As filed with the Securities and Exchange Commission on July 11, 1997
Registration No. 333-26039

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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PRE-EFFECTIVE
AMENDMENT NO. TWO

TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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D&N CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 6798 31-1517665
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

400 QUINCY STREET, HANCOCK, MICHIGAN 49930 (906) 482-2700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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KENNETH R. JANSON
PRESIDENT
D&N CAPITAL CORPORATION
400 QUINCY STREET
HANCOCK, MICHIGAN 49930
(906) 482-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
James S. Fleischer, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005-3934
(202) 414-6100

Donald L. Kunz
HONIGMAN MILLER SCHWARTZ AND COHN
2290 First National Building
Detroit, Michigan 48226
(313) 256-7800

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

SUBJECT TO COMPLETION, DATED JULY , 1997

PROSPECTUS
1,100,000 SHARES

D&N CAPITAL CORPORATION
% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK OF D&N BANK
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D&N Capital Corporation (the "Company") is hereby offering 1,100,000 shares
of its % Noncumulative Exchangeable Preferred Stock, Series A, par value
$25.00 per share (the "Series A Preferred Shares"). The Company has been formed
for the purpose of acquiring, holding and managing real estate mortgage assets
that are intended to generate sufficient income to permit the declaration of
dividends on the Series A Preferred Shares at the stated rate and to meet the
operating expenses of the Company. Dividends on the Series A Preferred Shares
are payable at the rate of % per annum of the liquidation preference (an
amount equal to $ per annum per share), if, when and as declared by the Board
of Directors of the Company. Dividends are not cumulative and, if declared, are
payable quarterly in arrears on the last day of March, June, September and
December in each year, commencing September 30, 1997. If no dividend is declared
on the Series A Preferred Shares by the Company for a quarterly dividend period,
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period. Dividends in each dividend period will accrue from the first day
of the period, whether or not declared or paid in the prior period.
------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED
SHARES. AMONG THE RISKS WHICH PROSPECTIVE INVESTORS SHOULD CONSIDER ARE THE
FOLLOWING:

- NO PRIOR OPERATING HISTORY OF THE COMPANY;

- DEPENDENCE ON D&N BANK (THE "BANK") AS ADVISOR AND SERVICER;

- GEOGRAPHIC CONCENTRATION IN MICHIGAN OF PROPERTIES SECURING THE
COMPANY'S INITIAL MORTGAGE LOAN PORTFOLIO;

- POSSIBLE ADVERSE EFFECT ON THE COMPANY'S CASH FLOW IN THE EVENT OF A
SIGNIFICANT DECLINE IN INTEREST RATES;

- POSSIBLE RESTRICTIONS ON OPERATIONS OF THE COMPANY OR THE COMPANY'S
ABILITY TO PAY DIVIDENDS BY FINANCIAL INSTITUTION REGULATORY
AUTHORITIES;

- IF THE BANK IS EXPERIENCING FINANCIAL DIFFICULTIES, SERIES A
PREFERRED SHARES MAY BE EXCHANGED FOR SERIES A PREFERRED SHARES OF
THE BANK WHICH WILL NOT BE LISTED ON THE NASDAQ NATIONAL MARKET OR
ANY EXCHANGE AND HAVE OTHER DISTINCT RISKS;

- POSSIBILITY OF CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE
BANK AND AFFILIATES OF THE BANK AND THAT THE OWNER OF THE BANK'S
COMMON STOCK MAY HAVE INVESTMENT GOALS AND STRATEGIES THAT DIFFER
FROM THOSE OF THE HOLDERS OF THE SERIES A PREFERRED SHARES; AND

- SINCE DIVIDENDS ARE NOT CUMULATIVE, IF NO DIVIDEND IS DECLARED ON
THE SERIES A PREFERRED SHARES BY THE COMPANY FOR A DIVIDEND PERIOD,
HOLDERS OF THE SERIES A PREFERRED SHARES WILL HAVE NO RIGHT TO
RECEIVE A DIVIDEND FOR THAT PERIOD.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
THE SERIES A PREFERRED SHARES ARE NOT DEPOSIT ACCOUNTS OR OTHER DEBT OBLIGATIONS
OF THE BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE INSURED.

===========================================================================================================================
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE COMMISSION(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------------

Per Share...................................... $25.00 $ $
- ---------------------------------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
===========================================================================================================================

(1) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. The Underwriters have agreed to an underwriting commission of 1.75%
for all Series A Preferred Shares sold to directors, officers and employees
of the Company and its affiliates, up to a maximum of 60,000 shares.
(2) Before deducting expenses payable by the Company estimated at $325,000.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional 110,000 Series A Preferred Shares at the
initial public offering price per Series A Preferred Share, less
underwriting commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting commission and proceeds to Company will be $30,250,000,
$_______ and $_______, respectively.
------------------

The Series A Preferred Shares are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Series A
Preferred Shares will be ready for delivery through the facilities of The
Depository Trust Company in New York, New York, on or about , 1997
against payment therefor in immediately available funds.
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(RONEY & CO LOGO)

THE DATE OF THIS PROSPECTUS IS JULY , 1997.

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
3
The Series A Preferred Shares are not redeemable prior to [ ],
2002 (except upon the occurrence of a Tax Event as described herein). On and
after [ ], 2002, the Series A Preferred Shares may be redeemed for
cash at the option of the Company, in whole or in part, at a redemption price
of $25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter, if any, thereon, subject to the receipt of prior approval from the
Office of Thrift Supervision or any successor regulatory agency. The Series A
Preferred Shares will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any other securities of the
Company.

Under certain circumstances, each Series A Preferred Share will be
exchanged automatically (the "Automatic Exchange") for one newly issued Series
A preferred share of D&N Bank (the "Bank Preferred Shares"), a federally
chartered and federally insured stock savings bank (the "Bank"), if the
appropriate regulatory agency directs in writing (a "Directive") an exchange of
the Series A Preferred Shares for Bank Preferred Shares because (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations, (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion and even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized" in the
near term (the "Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A
PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT
A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK
HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN
THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE
DESCRIPTION OF THE BANK SET FORTH ELSEWHERE IN THIS PROSPECTUS. In the event
of the Automatic Exchange, the Bank Preferred Shares would constitute a new
series of preferred shares of the Bank, would have the same dividend rights,
liquidation preference, redemption options and other attributes as the Series A
Preferred Shares, except that the Bank Preferred Shares would not be listed on
the Nasdaq National Market or any other quotation system, and would rank pari
passu in terms of cash dividend payments and liquidation preference with any
outstanding shares of preferred stock of the Bank. Holders of Series A
Preferred Shares cannot exchange their Series A Preferred Shares for Bank
Preferred Shares voluntarily, and, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any security
of the Bank. See "Description of Series A Preferred Shares--Automatic
Exchange".

The Company expects that all of its mortgage assets will be acquired
from the Bank, or its affiliates. All of the shares of the Company's common
stock, par value $300.00 per share (the "Common Stock"), are owned by the Bank.
The Bank currently intends that, so long as any Series A Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least a
majority of the outstanding shares of Common Stock of the Company.

A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N FINANCIAL CORPORATION ("D&N"). NO
OBLIGATION OF THE COMPANY IS GUARANTEED BY THE BANK OR D&N.

The Company expects to qualify as a real estate investment trust (a
"REIT") for federal income tax purposes, commencing with the taxable year
ending December 31, 1997. No person or persons acting as a group is permitted
to beneficially own more than 9.9% of any series of preferred stock of the
Company, including the Series A Preferred Shares, with limited exceptions.

Prior to the offering, there has been no market for the Series A
Preferred Shares. The Company has applied for listing of the Series A
Preferred Shares on the Nasdaq National Market, subject to official notice of
issuance, under the symbol "DNFCP". The Bank intends to register the Bank
Preferred Shares with the OTS promptly following the issuance of such shares,
but does not intend to apply for listing of the Bank Preferred Shares on any
national securities exchange or for quotation of the Bank Preferred Shares
through the Nasdaq System. Consequently, there can be no assurance as to the
liquidity of the trading markets for the Bank Preferred Shares, if issued, or
that an active public market for the Bank Preferred Shares would develop or be
maintained.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
4
TABLE OF CONTENTS

Page
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
POSSIBLE CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
THE FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Benefits to the Bank and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
TAX STATUS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
No Operating History; Dependence Upon Bank as Advisor and Servicer . . . . . . . . . . . . . . . . . . . . . . . 15
Risk of Automatic Exchange Upon a Decline in the Bank's Capital Position or the
Receivership of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Dividend and Other Regulatory Restrictions on Operations of the Company . . . . . . . . . . . . . . . . . . . . 17
Risks Associated with Changes in Interest Rates that Would Adversely Affect the
Company's Ability to Pay Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Dividends Not Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Risks Associated with Mortgage Loans Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Real Estate Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Delays in Liquidating Defaulted Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Environmental Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Risk of Future Revisions in Policies and Strategies By Board of Directors . . . . . . . . . . . . . . . . . . . 22
Ability to Increase Leverage May Adversely Affect the Company's Interest Income . . . . . . . . . . . . . . . . 22
Relationship with the Bank and its Affiliates; Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . 22
No Third Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates . . . . . . . . . . 24
Tax Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
No Prior Market for Series A Preferred Shares or for Bank Preferred Shares, If Issued . . . . . . . . . . . . . 26
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
General Description of Mortgage Assets; Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Acquisition of Initial Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Management Policies and Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Description of Initial Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Credit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Compensation of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Limitations on Liability of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

i
5

The Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
The Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Benefits to the Bank and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
DESCRIPTION OF SERIES A PREFERRED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Automatic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Rights Upon Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Independent Director Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Restrictions on Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Restrictions on Ownership and Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Taxation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Tax Treatment of Automatic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Taxation of United States Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Taxation of Foreign Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Information Reporting Requirements and Backup Withholding Tax . . . . . . . . . . . . . . . . . . . . . . . . . 80
Other Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Plan Asset Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Effect of Plan Asset Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Prohibited Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Unrelated Business Taxable Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
CERTAIN INFORMATION REGARDING THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Operations of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Risk Factors and Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
INDEX TO FINANCIAL STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

ii
6
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing
at page [__] for the definitions of certain terms used in this Prospectus. The
offering of 1,100,000 shares of [____]% Noncumulative Exchangeable Preferred
Stock, Series A, par value $25.00 per share (the "Series A Preferred Shares"),
is referred to herein as the "Offering". Unless otherwise indicated, all
information in this Prospectus assumes that the over-allotment option described
in "Underwriting" is not exercised.

THE COMPANY

D&N Capital Corporation is a newly-formed Delaware corporation
incorporated on March 18, 1997 and created for the purpose of acquiring, holding
and managing real estate mortgage assets ("Mortgage Assets"). The Company has
been formed by D&N Bank, a federally chartered savings bank, to provide the Bank
and its parent, D&N Financial Corporation, a Delaware corporation ("D&N"), with
a means of raising capital for bank regulatory purposes. The Series A Preferred
Shares will be treated as core capital for regulatory purposes for the Bank.
The Company has five directors of which two are independent directors. An
"Independent Director" is a director who, prior to and subsequent to
appointment is not and will not be a director, officer, employee or 1%
shareholder of D&N or the Bank and is not an officer or employee of the
Company. The issuance of the Series A Preferred Shares by the Company is a
more cost-effective means of raising capital for the Bank than if the Bank
were to issue preferred stock itself, because of the Company's ability to
deduct for income tax purposes the dividends payable on the Series A Preferred
Shares as a result of its qualification as a REIT. The Company will elect to
be subject to tax as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"), and will generally not be subject to federal income
tax to the extent that it distributes its earnings to its stockholders and
maintains its qualification as a REIT. In order to be treated as a REIT,
the Company is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to 95% of the
Company's "REIT taxable income". See "Federal Income Tax Considerations" for a
discussion of the requirements to qualify as a REIT. All of the shares of the
Company's common stock, par value $300.00 per share (the "Common Stock"), are
owned by the Bank. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect ownership
of at least a majority of the outstanding shares of Common Stock of the Company.
For information regarding restrictions on ownership of the Series A Preferred
Shares, see "Description of Capital Stock--Restrictions on Ownership and
Transfer".

The Company currently expects to pay an aggregate amount of dividends
with respect to its outstanding shares of capital stock equal to approximately
100% of the Company's "REIT taxable income" (which excludes capital gains).
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Although there can be no assurances, because
(i) the Mortgage Assets are interest bearing, (ii) the Series A Preferred
Shares represent only approximately 50% of the Company's capitalization and
(iii) the Company does not anticipate incurring any indebtedness, the Company
currently expects that both its cash available for distribution and its "REIT
taxable income" will be in excess of amounts needed to pay dividends

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7
on the Series A Preferred Shares. See "Risk Factors -- Risks Associated with
Changes in Interest Rates."

A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.

The principal executive offices of the Company are located at 400
Quincy Street, Hancock, Michigan 49930, telephone number (906) 482-2700.

RISK FACTORS

The purchase of the Series A Preferred Shares offered hereby is
subject to certain risks. See "Risk Factors" commencing on page 15. Among such
risks are the following:

- The Company is a newly organized corporation with no operating
history. The Company will be dependent in virtually every
phase of its operations on the diligence and skill of the
officers and employees of the Bank and its affiliates. To the
extent officers and employees of the Bank and its affiliates do
not exercise an appropriate level of diligence and skill, the
Company's results of operations may be adversely affected.

- A decline in the performance or capital levels of the Bank or
the placement of the Bank into conservatorship or receivership
could lead to the exchange of the Series A Preferred Shares
for Bank Preferred Shares, which would represent an investment
in the Bank and not in the Company. An investment in the Bank
is subject to certain risks that are distinct from the risks
associated with an investment in the Company. For example, an
investment in the Bank would involve risks relating to the
capital levels of and other federal regulatory requirements
applicable to the Bank and the performance of the Bank's loan
portfolio. In the event of receivership of the Bank, the
claims of the Bank's depositors and of its secured, senior,
general and subordinated creditors will be entitled to a
priority of payment over the claims of holders of equity
securities such as the Bank Preferred Shares. As a result, if
the Bank were to be placed into receivership after the
Automatic Exchange or if the Automatic Exchange were to occur
after receivership of the Bank, the holders of the Bank
Preferred Shares likely would receive, if anything,
substantially less than holders of the Series A Preferred
Shares would have received had the Series A Preferred Shares
not been exchanged for Bank Preferred Shares. Potential
investors in the Series A Preferred Shares should carefully
consider the risks with respect to an investment in the Bank
set forth in the Offering Circular attached hereto as Annex I.
In addition, the Bank Preferred Shares will not be listed on
the Nasdaq System and therefore will be an illiquid investment
with a value not readily determinable. Each individual holder
of Bank Preferred Shares will be

2
8

required to determine the fair market value of the Bank
Preferred Shares received to determine the tax effect of the
Automatic Exchange. Any such determination may be subject to
challenge by the IRS.

- Because of the relationship between the Company and the Bank
and its affiliates, conflicts of interest may arise between
the Bank and its affiliates and the Company. The Bank and its
affiliates may have interests which are not identical to those
of the Company. Consequently, conflicts of interest may arise
with respect to transactions, including without limitation,
the Company's acquisition of the Initial Portfolio; future
acquisitions of Mortgage Loans from the Bank or its
affiliates; servicing of Mortgage Loans, particularly with
respect to Mortgage Loans that become Classified or placed in
Nonaccrual Status or which have been, more than once during
the preceding twelve months, more than 30 days past due in the
payment of principal and interest; future dispositions of
Mortgage Loans to D&N and the Bank or any of their non-bank
subsidiaries; and the modification of the Advisory Agreement
or the Servicing Agreements. Any resolution of a conflict may
adversely effect the Company's results of operations.

- As a subsidiary of the Bank, the Company is subject to the
risk that banking authorities will restrict the ability of the
Company to transfer assets, to make distributions to
stockholders, including dividends to the holders of Series A
Preferred Shares, or to redeem shares of Preferred Stock.
Under certain circumstances, certain of these restrictions
could result in the Company's failure to qualify as a REIT
which could result in the inability of the Company to pay
dividends on the Series A Preferred Shares.

- Because the rate at which dividends are to be paid is fixed
and a majority of the Mortgage Loans that constitute the
Initial Portfolio are adjustable rate Mortgage Loans, a
significant decline in interest rates may adversely affect the
Company's ability to pay dividends on the Series A Preferred
Shares. In such an interest rate environment, the Company may
experience an increase in prepayments on its Mortgage Loans
and may find it more difficult to purchase additional Mortgage
Loans bearing rates sufficient to support payment of the
dividends on the Series A Preferred Shares.

- Dividends are not cumulative. Consequently, if the Board of
Directors does not authorize and declare a dividend on the
Series A Preferred Shares for any quarterly period, including
if prevented by federal regulators from paying such dividend,
the holders of Series A Preferred Shares would not be entitled
to receive dividends whether or not funds are or subsequently
become available. The board of directors of the Company (the
"Board of Directors") may determine, in its business judgment,
that it would be in the best interests of the Company to pay
less than the full amount of the stated dividends on the
Series A Preferred Shares or no dividends for any quarter,
even if funds are available. To remain qualified as a REIT,
however, the Company must distribute annually at least 95% of
its "REIT taxable" income to stockholders, and the Company
expects that the Board of Directors will authorize dividends
on the Series A Preferred Shares quarterly.

3
9
- Risks associated with mortgage loans generally, and
particularly the geographic concentration of the Company's
mortgage loan portfolio in Michigan, could adversely affect
the value of the Series A Preferred Shares and the Mortgage
Loans (defined below) held by the Company. The quality of the
Company's loan portfolio is dependent on the cash flow of
borrowers, regional economic conditions and residential and
commercial real estate values. Adverse changes affecting any
of the above mentioned segments are likely to have an adverse
impact on the Company's Mortgage Loans and, as a result, the
Company's financial condition and results of operations may
deteriorate which could adversely affect the Company's ability
to pay dividends.

- The Board of Directors may amend or revise (in certain
circumstances subject to the approval of a majority of the
Independent Directors) the policies of the
Company set forth herein, including the Company's policy
regarding incurring indebtedness. To the extent the Company
were to change its policy with respect to the incurrence of
indebtedness, the Company would be subject to risks associated
with leverage, including, without limitation, changes in
interest rates, prepayment risk and risks of various hedging
strategies which may adversely affect the Company's ability to
pay dividends on the Series A Preferred Shares.

- The Company is subject to risks associated with the failure of
the Company to maintain its status as a REIT. If the Company
fails to maintain its status as a REIT for federal income tax
purposes, it will be subject to corporate income tax and will
not be permitted to deduct, for income tax purposes, dividends
on the Series A Preferred Shares or the Common Stock and may
not generate sufficient after-tax income to support payment
of dividends on the Series A Preferred Shares.

THE BANK

The Bank is a federally chartered and federally insured stock savings
bank which is wholly owned by D&N Financial Corporation. At December 31, 1996,
D&N Financial Corporation had total assets of $1.47 billion and stockholders'
equity of $86.1 million. Its common stock is listed on the Nasdaq National
Market under the symbol "DNFC". At December 31, 1996, the Bank conducted
business from 37 full service offices, seven savings agency offices and four
mortgage banking offices in Michigan. At December 31, 1996, the Bank had total
assets of $1.47 billion, total deposits of $964.1 million and total
stockholders' equity of $79.9 million. For the year ended December 31, 1996,
the Bank had net income of $9.3 million and a return on average assets of
0.69%. See "Certain Information Regarding the Bank--Selected Consolidated
Financial Data".

Under certain circumstances, each Series A Preferred Share will be
exchanged automatically for one newly issued Series A preferred share of the
Bank (a "Bank Preferred Share") if the appropriate regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or receivership or
(iii) the appropriate regulatory agency, in its sole discretion and even if the
Bank is not "undercapitalized," anticipates the Bank becoming
"undercapitalized" in the near term (the "Exchange Event"). CONSEQUENTLY, AN
INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT IN
BANK PREFERRED

4
10
SHARES AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE
BANK HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS
IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE
DESCRIPTION OF THE BANK SET FORTH UNDER "CERTAIN INFORMATION REGARDING THE
BANK". See also "Description of Series A Preferred Shares--Automatic
Exchange". The Bank will be considered to be "undercapitalized" under the
prompt corrective action regulations established pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"),
if it has (i) a core capital (or leverage) ratio of less than 4.0%, (ii) a Tier
1 risk-based capital ratio of less than 4.0%, or (iii) a total risk-based
capital ratio of less than 8.0%. Tier 1 or core capital consists of common
shareholders' equity, noncumulative perpetual preferred stock, and minority
interests in consolidated subsidiaries, less certain intangible assets and
investments in certain subsidiaries. Total capital consists of core capital
plus supplementary capital (which includes cumulative perpetual preferred
stock, qualifying subordinated debt, and a limited amount of the allowances for
loan and lease losses) to the extent such supplementary capital does not exceed
100% of core capital, less certain equity investments. For purposes of the
prompt corrective action regulations, the Bank's capital category is determined
as of the most recent date (i) certain quarterly financial reports are required
to be filed with the regulators; (ii) a final report of examination has been
delivered to the Bank; or (iii) the Bank is notified in writing by the OTS of
its capital category or a change in such category. For its fiscal years ended
December 31, 1996, 1995 and 1994, the Bank's core capital (or leverage) ratio
was 5.11%, 5.41% and 5.09%, its Tier 1 risk-based capital ratio was 8.72%,
9.20% and 8.92%, and its total risk-based capital ratio was 9.94%, 10.45% and
10.08%, respectively. After giving effect to the Offering, the 1996 ratios
would have been 6.84%, 11.87% and 13.10%, respectively. For a discussion of the
capital requirements applicable to the Bank, see "Certain Information Regarding
the Bank--Risk Factors and Other Considerations--Regulatory Capital Levels".

The Bank Preferred Shares will only be issued upon the occurrence of
the Automatic Exchange. The Bank Preferred Shares will not be registered with
the Securities and Exchange Commission (the "Commission") but are being
registered with the Office of Thrift Supervision (the "OTS"). A copy of the
offering circular filed with the OTS relating to the Bank Preferred Shares is
affixed to this Prospectus (the "Offering Circular") as Annex I. The principal
executive offices of the Bank are located at 400 Quincy Street, Hancock,
Michigan 49930, and its telephone number at such address is (906) 482-2700.

POSSIBLE CONFLICTS OF INTEREST

The Bank and its affiliates may have interests which are not identical
to those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including without limitation, the Company's
acquisition of the Initial Portfolio; future acquisitions of Mortgage Loans
from the Bank or its affiliates; servicing of Mortgage Loans, particularly with
respect to Mortgage Loans that become Classified or placed on Nonaccrual Status
or which have been, more than once during the preceding twelve months, more
than 30 days past due in the

5
11
payment of principal and interest; future dispositions of Mortgage Loans to D&N
and the Bank or any of their non-bank subsidiaries; and the modification of the
Advisory Agreement or the Servicing Agreements.

It is the intention of the Company, D&N and the Bank that any
agreements and transactions between the Company, on the one hand, and D&N, the
Bank or their affiliates, on the other hand, are fair to all parties and
consistent with market terms, including the prices paid and received for
Mortgage Loans, including those in the Initial Portfolio, on their acquisition
or disposition by the Company or in connection with the servicing of such
Mortgage Loans. The requirement in the Certificate of Designation establishing
the Series A Preferred Shares that certain actions of the Company be approved
by a majority of the Independent Directors is also intended to ensure fair
dealings between the Company, D&N, the Bank and their respective affiliates.
However, there can be no assurance that such agreements or transactions will be
on terms as favorable to the Company as those that could have been obtained
from unaffiliated third parties. See "Risk Factors--Relationship with the Bank
and its Affiliates; Conflicts of Interest" and"Business and
Strategy--Management Policies and Programs--Conflict of Interest Policies".

THE OFFERING

For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares".

Issuer . . . . . . . . . . . . . . D&N Capital Corporation, a
newly-formed Delaware corporation
created for the purpose of acquiring,
holding and managing Mortgage Assets.

Securities Offered . . . . . . . . 1,100,000 Series A Preferred Shares.
The Company has granted the
Underwriters an option for 30 days to
purchase up to an additional 110,000
Series A Preferred Shares at the
initial public offering price solely
to cover over-allotments, if any.

Ranking . . . . . . . . . . . . . . With respect to the payment of
dividends and amounts upon
liquidation, the Series A Preferred
Shares will rank senior to the
Company's Common Stock. Additional
shares of preferred stock of the
Company (the "Preferred Stock")
ranking senior to the Series A
Preferred Shares may not be issued
without the approval of holders of at
least two-thirds of the Series A
Preferred Shares. Additional shares
of Preferred Stock ranking on a
parity with the Series A Preferred
Shares may not be issued without the
approval of a majority of the
Independent Directors. See
"Description of Series A Preferred
Shares--Independent Director Approval".

6
12
Use of Proceeds . . . . . . . . . . The net proceeds to the Company from
the Offering, together with proceeds
received in connection with the sale
of shares of Common Stock to the
Bank, will be used to purchase the
Company's initial portfolio of Mortgage
Assets and to pay the expenses of the
Offering and the formation of the
Company (currently estimated by the
Company to be approximately $325,000
in the aggregate). See "Use of
Proceeds".

Dividends . . . . . . . . . . . . . Dividends on the Series A Preferred
Shares are payable at the rate of [ ]%
per annum of the liquidation
preference (an amount equal to $[ ] per
annum per share), if, when and as
declared by the Board of Directors
of the Company. If declared,
dividends are payable quarterly in
arrears on the last day of March,
June, September and December in each
year, commencing September 30, 1997.
Dividends accrue in each quarterly
period from the first day of such
period, whether or not dividends are
paid with respect to the preceding
period. Dividends on the Series A
Preferred Shares are not cumulative
and, accordingly, if no dividend is
declared on the Series A Preferred
Shares by the Company for a quarterly
dividend period, holders of the Series
A Preferred Shares will have no right
to receive a dividend for that
period, and the Company will have no
obligation to pay a dividend for that
period, whether or not dividends are
declared and paid for any future
period with respect to either the
Series A Preferred Shares or the
Common Stock. If no dividend is paid
on the Series A Preferred Shares
for a quarterly dividend period, the
payment of dividends on the Common
Stock (100% of which is owned by the
Bank) will be prohibited for that
period and at least the following
three quarterly dividend periods.
See "Description of Series A
Preferred Shares--Dividends".

Liquidation Preference . . . . . . The liquidation preference for each
Series A Preferred Share is $25.00,
plus an amount equal to the
quarterly accrued and unpaid
dividends, if any, thereon. See
"Description of Series A Preferred
Shares--Rights Upon Liquidation".

7
13
Redemption . . . . . . . . . . . . The Series A Preferred Shares
are not redeemable prior to [ ],
2002 (except upon the occurrence of a
Tax Event as defined in "Description of
Series A Preferred Shares--Redemption").
On and after [ ], 2002, the Series
A Preferred Shares may be redeemed for
cash at the option of the Company, in
whole or in part, at any time and from
time to time, at a redemption price of
$25.00 per share, plus the accrued and
unpaid dividends for the most recent
quarter, if any, thereon. Upon the
occurrence of a Tax Event, the Company
will have the right at any time to
redeem the Series A Preferred Shares in
whole (but not in part) at a redemption
price of $25.00 per share, plus the
accrued and unpaid dividends for the
most recent quarter, if any, thereon.
The Series A Preferred Shares will not
be subject to any sinking fund or
mandatory redemption and will not be
convertible into any other securities of
the Company. See "Description of Series
A Preferred Shares--Redemption".

Automatic Exchange . . . . . . . . Each Series A Preferred Share will be
exchanged automatically for one Bank
Preferred Share upon the occurrence of
the Automatic Exchange. See
"Description of Series A Preferred
Shares--Automatic Exchange".

Voting Rights . . . . . . . . . . . Except as described herein with
respect to certain voting rights in
the Company, holders of Series A
Preferred Shares will not have any
voting rights. In any matter on which
the Series A Preferred Shares may vote
(as expressly provided herein or as may
be required by law), each Series A
Preferred Share will be entitled to
one vote. See "Description of Series A
Preferred Shares--Voting Rights".

Ownership Limits . . . . . . . . . Ownership of more than 9.9% of any
outstanding series of Preferred
Stock, including the Series A
Preferred Shares offered hereby, is
restricted in order to preserve the
Company's status as a REIT for
federal income tax purposes. See
"Description of Capital
Stock--Restrictions on Ownership and
Transfer".

Trading . . . . . . . . . . . . . . The Company has applied for listing of
the Series A Preferred Shares on the
Nasdaq National Market, subject to
official notice of issuance, under
the symbol "DNFCP".

8
14
Ratings . . . . . . . . . . . . . . It is expected that the Series A
Preferred Shares will be rated BB- by
Duff & Phelps Credit Rating Co. A
security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any
time by the assigning rating
organization.

9
15
THE FORMATION

THE FORMATION

Prior to or simultaneously with the completion of the Offering, the
Company, D&N, the Bank and its affiliates will engage in the transactions
described under "Certain Transactions Constituting the Formation--The
Formation". These transactions are designed (i) to facilitate the Offering,
(ii) to transfer the ownership of the Initial Portfolio (defined below) to the
Company and (iii) to enable the Company to qualify as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1997.

The following chart outlines the relationship between the Company, the
Bank and its affiliates relevant to the Offering following completion of the
Offering.

BENEFITS TO THE BANK AND ITS AFFILIATES

The Bank is required by the OTS to maintain certain levels of capital
for bank regulatory purposes. The Bank has informed the Company that the Series
A Preferred Shares will be treated as capital of the Bank for regulatory
purposes. The Bank has indicated to the Company that such treatment, together
with the Company's ability to deduct, for income tax purposes, the dividends
payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT, will provide the Bank with a more cost-effective means
of obtaining capital for regulatory purposes than if the Bank were to issue
preferred stock itself.

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16
The Bank will realize certain other benefits from the Offering and the
other transactions constituting the formation of the Company, including (i) the
receipt by the Bank of the net proceeds from the sale of the Series A Preferred
Shares in connection with the sale to the Company of the Initial Portfolio and
(ii) the receipt of advisory and servicing fees under the Advisory Agreement
and the Servicing Agreements. It is also expected that the Bank will receive
dividends in respect of the Common Stock held by the Bank. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".

BUSINESS AND STRATEGY

The Company's principal business objective is to acquire, hold and
manage Mortgage Assets that will generate net income for distribution to
stockholders. The Company expects that all of its Mortgage Assets will be
acquired from the Bank or affiliates of the Bank as whole loans ("Mortgage
Loans") secured by first mortgages or deeds of trust on single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties. The Company may also from time to time acquire mortgage securities
that qualify as real estate assets under Section 856(c)(6)(B) of the Code, that
are rated AA or higher by at least one nationally recognized independent rating
organization and that represent interests in or obligations backed by pools of
mortgage loans ("Mortgage-Backed Securities"). Mortgage loans underlying the
Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located in the United States.

Simultaneously with the consummation of the Offering, the Bank will
purchase shares of Common Stock for a price equal to $27.5 million. The Company
will use the aggregate proceeds of $55 million received in connection with both
the Offering and such sale of shares of Common Stock to the Bank to purchase a
portfolio of Mortgage Loans (the "Initial Portfolio") from the Bank. If the
Underwriters exercise their option to purchase additional Series A Preferred
Shares to cover over-allotments, the Bank will purchase additional shares of
Common Stock for a price equal to the aggregate public offering price of the
additional Series A Preferred Shares purchased pursuant to the Underwriters'
over-allotment option, and the Company will use the additional proceeds from
any such additional sales of Series A Preferred Shares and shares of Common
Stock to purchase additional Mortgage Loans of the types described in "Business
and Strategy--Description of Initial Portfolio". Simultaneously with the
consummation of the Offering (or upon the exercise by the Underwriters of their
over-allotment option), the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting commissions and
expenses incurred by the Company in connection with the Offering (including
without limitation any underwriting commissions associated with the exercise by
the Underwriters of their over-allotment option) and all expenses incurred by
the Company in connection with its formation in order to provide the Company
with funds sufficient to pay such expenses. See "Use of Proceeds".

On March 24, 1997, the pool of Mortgage Loans from which the Initial
Portfolio will be selected had an aggregate outstanding principal balance of
$64,141,000. Approximately 90%

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(measured by aggregate outstanding principal balance) of such pool consists of
Mortgage Loans secured solely by first mortgages or deeds of trust on
single-family (one- to four-unit) residential properties ("Residential Mortgage
Loans"). See "Business and Strategy--Description of Initial
Portfolio--Residential Mortgage Loans". The remainder of such pool consists of
Mortgage Loans secured by first mortgages or deeds of trust on commercial real
estate properties ("Commercial Mortgage Loans"). See "Business and
Strategy--Description of Initial Portfolio--Commercial Mortgage Loans". The
Bank will enter into servicing agreements with respect to the Residential
Mortgage Loans and the Commercial Mortgage Loans (the "Servicing Agreements")
pursuant to which it will service the Mortgage Loans included in the Initial
Portfolio and will be entitled to receive fees in connection with the servicing
of such Mortgage Loans. The Bank in its role as servicer under the Servicing
Agreements is hereinafter referred to as the "Servicer". The Company will not
receive income from servicing loans. See "Business and Strategy--Servicing".

The Company and the Bank believe, based on Bank management's
experience in evaluating mortgage loans, that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $55 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been
or will be obtained for purposes of the Offering. See "Risk Factors--No Third
Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations with
Affiliates".

The Company will enter into an advisory agreement with the Bank (the
"Advisory Agreement") pursuant to which the Bank will administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is hereinafter referred to as the "Advisor". The Advisor
will be responsible for (i) monitoring the credit quality of Mortgage Assets
held by the Company, (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets and
(iii) holding documents relating to the Mortgage Assets as custodian on behalf
of the Company. The Advisor may from time to time subcontract all or a portion
of its obligations under the Advisory Agreement to one or more of its
affiliates involved in the business of managing Mortgage Assets. The Advisor
may, with the approval of a majority of the Board of Directors, as well as a
majority of the Independent Directors, subcontract all or a portion of its
obligations under the Advisory Agreement to unrelated third parties. The
Advisor will not, in connection with the subcontracting of any of its
obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement. The Advisor and its
personnel have substantial experience in mortgage finance and in the
administration of Mortgage Loans.

The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $125,000. See "Management--The
Advisor".

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See "Certain Transactions Constituting the Formation--Benefits to the
Bank and Its Affiliates" for information regarding the aggregate amounts
payable to the Bank and its affiliates in connection with the Offering and the
transactions to be entered into in connection with the Offering.

The Company's Board of Directors is composed of five members, two of
whom will be Independent Directors. Certain actions by the Company require
the prior approval of a majority of Independent Directors. See "Description of
Series A Preferred Shares--Independent Director Approval". So long as there
are only two Independent Directors, any action that requires the approval of a
majority of the Independent Directors must be approved by both Independent
Directors. Pursuant to the Certificate of Designation establishing the Series A
Preferred Shares, the Independent Directors are required to take into account
the interests of the holders of both the Series A Preferred Shares and the
Common Stock in assessing the benefit to the Company of any proposed action
requiring their approval. The Company currently has four officers. The Company
has no other employees and does not anticipate that it will require additional
employees. See "Management".

The Company may from time to time purchase additional Mortgage Loans
or interests in Mortgage Loans out of proceeds received in connection with the
repayment or disposition of Mortgage Loans or the issuance of additional shares
of Common Stock or Preferred Stock. Additional shares of Preferred Stock
ranking senior to the Series A Preferred Shares may not be issued by the
Company without the approval of holders of at least two-thirds of the
outstanding Series A Preferred Shares. Additional shares of Preferred Stock
ranking on a parity with the Series A Preferred Shares may not be issued by the
Company without the approval of a majority of the Independent Directors. See
"Description of Series A Preferred Shares--Voting Rights" and "-- Independent
Director Approval". The Company does not currently intend to issue any
additional shares of Preferred Stock unless it simultaneously issues additional
shares of Common Stock to the Bank, and the aggregate proceeds to be received
from such issuance of Common Stock approximately equals the sum of the
aggregate offering price of such additional Preferred Stock and the Company's
expenses (including any underwriting commissions or placement fees) incurred in
connection with the issuance of such additional shares of Preferred Stock. It
is currently anticipated that the Company will issue additional shares of
Preferred Stock if such issuance would provide the Bank with the most
cost-effective means of raising capital for bank regulatory purposes at the
time. See "Certain Transactions Constituting the Formation--Benefits to the
Bank and Its Affiliates".

The Company currently anticipates that all of the Mortgage Loans that
it may acquire in the future will be purchased from the Bank and affiliates of
the Bank. No arrangements or procedures are currently in place regarding the
acquisition by the Company of Mortgage Loans from unaffiliated third parties.
The Company expects that any additional Mortgage Loans acquired by the Company
will be whole loans, will represent first lien positions, will be acquired on a
basis consistent with secondary market standards and will have been originated
and

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underwritten in conformity with standards generally applied by the Bank or
affiliates of the Bank at the time the Mortgage Loans were originated. The
Company currently intends to maintain approximately 90% of its portfolio of
Mortgage Assets in Residential Mortgage Loans and approximately 10% of its
portfolio in Commercial Mortgage Loans. It is not currently anticipated that
the Company will hold a significant amount of Mortgage-Backed Securities
although there is no limit on the amount that may be purchased. The Company
does not contemplate ownership of property other than Mortgage Assets and
Mortgage-Backed Securities and does not contemplate ownership of 10% or more of
the outstanding voting securities of any one issuer. The Company's current
policy is not to acquire any Commercial Mortgage Loan if such Commercial
Mortgage Loan would constitute more than 5% of the total book value of the
Mortgage Assets of the Company at the time of its acquisition. The Company's
current policy prohibits the acquisition of any Mortgage Loan or any interest
in a Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in
the payment of principal or interest. Mortgage Loans acquired by the Company
in the future will be whole loans owned by the Bank or an affiliate of the
Bank. Loans that are in Nonaccrual Status are generally loans that are past
due 90 days or more in principal or interest and Classified loans are troubled
loans which are deemed substandard or doubtful and where the full
collectibility of principal and interest on such loan is doubtful.

As a newly-formed entity, the Company has no prior operating history.
As of the date hereof, it has $1,000 in assets, $1,000 in stockholder's equity
and no indebtedness. Immediately after the issuance by the Company of the
Series A Preferred Shares to the public and the Common Stock to the Bank and
the purchase by the Company of the Initial Portfolio, the Company (assuming
that (i) the Underwriters' over-allotment option is not exercised and (ii)
there are $[ ] in aggregate offering and organizational expenses) will
have $55 million in Mortgage Assets, $27.5 million of stated capital
attributable to the Series A Preferred Shares, $8.65 million of stated capital
attributable to the Common Stock and $18.85 million of additional paid-in
capital. See "Capitalization".

TAX STATUS OF THE COMPANY

The Company will elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. As a REIT, the Company generally will not be subject to federal income
tax on net income and capital gains that it distributes to the holders of its
Common Stock and Preferred Stock, including the Series A Preferred Shares.

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meet the requirements for qualification and taxation as a REIT under the Code.
A REIT is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute to stockholders at least
95% of its "REIT taxable income". Notwithstanding qualification for taxation
as a REIT, the Company may be subject to federal, state and/or local tax. See
"Risk Factors--Tax Risks" and "Federal Income Tax Considerations".

RISK FACTORS

Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Series A Preferred Shares in the Offering. For a
description of certain risk factors relating to the Bank and the Bank Preferred
Stock, prospective investors should carefully review and consider the
information contained in the section entitled "Risk Factors" in the attached
Offering Circular. This Prospectus contains certain forward-looking statements
and information relating to the Company and the Bank that are based on the
beliefs of management as well as assumptions made by and information currently
available to management. In addition, the words "anticipate," "believe,"
"estimate," "expect," "intend" and similar expressions, as they relate to the
Company, the Bank or the Company's or the Bank's management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company or the Bank with respect to future events and are subject to
certain risks, uncertainties and assumptions, including the risk factors
described in this Prospectus. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company and the Bank do not
intend to update these forward-looking statements.

NO OPERATING HISTORY; DEPENDENCE UPON BANK AS ADVISOR AND SERVICER

The Company is a newly organized corporation with no operating history
and no revenues to date. The Company will be dependent for the selection,
structuring and monitoring of its Mortgage Assets on the diligence and skill of
its officers (all of whom are also officers of the Bank or its affiliates) and
the officers and employees of the Bank, as Advisor. See "Management". In
addition, the Company will be dependent upon the expertise of the Bank, as
Servicer, for the servicing of its Mortgage Loans. To the extent officers and
employees of the Bank and its affiliates do not exercise an appropriate level
of diligence and skill, the Company's results of operations may be adversely
affected. The Advisor may subcontract all or a portion of its obligations
under the Advisory Agreement, and the Servicer may subcontract all or a portion
of its obligations under the Servicing Agreements, to one or more affiliates,
and under certain conditions to non-affiliates, involved in the business of
managing or servicing, as the case may be, Mortgage Assets. In the event the
Advisor or the Servicer subcontracts its obligations in such a manner, the
Company will be dependent upon the subcontractor to provide any such services.
See "Management--The Advisor" and "Business and Strategy--Servicing".

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RISK OF AUTOMATIC EXCHANGE UPON A DECLINE IN THE BANK'S CAPITAL POSITION OR THE
RECEIVERSHIP OF THE BANK

The purchase of Series A Preferred Shares involves a high degree of
risk with respect to the performance and capital levels of the Bank. A decline
in the performance and capital levels of the Bank or the placement of the Bank
into conservatorship or receivership could result in the exchange of the Series
A Preferred Shares for Bank Preferred Shares, which would be an investment in
the Bank and not in the Company. As a result, holders of Series A Preferred
Shares would become preferred stockholders of the Bank at a time when the
Bank's financial condition was deteriorating or when the Bank had been placed
into conservatorship or receivership. An investment in the Bank is also
subject to certain risks that are distinct from the risks associated with an
investment in the Company. For example, an investment in the Bank would
involve risks relating to the capital levels of, and other regulatory
requirements applicable to, the Bank and the performance of the Bank's loan
portfolio. An investment in the Bank is also subject to the general risks
inherent in equity investments in depository institutions. In the event of a
liquidation of the Bank, the claims of depositors and secured, senior, general
and subordinated creditors of the Bank would be entitled to a priority of
payment over the claims of holders of equity interests such as the Bank
Preferred Shares. As a result, if the Bank were to be placed into receivership
after the Automatic Exchange or if the Automatic Exchange were to occur after
receivership of the Bank, the holders of the Bank Preferred Shares likely would
receive, if anything, substantially less than the holders of the Series A
Preferred Shares would have received had the Series A Preferred Shares not been
exchanged for Bank Preferred Shares. Furthermore, there can be no assurance
that the Bank would be in a financial position, after the occurrence of the
Automatic Exchange, to make any dividend payments on the Bank Preferred Shares.
Potential investors in the Series A Preferred Shares should carefully consider
the risks with respect to an investment in the Bank set forth under "Certain
Information Regarding the Bank--Risk Factors and Other Considerations". See
also "Description of Series A Preferred Shares--Automatic Exchange".

Although the Series A Preferred Shares will be listed on the Nasdaq
National Market, the Bank does not intend to apply for listing of the Bank
Preferred Shares, for which the Series A Preferred Shares will be exchanged
automatically on a one-for-one basis upon the occurrence of the Automatic
Exchange, on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq System. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred
Shares would develop or be maintained. Therefore, the value of the Bank
Preferred Shares will not be readily determinable. The Automatic Exchange will
be a taxable exchange with respect to which each holder of the Series A
Preferred Shares will have a gain or loss, as the case may be, measured by the
difference between the basis of such holder in the Series A Preferred Shares
and the fair market value of the Bank Preferred Shares received in the
Automatic Exchange. Each individual holder will be required to determine the
fair market value of the Bank Preferred Shares received to determine the tax
effect of the Automatic Exchange. Any such determination may be subject to
challenge by the IRS.

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DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY

Because the Company is a subsidiary of the Bank, regulatory
authorities will have the right to examine the Company and its activities.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
such regulatory authorities will have the authority to restrict the ability of
the Company to transfer assets, to make distributions to its stockholders
(including dividends to the holders of Series A Preferred Shares, as described
below), or to redeem shares of Preferred Stock, or even to require the Bank to
sever its relationship with or divest its ownership of the Company. Such
actions could potentially result in the Company's failure to qualify as a REIT.
See "--Tax Risks".

Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank becomes "undercapitalized" for
purposes of the OTS prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% and a core capital (or leverage)
ratio of less than 4.0%. At December 31, 1996, the Bank's total risk-based
capital ratio was 9.94%, its Tier 1 risk-based capital ratio was 8.72% and its
core capital (or leverage) ratio was 5.11%. Such ratios, adjusted to give
effect to the sale of Series A Preferred Shares in the Offering, would have
been 13.10%, 11.87% and 6.84%, respectively.

If the Automatic Exchange occurs, the Bank would likely be prohibited
from paying dividends on the Bank Preferred Shares. In all circumstances
following the Automatic Exchange, the Bank's ability to pay dividends would be
subject to various restrictions under OTS regulations.

Furthermore, in the event the Bank is placed into conservatorship or
receivership (whether before or after the Automatic Exchange), the Bank would
likely be unable to pay dividends on the Bank Preferred Shares. In addition,
in the event of a liquidation of the Bank, the claims of the Bank's depositors
and of its secured, senior, general and subordinated creditors would be
entitled to a priority of payment over the dividend and other claims of holders
of equity interests such as the Bank Preferred Shares issued pursuant to the
Automatic Exchange.

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Dividends on the Series A Preferred Shares in excess of the Company's
net income could be treated as "capital distributions" by the OTS, in which
case the Company's payment of such dividends would be subject to restrictions
under the OTS capital distribution regulations. Under these regulations,
institutions are divided into tiers. Tier 1 institutions are those in
compliance with their "fully phased-in" capital requirements and which have not
been notified by the OTS that they are "in need of more than normal
supervision". Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to
such distributions. Tier 1 institutions may seek OTS approval to pay dividends
beyond these amounts.

As of December 31, 1996, the Bank had sufficient levels of capital to
be a Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that it believes is in need of
more than normal supervision (after written notice) as a Tier 3 institution.

The OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds and must be given
30 days advance notice of all capital distributions. Any such exercise of
discretion would adversely affect the Bank's ability to pay dividends if the
Automatic Exchange occurs.

RISKS ASSOCIATED WITH CHANGES IN INTEREST RATES THAT WOULD ADVERSELY AFFECT THE
COMPANY'S ABILITY TO PAY DIVIDENDS

The Company's income will consist primarily of interest payments on
the Mortgage Loans held by it. The Company anticipates that approximately 60%
of its Commercial Mortgage Loans and approximately 50% of its Residential
Mortgage Loans will bear interest at adjustable rates. If there is a decline
in interest rates (as measured by the indices upon which the interest rates of
the Mortgage Loans are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In such an interest
rate environment, the Company may experience an increase in prepayments on its
Mortgage Loans and may find it more difficult to purchase additional Mortgage
Loans bearing rates sufficient to support payment of the dividends on the
Series A Preferred Shares. In addition, certain Residential Mortgage Loan
products which the Company will hold could allow borrowers in such an interest
rate environment to convert an adjustable rate mortgage to a fixed rate
mortgage, thus "locking in" a low fixed interest rate. Because the rate at
which dividends are required to be paid on the Series A Preferred Shares is
fixed, there can be no assurance that a declining interest rate environment
would not adversely affect the Company's ability to pay dividends on the Series
A Preferred Shares.

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DIVIDENDS NOT CUMULATIVE

In order to qualify as Tier 1 capital, dividends on the Series A
Preferred Shares are not cumulative. Consequently, if the Board of Directors
does not declare a dividend on the Series A Preferred Shares for any quarterly
period, the holders of the Series A Preferred Shares would not be entitled to
recover such dividend whether or not funds are or subsequently became
available. The Board of Directors may determine, in its business judgment,
that it would be in the best interests of the Company to pay less than the full
amount of the stated dividends on the Series A Preferred Shares or no dividends
for any quarter notwithstanding that funds are available. Factors that would
generally be considered by the Board of Directors in making this determination
are the Company's financial condition and capital needs, the impact of
legislation and regulations as then in effect or as may be proposed, economic
conditions, and such other factors as the Board may deem relevant. To remain
qualified as a REIT, the Company must distribute annually at least 95% of its
"REIT taxable income" (not including capital gains) to stockholders. See
"--Tax Risks," below and "Federal Income Tax Considerations--Taxation of the
Company--Organizational Requirements".

RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY

An investment in the Series A Preferred Shares may be affected by,
among other things, a decline in real estate values. In the event the Mortgage
Assets held by the Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares. Factors that
could affect the value of the Mortgage Assets held by the Company include the
following:

Concentration in Michigan. Geographically, the Company's Mortgage
Loans will be generally concentrated in the State of Michigan. Geographic
concentration of loans may present risks in addition to those present with
respect to Mortgage Loans generally. Approximately 90% of the residential
properties underlying the Company's Residential Mortgage Loans included in the
Initial Portfolio are located in Michigan. The remaining 10% are secured by
properties located in ten other states, the largest concentration being in Ohio
which comprise 3.3% of the Initial Portfolio. All of the commercial properties
underlying the Company's Commercial Mortgage Loans are located in Michigan.
Mortgage Loans secured by properties located in Michigan may be subject to a
greater risk of default than other comparable Mortgage Loans in the event of
adverse economic, political or business developments or natural hazards that
may affect Michigan and the ability of property owners in Michigan to make
payments of principal and interest on the underlying mortgages. The Company
complies with general hazard insurance policy requirements of Fannie Mae
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The Company
will not maintain, however, any special hazard insurance policies which could
mitigate any damages caused by natural disasters (such as floods) which may
occur in Michigan or any other state in which collateral underlying a Mortgage
Loan is located. In the event of any such natural disaster, the Company's
ability to pay dividends on the Series A Preferred Shares could be adversely
affected. Certain other geographic regions of the United States may from time
to time experience natural disasters or weaker regional economic conditions and
housing markets, and, consequently, may experience higher rates of loss and
delinquency on

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Mortgage Loans generally. Any concentration of the Mortgage Loans in any other
region may present risks in addition to those present with respect to Mortgage
Loans generally. See "Business and Strategy--Description of Initial
Portfolio--Geographic Distribution" herein for further information regarding
the geographic concentration of the Mortgage Loans in the Initial Portfolio.

