-----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, UdJKmJMuCzlnEH9tlZSXtG2o+B5wWaVVWD86fKdHNf/V64rRDcZAPGuA66kuclFm CTEbephP4ms7Grd2s09o1g== 0000950124-96-004922.txt : 19961115 0000950124-96-004922.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950124-96-004922 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: D&N FINANCIAL CORP CENTRAL INDEX KEY: 0000830143 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 342790646 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17137 FILM NUMBER: 96660482 BUSINESS ADDRESS: STREET 1: 400 QUINCY ST CITY: HANCOCK STATE: MI ZIP: 49930 BUSINESS PHONE: 2024146100 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30,1996 ------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------ Commission file number 0-17137 ------------------------------------------------- D&N FINANCIAL CORPORATION ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 38-2790646 --------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Quincy Street, Hancock, Michigan 49930 -------------------------------------------------------------------- (Address of principal executive offices) (906) 482-2700 -------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value 7,593,475 ----------------------------- --------------------------- (Class) (Shares Outstanding as of October 31, 1996) ================================================================================ 2 D&N FINANCIAL CORPORATION INDEX Page No. PART I Financial Information Consolidated statements of condition - September 30, 1996 and December 31, 1995 3 Consolidated statements of income - three months ended September 30, 1996 and 1995 nine months ended September 30, 1996 and 1995 4 Consolidated statements of cash flows - nine months ended September 30, 1996 and 1995 5 Notes to consolidated financial statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Other Information 16 - 2 - 3 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
September 30, December 31, 1996 1995 ------------------------------- (In thousands) ------------------------------- ASSETS Cash and due from banks $ 5,738 $ 9,264 Interest-bearing deposits in other bank 4,532 13,176 --------------------------- Total cash and cash equivalents 10,270 22,440 Investment securities (market value of $72,984,000 in 1996 and $55,840,000 in 1995) 73,347 55,537 Investment securities available for sale (at market value) 30,757 40,899 Mortgage-backed securities (market value of $127,242,000 in 1996 and $73,647,000 in 1995) 128,254 72,668 Mortgage-backed securities available for sale (At market value) 41,642 55,041 Loans receivable (including loans held for sale of $2,567,000 in 1996 and $21,610,000 in 1995) 1,100,094 962,440 Allowance for loan losses ( 10,390) ( 10,081) -------------------------- Net loans receivable 1,089,704 952,359 Other real estate owned, net 1,268 1,319 Federal income taxes 7,595 5,374 Office properties and equipment, net 15,625 14,850 Other assets 9,669 8,010 --------------------------- $1,408,131 $ 1,228,497 ============================ LIABILITIES Checking and NOW accounts $ 98,668 $ 91,621 Money market accounts 91,387 86,080 Savings deposits 154,764 149,728 Time deposits 598,892 594,044 Accrued interest 1,022 1,459 --------------------------- Total deposits 944,733 922,932 Securities sold under agreements to repurchase 61,690 -- FHLB advances and other borrowed money 300,529 216,295 Advance payments by borrowers and investors held in escrow 10,384 11,329 Other liabilities 12,646 5,962 ---------------------------- Total liabilities 1,329,982 1,156,518 STOCKHOLDERS' EQUITY Preferred stock (1,000,000 shares authorized; none issued) -- -- Common stock, $.01 par value per share (Shares authorized - 10,000,000; shares outstanding 7,608,909 in 1996 and 7,497,305 in 1995) 76 75 Additional paid-in capital 50,729 49,892 ---------------------------- Total paid in capital 50,805 49,967 Retained earnings - substantially restricted 26,337 20,573 Less cost of treasury stock (21,456 shares in 1996 and 1995) ( 213) ( 213) Less leveraged ESOP stock -- ( 63) Unrealized holding gains on debt securities available for sale, net of tax 1,220 1,715 ---------------------------- Total stockholders' equity 78,149 71,979 ---------------------------- $ 1,408,131 $ 1,228,497 ============================
See notes to consolidated financial statements. - 3 - 4 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ----------------------------------------- (In thousands, except per share) ----------------------------------------- Interest income: Loans $ 22,466 $ 18,633 $ 63,881 $ 53,021 Mortgage-backed securities 2,646 2,573 7,399 8,085 Investments and deposits 1,993 1,919 5,251 5,696 ---------------------------------------- TOTAL INTEREST INCOME 27,105 23,125 76,531 66,802 Interest expense: Deposits 10,917 10,180 32,823 27,797 Securities sold under agreements to repurchase 704 206 1,396 1,204 FHLB advances and other borrowed money 4,242 3,700 10,848 10,200 Interest rate instruments -- 212 -- 2,421 ---------------------------------------- TOTAL INTEREST EXPENSE 15,863 14,298 45,067 41,622 ---------------------------------------- NET INTEREST INCOME 11,242 8,827 31,464 25,180 Provision for loan losses 300 