-----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, Q3jnmxY3jSvt+4tEoNIDw4904cGYbwwL3HSkhPTUXlntB0a414eAkBV6VBQzEg2D DysVYIO9h7HQh04uaUX86A== 0000950124-98-004403.txt : 19980814 0000950124-98-004403.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950124-98-004403 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: SEC FILE NUMBER: 000-17137 FILM NUMBER: 98685851 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 June 30, 1998 ----------------------------- 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 jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 changes since last report) Indicate by check whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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 9,157,226 ------------------------------------ ---------------------------- (Class) (Shares Outstanding of July 31, 1998) =============================================================================== 2 D&N FINANCIAL CORPORATION INDEX Page No. PART I Consolidated statements of condition - June 30, 1998 and December 31, 1997 3 Consolidated statements of income - three months ended June 30, 1998 and 1997 six months ended June 30, 1998 and 1997 4 Consolidated statements of cash flows six months ended June 30, 1998 and 1997 5 Notes to consolidated financial statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Other Information 17 - 2 - 3 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION
June 30 December 31 1998 1997 ---------------------------------- (IN THOUSANDS) ---------------------------------- (Unaudited) ASSETS Cash and due from banks $ 11,882 $ 16,239 Federal funds sold 4,500 300 Interest-bearing deposits in other banks 9,002 3,958 ----------------------------------- Total cash and cash equivalents 25,384 20,497 Investment securities (market value of $58,949,000 in 1998 and $56,594,000 in 1997) 58,917 56,524 Investment securities available for sale (at market value) 36,937 46,112 Mortgage-backed securities (market value $240,635,000 in 1998 and $199,525,000 in 1997) 239,444 198,050 Mortgage-backed securities available for sale (at market value) 225,552 160,246 Loans receivable (including loans held for sale of $10,630,000 in 1998 and $5,275,000 in 1997) 1,286,996 1,311,508 Allowance for loan losses (10,733) (10,549) ----------------------------------- Net loans receivable 1,276,263 1,300,959 Other real estate owned, net 1,295 1,474 Federal income taxes 1,062 1,129 Office properties and equipment, net 17,234 16,621 Other assets 15,916 13,703 ----------------------------------- $ 1,898,004 $ 1,815,315 =================================== LIABILITIES Checking and NOW accounts $ 126,882 $ 119,412 Money market accounts 98,136 92,314 Savings deposits 189,942 163,119 Time deposits 664,131 667,204 Accrued interest 1,045 1,118 ----------------------------------- Total deposits 1,080,136 1,043,167 Securities sold under agreements to repurchase 133,481 149,092 FHLB advances and other borrowed money 523,605 470,431 Advance payments by borrowers and investors held in escrow 19,677 17,585 Other liabilities 6,657 8,239 ----------------------------------- Total liabilities 1,763,556 1,688,514 PREFERRED STOCK OF SUBSIDIARY 28,719 28,719 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value per share (1,000,000 shares authorized; none issued) -- -- Common stock, $.01 par value per share (shares authorized - 25,000,000; shares outstanding - 9,197,224 in 1998 and 1997) 92 92 Additional paid-in capital 75,946 77,025 ----------------------------------- Total paid-in capital 76,038 77,117 Retained earnings - substantially restricted 28,769 21,042 Less: Cost of treasury stock (39,998 shares in 1998 and 98,129 in 1997) (549) (1,581) Unrealized holding gains on debt securities available for sale, net of tax 1,471 1,504 ----------------------------------- Total stockholders' equity 105,729 98,082 ----------------------------------- $ 1,898,004 $ 1,815,315 ===================================
See Notes to Consolidated Financial Statements - 3 - 4 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 -------------------------------------------------- (In thousands, except per share) -------------------------------------------------- INTEREST INCOME Loans $ 26,831 $ 23,598 $ 53,660 $ 45,535 Mortgage-backed securities 6,047 4,625 12,192 9,061 Investments and deposits 1,490 2,070 3,063 4,032 ------------------------- ---------------------- TOTAL INTEREST INCOME 34,368 30,293 68,915 58,628 INTEREST EXPENSE Deposits 11,997 11,987 23,982 23,275 Securities sold under agreements to repurchase 1,316 1,147 3,307 1,906 FHLB advances and other borrowed money 7,736 5,350 15,102 10,303 ------------------------- ---------------------- TOTAL INTEREST EXPENSE 21,049 18,484 42,391 35,484 ------------------------- ---------------------- NET INTEREST INCOME 13,319 11,809 26,524 23,144 Provision for loan losses 550 300 1,075 600 ========================= ====================== NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,769 11,509 25,449 22,544 Noninterest income: Loan administrative fees 454 516 989 1,037 Deposit related fees 1,083 