No Credit Enhancement or Special Hazard Insurance. As described in
"--Concentration in Michigan" above, the Company generally does not intend to
obtain credit enhancements such as mortgagor bankruptcy insurance or to obtain
special hazard insurance for its Mortgage Loans, other than standard hazard
insurance, which will in each case only relate to individual Mortgage Loans.
Accordingly, during the time it holds Mortgage Loans for which third party
insurance is not obtained, the Company will be subject to risks of borrower
defaults and bankruptcies and special hazard losses that are not covered by
standard hazard insurance (such as those occurring from floods unless flood
insurance has been obtained on an individual basis). In addition, in the event
of a default on any Mortgage Loan held by the Company resulting from declining
property values or worsening economic conditions, among other factors, the
Company would bear the risk of loss of principal to the extent of any
deficiency between (i) the value of the related mortgaged property, plus any
payments from an insurer (or guarantor in the case of Commercial Mortgage
Loans) and (ii) the amount owing on the Mortgage Loan.

Special Risks Relating to Commercial Mortgage Loans. The Company
anticipates that approximately 10% (measured by aggregate outstanding principal
amount) of its portfolio of Mortgage Assets on an ongoing basis will consist of
Commercial Mortgage Loans. Commercial Mortgage Loans have certain distinct
risk characteristics. The Company's current policy is not to acquire any
Commercial Mortgage Loan if such Commercial Mortgage Loan would constitute more
than 5% of the total book value of the Mortgage Assets of the Company at the
time of its acquisition. Commercial Mortgage Loans generally lack standardized
terms, which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. In addition, commercial real estate properties are generally
subject to relatively greater environmental risks than non-commercial
properties and to the corresponding burdens and costs of compliance with
environmental laws and regulations. See "--Environmental Considerations".
Also, there may be costs and delays involved in enforcing rights of a property
owner against tenants in default under the terms of leases with respect to
commercial properties. For example, tenants may seek the protection of the
bankruptcy laws, which could result in termination of lease contracts.

RISKS ASSOCIATED WITH CHANGES IN REAL ESTATE MARKET CONDITIONS THAT MAY
ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS

The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as: (i) local
and other economic conditions affecting real estate value; (ii) the ability of
tenants to make lease payments; (iii) the ability of a property to attract and
retain tenants, which may in turn be affected by local conditions such as an
oversupply of space or a reduction in demand for rental space in the area, the
attractiveness of

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properties to tenants, competition from other available space and the ability of
the owner to pay leasing commissions, provide adequate maintenance and
insurance, pay tenant improvement costs and make other tenant concessions; (iv)
interest rate levels and the availability of credit to refinance such loans at
or prior to maturity; and (v) increased operating costs, including energy costs,
real estate taxes and costs of compliance with environmental controls and
regulations. The results of the Company's operations depend on, among other
things, the level of interest income generated by the Company's Mortgage Assets,
the market value of such Mortgage Assets and the supply of and demand for such
Mortgage Assets. Further, no assurance can be given that the values of the
properties securing the Mortgage Loans included in the Company's Initial
Portfolio have remained or will remain at the levels existing on the dates of
origination of such Mortgage Loans.

DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS

Even assuming that the mortgaged properties underlying the Mortgage
Loans held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a mortgaged property. In the event of
a default by a mortgagor, these restrictions, among other things, may impede
the ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan. In addition, the Servicer will be entitled to deduct from collections
received all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Loans, including legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses,
thereby reducing amounts available to the Company.

LEGAL CONSIDERATIONS THAT MAY LIMIT THE COMPANY'S COLLECTION OF PRINCIPAL AND
INTEREST AND ADVERSELY EFFECT THE COMPANY'S RESULTS OF OPERATIONS

Applicable state laws may regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Company to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Company to damages and
administrative sanctions. Management of the Company believes the laws of the
State of Michigan with regard to Mortgage Loans do not impose any uniquely
unfavorable burdens or conditions.

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ENVIRONMENTAL CONSIDERATIONS THAT MAY ADVERSELY EFFECT THE COMPANY'S RESULTS OF
OPERATIONS

In the event that the Company is forced to foreclose on a defaulted
Mortgage Loan to recover its investment in such Mortgage Loan, the Company may
be subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired in foreclosure or otherwise, the Company may be required
to remove those substances and clean up the property. There can be no assurance
that in such a case the Company would not incur full recourse liability for the
entire cost of any removal and clean-up, that the cost of such removal and
clean-up would not exceed the value of the property or that the Company could
recoup any of such costs from any third party. The Company may also be liable
to tenants and other users of neighboring properties. In addition, the Company
may find it difficult or impossible to sell the property prior to or following
any such clean-up.

RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS

The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies may be amended or revised from
time to time at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares. The ultimate effect of any change in the
policies and strategies set forth in this Prospectus on a holder of Series A
Preferred Shares may be positive or negative. See "Business and
Strategy--Management Policies and Programs".

ABILITY TO INCREASE LEVERAGE MAY ADVERSELY AFFECT THE COMPANY'S INTEREST INCOME

Although the Company does not currently intend to incur any
indebtedness in connection with the acquisition and holding of Mortgage Loans,
the Company may do so at any time (although indebtedness in excess of 20% of
the aggregate amount of net proceeds received in connection with the issuance
of Preferred Stock and Common Stock may not be incurred without the approval of
a majority of the Independent Directors of the Company). To the extent the
Company were to change its policy with respect to the incurrence of
indebtedness, the Company would be subject to risks associated with leverage,
including, without limitation, changes in interest rates, prepayment risk and
risks of various hedging strategies which may adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.

RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST

The Bank and its affiliates are involved in virtually every aspect of
the Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The

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Bank also services the Company's Mortgage Loans in its role as Servicer under
each of the Servicing Agreements. In addition, other than the Independent
Directors, all of the officers and directors of the Company are also officers
or directors of the Bank or its affiliates. As the holder of all of the
outstanding voting stock of the Company, the Bank will have the right to elect
all directors of the Company, including the Independent Directors.

For example, conflicts of interest may arise between the Bank and the
Company with respect to the Commercial Mortgage Loans included in the Initial
Portfolio. The Company's interest will be limited to its interest in the
Commercial Mortgage Loan, but the Bank may have other interests as a result of
the Bank's overall relationship with the mortgagor in the course of its
commercial lending business. In addition, certain of the Commercial Mortgage
Loans are cross-collateralized with other credit facilities with the Bank. As
a result of the Bank having a relationship with the mortgagor of a Commercial
Mortgage Loan, including as lender with respect to other outstanding loans to
such mortgagor, the Bank, in its role as Advisor and Servicer, may have
different interests with respect to such Commercial Mortgage Loan in the event
that such Commercial Mortgage Loan becomes Classified or placed on Nonaccrual
Status or is otherwise past due in the payment of principal and interest. As a
result of such conflict, the Company may hold a Commercial Mortgage Loan for a
shorter or longer period of time than would otherwise be the case if the Bank
were not the Servicer of the Commercial Mortgage Loan or the Advisor to the
Company.

It is the intention of the Company, D&N and the Bank that any
agreements and transactions between the Company, on the one hand, and D&N, the
Bank or their affiliates, on the other hand, are fair to all parties and
consistent with market terms, including the prices paid and received for
Mortgage Loans, including those in the Initial Portfolio, on their acquisition
or disposition by the Company or in connection with the servicing of such
Mortgage Loans. The requirement in the Certificate of Designation establishing
the Series A Preferred Shares that certain actions of the Company be approved
by a majority of the Independent Directors is also intended to ensure fair
dealings between the Company, D&N, the Bank and their respective affiliates.
However, there can be no assurance that such agreements or transactions will be
on terms as favorable to the Company as those that could have been obtained
from unaffiliated third parties. Any resolution of a conflict may adversely
effect the Company's results of operations. See "Business and
Strategy--Management Policies and Programs--Conflict of Interest Policies".

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NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES

In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company, the Bank and D&N intend that future
acquisitions or dispositions of Mortgage Loans will be on a fair value basis,
there can be no assurance that the consideration to be paid (or received) by
the Company to (or from) the Bank, D&N or any of their respective affiliates in
connection with future acquisitions or dispositions of Mortgage Loans will not
differ from the fair value of such Mortgage Loans.

TAX RISKS

Adverse Consequences of Failure to Qualify as a REIT. The Company
intends to operate so as to qualify as a REIT under the Code. Although the
Company believes that it will be owned and organized and will operate in such a
manner, and Coopers & Lybrand L.L.P. will render certain opinions, described
under "Federal Income Tax Considerations" below, regarding the Company's
qualification as a REIT, no assurance can be given that the Company will be
able to operate in such a manner so as to qualify as a REIT or to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances, not entirely within the Company's control and not addressed
by the opinion of Coopers & Lybrand L.L.P., may affect the Company's ability to
qualify as a REIT. Although the Company is not aware of any proposal in
Congress to amend the tax laws in a manner that would materially and adversely
affect the Company's ability to operate as a REIT, no assurance can be given
that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.

The Company is relying on the opinion of Coopers & Lybrand L.L.P., tax
advisor to the Company, regarding various issues affecting the Company's
ability to qualify, and retain qualification, as a REIT. Such opinion is not
binding on the Internal Revenue Service ("IRS").

If in any taxable year the Company fails to qualify as a REIT, the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for distribution to
the Company's stockholders would be reduced for the year or years involved
which could result in the inability of the Company to pay dividends on the
Series A Preferred Shares. In addition, unless

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30
entitled to relief under certain statutory provisions, the Company would also
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. A failure of the Company to
qualify as a REIT would not by itself give the Company the right to redeem the
Series A Preferred Shares. See "Description of Series A Preferred
Shares--Redemption".

Notwithstanding that the Company currently intends to operate in a
manner designed to qualify as a REIT, future economic, market, legal, tax or
other considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. The tax law prohibits the
Company from electing treatment as a REIT for the four taxable years following
the year of such revocation. See "Federal Income Tax Considerations".

REIT Requirements with Respect to Stockholder Distributions. To
obtain favorable tax treatment as a REIT qualifying under the Code, the Company
generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the
Company will be subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions considered as paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income for the
calendar year, 95% of its capital gains net income for the calendar year and
any undistributed taxable income from prior periods.

Redemption Upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to [ ],
2002, the Company will have the right to redeem the Series A Preferred Shares
in whole but not in part. See "Description of Series A Preferred
Shares--Redemption". Upon the occurrence of a Tax Event, should the Company not
redeem the Series A Preferred Shares, the Company's ability to pay dividends on
the Series A Preferred Shares may be adversely affected.

Automatic Exchange upon Occurrence of the Exchange Event. Upon the
occurrence of the Exchange Event and a Directive, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis into
Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange". Assuming, as is anticipated to be the case, that
the Bank Preferred Shares will be nonvoting, the Automatic Exchange will be
taxable, and each holder of Series A Preferred Shares will have a gain or loss,
as the case may be, measured by the difference between the basis of such holder
in the Series A Preferred Shares and the fair market value of the Bank
Preferred Shares received in the Automatic Exchange. Assuming that such
holder's Series A Preferred Shares were held for more than one year prior to
the Automatic Exchange and held as capital assets, any gain or loss will be
long-term capital gain or loss. See "Federal Income Tax Considerations--Tax
Treatment of Automatic Exchange".

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NO PRIOR MARKET FOR SERIES A PREFERRED SHARES OR FOR BANK PREFERRED SHARES, IF
ISSUED

Prior to the Offering, there has been no public market for the Series
A Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.

In the event the Series A Preferred Shares are exchanged for Bank
Preferred Shares, the Bank Preferred Shares will not be listed on the Nasdaq
System or any exchange. There can be no assurance as to the liquidity of the
trading markets for the Bank Preferred Shares, if issued, or that an active
public market for the Bank Preferred Shares would develop or be maintained.

THE COMPANY

The Company is a newly-formed Delaware corporation created for the
purpose of acquiring, holding and managing Mortgage Assets that will generate
net income for distribution to stockholders. The Company has been formed by the
Bank to provide the Bank with a means of raising capital for bank regulatory
purposes. The Company is not a financial institution or insurance company for
purposes of Section 856(a) of the Code. The Series A Preferred Shares will be
treated as capital for the Bank for regulatory purposes. The issuance of the
Series A Preferred Shares by the Company is a more cost-effective means of
raising capital for the Bank than if the Bank were to issue preferred stock
itself, because of the Company's ability to deduct for income tax purposes the
dividends payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT.

The Company anticipates that approximately 90% of its portfolio of
Mortgage Assets will represent interests in Residential Mortgage Loans and that
approximately 10% of its portfolio of Mortgage Assets will represent interests
in Commercial Mortgage Loans (in each case measured by aggregate outstanding
principal amounts).

The Company expects that all of its Mortgage Assets will be acquired
as whole loans from the Bank or affiliates of the Bank. The Bank will
administer the day-to-day operations of the Company in its role as Advisor
under the Advisory Agreement. The Company will elect to be subject to tax as a
REIT under the Code, and will generally not be subject to federal income tax to
the extent that it distributes its earnings to its stockholders and maintains
its qualification as a REIT.

All of the Common Stock of the Company is owned by the Bank, and all
of the common stock of the Bank is owned by D&N. D&N is a thrift institution
holding company organized under the laws of Delaware in 1988 and registered
under the Home Owners Loan Act of 1933, as amended. The Bank conducts its
business through a network of 37 full-service community banking offices,
including its main office in Hancock, Michigan, seven savings agency offices
which provide depository services and four mortgage banking offices. As of
December 31, 1996,

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the Bank had total assets of $1.47 billion. For the year ended December 31,
1996, the Bank had a return on average assets of 0.69%.

A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.

The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares upon the occurrence of the
Automatic Exchange. CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH UNDER "CERTAIN INFORMATION REGARDING THE BANK". See also
"Description of Series A Preferred Shares--Automatic Exchange".

For a further description of the operations of the Company, see
"Business and Strategy," "Management," "Risk Factors" and "Federal Income Tax
Considerations".

USE OF PROCEEDS

The proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby are expected to be $27.5 million (assuming the
Underwriters' over-allotment option is not exercised). Simultaneously with the
consummation of the Offering, the Bank will purchase shares of Common Stock for
a price equal to $27.5 million. The Company will use the aggregate proceeds of
$55 million received in connection with both the Offering and the sale of
shares of Common Stock to the Bank to purchase the Initial Portfolio from the
Bank. See "Business and Strategy".

If the Underwriters exercise their option to purchase additional
Series A Preferred Shares to cover over-allotments in the Offering, the Bank
will purchase additional shares of Common Stock for a price equal to the
aggregate initial public offering price of such additional Series A Preferred
Shares. The Company will use the additional proceeds from any such additional
sales of Series A Preferred Shares and shares of Common Stock to purchase
additional Mortgage Loans of the types described in "Business and
Strategy--Description of Initial Portfolio". The Company expects that it will
purchase any such additional Commercial and Residential Mortgage Loans within
six months from the exercise by the Underwriters of their over-allotment
option. Pending such purchase, the Company will invest such additional
proceeds in mortgage-backed securities or short-term money market investments.

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Simultaneously with the consummation of the Offering, the Bank will
also purchase additional shares of Common Stock for a price equal to the
aggregate amount of underwriting commissions and expenses incurred by the
Company in connection with the Offering and all expenses incurred by the
Company in connection with its formation and the offering of the Series A
Preferred Shares (currently estimated by the Company to be approximately
$325,000 in the aggregate) in order to provide the Company with funds
sufficient to pay such expenses. Simultaneously with the consummation of any
sale of additional Series A Preferred Shares in connection with the exercise by
the Underwriters of their over-allotment option, the Bank will also purchase
additional shares of Common Stock for a price equal to the aggregate amount of
underwriting commissions and expenses incurred by the Company in connection
with the exercise of such overallotment option in order to provide the Company
with funds sufficient to pay such expenses.

The following table illustrates the use of proceeds by the Company
from the sale of the Series A Preferred Shares offered hereby (assuming the
Underwriters' over-allotment option is not exercised) and the sale of shares of
Common Stock to the Bank described above.

Gross proceeds from the Offering of
Series A Preferred Shares . . . . . . . . . . . . . . . . . . . $27,500,000
Gross proceeds from the issuance of
shares of Common Stock to the Bank . . . . . . . . . . . . . . . 28,826,250
Public Offering Expenses:
Underwriting commissions . . . . . . . . . . . . . . . . . . . . 1,001,250
Other expenses of the formation
and the Offering . . . . . . . . . . . . . . . . . . . . . . . . 325,000(1)
-----------

Net proceeds to be applied to the
purchase of Mortgage Assets from
the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,000,000
===========

- --------------
(1) Assumes that expenses incurred by the Company in connection with its
formation and the Offering of the Series A Preferred Shares, other than
underwriting commissions, are $325,000. If such expenses are in excess of
$325,000, the Bank will purchase additional shares of Common Stock for a
purchase price equal to such excess.

Neither the Bank nor any of its affiliates will receive any
transaction fees upon completion of the Offering, including any advance payment
in respect of servicing or advisory fees.

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of
April 4, 1997 (the date of the most recent audited financial statement of the
Company) and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii)
the transactions described in "Certain Transactions Constituting The
Formation--The Formation" and the use of the net proceeds therefrom as
described under "Use of Proceeds".

April 4, 1997
----------------------------------------
As
Actual Adjusted
------------------- -------------------
(In Thousands)

DEBT
Total long-term debt . . . . . . . . . . . . . . . . . $ --- $ ---
------- -------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $25.00; 2,500,000
authorized, none issued and outstanding,
actual; and 2,500,000 shares authorized,
1,100,000 shares issued and outstanding, --- 27,500
as adjusted . . . . . . . . . . . . . . . . . . . . . .
Common Stock, par value $1.00 per share(1);
1,000 shares authorized, 1,000 shares issued and
outstanding, actual; and 250,000 shares authorized,
28,826 shares issued and outstanding, as adjusted . . . 1 8,648
Additional paid-in capital . . . . . . . . . . . . . . . --- 18,852
------- -------
Total stockholders' equity . . . . . . . . . . . . . . $ 1 $55,000
------- -------

TOTAL CAPITALIZATION . . . . . . . . . . . . . . . . . . . $ 1 $55,000
======= =======

- -------------
(1) The Company was formed with an initial capitalization of $1,000. Prior to
consummation of the Offering, the charter of the Company will be amended to
increase the authorized capital of the Company and to increase the par value
of the Common Stock to $300.00 per share. Since the par value per share of
the Preferred Stock equals the issue price of a Series A Preferred Share,
the full $27.5 million raised in the Offering will represent Preferred Stock
capital. The par value of the Common Stock will equal 30% of its purchase
price of $1,000 per share and, accordingly, the Bank will be acquiring
28,826 shares of Common Stock upon the consummation of the Offering for an
aggregate purchase price of $28,826,250 (such number of shares of Common
Stock includes Common Stock acquired by the Bank in order to provide
sufficient funds to pay aggregate offering and organization expenses,
currently estimated by the Company to be approximately $325,000). As a
result of these issuances of Common Stock, the Common Stock capital amount,
upon consummation of the Offering, will equal $8,647,800. The additional
paid-in capital of $18,852,200 represents the excess of the purchase price
for the Common Stock over the par value of such shares after deducting the
aggregate amount of offering and organization expenses.

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BUSINESS AND STRATEGY

GENERAL

The Company's principal business objective is to acquire, hold and
manage Mortgage Loans that will generate net income for distribution to
stockholders. The Company does not expect to be in the business of selling or
trading mortgage assets. The Company will acquire the Initial Portfolio of
Mortgage Loans from the Bank for an aggregate purchase price of approximately
$55 million. See "Certain Transactions Constituting the Formation".

In order to preserve its status as a REIT under the Code,
substantially all of the assets of the Company will consist of Mortgage Loans
and other qualified REIT real estate assets of the type set forth in Section
856(c)(6)(B) of the Code. See "Federal Income Tax Considerations".

DIVIDENDS

The Company currently expects to pay an aggregate amount of dividends
with respect to its outstanding shares of capital stock equal to approximately
100% of the Company's "REIT taxable income" (excluding capital gains). In order
to remain qualified as a REIT, the Company must distribute annually at least
95% of its "REIT taxable income" (excluding capital gains) to stockholders.
The Company anticipates that none of the dividends on the Series A Preferred
Shares and none or no material portion of the dividends on the Common Stock
will constitute non-taxable returns of capital.

The Company's income will consist primarily of interest payments on
the Mortgage Loans held by it. The Company anticipates that a majority of its
Mortgage Loans will bear interest at adjustable rates. If there is a decline in
interest rates (as measured by the indices upon which the interest rates of the
Mortgage Loans are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In addition, in such an
interest rate environment the Company may experience an increase in prepayments
on its Residential Mortgage Loans and may find it more difficult to purchase
additional Mortgage Loans bearing rates sufficient to support payment of the
dividends on the Series A Preferred Shares. In addition, certain Residential
Mortgage Loan products which the Company may purchase could allow borrowers in
such an interest rate environment to convert an adjustable rate mortgage to a
fixed rate mortgage, thus "locking in" a low fixed interest rate. Because the
rate at which dividends are required to be paid on the Series A Preferred
Shares is fixed, there can be no assurance that a declining interest rate
environment would not adversely affect the Company's ability to pay dividends
on the Series A Preferred Shares.

Dividends will be declared at the discretion of the Board of Directors
after considering the Company's distributable funds, financial requirements,
tax considerations and other factors. Although there can be no assurances,
because (i) the Mortgage Assets are interest bearing, (ii) the Series A
Preferred Shares represent only approximately 50% of the Company's
capitalization and (iii) the Company does not anticipate incurring any
indebtedness, the Company currently expects

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that both its cash available for distribution and its "REIT taxable income"
will be in excess of amounts needed to pay dividends on the Series A Preferred
Shares. Accordingly, the Company expects that it will, after paying the
quarterly dividends on the Series A Preferred Shares, pay dividends to holders
of its Common Stock. Assuming (i) the Mortgage Loans included in the Initial
Portfolio are held for the 12-month period following completion of the
Offering, (ii) principal repayments are reinvested in additional Mortgage Loans
with characteristics similar to those of the Mortgage Loans included in the
Initial Portfolio and (iii) interest rates remain constant during such 12-month
period, the Company anticipates that the Initial Portfolio will generate
interest income of approximately $3.9 million, after payment of servicing and
advisory fees, during such 12-month period. Since the aggregate annual dividend
payment on the Series A Preferred Shares is $[ ] million, based on the
foregoing, the Company anticipates that $[ ] million would be available for
payment of dividends on the Common Stock held by the Bank.

There are several limitations which restrict the Company's ability to
pay dividends on the Common Stock (none of which should adversely affect either
the ability of the Company to pay dividends in respect of the Series A
Preferred Shares or the ability of the Company to maintain its status as a
REIT). First, under the Company's current dividend policy, the Company may not
make any distribution in respect of the Common Stock with respect to any year
to the extent that, after taking into account such proposed distribution, total
cash or property distributions on the Company's outstanding shares of Preferred
Stock and Common Stock with respect to that year would exceed 105% of the
Company's "REIT taxable income" (excluding capital gains) for that year plus
net capital gains of the Company for that year. This policy regarding the
limitations on payment of dividends in respect of Common Stock may not be
modified without the approval of a majority of the Independent Directors.
Second, if the Company fails to declare and pay full dividends on the Series A
Preferred Shares in any dividend period, the Company may not make any dividends
or other distributions with respect to the Common Stock until such time as
dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period. See, "Description of
Series A Preferred Shares--Dividends". Third, Delaware law provides that
dividends (as well as other distributions) may be paid on the capital stock of
the Company only out of (i) the Company's capital surplus (i.e., the excess of
the Company's net assets over the aggregate par value of all shares of capital
stock issued by the Company) and (ii) the Company's net profits for the year in
which the dividend is declared and for the preceding year. Because the
aggregate par value of the Series A Preferred Shares and the outstanding shares
of Common Stock will, upon consummation of the Offering, equal $[ ] million
(assuming the Underwriters' over-allotment option is not exercised and there
are $[ ] of offering and organizational expenses), the amount of
dividends which the Company could legally pay on its Common Stock cannot exceed
an amount which would cause the Company's net assets to be less than $[ ]
million.

The OTS prompt corrective action regulations prohibit thrift
institutions such as the Bank from making "capital distributions" (defined to
include a transaction that the OTS or FDIC determines, by order or regulation,
to be "in substance a distribution of capital") unless the institution is at
least "adequately capitalized" after the distribution. There can be no
assurances

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that either the OTS or the FDIC would not seek to restrict the Company's
payment of dividends on the Series A Preferred Shares under this provision if
the Bank were to fail to maintain its status as "adequately capitalized".
Currently, an institution is considered "adequately capitalized" if it has a
total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital
ratio of at least 4.0% and a leverage (or core capital) ratio of at least 4.0%.
At December 31, 1996, the Bank's total risk-based capital ratio was 9.94%, Tier
1 risk-based capital ratio was 8.72% and core capital (or leverage) ratio was
5.11%. Such ratios, adjusted to give effect to the sale of Series A Preferred
Shares in the Offering, would be 13.10%, 11.87% and 6.84%, respectively. In
addition, the Exchange Event may take place under circumstances in which the
Bank will not be considered "adequately capitalized" for purposes of the OTS
prompt corrective action regulations. Thus, at the time of the Automatic
Exchange, the Bank would likely be prohibited from paying dividends on the Bank
Preferred Shares. Further, the Bank's ability to pay dividends on the Bank
Preferred Shares following the Automatic Exchange also would be subject to
various restrictions under OTS regulations and resolution of the Bank's board
of directors. See "Certain Information Regarding the Bank--Risk Factors and
Other Considerations--Restrictions on Bank Dividends". In the event that the
Bank did pay dividends on the Bank Preferred Shares, such dividends would be
paid out of the Bank's capital surplus.

Under certain circumstances, including any determination that the
Bank's relationship to the Company results in an unsafe and unsound banking
practice, regulatory authorities will have the authority to issue an order
which restricts the ability of the Company to make dividend payments to its
stockholders.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal liquidity need will be to fund the acquisition
of additional Mortgage Loans as Mortgage Loans held by the Company are repaid.
The acquisition of such additional Mortgage Loans will be funded with the
proceeds of principal repayments on its portfolio of Mortgage Loans. The
Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on its Mortgage Loan portfolio will provide sufficient
funds to meet both operating requirements and payment of dividends by the
Company in accordance with the REIT Requirements for the foreseeable future.

GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY

Residential Mortgage Loans. The Company may from time to time acquire
both conforming and nonconforming Residential Mortgage Loans consistent with
its primary investment objective to acquire assets primarily for income.
Conforming Residential Mortgage Loans comply with the requirements for
inclusion in a loan guarantee program sponsored by either the FHLMC or FNMA.
Under current regulations, the maximum principal balance allowed on conforming
Residential Mortgage Loans ranges from $214,600 for one-unit residential loans
to $442,450 for four-unit residential loans. Nonconforming Residential
Mortgage Loans are Residential Mortgage Loans that do not qualify in one or
more respects for purchase by FNMA or FHLMC under their standard programs. The
Company expects that approximately 33% of the

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Residential Mortgage Loans it purchases in the Initial Portfolio will be
nonconforming. These loans are nonconforming because they have original
principal balances which exceed the requirements for FHLMC or FNMA programs.
Although the Company's policy is to hold Mortgage Loans to maturity, a
substantial portion of the Company's nonconforming Residential Mortgage Loans
are expected to meet the requirements for sale to national private mortgage
conduit programs or other investors in the secondary mortgage market.

Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties. Residential real estate properties underlying Residential Mortgage
Loans consist of individual dwelling units, individual condominium units, two-
to four-family dwelling units, planned unit developments and townhouses.

The Company currently expects that approximately 50% of the
Residential Mortgage Loans to be acquired by it will be adjustable rate
Mortgage Loans and that approximately 50% of the Residential Mortgage Loans
will be fixed rate Mortgage Loans.

Commercial Mortgage Loans. The Company may from time to time acquire
Commercial Mortgage Loans secured by apartment buildings, industrial and
warehouse properties, office buildings, retail space and shopping malls, hotels
and motels. The Company expects that substantially all of the Commercial
Mortgage Loans it acquires will be secured by real estate located in Michigan.
The balance of the Commercial Mortgage Loans acquired are expected to be
secured by real estate located in the states surrounding the Great Lakes
(Illinois, Indiana, New York, Ohio, Pennsylvania and Wisconsin). Unlike
Residential Mortgage Loans, Commercial Mortgage Loans generally lack
standardized terms. Although Commercial Mortgage Loans are generally
nonrecourse to the borrower, the Company anticipates that substantially all of
the Commercial Mortgage Loans that it will acquire will either be recourse to
the borrower or supported by a guarantee of an affiliate of the borrower.
However, there is no requirement that Commercial Mortgage Loans acquired by the
Company have third party guarantees. Commercial Mortgage Loans may also not be
fully amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties,
particularly industrial and warehouse properties, are generally subject to
relatively greater environmental risks than non-commercial properties,
generally giving rise to increased costs of compliance with environmental laws
and regulations. See "Risk Factors--Risks Associated with Mortgage Loans
Generally" and "--Environmental Considerations".

The credit quality of a Commercial Mortgage Loan may depend on, among
other factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been
deferred), the creditworthiness of tenants, the historical and anticipated
level of vacancies and rents on the property and on other comparable properties
located in the same region, potential or existing environmental risks, the
availability of credit to refinance the Commercial Mortgage Loan at or prior to
maturity and the local and regional economic climate in general. Foreclosures
of defaulted Commercial Mortgage Loans are generally subject to a number of
complicating factors, including environmental considerations, which are
generally not present in foreclosures of Residential Mortgage Loans. The
Company will sell any foreclosed

33
39
Mortgage Assets. See "Risk Factors--Risks Associated with Mortgage Loans
Generally--Special Risks Relating to Commercial Mortgage Loans" and
"--Environmental Considerations".

Mortgage-Backed Securities. The Company may from time to time acquire
Mortgage-Backed Securities rated AA or higher representing interests in or
obligations backed by pools of Mortgage Loans. The Mortgage Loans underlying
the Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. It is not currently anticipated that the Company will hold a
significant amount of Mortgage-Backed Securities although there is no limit on
the amount that may be purchased. The Company does not intend to acquire any
interest-only, principal-only or high-risk Mortgage-Backed Securities. The
Company will not be precluded from investing in Mortgage-Backed Securities
where the Bank or one of its affiliates is the sponsor or issuer.

ACQUISITION OF INITIAL PORTFOLIO

Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of two mortgage purchase
agreements with the Bank: the Residential Mortgage Loan Purchase and Warranties
Agreement (the "Residential Mortgage Purchase Agreement") and the Commercial
Mortgage Loan Purchase and Warranties Agreement (the "Commercial Mortgage
Purchase Agreement", and, together with the Residential Mortgage Purchase
Agreement, the "Mortgage Purchase Agreements"), each to be entered into
simultaneously with the consummation of the Offering. The Residential Mortgage
Loans in the Initial Portfolio will be sold to the Company pursuant to the
Residential Mortgage Purchase Agreement. The Commercial Mortgage Loans in the
Initial Portfolio will be sold to the Company pursuant to the Commercial
Mortgage Purchase Agreement. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to its respective mortgage purchase agreement
(each, a "Mortgage Loan Schedule"). Each Mortgage Loan Schedule will specify,
among other things, with respect to each Mortgage Loan: the interest rate or
interest rate formula applicable to each Mortgage Loan, the original principal
amount and the unpaid principal balance as of the purchase date, the monthly
payment, maturity date, mortgagor, type of mortgaged property, location of the
mortgaged property and current interest rate.

In addition, the Bank will deliver or cause to be delivered to the
Company the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents will initially be held by the Bank, as Advisor, acting as
custodian for the Company. Although the Company will have the right to record
the assignments of mortgage at any time, it does not currently anticipate doing
so. The Company believes that maintaining record title of the Mortgage Loans in
the name of the Servicer will facilitate the servicing of the Mortgage Loans.
Once the assignments of mortgage are recorded, the Company's lien on the
mortgaged properties will date back to the date of the original mortgages and
rank ahead of any intervening mortgages granted by the borrowers. However, if
the Bank, in violation of the Advisory Agreement and the Servicing Agreements,
sells any of the Company's Mortgage Loans to a third party who records

34
40
its assignment of mortgage before the Company records its assignment of
mortgage with respect to such Mortgage Loan, the Company may lose its ownership
interest in such Mortgage Loan. See "--Servicing" and "--Description of Initial
Portfolio--General".

The Bank will make certain customary representations and warranties
with respect to the Mortgage Loans in the Initial Portfolio for the benefit of
the Company, including, among other things: (i) the information provided with
respect to the Mortgage Loans is correct in all material respects; (ii) each
Mortgage Loan is subject to a valid first lien subject only to the lien for
current real property taxes and assessments not yet due and payable, generally
acceptable covenants, conditions, restrictions, rights of way, easements and
other matters of public record present at the time of origination and other
common matters; (iii) the validity of the mortgage documents; (iv) all required
payments have been made; and (v) each Mortgage Loan complies with applicable
federal and state laws, including, without limitation, usury, truth-in-lending,
real estate settlement procedures, consumer credit protection, fair housing,
equal credit opportunity and disclosure laws. See also "Description of Initial
Portfolio". The Bank will be obligated to repurchase any Mortgage Loan sold by
it to the Company as to which there is a material breach of any such
representation or warranty, unless the Bank elects to substitute a qualified
Mortgage Loan for such Mortgage Loan. The Bank will also indemnify the Company
for damages or costs resulting from any such breach. The repurchase price for
any such Mortgage Loan will be its outstanding principal amount plus accrued
and unpaid interest on the date of repurchase plus any premium paid by the
Company. In addition, under the terms of the Mortgage Purchase Agreements, the
Company will acquire, in addition to the Mortgage Loans included in the Initial
Portfolio, (i) all amounts, including payments of principal and interest (other
than payments of principal and interest due on or before [ ], 1997
with respect to the Residential Mortgage Loans and [ ], 1997 with
respect to the Commercial Mortgage Loans) held in one or more accounts
maintained for the benefit of or in the name of the Company pursuant to the
Servicing Agreements and (ii) all insurance policies relating to the Mortgage
Properties and the proceeds thereof. See "--Servicing".

MANAGEMENT POLICIES AND PROGRAMS

In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect to
the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of
a majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also
"--Dividends".

Asset Acquisition and Disposition Policies. Subsequent to the
acquisition of the Initial Portfolio, the Company anticipates that it will from
time to time purchase additional Mortgage Loans from the Bank or its
affiliates, although Mortgage Loans may be acquired from unaffiliated third
parties, out of proceeds received in connection with the repayment or
disposition of Mortgage Loans or the issuance of additional shares of Common
Stock and Preferred Stock. The

35
41
Company anticipates that additional Mortgage Loans purchased from the Bank or
its affiliates will be purchased on terms that are substantially identical to
those that could be obtained by the Company if such additional Mortgage Loans
were purchased from third parties unaffiliated with the Company. No
arrangements or procedures are currently in place regarding the purchase of
additional Mortgage Loans from unaffiliated third parties. The Company
currently anticipates that additional Mortgage Loans acquired by the Company
will be of the types described in "--Description of Initial Portfolio",
although if the Bank or its affiliates develop additional Mortgage Loan
products, the Company may purchase such additional types of Mortgage Loans. In
addition, the Company may from time to time acquire Mortgage-Backed Securities
representing interests in or obligations backed by pools of Mortgage Loans that
will be secured by single-family residential, multifamily or commercial real
estate properties located throughout the United States. The Company currently
anticipates that it will not acquire the right to service any Mortgage Loan it
acquires in the future and that the Bank or an affiliate of the Bank will act
as servicer of any such additional Mortgage Loans. The Company anticipates that
any servicing arrangement that it enters into in the future with the Bank will
contain fees and other terms that would be substantially equivalent to those
that would be contained in servicing arrangements entered into with third
parties unaffiliated with the Company.

The Company currently intends to maintain approximately 90% of its
portfolio of Mortgage Assets in Residential Mortgage Loans and approximately
10% of the Company's portfolio of Mortgage Assets in Commercial Mortgage Loans
(in each case measured by aggregate outstanding principal balances). The
Company's current policy is not to acquire any Commercial Mortgage Loan that
constitutes more than 5% of the total book value of the Mortgage Assets of the
Company at the time of its acquisition. In addition, the Company's current
policy prohibits the acquisition of any Mortgage Loan or any interest in a
Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest at the time of proposed acquisition; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months,
more than 30 days past due in the payment of principal or interest.

The Company may choose, at any time subsequent to its acquisition of
any Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of
any Mortgage Loan, for any reason, including as a result of such mortgage loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. The Bank has indicated to the Company that it
will purchase, at the then fair value, any Mortgage Loan of the Company that
the Company chooses to dispose of for the foregoing reasons.

Capital and Leverage Policies. To the extent that the Board of
Directors determines that additional funding is required, the Company may raise
such funds through additional equity offerings, debt financing or retention of
cash flow (after consideration of provisions of the Code requiring the
distribution by a REIT of at least 95% of its "REIT taxable income" and taking
into

36
42
account taxes that would be imposed on undistributed taxable income), or a
combination of these methods.

The Company will have no debt outstanding following consummation of
the Offering, and the Company does not currently intend to incur any
indebtedness. However, the organizational documents of the Company do not
contain any limitation on the amount or percentage of debt, funded or
otherwise, the Company might incur. Notwithstanding the foregoing, the Company
may not, without the approval of a majority of the Independent Directors, incur
debt for borrowed money other than debt not in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of all
outstanding Preferred Stock and Common Stock of the Company. Any such debt
incurred may include intercompany advances made by the Bank to the Company.

The Company may also issue additional series of Preferred Stock.
However, the Company may not issue additional shares of Preferred Stock senior
to the Series A Preferred Shares without the consent of holders of at least
two-thirds of the outstanding shares of Preferred Stock at that time, voting as
a single class, including the Series A Preferred Shares, and the Company may
not issue additional shares of Preferred Stock on a parity with the Series A
Preferred Shares without the approval of a majority of the Company's
Independent Directors. The Company does not currently intend to issue any
additional series of Preferred Stock unless it simultaneously issues additional
Common Stock to the Bank and the proceeds to be received from the issuance of
the Common Stock are approximately equal to the aggregate offering price of
such additional Preferred Stock plus the Company's expenses (including
underwriting commissions or placement fees) in connection with the issuance of
such additional shares of Preferred Stock. It is currently anticipated that the
Company will issue additional shares of Preferred Stock if such issuance would
provide the Bank with the most cost-effective means of raising capital for bank
regulatory purposes at the time. See "Certain Transactions Constituting the
Formation--Benefits to the Bank and Its Affiliates".

Credit Risk Management Policies. The Company expects that
each Mortgage Loan acquired from the Bank or one of its affiliates in the
future will be a whole loan, will represent a first lien position and will be
originated by the Bank or such affiliate in the ordinary course of its real
estate lending activities based on the underwriting standards generally applied
(at the time of origination) for its own account by the Bank or the affiliate
of the Bank which originated the Mortgage Loan. See "--Description of Initial
Portfolio--Underwriting Standards". The Company also expects that all Mortgage
Loans held by the Company will be serviced pursuant to the Servicing
Agreements, which require servicing in conformity with accepted secondary
market standards, with any servicing guidelines promulgated by the Company and,
in the case of Residential Mortgage Loans, with FNMA and FHLMC guidelines and
procedures. The Company may also choose, at any time subsequent to its
acquisition of any Mortgage Loan, to require the Servicer of such Mortgage
Loans to dispose of any Mortgage Loan for any reason, including as a result of
such Mortgage Loan becoming Classified or being placed in Nonaccrual Status or
having been, more than once during the preceding 12 months, more than 30 days
past due in the payment of principal and interest.

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43
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Loans from, or disposition of
Mortgage Loans to, the Bank, D&N or their respective affiliates, foreclosure on
defaulted Commercial Mortgage Loans and the modification of the Advisory
Agreement or either of the Servicing Agreements. It is the Company's policy
that the terms of any financial dealings with the Bank, D&N and their
respective affiliates will be consistent with those available from third
parties in the mortgage lending industry. In addition, neither the Advisory
Agreement nor either of the Servicing Agreements may be modified or terminated
without the approval of a majority of the Independent Directors.

Conflicts of interest between the Company and the Bank and its
affiliates may also arise in connection with making decisions that bear upon
the credit arrangements that the Bank or one of its affiliates may have with a
mortgagor under a Mortgage Loan. Conflicts could also arise in connection with
actions taken by the Bank as a controlling person in the Company. It is the
intention of the Company, the Bank and D&N that any agreements and transactions
between the Company, on the one hand, and D&N, the Bank or their affiliates, on
the other hand, including without limitation the Mortgage Purchase Agreements
and Servicing Agreements, are fair to all parties and are consistent with
market terms for such types of transactions. The Servicing Agreements provide
that (i) foreclosures and dispositions of the Mortgage Loans are to be
performed with a view to maximizing the recovery by the Company as owner of the
Mortgage Loans and (ii) the Servicer shall service the Mortgage Loans solely
with a view toward the interests of the Company, and without regard to the
interests of the Bank or its affiliates. The requirement in the Certificate of
Designation establishing the Series A Preferred Shares that certain actions of
the Company be approved by a majority of the Independent Directors is also
intended to ensure fair dealings between the Company and D&N, the Bank and
their respective affiliates. However, there can be no assurance that any such
agreement or transaction will be on terms as favorable to the Company as would
have been obtained from unaffiliated third parties.

There are no provisions in the Company's Certificate of Incorporation
limiting any officer, director, security holder or affiliate of the Company
from having any direct or indirect pecuniary interest in any Mortgage Asset to
be acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank and its
affiliates will have direct interests in transactions with the Company
(including without limitation the sale of Mortgage Assets to the Company);
however, it is not currently anticipated that any of the officers or directors
of the Company will have any interests in such Mortgage Assets.

Other Policies. The Company intends to operate in a manner that will
not subject it to regulation under the Investment Company Act of 1940. The
Company does not intend to (i) invest in the securities of other issuers for
the purpose of exercising control over such issuers, (ii) underwrite securities
of other issuers, (iii) actively trade in loans or other investments, (iv)
offer securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the

38
44
open market or otherwise, provided, however, that the Company will not redeem
or repurchase any shares of its Common Stock for so long as any Series A
Preferred Shares are outstanding without the approval of a majority of the
Independent Directors. The Company has no present intention of causing the
Company to repurchase any shares of its capital stock, and any such action
would be taken only in conformity with applicable federal and state laws and
regulations and the requirements for qualifying as a REIT.

The Company intends to publish and distribute to stockholders, in
accordance with Exchange Act rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting principles
and certified by the Company's independent public accountants. The Certificate
of Designation establishing the Series A Preferred Shares provides that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.

The Company currently intends to make investments and operate its
business at all times in such a manner as to be consistent with the
requirements of the Code to qualify as a REIT. However, future economic,
market, legal, tax or other considerations may cause the Board of Directors,
subject to approval by a majority of Independent Directors, to determine that
it is in the best interests of the Company and its stockholders to revoke its
REIT status.

DESCRIPTION OF INITIAL PORTFOLIO

Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans in the Initial Portfolio is presented as of March 24,
1997. The composition of the Initial Portfolio actually purchased by the
Company contemporaneously with the consummation of the Offering will differ
from the Initial Portfolio as described in this Prospectus only to the extent
it is discovered prior to the consummation of the Offering that a Mortgage Loan
included in the Initial Portfolio described herein (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in
the payment of principal or interest. In such event a Mortgage Loan similar in
aggregate outstanding principal balance and product type will be substituted
for such non-purchased Mortgage Loan.

References herein to percentages of Mortgage Loans included in the
Initial Portfolio refer in each case to the percentage of the aggregate
outstanding principal balance of the Mortgage Loans in the Initial Portfolio as
of March 24, 1997, based on the outstanding principal balances of such Mortgage
Loans as of such date, after giving effect to scheduled monthly payments due on
or prior to such date, whether or not received.

The detailed information set forth in this Prospectus with respect to
the Mortgage Loans applies only to the Initial Portfolio and the Company's
portfolio of Mortgage Assets in the future may or may not have the
characteristics described below.

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45
General. The Initial Portfolio contains 489 Residential Mortgage
Loans, representing approximately 90% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio, and 10 Commercial Mortgage
Loans, representing approximately 10% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio. On March 24, 1997, the
Mortgage Loans included in the Initial Portfolio had an aggregate outstanding
principal balance of $64,141,000.

Substantially all of the Residential Mortgage Loans included in the
Initial Portfolio were originated by the Bank or the Bank's subsidiary, D&N
Mortgage Corporation in the ordinary course of its real estate lending
activities. All of the Residential Mortgage Loans included in the Initial
Portfolio were originated consistent with the underwriting policies of the Bank
at the time at which such Mortgage Loans were originated.

Each Commercial Mortgage Loan included in the Initial Portfolio was
originated by the Bank in the ordinary course of its commercial real estate
lending activities.

All of the Residential Mortgage Loans included in the Initial
Portfolio were originated between 1985 and 1997, and have original terms to
stated maturity of either 5, 10, 15, 20, 25 or 30 years. As of March 24, 1997,
the average outstanding principal balance of a Residential Mortgage Loan was
$115,000. The weighted average number of months since origination of the
Residential Mortgage Loans included in the Initial Portfolio (calculated as of
March 24, 1997) was approximately 21 months. The weighted average Loan-to-Value
Ratio (defined below) of the Residential Mortgage Loans included in the Initial
Portfolio is 73.25%; however, 22.44% of the Residential Mortgage Loans have
Loan-to-Value Ratios of greater than 80%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.

All of the Commercial Mortgage Loans included in the Initial Portfolio
were originated between 1974 and 1996, and have original terms to stated
maturity of between three and 30 years. Substantially all Mortgage Loans
included in the Initial Portfolio have mortgage notes which contain
"due-on-sale" provisions.

None of the Mortgage Loans included in the Initial Portfolio (i) is
delinquent in the payment of principal or interest as of March 24, 1997; (ii)
is or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) was, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest. If, prior to the
acquisition of the Initial Portfolio, any Mortgage Loan included in the
description of the Initial Portfolio herein falls within any of the foregoing
categories, the Company will not purchase such Mortgage Loan but will instead
purchase a Mortgage Loan similar in aggregate outstanding principal balance and
product type which does not fall into any of these categories.

46
Residential Mortgage Loans. The following types of Residential
Mortgage Loan products, each of which is more fully described below, will be
included in the Initial Portfolio: One-Year ARM, and 5, 10, 15, 20, 25 and
30-year fixed rate Residential Mortgage Loans.

