1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 -------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ------------- Commission file number 0-17137 ----------------------------------------- D&N FINANCIAL CORPORATION -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 38-2790646 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 Quincy Street, Hancock, Michigan 49930 -------------------------------------------------------- (Address of principal executive offices) (906) 482-2700 -------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value 7,572,354 -------------------------------------------------------- (Class) (Shares Outstanding as of July 31, 1996) =============================================================================== 2 D&N FINANCIAL CORPORATION INDEX Page No. PART I Financial Information Consolidated statements of condition - June 30, 1996 and December 31, 1995 3 Consolidated statements of income - three months ended June 30, 1996 and 1995 six months ended June 30, 1996 and 1995 4 Consolidated statements of cash flows - six months ended June 30, 1996 and 1995 5 Notes to consolidated financial statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Other Information 17 - 2 - 3 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) June 30, December 31, 1996 1995 -------------------------- (In thousands ) -------------------------- ASSETS Cash and due from banks $ 12,512 $ 9,264 Interest-bearing deposits in other banks 938 13,176 ------------------------- Total cash and cash equivalents 13,450 22,440 Investment securities (market value of $58,606,000 in 1996 and $55,376,000 in 1995) 58,635 55,239 Investment securities available for sale (at market value) 25,469 41,197 Mortgage-backed securities (market value of $93,629,000 in 1996 and $73,681,000 in 1995) 93,653 72,668 Mortgage-backed securities available for sale (at market value) 45,067 55,041 Loans receivable (including loans held for sale of $716,000 in 1996 and $21,610,000 in 1995) 1,105,958 962,440 Allowance for loan losses ( 10,150) ( 10,081) ------------------------- Net loans receivable 1,095,808 952,359 Other real estate owned, net 746 1,319 Federal income taxes 7,164 5,374 Office properties and equipment, net 15,676 14,850 Other assets 8,356 8,010 ------------------------- $1,364,024 $1,228,497 ========================= LIABILITIES Checking and NOW accounts $ 98,109 $ 91,623 Money market accounts 89,047 86,080 Savings deposits 155,639 149,727 Time deposits 590,573 594,046 Accrued interest 1,463 1,456 ------------------------- Total deposits 934,831 922,932 Securities sold under agreements to repurchase 46,852 -- FHLB advances and other borrowed money 285,244 216,295 Advance payments by borrowers and investors held in escrow 12,381 11,329 Other liabilities 5,762 5,962 ------------------------- Total liabilities 1,285,070 1,156,518 STOCKHOLDERS' EQUITY Preferred stock (1,000,000 shares authorized; none issued) -- -- Common stock, $.01 par value per share (shares authorized - 10,000,000; shares outstanding- 7,586,186 in 1996 and 7,497,305 in 1995) 76 75 Additional paid-in capital 50,550 49,892 ------------------------- Total paid-in capital 50,626 49,967 Retained earnings - substantially restricted 27,422 20,573 Less cost of treasury stock (21,456 shares in 1996 and 1995) ( 213) ( 213) Less leveraged ESOP stock ( 45) ( 63) Unrealized holding gains on debt securities available for sale, net of tax 1,164 1,715 ------------------------- Total stockholders' equity 78,954 71,979 ------------------------- $1,364,024 $1,228,497 ========================= See notes to consolidated financial statements. - 3 - 4 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 --------------------------------------------------------------- (In thousands except per share) --------------------------------------------------------------- Interest income: Loans $21,435 $18,059 $41,415 $34,388 Mortgage-backed securities 2,477 2,748 4,753 5,512 Investments and deposits 1,514 2,046 3,258 3,777 --------------------------------------------------------------- TOTAL INTEREST INCOME 25,426 22,853 49,426 43,677 Interest expense: Deposits 10,856 9,282 21,906 17,617 Securities sold under agreements to repurchase 597 633 692 998 FHLB advances and other borrowed money 3,433 3,328 6,606 6,500 Interest rate instruments -- 882 -- 2,209 --------------------------------------------------------------- TOTAL INTEREST EXPENSE 14,886 14,125 29,204 27,324 --------------------------------------------------------------- NET INTEREST INCOME 10,540 8,728 20,222 16,353 Provision for loan losses 300 800 600 1,000 --------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,240 7,928 19,622 15,353 Noninterest income: Loan servicing and administrative fees, net 703 431 1,026 1,021 Deposit related fees 879 763 1,699 1,492 Gain on loans held for sale 146 8 638 11 Other income 136 57 232 117 Gain (loss) on sale of investment securities 188 ( 120) 188 ( 120) Gain on sale of loans and mortgage-backed securities -- 899 -- 899 --------------------------------------------------------------- TOTAL NONINTEREST INCOME 2,052 2,038 3,783 3,420 Noninterest expense: