1
SELECTED FINANCIAL HIGHLIGHTS
D&N FINANCIAL CORPORATION
Exhibit 13
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1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
FOR THE YEAR:
Net interest income. . . . . . . . . . . . . $ 42,763 $ 34,750 $ 23,786 $ 21,212 $ 29,894
Provision for loan losses. . . . . . . . . . 1,100 2,400 100 -- 117
Noninterest income(loss) . . . . . . . . . . 7,224 6,912 7,488 (21,536) 13,397
Net income (loss). . . . . . . . . . . . . . 8,995 10,417 3,383 (66,642)(1) 4,008
Earnings (loss) per share
Primary . . . . . . . . . . . . . . . . . 1.11 1.35 0.46 (15.06) 0.91
Fully diluted . . . . . . . . . . . . . . 1.09 1.31 0.46 (15.06) 0.91
Weighted average shares:
Primary . . . . . . . . . . . . . . . . . 8,080,333 7,718,700 7,419,636 4,423,889 4,408,043
Fully diluted . . . . . . . . . . . . . . 8,229,812 7,932,142 7,419,636 4,423,889 4,408 043
Stock price range . . . . . . . . . . . . . 12 - 17 3/4 7 1/4 - 13 1/2 6 5/8 - 10 6 1/2 - 12 1/2 4 3/4 - 8 1/2
AT YEAR END:
Total assets . . . . . . . . . . . . . . . . 1,473,054 1,228,497 1,128,732 1,080,131 1,252,843
Net loans receivable . . . . . . . . . . . . 1,055,876 952,359 821,875 646,709 726,501
Nonperforming assets . . . . . . . . . . . . 8,091 9,701 24,520 43,593 56,056
Mortgage-backed securities . . . . . . . . . 251,256 127,709 151,293 171,983 241,040
Excess of cost over net assets of
association acquired. . . . . . . . . . . -- -- 384 845 36,380
Mortgage servicing rights . . . . . . . . . 1,443 1,113 968 9,870 29,198
Deposits . . . . . . . . . . . . . . . . . . 964,133 922,932 817,674 844,012 916,644
Borrowings . . . . . . . . . . . . . . . . . 404,037 216,295 226,956 101,648 174,232
Stockholders' equity . . . . . . . . . . . . 86,121 71,979 58,325 56,887 101,789
Per share. . . . . . . . . . . . . . . . 10.32 9.63 7.86 7.67 23.09
Tangible stockholders' equity. . . . . . . . 85,110 70,855 58,264 57,049 67,323
Per share. . . . . . . . . . . . . . . . 10.20 9.48 7.85 7.69 15.27
Number of offices . . . . . . . . . . . . . 48 46 41 38 40
SELECTED RATIOS:
Return on average assets . . . . . . . . . . 0.67% 0.89% 0.31% (5.47)% 0.28%
Return on average equity . . . . . . . . . . 11.58 16.01 5.97 (74.99) 4.05
Average equity to average assets . . . . . . 5.77 5.53 5.26 7.29 6.89
Net interest margin. . . . . . . . . . . . . 3.26 3.04 2.31 1.95 2.28
General and administrative expenses
to average assets . . . . . . . . . . . . 2.34 2.44 2.48 2.30 1.83
Nonperforming assets to total assets . . . . 0.55 0.79 2.17 4.04 4.47
Allowance for loan losses to
nonperforming loans . . . . . . . . . . . 166.77 122.21 46.38 38.21 34.79
Allowance for loan losses to total loans . . 1.03 1.05 1.01 1.76 2.10
Net loan charge-offs to average loans. . . . 0.01 0.07 0.43 0.59 0.42
Tangible capital ratio . . . . . . . . . . . 5.11 5.41 5.05 4.89 4.32
Core capital ratio . . . . . . . . . . . . . 5.11 5.41 5.09 4.97 5.32
Risk-based capital ratio . . . . . . . . . . 9.94 10.45 10.08 10.21 10.57
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).
4
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 financial services through its community banking offices in
Michigan and consumer loan origination network in the Great Lakes states. This
discussion highlights important trends and events that have shaped the
Company's financial performance in 1996.
In 1996, D&N reported income, before one-time regulatory charges, of $13.1
million, or $1.58 per fully diluted share. Net income in 1995 was $10.4 million
or $1.31 per share and in 1994 the Company earned $3.4 million or $0.46 per
share.
D&N Bank incurred a one-time charge in 1996 as its mandated contribution to
replenish the Federal Deposit Insurance Corporation's (FDIC) depleted Savings
Association Insurance Fund (SAIF). The third quarter assessment was $5.5
million before consideration of its impact on federal taxes, and is expected to
reduce the Bank's annual deposit insurance premiums by approximately $1.6
million.
Also during the third quarter of 1996, the Bank recognized a $500,000
adjustment to its balance of deferred tax assets following the enactment in
August of federal legislation which resolved the recapture status of previously
allowed accelerated deductions for bad debts. Historically, thrift institutions
such as the Bank had been permitted to deduct a portion of their income as bad
debt allowances. This practice was more advantageous than the specific-loss
method of deduction which was mandated for other classes of financial
institutions. The opportunity to use the percentage-of-income method expired in
1995, but the status of previously accelerated deductions remained in question
until the 1996 legislation was enacted. Notably, the presence of unresolved
prior deductions was felt to be a hindrance to evolution and consolidation of
the financial services industry because thrift institutions that had recorded
such accelerated deductions were required to repay them before charter
conversions or acquisitions by non-thrift institutions could be approved. The
new legislation required that accelerated deductions recorded after 1987 would
have to be repaid, but forgave that portion of institutions' accelerated loan
loss deductions that were recorded before 1988.
Including the non-recurring charges associated with the recapitalization of the
SAIF and the recapture of previously recorded post-1987 bad debt deductions,
the Company's net income for 1996 was $9.0 million or $1.09 per fully-diluted
share.
On December 31, 1996, the Company's balance sheet included total assets of
$1.47 billion, compared to $1.23 billion at the end of 1995. This 20% growth
reflected primarily the Bank's loan origination success, with $518 million of
new loans funded in 1996. Outstanding loan balances totaled $1.07 billion at
December 31, 1996, an increase of 11% during the year. Mortgage backed
securities also increased by 97% to $251 million as the Bank securitized $120
million of its residential mortgage loan production with the Federal National
Mortgage Association (FNMA or Fannie Mae).
Equity and capital support for D&N's robust growth in 1996 came from the
retention of earnings and as a consequence of the Bank's merger, in April, with
Macomb Federal Savings Bank (Macomb). The acquisition, accounted for as a
pooling of interests, added retail deposits, a quality loan portfolio, and a
prime community banking location in St. Clair Shores, Michigan to the D&N
franchise. In addition, the strong capital base of Macomb helped to support the
robust loan production that D&N experienced throughout its networks.
In 1996 the Company made provisions for loan losses of $1.1 million, after
making provisions of $2.4 million and $100,000 in 1995 and 1994, respectively.
At December 31, 1996, the allowance for loan losses was $11.0
12
3
million, or 1.03% of outstanding loans. D&N's portfolio of nonperforming assets
declined during 1996 by $1.6 million or 17% to $8.1 million. At December 31,
1996, the allowance for loan losses was 167% of the loans deemed to be
nonperforming. This ratio was 122% in 1995 and 46.4% in 1994.
Noninterest income from operations increased by 14.7% in 1996 after
experiencing a decline in 1995. In 1994 the Company sold a substantial portion
of its portfolio of purchased mortgage loan servicing rights, and focused its
servicing efforts on its own customers' loans. The increases in both loan
related and deposit related fee income experienced in 1996 reflects the
successful implementation of servicing strategies designed to complement the
Company's community banking focus.
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 1996 as the average size of the Company's
earning assets grew substantially. Interest income increased by $13.5 million,
or 14.9%, in 1996. The average yield on earning assets increased by 2 basis
points to 7.95% in 1996, from 7.93% in 1995. In 1994, earning assets yielded
6.95%. Driving the interest income gains in 1996 was D&N's 14.7% increase in
average earning balances, while 1995's gains were more evenly attributable to
larger balances and higher average earning rates.
Interest expense increased by $5.5 million, or 9.9%, in 1996 as the average
balance of interest-bearing liabilities increased by 14.6%, more than
off-setting the 22 basis point decrease in the average rate paid on those
liabilities. In 1996, interest-bearing liabilities had an average cost of
4.93%, compared to 5.15% in 1995 and 4.89% in 1994. Because the average yield
on interest-earning assets increased and the average cost of interest-bearing
liabilities decreased in 1996, the Company's interest rate spread increased
from 2.79% in 1995 to 3.02% in 1996. In 1994 the spread was 2.06%. Similarly,
the Bank's net interest margin, or ratio of net interest income to average
interest-earning assets, increased from 3.04% in 1995 to 3.26% in 1996. In 1994
the net interest margin was 2.31%. Average interest-earning assets exceeded
average interest-bearing liabilities by $64.5 million in 1996 compared to $55.3
million in 1995 and $52.1 million in 1994.
Spread and margin improvements in 1996 reflect the expiration, in late 1995, of
the last of the Company's portfolio of interest rate exchange agreements. In
1995 those contracts added 23 basis points to the average cost of interest
bearing liabilities, while the burden was 100 basis points in 1994.
Average balances of loans outstanding were higher in 1996 than 1995, 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 $169.7 million, or 19.0%;
mortgage-backed securities increased by $6.5 million, or 4.6%; and investment
securities declined by $7.6 million, or 6.8%. Average earning rates on loans
and mortgage-backed securities were lower in 1996 than 1995, while the average
earning rate on the investment portfolios increased modestly. In 1996, loans
earned an average yield of 8.11% compared to 8.13% in 1995. Mortgage-backed
securities earned an average of 7.46% in 1996, versus an average rate of 7.55%
in 1995. Investment securities earned 6.96% in 1996, up from 6.85% in 1995.
Even though average loan yields fell from the previous year, overall
earning-asset performance increased as a greater proportion of the
earning-asset portfolio was comprised of more profitable loan assets in 1996
than in 1995.
13
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (continued)
The average balances of loan assets and mortgage-backed securities also
increased from 1994 to 1995. As in 1996, average investment balances fell in
1995, reflecting the Company's application of surplus liquidity assets to fund
loan growth.