The following table sets forth certain information with respect to
each type of Residential Mortgage Loan included in the Initial Portfolio:

TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT

Percentage of
Initial
Residential
Number of Aggregate Principal Portfolio Weighted Average
Type Mortgage Loans Balance by Aggregate Remaining Term
--------------------------- -------------- ------------------- --------------- ----------------
(In Thousands)

Fixed Rate . . . . . . . . 248 $28,470 50.46% 239 months
One-Year ARM . . . . . . . 241 27,954 49.54 333 months
--- ------- ------

Total . . . . . . . . . . . 489 $56,424 100.00%
=== ======= ======

Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 50% bear interest at fixed rates (including adjustable rate
Residential Mortgage Loans that have been converted, pursuant to their terms,
to fixed rates). The interest rates of the fixed rate Residential Mortgage
Loans included in the Initial Portfolio range from 7.00% per annum to 8.50% per
annum. The weighted average interest rate of the fixed rate Residential
Mortgage Loans included in the Initial Portfolio is approximately 7.63% per
annum. The following tables contain certain additional data with respect to the
interest rates of the fixed rate Residential Mortgage Loans included in the
Initial Portfolio:

INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS

Percentage of
Number of Aggregate Initial Residential
Mortgage Principal Portfolio by
Principal Interest Rate Balance Loans Balance Aggregate
--------------------------------------- -------------- --------------- --------------
(In Thousands)

7.000%-7.249% . . . . . . . . . . . . . 33 $ 3,610 6.40%
7.250%-7.499% . . . . . . . . . . . . . 48 5,367 9.51
7.500%-7.749% . . . . . . . . . . . . . 72 8,890 15.76
7.750%-7.999% . . . . . . . . . . . . . 38 4,798 8.51
8.000%-8.249% . . . . . . . . . . . . . 18 2,502 4.43
8.250%-8.499% . . . . . . . . . . . . . 24 2,083 3.69
8.500% . . . . . . . . . . . . . . . . 15 1,220 2.16
--- ------- -----

Total . . . . . . . . . . . . . . . 248 $28,470 50.46%
=== ======= =====

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47
ORIGINAL TERM OF FIXED RATE RESIDENTIAL MORTGAGE LOANS

Percentage of
Aggregate Initial Residential
Original Term Number of Principal Portfolio
(in months) Mortgage Loans Balance by Aggregate
------------------------ -------------- ----------------- -----------------
(In Thousands)

0 -- 61 . . . . . . 1 $ 265 0.47%
61 -- 121 . . . . . . 18 994 1.76
121 -- 181 . . . . . . 66 7,402 13.12
181 -- 241 . . . . . . 39 3,139 5.56
241 -- 301 . . . . . . 2 148 0.27
301 -- 361 . . . . . . 122 16,522 29.28
--- ------- -----
Total . . . . 248 $28,470 50.46%

Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 50% bear interest at adjustable rates. The interest rates on the
"adjustable rate mortgages" or "ARMs" contained in the Initial Portfolio are
all tied to the one-year Treasury Index (defined below) ("One-Year ARM"), and
adjust periodically. ARMs are typically subject to limitations on lifetime
interest rates as well as periodic interest rate adjustments. The current
interest rates of the Residential Mortgage Loans included in the Initial
Portfolio that are ARMs ranged from 6.25% per annum to 8.50% per annum as of
March 24, 1997. As of March 24, 1997, the weighted average current interest
rate of the Residential Mortgage Loans included in the Initial Portfolio that
are ARMs was approximately 7.32% per annum. The following table contains
certain additional data as of March 24, 1997 with respect to the interest rates
of the Residential Mortgage Loans included in the Initial Portfolio that are
ARMs:

CURRENT INTEREST RATE OF ADJUSTABLE RATE
RESIDENTIAL MORTGAGE LOANS

Percentage of
Number of Aggregate Initial Residential
Mortgage Principal Portfolio by
Current Interest Rate Balance Loans Balance Aggregate
--------------------------------------- -------------- --------------- -------------------
(In Thousands)

6.250%-6.499% . . . . . . . . . . . . . 40 $ 4,753 8.42%
6.500%-6.749% . . . . . . . . . . . . . 19 3,592 6.37
6.750%-6.999% . . . . . . . . . . . . . 2 468 0.83
7.000%-7.249% . . . . . . . . . . . . . 8 1,457 2.58
7.250%-7.499% . . . . . . . . . . . . . 24 3,110 5.51
7.500%-7.749% . . . . . . . . . . . . . 41 3,527 6.25
7.750%-7.999% . . . . . . . . . . . . . 44 5,402 9.57
8.000%-8.249% . . . . . . . . . . . . . 25 2,931 5.20
8.250%-8.499% . . . . . . . . . . . . . 36 2,396 4.25
8.500% . . . . . . . . . . . . . . . . 2 318 0.56
--- ------- -----
Total . . . . . . . . . . . . . . . 241 $27,954 49.54%
=== ======= =====

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48
"Gross Margin", with respect to a Residential Mortgage Loan that is
an ARM, means the applicable fixed percentage which, when added to the
applicable index, results in the current interest rate paid by the borrower of
such Residential Mortgage Loan (without taking into account any interest rate
caps or minimum interest rates). Gross Margin is inapplicable to fixed rate
Residential Mortgage Loans. As of March 24, 1997, the weighted average Gross
Margin of the Residential Mortgage Loans included in the Initial Portfolio that
are ARMs was approximately 2.89%.

The following table sets forth certain additional data as of March 24,
1997 with respect to the Gross Margins of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:

GROSS MARGIN ON RESIDENTIAL MORTGAGE LOANS

Percentage of
Number of Aggregate Initial Residential
Mortgage Principal Portfolio by
Gross Margin Balance Loans Balance Aggregate
---------------------------------------- -------------- ------------------ --------------
(In Thousands)

2.13%-2.63% . . . . . . . . . . . . . . 16 $ 953 1.69%
2.64%-3.13% . . . . . . . . . . . . . . 213 23,341 41.37
3.14%-3.63% . . . . . . . . . . . . . . 8 3,217 5.70
3.64%-4.25% . . . . . . . . . . . . . . 4 443 0.78
--- ------- -----
Total . . . . . . . . . . . . . . . 241 $27,954 49.54%
=== ======= =====

The interest rate of each ARM loan included in the Initial Portfolio
adjusts at the times (each, a "Rate Adjustment Date") and in the manner
described below subject to lifetime interest rate caps, to minimum interest
rates and to maximum annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the Initial
Portfolio only. Mortgage Loans purchased by the Company after consummation of
the Offering may be subject to different interest rate caps and minimum
interest rates.

Each ARM bears interest at its initial interest rate until its first
Rate Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on most of the adjustable rate Mortgage Loans
included in the Initial Portfolio will be adjusted to an amount that will fully
amortize the then-outstanding principal balance of such Residential Mortgage
Loan over its remaining term to stated maturity and that will be sufficient to
pay interest at the adjusted interest rate. Certain of the ARMs contain an
option, which may be exercised by the mortgagor, to convert the ARM into a
fixed rate loan for the remainder of the mortgage term. If a Residential
Mortgage Loan that is an ARM is converted into a fixed rate loan, the interest
rate will be determined at the time of conversion as specified in the mortgage
note relating to such Mortgage Loan and will remain fixed at such rate until
the stated maturity of such Residential Mortgage Loan. Most of the Mortgage
Loans included in the Initial Portfolio allow the mortgagor to prepay at any
time some or all of the outstanding principal balance of the Mortgage Loan
without fee or penalty.

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One-Year ARM. The interest rate with respect to each One-Year ARM is
fixed at an initial rate for the first twelve monthly payments and adjusts
annually thereafter on the date specified in the related mortgage note to a
rate equal to the then-current Treasury Index (defined below) plus the Gross
Margin set forth in such mortgage note, subject to a maximum annual interest
rate increase or decrease of 2.00%, a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 6%
and to a minimum interest rate no less than the Gross Margin. The sum of the
Treasury Index and the Gross Margin is rounded upwards to the nearest 0.125%.
The "Treasury Index" with respect to each One-Year ARM is the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year
as published by the Federal Reserve Board in Statistical Release H.15 (519) or
any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency and made available
to the Advisor. Should the Treasury Index not be published or become otherwise
unavailable, the Advisor will select a comparable alternative index over which
it has no control and which is readily available.

Certain One-Year ARMs (52 loans aggregating $7.0 million or 12.4% of
the Initial Portfolio by aggregate) contain a conversion option which, if
exercised, would convert the One-Year ARM into a fixed rate loan for the
remainder of the term of the mortgage. Subject to conditions specified in the
mortgage note related to a One-Year ARM, a mortgagor may have the right to
convert the One-Year ARM to a fixed rate loan beginning with the first Rate
Adjustment Date and on the first day of each month thereafter until and
including the fifth Rate Adjustment Date. If the conversion option is
exercised, the interest rate will be fixed for the remainder of the term of the
mortgage and will equal the sum of a percentage equal to at least 0.625% and
the FNMA Required Net Yield. The mortgagor must pay a conversion fee at the
time the option is exercised.

Fixed Rate Loans. The fixed rate Residential Mortgage Loans which are
included in the Initial Portfolio or may be purchased by the Company will
generally have original terms to stated maturity of 15 or 30 years. The
interest rates of these Residential Mortgage Loans are fixed prior to
origination or have been converted, pursuant to the terms of a mortgage note,
to a fixed rate. The monthly principal and interest payment is calculated to
fully amortize the initial outstanding principal balance of such Residential
Mortgage Loan to its stated maturity.

Commercial Mortgage Loans. The Commercial Mortgage Loans included in
the Initial Portfolio will consist of multi-family residential rental
properties, and light industrial, hotel and retail shopping mall properties
located in Michigan. The borrowers of the Commercial Mortgage Loans included
in the Initial Portfolio are primarily customers of the Bank to which the Bank
has extended such Commercial Mortgage Loans in the ordinary course of its
commercial real estate lending activities. Substantially all of the Commercial
Mortgage Loans included in the Initial Portfolio are either recourse to the
borrower or guaranteed as to the payment of principal and interest by an
affiliate of the borrower. The outstanding principal balances of the Commercial
Mortgage Loans included in the Initial Portfolio ranged from $111,000 to $2.1
million as of March 24, 1997.

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The following table sets forth certain information with respect to
each type of commercial property underlying each Commercial Mortgage Loan
included in the Initial Portfolio:

TYPE OF COMMERCIAL MORTGAGE LOAN

Percentage
of Initial Weighted Weighted Weighted
Commercial Average Average Average
Portfolio by Original Current Expected
Aggregate Aggregate Loan-to Loan-to Months
Principal Principal Value Value Remaining
Type of Mortgaged Property Balance Balance Ratio(1) Ratio(2) to Maturity
-------------------------- ------------- ------------ -------- -------- -----------
(In Thousands)

5-36 unit apartments . . . . . . $ 1,644 21.3% 61.3 44.2 46.2
36+ unit apartments . . . . . . . 963 12.5 69.6 64.7 56.1
Hotel . . . . . . . . . . . . . . 2,070 26.8 74.5 70.1 47.0
Light industrial . . . . . . . . 1,717 22.3 75.2 71.4 53.0
Retail shopping mall . . . . . . 1,321 17.1 55.5 52.9 20.0
------- -----
Total . . . . . . . . . . . . $ 7,715 100.0%
======= =====

- ---------------
(1) Represents the ratio of the outstanding principal amount of each Commercial
Mortgage Loan at the time of loan origination or modification, if any, to
the value of the property securing such Commercial Mortgage Loan at the
time of loan origination or modification, if any.

(2) Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at March 24, 1997 to the value of the property securing such
Commercial Mortgage Loan at the time of loan origination or modification,
if any.

Of the Commercial Mortgage Loans included in the Initial Portfolio,
approximately 41% are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity.

Of the Commercial Mortgage Loans included in the Initial Portfolio,
31% bear interest at fixed rates. The interest rates of the fixed rate
Commercial Mortgage Loans included in the Initial Portfolio range from 8.25%
per annum to 9.88% per annum. The following table contains certain additional
data with respect to the interest rates of the fixed rate Commercial Mortgage
Loans included in the Initial Portfolio (including those variable rate
Commercial Mortgage Loans that have been converted, pursuant to their terms, to
fixed rates):

INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS

Percentage of Initial
Number of Commercial Portfolio
Mortgage Aggregate Principal By Aggregate
Loans Balance Principal Balance
---------- ------------------- ---------------------
(In Thousands)

7.00 - 8.99% . . . . . . . . . . . . 2 $1,432 18.6%
9.00 - 11.00% . . . . . . . . . . . . 2 981 12.7
- ------ ----
Total . . . . . . . . . . . . . . 4 $2,413 31.3%
= ====== ====

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Of the Commercial Mortgage Loans included in the Initial Portfolio,
69% bear interest at variable rates which are typically tied to an index (such
as the Bank's Prime Rate or the U.S. Treasury Index adjusted for a constant
maturity of either one year or three years) and are adjustable periodically.
The current interest rates borne by the variable rate Commercial Mortgage Loans
included in the Initial Portfolio ranged from 9.00% per annum to 10.125% per
annum as of March 24, 1997. The following table contains certain additional
data as of March 24, 1997 with respect to the interest rates of the variable
rate Commercial Mortgage Loans included in the Initial Portfolio:

CURRENT INTEREST RATE OF VARIABLE RATE
COMMERCIAL MORTGAGE LOANS

Percentage of Initial
Number of Commercial Portfolio
Mortgage Aggregate Principal By Aggregate
Loans Balance Principal Balance
--------- ------------------- ---------------------
(In Thousands)

9.00 - 9.99% . . . . . . . . . . . 5 $5,053 65.5%
10.00 - 11.00% . . . . . . . . . . . 1 251 3.2
- ------ ----
Total . . . . . . . . . . . . . . 6 $5,304 68.7%
= ====== ====

Underwriting Standards. The Bank has represented to the Company that
all of the Residential Mortgage Loans included in the Initial Portfolio were
originated generally in accordance with the underwriting policy customarily
employed by the Bank at the time at which the Residential Mortgage Loan in the
Initial Portfolio was originated. The Bank has represented to the Company that
all of the Commercial Mortgage Loans included in the Initial Portfolio were
originated generally consistent with the underwriting policies customarily
employed by the Bank at the time at which the Commercial Mortgage Loans in the
Initial Portfolio were originated.

Residential Mortgage Loans. The underwriting standards applied at
origination of the Residential Mortgage Loans were intended to evaluate the
borrower's credit standing and repayment ability, and the value and adequacy of
the underlying mortgaged property as collateral. Initially, each prospective
borrower was required to provide a current balance sheet describing assets and
liabilities and a statement of income and expenses, as well as, to the extent
required by applicable state law, an authorization to apply for a credit report
which summarized the borrower's credit history with merchants and lenders and
any record of bankruptcy.

For any prospective borrower, an employment verification was obtained
from the borrower's employer wherein the employer reported the length of
employment with the employer, the employee's current salary, and whether it was
expected that the borrower would continue such employment in the future, or the
borrower submitted such other evidence of employment (such as pay stubs)
satisfactory to the Bank. For a self-employed prospective borrower, the
borrower was generally required to submit copies of personal and business
federal income tax returns for the previous two years. For certain prospective
borrowers, the borrower authorized verification of all deposits at financial
institutions at which the borrower had demand or savings accounts.

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52

Once the credit report and the employment and deposit verifications
were received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In all instances, the Bank's
underwriting policies (including those applied in originating the Mortgage
Loans in the Initial Portfolio) may be varied in cases deemed appropriate by
its underwriting officers.

In determining the adequacy of the property as collateral, an
independent appraisal was made of each property considered for financing. Each
appraiser was selected in accordance with predetermined guidelines established
for appraisers. The appraiser was required to inspect the property and verify
that it was in good condition and that construction, if new, had been
completed. If the appraiser reported any exceptions to the verification, the
Bank (or its predecessor) or its agent determined that such property had been
substantially completed to its satisfaction. The appraisal was based on the
appraiser's judgment of value giving appropriate weight to both the market
value of comparable properties and the cost of replacing the property and other
factors as appropriate. The Bank's or its predecessors' underwriting standards
also required a search of the public records relating to a mortgaged property
for liens and judgments against such mortgaged property, as well as customary
title insurance.

Commercial Mortgage Loans. The loan underwriting procedures and
guidelines utilized by the Bank in connection with the origination of the
Commercial Mortgage Loans included in the Initial Portfolio were intended to
assess the value of the related mortgaged property, the ability of such
mortgaged property to be used by the borrower or its agents and the financial
condition of the borrower, including its ability to service the Commercial
Mortgage Loan. The underwriting guidelines included an internal system for
rating the quality of the mortgaged property. The interest rate for the
Commercial Mortgage Loans was determined, in part, upon this rating system.

The underwriting guidelines took into account such factors as
suitability of the mortgaged property for the proposed use; the availability,
rental rates and relative value of comparable properties in the relevant market
area and the anticipated growth or decline in both the immediate and broader
geographic areas in which the mortgaged property is located; the current or
projected occupancy or leasing ratios, if relevant; the condition and age of
the mortgaged property; the management ability of the borrower, including its
business experience and financial soundness; and such other economic,
demographic or other factors as in the judgment of the Bank might affect the
value of the mortgaged property and the ability of the borrower to service the
Commercial Mortgage Loan. Each proposal for a Commercial Mortgage Loan was
presented to the appropriate lending unit of the Bank, which analyzed the
proposed transaction focusing on economic assumptions and the feasibility of
the loan, identified and evaluated potential risks, and made a recommendation
to approve or disapprove the loan. The proposed transaction was then presented
to appropriate credit officers of the Bank for approval.

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Once a loan proposal was approved, a loan commitment was issued by the
Bank to the proposed borrower, subject to, among other things, receipt of
acceptable environmental (including Phase I) and appraisal reports and, if
deemed appropriate, engineering reports. The Bank contracted with approved
firms to prepare these reports for the account of the Bank. Any environmental
exceptions were approved by appropriate officers of the Bank before the loan
was funded. All Commercial Mortgage Loans were closed using a standardized set
of loan documents to ensure consistency in the portfolio, subject to approved
transaction specific requirements.

Geographic Distribution. Approximately 90% of the residential real
estate properties underlying the Company's Residential Mortgage Loans included
in the Initial Portfolio are located in Michigan. Consequently, these
Residential Mortgage Loans may be subject to a greater risk of default than
other comparable Residential Mortgage Loans in the event of adverse economic,
political or business developments and natural hazards in Michigan that may
affect the ability of residential property owners in Michigan to make payments
of principal and interest on the underlying mortgages. Standard hazard
insurance required to be maintained with respect to Residential Mortgage Loans
held by the Company may not protect the Company against losses occurring from
tornados and other natural disasters. Consequently, in the event of a natural
disaster, the Company's ability to pay dividends on the Series A Preferred
Shares could be adversely affected as the Company will not maintain special
hazard insurance to protect against such losses.

All of the commercial mortgaged properties underlying its Commercial
Mortgage Loans will be located in Michigan. Consequently, these Commercial
Mortgage Loans may be subject to a greater risk of default than other
comparable Commercial Mortgage Loans in the event of adverse economic,
political or business developments in Michigan that may affect the ability of
businesses in that area to make payments of principal and interest on the
underlying mortgages.

Loan-to-Value Ratios; Insurance. All of the Residential Mortgage
Loans having Loan-to-Value Ratios of greater than 80% are insured under primary
mortgage guaranty insurance policies. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property. At the
time of origination of the Residential Mortgage Loans, each of the primary
mortgage insurance policy insurers was approved by FNMA or FHLMC. A standard
hazard insurance policy is required to be maintained by the mortgagor with
respect to each Residential Mortgage Loan in an amount equal to the maximum
insurable value of the improvements securing such Residential Mortgage Loan or
the principal balance of such Residential Mortgage Loan, whichever is less. If
the residential real estate property underlying a Residential Mortgage Loan is
located in a flood zone, such Residential Mortgage Loan may also be covered by
a flood insurance policy as required by law. No mortgagor bankruptcy insurance
will be maintained by the Company with respect to the Residential Mortgage
Loans in the Initial Portfolio, nor will any Residential Mortgage Loan be
insured by the Federal Housing Administration or guaranteed by the Veterans
Administration. The Company will not maintain any special hazard insurance
policy with respect to any Residential Mortgage Loan which could mitigate
damages caused by any natural disaster. In addition, the

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54
standard hazard insurance required to be maintained with respect to Residential
Mortgage Loans does not protect the Company against losses occurring from
natural disasters. In the event of any such natural disaster, the Company's
ability to pay dividends on the Series A Preferred Shares could be adversely
affected.

A standard hazard insurance policy is also required to be maintained
by the mortgagor with respect to each of the Commercial Mortgage Loans included
in the Initial Portfolio. If the commercial real estate property securing a
Commercial Mortgage Loan is located in a flood zone, such Commercial Mortgage
Loan may be covered by a flood insurance policy as required by law. However,
as with the Residential Mortgage Loans in the Initial Portfolio, no special
hazard insurance or mortgagor bankruptcy insurance will be maintained by the
Company with respect to the Commercial Mortgage Loans in the Initial Portfolio.

SERVICING

The Mortgage Loans included in the Initial Portfolio will be sold to
the Company by the Bank on a servicing retained basis. The Bank will service
the Mortgage Loans included in the Initial Portfolio pursuant to the terms of
the Servicing Agreements. The Bank in its role as servicer under the terms of
the Servicing Agreements is herein referred to as the "Servicer". The Servicer
will receive an annual servicing fee with respect to each Mortgage Loan
serviced for the Company which shall equal the outstanding principal balance of
such Mortgage Loans multiplied by a fee of .375%.

Each Servicing Agreement requires the Servicer to service the
Company's Mortgage Loans in a manner generally consistent with accepted
secondary market practices, with any servicing guidelines promulgated by the
Company and, in the case of Residential Mortgage Loans, with FNMA and FHLMC
guidelines and procedures. The Servicing Agreements require the Servicer to
service the Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or its affiliates. The
Servicer will collect and remit principal and interest payments, administer
mortgage escrow accounts, submit and pursue insurance claims and initiate and
supervise foreclosure proceedings on the Mortgage Loans it services. The
Servicer will also provide accounting and reporting services required by the
Company for such Mortgage Loans. Each Servicing Agreement requires the Servicer
to follow such collection procedures as are customary in the industry,
including contacting delinquent borrowers and supervising foreclosures and
property dispositions in the event of unremedied defaults in accordance with
servicing guidelines promulgated by the Company. The Servicer may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation
of delinquencies, provided that, in the case of Residential Mortgage Loans, no
primary mortgage guarantee insurance coverage is adversely affected. The
Servicer may also be directed by the Company, at any time during the servicing
process, to dispose of any Mortgage Loan which becomes Classified, placed in
Nonaccrual Status or which has been, more than once during the preceding 12
months, more than 30 days past due in the payment of principal and interest.

The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreements to one or more of its
affiliates or, subject to approval of a

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majority of the Independent Directors, may subcontract all or a portion of its
obligations under the Servicing Agreements to an unrelated third party. At
March 24, 1997 the Bank serviced mortgage loans having an aggregate principal
balance of approximately $1 billion. The Servicer will not, in connection with
subcontracting any of its obligations under the Servicing Agreements, be
discharged or relieved in any respect from its obligation to the Company to
perform its obligations under the Servicing Agreements.

Each Servicing Agreement requires the Servicer to pay all expenses
related to the performance of its duties under such Servicing Agreement. In
addition, the Servicer will be required to make advances of principal and
interest and, with respect to the Residential Mortgage Loans and certain
Commercial Mortgage Loans, taxes and required insurance premiums that are due
from mortgagors, unless (with respect to advances of principal and interest) it
determines that such advances are nonrecoverable. If such advances are made,
the Servicer generally will be reimbursed prior to the Company out of proceeds
related to such Mortgage Loan. The Servicer also will be entitled to
reimbursement by the Company for expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans serviced by it and in connection with
the restoration of mortgaged property. If claims are not made or paid under
applicable insurance policies or if coverage thereunder has ceased, the Company
will suffer a loss to the extent that the proceeds from liquidation of the
mortgaged property, after reimbursement of the Servicer's expenses in the sale,
are less than the outstanding principal balance of the related Mortgage Loan.
The Servicer will be responsible to the Company for any loss suffered as a
result of its failure to make and pursue timely claims or as a result of
actions taken or omissions made by it which cause the policies to be canceled
by the insurer.

In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise any power of sale contained in any
mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a mortgaged property underlying a Mortgage Loan by operation
of law or otherwise in accordance with the terms of the relevant Servicing
Agreement. The Servicer will not be permitted under the terms of the Commercial
Mortgage Loan Servicing Agreement to acquire title to any commercial real
estate property underlying a Commercial Mortgage Loan or take any action that
would cause the Company to be an "owner" or an "operator" within the meaning of
certain federal environmental laws, unless it has also previously determined,
subject to the approval of the Advisor, based on a report prepared by an
independent person who regularly conducts environmental assessments, that (i)
the mortgaged property is in compliance with applicable environmental laws or
that it would be in the best interests of the Company to take such actions as
are necessary to cause the mortgaged property to comply therewith and (ii)
there are no circumstances or conditions present at the mortgaged property
relating to the use, management or disposal of any hazardous substances,
hazardous materials, hazardous wastes or petroleum-based materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any federal, state or local law or regulation, or, if any
such materials are present for which such action could be required, that it
would be in the best interest of the Company to take such actions with respect
to the mortgaged property.

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The Company may terminate either Servicing Agreement upon the
happening of one or more events specified in the Servicing Agreement. Such
events relate generally to the Servicer's proper and timely performance of its
duties and obligations under the Servicing Agreement. In addition, the Company
may also terminate either Servicing Agreement without cause upon 30 days'
notice and payment of a termination fee that is competitive with that which is
generally payable in the industry.

The termination fee will be equal to 2% of the aggregate outstanding
principal amount of the loans then serviced under the applicable Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate, or elect not to renew, either Servicing Agreement
without the approval of a majority of the Independent Directors. As is
customary in the mortgage loan servicing industry, the Servicer will be
entitled to retain any late payment charges and penalties collected in
connection with the Mortgage Loans serviced by it. In addition, the Servicer
will receive any benefit derived from interest earned on collected principal
and interest payments between the date of collection and the date of remittance
to the Company and from interest earned on tax and insurance impound funds with
respect to Mortgage Loans serviced by it. Each Servicing Agreement requires the
Servicer to remit to the Company no later than the 20th day of each month all
principal and interest due from borrowers of Mortgage Loans serviced by it
(unless deemed nonrecoverable by the Servicer) on the first day of such month
with respect to the Residential Mortgage Loans and from the last remittance
date with respect to the Commercial Mortgage Loans.

When any mortgaged property underlying a Mortgage Loan is conveyed by
a mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law
and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the exercise of the "due-on-sale"
clause is prohibited under certain circumstances related to the security
underlying the Mortgage Loan and the buyer's ability to fulfill the obligations
under the related mortgage note. Upon any assumption of a Mortgage Loan by a
transferee, a fee equal to a specified percentage of the outstanding principal
balance of the Mortgage Loan is typically required, which sum will be retained
by the Servicer as additional servicing compensation.

As a result of the relationship between the Servicer and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".

EMPLOYEES

The Company has four officers, each of whom is described further below
under "Management". The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under
"Management--The Advisor". It is currently anticipated that all of the officers
of the Company will also be officers or employees of D&N, the Bank or their
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or

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directors of the Company will have any direct or indirect pecuniary interest in
any Mortgage Asset to be acquired or disposed of by the Company or in any
transaction in which the Company has an interest or will engage in acquiring,
holding and managing Mortgage Assets.

COMPETITION

The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that all of these
Mortgage Loans will be purchased from the Bank or affiliates of the Bank.

LEGAL PROCEEDINGS

The Company is not the subject of any material litigation. None of the
Company, the Advisor, the Bank or any of its affiliates is currently involved
in nor, to the Company's knowledge, currently threatened with any material
litigation with respect to the Mortgage Loans to be included in the Initial
Portfolio, other than routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability insurance.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's Board of Directors is composed of five members, two of
whom are Independent Directors. These directors will serve until their
successors are duly elected and qualified. There is no current intention to
alter the number of directors comprising the Board of Directors. Pursuant to
the Certificate of Designation establishing the Series A Preferred Shares, the
Independent Directors are required to take into account the interests of the
holders of both the Series A Preferred Shares and the Common Stock in assessing
the benefit to the Company of any proposed action requiring their consent. In
considering the interests of the holders of the Series A Preferred Shares, the
Independent Directors shall owe the same duties which the Independent Directors
owe to holders of Common Stock. The Company currently has four officers. The
Company has no other employees and does not anticipate that it will require
additional employees. See "Business and Strategy--Employees".

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The persons who are directors and executive officers of the Company
are as follows:

Name Position and Offices Held
---------------------------------- --------------------------------------------------------

James Bogan Director
William J. McGarry Director
George J. Butvilas Director
Kenneth R. Janson Director, President and Chief Executive Officer
Richard E. West Director and Vice President
Daniel D. Greenlee Treasurer and Chief Financial Officer
Peter L. Lemmer Secretary

The following is a summary of the experience of the executive officers
and directors of the Company:

James Bogan, age 46, is Chief Executive Officer of Portage Health
System, Hancock, Michigan. Prior to joining the Health System in June 1989, he
held various positions involving health care management, the last three years
as Chief Operating Officer of Trinity Medical Center, Minot, North Dakota. Mr.
Bogan is responsible for directing the affairs of Portage Health System, which
include a 44 bed acute care unit, a 30 bed nursing home unit, a medical group
including 15 physicians, a home health agency, and two retail pharmacies.

William J. McGarry, age 54, is the Treasurer and Chief Financial
Officer of Michigan Technological University located in Houghton, Michigan. He
was named to his current position at the University in December 1992, after
serving two years as a senior associate with Coopers & Lybrand in Boston.
Prior to his term with Coopers & Lybrand, Mr. McGarry served as principal
consultant with Information Associates of Rochester, New York, and was vice
president in charge of the large financial services management consulting and
systems integration practice of SEI Corporation of Cambridge, Massachusetts.
He has also served as senior director of finance and administration at
Rensselaer Polytechnic Institute and as director of administrative systems at
Lehigh University.

George J. Butvilas, age 51, joined the Bank as President in May 1990.
He was named Chief Executive Officer of the Bank in 1991 and Chief Executive
Officer of D&N in 1992. Prior to joining the Bank, he had over 16 years
experience as a commercial and community banker, most recently as Executive
Vice President and Director of Boulevard Bancorp, Inc. of Chicago, Illinois.

Kenneth R. Janson, age 45, is Executive Vice President/Chief Financial
Officer and Treasurer of D&N and the Bank. Prior to joining the Bank in May
1988 as Vice President/Financial Analysis, he was affiliated with various
universities, the last six years as Associate Professor of Accounting at
Michigan Technological University. Mr. Janson is responsible for directing the
accounting, investment and investor relations functions for the Bank and D&N.

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Richard E. West, age 50, is Executive Vice President/Wholesale Banking
of the Bank. Prior to joining the Bank in January 1990, he was Servicing
Manager for 20 years with Rothschild Financial Corporation and Valley National
Bank of Arizona. Mr. West is responsible for directing the loan servicing,
residential lending, consumer lending, bank operations and information systems
functions of the Bank.

Daniel D. Greenlee, age 45, is Senior Vice President/Controller of the
Bank. He has been with the Bank in various capacities since 1984 and is
presently responsible for the accounting, financial and regulatory reporting,
financial analysis, tax and risk management functions of the Bank.

Peter L. Lemmer, age 39, is Senior Vice President/General Counsel of
D&N and the Bank. Prior to joining the Bank in October 1990, he held various
positions involving legal services, the last five years as Senior Vice
President/Compliance and Vice President, Associate General Counsel/Compliance
Officer with Cal America Savings, later known as Columbus Savings, and American
Federal Bank, respectively. Mr. Lemmer is responsible for the legal and
regulatory functions of the Bank and D&N.

INDEPENDENT DIRECTORS

The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. See "Description of Series A Preferred
Shares--Independent Director Approval". James Bogan and William McGarry are
the Company's initial Independent Directors. For so long as there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors.

If at any time the Company fails to declare and pay a quarterly
dividend payment on the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two at
the Company's next annual meeting and the holders of Series A Preferred Shares,
voting together with the holders of any other outstanding series of Preferred
Stock as a single class, will be entitled to elect two additional directors to
serve on the Company's Board of Directors. Any member of the Board of
Directors elected by holders of the Company's Preferred Stock will be deemed to
be an Independent Director for purposes of the actions requiring the approval
of a majority of the Independent Directors. See "Description of Series A
Preferred Shares--Voting Rights".

AUDIT COMMITTEE

Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors.
The audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of Messrs.
Bogan and McGarry.

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CREDIT COMMITTEE

Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review the status of all Mortgage Loans
which have become Classified or have been placed in Nonaccrual Status, and will
review the terms and conditions upon which any such Loans are modified or
disposed of by the Company. The credit committee will initially be comprised of
Messrs. Butvilas, Janson and West.

COMPENSATION OF DIRECTORS AND OFFICERS

The Company intends to pay the Independent Directors of the Company
fees for their services as directors. The Independent Directors will receive a
fee of $250 for attendance (in person or by telephone) at each meeting of the
Board of Directors or Committee of the Board. However, multiple fees shall not
be paid for two or more meetings attended on the same day. The Company will
not pay any compensation to its officers or employees or to directors who are
not Independent Directors.

LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS

The Company's Certificate of Incorporation eliminates, to the fullest
extent permitted by the Delaware General Corporation Law, the personal
liability of a director to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty. The Company's Certificate of
Incorporation empowers the Company to indemnify, to the fullest extent
permitted by the Delaware General Corporation Law, any director or officer of
the Company. The Company's Certificate of Incorporation also empowers the
Company to purchase and maintain insurance to protect any director or officer
against any liability asserted against him or her, or incurred by him or her,
arising out of his or her status as such.

The by-laws of the Company (the "By-laws") require indemnification of
the Company's directors and officers and specify that the right to
indemnification is a contract right, setting forth certain procedural and
evidentiary standards applicable to the enforcement of a claim under the
By-laws. The By-laws also entitle any director or officer to be reimbursed for
the expenses of defending any claim against him or her arising out of his or
her status as such. The By-laws of the Company also provide that the Company
may enter into contracts with any director or officer in furtherance of the
indemnification provisions contained in the By-laws and allow the Company to
create a trust fund to ensure payment of amounts indemnified.

THE ADVISOR

In connection with the consummation of the Offering and the formation
of the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day operations of the Company.
The Bank in its role as advisor under the terms of the Advisory Agreement is
herein referred to as the "Advisor". The Advisor will be responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company, (ii)

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advising the Company with respect to the acquisition, management, financing and
disposition of the Company's Mortgage Assets and (iii) maintaining custody of
the documents related to the Company's Mortgage Loans. The Advisor may, from
time to time, subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business of
managing Mortgage Assets or, with the approval of a majority of the Board of
Directors as well as a majority of the Independent Directors, subcontract all
or a portion of its obligations under the Advisory Agreement to unrelated third
parties. The Advisor will not, in connection with the subcontracting of any of
its obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement. Notwithstanding the
above, the Company will control the activities of the Advisor and the Company's
directors will maintain the continuing and exclusive authority to manage the
operations of the Company.

The Advisor has substantial experience in the mortgage lending
industry, both in the origination and in the servicing of mortgage loans. At
December 31, 1996, the Advisor held approximately $614 million of residential
mortgage loans and approximately $111 million of commercial mortgage loans. In
its residential mortgage loan business, the Advisor originates and purchases
residential mortgage loans and may sell such loans to investors, primarily in
the secondary market, while generally retaining the rights to service such
loans. In its commercial mortgage loan business, the Advisor typically
services the commercial mortgage loans in its portfolio which it has
originated.

As a result of the relationship between the Bank and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".

The principal executive offices of the Advisor are located at 400
Quincy Street, Hancock, Michigan 49930, telephone number (906) 482-2700.

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CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION

THE FORMATION

Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions described
below which are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio to the Company and (iii) to enable the
Company to qualify as a REIT for federal income tax purposes commencing with
its taxable year ending December 31, 1997.

The transactions constituting the formation of the Company will
include the following:

- The Certificate of Incorporation of the Company will be
amended to provide for 2,500,000 authorized shares of
Preferred Stock and 250,000 authorized shares of Common Stock,
and the Company will file a Certificate of Designation with
the Secretary of State of the State of Delaware establishing
the terms of the Series A Preferred Shares.

- The Company will sell to the public 1,100,000 Series A
Preferred Shares in the Offering (assuming the Underwriters'
over-allotment option is not exercised).

- The Bank will acquire 27,500 shares of Common Stock for a
purchase price equal to $27.5 million. In addition, the Bank
will acquire additional shares of Common Stock for a purchase
price equal to the aggregate amount of underwriting
commissions and expenses of the Offering and the formation of
the Company.

- The Bank will sell the Initial Portfolio to the Company for an
aggregate purchase price equal to approximately $55 million
pursuant to the terms of the Residential Mortgage Purchase
Agreement and the Commercial Mortgage Purchase Agreement.

- The Company will enter into the Advisory Agreement with the
Bank pursuant to which the Bank, as Advisor, will manage the
Mortgage Assets held by the Company and administer the
day-to-day operations of the Company. See "Management--The
Advisor".

- The Company will enter into the Servicing Agreements with the
Bank pursuant to which the Bank, as Servicer, will service the
Mortgage Loans included in the Initial Portfolio. See
"Business and Strategy--Servicing".
The Bank currently owns, and following the completion of the Offering
intends to continue to own, all of the issued and outstanding shares of Common
Stock of the Company. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain

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direct or indirect ownership of at least a majority of the outstanding
shares of Common Stock of the Company. D&N intends to maintain direct
ownership of the Bank for the foreseeable future.

A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.

In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management
and custody of the Company's assets, in its capacity as Advisor under the
Advisory Agreement, and will have responsibility for servicing the Mortgage
Loans as Servicer under the Servicing Agreements. See "Management--The Advisor"
and "Risk Factors--Relationship with the Bank and its Affiliates; Conflicts of
Interest".

The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $55 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been
or will be obtained for purposes of the Offering, and there can be no assurance
that the fair value of the Initial Portfolio will not differ from the purchase
price to be paid by the Company. See "Risk Factors--No Third Party Valuation of
the Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"--Relationship with the Bank and its Affiliates; Conflicts of Interest".

BENEFITS TO THE BANK AND ITS AFFILIATES

The Bank and its affiliates expect to realize the following benefits
in connection with the Offering and the formation of the Company:

- The Bank is required by the OTS to maintain certain levels of
capital for regulatory purposes. The Bank has informed the
Company that the Series A Preferred Shares will be treated as
capital of the Bank for regulatory purposes. The Bank would
not be permitted to treat any securities issued by a trust
established by the Bank to securitize its mortgage assets as
capital for regulatory purposes.

- As a result of the Company's qualification as a REIT, the
dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes and will provide the Bank
with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself.

- The Bank will receive approximately $55 million at the
consummation of the Offering (assuming no exercise by the
Underwriters of their over-allotment option) in connection
with the sale of the Initial Portfolio to the Company
(approximately $27.5 million of which represents new funds
after giving effect to the Bank's expense of purchasing the
Company's Common Stock).

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- The Bank will be entitled to receive annual advisory and
servicing fees and annual dividends in respect of the Common
Stock. For the first 12 months following completion of the
Offering, these annual fees and dividends are anticipated to
be as follows:

Advisory Fee . . . . . . . . . . . . . . . . . $125,000
Servicing Fee(1) . . . . . . . . . . . . . . . 214,000
Common Stock Dividend(2) . . . . . . . . . . . [______]

$[ ]
========

- ---------------
(1) Assumes that for the first 12 months following completion of the Offering,
the Company holds Residential Mortgage Loans and Commercial Mortgage Loans
with the same outstanding principal balances as those Mortgage Loans
included in the Initial Portfolio. See "Business and Strategy--Servicing"
for a description of the basis upon which the servicing fees will be
calculated.

(2) The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's "REIT taxable income"
(excluding capital gains) over the amount of dividends paid in respect of
Preferred Stock. The aggregate annual dividend amount of the Series A
Preferred Shares is $[ ] million. Assuming that (i) the Mortgage Loans
included in the Initial Portfolio are held for the 12-month period
following completion of the Offering, (ii) principal repayments are
reinvested in additional Mortgage Loans with characteristics similar to
those of the Mortgage Loans included in the Initial Portfolio and (iii)
interest rates remain constant during such 12-month period, the Company
anticipates that the Initial Portfolio will generate "REIT taxable income"
(excluding capital gains) of approximately $3.9 million, after payment of
servicing and advisory fees, during such 12-month period.

- The Bank will also be entitled to retain any late payment
charges and penalties collected in connection with the
Mortgage Loans serviced by it. In addition, the Bank, as
Servicer, will receive any benefit derived from interest
earned on collected principal and interest payments between
the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance escrow
funds with respect to Mortgage Loans serviced by it.

DESCRIPTION OF SERIES A PREFERRED SHARES

The following summary sets forth the material terms and provisions of
the Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Certificate of Designation establishing the
Series A Preferred Shares and the Company's Certificate of Incorporation, the
forms of which have been filed with the Securities and Exchange Commission (the
"Commission") as exhibits to the registration statement of which this
Prospectus forms a part. See "Description of Capital Stock" below.

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GENERAL

The Series A Preferred Shares form a series of the Preferred Stock of
the Company, which Preferred Stock may be issued from time to time in one or
more series with such rights, preferences and limitations as are determined by
the Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.

When issued, the Series A Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the capital stock of
the Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or
series of capital stock of the Company and will not be subject to any sinking
fund or other obligation of the Company for its repurchase or retirement.

The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be Illinois Stock Transfer Company, Inc. The registrar
for shares of Preferred Stock will send notices to shareholders of any meetings
at which holders of the Preferred Stock have the right to elect directors of
the Company or to vote on any other matter.

DIVIDENDS

Holders of Series A Preferred Shares will be entitled to receive, when
and as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cash dividends at the rate of [ ]% per
annum of the initial liquidation preference (equivalent to $[ ] per share
per annum). If declared, dividends on the Series A Preferred Shares will be
payable quarterly on March 31, June 30, September 30 and December 31 of each
year, at such annual rate, commencing on September 30, 1997. Dividends in each
quarterly period will accrue from the first day of such period, whether or not
declared or paid for the prior quarterly period. Each declared dividend will
be payable to holders of record as they appear on the stock register of the
Company on such record dates, not exceeding 45 days preceding the payment dates
thereof, as shall be fixed by the Board of Directors of the Company or a duly
authorized committee thereof. Dividends payable on the Series A Preferred
Shares for any period greater or less than a full dividend period shall be
computed on the basis of twelve 30-day months, a 360-day year and the actual
number of days elapsed in the period. Dividends payable on the Series A
Preferred Shares for each full dividend period shall be computed by dividing
the rate per annum by four.

The right of holders of Series A Preferred Shares to receive dividends
is noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for
any future period with respect to either the Series A Preferred Shares or the
Common Stock. If the Company fails to pay or declare and set aside for payment
a quarterly dividend on the Series A Preferred Shares, holders

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of the Preferred Stock of the Company, including the Series A Preferred Shares,
will be entitled to elect two directors. See "--Voting Rights".

If full dividends on the Series A Preferred Shares for any dividend
period shall not have been declared and paid, or declared and a sum sufficient
for the payment thereof shall not have been set apart for such payments, no
dividends shall be declared or paid or set aside for payment and no other
distribution shall be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Shares as to dividends or amounts upon
liquidation, nor shall any Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Series A Preferred Shares as
to dividends or amounts upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any monies to be paid to or made available
for a sinking fund for the redemption of any such stock) by the Company (except
by conversion into or exchange for other capital stock of the Company ranking
junior to the Series A Preferred Shares as to dividends and amounts upon
liquidation), until such time as dividends on all outstanding Series A
Preferred Shares have been (i) declared and paid for three consecutive dividend
periods and (ii) declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for the fourth consecutive
dividend period.

When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends declared upon the Series A Preferred
Shares and any other series of capital stock ranking on a parity as to
dividends with the Series A Preferred Shares shall be declared pro rata so that
the amount of dividends declared per share on the Series A Preferred Shares and
such other series of capital stock shall in all cases bear to each other the
same ratio that full dividends, for the then-current dividend period, per share
on the Series A Preferred Shares (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods) and full dividends,
including required or permitted accumulations, if any, on such other series of
capital stock bear to each other.

For a discussion of the tax treatment of distributions to
stockholders, see "Federal Income Tax Considerations--Taxation of United States
Stockholders" and "--Taxation of Foreign Stockholders" and for a discussion of
certain potential regulatory limitations on the Company's ability to pay
dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions on
Operations of the Company".

AUTOMATIC EXCHANGE

Each Series A Preferred Share will be exchanged automatically for one
newly issued Bank Preferred Share if the appropriate regulatory agency directs
in writing an exchange of the Series A Preferred Shares for Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized"

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in the near term (i.e., the Exchange Event). Upon the Automatic Exchange, each
holder of Series A Preferred Shares shall be unconditionally obligated to
surrender to the Bank the certificates representing each Series A Preferred
Share of such holder, and the Bank shall be unconditionally obligated to issue
to such holder in exchange for each such Series A Preferred Share a certificate
representing one Bank Preferred Share. Any Series A Preferred Shares purchased
or redeemed by the Company prior to the Time of Exchange (as defined below)
shall not be deemed outstanding and shall not be subject to the Automatic
Exchange.

The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release prior to such time.
As of the Time of Exchange, all of the Series A Preferred Shares will be deemed
cancelled without any further action by the Company, all rights of the holders
of Series A Preferred Shares as stockholders of the Company will cease, and
such persons shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank Preferred Shares within 30 days of such event,
and the Bank will deliver to each such holder certificates for Bank Preferred
Shares upon surrender of certificates for Series A Preferred Shares. Until
such replacement stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing Series A Preferred Shares shall be deemed for all purposes to
represent Bank Preferred Shares. All corporate action necessary for the Bank
to issue the Bank Preferred Shares will be completed upon completion of the
Offering. Accordingly, once the Directive is issued, no action will be
required to be taken by holders of Series A Preferred Shares, by the Bank or by
the Company in order to effect the Automatic Exchange as of the Time of
Exchange.

Absent the occurrence of the Exchange Event, no shares of Bank
Preferred Shares will be issued. Upon the occurrence of the Exchange Event,
the Bank Preferred Shares to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
constitute 100% of the issued and outstanding shares of Bank Preferred Shares.
Holders of Bank Preferred Shares would have the same dividend rights,
liquidation preference, redemption options and other attributes as to the Bank
as holders of Series A Preferred Shares have as to the Company, except that the
Bank Preferred Shares would not be listed on the Nasdaq System. Any accrued
and unpaid dividends for the most recent quarter on the Series A Preferred
Shares as of the Time of Exchange would be deemed to be accrued and unpaid
dividends for the most recent quarter on the Bank Preferred Shares. The Bank
Preferred Shares would rank pari passu in terms of dividend payment and
liquidation preference with any outstanding shares of preferred stock of the
Bank. The Bank intends to register the Bank Preferred Shares with the OTS
pursuant to an Offering Circular, a copy of which is affixed to this Prospectus
as Annex I and incorporated herein by reference. The Bank Preferred Shares
will not be registered with the Commission and will be offered pursuant to an
exemption from registration under Section 3(a)(5) of the Securities Act of
1933, as amended (the "Securities Act"). The Bank does not intend to apply for
listing of the Bank Preferred Shares on any national securities exchange or for
quotation of the Bank Preferred Shares through the Nasdaq System. Absent the
occurrence of the Exchange Event, however, the Bank will not issue any Bank
Preferred Shares, although the Bank will be

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able to issue preferred stock in series. There can be no assurance as to the
liquidity of the trading markets for the Bank Preferred Shares, if issued, or
that an active public market for the Bank Preferred Shares would develop or be
maintained.

Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of Series A Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to any security of the Bank; such rights as are conferred by the Series
A Preferred Shares exist solely as to the Company.

VOTING RIGHTS

Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote as indicated below, each Series A Preferred Share will be entitled to one
vote on matters on which holders of the Series A Preferred Shares are entitled
to vote.

If at the time of any annual meeting of the Company's stockholders for
the election of directors the Company has failed to pay or declare and set
aside for payment a quarterly dividend during any of the four preceding
quarterly dividend periods on any series of Preferred Stock of the Company,
including the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two,
and the holders of the Series A Preferred Shares, voting together with the
holders of all other series of Preferred Stock as a single class, will be
entitled to elect such two additional directors to serve on the Company's Board
of Directors at each such annual meeting. Each director elected by the holders
of shares of the Preferred Stock shall continue to serve as such director until
the later of (i) the full term for which he or she shall have been elected or
(ii) the payment of four quarterly dividends on the Preferred Stock, including
the Series A Preferred Shares.

The affirmative vote or consent of the holders of at least two-thirds
of the outstanding shares of each series of Preferred Stock of the Company,
including the Series A Preferred Shares, voting as a single class without
regard to series, will be required (a) to create any class or series of stock
which shall have preference as to dividends or distribution of assets over any
outstanding series of Preferred Stock of the Company other than a series which
shall not have any right to object to such creation or (b) to alter or change
the provisions of the Company's Certificate of Incorporation (including the
Certificate of Designation establishing the Series A Preferred Shares) so as to
adversely affect the voting powers, preferences or special rights of the
holders of a series of Preferred Stock of the Company; provided that if such
amendment shall not adversely affect all series of Preferred Stock of the
Company, such amendment need only be approved by at least two-thirds of the
holders of shares of all series of Preferred Stock adversely affected thereby.

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REDEMPTION

The Series A Preferred Shares will not be redeemable prior to [
], 2002 (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days' notice by mail, at a redemption price of $25.00 per share, plus
the accrued and unpaid dividends for the most recent quarter to the date of
redemption, if any, thereon. Any such redemption may only be effected with the
prior approval of the OTS (unless at such time such approvals are not
required). Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof has been set apart for payment for the then current
dividend period, no Series A Preferred Shares shall be redeemed unless all
outstanding Series A Preferred Shares are redeemed and the Company shall not
purchase or otherwise acquire any Series A Preferred Shares; provided, however,
that the Company may purchase or acquire Series A Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Series A Preferred Shares.

The Company will also have the right at any time, upon the occurrence
of a Tax Event and with the prior written approval of the OTS, to redeem the
Series A Preferred Shares, in whole (but not in part) at a redemption price of
$25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter to the date of redemption, if any, thereon. "Tax Event" means the
receipt by the Company of an opinion of a law or accounting firm experienced in
such matters to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change) in the
laws or treaties (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative pronouncement,
published or private ruling, regulatory procedure, notice or announcement
(including any notice or announcement of intent to adopt such procedures or
regulations) ("Administrative Action") or (iii) any amendment to, clarification
of, or change in the official position or the interpretation of such
Administrative Action or any interpretation or pronouncement that provides for
a position with respect to such Administrative Action that differs from the
theretofore generally accepted position, in each case, by any legislative body,
court, governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends paid or to be paid
by the Company with respect to the capital stock of the Company are not, or
will not be, fully deductible by the Company for United States federal income
tax purposes or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.

RIGHTS UPON LIQUIDATION

In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Series A Preferred Shares at
the time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any

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distribution of assets is made to holders of Common Stock or any other class of
stock ranking junior to the Series A Preferred Shares upon liquidation,
liquidating distributions in the amount of $25 per share, plus the accrued and
unpaid dividends for the most recent quarter thereon, if any, to the date of
liquidation.

After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series A Preferred Shares will have no
right or claim to any of the remaining assets of the Company. In the event
that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidation distributions on all outstanding Series A Preferred
Shares and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with the Series A
Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Company, then the holders of
the Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.

For such purposes, the consolidation or merger of the Company with or
into any other entity, the consolidation or merger of any other entity with or
into the Company or the sale of all or substantially all of the property or
business of the Company shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company.