Compensation and benefits 4,903 3,890 8,984 7,733 Occupancy 685 491 1,397 1,043 Other expense 3,184 2,678 6,139 4,981 --------------------------------------------------------------- General and administrative expense 8,772 7,059 16,520 13,757 Other real estate owned, net 22 ( 389) 62 ( 465) Amortization of intangibles -- 79 -- 213 Federal deposit insurance premiums 674 598 1,310 1,197 --------------------------------------------------------------- TOTAL NONINTEREST EXPENSE 9,468 7,347 17,892 14,702 --------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE (CREDIT) 2,824 2,619 5,513 4,071 --------------------------------------------------------------- Federal income tax expense (credit) ( 537) 30 ( 1,336) 58 --------------------------------------------------------------- NET INCOME $ 3,361 $ 2,589 $ 6,849 $ 4,013 =============================================================== Earnings per common and common equivalent share: PRIMARY $ 0.42 $ 0.35 $ 0.85 $ 0.54 =============================================================== FULLY DILUTED $ 0.41 $ 0.33 $ 0.84 $ 0.52 =============================================================== See notes to consolidated financial statements. - 4 - 5 D&N FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 1996 1995 ------------------------------- (In thousands) ------------------------------- OPERATING ACTIVITIES Net income $ 6,849 $ 4,013 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 1,000 Depreciation and amortization of office properties and equipment 985 892 Amortization of net discounts on purchased loans and securities ( 670) ( 2,386) Originations and purchases of loans held for sale ( 12,282) ( 1,002) Proceeds from sales of loans held for sale 43,264 2,820 Realized and unrealized investment security (gains)losses ( 188) 120 Realized and unrealized (gain)loss on loans and mortgage-backed securities -- ( 897) Amortization and writedown of loan servicing rights 78 151 Other ( 2,967) ( 3,433) ------------------------------- Net cash provided by operating activities 35,669 1,278 INVESTING ACTIVITIES Proceeds from sales of investment securities 298 10,069 Proceeds from maturities of investment securities 74,995 26,038 Purchases of investment securities ( 62,858) ( 47,529) Proceeds from sales of mortgage-backed securities -- 4,478 Proceeds from sales of loans -- 35,218 Principal collected on mortgage-backed securities 22,949 6,548 Mortgage-backed securities purchased ( 34,634) -- Purchases of loans ( 131,769) ( 40,824) Net change in loans receivable ( 41,734) ( 54,341) (Increase)decrease in other real estate owned 573 1,257 Purchases of premises and equipment ( 1,797) ( 345) ------------------------------- Net cash used by investing activities ( 173,977) ( 59,431) FINANCING ACTIVITIES Net change in time deposits ( 6,289) 37,593 Net change in other deposits 18,181 ( 6,631) Proceeds from notes payable, securities sold under agreements to repurchase and other borrowed money 181,852 149,000 Payments on maturity of notes payable, securities sold under agreements to repurchase and other borrowed money ( 66,155) ( 130,427) Net activity in advance payments by borrowers and investors held in escrow 1,052 ( 3,582) Proceeds from issuance of stock 659 12 Reduction of leverage ESOP stock 18 18 ------------------------------- Net cash provided by financing activities 129,318 45,983 ------------------------------- Increase (decrease) in cash and cash equivalents ( 8,990) ( 12,170) Cash and cash equivalents at beginning of period 22,440 33,896 ------------------------------- Cash and cash equivalents at end of period $13,450 $21,726 =============================== See notes to consolidated financial statements. - 5 - 6 D&N FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1996 are not necessarily indicative of the results that may be expected for the full year. NOTE 2: EARNINGS PER SHARE Per share data is based on the weighted average number of shares outstanding for the periods presented. The weighted average number of common and common equivalent shares used in computing primary earnings per share was 8,070,809 and 7,421,063 for the three months ended June 30, 1996 and June 30, 1995, respectively, and 8,042,065 and 7,420,821 for the six months ended June 30, 1996 and June 30, 1995, respectively. The weighted average number of common and common equivalent shares used in computing fully diluted earnings per share was 8,149,139 and 7,777,050 for the three months ended June 30, 1996 and June 30, 1995, respectively, and 8,122,669 and 7,776,808 for the six months ended June 30, 1996 and June 30, 1995, respectively. NOTE 3: ALLOWANCE FOR LOAN LOSSES The allowance for possible losses on loans is maintained at a level believed adequate by management to absorb potential losses from impaired loans as well as losses from the remainder of the portfolio. Management's determination of the level of the allowance is based upon evaluation of the portfolio, past experience, current economic conditions, size and composition of the portfolio, collateral location and values, cash flow positions, industry concentrations, delinquencies, and other relevant factors. The