Average deposit balances increased 10.1% to $938 million in 1996, from $852
million in 1995. The average cost of deposits increased 14 basis points, to
4.67%, in 1996, from 4.53% in 1995. From 1994 to 1995, average deposit balances
increased by $30 million, or 3.7%. In 1994, the average cost of deposits was
3.63%.
The average balance of borrowed funds increased by 31.0%, to $310 million in
1996, from $236 million in 1995. In 1994, the average balance of borrowed funds
was $155 million.
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:
Years Ended December 31, 1996 and 1995
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Average balance (1) Average rate Interest Variance due to: (2)
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Increase
1996 1995 1996 1995 1996 1995 (Decrease) Volume Rate
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans (3) . . . . . . . . . . . . $1,062,108 $ 892,364 8.11% 8.13% $ 86,151 $72,550 $13,601 $13,767 ($166)
Mortgage-backed securities (4) 146,560 140,093 7.46 7.55 10,930 10,577 353 484 (131)
Investments and deposits (4) 103,848 111,476 6.96 6.85 7,228 7,638 (410) (525) 115
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1,312,516 1,143,933 7.95 7.93 104,309 90,765 13,544 13,726 (182)
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Interest-bearing liabilities:
Deposits . . . . . . . . . . . . 938,484 852,382 4.67 4.53 43,859 38,639 5,220 4,020 1,200
Borrowings . . . . . . . . . . . 309,516 236,242 5.71 6.29 17,687 14,855 2,832 4,283 (1,451)
Interest rate instruments . . . . -- -- -- 0.23 -- 2,521 (2,521) -- (2,521)
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1,248,000 1,088,624 4.93 5.15 61,546 56,015 5,531 8,303 (2,772)
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Interest rate spread . . . . . . . . 3.02 2.79
Excess average earning assets. . . . $ 64,516 $ 55,309 7.95% 7.93%
==================================
Net interest margin . . . . . . . . 3.26% 3.04% $ 42,763 $34,750 $ 8,013 $ 5,423 $2,590
===========================================================
Years Ended December 31, 1995 and 1994
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Average balance (1) Average rate Interest Variance due to:(2)
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Increase
1995 1994 1995 1994 1995 1994 (Decrease) Volume Rate
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(Dollars in thousands)
Interest-earning assets:
Loans (3) . . . . . . . . . . . . $ 892,364 $ 769,733 8.13% 7.57% $72,550 $58,274 $14,276 $9,744 $4,532
Mortgage-backed securities (4) 140,093 135,669 7.55 5.80 10,577 7,875 2,702 264 2,438
Investments and deposits (4) 111,476 124,271 6.85 4.40 7,638 5,462 2,176 (611) 2,787
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1,143,933 1,029,673 7.93 6.95 90,765 71,611 19,154 9,397 9,757
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Interest-bearing liabilities:
Deposits . . . . . . . . . . . . 852,382 822,112 4.53 3.63 38,639 29,806 8,833 1,134 7,699
Borrowings . . . . . . . . . . . 236,242 155,420 6.29 5.28 14,855 8,207 6,648 4,854 1,794
Interest rate instruments . . . . -- -- 0.23 1.00 2,521 9,812 (7,291) -- (7,291)
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1,088,624 977,532 5.15 4.89 56,015 47,825 8,190 5,988 2,202
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Interest rate spread . . . . . . . . 2.79 2.06
Excess average earning assets. . . . $ 55,309 $ 52,141 7.93% 6.95%
==================================
Net interest margin 3.04% 2.31% $34,750 $23,786 $10,964 $3,409 $7,555
===========================================================
(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.
14
5
In 1995 and 1994, D&N's interest expense included the net costs of interest
rate hedging instruments. During 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. During 1994, these
costs totaled $9.8 million. The swap contracts, originally executed as hedges
against rising interest rates, have expired, with the final contract maturing
in November of 1995.
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 non-recurring gains and losses from events such as securities
sales and sales of non-earning and depreciated assets.
D&N's loan and deposit-related fee income totaled $5.5 million in 1996, up
$506,000 or 10.1% from 1995, reflecting primarily the Bank's successful
introduction of a new line of retail checking account products.
In 1996, net loan servicing and administrative fees were unchanged from 1995 at
$1.9 million. Deposit-related fees, on the other hand, increased by 15.1% in
1996.
Gains on sales of loans totaled $1.0 million in 1996, up from $882,000 in 1995.
In 1996, $66.1 million of D&N's residential mortgages were sold to secondary
market investors, compared to $67.4 million in 1995. In each year, D&N Bank
retained the rights to service all of these loans.
Other income increased from $222,000 in 1995 to $470,000 in 1996 as D&N Bank's
subsidiary, Quincy Insurance Agency, successfully initiated sales of annuities
and other investment products.
NONINTEREST EXPENSE
General and administrative expenses in 1996 included $1.4 million of
non-recurring costs associated with the Bank's merger with Macomb Federal
Savings Bank. Excluding these costs, general and administrative expenses were
up by $1.5 million, or 5.1%, in 1996, following an increase of $2.0 million, or
7.6% in 1995. These increases reflect the costs of D&N's expanding retail
delivery network, as the number of Bank and D&N Mortgage Company offices
increased from 41 at the end of 1994 to 48 at the end of 1996.
In 1996, noninterest expense included $71,000 of net operating costs related to
other real estate owned (OREO). In 1995 and 1994, net recoveries on sales of
OREO properties exceeded operating costs resulting in credits in this category
of $1.0 million and $2.1 million, respectively.
In 1995 and 1994, D&N's noninterest expense included amortization costs for
goodwill associated with the Company's 1982 merger with First Federal Savings
and Loan Association of Flint, Michigan.
Excluding the FDIC's SAIF recapitalization assessment of $5.5 million, deposit
insurance premiums in 1996 were $2.4 million, unchanged from the 1995 level,
and down from $2.6 million in 1994.
INCOME TAXES
The Company's effective income tax rates were 3.74% in 1996, (19.16%) in 1995,
and 4.25% in 1994, primarily as a result of reductions in each year of a
portion of the valuation allowance for deferred tax assets provided in prior
years, when the Company incurred substantial net operating losses. The
valuation allowance has been eliminated as of December 31, 1996.
15
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (continued)
FINANCIAL CONDITION
BALANCE SHEET TRENDS
At December 31, 1996, D&N's assets totaled $1.47 billion, an increase of $245
million, or 20%, from the previous year end. The Company's balance sheet growth
has been fueled by substantial loan production and increased capitalization.
In 1996, net loans receivable increased by $104 million, or 10.9%, reflecting
continued strong demand for the Company's consumer loan products. Balances of
mortgage-backed securities increased $124 million, or 97%, primarily as a
consequence of securitization of $120 million of the Bank's residential
mortgage loans. All of the servicing rights for sold and securitized mortgages
were retained, resulting in an increase in the balances of loans serviced for
others from $278 million to $415 million during the year.
The Company's liabilities increased by 20%, or $230 million, to $1.39 billion
at December 31, 1996, compared to $1.16 billion at the end of 1995. Overall
deposit balances increased by 4.5%, or $41.2 million, while core deposits
experienced a 5.7% increase from $327.4 million at December 31, 1995, to $346.1
million at year end 1996. Borrowed funds increased by 87%, or $188 million, in
1996, while advance payments by borrowers and investors held in escrow
increased from $11.3 million to $11.8 million.
In 1996, D&N's stockholders' equity rose from $72.0 million to $86.1 million.
Profitable operations contributed $9.0 million to the Company's retained
earnings while the exercise of warrants and options resulted in $5.5 million of
net capital contributions in 1996. An additional source of equity in 1996 was
$1.2 million of excess market value attributable to investment and
mortgage-backed securities held for sale. 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 Income.
Under its federal charter, the Bank must maintain adequate levels of capital to
assure the safety and soundness of its operations. At December 31, 1996, the
Bank had a tangible capital ratio of 5.11%, a core capital ratio of 5.11%, and
a risk-based capital ratio of 9.94%. D&N Bank'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 1996, those
minimum standards were tangible capital of 1.50%, core capital of 3.0% (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 maintain. 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, 1996,
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 1996, the Bank's average
liquidity ratio was 6.61%, down from the December 1995 ratio of 8.3%.
16
7
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 residential 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 security
and mortgage loan collateral, D&N had approximately $180 million of unused
borrowing capacity at December 31, 1996.
LOAN PORTFOLIO
The following table categorizes the Bank's loans receivable for the past five
years:
December 31
-----------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential mortgages . . . . . . . . . $ 600,923 $597,892 $526,572 $387,252 $457,196
Mortgages on income-producing property 85,619 89,176 115,162 131,372 173,122
Construction loans . . . . . . . . . . 39,673 41,056 19,900 12,558 2,222
Consumer loans . . . . . . . . . . . . 339,268 239,459 170,939 134,644 119,461
Commercial loans . . . . . . . . . . . 12,345 7,769 4,748 -- --
Allowance for losses. . . . . . . . . . (11,042) (10,081) (8,349) (11,570) (15,611)
Discounts, deferrals and other. . . . . (10,910) (12,912) (7,097) (7,547) (9,889)
-----------------------------------------------------
$1,055,876 $952,359 $821,875 $646,709 $726,501
=====================================================
D&N's investment in loans increased by $104 million, or 10.9%, in 1996.
Consumer loans and commercial loans experienced the most significant percentage
increases, while residential mortgages grew at a more modest rate. The Bank's
investment in mortgages on income-producing properties decreased for the sixth
consecutive year and the year-end balance of construction loans was down
slightly from the previous year. Consumer loans increased by $99.8 million, or
41.7% in 1996. Commercial loans increased by $4.6 million, or 58.9%, while
residential mortgage loans increased during the year by $3.0 million, or 0.5%.
Mortgages on income-producing properties decreased by $3.6 million, or 4.0%, as
construction loan balances declined by $1.4 million, or 3.4%. At the end of
1996, 44% of the Company's loan balances were in consumer or commercial-related
loans, compared to a 38% weighting at the end of 1995.
