<PAGE>
 
UNITED STATES
                      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, 1998
 
[ ]  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 9, 1999, there were issued and outstanding 9,392,073 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 9,
1999, was $200,791,443.  (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, 1998.

  PART III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999.

==========================================================================
<PAGE>
 
                                    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 $2.02 billion at December 31,
1998, D&N is one of the largest savings institutions 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 41 full-service community banking offices, including its main office in
Hancock, Michigan, seven savings agency offices which provide depository
services and five 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.

     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>
 
     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 $297.0 million or 39% of the Bank's total loans, excluding
     loans held for sale, secured by real estate as of December 31, 1998, 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
                          ----------------------------------------------------------------------------------------------------------
                               1998                  1997                  1996                    1995               1994 
                          -----------------    -------------------------------------------------------------------------------------
                            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 LOAN
REAL ESTATE
  One to four family
  Permanent               $ 650,502  48.94%    $ 703,580   54.08%    $ 600,923   56.91%     $ 597,892   62.78%   $ 526,572   64.07%
 Construction                15,998   1.20        13,864    1.07        13,201    1.25         19,982    2.10        2,159    0.26
</TABLE> 

                                      -3-
<PAGE>
 
<TABLE> 
<S>                        <C>           <C>       <C>          <C>       <C>         <C>       <C>       <C>      <C>       <C> 
Income producing property
Permanent                      94,552     7.12       81,830     6.29       85,619     8.11      89,176    9.36     115,162   14.01
Construction                   39,324     2.96       42,582     3.27       26,472     2.51      21,074    2.21      17,741    2.16
                           --------------------------------------------------------------------------------------------------------
Total real estate loans       800,376    60.22      841,856    64.71      726.215    68.78     728,124   76.45     661,634   80.50
 
CONSUMER LOANS
Automobile loans              243,393    18.31      198,505    15.26      141,056    13.36      81,885    8.60      46,711    5.68
Home equity                    94,057     7.08       99,122     7.62       82,305     7.79      60,003    6.30      39,939    4.86
Home improvement               41,237     3.10       47,845     3.68       46,545     4.41      41,542    4.36      39,279    4.78
Mobile home loans                 145     0.01          213     0.02          289     0.03         417    0.04         619    0.08
Unsecured                      11,514     0.87       12,395     0.95       15,172     1.44      19,637    2.06      22,197    2.70 
Other                         113,723     8.56       91,471     7.03       53,901     5.10      35,975    3.78      22,194    2.70
                           --------------------------------------------------------------------------------------------------------
Total consumer loans          504,069    37.93      449,551    34.56      339,268    32.13     239,459   25.14     170,939   20.80
   
COMMERCIAL LOANS
Revolving business loans       23,026     1.73       11,363     0.87        2,363     0.22       1,119    0.12          --      --
Term business loans            28,293     2.13       27,072     2.08        9,982     0.95       6,650    0.70       4,748    0.58
                           --------------------------------------------------------------------------------------------------------
Total commercial loans         51,319     3.86       38,435     2.95       12,345     1.17       7,769    0.82       4,748    0.58
                           --------------------------------------------------------------------------------------------------------
Loans receivable, gross     1,355,764   102.01    1,329,842   102.22    1,077,828   102.08     975,352  102.41     837,321  101.88
 
Less:
Discounts (premiums)
  on loans purchased           (2,312)   (0.17)      (2,356)   (0.18)      (2,035)   (0.19)     (1,709)  (0.18)        999    0.12
Allowance for losses           10,995     0.83       10,549     0.81       11,042     1.05      10,081    1.06       8,349    1.02
Undisbursed portion
  of  loan proceeds            17,679     1.33       20,315     1.56       12,085     1.14      13,198    1.38       4,213    0.51
Deferred income                   254     0.02          375     0.03          860     0.08       1,423    0.15       1,885    0.23
                           --------------------------------------------------------------------------------------------------------
                               26,616     2.01       28,883     2.22       21,952     2.08      22,993    2.41      15,446    1.88
                           --------------------------------------------------------------------------------------------------------
Loans receivable, net      $1,329,148   100.00%  $1,300,959   100.00%  $1,055,876   100.00%   $952,359  100.00%   $821,875  100.00%
                           ========================================================================================================
</TABLE> 


          LOAN MATURITIES.   The following schedule illustrates the maturity
     structure of the Company's loan portfolio at December 31, 1998. Loans are
     shown as maturing in the period in which payment is due. This schedule does
     not reflect the effects of possible prepayments or enforcement of due-on-
     sale clauses.


