SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2002 Commission file number 0-22767
D&N CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1517665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 Quincy Street, Hancock, Michigan 49930
(Address of principal executive offices)
(906) 482-2700
(Registrant's telephone number)
Indicate by check whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock Outstanding as of April 30, 2002:
Common Stock, $300 par value ................... 31,781 shares
D&N CAPITAL CORPORATION
INDEX
Page No.
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PART I Financial Information
Item 1. Financial Statements (Unaudited)
Statements of Condition as of March 31, 2002
and December 31, 2001 2
Statements of Income for the three
months ended March 31, 2002 and 2001 3
Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 4
Notes to Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 9
PART II Other Information 9
Signatures 10
Exhibits 11 - 12
1
D&N CAPITAL CORPORATION
STATEMENTS OF CONDITION
(In thousands, except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
Assets:
Loans receivable:
Residential mortgage loans $ 57,058 $ 54,298
Commercial mortgage loans 2,053 2,743
---------------- ---------------
Net loans receivable 59,111 57,041
Cash - 15
Due from Parent 2,090 3,329
Accrued interest receivable 388 395
---------------- ---------------
Total assets $ 61,589 $ 60,780
================ ===============
Liabilities:
Other liabilities $ 729 $ 38
---------------- ---------------
Total liabilities 729 38
Stockholders' Equity:
Preferred stock, $25 par value; 2,500,000
shares authorized, 1,210,000 shares
issued and outstanding 30,250 30,250
Common stock, $300 par value; 250,000
shares authorized, 31,781 shares
issued and outstanding 9,534 9,534
Additional paid-in capital 20,716 20,716
Retained earnings 360 242
---------------- ---------------
Total stockholders' equity 60,860 60,742
---------------- ---------------
Total liabilities and
stockholders' equity $ 61,589 $ 60,780
================ ===============
See Notes to Financial Statements.
2
D&N CAPITAL CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
March 31,
2002 2001
-----------------------
Interest income:
Loans:
Residential mortgage loans $ 791 $ 861
Commercial mortgage loans 47 148
--------- --------
Total loan interest income 838 1,009
Intercompany interest 21 32
--------- --------
Total interest income 859 1,041
Noninterest expense:
Advisory fees 31 31
Other expenses 29 39
--------- --------
Total noninterest expense 60 70
Net income 799 971
Preferred stock dividend paid 681 681
--------- --------
Net income applicable to common shares $ 118 $ 290
========= ========
Net income per common share $ 3.71 $ 9.12
========= ========
Weighted average common
shares outstanding 31,781 31,781
========= ========
See Notes to Financial Statements.
3
D&N CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31,
2002 2001
----------------------------
Operating activities
Net Income $ 799 $ 971
Adjustments to reconcile net income
to net cash provided by operating activities:
Net change in:
Accrued interest receivable 7 19
Amortization of premiums 114 83
Due from Parent 1,239 (3,471)
Other assets - 6
Other liabilities 691 (18)
--------- ---------
Net cash provided by (used in) operating activities 2,850 (2,410)
--------- ---------
Investing activities:
Purchase of mortgage loans (14,654) (1,401)
Payoffs and principal payments received 12,470 4,492
--------- ---------
Net cash used in (provided by) investing activities (2,184) 3,091
--------- ---------
Financing activities:
Preferred stock dividends paid (681) (681)
Common stock dividends paid -- --
--------- ---------
Net cash used in financing activities (681) (681)
--------- ---------
Net decrease in cash (15) --
Cash at beginning of period 15 11
--------- ---------
Cash at end of period $ -- $ 11
========= =========
See Notes to Financial Statements.