D&N originated $518 million of loans in 1996, up $113 million, or 28.0% from
$405 million originated in 1995. Aggregate mortgage loan production was $228
million, an increase of $24 million, or 11.9%, from 1995. Construction lending
accounted for $42.9 million of this total, up 8.6% from $39.5 million in 1995.
Consumer loan production totaled $272 million in 1996, up by $76.5 million, or
39.2%, from 1995. Within the consumer category, home equity credit line (HECL)
production was again strong, increasing by $12.8 million, or 23.4%, over 1995.
CREDIT RISK MANAGEMENT AND PROVISION FOR
LOSSES ON LOANS AND OTHER ASSETS
At December 31, 1996, the Company's nonperforming assets totaled $8.1 million,
down from $9.7 million at the end of the previous year and $24.5 million at the
end of 1994. The 1996 balance was comprised of $6.6 million of nonperforming
loans and $1.5 million of other real estate owned (OREO). At the end of 1996,
nonperforming loans comprised just 0.62% of the loan portfolio, and the
allowance for loan losses stood at 167% of the total balances of nonperforming
loans.
17
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (continued)
The following table traces the Company's nonperforming asset experience for the
last five years:
December 31
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nonaccruing loans............................... $6,621 $8,225 $17,995 $30,102 $44,703
Accruing loans delinquent more than 90 days..... -- 24 5 13 --
Restructured loans.............................. -- -- -- 166 167
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Total nonperforming loans....................... 6,621 8,249 18,000 30,281 44,870
Other real estate owned (OREO).................. 1,470 1,452 6,520 13,312 11,186
----------------------------------------------------------------------------
Total nonperforming assets................... $8,091 $9,701 $24,520 $43,593 $56,056
============================================================================
Nonperforming loans as a percentage
of total loans............................... 0.62% 0.86% 2.17% 4.60% 6.05%
============================================================================
Nonperforming assets as a percentage of
total assets................................. 0.55% 0.79% 2.17% 4.04% 4.47%
============================================================================
Allowance for loan losses as a percentage of
nonperforming loans.......................... 166.77% 122.21% 46.38% 38.21% 34.79%
============================================================================
Allowances for loan and OREO losses as a
percentage of nonperforming assets........... 136.47% 105.29% 35.40% 28.03% 30.08%
============================================================================
Allowances for losses on the loan portfolio increased by $1.0 million in 1996.
Losses of $1.5 million were charged off and $1.4 million were recovered, as new
provisions for loan losses of $1.1 million were recorded during the year. At
December 31, 1996, the allowance for loan losses was $11.0 million, 1.03% of
the total outstanding loan portfolio balance.
The following table details the changes in the Company's allowance for loan
losses for the last five years:
Year Ended December 31
-------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of period............................ $10,081 $ 8,349 $11,570 $15,611 $18,744
Charge-offs:
Residential mortgages.................................. 314 169 110 1,136 329
Mortgages on income-producing property................. -- 1,019 3,109 2,584 2,180
Commercial loans....................................... -- -- -- -- --
Consumer loans......................................... 1,216 999 773 681 1,000
-------------------------------------------------------------------
1,530 2,187 3,992 4,401 3,509
Recoveries:
Residential mortgages.................................. 3 917 9 25 --
Mortgages on income-producing property................. 1,098 245 300 8 3
Commercial loans....................................... -- -- -- -- --
Consumer loans......................................... 290 357 362 327 256
-------------------------------------------------------------------
1,391 1,519 671 360 259
Net charge-offs........................................... 139 668 3,321 4,041 3,250
Provision charged to operations........................... 1,100 2,400 100 -- 117
-------------------------------------------------------------------
Balance at end of period.................................. $11,042 $10,081 $ 8,349 $11,570 $15,611
===================================================================
Net charge-offs as a percentage of average loans.......... 0.01% 0.07% 0.43% 0.59% 0.42%
===================================================================
Allowance for loan losses as a percentage
of total loans......................................... 1.03% 1.05% 1.01% 1.76% 2.10%
===================================================================
18
9
At the end of 1996, $6.3 million of the allowance for loan losses was allocated
to the commercial real estate mortgage portfolio while $3.5 million of the
allowance was allocated to the consumer loan portfolio. The following table
summarizes the allocation of the allowance for loan losses among the Company's
assets in each of the past five years:
December 31
---------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------
PERCENTAGE Percentage Percentage
OF LOANS of loans of loans
AMOUNT TO TOTAL Amount to total Amount to total
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential mortgages................... $ 859 57% $ 1,170 63% $ 813 63%
Mortgages on income-producing property.. 6,314 10 6,115 11 6,423 17
Commercial loans........................ 400 1 400 1 -- --
Consumer loans.......................... 3,469 32 2,396 25 1,113 20
-----------------------------------------------------------------------
$11,042 100% $10,081 100% $8,349 100%
=======================================================================
--------------------------------------------------
1993 1992
--------------------------------------------------
Percentage Percentage
of loans of loans
Amount to total Amount to total
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential mortgages................... $ 429 60% $ 380 63%
Mortgages on income-producing property.. 9,617 19 13,353 21
Commercial loans........................ -- -- -- --
Consumer loans.......................... 1,524 21 1,878 16
----------------------------------------------
$11,570 100% $15,611 100%
==============================================
ANALYSIS OF CASH FLOWS
The Company's balances of cash and cash equivalents declined from $22.4 million
to $12.8 million in 1996. During the year, $235 million of cash was provided
from financing activities, primarily from expanded borrowings and increases in
customers' deposit balances. Investing activities utilized $272 million of
available cash and cash equivalents as loan purchases, mortgage-backed security
purchases, and purchases of investment securities exceeded repayments in these
categories. Operating activities provided $27.0 million of net cash in 1996.
ASSET/LIABILITY MANAGEMENT
The Company's objectives for the management of assets and liabilities include
achieving and maintaining adequate and stable levels of both net interest
income and market value for the Company's net assets. The level of net interest
income that can be attained is enhanced by 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 is enhanced across various interest rate scenarios by properly
matching maturity structures of assets and liabilities.
19
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (continued)
The Company employs various tools, including gap analysis, duration analysis
and simulation analysis, to assess the sensitivity of its net interest income
and MVPE to changes in interest rates. D&N's cumulative gap analysis for
December 31, 1996 is presented in the following table:
Maturity
------------------------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Cash and due from banks/others............... $ 12,789 $ -- $ -- $ -- $ 12,789
Investment securities........................ 23,003 50,255 24,178 22,341 119,777
Mortgage-backed certificates................. 16,455 51,140 94,574 89,087 251,256
Net loans receivable......................... 232,114 327,417 476,162 20,183 1,055,876
Other assets................................. 5,547 6,967 3,608 17,234 33,356
----------------------------------------------------------------------
Total assets............................ $ 289,908 $ 435,779 $598,522 $148,845 $1,473,054
======================================================================
Liabilities:
Deposits..................................... $ 181,095 $ 335,659 $312,376 $135,003 $ 964,133
FHLB advances and other borrowed money....... 299,280 60,719 43,035 1,003 404,037
Escrow funds................................. -- -- -- 11,808 11,808
Other liabilities............................ -- -- -- 6,955 6,955
----------------------------------------------------------------------
Total liabilities....................... 480,375 396,378 355,411 154,769 1,386,933
----------------------------------------------------------------------
Stockholders' Equity:
Common stock................................. -- -- -- 84 84
Additional paid-in capital................... -- -- -- 55,452 55,452
Retained earnings and other.................. -- -- -- 30,811 30,811
Treasury stock............................... -- -- -- (226) (226)
----------------------------------------------------------------------
Total liabilities and equit............. $ 480,375 $ 396,378 $355,411 $240,890 $1,473,054
======================================================================
Reprice difference.............................. $(190,467) $ 39,401 $243,111 $(92,045)
Cumulative gap.................................. $(190,467) $(151,066) $ 92,045 --
Percent of total assets......................... (12.93)% (10.26)% 6.25% --
======================================================================
For each maturity category in the table above, the difference between
interest-earning assets and interest-bearing liabilities reflects an imbalance
between repricing opportunities for the two sides of the balance sheet. The
consequence of a negative cumulative gap at the end of one year suggests that,
if interest rates were to fall, the Company's earnings stream would be enhanced
as more liability balances would reprice to lower rates than would asset
balances. Similarly, the negative cumulative gap suggests that if interest
rates were to rise, liability costs would increase more quickly than asset
yields, placing negative pressure on earnings.
With a cumulative one-year gap of -10.3%, D&N's balance sheet is somewhat
liability sensitive. At year-end, however, 46.0% of the Bank's loan portfolio
carried variable or adjustable interest rates, and a growing proportion of the
fixed-rate loan portfolio was comprised of relatively shorter-term installment
consumer loans.
The balances presented reflect contractual repricings for certificates of
deposit. Certain demand deposit accounts and regular savings accounts, however,
have been classified as repricing beyond one year. While these accounts are
subject to immediate withdrawal, experience has shown them to be relatively
rate insensitive. If these accounts were included in the 0-3 month category,
the gap in that time frame would be negative $379 million and the cumulative
gap at twelve months would be negative $317 million.
20
11
SIGNIFICANT LITIGATION
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) was passed, significantly altering the regulatory environment in which
depository institutions in general, and the Company in particular, would
subsequently operate. A provision of the Act provided for the elimination, over
time, of one form of regulatory capital that many institutions, including D&N
Bank, had utilized in their capital structures. The phased elimination of
supervisory goodwill, an intangible asset previously created when Companies
such as D&N acquired weaker institutions at the request of Government-sponsored
deposit insurance funds, resulted in many of the affected companies
experiencing capital shortfalls. In D&N's case, $42 million of unamortized
supervisory goodwill was permitted to be counted as regulatory capital in 1989
at the time of the Act's passage, while $37 million remained in 1993 when its
phase-out as qualifying capital was complete. The loss of this significant
portion of D&N's regulatory capital base precipitated drastic changes in the
Company's strategic plans, including the 56% shrinkage of the balance sheet
from $2.3 billion in 1988 to $1.0 billion in 1993, the closure of the Company's
national network of mortgage origination offices, the elimination of many jobs,
and the cessation of stockholder dividends.