<TABLE> 
<CAPTION> 
                                                                       Residential 
                                          Commercial                         and                         Real Estate  
                                           Business                   Income Producing                  Construction
                                           Property                       Property                          Loans
                                   --------------------------      -----------------------       ---------------------------     
   Amounts
    Due in 
    Years                                            Weighted                    Weighted                         Weighted
  Ending                                             Average                     Average                          Average
  December 31,                        Amount           Rate          Amount       Rate              Amount         Rate
  -------------------------------------------       --------       ----------   --------         ----------      -------
                                                                        (Dollars in thousands)
  <S>                              <C>              <C>            <C>          <C>              <C>             <C>  
  1999                             $   24,754          8.56%       $   13,496     8.75%          $   33,658       8.34% 
  2000                                  9,329          8.73            20,573     8.08               10,959       9.15  
  2001                                  6,175          8.73            22,920     8.16                2,265       8.73  
  2002-2003                             8,286          9.06            48,381     8.51                8,296       8.51  
  2004-2008                             1,661          8.45            60,924     7.52                   --         --  
  2009-2013                               741          8.89            89,750     7.31                   60       8.54  
  Thereafter                               76          8.39           485,941     7.49                   --         --  
                                   ----------                      ----------                    ----------     

     Total                         $   51,022          8.69%       $  741,985     7.60%          $   55,238       8.54% 
                                   ==========                      ==========                    ==========             
 
<CAPTION> 
                                         Consumer Loans                    Total
                                    ------------------------       ----------------------- 
   Amounts
    Due in 
    Years                                            Weighted                     Weighted       
  Ending                                             Average                      Average        
  December 31,                        Amount           Rate          Amount         Rate         
  -------------                     ---------       --------       ----------     --------       
  <S>                               <C>             <C>            <C>            <C> 
  1999                               $104,539         8.97%        $  176,447       8.77%
  2000                                102,098         8.93            142,959       8.81
  2001                                100,289         8.85            131,649       8.72
  2002-2003                           137,611         8.78            202,574       8.72
  2004-2008                            44,985         8.83            107,570       8.08
  2009-2013                            10,841         8.24            101,392       7.42
  Thereafter                              107         7.94            486,124       7.49
                                     --------                      ----------
                          
     Total                           $500,470         8.86%        $1,348,715       8.14%
                                     ========
</TABLE> 

                                      -4-
<PAGE>
 
<TABLE> 
<S>                                                       <C> 
Plus:
  Accrued interest receivable,
   net of reserve for uncollected
   interest                                                    7,023
 
  Deferred income and premiums                                 2,084
 
Less:
  Loans in process                                            17,679
  Loss and valuation allowances                               10,995
                                                          ----------
                                                          $1,329,148
                                                          ==========
</TABLE>

          The total amount of loans, excluding loans held for sale, due after
     December 31, 1999 which have fixed interest rates is $459.7 million, while
     the amount of loans due after such date having floating or adjustable rates
     is $703.8 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 origination in their
     market areas. At December 31, 1998, 81% 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.

          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, 1998. See "- Classified Assets,
     Loan Delinquencies and Defaults" for a discussion of other real estate
     owned.

