1
EXHIBIT 13
SELECTED FINANCIAL HIGHLIGHTS
D&N FINANCIAL CORPORATION
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
FOR THE YEAR:
Net interest income ........................... $ 33,632 $ 22,614 $ 20,130 $ 28,690 $ 29,976
Provision for loan losses ..................... 2,400 100 --- --- 10,150
Noninterest income (loss) ..................... 6,834 7,424 (21,718) 13,362 24,743
Net income (loss) ............................. 10,140 3,091 (67,020)(1) 3,773 3,573
Primary earnings (loss) per share ............. 1.45 0.46 (18.00) 1.01 0.96
Weighted average shares (primary) ............. 7,019,075 6,720,011 3,724,264 3,708,418 3,708,418
Fully diluted earnings (loss) per share ....... 1.40 0.46 (18.00) 1.01 0.96
Weighted average shares (fully diluted) ....... 7,232,517 6,720,011 3,724,264 3,708,418 3,708,418
Dividends per share ........................... --- --- --- --- ---
Stock price range ............................. 7 1/4-13 1/2 6 5/8-10 6 1/2-12 1/2 4 3/4-8 1/2 2 1/2-5 1/2
AT YEAR END:
Total assets .................................. 1,186,661 1,088,693 1,041,950 1,212,196 1,518,930
Net loans receivable .......................... 931,188 801,248 627,605 707,570 845,576
Nonperforming assets .......................... 9,624 24,515 43,557 55,890 66,951
Mortgage-backed securities .................... 123,475 146,646 167,677 235,137 365,240
Excess of cost over net assets of
association acquired ........................ --- 384 845 36,380 38,320
Mortgage servicing rights ..................... 1,113 968 9,870 29,198 8,992
Deposits ...................................... 887,869 784,075 811,510 881,424 979,583
Borrowings .................................... 216,232 226,857 101,513 174,061 373,851
Stockholders' equity .......................... 65,711 52,623 51,454 96,770 92,997
Per share ................................... 9.70 7.83 7.66 26.10 25.08
Tangible stockholders' equity ................. 64,587 52,562 51,616 62,304 58,386
Per share ................................... 9.53 7.82 7.68 16.80 15.74
Number of offices ............................. 45 40 37 39 46
SELECTED RATIOS:
Return on average assets ...................... 0.89% 0.30% (5.68)% 0.27% 0.21%
Return on average equity ...................... 17.18 6.04 (80.13) 3.98 3.90
Average equity to average assets .............. 5.20 4.92 7.09 6.79 5.49
Net interest margin ........................... 3.05 2.28 1.91 2.26 1.95
General and administrative expenses
to average assets ........................... 2.47 2.50 2.32 1.82 1.73
Nonperforming assets to total assets .......... 0.81 2.25 4.18 4.61 4.41
Allowance for loan losses to
nonperforming loans ......................... 121.53 45.56 37.76 34.59 33.71
Allowance for loan losses to total loans ...... 1.06 1.01 1.79 2.14 2.16
Net loan charge-offs to average loans ......... 0.08 0.44 0.61 0.44 0.99
Dividend payout ratio ......................... --- --- --- --- ---
Tangible capital ratio ........................ 5.10 4.71 4.56 4.04 3.36
Core capital ratio ............................ 5.10 4.75 4.64 5.04 4.86
Risk-based capital ratio ...................... 9.78 9.34 9.47 9.93 9.66
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
D&N Financial Corporation (D&N or the Company) is a savings bank holding
company whose sole subsidiary is D&N Bank (the Bank). D&N's primary focus is
the delivery of retail financial services through its network of community
banking offices in Michigan and Wisconsin. This discussion highlights important
trends and events that have shaped the Company's financial performance in 1995.
In 1995, D&N reported net income of $10.1 million, or $1.45 per share. On
a fully diluted basis, 1995 earnings were $1.40 per share. These results
compare to net income of $3.1 million, or $0.46 per share, in 1994, and an
aggregate net loss of $67.0 million, or $18.00 per share, in 1993. The 1993
loss consisted of $31.4 million, or $8.44 per share, from operations before
consideration of an extraordinary item and the cumulative effects of changes in
accounting principles, and $35.6 million, or $9.56 per share, from those
nonrecurring items.
On December 31, 1995, the Company's balance sheet included total assets of
$1.19 billion, compared to $1.09 billion at the end of 1994 and $1.04 billion
at the end of 1993. Balance sheet growth in 1994 and 1995 followed several
years of planned shrinkage as the Company refocused its efforts on its
community banking franchise and de-emphasized its commercial real estate and
investment activities. During 1995, the average balance of earning assets grew
to $1.10 billion, up from the $991 million level in 1994 and the $1.05 billion
average of 1993. Net interest income after provision for loan losses in 1995
totaled $31.2 million, compared to $22.5 million in 1994 and $20.1 million in
1993. In both 1995 and 1994, the income statements benefited from the declining
adverse impact of unfavorable interest rate exchange agreements. Net interest
expense attributable to these interest rate swaps totaled $2.5 million in 1995,
down from $9.8 million in 1994 and $15.3 million in 1993.
In 1995, the Company made a $2.4 million provision for loan losses after
making a provision of $100,000 in 1994 and no such provision in 1993. At
December 31, 1995, the allowance for loan losses was $9.9 million, or 1.06% of
outstanding loans. D&N's portfolio of nonperforming assets decreased during
1995 by $14.9 million, or 61%, from $24.5 million to $9.6 million.
Nonperforming assets totaled $43.6 million at year-end 1993.
Noninterest income from operations totaled $6.1 million in 1995, compared
to $6.7 million in 1994 and a $9.7 million loss reported in 1993. The 1993 loss
included a $14.6 million charge to write down D&N's portfolio of purchased
mortgage loan servicing rights. All but a small portion of this portfolio was
sold in 1994 as the Company concentrated its loan servicing activities on
originated loans. A gain of $140,000 was recorded in 1994 on the sale of the
purchased mortgage loan servicing rights, and the scale of the Company's loan
servicing operations was subsequently reduced. Loan servicing and
administrative fee income was smaller in 1995 than 1994, reflecting that
smaller scale. Also, 1994's results included as other income, earnings recorded
at the completion of the Company's participation in a residential real estate
development joint venture.
In 1995, D&N recognized gains totaling $779,000 on sales of
mortgage-backed and investment securities and mortgage loans. In 1994, such
gains totaled $622,000, and in 1993, $12.5 million of net losses were recorded,
primarily the consequence of adopting a held-for-sale accounting convention for
the Company's portfolio of investments in interest- only strip securities
(IOs).
In 1993, the Company reported an extraordinary loss on the early
prepayment of $43.1 million of long-term debt. Net of income tax effects, this
loss totaled $1.9 million. Also in 1993, the Company recorded a $1.1 million
gain from a change in accounting for income taxes and a $34.8 million loss as
the cumulative effect of a change in the accounting treatment accorded
goodwill.
10
3
RESULTS OF OPERATIONS NET INTEREST INCOME The Company's primary source of
earnings is its net interest income, defined as the difference between the
interest earned on its loans and investments and the interest paid on its
deposits and other liabilities. Interest income and interest expense each
increased in 1995 as the average size of the Company's balance sheet was
increased. Interest income increased by $18.8 million, or 27.2%, as the average
yield on earning assets increased by 99 basis points to 7.96% in 1995 from 6.97%
in 1994. In 1993, earning assets yielded 7.37%. Interest expense increased by
$7.8 million, or 16.7%, in 1995 as the average cost of interest-bearing
liabilities increased by 23 basis points. In 1995, interest-bearing liabilities
had an average cost of 5.15%, compared to 4.92% in 1994 and 5.65% in 1993.
Because the average yield on interest-earning assets increased more than the
average funding cost in 1995, the Company's interest rate spread increased from
2.05% in 1994 to 2.81% in 1995. In 1993, the spread was 1.72%. Similarly, the
Bank's net interest margin, or ratio of net interest income to average
interest-earning assets, increased from 2.28% in 1994 to 3.05% in 1995. In 1993,
the net interest margin was 1.91%. Average interest-earning assets exceeded
average interest-bearing liabilities by $50.1 million in 1995 compared to $47.0
million in 1994 and $36.0 million in 1993.
The improvement in spread and margin in 1995 reflects primarily the
decreasing burden of interest rate exchange agreements on interest expense, as
the burden of those instruments declined from 104 basis points in 1994 to 24
basis points in 1995.
Average balances of loans outstanding were higher in 1995 than 1994, as the
Company's loan originations increased significantly. Average balances of
mortgage-backed securities were slightly higher, while the investment securities
category declined. Loans increased by $121.5 million, or 16.2%; mortgage-backed
securities increased by $4.5 million, or 3.5%; and investment securities
declined by $13.2 million, or 11.9%. Average earnings rates on the loan,
mortgage-backed securities and investment portfolios were higher in 1995 than
1994. In 1995, loans earned an average yield of 8.13% compared to 7.56% in 1994.
Mortgage-backed securities earned an average of 7.61% in 1995, versus an average
rate of 5.81% in 1994. Investment securities earned 6.96% in 1995, up from 4.40%
in 1994.
Average balances of loans also increased from 1993 to 1994 as the Company
renewed its community banking strategy after restructuring its balance sheet in
1993. Average balances of mortgage-backed securities and investment securities
fell significantly from 1993 to 1994 as D&N deployed surplus liquidity assets to
fund loan growth.
Average deposit balances increased 3.7%, to $818 million in 1995, from $789
million in 1994. The average cost of deposits increased 90 basis points, to
4.51% in 1995, from 3.61% in 1994, as the increasing short term rates of 1993
worked their way through the deposit file. From 1993 to 1994, average deposit
balances fell by $50.5 million. In 1993, the average cost of deposits was 3.87%.
The average balance of borrowed funds increased by 52.1%, to $236 million
in 1995, from $155 million in 1994. In 1993, the average balance of borrowed
funds was $178 million.
11
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following tables set forth the extent to which the Company's net
interest income has been affected by changes in average interest rates and
average balances of interest-earning assets and interest-bearing liabilities:
Year Ended December 31, 1995
--------------------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------------
Increase
1995 1994 1995 1994 1995 1994 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans(3) $ 871,032 $749,486 8.13% 7.56% $70,815 $ 56,634 $ 14,181 $ 9,651 $ 4,530
Mortgage-backed securities(4) 135,614 131,084 7.61 5.81 10,314 7,610 2,704 70 2,634
Investments and deposits(4) 97,652 110,894 6.96 4.40 6,792 4,883 1,909 (641) 2,550
----------------------------------------------------------------------------------------------------
1,104,298 991,464 7.96 6.97 87,921 69,127 18,794 9,080 9,714
----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 817,994 789,176 4.51 3.61 36,913 28,494 8,419 1,075 7,344
Borrowings 236,216 155,303 6.29 5.28 14,855 8,207 6,648 4,871 1,777
Interest rate instruments -- -- 0.24 1.04 2,521 9,812 (7,291) -- (7,291)
----------------------------------------------------------------------------------------------------
1,054,210 944,479 5.15 4.92 54,289 46,513 7,776 5,946 1,830
----------------------------------------------------------------------------------------------------
Interest rate spread 2.81 2.05
Excess average earning assets $ 50,088 $ 46,985 7.96 6.97
===========================================
Net interest margin 3.05% 2.28% $33,632 $ 22,614 $ 11,018 $ 3,134 $ 7,884
=======================================================================
Year Ended December 31, 1994
--------------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
--------------------------------------------------------------------------------------------------
Increase
1994 1993 1994 1993 1994 1993 (Decrease) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans(3) $ 749,486 $ 662,235 7.56 8.65 $56,634 $ 57,278 $ (644) $ 7,066 $ (7,710)
Mortgage-backed securities(4) 131,084 221,758 5.81 5.70 7,610 12,649 (5,039) (4,629) (410)
Investments and deposits(4) 110,894 169,343 4.40 4.56 4,883 7,728 (2,845) (2,582) (263)
-------------------------------------------------------------------------------------------------
991,464 1,053,336 6.97 7.37 69,127 77,655 (8,528) (145) (8,383)
-------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 789,176 839,716 3.61 3.87 28,494 32,478 (3,984) (1,892) (2,092)
Borrowings 155,303 177,595 5.28 5.48 8,207 9,738 (1,531) (1,198) (333)
Interest rate instruments -- -- 1.04 1.50 9,812 15,309 (5,497) -- (5,497)
-------------------------------------------------------------------------------------------------
944,479 1,017,311 4.92 5.65 46,513 57,525 (11,012) (3,090) (7,922)
-------------------------------------------------------------------------------------------------
Interest rate spread 2.05 1.72
Excess average earning assets $ 46,985 $ 36,025 6.97 7.37
=========================================
Net interest margin 2.28% 1.91% $22,614 $ 20,130 $ 2,484 $ 2,945 $ (461)
=====================================================================
(1) Based on average daily balances
(2) Changes in interest income and interest expense attributable to changes in
both rate and volume have been attributed proportionately to the change due
to rate and the change due to volume
(3) Loans on nonaccrual are included in the average balances shown above. The
variance due to rate includes the effect of such loans because no interest
is earned on such loans.