500 900 1,500 ---------------------------------------- TOTAL NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,942 8,327 30,564 23,680 Noninterest income: Loan servicing and administrative fees 398 602 1,424 1,623 Deposit related fees 996 818 2,695 2,310 Gain on sale of loans held for sale 204 572 842 583 Other income 82 57 314 174 ---------------------------------------- 1,680 2,049 5,275 4,690 Gain (loss) on sale of investment securities -- -- 188 ( 120) Gain on sale of loans and mortgage-backed securities -- -- -- 899 ---------------------------------------- TOTAL NONINTEREST INCOME 1,680 2,049 5,463 5,469 Noninterest expense: Compensation and benefits 4,232 3,530 13,216 11,263 Occupancy 706 572 2,103 1,615 Other expenses 2,669 2,753 8,808 7,734 ---------------------------------------- Total general and administrative expense 7,607 6,855 24,127 20,612 Other real estate owned, net 6 ( 239) 68 ( 704) Amortization of intangibles -- 77 -- 290 Federal deposit insurance premiums 6,136 599 7,446 1,796 ---------------------------------------- TOTAL NONINTEREST EXPENSE 13,749 7,292 31,641 21,994 ---------------------------------------- INCOME(LOSS)BEFORE INCOME TAX EXPENSE (CREDIT) ( 1,127) 3,084 4,386 7,155 ---------------------------------------- Federal income tax expense (credit) ( 42) 26 ( 1,378) 84 ---------------------------------------- NET INCOME(LOSS) ($ 1,085) $ 3,058 $ 5,764 $ 7,071 ======================================== Earnings per common and common equivalent share: PRIMARY ($ 0.13) $ 0.39 $ 0.72 $ 0.92 ======================================== FULLY DILUTED ($ 0.13) $ 0.39 $ 0.71 $ 0.90 ========================================
- 4 - 5 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 1996 1995 --------------------- (In thousands) --------------------- OPERATING ACTIVITIES Net income $ 5,764 $ 7,071 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 900 1,500 Depreciation and amortization of office properties and equipment 1,462 1,352 Amortization of net discount on purchased loans and securities (203) (2,676) Originations and purchases of loans held for sale (12,755) (52,978) Proceeds from sales of loans held for sale 58,156 44,041 (Gain)loss on investment securities (188) 120 (Gain)on loans and mortgage-backed securities -- (899) Amortization and writedown of loan servicing rights 191 207 Other 1,627 (5,462) ----------------------- Net cash provided by (used in) operating activities 54,954 (7,724) INVESTING ACTIVITIES Proceeds from sales of investment securities 298 10,070 Proceeds from maturities of investment securities 83,991 33,040 Purchases of investment securities (91,674) (55,200) Proceeds from sales of mortgage-backed securities -- 4,477 Proceeds from sales of loans -- 34,772 Principal collected on mortgage-backed securities 38,417 13,809 Mortgage-backed securities purchased (34,634) -- Purchases of loans (130,790) (81,221) Net change in loans receivable (98,533) (49,468) Decrease in other real estate owned 51 5,063 Purchases of premises and equipment (2,221) (1,559) ----------------------- Net cash used in investing activities (235,095) (86,217) FINANCING ACTIVITIES Net change in time deposits 4,848 59,964 Net change in other deposits 17,387 (5,505) Proceeds from notes payable, securities sold under agreements to repurchase, FHLB advances and other borrowed money 266,690 183,700 Payments on maturity of notes payable, securities sold under agreement to repurchase, FHLB advances and other borrowed money (120,910) (161,905) Net change in advance payments by borrowers and investors held in escrow (945) (4,604) Proceeds from issuance of stock 838 59 Purchase of treasury stock/warrants -- (44) Reduction of leverage ESOP stock 63 27 ----------------------- Net cash provided by financing activities 167,971 71,692 ----------------------- DECREASE IN CASH AND CASH EQUIVALENTS (12,170) (22,249) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,440 33,896 ----------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,270 $ 11,647 =======================
See notes to consolidated financial statements. - 5 - 6 D&N FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the full year. NOTE 2: EARNINGS PER SHARE Per share data is based on the weighted average number of shares outstanding for the periods presented. The weighted average number of common and common equivalent shares used in computing primary earnings per share was 8,119,258 and 7,820,768 for the three months ended September 30, 1996 and September 30, 1995, respectively, and 8,058,047 and 7,646,108 for the nine months ended September 30, 1996 and September 30, 1995, respectively. The weighted average number of common and common equivalent shares used in computing fully diluted earnings per share was 8,202,564 and 7,881,373 for the three months ended September 30, 1996 and September 30, 1995, respectively, and 8,167,211 and 7,879,200 for the nine months ended September 30, 1996 and September 30, 1995, respectively. NOTE 3: ALLOWANCE FOR LOAN LOSSES The allowance for possible losses on loans is maintained at a level believed adequate by management to absorb potential losses from 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. The allowance is increased by a