<TABLE>
<CAPTION>
                                         Outstanding Balance
                                                 at
                                          December 31, 1998
                                      --------------------------
                                            (In thousands)
<S>                                   <C>                 
MICHIGAN
 One- to four-family residential....           $523,810
  Apartments........................              8,183
  Mini warehouse, storage...........              1,518
  Mobile home parks.................              4,262
</TABLE> 
 

                                      -5-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                          Outstanding Balance
                                                  at
                                           December 31, 1998
                                           -----------------
                                            (In thousands)
<S>                                       <C>  
 Motels/hotels......................             11,005
 Shopping centers and retail........             23,707
  Office buildings..................             21,440
 Nursing Homes......................              9,900
 Industrial.........................              6,734
 Condominiums and land development..             26,243
 Other..............................             11,577
                                               --------
                                                648,379 
CALIFORNIA
 One- to four-family residential....             19,936
 Apartments.........................              3,897
 Shopping centers & retail..........              1,823
 Office buildings...................                461
 Nursing homes......................                 80   
                                               --------
                                                 26,197
MASSACHUSETTS
 One- to four-family residential....             13,185
                                               --------
                                                 13,185
NEW YORK
 One- to four-family residential....              2,775
                                               --------
                                                  2,775
NORTH CAROLINA
 One- to four-family residential....              5,195
                                               --------
                                                  5,195
TEXAS
 One- to four-family residential....              8,258
                                               --------
                                                  8,258
PENNSYLVANIA
 One- to four-family residential....              3,662
 Apartments                                         118
 Industrial.........................                 96
 Other..............................                 27    
                                               --------
                                                  3,903
FLORIDA
One-to four-family residential......              3,389
                                               --------
                                                  3,389
</TABLE>

                                      -6-
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                        Outstanding Balance
                                                                at
                                                         December 31, 1998
                                                         -----------------
                                                           (In thousands)
 <S>                                                    <C> 
 OTHER (31 STATES)
  One- to four-family residential..................             79,920
  Apartments.......................................                 40
  Motels/hotels....................................                265
  Shopping centers and retail......................              2,016
  Office buildings.................................                 31
  Nursing homes....................................                104
  Other............................................                 34
                                                              --------
                                                                82,410
Rated conventional residential
 participation certificates........................              3,532
                                                              --------
Total..............................................            797,223
 
Plus:
  Loan control and clearing........................               (565)
  Accrued interest receivable, net of reserve for
      uncollected interest ........................              3,719
 
Less:
    Deferred income, discounts and premiums........             (1,107)
    Loans in process...............................             17,679
    Loss and valuation allowances..................              6,442
                                                              --------
     Total                                                    $777,363
                                                              ========
</TABLE>

     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 1998, total loan originations increased
$174.6 million, or 28% as a result of a significant increase in consumer lending
activity.  Consumer loan originations alone increased $20.4 million, or 6%.

     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, 1998, the Bank had $8.8 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

                                      -7-
<PAGE>
 
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.

     The weighted average servicing fee for loans serviced for others was .30%
at December 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Noninterest Income." At December 31, 1998,
D&N serviced for others approximately $576 million in loans and loan
participations. See also Note A of Notes to Consolidated Financial Statements
"Summary of Significant Accounting Policies - Capitalized Mortgage Servicing
Rights".

     The Bank's investment in mortgage servicing rights ("MSRs") totaled $4.8
million at December 31, 1998. The following table details the value of the
Bank's investment in MSRs.

<TABLE> 
<CAPTION> 
                                                Year Ended December 31
                                       --------------------------------------
                                           1998            1997         1996
                                       ---------         -------     --------
                                                     (In thousands)
<S>                                    <C>               <C>         <C> 
Balance at beginning of year           $  2,136          $ 1,443     $  1,113
Additions:
  Capitalized servicing                   4,552            1,236          630
Reductions:
  Scheduled amortization                    605              321          267
  Additional amortization due to
    changes in prepayment assumptions     1,018              222           33
  Impairment                                 --               --           --
  Sales                                     243               --           --
                                       --------          -------     --------
  Total                                   1,866              543          300
                                       --------          -------     --------
Balance at end of year                 $  4,822          $ 2,136     $  1,443
                                       ========          =======     ========
Fair market value at end of year       $  4,897          $ 2,389     $  1,770
                                       ========          =======     ========
</TABLE> 
 
