-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TkfaCK55iw1P4TGib6VS6si8ET4/uERAECfMwhCNpVrkI5lY/FgAuLnrxTzcIr4K OlOq876kc0wvmxuC2Ymg3w== 0001067312-99-000349.txt : 19991117 0001067312-99-000349.hdr.sgml : 19991117 ACCESSION NUMBER: 0001067312-99-000349 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: D&N CAPITAL CORP CENTRAL INDEX KEY: 0001036263 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22767 FILM NUMBER: 99754326 BUSINESS ADDRESS: STREET 1: 400 QUINCY STREET CITY: HANCOCK STATE: MI ZIP: 49930 BUSINESS PHONE: 9064822700 MAIL ADDRESS: STREET 1: 400 QUINCY STREET CITY: HANCOCK STATE: MI ZIP: 49930 10-Q 1 QUARTERLY REPORT DATED SEPT. 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ -------------------------- Commission file number 0-22767 ------------------------------------- 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, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $300 par value 31,781 - ------------------------------------------ ------------------------- Series A Preferred Shares, $25 par value 1,210,000 - ------------------------------------------ ------------------------- (Class) (Shares Outstanding as of October 31, 1999) D&N CAPITAL CORPORATION INDEX Page No. ---------- PART I Financial Information Item 1. Financial Statements (Unaudited) Statements of Condition - As of September 30, 1999 and December 31, 1998 3 Statements of Income - For the three and nine months ended September 30, 1999 and 1998 4 Statements of Cash Flows - For the nine months ended September 30, 1999 and 1998 5 Notes to Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 12 PART II Other Information 13 Signature 14 Exhibits 15 - 18 - 2 - D&N CAPITAL CORPORATION STATEMENTS OF CONDITION (In thousands, except share data)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) Assets: Loans receivable: Residential mortgage loans $53,222 $52,858 Commercial mortgage loans 7,128 7,401 ------- ------- Net loans receivable 60,350 60,259 Cash 2 2 Due from Parent 642 21 Other assets 10 5 Accrued interest receivable 346 358 ------- ------- Total assets $61,350 $60,645 ======= ======= Liabilities: Other liabilities $ 46 $ 70 ------- ------- Total liabilities 46 70 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 804 75 ------- ------- Total stockholders' equity 61,304 60,575 ------- ------- Total liabilities and stockholders' equity $61,350 $60,645 ======= =======
See Notes to Financial Statements. - 3 - D&N CAPITAL CORPORATION STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------------------------- ------------------------- Interest income: Loans: Residential mortgage loans $ 860 $ 869 $ 2,509 $ 2,659 Commercial mortgage loans 123 152 405 463 ------- ------- ------- ------- Total loan interest income 983 1,021 2,914 3,122 Intercompany interest 12 17 39 29 ------- ------- ------- ------- Total interest income 995 1,038 2,953 3,151 Noninterest expense: Advisory fees 31 31 94 94 Other expenses 29 14 88 39 ------- ------- ------- ------- Total noninterest expense 60 45 182 133 Net income 935 993 2,771 3,018 Preferred stock dividend requirements 681 681 2,042 2,042 ------- ------- ------- ------- Net income applicable to common shares $ 254 $ 312 $ 729 $ 976 ======= ======= ======= ======= Net income per common share $ 8.00 $ 9.81 $ 22.94 $ 30.71 ======= ======= ======= ======= Weighted average common shares outstanding 31,781 31,781 31,781 31,781 ======= ======= ======= =======
See Notes to Financial Statements. - 4 - D&N CAPITAL CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended September 30, 1999 1998 ----------- ----------- Operating activities Net Income $ 2,771 $ 3,018 Adjustments to reconcile net income to net cash provided by operating activities: Net change in: Accrued interest receivable 12 -- Due from Parent (621) (1,074) Other assets (5) (10) Accounts payable (24) 6 -------- -------- Net cash provided by operating activities 2,133 1,940 -------- -------- Investing activities: Purchase of mortgage loans (18,700) (20,815) Principal payments received 18,609 20,917 -------- -------- Net cash used by investing activities (91) 102 -------- -------- Financing activities: Preferred stock dividends paid (2,042) (2,042) Common stock dividends paid -- -- -------- -------- Net cash used by financing activities (2,042) (2,042) -------- -------- Net increase in cash -- -- Cash at beginning of period 2 2 -------- -------- Cash at end of period $ 2 $ 2 ======== ========
See Notes to Financial Statements. - 5 - D&N CAPITAL CORPORATION NOTES TO CONSOLIDATED 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 was created for the purpose of acquiring, holding and managing real estate assets. The Company is a wholly-owned subsidiary of D&N Bank ("D&N"), a state chartered savings bank, which itself became a wholly-owned subsidiary of Republic Bancorp Inc., a Michigan bank holding company, on May 17, 1999. All shares of common stock are held by D&N Bank. The Series A Preferred Shares are traded on The Nasdaq Stock Market under the symbol "DNFCP". The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by generally accepted accounting principles 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, 1998. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mortgage Loans: Mortgage loans are carried at the principal amount outstanding, plus premium or discount, upon purchase from D&N Bank. 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 loan losses 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 September 30, 1999 and December 31, 1998, there were no allowances for loan losses. - 6 - Dividends: Preferred Stock. Dividends on the Series A Preferred Shares 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. D&N Bank, as 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. Net Income Per Common Share: Net income per common share is computed by dividing net income after preferred dividends by the weighted average number of common shares outstanding. Diluted earnings per share is not presented, as there are no outstanding dilutive securities. 