A number of institutions, including D&N, that were adversely affected by the
FIRREA legislation subsequently initiated legal actions against the United
States. The institutions have claimed that the inducements offered by federal
regulatory agencies to acquire weakened or insolvent thrifts constituted
contractual guarantees that the goodwill created through the acquisition
transactions would qualify as regulatory capital. FIRREA's mandated phase-out
of regulatory capital treatment for supervisory goodwill, then, has been
alleged to be a breach of a contract right. The United States Court of Federal
Claims has registered approximately 120 similar cases, including D&N's, which
seek damages for such breach.
Early cases were bifurcated into questions of liability and damages, with the
trial courts reasoning that, until the question of the government's liability
was unequivocally established, efforts to determine damages or to develop
damage theories were potentially irrelevant. Three early cases have proceeded
through the Court of Claims, and after consolidation, through the Federal
Circuit of the United States Court of Appeals, and the United States Supreme
Court. In July of 1996, the Supreme Court found generally that the United
States was liable for damages under a theory of contractual breach, and that
claims of governmental immunity were not applicable in these cases. The cases
were remanded to the Court of Claims where arguments concerning the extent of
damages are scheduled to begin on March 17, 1997.
In consideration of the complexities of the pending litigation, the similarity
of issues in the various cases, and the potential magnitude of the damage
amounts that might ultimately be awarded, the Court of Claims has issued a case
management order on the remaining cases, in essence creating an orderly
procedure for these lawsuits to proceed. At this time estimation of potential
damages from this action is speculative.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for the subject matter based on consistent application of a financial
component's approach that focuses on control. The standard will be adopted
effective January 1, 1997 and is not expected to have any material effect on
the financial statements.
In March 1997, the FASB issued SFAS 128, "Earnings Per Share". SFAS 128
supersedes APB 15, "Earnings Per Share", and simplifies the computation of
earnings per share ("EPS") by replacing the "primary" EPS requirements of APB
15 with a "basic" EPS computation based upon weighted shares outstanding. The
new standard requires a dual presentation of basic and diluted EPS. Diluted EPS
is similar to "fully diluted" EPS required under APB 15. The Company will adopt
the provisions of this statement, as required, in 1997.
21
12
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, 1996 and 1995, and the related
Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each
of the three years in the period ending December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ending December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand LLP
Detroit, Michigan
January 22, 1997
22
13
CONSOLIDATED STATEMENTS OF CONDITION
D&N FINANCIAL CORPORATION
December 31
----------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Cash and due from banks........................................................ $ 2,847 $ 9,264
Federal funds sold............................................................. 8,600 --
Interest-bearing deposits in other banks....................................... 1,342 13,176
---------------------------
Total cash and cash equivalents............................................ 12,789 22,440
Investment securities
(market value of $60,783,000 in 1996 and $55,368,000 in 1995).............. 60,739 55,239
Investment securities available for sale (at market value)..................... 59,038 41,197
Mortgage-backed securities
(market value of $213,304,000 in 1996 and $73,647,000 in 1995)............. 214,690 72,668
Mortgage-backed securities available for sale (at market value)................ 36,566 55,041
Loans receivable (including loans held for sale of $5,218,000 in 1996
and $21,713,000 in 1995).................................................. 1,066,918 962,440
Allowance for loan losses...................................................... (11,042) (10,081)
---------------------------
Net loans receivable....................................................... 1,055,876 952,359
Other real estate owned, net................................................... 1,470 1,319
Federal income taxes........................................................... 6,002 5,374
Office properties and equipment, net........................................... 15,764 14,850
Other assets................................................................... 10,120 8,010
---------------------------
$ 1,473,054 $ 1,228,497
===========================
LIABILITIES
Checking and NOW accounts...................................................... $ 107,550 $ 91,621
Money market accounts.......................................................... 89,321 86,080
Savings deposits............................................................... 149,226 149,728
Time deposits.................................................................. 617,102 594,044
Accrued interest............................................................... 934 1,459
---------------------------
Total deposits............................................................. 964,133 922,932
Securities sold under agreements to repurchase................................. 58,040 --
FHLB advances and other borrowed money......................................... 345,997 216,295
Advance payments by borrowers and investors held in escrow..................... 11,808 11,329
Other liabilities.............................................................. 6,955 5,962
---------------------------
Total liabilities.......................................................... 1,386,933 1,156,518
STOCKHOLDERS'EQUITY
Preferred stock (1,000,000 shares authorized; none issued)..................... -- --
Common stock, $.01 par value per share (shares authorized - 25,000,000;
shares outstanding - 8,370,494 in 1996 and 7,497,305 in 1995).............. 84 75
Additional paid-in capital..................................................... 55,452 49,936
---------------------------
Total paid-in capital...................................................... 55,536 50,011
Retained earnings - substantially restricted................................... 29,568 20,573
Less: Cost of Treasury stock (22,339 shares in 1996 and 21,456 in 1995)....... (226) (257)
Less: Leveraged ESOP debt...................................................... -- (63)
Unrealized holding gains on debt securities available for sale, net of tax..... 1,243 1,715
---------------------------
Total stockholders' equity................................................. 86,121 71,979
---------------------------
$ 1,473,054 $ 1,228,497
===========================
See Notes to Consolidated Financial Statements.
23
14
CONSOLIDATED STATEMENTS OF INCOME
D&N FINANCIAL CORPORATION
Year Ended December 31
--------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share )
INTEREST INCOME
Loans.......................................................... $ 86,151 $ 72,550 $ 58,274
Mortgage-backed securities..................................... 10,930 10,577 7,875
Investments and deposits....................................... 7,228 7,638 5,462
-----------------------------------------
TOTAL INTEREST INCOME...................................... 104,309 90,765 71,611
INTEREST EXPENSE
Deposits....................................................... 43,859 38,639 29,806
Securities sold under agreements to repurchase................. 2,193 1,450 808
FHLB advances and other borrowed money......................... 15,494 13,405 7,399
Interest rate instruments...................................... -- 2,521 9,812
-----------------------------------------
TOTAL INTEREST EXPENSE..................................... 61,546 56,015 47,825
-----------------------------------------
NET INTEREST INCOME........................................ 42,763 34,750 23,786
Provision for loan losses...................................... 1,100 2,400 100
-----------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS.......... 41,663 32,350 23,686
NONINTEREST INCOME
Loan servicing and administrative fees, net.................... 1,914 1,882 2,228
Deposit related................................................ 3,621 3,147 3,098
Gain on sale of loans held for sale............................ 1,031 882 227
Other.......................................................... 470 222 1,173
-----------------------------------------
TOTAL OPERATING NONINTEREST INCOME......................... 7,036 6,133 6,726
Gain (loss) on investment securities available for sale........ 188 (120) (221)
Gain on sale of loans and mortgage-backed securities
available for sale......................................... -- 899 843
Gain on sale of loan servicing rights.......................... -- -- 140
-----------------------------------------
TOTAL NONINTEREST INCOME................................... 7,224 6,912 7,488
NONINTEREST EXPENSE
Compensation and benefits...................................... 16,881 15,732 14,581
Occupancy...................................................... 2,834 2,273 1,987
Other expense.................................................. 11,863 10,713 10,122
-----------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSE......................... 31,578 28,718 26,690
Other real estate owned, net................................... 71 (999) (2,136)
Amortization of intangibles.................................... -- 370 448
FDIC insurance................................................. 7,894 2,431 2,639
-----------------------------------------
TOTAL NONINTEREST EXPENSE.................................. 39,543 30,520 27,641
-----------------------------------------
INCOME BEFORE INCOME TAX EXPENSE........................... 9,344 8,742 3,533
Federal income tax expense (credit)............................ 349 (1,675) 150
-----------------------------------------
NET INCOME................................................. $ 8,995 $ 10,417 $ 3,383
=========================================
Earnings per common and common equivalent share:
Primary.................................................... $ 1.11 $ 1.35 $ 0.46
=========================================
Fully Diluted.............................................. $ 1.09 $ 1.31 $ 0.46
=========================================
See Notes to Consolidated Financial Statements.
24
15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
D&N FINANCIAL CORPORATION
Unrealized
Holding
Gains
Treasury (Losses) on
Additional Stock & Leveraged Securities Total
Common Paid-In Retained Treasury ESOP Available Stockholders'
Stock Capital Earnings Warrants Debt for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance December 31, 1993................... $ 74 $ 49,580 $ 6,773 $ (213) $ (135) $ 808 $ 56,887
Net income.................................. -- -- 3,383 -- -- -- 3,383
Issuance of common stock
upon exercise of stock options
and warrants - 1,390 shares........... -- 11 -- -- -- -- 11
Reduction of leveraged ESOP debt............ -- -- -- -- 36 -- 36
Change in value of securities
available for sale.................... -- -- -- -- -- (1,992) (1,992)
--------------------------------------------------------------------------------
Balance December 31, 1994................... $ 74 $ 49,591 $ 10,156 $ (213) $ (99) $(1,184) $ 58,325
Net income.................................. -- -- 10,417 -- -- -- 10,417
Issuance of common stock upon
exercise of stock options and
warrants - 55,351 shares.............. 1 345 -- -- -- -- 346
Purchase of 10,000 warrants................. -- -- -- (44) -- -- (44)
Reduction of leveraged ESOP debt............ -- -- -- -- 36 -- 36
Change in value of securities
available for sale.................... -- -- -- -- -- 2,899 2,899
--------------------------------------------------------------------------------
Balance December 31, 1995................... $ 75 $ 49,936 $ 20,573 $ (257) $ (63) $ 1,715 $ 71,979
Net income.................................. -- -- 8,995 -- -- -- 8,995
Issuance of common stock upon
exercise of stock options
and warrants - 873,189 shares......... 9 9,046 -- -- -- -- 9,055
Net purchase of Treasury stock
and warrants.......................... -- -- -- (3,499) -- -- (3,499)
Reissuance of 232,955
Treasury shares....................... -- (3,530) -- 3,530 -- -- --
Reduction of leveraged ESOP debt............ -- -- -- -- 63 -- 63
Change in value of securities
available for sale.................... -- -- -- -- -- (472) (472)
--------------------------------------------------------------------------------
Balance December 31, 1996................... $ 84 $ 55,452 $ 29,568 $ (226) $ -- $ 1,243 $ 86,121
================================================================================
See Notes to Consolidated Financial Statements.