     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
                                                                     ----------------------------------------------------------
                                                                           1998       1997       1996        1995         1994
                                                                     ----------------------------------------------------------
                                                                                             (In thousands)
<S>                                                                  <C>          <C>          <C>         <C>          <C> 
ORIGINATIONS
Real estate:
   One- to four-family residential.................................  $  315,760   $215,452     $194,357    $182,800     $ 81,279
   Income producing property.......................................      57,365     45,594       33,816      17,614       17,350
 Non-real estate:                                                                              
Consumer...........................................................     344,061    323,676      271,622     195,109      132,836
   Commercial......................................................      88,866     46,708       11,437       3,739        4,748
                                                                     -----------------------------------------------------------
     Total originations............................................     806,052    631,430      511,232     399,262      236,213
</TABLE> 
 

                                      -8-
<PAGE>
 
<TABLE> 
<S>                                                                  <C>          <C>          <C>         <C>          <C> 
PURCHASES
 Real estate:
   One- to four-family residential                                      193,779    234,886      148,405     103,524      188,481
   Income producing property.......................................          --         --           --          --        1,852
   Mortgage-backed securities......................................     337,029    107,400       58,892          --       68,391
                                                                     -----------------------------------------------------------
     Total purchases...............................................     530,808    342,286      207,297     103,524      258,724
                                                                     -----------------------------------------------------------
     Total additions...............................................   1,336,860    973,716      718,529     502,786      494,937
                                                                                               
                                                                                               
SALES                                                                                          
 Real estate:                                                                                  
   One- to four-family residential.................................     226,506     85,778       68,024     107,080       45,311
   Mortgage-backed securities(1)...................................     109,338     23,555           --       4,210       50,658
   Non-real estate:                                                                            
   Consumer loans..................................................       1,070      2,383        2,810       2,976        2,894
                                                                     -----------------------------------------------------------
     Total sales...................................................     336,914    111,716       70,834     114,266       98,863
 Principal repayments..............................................     853,519    504,972      426,291     288,485      239,816
                                                                     -----------------------------------------------------------
     Total reductions..............................................   1,190,433    616,688      497,125     402,751      338,679
 Transfers to other real estate owned..............................        (284)      (961)      (3,373)     (1,936)      (2,861)
 Increase (decrease) in other items, net...........................      17,962     (3,944)       9,033       8,801        1,079
                                                                     -----------------------------------------------------------
    Net increase (decrease)........................................  $  164,105   $352,123     $227,064    $106,900     $154,476
                                                                     ===========================================================
</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, 1998 amounted to
$56.0 million for one- to four-family residential real estate loans and $26.1
million for commercial real estate loans. See "Regulation - Federal Regulation."


     RESIDENTIAL MORTGAGE LOANS. At December 31, 1998 the Bank had $666.5
million in residential mortgage loans representing 50.1% of the Bank's total
loan portfolio. This amount represents a 7.1% decrease in the dollar value of
the residential loan portfolio. However, it also represents a 5% decrease in the
percentage of the Bank's portfolio consisting of residential 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 market area
through its community banking, correspondent lending, and

                                      -9-
<PAGE>
 
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 typically 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") 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, Krupka, Janson,
West and Donnelly). 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, 1998, residential ARMs
totaled $224 million, or 36% of the Bank's total residential one- to four-family
mortgage loan portfolio. Of this total ARM

                                      -10-
<PAGE>
 
  portfolio, $123 million or 55% were purchased from others. Due to consumer
  demand, residential loans originated during 1998 were predominately fixed rate
  loans.

     Despite the benefits of ARMs to the Bank's asset/liability management
  program, such loans also pose potential additional risks, primarily because as
  interest rates rise, the underlying payment 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 1998, the Company purchased $338.8 million of
  fixed rate Collateralized Mortgage Obligations ("CMO") with expected average
  lives of 1.2 to 4.9 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 1998 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") as part of its asset/liability management strategy. At December 31, 
  1998, D&N had IOs with a book value and market value of $620,000, 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 F of Notes to Consolidated Financial
  Statements.