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 income taxes in the accompanying financial statements. NOTE 3: DIVIDENDS For each of the three and nine month periods ended September 30, 1999 and 1998, the Company paid dividends on Series A Preferred Shares in the amount of $680,625, and $2,041,875, respectively. - 7 - D&N CAPITAL CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The principal business of the Company is to acquire, hold and manage residential and commercial mortgage loans ("mortgage loans") that will generate net income for distribution to stockholders. The Company currently intends to continue to acquire all its mortgage loans from D&N Bank, consisting of whole loans secured by first mortgages or deeds of trust on single-family residential real estate properties or on commercial real estate properties. D&N Bank administers the day-to-day activities of the Company in its role as Advisor under the Advisory Agreement. D&N Bank also services the Company's mortgage loans under each of the Servicing Agreements. It is the intention of the Company and D&N Bank that any agreements and transactions between the Company and D&N 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 September 30, 1999 of approximately $995,000. Interest income from residential and commercial mortgage loans were $860,000 and $123,000, respectively. After a deduction of approximately $31,000 in advisory fees and $29,000 in other administrative expenses, the Company reported net income of approximately $935,000 for the quarter ended September 30, 1999. The Company reported total interest income for the nine months ended September 30, 1999 of approximately $2,953,000. Interest income from residential and commercial mortgage loans were $2,509,000 and $405,000, respectively. After a deduction of approximately $94,000 in advisory fees and $88,000 in other administrative expenses, the Company reported net income of approximately $2,771,000 for the nine months ended September 30, 1999. - 8 - For the three month and nine month periods ended September 30, 1999, the Company reported net income per common share of $8.00 and $22.94, respectively. For the quarter ended September 30, 1999, the Company paid $680,625 in preferred stock dividends. Dividends on the common stock are paid to D&N Bank when, as 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 ("ARMs") and Fixed Rate Mortgages ("FRM's"). The commercial mortgage loans consist of fixed and variable rate loans, a majority of which have balloon payments. Reinvestments in mortgage loans have been and will continue to be consistent in maintaining an approximate 90% and 10% ratio between residential and commercial mortgage loans, respectively. All loans are purchased from D&N Bank. For the three month and nine month periods ended September 30, 1999, the Company purchased replacement mortgage loans from D&N Bank of approximately $6,535,000 and $18,700,000. In addition, the Company received approximately $5,104,000 and $18,609,000, respectively, of principal payments on its portfolio for the three and nine month periods ended September 30, 1999. INTEREST RATE RISK The Company's income consists primarily of interest payments on mortgage loans. If there is a decline in interest rates (as measured by the indices upon which the interest rates of the residential ARM and variable rate commercial mortgage loans 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 Series A Preferred Shares. - 9 - 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 90% of the Company's total mortgage loan portfolio are 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, geographically diverse, residential mortgage loans in the event of adverse economic, political or business developments and natural hazards in Michigan. In addition, the majority of the commercial mortgage properties underlying the Company's commercial mortgage loans are located in the Detroit, Michigan metropolitan area. Consequently, these commercial mortgage loans may be subject to greater risk of default in the event of adverse economic, political or business developments in the Detroit metropolitan area. 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 and to capitalize on opportunities for the Company's business expansion. In managing liquidity, the Company takes into account various legal limitations placed on a REIT as discussed below 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 Series A Preferred Shares. The acquisition of additional mortgage loans is intended to be funded with the proceeds obtained from the repayment of principal balances by individual borrowers. The Company does not have and does not anticipate having any material capital expenditures. - 10 - YEAR 2000 COMPLIANCE The Company relies on D&N Bank for data processing services, through its loan servicing operations and for maintenance of financial and other records involved in the management of D&N Capital Corporation. The following disclosure discusses D&N Bank's year 2000 project and its associated costs. D&N utilizes various electronic computer systems for the delivery of its financial services products such as deposit and loan accounts, for the maintenance of its financial and other business records, and for general management purposes. Some of these systems include legacy procedures and historic data that may have been stored in such a manner that inconsistencies or failures could occur when dates from the new millennium are considered. Commonly known as the Year 2000 problem, a myriad of related potential computing difficulties face entities that rely extensively upon computer systems. D&N's major computer systems include deposit accounts, commercial lending, consumer lending, financial control, and sales platform support applications provided by M&I Data Services, Inc.; mortgage lending applications provided by ALLTEL Information Services, Inc. and