<PAGE>   1
3/19/97                          UNITED STATES                            DRAFT
3:05 P.M.              SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                       ----------------------------------
                                   FORM 10-K

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 [FEE REQUIRED]

         For the Fiscal Year Ended December 31, 1996

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the  Securities
         Exchange Act of 1934 [NO FEE REQUIRED]

         For the transition period from               to 
                                        -------------    ---------------
         Commission File Number 0-17137

                          D & N FINANCIAL CORPORATION
         ---------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

                     Delaware                                   38-2790646
         -------------------------------                  ---------------------
         (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          (Zip Code)


         Registrant's telephone number, including area code (906) 482-2700
                                                            -------------------

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
                                      ----
          Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.

  YES X .  NO    .
     ---     ---

     Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

     As of March 11, 1997, there were issued and outstanding 8,314,654 shares of
the Registrant's Common Stock.

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock at
March 11, 1997, was $142,067,000.  (The exclusion from such amount of the market
value of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)

                      DOCUMENTS INCORPORATED BY REFERENCE

     PARTS II and IV of Form 10-K - Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1996.

     PART III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997.

================================================================================


<PAGE>   2
                                   PART I

ITEM 1.  BUSINESS

     D&N Financial Corporation ("D&N" or the "Company") is a financial services
holding company organized under the laws of the state of Delaware. The Company's
principal subsidiary is D&N Bank (the "Bank"), a federally chartered stock
savings bank headquartered in Hancock, Michigan.

     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 total assets of $1.47 billion at December 31,
1996, D&N is the second largest savings institution headquartered in Michigan.

     D&N's primary business consists of attracting deposits from the general
public and making real estate loans, business loans,  and consumer loans and
other types of investments. The Company 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.  The Bank's deposits are insured up
to the maximum extent permitted 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 Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the FDIC.

     In December 1993, the Company raised an additional $20.9 million of capital
in a shareholder rights offering and began to implement growth and expansion
strategies.  At December 31, 1996, the Bank was in compliance with its
regulatory capital requirements.

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

     Like many financial institutions, the operations of the Company's
subsidiary 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.  See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition - Asset/Liability Management."

                                     - 2 - 

<PAGE>   3
FORWARD LOOKING STATEMENTS

     When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.

     The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.

     The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.

LENDING ACTIVITIES

     GENERAL.  The Bank, has concentrated its lending activities on first
mortgage conventional loans secured by residential and commercial real estate
and both installment and revolving consumer and business 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.

     LOAN PORTFOLIO COMPOSITION.  The following table sets forth information
concerning the composition of D&N's loan portfolio in dollar amounts and
percentages, by type of loan.

<TABLE>
<CAPTION>
                                                                           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
<S>                        <C>         <C>       <C>        <C>        <C>        <C>       <C>        <C>       <C>        <C>
   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    1.4       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        1,901    0.29        4,037    0.56 
                                 ----  ------    --------    ------    --------   ------     --------   -------   --------  -------
                               21,952    2.08      22,993      2.41       5,446     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%
                           ==========  =======   ========    =======   ========   ======     ========  =======    ========  ====== 
</TABLE>

                                     - 3 -
<PAGE>   4

     LOAN MATURITIES.   The following schedule illustrates the maturity
structure of the Company'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.

<TABLE>
<CAPTION>
                                                  Residential
                         Commercial                  and                    Real Estate
                          Business              Income Producing           Construction
                          Property                  Property                  Loans                  Consumer Loans       Total
                         ---------              ----------------           ------------              --------------       ----- 
Amounts
 Due in
 Years                   
Ending                    Weighted              Weighted                Weighted                Weighted                 Weighted
Average                    Average               Average                 Average                 Average                  Average
December 31,      Amount    Rate        Amount     Rate       Amount      Rate        Amount     Rate         Amount        Rate  
-------------   --------- --------    ---------  --------   ---------   -------     ---------  --------     ---------     --------
                                                            (Dollars in thousands)
<S>            <C>          <C>      <C>         <C>       <C>         <C>        <C>          <C>         <C>            <C>
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:                                                                                                          12,085
  Loans in process                                                                                             11,042 
  Loss and valuation allowances                                                                            ----------
                                                                                                           $1,055,876 
                                                                                                           ==========            
</TABLE>

     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.  D&N has originated residential mortgage loans
secured by property both within and outside the State of Michigan. D&N has also
purchased residential mortgage loans secured by property located in various
states.  In addition, the Company 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 D&N's real
estate loans receivable (excluding government agency insured or guaranteed
mortgage-backed and derivative products) were secured by real estate located in
Michigan.