provision for losses charged against income. - 6 - 7 Changes in the allowance for loan losses are summarized as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 --------------------- ----------------------- (In thousands) Balance at beginning of period $ 10,150 $ 9,052 $ 10,081 $ 8,349 Charge-offs: Single family 40 49 129 145 Income producing property -- -- -- 225 Commercial -- -- -- -- Installment 289 242 878 666 ------------------- -------------------- Total 329 291 1,007 1,036 Recoveries: Single family -- -- 3 2 Income producing property 193 -- 193 245 Commercial -- -- -- -- Installment 76 89 220 290 ------------------- ------------------- Total 269 89 416 537 ------------------- ------------------- Net charge-offs 60 202 591 499 Provision charged to operations 300 500 900 1,500 ------------------- ------------------- Balance at end of period $ 10,390 $ 9,350 $ 10,390 $ 9,350 =================== ===================
NOTE 4: SAVINGS AND LOAN INSURANCE FUND ASSESSMENT As of September 30, 1996, the Company accrued a one-time charge of $5.5 million pretax, ($3.6 million after-tax) as the mandated contribution of its wholly-owned subsidiary, 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 requires all thrifts to pay a one-time assessment to restore the SAIF fund to it statutory reserve level. The assessment is 65.7 basis points (b.p.) of the institution's deposits as of March 31, 1995. NOTE 5: FEDERAL INCOME TAXES The liability method is used in accounting for federal income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A federal income tax credit was recorded in the first two quarters of 1996 as a result of the elimination of a previously recorded deferred tax valuation allowance. The third quarter of 1996 reflects a federal income tax credit due to the net tax effect of the loss resulting from the one-time SAIF charge, offset by a $500,000 federal income tax charge resulting from a change in the taxation rules covering thrifts' reserves for losses on loans. This charge follows the August 1996 enactment of federal legislation which disallowed recapture of pre-1988 loan loss provision deductions. - 7 - 8 No material federal income taxes were recorded in the same 1995 reporting periods due to reductions of the deferred tax valuation allowance. NOTE 6: 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, prior to the merger, have been restated to include the results of Macomb. A reconciliation of consolidated net interest income, net income and earnings per share, previously reported and restated amounts, follows:
Three Months Nine Months Ended Ended September 30, 1995 September 30, 1995 ---------------------------------------- (In thousands, except per share) Net interest income Previously reported $ 8,548 $ 24,332 As restated $ 8,827 $ 25,180 Net income Previously reported $ 2,996 $ 6,856 As restated $ 3,058 $ 7,071 Primary earnings per share Previously reported $ 0.45 $ 1.02 As restated $ 0.39 $ 0.92 Fully diluted earnings per share Previously reported $ 0.42 $ 0.96 As restated $ 0.39 $ 0.90
NOTE 7: RECLASSIFICATIONS Certain amounts in the previously issued consolidated financial statements have been reclassified to conform with the current period presentation. - 8 - 9 D&N FINANCIAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information regarding D&N Financial Corporation's (D&N or the Company) financial condition and results of operations for the three-month and nine-month periods ended September 30, 1996 and 1995. Ratios for the three-month and nine-month periods are stated on an annualized basis. Results of operations for the 1996 periods are not necessarily indicative of results which may be expected for the entire year. This discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. RESULTS OF OPERATIONS NET INCOME D&N Bank, the company's wholly-owned subsidiary, incurred a one-time after-tax charge of $3.6 million during the quarter as its mandated contribution 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 requires all thrifts to pay a one-time assessment to restore the SAIF fund to its statutory reserve level. The assessment is 65.7 basis points (b.p.) of an institution's deposits as of March 31, 1995. The Bank also incurred a $500,000 charge related to federal legislation changing the taxation rules covering thrifts' reserves for losses on loans. This charge follows the August 1996 enactment of federal legislation which disallowed recapture of pre-1988 loan loss provision deductions. Including the one-time charges, the Company recorded a net loss for the quarter ended September 30, 1996 of $1.1 million, compared to net income of $3.1 million in the third quarter of 1995. Return on assets and return on equity were (0.31)% and (5.44)%, respectively, during the quarter ended September 30, 1996, compared to 1.02% and 18.50%, respectively, during the quarter ended September 30, 1995. The decrease in net income was primarily due to the one-time SAIF charge, the disallowed loan loss recapture, higher operating costs and reduction in both loan servicing income and gain on sale of loans held for sale, partially offset by higher net interest income and higher deposit related fees. For the nine months ended September 