<TABLE> 
<CAPTION> 
                                                                         December 31
                           --------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED                   1998                  1997                1996                    1995                1994
                           -----------------    -------------------   ------------------   -----------------   ------------------
      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.........     $492,085    99.57%   $356,079   99.38%     $249,186   99.18%    $125,264    98.09%  $147,988     97.81%
Interest only                                                        
 certificates.........          635     0.13      1,456    0.41         2,070    0.82         2,456     1.92      3,886      2.57
                           ------------------------------------------------------------------------------------------------------
                                                                     
Mortgage-backed                                                      
   securities, gross..      492,720    99.70    357,535   99.79       251,256  100.00       127,720   100.01    151,874    100.38
Net (discounts)                                                      
  premiums............        1,492     0.30        761    0.21            --      --           (11)   (0.01)      (581)    (0.38)
                           ------------------------------------------------------------------------------------------------------
                                                                     
Mortgage-backed                                                      
   securities, net....     $494,212   100.00%  $358,296  100.00%     $251,256  100.00%     $127,709   100.00%  $151,293    100.00%
                           ======================================================================================================
</TABLE>

                                      -11-
<PAGE>
 
     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, 1998, $9.6 million of D&N's portfolio of income
producing property loans were purchased loans.

   The following table shows the composition of the Bank's income producing
property and land development loans at December 31, 1998. 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                   $ 12,267           10.61%        $   145
Other income producing property:
  Motels/hotels                                            11,297            9.78           3,396
  Offices                                                  18,398           15.92              --
  Mobile home parks                                         4,272            3.70              75
  Shopping centers                                         24,077           20.84             436
  Industrial                                                6,846            5.92              --
  Nursing homes                                             9,520            8.24              --
  Condominium development                                   6,961            6.02              --
  Other                                                       592            0.51               2
                                                         --------        --------         -------
  Total                                                    94,230           81.54           4,054
 
Land development loans and other                           39,646           34.31             880
                                                         --------        --------         -------
  Total                                                   133,876          115.85         $ 4,934
                                                                                          =======
Allowance for losses                                       (6,099)          (5.28)
Loans in process, deferred income and
  other miscellaneous credits                             (12,212)         (10.57)
                                                         --------         -------
          Total                                          $115,565          100.00%
                                                         ========         =======
</TABLE>

     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

                                      -12-
<PAGE>
 
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, 1998, consumer
loans totaled $504.1 million or 38% of the Bank's loan portfolio, an increase of
$54.5 million or 12% from December 31, 1997.

     During 1998, net consumer loan charge-offs were $1,776,000 compared to
$1,276,000 in 1997, $926,000 in 1996, $642,000 in 1995 and $411,000 in 1994.

     Indirect loan originations totaled $205.9 million in 1998. Indirect
receivables amounted to $307.5 million at December 31, 1998 and make up 61% 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 80% 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 payment based upon
the outstanding balance. Home equity credit lines generally have five-year terms
at which time the Bank may require payment in

                                      -13-
<PAGE>
 
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, 1998, the Bank's loans to one borrower limit was
approximately $21.3 million. See "Regulation - Federal Regulation". At December
31, 1998, 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

                                      -14-
<PAGE>
 
certain circumstances, one year) to redeem the conditional deed by repaying the
bid amount in full. During this redemption period, the borrower may occupy and
use the property as he sees fit. If he fails to redeem the sheriff's deed, then
the Bank acquires clear title to the real estate and subsequently sells it to
recover its investment. In most cases, it is not economical to obtain a
deficiency judgment against the borrower if residential property is sold for
less than the unpaid balance of the loan.

     The following table sets forth information concerning delinquent mortgage
and other loans at December 31, 1998. 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.

<TABLE>
<CAPTION>
                                                        Real Estate
                                             --------------------------------
                                                             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                     2     $27      83  $2,944       2   $   74     740   $6,012
 60 - 89 days                     -     ---      24     950      --       --     248    1,730
 90 days and over                 2      39      44   1,430       8    5,020     219    1,378
                                  -----------------------------------------------------------
 
   Total delinquent loans         4     $66     151  $5,324      10   $5,094   1,207   $9,120
                                  ===========================================================
</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. 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, 1998, $11.9 million of the Bank's
assets were classified as "substandard", none of such assets were classified as
"doubtful" or as "loss". The Bank's classification of assets is consistent with
OTS examination classifications.

     Hotels and motels account for $2.4 million of classified assets and
apartments account for $477,000. The balance of classified assets consists of
loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans.