FiTech, Inc.; and internally maintained microcomputer and network systems which support management functions and communications. D&N has completed all phases of their Year 2000 project. The project has addressed computer hardware, software, procedures, large borrowers and facilities. This project began in October 1996. To date all at-risk computer hardware has been tested and confirmed Year 2000 compliant. The four primary business applications (deposit account processing, installment loan account processing, general ledger and mortgage loan processing) have been certified by the third party provider, as Year 2000 compliant. The remaining applications systems have been tested and contingency plans have been developed to mitigate business operational risk. D&N's internally maintained systems, consisting primarily of a Lotus Notes server and various workstation-based business suite software, are Year 2000 compliant as currently installed. All newly acquired software is being tested for Year 2000 compliance before acceptance. Software testing has been done to verify date changes for 1999 to 2000, the identification and correct processing of leap years, along with numerous date projections from 1999 through the next millennium using day, month and year increments. - 11 - Manual procedures have been reviewed and changed where date specific actions occur. Necessary changes to supporting forms to properly record dates in the new millennium have been identified and are being made. Costs associated with addressing the Year 2000 issue as it affects D&N's third party applications is implicitly included in the contractual arrangements for those applications. D&N's total Year 2000 estimated project cost, which is based upon currently available information, included expenses for the review and testing of third parties including governmental applications. However, there can be no guarantee that the hardware, software and systems of such third parties will be without unfavorable Year 2000 issues and therefore not present a material adverse impact upon D&N Bank. Year 2000 compliance costs incurred have totaled approximately $26,000. This figure does not include the implicit costs associated with the reallocation of internal staff hours to Year 2000 project related efforts. At this time no significant projects have been delayed as a result of D&N's Year 2000 effort. Management of D&N Bank believes it has an effective program in place to resolve the Year 2000 issue without business interruption. In the event of vendor failures, under the most reasonable likely worst case scenario, D&N Bank would be required to process certain transactions manually, which may effect customer service. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially effect D&N Bank. D&N Bank could be subject to litigation for equipment shutdown or failure to properly date customer records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. OTHER MATTERS As of September 30, 1999, the Company believed that it was in full compliance with the REIT tax rules and it will continue to quality as a REIT under the provision of the Code. The Company calculates that: * its Qualified REIT Assets, as defined in the Code, are approximately 100% of its total assets, as compared to the federal tax requirements that at least 75% of its total assets must be Qualified REIT assets. * 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 1999 annual distribution and administrative requirements. - 12 - D&N CAPITAL CORPORATION PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS None ITEM 2: CHANGES IN SECURITIES None ITEM 3: DEFAULTS UPON SENIOR SECURITIES None ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5: OTHER INFORMATION None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits 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 (27) Financial Data Schedule (b) Reports to Form 8-K: No reports on Form 8-K have been filed during the quarter ended September 30, 1999. - 13 - SIGNATURE 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: November 15, 1999 /s/ Richard E. West ----------------- ------------------------------ Richard E. West, President and Chief Executive Officer /s/ Thomas F. Menacher ------------------------------ Thomas F. Menacher, Chief Financial Officer - 14 - INDEX TO EXHIBITS Exhibit No. Exhibits ---------- -------- 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 27 Financial data schedule - 15 - EX-12.A 2 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12(A) D&N CAPITAL CORPORATION Computation of ratio of earnings to fixed charges For the Nine Months Ended September 30, 1999 (In thousands, except ratio) Net income $2,771 Fixed charges: Advisory fees 94 Total fixed charges 94 Earnings before fixed charges $2,865 Fixed charges, as above 94 Ratio of earnings to fixed charges 30.5 - 16 - EX-12.B 3 RATIO OF EARNINGS TO FIXED CHARGES PERFERRED STOCK EXHIBIT 12(B) D&N CAPITAL CORPORATION Computation of ratio of earnings to fixed charges and preferred stock dividend requirements For the Nine Months Ended September 30, 1999 (In thousands, except ratio) Net income $2,771 Fixed charges: Advisory fees 94 Total fixed charges 94 Earnings before fixed charges 2,865 Fixed charges, as above 94 Preferred stock dividend requirement 2,042 Fixed charges including preferred stock dividends $2,136 Ratio of earnings to fixed charges and preferred stock dividends requirements 1.34 - 17 - EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONDITION SHEET AS OF SEPTEMBER 30, 1999, STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, SCHEDULES AND OTHER REQUIRED DISCLOSURES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S SEPTEMBER 30, 1999 FORM 10-Q. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2 0 0 0 0 0 0 60,350 0 61,350 0 0 46 0 0 30,250 30,250 804 61,350 2,914 0 39 2,953 0 0 2,953 0 0 182 2,771 2,771 0 0 2,771 22.94 22.94 7.09 0 0 0 0 0 0 0 0 0 0 0
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