30, 1996, the Company recorded net income of $5.8 million, compared to net income of $7.1 million for the nine months ended September 30, 1995. Return on assets and return on equity were 0.58% and 10.02%, respectively, during the nine months ended September 30, 1996, compared to 0.81% and 14.88%, respectively, during the nine months ended September 30, 1995. The same factors that explained the third quarter comparison were present during the year-to-date comparative periods. - 9 - 10 NET INTEREST INCOME Net interest income, or the difference between interest earned on interest earning assets such as loans and investments and interest paid on sources of funds such as deposits and borrowings, is a significant component of the Company's earnings. Net interest income is affected by changes in both the balance of and the rates of interest earning assets and interest bearing liabilities and the amount of interest earning assets funded with non-interest or low-interest bearing funds. Net interest income increased $2.4 million to $11.2 million for the quarter ended September 30, 1996 compared to $8.8 million for the quarter ended September 30, 1995. The increase was due to increased volume and improved yields on variable rate and short lived assets and to maturity of the Company's interest rate exchange agreements. These improvements were partially offset by increased interest paid on FHLB advances and borrowings under agreements to repurchase along with increases in interest paid on deposits due to a higher volume of deposits for the period. Similarly, net interest income increased $6.3 million to $31.5 million for the nine months ended September 30, 1996 from $25.2 million for the nine months ended September 30, 1995. The same factors that explained the third quarter comparison were present during the year-to-date comparative periods. After raising additional capital in December 1993 and by increasing its consumer and commercial lending activities, the Company has been able to increase its net interest earning assets and to realize increased net yields. The result of these factors is that net interest margin has steadily improved during recent quarters. Net interest margin was 3.37% for the third quarter of 1996, compared to 3.05% for the third quarter of 1995. Net interest margin was 3.28% for the first nine months of 1996, compared to 3.05% for the 1995 nine-month period. PROVISION FOR LOAN LOSSES A provision for loan losses is charged to income based on the size and quality of the loan portfolio measured against prevailing economic conditions. This process is accomplished through a formal review analysis. The provision is recorded in amounts sufficient to maintain the allowance for possible loan losses at a level in excess of that expected by management to be required to cover specific exposures in the portfolio. The Company recorded a $300,000 provision for loan losses during the quarter ended September 30, 1996 compared to a $500,000 provision recorded during the quarter ended September 30, 1995. For the first nine months of 1996, the Company's provision for loan losses was $900,000, compared to $1.5 million for the first nine months of 1995. The allowance for possible loan losses has been maintained at approximately 1.00% of gross loans even as the loan portfolio has experienced significant growth over the past nine months. - 10 - 11 NONINTEREST INCOME Total noninterest income was $1.7 million for the third quarter of 1996, versus $2.0 million for the third quarter of 1995. Loan servicing fees were down $204,000 largely due to higher rates of amortization on mortgage servicing rights. Deposit related fees were up $178,000 primarily due to increased ATM network income. Gain on sale of loans held for sale decreased $368,000 due to decreased sales of loans originated or purchased for sale. The adoption of SFAS 122 in the prior year quarter also resulted in an increase in income by a recognition of servicing rights created back to July 1, 1995. This increased income in the prior year quarter by $458,000. For the nine months ended September 30, 1996 and September 30, 1995, total noninterest income was $5.5 million, in each period. Increases of $644,000 occurred in the areas of deposit related fees and gain on loans held for sale. Also during the current year, the Company sold investment securities from its available-for-sale portfolio at a gain of $188,000. During the prior year, the Company sold several low-yielding investment and mortgage-backed securities from its available-for-sale portfolios and reinvested the proceeds in higher-yielding securities of a similar nature. Additionally, the Company sold a $34.6 million package of loans and used the proceeds to fund loan demand and to reduce short-term debt. These transactions resulted in net gains of $779,000 in the prior year period. For the above reasons, there was a decrease of $591,000 in gain on sales of interest-earning assets. NONINTEREST EXPENSE Total noninterest expense increased $6.4 million to $13.7 million during the quarter ended September 30, 1996, from $7.3 million during the prior year quarter. Compensation and benefits increased due to general wage and benefit increases, deferred