(4) Average rates on mortgage-backed and investment securities available for
sale are based on historical amortized cost balances.
D&N's interest expense includes the net costs of interest
rate hedging instruments. In 1995, contracts written in the 1980s to
exchange fixed interest payments for variable receipts ("interest rate
swaps") resulted in net charges to interest expense of $2.5 million. This
swap expense was $9.8 million in 1994 and, along with the costs of now
expired interest rate cap contracts, totaled $15.3 million in 1993. The
swap contracts, originally executed as hedges against rising interest
rates, have now expired, with the final contract maturing in November of
1995. The final cap contract expired on March 31, 1993.
12
5
Noninterest Income
D&N's noninterest income includes recurring fees from loan and
deposit-related activities, recurring income from the marketing of assets that
are originated for sale, and nonrecurring gains and losses from events such as
securities sales and write-downs of depreciated assets.
In 1995, net loan servicing and administrative fees were $1.9 million, down
from 1994's level of $2.2 million primarily due to the sale in mid-1993 of a
substantial portion of the Bank's portfolio of purchased mortgage loan servicing
rights (PMSRs). Deposit-related fees were $3.1 million in 1995, up slightly from
the 1994 level. Gains, losses and other income totaled $1.8 million in 1995. Net
gains on sales of investment securities, mortgage-backed securities and
purchased loans totaled $779,000 during the year, while net funding gains and
gains from the capitalization of servicing rights for mortgage loans originated
and then sold by the Bank amounted to $882,000. In 1994, these items totaled
$1.4 million, including in the other income category a $662,000 gain realized on
the completion of a Bank subsidiary's investment in a real estate development
joint venture. Nonrecurring gains from the sale of investment assets and loan
servicing rights totaled $762,000 in 1994.
In 1993, the noninterest income category was dominated by two nonrecurring
items. The first was the recognition of market value depreciation that had been
present in the Company's portfolio of IO strip securities but previously
deferred because of the securities' status as hedge instruments. The second was
the recognition of impairment of value in the Company's portfolio of PMSRs.
Together, these two adjustments required charges of $33.1 million, resulting in
an aggregate loss of $21.7 million in the noninterest income category for 1993.
Noninterest Expense
General and administrative expenses increased in 1995 by $2.0 million, or
7.7%, following a decrease of $1.4 million, or 5.2%, in 1994. Compensation
expense increased during the year by $1.1 million, or 8.0%, following an
increase of $1.0 million, or 8.0%, in 1994. In 1993, the Company began to
rebuild its community banking infrastructure in anticipation of the
recapitalization that was affected late that year. Occupancy costs totaled $2.3
million in 1995 and $2.0 million each of the years 1994 and 1993.
In 1995, noninterest expense included a credit of $999,000 related to other
real estate owned (OREO). This category includes net operating expenses of
$10,000 and net recoveries on sales of OREO of $989,000. In 1994, OREO items
contributed net revenue of $2.1 million, while net OREO expenses totaled $3.3
million in 1993.
In 1993, D&N adopted Statement of Financial Accounting Standards (SFAS) No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, for
its 1982 acquisition of First Federal Savings and Loan Association of Flint,
Michigan. As a consequence, the Company's 1993 Statement of Operations contains
a $34.8 million charge for the cumulative effect of this change in accounting
principle for goodwill. While the Company's amortization expense associated with
goodwill was $2.0 million in 1992 computed on a straight line basis, for 1993
and subsequent years, the amortization expense was based upon the rate of
discount accretion on loans acquired in the 1982 merger. For 1993, goodwill
amortization was $777,000, with the ending balance at $845,000. Amortization
charges of $461,000 in 1994 and $384,000 in 1995 exhausted the goodwill account
by year end 1995.
Deposit insurance premiums from the Federal Deposit Insurance Corporation
(FDIC) were $2.4 million in 1995, compared to $2.6 million in 1994 and $2.2
million in 1993.
13
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERAIONS (CONTINUED)
FINANCIAL CONDITION
Balance Sheet Trends
At December 31, 1995, D&N's assets totaled $1.19 billion, an increase of
$98 million, or 9.0%, from the previous year end.
In 1995, net loans receivable increased by $129.9 million, or 16.2%, as
the Company continued to enjoy strong demand for its consumer loan products.
Balances of mortgage-backed securities declined by $23.2 million, or 15.8% in
1995, while investment securities balances increased by $6.5 million, or 8.0%.
The Company's liabilities increased by 8.2%, or $84.9 million, to $1.12
billion at December 31, 1995, compared to $1.04 billion at the end of 1994.
Overall deposit balances increased by 13.2%, or $103.8 million, while core
deposits experienced an increase from $311.4 million at December 31, 1994 to
$322.1 million at year end 1995. Borrowed funds decreased by 4.7%, or $10.6
million, in 1995, while advance payments by borrowers and investors held in
escrow, declined from $15.3 million to $11.1 million.
In 1995, D&N's stockholders' equity rose from $52.6 million to $65.7
million. Profitable operations contributed $10.1 million to the Company's
retained earnings, and net capital contributions, primarily from the exercise
of options and warrants, were $297,000. An additional source of equity in 1995
was $2.7 million of market value appreciation in the Company's portfolios of
held-for-sale securities. In accordance with the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," unrealized
gains such as these are recorded in the stockholders' equity section of the
Company's Statement of Financial Condition, but are not recognized through the
Statement of Operations.
Under its federal charter, the Bank must maintain adequate levels of
capital to assure the safety and soundness of its operations. At December 31,
1995, the Bank had a tangible capital ratio of 5.10%, a core capital ratio of
5.10%, and a risk-based capital ratio of 9.78%. D&N's ratios continue to exceed
the levels specified in the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA) as minimally acceptable standards. At the close of
1995, those minimum standards were tangible capital of 1.50%, core capital of
3.00% (with a proposed regulation which would raise the core capital
requirement to between 4.00% and 5.00%), and risk-based capital of 8.00%.
The Bank's primary regulator, the Office of Thrift Supervision (OTS), has
issued its final rules adding an interest rate risk component to the total
capital that certain rate-sensitive institutions must hold. The rule requires
the OTS to measure an institution's interest rate risk as the percentage change
in market value of its portfolio resulting from a hypothetical 200 basis point
shift in interest rates. At December 31, 1995, D&N's level of interest rate
risk was such that no additional capital was required.
Liquidity and Capital Resources
The OTS also requires that institutions maintain liquid assets in the form
of cash, short-term U.S. Government securities and other qualifying assets, in
amounts equal to at least 5% of net withdrawable accounts and borrowed funds
payable in one year or less. For the month of December 1995, the Bank's average
liquidity ratio was 8.3%, down from the December 1994 ratio of 8.8%. Borrowing
capacity can be viewed as a supplemental source of liquidity for the Bank. D&N's
government bond and mortgage-backed securities portfolios include high quality
investment securities which are readily acceptable as collateral for additional
borrowed funds, obtainable from either the FHLB system or from other financial
institutions. Also, much of the Bank's mortgage loan portfolio would be
acceptable as collateral to support new advances from the FHLB. In the
aggregate, by virtue of its inventory of unpledged collateral, D&N had
approximately $242 million of unused borrowing capacity at December 31, 1995.
14
7
Loan Portfolio
The following table categorizes the Bank's loans receivable for the past five
years:
December 31
--------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
Single family ........................... $576,461 $505,690 $367,944 $438,068 $534,111
Income-producing property ............... 89,176 115,162 131,372 173,122 217,129
Construction ............................ 41,056 19,900 12,558 2,222 11,964
Installment ............................. 239,397 170,865 134,529 119,357 116,448
Commercial .............................. 7,769 4,748 -- -- --
Allowance for losses .................... (9,931) (8,199) (11,420) (15,461) (18,693)
Discounts, deferrals and other .......... (12,740) (6,918) (7,378) (9,738) (15,383)
----------------------------------------------------------------------
$931,188 $801,248 $627,605 $707,570 $845,576
======================================================================
D&N's investment in loans increased by $129.9 million, or 16.2%, in
1995. Consumer installment loans and construction loans experienced
significant percentage increases, while single family mortgage loans increased
at a more modest rate. The Bank's investment in mortgages on income-producing
property decreased for the fifth consecutive year, but the loan portfolio
included, for the first time, a significant quantity of D&N originated business
and commercial loans. Installment consumer loans increased by $68.5 million, or
40.1% in 1995, while construction loans increased by $21.2 million, or 106%.
Single family residential loans increased during the year by $70.8 million, or
14.0%, as commercial mortgages declined by $26.0 million, or 22.6%. Business
and commercial loans totaled $7.8 million at December 31, 1995.
D&N originated $399.3 million of loans in 1995, up significantly from
$236.2 million originated in 1994. Aggregate mortgage loan production was
$200.4 million, an increase of $101.8 million, or 103.2%, from 1994.
Construction lending accounted for $39.5 million of this total, up 153.1% from
$15.6 million in 1994. Consumer loan production totaled $195.1 million in 1995,
up by $62.3 million, or 46.9%, from 1994. Within the consumer category, home
equity credit line (HECL) production was again strong, increasing by $16.4
million, or 42.6%, over 1994.
Credit Risk Management and Provision for Losses on Loans and Other Assets
At December 31, 1995, the Company's nonperforming assets totaled $9.6
million, down from $24.5 million at the end of the previous year and $43.6
million at the end of 1993. The 1995 balance was comprised of $8.2 million of
nonperforming loans and $1.4 million of other real estate owned (OREO). The
following table traces the Company's nonperforming asset experience for the
last five years:
December 31
------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nonaccruing loans ........................... $ 8,172 $17,995 $30,079 $44,537 $51,953
Accruing loans delinquent more than 90 days . -- -- -- -- 1,160
Restructured loans .......................... -- -- 166 167 2,339
----------------------------------------------------------------------
Total nonperforming loans ................. 8,172 17,995 30,245 44,704 55,452
Other real estate owned (OREO) .............. 1,452 6,520 13,312 11,186 11,499
----------------------------------------------------------------------
Total nonperforming assets ................ $ 9,624 $24,515 $43,557 $55,890 $66,951
======================================================================
Nonperforming loans as a percentage of
total loans ............................... 0.87% 2.22% 4.73% 6.18% 6.42%
======================================================================
Nonperforming assets as a percentage of
total assets .............................. 0.81% 2.25% 4.18% 4.61% 4.41%
======================================================================
Allowance for loan losses as a percentage
of nonperforming loans .................... 121.53% 45.56% 37.76% 34.59% 33.71%
======================================================================
Allowances for loan and OREO losses as a
percentage of nonperforming assets ........ 104.57% 34.79% 27.71% 29.90% 28.67%
======================================================================
15
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Allowances for losses on the loan portfolio increased by $1 .7
million in 1995, as $2.2 million was charged off and $1.5 million was
recovered, primarily on consumer mortgages and installment loans.
Provisions for loan losses of $2.4 million were recorded in 1995.
The Company believes that its reserve positions for possible credit
losses continue to be adequate.
The following table sets forth an analysis of the Company's
allowance for loan losses:
Year Ended December 31
------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of period ............. $8,199 $11,420 $15,461 $18,693 $18,315
Charge-offs:
Single family ............................ 169 110 1,111 311 117
Income-producing property ................ 1,019 3,109 2,584 2,180 8,936
Commercial ............................... -- -- -- -- --
Installment .............................. 999 773 681 1,000 1,555
--------------------------------------------------------------------
2,187 3,992 4,376 3,491 10,608
Recoveries:
Single family ............................ 917 9 -- -- 280
Income-producing property ................ 245 300 8 3 365
Commercial ............................... -- -- -- -- --
Installment .............................. 357 362 327 256 191
--------------------------------------------------------------------
1,519 671 335 259 836
--------------------------------------------------------------------
Net charge-offs ............................ 668 3,321 4,041 3,232 9,772
Provision charged to operations ............ 2,400 100 -- -- 10,150
--------------------------------------------------------------------
Balance at end of period ................... $9,931 $ 8,199 $11,420 $15,461 $18,693
====================================================================
Net charge-offs as a percentage
of average loans ......................... 0.08% 0.44% 0.61% 0.44% 0.99%
====================================================================
Allowance for loan losses as a percentage
of total loans ........................... 1.06% 1.01% 1.79% 2.14% 2.16%
====================================================================
At the end of 1995, loan loss reserves totaled $9.9 million,
with the majority of the allowance allocated to the income-producing
property category.