                                     - 4 -
<PAGE>   5

     The following table presents information regarding the geographic location
of the properties securing D&N'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 
  Office buildings  . . . . . . . . . . . . . . . . . . . . . . .     3,950 
  Industrial  . . . . . . . . . . . . . . . . . . . . . . . . . .       726 
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       390
                                                                        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

TEXAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
      
 One- to four-family residential  . . . . . . . . . . . . . . . .     8,762
                                                                   --------  
                                                                      8,762


                                     - 5 -

<PAGE>   6
                                                             Outstanding Balance
                                                                      at 
                                                              December 31, 1996
                                                             -------------------
                                                                (In thousands)

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 
  Deferred income, discounts and                                 
   premiums, net  . . . . . . . . . . . . . . . . . . . . . . . .      489
                                                                 
Less:                                                            
  Loans in process  . . . . . . . . . . . . . . . . . . . . . . .  (12,085) 
  Loss allowances   . . . . . . . . . . . . . . . . . . . . . . .   (7,173)
                                                                  -------- 
  Total                                                           $707,446
                                                                  ========


     Residential loan originations are attributable  to direct marketing efforts
of the Bank and of the Bank's subsidiary, D&N Mortgage Corporation, as well as
to referrals from real estate brokers and builders.  Income producing property
loans are originated through the Bank's direct marketing efforts and through
referrals by existing customers. In 1996, total loan originations increased
$111.9 million, or 28% as a result of a significant increase in consumer
lending activity. Consumer loan originations alone increased $76.5 million, or
39%. 


                                     - 6 -
<PAGE>   7
     D&N 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, 1996, the Bank had $5.3 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 D&N.  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.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Noninterest Income."  At December 31, 1996, D&N serviced
for others approximately $415 million in loans and loan participations.  See
also Note A of Notes to Consolidated Financial Statements "Summary of
Significant Accounting Policies - Mortgage Servicing Rights".

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

<TABLE>
<CAPTION>
                                                                                                                            
                                                       Year Ended December 31            
                                          -------------------------------------------------
                                              1996              1995               1994   
                                          ------------     --------------       -----------
                                                           (In thousands)
<S>                                        <C>             <C>                    <C>
Balance at beginning of year               $ 1,113         $    968               $ 9,870
Additions:                               
  Capitalized servicing                        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
                                           =======          =======               =======
</TABLE>





                                     - 7 -
<PAGE>   8

               The following table shows origination, purchase, sale and
repayment activities of D&N Bank, including mortgage-backed securities, for the
periods indicated.
<TABLE>
<CAPTION>
                                                                    Year Ended December 31                           
                                       ------------------------------------------------------------------------------
                                                1996          1995          1994          1993         1992   
                                            ----------    ----------    -----------   -----------  -----------
                                                                      (In thousands)
<S>                                         <C>           <C>         <C>             <C>          <C>
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       17,350          13,014         2,711
Non-real estate:                                                                                              
   Consumer   . . . . . . . . . . . . .      271,622        195,109      132,836          95,129        85,254
   Commercial   . . . . . . . . . . . .       11,437          3,739        4,748              --            --
                                            --------       --------     --------       ---------     ---------
    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   . . . . .           --            --         1,852              --            --
  Mortgage-backed securities  . . . . .       58,892            --        68,391         108,749        91,453
                                            --------       --------     --------       ---------     ---------
    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)  
                                            ========       ========     ========       =========     =========
</TABLE>

(1)  Includes sales of CMO residuals 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.   See "Regulation - Federal
Savings Association Regulation."

         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 D&N 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.

         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



                                     - 8 -
<PAGE>   9

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 Federal National Mortgage
Association ("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 Bank 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.

                                     - 9 -
<PAGE>   10

     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 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 Company
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.