compensation payments and additional staffing at new banking facilities. Occupancy expense increased primarily because of increased rental expense and leasehold improvements for new or expanded leased office locations. The prior year's quarter included sales of two commercial OREO properties, resulting in a decrease of the net cost effect that quarter. FDIC insurance rose to $6.1 million for the current quarter versus $599,000 for the prior year's quarter, due to a one-time charge in the current quarter of approximately $5.5 million to replenish the SAIF, see "Regulatory Developments". For the nine months ended September 30, 1996, total noninterest expense increased $9.6 million to $31.6 million, compared to $22.0 million recorded during the nine months ended September 30, 1995. Similar factors contributed to the increase in noninterest expense for the nine month period as contributed to the three month period. In addition to items described in the quarterly comparison, the Company also incurred merger-related expenses in connection with its acquisition of Macomb (see Note 6 of Notes to Consolidated Financial Statements). These expenses accounted for approximately $1.5 million of the $9.6 million increase in the year versus prior year noninterest expense. - 11 - 12 FEDERAL INCOME TAXES Federal income tax credits of $42,000 and $1.4 million were recorded during the three months and nine months ended September 30, 1996, respectively, compared to no material federal income tax recorded in either of the 1995 periods. The federal income tax credit in the third quarter was primarily due to the net tax effect of the one-time SAIF charge in excess of third quarter pre-tax income. During the fourth quarter of 1996, the Company expects to record normal provisions for federal income tax expense. FINANCIAL CONDITION Total assets at September 30, 1996 were $1.41 billion, an increase of $180 million from December 31, 1995. Earning assets represented approximately 98% of total assets as of September 30, 1996, substantially the same as at year-end 1995. CASH, DEPOSITS AND INVESTMENT SECURITIES Cash, deposits and investment securities were $114.4 million at September 30, 1996, down $4.5 million from December 31, 1995. During the period, a portion of the Company's liquidity portfolio was used to partially fund loan demand. MORTGAGE-BACKED SECURITIES Mortgage-backed securities increased $42.2 million to $169.9 million at September 30, 1996. During the period, the Company purchased $34.3 million of government agency collateralized mortgage obligations with a weighted average yield of 6.90% and a weighted average life of 2.5 years and in a separate transaction, exchanged $46.7 million in fixed-rate mortgage loans for FNMA mortgage-backed securities. The FNMA mortgage-backed securities have a weighted average coupon of 6.82% and a weighted average maturity of 12 years. No gain or loss was recorded in this exchange transaction. The entire mortgage-backed securities portfolio experienced repayments and amortization during the period of $38.4 million plus a decrease of $281,000 in market value recognized through stockholders' equity on mortgage-backed securities available for sale. NET LOANS RECEIVABLE Net loans receivable increased $137.3 million during the period to $1.1 billion at September 30, 1996. Loan originations of $393.5 million and purchases of $130.4 million exceeded repayments of $280.8 million and sales (and exchanges) of $104.9 million. Loan originations during the nine months ended September 30, 1996 were substantially higher compared to the first nine months of 1995. Consumer loan originations were $208.7 million compared to $148.7 million, while real estate and commercial loan originations were $184.8 million compared to $144.5 million. - 12 - 13 NONPERFORMING ASSETS AND RISK ELEMENTS The following table sets forth the amounts and categories of risk elements in the Company's loan portfolio.
September 30, December 31, 1996 1995 ------------------------------- (Dollars in thousands) Nonaccruing loans $ 7,962 $ 8,225 Accruing loans delinquent more than 90 days -- 24 Restructured loans -- -- ------------------------- Total nonperforming loans 7,962 8,249 Other real estate owned (OREO) 1,268 1,452 ------------------------- Total nonperforming assets $ 9,230 $ 9,701 ========================= Nonperforming loans as a percentage of total loans 0.72% 0.86% ========================= Nonperforming assets as a percentage of total assets 0.66% 0.79% ========================= Allowance for loan losses as a percentage of nonperforming loans 130.49% 122.21% ========================= Allowances for loan and OREO losses as a percentage of nonperforming assets 112.57% 105.29% =========================
Nonperforming assets, before allowances for loan and OREO losses, experienced a slight decrease during the period. OREO decreased primarily due to the sale of a repossessed apartment complex, offset partially by increased OREO on purchased residential properties. MORTGAGE SERVICING RIGHTS (MSRs) The Company's net investment in MSRs increased during the period to $1.4 million at September 30, 1996. The following table details activity in the portfolio for the periods indicated.