INDEPENDENT DIRECTOR APPROVAL

The Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the Independent
Directors. For so long as there are only two Independent Directors, any action
that requires the approval of a majority of Independent Directors must be
approved by both Independent Directors. James Bogan and William McGarry are
the Company's initial Independent Directors. See "Management--Independent
Directors". In order to be considered "independent", a director must not, prior
to appointment, be a current director, officer or employee of the Company, the
Bank or any affiliate of the Bank or of any person or persons that, in the
aggregate, own more than one percent of the Common Stock of D&N. In addition,
any members of the Board of Directors of the Company elected by holders of
Preferred Stock, including the Series A Preferred Shares, will be deemed to be
Independent Directors for purposes of approving actions requiring the approval
of a majority of the Independent Directors.

The actions which may not be taken without the approval of a majority
of the Independent Directors include (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the aggregate amount
of net proceeds received in connection with the issuance of Preferred Stock and
Common Stock, (iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any year if,
after taking into account any such proposed distribution, total distributions
on the Series A Preferred Shares and the Common Stock

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would exceed an amount equal to the sum of 105% of the Company's "REIT taxable
income" (excluding capital gains) for such year plus net capital gains of the
Company for that year, (iv) the acquisition of real estate assets other than
Mortgage Loans or Mortgage-Backed Securities that (A) qualify as real estate
assets under Section 856(c)(6)(B) of the Code, (B) are rated investment grade
or better by at least one nationally recognized independent rating
organization, (C) are not interest-only, principal-only or high-risk securities
and (D) represent interests in or obligations backed by pools of mortgage
loans, (v) the redemption of any shares of Common Stock, (vi) the termination
or modification of, or the election not to renew, the Advisory Agreement or any
Servicing Agreement or the subcontracting of any duties under the Advisory
Agreement or the Servicing Agreements to third parties unaffiliated with the
Bank, (vii) any dissolution, liquidation or termination of the Company prior to
[ ], 2002, (viii) any material amendment to or modification of
either of the Mortgage Purchase Agreements, including, without limitation, any
amendment to the representations, warranties and covenants contained in such
agreements made in connection with the acquisition of additional Mortgage Loans
and (ix) the determination to revoke the Company's REIT status or the amendment
of any of the ownership limitations contained in the Certificate of
Incorporation. The Certificate of Designation requires that, in assessing the
benefits to the Company of any proposed action requiring their consent, the
Independent Directors take into account the interests of holders of both the
Common Stock and the Preferred Stock, including, without limitation, holders of
the Series A Preferred Shares. In considering the interests of the holders of
Preferred Stock, including without limitation the holders of the Series A
Preferred Shares, the Independent Directors shall owe the same duties which the
Independent Directors owe to the holders of Common Stock.

RESTRICTIONS ON OWNERSHIP

For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer".

DESCRIPTION OF CAPITAL STOCK

The following summary of the material terms and provisions of the
capital stock of the Company does not purport to be complete and is subject in
all respects to the applicable provisions of the Delaware General Corporation
Law and the Certificate of Incorporation of the Company.

COMMON STOCK

General. The Company is authorized to issue up to 250,000 shares of
Common Stock. Upon consummation of the Offering and the transactions described
in "Certain Transactions Constituting the Formation", the Company will have
outstanding [ ] shares of Common Stock, all of which will be held by the
Bank.

Dividends. Holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, provided that, so long

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as any shares of Preferred Stock are outstanding, no dividends or other
distributions (including redemptions and purchases) may be made with respect to
the Common Stock unless full dividends on the shares of all series of Preferred
Stock, including accumulations in the case of noncumulative Preferred Stock,
have been paid for the prior four quarters. In order to remain qualified as a
REIT, the Company must distribute annually at least 95% of its annual "REIT
taxable income" (not including capital gains) to stockholders.

Voting Rights. Subject to the rights, if any, of the holders of any
class or series of Preferred Stock, all voting rights are vested in the Common
Stock. The holders of Common Stock are entitled to one vote per share. All of
the issued and outstanding shares of Common Stock are currently, and upon
consummation of the Offering will be, held by the Bank.

Rights Upon Liquidation. In the event of the liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, after there
have been paid or set aside for the holders of all series of Preferred Stock
the full preferential amounts to which such holders are entitled, the holders
of Common Stock will be entitled to share equally and ratably in any assets
remaining after the payment of all debts and liabilities.

PREFERRED STOCK

Subject to limitations prescribed by Delaware law and the Company's
Certificate of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish,
from time to time, the number of shares of Preferred Stock to be included in
any such class or series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the shares
of any such class or series, and such other subjects or matters as may be fixed
by resolution of the Board of Directors.

Preferred Stock, upon issuance against full payment of the purchase
price therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Designation relating to that class or series.

A Certificate of Designation relating to each class or series of
Preferred Stock will set forth the preferences and other terms of such class or
series, including, without limitation, the following: (1) the title and stated
value of such class or series; (2) the number of shares of such class or series
offered and the liquidation preference per share of such class or series; (3)
the dividend rate(s), period(s), and/or payment date(s) or method(s) of
calculation thereof applicable to such class or series; (4) whether such class
or series of Preferred Stock is noncumulative or not and, if noncumulative, the
date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the
provision for redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a
REIT; (8) any voting rights of such class or series; (9) the relative ranking
and preferences

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of such class or series as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; (10) any limitations
on issuance of any class or series of Preferred Stock ranking senior to or on a
parity with such class or series of Preferred Stock as to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of the
Company; and (11) any other specific terms, preferences, rights, limitations or
restrictions of such class or series.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

The Company's Certificate of Incorporation contains certain
restrictions on the number of shares of Common Stock and Preferred Stock that
individual stockholders may own. For the Company to qualify as a REIT under the
Code, no more than 50% in number or value of its outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The capital stock of the
Company must also be beneficially owned by 100 or more persons during at least
335 days of a taxable year or during a proportionate part of a shorter taxable
year (the "One Hundred Persons Test"). The ownership by the Bank of 100% of the
shares of Common Stock of the REIT will not adversely affect the Company's REIT
qualification because each stockholder of D&N (the sole stockholder of the
Bank) counts as a separate beneficial owner for purposes of the Five or Fewer
Test and the capital stock of D&N is widely held. Further, the Certificate of
Incorporation of the Company contains restrictions on the acquisition of
Preferred Stock intended to ensure compliance with the One Hundred Persons
Test. Such provisions include a restriction that if any transfer of shares of
capital stock of the Company would cause the Company to be beneficially owned
by fewer than 100 persons, such transfer shall be null and void and the
intended transferee will acquire no rights to the stock.

Subject to certain exceptions specified in the Company's Certificate
of Incorporation, no holder of Preferred Stock is permitted to own (including
shares deemed to be owned by virtue of the attribution provisions of the Code)
more than 9.9% (the "Ownership Limit") of any issued and outstanding class or
series of Preferred Stock. The Board of Directors may (but in no event will be
required to), upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, waive the Ownership Limit with respect to a holder if such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.

The Certificate of Incorporation provides that shares of any class or
series of Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares") will
automatically be transferred, by operation of law, to a trustee as a trustee of
a trust for the exclusive benefit of a charity to be named by the Company as of
the day prior to the day the prohibited transfer took place. Any distributions
paid prior to the discovery of the prohibited transfer are to be repaid by the
original transferee to the Company and by the Company to the trustee; any vote
of the shares while the shares were held by the original transferee prior to
the Company's discovery thereof shall be void ab initio and the original
transferee shall be deemed to have given its proxy to the trustee. Any unpaid
distributions with respect to the original transferee will be rescinded as void
ab initio. In liquidation, the original transferee stockholder's ratable share
of the Company's assets would be limited to the price paid

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by the original transferee for the Excess Shares or, if no value was given, the
price per share equal to the closing market price on the date of the purported
transfer. The trustee of the trust shall promptly sell the shares to any person
whose ownership is not prohibited, whereupon the interest of the trust shall
terminate. Proceeds of the sale shall be paid to the original transferee up to
its purchase price (or, if the original transferee did not purchase the shares,
the value on its date of acquisition) and any remaining proceeds shall be paid
to a charity to be named by the Company.

The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.9% of a class
or series of issued and outstanding Preferred Stock (or the acquisition of an
interest in an entity that owns shares of such series of Preferred Stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.9% of such class or
series of Preferred Stock, and thus subject such stock to the Ownership Limit.
Direct or constructive ownership in excess of the Ownership Limit would cause
ownership of the shares in excess of the limit to be transferred to the
trustee.

All certificates representing shares of Preferred Stock will bear a
legend referring to the restrictions described above.

The Ownership Limit provisions will not be automatically removed even
if the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration limitation
is increased. The Certificate of Incorporation may not be amended to alter,
change, repeal or amend any of the Ownership Limit provisions without the prior
approval of a majority of the Independent Directors.

The Certificate of Incorporation requires that any person who
beneficially owns 1% (or such lower percentage as may be required by the Code
or the Treasury Regulations) of the outstanding shares of any class or series
of Preferred Stock of the Company must provide certain information to the
Company within 30 days of June 30 and December 31 of each year. In addition,
each stockholder shall upon demand be required to disclose to the Company in
writing such information as the Company may request in order to determine the
effect, if any, of such stockholder's actual and constructive ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.

FEDERAL INCOME TAX CONSIDERATIONS

The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent that
it constitutes summaries of tax matters or tax conclusions, has been reviewed
by Coopers & Lybrand L.L.P., and it is their opinion that such information is
accurate in all material respects. The discussion below is based on existing
federal income tax law, which is subject to change, with possible retroactive
effect. The discussion below

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does not address all aspects of taxation that may be relevant in the particular
circumstances of each stockholder or to certain types of stockholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States, except to the extent discussed) subject to
special treatment under the federal income tax laws.

EACH PROSPECTIVE INVESTOR IS URGED TO SEEK INDIVIDUAL ADVICE
CONCERNING THE EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE
SERIES A PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS,
INCLUDING THE EFFECT OF POSSIBLE CHANGES IN TAX LAW.

TAXATION OF THE COMPANY

General. The Company will elect to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), which are the requirements for
qualifying as a REIT, commencing with its taxable year ending December 31,
1997. The Company believes that, commencing with its taxable year ending
December 31, 1997, it will be owned and organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and the Company
intends to continue to operate in such a manner, but no assurance can be given
that it will operate in a manner so as to qualify or remain qualified.

The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.

In the opinion of Coopers & Lybrand L.L.P., commencing with the
Company's taxable year ending December 31, 1997, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In addition,
this opinion is based upon factual assumptions and representations of the
Company concerning its business and Mortgage Assets. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to
meet, through actual annual operating results, distribution levels and
diversity of stock ownership and the various qualification tests imposed under
the Code discussed below, the results of which will not be reviewed by Coopers
& Lybrand L.L.P. on a continuing basis. No assurance can be given that the
actual results of the Company's operation for any one taxable year will satisfy
such requirements. See "--Failure to Qualify".

If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently

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distributed to stockholders. Such treatment substantially eliminates the
federal "double taxation" on earnings (at the corporate and the stockholder
levels) that generally results from investment in a corporation.

Despite the REIT election, the Company may be subject to federal
income and excise tax as follows:

First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.

Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences,
if any.

Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale
to customers in the ordinary course of business or (ii) other
nonqualifying net income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.

Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course
of business, other than sales of foreclosure property and sales that
qualify for a statutory safe harbor), such income will be subject to a
100% tax.

Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the
net income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended
to reflect the Company's profitability.

Sixth, if the Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed.

The Company does not now intend to acquire any appreciated assets from
a corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event
of such an acquisition, the Company could, under certain circumstances, be
subject to tax upon disposition of such assets.

Organizational Requirements. The Code defines a REIT as a
corporation, trust, or association (i) that is managed by one or more trustees
or directors; (ii) the beneficial ownership

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of which is evidenced by transferable shares, or by transferable certificates
of beneficial interest; (iii) that would be taxable as a domestic corporation,
but for the REIT Requirements; (iv) that is neither a financial institution nor
an insurance company subject to certain provisions of the Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
private foundations and certain pension trusts and other entities) at any time
during the last half of each taxable year; (vii) that is not a bank, an
insurance company or certain other specified types of financial institutions;
and (viii) that meets certain other tests, described below, regarding the
nature of its income and assets. The Code provides that conditions (i) through
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT. For purposes of condition
(vi), certain tax-exempt entities are generally treated as individuals, and the
beneficiaries of a pension trust that qualifies under Section 401(a) of the
Code and that holds shares of a REIT will be treated as holding shares of the
REIT in proportion to their actuarial interests in the pension trust. See
"--Taxation of United States Stockholders--Treatment of Tax-Exempt
Stockholders".

Coopers & Lybrand L.L.P. is of the opinion that, for purposes of
condition (v) above, beneficial owners of both common and preferred shares of a
corporation are counted toward the 100 holder requirement. The Company expects
that the Series A Preferred Shares will be held by not less than 100 beneficial
owners at all times such Shares are outstanding. Such ownership of the Series A
Preferred Shares would allow the Company to meet condition (v). Coopers &
Lybrand L.L.P. is of the opinion that, in determining whether condition (vi)
above is met, shareholders of a corporation are treated as owning their
proportionate share of any stock held by that corporation. The Company expects
that the stock of the Company and of D&N will at no time be held directly or
indirectly by five or fewer shareholders who are individuals, private
foundations, pension trusts or other relevant entities that in the aggregate
own more than 50 percent by value of the stock of the Company or D&N,
respectively. Stock ownership of the Company and D&N in accordance with the
Company's expectation will satisfy condition (vi) with respect to the Company.
In addition, the Company's Certificate of Incorporation includes certain
restrictions regarding transfer of its shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership restrictions are
described under "Description of Capital Stock--Restrictions on Ownership and
Transfer".

In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in

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the hands of the REIT for purposes of the REIT Requirements, including
satisfying the gross income tests and the assets test.

Income Tests. In order to maintain qualification as a REIT, the
Company must annually satisfy three gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (as
interest on obligations secured by mortgages on real property, certain "rents
from real property" or as gain on the sale or exchange of such property and
certain fees with respect to agreements to make or acquire mortgage loans),
from certain types of temporary investments or certain other types of gross
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments as aforesaid and from dividends, interest, and
gain from the sale or other disposition of stock or securities and certain
other types of gross income (or from any combination of the foregoing). Third,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) from the date of acquisition must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.

For interest to qualify as "interest on obligations secured by
mortgages on real property or on interests in real property," the obligation
must be secured by real property having a fair market value at the time of
acquisition at least equal to the principal amount of the loan. The term
"interest" includes only an amount that constitutes compensation for the use or
forbearance of money. For example, a fee received or accrued by a lender which
is in fact a charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includible as interest; amounts earned as
consideration for entering into agreements to make loans secured by real
property, although not interest, are otherwise treated as within the 75% and
95% classes of gross income so long as the determination of those amounts does
not depend on the income or profits of any person. By statute, the term
interest does not include any amount based on income or profits except that the
Code provides that (i) interest "based on a fixed percentage or percentages of
receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the
borrower leases under one or more leases based on income or profits, only a
portion of the contingent interest paid by the borrower will be disqualified as
interest.

Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the
event that a REIT acquires by foreclosure property that generates income that
does not qualify as "rents from real property," such income may be treated as
qualifying for two years following foreclosure (which period may be extended by
the IRS) so long as (i) all leases entered into after foreclosure generate only
qualifying rent, (ii) only limited construction takes place and (iii) within 90
days of foreclosure, any trade or business in which the property is used is
conducted by an independent contractor from which the REIT derives no income.
In the event

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the special foreclosure property rule applies to qualify otherwise unqualified
income, the net income that qualifies only under the special rule for
foreclosure property may be subject to tax, as described above.

Relief Provisions. If the Company fails to satisfy one or both of the
75% or 95% gross income tests for any taxable year, it may nevertheless qualify
as a REIT for such year if it is entitled to relief under certain provisions of
the Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions apply, a tax would be imposed with respect to the
excess net income.

Asset Tests. At the close of each quarter of its taxable year, the
Company must satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including stock or debt instruments held for not more than
one year that were purchased with the proceeds of a stock offering or long-term
(at least five years) debt offering of the Company), cash, cash items, and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.

After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and to take such
action within 30 days after the close of any quarter as may be required to cure
any noncompliance but no assurance can be given that such asset tests will be
met.

Annual Distribution Requirements. In order to be treated as a REIT,
the Company is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "REIT taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (B) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Company
does not distribute (or is

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not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. The Code permits a
stockholder to elect to be treated for tax purposes as having (i) received a
distribution in the amount specified in the election and (ii) contributed the
amount thereof to the capital of the Company. In the event the Company fails to
distribute 100% of its income and capital gains, the Bank may elect to be so
treated. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirement.

"REIT taxable income" is the taxable income of a REIT, which generally
is computed in the same fashion as the taxable income of any corporation,
except that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.

It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in calculating the taxable income of the Company. In
the event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution requirement the Company may find it necessary to
arrange for borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.

Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to stockholders
will be taxable as ordinary income, and subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost, and will not be
permitted to requalify unless it

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distributes any earnings and profits attributable to the period when it failed
to qualify. In addition, it would be subject to tax on any built-in gains on
property held during the period during which it did not qualify if it sold such
property within 10 years of requalification. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief.

TAX TREATMENT OF AUTOMATIC EXCHANGE

Upon the occurrence of the Automatic Exchange, the outstanding Series
A Preferred Shares will be automatically exchanged on a one-for-one basis for
Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange". The Automatic Exchange will be a taxable exchange
with respect to which each holder of the Series A Preferred Shares will have a
gain or loss, as the case may be, measured by the difference between the basis
of such holder in the Series A Preferred Shares and the fair market value of
the Bank Preferred Shares received in the Automatic Exchange. Because the Bank
Preferred Shares will not be listed on the Nasdaq System or on any exchange,
each individual holder will be required to determine the fair market value of
Bank Preferred Shares received to determine the tax effect of the
Automatic Exchange. Assuming that such holder's Series A Preferred
Shares were held as capital assets for more than one year prior to the
Automatic Exchange, any gain or loss will be long-term capital gain or loss.
Long-term capital losses are deductible, subject to certain limitations. The
basis of the holder in the Bank Preferred Shares will be their fair market
value at the time of the Automatic Exchange.

TAXATION OF UNITED STATES STOCKHOLDERS

As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.

Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital
gains dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the

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Company during January of the following calendar year. Stockholders may not
claim the benefit of any tax losses of the Company on their own income tax
returns.

The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount
required to be distributed in order to avoid imposition of the 4% excise tax
discussed under "--Taxation of the Company--General" and "--Taxation of the
Company--Annual Distribution Requirements" above. As a result, stockholders may
be required to treat as taxable dividends certain distributions that would
otherwise result in tax-free returns of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.

Losses incurred on the sale or exchange of Series A Preferred Shares
held for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling stockholder with
respect to such stock.

Treatment of Tax-Exempt Stockholders. Distributions from the Company
to a tax-exempt employee's pension trust or other domestic tax-exempt
stockholder will generally not constitute "unrelated business taxable income"
unless the stockholder has borrowed to acquire or carry its shares of the
Company. A tax-exempt employee's pension trust that holds more than 10% of the
shares of the capital stock of the Company may under certain circumstances be
required to treat a certain percentage of dividends as unrelated business
taxable income if the Company is "predominantly held" by qualified trusts. For
these purposes, a qualified trust is any trust defined under Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code.

TAXATION OF FOREIGN STOCKHOLDERS

The rules governing United States income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates holding Series A Preferred Shares (collectively, "Foreign
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. A Foreign Stockholder should consult with its own
tax advisor to determine the effect of federal, state, and local and country of
tax residence income tax laws on an investment in the Company, including any
reporting requirements.

In general, a Foreign Stockholder will be subject to regular United
States income tax to the same extent as a United States Stockholder with
respect to income or gain derived from its investment in the Company if under
all facts and circumstances such income or gain is "effectively connected" with
such stockholder's conduct of a trade or business in the United States. See "--
Taxation of United States Stockholders". A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to the regular United States corporate
income tax. The following discussion will apply to a Foreign Stockholder whose
income or gain derived from investment in the Company is not so effectively
connected in light of the facts and circumstances.

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The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real property interest"
("USRPI") by a foreign taxpayer is treated by statute as effectively connected
with a U.S. trade or business as a matter of law, without regard to the
particular facts and circumstances. Shares of a corporation generally are
treated as a USRPI only if the fair market value of USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its total assets.
If at no time within the five years preceding the sale or exchange of shares in
the Company the shares constituted a USRPI, gain or loss on the sale or
exchange will not be treated as effectively connected with a U.S. trade or
business by reason of FIRPTA. While ownership of real property within the U.S.
(including ownership of interests in certain entities) is always a USRPI, a
loan secured by a mortgage on U.S. real property constitutes a USRPI only if
the amounts payable by the borrower are contingent on the income or receipts of
the borrower or the property or otherwise based on the property. Because such
contingent interest is not likely to be present in the residential mortgage
loans to be owned by the Company that are expected to represent approximately
90% of the assets of the Company (although such interest is fairly common in
commercial loans) the Company believes it is unlikely that its shares will be
USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether its shares are a USRPI or it derives income from
USRPIs will depend upon the facts as they ultimately develop. A distribution of
cash to a Foreign Stockholder that is not attributable to gain from sales or
exchanges by the Company of USRPIs and not designated by the Company as a
capital gain dividend is not subject to FIRPTA but generally will be subject to
the withholding of United States federal income tax at a rate of 30%, unless
(i) a lower treaty rate applies or (ii) the Foreign Stockholder files an IRS
Form 4224 with the withholding agent certifying that the investment to which
the distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. A Foreign Stockholder who receives a
distribution that has been subject to such withholding tax may file a claim for
refund to the extent the withholding has been imposed on a portion of such
distributions representing amounts in excess of current and accumulated
earnings and profits. Under FIRPTA, distributions of proceeds attributable to
gain from the Company's sale or exchange of a USRPI are subject to income tax
at the normal capital gains rates applicable to United States stockholders
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual). Also, these
distributions may be subject to a 30% branch profits tax in the hands of a
corporate Foreign Stockholder not entitled to a treaty exemption or reduced
rate of tax. Treasury Regulations require the withholding of 35% of any
distribution that could be designated by the Company as a capital gain
dividend. This amount is creditable against the Foreign Stockholder's tax
liability. It should be noted that the 35% withholding tax rate on capital gain
dividends is higher than the 28% maximum rate on capital gains of individuals.
Capital gain dividends not attributable to gain on the sale or exchange of
USRPIs are not subject to United States taxation if there is no requirement of
withholding.

If the shares of the Company do constitute a USRPI (or did so
constitute within the previous five years), gain or loss on the sale or
exchange of the shares will be treated as effectively connected with the
conduct of a U.S. trade or business unless one or more special rules apply to
preclude U.S. taxation.

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If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a
domestically-controlled REIT or that it will be possible to ascertain whether
or not it is domestically-controlled.

If the Company is not a domestically-controlled REIT, a sale of Series
A Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI
and gain or loss would be effectively connected with a United States trade or
business if either (i) the Series A Preferred Shares were not "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market (e.g., the Nasdaq System, on which the Series A Preferred
Shares will be listed) during the quarter in which the Series A Preferred
Shares were sold or (ii) even if the Series A Preferred Shares were "regularly
traded", the selling stockholder held, directly or indirectly, more than 5% of
the Series A Preferred Shares during the five-year period ending on the date of
disposition. The applicable Treasury Regulations that define "regularly
traded" for this purpose may be interpreted to provide that a security will not
be "regularly traded" for any calendar quarter during which 100 or fewer
persons (treating related persons as one person) in the aggregate own 50% or
more of such security or the quarterly trading volume is less than 7.5% of the
average number of the issued and outstanding shares of such security (2.5% if
there are 2,500 or more stockholders of record). In the event that the Series A
Preferred Shares were not "regularly traded" and the Company did not at that
time constitute a domestically-controlled REIT, a Foreign Stockholder (without
regard to its ownership percentage of Series A Preferred Shares) must treat as
effectively connected with a United States trade or business any gain or loss
on any sale or other disposition of Series A Preferred Shares that occurs
within a calendar quarter during which the Series A Preferred Shares were not
"regularly traded" and the shares were a USRPI.

If the gain on the sale of the Company's Series A Preferred Shares
were subject to taxation under FIRPTA, the Foreign Stockholder would be subject
to the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual). Notwithstanding the
foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA
will nonetheless be taxable to a Foreign Stockholder who is an individual
(under rules generally applicable to United States Stockholders) if such person
is in the United States for 183 days or more during the taxable year of
disposition and certain other conditions apply. In any event, a purchaser of
Series A Preferred Shares from a Foreign Stockholder will not be required under
FIRPTA to withhold on the purchase price if the purchased Series A Preferred
Shares are "regularly traded" on an established securities market or if the
Company is a domestically-controlled REIT. Otherwise, under FIRPTA the
purchaser of Series A Preferred Shares may be required to withhold 10% of the
purchase price and remit such amount to the IRS.

Shares of the Company owned by a nonresident alien decedent are
subject to United States federal estate tax (which is imposed at rates up to
55%) unless an estate tax treaty binding upon the United States provides
otherwise.

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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.

United States Stockholders. Under certain circumstances, a United
States Stockholder of Series A Preferred Shares may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Series A Preferred Shares. Backup withholding will
apply only if the holder (i) fails to furnish the person required to withhold
with its Taxpayer Identification Number ("TIN") which, for an individual, would
be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations. A United States Stockholder should consult with a tax
advisor regarding qualification for exemption from backup withholding and the
procedure for obtaining such an exemption. Backup withholding is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a United States Stockholder will be allowed as a credit against such
United States Stockholder's United States federal income tax liability and may
entitle such United States Stockholder to a refund, provided that the required
information is furnished to the IRS.

Foreign Stockholders. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Foreign
Stockholders, and a Foreign Stockholder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Foreign Stockholder is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment to
a Foreign Stockholder will be allowed as a credit against any United States
federal income tax liability of such Foreign Stockholder. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.

OTHER TAX CONSEQUENCES

The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.

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ERISA CONSIDERATIONS

GENERAL

In evaluating the purchase of Series A Preferred Shares, a fiduciary
of a qualified profit-sharing, pension or stock bonus plan, including a plan
for self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA and the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code;
(c) whether the Company's assets are treated as assets of the Plan; and (d) the
need to value the assets of the Plan annually. In addition, the fiduciary of an
individual retirement arrangement under Section 408 of the Code (an "IRA")
considering the purchase of Series A Preferred Shares should consider whether
the ownership of Series A Preferred Shares would result in a non-exempt
prohibited transaction under Section 4975 of the Code.

The fiduciary investment considerations summarized below provide a
general discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD
CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.

PLAN ASSET REGULATION

Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered Plan
Assets if the equity interest is a "publicly-offered security".

For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable", (b) part of a class
of securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the

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Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. The Series A Preferred
Shares will be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act within the time periods specified in
the Plan Asset Regulation.

The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to the initial offering as a result of events beyond the
control of the issuer. The Company expects the Series A Preferred Shares to be
"widely held" upon the completion of the Offering.

The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable". The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable".

A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series A
Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.

EFFECT OF PLAN ASSET STATUS

ERISA generally requires that the assets of a Plan be held in trust
and that the trustee, or an investment manager (within the meaning of Section
3(38) of ERISA), have exclusive authority and discretion to manage and control
the assets of the Plan. As discussed above, the assets of the Company under
current law do not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be assets of the Plans under ERISA, certain directors
and officers of the Company might be deemed fiduciaries with respect to the
Plans that invest in the Company and the prudence and other fiduciary standards
set forth in ERISA would apply to them and to all investments.

If the assets of the Company were deemed to be Plan Assets,
transactions between the Company and parties in interest or disqualified
persons with respect to the investing Plan or IRA could be prohibited
transactions unless a statutory or administrative exemption is available. In
addition, investment authority would also have been improperly delegated to
such fiduciaries, and, under certain circumstances, Plan fiduciaries who make
the decision to invest in the Series A Preferred Shares could be liable as
co-fiduciaries for actions taken by the Company that do not conform to the
ERISA standards for investments under Part 4 of Title I of ERISA.

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PROHIBITED TRANSACTIONS

Section 406 of ERISA provides that Plan fiduciaries are prohibited
from causing the Plan to engage in certain types of transactions. Section
406(a) prohibits a fiduciary from knowingly causing a Plan to engage directly
or indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from
acting in any capacity in any transaction involving the Plan on behalf of a
party (or representing a party) whose interests are adverse to the interests of
the Plan, and from receiving any consideration for its own account from any
party dealing with the Plan in connection with a transaction involving Plan
assets. Similar provisions in Section 4975 of the Code apply to transactions
between disqualified persons and Plans and IRAs and result in the imposition of
excise taxes on such disqualified persons.

If a prohibited transaction has occurred, Plan fiduciaries involved in
the transaction could be required to (a) undo the transaction, (b) restore to
the Plan any profit realized on the transaction and (c) make good to the Plan
any loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.

If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.

Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank,
D&N or any of their affiliates is a party in interest or disqualified person
with respect to the Plan. Any such prohibited transaction could be treated as
exempt under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans
and broker-dealers (such as the Underwriters), reporting dealers, and banks),
PTCE 84-14 (an exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an
insurance company's general account) and PTCE 96-23 (an exemption for certain
transactions determined by a qualifying in-house asset manager).

A Plan should not acquire the Series A Preferred Shares pursuant to
the Offering if such acquisition will constitute a non-exempt prohibited
transaction.

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UNRELATED BUSINESS TAXABLE INCOME

Plan fiduciaries should also consider the consequences of holding more
than 10% of the Series A Preferred Shares if the Company is "predominantly
held" by qualified trusts. See "Federal Income Tax Considerations--Taxation of
United States Stockholders--Treatment of Tax-Exempt Stockholders".

CERTAIN INFORMATION REGARDING THE BANK

The following is a summary of certain information regarding the Bank.
As an integral part of this Prospectus, a copy of the Bank's offering circular
filed with the OTS relating to the Bank Preferred Shares to be issued upon the
Exchange Event (the "Offering Circular"), including exhibits, is attached
hereto as Annex I and is incorporated by reference herein. All material
information relating to the Bank, including information relating to the Bank's
financial position, can be found in these documents. There has been no
material change in the Bank's affairs since the conclusion of the fiscal year
ended December 31, 1996 which has not otherwise been disclosed by the Bank.

OPERATIONS OF THE BANK

The Bank's primary business consists of attracting deposits from the
general public and making real estate loans, consumer loans and other types of
investments. The Bank conducts its business principally in the State of
Michigan through a network of 37 full-service community banking offices,
including its main office in Hancock, Michigan, seven savings agency offices
which provide depository services and four mortgage banking offices. At
December 31, 1996, the Bank had total assets of $1.47 billion, total deposits
of $964.1 million and total stockholders' equity of $79.9 million. For the
year ended December 31, 1996, the Bank had net income of $9.3 million and a
return on average assets of 0.69%. The Bank's deposits are insured up to the
maximum extent permitted by law by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
The Bank is subject to supervision by the OTS and by the FDIC.

Like many savings institutions, the operations of the Bank are
materially affected by general economic conditions, the monetary and fiscal
policies of the federal government and the policies of the various regulatory
authorities, including the OTS, the FDIC and the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Its results of
operations are largely dependent upon its net interest income, which is the
difference between the interest it receives on its loans and investment
securities, and the interest it pays on its liabilities.

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial and other data of the Bank herein,
as of and for the three months ended Mach 31,1997 and as of and for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, have been derived from
the Consolidated Financial Statements of the Bank and the unaudited financial
statements of the Bank contained in Annex I. In the opinion of management all
adjustments (which consist of normal recurring accruals) necessary for a fair
presentation of the results of operations for such periods have been included.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year.

For the Three
Months Ended For the Year Ended December 31,
March 31, ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)

INTEREST INCOME
Loans . . . . . . . . . . . . . . . . $ 21,937 $ 86,151 $ 72,550 $ 58,274 $ 58,906 $ 72,729
Mortgage-backed securities . . . . . 4,436 10,930 10,577 7,875 12,935 31,878
Investments and deposits . . . . . . 1,962 7,228 7,638 5,462 8,233 12,921
--------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME . . . 28,335 104,309 90,765 71,611 80,074 117,528
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . 11,288 43,859 38,639 29,806 33,815 46,607
Securities sold under agreement to
repurchase. . . . . . . . . . . . . 759 2,193 1,450 808 1 159
FHLB advances and other borrowed money 5,030 15,558 13,445 7,446 9,757 21,997
Interest rate instruments . . . . . . -- -- 2,521 9,812 15,309 18,876
--------- -------- -------- -------- -------- --------
TOTAL INTEREST EXPENSE . . . 17,077 61,610 56,055 47,872 58,882 87,639
--------- -------- -------- -------- -------- --------
NET INTEREST INCOME . . . 11,258 42,699 34,710 23,739 21,192 29,889
Provision for loan losses . . . . . . 300 1,100 2,400 100 -- 117
--------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS. . 10,958 41,599 32,310 23,639 21,192 29,772
NONINTEREST INCOME
Loan servicing and administrative
fees, net . . . . . . . . . . . . . 521 1,914 1,882 2,228 (13,964) 3,431
Deposit related fees . . . . . . . . 921 3,621 3,147 3,098 3,002 3,356
Gain (loss) on loans held for sale . 26 1,031 882 227 777 (44)
Other . . . . . . . . . . . . . . . . 135 470 222 1,173 672 765
--------- -------- -------- -------- -------- --------
TOTAL OPERATING NONINTEREST
INCOME . . . . . . . . . 1,603 7,036 6,133 6,726 (9,513) 7,508
Gain (loss) on investment securities
available for sale . . . . . . . . -- 188 (120) (221) 470 962
Gain (loss) on sale of loans and
mortgage-backed securities
available for sale. . . . . . . . . 5 -- 899 843 (12,968) 333
Gain on sale of loan servicing rights -- -- -- 140 475 4,594
--------- -------- -------- -------- -------- --------
TOTAL NONINTEREST INCOME . . 1,608 7,224 6,912 7,488 (21,536) 13,397
NONINTEREST EXPENSE
Compensation and benefits . . . . 4,064 16,868 15,723 14,572 13,344 12,564
Occupancy . . . . . . . . . . . . 780 2,834 2,273 1,987 2,044 2,137
Other expense . . . . . . . . . . 2,495 11,429 10,481 9,902 14,171 11,581
--------- -------- -------- -------- -------- --------
GENERAL AND ADMINISTRATIVE
EXPENSE . . . . . . . . . 7,339 31,131 28,477 26,461 29,559 26,282
Other real estate owned, net . . . (22) 71 (999) (2,136) 2,340 2,919
Amortization of intangibles . . . -- -- 370 448 767 1,933
FDIC insurance . . . . . . . . . . 176 7,894 2,431 2,639 2,275 2,207
--------- -------- -------- -------- -------- --------
TOTAL NONINTEREST EXPENSE . 7,493 39,096 30,279 27,412 34,941 33,341
--------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE . . . . . . . 5,073 9,727 8,943 3,715 (35,285) 9,828
Federal income tax expense (credit) . 1,781 349 (1,675) 150 (3,738) 4,254
--------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE 3,292 9,378 10,618 3,565 (31,547) 5,574
EXTRAORDINARY ITEMS . . .
Extraordinary items and accounting
changes, net of taxes . . . . . . . -- -- -- -- (35,575) (1,572)
--------- -------- -------- -------- -------- --------
NET INCOME (LOSS) . . . . . $ 3,292 $ 9,378 $ 10,618 $ 3,565 $(67,122) $ 4,002
========= ======== ======== ========= ======== ========

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At or for the
Three Months
Ended At or for the Year Ended December 31,
March 31, -----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)

Total assets . . . . . . . . . . $1,528,466 $1,472,988 $1,228,495 $1,128,730 $1,080,324 $1,252,955
Net loans receivable . . . . . . 1,081,837 1,055,876 952,359 821,875 646,709 726,501
Nonperforming assets . . . . . . 5,714 8,091 9,701 24,520 43,593 56,056
Mortgage-backed securities . . . 273,460 251,256 127,709 151,293 171,983 241,040
Excess of cost over net assets of
association acquired . . . . . -- -- -- 384 845(1) 36,380
Mortgage servicing rights . . . . 1,404 1,443 1,113 968 9,870 29,198
Deposits . . . . . . . . . . . . 1,007,508 964,133 922,932 817,674 844,012 916,644
Borrowings . . . . . . . . . . . 417,485 404,037 216,295 226,956 101,648 174,232
Stockholder's equity . . . . . . 83,291 80,014 71,108 57,545 55,971 101,698
Tangible stockholder's equity . . 82,299 49,003 69,985 57,484 56,133 67,232
Number of offices . . . . . . . . 48 48 46 41 38 40

SELECTED RATIOS:

Return on average assets . . . . 0.89% 0.69% 0.90% 0.33% (5.50)% 0.28%
Net interest margin . . . . . . . 3.13 3.26 3.04 2.31 1.95 2.28
General and administrative expenses
to average assets . . . . . . . 2.31 2.42 2.45 2.42 1.83
Nonperforming assets to total
assets . . . . . . . . . . . . 0.37 0.55 0.79 2.17 4.04 4.47
Allowance for loan losses to
nonperforming loans . . . . . . 244.81 166.77 122.21 46.38 38.21 34.79
Allowance for loan losses to
total loans . . . . . . . . . . 1.01 1.03 1.05 1.01 1.76 2.10
Net loan charge-offs to average
loans . . . . . . . . . . . . . 0.13 0.01 0.07 0.43 0.59 0.42
Tangible capital ratio . . . . . 5.15 5.11 5.41 5.05 4.89 4.32
Core capital ratio . . . . . . . 5.15 5.11 5.41 5.09 4.97 5.32
Tier 1 risk-based capital ratio . 8.69 8.72 9.20 8.92 8.95 9.34
Risk-based capital ratio . . . . 9.85 9.94 10.45 10.08 10.21 10.57

____________________________________
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).

RISK FACTORS AND OTHER CONSIDERATIONS

Because of the potential for the Automatic Exchange, the purchase of
the Series A Preferred Shares involves a high degree of risk with respect to
the performance and capital levels of the Bank. Prospective investors in the
Series A Preferred Shares should carefully consider the following risk factors
and other considerations relating to the Bank before deciding whether to invest
in such shares.

Effect of an Increase in Interest Rates on Operating Results. The
Bank's operating results depend to a large extent on its net interest income,
which is the difference between the interest the Bank receives from its loans,
securities and other assets and the interest the Bank pays on its deposits and
other liabilities. Interest rates are highly sensitive to many factors,
including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession,
unemployment, money supply, international disorders and other factors beyond
the control of the Bank may affect interest rates. If generally prevailing
interest rates increase, the "net interest spread" of the Bank, which is the
difference between the rates of interest earned and the rates of interest paid
by the Bank, is likely to contract, resulting in less net interest income.

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Although the Bank pursues an asset-liability management strategy
designed to control its risk from changes in market interest rates, the Bank's
liabilities have shorter terms and are more interest-sensitive than its assets.
At March 31, 1997, the Bank's one-year interest-sensitivity "gap" (the sum of
all interest earning assets to be re-priced within one year minus all
interest-bearing liabilities to be re-priced within one year, as a percentage
of total assets) was a negative 11.15%. As a result of its gap position, the
Bank's net interest spread will narrow, and its operating results will be
adversely affected, during periods of rising market interest rates if the Bank
is unable to reduce its gap. There can be no assurance that the Bank will be
able to adjust its gap sufficiently to offset any negative effect of changing
market interest rates.

Regulatory Capital Levels. As a federal savings association, the Bank
is subject to minimum capital requirements prescribed by federal statute and
OTS regulations. At March 31, 1997, the Bank was in compliance with all of its
regulatory capital requirements under FIRREA, with tangible, core and total
risk-based regulatory capital ratios of 5.15%, 5.15% and 9.85%, respectively,
compared to the regulatory requirements of 1.50%, 3.00% and 8.00%,
respectively.

The OTS prompt corrective action regulations establish five capital
categories for thrift institutions: well capitalized, adequately capitalized,
undercapitalized, severely undercapitalized and critically undercapitalized.
These categories are determined for the supervisory purposes of Section 38 of
the Federal Deposit Insurance Act (which establishes a system of mandatory and
discretionary supervisory actions which generally become more severe as capital
levels decline) and may not necessarily constitute an accurate measure of the
Bank's current overall financial condition or its future prospects. A thrift
generally will be considered "well capitalized" if it has a core capital (or
leverage) ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%. A thrift
generally will be considered "adequately capitalized" if it has a core capital
(or leverage) ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at
least 4.0%, and a total risk-based capital ratio of at least 8.0%. The Bank's
core (or leverage), Tier 1 risk-based and total risk-based capital ratios at
March 31, 1997 of 5.15%, 8.69% and 9.85%, respectively, exceeded the capital
ratios established for "adequately capitalized" institutions. The OTS has the
discretion to reclassify an institution from "well capitalized" to "adequately
capitalized" and to treat an "adequately capitalized" institution as an
"undercapitalized" institution for purposes of the prompt corrective action
regulations (including imposing restrictions on the payment of dividends) if,
after notice and an opportunity for a hearing, the OTS determines that the
institution (i) is in an unsafe or unsound condition or (ii) has received and
has not corrected a less than satisfactory examination rating for asset
quality, management, earnings or liquidity.

Risks Relating to Elimination of Thrift Charter. During the past few
years, Congress has been considering legislation in various forms that would
require federal thrifts, like the Bank, to convert their charters to national
or state bank charters. Recent legislation requires the merger of the Bank
Insurance Fund ("BIF") and the SAIF into a single Deposit Insurance Fund on
January 1, 1999 but only if the thrift charter is eliminated by that date. In
the absence of appropriate "grandfather" provisions, legislation eliminating
the thrift charter could have a material adverse effect on the Bank. The Bank
cannot determine whether, or in what form, such legislation will

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eventually be enacted and there can be no assurance that any such legislation
that is enacted will contain adequate grandfather rights for the Bank.

Absence of a Public Market for Bank Preferred Shares. If Bank
Preferred Shares are issued, the Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the Nasdaq System. There can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares or that an active public market for the Bank Preferred Shares would
develop or be maintained.

Restrictions on Bank Dividends. If the Automatic Exchange occurs and
the Bank has not been placed into conservatorship or receivership, the Bank
would likely be prohibited from paying dividends on the Bank Preferred Shares
as long as the Bank remains "undercapitalized" for purposes of the OTS prompt
corrective action regulations or the OTS anticipates the Bank being
"undercapitalized" in the near term. The prompt corrective action regulations
prohibit thrift institutions such as the Bank from making "capital
distributions" (defined to include a cash distribution) unless the institution
is at least "adequately capitalized" after the distribution.

However, if the Automatic Exchange occurs after the Bank has been
placed into conservatorship or receivership, the claims of the Bank's
depositors and of its secured, senior, general and subordinated creditors would
be entitled to a priority of payment over the claims of holders of equity
interests such as the Bank Preferred Shares issued pursuant to the Automatic
Exchange.

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement
dated [ ], 1997 (the "Underwriting Agreement") among the
Company, the Bank and the underwriters named below (the "Underwriters"), the
Company has agreed that the Company will sell to each of the Underwriters, and
each of such Underwriters for which Roney & Co., L.L.C. is acting as a
representative (the "Representative") has severally agreed to purchase from the
Company, the respective number of Series A Preferred Shares set forth opposite
its name below:

Number of Shares
of Series A
Underwriter Preferred Shares
----------- ----------------

Roney & Co., L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
=========

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred
Shares offered hereby, if any are taken.

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The Underwriters propose to offer the Series A Preferred Shares in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $[ ] per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $[ ] per share
to certain brokers and dealers. After the Series A Preferred Shares are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the Representative.

The Company has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
110,000 additional Series A Preferred Shares solely to cover over-allotments,
if any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of Series A Preferred
Shares to be purchased by each of them, as shown in the foregoing table, bears
to the 1,100,000 Series A Preferred Shares offered hereby.

The Company has agreed that, during the period beginning from the date
of this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
without the prior written consent of the Representative, except for the Series
A Preferred Shares offered in connection with the Offering.

The Representative of the Underwriters has informed the Company that
it does not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of Series A
Preferred Shares offered by them.

Prior to the Offering, there has been no public market for the Series
A Preferred Shares.

The Company has filed an application to list the Series A Preferred
Shares, subject to official notice of issuance, on the Nasdaq National Market
(the "Exchange"). In order to meet one of the requirements for listing the
Series A Preferred Shares on the Exchange, the Underwriters have undertaken to
sell the Series A Preferred Shares to a minimum of 400 beneficial holders. The
Representative has advised the Company that it intends to make a market in the
Series A Preferred Shares prior to commencement of trading on the Exchange, but
is not obligated to do so and may discontinue any such market making at any
time without notice.

The Company and the Bank have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.

Certain of the Underwriters or their affiliates have provided from
time to time, and expect to provide in the future, investment or commercial
banking services to affiliates of the Company, for which such Underwriters or
their affiliates have received or will receive customary fees and commissions.

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EXPERTS

The balance sheet of D&N Capital Corporation as of April 4, 1997
included in this Prospectus has been so included in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.

RATINGS

It is expected that the Series A Preferred Shares will be rated BB- by
Duff & Phelps Credit Rating Co. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating organization. No person is obligated to
maintain any rating on the Series A Preferred Shares, and, accordingly, there
can be no assurance that the ratings assigned to the Series A Preferred Shares
upon initial issuance will not be lowered or withdrawn by the assigning rating
organization at any time thereafter.

CERTAIN LEGAL MATTERS

The validity of the Series A Preferred Shares offered hereby will be
passed upon for the Company by Silver, Freedman & Taff, L.L.P., Washington,
D.C. Certain tax matters described under "Federal Income Tax Considerations"
will be passed upon for the Company by Coopers & Lybrand L.L.P., Detroit,
Michigan. The validity of the Series A Preferred Shares will be passed upon
for the Underwriters by Honigman Miller Schwartz and Cohn, Detroit, Michigan.

ADDITIONAL INFORMATION

The Company has filed with the Commission a registration statement (of
which this Prospectus is a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, reference is made to the Registration
Statement and the exhibits thereto.

The Registration Statement and the exhibits forming a part thereof
filed by the Company with the Commission can be inspected at and copies can be
obtained from the Commission, Room

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1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, 14th Floor, Suite 1400, Chicago, Illinois 60661 and at the
offices of the National Association of Securities Dealers, 1735 K Street, N.W.,
Washington, D.C. 20006. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.

The Certificate of Designation establishing the rights, preferences
and limitations of the Series A Preferred Shares provides that the Company
shall maintain its status as a reporting company under the Exchange Act for so
long as any of the Series A Preferred Shares are outstanding.

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GLOSSARY

"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.

"Advisory Agreement" means the agreement between the Bank and the
Company pursuant to which the Bank will (i) administer the day-to-day
operations of the Company, (ii) monitor the credit quality of the Mortgage
Assets held by the Company, (iii) advise the Company with respect to the
acquisition, management, financing and disposition of the Company's Mortgage
Assets and (iv) maintain custody of the documents related to the Company's
Mortgage Loans.

"ARM" or "adjustable rate mortgage" means a Mortgage Loan that
features adjustments of the underlying interest rate at predetermined times
based on an agreed margin to an established index. An ARM is usually subject to
periodic interest rate and/or payment caps and a lifetime interest rate cap.

"Automatic Exchange" means the automatic exchange on a share-for-share
basis of Series A Preferred Shares for Bank Preferred Shares upon the
occurrence of the Exchange Event.

"Bank" means D&N Bank, a thrift institution organized under the laws
of the United States, and the parent of the Company.

"Bank Preferred Shares" means the newly issued series of preferred
stock of the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.

"Board of Directors" means the board of directors of the Company.

"By-laws" means the by-laws of the Company.

"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company.

"Classified" means a loan which, for financial institution regulatory
purposes, is designated as "substandard", "doubtful" or "loss". For such
purposes, a substandard asset is one that is deemed inadequately protected by
the current sound worth and paying capacity of the obligor or of the collateral
pledged, if any, because the asset has a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. An asset classified as doubtful
has all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible.

"Code" means the Internal Revenue Code of 1986, as amended.

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"Commercial Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a commercial real estate property.

"Commercial Mortgage Purchase Agreement" means the Commercial Mortgage
Loan Purchase and Warranties Agreement between the Company and the Bank.

"Commission" means the United States Securities and Exchange
Commission.

"Common Stock" means the common stock, par value $300.00 per share, of
the Company.

"Company" means D&N Capital Corporation, a Delaware corporation.

"D&N" means D&N Financial Corporation, a Delaware corporation and the
parent of the Bank.

"Directive" means the writing issued by the appropriate regulatory
agency directing the Automatic Exchange.

"DOL" means the United States Department of Labor.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Excess Shares" means the shares of any class or series of Preferred
Stock owned, or deemed to be owned, by or transferred to a stockholder in
excess of the Ownership Limit.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Event" means the appropriate regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized" in the near term.

"FHLMC" means the Federal Home Loan Mortgage Corporation.

"FIRPTA" means the Foreign Investment in Real Property Tax Act of
1980, as amended.

"Five or Fewer Test" means the Code requirement that not more than 50%
in value of the Company's outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code).

"FNMA" means Fannie Mae.

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"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan
with an original term of 20, 25 or 30 years, FNMA's required net yield for
30-year fixed rate mortgages (covered by 60-day mandatory commitments) that was
in effect 45 days prior to the effective date of any conversion of such
Mortgage Loan and (ii) with respect to any Mortgage Loan with an original term
of 15 years, FNMA's required net yield for 15-year fixed rate mortgages
(covered by 60-day mandatory commitments) that was in effect 45 days prior to
the effective date of any conversion of such Mortgage Loan.

"Foreign Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii)
foreign trusts and estates.

"Gross Margin" means, with respect to a Residential Mortgage Loan that
is an ARM, the applicable fixed percentage which, when added to the applicable
index, calculates to the current interest rate paid by the borrower of the
adjustable rate Mortgage Loan (without taking into account any interest rate
caps or minimum interest rates). Gross Margin is inapplicable to fixed rate
loans.