allowance is increased by a provision for losses charged against income. - 6 - 7 Changes in the allowance for loan losses are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 ------------------ ----------------- (In thousands) Balance at beginning of period $ 10,141 $ 8,460 $ 10,081 $ 8,349 Charge-offs: Single family 40 61 89 96 Income producing property -- 25 -- 225 Commercial -- -- -- -- Installment 332 225 589 424 ------------------ ----------------- Total 372 311 678 745 Recoveries: Single family 3 -- 3 2 Income producing property -- -- -- 245 Commercial -- -- -- -- Installment 78 103 144 201 ------------------ ----------------- Total 81 103 147 448 ------------------ ----------------- Net charge-offs 291 208 531 297 Provision charged to operations 300 800 600 1,000 ------------------ ----------------- Balance at end of period $ 10,150 $ 9,052 $ 10,150 $ 9,052 ================== ================= NOTE 4: FEDERAL INCOME TAXES The liability method is used in accounting for federal income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A federal income tax credit was recorded in both of the 1996 reporting periods and no federal income tax expense was recorded in either of the 1995 reporting periods as the Company offset taxes ordinarily payable by a realization, through a reduction in the valuation allowance previously provided, of prior years' net operating loss carryforwards. At June 30, 1996, no further reductions of the valuation allowance are available to offset future tax expense. NOTE 5: BUSINESS COMBINATION On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into the Company. The Company issued 716,497 shares of common stock and cash in lieu of fractional shares for all of the outstanding shares of Macomb. At the time of the merger, Macomb had assets and stockholders' equity (unaudited)of $41,932,000 and - 7 - 8 $6,268,000, respectively. The merger was accounted for as a pooling-of-interests, and accordingly, the financial statements, prior to the merger, have been restated to include the results of Macomb. Pre-merger amounts of net interest income and net income included in the fiscal 1996 consolidated statement of income are as follows: Net Interest Net Income Income(Loss) ---------------------------- (In thousands) D&N $ 9,465 $ 3,497 Macomb 217 ( 9) ---------------------------- $ 9,682 $ 3,488 ============================ A reconciliation of consolidated net interest income, net income and earnings per share, previously reported and restated amounts, follows: Three Months Six Months Ended Ended June 30, 1995 June 30, 1995 ------------------------------------- (In thousands, except per share) Net interest income Previously reported $8,455 $15,784 As restated $8,728 $16,353 Net income Previously reported $2,520 $3,860 As restated $2,589 $4,013 Primary earnings per share Previously reported $0.37 $0.57 As restated $0.35 $0.54 Fully diluted earnings per share Previously reported $0.35 $0.55 As restated $0.33 $0.52 NOTE 6: RECLASSIFICATIONS Certain amounts in the 1995 consolidated financial statements have been reclassified to conform with the current period presentation. - 8 - 9 D&N FINANCIAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information regarding D&N Financial Corporation's (D&N or the Company) financial condition and results of operations for the three-month and six-month periods ended June 30, 1996 and 1995. Ratios for the three-month and six-month periods are stated on an annualized basis. Results of operations for the 1996 periods are not necessarily indicative of results which may be expected for the entire year. This discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. RESULTS OF OPERATIONS NET INCOME The Company recorded net income for the second quarter ended June 30, 1996 of $3.4 million, compared to net income of $2.6 million in the second quarter of 1995. Return on assets and return on equity were 1.02% and 17.53%, respectively, during the quarter ended June 30, 1996, compared to 0.89% and 16.29%, respectively, during the quarter ended June 30, 1995. The increase in net income was primarily due to increases in net interest income and loan servicing income plus decreases in loan loss provision and tax expense, partially reduced by lower gains on sales of assets and increased operating expenses. For the six months ended June 30, 1996, the Company recorded net income of $6.8 million, compared to net income of $4.0 million for the six months ended June 30, 1995. Return on assets and return on equity were 1.07% and 18.24%, respectively, during the six months ended June 30, 1996, compared to 0.70% and 12.95%, respectively, during the six months ended June 30, 1995. The increase in net income was primarily due to increases in net interest income and gains on loans held for sale plus decreases in loan loss provision and tax expense, partially reduced by lower gains on sales of assets and increased operating expenses. NET INTEREST INCOME Net interest income, or the difference between interest earned on interest earning assets such as loans and investments and interest paid on sources of funds such as deposits and borrowings, is a