Nine Months Year Ended Ended September 30, 1993 December 31, 1995 ---------------------------------------- (Dollars in thousands) Balance at beginning of period $ 1,113 $ 968 Additions: Capitalized servicing 486 621 Purchased servicing -- -- -------- ------- Total 486 621 Reductions: Scheduled amortization 200 169 Additional amortization due to changes in prepayment assumptions 78 71 Impairment (recovery) ( 88) 234 Sales -- -- Transfers to loan portfolio under recourse and other provisions -- 2 -------- ------- Total 190 476 -------- ------- Balance at end of period $ 1,409 $ 1,113 ======== ======= Fair market value at end of period $ 1,778 $ 1,161 ======== =======
- 13 - 14 DEPOSITS Deposits increased $21.8 million during the period to $944.7 million at September 30, 1996. Certificates of deposit increased $4.8 million while savings deposits increased $5.0 million, checking accounts increased $7.0 million and money market accounts increased $5.3 million. The Company's cost of deposits decreased to 4.59% at September 30, 1996, compared to 4.82% at December 31, 1995, as a result of a general decrease in market rates of interest coupled with the increase in lower cost core deposits. BORROWINGS Total borrowings increased $145.9 million during the period to $362.2 million at September 30, 1996 in order to fund actual and future anticipated loan growth. The Company's cost of borrowings was 5.72% at September 30, 1996, compared to 6.09% at December 31, 1995. CAPITAL According to federal regulations, the Bank must meet certain minimum capital ratios. As the following table indicates, the Bank's capital ratios at September 30, 1996 exceeded these requirements.
Tangible Core Risk-Based Capital Capital Capital -------- ------- ---------- (Dollars in thousands) Actual capital $ 71,010 $ 71,010 $ 81,255 Required capital 21,278 42,556 68,799 -------- -------- -------- Excess capital $ 49,732 $ 28,454 $ 12,456 ======== ======== ======== Actual ratio 5.01% 5.01% 9.45% ======== ======== ======== Required ratio 1.50% 3.00% 8.00% ======== ======== ========
Consolidated stockholders' equity was $78.1 million at September 30, 1996 and represents 5.55% of consolidated assets. LIQUIDITY Liquidity is the ability to meet financial obligations when due. Regulatory authorities require that thrift institutions maintain liquidity consisting of cash, short-term U. S. Government Securities and other specified assets, equal to at least 5% of net withdrawable accounts and borrowings payable in one year or less. At September 30, 1996, the Bank's average liquidity ratio was 5.87%. At September 30, 1996, unused borrowing capacity as measured by the Bank's inventory of readily available but unpledged collateral was approximately $154 million. The Company considers its current liquidity and other funding sources sufficient to fund its outstanding loan commitments and scheduled liability maturities. - 14 - 15 REGULATORY DEVELOPMENTS The deposits of savings associations, such as D&N Bank, are presently insured by the SAIF, which together with the BIF (Bank Insurance Fund), are the two insurance funds administered by the FDIC. Financial institutions which are members of the BIF are experiencing substantially lower deposit insurance premiums because the BIF has achieved its required level of reserves while the SAIF has not yet achieved its required reserves. In order to help eliminate this disparity and any competitive disadvantage due to disparate deposit insurance premium schedules, legislation to recapitalize the SAIF was enacted on September 30, 1996. The legislation requires a special one-time assessment of approximately 65.7 cents per $100 of SAIF deposits held by the Bank at March 31, 1995. Management recognized the one-time special assessment in a tax affected charge to earnings of approximately $3.6 million during the quarter ended September 30, 1996. The legislation is intended to fully recapitalize the SAIF fund so that commercial bank and thrift deposits will be charged FDIC premiums at the same rate beginning October 