918 2,128 1,839 Gain on sale of loans held for sale 1,146 189 2,031 220 Other income 207 183 943 318 ========================= ====================== TOTAL OPERATING NONINTEREST INCOME 2,890 1,806 6,091 3,414 Gain on sale of mortgage-backed securities -- 539 -- 539 ------------------------- ---------------------- TOTAL NONINTEREST INCOME 2,890 2,345 6,091 3,953 Noninterest expense: Compensation and benefits 5,026 4,301 9,848 8,368 Occupancy 826 745 1,642 1,525 Other expense 3,257 3,133 6,453 5,700 ------------------------- ---------------------- GENERAL AND ADMINISTRATIVE EXPENSE 9,109 8,179 17,943 15,593 Other real estate owned, net (19) 11 (1) (11) Federal deposit insurance premiums 244 159 487 335 ------------------------- ---------------------- TOTAL NONINTEREST EXPENSE 9,334 8,349 18,429 15,917 ------------------------- ---------------------- INCOME BEFORE INCOME TAX EXPENSE 6,325 5,505 13,111 10,580 Federal income tax expense 1,663 1,926 3,871 3,707 ------------------------- ---------------------- INCOME BEFORE PREFERRED STOCK DIVIDENDS 4,662 3,579 9,240 6,873 Preferred stock dividends of subsidiary 680 -- 1,361 -- ------------------------- ---------------------- NET INCOME $ 3,982 $ 3,579 $ 7,879 $ 6,873 ========================= ====================== Earnings per share: BASIC $ 0.44 $ 0.39 $ 0.86 $ 0.75 ========================= ====================== DILUTED $ 0.42 $ 0.38 $ 0.83 $ 0.73 ========================= ======================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 4 - 5 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 1998 1997 ---------------------------------- (IN THOUSANDS) ---------------------------------- OPERATING ACTIVITIES Net Income $ 7,879 $ 6,873 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,075 600 Depreciation and amortization of office properties and equipment 1,114 979 Amortization of net premiums (discounts) on purchased loans and securities 2,575 (186) Originations and purchases of loans held for sale (68,958) (16,671) Proceeds from sales of loans held for sale 143,396 19,583 Gain on loans and mortgage-backed securities available for sale -- (539) Gain on sale of loan servicing rights (193) -- Amortization and writedowns of mortgage servicing rights 456 158 Other (5,216) 2,668 ---------- ----------- Net cash provided by operating activities 82,128 13,465 INVESTING ACTIVITIES Proceeds from maturities of investment securities 28,972 67,956 Purchases of investment securities to be held to maturity (22,651) (97,115) Proceeds from sales of mortgage-backed securities -- 24,094 Principal collected on mortgage-backed securities 81,866 29,224 Purchases of mortgage-backed securities (104,292) (47,184) Loans purchased (89,288) (65,728) Net change in loans receivable (46,935) (54,278) (Increase) decrease in other real estate owned 179 (66) Sales of loan servicing rights 193 -- Purchases of office properties and equipment (1,714) (1,296) ---------- ----------- Net cash used by investing activities (153,670) (144,393) FINANCING ACTIVITIES Net change in time deposits (3,073) 48,312 Net change in other deposits 40,115 7,827 Proceeds from notes payable, securities sold under agreements to repurchase and other borrowed money 215,000 282,799 Payments on maturity of notes payable, securities sold under agreements to repurchase and other borrowed money (177,506) (207,898) Net change in advance payments by borrowers and investors held in escrow 2,092 2,051 Common stock cash dividend (915) -- Proceeds from issuance of stock 649 89 Purchases of Treasury stock/warrants (365) (2,995) Tax benefits on Exercise of Stock options (FAS 109) 432 -- ---------- ----------- Net cash provided by financing activities 76,429 130,185 ---------- ----------- INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 4,887 (743) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,497 12,789 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,384 $ 12,046 ========== =========== Noncash Transactions: Issuance of Treasury Stock on exercise of Stock Options $ 1,397 $ 158 ========== ===========
- 5 - 6 D&N FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIC 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 interim period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the full year. NOTE 2: EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards ("SFAS") 128, "Earnings per Share", for the year ended December 31, 1997. The earnings per share for three month and six month periods ended June 30, 1997, have been restated to comply with this standard. Basic earnings per share is calculated by dividing net income by the average number of shares outstanding during the applicable period. The company had stock options which are considered to be potentially dilutive to common stock. Diluted earnings per share is calculated by dividing net income by the average number of shares outstanding during the applicable period adjusted for these potentially dilutive options. The following table sets forth the computation of per share earnings as provided in SFAS 128, and illustrates the dilutive effect of options outstanding.