"Independent Directors" means the members of the Board of Directors
who, prior to and subsequent to their appointment, are not and will not be
directors, officers or employees of the D&N, the Bank or any affiliate
of the Bank or of any person or persons that, in the aggregate, own more than
one percent of the common stock of D&N or the Bank and are not officers or
employees of the Company.

"Initial Portfolio" means the initial portfolio of Mortgage Loans
purchased by the Company from the Bank.

"IRA" means an individual retirement arrangement under Section 408 of
the Code.

"IRS" means the United States Internal Revenue Service.

"LIBOR" means the London Inter-Bank Offered Rate.

"Lifetime interest rate cap" means, with respect to Mortgage Loans
that are ARMs, the maximum interest rate that may accrue during any period over
the term of such Mortgage Loan as stated in the governing instruments
evidencing such Mortgage Loan.

"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the
ratio (expressed as a percentage) of the original principal amount of such
Mortgage Loan to the lesser of (i) the appraised value at origination of the
mortgaged property underlying such Mortgage Loan and (ii) if the Mortgage Loan
was made to finance the acquisition of property, the purchase price of the
mortgaged property.

"Mortgage Assets" means real estate mortgage assets.

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"Mortgage-Backed Securities" means securities that qualify as real
estate assets under Section 856(c)(6)(B) of the Code, that are rated by at
least one nationally recognized independent rating organization and that
represent interests in or obligations backed by pools of Mortgage Loans.

"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties.

"Nonaccrual Status" means a loan on which, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement or on which the principal or interest is past
due 90 days or more and collateral, if any, is insufficient to cover principal
and interest.

"Offering" means the offering of Series A Preferred Shares pursuant to
the Prospectus.

"Offering Circular" means the registration statement on Form OC
pursuant to which the Bank Preferred Shares are being registered with the OTS.

"One Hundred Persons Test" means the Code requirement that the capital
stock of the Company be owned by 100 or more persons during at least 335 days
of a taxable year or during a proportionate part of a shorter taxable year.

"One-Year ARM" means an ARM that adjusts annually beginning in the
month in which the 12th monthly payment is due.

"OTS" means the Office of Thrift Supervision, Department of the
Treasury.

"Ownership Limit" means the provision in the Company's Certificate of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 9.9% of any issued
and outstanding class or series of Preferred Stock.

"Periodic interest rate cap" means, with respect to ARMs, the maximum
change in the coupon rate permissible under the terms of the loan at each
coupon adjustment date. Periodic interest rate caps limit both the speed by
which the coupon rate can adjust upwards in a rising interest rate environment
and the speed by which the coupon rate can adjust downwards in a falling rate
environment.

"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.

"Plan Asset Regulation" means the DOL regulations determining the
assets of a Plan for purposes of ERISA and the related prohibited transaction
excise tax provisions of the Code.

"Preferred Stock" means preferred stock, par value $25.00 per share,
of the Company.

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"Prime Rate" for any date means the lowest prime rate as published in
the "Money Rates" table of The Wall Street Journal for that date.

"Prospectus" means this prospectus, as the same may be amended.

"Rate Adjustment Date" means, with respect to any ARM, a date on which
the interest rate on such ARM adjusts.

"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.

"REIT" means a real estate investment trust as defined pursuant to the
REIT Provisions, or any successor provisions thereof.

"REIT Provisions" and "REIT Requirements" means Sections 856 through
860 of the Code and the applicable Treasury Regulations.

"REIT Taxable Income" shall have the meaning set forth in "Federal
Income Tax Considerations--Taxation of the Company--Annual Distribution
Requirements".

"Residential Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a single family (one-to four-unit) residential
real estate property.

"Residential Mortgage Purchase Agreement" means the Residential
Mortgage Loan Purchase and Warranties Agreement between the Company and the
Bank.

"Securities Act" means the Securities Act of 1933, as amended.

"Series A Preferred Shares" means the shares of Preferred Stock of
the Company offered hereby.

"Servicer" means the Bank in its role as servicer of the Mortgage
Loans under the Servicing Agreements.

"Servicing Agreements" means the servicing agreements entered into by
the Bank with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans.

"Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law or accounting firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in the laws or treaties (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any judicial
decision, official administrative pronouncement, ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or (iii) any
amendment to, clarification of, or change in the official position or the

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interpretation of such Administrative Action or judicial decision or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action or judicial decision that differs from the
theretofore generally accepted position, in each case, by any legislative body,
court, governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends payable by the
Company with respect to the capital stock of the Company are not, or will not
be, fully deductible for United States federal income tax purposes or (b) the
Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.

"TIN" means Taxpayer Identification Number.

"Treasury Index" means the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency.

"Treasury Regulations" means the income tax regulations promulgated
under the Code.

"Underwriters" means those underwriters to which the Company will sell
the Series A Preferred Shares pursuant to the terms of the Underwriting
Agreement.

"Underwriting Agreement" means the underwriting agreement by and among
the Company, the Bank and the Underwriters.

"United States Stockholders" means holders of Series A Preferred
Shares that are for United States federal income tax purposes (i) citizens or
residents of the United States, (ii) corporations, partnerships, or other
entities created or organized in or under the laws of the United States or of
any political subdivisions thereof, or (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.

"USRPI" means United States real property interest.

97
103
INDEX TO FINANCIAL STATEMENT

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Balance Sheet of D&N Capital Corporation as of April 4, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Note to Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

F-1
104
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
D&N Capital Corporation:

We have audited the accompanying balance sheet of D&N Capital Corporation (the
"Company") as of April 4, 1997. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement based on our audit.

We conducted our audit 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 statement is 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 our audit provides a reasonable basis for
our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of D&N Capital Corporation as of
April 4, 1997, in conformity with generally accepted accounting principles.

/s/Coopers & Lybrand L.L.P.
Detroit, Michigan
April 7, 1997.

F-2
105
D&N CAPITAL CORPORATION
BALANCE SHEET

April 4, 1997

ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
------

STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 1,000 shares
authorized; 1,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
------

The Note to the Financial Statement is an integral part of this Statement.

F-3
106
D&N CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENT

1. ORGANIZATION

D&N Capital Corporation (the "Company"), a wholly-owned subsidiary of
D&N Bank (the "Bank"), was incorporated on March 18, 1997 in the State of
Delaware.

The Company intends to invest in mortgage-related assets financed by
common and preferred stock offerings and expects to generate income for
distribution to its future preferred and common stockholders primarily from the
net interest income derived from its investments in mortgage-related assets.
The Company intends to purchase these mortgage-related assets from the Bank and
its affiliates at their estimated fair values. These assets will be recorded in
the Company's financial statements at the Bank's historical cost basis which
will approximate their estimated fair values. The Company intends to operate in
a manner that permits it to elect, and it intends to elect, to be subject to
tax as a real estate investment trust for federal income tax purposes. The
Company has not had any operations as of April 4, 1997.

The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.

F-4
107

OFFERING CIRCULAR ANNEX I

1,100,000 SHARES
D&N BANK

[____%] NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)

The [__%] Noncumulative Preferred Stock, Series A, par value $25.00 per
share (the "Series A Preferred Shares"), of D&N Bank ("D&N" or the "Bank") will
be issued only upon the automatic exchange of the [____%] Noncumulative
Exchangeable Preferred Stock, Series A (the "Preferred Capital Shares") of D&N
Capital Corporation, a wholly owned subsidiary of the Bank, upon the occurrence
of certain events. See "Offering Circular Summary -- D&N Bank -- REIT Preferred
Offering." Dividends on the Series A Preferred Shares will be payable at the
same rate as the Preferred Capital Shares if, when and as declared by the Board
of Directors of the Bank. For a description of the terms of the Series A
Preferred Shares, see "Description of the Series A Preferred Shares" herein.

The Series A Preferred Shares rank, in priority of payment of dividends
and rights upon the voluntary or involuntary dissolution, liquidation or winding
up of the Bank, junior to all claims of the Bank's creditors, including the
claims of the Bank's depositors. The Series A Preferred Shares rank superior
and prior to the issued and outstanding common stock of the Bank with respect to
dividend rights and rights upon voluntary or involuntary dissolution,
liquidation or winding up of the Bank, and to all other classes and series of
equity securities of the Bank hereafter issued, other than any class or series
expressly designated as being on parity with or senior to the Series A Preferred
Shares. The common stock of the Bank is the only class of equity securities
currently outstanding.

The Preferred Capital Shares have been registered with the Securities and
Exchange Commission (the "SEC") and an application for listing on the Nasdaq
National Market (the "NMS") has been filed to list the Preferred Capital Shares,
under the symbol ["______"]. In the event the Preferred Capital Shares are
exchanged into Series A Preferred Shares, the Bank does not intend to apply for
listing of the Series A Preferred Shares on any national securities exchange or
for quotation through the Nasdaq System.

AN INVESTMENT IN THE SERIES A PREFERRED SHARES INVOLVES A HIGH DEGREE OF
RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS AND OTHER
CONSIDERATIONS RELATING TO THE BANK AND THE SERIES A PREFERRED SHARES. SEE
"RISK FACTORS AND OTHER CONSIDERATIONS."

-----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL AGENCY,
OR BY ANY STATE SECURITIES COMMISSION, NOR HAS SUCH OFFICE ,
CORPORATION, COMMISSION, OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES
ARE BEING OFFERED PURSUANT TO AN OFFERING CIRCULAR ON
FORM OC FILED WITH THE OFFICE OF THRIFT SUPERVISION.

The date of this Offering Circular is [_________, 1997].
108
TABLE OF CONTENTS

PAGE
----

Available Information . . . . . . . . . . . . . . . . . . . . 2
Information With Respect to the Registrant . . . . . . . . . 3
Offering Circular Summary . . . . . . . . . . . . . . . . . . 4
Risk Factors and Other Considerations . . . . . . . . . . . . 11
Recent Developments . . . . . . . . . . . . . . . . . . . . . 16
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 17
Capitalization . . . . . . . . . . . . . . . . . . . . . . . 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 19
Results of Operations . . . . . . . . . . . . . . . . . . . . 22
Business . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 55
Management . . . . . . . . . . . . . . . . . . . . . . . . . 70
Description of the Series A Preferred Shares . . . . . . . . 79
Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . 85
Index to Financial Statements . . . . . . . . . . . . . . . . F-1

AVAILABLE INFORMATION

The Bank is not subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). However, the
Bank is wholly owned by D&N Financial Corporation which is subject to the
requirements of the Exchange Act and, in accordance therewith, files reports
and other information with the SEC. Such reports and other information may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the SEC's Regional Offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, the SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding the electronic filings of D&N Financial Corporation with the SEC.
The address of the SEC's web site is "http:// www.sec.gov."

The Bank has filed with the Office of Thrift Supervision, Department of
the Treasury ("OTS") a Registration Statement on Form OC (including any
amendments thereto, the "Form OC") with respect to the securities covered by
this Offering Circular. This Offering Circular does not contain all of the
information set forth in the Form OC, certain items of which are contained in
exhibits to the Form OC as permitted by the rules and regulations of the OTS.
For further

OC-2
109
information with respect to the Bank and the securities offered hereby,
reference is made to the Form OC, including the exhibits filed as a part
thereof. Statements contained in this Offering Circular as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Form OC, each such statement being qualified in all
respects by such reference. The Form OC and the exhibits thereto may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the OTS at 1700 G Street, N.W., Washington, D.C.
20552.

INFORMATION WITH RESPECT TO THE REGISTRANT

As an integral part of this Offering Circular, the Bank has attached
complete copies (including exhibits) of its audited financial statements for
the fiscal year ended December 31, 1996 and its financial statements for the
quarter ended March 31, 1997. All material financial information as of these
periods relating to the Bank can be found in these documents. There has been
no material change in the Bank's financial affairs since the conclusion of
these periods, which has not otherwise been disclosed by the Bank in this
Offering Circular.

OC-3
110
OFFERING CIRCULAR SUMMARY

This Offering Circular Summary, including the Selected Consolidated
Financial and Other Data, does not purport to be complete and is qualified in
its entirety by the more detailed information and financial statements and
notes thereto appearing elsewhere in this Offering Circular. Capitalized terms
used in the summary and not defined herein have the meanings ascribed to such
terms elsewhere in this Offering Circular.

D&N BANK

GENERAL

D&N Bank ("D&N" or the "Bank") is a federally chartered and federally
insured stock savings bank, headquartered in Hancock, Michigan. The Bank
conducts its business through a network of thirty-seven full-service community
banking offices, including its executive office, seven savings agency offices
which provide depository services and four mortgage banking offices. The Bank
was founded in 1889 and operated as a state-chartered mutual savings and loan
association until February 1984, when it converted to a federal charter. In
1985, the Bank converted to a stock association, and in 1986, converted to a
federal savings bank.

The Bank adopted a holding company structure in July 1988, with D&N as the
principal subsidiary of D&N Financial Corporation (the "Holding Company")
organized under the laws of the State of Delaware. In December 1993, the
Holding Company raised an additional $20.9 million of capital in a shareholder
rights offering and began to implement growth and expansion strategies.

D&N's primary business consists of attracting deposits from the general
public and making real estate loans and consumer loans and other types of
investments. The Bank's deposits are fully insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the Federal Deposit Insurance
Corporation ("FDIC") up to the maximum permitted by law of $100,000 per insured
depositor. The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the twelve regional banks comprising the FHLB
System. The Bank is subject to comprehensive regulation, examination and
supervision by the OTS and by the FDIC. At December 31, 1996, the Bank
was in compliance with its regulatory capital requirements. Assets totalled
$1.47 billion at December 31, 1996. D&N is the largest independent savings
institution headquartered in Michigan.

Like many savings institutions, the operations of the Bank are materially
affected by general economic conditions, the monetary and fiscal policies of
the federal government and the policies of the various regulatory authorities,
including the OTS, the FDIC and the Board of Governors of the Federal Reserve
System. Its results of operations are largely dependent upon its net interest
income which is the difference between the interest it receives on its loans
and investment securities, and the interest it pays on its liabilities.

OC-4
111
The executive office of the Bank is located at 400 Quincy Street, Hancock,
Michigan 49930, telephone (906) 482-2700.

REIT PREFERRED OFFERING

A registration statement has been filed with the SEC for the public
issuance of $27.5 million of Preferred Capital Shares by D&N Capital
Corporation, a new real estate investment trust ("REIT") subsidiary of the Bank
(the "REIT Subsidiary"). See "D&N Capital Corporation." The Preferred Capital
Shares, which would be automatically exchanged for Series A Preferred Shares
upon the occurrence of certain trigger events (specifically, if the appropriate
regulatory agency directs in writing an exchange of the Preferred Capital
Shares for Series A Preferred Shares because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations established
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991,
as amended ("FDICIA"), (ii) the Bank is placed into conservatorship or
receivership, or (iii) the appropriate regulatory agency, in its sole
discretion, anticipates the Bank becoming "undercapitalized" in the near
term), are designed to qualify as core capital of the Bank under the regulatory
capital requirements applicable to the Bank. The automatic exchange feature
was designed to ensure that the Preferred Capital Shares provide the same level
of capital support to the Bank on a consolidated basis as other forms of core
capital by making the capital represented by the Preferred Capital Shares
directly available to creditors of the Bank in certain circumstances. Proceeds
from the issuance of the Preferred Capital Shares, together with capital
contributions from the Bank to the REIT Subsidiary, will be used by the REIT
Subsidiary to purchase certain REIT-qualified assets from the Bank's mortgage
loan portfolio. Because the REIT Subsidiary will elect to qualify as a REIT
for federal income tax purposes, dividends payable on the REIT Preferred
Capital Shares will be deductible by the REIT Subsidiary for income tax
purposes. The treatment of the REIT Preferred Capital Shares as core capital
of the Bank and the REIT Subsidiary's ability to deduct, for income tax
purposes, the dividends payable on the REIT Preferred Capital Shares will
provide the Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself. See "Regulation
- - Regulatory Capital Requirements."

The mortgage loans expected to be transferred to the REIT Subsidiary by
the Bank have been selected from the Bank's existing portfolio of fixed and
adjustable-rate mortgage loans. The Bank will determine the values of the
selected mortgage loans using discounted cash flow analyses based on current
market conditions.

OC-5
112
THE OFFERING

Securities Offered . . . . . . . . . . . . . 1,100,000 Series A Preferred Shares.

Exchange . . . . . . . . . . . . . . . . . . The Series A Preferred Shares are to be issued, if
ever, in connection with an exchange of the
Preferred Capital Shares of D&N Capital Corporation,
a wholly owned subsidiary of the Bank. See
"Exchange."

Ranking . . . . . . . . . . . . . . . . . . . The Series A Preferred Shares rank senior to the
Bank's common stock, par value $0.01 per share (the
"Common Stock") and junior to all claims of the
Bank's creditors, including the claims of the Bank's
depositors. Additional shares of preferred stock
ranking senior to the Series A Preferred Shares may
not be issued without the approval of holders of at
least 2/3 of the Series A Preferred Shares.

Dividends . . . . . . . . . . . . . . . . . . Dividends on the Series A Preferred Shares are
payable at the rate of [___]% per annum of the
initial liquidation preference (an amount equal to
$[____] per annum per share), if, when, and as
declared by the Board of Directors of the Bank. If
declared, dividends are payable quarterly in arrears
on the last day of March, June, September and
December in each year, or, if such day is not a
business day, on the next business day. Dividends
on the Series A Preferred Shares are not cumulative
and, accordingly, if no dividend is declared on the
Series A Preferred Shares by the Bank for a
quarterly dividend period, holders of the Series A
Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have no
obligation to pay a dividend for that period,
whether or not dividends are declared and paid for
any future period.

OC-6
113

Upon the exchange of Preferred Capital Shares for
Series A Preferred Shares, any accrued and unpaid
dividends for the most recent quarter of the
Preferred Capital Shares at the time of the exchange
will be deemed to be accrued and unpaid dividends on
the Series A Preferred Shares. See "Description of
the Series A Preferred Shares -- Dividends." The
Bank's ability to pay cash dividends is subject to
regulatory and other restrictions described herein.

Liquidation Preference . . . . . . . . . . . The liquidation preference for each Series A
Preferred Share is $25.00, plus an amount equal to
the accrued and unpaid dividends for the most recent
quarter, if any, thereon for the then-current
dividend period to the date fixed for liquidation.
See "Description of the Series A Preferred Shares --
Rights Upon Liquidation."

Redemption . . . . . . . . . . . . . . . . . The Bank may not redeem the Series A Preferred
Shares before [______], 2002. After such date, the
Series A Preferred Shares may be redeemed for cash
at the option of the Bank, in whole or in part, at
any time and from time to time, at the redemption
price of $25.00 per share, plus the accrued and
unpaid dividends for the most recent quarter
thereon, to the date fixed for redemption, if any,
thereon. Redemption of the Series A Preferred
Shares will be subject to compliance with applicable
regulatory and other restrictions. See "Description
of the Series A Preferred Shares -- Redemption."

Voting Rights . . . . . . . . . . . . . . . . Holders of Series A Preferred Shares will not have
any voting rights, except as expressly provided
herein. On any matter on which holders of the
Series A Preferred Shares may vote, each Series A
Preferred Share will be entitled to one vote. See
"Description of the Series A Preferred Shares --
Voting Rights."

OC-7
114

Use of Proceeds . . . . . . . . . . . . . . . The Series A Preferred Shares will only be issued in
connection with an exchange for the Preferred
Capital Shares. The proceeds from the sale of the
Preferred Capital Shares were used by D&N Capital
Corporation to purchase a portfolio of mortgage
assets and to pay expenses associated with the
formation and offering of the Preferred Capital
Shares. The conversion of Preferred Capital Shares
into Series A Preferred Shares will produce no
proceeds to the Bank. See "Use of Proceeds."

Absence of a Public Market . . . . . . . . . There is currently no public market for the Series A
Preferred Shares as such shares have not been issued
and such shares will not be listed on any securities
exchange or for quotation through the Nasdaq System.

RISK FACTORS

See "Risk Factors and Other Considerations" for a discussion of the
risk factors and other considerations relating to the Bank and the Series A
Preferred Shares.

OC-8
115
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of the Bank herein
as of and for the three months ended March 31, 1997 and as of and for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, have been derived from the
Consolidated Financial Statements of the Bank and the unaudited financial
statements of the Bank. In the opinion of management all adjustments (which
consist of normal recurring accruals) necessary for a fair presentation of the
results of operations for such periods have been included. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire year.

AT OR FOR THE
THREE MONTHS
ENDED AS OF OR FOR THE YEAR ENDED DECEMBER 31,
MARCH 31, --------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)

Total assets . . . . . . . . . . . . $1,528,466 $1,472,988 $1,228,495 $1,128,730 $1,080,324 $1,252,955
Loans receivable, net . . . . . . . . 1,081,837 1,055,876 952,359 821,875 646,709 726,501
Non-performing assets . . . . . . . . 5,714 8,091 9,701 24,520 43,593 56,056
Mortgage-backed securities . . . . . 273,460 251,256 127,709 151,293 171,983 241,040
Excess of cost over net assets of
association acquired . . . . . . . --- --- --- 384 845(1) 36,380
Mortgage servicing rights . . . . . . 1,404 1,443 1,113 968 9,870 29,198
Deposits . . . . . . . . . . . . . . 1,007,508 964,133 922,932 817,674 844,012 916,644
Borrowings . . . . . . . . . . . . . 417,485 404,037 216,295 226,956 101,648 174,232
Stockholder's equity . . . . . . . . 83,291 80,014 71,108 57,545 55,971 101,698
Tangible stockholder's equity . . . . 82,299 79,003 69,984 57,485 56,133 67,232
Number of offices . . . . . . . . . . 48 48 46 41 38 40

SELECTED RATIOS:
Return on average assets . . . . . . 0.89% 0.69% 0.90% 0.33% (5.50)% 0.28%
Net interest margin . . . . . . . . . 3.13 3.26 3.04 2.31 1.95 2.28
General and administrative expenses
to average assets . . . . . . . . . 2.31 2.42 2.45 2.42 1.83
Nonperforming assets to total assets 0.37 0.55 0.79 2.17 4.04 4.47
Allowance for loan losses to
nonperforming loans . . . . . . . . 244.81 166.77 122.21 46.38 38.21 34.79
Allowance for loan losses to total
loans . . . . . . . . . . . . . . . 1.01 1.03 1.05 1.01 1.76 2.10
Net loan charge-offs to average loans 0.13 0.01 0.07 0.43 0.59 0.42
Tangible capital ratio . . . . . . . 5.15 5.11 5.41 5.05 4.89 4.32
Core capital ratio . . . . . . . . . 5.15 5.11 5.41 5.09 4.97 5.32
Tier 1 risk-based capital ratio . . . 8.69 8.72 9.20 8.92 8.95 9.34
Risk-based capital ratio . . . . . . 9.85 9.94 10.45 10.08 10.21 10.57

- --------------------
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).

OC-9
116

For the
Three
Months
Ended For the Year Ended December 31,
March 31, -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- -------- ------- ------- -------- -------
(In thousands)

INTEREST INCOME
Loans . . . . . . . . . . . . . . . . . . . $21,937 $ 86,151 $72,550 $58,274 $ 58,906 $ 72,729
Mortgage-backed securities . . . . . . . . 4,436 10,930 10,577 7,875 12,935 31,878
Investments and deposits . . . . . . . . . 1,962 7,228 7,638 5,462 8,233 12,921
------- -------- ------- ------- -------- --------
TOTAL INTEREST INCOME . . . . . . . 28,335 104,309 90,765 71,611 80,074 117,528
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . 11,288 43,859 38,639 29,806 33,815 46,607
Securities sold under agreement to repurchase 759 2,193 1,450 808 1 159
FHLB advances and other borrowed money . . . 5,030 15,558 13,445 7,446 9,757 21,997
Interest rate instruments . . . . . . . . . . -- -- 2,521 9,812 15,309 18,876
------- -------- ------- ------- -------- --------
TOTAL INTEREST EXPENSE . . . . . . . 17,077 61,610 56,055 47,872 58,882 87,639
------- -------- ------- ------- -------- --------
NET INTEREST INCOME . . . . . . . 11,258 42,699 34,710 23,739 21,192 29,889
Provision for loan losses . . . . . . . . . . 300 1,100 2,400 100 --- 117
------- -------- ------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSS . . . . . . . . . . 10,958 41,599 32,310 23,639 21,192 29,772
NONINTEREST INCOME
Loan servicing and administrative fees, net . 521 1,914 1,882 2,228 (13,964) 3,431
Deposit related . . . . . . . . . . . . . . 921 3,621 3,147 3,098 3,002 3,356
Gain on loans held for sale . . . . . . . . . 26 1,031 882 227 777 (44)
Other . . . . . . . . . . . . . . . . . . . . 135 470 222 1,173 672 765
------- -------- ------- ------- -------- --------
TOTAL OPERATING NONINTEREST INCOME . 1,603 7,036 6,133 6,726 (9,513) 7,508
Gain (loss) on investment securities available
for sale . . . . . . . . . . . . . . -- 188 (120) (221) 470 962
Gain on sale of loans and mortgage-backed
securities available for sale . . . . 5 -- 899 843 (12,968) 333
Gain on sale of loan servicing rights . . . . -- -- -- 140 475 4,594
------- -------- ------- ------- -------- --------
TOTAL NONINTEREST INCOME . . . . . . 1,608 7,224 6,912 7,488 (21,536) 13,397
NONINTEREST EXPENSE
Compensation and benefits . . . . . . . . 4,064 16,868 15,723 14,572 13,344 12,564
Occupancy . . . . . . . . . . . . . . . . 780 2,834 2,273 1,987 2,044 2,137
Other expense . . . . . . . . . . . . . . 2,495 11,429 10,481 9,902 14,171 11,581
------- -------- ------- ------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSE . 7,339 31,131 28,477 26,461 29,559 26,282
Other real estate owned, net . . . . . . . (22) 71 (999) (2,136) 2,340 2,919
Amortization of intangibles . . . . . . . -- -- 370 448 767 1,933
FDIC insurance . . . . . . . . . . . . . . 176 7,894 2,431 2,639 2,275 2,207
------- -------- ------- ------- -------- --------
TOTAL NONINTEREST EXPENSE . . . . . 7,493 39,096 30,279 27,412 34,941 33,341
------- -------- ------- ------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE . . 5,073 9,727 8,943 3,715 (35,285) 9,828
Federal income tax expense (credit) . . . . . 1,781 349 (1,675) 150 (3,738) 4,254
------- -------- ------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS . 3,292 9,378 10,618 3,565 (31,547) 5,574
Extraordinary items and accounting changes,
net of taxes . . . . . . . . . . . . -- --- --- --- (35,575) (1,572)
------- -------- ------- ------- -------- --------
NET INCOME . . . . . . . . . . . . . $ 3,292 $ 9,378 $10,618 $ 3,565 $(67,122) $ 4,002
======= ======== ======= ======= ======== ========

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RISK FACTORS AND OTHER CONSIDERATIONS

An investment in the Series A Preferred Shares involves a high degree
of risk. Investors should carefully consider the following risk factors and
other considerations relating to the Bank and the Series A Preferred Shares.

THE AUTOMATIC EXCHANGE

The Series A Preferred Shares will be issued in an automatic exchange
for the Preferred Capital Shares, only if (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate federal
regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term. As a result, holders of Preferred Capital
Shares would become holders of preferred stock of the Bank at a time when the
Bank's financial condition was deteriorating or when the Bank had been placed
into conservatorship or receivership. In the event of receivership of the Bank,
the claims of depositors and secured, senior, general and subordinated
creditors of the Bank would be entitled to a priority of payment over the
claims of holders of equity interests such as the Series A Preferred Shares. As
a result of such subordination, either if the Bank were to be placed into
receivership after the automatic exchange or if the automatic exchange were to
occur after receivership of the Bank, the holders of the Series A Preferred
Shares likely would receive, if anything, substantially less than the holders
of the Series A Preferred Shares would have received had the Preferred Capital
Shares not been exchanged for Series A Preferred Shares.

BANK PREFERRED SHARES WILL NOT BE LISTED ON THE NASDAQ SYSTEM

Although the Preferred Capital Shares will be listed on the Nasdaq
System, the Bank does not intend to apply for listing of the Series A Preferred
Shares, for which the Preferred Capital Shares will be exchanged automatically
on a one-for-one basis upon the occurrence of an Exchange Event as defined
hereafter under "Exchange", on any national securities exchange or for
quotation of the Series A Preferred Shares through the Nasdaq System.
Consequently, there can be no assurance as to the liquidity of the trading
markets for the Series A Preferred Shares, if issued, or that an active public
market for the Series A Preferred Shares would develop or be maintained.

DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE BANK

Federal regulatory authorities have the right to examine the Bank and
its activities. Under certain circumstances, including any determination that
the Bank's activities constitute an unsafe and unsound banking practice, such
regulatory authorities will have the authority to restrict the ability of the
Bank to transfer assets, to make distributions to its stockholders (including
dividends to the holders of Series A Preferred Shares, as described below), or
to redeem shares of preferred stock. Furthermore, in the event the Bank is
placed into conservatorship or receivership, the Bank would be unable to pay
dividends on the Series A Preferred Shares. In addition, in the event of a
liquidation of the Bank, the claims of the Bank's depositors and of its
secured, senior, general and subordinated creditors would be entitled to a
priority of payment over the dividend and other

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118
claims of holders of equity interests such as the Series A Preferred Shares
issued pursuant to the Automatic Exchange.

Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank became "undercapitalized" for
purposes of the OTS prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% and a core capital (or leverage)
ratio of less than 4.0%. At December 31, 1996, the Bank was in compliance with
all of its regulatory capital requirements. As of that date, the Bank's total
risk-based capital ratio was 9.94%, its Tier 1 risk-based capital ratio was
8.72% and its core capital (or leverage) ratio was 5.11%. Such ratios,
adjusted to give effect to the sale of Preferred Capital Shares in the
Offering, would be 13.10%, 11.89% and 6.84%, respectively.

Under OTS regulations, the ability of thrift institutions such as the
Bank to make "capital distributions" (defined to include payment of dividends,
stock repurchases, cash-out mergers and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's earnings and regulatory capital levels. The OTS retains general
discretion to prohibit any otherwise permitted capital distribution on general
safety and soundness grounds and must be given 30 days advance notice of all
capital distributions. Dividends on the Series A Preferred Shares in excess of
the Bank's net income would be treated as "capital distributions" by the OTS,
in which case the Bank's payment of such dividends would be subject to
restrictions under the OTS capital distribution regulations. Under these
regulations, institutions are divided into tiers. Tier 1 institutions are
those in compliance with their "fully phased-in" capital requirements and which
have not been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to
such distributions. Tier 1 institutions may seek OTS approval to pay dividends
beyond these amounts.

The category of Tier 2 institutions, which are defined as institutions
that are in compliance with their current, but not their "fully phased-in"
capital requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996.

Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.

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119
could result in recognition of losses on D&N's loan and REO portfolios and a
consequent reduction in capital.

DIVIDENDS NOT CUMULATIVE

Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not declare a dividend on the
Series A Preferred Shares for any quarterly period, the holders of the Series A
Preferred Shares would not be entitled to recover such dividend whether or not
funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Bank to pay less than the full amount of the stated dividends on the Series
A Preferred Shares or no dividends for any quarter notwithstanding that funds
are available. Factors that would be considered by the Board of Directors in
making this determination are the Bank's financial condition and capital needs,
the impact of legislation and regulations as then in effect or as may be
proposed, economic conditions, and such other factors as the Board may deem
relevant.

The Series A Preferred Shares will be issued upon an exchange of the
Preferred Capital Shares. Each Preferred Capital Share will be exchanged
automatically for one Series A Preferred Share if the appropriate regulatory
agency directs in writing an exchange of the Preferred Capital Shares for
Series A Preferred Shares because (i) the Bank becomes "undercapitalized" under
prompt corrective action regulations established pursuant to FDICIA, (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
regulatory agency, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term. The OTS' prompt corrective action
regulations prohibit "capital distributions" (including dividends) unless an
institution is at least "adequately capitalized." Thus, at the time of the
exchange, by regulation, the Bank may not be permitted to pay dividends on the
Series A Preferred Shares. In addition, the Bank's ability to pay dividends on
the Series A Preferred Shares even if the Bank were "adequately capitalized"
following the exchange would be subject to various restrictions under OTS
regulations.

RISKS ASSOCIATED WITH CHANGES IN INTEREST RATES THAT WOULD ADVERSELY AFFECT THE
BANK'S ABILITY TO PAY DIVIDENDS

Many of the Bank's mortgage loans bear interest at adjustable rates.
If there is a decline in interest rates (as measured by the indices upon which
the interest rates of the mortgage loans are based), then the Bank will
experience a decrease in income available to be distributed to its
stockholders. In such an interest rate environment, the Bank may experience an
increase in prepayments on its residential mortgage loans and may find it more
difficult to originate additional mortgage loans bearing rates sufficient to
support payment of the dividends on the Series A Preferred Shares. In
addition, certain residential mortgage loan products which the Bank holds could
allow borrowers in such an interest rate environment to convert an adjustable
rate mortgage to a fixed rate mortgage, thus "locking in" a low fixed interest
rate. Because the rate at which dividends are required to be paid on the
Series A Preferred Shares is fixed, there can be no assurance that an interest
rate environment in which there is a significant decline in interest rates
would not adversely affect the Bank's ability to pay dividends on the Series A
Preferred Shares.

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120
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY

An investment in the Series A Preferred Shares may be affected by,
among other things, a decline in real estate values. In the event the mortgage
assets held by the Bank become nonperforming, the Bank may not have sufficient
income or capital to pay dividends on the Series A Preferred Shares. Factors
that could affect the value of the mortgage assets held by the Bank include the
following:

Geographic Concentration. Certain geographic regions of the United
States may from time to time experience natural disasters or weaker regional
economic conditions and housing markets, and, consequently, may experience
higher rates of loss and delinquency on mortgage loans generally. Any
concentration of the mortgage loans in such a region may present risks in
addition to those present with respect to mortgage loans generally.
Substantially all of the residential properties underlying the Bank's
residential mortgage loans are located in Michigan. All of the commercial
properties underlying its commercial mortgage loans are located in Michigan.
These mortgage loans may be subject to a greater risk of default than other
comparable mortgage loans in the event of adverse economic, political or
business developments or natural hazards that may affect this region and the
ability of property owners in this region to make payments of principal and
interest on the underlying mortgages. In the event of any such natural
disaster, the Bank's ability to pay dividends on the Series A Preferred Shares
could be adversely affected.

Special Risks Relating to Commercial loans. The Bank's portfolio of
mortgage assets contains commercial mortgage loans. Commercial mortgage loans
have certain distinct risk characteristics. Commercial mortgage loans
generally lack standardized terms, which may complicate their structure.
Commercial real estate properties themselves tend to be unique and are more
difficult to value than residential real estate properties. Commercial
mortgage loans also tend to have shorter maturities than residential mortgage
loans and may not be fully amortizing, meaning that they may have a significant
principal balance or "balloon" payment due on maturity. In addition, commercial
real estate properties, particularly industrial and warehouse properties, are
generally subject to relatively greater environmental risks than non-commercial
properties and to the corresponding burdens and costs of compliance with
environmental laws and regulations. See "--Environmental Considerations."
Also, there may be costs and delays involved in enforcing rights of a property
owner against tenants in default under the terms of leases with respect to
commercial properties. For example, tenants may seek the protection of the
bankruptcy laws, which could result in termination of lease contracts.

REAL ESTATE MARKET CONDITIONS

The results of the Bank's operations will be affected by various
factors, many of which are beyond the control of the Bank, such as: (i) local
and other economic conditions affecting real estate value, (ii) the ability of
tenants to make lease payments, (iii) the ability of a property to attract and
retain tenants, which may in turn be affected by local conditions such as an
oversupply of space or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from other available
space, the ability of the owner to pay leasing commissions, provide adequate
maintenance and insurance, pay tenant improvement costs and

OC-14
121
make other tenant concessions, (iv) interest rate levels and the availability
of credit to refinance such loans at or prior to maturity and (v) increased
operating costs, including energy costs, real estate taxes and costs of
compliance with environmental controls and regulations. The results of the
Bank's operations depend on, among other things, the level of interest income
generated by the Bank's mortgage assets, the market value of such mortgage
assets and the supply of and demand for such mortgage assets. Further, no
assurance can be given that the values of the properties securing the mortgage
loans have remained or will remain at the levels existing on the dates of
origination of such mortgage loans.

LEGAL CONSIDERATIONS

Applicable state laws may regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of the mortgage loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Bank to collect all or part of the principal of or interest on
the mortgage loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Bank to damages and administrative
sanctions.

ENVIRONMENTAL CONSIDERATIONS

In the event that the Bank is forced to foreclose on a defaulted
mortgage loan to recover its investment in such mortgage loan, the Bank may be
subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the Bank
intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Bank's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the Bank
has acquired in foreclosure or otherwise, the Bank may be required to remove
those substances and clean up the property. There can be no assurances that in
such a case the Bank would not incur full recourse liability for the entire
costs of any removal and clean-up, that the cost of such removal and clean-up
would not exceed the value of the property or that the Bank could recoup any of
such costs from any third party. The Bank may also be liable to tenants and
other users of neighboring properties. In addition, the Bank may find it
difficult or impossible to sell the property prior to or following any such
clean-up.

RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS

The Board of Directors has established the investment policies and
operating policies and strategies of the Bank, certain of which are described
in the Offering Circular. These policies may be amended or revised from time to
time at the discretion of the Board of Directors (in certain circumstances
subject to the approval of a majority of the Independent Directors) without a
vote of the Bank's stockholders, including holders of the Series A Preferred
Shares. The ultimate effect

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122
of any change in the policies and strategies set forth in the Offering Circular
on a holder of Series A Preferred Shares may be positive or negative.

NO MARKET FOR SERIES A PREFERRED SHARES

Prior to the Exchange Event, there has been no market for the Series A
Preferred Shares as no such shares will have been issued, and there can be no
assurance that an active trading market will develop or be sustained or at what
price the Series A Preferred Shares may be resold.

RISK RELATING TO ELIMINATION OF THRIFT CHARTER

In the past few years, the Congress has considered legislation in
various forms that would require federal thrifts, like the Bank, to convert
their charters to national or state bank charters. In addition, the United
States Department of the Treasury recently released a form of proposed
legislation that would restructure the regulation of the financial services
industry by, among other things, eliminating the various restrictions on the
ability of banks to affiliate with companies engaged in lines of business not
generally currently permissible, such as securities and insurance activities.
The legislation would also require the conversion of federal thrifts to
national banks. Federal legislation also enacted in 1996 requires the merger of
the Bank Insurance Fund ("BIF") and the SAIF into a single deposit insurance
fund on January 1, 1999 but only if the thrift charter is eliminated by that
date. Although the Bank believes that the form of legislation currently under
consideration will not have a material adverse effect on the Bank, the Bank
cannot determine whether, or in what form, such legislation will eventually be
enacted or its effect on the Bank. See "Recent Developments--Legislative
Action."

RECENT DEVELOPMENTS

LEGISLATIVE ACTION

On September 30, 1996, President Clinton signed into law the Economic
Development and Regulatory Paperwork Reduction Act of 1996 (the "Act"). The
Act's principal provisions relate to recapitalization of SAIF, but it also
contains numerous regulatory relief measures, some of which are directly
applicable to the Bank.

Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interest due on Financial Corporation
("FICO") bonds used to rescue the savings and loan industry in the 1980's.
Annual FICO assessments to be added to deposit insurance premiums are expected
to equal approximately 6.4 basis points for SAIF members and 1.3 basis points
for BIF members from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF members thereafter.

Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions
concerning the form the current thrift charter may be required to take. The
Bank cannot determine at this time what effect this provision will have on

OC-16
123
its financial position or operations. See "Risk Factors--Risks Relating to
Elimination of Thrift Charter."

The Act also increases the Bank's commercial lending authority from
10% to 20% of assets, provided that the additional 10% consists of small
business loans.

Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicable to the Bank, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions an
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.

In addition, the United States Department of the Treasury recently
released a form of proposed legislation that would restructure the regulation
of the financial services industry by, among other things, eliminating the
various restrictions on the ability of banks to affiliate with companies
engaged in lines of business not generally currently permissible, such as
securities and insurance activities. Although the Bank believes that the form
of legislation currently under consideration will not have a material adverse
effect on the Bank, the Bank cannot determine whether, or in what form, such
legislation will eventually be enacted or its effect on the Bank.

D&N CAPITAL CORPORATION

In 1997, the Bank established D&N Capital Corporation for the purpose of
acquiring, holding and managing real estate mortgage assets. All of the D&N
Capital Corporation's common stock is owned by the Bank. It is expected that
substantially all of its mortgage assets will be acquired from the Bank. D&N
Capital Corporation will enter into a subservicing agreement with the Bank
pursuant to which the Bank will service mortgage assets. D&N Capital
Corporation will be the issuer of the Preferred Capital Shares which, under
certain circumstances, would be exchanged for the Series A Preferred Shares.

USE OF PROCEEDS

The Series A Preferred Shares are to be issued, if ever, in connection
with an exchange of the Preferred Capital Shares, which shares were sold
pursuant to an effective registration statement filed with the SEC. The
proceeds from the sale of the Preferred Capital Shares were used by D&N Capital
Corporation to purchase a portfolio of mortgage assets. The exchange of
Preferred Capital Shares into Series A Preferred Shares will produce no
proceeds to the Bank.

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CAPITALIZATION

The following table sets forth the actual capital of the Bank at
December 31, 1996 and as adjusted as of such date to give effect to (i) the
issuance of the Preferred Capital Shares by D&N Capital Corporation (assuming
the Underwriters' over-allotment option is not exercised) and (ii) an exchange
of the Preferred Capital Shares into Series A Preferred Shares of the Bank.
This table should be read in conjunction with the Consolidated Financial
Statements of the Bank and the notes thereto included elsewhere in this
Offering Circular.

DECEMBER 31, 1996
-----------------------------------------
AS AS
ACTUAL ADJUSTED(1) ADJUSTED(2)
---------- ---------- ----------
(DOLLARS IN THOUSANDS)

LIABILITIES:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 964,133 $ 964,133 $ 964,133
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . 404,037 404,307 404,307
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 24,804 24,804 24,804
---------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . 1,392,974 1,392,974 1,392,974

Minority interest in capital stock of consolidated subsidiary --- 27,500(3) ---

STOCKHOLDER'S EQUITY:
[ ]% Noncumulative Preferred Stock, Series A, $25.00 par
value, 2,000,000 shares authorized; issued and outstanding,
1,100,000 as adjusted . . . . . . . . . . . . . . . . . --- --- 27,500
Common stock, $.01 par value, 10,000,000 shares authorized,
3,650,636 shares, issued and outstanding . . . . . . . 37 37 37
Capital contributed in excess of par . . . . . . . . . . . 48,590 48,590 48,590
Retained earnings . . . . . . . . . . . . . . . . . . . . 30,144 30,144 30,144
Net unrealized holding gains . . . . . . . . . . . . . . . 1,243 1,243 1,243
---------- ---------- ----------
Total stockholder's equity . . . . . . . . . . . 80,014 107,514 107,514
---------- ---------- ----------
Total liabilities and stockholder's equity $1,472,988 $1,500,488 $1,500,488
========== ========== ==========

REGULATORY CAPITAL RATIO
Tangible . . . . . . . . . . . . . . . . . . . . . . . . . 5.11% 6.69% 6.84%
Core (or leverage) . . . . . . . . . . . . . . . . . . . . 5.11% 6.69%(3) 6.84%
Total risk-based . . . . . . . . . . . . . . . . . . . . . 9.94% 13.10% 13.10%
Tier 1 risk-based capital . . . . . . . . . . . . . . . . 8.72% 11.87% 11.87%

- ---------------
(1) Adjusted to give effect to the issuance of the Preferred Capital Shares by
D&N Capital Corporation.

(2) Adjusted to give effect to the exchange of the Preferred Capital Shares
into Series A Preferred Shares of the Bank.

(3) The preferred stock of D&N Capital Corporation, while outstanding,
represents permanent capitalization of the Bank and, as such, is
includable in the capital accounts of the Bank at up to 25% of the Bank's
total leverage capital.

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125

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

GENERAL

The Bank is a savings bank and wholly-owned subsidiary of the Holding
Company. 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 Bank's financial performance in 1996.

In 1996, D&N reported income, before one-time regulatory charges, of $13.4
million. Net income in 1995 was $10.6 million, and in 1994 the Bank earned $3.6
million.

D&N incurred a one-time charge in 1996 as its mandated contribution to
replenish the Federal Deposit Insurance Corporation's depleted Savings
Association Insurance Fund. 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 Bank's net income for 1996 was $9.4 million.

On December 31, 1996, the Bank'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 Fannie Mae ("FNMA").

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126
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 Bank made provisions for loan losses of $1.1 million, after
making provisions of $2.4 million and $100,000 in 1995 and 1994, respectively.
The increase in the provisions for loan losses in both 1996 and 1995 was the
result of increases in the amount of loans receivable and also reflects
increases in non-residential loans. See "- Loan Portfolio." At December 31,
1996, the allowance for loan losses was $11.0 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 Bank 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
Bank's community banking focus.

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127
AVERAGE BALANCE SHEET/RATE-VOLUME

The following tables set forth the extent to which the Bank'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
-------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
---------------------- ------------- ----------------------------- -------------------
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
---------- --------- ---- ---- -------- ------- ------- ------- -------
1,312,516 1,143,933 7.95 7.93 104,309 90,765 13,544 13,726 (182)
---------- ---------- ---- ---- -------- ------- ------- -------- -------
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)
---------- ---------- ---- ---- -------- ------- ------- ------- -------
1,248,000 1,088,624 4.93 5.15 61,546 56,015 5,531 8,303 (2,772)
---------- ---------- ---- ---- -------- ------- ------- ------- -------
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
-------------------------------------------------------------------------------------------
Average balance(1) Average rate Interest Variance due to:(2)
---------------------- ------------- ----------------------------- -------------------
Increase
1995 1994 1995 1994 1995 1994 (Decrease) Volume Rate
---------- ---------- ---- ---- ------- ------- ------- ------ -------
(Dollars in thousands)

Interest-earning assets:
Loans(3) . . . . . . . . . . . . $ 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
---------- ---------- ---- ---- ------- ------- ------- ------ -------
1,143,933 1,029,673 7.93 6.95 90,765 71,611 19,154 9,397 9,757
---------- ---------- ---- ---- ------- ------- ------- ------ -------
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)
--------- --------- ---- ---- ------- ------- ------- ------ -------
1,088,624 977,532 5.15 4.89 56,015 47,825 8,190 5,988 2,202
---------- --------- ---- ---- ------- ------- ------- ------ -------
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.

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128
RESULTS OF OPERATIONS

NET INTEREST INCOME

The Bank'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 Bank'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 $5.6 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 Bank'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 Bank'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 Bank'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.

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 Bank's application of surplus liquidity assets to fund
loan growth.

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129
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.

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 $509,000 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.

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130
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 Bank'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 Bank's effective income tax rates were 3.63% in 1996, (18.73%) in
1995, and 4.04% 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 Bank incurred substantial net operating losses.

D&N's deferred tax assets represent temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. In the case of the tax effect of net
operating loss carryforwards, current operations are giving rise to income,
the federal income tax on which is being provided by amortization of this item.
As the Bank continues profitable operations, this item will be fully realized
in the near future. Other items, such as the bad debt reserves which have not
yet been deducted, will be realized through continuing operations as, for
instance, actual loss experience perfects the deductibility of the reserves.

Since the creation, in 1993, of a significant deferred tax asset
attributable to the carryforward of net operating losses, the ultimate
realizability of that asset has been regularly assessed. The criterion
employed has focused upon that portion of the deferred tax asset that would
likely be recovered through the realization of the next twelve months
prospective income, a horizon deemed by management to be reasonably estimable.
Amounts of deferred tax asset in excess of this criterion amount have been
offset by a valuation allowance which, as profitable operations have occurred,
has been reduced and ultimately eliminated. The valuation allowance has been
eliminated as of December 31, 1996.

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 Bank'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 Bank's consumer loan products.
Balances of mortgage-backed securities increased $124 million, or 97%,
primarily as a consequence of securitization of $120 million of

OC-24
131
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 Bank'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 $71.1 million to $80.0
million. Profitable operations contributed $9.4 million to the Bank's retained
earnings offset by a decline of $472,000 in the 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 Bank'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 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%.

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

OC-25
132
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

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 Bank'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 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 Bank'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 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.

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.

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.

OC-26
133
ANALYSIS OF CASH FLOWS

The Bank's balances of cash and cash equivalents declined from $22.4
million to $12.8 million in 1996. During the year, $230 million of cash was
provided from financing activities, primarily from expanded borrowings and
increases in customers' deposit balances. Investing activities utilized $267
million of available cash and cash equivalents as loan purchases, mortgage-
backed security purchases, and purchases of investment securties exceeded
repayments in these categories. Operating activities provided $27.2 million of
net cash in 1996.

ASSET/LIABILITY MANAGEMENT

The Bank'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 Bank'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.