The following table summarizes the allocation of the loan loss
allowance among the Company's assets in each of the past five years.
December 31
---------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------------------------------
Percent Of Percent Of Percent Of
Amount Loans To Total Amount Loans To Total Amount Loans To Total
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Single family ............. $ 1,020 62% $ 663 62% $ 279 57%
Income-producing property . 6,115 12 6,423 17 9,617 22
Commercial ................ 400 1 -- -- -- --
Installment ............... 2,396 25 1,113 21 1,524 21
-----------------------------------------------------------------------------------------------------
$ 9,931 100% $ 8,199 100% $11,420 100%
=====================================================================================================
1992 1991
----------------------------------------------------------------
Percent of Percent of
Amount loans to total Amount loans to total
----------------------------------------------------------------
Single family ............. $ 230 60% $ 130 62%
Income-producing property . 13,353 24 16,590 25
Commercial ................ -- -- -- --
Installment ............... 1,878 16 1,973 13
-----------------------------------------------------------------
$15,461 100% $18,693 100%
=================================================================
16
9
D&N's carrying balance for OREO, stated net of reserves, decreased from
$6.2 million at the end of 1994 to $1.3 million at the end of 1995, a reduction
of 78.7%. This significant decrease reflects the Company's continuing progress
to resolve its troubled commercial real estate loan portfolio.
Asset/Liability Management
The Company's objective for the management of assets and liabilities is
to achieve and maintain adequate and stable levels of both net interest income
and market value for the Company's net assets. The level of net interest income
is enhanced by prudently assuming credit, liquidity and interest rate risks and
by striving to keep nonearning asset balances to a minimum. Net interest income
and market value of portfolio equity (MVPE) stability may be achieved across
various interest rate scenarios by properly matching maturity structures of
assets and liabilities and, when appropriate, employing hedging instruments.
The Company employs various tools, including gap analysis, duration
analysis and simulation analysis, to assess the sensitivities of its net
interest income and MVPE to changes in interest rates. D&N's cumulative gap
analysis for December 31, 1995 is presented in the following table:
Maturity/Rate Sensitivity
------------------------------------------------------------------------------
0 to 3 Months 4 to 12 Months 1 to 5 Years Over 5 Years Total
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Investments and deposits ....... $ 39,631 $ 33,828 $ -- $ 19,774 $ 93,233
Mortgage-backed securities ..... 13,944 56,023 46,819 3,110 119,896
Loans receivable ............... 221,882 286,989 348,015 78,754 935,640
------------------------------------------------------------------------
275,457 376,840 394,834 101,638 1,148,769
------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits ....................... 317,865 323,894 212,963 31,716 886,438
FHLB advances and other
borrowed money ............... 185,435 1,304 28,490 1,003 216,232
------------------------------------------------------------------------
503,300 325,198 241,453 32,719 1,102,670
------------------------------------------------------------------------
Interest-earning assets minus
interest-bearing liabilities (gap) $(227,843) $ 51,642 $ 153,381 $ 68,919 $ 46,099
========================================================================
Cumulative gap ................... $(227,843) $(176,201) $ (22,820) $ 46,099
=========================================================
Cumulative gap as a percent of
total assets ................... (19.20)% (14.85)% (1.92)% 3.88%
=========================================================
The preceding table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1995.
The Company's interest rate sensitivity "gap" is defined as the amount by which
assets repricing within the respective periods exceed liabilities repricing
within such periods. One-to-four family fixed-rate mortgage loans are assumed to
prepay at an annual rate of 17% for the first five years and from 12% to 17% per
year during the subsequent periods, depending on the stated interest rate.
Adjustable rate mortgage loans are assumed to prepay at a rate of 12% per year.
Second mortgage loans and all other loans are assumed to prepay at annual rates
of 15% and 17%, respectively. Savings and money market deposit accounts are
assumed to reprice within the first year.
With a cumulative one year GAP of -14.9%, the Company's balance sheet
is somewhat liability sensitive. At year end, however, 51.6% of the Bank's loan
portfolio and 45.8% of total interest-earning assets carried variable or
adjustable interest rates, mitigating much of the Company's exposure to rising
interest rates.
In the past, D&N has relied on both assets and off-balance sheet hedges
to control its interest rate risk, but as its synthetic hedge instruments have
matured, the Company has utilized more traditional methods of asset/liability
management to support its community banking strategy. Notably, the last of D&N's
long-term interest rate exchange agreements matured in 1995, and the Company has
no plans to employ such instruments again in the foreseeable future.
17
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED)
Regulatory Environment
In May 1991, the Company and the Bank entered into respective voluntary
cease and desist orders with the OTS. Pursuant to the orders, the operations of
the Bank and the Company were significantly restricted, and the Company was
required to evaluate the desirability of marketing the Bank to a potential
acquirer or merger partner. The OTS notified the Bank and Company in connection
with its October 1992 regulatory examination, that the Bank and Company are in
substantial compliance with the requirements of the voluntary cease and desist
orders.
In March 1993, the OTS agreed to modify the voluntary orders in order to
eliminate the requirement that the Company evaluate the desirability of selling
the Bank, to eliminate a number of policy and procedural requirements which had
been satisfied, and to permit the Bank to engage in a limited amount of
commercial real estate lending.
In October 1994, the OTS removed the voluntary orders entirely and since
that time, neither the Bank nor the Company have operated under more than normal
levels of regulatory scrutiny.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." Under the provisions of SFAS 123, the
Company is encouraged, but not required, to measure compensation costs related
to its employee stock compensation plans based on the fair value of awards, as
defined by SFAS 123. If the Company elects not to recognize compensation expense
under this method, it is required to disclose the pro forma net income and
earnings per share effects, based on the fair value methodology, in the notes to
financial statements. The Company will implement the requirements of SFAS 123 in
1996 and will only adopt the disclosure provisions of this statement;
accordingly, this statement will have no impact on financial position or results
of operations when adopted.
18
11
CONSOLIDATED STATEMENTS OF CONDITION
D&N Financial Corporation
December 31
--------------------------
1995 1994
--------------------------
(In thousands)
ASSETS
Cash and due from banks........................................................... $ 8,923 $ 9,174
Interest-bearing deposits in other banks.......................................... 6,636 18,950
--------------------------
Total cash and cash equivalents............................................. 15,559 28,124
Investment securities
(market value of $47,062,000 in 1995 and $19,775,000 in 1994).................. 46,925 19,775
Investment securities available for sale (at market value)........................ 40,899 61,536
Mortgage-backed securities
(market value of $69,447,000 in 1995 and $77,153,000 in 1994).................. 68,434 79,616
Mortgage-backed securities available for sale (at market value)................... 55,041 67,030
Loans receivable (including net loans held for sale of $21,610,000 in 1995) ...... 941,119 809,447
Allowance for loan losses ........................................................ (9,931) (8,199)
--------------------------
Net loans receivable ....................................................... 931,188 801,248
Other real estate owned, net ..................................................... 1,319 6,190
Federal income taxes ............................................................. 5,380 4,505
Office properties and equipment, net ............................................. 14,738 14,223
Excess of cost over net assets of association acquired ........................... -- 384
Other assets...................................................................... 7,178 6,062
--------------------------
$1,186,661 $1,088,693
==========================
LIABILITIES
Checking and NOW accounts ........................................................ $ 91,621 $ 91,484
Money market accounts ............................................................ 85,287 94,543
Savings deposits ................................................................. 145,241 125,399
Time deposits .................................................................... 564,289 471,392
Accrued interest ................................................................. 1,431 1,257
--------------------------
Total deposits ............................................................. 887,869 784,075
Securities sold under agreements to repurchase ................................... -- 28,627
FHLB advances and other borrowed money ........................................... 216,232 198,230
Advance payments by borrowers and investors held in escrow ....................... 11,093 15,288
Other liabilities 5,756 9,850
--------------------------
Total liabilities .......................................................... 1,120,950 1,036,070
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 - 6,797,680 in 1995
and 6,742,329 in 1994) ......................................................... 68 67
Additional paid-in capital ....................................................... 48,283 47,987
--------------------------
Total paid-in capital ...................................................... 48,351 48,054
Retained earnings - substantially restricted ..................................... 16,046 5,906
Less cost of treasury stock (21,456 shares in 1995 and 1994) ..................... (213) (213)
Unrealized holding gains (losses) on securities available for sale,
net of income taxes of $822,000 in 1995 ......................................... 1,527 (1,124)
--------------------------
Total stockholders' equity ................................................. 65,711 52,623
--------------------------
$1,186,661 $1,088,693
==========================
See Notes to Consolidated Financial Statements.
19
12
CONSOLIDATED STATEMENTS OF OPERATIONS
D&N Financial Corporation
Year Ended December 31
-------------------------------------------
1995 1994 1993
-------------------------------------------
(In thousands, except per share)
INTEREST INCOME:
Loans ......................................................................... $70,815 $56,634 $ 57,278
Mortgage-backed securities .................................................... 10,314 7,610 12,649
Investments and deposits ...................................................... 6,792 4,883 7,728
-------------------------------------------
Total interest income ................................................... 87,921 69,127 77,655
INTEREST EXPENSE:
Deposits ...................................................................... 36,913 28,494 32,478
Securities sold under agreements to repurchase ................................ 1,450 808 1
FHLB advances and other borrowed money ........................................ 13,405 7,399 9,737
Interest rate instruments ..................................................... 2,521 9,812 15,309
-------------------------------------------
Total interest expense .................................................. 54,289 46,513 57,525
-------------------------------------------
Net interest income ..................................................... 33,632 22,614 20,130
Provision for loan losses ....................................................... 2,400 100 --
-------------------------------------------
Net interest income after provision for loan losses ..................... 31,232 22,514 20,130
NONINTEREST INCOME (LOSS):
Loan servicing and administrative fees, net ................................... 1,860 2,208 637
Writedown of purchased loan servicing rights .................................. -- -- (14,628)
Deposit related fees .......................................................... 3,147 3,098 3,002
Gain (loss) on loans held for sale ............................................ 882 227 777
Other income ................................................................. 166 1,129 552
-------------------------------------------
6,055 6,662 (9,660)
Gain (loss) on investment securities .......................................... (120) (221) 472
Gain (loss) on loans and mortgage-backed securities ........................... 899 843 (13,005)
Gain on sale of loan servicing rights ......................................... -- 140 475
-------------------------------------------
Total noninterest income (loss) ......................................... 6,834 7,424 (21,718)
NONINTEREST EXPENSE:
Compensation and benefits ..................................................... 15,199 14,073 13,031
Occupancy ..................................................................... 2,256 1,971 2,027
Other expense ................................................................. 10,522 9,928 12,331
-------------------------------------------
General and administrative expense ......................................... 27,977 25,972 27,389
Other real estate owned, net .................................................. (999) (2,136) 3,277
Amortization of intangibles ................................................... 370 448 777
Federal deposit insurance premiums ............................................ 2,353 2,563 2,217
-------------------------------------------
Total noninterest expense .................................................. 29,701 26,847 33,660
-------------------------------------------
Income (loss) before income tax expense (credit) ........................... 8,365 3,091 (35,248)
Federal income tax expense (credit) ............................................ (1,775) -- (3,803)
-------------------------------------------
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles ................................. 10,140 3,091 (31,445)
Extraordinary item-prepayment penalty for early
repayment of FHLB advances, net of tax ........................................ -- -- (1,921)
Cumulative effect of change in accounting for goodwill .......................... -- -- (34,754)
Cumulative effect of change in accounting for income taxes ...................... -- -- 1,100
-------------------------------------------
Net income (loss) ......................................................... $10,140 $ 3,091 $(67,020)
===========================================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles ................................. $ 1.45 $ 0.46 $ (8.44)
Extraordinary item ............................................................ -- -- (0.52)
Cumulative effect of change in accounting for goodwill ........................ -- -- (9.33)
Cumulative effect of change in accounting for income taxes .................... -- -- 0.29
-------------------------------------------
Net income (loss) .......................................................... $ 1.45 $ 0.46 $ (18.00)
===========================================
20
13
CONSOLIDATED STATEMENTS OF OPERATIONS CONTINUED
D&N FINANCIAL CORPORATION
Year Ended December 31
-----------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share)
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles .................................. $1.40 $0.46 $(8.44)
Extraordinary item ........................................................... -- -- (0.52)
Cumulative effect of change in accounting for goodwill ....................... -- -- (9.33)
Cumulative effect of change in accounting for income taxes ................... -- -- 0.29
----------------------------------
Net income (loss) ....................................................... $1.40 $0.46 $(18.00)
==================================
PRO FORMA AMOUNTS ASSUMING THE NEW GOODWILL
AMORTIZATION METHOD IS APPLIED RETROACTIVELY:
Income (loss) before extraordinary item and cumulative
effect of changes in accounting principles .............................. $(31,445)
Earnings (loss) per common share ............................................ $ (8.44)
Net income (loss) ........................................................... $(32,266)
Earnings (loss) per common share ............................................ $ (8.67)
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N FINANCIAL CORPORATION
Unrealized
Holding
Gains(Losses)
Additional on Securities Total
Common Paid-In Retained Treasury Available Stockholders'
Stock Capital Earnings Stock For Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance December 31, 1992 ................ $ 37 $27,111 $ 69,835 $(213) $ -- $ 96,770
Net loss ................................ -- -- (67,020) -- -- (67,020)
Issuance of common stock -
3,011,065 shares ...................... 30 20,866 -- -- -- 20,896
Cumulative effect of change in
accounting for debt and equity
securities available for sale ......... -- -- -- -- 808 808
-------------------------------------------------------------------------------
Balance December 31, 1993 ................ 67 47,977 2,815 (213) 808 51,454
Net income .............................. -- -- 3,091 -- -- 3,091
Issuance of common stock upon
exercise of stock options and
warrants-1,390 shares ................. -- 10 -- -- -- 10
Change in value of securities
available for sale .................... -- -- -- -- (1,932) (1,932)
-------------------------------------------------------------------------------
Balance December 31, 1994 ................ 67 47,987 5,906 (213) (1,124) 52,623
Net income .............................. -- -- 10,140 -- -- 10,140
Issuance of common stock upon
exercise of stock options
and warrants - 55,351
shares ................................ 1 340 -- -- -- 341
Purchase of 10,000 stock
warrants .............................. -- (44) -- -- -- (44)
Change in value of
securities available for sale ......... -- -- -- -- 2,651 2,651
-------------------------------------------------------------------------------
Balance December 31, 1995 ................ $ 68 $48,283 $ 16,046 $(213) $ 1,527 $ 65,711
===============================================================================
See Notes to Consolidated Financial Statements.