                                      -15-
<PAGE>
 
NONPERFORMING ASSETS AND RISK ELEMENTS

     Nonperforming assets, including other real estate owned, increased to $9.2
million at December 31, 1998 compared to $5.3 million at December 31, 1997. The
ratio of nonperforming assets to total assets was 0.46% at December 31, 1998
compared to 0.29% at December 31, 1997. Allowances for losses represented 119%
of nonperforming assets at December 31, 1998.
 
     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 1998, the Bank would have recorded interest income of $668,000 if
nonaccrual and restructured loans had performed in accordance with their
original terms. The Bank recognized zero interest income on these loans in 1998.

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

<TABLE> 
<CAPTION> 
                                                              December 31
                                          ------------------------------------------------
                                             1998     1997      1996      1995      1994
                                          --------  --------------------------------------
                                                         (Dollars in thousands)
<S>                                       <C>       <C>       <C>       <C>        <C>
Nonaccruing loans                         $ 7,867   $ 3,162   $ 6,429   $ 8,133    $17,949
Accruing loans delinquent
   more than 90 days                           --       274        --        24          5
Restructured loans                             --        --        --        --         --
                                          -------   -------   -------   -------    -------
 
   Total nonperforming loans                7,867     3,436     6,429     8,157     17,954
 Other real estate owned (OREO)
   and other repossessed assets             1,372     1,864     1,662     1,544      6,566
                                          -------   -------   -------   -------    -------
 
   Total nonperforming assets             $ 9,239   $ 5,300   $ 8,091   $ 9,701    $24,520
                                          =======   =======   =======   =======    =======

Nonperforming loans as a
   percentage of total loans                 0.59%     0.26%     0.60%     0.85%      2.16%

Nonperforming assets as a
    percentage of total assets               0.46%     0.29%     0.55%     0.79%      2.17%

Allowance for loan losses as a
    percentage of  nonperforming loans     139.76%   307.01%   171.75%   123.59%     46.50%

Allowances for loan and OREO losses
    as a percentage of
   nonperforming assets                    119.01%   199.04%   136.47%   105.29%     35.40%

</TABLE>

                                      -16-
<PAGE>
 
OTHER REAL ESTATE OWNED

     Other real estate owned, net of reserves, totaled $857,000 at December 31,
1998, versus $1.5 million at December 31, 1997. Other real estate owned
consisted of single family homes, and multi-family dwelling units. 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 residential property
located in Michigan. This asset had a carrying value of approximately $456,000
at December 31, 1998.

OTHER LOANS OF CONCERN

     In addition to nonperforming assets, the Bank has other loans of concern
aggregating $16.7 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.


ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents the Company's estimate of probable
credit losses related to specifically identified loans as well as probable
credit losses inherent in the remainder of the Company's loan portfolio that
have been incurred as of the balance sheet date.  The allowance for loan losses
is maintained at an adequate level through additions to the provision for loan
losses.  An appropriate level of the general allowance is determined based on
the application of projected risk percentages to graded loans by categories.  In
addition, specific reserves are established for individual loans when deemed
necessary by management.  Management also considers other factors when
determining the unallocated allowance, including loan quality, changes in the
size and character of the loan portfolio, consultation with regulatory
authorities, amount of nonperforming loans, delinquency trends , economic
conditions and industry trends.

SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by
SFAS No. 118, considers a loan impaired when it is probable that payment of
principal and interest will not be collected in accordance with the contractual
terms of the original loan agreement.  Consistent with this definition, all non-
accrual and restructured loans (with the exception of residential mortgage and
consumer installment loans) are impaired.  An impaired loan for which it is
deemed necessary to record a specific allowance is, typically, written down to
the fair value of the underlying collateral at the time it is placed on non-
accrual status via a direct charge-off against the allowance for loan losses.
Consequently, those impaired loans not requiring a specific allowance represent
loans for which the fair value of the underlying collateral equaled or exceeded
the recorded investment in the loan.  All impaired loans were evaluated using
the fair value of the underlying collateral as the measurement method.