Three months ended June 30, 1998 June 30, 1997 --------------------- ------------------- Earnings Earnings Shares per share Shares per share ------ --------- ------- --------- (In thousands, except per share earnings) Basic EPS 9,147 $ 0.44 9,071 $ 0.39 Net dilutive effect of stock options outstanding 384 (0.02) 271 (0.01) ------ -------- ----- -------- Diluted EPS 9,531 $ 0.42 9,342 $ 0.38 ====== ======== ===== ========
- 6 - 7
Six months ended June 30, 1998 June 30, 1997 ------------- ------------- Earnings Earnings Shares per share Shares per share ------ ----------- -------- --------- (In thousands, except per share earnings) Basic EPS 9,130 $ 0.86 9,119 $ 0.75 Net dilutive effect of stock options outstanding 375 (0.03) 346 (0.02) ----- -------- ----- -------- Diluted EPS 9,505 $ 0.83 9,465 $ 0.73 ===== ======== ===== ========
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 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 flows positions, industry concentrations, delinquencies, and other relevant factors. The allowance is increased by a provision for losses charged against income. Changes in the allowance for loan losses are summarized as follows:
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ---------------------------- ------------------------- (In thousands) Balance at beginning of period $ 10,679 $ 10,987 $ 10,549 $ 11,042 Charge-offs: Single family 36 12 46 65 Commercial 54 -- 54 -- Installment 518 385 976 766 -------------------------- ------------------------- Total 608 397 1,076 831 Recoveries: Installment 112 88 185 167 -------------------------- ------------------------- Total 112 88 185 167 -------------------------- ------------------------- Net charge-offs 496 309 891 664 Provision charged to operations 550 300 1,075 600 -------------------------- ------------------------- Balance at end of period $ 10,773 $ 10,978 $ 10,733 $ 10,978 ========================== =========================
- 7 - 8 NOTE 4: 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. NOTES 5: COMPREHENSIVE INCOME The Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", as of January 1, 1998. SFAS No. 130 established standards for reporting and display of comprehensive income and its components. Total Comprehensive Income for the three month and six month periods ended June 30, 1998 and 1997 was as follows:
Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 ------------------------ ---------------------- (In thousands) (In thousands) ------------------------ ---------------------- Net income $ 3,982 $ 3,579 $ 7,879 $ 6,873 Other comprehensive income Unrealized holding gains and losses on debt securities available for sale, net of tax 126 (346) (33) (361) -------- -------- ------- -------- Total accumulated other comprehensive income 126 (346) (33) (361) -------- -------- ------- -------- Total Comprehensive Income $ 4,108 $ 3,233 $ 7,846 $ 6,512 ======== ======== ======= ========
- 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 six month periods ended June 30, 1998 and 1997. Ratios for the periods are stated on an annualized basis. Results of operations for three month and six month periods ended June 30, 1998 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 The Company recorded net income for the quarter ended June 30, 1998 of $4.0 million, compared to net income of $3.6 million in the second quarter of 1997. Return on assets and return on equity were 0.87% and 15.34%, respectively, during the quarter ended June 30, 1998, compared to 0.91% and 16.08%, respectively, during the quarter ended June 30, 1997. The increase in net income was primarily due to increases in net interest income of $1.5 million, increased gains on sales of loans of $957,000 and lower income tax expense. These increases in income were partially offset by an increase in the provision for loan losses of $250,000, and increased operating expenses of $930,000. For the six months ended June 30, 1998, the Company recorded net income of $7.9 million, compared to net income of $6.9 million for the six months ended June 30, 1997. Return on assets and return on equity were 0.86% and 15.44%, respectively, during the six months ended June 30, 1998, compared to 0.90% and 15.58%, respectively, during the six months ended June 30, 1997. The increase in net income was primarily due to increases in net interest income of $3.4 million, increased gains on sales of loans of $1.8 million and increased other income. These increases in income were partially offset