21
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N Financial Corporation
Year Ended December 31
------------------------------------
1995 1994 1993
------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) ................................................................... $ 10,140 $ 3,091 $ (67,020)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Extraordinary item ............................................................... -- -- 1,921
Cumulative effect of changes in accounting principles ............................ -- -- 33,654
Provision for loan losses ........................................................ 2,400 100 --
Provision for losses on other real estate owned .................................. -- -- 3,467
Depreciation and amortization of office properties and equipment ................. 1,838 1,837 2,142
Amortization of net premiums (discounts) on purchased loans and securities ....... (2,305) 1,132 (621)
Originations and purchases of loans held for sale ................................ (91,203) (15,432) (101,442)
Proceeds from sales of loans held for sale ....................................... 75,928 48,181 108,396
Investment security (gains) losses ............................................... 120 221 (472)
(Gain) loss on loans and mortgage-backed securities .............................. (899) (843) 13,005
Gain on sale of loan servicing rights ............................................ -- (140) (475)
Amortization and writedowns of mortgage servicing rights ......................... 476 1,754 19,381
Other ............................................................................ (7,928) 2,581 9,475
------------------------------------
Net cash provided (used) by operating activities .............................. (11,433) 42,482 21,411
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale ..................... 10,070 20,779 31,470
Proceeds from maturities of investment securities ................................... 27,000 136,024 497,868
Purchases of investment securities to be held to maturity ........................... (42,662) (124,441) (520,999)
Proceeds from sales of mortgage-backed securities available for sale ................ 4,145 52,348 131,041
Principal collected on mortgage-backed securities ................................... 21,649 38,519 87,295
Mortgage-backed securities purchased ................................................ -- (66,922) (107,975)
Proceeds from sales of loans ........................................................ 33,535 -- --
Loans purchased ..................................................................... (99,917) (184,962) (65,333)
Net change in loans receivable ...................................................... (46,361) (24,779) 79,095
(Increase) decrease in other real estate owned ...................................... 4,871 6,472 (2,036)
Proceeds from sales of loan servicing rights ........................................ -- 7,288 475
Purchases of office properties and equipment ........................................ (2,333) (776) (1,701)
------------------------------------
Net cash provided (used) by investing activities .............................. (90,003) (140,450) 129,200
FINANCING ACTIVITIES
Net change in time deposits ......................................................... 92,897 4,265 (70,170)
Net change in other deposits ........................................................ 10,723 (30,935) 410
Proceeds from notes payable, securities sold under agreements .......................
to repurchase and other borrowed money ........................................... 203,000 255,627 78,075
Payments on maturity of notes payable, securities sold under ........................
agreements to repurchase and other borrowed money ................................ (213,851) (130,652) (153,282)
Net change in advance payments by borrowers and investors held in escrow ............ (4,195) (51,731) 21,963
Purchase of stock warrants .......................................................... (44) -- --
Proceeds from issuance of stock ..................................................... 341 010 20,896
------------------------------------
Net cash provided (used) by financing activities .............................. 88,871 46,584 (102,108)
------------------------------------
Increase (decrease) in cash and cash equivalents .............................. (12,565) (51,384) 48,503
Cash and cash equivalents at beginning of year ........................................ 28,124 79,508 31,005
------------------------------------
Cash and cash equivalents at end of year ...................................... $ 15,559 $ 28,124 $ 79,508
====================================
Supplemental disclosures of cash flow information:
Interest paid ....................................................................... $ 58,489 $ 48,605 $ 62,798
Income taxes paid (refunded) ........................................................ $ 320 $ (4,771) $ (5,551)
Noncash investing activities:
Transfer of loans to other real estate owned ........................................ $ 1,936 $ 2,861 $ 9,380
Loans to facilitate sale of other real estate owned ................................. $ -- $ 782 $ 2,371
See Notes to Consolidated Financial Statements.
22
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N Financial Corporation, December 31, 1995
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
D&N Financial Corporation ("the Company") is a financial services holding
company whose sole subsidiary is D&N Bank ("the Bank"), a federally-chartered
stock savings bank. D&N Financial Corporation's primary business is the
delivery of retail financial services to consumers and businesses through its
network of 45 community banking and financial services offices in Michigan and
Wisconsin.
Principles of Consolidation: The consolidated financial statements
include the accounts and transactions of the Company and the Bank and the
Bank's wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents represent
short-term, highly liquid investments with original maturities of three months
or less and include cash, demand deposits in other banks and interest-bearing
deposits in other banks.
Investment Classifications: In May 1993, the Financial Accounting
Standards Board issued SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under SFAS 115, the accounting for
securities depends on the classification of such securities as either held to
maturity (amortized cost), trading (fair value, with unrealized gains and
losses reported in income), or available for sale (fair value, with unrealized
gains and losses reported directly in equity, net of taxes). As permitted under
SFAS 115, the Company elected to adopt the provisions of the new standard as of
December 31, 1993. In accordance with SFAS 115, prior period financial
statements were not restated to reflect the change in accounting principle.
There was no cumulative effect of adopting SFAS 115 to 1993 results of
operations. The December 31, 1993 balance of stockholders' equity was increased
by $808,000 (net of $417,000 in deferred income taxes) to reflect the net
unrealized holding gain on securities classified as available for sale
previously carried at amortized cost.
Investment and Mortgage-Backed Securities: Investment and mortgage-backed
securities which the Company has the intent and ability to hold until maturity
are stated at cost. Investment and mortgage-backed securities available for
sale are carried at fair value. Fair value adjustments are included in
stockholders' equity. Gains or losses realized on the sale of investment and
mortgage-backed securities are determined by the specific identification method
and are included in securities gains (losses). Interest income is adjusted by
the level-yield method for amortization of premiums and accretion of discounts.
Mortgage Derivative Products: Mortgage derivative products (interest only
certificates) available for sale are recorded at fair value. Fair value
adjustments are included in stockholders' equity. Mortgage derivative products
are classified on the Statement of Condition with mortgage-backed securities.
Management evaluates each mortgage derivative product investment
separately to determine whether expected future discounted cash flows, using a
risk-free rate of return, are adequate to recover the recorded investment
balance. If the recorded investment balance is greater than the discounted
estimated future cash flows, the investment balance is written down to fair
value by a charge to income. Writedowns establish a new cost basis, which then
is used for purposes of calculating effective yields in subsequent periods.
Allowance for Loan Losses: The Company adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS 118, as of January 1,
1994. Under this standard, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement
23
16
of impaired loans is generally based on the present value of expected future
cash flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. The adoption of SFAS 114 did not result in any additional
provision for loan losses as of January 1, 1994.
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.
Mortgage Loans Held for Sale: The Bank enters into commitments to
originate and does originate mortgage loans for sale to investors and in the
secondary market.
Loans held for sale are carried at the lower of cost or market value,
determined on an aggregate basis. Commitment fees are amortized either over the
commitment period or the combined commitment and loan period depending upon the
probability of performance under the commitment.
Interest on Loans: Interest on loans is credited to income when earned.
An allowance for interest on loans is provided when management considers the
collection of these loans doubtful, and the accrual of interest is suspended
for loans that pass more than 90 days past due.
Loan Fees: Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the lives of the related
loans as an adjustment of the yields using the level-yield method.
Other Real Estate Owned: Real estate acquired through foreclosure and
similar proceedings is recorded at the lower of the related loan balance or
estimated fair value of the property at the acquisition date. Subsequent to the
acquisition date, properties are carried at no more than their fair value, less
cost to sell. Operating expenses of such properties, net of any income, are
charged to expense.
Depreciation: Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of office properties and
equipment.
Excess of Cost Over Net Assets of Association Acquired: The excess of
cost over net assets of the association acquired ("goodwill") arose from a
business combination which has been accounted for using the purchase method.
Effective January 1, 1993, the Company adopted SFAS 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", which changed the
accounting method used to amortize goodwill. Management believes this is a
preferable accounting method. Previously, goodwill was amortized by the
straight-line method over a 25-year period. Under the new method, goodwill is
amortized using the interest method over the estimated remaining lives of the
long-term interest-bearing assets acquired. The Company continually evaluates
the period of amortization to determine if events and circumstances warrant
revised estimates of the useful lives. The effect of the change in 1993 was to
decrease the loss before extraordinary item by $1,160,000, or $0.31 per share.
The cumulative effect of this change was a charge to income of $34,754,000. The
pro forma amounts shown on the Statement of Operations have been adjusted for
the effect of retroactive application on goodwill amortization.
Securities Sold Under Agreements to Repurchase: The Company enters into
sales of investment and mortgage-backed securities under agreements to
repurchase the same or substantially identical securities. The agreements are
short-term and are accounted for as secured borrowings. The obligations to
repurchase securities sold are reflected as a liability in the Statement of
Condition, and the securities which collateralize the agreements are reflected
in the corresponding asset accounts.
24
17
Interest Rate Instruments: Interest rate instruments are used to adjust
the maturity structure of liabilities and assets to manage the Company's
exposure to fluctuating interest rates. These instruments include interest rate
exchange agreements and interest rate floors and caps. These instruments are
used only to hedge specifically identified assets and liabilities and not for
speculative purposes. Fees associated with swaps, floors and caps are amortized
to expense on a straight-line basis over the lives of the agreements. Gains or
losses upon termination of these instruments are deferred and amortized over
the shorter of the remaining term to maturity of the related hedged asset or
liability or the remaining life of the instrument. Interest paid or received
associated with interest rate swap, floor or cap agreements, is reflected as a
component of net interest margin.
Mortgage Servicing Rights: The Company services mortgage loans for
investors. Fees earned for and in connection with this activity are recognized
as income when the related mortgage payments are received. Mortgage servicing
costs are charged to expense as incurred.