25
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N FINANCIAL CORPORATION
Year Ended December 31
--------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income............................................................ $ 8,995 $ 10,417 $ 3,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses............................................ 1,100 2,400 100
Depreciation and amortization of office properties and equipment..... 1,954 1,843 1,841
Amortization of net premiums (discounts) on purchased
loans and securities................................................ (73) (2,395) 1,132
Originations and purchases of loans held for sale.................... (56,132) (91,203) (15,432)
Proceeds from sales of loans held for sale........................... 73,658 75,928 48,181
(Gain) loss on investment securities available for sale.............. (188) 120 221
Gain on loans and mortgage-backed securities available for sale...... -- (899) (843)
Gain on sale of loan servicing rights................................ -- -- (140)
Amortization and writedowns of mortgage servicing rights............. 300 476 1,754
Other................................................................ (2,635) (7,888) 2,657
------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES................... 26,979 (11,201) 42,854
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale...... 298 10,070 20,779
Proceeds from maturities of investment securities.................... 83,970 44,025 138,879
Purchases of investment securities to be held to maturity............ (107,012) (60,309) (135,304)
Proceeds from sales of mortgage-backed securities available for sale. -- 4,145 52,348
Proceeds from sales of loans......................................... -- 33,535 --
Principal collected on mortgage-backed securities.................... 54,951 22,077 38,860
Purchases of mortgage-backed securities.............................. (58,661) -- (66,922)
Loans purchased...................................................... (148,405) (103,524) (190,333)
Net change in loans receivable....................................... (94,006) (43,299) (20,931)
(Increase) decrease in other real estate owned....................... (151) 4,871 6,472
Proceeds from sales of loan servicing rights......................... -- -- 7,288
Purchases of office properties and equipment......................... (2,868) (2,333) (785)
------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES.............................. (271,884) (90,742) (149,649)
FINANCING ACTIVITIES
Net change in time deposits.......................................... 23,058 94,581 5,863
Net change in other deposits......................................... 18,666 10,510 (31,070)
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money............................. 309,040 203,000 255,627
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money.................. (121,482) (213,851) (130,652)
Net change in advance payments by borrowers and investors
held in escrow..................................................... 479 (4,022) (51,626)
Proceeds from issuance of stock...................................... 9,055 346 11
Purchases of Treasury stock/warrants................................. (3,499) (44) --
Reduction of leveraged ESOP debt..................................... (63) (36)
------------------------------------------
Net cash provided by financing activities.......................... 235,254 90,484 48,117
------------------------------------------
Decrease in cash and cash equivalents.............................. (9,651) (11,459) (58,678)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 22,440 33,899 92,577
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $ 12,789 $ 22,440 $ 33,899
==========================================
Supplemental disclosures of cash flow information:
Interest paid...................................................... $ 61,689 $ 60,222 $ 49,937
Income taxes paid (refunded)....................................... $ 299 397 (4,650)
Noncash investing activities:
Transfer of loans to other real estate owned....................... $ 3,373 $ 1,936 $ 2,861
Loans to facilitate sale of other real estate owned................ $ -- $ -- $ 782
Securitization of loans into mortgage-backed securities............ $119,717 $ -- $ 15,086
See Notes to Consolidated Financial Statements.
26
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N Financial Corporation, December 31, 1996
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 financial services to consumers and businesses through its network
of 48 community banking and financial services offices in Michigan.
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: Securities are classified as either held to
maturity (amortized cost), available for 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).
INVESTMENT AND MORTGAGE-BACKED SECURITIES: Investment and mortgage-backed
securities which the Company has the ability and the intent to hold until
maturity are stated at amortized cost. Investment and mortgage-backed
securities available for sale are carried at fair value. Fair value
adjustments are included in stockholders' equity, net of tax. 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 using the level-yield method for
amortization of premiums and accretion of discounts.
MORTGAGE DERIVATIVE PRODUCTS: The Bank's interest only certificates are
classified as available for sale and are recorded at fair value. Fair value
adjustments are included in stockholders' equity and are classified on the
Statements of Condition with mortgage-backed securities.
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 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.
27
18
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
when a loan becomes 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 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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into
sales of investment and mortgage-backed securities under agreements to
repurchase the same or essentially 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 , and the securities
which collateralize the agreements are reflected as an asset in the Statement
of Condition.
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. At December 31, 1996 and
1995, the Company was not party to any interest rate instruments.
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 $0.08
per share.
INCOME TAXES: The Company uses the liability method 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. The deferred taxes are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
28
19
PER SHARE DATA: Per share amounts are based on the weighted average
number of shares outstanding during the year. For 1996, 1995 and 1994 there
were 8,080,333, 7,718,700 and 7,419,636 average shares outstanding,
respectively, used in computing primary earnings per share. For 1996, 1995 and
1994 there were 8,229,812, 7,932,142 and 7,419,636 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: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged into the
Company. The Company issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. At the time of
the merger, Macomb had assets and stockholders' equity (unaudited) of
$41,932,000 and $6,268,000, respectively. The merger was accounted for as a
pooling-of-interests and accordingly, the financial statements, have been
restated to include the results of Macomb.
A reconciliation of previously reported net interest income and net income is
as follows:
1995 1994
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share)
Net interest income (as previously reported).............. $33,632 $22,614
Macomb Federal Savings Bank - net interest income......... 1,118 1,172
---------------------------------------
Total net interest income............................. $34,750 $23,786
=======================================
Net income (as previously reported)....................... $10,140 $ 3,091
Macomb Federal Savings Bank - net income.................. 277 292
---------------------------------------
Total net income...................................... $10,417 $ 3,383
=======================================
A reconciliation of previously reported per share income is as follows:
1995 1994
- -----------------------------------------------------------------------------------------------------
Primary earnings per share:
Net income (as previously reported)................... $ 1.45 $ 0.46
Macomb Federal Savings Bank........................... (0.10) --
---------------------------------------
Primary earnings per share....................... $ 1.35 $ 0.46
=======================================
Fully diluted earnings per share:
Net income (as previously reported)................... $ 1.40 $ 0.46
Macomb Federal Savings Bank........................... (0.09) --
---------------------------------------
Fully diluted earnings per share................. $ 1.31 $ 0.46
=======================================
NOTE C: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average amounts of those reserve balances for the year ended
December 31, 1996 and December 31, 1995 were $418,000 and 491,000,
respectively.
29
20
NOTE D: INVESTMENT SECURITIES
Investment securities consisted of the following:
December 31
------------------------------------------------------------
1996 1995
------------------------------------------------------------
BOOK MARKET Book Market
VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities......................... $ 40,737 $ 40,781 $ 35,100 $ 35,229
Other securities................................. 20 20 -- --
Investment in Federal Home Loan Bank stock....... 19,959 19,959 19,953 19,953
Other equity securities.......................... 23 23 186 186
-----------------------------------------------------------
Held to maturity............................. 60,739 60,783 55,239 55,368
U.S. Treasury securities......................... 57,996 58,000 40,656 40,899
Other securities................................. 1,032 1,038 110 298
Valuation allowances............................. 10 -- 431 --
-----------------------------------------------------------
Available for sale........................... 59,038 59,038 41,197 41,197
-----------------------------------------------------------
$119,777 $119,821 $ 96,436 $ 96,565
===========================================================
An analysis of gross unrealized gains and losses is as follows:
December 31
---------------------------------------------------------------
1996 1995
---------------------------------------------------------------
GROSS GROSS Gross Gross
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Held to maturity
U.S. Treasury securities ...................... $ 79 $ (35) $ 137 $ (7)
---------------------------------------------------------------
79 (35) 137 (7)
Available for sale
U.S. Treasury securities....................... 31 (27) 244 --
Other equity securities........................ 6 -- 187 --
---------------------------------------------------------------
37 (27) 431 --
---------------------------------------------------------------
$ 116 $ (62) $ 568 $ (7)
===============================================================
Proceeds from sales of investment securities available for sale during 1996
were $298,000. Gross gains of $188,000 were realized on those sales. Proceeds
from sales of investment securities available for sale during 1995 were
$10,070,000. Gross losses of $120,000 were realized on those sales. Proceeds
from sales of investment securities available for sale during 1994 were
$20,779,000. Gross losses of $221,000 were realized on those sales.
The book value and market value of debt securities at December 31, 1996, by
contractual maturity, were as follows:
Less than one year 1 - 5 Years
------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities held to maturity............... $20,146 $20,165 5.93% $20,591 $20,616 6.02%
Other Securities held to maturity....................... -- -- -- 20 20 6.00
------------------------------------------------------------------
20,146 20,165 5.93 20,611 20,636 6.02
U.S. Treasury securities available for sale............. 53,975 53,959 5.62 4,021 4,041 6.33
------------------------------------------------------------------
$74,121 $74,124 5.71% $24,632 $24,677 6.07%
==================================================================
30
21
NOTE E : MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
December 31
-----------------------------------------------------------
1996 1995
-----------------------------------------------------------
BOOK MARKET Book Market
VALUE VALUE Value Value
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Government agency securities.................... $ 127,677 $ 126,576 $ 12,149 $ 12,451
Collateralized mortgage obligations............. 85,755 85,311 60,305 60,550
Accrued interest receivable..................... 1,417 1,417 646 646
Net discounts................................... (159) -- (432) --
-------------------------------------------------------------
Held to maturity.............................. 214,690 213,304 72,668 73,647
Government agency securities.................... 18,815 19,255 28,324 29,135
Collateralized mortgage obligations............. 14,767 15,005 22,810 23,110
Interest-only certificates...................... 639 2,023 984 2,400
Accrued interest receivable..................... 283 283 396 396
Net premiums.................................... 160 -- 421 --
Valuation allowances............................ 1,902 -- 2,106 --
-------------------------------------------------------------
Available for sale.......................... 36,566 36,566 55,041 55,041
-------------------------------------------------------------
$ 251,256 $ 249,870 $ 127,709 $ 128,688
=============================================================
Mortgage-backed securities with a carrying value of $44,847,000 are
specifically pledged as collateral for advances from the Federal Home Loan Bank
of Indianapolis (FHLB). Mortgage-backed securities with a carrying value of
$9,160,000 are pledged as collateral for other borrowings.