<TABLE>
<CAPTION>
                                                                   December 31                                           
                        ----------------------------------------------------------------------------------------------------------
 MORTGAGE-BACKED                    1996                1995                 1994                 1993                1992          
  SECURITIES                        ----                ----                 ----                 ----                ----
 ---------------              Amount   Percent    Amount  Percent      Amount  Percent       Amount  Percent     Amount  Percent
                              ----------------    ---------------      ---------------       ---------------     ---------------
                                                                 (Dollars In thousands)
<S>                         <C>        <C>       <C>         <C>      <C>        <C>        <C>        <C>       <C>        <C>
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%
                            ========  ======     ========   ======     ========  ======     ========   ======     ========  ====== 
</TABLE>


                                      -10-
<PAGE>   11

     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.

     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."

<TABLE>
<CAPTION>
                                                                                  Amount Non-
                                               Loans          Percentage         Performing or
                                            Outstanding        of Total            of Concern  
                                            -----------       ----------         --------------
                                                         (Dollars in thousands)
                                          
<S>                                         <C>             <C>                 <C>
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%
                                              =======        ======     
</TABLE>

                                     - 11 -
<PAGE>   12

     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 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


                                     - 12 -


<PAGE>   13

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.

     D&N Bank 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


                                     - 13 -
<PAGE>   14

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.

     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

<TABLE>
<CAPTION>
                                                                     Income Producing
                               Commercial         Residential            Property            Consumer     
                             ---------------     ---------------     ------------------   -----------------
                             Number   Amount     Number   Amount     Number     Amount    Number     Amount
                             ------   ------     ------   ------     ------    --------   -------    ------
                                                     (Dollars in thousands)
<S>                         <C>       <C>        <C>       <C>          <C>   <C>          <C>      <C>
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
                             ======   =======      ===     ======      ===     =======       ===     =======

</TABLE>

     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.

                                     - 14 -
<PAGE>   15


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 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:

<TABLE>
<CAPTION>
                                                                                December 31                                     
                                           ---------------------------------------------------------------------------
                                              1996            1995           1994               1993            1992   
                                              ----            ----           ----               ----            ----
                                                                        (Dollars in thousands)
<S>                                       <C>             <C>             <C>                <C>             <C>
Nonaccruing loans                          $  6,621        $  8,225        $ 17,995           $ 30,102        $ 44,703 
Accruing loans delinquent
  more than 90 days                              --              24               5                 13              -- 
Restructured loans                               --              --              --                166             167
                                           --------        --------        --------           --------        --------
     
  Total nonperforming loans                   6,621           8,249          18,000             30,281          44,870 
 Other real estate owned (OREO)               1,470           1,452           6,520             13,312          11,186
                                           --------        --------        --------           --------        --------

   Total nonperforming assets              $  8,091        $  9,701        $ 24,520           $ 43,593        $ 56,056
                                           ========        ========        ========           ========        ========

Nonperforming loans as a
  percentage of total loans                    0.62%           0.86%           2.17%              4.60%           6.05%
                                           ========        ========        ========           ========        ========

Nonperforming assets as a
   percentage of total assets                  0.55%           0.79%           2.17%              4.04%           4.47%
                                           ========        ========        ========           ========        ========

Allowance for loan losses as a
   percentage of  nonperforming loans        166.77%         122.21%          46.38%             38.21%          34.79%
                                           ========        ========        ========           ========        ========

Allowances for loan and OREO losses
   as a percentage of
   nonperforming assets                      136.47%         105.29%          35.40%             28.03%          30.08%
                                           ========        ========        ========           ========        ========

</TABLE>




                                     - 15 -
<PAGE>   16

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 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

                                     - 16 -
<PAGE>   17

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."


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

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31                             
                                                         -------------------------------------------------------------------------
                                                           1996               1995            1994              1993         1992 
                                                         -------------------------------------------------------------------------
                                                                                  (Dollars in thousands)
<S>                                                      <C>             <C>               <C>              <C>          <C>
Balance at beginning of year . . . . . . . . . . . . .    $10,081          $  8,349        $ 11,570          $ 15,611    $ 18,744
Charge-offs:
 Residential mortgages . . . . . . . . . . . . . . . .        314               169             110             1,136         329
 Mortgages on income producing property  . . . . . . .         --             1,019           3,109            2 ,584       2,180
 Consumer loans  . . . . . . . . . . . . . . . . . . .      1,216               999             773               681       1,000
                                                          -----------------------------------------------------------------------
                                                            1,530             2,187           3,992             4,401       3,509
Recoveries:
 Residential mortgages. . . . . .  . . . . . . . . . .          3               917               9                25          --
 Mortgages on income producing property  . . . . . . .      1,098               245             300                 8           3
 Consumer loans . . . . . . . .  . . . . . . . . . . .        290               357             362               327         256
                                                          -----------------------------------------------------------------------
                                                            1,391             1,519             671               360         259