by an increase in operating expenses of $2.3 million and an increase in the provision for loan losses of $475,000. NET INTEREST INCOME Net interest income, or the difference between interest earned on interest earning assets such as loans and investment securities and interest paid on - 9 - 10 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 on 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 $1.5 million to $13.3 million for the quarter ended June 30, 1998 compared to $11.8 million for the quarter ended June 30, 1997. The increase was due to increased volume on D&N's loan portfolio and increased volume in the mortgage backed securities portfolio. These improvements were partially offset by increases in interest paid on deposits, FHLB advances, and other borrowings, as the Company utilized the increased borrowing to fund loan demand. Similarly, net interest income increased $3.4 million to $26.5 million for the six months ended June 30, 1998 from $23.1 for the six months ended June 30, 1997. The same factors that explained the second quarter comparison were present during the year-to-date comparative periods. By increasing its consumer and commercial lending activities, the Company has been able to increase its net interest earnings and to realize increased net yields. The result of these factors is that net interest income has improved in recent quarters. 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 exposure in the portfolio. The Company recorded a $550,000 provision for loan losses during the quarter ended June 30, 1998 and $300,000 during the quarter ended June 30, 1997. For each of the first six months in 1998 and 1997, the Company's provision for loan losses was $1.1 million, and $600,000, respectively. NONINTEREST INCOME Total noninterest income increased to $2.9 million during the second quarter of 1998, from $2.3 million recorded during the second quarter of 1997. The majority of this increase was due to an increase in gain on sale of - 10 - 11 loans of $957,000, increases in deposit related fees and increased revenue from the sale of insurance products and annuity contracts through the Bank's subsidiary, Quincy Insurance Agency, Incorporated. Offsetting these increases was a $539,000 decrease in gain on sale of mortgage-backed securities. During the prior year quarter, the Company sold mortgage backed securities totaling $23.7 million from its available-for-sale portfolio at a gain of $539,000. The proceeds from the prior year sale were used to fund loan demand and to reduce short-term debt. For the six months ended June 30, 1998, total noninterest income increased to $6.1 million from $4.0 million recorded during the six months ended June 30, 1997. The majority of this increase was due to a $1.8 million increase in gain on sale of loans available for sale. Deposit related fees also increased by $289,000 during the six month period, primarily due to increased ATM surcharge income. Other income increased by $625,000 due to a sale of mortgage servicing rights, and a recovery on a previously written-off investment. Offsetting these increases was a decrease in the gain on sale of mortgage-backed securities of $539,000. NONINTEREST EXPENSE Total noninterest expense increased $1.0 million to $9.3 million during the quarter ended June 30, 1998, from $8.3 million during the prior year quarter. Compensation and benefits increased $725,000 reflecting staffing levels to handle increased loan volumes and incentives paid on those increased volumes. Other expense increased $124,000 with the greatest increases being office administration, data processing, ATM expenses and legal fees. For the six months ended June 30, 1998, total noninterest expense increased $2.5 million to $18.4 million, compared to $15.9 million recorded during the six months ended June 30, 1997. The factors contributing to the year-to-date period were essentially the same as those for the quarterly period. FEDERAL INCOME TAXES The second quarter and first half of 1998 reflect a federal tax refund of $385,000 that was received in June, 1998. This refund was the result of a credit for prior years corporate minimum tax. The second quarter and first half of 1997 reflect customary provisions for income taxes. - 11 - 12 FINANCIAL CONDITION Total assets at June 30, 1998 were $1.90 billion, an increase of $82.7 million from December 31, 1997. Earning assets represented approximately 98% of total assets as of June 30, 1998, substantially the same as at