An analysis of gross unrealized gains and losses is as follows:
December 31
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
GROSS GROSS Gross Gross
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Government agency securities..................... $ 764 $ (2,119) $ 302 $ --
Collateralized mortgage obligations.............. 294 (325) 711 (34)
--------------------------------------------------------------
Held to maturity............................... 1,058 (2,444) 1,013 (34)
Government agency securities..................... 287 (11) 425 (16)
Collateralized mortgage obligations.............. 270 (28) 314 (33)
Interest-only certificates....................... 1,384 -- 1,416 --
---------------------------------------------------------------
Available for sale........................... 1,941 (39) 2,155 (49)
---------------------------------------------------------------
$ 2,999 $ (2,483) $ 3,168 $ (83)
===============================================================
There were no sales of mortgage-backed securities during 1996. 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.
31
22
The book value and market value of mortgage-backed securities at December 31,
1996, by contractual maturity, were as follows :
Held to Maturity Available for Sale
----------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Government agency securities
Less than one year........... $ -- $ -- --% $ -- $ -- --%
One to five years............ -- -- -- -- -- --
Five to ten years............ 1,832 1,778 6.78 -- -- --
After ten years.............. 126,099 124,798 7.10 18,979 19,255 6.64
-----------------------------------------------------------------------
127,931 126,576 7.09 18,979 19,255 6.64
Collateralized mortgage obligations
Less than one year........... -- -- -- -- -- --
One to five years............ -- -- -- -- -- --
Five to ten years............ 224 229 17.63 -- -- --
After ten years.............. 85,118 85,082 6.90 14,763 15,005 7.02
-----------------------------------------------------------------------
85,342 85,311 6.93 14,763 15,005 7.02
Interest-only certificates
Less than one year........... -- -- -- -- -- --
One to five years............ -- -- -- -- -- --
Five to ten years............ -- -- -- 5 16 430.67
After ten years.............. -- -- -- 634 2,007 110.68
-----------------------------------------------------------------------
-- -- -- 639 2,023 113.18
-----------------------------------------------------------------------
$213,273 $211,887 7.03% $34,381 $36,283 8.78%
========================================================================
Mortgage-backed securities will mature according to the repayment
characteristics of the underlying mortgage loans which collateralize the
securities. Expected maturities for mortgage-backed securities will differ from
contractual maturities because borrowers have the right to prepay.
The aggregate book value and aggregate market value of the securities of any
one issuer, other than U.S. Government agencies, did not exceed 10% of
stockholders' equity at December 31, 1996 or 1995.
NOTE F: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
December 31
---------------------------------------------------------------
1996 1995
---------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential mortgages ........................ $ 592,712 $ 598,390 $ 573,089 $ 570,798
Residential mortgages held for sale .......... 5,218 5,218 21,713 21,963
Mortgages on income producing property ....... 84,983 79,704 88,491 79,985
Construction loans ........................... 39,535 39,404 40,882 37,160
Consumer loans ............................... 337,178 338,180 237,873 235,557
Commercial loans ............................. 12,262 11,959 7,717 7,298
Accrued interest receivable .................. 5,940 5,940 5,588 5,588
---------------------------------------------------------------
1,077,828 1,078,795 975,353 958,349
Less:
Discounts on purchased loans .............. (2,035) -- (1,709) --
Allowance for loan losses .................. 11,042 -- 10,081 --
Undisbursed portion of loan proceeds ....... 12,085 -- 13,198 --
Deferred income............................. 860 -- 1,424 --
---------------------------------------------------------------
$ 1,055,876 $1,078,795 $ 952,359 $ 958,349
===============================================================
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.
32
23
Loans collateralized by income producing property are categorized as follows:
December 31
---------------------------
1996 1995
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Multi-family apartments....................................... $ 25,404 $ 29,337
Motels/hotels................................................. 13,540 14,105
Shopping centers.............................................. 23,582 20,232
Mobile home parks............................................. 3,625 3,781
Offices....................................................... 6,667 8,698
Industrial.................................................... 4,565 6,584
Other......................................................... 7,600 5,754
---------------------------
$ 84,983 $ 88,491
===========================
Loans collateralized by income producing property categorized by state are as
follows:
December 31
---------------------------
1996 1995
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Michigan...................................................... $ 65,645 $ 67,048
California.................................................... 11,738 12,202
New York...................................................... 2,037 3,413
Pennsylvania.................................................. 607 1,396
Other......................................................... 4,956 4,432
---------------------------
$ 84,983 $ 88,491
===========================
Changes in the allowance for loan losses are summarized as follows:
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year................................. $ 10,081 $ 8,349 $ 11,570
Provision for loan losses.................................... 1,100 2,400 100
Transfers.................................................... -- -- 300
Net charge-offs.............................................. (139) (668) (3,621)
-----------------------------------------
Balance at end of year................................... $ 11,042 $ 10,081 $ 8,349
=========================================
At December 31, 1996 and 1995, the total recorded investment in impaired
loans, as defined by SFAS 114, was $7,241,000 and $8,619,000, respectively. In
1996 the amount of the recorded investment in impaired loans for which there is
a related allowance for loan losses is $145,000, and the amount of the recorded
investment for which there is no related allowance for loan losses is
$7,096,000. In 1995 none of the impaired loans required a specific allowance
for loan losses. Interest income on impaired loans is recognized primarily on
a cash basis. During 1996 and 1995, the amount of interest income recognized
on impaired loans was insignificant.The balance of nonaccrual loans was
$6,621,000 and $8,225,000 at December 31, 1996 and 1995, respectively.
Changes in capitalized mortgage servicing rights, included in other assets in
the Consolidated Statements of Condition, are summarized as follows:
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year................................. $ 1,113 $ 968 $ 9,870
Additions.................................................... 630 621 --
Amortization, sales and writedowns........................... (300)
(476)
(8,902)
-----------------------------------------
Balance at end of year................................... $ 1,443 $ 1,113 $ 968
=========================================
33
24
Changes in the valuation allowance for mortgage servicing rights are summarized
as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year...................................... $ 291 $ -- $ --
Additions:
Purchased morgage servicing rights............................ 151 222 --
Originated morgage servicing rights........................... 55 77 --
-----------------------------------------
Total additions .......................................... 206 299 --
Reductions:
Purchased morgage servicing rights............................ 158 8 --
Originated morgage servicing rights........................... 118 -- --
------------------------------------------
Total reductions ......................................... 276 8 --
Balance at end of year............................ $ 221 $ 291 $ --
==========================================
At December 31, 1996 and 1995, the fair value of capitalized mortgage servicing
rights was $1,770,000 and $1,161,000 respectively.
Loans serviced for others amounted to $415,156,000, $278,051,000, and
$243,834,000 at December 31, 1996, 1995 and 1994, respectively.
NOTE G: OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consisted of the following:
December 31
-----------------------
1996 1995
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate acquired through foreclosure......................... $ 1,365 $ 1,226
Real estate in judgment.......................................... 105 226
-------------------------
1,470 1,452
Less allowance for losses........................................ -- 133
-------------------------
$ 1,470 $ 1,319
=========================
Changes in the allowance for possible losses on OREO are summarized as follows:
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year.................................... $ 133 $ 330 $ 650
Provision for losses............................................ -- 150 --
Net charge-offs................................................. (133) (347) (320)
------------------------------------------
Balance at end of year.......................................... $ -- $ 133 $ 330
==========================================
The Company recorded writedowns of other real estate owned amounting to $75,000
during 1996. The Company did not record any writedowns of other real estate
owned in 1995 or 1994.
The Company recognized gains on sale of OREO amounting to $164,000, $1,139,000
and $2,407,000 during 1996, 1995 and 1994 respectively.
34
25
NOTE H: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
December 31
-------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cost:
Land................................................. $ 2,634 $ 2,634
Buildings and improvements........................... 17,174 16,229
Furniture and equipment.............................. 16,839 15,780
--------------------------------------
36,647 34,643
Less accumulated depreciation.......................... 20,883 19,793
--------------------------------------
$ 15,764 $ 14,850
======================================
Depreciation and amortization expense was $1,954,000, $1,843,000 and $1,841,000
in 1996, 1995 and 1994, respectively.
Rental expense for leased properties and equipment was $938,000, $643,000 and
$488,000 in 1996, 1995 and 1994, respectively. The aggregate minimum annual
rental commitments under these leases are approximately $1,003,000 in 1997,
$771,000 in 1998, $619,000 in 1999, $573,000 in 2000, $500,000 in 2001 and
$992,000 thereafter.
NOTE I: DEPOSITS
The carrying amounts and fair values of deposits and the nominal rate of
interest paid were as follows:
December 31
--------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------
WEIGHTED Weighted
CARRYING FAIR AVERAGE Carrying Fair Average
AMOUNT VALUE RATE Amount Value Rate
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Checking accounts........................ $ 46,882 $ 46,882 --% $ 37,939 $ 37,939 --%
NOW accounts............................. 60,668 60,668 1.52 53,682 53,682 1.52
Money market accounts.................... 89,321 89,321 4.01 86,080 86,080 4.18
Savings deposits......................... 149,226 149,226 2.82 149,728 149,728 2.91
Certificates of deposit.................. 617,102 622,040 5.79 594,044 598,070 6.00
Accrued interest......................... 934 934 -- 1,459 1,459 --
-----------------------------------------------------------------------------
$ 964,133 $ 969,071 4.61% $ 922,932 $ 926,958 4.82%
=============================================================================
Included in deposits are $107,386,000 and $81,442,000 of deposit accounts with
balances in excess of $100,000 as of December 31, 1996 and 1995, respectively.