significant component of the Company's earnings. Net interest income is affected by changes in both the balance of and the rates - 9 - 10 on interest earning assets and interest bearing liabilities and the amount of interest earning assets funded with non-interest or low-interest bearing funds. Net interest income increased $1.8 million to $10.5 million for the quarter ended June 30, 1996 compared to $8.7 million for the quarter ended June 30, 1995. The increase was due to increased volume and improved yields on variable rate and short lived assets and to maturity of the Company's interest rate exchange agreements. These improvements were partially offset by lower yields on fixed rate, long term assets and increases in interest paid on deposits due to higher volumes and general increases in market interest rates. Similarly, net interest income increased $3.8 million to $20.2 million for the six months ended June 30, 1996 from $16.4 million for the six months ended June 30, 1995. The same factors that explained the second quarter comparison were present during the year-to-date comparative periods. After raising additional capital in December 1993 and by increasing its consumer and commercial lending activities, the Company has been able to increase its net interest earning assets and to realize increased net yields. The result of these factors is that net interest margin has steadily improved during recent quarters. Net interest margin was 3.27% for the second quarter of 1996, compared to 3.08% for the second quarter of 1995. Net interest margin was 3.23% for the first six months of 1996, compared to 2.94% for the 1995 six-month period. PROVISION FOR LOAN LOSSES A provision for loan losses is charged to income based on the size and quality of the loan portfolio measured against prevailing economic conditions. This process is accomplished through a formal review analysis. The provision is recorded in amounts sufficient to maintain the allowance for possible loan losses at a level in excess of that expected by management to be required to cover specific exposures in the portfolio. The Company recorded a $300,000 provision for loan losses during the quarter ended June 30, 1996 compared to $800,000 recorded during the quarter ended June 30, 1995. For the first six months of 1996, the Company's provision for loan losses was $600,000, compared to $1.0 million for the first six months of 1995. The allowance for loan losses has been maintained at approximately 1.00% of gross loans even as the loan portfolio has experienced significant growth over the past several fiscal quarters. - 10 - 11 NONINTEREST INCOME Total noninterest income was $2.0 million in both the second quarter of 1996 and the second quarter of 1995. Loan servicing fees were up $272,000 largely due to lower rates of amortization on mortgage servicing rights. Deposit related fees were up $116,000 primarily due to increased ATM network income. Gain on loans held for sale increased $138,000 due to increased sales of loans originated or purchased for sale and from the recognition of originated mortgage servicing rights. During the current year quarter, the Company sold investment securities from its available-for-sale portfolio at a gain of $188,000. During the prior year quarter, the Company sold several low-yielding investment and mortgage-backed securities from its available-for-sale portfolios and reinvested the proceeds in higher-yielding securities of a similar nature. Additionally, the Company sold a $34.6 million package of loans and used the proceeds to fund loan demand and to reduce short-term debt. These transactions resulted in net gains of $779,000 in the prior year quarter. For the six months ended June 30, 1996, total noninterest income increased to $3.8 million from $3.4 million recorded during the six months ended June 30, 1995. Increases of $834,000 were in the areas of deposit related fees and gain on loans held for sale due to the same factors as the three-month period. Also for the same reasons as in the three month period, there was a decrease of $591,000 in gains on sales of interest-earning assets. NONINTEREST EXPENSE Total noninterest expense increased $2.1 million to $9.4 million during the quarter ended June 30, 1996, from $7.3 million during the prior year quarter. Compensation and benefits increased due to general wage and benefit increases, deferred compensation payments and additional staffing at new banking facilities. Occupancy expense increased primarily because of increased rental expense and leasehold improvements for new or expanded leased office locations. The increase in other expense represents the higher cost of doing business in additional and expanded facilities and locations and the resulting cost of increased support operations. The primary areas of increase were general office, data processing, furniture and equipment, marketing, legal and state tax expense. Additionally, the prior year quarter included gains from the sale of repossessed commercial real estate properties. During the quarter, the Company incurred merger-related expenses in connection with its acquisition of Macomb (see Note 