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights," which requires the Company to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. As the Company acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained, it must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. The capitalized cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing income
(servicing revenue in excess of servicing costs).
Capitalized mortgage servicing rights are periodically assessed for
impairment based on the fair value of those rights calculated on a discounted
basis. This assessment is performed on a disaggregate basis, stratified by
mortgage type, term and rate. Identified impairments are recognized through a
valuation allowance.
As permitted by SFAS 122, the Company adopted the provisions of the
Statement effective July 1, 1995. The effect of adopting SFAS 122 was to
increase net income for the year ended December 31, 1995 by $621,000 or $0.09
per share.
Income Taxes: Effective January 1, 1993, the Company adopted SFAS 109,
"Accounting for Income Taxes." Under SFAS 109, the liability method is used in
accounting for income taxes. Under this method, deferred income taxes result
from temporary differences between the tax bases of assets and liabilities and
the bases reported in the consolidated financial statements and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The effect of the change on income from
operations for the year ended December 31, 1993, was not material. However, the
cumulative effect of the change on periods prior to January 1, 1993, increased
1993 net income by $1,100,000, or $0.29 per share.
Per Share Data: Per share amounts are based on the weighted average
number of shares outstanding during the year. For 1995, 1994 and 1993 there
were 7,019,075, 6,720,011 and 3,724,264 average shares outstanding,
respectively, used in computing primary earnings per share. For 1995, 1994 and
1993 there were 7,232,517, 6,720,011 and 3,724,264 average shares outstanding,
respectively, used in computing fully diluted earnings per share.
Reclassifications: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with the current year
presentation.
NOTE B: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES
The Company is required to maintain reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1995 was $491,000, with no reserve balance required at year-end.
The average amount of those reserve balances for the year ended December 31,
1994 was $587,000, with no reserve balance required at year-end.
25
18
NOTE C: INVESTMENT SECURITIES
Investment securities consisted of the following:
December 31
---------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------
Book Market Book Market
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury ..................................... $27,151 $27,288 $ -- $ --
Investment in Federal Home Loan Bank stock ........ 19,745 19,745 19,745 19,745
Other equity securities ........................... 29 29 30 30
---------------------------------------------------------------------
Held to maturity ............................... 46,925 47,062 19,775 19,775
U.S. Treasury ..................................... 40,655 40,899 61,979 61,536
Valuation allowance ............................... 244 -- (443) --
---------------------------------------------------------------------
Available for sale ............................. 40,899 40,899 61,536 61,536
---------------------------------------------------------------------
$87,824 $87,961 $81,311 $81,311
=====================================================================
An analysis of gross unrealized gains and losses is as follows:
December 31
-------------------------------------------------------
1995 1994
-------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- --------------------------------------------------------------------------------------------------
(In thousands)
Held to maturity
U. S. Treasury
Equity securities .................. $ 137 $ -- $ -- $ --
----------------------------------------------------
137 -- -- --
Available for sale
U.S. Treasury ...................... 244 -- 7 (450)
----------------------------------------------------
$ 381 $ -- $ 7 $ (450)
====================================================
The book value and market value of debt securities at December
31, 1995, by contractual maturity, were as follows:
Less than one year Greater than one year
--------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury held to maturity ................ $ 27,151 $ 27,288 6.72% $ -- $ -- --%
U.S. Treasury available for sale .............. 40,655 40,899 7.12 -- -- --
---------------------------------------------------------------------
$ 67,806 $ 68,187 6.96% $ -- $ -- --%
=====================================================================
Proceeds from sales of debt securities available for sale
during 1995 were $10,070,000. Gross losses of $120,000 were realized
on those sales. Proceeds from sales of debt securities available for
sale during 1994 were $20,779,000. Gross losses of $221,000 were
realized on those sales. Proceeds from sales of debt securities
during 1993 were $31,470,000. Gross gains of $472,000 were realized
on those sales.
26
19
NOTE D: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
December 31
--------------------------------------------------------
1995 1994
--------------------------------------------------------
Book Market Book Market
Value Value Value Value
--------------------------------------------------------
(In thousands)
Government agency securities .................... $ 12,149 $ 12,451 $ 14,643 $ 14,149
Collateralized mortgage obligations ............. 56,052 56,368 65,109 62,256
Accrued interest receivable ..................... 628 628 748 748
Net discounts ................................... (395) -- (884) --
--------------------------------------------------------
Held to maturity .............................. 68,434 69,447 79,616 77,153
Government agency securities .................... 28,324 29,135 37,901 36,402
Collateralized mortgage obligations ............. 22,810 23,110 27,374 26,363
Interest-only certificates ...................... 984 2,400 1,644 3,819
Accrued interest receivable ..................... 396 396 446 446
Net premiums .................................... 421 -- 346 --
Valuation allowances ............................ 2,106 -- (681) --
--------------------------------------------------------
Available for sale............................. 55,041 55,041 67,030 67,030
--------------------------------------------------------
$123,475 $124,488 $146,646 $144,183
========================================================
Mortgage-backed securities with a carrying value of
$22,967,000 are pledged as collateral for FHLB advances and other
borrowings.
An analysis of gross unrealized gains and losses is as follows:
December 31
--------------------------------------------------------
1995 1994
--------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
--------------------------------------------------------
(In thousands)
Government agency securities .................... $ 302 $ -- $ -- $ (494)
Collateralized mortgage obligations ............. 711 -- -- (1,969)
--------------------------------------------------------
Held to maturity ............................. 1,013 -- -- (2,463)
Government agency securities ................... 425 (16) 214 (2,017)
Collateralized mortgage obligations ............ 314 (33) -- (1,053)
Interest-only certificates ..................... 1,416 -- 2,175 --
--------------------------------------------------------
Available for sale ........................... 2,155 (49) 2,389 (3,070)
--------------------------------------------------------
$ 3,168 $ (49) $ 2,389 $ (5,533)
========================================================
27
20
The book value and market value of mortgage-backed securities
at December 31, 1995, by contractual maturity, were as follows:
Held to Maturity Available for Sale
----------------------------------------------------------------------------
Average Average
Book Value Market Value Yield Book Value Market Value Yield
----------------------------------------------------------------------------
(Dollars in thousands)
Government agency securities
Less than one year ........................ $ -- $ -- --% $ -- $ -- --%
One to five years ......................... -- -- -- -- -- --
Five to ten years ......................... 2,340 2,355 6.77 -- -- --
After ten years ........................... 9,809 10,096 8.02 28,726 29,135 7.37
----------------------------------------------------------------------------
12,149 12,451 7.77 28,726 29,135 7.37
Collateralized mortgage obligations
Less than one year ........................ 48,790 49,370 7.31 9,210 9,238 7.13
One to five years ......................... 6,867 6,998 8.74 4,738 4,712 6.51
Five to ten years ......................... -- -- -- -- -- --
After ten years ........................... -- -- -- 8,881 9,160 7.36
----------------------------------------------------------------------------
55,657 56,368 7.49 22,829 23,110 7.09
Interest-only certificates
Less than one year ........................ -- -- -- -- -- --
One to five years ......................... -- -- -- -- -- --
Five to ten years ......................... -- -- -- 009 021 77.40
After ten years ........................... -- -- -- 975 2,379 70.05
----------------------------------------------------------------------------
-- -- -- 984 2,400 70.12
----------------------------------------------------------------------------
$67,806 $68,819 7.54% $52,539 $54,645 8.42%
============================================================================
The aggregate book value and aggregate market value of the
securities of any one issuer, other than U.S. Government securities,
did not exceed 10% of stockholders' equity.
Proceeds from sales of mortgage-backed securities available for
sale during 1995 were $4,145,000. Gross gains of $267,000 were
realized on those sales. Proceeds from sales of mortgage-backed
securities available for sale during 1994 were $52,348,000. Gross
gains of $865,000 and gross losses of $22,000 were realized on those
sales. Proceeds from sales of mortgage-backed securities during 1993
were $131,041,000. Gross gains of $5,424,000 were realized on those
sales.
NOTE E: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable
consisted of the following:
December 31
-----------------------------------------------------------------
1995 1994
-----------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------
(In thousands)
Single family ................................ $551,767 $549,379 $503,158 $481,170
Single family held for sale .................. 21,713 21,963 -- --
Income-producing property .................... 88,491 79,985 114,395 102,146
Construction ................................. 40,882 37,160 19,772 19,385
Installment .................................. 237,810 235,494 169,797 164,485
Commercial ................................... 7,717 7,298 4,748 4,294
Accrued interest receivable .................. 5,479 5,479 4,495 4,495
-----------------------------------------------------------------
953,859 936,758 816,365 775,975
Less:
Discounts (premiums) on purchased loans ... (1,709) -- 999 --
Allowance for loan losses ................. 9,931 -- 8,199 --
Undisbursed portion of loan proceeds ...... 13,198 -- 4,213 --
Deferred income ........................... 1,251 -- 1,706 --
-----------------------------------------------------------------
$931,188 $936,758 $801,248 $775,975
=================================================================
28
21
Changes in the allowance for loan losses are summarized as follows:
1995 1994 1993
--------------------------------------------
(In thousands)
Balance at beginning of year ................................ $8,199 $11,420 $15,461
Provision for loan losses ................................... 2,400 100 --
Net charge-offs ............................................. (668) (3,321) (4,041)
--------------------------------------------
Balance at end of year ...................................... $9,931 $ 8,199 $11,420
============================================
Changes in capitalized mortgage servicing rights are summarized as follows:
1995 1994 1993
--------------------------------------------
(In thousands)
Balance at beginning of year................................ $ 968 $ 9,870 $29,198
Originations and acquisitions............................... 621 -- 053
Amortization, sales and impairment.......................... (476) (8,902) (19,381)
--------------------------------------------
Balance at end of year...................................... $1,113 $ 968 $ 9,870
============================================
At December 31, 1995, the fair value of purchased and capitalized
originated mortgage servicing rights was $1,161,000.
Loans serviced for others amounted to $278,051,000, $243,834,000, and
$1,189,627,000 at December 31, 1995, 1994 and 1993, respectively.
Loans with a carrying value of of approximately $477,698,000 are pledged as
collateral for current and future FHLB advances and other borrowed money.
The balance of nonaccrual loans was $8,172,000 and $17,995,000 at December
31, 1995 and 1994, respectively.
Credit is extended based on evaluation of the borrower's financial
condition, the value of the collateral and, in the case of income-producing
property, the sufficiency of net cash flows from the property's operation to
service the debt. When loans are made to businesses, personal guarantees may
also be required of owners or partners.
Loans collateralized by income-producing property are categorized as
follows:
December 31
-----------------------
1995 1994
-----------------------
(In thousands)
Multi-family apartments ........... $29,337 $ 37,142
Motels/hotels ..................... 14,105 20,515
Shopping centers .................. 20,232 20,367
Mobile home parks ................. 3,781 8,226
Offices ........................... 8,698 11,928
Industrial ........................ 6,584 5,609
Other ............................. 5,754 10,608
-----------------------
$88,491 $114,395
=======================
Loans collateralized by income-producing property categorized by state
are as follows:
December 31
-----------------------
1995 1994
-----------------------
(In thousands)
Michigan ......................... $67,048 $ 80,721
California ....................... 12,202 20,300
New York ......................... 3,413 4,769
Pennsylvania ..................... 1,396 1,751
Other ............................ 4,432 6,854
-----------------------
$88,491 $114,395
=======================
At December 31, 1995 and 1994, the total recorded investment in impaired
loans, as defined by SFAS 114, was $8,619,000 and $19,646,000, respectively.
None of the impaired loans required a specific allowance for loan losses to be
recorded. Interest income on impaired loans is recognized primarily on a cash
basis. During 1995 and 1994, the amount of interest income recognized on
impaired loans was insignificant.
29
22
NOTE F: OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consisted of the following:
December 31
--------------
1995 1994
- ---------------------------------------------------------------------------------
(In thousands)
Real estate acquired through foreclosure ..................... $1,226 $6,359
Real estate in judgment ...................................... 226 161
---------------
1,452 6,520
Less allowance for losses .................................... 133 330
---------------
$1,319 $6,190
===============
Changes in the allowance for possible losses on OREO are summarized as follows:
1995 1994 1993
- -------------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year.......................... $ 330 $ 650 $ 1,251
Provision for losses ................................. 150 -- 3,467
Net charge-offs ...................................... (347) (320) (4,068)
----------------------------------
Balance at end of year ............................... $ 133 $ 330 $ 650
==================================
The Company recognized gains on sales of OREO amounting to
$1,139,000, $2,407,000 and $1,127,000 during 1995, 1994 and 1993,
respectively.