Net charge-offs  . . . . . . . . . . . . . . . . . . .        139               668           3,321             4,041       3,250
Provision charged to operations  . . . . . . . . . . .      1,100             2,400             100                --         117

Balance at end of year . . . . . . . . . . . . . . . .    $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%
                                                          =======================================================================
</TABLE>
                                     - 17 -
<PAGE>   18

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

<TABLE>
<CAPTION>
                                                                   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)
<S>                    <C>            <C>       <C>           <C>       <C>        <C>        <C>       <C>      <C>       <C>
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%
                       =========================================================================================================
</TABLE>


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-


                                     - 18 -
<PAGE>   19

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.

     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.

<TABLE>
<CAPTION>
                                                                              December 31                                     
                                                  ------------------------------------------------------------------
                                                             1996              1995                    1994       
                                                  ------------------------------------------------------------------
                                                   Book       Market     Book       Market       Book      Market
                                                   Value      Value      Value      Value        Value     Value   
                                                  ------------------------------------------------------------------
                                                                              (In thousands)
<S>                                               <C>        <C>        <C>         <C>         <C>        <C>
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
                                                  =================================================================
</TABLE>




                                     - 19 -
<PAGE>   20

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

<TABLE>
<CAPTION>
                                                                                                      Weighted
                                                                                        Market         Average
                                                                        Book Value      Value            Yield  
                                                                        ----------------------------------------
                                                                                (Dollars in thousands)
<S>                                                                   <C>               <C>             <C>
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%
                                                                      ========================================
</TABLE>


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 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 Company 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.


                                     - 20 -
<PAGE>   21
<TABLE>
<CAPTION>
                                                                              December 31                                       
                                           -----------------------------------------------------------------------------
                                                    1996                        1995                         1994            
                                           -----------------------------------------------------------------------------
                                                         Percent                      Percent                   Percent
                                                          of                            of                       of
                                             Amount      Total          Amount        Total          Amount     Total  
                                           ----------------------------------------------------------------------------
                                                                            (Dollars in thousands)
<S>                                         <C>          <C>          <C>            <C>            <C>          <C>
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%
                                             =========================================================================

</TABLE>

         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 Bank during
the periods indicated.


<TABLE>
<CAPTION>
                                                      Year Ended December 31
                                       -------------------------------------------------
                                         1996               1995               1994
                                       -------------------------------------------------
                                                           (In thousands)
<S>                                   <C>               <C>                 <C>
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
                                       ===========       ===========         =========== 
</TABLE>


                                     - 21 -
<PAGE>   22

     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. 

<TABLE>
<CAPTION>
                                                                           Year Ended December 31            
                                                        ------------------------------------------------------
                                                               1996           1995                 1994   
                                                        ------------------------------------------------------
                                                                           (In thousands)
<S>                                                      <C>                <C>              <C>
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)
                                                         ==========         =========         =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  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)
<S>                                  <C>      <C>        <C>       <C>         <C>          <C>         <C>
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%
                                     ===============
</TABLE>


                                     - 22 -


<PAGE>   23

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

<TABLE>
<CAPTION>
                                        December 31, 1996 
                                        -----------------
                                         (In thousands)
<S>                                        <C>
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
                                           ========
 </TABLE>


     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 Bank 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".


                                     - 23 -


<PAGE>   24

         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.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31      
                                                             -----------------------------------
                                                                 1996          1995        1994  
                                                             ------------------------------------
                                                                         (In thousands)
<S>                                                           <C>            <C>         <C>
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
</TABLE>

         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.

<TABLE>
<CAPTION>
                                                                           At December 31           
                                                            ----------------------------------------
                                                                                                   
                                                                 1996          1995          1994  
                                                            ---------------------------------------
                                                                   (Dollars in thousands)
<S>                                                           <C>           <C>            <C>
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
</TABLE>



                                     - 24 -

<PAGE>   25

         The following table sets forth the Bank's maturity and rate structure
of FHLB advances as of December 31, 1996.