4
D&N CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
D&N Capital Corporation (the "Company") is a Delaware corporation
incorporated on March 18, 1997 and created for the purpose of acquiring and
holding real estate assets. The Company was a wholly-owned subsidiary of D&N
Bank ("D&N"), a state chartered savings bank, which became wholly-owned by
Republic Bancorp Inc. on May 17, 1999. On December 1, 2000, the Company became a
wholly-owned subsidiary of Republic Bank ("Republic"), a state chartered bank
when D&N Bank merged into Republic Bank. Republic Bank is wholly owned by
Republic Bancorp Inc.
All shares of common stock are held by Republic Bank. The Company's
preferred stock is traded on The Nasdaq Stock Market(R) under the symbol
"DNFCP".
The accompanying unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes necessary for a comprehensive presentation of
financial position, results of operations and cash flow activity required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all normal recurring
adjustments necessary for a fair presentation of results have been included. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report of Form 10-K for the year ended December
31, 2001.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans: Mortgage loans are carried at the principal amount
outstanding, plus premium or discount, upon purchase. Interest income is
recognized using the interest method, which approximates a level rate of return
over the term of the loan.
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 from the remainder of the portfolio. Management's
determination of the level of the allowance is based upon an 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. At March 31, 2002 and
December 31, 2001, there was no allowance for loan losses.
Due from Parent: Accounts receivable from parent represents principal
and interest payments due the Company from Republic Bank, partially offset by
prior amounts due Republic Bank by the Company.
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: The Company has elected to be treated as a Real Estate
Investment Trust ("REIT") pursuant to provisions of the Internal Revenue Code of
1986, as amended (the "Code"). As a result, the Company will not be subject to
federal income tax on its taxable income to the extent it distributes at least
95% of its taxable income to its shareholders and it meets certain other
requirements as defined in the Code. The Company intends to maintain its
qualification as a REIT for federal income tax purposes. The Company intends to
make qualifying dividends (for federal income tax purposes) of all of its
taxable income to its common and preferred stock shareholders, a portion of
which may be in the form of "consent" dividends, as defined under the Code. As a
result, the Company has made no provision for federal income taxes in the
accompanying financial statements.
Dividends:
Preferred Stock: Dividends on preferred stock are noncumulative from
issuance (July 17, 1997) and are payable quarterly on the last day of March,
June, September and December at a rate of 9.00% per annum of the liquidation
preference ($25.00 per share).
Common Stock: Republic Bank, as sole common shareholder, is entitled to
receive dividends when, as and if declared by the Board of Directors from funds
legally available after all preferred dividends have been paid.
Earnings Per Common Share: Earnings per share is computed by dividing net
income after preferred dividends by the weighted average number of common shares
outstanding. There are no outstanding dilutive securities.
NOTE 3: DIVIDENDS
For each of the three month periods ended March 31, 2002 and 2001, the
Company paid dividends on Series A Preferred Shares in the amount of $680,625.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business of the Company is to acquire and hold residential
and commercial mortgage loans ("mortgage loans") that will generate net income
for distribution to stockholders. The Company intends to acquire all its loans
from Republic Bank. These loans consist of whole loans secured by first
mortgages or deeds of trust on single-family residential real estate properties
or on commercial real estate properties.
Republic Bank administers the day-to-day activities of the Company in its
role as Advisor under the Advisory Agreement. Republic Bank also services the
Company's mortgage loans under each of the Servicing Agreements.
It is the intention of the Company and Republic Bank that any agreements
and transactions between the Company and Republic Bank are consistent with
market terms, including the price paid and received for mortgage loans, upon
their acquisition or disposition by the Company, or in connection with the
servicing of such mortgage loans.
RESULTS OF OPERATIONS
The Company reported total interest income for the quarter ended March 31,
2002 of $838,000, compared to $1,009,000 for the first quarter of 2001. Interest
income from residential and commercial mortgage loans was $791,000 and $47,000,
respectively, for the first quarter of 2002, compared to $861,000 and $148,000,
respectively for the first quarter of 2001. After a deduction of $31,000 in
advisory fees and $29,000 in other administrative expenses, the Company reported
net income of $799,000 for the quarter ended March 31, 2002, compared to
$971,000 for the quarter ended March 31, 2001.