OC-27
134
The Bank 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 Maturity Maturity Maturity No
0 to 3 4 to 12 1 to 5 Over Maturity
Months Months Years 5 Years Date Total
--------- --------- -------- -------- -------- ----------
(In thousands)

ASSETS
Cash and due from banks/other . $ 12,787 $ --- $ --- $ --- $ --- $ 2,787
Investment securities . . . . . 23,003 50,255 24,178 22,341 --- 119,777
Mortgage derivative products . 249 630 1,144 --- --- 2,023
Mortgage-backed certificates . 16,206 50,510 93,430 89,087 --- 249,233
Net loans receivable . . . . . 232,114 327,417 476,162 20,183 --- 1,055,876
Other assets . . . . . . . . . 5,547 6,967 3,544 17,234 --- 33,292
--------- --------- -------- -------- ------- ----------
Total assets . . . . . . . . 289,906 435,779 598,458 148,846 --- 1,472,988
--------- --------- -------- -------- ------- ----------

LIABILITIES
Deposits . . . . . . . . . . . 181,095 335,658 312,377 135,003 --- 964,133
FHLB advances . . . . . . . . . 241,000 60,000 36,000 1,003 --- 338,003
Other borrowed money . . . . . 58,280 719 7,035 --- --- 66,034
Escrow funds . . . . . . . . . --- --- --- 11,808 --- 11,808
Other liabilities . . . . . . . --- --- --- 12,996 --- 12,996
--------- --------- -------- -------- ------- ----------
Total liabilities . . . . . 480,375 396,378 366,411 160,810 --- 1,392,974

STOCKHOLDERS EQUITY
Common stock . . . . . . . . . --- --- --- --- 37 37
Additional paid-in capital . . --- --- --- --- 48,590 48,590
Retained earnings and other . . --- --- --- --- 31,387 31,387
--------- --------- -------- -------- ------- ----------

Total liabilities and equity 480,375 396,378 355,411 160,810 80,014 1,472,988
--------- --------- -------- -------- ------- ----------

Reprice difference . . . . . . . (190,469) 39,401 243,046 (11,964)
Cumulative gap . . . . . . . . . (190,469) (151,068) 91,978 80,014
Percent of total assets . . . . . -12.93% -10.26% 6.24% 5.43%

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 Bank'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.

OC-28
135
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.

SIGNIFICANT LITIGATION

In 1989, FIRREA was passed, significantly altering the regulatory
environment in which depository institutions in general, and the Bank 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, 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 FIRREA'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 Bank'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 Bank's national network of mortgage origination offices and the elimination
of many jobs.

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 ("Court of Claims") has registered approximately 120 similar cases,
including D&N's, which seek damages for such breach. Pursuant to a "Case
Management Order" issued in September 1996, D&N and other similarly situated
financial institutions were required to designate counsel to serve on a
"Plaintiff's Coordinating Committee" (the "Committee") to bind all plaintiffs
with respect to procedural matters. The Bank's counsel is in contact with the
Committee and monitoring Committee actions on behalf of the Bank. The Bank is
currently awaiting a decision on its motion for partial summary judgment
requesting that the Court of Claims hold the government liable for breach of
contract. The Bank cannot predict when the Court of Claims will rule on its
motion.

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

OC-29
136
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

BUSINESS

LENDING ACTIVITIES

General. The Bank, like most other savings institutions, has
traditionally concentrated its lending activities on first mortgage
conventional loans secured by residential real estate and, to a lesser extent,
consumer loans and income producing property loans. Approximately $377.0
million or 54% of the Bank's total loans, excluding loans held for sale,
secured by real estate as of December 31, 1996, permit periodic interest rate
adjustments.

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137
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and
percentages, by type of loan.

December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------ ------------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)

TYPE OF LOAN
REAL ESTATE
One- to four-family
Permanent $ 600,923 56.91% $597,892 62.78% $526,572 64.07% $387,252 59.89% $457,196 62.93%
Construction 13,201 1.25 19,982 2.10 2,159 0.26 2,083 0.32 1,289 0.18
Income producing property
Permanent 85,619 8.11 89,176 9.36 115,162 14.01 131,372 20.31 173,122 23.83
Construction 26,472 2.51 21,074 2.21 17,741 2.16 10,475 1.62 933 0.13
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans 726,215 68.78 728,124 76.45 661,634 80.50 531,182 82.14 632,540 87.07

CONSUMER LOANS
Automobile loans 141,056 13.36 81,885 8.60 46,711 5.68 34,220 5.29 32,494 4.47
Home equity 82,305 7.79 60,003 6.30 39,939 4.86 23,058 3.57 18,702 2.58
Home improvement 46,545 4.41 41,542 4.36 39,279 4.78 40,017 6.19 46,368 6.38
Mobile home loans 289 0.03 417 0.04 619 0.08 776 0.12 1,170 0.16
Unsecured 15,172 1.44 19,637 2.06 22,197 2.70 20,328 3.14 8,539 1.18
Other 53,901 5.10 35,975 3.78 22,194 2.70 16,245 2.51 12,188 1.68
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans 339,268 32.13 239,459 25.14 170,939 20.80 134,644 20.82 119,461 16.45

COMMERCIAL LOANS
Revolving business loans 2,363 0.22 1,119 0.12 -- -- -- -- -- --
Term business loans 9,982 0.95 6,650 0.70 4,748 0.58 -- -- -- --
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total commercial loans 12,345 1.17 7,769 0.82 4,748 0.58 -- -- -- --
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Loans receivable, gross 1,077,828 102.08 975,352 102.41 837,321 101.88 665,826 102.96 752,001 103.52

Less:
Discounts (premiums)
on loans purchased (2,035) (0.19) (1,709) (0.18) 999 0.12 2,896 0.45 5,448 0.75
Allowance for losses 11,042 1.05 10,081 1.06 8,349 1.02 11,570 1.79 15,611 2.15
Undisbursed portion
of loan proceeds 12,085 1.14 13,198 1.38 4,213 0.51 2,750 0.43 404 0.06
Deferred income 860 0.08 1,423 0.15 1,885 0.23 1,900 0.29 3,993 0.55
Unearned income on
consumer loans -- -- -- -- -- -- 1 -- 44 0.01
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
21,952 2.08 22,993 2.41 15,446 1.88 19,117 2.96 25,500 3.52

Loans receivable, net $1,055,876 100.00% $952,359 100.00% $821,875 100.00% $646,709 100.00% $726,501 100.00%
========== ======= ======== ======= ======== ======= ======== ======= ======== =======

OC-31
138
Loan Maturities. The following schedule illustrates the maturity
structure of the Bank's loan portfolio at December 31, 1996. Loans are shown
as maturing in the period in which payment is due. This schedule does not
reflect the effects of possible prepayments or enforcements of due-on-sale
clauses.

Residential and
Commercial Income Producing Real Estate
Business Property Property Construction Loans Consumer Loans Total
------------------- ------------------- -------------------- ------------------- -------------------
Amounts Due in Weighted Weighted Weighted Weighted Weighted
Years Ending Average Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)

1997 . . . . . . $ 4,046 9.50% $ 23,357 9.22% $23,494 9.10% $ 66,178 9.22% $ 117,075 9.21%
1998 . . . . . . 2,001 9.39 9,500 9.05 8,686 9.67 66,872 9.14 87,059 9.19
1999 . . . . . . 1,516 9.35 16,063 8.68 6,214 9.79 67,238 8.91 91,031 8.94
2000-2001 . . . . 3,868 9.54 27,587 8.50 49 10.09 115,743 9.02 147,247 8.94
2002-2006 . . . . 572 9.35 45,483 8.41 32 10.24 18,306 9.67 64,393 8.78
2007-2011 . . . . 136 9.14 80,881 7.97 1,060 10.01 2,811 8.63 84,888 8.02
Thereafter . . . 123 8.64 480,042 7.69 -- -- 30 9.75 480,195 7.69
------- -------- ------- -------- ----------
Total . . . . . $12,262 9.46% $682,913 7.90% $39,535 9.36% $337,178 9.09% $1,071,888 8.35%
======= ======== ======= ======== ==========

Plus:
Accrued interest receivable,
net of reserve for uncollected
interest 5,940
Deferred income and premiums 1,175
Less:
Loans in process 12,085
Loss and valuation allowances 11,042
------
$1,055,876
==========

The total amount of loans, excluding loans held for sale, due after
December 31, 1997 which have fixed interest rates is $322.1 million, while the
amount of loans due after such date having floating or adjustable rates is
$627.4 million.

Loan Originations, Purchases and Sales. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. The Bank has originated residential mortgage
loans secured by property both within and outside the State of Michigan. The
Bank has also purchased residential mortgage loans secured by property located
in various states. In addition, the Bank has originated income producing
property loans secured by real estate located in the State of Michigan and has
purchased such loans secured by property located in Michigan and elsewhere.
Since 1990, the Bank has chosen to focus the activities of its community
banking offices on loan originations in their market areas. At December 31,
1996, 75% of the Bank's real estate loans receivable (excluding government
agency insured or guaranteed mortgage-backed and derivative products) were
secured by real estate located in Michigan.

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139
At December 31, 1996, 5% of the Bank's real estate loans receivable
(excluding government agency insured or guaranteed mortgage-backed securities)
was secured by real estate located in California. At December 31, 1996,
$351,000, or 1%, of real estate loans located in California were nonperforming.

The following table presents information regarding the geographic
location of the properties securing the Bank's residential mortgage and income
producing property loans at December 31, 1996. See "- Classified Assets, Loan
Delinquencies and Defaults" for a discussion of other real estate owned.

Outstanding Balance at
December 31, 1996
---------------------
(In thousands)

MICHIGAN
One- to four-family residential . . . . . . . . . . . . . . . $448,387
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . 15,554
Mini warehouse, storage . . . . . . . . . . . . . . . . . . . 848
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . 2,710
Motels/hotels . . . . . . . . . . . . . . . . . . . . . . . . 13,171
Shopping centers and retail . . . . . . . . . . . . . . . . . 17,455
Office buildings . . . . . . . . . . . . . . . . . . . . . . 8,317
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . 3,907
Condominiums and land development . . . . . . . . . . . . . . 16,895
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,569
----------
538,813
CALIFORNIA
One- to four-family residential . . . . . . . . . . . . . . . 22,222
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . 6,436
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . 133
Shopping Centers and Retail . . . . . . . . . . . . . . . . . 3,950
Office buildings . . . . . . . . . . . . . . . . . . . . . . 726
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . 390
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
----------
33,960
MASSACHUSETTS
One- to four-family residential . . . . . . . . . . . . . . . 22,385
----------
22,385
NEW YORK
One- to four-family residential . . . . . . . . . . . . . . . 5,836
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . 2,037
----------
7,873
NORTH CAROLINA
One- to four-family residential . . . . . . . . . . . . . . . 4,778
----------
4,778

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140

Outstanding Balance at
December 31, 1996
----------------------
(In thousands)

TEXAS
One- to four-family residential . . . . . . . . . . . . . . . 8,762
--------
8,762
PENNSYLVANIA
One- to four-family residential . . . . . . . . . . . . . . . 5,508
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . 336
Office buildings . . . . . . . . . . . . . . . . . . . . . . 22
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . 130
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
--------
6,115
FLORIDA
One- to four-family residential . . . . . . . . . . . . . . . 4,768
--------
4,768
OTHER (31 STATES)
One- to four-family residential . . . . . . . . . . . . . . . 82,679
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . 2,316
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . 783
Motels/hotels . . . . . . . . . . . . . . . . . . . . . . . . 368
Shopping centers and retail . . . . . . . . . . . . . . . . . 2,428
Office buildings . . . . . . . . . . . . . . . . . . . . . . 76
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . 138
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
--------
89,219
Rated conventional residential participation certificates . . . 5,775
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722,448
Plus
Accrued interest receivable, net of
reserve for uncollected interest . . . . . . . . . . . . . 3,767
Less
Deferred income, discounts and premiums, net . . . . . . . . (489)
Loans in process . . . . . . . . . . . . . . . . . . . . . . 12,085
Loss allowances . . . . . . . . . . . . . . . . . . . . . . . 7,173
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $707,446
========

Residential loan originations are attributable primarily to referrals
from real estate brokers and builders, as well as walk-in customers.
Construction loan originations have been obtained primarily by direct
solicitation of builders and continued business from builders who have
previously borrowed from the Bank. Income producing property loans have been
obtained from mortgage broker referrals, previous borrowers and direct contacts
with the Bank.

The Bank has sold loans and loan participations in the secondary
market, generally without recourse. Loans held for sale are recorded at the
lower of cost or market value. At December 31,

OC-34
141
1996, the Bank had $5.2 million of net loans held for sale consisting of 15-
and 30-year fixed rate loans. These sales have provided additional funds for
loan originations and investments and also generated income. The Bank
generally continues, after the sale, to service the loans and loan
participations sold. Loan sales are made on a yield basis with a portion of
the difference between the yield to the purchaser and the amount paid by the
borrower constituting servicing income to the Bank. On occasion, the Bank also
purchased mortgage loan servicing rights from others in order to maintain its
loan servicing portfolio economies of scale. During 1994, the Bank decided to
sell the majority of its portfolio of purchased mortgage loan servicing rights
in order to reduce the Bank's interest rate risk and balance sheet volatility.
The scale of loan servicing operations has been reduced as the Bank
concentrates its loan servicing activities on originated loans. The weighted
average servicing fee for loans serviced for others was .29% at December 31,
1996. At December 31, 1996, the Bank serviced for others approximately $415
million in loans and loan participations.

The Bank's investment in mortgage servicing rights ("MSR"s) totaled
$1.4 million at December 31, 1996. The following table details the value of
the Bank's investment in MSRs.

Year Ended December 31
-------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)

Balance at beginning of year . . . . . . . $ 1,113 $ 968 $ 9,870
Additions:
Capitalized servicing . . . . . . . . . . 630 621 --
Purchased servicing . . . . . . . . . . . -- -- --
------- ------- -------
Total . . . . . . . . . . . . . . . . . 630 621 --
Reductions:
Scheduled amortization . . . . . . . . . 267 169 1,315
Additional amortization due to
changes in prepayment assumptions . . . 33 71 421
Impairment . . . . . . . . . . . . . . . -- 234 --
Sales . . . . . . . . . . . . . . . . . . -- -- 7,148
Transfers to loan portfolio under
recourse and other provisions . . . . . -- 2 18
------- ------- -------
Total . . . . . . . . . . . . . . . . . 300 476 8,902
------- ------- -------
Balance at end of year . . . . . . . . . . $ 1,443 $ 1,113 $ 968
======= ======= =======
Fair market value at end of year . . . . . $ 1,770 $ 1,161 $ 912
======= ======= =======

OC-35
142
The following table shows origination, purchase, sale and repayment
activities of the Bank, including mortgage-backed securities, for the periods
indicated.

Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- ---------
(In thousands)

ORIGINATIONS
Real estate:
One- to four-family residential . $194,357 $182,800 $ 81,279 $147,246 $121,468
Income producing property . . . . 33,816 17,614 17,620 13,014 2,711
Non-real estate:
Consumer . . . . . . . . . . . . 271,622 195,109 132,836 95,129 85,254
Commercial . . . . . . . . . . . 11,437 3,739 4,478 -- --
-------- -------- -------- -------- --------
Total originations . . . . . . . 511,232 399,262 236,213 255,389 209,433

PURCHASES
Real estate:
One- to four-family residential . 148,405 103,524 188,481 72,125 5,662
Income producing property . . . . -- -- 1,825 -- 4,989
Mortgage-backed securities . . . . 58,892 -- 68,391 108,749 86,464
-------- -------- -------- --------- ---------
Total purchases . . . . . . . . 207,297 103,524 258,724 180,874 97,115
-------- -------- -------- --------- ---------
Total additions . . . . . . . . 718,529 502,786 494,937 436,263 306,548

SALES
Real estate:
One- to four-family residential . 68,024 107,080 45,311 106,167 40,610
Mortgage-backed securities(1) . . -- 4,210 50,658 126,932 110,737
Non-real estate:
Consumer loans . . . . . . . . . . 2,810 2,976 2,894 2,229 2,934
-------- -------- -------- --------- ---------
Total sales . . . . . . . . . . 70,834 114,266 98,863 235,328 154,281
Principal repayments . . . . . . . . 426,291 288,485 239,816 316,624 400,042
-------- -------- -------- --------- ---------
Total reductions . . . . . . . . 497,125 402,751 338,679 551,952 554,323
Transfers to other real estate owned (3,373) (1,936) (2,861) (9,380) (6,259)
Increase (decrease) in other items, net 9,033 8,801 1,079 (19,622) 4,477
-------- -------- -------- --------- ---------
Net increase (decrease) . . . . $227,064 $106,900 $154,476 $(144,691) ($249,557)
======== ======== ======== ========= =========

- ----------------
(1) Includes sales of mortgage derivative products which were carried at the
lower of cost or market.

Outstanding loan commitments of the Bank at December 31, 1996 amounted
to $36.7 million for one- to four-family residential real estate loans and
$32.7 million for commercial real estate loans.

Residential Mortgage Loans. At December 31, 1996, the Bank had $614.1
million in residential mortgage loans representing 58.2% of the Bank's total
loan portfolio. This amount represents a slight increase in the dollar value of
the residential loan portfolio. However, it also represents a decrease in the
percentage of the Bank's portfolio consisting of real estate loans as the Bank
shifted its focus to emphasize the origination of consumer loans. The original
contractual loan payment period for residential loans originated by the Bank
normally ranges from 15 to 30 years. Because borrowers may refinance or prepay
their loans, however, such loans often remain outstanding for a substantially
shorter period of time.

OC-36
143
Prior to 1992, most of the Bank's residential mortgage loans were
originated by its mortgage banking subsidiary. The mortgage banking subsidiary
originated loans in southeastern Michigan, Illinois, Arizona, Texas and North
Carolina. The Bank now originates loans primarily in its Michigan market area
through its community banking and mortgage banking offices. Substantially all
of the residential loans being originated by the Bank are in a form which
permits their sale in the secondary market.

The Bank's first mortgages customarily include "due-on-sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid. In general, the Bank enforces due-on-sale clauses in its first
mortgages.

In the case of conventional mortgage loans intended for sale, the
Bank's policy is to lend a maximum of 95% of the appraised value of
single-family residences. The Bank generally does not lend more than 90% of
the appraised value of the property on those loans it intends to hold. Private
mortgage insurance is required if the loan amount exceeds 80% of the appraised
value, in an amount sufficient to reduce the Bank's exposure to 75% or less of
the appraised value of the property. Property securing real estate loans made
by the Bank is appraised by independent appraisers selected by the Bank and
whose appraisals are reviewed by D&N personnel or other independent appraisers.

Loans up to the maximum limits for single family homes of the Federal
Home Loan Mortgage Corporation ("FHLMC") and the FNMA (currently $214,600) may
be approved by qualified loan officers of the Bank. The Bank's Residential
Loan Committee has single-family lending authority up to $500,000, if two
members approve. Loans in excess of $500,000 must be approved by the Bank's
Loan Committee (comprised of Messrs. Butvilas, Donnelly, Janson, West and
Sliwinski). Loans in excess of $2 million must also be approved by the Bank's
Board of Directors.

Title, fire and casualty insurance as well as surveys are generally
required on all mortgage loans.

D&N also offers a variety of Adjustable Rate Mortgages, ("ARM") loans
which offer adjustable rates of interest, payments, loan balances or terms to
maturity which vary according to specified indices. The Bank's ARMs generally
have a loan term of 30 years with rate adjustments every year or every three
years during the term of the loan. ARMs currently originated by the Bank
contain a 2% limit as to the maximum amount of change in the interest rate at
any adjustment period and a 6% limit over the life of the loan. The Bank
generally originates ARMs to hold in its portfolio. At December 31, 1996,
residential ARMs totaled $290 million, or 49% of the Bank's total residential
one- to four-family mortgage loan portfolio. Of this total ARM portfolio, $153
million or 53% were purchased from others. Due to consumer demand, residential
loans originated during 1996 were predominately fixed rate loans.

Despite the benefits of ARMs to the Bank's asset/liability management
program, such loans also pose potential additional risks, primarily because as
interest rates rise, the underlying payment

OC-37
144
by the borrower rises, increasing the potential for default. At the same time,
marketability of the underlying property may be adversely affected by higher
interest rates.

Mortgage-backed Securities. The Bank on occasion purchases
mortgage-backed securities to supplement residential loan production. The
types of securities purchased are based upon the Bank's asset/liability
management strategy and balance sheet objectives. In 1996, the Bank purchased
$58.7 million of fixed rate Collateralized Mortgage Obligations ("CMO") with
expected average lives of 2.1 to 3.3 years. CMOs are securities derived by
reallocating cash flows from mortgage pass-through securities or pools of
mortgage loans held by a trust. The CMO securities purchased by the Bank in
1996 are backed by pass-through securities of either FHLMC, FNMA or Government
National Mortgage Association ("GNMA").

The Bank has in the past invested in interest only strip securities
("IOs") and principal only strip securities ("POs") as part of its
asset/liability management strategy. At December 31, 1996, D&N had IOs with a
book value and a market value of $2.0 million, and had no POs at that date.

The following table sets forth information concerning the composition
of D&N's mortgage- backed securities portfolio in dollar amounts and
percentages, by type of security. See also Note E of Notes to Consolidated
Financial Statements.

December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars In thousands)

TYPE OF SECURITY
One- to four-family:
Mortgage-backed
securities. . . . . $249,186 99.18% $125,264 98.09% $147,988 97.81% $166,284 96.69% $212,652 88.23%

Interest only
certificates. . . . 2,070 0.82 2,456 1.92 3,886 2.57 4,321 2.51 27,075 11.23

Mortgage-backed
securities, gross . 251,256 100.00 127,720 100.01 151,874 100.38 170,605 99.20 239,727 99.46

Net (discounts)
premiums . . . . . . -- -- (11) (0.01) (581) (0.38) 1,378 0.80 1,313 0.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Mortgage-backed
securities, net . . . $251,256 100.00% $127,709 100.00% $151,293 100.00% $171,983 100.00% $241,040 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======

Income Producing Property Loans. The Bank has historically
originated and purchased both permanent and, to a substantially lesser extent,
construction loans secured by income producing property and land development
loans. Essentially all permanent income producing property loans originated by
the Bank to date have been secured by real property located in Michigan.

OC-38
145
To a substantially lesser extent, the Bank has also purchased income
producing property loans and participation interests in these loans outside of
Michigan. These loans may be in the form of mortgage-backed securities, may
have fixed or variable interest rates and most have been outstanding for three
to twelve years. At December 31, 1996, $24.0 million of D&N's portfolio of
income producing property loans were purchased loans.

During 1990, the Bank ceased all origination and purchase activity
involving income producing and land development loans. Although the Bank was
not originating new loans until 1993, it provided financing to facilitate the
sale of real estate it had acquired through foreclosure or in settlement of
loans. Some of this property has been in a distressed condition and has been
difficult to market. To facilitate a sale, the Bank has, from time to time,
provided financing at rates and terms which have not been reflective of true
market conditions. When this has occured, the Bank reduced the carrying value
of the below market loan by discounting the expected cash flows to a present
value using a market rate of interest. Since 1993, the Bank has resumed
originating income producing property loans secured by real estate.

The following table shows the composition of the Bank's income
producing property and land development loans at December 31, 1996. See
"Non-Performing Assets and Risk Elements."

Amount Non-
Loans Percentage Performing or
Outstanding of Total of Concern
----------- -------------- ---------------
(Dollars in thousands)

Apartments and multi-family residences . . $ 25,574 25.91% $ 168
Other income producing property:
Motels/hotels . . . . . . . . . . . . . 13,630 13.81 --
Offices . . . . . . . . . . . . . . . . 6,711 6.80 69
Mobile home parks . . . . . . . . . . . 3,649 3.70 --
Shopping centers . . . . . . . . . . . 23,740 24.05 2,487
Industrial . . . . . . . . . . . . . . 4,595 4.66 --
Other . . . . . . . . . . . . . . . . . 7,651 7.75 --
-------- ------ -------
Total . . . . . . . . . . . . . . . . . 85,550 86.68 2,724
Land development loans and other . . . . . 26,541 26.89 --
-------- ------ -------
Total . . . . . . . . . . . . . . . . . 112,091 113.57 $ 2,724
=======
Allowance for losses . . . . . . . . . . . (6,314) (6.40)
Loans in process, deferred income and
other miscellaneous credits . . . . . . (7,074) (7.17)
-------- ------
Total . . . . . . . . . . . . . . . $ 98,703 100.00%
======== ======

Consumer Lending. Federal regulations permit federal savings
institutions to make secured and unsecured consumer loans, together with
investments in commercial paper and corporate debt securities, in an amount up
to 35% of the institution's assets. In addition, a federal savings institution

OC-39
146
has lending authority above the 35% category for certain consumer loans, such
as home equity loans, property improvement loans, mobile home loans and deposit
account secured loans.

Consumer loans originated by the Bank are offered at fixed and
adjustable rates of interest. The underwriting standards employed by the Bank
for consumer loans include a determination of the applicant's payment history
on other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.

The Bank has established programs to originate consumer loans
including automobile loans, home improvement loans, home equity loans, student
loans under various guaranteed student loan programs, loans to depositors
secured by pledges of their deposit accounts and unsecured loans. Although
consumer loans involve a higher level of risk than one- to four-family
residential mortgage loans, they generally carry higher yields and have shorter
terms to maturity. The Bank has increased its origination of consumer loans
during the past several years, and is continuing to emphasize these types of
loans. At December 31, 1996, consumer loans totaled $339.3 million or 32% of
the Bank's loan portfolio, an increase of $99.8 million, or 42% from December
31, 1995.

During 1996, net consumer loan charge-offs were $926,000 compared to
$642,000 in 1995, $411,000 in 1994, $354,000 in 1993 and $744,000 in 1992.

Indirect loan originations totaled $115.5 million in 1996. Indirect
receivables amounted to $141.4 million at December 31, 1996 and make up 42% of
the consumer loan portfolio. Indirect loans are underwritten according to the
same guidelines as direct loans, and the maximum dollar exposure to any one
dealer is typically limited to $5 million.

Home equity loans and home equity credit lines are extended at fixed
or variable rates of interest and normally do not exceed 75% of the property's
appraised value less the amount owing, if any, on a first mortgage. Home
equity loans are repaid according to fixed monthly payments over a maximum term
of ten years. Home equity credit lines require a monthly interest and
principal payment based upon the outstanding balance. Home equity credit lines
generally have five-year terms at which time the Bank may require payment in
full or renew the loan for another five-year term. Amounts repaid are
available for subsequent borrowing, subject to satisfactory loan performance.

Home improvement loans are generally treated as home equity loans with
a first or second mortgage lien securing the loan. A small number of home
improvement loans are written as unsecured loans.

The Bank has increased its emphasis in recent years on unsecured
loans. These loans are underwritten according to strict guidelines, and loan
officers generally have lower approval limits for unsecured loans than for
secured loans.

OC-40
147
D&N is subject to various state and federal limitations on the maximum
rates of interest it may charge on consumer and certain other loans. These
limitations have not had a significant effect on D&N's consumer loan
activities.

LOANS TO ONE BORROWER

Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus. At December 31, 1996, the Bank's loans to one borrower
limit was approximately $13.3 million. See "Regulation - Federal Savings
Association Regulation". At December 31, 1996, the Bank had no loans to one
borrower in excess of its lending limit.

CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS

The Bank's collection procedures provide that when a residential
mortgage loan is 15 days past due, the borrower is contacted by mail and
payment is requested. For loans secured by income producing property, the
borrower is contacted by telephone when the loan is 15 days past due. If the
delinquency continues, subsequent efforts are made by telephone and mail to
contact the delinquent borrower. In certain instances, the Bank may modify the
loan or grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent status
for 90 days or more, the Bank generally initiates foreclosure proceedings.

The process of non-judicial foreclosure in Michigan takes
approximately six weeks. A sheriff's sale is then held at which the Bank
normally bids for the purchase of the property. A conditional sheriff's deed
is then awarded to the highest bidder, usually the Bank, and the customer is
given six months (or in certain circumstances, one year) to redeem the
conditional deed by repaying the bid amount in full. During this redemption
period, the borrower may occupy and use the property as he sees fit. If he
fails to redeem the sheriff's deed, then the Bank acquires clear title to the
real estate and subsequently sells it to recover its investment. In most
cases, it is not economical to obtain a deficiency judgment against the
borrower if residential property is sold for less than the unpaid balance of
the loan.

OC-41
148
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1996. The amounts presented represent
the total remaining principal balances of the related loans (before reserves
for losses), rather than the actual payment amounts which are overdue.

Real Estate
----------------------------------------
Income
Producing
Commercial Residential Property Consumer
----------------- ----------------- ------------------ -------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)

Loans delinquent for:
30 - 59 days -- $ -- 128 $4,289 2 $1,116 517 $2,896
60 - 89 days 1 96 34 1,410 1 109 195 864
90 days and over -- -- 58 3,047 5 2,724 145 658
-- ----- --- ------ - ------ --- ------
Total delinquent loans 1 $ 96 220 $8,746 8 $3,949 857 $4,418
== ===== === ====== = ====== === ======

Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser credit
quality as "substandard," "doubtful" or "loss" assets. The regulation requires
insured institutions to classify their own assets and to establish prudent
general allowances for loan losses for assets classified "substandard" or
"doubtful." For the portion of assets classified as "loss", an institution is
required to either establish specific allowances for loan losses for assets of
100% of the amount classified or charge off such amount. In addition, the OTS
may require the establishment of a general allowance for losses based on assets
classified as "substandard" and "doubtful" or based on the general credit
quality of the asset portfolio of an institution. At December 31, 1996, $10.4
million of the Bank's assets were classified as "substandard", $37,000 of such
assets were classified as "doubtful" and $385,000 were classified as "loss".
The Bank's classification of assets is consistent with OTS examination
classifications.

Hotels and motels account for $3.3 million of classified assets and
apartments account for $4.3 million. The balance of classified assets consists
of loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans. Classified assets amounting to
$3.7 million, or 16% of total classified assets, are secured by real estate
located in the state of California.

NONPERFORMING ASSETS AND RISK ELEMENTS

Nonperforming assets, including other real estate owned, decreased to
$8.1 million at December 31, 1996 compared to $9.7 million at December 31,
1995. The ratio of nonperforming assets to total assets was 0.55% at December
31, 1996 compared to 0.79% at December 31, 1995. Allowances for losses
represented 136% of nonperforming assets at December 31, 1996.

Loans are placed on nonaccrual status when the collection of principal
and/or interest becomes doubtful. In addition, residential mortgage loans and
income producing property loans are placed on nonaccrual status when the loan
becomes 90 days or more contractually delinquent. All consumer loans more than
90 days delinquent are charged against the consumer loan allowance for

OC-42
149
loan losses. For 1996, the Bank would have recorded interest income of
$558,000 if nonaccrual and restructured loans had performed in accordance with
their original terms. The Bank recognized $6,000 of interest income on these
loans in 1996. During 1996 and 1995, the amount of interest income on impaired
loans was insignificant.

The following table sets forth the amounts and categories of risk
elements in Bank's loan portfolio:

December 31
March 31, ------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)

Nonaccruing loans . . . . . . . . $ 4,488 $ 6,621 $ 8,225 $ 17,995 $ 30,102 $ 44,703
Accruing loans delinquent
more than 90 days . . . . . . -- -- 24 5 13 --
Restructured loans . . . . . . . -- -- -- -- 166 167
------- -------- -------- -------- -------- --------
Total nonperforming loans . . 4,488 6,621 8,249 18,000 30,281 44,870
Other real estate owned (OREO) . 1,226 1,470 1,452 6,520 13,312 11,186
------- -------- -------- -------- -------- --------
Total nonperforming assets . $ 5,714 $ 8,091 $ 9,701 $ 24,520 $ 43,593 $ 56,056
======= ======== ======== ======== ======== ========
Nonperforming loans as a
percentage of total loans . . 0.41% 0.62% 0.86% 2.17% 4.60% 6.05%
======= ======== ======== ======== ======== ========
Nonperforming assets as a
percentage of total assets . 0.37% 0.55% 0.79% 2.17% 4.04% 4.47%
======= ======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of nonperforming
loans . . . . . . . . . . . . 244.81% 166.77% 122.21% 46.38% 38.21% 34.79%
======= ======== ======== ======== ======== ========
Allowances for loan and OREO losses
as a percentage of
nonperforming assets . . . . 192.28% 136.47% 105.29% 35.40% 28.03% 30.08%
======= ======== ======== ======== ======== ========

OTHER REAL ESTATE OWNED

Other real estate owned, net of reserves, totaled $1.5 million at
December 31, 1996, compared with $1.3 million at December 31, 1995. Other real
estate owned consisted of single family homes, multi-family dwelling units and
commercial real estate. At foreclosure, real estate is recorded at estimated
fair value less disposal costs. Any difference between estimated fair value
and the loan balance is charged to the allowance for loan losses.

The largest asset in other real estate owned is a auto retail center
located in Michigan. This asset has a carrying value of $743,000 at December
31, 1996.

OTHER LOANS OF CONCERN

In addition to nonperforming assets, the Bank has other loans of
concern aggregating $15.9 million. These are loans which are currently
performing but which demonstrate a specific

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150
weakness or weaknesses which, if not corrected, could cause failure of the
borrower and default. These loans are closely monitored by management, and as
the weaknesses are corrected, may be reclassified as acceptable loans.

Included in other loans of concern at December 31, 1996, are three
income producing property loans totaling $4.7 million that have all paid as
agreed but, for various reasons, indicate potential payment concerns.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established at levels considered
appropriate based on management's judgment of potential losses in residential,
income producing and consumer loan portfolios. The loan portfolios are
reviewed at least quarterly for changes in performance, collateral value and
overall quality. Allocated allowances are established for problem loans with
expected losses, and in addition, allowances are established for unidentified
potential losses. Regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based
upon their judgment of the information available to them at the time of their
examination. A $1.1 million provision for potential loan losses was made in
1996, compared to $2.4 million in 1995 and $100,000 in 1994. Management's
judgment in determining the level of the allowance for loan losses is
influenced by several factors during the quarterly reviews. These factors
include, but are not limited to, past loan performance and loss experience,
current economic and market conditions, collateral location and market values,
industry and geographic concentrations and delinquency statistics and ratios.
Management also considers the different levels of risk between income producing
property loans, installment loans and one-to four-family residential loans. In
addition, management considers the level of nonperforming assets and classified
assets, the level of lending activity and the overall size of the loan
portfolio.

Income-producing property charge-offs were primarily due to writedowns
of loans to estimated fair value. Consumer loan charge-offs increased
somewhat, but charge-off ratios decreased as the consumer loan portfolio grew
at a faster rate. See "Lending Activities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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151
The following table sets forth an analysis of the Bank's allowance for
loan losses:

Year Ended December 31
------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ----------- ----------- ----------- -----------

Balance at beginning of period $ 10,081 $ 8,349 $ 11,570 $ 15,611 $ 18,744
Charge-offs:
Single family . . . . . . . 314 169 110 1,136 329
Income producing property . -- 1,019 3,109 2,584 2,180
Installment . . . . . . . . 1,216 999 773 681 1,000
Commercial . . . . . . . . . -- -- -- -- --
-------- -------- -------- -------- --------
1,530 2,187 3,992 4,401 3,509
Recoveries:
Single family . . . . . . . 3 917 9 25 --
Income producing property . 1,098 245 300 8 3
Installment . . . . . . . . 290 357 362 327 256
Commercial . . . . . . . . . -- -- -- -- --
-------- -------- -------- -------- --------
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%
======= ======= ======= ======= =======

The following table summarizes the allocation of the allowance for
loan losses by major categories at the dates indicated:

December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)

Residential mortgages . $ 859 57% $ 1,170 63% $ 813 63% $ 429 60% $ 380 63%
Mortgages on income
producing property . 6,314 10 6,115 11 6,423 17 9,617 19 13,353 21
Commercial loans . . . 400 1 400 1 -- -- -- -- -- --
Consumer loans . . . . 3,469 32 2,396 25 1,113 20 1,524 21 1,878 16
------- --- ------- --- ------ --- ------- --- ------- ---
Total . . . . $11,042 100% $10,081 100% $8,349 100% $11,570 100% $15,611 100%
======= === ======= === ====== === ======= === ======= ===

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152
INVESTMENT ACTIVITIES

Federal savings institutions have authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of various
federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Federal savings institutions are also permitted
to invest in any account at a federally insured institution.

Federal savings institutions may also invest a portion of their assets
in certain commercial paper and corporate debt securities. They are also
authorized to invest in mutual funds whose assets conform to the type of
investment that a federal savings institution is authorized to make directly.
There are various restrictions on the foregoing investments. For example, the
commercial paper must be appropriately rated by at least two national
investment rating services and the corporate debt securities must be
appropriately rated in one of the two highest rating categories by at least one
such service. In addition, the commercial paper must mature within nine months
of issuance. Moreover, a federal savings institution's total investment in the
commercial paper and corporate debt securities of any one issuer may not exceed
the loans to one borrower limitation applicable to the savings institution,
except that a federal savings institution may invest up to 5% of its assets in
the shares of any appropriate mutual fund. At December 31, 1996, the Bank was
in compliance with all such requirements.

The Bank has invested in various securities which are acquired in the
capital markets. These investments consist of loans, mortgage-backed
securities, corporate debt securities and derivative mortgage instruments.
Investments were funded with advances from the FHLB and short-term borrowings,
primarily in the form of reverse repurchase agreements, and retail deposits.
Various combinations of techniques and instruments, including interest rate
exchange agreements, interest rate caps, interest rate floors, collateralized
mortgage obligation residuals, interest only stripped mortgage-backed
securities and principal only stripped mortgage-backed securities, have been
used in an attempt to provide adequate and relatively stable returns over a
variety of interest rate environments. The investments and financings are
structured based upon forecasts of mortgage loan repayments for loans and
mortgage-backed securities. If mortgage loan repayments differ significantly
from the level upon which the investment was made, the interest rate spread and
market value may be reduced.

As a member of the FHLB System, the Bank must maintain minimum levels
of liquid assets specified by federal regulations which vary from time to time.
See "Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to return on loans.

Historically, the Bank has maintained liquid assets above the minimum
requirements imposed by federal regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1996, the Bank's
average liquidity ratio (liquid assets as a percentage of net withdrawable
deposits and current borrowings) was 6.6%, which was in excess of regulatory
requirements.

OC-46
153
The following table sets forth information concerning the Bank's
investment securities at the dates indicated. See also Note D of Notes to
Consolidated Financial Statements for additional information regarding the
contractual maturities and weighted average yields of the Bank's investment
securities.

December 31,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- ---------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
-------- -------- ------- ------- ------- -------
(In thousands)

U.S. Treasury and government
agencies and corporations . . . $ 40,757 $ 40,801 $35,100 $35,229 $ 7,819 $ 7,819
U.S. Treasury available for sale 57,996 58,000 40,656 40,899 61,979 61,536
Valuation allowance . . . . . . . 4 -- 244 -- (443) --
-------- -------- ------- ------- ------- -------
98,757 98,801 76,000 76,128 69,355 69,355
Investment in Federal Home Loan
Bank stock . . . . . . . . . . 19,959 19,959 19,953 19,953 19,937 19,937
Other equity securities . . . . . 23 23 186 186 85 85
Other equity securities available
for sale . . . . . . . . . . . 1,032 1,038 110 298 14 14
Valuation allowance . . . . . . . 6 -- 187 -- -- --
-------- -------- ------- ------- ------- -------
$119,777 $119,821 $96,436 $96,565 $89,391 $89,391
======== ======== ======= ======= ======= =======

The book value and market value of investment securities at December
31, 1996, by maturity ranges, were as follows:

Weighted
Market Average
Book Value Value Yield
---------- ---------- -------------
(Dollars in thousands)

U.S. Treasury and government agencies
and corporate securities maturing:
In one year or less . . . . . . . $ 74,121 $ 74,124 5.71%
After one year through five years 24,632 24,677 6.07
Valuation allowance . . . . . . . 4 -- --
-------- -------- ----
98,757 98,801 5.80
Equity securities . . . . . . . . 21,014 21,020 7.72
Valuation allowance . . . . . . . 6 -- --
-------- -------- ----
$119,777 $119,821 6.14%
======== ======== ====

SOURCE OF FUNDS

General. Deposits are an important source of the Bank's funds for use
in lending and for other general business purposes. In addition to deposits,
the Bank derives funds from loan

OC-47
154
repayments, advances from the FHLB of Indianapolis and other borrowings, and at
times has derived funds from reverse repurchase agreements and loan and
securities sales. Scheduled loan repayments are a relatively stable source of
funds, while loan prepayments and deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in normal sources of funds,
such as deposit inflows at less than projected levels or deposit outflows, or
to support expanded activities. Historically, the Bank has borrowed primarily
from the FHLB of Indianapolis, through institutional reverse repurchase
agreements and, to a lesser extent, from other sources.

Deposit Activities. The Bank attracts both short-term and long- term
deposits from the general public by offering a wide assortment of accounts and
rates. In recent years, market conditions have required the Company to rely
increasingly on short-term accounts that are more responsive to market interest
rates. The Bank offers regular savings accounts, checking accounts, various
money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate certificates of deposit of $100,000 or above
("Jumbo CDS") and individual retirement accounts.

The composition of the Bank's deposits at the end of recent periods is
set forth in Note I of Notes to Consolidated Financial Statements. At December
31, 1996, the Bank had no brokered deposits. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, the
Bank believes that, based on its experience over the past five years, its
savings accounts are stable sources of deposits.

December 31,
---------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------- ----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ -------
(Dollars in thousands)

Regular Accounts:
Savings accounts,
1.75% - 5.07% . . . . . . . $149,226 15.48% $149,728 16.22% $130,297 15.93%
Checking and NOW accounts,
0.00% - 1.50% . . . . . . . 107,550 11.16 91,621 9.93 91,484 11.19
Money market accounts,
variable . . . . . . . . . 89,321 9.26 86,080 9.33 95,573 11.69
-------- ------ -------- ------ ------- ------
Total regular accounts 346,097 35.90 327,429 35.48 317,354 38.81
Certificates:
0.00 - 2.99% . . . . . . . 9,864 1.02 6,218 0.67 15,697 1.92
3.00 - 4.99% . . . . . . . 74,620 7.74 67,887 7.36 264,075 32.30
5.00 - 6.99% . . . . . . . 476,651 49.44 443,782 48.08 150,810 18.44
7.00 - 8.99% . . . . . . . 52,073 5.40 59,847 6.48 51,327 6.28
9.00 - 10.99% . . . . . . . 3,894 0.40 16,310 1.77 16,671 2.04
11.00 - 12.99% . . . . . . . -- -- -- -- 450 0.05
-------- ------ -------- ------ ------- ------
Total certificates . . . 617,102 64.00 594,044 64.36 499,030 61.03
Accrued interest . . . . . . . 934 0.10 1,459 0.16 1,290 0.16
-------- ------ -------- ------ ------- ------
Total deposits . . . . . $964,133 100.00% $922,932 100.00% $817,674 100.00%
======== ====== ======== ====== ======== ======

OC-48
155
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and has allowed it to respond with
flexibility (by paying rates of interest more closely approximating market
rates of interest) to, although not eliminate the threat of, disintermediation
(the flow of funds away from depository institutions such as savings
institutions into direct investment vehicles such as government and corporate
securities). In addition, the Bank has become much more subject to short-term
fluctuations in deposit flows. The ability of the Bank to attract and maintain
deposits, and its cost of funds, have been, and will continue to be,
significantly affected by money market conditions.

The following table sets forth the deposit flows at D&N during the
periods indicated.

Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------ ----------- -----------
(In thousands)

Opening balance . . . . . . . . $ 922,932 $ 817,674 $ 844,012
Deposits . . . . . . . . . . . 2,425,493 1,992,613 1,741,646
Withdrawals . . . . . . . . . . (2,422,882) (1,922,325) (1,794,778)
Interest credited . . . . . . . 39,115 34,801 27,579
Accrued interest . . . . . . . (525) 169 (785)
------------ ----------- -----------
Ending balance . . . . . . . . $ 964,133 $ 22,932 $ 817,674
============ =========== ===========

The following table sets forth the change in dollar amount of deposits
in the various types of deposit programs offered by the Bank for the periods
indicated.

Year Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(In thousands)

Savings accounts . . . . . . . $ (502) $ 19,431 $(10,022)
Checking and NOW accounts . . . 15,929 137 (640)
Money market accounts . . . . . 3,241 (9,493) (20,754)
Certificates with maturities:
7 to 91 days . . . . . . . . 8,319 (2,162) (2,120)
92 days to 6 months . . . . . 1,133 12,448 (32,418)
6 months to 1 year . . . . . 33,200 21,925 (10,708)
1 year to 1 1/2 years . . . . 16,156 15,004 6,858
1 1/2 years to 3 years . . . (15,179) 34,840 44,249
3 years to 10 years . . . . (26,232) 7,655 (2,432)
Negotiable rate certificates . 5,661 5,304 2,434
-------- -------- --------
Increase (decrease) . . . . . 41,726 105,089 (25,553)
Change in accrued interest . . (525) 169 (785)
-------- -------- --------
Total increase (decrease) . . $ 41,201 $105,258 $(26,338)
======== ======== ========

OC-49
156
The following table shows rate and maturity information for the Bank's
deposits as of December 31, 1996.

Interest Rate Range -- Certificates
------------------------------------------------------------------
0.00 3.00 5.00 7.00 9.00
Percent to to to to to
Amount of Total 2.99% 4.99% 6.99% 8.99% 10.99%
------- -------- ------- ------- -------- ------- ------
(Dollars in thousands)

Savings accounts . . . . . . . $149,226 15.48% $ -- $ -- $ $ -- $ --
Checking and NOW accounts . . . 107,550 11.16 -- -- -- -- --
Money market accounts . . . . 89,321 9.26 -- -- -- --
-------- ------ ------ ------- -------- ------- ------
346,097 35.90 -- -- -- -- --
Certificate accounts
maturing in quarter ending:
03/31/97 . . . . . . . . . . . 136,674 14.17 3,324 37,974 84,136 11,234 6
06/30/97 . . . . . . . . . . . 117,589 12.19 2,358 16,141 93,583 5,420 87
09/30/97 . . . . . . . . . . . 61,958 6.42 1,536 8,369 51,149 904 --
12/31/97 . . . . . . . . . . . 76,529 7.93 984 3,370 70,858 1,246 71
03/31/98 . . . . . . . . . . . 43,264 4.49 623 1,910 35,039 5,596 96
06/30/98 . . . . . . . . . . . 50,587 5.25 553 1,722 41,753 6,444 115
09/30/98 . . . . . . . . . . . 43,338 4.50 153 1,447 38,513 3,115 110
12/31/98 . . . . . . . . . . . 21,935 2.28 31 999 17,019 3,684 202
03/31/99 . . . . . . . . . . . 11,524 1.20 66 1,016 5,077 3,700 1,665
06/30/99 . . . . . . . . . . . 8,658 0.90 101 520 3,652 2,933 1,452
09/30/99 . . . . . . . . . . . 2,693 0.28 -- 346 1,857 400 90
12/31/99 . . . . . . . . . . . 3,020 0.31 60 150 2,537 273 --
Maturity over 3 years . . . . . 39,333 4.08 75 656 31,478 7,124 --
-------- ------ ------ ------- -------- ------- ------
Total . . . . . . . . . . $617,102 64.00 $9,864 $74,620 $476,651 $52,073 $3,894
====== ======= ======== ======= ======

Interest accrued . . . . . . . 934 0.10
-------- ------

Total deposits . . . . . . $964,133 100.00%
======== ======

The following table shows the scheduled maturities of certificates of
deposit of $100,000 or greater as of December 31, 1996.

December 31, 1996
-----------------
(In thousands)

Certificates with maturities:
Three months or less . . . . . . . . . . $ 30,059
Over three through six months . . . . . . 13,868
Over six through twelve months . . . . . 17,291
Over twelve months . . . . . . . . . . . 17,892
--------
Total . . . . . . . . . . . . . . . $ 79,110
========

OC-50
157
Borrowings. The FHLB of Indianapolis functions as a central reserve bank,
providing credit for savings institutions within its assigned region. As a
member of the FHLB of Indianapolis, D&N is required to own capital stock in the
FHLB of Indianapolis and is authorized to apply for advances on the security of
such stock and certain of its residential mortgage loans and other assets
(principally, securities which are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been met.
See "Regulation -- Federal Home Loan Bank System." FHLB advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. The FHLB of Indianapolis prescribes the
acceptable uses to which the advances pursuant to each program may be made as
well as limitations on the size of advances. Depending on the program
limitations, the amount of advances are generally based on the FHLB of
Indianapolis' assessment of the institution's creditworthiness. The FHLB of
Indianapolis is required to review its credit limitations and standards at
least once every six months. The Bank utilizes borrowings, in part, to fund
increases in loan demand.

The Bank has entered into reverse repurchase agreements with major
investment bankers utilizing government securities or various mortgage
instruments as collateral. These reverse repurchase agreements are generally
utilized in connection with the Bank's investments. See "Investment
Activities" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".

The following table sets forth the maximum month-end and average balance
of FHLB advances, securities sold under agreements to repurchase and other
borrowings as of the dates indicated.

Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
(In thousands)

Maximum Balance:
Advances from FHLB . . . . . . . . . . $338,003 $226,003 $186,003
Securities sold under agreements
to repurchase . . . . . . . . . . . . 74,621 52,579 54,911
Other borrowings . . . . . . . . . . . 13,385 12,368 17,213

Average Balance:
Advances from FHLB . . . . . . . . . . 259,694 200,770 123,710
Securities sold under
agreements to repurchase . . . . . . 40,095 24,020 17,284
Other borrowings . . . . . . . . . . . 9,720 11,504 14,423

OC-51
158
The following table sets forth certain information as to the Bank's FHLB
advances, securities sold under agreements to repurchase and other borrowings
at the dates indicated. See also Note K of Notes to Consolidated Financial
Statements.

At December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in thousands)

Advances from FHLB . . . . . . . . . . . . . . . . . . $338,003 $206,003 $186,003
Securities sold under agreements to repurchase . . . . 58,040 -- 28,627
Other borrowings . . . . . . . . . . . . . . . . . . . 7,994 10,292 12,326
-------- -------- --------
Total borrowings . . . . . . . . . . . . . . . . . . $404,037 $216,295 $226,956
======== ======== ========
Weighted average interest
rate of advances from FHLB . . . . . . . . . . . . . 5.59% 5.82% 6.03%

Weighted average interest rate of securities sold under
agreements to repurchase . . . . . . . . . . . . . . 5.66 -- 6.29

Weighted average interest rate of other borrowings . . 9.76 9.59 10.00

Weighted average interest rate of total borrowings . . 5.68 6.00 6.28

The following table sets forth the Bank's maturity and rate structure of
FHLB advances as of December 31, 1996.