<TABLE>
<CAPTION>
                                                                   Weighted
                                                                   Average
                                                                     Rate              Amount
                                                                  -----------------------------
                                                                      (Dollars in thousands)
<S>                                                                 <C>            <C>
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
                                                                    =========================
</TABLE>

                 (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 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.


                                     - 25 -


<PAGE>   26

     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
Bank's investment in Holdings totaled approximately $200,000.

     MORTGAGE BANKING. On May 1, 1984, D&N Bank 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 Bank 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 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 Bank 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.


                                     - 26 -


<PAGE>   27

     D&N Bank 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.

EXECUTIVE OFFICERS

     The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company or its
wholly owned subsidiary, other than the Chief Executive Officer, who do not

                                     - 27 -


<PAGE>   28

serve on the Company's Board of Directors.  Executive officers are elected
annually to serve until their successors are 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.

     George J. Butvilas, age 51.  Joining D&N as President in May 1990, Mr.
Butvilas was named Chief Executive Officer of the Bank in 1991 and Chief
Executive Officer of the Company in 1992.  He brought with him over 16 years
experience as a commercial and community banker.  Mr.  Butvilas was formerly
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 the 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
Company and the Bank.  Prior to joining D&N 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.

     Alfred J. Sliwinski, age 50, is Executive Vice President/Community Banking.
He has been employed by D&N Bank in various community banking capacities since
May 1977 and is presently responsible for the community banking, bank operations
and information systems functions of the Bank.

     Richard E. West, age 50, is Senior Vice President/Wholesale Lending. Prior
to joining D&N 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 and
consumer lending functions of the Bank.

     Linda K. Korpela, age 46, is Vice President/Corporate Secretary of the
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 Bank in various capacities since 1986 and is
presently responsible for the training and development, facilities management
and human resources functions of the Bank.


                                    - 28 - 


<PAGE>   29


     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 1995
and is presently responsible for the business lending and commercial real
estate lending functions of the Bank.

     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 Bank in
May 1988, he was employed by Citicorp Acceptance 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 44, is Senior Vice President/Controller of the
Bank.  He has been with D&N 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.


                                     - 29 -


<PAGE>   30

                                 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 Company also is subject to federal regulation and oversight.  The purpose
of the regulation of the Company and other holding companies is to protect
subsidiary savings institutions.  The Bank is a member of the Savings
Association Insurance Fund ("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.



                                     - 30 -


<PAGE>   31

         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.

         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

                                     - 31 -


<PAGE>   32

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
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
Bank recognized the one-time special assessment in a tax affected charge

                                     - 32 -


<PAGE>   33

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 Bank, 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 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.


                                     - 33 -


<PAGE>   34

     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.

     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 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.


                                     - 34 -



<PAGE>   35

     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.

     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



                                     - 35 -


<PAGE>   36

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.  The Company's stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.


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.

                                     - 36 -


<PAGE>   37

     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 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%.


                                     - 37 -


<PAGE>   38

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
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."


                                     - 38 -


<PAGE>   39

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 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.


                                     - 39 -
<PAGE>   40

HOLDING COMPANY REGULATION

     The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS.  As such, the 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 Company generally is not
subject to activity restrictions.  If the 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 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 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 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 SECURITIES LAW

     The stock of the Company is registered with the SEC under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act").  The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.

     Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions.  If
the Company meets specified current public information

                                     - 40 -
<PAGE>   41

requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.

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."

     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.


                                     - 41 -


<PAGE>   42

     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

     D&N 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, 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 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.

     D&N and its consolidated subsidiaries have been audited or their books
closed without audit by the IRS with respect to consolidated federal income tax


                                     - 42 -

<PAGE>   43

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, D&N) would not result in a deficiency which could
have a material adverse effect on the financial condition of D&N 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.

     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.

     DELAWARE TAXATION.   As a Delaware business corporation, the Company is
required to file annual returns with and pay annual fees to the State of
Delaware.  The Company is also subject to an annual franchise tax imposed by the
State of Delaware based on the number of authorized shares of the Company stock.


                                     - 43 -


<PAGE>   44

ITEM 2. PROPERTIES

Offices

         The following table sets forth information with respect to D&N offices
as of December 31, 1996.