1, 1996. D&N Bank, however, will continue to be subject to an assessment to fund repayment of the Financing Corporation (FICO) bond obligation. It is anticipated that the FICO assessment for SAIF insured institutions will be 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. Accordingly, as result of the reduction of the SAIF assessment and the resulting FICO assessment, the annual before tax decrease in assessment costs is expected to be approximately $1.6 million based upon a September 30, 1996 assessment base. - 15 - 16 D&N FINANCIAL CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: (11) Statement re: computation of per share earnings (27) Financial Data Schedule (99) Additional exhibits I. Interest rate/volume analysis: quarter ended 9/30/96 vs. quarter ended 9/30/95 and nine months ended 9/30/96 vs. nine months ended 9/30/95 (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended September 30, 1996. - 16 - 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. D&N FINANCIAL CORPORATION \s\ George J. Butvilas ------------------------------ George J. Butvilas, President and Chief Executive Officer \s\ Kenneth R. Janson ------------------------------- Kenneth R. Janson, Executive Vice President/Chief Financial Officer and Treasurer Date: November 14, 1996 18 Exhibit Index Exhibit No. Description 11 Computation of Per Share Earnings 27 FINANCIAL DATA SCHEDULE 99 Operating Margin And Rate Volume Analysis D&N Financial Corporation EX-11 2 COMPUTATION OF EARNINGS 1 EXHIBIT (11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended September 30, ----------------------------------------------- 1996 1995 ---------------------- --------------------- Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- (In thousands, except per share) Net income ($1,085) ($1,085) $3,058 $3,058 ====== ====== ====== ====== Average share Common 7,576 7,576 7,424 7,424 Common equivalents 543 627 397 457 ------ ------ ------ ------ Total 8,119 8,203 7,821 7,881 ====== ====== ====== ====== Earnings per common share ($ 0.13) ($ 0.13) $ 0.39 $ 0.39 ====== ====== ====== ======
Nine Months Ended September 30, --------------------------------------------- 1996 1995 ---------------------- ------------------- Fully Fully Primary Diluted Primary Diluted ------- -------- ------- ------- (In thousands, except per share) Net income $ 5,764 $ 5,764 $ 7,071 $ 7,071 ======= ======= ======= ======= Average shares Common 7,540 7,540 7,422 7,422 Common equivalents 518 627 224 457 ------- ------- ------- ------- Total 8,058 8,167 7,646 7,879 ======= ======= ======= ======= Earnings per common share $ 0.72 $ 0.71 $ 0.92 $ 0.90 ======= ======= ======= =======
Common share equivalents assume exercise of stock options and warrants, if dilutive. EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 5,738 4,532 0 0 72,399 201,601 200,226 1,100,094 10,390 1,408,131 944,733 61,690 23,030 300,529 0 0 50,805 27,344 1,408,131 22,466 4,639 0 27,105 10,917 15,863 11,242 300 0 13,749 (1,127) (1,085) 0 0 (1,085) (0.13) (0.13) 3.37 7,962 0 0 15,131 10,150 329 269 10,390 10,390 0 0
EX-99 4 OPERATING MARGIN & RATE VOLUME ANALYSIS 1 EXHIBIT (99) OPERATING MARGIN AND RATE VOLUME ANALYSIS D&N FINANCIAL CORPORATION
AVERAGE BALANCE AVERAGE RATE INTEREST ----------------------- ------------------- ----------------------- OPERATING MARGIN FOR YEAR TO DATE 09/30/96 09/30/95 09/30/96 09/30/95 09/30/96 09/30/95 - ----------------------------------------------- ----------- ----------- ---------- ---------- ---------- ---------- (Dollars in thousands) INTEREST-EARNING ASSETS: Loans receivable $ 1,053,720 $ 874,732 8.08% 8.08% $ 63,881 $ 53,021 Mortgage-backed securities 130,588 143,641 7.55% 7.50% 7,399 8,085 Investments 99,836 111,695 7.03% 6.82% 5,251 5,696 ----------- ---------- ---- ---- -------- -------- 1,284,145 1,130,068 7.95% 7.88% 76,531 66,802 ----------- ---------- ---- ---- -------- -------- INTEREST-BEARING LIABILITIES: Deposits 934,395 836,584 4.69% 4.44% 32,823 27,797 Borrowings Securities sold w/repo 34,122 26,525 5.38% 6.06% 