NOTE G: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
December 31
----------------------
1995 1994
- ------------------------------------------------------------------------------------------------
(In thousands)
Cost:
Land .................................................. $ 2,603 $ 2,603
Buildings and improvements ............................ 16,129 15,229
Furniture and equipment ............................... 15,713 14,464
-----------------------
34,445 32,296
Less accumulated depreciation .......................... 19,707 18,073
-----------------------
$14,738 $14,223
=======================
Depreciation and amortization expense was $1,850,000,
$1,837,000 and $2,142,000 in 1995, 1994 and 1993, respectively.
Rental expense for leased properties and equipment was
$643,000, $488,000 and $486,000 in 1995, 1994 and 1993,
respectively. The aggregate minimum annual rental commitments under
these leases are approximately $814,000 in 1996, $705,000 in 1997,
$533,000 in 1998, $412,000 in 1999, $367,000 in 2000 and $734,000
thereafter.
NOTE H: DEPOSITS
The carrying amounts and fair values of deposits and the
nominal rate of interest paid were as follows:
December 31
------------------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------------------
Weighted Weighted
Carrying Fair Average Carrying Fair Average
Amount Value Rate Amount Value Rate
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Checking accounts ........... $ 37,939 $ 37,939 --% $ 40,485 $ 40,485 --%
NOW accounts ................ 53,682 53,682 1.52 50,999 50,999 1.55
Money market accounts ....... 85,287 85,287 4.19 94,543 94,543 3.86
Savings deposits ............ 145,241 145,241 2.92 125,399 125,399 2.25
Certificates of deposit ..... 564,289 568,113 6.01 471,392 462,746 5.03
Accrued interest ............ 1,431 1,431 -- 1,257 1,257 --
----------------------------------------------------------------------------------
$887,869 $891,693 4.80% $784,075 $775,429 3.96%
==================================================================================
30
23
Included in deposits are $73,098,000 and $47,542,000 of
deposit accounts with balances in excess of $100,000 as of December
31, 1995 and 1994, respectively.
Certificates of deposit had the following maturities at December 31, 1995:
Weighted
Average
Amount Rate
- ------------------------------------------------------------------
(Dollars in thousands)
1996 ................................. $371,340 5.84%
1997 ................................. 104,587 5.90
1998 ................................. 48,240 6.76
1999 ................................. 15,973 7.71
2000 and beyond ...................... 24,149 6.47
--------------------
$564,289 6.01%
====================
The average balance, interest expense and average rate on deposits was
as follows:
1995 1994
-------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Checking accounts ........... $ 36,886 $ -- --% $ 36,138 $ -- --%
NOW and money market ........
accounts ................. 136,954 4,233 3.09 131,879 3,177 2.41
Savings deposits ............ 134,981 3,600 2.67 167,920 4,066 2.42
Certificates of deposit ..... 509,173 29,080 5.71 453,240 21,251 4.69
------------------------------------------------------------------------------------
$817,994 $36,913 4.51% $789,177 $28,494 3.61%
====================================================================================
1993
-----------------------------------
Average Interest Average
Balance Expense Rate
-----------------------------------
(Dollars in thousands)
Checking accounts ........... $ 19,917 $ -- --%
NOW and money market ........
accounts ................. 152,885 3,490 2.28
Savings deposits ............ 140,658 3,810 2.71
Certificates of deposit ..... 526,256 25,178 4.78
----------------------------------
$839,716 $32,478 3.87%
==================================
NOTE I: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, in which the
Company will repurchase identical securities, consisted of the
following:
December 31
------------------------------------------------
1995 1994
------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
Collateral pledged:
Mortgage-backed securities with a book
value including accrued interest of
$31,045,000 and a market value of
$29,085,000 .......................................... $ -- $ -- $ 28,627 $ 28,627
==================================================
Securities sold under agreements to repurchase averaged
$24,020,000 and $17,284,000 during 1995 and 1994, respectively, and
the maximum amounts outstanding at any month-end during 1995 and
1994 were $52,579,000 and $54,911,000, respectively.
The mortgage-backed securities underlying the agreements
were delivered to the dealers who arranged the transactions. The
dealers may have sold, loaned or otherwise disposed of such
securities to other parties in the normal course of their
operations, and have agreed to resell to the Company identical
securities at the maturities of the agreements.
31
24
NOTE J: FHLB ADVANCES AND OTHER BORROWED MONEY
The carrying amounts and fair values of FHLB advances and other
borrowed money consisted of the following:
December 31
--------------------------------------------------------------------
1995 1994 1995 1994
--------------------------------------------------------------------
Year of Weighted Carrying Fair Carrying Fair
Maturity Average Rate Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Advances from Federal Home
Loan Bank of Indianapolis:
Variable rate of interest:
5.98% ............... 1995 --% 5.98% $ -- $ -- $ 34,000 $ 33,956
5.81 - 6.38 ................ 1996 5.86 6.38 124,000 124,065 35,000 35,011
5.63 - 6.31 ................ 1997 5.86 5.92 61,000 61,027 51,000 50,981
Fixed rate of interest:
5.69 - 6.40% ............... 1995 -- 6.08 -- -- 65,000 64,984
5.42 ................ 1997 5.42 -- 10,000 9,977 -- --
5.47 ................ 1998 5.47 -- 10,000 9,965 -- --
4.00 ................ 2005 4.00 4.00 1,003 857 1,003 643
------------------------------------------------------------------
206,003 205,891 186,003 185,575
Other borrowed money:
Collateralized mortgage
obligations ................. 10,229 11,187 12,227 12,764
-----------------------------------------
$216,232 $217,078 $198,230 $198,339
=========================================
The Company is required to maintain qualifying loans and
mortgage-backed securities with a market value of at least 125% of
outstanding amounts as collateral for the FHLB advances. FHLB stock
is also pledged as collateral for these advances.
The collateralized mortgage obligation (CMO) was issued through
a special purpose finance subsidiary established in 1986. The CMO is
secured by mortgage-backed securities with unpaid principal balances
of $11,709,000 and $14,262,000 at December 31, 1995 and 1994,
respectively. The notes underlying the obligations bear interest,
payable quarterly, at rates varying from 7.27% to 7.33%, with
contractual maturity dates ranging from 2008 to 2010.
NOTE K: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(In thousands)
Current ................................................... $ -- $ -- $(3,803)
Deferred .................................................. 3,959 1,199 (9,812)
Change in valuation allowance for deferred tax assets ..... (5,734) (1,199) 9,812
------------------------------------
$(1,775) $ -- $(3,803)
====================================
Deferred income tax expense included in stockholders' equity
related to unrealized holding gains (losses) on securities available
for sale for 1995, 1994 and 1993 amounted to $822,000, $-0- and
$417,000, respectively.
The 1993 extraordinary item related to the early repayment of
FHLB advances is net of an income tax credit of $989,000.
A reconciliation of the statutory federal income tax rate to
the effective income tax rate follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Statutory tax rate .............................................. 35.00 % 35.00 % (35.00) %
Effect of:
Change in valuation allowance for deferred tax assets ......... (68.54) (38.79) 27.84
Adjustment to net operating loss carryforward ................. 12.46 -- --
Other items, net .............................................. (0.14) 3.79 (3.63)
----------------------------------------------------------
Effective tax rate .............................................. (21.22)% -- % (10.79) %
==========================================================
32
25
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred and
other tax assets and liabilities are as follows:
December 31
-------------------------
1995 1994
-------------------------
(In thousands)
Deferred tax assets:
Bad debt reserves not previously deducted ............................... $ 3,545 $ 2,800
Net deferral required by SFAS 91 ........................................ 400 411
Pension and other benefit obligations ................................... 580 585
Tax effect of net operating loss carryforward ........................... 6,307 12,184
Other items, net ........................................................ 422 459
------------------------
Total deferred tax assets ........................................ 11,254 16,439
Valuation allowance for deferred tax assets ............................ (2,879) (8,613)
------------------------
Total deferred tax assets less valuation allowance ............... 8,375 7,826
Deferred tax liabilities:
Securities marked to market for tax purposes* .......................... 433 1,229
Tax over book depreciation ............................................. 723 821
FHLB stock dividends ................................................... 1,075 551
Valuation adjustment on CMO residuals .................................. 1,333 1,331
Excess general valuation allowances over base year reserves ............ 448 439
Other items, net 092 137
------------------------
Total deferred tax liabilities ................................... 4,104 4,508
------------------------
Total net deferred tax assets ............................................ 4,271 3,318
Current income tax receivable due to net operating loss ..................
carrybacks and other overpayments ....................................... 1,109 1,187
Total net federal income tax assets ...................................... $ 5,380 $ 4,505
========================
* The amount shown is net of the $822,000 tax effect of SFAS 115 unrealized
holding gains at December 31, 1995.
As of December 31, 1995, the Company had a net operating loss
carryforward for income tax purposes of $18,019,000, which expires
on December 31, 2009.
The Bank has qualified under provisions of the Internal
Revenue Code that permit federal income taxes to be computed after
the deduction of additions to loan loss reserves. Accordingly,
retained earnings includes approximately $13,964,000 for which no
provision for federal income taxes has been made. If in the future
this amount is used for any purpose other than to absorb losses on
loans, federal income taxes may be imposed at the then prevailing
rates.
NOTE L: STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
OTS regulations governing the payment of dividends by savings
institutions provide that an institution may only pay dividends
with regulatory approval. Unlike the Bank, the Company is not
subject to these regulatory restrictions on the payment of
dividends to its stockholders. However, the source of future
dividends may depend upon the payment of dividends from the Bank to
the Company.
In December 1993, the Company issued 3,009,657 shares of
common stock and 1,003,219 warrants in a shareholder rights
offering in which the Company issued rights entitling the holder to
purchase units for $22.75 each. Each unit consisted of three shares
of common stock and one warrant. Each warrant entitles the holder
thereof to purchase one share of common stock at an exercise price
of $8.25 at any time no later than December 31, 1996. The net
proceeds of $20,888,000 were used to provide additional working
capital, improve the regulatory capital ratios of the Bank and for
general corporate purposes. The Company also issued 1,408 shares of
common stock in 1993, with proceeds of $8,000, in connection with
its stock option plan. During 1994, the Company issued 1,000 shares
of common stock in connection with its stock option plan and 390
shares of common stock upon the exercise of warrants. Total
proceeds from these transactions amounted to $10,000. During 1995,
the Company issued
33
26
52,798 shares upon the exercise of stock options and 2,553 shares upon the
exercise of warrants, resulting in total proceeds of $341,000. Additionally, the
Company purchased 10,000 stock warrants at a cost of $44,000. See Note N.
The FDIC Improvement Act of 1992 (FDICIA) requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to this requirement, the OTS adopted final rules,
effective December 19, 1993, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either "well capitalized" or "adequately capitalized". The rules generally
provide that a savings institution is "well capitalized" if its total risk-based
capital ratio is 10% or greater, its ratio of core capital to risk-based assets
is 6% or greater, its core capital (leverage) ratio is 5% or greater, and the
institution is not subject to a capital directive. At December 31, 1995, the
Bank was considered adequately capitalized.
On December 7, 1989, new capital standards were imposed on the thrift
industry as a result of FIRREA. Regulatory standards impose the following
capital requirements: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted assets,
and a tangible capital ratio expressed as a percent of total adjusted assets. As
of December 31, 1995, the Bank exceeded all regulatory capital standards.
The table below summarizes, as of December 31, 1995, the Bank's capital
requirements under FIRREA and its actual capital ratios at that date:
Regulatory Bank Actual
Requirements Capital
-----------------------------------------------------
Amount Percent Amount Percent
-----------------------------------------------------
(Dollars in thousands)
Risk-based capital ... $57,274 8.00% $70,033 9.78%
Core capital ......... 35,959 3.00 61,072 5.10
Tangible capital ..... 17,979 1.50 61,072 5.10
NOTE M: EMPLOYEE BENEFIT PLANS
The Company sponsors a non-contributory defined benefit retirement plan
covering substantially all of its employees. The benefits are based on years of
service and the employee's compensation during the last five years of
employment. The plan was curtailed in 1995, and no additional benefits will
accumulate. The Company's funding policy has been to contribute amounts to the
plan sufficient to meet the minimum funding requirements set forth in the
Employees Retirement Income Security Act of 1974, plus such amounts as the
Company may determine to be appropriate from time to time. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future. The Company intends to terminate
the plan in 1996. All assets of the plan will be disbursed, and no gain or loss
will be recorded. An application has been made to the Internal Revenue Service
for an advance determination as to whether the plan meets the qualification
requirements of section 401(a) of the Internal Revenue Code of 1954, with
respect to the plan's termination.