For the three month periods ended March 31, 2002 and 2001, the Company
reported net income per common share of $3.71 and $9.12, respectively.
The Company paid $680,625 in preferred stock dividends for both three month
periods ended March 31, 2002 and 2001. Dividends on the common stock are paid to
Republic Bank when and if declared by the Board of Directors of the Company out
of funds available. The Company expects to pay common stock dividends at least
annually in amounts necessary to continue to preserve its status as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
MORTGAGE LOANS
Residential mortgage loans consist of adjustable rate mortgages and fixed
rate mortgages. The commercial mortgage loans consist of fixed and variable rate
loans, a majority of which have balloon payments. Reinvestments in mortgage
loans are made to maintain a ratio of approximately 90% to 95% residential and
5% to 10% commercial mortgage loans in the portfolio. All mortgage loans are
purchased from Republic Bank on a fair value basis.
For the three month periods ended March 31, 2002 and 2001, the Company
purchased replacement mortgage loans from Republic Bank of $14,654,000 and
$1,401,000, respectively. In
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addition, the Company received $12,470,000 and $4,492,000, respectively, of
principal payments and loan payoffs on its portfolio for the three month periods
ended March 31, 2002 and 2001.
INTEREST RATE RISK
The Company's income consists primarily of interest payments on mortgage
loans. Currently, the Company does not use any derivative products to manage
interest rate risk. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of adjustable rate mortgages are based),
then the Company will experience a decrease in income available to be
distributed to its shareholders. There can be no assurance that an interest rate
environment in which there is a significant decline in interest rates over an
extended period of time would not adversely affect the Company's ability to pay
dividends on the preferred stock.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk arises when a number of customers engage in
similar business activities, or activities in the same geographical region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Concentration of credit risk indicates the relative sensitivity of
the Company's performance to both positive and negative developments affecting a
particular industry.
Approximately 87% of the Company's total mortgage loan portfolio is loans
secured by residential real estate properties 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.
In addition, all of the commercial mortgage properties underlying the
Company's commercial mortgage loans are located in Michigan. Consequently, these
commercial mortgage loans may be subject to 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 the area to make payments of principal and interest on the underlying
mortgages.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. In
managing liquidity, the Company takes into account various legal limitations
placed on a REIT as discussed on the following page in Other Matters.
The Company's principal liquidity needs are to maintain the current
portfolio size through the acquisition of additional mortgage loans as mortgage
loans currently in the portfolio mature, or prepay, and to pay dividends on the
preferred and common stock. The acquisition of additional mortgage loans is
intended to be funded with the proceeds obtained from the repayment of principal
balances by individual mortgagees. The Company does not have and does not
anticipate having any material capital expenditures.
8
OTHER MATTERS
As of March 31, 2002, the Company believed that it was in full compliance
with the REIT tax rules and that it will continue to quality as a REIT for
federal income tax purposes. The Company calculated that (a) its Qualified REIT
Assets to be 100% of total assets, compared to the federal tax requirements of
75%; and (b) that 98% of its revenues qualify for the 75% source of income test
and 100% of its revenues qualify for the 95% source of income test under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its
common and preferred stocks and anticipates meeting the 2002 annual distribution
and administrative requirements.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits is included herein:
12(a) Computation of Ratio of Earnings to Fixed Charges
12(b) Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividend Requirements
(b) Reports to Form 8-K:
There were no reports filed on Form 8-K during the first
quarter of 2002.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
D&N CAPITAL CORPORATION
-----------------------
(Registrant)
Date: May 15, 2002 /s/ Leonard M. Bolduc
------------------------------------
Leonard M. Bolduc, President and
Chief Executive Officer
/s/ Thomas F. Menacher
-----------------------------------
Thomas F. Menacher,
Principal Accounting Officer
10