Michigan's D&N Financial aims to restore its health with $23 million offering.

D&N Financial Corp., Hancock, Mich., hopes that a $23 million rights offering will help it jettison the esoteric assets that caused the community bank to lose millions in recent years.

D&N, a $1.1 billion-asset banking company, will use the proceeds to boost the weak capital of its subsidiary, D&N Bank.

The offering also would support continued investment writedowns in the fourth quarter of approximately $10 million and would allow the bank to expand.

"This offering is very important for the bank," said John Pickart, an analyst with First of Michigan Corp. in Detroit. "This will likely take care of any capital needs in the future."

Swaps Led to Losses

D&N, based in Michigan's Upper Peninsula, went public in 1985 It entered commercial-property lending in its own market and outside Michigan during the 1980s, according to Mr. Pickart.

Former management also used interest-rate exchange agreements and mortgage-derivative products to hedge interest-rate risk, instead of the more bread-and-butter method of adjusting existing assets and liabilities, he said.

The swaps and derivatives investment were responsible for almost $19 million of losses at the company so far this year.

Since 1990, new management has worked to lessen the company's reliance on these troubled hand-me-downs.

Big Demand Seen

For instance, the new management has sold assets, which peaked at $2.2 billion in 1988, to shore up capital ratios.

"We feel this is the final stage of D&N's turnaround," president and chief executive George J. Butvilas said of the rights offering.

Mr. Butvilas said he anticipates a successful rights offering. "Indications are there's significant demand for the offering," he said.

Securities and Exchange Commission approval for the offering came after D&N filed an amendment to its registration statement earlier this month, which included several additional actions that the company plans for its recovery.

As of Sept. 30, D&n's capital ratios were: tangible, 3.31%; core, 4.06%, and risk-based, 8.32%, compared with regulatory minimums of 1. 5%, 3%, and 8% respectively, according to the bank's third-quarter statement.

The Writedown Hurdle

For the fourth quarter, D&N is considering allowances of up to $6 million for investments in purchased mortgage servicing rights and interest-only mortgage derivative securities, because of continued low interest rates and high prepayment levels.

Further, D&N May terminate several interest-rate exchange agreements, at an estimated cost of $3 million, as well as dispose of its participation interest in a large nonperforming commercial real estate loan by yearend, at a loss of $1 million to $2 million.

The remaining interest swaps mature in 1995, Mr. Butvilas said.

By getting the bulk of the writedowns over with this year, D&N could return to profitability in the first quarter of 1994 if interest rates remain steady' First of Michigan's Mr. Pickart predicted.

Posting Losses

For the third quarter, D&N reported a loss of $5.9 million, compared with earnings of $678,000 a year ago. For the first nine months, the company had a loss of $18.9 million, down from earnings of $1.3 million the previous year.

The losses resulted primarily from third-quarter writedowns on the purchased mortgage servicing rights and interest-only mortgage derivative securities.

The rights offering consists of the sale of up to approximately 1.1 million units, each with three shares of common stock and one warrant, at a subscription price of $22.75 per unit.

Each warrant will entitle the holder to purchase one additional share of D&N common stock at a price of $8.25 at any time before the end of 1996.

The rights offering also will allow D&N, the third-largest savings bank in Michigan, to refocus on full-service community banking, "taking care of the consumer and small-business person," Mr. Butvilas said.

D&N, in business since 1889, has 37 financial services offices throughout the Upper Peninsula and mid-Michigan. The bank has opened a subsidiary office in Marinette, Wis.

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