1,396 1,204 Notes payable 242,175 202,084 5.50% 6.10% 10,140 9,343 Other borrowed money 9,836 11,674 9.60% 9.79% 708 857 ----------- ---------- ---- ---- -------- -------- SUBTOTAL - BORROWINGS 286,132 240,283 5.63% 6.27% 12,244 11,404 Interest rate instruments n/a n/a -- 0.22% -- 2,421 ----------- ---------- ---- ---- -------- -------- 1,220,527 1,076,867 4.91% 5.07% 45,067 41,622 ----------- ---------- ---- ---- -------- -------- INTEREST RATE SPREAD 3.04% 2.81% ==== ==== EXCESS AVERAGE EARNING ASSETS $ 63,618 $ 53,200 =========== ========== NET INTEREST MARGIN 3.28% 3.05% $ 31,464 25,180 ======== ======== Net interest margin w/o swaps 3.28% 3.26% ==== ====
INTEREST VARIANCE DUE TO ------------- --------------------- OPERATING MARGIN FOR INCREASE YEAR TO DATE (DECREASE) VOLUME RATE ------------------------------------- ------------- ------------- ---------- (Dollars in thousands) INTEREST-EARNING ASSETS: Loans receivable 10,860 $ 10,825 $ 35 Mortgage-backed securities (686) (739) 53 Investments (445) (610) 165 ------ -------- ------- 9,729 9,476 253 ------ -------- ------- INTEREST-BEARING LIABILITIES: Deposits 5,026 3,428 1,598 Borrowings Securities sold w/repo 192 334 (142) Notes payable 797 1,768 (971) Other borrowed money (149) (133) (16) ------ -------- ------- SUBTOTAL - BORROWINGS 840 1,969 (1,129) Interest rate instruments (2,421) -- (2,421) ------- -------- -------- 3,445 5,396 (1,951) ------- -------- -------- INTEREST RATE SPREAD EXCESS AVERAGE EARNING ASSETS NET INTEREST MARGIN $ 6,284 $ 4,079 $ 2,205 ======= ======= ======= Net interest margin w/o swaps
AVERAGE BALANCE AVERAGE RATE INTEREST ---------------------- ------------------------ ------------------------- OPERATING MARGIN FOR QUARTER ENDED 09/30/96 09/30/95 09/30/96 09/30/95 09/30/96 09/30/95 - -------------------------------------------- ------------- ---------- ------------ ----------- ------------ ------------ (Dollars in thousands) INTEREST-EARNING ASSETS: Loans receivable $ 1,102,336 $ 919,802 8.15% 8.08% $ 22,466 $ 18,633 Mortgage-backed securities 144,712 137,526 7.31% 7.48% 2,646 2,573 Investments 105,163 109,460 7.54% 6.96% 1,993 1,919 ----------- ---------- ---- ---- -------- -------- 1,352,210 1,166,788 8.01% 7.90% 27,105 23,125 ----------- ---------- ---- ---- -------- -------- INTEREST-BEARING LIABILITIES: Deposits 941,757 861,560 4.61% 4.69% 10,917 10,180 Borrowings Securities sold w/repo 51,260 13,413 5.37% 6.07% 704 206 Notes payable 285,416 224,699 5.52% 5.97% 4,023 3,428 Other borrowed money 9,355 11,288 9.36% 9.64% 219 272 ----------- ---------- ---- ---- -------- -------- SUBTOTAL - BORROWINGS 346,030 249,399 5.60% 6.14% 4,946 3,906 Interest rate instruments m/a n/a -- 0.08% -- 212 ----------- ---------- ---- ---- -------- -------- 1,287,787 1,110,960 4.88% 5.09% 15,863 14,298 ----------- ---------- ---- ---- -------- -------- INTEREST RATE SPREAD 3.14% 2.81% ==== ==== EXCESS AVERAGE EARNING ASSETS $ 64,423 $ 55,828 =========== ========== Net interest margin 3.37% 3.05% $ 11,242 $ 8,827 ======== ======== Net interest margin w/o swaps 3.37% 3.13% ==== ====
INTEREST VARIANCE DUE TO: ------------ ---------------------- OPERATING MARGIN FOR INCREASE QUARTER ENDED (DECREASE) VOLUME RATE - --------------------------------------------- ------------ -------- ------------- (Dollars in thousands) INTEREST-EARNING ASSETS: Loans receivable $ 3,833 $ 3,655 $ 178 Mortgage-backed securities 73 132 (59) Investments 74 (79) 153 ------- ------- ------ 3,980 3,708 272 ------- ------- ------ INTEREST-BEARING LIABILITIES: Deposits 737 909 (172) Borrowings Securities sold w/repo 498 524 (26) Notes payable 595 871 (276) Other borrowed money (53) (45) (8) ------- ------- ------ SUBTOTAL - BORROWINGS 1,040 1,350 (310) Interest rate instruments (212) -- (212) ------- ------- ------ 1,565 2,259 (694) ------- ------- ------ INTEREST RATE SPREAD EXCESS AVERAGE EARNING ASSETS NET INTEREST MARGIN $ 2,415 $ 1,449 $ 966 ======= ======= ====== Net interest margin w/o swaps
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