The following table sets forth the plan's funded status and amounts
recognized in the Company's Consolidated Statement of Condition:
December 31
--------------------
1995 1994
--------------------
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $14,812,000 in 1995 and $10,110,000 in 1994 .................... $(14,812) $(10,773)
====================
Projected benefit obligation for service rendered to date ............. $(14,812) $(13,319)
Plan assets at fair value, primarily participation in common
trust funds ......................................................... 18,292 17,025
--------------------
Plan assets greater than projected benefit obligation ................. 3,480 3,706
Unrecognized net asset ................................................ (569) (654)
Unrecognized prior service cost ....................................... -- 368
Unrecognized net gains ................................................ (3,301) (3,637)
--------------------
Accrued pension cost .................................................. $ (390) $ (217)
====================
34
27
Pension expense included the following components:
1995 1994 1993
------------------------------------
(In thousands)
Service cost-benefits earned during the period ........... $ 620 $ 728 $ 606
Interest cost on projected benefit obligation ............ 1,071 1,055 914
Return on plan assets .................................... (2,030) (362) (1,351)
Net amortization ......................................... 512 (1,046) (80)
-----------------------------------
$ 173 $ 375 $ 89
===================================
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of projected
benefit obligation were 6.25% and 5.40%, respectively, in 1995 and 8.25% and
5.40%, respectively, in 1994. The expected long-term rate of return on plan
assets was 8.00% in 1995, 1994 and 1993.
The Company sponsors an employee savings and investment plan in which all
employees may participate after completing a minimum of 1,000 hours in an
eligibility period. The plan allows participants to make contributions by salary
deductions equal to 15% or less of their salary pursuant of Section 401(k) of
the Internal Revenue Code. Employee contributions are matched by the Company at
the rate of 50 cents per dollar, up to 6% of the employee's salary. Employees
vest immediately in their own contributions and over a six-year period in the
Company's contributions. Employee contributions may be invested in the Company's
common stock, a guaranteed interest account, a bond and mortgage account,
independent equity accounts or a combination thereof. Company contributions are
invested in the Company's common stock. The Company's contributions to the plan
were $273,000, $193,000 and $157,000 in 1995, 1994 and 1993, respectively.
Effective January 1, 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which established
new accounting standards for such benefits. It significantly changed the
practice of accounting for postretirement benefits on a pay-as-you-go (cash)
basis by requiring accrual, during the years the employee renders the necessary
service, of the expected cost of providing those benefits to an employee and the
employee's beneficiaries and covered dependents. The Company has a benefit plan
which provides postretirement medical benefits to certain employees who have
attained the age of 55 and have at least five years of service. The plan is
contributory, and the Company has no plan assets attributable under SFAS 106.
The Company's SFAS 106 liability at January 1, 1993 was approximately
$2,256,000, and the Company is recognizing its SFAS 106 liability (accumulated
postretirement benefit obligation) over a prospective 20-year period. During
1994, the plan was changed to provide certain caps on benefits for existing
retirees and eliminate benefits for future retirees. The effect of the plan
change was to reduce the accumulated postretirement benefit obligation by
approximately $1,425,000.
The following table sets forth the plan's status and amounts recognized in
the Company's Consolidated Statement of Condition:
December 31
---------------
1995 1994
---------------
(In thousands)
Accumulated postretirement benefit obligation ....................... $1,322 $1,261
Unrecognized net loss ............................................... (178) (87)
Unrecognized transition obligation .................................. (877) (926)
---------------
Accrued postretirement benefit cost ................................. $ 267 $ 248
===============
Postretirement benefit expense included the following components:
1995 1994 1993
---------------------------------
(In thousands)
Service cost ...................................................... $ -- $ 44 $ 79
Interest cost ..................................................... 99 132 173
Amortization of transition obligation ............................. 49 80 107
---------------------------------
$ 148 $ 256 $ 359
=================================
35
28
A weighted average discount rate of 7.00% in 1995 and 8.25% in 1994 was
used in determining the SFAS 106 liability. The 1995 health care trend rate was
projected to be 12.8% for participants under the age of 65, and this rate is
assumed to trend downward until it reaches 5.5% and remains at that level
thereafter. This trend rate assumption does not have a significant effect on the
plan; therefore, a one percent change in the trend rate is not material in the
determination of the accumulated postretirement benefit obligation or the
ongoing expense.
NOTE N: STOCK OPTION PLAN
The Company has stock option plans in which 1,340,000 shares of common
stock have been reserved for issuance as of December 31, 1995. Under the plans,
the exercise price of any option will not be less than the fair market value of
the common stock on the date of grant. The date on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors, and the term on any options may not exceed ten years from the date of
grant.
The following table sets forth changes in options outstanding:
1995 1994 1993
-----------------------------------------------------------
Shares under option:
Outstanding at beginning of year ......... 621,730 664,180 432,086
Granted .................................. 74,880 50,298 236,202
Forfeited ................................ (4,029) (91,748) (2,700)
Cancelled ................................ (62,150) -- --
Exercised ................................ (52,798) (1,000) (1,408)
----------------------------------------------------------
Outstanding at end of year ............... 577,633 621,730 664,180
==========================================================
Exercisable at end of year ............... 495,190 455,475 299,478
==========================================================
Option price per share ................... $6.00--$16.063 $4.563--$16.063 $4.563--$16.063
NOTE O: LITIGATION
The Company is involved in a number of matters of litigation, substantially
all of which have arisen in the ordinary course of business. It is the opinion
of management that the resulting liabilities, if any, from these actions and
other pending claims will not materially affect the Consolidated Financial
Statements.
NOTE P: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate or purchase loans,
standby letters of credit, recourse arrangements on sold assets, interest rate
exchange agreements and forward commitments. The instruments involve, to varying
degrees, elements of credit and interest rate risk in addition to the amounts
recognized in the Consolidated Statement of Condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as for on-balance sheet instruments. For
interest rate exchange agreements and forward commitments, the contract or
notional amounts do not represent exposure to credit loss. The Company controls
the credit risk of those instruments through credit approvals, limits and
monitoring procedures.
36
29
The following table sets forth financial instruments with off-balance sheet
risk and their contract or notional amounts and their fair values:
December 31
---------------------------------------
1995 1995 1994 1994
---------------------------------------
Fair Fair
Value Value
---------------------------------------
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate
and purchase loans ..................................... $60,443 $(604) $ 18,489 $ (185)
Unused lines of credit .................................... 56,867 (569) 36,357 (364)
Standby letters of credit ................................. 1,210 (12) 1,554 (16)
Loans sold with recourse .................................. 3,563 (178) 3,823 (191)
Financial instruments whose notional ........................
or contract amounts exceed the amount .......................
of credit risk:
Notional amounts underlying ...............................
obligations to pay fixed rates ......................... $ -- $ -- $104,000 $(6,223)
Forward commitments to sell
loans and securities ................................... -- -- -- --
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Additionally, the Company has
retained credit risk on certain residential and commercial mortgage loans sold
with recourse with outstanding balances at December 31, 1995 of $1,769,000 and
$1,794,000, respectively. The maximum amount of loss that the Company is subject
to under the recourse provisions is $1,948,000 at December 31, 1995. Management
does not believe the recourse provisions subject the Company to any material
risk of loss. This credit risk is considered to be no different than that
existing on similar loans in the Company's loan portfolio.
The Company has entered into interest rate exchange agreements in managing
its interest rate exposure. These instruments generally involve the exchange of
fixed and floating interest payment obligations without the exchange of the
underlying principal amounts. Entering into these instruments involves not only
the risk of default by the other party, but also the interest rate risk if
positions are not matched. The amounts potentially subject to credit risk are
the streams of payments under the agreements and not the notional principal
amounts used to express the volume of these transactions.
Forward commitments to sell loans are contracts the Company enters into for
the purpose of reducing the market risk associated with holding loans originated
for sale. In order to fulfill a forward commitment, the Company typically
exchanges its current production of loans for mortgage-backed securities through
FNMA, FHLMC or GNMA, which are then delivered to a national securities firm at a
future date at prices or yields specified by the contracts. Risks may arise from
the possible inability of the Company to originate loans to fulfill the
contracts, in which case the Company would normally purchase securities in the
open market to deliver against the contracts.
37
30
NOTE Q: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
financial instruments at the dates indicated. SFAS 107, "Disclosures about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The amounts in the table are presented net of amounts offset in accordance with
FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts".
December 31
-----------------------------------------------
1995 1994
------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------
(In thousands)
Cash and cash equivalents ............. $ 15,559 $ 15,559 $ 28,124 $ 28,124
Investment securities (Note C) ........ 87,824 87,961 81,311 81,311
Mortgage-backed securities (Note D) ... 123,475 124,488 146,646 144,183
Loans receivable (Note E) ............. 931,188 936,758 801,248 775,975
Deposits (Note H) ..................... (887,869) (891,693) (784,075) (775,429)
Debt (Notes I and J) .................. (216,232) (217,078) (226,857) (226,966)
Derivatives relating to:
Loans ............................... -- (604) -- (185)
Debt ................................ -- -- 45 (6,223)
Estimation of Fair Values
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the Statement of Condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statement of Condition for cash and
cash equivalents approximate those assets' fair value.
Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Fair values for the Company's loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value.
The fair values of checking and NOW accounts, money market accounts and
savings deposits are the amounts payable on demand at the reporting date. The
fair value for fixed-maturity time deposits is estimated using a discounted cash
flow calculation using the rates currently offered for deposits with similar
remaining maturities.
The fair values of the Company's debt are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
debt with similar terms and remaining maturities.
Fair values for the Company's off-balance sheet instruments (interest rate
instruments, guarantees and credit commitments) are based on current settlement
or termination values and on fees currently charged to enter into similar
agreements, given the remaining terms of the agreements and the counterparties'
credit standing.
38
31
NOTE R: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Gain (Loss) on Income Before Income Tax
Interest Interest Net Interest Provision for Securities and Income Tax Expense
Income Expense Income Loan Losses Other Assets Expense (Credit) (Credit) Net Income
---------------------------------------------------------------------------------------------------------------------
(In thousands)
---------------------------------------------------------------------------------------------------------------------
1st Quarter
1995 $20,139 $12,810 $ 7,329 $ 200 $ -- $1,340 $ -- $ 1,340
1994 15,889 11,586 4,303 -- 620 230 -- 230
2nd Quarter
1995 22,137 13,682 8,455 800 779 2,520 -- 2,520
1994 16,405 11,421 4,984 -- 189 632 -- 632
3rd Quarter
1995 22,405 13,857 8,548 500 -- 2,996 -- 2,996(1)
1994 17,534 11,467 6,067 -- 174 1,328 -- 1,328
4th Quarter
1995 23,240 13,940 9,300 900 -- 1,509 (1,775) 3,284(1)
1994 19,299 12,039 7,260 100 (221) 901 -- 901
Year
1995 87,921 54,289 33,632 2,400 779 8,365 (1,775) 10,140(1)
1994 69,127 46,513 22,614 100 762 3,091 -- 3,091
Earnings Per Share Stock Price Range
------------------ -----------------
Fully
Primary Diluted High Low
--------------------------------------
(In thousands)
1st Quarter
1995 $0.20 $0.20 9 1/8 7 1/4
1994 0.03 0.03 8 1/8 6 7/8
2nd Quarter
1995 0.37 0.35 10 1/2 8 3/8
1994 0.10 0.10 9 6 5/8
3rd Quarter
1995 0.45 0.41 13 1/2 10 1/8
1994 0.20 0.20 10 8 1/2
4th Quarter
1995 0.46 0.45 12 3/4 11 3/16
1994 0.13 0.13 9 1/8 6 7/8
Year
1995 1.45 1.40 13 1/2 7 1/4
1994 0.46 0.46 10 6 5/8
(1) Includes income of $458,000, $163,000 and $621,000 in the third quarter of
1995, fourth quarter of 1995 and year 1995, respectively, resulting from
the adoption of SFAS 122.