<TABLE>
<CAPTION>
                                              Owned           Lease           Date               Net
                                               or          Expiration       Acquired or          Book
     Office Locations                         Leased          Date         Constructed          Value   
----------------------------------------   ------------    -----------  -----------------     --------
<S>                                          <C>       <C>                  <C>             <C>

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

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

</TABLE>


                                     - 44 -


<PAGE>   45

<TABLE>
<CAPTION>
                                              Owned           Lease           Date             Net
                                               or          Expiration       Acquired or       Book
     Office Locations                         Leased          Date         Constructed        Value   
----------------------------------------   ------------    -----------  -----------------   --------
<S>                                          <C>       <C>                  <C>             <C>

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

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

</TABLE>


                                    - 45 -


<PAGE>   46


<TABLE>
<CAPTION>
                                              Owned               Lease                  Date        Net
                                                or             Expiration            Acquired or     Book
     Office Locations                         Leased               Date              Constructed    Value   
----------------------------------------   ------------    ---------------------    -------------  --------
<S>                                         <C>             <C>                      <C>           <C>

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

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 

</TABLE>


                                     - 46 -


<PAGE>   47


<TABLE>
<CAPTION>
                                              Owned             Lease              Date               Net
                                                or            Expiration         Acquired or          Book
     Office Locations                         Leased            Date            Constructed           Value   
----------------------------------------   ------------       -----------      -----------------    --------
<S>                                         <C>             <C>                  <C>               <C>

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
</TABLE>


     At December 31, 1996, the net book value of the land, buildings and
leasehold improvements owned by D&N Bank was $11,747,000, and the net book value
of its office furniture, fixtures and equipment was $4,017,000.


     COMPUTER EQUIPMENT.  D&N Bank 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.


ITEM 3.  LEGAL PROCEEDINGS

     The Company is a defendant in a number of matters of litigation,
substantially all of which have arisen in the ordinary course of business.  It
is the opinion of management that the resulting liabilities, if any, from these
actions will not materially affect the Consolidated Financial Statements.



                                     - 47 -


<PAGE>   48

     D&N Bank is a plaintiff, like approximately 120 other institutions, in a
currently pending claim in the United States Court of Federal Claims seeking
substantial damages as a result of the 1989 Financial Institutions Reform,
Recovery and Enforcement Act's mandatory phase-out of the regulatory capital
treatment of supervisory goodwill.  Arguments concerning the extent of damages
in the cases of three initial plaintiffs are scheduled to begin March 17, 1997.
The other cases, including D&N's, are scheduled to be considered after the
initial cases are resolved.  The ultimate outcome of these matters cannot be
ascertained at this time.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.

                                     - 48 -


<PAGE>   49
                                    PART II



ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

              Page 48 of the attached 1996 Annual Report to Stockholders is
              herein incorporated by reference.

ITEM 6.       SELECTED FINANCIAL DATA

              Page 4 of the attached 1996 Annual Report to Stockholders is
              herein incorporated by reference.


ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATION

              Pages 12 through 21 of the attached 1996 Annual Report to
              Stockholders are herein incorporated by reference.


ITEM 8.       FINANCIAL STATEMENTS SUPPLEMENTARY DATA

              Pages 22 through 45 of the attached 1996 Annual Report to
              Stockholders are herein incorporated by reference.


ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

              There has been no Current Report on Form 8-K filed within 24
              months prior to the date of the most recent financial statements
              reporting a change of accountants and/or reporting disagreements
              on any matter of accounting principle or financial statement
              disclosure.


                                     - 49 -


<PAGE>   50
                                  PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning Executive Officers of the Company is contained on
page 27 herein.  Information concerning Directors of the Company, is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 1997, except for
information contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation." A copy of this Proxy Statement
will be filed not later than 120 days after the close of the fiscal year.


ITEM 11. EXECUTIVE COMPENSATION

     Information concerning executive compensation is incorporated herein  by
reference from the Company's definitive Proxy Statement or the Annual Meeting of
Stockholders to be held in 1997, except for information contained under the
heading "Compensation Committee Report" and "Stockholder Return Performance
Presentation."  A copy of this Proxy Statement will be filed not later than 120
days after the close of the fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

     Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1997,
except for information contained under the heading "Compensation Committee
Report" and "Stockholder Return Performance Presentation."  A copy of this Proxy
Statement will be filed not later than 120 days after the close of the fiscal
year.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning certain relationships and related transactions
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 1997, except for the
information contained under the heading Compensation Committee Report" and
"Stockholder Return Performance Presentation."  A copy of this Proxy Statement
will be filed not later than 120 days after the close of the fiscal year.



