849 $ 4,039 Fixed charges, as above $ 125 $ 125 Ratio of earnings to fixed charges 30.8 32.3
EX-12.B 3 EXHIBIT 12(B) EXHIBIT 12(b) D&N CAPITAL CORPORATION Computation of ratio of earnings to fixed charges and preferred stock dividend requirements
1999 1998 ---------------------------- (In thousands, except ratio) Net income $3,724 $3,914 Fixed charges: Advisory fees 125 125 Total fixed charges 125 125 Earnings before fixed charges 3,849 4,039 Fixed charges, as above 125 125 Preferred stock dividend requirements 2,723 2,723 Fixed charges including preferred stock dividends $2,848 $2,848 Ratio of earnings to fixed charges and preferred stock dividend requirements 1.35 1.42
EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM D&N CAPITAL CORPORATION'S BALANCE SHEET AS OF DECEMBER 31, 1999 AND ITS STATEMENT OF INCOME FOR THE YEAR THEN ENDED, AS WELL AS FINANCIAL SCHEDULES AND OTHER REQUIRED DISCLOSURES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S 1999 ANNUAL REPORT ON FORM 10-K. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2 0 0 0 0 0 0 60,195 0 60,796 0 0 60 0 0 30,250 9,534 20,862 60,706 3,912 0 50 3,962 0 0 3,962 0 0 238 3,724 3,724 0 0 3,724 31.51 31,51 7.32 0 0 0 0 0 0 0 0 0 0 0
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