Certificates of deposit had the following maturities at December 31, 1996:
Weighted
Amount Average Rate
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
1997............................................ $ 392,752 5.54%
1998............................................ 159,122 6.12
1999............................................ 25,894 6.93
2000............................................ 8,655 6.64
2001 and beyond................................. 30,679 6.04
---------------------------------------------
$ 617,102 5.79%
=============================================
35
26
The average balance, interest expense and average rate on deposits were as
follows:
1996 1995 1994
------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE Average Interest Average Average Interest Average
BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Checking accounts ............ $ 40,349 $ -- --% $ 36,886 $ -- --% $ 36,138 $ -- --%
NOW and money
market accounts ............ 146,863 4,490 3.06 137,867 4,261 3.09 133,079 3,197 2.40
Savings deposits ............. 153,701 4,446 2.89 139,685 3,723 2.67 172,875 4,174 2.41
Certificates of deposit ...... 597,571 34,923 5.84 537,944 30,655 5.70 480,020 22,435 4.67
------------------------------------------------------------------------------------------------
$ 938,484 $43,859 4.67% $852,382 $ 38,639 4.53% $822,112 $29,806 3.63%
================================================================================================
NOTE J: 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
---------------------------------------------------------
1996 1995
---------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Collateral pledged:
Mortgage-backed securities with a book
value including accrued interest of
$59,835,000 and a market value of
$59,750,000 ................................. $ 58,040 $ 58,040 $ -- $ --
=========================================================
Securities sold under agreements to repurchase averaged $40,095,000 and
$24,020,000 during 1996 and 1995, respectively, and the maximum amounts
outstanding at any month-end during 1996 and 1995 were $74,621,000 and
$52,579,000, respectively.
The 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 essentially identical
securities at the maturities of the agreements.
Agreements to repurchase, as of December 31, 1996, are as follows:
Average
Broker Borrowing Rate Maturity Date
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Morgan Stanley...................................... $ 23,397 5.52% January 1997
Federal National Mortgage Association............... 34,643 5.76 January 1997
-------------------------
$ 58,040 5.66%
=========================
36
27
NOTE K: 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
-----------------------------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------------------
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:
5.81 - 6.38 %.................... 1996 --% 5.86% $ -- -- $124,000 $124,065
5.47 - 6.80...................... 1997 5.58 5.86 206,000 206,047 61,000 61,027
Fixed rate of interest:
5.20 - 5.42%..................... 1997 5.25 5.42 45,000 44,977 10,000 9,977
5.47 - 5.91...................... 1998 5.77 5.47 43,000 42,566 10,000 9,965
5.81 - 5.95...................... 1999 5.84 -- 43,000 42,233 -- --
4.00............................. 2005 4.00 4.00 1,003 802 1,003 857
- -----------------------------------------------------------------------------------------------------------------------
338,003 336,625 206,003 205,891
Other borrowed money:
Collateralized mortgage obligations................................ 7,994 8,606 10,292 11,250
----------------------------------------------
$345,997 $345,231 $216,295 $217,141
==============================================
The Company is required to maintain qualifying loans, investments and
mortgage-backed securities as collateral for the FHLB 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 $9,160,000 and
$11,709,000 at December 31, 1996 and December 31, 1995, 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 L: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Current................................................... $ -- $ 100 $ 150
Deferred.................................................. 3,228 3,959 1,199
Change in valuation allowance for deferred tax assets..... (2,879) (5,734) (1,199)
----------------------------------------------------
$ 349 $ (1,675) $ 150
====================================================
Deferred income tax expense (credit) included in stockholders' equity related
to unrealized holding gains (losses) on securities available for sale for 1996,
1995 and 1994 amounted to $(181,000), $850,000 and $-0-, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
1996 19951994
- --------------------------------------------------------------------------------------------------------------------
Statutory tax rate............................................ 35.00% 35.00% 35.00%
Effect of:
Change in valuation allowance for deferred tax assets....... (30.81) (68.54) (38.79)
Adjustment to net operating loss carry forward.............. -- 12.46 --
Other items, net............................................ (0.45) 1.92 8.04
-------------------------------------------------
Effective tax rate............................................ 3.74% (19.16)% 4.25%
=================================================
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:
37
28
December 31
--------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets:
Bad debt reserves not previously deducted.............. $ 3,036 $ 3,545
Net deferral required by SFAS 91....................... 229 400
Pension and other benefit obligations.................. 695 580
Tax effect of net of operating loss carryforward....... 3,258 6,307
Other items, net....................................... 381 416
--------------------------------------
Total deferred tax assets........................... 7,599 11,248
Valuation allowance for deferred tax assets............ -- (2,879)
--------------------------------------
Total deferred tax assets less valuation
allowance.................................... 7,599 8,369
Deferred tax liabilities:
Securities marked to market for tax purposes*.......... 289 433
Tax over book depreciation............................. 662 723
FHLB stock dividends................................... 1,075 1,075
Valuation adjustment on CMO residuals.................. 1,408 1,333
Excess general valuation allowances over base year
reserves .................................... -- 448
Other items, net....................................... 68 92
Total deferred tax liabilities...................... 3,502 4,104
Total net deferred tax assets.............................. 4,097 4,265
Current income tax receivable due to net operating loss.... --------------------------------------
carrybacks and other overpayments........................ 1,905 1,109
--------------------------------------
Total net federal income tax assets........................ $ 6,002 $ 5,374
======================================
* The amount shown is net of the $669,000 and $822,000 tax effect of SFAS 115
unrealized holding gains at December 31, 1996 and December 31, 1995
respectively.
As of December 31, 1996, the Company had a net operating loss carryforward for
income tax purposes of $9,310,000 which expires on December 31, 2009.
NOTE M: 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 1,003,219 units in a shareholder rights
offering. Each unit consisted of three shares of common stock and one warrant.
Each warrant entitled 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.
During 1996, 1995 and 1994, 996,369, 2,553 and 390 warrants were excercised,
respectively. The warrant period ended with 3,907 warrants unexercised.
During 1996, the Company paid a one-time charge of $5.5 million pretax, ($3.6
million after tax) as the mandated contribution of its wholly-owned
subsidiary, D&N Bank, to replenish the Federal Deposit Insurance Corporation's
depleted Savings Association Insurance Fund ("SAIF"). This charge is the
result of federal legislation passed and signed into law on September 30, 1996,
which requires all thrifts to pay a one-time assessment to restore the SAIF
fund to its statutory reserve level. The assessment is 65.7 basis points
(b.p.) of the institution's deposits as of March 31, 1995.
Macomb had a leveraged Employee Stock Ownership Plan ("ESOP"), which was
terminated subsequent to the merger with the Company. The related ESOP debt was
paid in full in 1996.
On December 7, 1989, new capital standards were imposed on the thrift industry
as a result of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("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, 1996, the Bank exceeded all regulatory capital
standards.
38
29
The table below summarizes as of December 31, 1996, 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.............................. $ 69,740 8.00% $ 86,669 9.94%
Core capital.................................... 44,598 3.00 76,012 5.11
Tangible capital................................ 22,299 1.50 76,012 5.11
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. The OTS has adopted rules, 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 (tier 1 risk-based capital) is 6% or greater, its core
capital (leverage) ratio is 5% or greater, and the institution is not subject
to a capital directive. The Bank's tier 1 risk-based capital ratio at December
31, 1996 was 8.72%. As of December 31, 1996, the Bank was considered
adequately capitalized.
NOTE N: EMPLOYEE BENEFIT PLANS
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 to Section
401(k) of the Internal Revenue Code. Employee contributions are matched by the
Company at the rate of 100 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 a variety of instruments, including the Company's common stock. The first 3%
of the Company's contribution for each individual is invested in the Company's
common stock, the remainder of the Company's contribution, (up to 6%, total) is
invested at the direction of the participant. The Company's contributions to
the plan were $621,000, $273,000 and $193,000 in 1996, 1995 and 1994,
respectively.
The Company terminated its noncontributory defined benefit retirement plan
during 1996, with all assets of the plan being distributed to participants. No
gain or loss was recorded on this transaction.
The following table sets forth the market value of assets and distribution
thereof on December 16, 1996, the date of distribution.
Before Effect of After
Termination Termination Termination
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets and obligations
Accumulated benefit obligation............................ $ (8,419) $ 8,419 $ --
Plan assets at fair value................................. 11,238 (11,238) --
---------------------------------------------------
Excess assets............................................. $ 2,819 $ (2,819) $ --
===================================================
Benefits under the plan were based on years of service and the employee's
compensation during the last five years of employment.
39
30
Pension expense included the following components:
1996* 1995* 1994
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost-benefits earned during the period ............... $ -- $ 620 $ 728
Interest cost on projected benefit obligation ................ -- 1,071 1,055
Return on plan assets ........................................ -- (2,030) (362)
Net amortization ............................................. -- 512 (1,046)
-----------------------------------------
$ -- $ 173 $ 375
=========================================
* Benefits were frozen as of September 30, 1995; therefore, no cost or
amortization was subsequently recorded.
NOTE O: POSTRETIREMENT BENEFITS
The Company has a contributory unfunded benefit plan which provides
postretirement medical benefits to certain employees who have retired prior to
September 30, 1995. The Company is recognizing its 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,
-------------------------------
1996 1995
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Accumulated postretirement benefit obligation............ $ 1,358 $ 1,322
Unrecognized net loss ................................... (233) (178)
Unrecognized transition obligation ...................... (829) (877)
-------------------------------
Accrued postretirement benefit cost ................ $ 296 $ 267
===============================
Postretirement benefit expense included the following components:
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost ............................................ $ -- $ -- $ 44
Interest cost ........................................... 97 99 132
Amortization of transition obligation ................... 48 49 80
------------------------------------------
$ 145 $ 148 $ 256
==========================================
A weighted average discount rate of 7.00% in 1996 and 1995 was used in
determining the accumulated post retirement benefit obligation. The 1996
health care trend rate was projected to be 9.5% 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 P: 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, 1996. 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 dates on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors, and have generally vested over a two year period from the date of
grant. The term on any option may not exceed ten years from the date of grant.