NOTE S: D&N FINANCIAL CORPORATION - PARENT COMPANY ONLY -
FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION
December 31
-----------
1995 1994
- ------------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash and due from banks ........................... $ 2 $ 2
Amounts receivable from subsidiary ................ 879 777
Investment in subsidiary .......................... 64,840 51,848
-----------------------
$65,721 $52,627
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ................................. $ 10 $ 4
Stockholders' equity .............................. 65,711 52,623
-----------------------
$65,721 $52,627
=======================
39
32
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31
------------------------------------
1995 1994 1993
------------------------------------
(In thousands)
Interest income from subsidiary ............................. $ 40 $ 47 $ 20
Fee income from subsidiary .................................. -- -- 900
Equity in undistributed net income (loss) of subsidiary ..... 10,341 3,273 (67,437)
Noninterest expense:
Compensation and benefits ................................ 9 9 141
Other .................................................... 232 220 292
----------------------------------
Total noninterest expense ............................. 241 229 433
----------------------------------
Income (loss) before income tax expense ............ 10,140 3,091 (66,950)
Federal income tax expense .................................. -- -- 70
----------------------------------
Net income (loss) ..................................... $10,140 $3,091 $(67,020)
==================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------------------
1995 1994 1993
--------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income (loss) ........................................... $ 10,140 $ 3,091 $(67,020)
Items not affecting cash:
Equity in undistributed net (income) loss of subsidiary .. (10,341) (3,273) 67,437
Other .................................................... 201 182 (417)
------------------------------------
Net cash provided by operating activities ............. -- -- --
Net change in cash and cash equivalents ..................... -- -- --
Cash and cash equivalents at beginning of year .............. 2 2 2
------------------------------------
Cash and cash equivalents at end of year .................... $ 2 $ 2 $ 2
====================================
40
33
REPORT OF INDEPENDENT AUDITORS
[COOPERS & LYBRAND LETTERHEAD]
BOARD OF DIRECTORS AND STOCKHOLDERS
D&N FINANCIAL CORPORATION
We have audited the Consolidated Statements of Condition of D&N Financial
Corporation and Subsidiary as of December 31, 1995 and 1994, and the related
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
each of the three years in the period ending December 31, 1995. 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.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D&N Financial
Corporation and Subsidiary at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ending December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note A to the Consolidated Financial Statements, D&N Financial
Corporation changed its methods of accounting for goodwill, income taxes and
investments in debt and equity securities in 1993.
Coopers and Lybrand L.L.P.
Detroit, Michigan
January 22, 1996
41
34
BOARD OF DIRECTORS
JOSEPH C. BROMLEY is Executive Vice President-Treasurer of Churchill
Transportation, Inc. of Detroit, Michigan, a 48-state truck load carrier. Prior
to that, he was Director, President and CEO of Regency Motor Freight, Inc. of
Detroit, a common carrier trucking firm.
GEORGE J. BUTVILAS joined D&N as President in May 1990. He was named CEO of D&N
Bank in 1991 and of D&N Financial Corp. in 1992. Prior to that, he served most
recently as Executive Vice President and Director of Boulevard Bancorp, Inc. of
Chicago, Illinois.
RANDOLPH P. PIPER has been an attorney at law in Flint, Michigan, for more than
22 years.
SHARON A. REESE DALENBERG is founder and president of The Astor Group, a
management consulting firm. She also heads Abbott Smith Associates, an
executive recruiting firm, and Continental Courier Ltd., a courier service
provider headquartered in Chicago.
KENNETH D. SEATON has been Chairman of the Corporation since its formation in
1988. He joined the Bank in 1957 and retired from active management in 1992.
B. THOMAS M. SMITH, JR. has been a consultant for ITT Corporation, a
multi-national conglomerate headquartered in New York since January 1996. Prior
to that, he served as Vice President and Director of Corporate Purchasing for
ITT.
THOMAS J. ST. DENNIS is an attorney and President of St. Dennis Development,
Inc., a home building and land development corporation. He also holds a real
estate broker's license and is managing officer of Independent Realty Group.
PETER VAN PELT is manager of The Museum Shop, a retail book and gift store in
Eagle Harbor, Michigan. From 1990 to 1993, he was self-employed as a management
consultant. Prior to that, he was President of Runzheimer International, a
specialized management consulting firm.
LINDA K. KORPELA is Vice President/Corporate Secretary of D&N Bank and D&N
Financial Corporation. She has been with the Bank since 1969 and served as
Assistant Secretary of the Bank from 1978 to 1990.
FRONT ROW (L TO R):
Thomas J. St. Dennis
Kenneth D. Seaton
George J. Butvilas
Linda K. Korpela
Randolph P. Piper
BACK ROW (L TO R):
Joseph C. Bromley
Peter Van Pelt
B. Thomas M. Smith, Jr.
Sharon A. Reese Dalenberg
42
35
D&N BANK OFFICERS
EXECUTIVE MANAGEMENT TEAM
George J. Butvilas
President and Chief Executive Officer
Alfred J. Sliwinski
Executive Vice President/Community Banking
Richard E. West
Senior Vice President/Wholesale Banking
Kenneth R. Janson
Executive Vice President/Chief Financial Officer and Treasurer
Donald W. Schulze
Senior Vice President/Human Resources
Peter L. Lemmer
Senior Vice President/General Counsel
SENIOR OFFICERS
John L. Blissett
Senior Vice President/Controller
Leonard M. Bolduc
Senior Vice President/Retail Loan Operations
Thomas R. Burns
Senior Vice President/Operations
Frank R. Donnelly
Senior Vice President/Commercial Lending
Daniel D. Greenlee
Senior Vice President/Portfolio Manager
Eugene W. Riggs
Senior Vice President/Mortgage and Indirect Lending
D&N MORTAGE CORPORATION
George J. Butvilas, Chairman
Richard E. West, President and CEO
Directors
George J. Butvilas
Kenneth R. Janson
Alfred J. Sliwinski
Richard E. West
QUINCY INSURANCE AGENCY INC.
Brian A. Zinser, President
Directors
John R. Clemmer
Mark W. Gilmer
James L. Murdey
Ralph H. Schaller
Alfred J. Sliwinski
Brian A. Zinser
43
36
D&N BANK OFFICES
D&N BANK OF LIVINGSTON
MARK W. GILMER, PRESIDENT
611 E. Grand River, Howell+#
9880 E. Grand River, Brighton+#
300 Fenton Square, Fenton+#
524 W. Grand River, Fowlerville#
10490 Highland Road, Hartland#
1075 E. Main St., Pinckney+#
5844 N. Sheldon Road, Canton
D&N BANK OF FLINT
JOHN R. CLEMMER, PRESIDENT
460 S. Saginaw St., Flint
1151 N. Ballenger Hwy., Flint+#
3410 S. Dort Hwy., Flint+#
3213 Genesee Road, Flint+#
2629 W. Pierson Rd., Flint+
G-4409 Miller Road, Flint+
Great Lakes Technology Centre, Flint+
12770 S. Saginaw St., Grand Blanc+#
G-6120 Fenton Road, Flint+#
Genesee Valley Mall Drive-up, Flint+#
Lincor Park, 4495 Corunna Rd., Flint@
University of Michigan Pavilion, Flint*
Courtland Mall, Flint*
D&N BANK OF TROY
PETER W. SMITH, PRESIDENT
363 W. Big Beaver, Ste. 150, Troy#
1304 W. 13-Mile Road, Clawson
3005 University, Auburn Hills@
D&N BANK OF MACOMB COUNTY
DOUGLAS C. MARSHALL, PRESIDENT
141 S. Main St., Romeo+#
23505 Greater Mack Ave., St. Clair Shores%
D&N BANK OF SOUTH LYON
JOHN R. MACLACHLAN, JR., PRESIDENT
419 S. Lafayette, South Lyon+#
D&N BANK OF DAVISON
Dale N. Smallidge, President
727 S. State Road, Davison+#
D&N BANK OF FLUSHING
William E. O'Connor, President
1559 E. Pierson Road, Flushing#
Bueche Mall, Flushing*
D&N BANK OF THE COPPER COUNTRY
Ralph H. Schaller, President
400 Quincy Street, Hancock+#
901 W. Sharon Ave., Houghton+#
Festival Foods Store, Houghton+
111 U.S. 41, L'Anse
Michigan Tech University, Houghton*
D&N BANK OF IRON MOUNTAIN
James P. Benbow, President
1000 S. Carpenter Ave., Iron Mountain+#
D&N BANK OF MARQUETTE
James L. Murdey, President
1930 U.S. 41, Marquette+#
662 Palms Ave., Ishpeming#
D&N BANK OF ESCANABA
Carol D. Shiplett, President
2325 Ludington St., Escanaba#
1015 Tenth Ave., Menominee#
1507 Cleveland Ave., Marinette, Wisconsin+
Holiday Station Store, Escanaba*
D&N BANK OF SAULT STE. MARIE
William J. McLeod, President
501 Court St., Sault Ste. Marie+#
D&N BANK OF IRONWOOD
Cynthia J. Rosen, President
100 S. Suffolk St., Ironwood+#
D&N BANK OF CALUMET
Daniel L. Dalquist, President
330 Fifth Street, Calumet#
Holiday Station Store, Calumet*
AGENT OFFICES
Bessemer Newberry
Crystal Falls Ontonagon
Manistique White Pine
Munising
D&N MORTGAGE CORP. OFFICES
3900 Sparks Dr. SE, Ste. 105, Grand Rapids
2620 S. Cleveland, Ste. 201, St. Joseph
7071 Orchard Lake Rd., Ste. 100, West Bloomfield
COMMERCIAL LENDING DIVISION
363 W. Big Beaver, Ste. 150, Troy
RESIDENTIAL LENDING PRODUCTION AND UNDERWRITING OFFICE
309 S. Front St., Marquette
+ Offices with D&N Cash Machine
# Offices with Drive-up Banking
* ATM-only location
@ Scheduled to open Spring, 1996
% Acquisition pending, scheduled for completion in April, 1996
44
37
STOCKHOLDER INFORMATION
D&N FINANCIAL CORPORATION
400 Quincy Street 363 W. Big Beaver, Ste. 100
Hancock, Michigan 49930 Troy, Michigan 48084
(906) 482-2700 (810) 528-0704
COMMON STOCK
D&N's Common Stock is listed on the NASDAQ Stock Market under the symbol DNFC.
The stock quotations appear in major daily newspapers under the listing D&N
Fncl. At December 31, 1995, there were approximately 8,900 holders of D&N
Common Stock.
WARRANTS
D&N's Warrants are listed on the NASDAQ Stock Market under the symbol DNFCW.
The Warrants have an exercise price of $8.25, are not callable, and expire on
December 31, 1996. D&N's Warrant Agent is Illinois Stock Transfer Company,
Chicago.
TRANSFER AGENT
Stockholders with questions concerning stock transfer, lost certificates,
warrant exercises or other transfer related issues should contact the transfer
agent listed below:
Illinois Stock Transfer Company
223 West Jackson Blvd., Suite 1210
Chicago, Illinois 60606
1-800-757-5755
FORM 10-K
The 1995 Annual Report on Form 10-K is available to stockholders at no cost
upon written request to the Company at the address above.
INVESTOR RELATIONS CONTACT
Analysts, investment professionals, stockholders and others seeking financial
information should contact:
Joann C. Cadwell
Director of Investor Relations
(906) 487-6225
jccadwell @aol.com
ON-LINE ACCESS
Stockholders or professional investors with questions about the Company can
contact the CEO directly on-line at dandn@aol.com. For more information on D&N
Bank, including real-time loan rates, visit our Internet home page at
http://www.dn.portup.com.
ANNUAL MEETING
The 1996 Annual Meeting of Stockholders will be held Tuesday, April 23, 1996 at
2:00 p.m., Eastern time. The meeting will be held at the Franklin Square Inn in
Houghton, Michigan.
INDEPENDENT AUDITORS
Coopers & Lybrand, L.L.P., Detroit, Michigan
DIRECT INVESTMENT PLAN
Registered holders of D&N Financial Corporation Common Stock are eligible to
participate in the Company's Direct Investment Plan. The Plan provides a
convenient method for making direct cash investments toward the purchase of
additional shares of D&N stock without fees or commissions. Purchases are made
on or about the first working day of each month on the open market. The minimum
investment is $25; the maximum is $12,000 annually. Cash investments must be
received by Illinois Stock Transfer Company no less than five working days
prior to month end to be included in the monthly purchase.
For more information, please contact the Transfer Agent or D&N's Investor
Relations Department.
45