5 of Notes to Consolidated Financial Statements). These expenses accounted for $1.4 million of the $2.1 million increase in - 11 - 12 noninterest expense experienced during the period. For the six months ended June 30, 1996, total noninterest expense increased $3.2 million to $17.9 million, compared to $14.7 million recorded during the six months ended June 30, 1995. The factors contributing to the year-to-date increase were the same as those for the quarterly variance. FEDERAL INCOME TAXES Federal income tax credits of $537,000 and $1.3 million were recorded during the three months ended June 30, 1996 and the six months ended June 30, 1996, respectively, compared to essentially no federal income tax recorded in either of the 1995 periods. The Company offset taxes ordinarily payable by a realization, through a reduction in the valuation allowance previously provided, of prior years' net operating loss carryforwards. Beginning in the third quarter of 1996, the Company expects to record normal provisions for federal income tax expense. FINANCIAL CONDITION Total assets at June 30, 1996 were $1.36 billion, an increase of $135.5 million from December 31, 1995. Earning assets represented approximately 98% of total assets as of June 30, 1996, substantially the same as at year-end 1995. CASH, DEPOSITS AND INVESTMENT SECURITIES Cash, deposits and investment securities were $97.6 million at June 30, 1996, down $21.3 million from December 31, 1995. During the period, a significant portion of the Company's liquidity portfolio was used to partially fund loan demand. MORTGAGE-BACKED SECURITIES Mortgage-backed securities increased $11.0 million to $138.7 million at June 30, 1996. During the period, the Company purchased $34.3 million of government agency collateralized mortgage obligations with a weighted average yield of 6.90% and a weighted average life of 2.5 years. The portfolio experienced repayments and amortization during the period of $23.3 million plus a decrease of $313,000 in market value recognized through stockholders' equity on mortgage-backed securities available for sale. NET LOANS RECEIVABLE Net loans receivable increased $143.4 million during the period to $1.1 billion at June 30, 1996. Loan originations of $266.6 million and purchases of $110.6 million exceeded repayments of $190.5 million and sales of $43.3 million. Loan originations - 12 - 13 during the six months ended June 30, 1996 were substantially higher compared to the first six months of 1995. Consumer loan originations were $128.1 million compared to $95.7 million, while real estate and commercial loan originations were $138.5 million compared to $73.7 million. NONPERFORMING ASSETS AND RISK ELEMENTS The following table sets forth the amounts and categories of risk elements in the Company's loan portfolio. June 30, December 31, 1996 1995 ------------------------- (Dollars in thousands) Nonaccruing loans $ 6,626 $ 8,225 Accruing loans delinquent more than 90 days 2,425 24 Restructured loans -- -- ----------------------- Total nonperforming loans 9,051 8,249 Other real estate owned (OREO) 745 1,452 --------- --------- Total nonperforming assets $ 9,796 $ 9,701 ======================= Nonperforming loans as a percentage of total loans 0.82% 0.86% ======================= Nonperforming assets as a percentage of total assets 0.72% 0.79% ======================= Allowance for loan losses as a percentage of nonperforming loans 112.14% 122.21% ======================= Allowances for loan and OREO losses as a percentage of nonperforming assets 103.61% 105.29% ======================= Nonperforming assets, before allowances for loan and OREO losses, experienced a slight increase during the period. Nonaccruing loans decreased as a large commercial real estate loan secured by a hotel was restored to accrual status after several months of performance in accordance with the loan contract terms. OREO decreased primarily due to the sale of a repossessed apartment complex. However, accruing loans delinquent more than 90 days increased as payments on a $2.4 million loan secured by a shopping center in Mississippi continued to be delinquent. Subsequent to the reporting date, the Company began foreclosure proceedings. - 13 - 14 MORTGAGE SERVICING RIGHTS (MSRS) The Company's net investment in MSRs increased during the period to $1.4 million at June 30, 1996. The following table details activity in the portfolio for the periods indicated. Six Months Year Ended Ended June 30, 1996 December 31, 1995 ---------------------------------- (Dollars in thousands) Balance at beginning of period $ 1,113 $ 968 Additions: Capitalized servicing 351 621 Purchased servicing -- -- --------- -------- Total 351 621 Reductions: Scheduled amortization 138 169 Additional amortization due to changes in prepayment assumptions 51 71 Impairment (recovery) ( 112) 234 Sales -- -- Transfers to loan portfolio under recourse and other provisions -- 2 --------- -------- Total 77 476 --------- -------- Balance at end of period $ 1,387 $ 1,113 ========= ======== Fair market value at end of period $ 1,640 $ 1,161 ========= ======== DEPOSITS Deposits increased $11.9 million during