year-end 1997. CASH, DEPOSITS AND INVESTMENT SECURITIES Cash, deposits and investment securities were $121.2 million at June 30, 1998, down $1.9 million from December 31, 1997. This decrease was due to maturities in D&N's non-mortgage liquidity portfolio of approximately $29.5 million in U.S. Treasury Securities, partially offset by increases of $20.0 million in commercial paper, $4.9 million in cash and cash equivalents, and $2.7 million in FHLB stock. MORTGAGE-BACKED SECURITIES Mortgage-backed securities increased $106.7 million to $465.0 million at June 30, 1998 compared to $358.3 million at December 31, 1997. During the period, the Company purchased $104.6 million of government agency collateralized mortgage obligations, with a weighted average yield of 6.43% and a weighted average life of 4.3 years. The Company also securitized 15 and 30 year fixed-rate mortgage loans with FNMA, adding $83.8 million to D&N's mortgage-backed securities portfolio. The entire mortgage-backed securities portfolio experienced repayments and amortization during the period of $81.8 million, plus a net increase of $19,000 in market value, recognized through stockholders' equity on mortgage-backed securities available for sale. NET LOANS RECEIVABLE Net loans receivable decreased $24.7 million during the period to $1.28 billion at June 30, 1998. Loan originations of $434.0 million and purchases of $88.1 million were less than repayments of $322.6 million and sales (including securitizations) of $224.2 million. Loan originations and purchases during the three months ended June 30, 1998 were $179.0 million for consumer loans, while residential mortgage loans and commercial loans were $281.1 million and $62.0 million, respectively. NONPERFORMING ASSETS AND RISK ELEMENTS The following table sets forth the amounts and categories of risk elements in the Bank's loan portfolio. - 12 - 13
June 30, December 31, 1998 1997 --------------------------------- (Dollars in thousands) Nonaccruing loans $ 8,173 $ 3,552 Accruing loans delinquent more than 90 days -- 274 ============================ Total nonperforming loans 8,173 3,826 Other real estate owned (OREO) 1,295 1,474 ---------------------------- Total nonperforming assets $ 9,468 5,300 ============================ Nonperforming loans as a percentage of total loans 0.64% 0.29% ============================ Nonperforming assets a a percentage of total assets 0.50% 0.29% ============================ Allowance for loan losses as a percentage of nonperforming loans 131.33% 275.72% ============================ Allowance for loan and OREO losses as a percentage of nonperforming assets 113.37% 199.04% ============================
Nonperforming assets, before allowances for loans and OREO losses, increased $4.2 million during the period, primarily as three commercial real estate loans were downgraded. MORTGAGE SERVICING RIGHTS (MSRS) The Company's net investment in MSRs increased during the period to $3.4 million at June 30, 1998. The following table details activity in the portfolio for the periods indicated.
Six Months Year Ended Ended June 30, 1998 December 31, 1997 --------------------------------------- (Dollars in thousands) Balance at beginning of period $ 2,136 $ 1,443 Additions: Capitalized servicing 1,880 1,236 Total -------- -------- 1,880 1,236 Reductions: Scheduled amortization 225 321 Additional amortization due to changes in prepayment assumptions 144 222 Sale of servicing 243 -- -------- -------- Total 612 543 -------- -------- Balance at end of period $ 3,404 $ 2,136 ======== ======== Fair market $ 3,676 $ 2,389 ======== ========
- 13 - 14 DEPOSITS Deposits increased $37.0 million during the period to $1.08 billion at June 30, 1998. Certificates of deposit decreased $3.1 million and savings deposits increased $26.8 million, while checking accounts increased $7.5 million and money market accounts increased $5.8 million. The Company's cost of deposits decreased to 4.61% at June 30, 1998, compared to 4.74% at December 31, 1997, reflecting general decreases in market rates of interest. BORROWINGS Total borrowings increased $37.6 million during the period to $657.1 million at June 30, 1998 in order to fund loan demand. The Company's cost of borrowings was 5.83% at June 30, 1998, compared to 5.94% at December 31, 1997. CAPITAL According to federal regulations, the Bank must meet certain minimum capital ratios. As the following table indicates, the Bank's capital ratios at June 30, 1998 exceeded these requirements.