Weighted
Average
Rate Amount
------------ -------------
(Dollars in thousands)

Matures within:
One year . . . . . . . . . . . . . . . . 5.52% $251,000(1)
Two years . . . . . . . . . . . . . . . 5.77 43,000
Three years . . . . . . . . . . . . . . 5.84 43,000
Four years . . . . . . . . . . . . . . . -- --
Thereafter . . . . . . . . . . . . . . . 4.00 1,003
---- --------
Total FHLB advances . . . . . . . . . . . . 5.59% $338,003
==== ========

-----------------
(1) Includes variable rate advances which adjust quarterly.

SERVICE CORPORATION ACTIVITIES

The Bank is permitted to invest an amount equal to 2% of its assets
(excluding those of its subsidiaries) in its service corporations. Up to an
additional 1% of assets may be invested in service

OC-52
159
corporations provided that such amount is used for certain types of community
development projects. In addition, federal regulations permit institutions to
make specified types of loans to such subsidiaries (other than special-purpose
finance subsidiaries) in which the institution owns more than 10% of the stock,
in an aggregate amount not exceeding 50% of the institution's total capital as
defined below. As of December 31, 1996, the Bank's investment in stock of and
loans to its subsidiaries (other than its special-purpose finance subsidiary)
was in compliance with the regulations and totaled $4.3 million. A federal
institution may also invest up to 30% of its assets in special-purpose finance
subsidiaries established and operated in accordance with federal regulations.
The Bank's investment in its special purpose finance subsidiary, D&N Funding I
Corp., was in compliance with these regulations at December 31, 1996. Federal
law imposes special capitalization requirements on savings institutions such as
the Bank which are engaged in activities through a subsidiary that are not
permissible for national banks. See "Regulation -- Regulatory Capital
Requirements." The following is a description of the Bank's service
corporations.

D&N Enterprises, Inc. ("Enterprises") was formed in 1972 for the purpose
of developing real estate through joint venture arrangements. At December 31,
1996, the Company had a $300,000 investment in Enterprises and loans totaling
approximately $1.4 million to the subsidiary.

Enterprises entered into the Cumberland Joint Venture in February 1989 to
acquire land (73 acres) and to develop the land into 168 residential building
sites in Rochester Hills, Michigan. Enterprises sold this property in two
separate transactions in 1993 and 1994 and provided financing to the new
borrowers at market rates and terms. The sales resulted in a total gain of
$662,000 recognized in 1994.

Enterprises entered into the Northside Joint Venture in March 1989 to
acquire and develop commercial sites in Shelby Township, Michigan. Enterprises
is in the process of marketing this property in its entirety.

D&N Holdings, Inc. ("Holdings") was formed in 1985 and is involved in the
sale of mortgage life insurance through its investment in Minnesota Mutual Life
Insurance Company ("MIMLIC") and also offers insurance products and annuity
contracts through Quincy Insurance Agency, Inc., a subsidiary of Holdings
formed in 1995. In Michigan, MIMLIC's mortgage life insurance policies are
marketed and sold primarily through Michigan savings institutions. At December
31, 1996, D&N's investment in Holdings totaled approximately $200,000.

Mortgage Banking. On May 1, 1984, D&N established a mortgage banking
operation through a subsidiary, D&N Mortgage Corporation ("DNMC"). This
subsidiary was relatively dormant from 1992 until 1995. Since restarting
operations, D&N Mortgage Corporation has originated loans mainly for the Bank's
portfolio. D&N Mortgage Corporation currently has four origination offices
located in Michigan's lower peninsula in the cities of Grand Rapids, Hastings,
West Bloomfield and St. Joseph. At December 31, 1996, the Bank had $2.4
million invested in this subsidiary.

Finance Subsidiary. In 1986, D&N incorporated a special-purpose finance
subsidiary, D&N Funding I Corp. ("Funding"). Funding was established solely
for the purpose of issuing collateralized mortgage obligations ("CMOs"). In
August 1986, Funding pledged $61.5 million in principal amount of FHLMC
participation certificates to collateralize the issuance and sale of the CMOs
from which

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the Bank received $56.4 million in net proceeds. The CMOs were sold through a
third party conduit and were secured by the pledge of the participation
certificates. D&N reinvested the proceeds from the sale of the CMOs in
residential and commercial mortgage loans.

COMPETITION

At December 31, 1996, the Bank ranked second among all savings
institutions headquartered in the State of Michigan with respect to total
assets. D&N is the largest financial institution based in the Upper Peninsula
of Michigan.

D&N experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factors in competing for deposits
are the ability to offer attractive rates, the availability of convenient
office locations and the range and quality of services offered.

Direct competition for deposits comes from other savings institutions,
credit unions and commercial banks. Additional significant competition for
deposits comes from money market mutual funds and corporate and government
securities. The primary factors in competing for loans are interest rates,
loan origination fees and the range of services offered. Competition for
origination of real estate loans and consumer loans normally comes from other
savings institutions, credit unions, commercial banks, mortgage bankers,
mortgage brokers and insurance companies.

The deposit programs of savings institutions such as the Bank compete with
government securities, money market mutual funds and other investment
alternatives. Legislative and regulatory action has increased competition
between savings institutions and other financial institutions, such as
commercial banks, by expanding the ranges of financial services that may be
offered by savings institutions such as interest bearing checking accounts,
trust services and consumer loan products, while reducing or eliminating the
difference between savings institutions and commercial banks with respect to
long-term lending authority, taxation and maximum rates of interest that may be
paid on savings deposits.

EMPLOYEES

At December 31, 1996, the Bank had 526 employees, including 87 part-time
employees. Management considers its relations with its employees to be
satisfactory. The Bank's employees are not represented by any collective
bargaining group.

The Bank currently maintains a comprehensive employee benefit program
providing, among other benefits, a 401(k) plan with an Employee Stock Ownership
Program, hospitalization and major medical insurance, paid sick leave,
long-term disability insurance and life insurance. The Bank terminated the
pension plan and disbursed all of the assets in 1996. In connection with
acquisitions of five savings and loan institutions in 1980, 1982, 1986, 1988,
and 1996 employees of these institutions were made eligible to participate in
the Bank's benefit programs and were given full credit for all years of service
under prior plans of the acquired institutions.

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REGULATION

GENERAL

The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all operations. The Bank is a member of FHLB of
Indianapolis and is subject to certain limited regulation by the Federal
Reserve Board. As the savings and loan holding company of the Bank, the
Holding Company also is subject to federal regulation and oversight. The
purpose of the regulation of the Holding Company and other holding companies is
to protect subsidiary savings institutions. The Bank is a member of the SAIF,
and the deposits of the Bank are insured by the FDIC. As a result, the FDIC
has certain regulatory and examination authority over the Bank. Certain of
these regulatory requirements and restrictions are discussed below or elsewhere
in this document.

FEDERAL REGULATION

The OTS has extensive authority over the operations of savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of June
30, 1996. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss reserves.

The OTS has established a schedule for the assessment of fees upon all
savings institutions to fund the operations of the OTS. The general
assessment, to be paid on a semi-annual basis, is based upon the savings
institution's total assets as reported in the institution's latest quarterly
thrift financial report. The Bank's OTS assessment for the fiscal year ended
December 31, 1996, was $239,000.

The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.

In addition, the investment, lending and branching authority of the Bank
is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
institutions in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
institutions are also generally authorized to branch nationwide. The Bank is
in compliance with the noted restrictions.

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The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At December 31, 1996, the Bank's lending limit under this restriction was $13.3
million. The Bank is in compliance with the loans-to-one-borrower limitation.

The OTS, as well as the other federal banking agencies, has adopted safety
and soundness standards on matters such as loan underwriting and documentation,
internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to
comply with these standards must submit a compliance plan. A failure to submit
a plan or to comply with an approved plan will subject the institution to
further enforcement action. The OTS and the other federal banking agencies have
also proposed additional guidelines on asset quality and earnings standards.
No assurance can be given as to the final form of the proposed regulations.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged or is engaging in unsafe or unsound practices, or
is in an unsafe or unsound condition.

The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital
and supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as established by
the FDIC. In addition, the FDIC may impose special assessments on SAIF members
to repay amounts borrowed from the United States Treasury or for any other
reason deemed necessary by the FDIC.

As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. As a result of the BIF reaching its statutory reserve ratio, the

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FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to 0.31% of deposits. The revisions became effective in the
third quarter of 1995. In addition, the BIF rates were further revised,
effective January 1996, to provide a range of 0% to .27% with a minimum annual
assessment of $2,000. The SAIF rates, however, were not adjusted.

Due to the shrinking deposit base for SAIF assessments and the requirement
that SAIF premiums be used to make the interest payments on bonds issued by the
Financing Corporation ("FICO") in order to finance the costs of resolving
thrift failures in the 1980s, the SAIF would not attain the designated reserve
ratio until the year 2002. As a result, SAIF insured members would generally
be subject to higher deposit insurance premiums than BIF members until, all
things being equal, the SAIF attains the required reserve ratio.

In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted on September 30, 1996.

The legislation required a special one-time assessment of approximately
65.7 cents per $100 of SAIF deposits held by the Bank at March 31, 1995. D&N
recognized the one-time special assessment in a tax affected charge to earnings
of approximately $3.6 million during the quarter ended September 30, 1996. The
legislation is intended to fully recapitalize the SAIF fund so that commercial
bank and thrift deposits will be charged FDIC premiums at the same rate
beginning October 1, 1996.

D&N, however, will continue to be subject to an assessment to fund
repayment of the FICO bond obligation of 6.5 cents per $100 of deposits while
BIF insured institutions will pay 1.3 cents per $100 of deposits until the year
2000 when the assessment will be imposed at the same rate on all FDIC insured
institutions.

REGULATORY CAPITAL REQUIREMENTS

Federally insured savings institutions, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual institutions on a case-by-case basis.

The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of mortgage servicing rights
(MSRs) must be deducted from tangible capital. At December 31, 1996, the Bank
had $1,443,000 of unamortized MSRs, none of which was required to be deducted
from tangible capital.

The OTS regulations establish special capitalization requirements for
savings institutions that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes

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and others are excluded from assets and capital. In determining compliance
with the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the institution's level of ownership,
including the assets of includable subsidiaries in which the institution has a
minority interest that is not consolidated for GAAP purposes. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital, with a transition period ending on July 1, 1996, for
investments made before April 12, 1989. At December 31, 1996, the Bank had
approximately $1.7 million net investment in subsidiaries that will be excluded
from capital pursuant to this transition rule.

At December 31, 1996, the Bank had tangible capital of $76.0 million, or
5.11% of adjusted total assets, which is approximately $53.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a
limited amount of purchased credit card relationships. As a result of the
prompt corrective action provisions discussed below, however, a savings
institution must maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such to allow it to
maintain a 3% ratio.

At December 31, 1996, the Bank had core capital equal to $76.0 million, or
5.11% of adjusted total assets, which is $31.4 million above the minimum
leverage ratio requirement of 3% as in effect on that date.

Pursuant to OTS guidelines the total amount of preferred stock that may be
included in core capital should not exceed 25% of the institution's total core
capital including the preferred stock. The OTS also has the discretion to
exclude preferred stock from core capital inclusion if it concludes that the
stock ceases to provide meaningful capital support and a realistic ability to
absorb losses or otherwise raises supervisory concerns as a result of, among
other things, the capital mix or asset structure of the institution.

The OTS risk-based requirement requires savings institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
$10.7 million of general loss reserves which could be counted as supplementary
capital.

Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value

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ratio and reciprocal holdings of qualifying capital instruments. The Bank had
no such exclusions from capital and assets at December 31, 1996.

In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one-to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.

OTS regulations also require that every savings institution with more than
normal interest rate risk to deduct from its total capital, for purposes of
determining compliance with such requirement, an amount equal to 50% of its
interest-rate risk exposure multiplied by the present value of its assets. This
exposure is a measure of the potential decline in the net portfolio value of a
savings institution, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule provides for a two quarter lag between calculating
interest rate risk and recognizing any deduction from capital. The rule will
not become effective until the OTS evaluates the process by which savings
institutions may appeal an interest rate risk deduction determination. The OTS
is uncertain as to when this evaluation may be completed. Any savings
institution with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise. The Bank does not expect the rule to have a significant effect on
its calculation of total capital.

On December 31, 1996, the Bank had total capital of $86.7 million
(including $76.0 million in core capital and $10.7 million in qualifying
supplementary capital) and risk-weighted assets of $871.7 million (including
$45.7 million in converted off-balance sheet assets); or total capital of 9.94%
of risk-weighted assets. This amount was $16.9 million above the 8% requirement
in effect on that date.

The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against institutions that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized institution" (generally defined to be
one with less than either a 4% core ratio, a 4% Tier 1 risk-based capital ratio
or an 8% risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OTS may not increase
its assets, acquire another institution, establish a branch or engage in any
new activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized institutions.

As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.

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Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized institutions. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings institution, with certain limited exceptions, within 90
days after it becomes critically undercapitalized. Any undercapitalized
institution is also subject to the general enforcement authority of the OTS and
the FDIC, including the appointment of conservator or a receiver.

If the OTS determines that an institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice, it is authorized to
reclassify a well-capitalized institution as an adequately capitalized
institution and if the institution is adequately capitalized, to impose the
restrictions applicable to an undercapitalized institution. If the institution
is undercapitalized, the OTS is authorized to impose the restrictions
applicable to a significantly undercapitalized institution.

The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Bank's operations and
profitability.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

OTS regulations impose various restrictions on institutions with respect
to their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an institution from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the institution would be reduced below the amount required to be maintained for
the liquidation account established in connection with its mutual to stock
conversion.

Generally, institutions such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or 75% of its net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.

Savings institutions that will meet their current minimum capital
requirement following a proposed capital distribution need only submit written
notice to the OTS 30 days prior to such distribution. The OTS may object to
the distribution during the 30-day period based on safety and soundness
concerns. See " -- Regulatory Capital Requirements."

The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings institution may make
a capital distribution without notice to the OTS (unless it is a subsidiary of
a holding company) provided that it has a CAMEL 1 or 2

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rating, is not of supervisory concern and would remain adequately capitalized
(as defined in the OTS prompt corrective action regulation) following the
proposed distribution. Savings institutions that would remain adequately
capitalized following the proposed distribution but do not meet the other noted
requirements must notify the OTS 30 days prior to declaring a capital
distribution. The OTS stated it will generally regard as permissible that
amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings institution may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a
capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.

LIQUIDITY

All savings institutions, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. At the present time,
the minimum liquid asset ratio is 5%.

In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the institution's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon institutions for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 6.6% and a short-term
liquid asset ratio of 3.7%.

ACCOUNTING

An OTS policy statement applicable to all savings institutions clarifies
and reemphasizes that the investment activities of a savings institution must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, available for sale or
trading) with appropriate documentation. The Bank is in compliance with these
rules.

The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS.

QUALIFIED THRIFT LENDER TEST

All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of
its portfolio assets as defined by regulation in qualified thrift investments
on

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a monthly average for nine out of every 12 months on a rolling basis. Such
assets primarily consist of residential housing related loans and investments.
At December 31, 1996, the Bank met the test and has always met the test since
its inception.

Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If the institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an institution that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings institution and
a national bank, and it is limited to national bank branching rights in its
home state. In addition, the institution is immediately ineligible to receive
any new FHLB borrowings and is subject to national bank limits for payment of
dividends. If such institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments
and cease all activities not permissible for a national bank. In addition, it
must repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any institution that fails the QTL test is controlled
by a holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See " -- Holding Company Regulation."

COMMUNITY REINVESTMENT ACT

Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe
and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.

The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1995 and received a rating of "Satisfactory".

TRANSACTIONS WITH AFFILIATES

Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these
transactions are restricted to a percentage of the institution's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings institution may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The Bank's subsidiaries
are not

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deemed affiliates; however, the OTS has the discretion to treat subsidiaries of
savings institutions as affiliates on a case by case basis.

Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.

HOLDING COMPANY REGULATION

The Holding Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Holding Company is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings institution.

As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings institution as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings institution) would become subject to such restrictions
unless such other institutions each qualify as a QTL and were acquired in a
supervisory acquisition.

If the Bank fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or multiple savings
and loan holding company. See " -- Qualified Thrift Lender Test."

The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured institution. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings institutions in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.

FEDERAL RESERVE SYSTEM

The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At December
31, 1996, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. See "--Liquidity."

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Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.

FEDERAL HOME LOAN BANK SYSTEM

The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administer the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are
subject to the regulation and oversight of the Federal Housing Finance Board.
All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.

As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1996, the Bank had $20.0 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 8.22% and were 7.84% for calendar
year 1996.

Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderate priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

For the year ended December 31, 1996, the dividends paid by the FHLB of
Indianapolis to the Bank totaled $1.6 million. The $394,000 dividend received
for the quarter ended December 31, 1996 reflects an annualized rate of 7.89%.

FEDERAL AND STATE TAXATION

The Holding Company and its subsidiaries file a consolidated federal
income tax return on a calendar year basis using the accrual method of
accounting.

Savings institutions, such as the Bank, were permitted to establish
reserves for bad debts and make annual additions thereto which could be taken
as a deduction in computing taxable income for federal income tax purposes.
This tax bad debt reserve method available to thrifts institutions was repealed
for tax years beginning after 1995. As a result, the Bank was required to
change from the reserve method to the specific charge-off method to compute its
bad debt deduction. Basically,

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171
repeal of the thrift bad debt reserve method puts large thrifts, such as the
Bank, on the tax method used by large commercial banks.

Upon repeal, the Bank is required to recapture into income the portion of
its bad debt reserves (other than the supplemental reserve) that exceeds its
base year reserves (i.e. its tax reserves for the last tax year beginning
before 1988). The recapture amount resulting from the change in the Bank's
method of accounting for its bad debt reserves is taken into taxable income
ratably (on a straight-line basis) over a six-year period.

The base year reserve is frozen, not forgiven. Certain events can still
trigger a recapture of the base year reserve. For example, while the base year
reserve will not be recaptured if the thrift converts to a bank charter or is
merged into a bank, it will be recaptured if the thrift ceases to qualify as a
bank for federal income tax purposes. The base year reserves also remain
subject to income tax penalty provisions which, in general, require recapture
upon certain stock redemptions of, and excess distributions to, shareholders.

In addition to the regular income tax, corporations, such as the Holding
Company, generally are subject to a minimum tax. An alternative minimum tax is
imposed at a minimum tax rate of 20% on alternative minimum income, which is
the sum of a corporation's regular taxable income (with certain adjustments)
and tax preference items, less any available exemption. The alternative
minimum tax is imposed to the extent it exceeds the corporation's regular
income tax and net operating losses can offset no more than 90% of alternative
minimum taxable income.

The Holding Company and its consolidated subsidiaries have been audited or
their books closed without audit by the IRS with respect to consolidated
federal income tax returns through December 31, 1993. With respect to years
examined by the IRS, either all deficiencies have been satisfied or sufficient
reserves have been established to satisfy asserted deficiencies. In the
opinion of management, any examination of open returns (including returns of
subsidiaries and predecessors of, or entities merged into, the Holding Company)
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Holding Company and its consolidated
subsidiaries. See Note L of Notes to Consolidated Financial Statements.

During the third quarter of 1996, the Bank recognized an 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. 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. The presence of unresolved prior deductions was felt
to be 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.

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Michigan Taxation. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings
bank or a savings and loan institution less deposits owed to the federal or
Michigan state governments, their agencies or certain other financial
institutions. The Michigan intangibles tax is being phased out over four years
until the tax is fully repealed effective January 1, 1998. The State of
Michigan also imposes a "Single Business Tax." The Single Business Tax is a
value-added type of tax for the privilege of doing business in the State of
Michigan. The major components of the Single Business Tax are federal taxable
income, compensation and depreciation as increased by net operating loss
carryforwards, if any, utilized in arriving at federal taxable income, and
decreased by the cost of acquisition of tangible assets during the year. The
tax rate is 2.30% of the Michigan adjusted tax base.

PROPERTIES

Offices. The following table sets forth information with respect to D&N
offices as of December 31, 1996.

Owned Date
or Acquired or Net
Office Locations Leased Lease Expiration Date Constructed Book Value
--------------------------------- -------- --------------------- ----------- ----------

MAIN OFFICE:

400 Quincy Street
Hancock, Michigan . . . . . . . . Owned -- 1972 $2,989,880

BRANCH OFFICES:

1000 S. Carpenter Street
Iron Mountain, Michigan . . . . . Owned -- 1968 289,797

1930 U.S. 41, West
Marquette, Michigan . . . . . . . Owned -- 1976 1,474,559

2325 Ludington Street
Escanaba, Michigan . . . . . . . Owned -- 1975 323,553

501 Court Street
Sault Ste. Marie, Michigan . . . Owned -- 1980 336,286

U.S. 41
Ishpeming, Michigan . . . . . . . Owned -- 1978 194,272

1015 Tenth Street
Menominee, Michigan . . . . . . . Owned -- 1976 258,730

100 S. Suffolk Street
Ironwood, Michigan . . . . . . . Owned -- 1982 261,358

330 Fifth Street
Calumet, Michigan . . . . . . . . Owned -- 1980 83,022

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173

Owned Date
or Acquired or Net
Office Locations Leased Lease Expiration Date Constructed Book Value
--------------------------------- -------- --------------------- ----------- ----------

Festival Foods, Highway M-26
Houghton, Michigan . . . . . . . Leased Monthly 1986 3,873

Pat's Foods, 111 U.S. 41
L'Anse, Michigan . . . . . . . . Leased December 31, 1997 1992 7,406
No Options

901 W. Sharon Avenue, Suite 100
Houghton, Michigan . . . . . . . Leased May 25, 2000 1995 178,169
Two 5 Yr. Options

23505 Greater Mack
St. Clair Shores, Michigan . . . Owned -- 1956 115,997

141 S. Main Street
Romeo, Michigan . . . . . . . . . Owned -- 1974 326,341

460 S. Saginaw Street
Flint, Michigan . . . . . . . . . Owned -- 1924 798,527

300 Fenton Square
Fenton, Michigan . . . . . . . . Owned -- 1984 189,517

2629 W. Pierson Road
Flint, Michigan . . . . . . . . . Leased October 4, 2010 1995 57,471
No Options

3410 S. Dort Highway
Flint, Michigan . . . . . . . . . Leased September 30, 1998 1961 55,389
One 5 Yr. Option

G-4409 Miller Road
Flint, Michigan . . . . . . . . . Owned -- 1975 404,582

1151 N. Ballenger Highway
Flint, Michigan . . . . . . . . . Leased August 31, 1997 1975 --
Yearly Option

4400 South Saginaw, Suite 1310
Flint, Michigan . . . . . . . . . Leased February 28, 1999 1994 56,682
One 5 Yr. Option

4495 Corunna Road
Flint, Michigan . . . . . . . . . Leased March 10, 2006 1996 88,585
Two 5 Yr. Options

12770 S. Saginaw Street
Grand Blanc, Michigan . . . . . . Owned -- 1981 338,523

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Owned Date
or Acquired or Net
Office Locations Leased Lease Expiration Date Constructed Book Value
--------------------------------- -------- --------------------- ----------- ----------

727 S. State Road
Davison, Michigan . . . . . . . . Owned -- 1972 177,659

1559 E. Pierson Road
Flushing, Michigan . . . . . . . Owned -- 1974 223,302

G-6120 Fenton Road
Flint, Michigan . . . . . . . . . Owned -- 1979 150,052

3213 Genesee Road
Flint, Michigan . . . . . . . . . Owned -- 1979 201,811

1305 W. 14 Mile Road
Clawson, Michigan . . . . . . . . Leased March 31, 1998 1995 --
One 3 Yr. Option

363 West Big Beaver, Suite 150
Troy, Michigan . . . . . . . . . Leased June 30, 2002 1995 323,510
Two 3 Yr. Options

3005 University Drive
Auburn Hills, Michigan . . . . . Leased December 14, 2006 1996 79,388
Two 5 Yr. Options

611 East Grand River
Howell, Michigan . . . . . . . . Leased January 1, 2002 1967 33,245
Two 5 Yr. Options

9880 East Grand River
Brighton, Michigan . . . . . . . Leased February 28, 1999 1988 252
Two 5 Yr. Options

419 South Lafayette
South Lyon, Michigan . . . . . . Leased October 31, 2000 1990 322,036
One 10 Yr. Option

1075 East Main Street
Pinckney, Michigan . . . . . . . Owned -- 1971 340,519

10590 Highland Road
Hartland, Michigan . . . . . . . Leased August 1, 2000 1995 93,421
Two 5 Yr. Options

524 West Grand River
Fowlerville, Michigan . . . . . . Owned -- 1974 63,194

5844 N. Sheldon Road
Canton, Michigan . . . . . . . . Leased July 31, 1997 1995 --
Two 3 Yr. Options

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175

Owned Date
or Acquired or Net
Office Locations Leased Lease Expiration Date Constructed Book Value
--------------------------------- -------- --------------------- ----------- ----------

OTHER OFFICE PROPERTIES:

435 Building
435 Mesnard Street
Hancock, Michigan . . . . . . . . Owned -- 1974 280,885

424 Building
424 Hancock Street
Hancock, Michigan . . . . . . . . Owned -- 1986 458,114

Troy Commercial Lending
363 W Big Beaver Road, Suite 201
Troy, Michigan . . . . . . . . . Leased June 30, 2002 1995 69,307

Troy Corporate Center
363 W. Big Beaver Road, Ste 100
Troy, Michigan . . . . . . . . . Leased June 30, 2002 1995 86,637
Two 3 Yr. Options

Marquette Residential Lending
309 S. Front Street
Marquette, Michigan . . . . . . . Leased October 31, 1997 1992 2,741
Yearly Option

Mortgage Corp. Lending Office
3900 Sparks Drive SE, Suite 105
Grand Rapids, Michigan . . . . . Leased February 28, 1998 1994 --
No Options

Mortgage Corp. Lending Office
2620 S. Cleveland Avenue, Suite 201
St. Joseph, Michigan . . . . . . Leased April 30, 1997 1994 --
One 2 Yr. Option

Mortgage Corp. Lending Office
7071 Orchard Lake Road, Suite 100
West Bloomfield, Michigan . . . . Leased November 1, 1998 1995 --
No Options

Mortgage Corp Lending Office
145 W. State St.
Hastings, Michigan . . . . . . . Leased December 31, 1997 1996 7,867
Yearly Option

At December 31, 1996, the net book value of the land, buildings and
leasehold improvements owned by D&N was $11,747,000, and the net book value of
its office furniture, fixtures and equipment was $4,017,000.

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Computer Equipment. D&N processes all depositor and borrower customer
files and transactions through a third party data services provider including
general ledger accounting and information reporting. The book value of all
computer equipment and software owned by the Bank was $738,000 at December 31,
1996. The Bank also leases an insignificant amount of data processing hardware
and software.

LEGAL PROCEEDINGS

The Bank 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 either the Bank's Consolidated Financial
Statements.

D&N 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. See "Management's Discussion and Analysis of Results
of Operation -- Significant Litigation."

MANAGEMENT

DIRECTORS

Approximately one-third of the Bank's Board of Directors is elected
annually.

INFORMATION REGARDING DIRECTORS

The number of directors increased from eight to nine as a result of the
merger with Macomb Federal Savings Bank on April 10, 1996. Stanley A. Jacobson
was appointed to fill the newly created Board position until the 1996 Annual
Meeting of the Stockholder. In addition, Thomas J. St. Dennis resigned from
the Board of Directors effective October 4, 1996 due to other business
commitments. On December 2, 1996, the Board of Directors appointed Steven E.
Zack to fill the vacancy until the 1997 Annual Meeting of the Stockholder.

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The table below sets forth certain information regarding the composition
of the Bank's Board of Directors, including terms of office.

Director of
Holding
Company Term
Positions Held in the Holding Company Or Bank To
Name Age and the Bank Since Expire
----------------------------- --- ----------------------------------------------- ------------- ------

Joseph C. Bromley . . . . . 68 Director of the Holding Company and the Bank 1980 2000(1)

George J. Butvilas . . . . 51 Director, President and Chief Executive 1990 1999
Officer of the Holding Company and the Bank

Stanley A. Jacobson . . . . 47 Director of the Holding Company and the Bank 1996 1998
and Vice President/Business Development
Officer of the Bank

Randolph P. Piper . . . . . 48 Director of the Holding Company and the Bank 1982 1998

Sharon A. Reese Dalenberg . 52 Director of the Holding Company and the Bank 1994 2000(2)

Kenneth D. Seaton . . . . . 67 Director and Chairman of the Board of the 1964 1998
Holding Company and the Bank

B. Thomas M. Smith, Jr. . . 62 Director of the Holding Company and the Bank 1995 1999

Peter Van Pelt . . . . . . 65 Director of the Holding Company and the Bank 1988 2000

Steven E. Zack . . . . . . 47 Director of the Holding Company and the Bank 1996 1999

- ------------------------
(1) In accordance with the age limitation for directors in the Bylaws of the
Holding Company and the Bank, Mr. Bromley is required to retire at the 1999
Annual Meeting of Stockholders following his 70th birthday. The Board of
Directors has not made a determination at this time whether to fill the
vacancy or to reduce the number of directors.

(2) The OTS extended an exemption from the Depository Institution Management
Interlocks Act until July 26, 1997. While the Board of Directors has
nominated Ms. Reese for a three-year term, the Company has not yet filed an
application for an extension of this exemption.

The business experience of each of the directors during the last five
years is as follows:

Joseph C. Bromley. Mr. Bromley has been associated with Churchill
Transportation, Inc. of Detroit, Michigan, a 48-state truck load carrier, since
October 1990 and presently serves as its Executive Vice President and
Treasurer. Prior to that, he had been Director, President and Chief Executive
Officer of Regency Motor Freight, Inc. in Detroit, Michigan. Mr. Bromley was a
director of First Farmington Savings and Loan Association from 1959 until its
merger with the Bank in 1980.

George J. Butvilas. Mr. Butvilas joined D&N as President in May 1990.
He was named Chief Executive Officer of the Bank in 1991 and Chief Executive
Officer of the Holding Company in 1992.

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Prior to joining D&N, he had over 16 years experience as a commercial and
community banker, most recently as Executive Vice President and Director of
Boulevard Bancorp, Inc. of Chicago, Illinois.

Stanley A. Jacobson. Mr. Jacobson has served as Vice
President/Business Development Officer of the Bank since April 1996. He also
is an attorney and has been active in southeastern Michigan real estate
developments for his own account and in association with Mark Jacobson &
Associates, Inc. since 1986. Mr. Jacobson was President since 1989 and a
director since 1975 of Macomb Federal Savings Bank until its merger with the
Bank in 1996.

Randolph P. Piper. Mr. Piper has been an attorney-at-law in Flint,
Michigan for over 23 years. He was a director of First Federal Savings and Loan
Association of Flint from 1979 until its merger with the Bank in 1982.

Sharon A. Reese Dalenberg. Ms. Reese is founder and has been President
of The Astor Group of Chicago, Illinois since 1978, which is a management
consulting firm specializing in all aspects of human resource training and
management development with Fortune Five Hundred and Fifty firms. Ms. Reese
also is President and CEO of Continental Courier, Inc., a courier service
provider in the Chicago metropolitan area. She also serves as a member of the
Board of Directors for Standard Federal Bank in Chicago, Illinois.

Kenneth D. Seaton. Mr. Seaton has been Chairman of the Board of the
Holding Company since its formation in 1988 and served as its Chief Executive
Officer from 1988 to 1992. He was Chief Executive Officer of the Bank from 1968
to 1991. He joined the Bank in 1957 and had been an executive officer since
1962.

B. Thomas M. Smith, Jr. Mr. Smith was a consultant for ITT
Corporation, a multi-national conglomerate headquartered in New York, from
January 1996 to December 1996. Prior to that, he served as Vice President and
Director of Corporate Purchasing for ITT.

Peter Van Pelt. Mr. Van Pelt has served as the manager of North Wind
Books (and its predecessor business, The Museum Shop) of Eagle Harbor, Michigan
since January 1994. From 1990 to 1993, he was an independent management
consultant. Prior to that, he served as President of Runzheimer International
of Rochester, Wisconsin, a specialized management consulting firm.

Steven E. Zack. Mr. Zack has served as President of Global Commercial
Credit, a specialty insurance firm in Franklin, Michigan, since March 1996 and
as Executive Vice President of J. A. Versical & Associates, Inc., a Michigan
retail insurance broker, since May 1994. From May 1992 to May 1994, he served
as an independent insurance consultant and prior to that, as the National
Marketing Coordinator of Burns and Wilcox, Ltd., a wholesale insurance broker.
Mr. Zack was a director of Macomb Federal Savings Bank from 1989 until its
merger with the Bank in 1996.

EXECUTIVE OFFICERS

The following information as to the business experience during the
past five years is supplied with respect to executive officers of the Holding
Company and the Bank, who do not serve on the Bank's Board of Directors.
Executive officers are elected annually to serve until their successors are

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179
elected or until they resign or are removed by the Board of Directors. There
are no arrangements or understandings between the persons named and any other
person pursuant to which such officers were elected.

Kenneth R. Janson, age 45, is Executive Vice President/Chief Financial
Officer and Treasurer of the Holding Company and the Bank. Prior to joining
the Bank in May 1988 as Vice President/Financial Analysis, he was affiliated
with various universities, the last six years as Associate Professor of
Accounting at Michigan Technological University. Mr. Janson is responsible for
directing the Bank's accounting, investment and investor relations functions.

Peter L. Lemmer, age 39, is Senior Vice President/General Counsel of
the Holding Company and the Bank. Prior to joining D&N in October 1990, he
held various positions involving legal services, the last five years as Senior
Vice President/Compliance and Vice President, Associate General
Counsel/Compliance Officer with Cal America Savings, later known as Columbus
Savings, and American Federal Bank, respectively. Mr. Lemmer is responsible
for the legal and regulatory functions of the Bank.

Alfred J. Sliwinski, age 50, is Executive Vice President/Community
Banking of the Bank. He has been employed by D&N in various community banking
capacities since May 1977 and is presently responsible for the community
banking function of the Bank.

Richard E. West, age 50, is Executive Vice President/Wholesale Banking
of the Bank. Prior to joining D&N in January 1990, he was Servicing Manager for
20 years with Rothschild Financial Corporation and Valley National Bank of
Arizona. Mr. West is responsible for directing the loan servicing, residential
lending, consumer lending, bank operations and information systems functions of
the Bank.

Linda K. Korpela, age 46, is Vice President/Corporate Secretary of the
Holding Company and the Bank. She has been employed by the Bank since 1969 and
served as Assistant Secretary of the Bank from 1978 to 1990.

Donald W. Schulze, age 46, is Senior Vice President/Human Resources of
the Bank. He has been with D&N in various capacities since 1986 and is
presently responsible for the training and development, facilities management
and human resources functions of the Bank.

Frank R. Donnelly, age 56, is Senior Vice President/Commercial Lending
of the Bank. He has been employed by the Bank in various capacities since 1965
and is presently responsible for business and commercial real estate loan
development for the Bank.

Robert J. Krupka, age 36, is Senior Vice President/Chief Credit
Officer of the Bank. Prior to joining D&N in March 1997, he was Commercial
Loan Officer and Credit Manager with Old Kent Bank. Mr. Krupka is responsible
for the commercial loan credit analysis and operations functions.

Leonard M. Bolduc, age 58, is Senior Vice President/Retail Loan
Operations of the Bank, responsible for planning and directing the consumer
lending and consumer and residential loan servicing functions. Prior to
joining D&N in May 1988, he was employed by Citicorp Acceptance

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Company for three years, most recently as Regional Credit Center Manager. Mr.
Bolduc was also employed for 19 years in various capacities at ITT Consumer
Financial Corporation, his last position being Vice President/Division
Director.

Daniel D. Greenlee, age 45, is Senior Vice President/Controller of the
Bank. He has been with D&N in various capacities since 1984 and is presently
responsible for the accounting, financial and regulatory reporting, financial
analysis, tax and risk management functions of the Bank.

BOARD OF DIRECTORS MEETINGS, COMPENSATION AND COMMITTEES

The Bank, as the principal subsidiary of the Holding Company, has
certain standing committees of its Board of Directors. These committees
consist of the Asset/Liability, Audit, Community Responsibility, Compensation,
Executive and Loan Committees. The Bank's Board of Directors is comprised of
the same individuals who currently serve on the Board of Directors of the
Holding Company. During fiscal year 1996, the Board of Directors of the Bank
held twelve meetings. No incumbent director of the Bank attended fewer than 96%
of the total meetings of the Board of Directors and committees on which such
director served during this period. The Bank has no standing nominating
committee. The full Board of Directors acts as a nominating committee for the
annual selection of its nominees for election as directors. During fiscal year
1996, the Board of Directors acting as a nominating committee met three times.

During fiscal year 1996, directors received $8,500 per annum, payable
monthly; the chairpersons of the Board's Asset/Liability, Audit, Community
Responsibility, Compensation and Loan Committees received additional
compensation of $50 per month; and the Chairman of the Board received
additional compensation of $750 per month. In addition, directors received a
fee of $400 per day for attendance at meetings of the Board of Directors and a
fee of $400 for attendance at Board committee meetings. These are the total
fees paid for representation on both the Holding Company and the Bank Boards of
Directors and are allocated pursuant to a cost allocation agreement between the
Holding Company and the Bank. A separate attendance fee is not received for a
Holding Company Board or committee meeting if a fee is received for a meeting
of the Bank Board or parallel Bank committee held on the same day. Directors
who are full-time employees of the Holding Company or the Bank did not receive
the Board meeting or committee meeting attendance fees.

Set forth below is a list of the principal committees formed by the
Board of Directors of the Holding Company and the Bank and members of those
committees.

Asset/Liability Committee. The Asset/Liability Committee is
responsible for monitoring the Bank's exposure to interest rate risk in
conjunction with credit, operational and liquidity risks as they affect net
interest income, capital and return on equity and other aspects of
asset/liability management. Directors Piper (Chairperson), Smith, Van Pelt and
Zack currently compose the Asset/Liability Committee. This committee met four
times during fiscal year 1996.

Audit Committee. The Audit Committee meets with the Holding Company's
independent auditors and oversees the internal audit functions of the Holding
Company and the Bank. The Audit Committee currently is composed of Directors
Van Pelt (Chairperson), Reese, Smith and Zack. The Bank's Audit Committee met
four times during fiscal year 1996.

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Community Responsibility Committee. The Community Responsibility
Committee is responsible for ensuring that an affirmative effort is made by the
Bank to meet the banking and financial needs within its communities, with an
understanding of the cultural diversity within these communities. The Community
Responsibility Committee currently is composed of Directors Reese
(Chairperson), Smith, Van Pelt and Zack. This committee met three times during
fiscal year 1996.

Compensation Committee. The Compensation Committee is responsible for
reviewing and recommending to the Board of Directors senior officers' salaries,
compensation and benefit programs and other aspects of personnel matters.
Directors Bromley (Chairperson), Reese, Smith and Van Pelt currently compose
the Compensation Committee. The Bank's Compensation Committee met four times
during fiscal year 1996.

Executive Committee. The Executive Committee is authorized to exercise
all of the authority of the Board of Directors in the management of the Holding
Company and the Bank between Board meetings, unless otherwise provided for in
the Bylaws of such entities. The Executive Committee currently is composed of
Directors Butvilas (Chairperson), Bromley, Jacobson, Seaton and Smith. The
Executive Committee did not meet during fiscal year 1996.

Loan Committee. The Loan Committee is responsible for monitoring the
credit risk and other aspects of the Bank's lending operations. Members of the
committee currently are Directors Jacobson (Chairperson), Piper and Seaton.
This committee met twelve times during fiscal year 1996.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the compensation
paid or granted to the Holding Company's and the Bank's Chief Executive Officer
and to each of the four other most highly compensated executive officers of the
Bank whose aggregate cash compensation exceeded $100,000.

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SUMMARY COMPENSATION TABLE

Long Term Compensation
--------------------------------
Awards Payouts
------------------------ -------
Annual Compensation Securities
--------------------------------------- Restricted Underlying
Other Annual Stock Options/ LTIP All Other
Name and Principal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)(2)
----------------------------- ---- ------------ --------- -------------- ------- ----------- --------- ------------

George J. Butvilas . . . 1996 $248,500(1) $72,007 $0 $0 42,353 $0 $23,338
President and Chief 1995 248,500(1) 0 0 0 0 0 5,270
Executive Officer 1994 207,544(1) 0 0 0 0 0 5,208

Kenneth R. Janson . . . . 1996 $109,651 $21,433 $0 $0 15,731 $0 $ 8,284
Executive VP, Chief 1995 106,968 6,800 0 0 0 0 3,568
Financial Officer and 1994 100,000 0 0 0 0 0 3,352
Treasurer

Alfred J. Sliwinski . . . 1996 $109,700 $19,818 $0 $0 14,706 $0 $ 8,215
Executive VP/Community 1995 95,559 5,000 0 0 0 0 3,190
Banking 1994 86,029 0 0 0 0 0 2,953

Richard E. West . . . . . 1996 $ 93,163 $19,508 $0 $0 12,671 $0 $ 7,120
Executive VP/Wholesale 1995 86,161 5,750 0 0 0 0 2,908
Banking 1994 82,053 0 0 0 0 0 2,730

Peter L. Lemmer . . . . . 1996 $ 91,709 $ 9,627 $0 $0 10,526 $0 $ 6,331
Senior VP/General 1995 89,473 5,300 0 0 0 0 1,627
Counsel 1994 84,429 0 0 0 0 0 1,510

- ------------------
(1) Includes annual fees received as a director; no meeting or committee fees
were received.

(2) Represents employer matching contribution under the D&N 401(k) Plan,
contributions under a nonqualified supplemental executive retirement plan
("SERP"), and life insurance premiums paid by the Bank as follows:

Year 401(k) SERP Life Ins.
---- ------ ---- ---------

Butvilas . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 $9,500 $13,070 $768
1995 4,620 0 650
1994 4,619 0 589

Janson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 $7,865 $ 0 $419
1995 3,208 0 360
1994 2,999 0 353

Sliwinski . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 $7,771 $ 0 $444
1995 2,866 0 324
1994 2,647 0 306

West . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 $6,760 $ 0 $360
1995 2,585 0 323
1994 2,462 0 268

Lemmer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 $5,977 $ 0 $354
1995 1,342 0 285
1994 1,266 0 244

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The following table sets forth certain information concerning stock
options and stock appreciation rights ("SARs") in the Holding Company granted
to named executive officers in 1996 pursuant to the Holding Company's stock
based benefit plans.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Grant Date
Individual Grants Value
------------------------------------------------------------- --------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base Grant Date
Options/SARs Employees in Price Expiration Present Value
Name Granted(#) Fiscal Year ($/Sh) Date ($)(6)
----------------------- -------------- -------------- ------------ -------------- --------------

Butvilas . . . . . . 42,353(1) 18.04% $12.75 3/30/06 $235,279
Janson . . . . . . . 15,731(2) 6.70% $12.75 3/30/06 $ 87,389
Sliwinski . . . . . . 14,706(3) 6.27% $12.75 3/30/06 $ 81,695
West . . . . . . . . 12,671(4) 5.40% $12.75 3/30/06 $ 70,390
Lemmer . . . . . . . 10,526(5) 4.48% $12.75 3/30/06 $ 58,474

- --------------------
(1) 14,118 options were exercisable on 3/31/96, and 14,118 and 14,117 options
will become exercisable on 3/31/97 and 3/31/98, respectively.

(2) 5,244 options were exercisable on 3/31/96, and 5,244 and 5,243 options will
become exercisable on 3/31/97 and 3/31/98, respectively.

(3) 4,902 options were exercisable on 3/31/96, and 4,902 and 4,902 options will
become exercisable on 3/31/97 and 3/31/98, respectively.

(4) 4,224 options were exercisable on 3/31/96, and 4,224 and 4,223 options will
become exercisable on 3/31/97 and 3/31/98, respectively.

(5) 3,509 options were exercisable on 3/31/96, and 3,509 and 3,508 options will
become exercisable on 3/31/97 and 3/31/98, respectively.

(6) The fair value of grants made in fiscal 1996 was estimated to be $5.5552
per share on the date of grant using the Black-Scholes option pricing model
with the following assumptions used: risk-free interest rate of 6.3%,
expected volatility of 25.1%, expected lives of seven years and no dividend
yield.

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The following table sets forth certain information concerning the
number and value of stock options and SARs at December 31, 1996 held by the
named executive officers. None of the named officers exercised any stock
options or SARs during 1996.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES

Number of Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options/SARs at Options/SARs at
Shares FY-End(#) FY-End($)
Acquired On Value ---------------------------- ------------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
--------------- -------------- ----------- ----------- ------------- ------------- -------------

Butvilas . . 0 N/A 189,562 28,235 $1,468,815 $112,940
Janson . . . 0 N/A 28,500 10,487 227,108 41,948
Sliwinski . . 0 N/A 41,790 9,804 348,451 39,216
West . . . . 0 N/A 20,311 8,447 161,674 33,788
Lemmer . . . 0 N/A 18,626 7,017 150,144 28,068

EMPLOYMENT CONTRACTS

The Bank has an employment contract with Mr. Butvilas, President and Chief
Executive Officer of the Bank and the Holding Company. On February 26, 1997,
the Board of Directors extended the expiration date of Mr. Butvilas' contract
from May 1998 to May 2000.

The employment contract provides for a salary as determined by the Board
of Directors. Salary increases may be reviewed at least annually and are
subject to the sole discretion of the Board of Directors, except that any new
salary must not be less than the employee's prior year's salary. The contract
also provides for, among other things, participation in an equitable manner in
employee benefits applicable to executive personnel.

This contract provides for termination upon the employee's death, for
cause or in certain events as specified by OTS regulations. The contract is
terminable by Mr. Butvilas upon 90 days notice to the Bank. Mr. Butvilas'
contract also provides for a severance payment up to the remaining amount under
his contract term with a minimum payment of 200% of his annual salary in the
event of an involuntary termination or other specified circumstances in
connection with a change of control or within one year thereafter, provided
that the employee is not thereafter employed by the purchasing entity. Change
of control means the acquisition of 25% or more of voting securities of the
Bank or the Holding Company by any person or persons acting as a group within
the meaning of Section 13(d) of the Securities Exchange Act of 1934.

CERTAIN TRANSACTIONS

The Bank has followed a policy of granting to its executive officers,
directors and principal stockholders consumer loans as well as mortgage loans
for purposes of purchasing or improving their residences. These loans were
initially made on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with nonaffiliated
persons. Federal Reserve

OC-78
185
Board Regulation O, 12 CFR Part 215 was amended to permit making certain kinds
of loans to directors and executive officers at favorable interest rates. The
Bank adopted a policy, effective September 30, 1996, of granting certain loans
to executive officers at the same rates as are available to other Bank
employees through the Employee Loan Program. Generally, employees may receive a
loan benefit that provides up to a 1% interest rate reduction on eligible loans
and a waiver of the loan processing/origination fee. There are limitations
with regard to loan type and the frequency of receiving certain benefits. All
participants in the Employee Loan Program must meet the same credit and
approval standards that are applicable to the general public. It is the belief
of management that these loans neither involve more than the normal risk of
collectability nor present other unfavorable features. Loans to directors are
made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with nonaffiliated persons.
All loans by the Bank to its directors and executive officers are subject to
OTS regulations restricting loans and other transactions with affiliated
persons of the Bank.

Set forth below is certain information as of December 31, 1996 regarding
the indebtedness under the Bank's Employee Loan Program of each executive
officer of the Bank and his or her affiliates whose aggregate indebtedness to
the Bank under such program exceeded $60,000 at any time during the fiscal year
ended December 31, 1996.

Largest
Amount
Outstanding
Date of Type of Original Since Balance at Interest Rate
Name and Position Loan Loan Amount 12/31/95 12/31/96 Paid
----------------- ----------- ------------- ---------- ------------- ----------- --------------

George J. Butvilas . . . . . 12/14/92 Mortgage $226,600 $218,451 $215,913 7.0%
Director, President and CEO of 05/26/92 Advantage 25,000 24,763 24,599 1.5%
Holding Company and Bank Line of over prime
Credit

Peter L. Lemmer . . . . . . . 05/31/95 Mortgage 95,200 93,127 89,289 6.5%
Senior VP/General Counsel of
Holding Company and Bank

Donald W. Schulze . . . . . . 08/16/96 Mortgage 112,881 112,881 112,881 8.25%
Senior VP/Human Resources
of Bank

Alfred J. Sliwinski . . . . . 10/04/96 Mortgage 224,050 224,050 224,050 8.25%
Executive VP/Community 10/08/96 Auto 10,339 10,339 10,150 8.4%
Banking of Bank

DESCRIPTION OF THE SERIES A PREFERRED SHARES

OC-79
186
of which have been filed with the OTS as exhibits to the registration statement
of which this Offering Circular forms a part.

GENERAL

The Series A Preferred Shares form an initial series of preferred stock of
the Bank, which preferred stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Bank's Board of Directors or, if then constituted, a duly authorized committee
thereof. The Board of Directors has authorized the Bank to issue the Series A
Preferred Shares.

When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Bank or any other securities of the Bank convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Shares will not be
convertible into shares of Common Stock or any other class or series of capital
stock of the Bank and will not be subject to any sinking fund or other
obligation of the Bank for their repurchase or retirement.