During 1996, the Company adopted the disclosure requirements of Statements of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, the fair value of each option grant in
1996 and 1995 was estimated using the Black-Scholes option pricing model with
the following assumptions used:
40
31
1996 1995
- -------------------------------------------------------------------------------------------------
Estimated weighted average fair value
per share of options granted ............................. $ 4.61 $ 2.63
Assumptions:
Annualized dividend yield ............................ --% --%
Common-stock price volatility ........................ 25.1% 25.1%
Weighted average risk free rate of return ............ 5.9% 7.4%
Weighted average expected option term (in years) ..... 5 4
The Company has elected to continue to measure compensation cost using the
intrinsic value method, in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, since all options are granted at a
fixed price not less than the fair market value of the Company's common stock
on the date of grant, no compensation cost has been recognized for its stock
option plans. Had stock option costs of these plans been determined based on
the fair value at the 1996 and 1995 grant dates for awards under those plans
consistent with the methodology of SFAS 123, the pro forma effects on the
Company's net income and earnings per share would be as follows:
1996 1995
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share)
Net income (as reported) ........................... $ 8,995 $ 10,417
Stock option compensation cost ..................... (396) (74)
---------------------------------------------
Pro forma net income ........................... $ 8,599 $ 10,343
=============================================
Primary earnings per share (as reported) ........... $ 1.11 $ 1.35
Stock option compensation cost ..................... (0.05) (0.01)
---------------------------------------------
Pro forma primary earnings per share ........... $ 1.06 $ 1.34
=============================================
Fully diluted earnings per share ................... $ 1.09 $ 1.31
Stock option compensation cost ..................... (0.05) (0.01)
---------------------------------------------
Pro forma fully diluted earnings per share ..... $ 1.04 $ 1.30
=============================================
The following table sets forth changes in options outstanding:
1996 1995 1994
---------------------------------------------------------------------------
WEIGHTED Weighted
Amount Avg. Price AMOUNT AVG. PRICE AMOUNT
- ------------------------------------------------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year ... 594,505 $ 8.32 638,602 $ 8.18 681,052
Granted ............................ 287,208 13.49 74,880 8.01 50,298
Forfeited .......................... (19,851) 10.39 (4,029) 7.86 (91,748)
Canceled ........................... (5,775) 16.06 (62,150) 8.50 --
Exercised .......................... (109,775) 7.94 (52,798) 6.06 (1,000)
-------------------------------------------------------------------------------
Outstanding at end of year ......... 746,312 10.24 594,505 8.32 638,602
-------------------------------------------------------------------------------
Exercisable at end of year ......... 537,144 $ 9.24 512,062 $ 8.40 472,347
-------------------------------------------------------------------------------
41
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The following table sets forth details of options outstanding at December 31,
1996:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
$ 6.00 - 8.38 397,104 6.7 Years $ 7.69 371,409 $ 7.68
11.19 - 13.25 267,708 7.9 Years 12.51 129,235 12.10
14.25 - 15.44 81,500 8.5 Years 15.23 36,500 14.98
-------------------------------------------------------------------------------------------------------
$ 6.00 - 15.44 746,312 7.3 Years $ 10.24 537,144 $ 9.24
=======================================================================================================
NOTE Q: LITIGATION
The Company is a defendant 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 will
not materially affect the Consolidated Financial Statements.
D&N Bank is a plaintiff, like approximately 120 other institutions, in a
currently pending claim in the United States Court of Federal Claims seeking
substantial damages as a result of the 1989 Financial Institutions Reform,
Recovery and Enforcement Act's mandatory phase-out of the regulatory capital
treatment of supervisory goodwill. Arguments concerning the extent of damages
in the cases of three initial plaintiffs are scheduled to begin March 17, 1997.
The other cases, including D&N's, are scheduled to be considered after the
initial cases are resolved. The ultimate outcome of these matters cannot be
ascertained at this time.
NOTE R: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk (in
the normal course of its business) to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments may include commitments to originate or purchase loans,
standby letters of credit, recourse arrangements on sold assets, 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 Statements of Condition. The contract amounts of those
instruments reflect the extent of the Company's involvement 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 forward commitments, the contract amounts do not represent exposure to
credit loss. The Company controls the credit risk of those instruments through
credit approvals, limits and monitoring procedures.
The following table sets forth financial instruments with off-balance sheet
risk and their contract amounts and fair values:
--------------------------------------------------------------
December 31
--------------------------------------------------------------
1996 1995
CONTRACT FAIR Contract Fair
- ----------------------------------------------------------------------------------------------------------------
AMOUNT VALUE Amount Value
(Dollars in thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate and purchase loans .. $ 69,383 $ (694) $ 60,443 $ (604)
Unused lines of credit ....................... 78,303 (783) 56,867 (569)
Standby letters of credit .................... 367 (4) 1,210 (12)
Loans sold with recourse ..................... 3,004 (150) 3,563 (178)
Financial instruments whose contract amounts
exceed the amount of credit risk:
Forward commitments to sell loans ............ 4,000 (40) -- --
42
33
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 on, 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 evaluation of the borrower's credit worthiness.
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, 1996 of $1,430,000 and
$1,574,000, respectively. These balances as of December 31,1995 were $1,769,000
and $1,794,000, respectively. The maximum amount of loss to which the Company
is subject, under the recourse provisions, is $1,587,000 at December 31, 1996.
Management does not believe the recourse provisions subject the Company to any
material risk of loss. This credit risk is considered to be no more onerous
than that existing on similar loans in the Company's loan portfolio.
Forward commitments to sell loans are contracts the Company negotiates for the
purpose of reducing the market risk associated with rate lock agreements with
customers for new loan applications that have not yet been closed. In order to
fulfill a forward commitment, the Company typically exchanges through FNMA,
FHLMC or GNMA,its current production of loans for mortgage-backed securities
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.
NOTE S: 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.
December 31
-------------------------------------------------------------
1996 1995
-------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash and cash equivalents .................... $ 12,789 $ 12,789 $ 22,440 $ 22,440
Investment securities (Note D) ............... 119,777 119,821 96,436 96,565
Mortgage-backed securities (Note E) .......... 251,256 249,870 127,709 128,688
Loans receivable (Note F) .................... 1,055,876 1,078,795 952,359 958,349
Deposits (Note I) ............................ (964,133) (969,071) (922,932) (926,958)
Securities sold under agreement
to repurchase (Note J) ................... (58,040) (58,040) -- --
Debt (Note K) ................................ (345,997) (345,231) (216,295) (217,141)
Commitments to originate and
purchase loans (Note R) .................. -- (694) -- (604)
Unused lines of credit (Note R) .............. -- (783) -- (569)
Standby letters of credit (Note R)............ -- (4) -- (12)
Loans sold with recourse (Note R) ............ -- (150) -- (178)
Forward commitments to sell loans (Note R) ... -- (40) -- --
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.
43
34
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 analysis using the rates currently offered for deposits with similar
remaining maturities. The fair values of securities sold under agreement to
repurchase and 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 (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.
NOTE T: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Before
Gain on Income Income
Net Provision Securities Tax Tax Net Earnings Per Share Stock Price
Interest Interest Interest For Loan & Other Expense Expense Income Fully Range
Income Expense Income Losses Assets (Credit) (Credit) (Loss) Primary Diluted High Low
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share and stock price)
1st Quarter
1996 $ 24,000 $ 14,318 $ 9,682 $ 300 $ -- $ 2,689 $ (799) $ 3,488 $ 0.43 $ 0.42 13 3/4 12
1995 20,824 13,199 7,625 200 -- 1,452 28 1,424 0.18 0.18 9 1/8 7 1/4
2nd Quarter
1996 25,426 14,886 10,540 300 188 2,824 (537) 3,361 0.42 0.41 14 12
1995 22,853 14,125 8,728 800 779 2,619 30 2,589 0.35 0.33 10 1/2 8 3/8
3rd Quarter
1996 27,105 15,863 11,242 300 -- (1,127)(1) (42) (1,085)(1) (0.13) (0.13) 14 1/4 12 1/4
1995 23,125 14,298 8,827 500 -- 3,084 26 3,058(2) 0.39 0.39 13 1/2 10 1/8
4th Quarter
1996 27,778 16,479 11,299 200 -- 4,958 1,727 3,231 0.39 0.39 17 3/4 13 3/4
1995 23,963 14,393 9,570 900 -- 1,587 (1,759) 3,346(2) 0.42 0.42 12 3/4 11 3/16
Year
1996 104,309 61,546 42,763 1,100 188 9,344 349 8,995 1.11 1.09 17 3/4 12
1995 90,765 56,015 34,750 2,400 779 8,742 (1,675) 10,417(2) 1.35 1.31 13 1/2 7 1/4
(1)Included in this loss is the one-time charge of $5.5 million to replenish
the Federal Deposit Insurance Corporation's Savings Association
Insurance Fund (see Note M).
(2)Included income of $458,000, $163,000 and $621,000 in the third quarter of
1995, forth quarter of 1995 and year 1995, respectively, resulting from the
adoption of SFAS122.
44
35
NOTE U: D&N FINANCIAL CORPORATION -PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION
December 31
---------------------------
1996 1995
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents ............................... $ 2 $ 2
Amounts receivable from subsidiary ...................... 6,104 879
Investments in subsidiary ............................... 80,014 71,108
Other assets ............................................ 65 --
--------------------------
$ 86,185 $ 71,989
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities ....................................... $ 64 $ 10
Stockholders' equity .................................... 86,121 71,979
--------------------------
$ 86,185 $ 71,989
==========================
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
---------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest income from subsidiary ............................. $ 64 $ 40 $ 47
Equity in undistributed net income of subsidiary ............ 9,378 10,618 3,565
Noninterest expense
Compensation and benefits ................................. 13 9 9
Other ..................................................... 434 232 220
---------------------------------------------
Total noninterest expense ............................... 447 241 229
---------------------------------------------
Income before income tax expense ....................... 8,995 10,417 3,383
Federal income tax expense .................................. -- -- --
---------------------------------------------
Net income .................................................. $ 8,995 $ 10,417 $ 3,383
=============================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating activities
Net income ................................................ $ 8,995 $ 10,417 $ 3,383
Items not affecting cash:
Equity in undistributed net income of subsidiary ........ (9,378) (10,618) (3,565)
Other ................................................... 115 37 (214)
-------------------------------------------
Net cash used by operating activities (268) (164) (396)
Investing activities ........................................
Change in intercompany receivable ......................... (5,225) (102) 421
Financing activities
Proceeds from issuance of stock ........................... 9,055 346 11
Purchases of Treasury stock/warrants ...................... (3,499) (44) --
Payment of ESOP debt ...................................... (63) (36) (36)
-------------------------------------------
Net cash used by financing activities .................. 5,493 266 (25)
Net change in cash and cash equivalents ................... -- -- --
Cash and cash equivalents at beginning of year .......... 2 2 2
-------------------------------------------
Cash and cash equivalents at the end of year .............. $ 2 $ 2 $ 2
===========================================
45