Tier 1 Tangible Core Risk-based Risk-based Capital Capital Capital Capital -------- ------- ----------- ------------ (Dollars in thousands) Actual capital $ 127,807 $ 127,807 $ 138,396 $ 127,807 Required capital 28,701 57,402 92,244 46,122 ---------- --------- ---------- --------- Excess capital $ 99,106 $ 70,405 $ 46,152 $ 81,685 ========== ========= ========= ========= Actual ratio 6.68% 6.68% 12.00% 11.08% ========== ========= ========= ========= Required ratio 1.50% 3.00% 8.00% 4.00% ========== ========= ========= =========
Consolidated stockholders' equity was $105.7 million at June 30, 1998 and represents 5.57% 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, U.S. Government Securities and other specified assets, equal to at least 4% of net withdrawable accounts and to borrowings payable in one year or less. For June 1998, the Bank's average liquidity ratio was 19.4%. At June 30, 1998, unused borrowing capacity as measured by the Bank's inventory of - 14 - 15 readily available but unpledged collateral was approximately $193 million. The Company considers its current liquidity and other funding sources sufficient to fund its outstanding loan commitments and scheduled liability maturities. REGULATORY INSURANCE The deposits of savings associations, such as D&N Bank, are presently insured by the SAIF ("Savings Association Insurance Fund"), which together with the BIF ("Bank Insurance Fund"), are the two insurance funds administered by the FDIC. The assessment for SAIF insured institutions is 6.5 cents per $100 of deposits while BIF insured institutions 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. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requiries that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement will be adopted effective January 1, 2000 and is not expected to have any material effect on the Company's financial statements. 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. Some of these systems include legacy procedures that may have been designed and historic data that may have been stored in such a manner that inconsistencies or failures might occur when dates from the new millennium are considered. Commonly known as the Year 2000 problem, a myriad of related potential computing difficulties face entities that rely extensively upon computer systems. D&N's major computer systems include financial control applications provided by M&I Data Services, Inc.; mortgage lending application provided by ALLTEL Information Services, Inc. and FiTech, Inc.; and internally maintained micro-computer and network systems which support management functions and communication. D&N is working closely with its data services vendors to ascertain that their applications, upon which the Bank relies, will be certifiable as compliant by the end of 1998. - 15 - 16 D&N had determined that its internally maintained systems, consisting primarily of a Lotus Notes server array and various workstation-based business suite software are Year 2000 compliant as currently installed. Costs associated with addressing the Year 2000 issue as it affects D&N's externally vended applications, is implicitly included in the contractual arrangements for those applications. Accordingly, D&N's duty is to monitor the progress of its vendors toward the attainment of compliance and to test for compliance. Where progress is acceptable and timely compliance is deemed likely, no material costs of addressing the Year 2000 issue are imputable to D&N. At this time, D&N deems the progress attained by each of its service bureau vendors to achieve Year 2000 compliance in a timely fashion to be acceptable. Accordingly, the potential cost of addressing the Year 2000 issue is not expected to be material to D&N's business, operations or financial condition. - 16 - 17 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: (27) Financial Data Schedule (99) Additional exhibits I. Interest rate/volume analysis: quarter ended 6/30/98 vs. quarter ended 6/30/97 six months ended 6/30/98 vs. six months ended 6/30/97 (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended June 30, 1998. -17- 18 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: August 13, 1998 ----------------------------- 19 Exhibit Index ------------- Exhibit No. Description - ------------ ----------- 27 Financial Data Schedule 99.I Operating Marginand Rate Volume Analysis EX-27 2 EXHIBIT 27