                                     - 50 -
<PAGE>   51

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


         (a) (1)  Financial Statements
                                     

     The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.


Annual Report Section                   Pages in Annual Report
---------------------                   ----------------------

Selected Financial Data                           4

Management's Discussion and Analysis           12 - 21
  of Financial Condition and Results
  of Operations


Report of Independent Auditors                    22


Consolidated Statements of Condition              23


Consolidated Statements of  Income                24 

Consolidated Statements of                        25
  Stockholders' Equity


Consolidated Statements of Cash Flows             26


Notes to Consolidated Financial Statements     27 - 45


         (a) (2) Financial Statement Schedules
                                             
     All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.


                                     - 51 -
<PAGE>   52
(a) (3) Exhibits

<TABLE>
<CAPTION>
                                                     Reference to         Sequential
                                                     Prior Filing        Page Number
                                                     or Exhibit         Where Attached/
Regulation                                            Number               Located in
S-K Exhibit                                           Attached            ThisForm 10-K
  Number                     Document                   Hereto               Report    
-----------        -----------------------------    -------------       --------------------
   <S>               <C>                            <C>                 <C>

    3(I)             Articles of Incorporation          *                   Not applicable                  
                                                                                                            
    3(ii)            By-Laws                            *                   Not applicable                  
                                                                                                            
    4                Instruments defining the           *                   Not applicable                  
                     rights of security holders,                                                            
                     including  debentures                                                                  
                                                                                                            
    9                Voting Trust Agreement           None                  Not applicable                  
                                                                                                            
   10                Material Contracts                                                                     
                                                                                                            
                     1993 401(k) Plan & Trust          *                    Not applicable                  
                     (1994 Amendment)                                        
                                                                                                            
                     1984 Stock Option Plan            *                    Not applicable                  
                     (1995 Amendment)                                                                      
                                                                                                            
                     1994 Management                                                                        
                     Stock Incentive                   *                    Not applicable                  
                     Plan (1995 Amendment)                                                                  
                                                                                                            
                     Employment Agreement of                                                                
                     G. Butvilas                       *                    Not applicable                  
                                                                                                            
   11                Statement re:  computation       11                    Filed Herewith
                     of per share earnings                                                                  
                                                                                                            
   12                Statement re:  computation       Not required          Not applicable                  
                     of ratios                                                                              
                                                                                                            
   13                Annual Report to Security        13                    Filed Herewith
                     Holders                                                                                
                                                                                                            
   16                Letter re: change in             None                  Not applicable                  
                     Certifying Accountant                                                                  
                                                                                                            
   18                Letter re:  change in            None                  Not applicable                  
                     accounting principles                                                                  
                                                                                                            
   21                Subsidiaries of Registrant       21                    Filed Herewith
                                                                                                            
   22                Published report regarding       None                  Not applicable                  
                     matters submitted to vote                                                              
                     of security holders                                                                    
                                                                                                            
                                                                                                            
   23                Consent of Experts and           23                    Filed Herewith
                     Counsel                                                                                
                                                                                                            
   24                Power of Attorney                Not required          Not applicable                  
                                                                                                            
   27                Financial Data Schedule          27                   Filed Herewith
                                                                                                            
</TABLE>
<PAGE>   53
<TABLE>
   <S>               <C>                            <C>                 <C>                                                        
   28                Information from reports         None              Not applicable                                            
                      furnished to state
                      insurance regulatory
                      authorities

   99                Additional exhibits              None              Not applicable                                            
</TABLE>


-------------------
         *Filed as exhibits to the Registrant's registration statement on Form
S-2 (File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description.  All of
such previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.

         (b)  Reports on Form 8-K
                                

None.