the period to $934.8 million at June 30, 1996. Certificates of deposit decreased $3.5 million while savings deposits increased $5.9 million, checking accounts increased $6.5 million and money market accounts increased $2.9 million. The Company's cost of deposits decreased to 4.61% at June 30, 1996, compared to 4.80% at December 31, 1995, as a result of a general decrease in market rates of interest coupled with the increase in lower cost core deposits and the decrease in higher cost time deposits. BORROWINGS Total borrowings increased $115.8 million during the period to $332.1 million at June 30, 1996 in order to fund actual and further anticipated loan growth. The Company's cost of borrowings was 5.64% at June 30, 1996, compared to 6.09% at December 31, 1995. - 14 - 15 CAPITAL According to federal regulations, the Bank must meet certain minimum capital ratios. As the following table indicates, the Bank's capital ratios at June 30, 1996 exceeded these requirements. Tangible Core Risk-Based Capital Capital Capital ---------- ---------- ---------- (Dollars in thousands) Actual capital $ 72,710 $ 72,710 $ 82,715 Required capital 20,668 41,336 67,224 --------- --------- --------- Excess capital $ 52,042 $ 31,374 $ 15,491 ========= ========= ========= Actual ratio 5.28% 5.28% 9.84% ========= ========= ========= Required ratio 1.50% 3.00% 8.00% ========= ========= ========= Consolidated stockholders' equity was $79.0 million at June 30, 1996 and represents 5.79% of consolidated assets. LIQUIDITY Liquidity is the ability to meet financial obligations when due. Regulatory authorities require that thrift institutions maintain liquidity consisting of cash, short-term U. S. Government Securities and other specified assets, equal to at least 5% of net withdrawable accounts and borrowings payable in one year or less. At June 30, 1996, the Bank's average liquidity ratio was 6.24%. At June 30, 1996, unused borrowing capacity as measured by the Bank's inventory of readily available but unpledged collateral was approximately $168 million. The Company considers its current liquidity and other funding sources sufficient to fund its outstanding loan commitments and scheduled liability maturities. REGULATORY DEVELOPMENTS The Bank is a member of the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. As in the case with SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the Bank Insurance Fund (the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. The FDIC revised the premium schedule for BIF insured institutions to provide a range of 0.04% to 0.31% of deposits in anticipation of the BIF reaching the required reserve ratio. The revisions became effective in the third quarter of 1995. - 15 - 16 The FDIC also noted that the SAIF is not expected to attain the designated reserve ratio until the year 2002 due to the shrinking deposit base of SAIF assessments and the requirement that SAIF premiums be used to make the interest payments on bonds issued by the Financing Corporation ("FICO") in order to finance the costs of resolving thrift failures in the 1980s. As a result, SAIF insured members will generally be subject to higher deposit premiums than banks until, all things being equal, the SAIF attains the required reserve ratio. The effect of this potential disparity on the Bank and other SAIF members is uncertain at this time. It may have the effect of permitting BIF-insured banks to offer loan and deposit products on more attractive terms than SAIF members due to the cost savings achieved through lower deposit premiums, thereby placing SAIF members at a competitive disadvantage. Proposed legislation currently under consideration in the Congress provides for a one-time assessment of 0.85% to 0.90% to be imposed on all SAIF insured deposits as of March 31, 1995, including those held by commercial banks, and BIF deposit insured premiums to be used to pay the FICO bond interest on a pro-rata basis together with SAIF premiums. Based upon the Bank's deposits at March 31, 1995 (the date currently utilized in the proposed legislation) and assuming the legislation is adopted as proposed, the Bank's assessment would be approximately $7.8 million. - 16 - 17 D&N FINANCIAL CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: (11) Statement re: computation of per share earnings (27) Financial Data Schedule (99) Additional exhibits i. Interest rate/volume analysis: quarter ended 6/30/96 vs. quarter ended 6/30/95 and six months ended 6/30/96 vs. six months ended 6/30/95 (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended June 30, 1996. - 17 - 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. D&N FINANCIAL CORPORATION \s\ George J. Butvilas ---------------------------------- George J. Butvilas, President and Chief Executive Officer \s\ Kenneth R. Janson ---------------------------------- Kenneth R. Janson, Executive Vice President/Chief Financial Officer and Treasurer Date: August 12, 1996 ----------------------- 19 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 11 Statement Re: Computation of Per Share Earnings 99(i) D&N Financial Corporation's Rate/Volume Analysis 27 Financial Data Schedule