9 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 11,882 9,002 4,500 0 262,489 298,361 299,584 1,286,996 10,733 1,898,004 1,080,136 133,481 26,324 523,605 0 28,719 76,038 29,691 1,898,004 26,831 7,537 0 34,368 11,997 21,049 13,319 550 0 9,334 5,645 3,982 0 0 3,982 0.44 0.42 3.01 8,173 0 0 11,822 10,679 608 112 10,773 10,773 0 0
EX-99.I 3 EXHIBIT 99.I 1 EXHIBIT (99)I OPERATING MARGIN AND RATE VOLUME ANALYSIS D&N FINANCIAL CORPORATION
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO: OPERATING MARGIN FOR June 30, June 30, June 30, Increase Quarter ended 1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate ------------------------------------------------------------------------------------------- ---------------------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: LOANS RECEIVABLE $1,340,256 $1,143,747 8.01% 8.25% $26,831 $23,598 $3,233 $3,955 ($722) MORTGAGE-BACKED SECURITIES 352,964 256,940 6.85% 7.20% 6,047 4,625 1,422 1,655 (233) INVESTMENTS 86,875 13,460 6.88% 6.36% 1,490 2,070 (580) (738) 158 ---------- ---------- ---- ---- ------- ------- -------- ------ ----- 1,780,095 1,531,147 7.72% 7.91% 34,368 30,293 4,075 4,872 (797) ---------- ---------- ---- ---- ------- ------- -------- ------ ----- INTEREST-BEARING LIABILITIES: DEPOSIT $1,045,860 1,013,886 4.60% 4.74% 11,987 11,987 10 372 (362) BORROWINGS SECURITIES SOLD W/REPO 93,975 81,428 5.54% 5.57% 1,316 1,147 169 176 (7) NOTES PAYABLE 513,772 352,948 5.83% 5.78% 7,577 5,161 2,416 2,371 45 OTHER BORROWED MONEY 6,729 8,219 9.45% 9.20% 159 189 (30) (35) 5 ---------- --------- ---- ---- ------- ------- -------- ------ ----- SUBTOTAL - BORROWINGS 614 ,476 442,595 5.83% 5.81% 9,052 6,497 2,555 2,512 43 ---------- --------- ---- ---- ------- ------- -------- ------ ----- 1,660,336 1,456,481 5.06% 5.07% 21,049 18,484 2,565 2,884 (319) ---------- --------- ---- ---- ------- ------- -------- ------ ----- INTEREST RATE SPREAD 2.67% 2.85% ==== ==== EXCESS AVERAGE EARNING ASSETS $119,759 $74,666 ======== ======= NET INTEREST MARGIN 3.01% 3.09% $13,319 $11,809 $ 1,510 $1,987 ($477) ==== ==== ======= ======= ======== ====== =====
AVERAGE BALANCE AVERAGE RATE INTEREST VARIANCE DUE TO: OPERATING MARGIN FOR June 30, June 30, June 30, Increase Year to Date 1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate - ----------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: LOANS RECEIVABLE $1,337,575 $1,105,052 8.04% 8.26% $53,660 $45,535 $8,125 $9,353 ($1,228) MORTGAGE-BACKED SECURITIES 355,904 252,013 6.85% 7.19% 12,192 9,061 3,131 3,577 (446) INVESTMENT 92,824 130,032 6.65% 6.25% 3,063 4,032 (969) (1,218) 249 ---------- ---------- ---- ---- ------- ------- ------ ------- ------- 1,786,303 1,487,097 7.73% 7.90% 68,915 58,628 10,287 11,712 (1,425) ---------- ---------- ---- ---- ------- ------- ------ ------- ------- INTEREST-BEARING LIABILITIES: DEPOSIT $1,041,063 994,116 4.65% 4.72% 23,982 23,275 707 1,086 (379) BORROWINGS SECURITIES SOLD W/REPO 118,246 68,968 5.56% 5.50% 3,307 1,906 1,401 1,378 23 NOTES PAYABLE 502,838 345,517 5.84% 5.71% 14,774 9,918 4,856 4,617 239 OTHER BORROWED MONEY 7,182 8,203 9.13% 9.39% 328 385 (57) (47) (10) ---------- ---------- ---- ---- ------- ------- ------ ------- ------- (10) SUBTOTAL - BORROWINGS 628,266 422,688 5.83% 5.75% 18,409 12,209 6,200 5,948 252 ---------- ---------- ---- ---- ------- ------- ------ ------- ------- 1,669,329 1,416,804 5.09% 5.03% 42,391 35,484 6,907 7,034 (127) ---------- ---------- ---- ---- ------- ------- ------ ------- ------- INTEREST RATE SPREAD 2.64% 2.87% ==== ==== EXCESS AVERAGE EARNING ASSETS $ 116,974 $70,293 ========== ========== NET INTEREST MARGIN 2.98% 3.11% $26,524 $23,144 $3,380 $4,678 ($1,298) ===============================================================
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