<PAGE>   54

                                   SIGNATURES



  Pursuant to the requirements of Section 13 or 15(d) 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 FINANCIAL CORPORATION

Date                                              By: /s/ GEORGE J. BUTVILAS 
    --------------------------------                  -------------------------
                                                        GEORGE J. BUTVILAS
                                                         (Duly Authorized
                                                          Representative)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


By: /s/ GEORGE J. BUTVILAS                        By: /s/ KENNETH D. SEATON  
    --------------------------------                  -------------------------
        GEORGE J. BUTVILAS                            KENNETH  D. SEATON
        Director, President and                       Director, Chairman of 
        Chief Executive Officer                       the Board  
        (Principal Executive Officer)

Date                                              Date                         
    --------------------------------                  -------------------------


By: /s/ JOSEPH C. BROMLEY                         By: /s/ B. THOMAS M. SMITH,JR
    --------------------------------                  -------------------------
        JOSEPH C. BROMLEY                                B. THOMAS M. SMITH, JR
         Director                                        Director
    
Date                                              Date                         
    --------------------------------                  -------------------------



By: /s/ STANLEY A. JACOBSON                       By: /s/ PETER VAN PELT
    --------------------------------                  -------------------------
       STANLEY A. JACOBSON                                PETER VAN PELT
       Director                                           Director

Date                                              Date                         
    --------------------------------                  -------------------------



<PAGE>   55

By: /s/ RANDOLPH P. PIPER                         By: /s/ STEVEN E. ZACK 
    -----------------------------                     -------------------------
        RANDOLPH P. PIPER                                 STEVEN E. ZACK 
        Director                                          Director

Date                                              Date 
    -----------------------------                     -------------------------


By: /s/ SHARON A. REESE DALENBERG
    -----------------------------
        SHARON A. REESE DALENBERG
        Director

Date
    -----------------------------


By: /s/ KENNETH R. JANSON                 
    -----------------------------
        KENNETH R. JANSON
        Executive Vice President/
        Chief Financial Officer

Date
    -----------------------------
<PAGE>   56
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                     Reference to         Sequential
                                                     Prior Filing        Page Number
                                                     or Exhibit         Where Attached/
Regulation                                            Number               Located in
S-K Exhibit                                           Attached            ThisForm 10-K
  Number                     Document                   Hereto               Report    
-----------        -----------------------------    -------------       --------------------
   <S>               <C>                            <C>                 <C>

    3(I)             Articles of Incorporation          *                   Not applicable                  
                                                                                                            
    3(ii)            By-Laws                            *                   Not applicable                  
                                                                                                            
    4                Instruments defining the           *                   Not applicable                  
                     rights of security holders,                                                            
                     including  debentures                                                                  
                                                                                                            
    9                Voting Trust Agreement           None                  Not applicable                  
                                                                                                            
   10                Material Contracts                                                                     
                                                                                                            
                     1993 401(k) Plan & Trust          *                    Not applicable                  
                     (1994 Amendment)                                        
                                                                                                            
                     1984 Stock Option Plan            *                    Not applicable                  
                     (1995 Amendment)                                                                      
                                                                                                            
                     1994 Management                                                                        
                     Stock Incentive                   *                    Not applicable                  
                     Plan (1995 Amendment)                                                                  
                                                                                                            
                     Employment Agreement of                                                                
                     G. Butvilas                       *                    Not applicable                  
                                                                                                            
   11                Statement re:  computation       11                    Filed Herewith
                     of per share earnings                                                                  
                                                                                                            
   12                Statement re:  computation       Not required          Not applicable                  
                     of ratios                                                                              
                                                                                                            
   13                Annual Report to Security        13                    Filed Herewith
                     Holders                                                                                
                                                                                                            
   16                Letter re: change in             None                  Not applicable                  
                     Certifying Accountant                                                                  
                                                                                                            
   18                Letter re:  change in            None                  Not applicable                  
                     accounting principles                                                                  
                                                                                                            
   21                Subsidiaries of Registrant       21                    Filed Herewith
                                                                                                            
   22                Published report regarding       None                  Not applicable                  
                     matters submitted to vote                                                              
                     of security holders                                                                    
                                                                                                            
                                                                                                            
   23                Consent of Experts and           23                    Filed Herewith
                     Counsel                                                                                
                                                                                                            
   24                Power of Attorney                Not required          Not applicable                  
                                                                                                            
   27                Financial Data Schedule          27                   Filed Herewith
                                                                                                            
</TABLE>
<PAGE>   57
<TABLE>
   <S>               <C>                            <C>                 <C>                                                        
   28                Information from reports         None              Not applicable                                            
                      furnished to state
                      insurance regulatory
                      authorities

   99                Additional exhibits              None              Not applicable                                            
</TABLE>


-------------------
         *Filed as exhibits to the Registrant's registration statement on Form
S-2 (File No. 33-69300) filed with the Commission on September 23, 1993 or as
part of reports filed for the purpose of updating such description.  All of
such previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.