The transfer agent, registrar and dividend disbursement agent for the
Series A Preferred Shares will be Illinois Stock Transfer Company. The
registrar for the Series A Preferred Shares will send notices to shareholders
of any meetings at which holders of such shares have the right to elect
directors of the Bank or to vote on any other matter.

DIVIDENDS

Holders of Series A Preferred Shares shall be entitled to receive, if,
when, and, as declared by the Board of Directors of the Bank out of assets of
the Bank legally available therefor, cash dividends at the rate of [__]% per
annum of the initial liquidation preference (equivalent to $[______] per share
per annum). If declared, dividends on the Series A Preferred Shares shall be
payable quarterly in arrears on the last day of March, June, September, and
December of each year, or, if such day is not a business day, on the next
business day, at such annual rate. Dividends in each quarterly period will
accrue from the first day of such period. Each declared dividend shall be
payable to holders of record as they appear at the close of business on the
stock register of the Bank on such record dates, not exceeding 45 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors of the Bank or a duly authorized committee thereof. Upon the
exchange of Preferred Capital Shares for Series A Preferred Shares, any accrued
and unpaid dividends for the most recent quarter of the Preferred Capital
Shares at the time of the conversion will be deemed to be accrued and unpaid
dividends for the most recent quarter on the Series A Preferred Shares.

The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for
any future period with respect to either the preferred stock or the Common
Stock. If the Bank fails to declare and pay or declare and set

OC-80
187
aside for payment a quarterly dividend on the Series A Preferred Shares,
holders of the preferred stock of the Bank, including the Series A Preferred
Shares, will be entitled to elect two directors. See " --Voting Rights."

If full dividends on the Series A Preferred Shares for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared and paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Bank ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or amounts upon liquidation, nor
shall any Common Stock or any other capital stock of the Bank ranking junior to
or on a parity with the Series A Preferred Shares as to dividends or amounts
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any monies to be paid to or made available for a sinking fund
for the redemption of any such stock) by the Bank, except by conversion into,
or exchange for, other capital stock of the Bank ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such time
as dividends on all outstanding Series A Preferred Shares have been (i)
declared and paid or declared and a sum sufficient for the payment thereof has
been set apart for payment for three consecutive dividend periods and (ii)
declared and paid or declared and a sum sufficient for the payment thereof has
been set apart for payment for the fourth consecutive dividend period.

If any Series A Preferred Shares are outstanding, no full dividends shall
be declared and paid or set apart for payment and no other distribution shall
be declared and made or set aside for payment on any series of capital stock of
the Bank ranking, as to dividends, on a parity with or junior to the Series A
Preferred Shares for any dividend period unless full dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payments on the Series A Preferred
Shares, for the then-current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not set apart) upon the
Series A Preferred Shares and the shares of any other series of capital stock
ranking on a parity as to dividends with the Series A Preferred Shares, all
dividends declared upon Series A Preferred Shares and any other series of
capital stock ranking on a parity as to dividends with the Series A Preferred
Shares shall be declared pro rata so that the amount of dividends declared per
share on the Series A Preferred Shares and such other series of capital stock
shall in all cases bear to each other the same ratio that full dividends, for
the then-current dividend period, per share on the Series A Preferred Shares,
which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods, and full dividends, including required or permitted
accumulations, if any, on such other series of capital stock bear to each
other.

REDEMPTION

The Series A Preferred Shares will not be redeemable prior to [_______],
2002. On or after such date, the Series A Preferred Shares will be redeemable
at the option of the Bank, in whole or in part, at any time or from time to
time on not less than 30 nor more than 60 days' notice by mail, at a redemption
price of $25.00 per share, plus the accrued and unpaid dividends for the most
recent quarter to the date of redemption, if any, thereon.

OC-81
188
Any such redemption must comply with the prompt corrective action and
capital distribution regulations of the OTS, which may prohibit a redemption or
require the OTS' prior approval of a redemption. Unless full dividends on the
Series A Preferred Shares have been, or contemporaneously are, declared and
paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for the then current dividend period, no Series A Preferred
Shares shall be redeemed unless all outstanding Series A Preferred Shares are
redeemed and the Bank shall not purchase or otherwise acquire any Series A
Preferred Shares; provided, however, that the Bank may purchase or acquire
Series A Preferred Shares pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Series A Preferred Shares.

VOTING RIGHTS

If at the time of any annual meeting of the Bank's stockholders, the Bank
has declared and failed to pay or declared and failed to set aside for payment
a quarterly dividend during any of the four preceding quarterly dividend
periods on any series of preferred stock of the Bank, including the Series A
Preferred Shares, the number of directors then constituting the Board of
Directors of the Bank will be increased by two (if not already increased by two
due to a default in preference dividends), and the holders of the Series A
Preferred Shares, voting together as a single class with the holders of all
other series of preferred stock as a single class will be entitled to elect
such two additional directors to serve on the Bank's Board of Directors at each
such annual meeting. Each director elected by the holders of shares of the
preferred stock shall continue to serve as such director until the later of (i)
the expiration of the term of such director or (ii) the payment of four
consecutive quarterly dividends on the Series A Preferred Shares.

The affirmative vote or consent of the holders of at least 66-2/3% of the
outstanding shares of each series of preferred stock of the Bank, including the
Series A Preferred Shares, voting as a single class without regard to series,
will be required (a) to create any class or series of stock which shall have
preference as to dividends or distribution of assets over any outstanding
series of preferred stock of the Bank other than a series which shall not have
any right to object to such creation or (b) to alter or change the provisions
of the Bank's Charter (including the Certificate of Designation establishing
the Series A Preferred Shares) so as to adversely affect the voting powers,
preferences or special rights of the holders of a series of preferred stock of
the Bank; provided that if such amendment shall not adversely affect all series
of preferred stock of the Bank, such amendment need only be approved by at
least 66-2/3% of the holders of shares of all series of preferred stock
adversely affected thereby.

RIGHTS UPON LIQUIDATION

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive or have funds set aside for such
payments out of assets of the Bank available for distribution to

OC-82
189
stockholders, before any payment or distribution of assets is made to holders
of Common Stock or any other class of stock ranking junior to the Series A
Preferred Shares upon liquidation, liquidating distributions in the amount of
$25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter thereon, if any, to the date of liquidation.

After receipt of payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Shares will have no right or claim to any of the remaining assets of the Bank.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Bank are insufficient to
pay the amount of the liquidation distributions on all outstanding Series A
Preferred Shares and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Bank ranking on a parity with the
Series A Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Bank, then the holders of the
Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.

For such purposes, the consolidation or merger of the Bank with or into
any other entity or the sale, lease or conveyance of all or substantially all
of the property or business of the Bank, shall not be deemed to constitute
liquidation, dissolution or winding up of the Bank.

APPROVAL OF INDEPENDENT DIRECTORS

The Bank's Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Bank be approved by a majority of the
Independent Directors of the Bank. At any time that there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors.
"Independent Director" means any director of the Bank who (i) is not a current
director, officer or employee of the Bank, of D&N Capital Corporation or of D&N
Financial Corporation or of any affiliate of the Bank; and (ii) is not a person
or persons that, in the aggregate, own more than one percent of the Common
Stock of D&N Financial Corporation. In addition, any members of the Board of
Directors of the Bank elected by holders of preferred stock, including the
Series A Preferred Shares, will be deemed to be independent directors for
purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require the prior approval of a
majority of the Independent Directors include:

(i) the issuance of a series of preferred stock on a parity with the
Series A Preferred Shares; and

(ii) the redemption of any shares of Common Stock.

In assessing the benefits to the Bank of any proposed action requiring their
consent, the Independent Directors shall take into account the interests of
holders of both the Common Stock and the preferred stock, including, without
limitation, the holders of the Series A Preferred Shares. In considering the
interests of the holders of the preferred stock, including without limitation
holders of the Series A Preferred Shares, the Independent Directors shall owe
the same duties which the Independent Directors owe to holders of Common Stock.

OC-83
190
CERTAIN DEFINITIONS

"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.

"FHLB" means any of the regional Federal Home Loan Banks.

"OTS" means the Office of Thrift Supervision or any successor thereto.

"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.

"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either such Section) or any successor law
or regulation.

"Series A Preferred Shares" means the 1,100,000 shares of the [___%]
Noncumulative Series A Preferred Shares of the Bank.

EXCHANGE

The Series A Preferred Shares are to be issued, if ever, in connection
with an exchange of the Preferred Capital Shares. The Preferred Capital Shares
are subject to an automatic exchange in whole and not in part, on a
share-for-share basis, into Series A Preferred Shares if the appropriate
regulatory agency directs in writing an exchange of the Preferred Capital
Shares for Series A Preferred Shares because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations established
pursuant to FDICIA, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate regulatory agency, in its sole
discretion, anticipates the Bank's becoming "undercapitalized" in the near term
(an "Exchange Event"). The Bank has registered with the OTS a total of
1,210,000 Series A Preferred Shares to cover an Exchange Event, if necessary,
of the 1,100,000 Preferred Capital Shares offered by D&N Capital Corporation
and the 110,000 share over-allotment option granted to the underwriters of the
Preferred Capital Shares.

EXPERTS

The Consolidated Financial Statements of the Bank and subsidiaries as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, have been audited by Coopers & Lybrand L.L.P., independent
public accountants, as indicated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.

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191
LEGAL MATTERS

The legality of the securities offered by this Offering Circular has been
passed upon for the Bank by Silver, Freedman & Taff, L.L.P., Washington, D.C.,
a partnership including professional corporations and for the underwriters by
Honigman Miller Schwartz and Cohn, Detroit, Michigan.

OC-85
192
D&N BANK

INDEX TO FINANCIAL STATEMENTS

Page

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Financial Statements:

Consolidated Statements of Condition at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Consolidated Statements of Condition at March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30

Consolidated Statement of Income for the Three Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31

Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33

Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . F-35

F-1
193

[COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder of
D&N Bank

We have audited the Consolidated Statements of Condition of D&N Bank and
Subsidiaries as of December 31, 1996 and 1995, and the related Consolidated
Statements of Income, Stockholder's Equity and Cash Flows for each of the three
years in the period ended 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 Bank and
Subsidiaries 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 ended December
31, 1996, in conformity with generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.

Detroit, Michigan
January 22, 1997

F-2

194
CONSOLIDATED STATEMENTS OF CONDITION
D&N BANK

December 31
----------------------------
1996 1995
----------------------------
(In thousands)

ASSETS
Cash and due from banks $ 2,845 $ 9,262
Federal funds sold 8,600 --
Interest-bearing deposits in other banks 1,342 13,176
Total cash and cash equivalents 12,787 22,438
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 10,056 8,010
----------------------------
$ 1,472,988 $1,228,495
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 345,997 216,232
Advance payments by borrowers and investors held in escrow 11,808 11,329
Payable to DNFC 6,105 879
Other liabilities 6,891 6,015
----------------------------
Total liabilities 1,392,974 1,157,387

STOCKHOLDER'S EQUITY
Preferred stock (2,000,000 shares authorized; none issued) -- --
Common stock, $.01 par value per share (shares authorized - 10,000,000;
shares issued - 3,650,636 in 1996 and 1995) 37 37
Additional paid-in capital 48,590 48,590
----------------------------
Total paid-in capital 48,627 48,627
Retained earnings - substantially restricted 30,144 20,766
Unrealized holding gains on debt securities available for sale, net of tax 1,243 1,715
----------------------------
Total stockholder's equity 80,014 71,108
----------------------------
$ 1,472,988 $1,228,495
============================

See Notes to Consolidated Financial Statements.

F-3

195

CONSOLIDATED STATEMENTS OF INCOME
D&N BANK

Year Ended December 31
--------------------------------------------
1996 1995 1994
--------------------------------------------
(In thousands)

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 15,558 13,445 7,446
Interest rate instruments -- 2,521 9,812
--------------------------------------------
TOTAL INTEREST EXPENSE 61,610 56,055 47,872
--------------------------------------------
NET INTEREST INCOME 42,699 34,710 23,739
Provision for loan losses 1,100 2,400 100
--------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 41,599 32,310 23,639
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 16,868 15,723 14,572
Occupancy 2,834 2,273 1,987
Other expense 11,429 10,481 9,902
--------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSE 31,131 28,477 26,461
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 39,096 30,279 27,412
--------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 9,727 8,943 3,715
Federal income tax expense (credit) 349 (1,675) 150
--------------------------------------------
NET INCOME $ 9,378 $ 10,618 $ 3,565
============================================

See Notes to Consolidated Financial Statements

F-4

196

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
D&N BANK

Unrealized
Holding
Gains
(Losses)
Additional on Securities Total
Common Paid-In Retained Available Stockholder's
Stock Capital Earnings For Sale Equity
-----------------------------------------------------------------------
(Dollars In thousands)

BALANCE DECEMBER 31, 1993 $ 37 $ 48,543 $ 6,583 $ 808 $ 55,971
Net income 3,565 3,565
Capital contribution 1 1
Change in value of securities
available for sale (1,992) (1,992)
-----------------------------------------------------------------------

BALANCE DECEMBER 31, 1994 $ 37 $ 48,544 $ 10,148 $ (1,184) $ 57,545
Net income 10,618 10,618
Capital contribution 46 46
Change in value of securities
available for sale 2,899 2,899
-----------------------------------------------------------------------

BALANCE DECEMBER 31, 1995 $ 37 $ 48,590 $ 20,766 $ 1,715 $ 71,108
Net income 9,378 9,378
Change in value of securities
available for sale (472) (472)
-----------------------------------------------------------------------

BALANCE DECEMBER 31, 1996 $ 37 $ 48,590 $ 30,144 $ 1,243 $ 80,014
=======================================================================

See Notes to Consolidated Financial Statements.

F-5

197

CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N BANK

Year Ended December 31
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)

OPERATING ACTIVITIES
Net income $ 9,378 $ 10,618 $ 3,565
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 (2,750) (7,925) 2,871
-------------------------------------------
Net cash provided (used) by operating activities 27,247 (11,037) 43,250

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
Change in payable to Parent Company 5,225 102 (421)
Purchases of office properties and equipment (2,868) (2,333) (785)
-------------------------------------------
Net cash used by investing activities (266,659) (90,640) (150,070)

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)
-------------------------------------------
Net cash provided by financing activities 229,761 90,218 48,142
-------------------------------------------
Decrease in cash and cash equivalents (9,651) (11,459) (58,678)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,438 33,897 92,575
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,787 $ 22,438 $ 33,897
===========================================

F-6

198

Year Ended December 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
Interest paid $ 61,753 $ 60,262 $ 49,984
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
Securitizations of loans into mortgage-backed securities $ 119,717 $ -- $ 15,086

See Notes to Consolidated Financial Statements.

F-7

199

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N BANK, DECEMBER 31, 1996

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

D&N Bank ("the Bank" or "the Company"), a federally-chartered stock
savings bank is a wholly-owned subsidiary of D&N Financial Corporation
("DNFC"). The Bank'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 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 Bank 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.

F-8

200

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 Bank 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 Bank 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.

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
F-9

201

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 Bank 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
Consolidated Statement of Condition.

Interest Rate Instruments: Interest rate instruments are used to adjust
the maturity structure of liabilities and assets to manage the Bank'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 Bank was not party to any interest rate instruments.

Mortgage Servicing Rights: The Bank 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 Bank to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. As the Bank 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

F-10

202

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 Bank 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.

Income Taxes: The Bank and its subsidiaries file a consolidated federal
tax return with its parent, DNFC. Taxes are allocated to the Bank as if it had
filed a separate consolidated income tax return. 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.

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 Bank. At the time of the merger, Macomb had assets and stockholders'
equity (unaudited) of $41,932,000 and $6,268,000, respectively. DNFC issued
716,497 shares of common stock and cash in lieu of fractional shares for all of
the oustanding shares of Macomb. 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:

Three Months
Ended
March 31,
1996 1995 1994
------------ --------- ---------
(In thousands)

Net interest income (as previously reported) $ 9,453 $ 33,592 $ 22,567
Macomb Federal Savings Bank - net interest income 218 1,118 1,172
--------- --------- ---------
Total Net Interest Income $ 9,671 $ 34,710 $ 23,739
========= ========= =========

Net income (as previously reported) 3,574 10,341 3,273
Macomb Federal Savings Bank - net income (8) 277 292
--------- --------- ---------
Total Net Income $ 3,566 $ 10,618 $ 3,565
========= ========= =========

F-11

203
NOTE C: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES

The Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average amounts of those reserve balances for the years
ended December 31, 1996 and December 31, 1995 were $418,000 and $491,000,
respectively.

NOTE D: INVESTMENT SECURITIES

Investment securities consisted of the following:

December 31
------------------------------------------------------
1996 1995
------------------------------------------------------
Book Market Book Market
Value Value Value Value
------------------------------------------------------
(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
----------------------------------------------------------------------
(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)
===========================================================

F-12

204

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%
===================================================================

NOTE E: MORTGAGE-BACKED SECURITIES

Mortgage-backed securities consisted of the following:

December 31
---------------------------------------------------
1996 1995
---------------------------------------------------
Book Market Book Market
Value Value Value Value
---------------------------------------------------
(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.

F-13

205

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
-------------------------------------------------------
(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.

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%
=================================================================

F-14

206

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
---------------------------------------------------------
(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.

F-15

207

Loans collateralized by income producing property are categorized as
follows:

December 31
----------------------------------
1996 1995
----------------------------------
(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
----------------------------------
(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
------------------------------------------------
(In thousands)

Balance at beginning of year $ 10,081 $ 8,349 $ 11,570
Provisions 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

F-16

208

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
---------------------------------------
(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
=======================================

Changes in the valuation allowance for mortgage servicing rights are
summarized as follows:

1996 1995 1994
--------------------------------------
(In thousands)

Balance at beginning of year $ 291 $ -- $ --
Additions:
Purchased mortgage servicing rights 151 222 --
Originated mortgage servicing rights 55 77 --
--------------------------------------
Total additions 206 299 --
Reductions:
Purchased mortgage servicing rights 158 8 --
Originated mortgage 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.

F-17

209

NOTE G: OTHER REAL ESTATE OWNED

Other real estate owned (OREO) consisted of the following:

December 31
---------------------------------------
1996 1995
---------------------------------------
(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
----------------------------------------
(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 Bank recorded writedowns of other real estate owned amounting to
$75,000 during 1996. The Bank did not record any writedowns of other real
estate owned in 1995 or 1994.

The Bank recognized gains on sale of OREO amounting to $164,000, $1,139,000
and $2,407,000 during 1996, 1995 and 1994 respectively.

NOTE H: OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment are summarized as follows:

December 31
----------------------------
1996 1995
----------------------------
(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
============================

F-18

210

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 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%
=================================

F-19

211

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 Bank will
repurchase identical securities, consisted of the following:

December 31
----------------------------------------------------------
1996 1995
----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------
(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 Bank essentially identical
securities at the maturities of the agreements.

F-20

212

Agreements to repurchase as of December 31, 1996, are as follows:

Interest
Broker Borrowing Rate Maturity Date
- ------------------------------------------------- ----------- ---------- ---------------------
(In thousands)

Morgan Stanley $23,397 5.52% January 1997
Federal National Mortgage Association 34,643 5.76 January 1997
-------- ----

Total Reverse Repurchase Agreements $58,040 5.66%
======= ====

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 1996 1995 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 Bank 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.

F-21

213

NOTE L: FEDERAL INCOME TAXES

Federal income tax expense (credit) consisted of the following:

1996 1995 1994
------------------------------------------------
(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 1995 1994
---------------------------------------------------

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
carryforward -- 12.46 --
Other items, net (0.56) 2.35 7.83
----------------------------------------------------
Effective tax rate 3.63% (18.73)% 4.04%
====================================================

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 Bank's deferred and other tax assets and liabilities are as follows:

December 31
--------------------------
1996 1995
----------------------------
(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

F-22

214

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 Bank had a net operating loss carryforward for
income tax purposes of $9,310,000 which expires on December 31, 2009.

NOTE M: REGULATORY MATTERS

OTS regulations governing the payment of dividends by savings institutions
provide that an institution may only pay dividends with regulatory approval.

During 1996, the Bank paid a one-time charge of $5.5 million pretax, ($3.6
million after tax) as the mandated contribution to replenish the Federal Deposit
Insurance Corporation's depleted Savings Association Insurance Fund ("SAIF").
This charge is the result of federal legislation passed and signed into law on
September 30, 1996, which requires all thrifts to pay a one-time assessment to
restore the SAIF fund to its statutory reserve level. The assessment is 65.7
basis points (b.p.) of the institution's deposits as of March 31, 1995.

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

F-23

215

tangible capital ratio expressed as a percent of total adjusted assets. As of
December 31, 1996, the Bank exceeded all regulatory capital standards.

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 table below provides a reconciliation of capital calculated under generally
accepted accounting principles ("GAAP") and regulatory capital at December 31,
1996

December 31, 1996

GAAP Capital $80,014
Adjustment
Unrealized gains on available-for-sale securities (1,243)
-------
Adjusted regulatory equity capital 78,771

Less:
Intangible assets (1,011)
Investments in and advances to nonincludible subsidiaries (1,748)
-------
Tangible and core capital $76,012
=======
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%. At
December 31, 1996, the Bank was considered adequately capitalized.

NOTE N: EMPLOYEE BENEFIT PLANS

The Bank 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
Bank 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 a variety of investments, including the Bank's contributions. Employee
contributions may be invested in a variety of investments including the DNFC's
common stock. The first 3% of the Bank's contribution for each individual is
invested in the DNFC's common stock, the remainder of the Bank's contribution,
(up to 6%, total) is invested at the direction of the participant. The Bank's
contributions to the plan were $621,000, $273,000 and $193,000 in 1996, 1995 and
1994, respectively.

F-24

216

The Bank terminated its noncontributory defined benefit retirement
plan during 1996, with all assets 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
----------- ----------- -----------
(In thousands)

Assets and obligations:
Accumulated benefit obligation $ (8,419) $ 8,419 $ 0

Plan assets at fair value 11,238 (11,238) 0
----------- ----------- -----------
Excess assets $ 2,819 $ (2,819) $ 0
=========== =========== ============

Benefits under the plan were based on years of service and the
employee's compensation during the last five years of employment.

Pension expense included the following components:

1996* 1995* 1994
-------------------------------------
(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 Bank has a contributory unfunded benefit plan which provides
postretirement medical benefits to certain employees who have retired prior to
September 30, 1995. The Bank 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.

F-25

217

The following table sets forth the plan's status and amounts
recognized in the Bank's Consolidated Statement of Condition:

December 31,
1996 1995
---------------------------
(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
-----------------------------------------
(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

DNFC has stock option plans in which common shares of DNFC's common stock
are granted to employees and directors of the Bank. 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 Bank adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, the fair value of each option grant to Bank
employees and Directors in 1996 and 1995 was estimated using the Black-Scholes
option pricing model with the following assumptions used:

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 Bank 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 DNFC's common stock on the
date of grant, no compensation cost has been recognized for the stock option
grants. Had stock option costs of these plans been determined based on the fair
value at the 1996 and 1995 grant dates for award under those plans consistent
with the methodology of SFAS 123, the pro forma effects on the Bank's net income
and earnings per share would be as follows:

1996 1995
----------- ------------

(In thousands)

Net income (as reported) ........................ $9,378 $10,618
Stock option compensation cost .................. (396) (74)
---- ---
Pro forma net income ........................... $8,982 $10,544
====== =======

NOTE Q: LITIGATION

The Bank 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,

F-26

218

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 the Bank'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 Bank is party to financial instruments with off-balance sheet risk
(in the normal course of it's 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 Bank's involvement in particular classes
of financial instruments.

The Bank'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 Bank 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 Bank 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 1996 1995 1995
-----------------------------------------------
Contract Fair Contract Fair
Amount Value Amount Value
-----------------------------------------------
(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) -- --

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

F-27

219

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 Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
evaluation of the borrower's creditworthiness.

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 Bank 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 Bank is subject, which under the recourse provisions, is $1,587,000 at
December 31, 1996. Management does not believe the recourse provisions subject
the Bank to any material risk of loss. This credit risk is considered to be no
more onerous than that existing on similar loans in the Bank's loan portfolio.

Forward commitments to sell loans are contracts the Bank negotiates for the
purpose of reducing the market risk associated with rate lock agreements with
customers for new loan applications that we have not yet been closed. In order
to fulfill a forward commitment, the Bank 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 Bank to originate loans to fulfill the contracts, in which case
the Bank 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
-----------------------------------------------------
(In thousands)

Cash and cash equivalents $ 12,787 $ 12,787 $ 22,438 $ 22,438
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)

F-28

220

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 Q) -- (694) -- (604)
Unused lines of credit (Note Q) -- (783) -- (569)
Standby letters of credit (Note Q) -- (4) -- (12)
Loans sold with recourse (Note Q)
Forward commitments to sell loans (Note Q) -- (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.

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 Bank'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 analyses using the rates currently offered for deposits with similar
remaining maturities.

The fair values of securities sold under agreement to repurchase and
the Bank's debt are estimated using discounted cash flow analyses, based on the
Bank's current incremental borrowing rates for debt with similar terms and
remaining maturities.

F-29

221

Fair values for the Bank'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.

F-30

222

D&N BANK
CONSOLIDATED STATEMENTS OF CONDITION

March 31 December 31
1997 1996
-------------------------------------
(In thousands)
-------------------------------------
(unaudited)

ASSETS
Cash and due from banks $ 1,798 $ 2,845
Federal funds sold 1,300 8,600
Interest-bearing deposits in other banks 747 1,342
-------------------------------------
Total cash and cash equivalents 3,845 12,787

Investment securities
(market value of $98,517,00 in 1997 and $60,783,000 in 1996) 98,639 60,739
Investment securities available for sale (at market value) 40,868 59,038
Mortgage-backed securities
(Market value $235,830,000 in 1997 and $213,304,000 in 1996) 240,264 214,690
Mortgage-backed securities available for sale (at market value) 33,196 36,566
Loans receivable (including loans held for sale
of $219,000 in 1997 and $5,218,000 in 1996) 1,092,824 1,066,918
Allowance for loan losses (10,987) (11,042)
-------------------------------------
Net loans receivable 1,081,837 1,055,876
Other real estate owned, net 1,226 1,470
Federal income taxes 3,025 6,002
Office properties and equipment, net 16,006 15,764
Other assets 9,560 10,056
-------------------------------------
$ 1,528,466 $ 1,472,988
=====================================
LIABILITIES
Checking and Now accounts $ 103,248 $ 107,550
Money market accounts 90,154 89,321
Savings deposits 151,673 149,226
Time deposits 661,435 617,102
Accrued interest 998 934
------------------------------------

Total deposits 1,007,508 964,133
Securities sold under agreements to repurchase 71,886 58,040
FHLB advances and other borrowed money 345,599 345,997
Advance payments by borrowers and investors held in escrow 9,527 11,808
Payable to DNFC 5,510 6,105
Other liabilities 5,145 6,891
------------------------------------
Total liabilities 1,445,175 1,392,974

STOCKHOLDERS' EQUITY
Preferred stock (2,000,000 shares authorized; none issued)
Common stock, $.01 par value per share (shares authorized - 10,000,000;
shares outstanding - 3,650,636 in 1997 and 1996) 37 37
Additional paid-in capital 48,590 48,590
------------------------------------
Total paid-in capital 48,627 48,627

Retained earnings - substantially restricted 33,436 30,144
Unrealized holding gains on debt securities
available for sale, net of tax 1,228 1,243
------------------------------------
Total stockholders' equity 83,291 80,014
------------------------------------
$ 1,528,466 $ 1,472,988
====================================

F-31

223

D&N BANK
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended
March 31,
1997 1996
-------------------------------
(In thousands)
-------------------------------

INTEREST INCOME
Loans $ 21,937 $ 19,980
Mortgage-backed securities 4,436 2,276
Investments and deposits 1,962 1,744
------------------------------
TOTAL INTEREST INCOME 28,335 24,000

INTEREST EXPENSE
Deposits 11,288 11,050
Securities sold under agreements to repurchase 759 94
FHLB advances and other borrowed money 5,030 3,185
------------------------------
TOTAL INTEREST EXPENSE 17,077 14,329
------------------------------
NET INTEREST INCOME 11,258 9,671
Provision for loan losses 300 300
------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,958 9,371

NONINTEREST INCOME
Loan servicing and administrative fees, net 521 324
Deposit related fees 921 820
Gain on loans held for sale 26 486
Other 135 95
------------------------------
TOTAL OPERATING NONINTEREST INCOME 1,603 1,725
Gain on loans and MBS available for sale 5 5
------------------------------
TOTAL NONINTEREST INCOME 1,608 1,730

NONINTEREST EXPENSE
Compensation and benefits 4,064 4,079
Occupancy 780 712
Other expense 2,495 2,867
------------------------------
7,339 7,658
Other real estate owned, net (22) 40
FDIC insurance 176 636
------------------------------
TOTAL NONINTEREST EXPENSE 7,493 8,334
------------------------------
INCOME BEFORE INCOME TAX EXPENSE (CREDIT) 5,073 2,767
Federal income tax expense (credit) 1,781 (799)
------------------------------
NET INCOME $ 3,292 $ 3,566
==============================

F-32

224

D&N BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
March 31,

1997 1996
---------------------------
(In thousands)
---------------------------

OPERATING ACTIVITIES
Net income $ 3,292 $ 3,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 300

Depreciation and amortization of
office properties and equipment 501 522
Amortization of net premuium (discounts) on
purchased loans and securities 108 (773)
Originations and purchases of loans held for sale (5,297) (12,121)
Proceeds from sales of loans held for sale 11,377 26,930
Amortization and writedowns of loan servicing rights 73 201
Other 640 (199)
--------------------------
Net cash provided by operating activities 10,994 18,424

INVESTING ACTIVITIES
Proceeds from maturities of investment securities 22,988 39,946
Purchases of investment securities (42,713) (8,848)
Principal collected on mortgage-backed securities 14,213 10,213
Purchases of mortgage-backed securities (36,684) --
Loans purchased (27,215) (73,160)
Net change in loans receivable (5,165) (14,610)
Decrease in other real estate owned 244 246
Change in payable to Parent Company 594 (335)
Purchase of office properties and equipment (733) (827)
--------------------------
Net cash used by investing activities (74,371) (47,375)

FINANCING ACTIVITIES
Net change in time deposits 44,333 2,469
Net change in other deposits (1,022) 10,826
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 120,846 58,600
Payments on maturity of notes payable, securities
sold under agreements to repurchase and other
borrowed money (107,440) (28,680)
Net change in advance payments by borrowers
and investors held in escrow (2,281) (1,258)
--------------------------
Net cash provided by financing activities 54,436 41,957
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,941) 5,771
Cash and cash equivalents at beginning of period 12,786 22,438
--------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,845 $ 35,446
==========================

See notes to consolidated financial statements.

F-33

225

D&N BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month periods ended March 31, 1997 and 1996 are not necessarily
indicative of the results that may be expected for the full year.

NOTE 2: ALLOWANCE FOR LOAN LOSSES

The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well
as losses from the remainder of the portfolio. Management's determination of
the level of the allowance is based upon evaluation of the portfolio, past
experience, current economic conditions, size and composition of the portfolio,
collateral location and values, cash flow positions, industry concentrations,
delinquencies, and other relevant factors. The allowance is increased by a
provision for losses charged against income.

Changes in the allowance for loan losses are summarized as follows:

Three Months Ended
March 31,
1997 1996
-----------------------------
(In thousands)
Balance at beginning of period $ 11,042 $ 9,931
Charge-offs:
Single family 53 49
Income producing property -- --
Commercial -- --
Installment 381 257
------------------------
Total 434 306
Recoveries:
Single family -- --

Income producing property -- --

F-34

226

Commercial -- --
Installment 79 66
------------------------
Total 79 66
------------------------
Net charge-offs 355 240
Provision charged to operations 300 300
------------------------
Balance at end of period $ 10,987 $ 9,991
========================

NOTE 3: FEDERAL INCOME TAXES

A federal income tax credit was recorded in the 1996 reporting period as the
Bank offset taxes ordinarily payable by a realization, through a reduction in
the valuation allowance previously provided, of prior years' net operating loss
carryforwards.

NOTE 4: ACQUISITION

On April 10, 1996, Macomb Federal Savings Bank ("Macomb"), a $43 million asset
savings bank, was merged into the Bank. The Bank's Parent, D&N Financial
Corporation, issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. The merger was
accounted for as a pooling-of-interests. No changes in accounting methods
resulted from the business combination.

NOTE 5: RECLASSIFICATIONS

Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the current period presentation.

F-35

227

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

The following discussion and analysis provides information regarding
the Bank's financial condition and results of operations
for the three-month periods ended March 31, 1997 and 1996. Ratios for the
three-month periods are stated on an annualized basis. Results of operations
for the 1997 period are not necessarily indicative of results which may be
expected for the entire year. This discussion and analysis should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere in this document.

RESULTS OF OPERATIONS

NET INCOME

The Bank recorded net income for the first quarter ended March 31, 1997
of $3.3 million, compared to net income of $3.6 million in the first quarter of
1996. Return on average assets and return on average equity were 0.89% and
16.13%, respectively, during the quarter ended March 31, 1997, compared to
1.15% and 19.60%, respectively, during the quarter ended March 31, 1996. The
decrease in net income was due primarily to a tax credit usage of $799,000 in
the first quarter of 1996, versus a tax expense of $1,781,000 in the first
quarter of 1997. This shift of $2.6 million in taxes, was partially offset by
an increase of $1.6 million in net interest income and a decrease in
noninterest expense of $800,000.

NET INTEREST INCOME

Net interest income, or the difference between interest earned on
interest earning assets such as loans and investment securities and interest
paid on sources of funds such as deposits and borrowings, is a significant
component of the Bank's earnings. Net interest income is affected by changes
in both the balance of and the rates on interest earning assets and interest
bearing liabilities and the amount of interest earning assets funded with
non-interest or low-interest bearing funds.

F-36

228

Net interest income increased $1.6 million to $11.3 million for the
quarter ended March 31, 1997 compared to $9.7 million for the quarter ended
March 31, 1996. The increase was due to increased volume and improved yields
on loans originated and to lower relative expense on the Bank's borrowings due
to repricing and more significantly aided by decreases in interest rates on
deposits due to general decreases in market interest rates.

By increasing its consumer and commercial lending activities, the
Bank has been able to increase its net interest earning assets and to
realize increased net yields. The result of these factors is that net interest
income has steadily improved during recent quarters.

PROVISION FOR LOAN LOSSES

A provision for loan losses is charged to income based on the size and
quality of the loan portfolio measured against prevailing economic conditions.
This process is accomplished through a formal review analysis. The provision
is recorded in sufficient amounts to maintain the allowance for possible loan
losses at a level in excess of that expected by management to be required to
cover specific exposures in the portfolio.

The Bank recorded a $300,000 provision for loan losses during the
quarter ended March 31, 1997 and during the quarter ended March 31, 1996. The
allowance for loan losses has been maintained at approximately 1.00% of gross
loans even as the loan portfolio has experienced significant growth over the
past several fiscal quarters.

NONINTEREST INCOME

Total noninterest income decreased to $1.6 million during the quarter
ended March 31, 1997, from $1.7 million recorded during the quarter ended March
31, 1996. The majority of this decrease was due to reduction in gain on sale
of loans available for sale. Net loan servicing and administrative fees
increased $198,000 as the Bank recorded recoveries on its portfolio of
mortgage servicing rights due to increased market values caused primarily by
lower loan prepayment experience. Deposit related fees were up approximately
$100,000 in the current year quarter primarily due to an increase in fee
income.

F-37

229

NONINTEREST EXPENSE

Total noninterest expense decreased $800,000 to $7.5 million during
the quarter ended March 31, 1997, from $8.3 million recorded in the first
quarter of 1996. Decreases in other expense represents D&N's continuing
commitment to cost control. The primary areas of decrease were general
office, furniture and equipment, marketing, legal and state tax expenses.

FEDERAL INCOME TAXES

The first quarter of 1997 is presented on a fully-taxed basis versus
a federal income tax credit of $818,000 being recorded in the first quarter
of 1996.

FINANCIAL CONDITION

Total assets at March 31, 1997 were $1.53 billion, an increase of
$55.5 million from December 31, 1996. Earning assets represented approximately
98% of total assets as of March 31, 1997, substantially the same as at year-end
1996.

CASH, DEPOSITS AND INVESTMENT SECURITIES

Cash, deposits and investment securities were $143.3 million at March
31, 1997, up $10.7 million from December 31, 1996.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities increased $22.2 million from year-end 1996
to $273.5 million at March 31, 1997. The increase was due to purchase of
several short-term tranche CMO's of $36.4 million, reduced by repayments and
amortization of $14.3 million.

NET LOANS RECEIVABLE

Net loans receivable increased $26.0 million during the period to
$1.10 billion at March 31, 1997. Loan originations of $100.6 million and
purchases of $27.1 million exceeded repayments and sales. Loan originations
and purchases

F-38

230

during the three months ended March 31, 1997 were: consumer loans, $58.5
million, while residential mortgage loans and commercial loans were $56.1
million and $13.1 million, respectively.

NONPERFORMING ASSETS AND RISK ELEMENTS

The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.

March 31, December 31,
1997 1996
-------------------------------
(Dollars in thousands)

Nonaccruing loans $ 4,488 $ 6,621
Accruing loans delinquent more
than 90 days -- --
Restructured loans -- --
-------------------------
Total nonperforming loans 4,488 6,621
Other real estate owned (OREO) 1,226 1,470
-------------------------
Total nonperforming assets $ 5,714 $ 8,091
=========================
Nonperforming loans as a
percentage of total loans 0.41% 0.62%
=========================
Nonperforming assets as a
percentage of total assets 0.37% 0.55%
=========================
Allowance for loan losses as a
percentage of nonperforming loans 244.81% 166.77%
=========================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 192.28% 136.47%
=========================

Nonperforming assets, before allowances for loan and OREO losses,
decreased $2.4 million during the period primarily as a large commercial real
estate loan secured by a shopping center was restored to accrual status
after sale of the property.

F-39

231
MORTGAGE SERVICING RIGHTS

The Bank's net investment in MSRs increased during the period to $1.4
million at March 31, 1997. The following table details activity in the
portfolio for the periods indicated.

Three Months Year
Ended Ended
March 31, 1997 December 31, 1996
------------------------------------
(Dollars in thousands)

Balance at beginning of period $ 1,443 $ 1,113
Additions:
Capitalized servicing 34 630
Reductions:
Scheduled amortization (72) (267)
Additional amortization due
to changes in prepayment
assumptions (1) (33)
--------- -----------
Total (73) (300)
--------- -----------
Balance at end of period $ 1,404 $ 1,443
========= ===========

Fair market value at end of period $ 1,836 $ 1,770
========= ===========

DEPOSITS

Deposits increased $43.4 million during the period to $1.01 billion at
March 31, 1997. Certificates of deposit increased $44.3 million and savings
deposits increased $2.5 million while checking accounts decreased $4.3 million
and money market accounts increased $900,000. The Bank's cost of deposits
increased to 4.73% at March 31, 1997, compared to 4.61% at December 31, 1996, a
result of general increase in market rates of interest.

BORROWINGS

Total borrowings increased $13.4 million during the period to $417.5
million at March 31, 1997 in order to fund loan demand. The Bank's cost of
borrowings was 5.79% at March 31, 1997, compared to 5.73% at December 31, 1996.

F-40

232

CAPITAL

According to federal regulations, the Bank must meet certain minimum
capital ratios. As the following table indicates, the Bank's capital ratios at
March 31, 1997 exceeded these requirements.

Tier 1
Tangible Core Risk-Based Risk-based
Capital Capital Capital Capital
--------- --------- ---------- -------------
(Dollars in thousands)

Actual capital $ 79,332 $ 79,332 $ 89,897 $ 79,332
Required capital 23,114 46,228 73,034 36,517
--------- -------- -------- ---------
Excess capital $ 56,218 $ 33,104 $ 16,863 $ 42,815
========= ======== ======== ========

Actual ratio 5.15% 5.15% 9.85% 8.69%
========= ======== ======== ========

Required ratio 1.50% 3.00% 8.00% 4.00%
========= ======== ======== ========

Consolidated stockholders' equity was $83.3 million at March 31, 1997
and represents 5.45% of consolidated assets.

LIQUIDITY

Liquidity is the ability to meet financial obligations when due.
Regulatory authorities require that thrift institutions maintain liquidity
consisting of cash, short-term U. S. Government Securities and other specified
assets, equal to at least 5% of net withdrawable accounts and borrowings
payable in one year or less. For March, 1997, the Bank's average liquidity
ratio was 6.54%. At March 31, 1997, unused borrowing capacity as measured by
the Bank's inventory of readily available but unpledged collateral was
approximately $172 million. The Bank considers its current liquidity and
other funding sources sufficient to fund its outstanding loan commitments and
scheduled liability maturities.

F-41

233

=======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.

------------------------

TABLE OF CONTENTS

PAGE
----

Table of Contents..................... i
Prospectus Summary.................... 1
The Formation......................... 10
Business and Strategy................. 11
Tax Status of the Company............. 14
Risk Factors.......................... 15
The Company........................... 26
Use of Proceeds....................... 27
Capitalization........................ 29
Business and Strategy................. 30
Management............................ 52
Certain Transactions Constituting the
Formation........................... 57
Description of Series A Preferred
Shares.............................. 59
Description of Capital Stock.......... 66
Federal Income Tax Considerations..... 69
ERISA Considerations.................. 81
Certain Information Regarding the
Bank................................ 84
Underwriting.......................... 88
Experts............................... 90
Ratings............................... 90
Certain Legal Matters................. 90
Additional Information................ 90
Glossary.............................. 92
Index to Financial Statement.......... F-1
Annex I -- Offering Circular for Bank
Preferred Shares.................... OC-1

------------------------

THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE COMMENCEMENT OF
THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

=======================================================
=======================================================

1,100,000 SHARES

D&N CAPITAL
CORPORATION

% NONCUMULATIVE

PREFERRED STOCK, SERIES A
--------------------------

PROSPECTUS
--------------------------
(RONEY & CO. LOGO)

July , 1997

=======================================================
234

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Registration Fee . . . . . . . . . . . . . . . . . . . $ 10,000
Rating Agency Fee . . . . . . . . . . . . . . . . . . . 35,000
Printing and Out of Pocket Expenses . . . . . . . . . . 70,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . 150,000
Accounting Fees and Expenses . . . . . . . . . . . . . 50,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . 10,000
--------
Total . . . . . . . . . . . . . . . . . . . . $325,000
========

ITEM 31. SALES TO SPECIAL PARTIES.

See response to Item 32 below.

ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES

In connection with the formation of D&N Capital Corporation (the "Company"
or the "Registrant"), the Company issued 1000 shares of Common Stock, par value
$1.00 per share, to D&N Bank (the "Bank"). Prior to the consummation of the
Offering, the Company will amend its Certificate of Incorporation to change the
par value of its Common Stock to $300.00 per share. Simultaneously with the
consummation of the Offering, the Company will issue an aggregate of __________
shares of Common Stock to the Bank. The description of these transactions in
the Prospectus under the heading "Certain Transactions Constituting The
Formation" is incorporated herein by reference. These shares of Common Stock
will be issued in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933 (the "Securities Act").

ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Pursuant to the Delaware General Corporation Law ("DGCL"), a corporation
may indemnify any person in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a derivative action by or in the right of such
corporation) who is or was a director, officer, employee or agent of such
corporation, or serving at the request of such corporation in such capacity for
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding, if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.

II-1
235

The DGCL also permits indemnification by a corporation under similar
circumstances for expenses (including attorneys' fees) actually and reasonably
incurred by such persons in connection with the defense or settlement of a
derivative action, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to such corporation unless the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that
such person is fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper.

The DGCL provides that the indemnification described above shall not
be deemed exclusive of other indemnification that may be granted by a
corporation pursuant to its By-laws, disinterested directors' vote,
stockholders' vote, agreement or otherwise. The DGCL also provides corporations
with the power to purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation in a similar capacity for another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liability as described above.

The Amended and Restated Certificate of Incorporation of the
Registrant provides that, to the fullest extent that the DGCL as from time to
time in effect permits the limitation or elimination of the liability of
directors, no director of the Registrant shall be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director.

The Amended and Restated Certificate of Incorporation empowers the
Registrant to indemnify any director, officer, employee or agent of the
Registrant or any other person who is serving at the Registrant's request in
any such capacity with another corporation, partnership, joint venture, trust
or other enterprise (including, without limitation, an employee benefit plan)
to the fullest extent permitted under the DGCL as from time to time in effect,
and any such indemnification may continue as to any person who has ceased to be
a director, officer, employee or agent and may inure to the benefit of the
heirs, executors and administrators of such a person.

The Amended and Restated Certificate of Incorporation also empowers
the Registrant by action of its Board of Directors, notwithstanding any
interest of the directors in the action, to purchase and maintain insurance in
such amounts as the Board of Directors deems appropriate to protect any
director, officer, employee or agent of the Registrant or any other person who
is serving at the Registrant's request in any such capacity with another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, an employee benefit plan) against any liability asserted
against such individual or incurred by such individual in any such capacity
arising out of such individual's status as such (including, without limitation,
expenses, judgments, fines (including any excise taxes assessed on a person
with respect to any employee benefit plan) and amounts paid in settlement) to
the fullest extent permitted under the DGCL as from time to time in effect,
whether or not the Registrant would have the power or be required to indemnify
any such individual under the terms of any agreement or by-law or the DGCL.

In addition, the Registrant's By-laws require indemnification to the
fullest extent permitted under applicable law, as from time to time in effect.
The By-laws provide a clear and unconditional

II-2

236

right to indemnification for expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by any
person in connection with any threatened, pending or completed investigation,
claim, action, suit or proceeding, whether civil, administrative or
investigative (including, to the extent permitted by law, any derivative
action) by reason of the fact that such person is or was serving as a director,
officer, employee or agent of the Registrant or, at the request of the
Registrant, of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, an employee benefit plan). The
By-laws specify that the right to indemnification so provided is a contract
right, set forth certain procedural and evidentiary standards applicable to the
enforcement of a claim under the By-laws, entitle the persons to be indemnified
to be reimbursed for the expenses of prosecuting any such claim against the
Registrant and entitle them to have all expenses incurred in advance of the
final disposition of a proceeding paid by the Registrant. Such provisions,
however, are intended to be in furtherance and not in limitation of the general
right to indemnification provided in the By-laws, which right of
indemnification and of advancement of expenses is not exclusive.

The Registrant's By-laws also provide that the Registrant may enter
into contracts with any director, officer, employee or agent of the Registrant
in furtherance of the indemnification provisions in the By-laws, as well as
create a trust fund, grant a security interest or use other means (including,
without limitation, a letter of credit) to ensure payment of amounts
indemnified.

ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

Not applicable.

ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements

See F-1 of the Prospectus for an index to financial statements included as
part of the Prospectus.

II-3
237

(b) Exhibits

Exhibit
Number Description
------ ---------------------------------------------------------------------

1 Form of Underwriting Agreement between the Company, the Bank and the
Underwriter *

3(a)(i) Certificate of Incorporation of the Company *

3(a)(ii) Form of Certificate of Designation establishing the Series A
Preferred Shares *

3(a)(iii) Form of Restated Certificate of Incorporation *

3(b) Bylaws of the Company *

4 Specimen of certificate representing Series A Preferred Shares *

5 Opinion of Silver, Freedman & Taff, L.L.P., counsel to the Company,
relating to Series A Preferred Shares *

8 Opinion of Coopers & Lybrand L.L.P., tax adviser to the Company,
relating to certain tax matters

10(a) Form of Residential Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank *

10(b) Form of Commercial Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank *

10(c) Form of Residential Mortgage Loan Servicing Agreement between the
Company and the Bank *

10(d) Form of Commercial Mortgage Loan Servicing Agreement between the
Company and the Bank *

10(e) Form of Advisory Agreement between the Company and the Bank *

23(a) Consent of Coopers & Lybrand L.L.P.

23(b) Consent of Tax Advisor

23(c) Consent of Silver, Freedman & Taff, L.L.P. (included in Exhibit 5) *

23(d) Consent of Honigman Miller Schwartz and Cohn *

24 Powers of Attorney *

- ---------------

* Previously filed

II-4
238

ITEM 36. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding), is asserted by such director, officer, or
controlling person in connection with the securities registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-5
239

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hancock, Michigan, on the 10th day of July, 1997.

D&N CAPITAL CORPORATION

By: /s/ Kenneth R. Janson
----------------------------
Kenneth R. Janson, President

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

/s/ Kenneth R. Janson *
- ---------------------------------- -------------------------------
Kenneth R. Janson Richard E. West
President, Director Director
(Principal Executive Officer)

July 10, 1997 July 10, 1997
- --------------------------------- -------------------------------
Date Date

* /s/ James Bogan
- -------------------------------- -------------------------------

Daniel D. Greenlee James Bogan
Treasurer (Principal Financial Director
and Accounting Officer)

July 10, 1997 July 10, 1997
- ---------------------------------- -------------------------------
Date Date

* /s/ William McGarry
- ---------------------------------- -------------------------------
George J. Butvilas William McGarry
Director Director

July 10, 1997 July 10, 1997
- ---------------------------------- -------------------------------
Date Date

* By: Kenneth R. Janson
--------------------------
Kenneth R. Janson,
Attorney in Fact

July 10, 1997
- ----------------------------------
Date

240
Exhibit Index

Exhibit
Number Description
------ ---------------------------------------------------------------------

1 Form of Underwriting Agreement between the Company, the Bank and the
Underwriter. *

3(a)(i) Certificate of Incorporation of the Company *

3(a)(ii) Form of Certificate of Designation establishing the Series A
Preferred Shares *

3(a)(iii) Form of Restated Certificate of Incorporation*