It must be understood, however, that inherent risks and uncertainties related to
the operation of a financial institution require management to depend on
estimates, appraisals and evaluations of loans to prepare the Company's
financial statements.  Changes in economic conditions and the financial
prospects of borrowers may result in abrupt changes to the estimates, appraisals
or evaluations used.  In addition, if actual circumstances and losses differ
substantially from management's assumptions and estimates, the allowance for
loan losses may not be sufficient to absorb all future losses, and net income
could be significantly impacted.

Gross loan charge-offs increased $218,000 to $2.4 million in 1998, compared to
$2.2 million in 1997 and $1.5 million in 1996.  The ratio of net loan charge-
offs to average loans, including loans held for sale, was 0.15% for 1998 and
1997, compared to 0.01% for 1996.  Commercial loan net charge-offs as a
percentage of average commercial loans was 0.03% for 1998, compared to 0% for
1997 and 1996.  Residential real estate mortgage loan net charge-offs as a
percentage of average residential mortgage loans, including loans held for sale,
was 0.03% for 1998, 0.04% for 1997 and 0.05% for 1996.  Mortgages on income
producing property net charge-offs as a percentage of average mortgages on
income producing property was 0.03% for 1998, compared to 0.24% for 1997 and,
due to recoveries on properties previously written down, was (1.00)% for 1996.
Consumer loan net charge-offs as a percentage of average consumer loans was
0.37% for 1998 and 1997 compared to 0.33% for 1996.

Allowances for losses on the loan portfolio totaled $11.0 million at December
31, 1998. Losses of $2.4 million were charged off and $347,000 was recovered, as
new provisions for loan losses of $2.5 million were recorded during the year. At
year-end, the allowance for loan losses represented .82% of the total
outstanding loan portfolio balance.

The following table details the changes in the Company's allowance for loan
losses for the last five years.


<TABLE>
<CAPTION>
                                                                      Year Ended December 31
                                                       -------------------------------------------------
                                                           1998      1997      1996      1995      1994
--------------------------------------------------------------------------------------------------------
<S>                                                      <C>       <C>       <C>       <C>       <C>
                                                                     (Dollars in thousands)
Balance at beginning of period.........................  $10,549   $11,042   $10,081   $ 8,349   $11,570
Charge-offs:
  Residential mortgages................................      226       290       314       169       110
  Mortgages on income-producing property...............       38       277        --     1,019     3,109
  Commercial loans.....................................       14        --        --        --        --
  Consumer loans.......................................    2,123     1,616     1,216       999       773
                                                       -------------------------------------------------
                                                           2,401     2,183     1,530     2,187     3,992
Recoveries:
  Residential mortgages................................       --        --         3       917         9
  Mortgages on income-producing property...............       --        --     1,098       245       300
  Commercial loans.....................................       --        --        --        --        --
  Consumer loans.......................................      347       340       290       357       362
                                                       -------------------------------------------------
                                                             347       340     1,391     1,519       671
 
Net Charge-offs........................................    2,054     1,843       139       668     3,321
Provision charged to operations........................    2,500     1,350     1,100     2,400       100
                                                       -------------------------------------------------
Balance at end of period...............................  $10,995   $10,549   $11,042   $10,081   $ 8,349
                                                       =================================================

Net charge-offs as a percentage of average loans.......   0.15%     0.15%     0.01%     0.07%     0.43%
Allowance for loan losses as a percentage of total          
 loans.................................................   0.82%     0.80%     1.03%     1.05%     1.01%
</TABLE>

The Company's policy for charging off loans varies with respect to the category
of and specific circumstances surrounding each loan under consideration.
Installment loans are generally charged off when deemed to be uncollectible or
180 days past due, whichever comes first.  Charge-offs of commercial loans and
residential real estate mortgage loans are made on the basis of management's
ongoing evaluation of non-performing loans.

The following table summarizes the allocation of the allowance for loan losses
for general, specific and unallocated allowances by loan type and the percentage
of each loan type of total portfolio loans.  The entire allowance, however, is
available for use against any type of loan loss deemed necessary.

<PAGE>
<TABLE>
<CAPTION>
                                                                              December 31
                                   ----------------------------------------------------------------------------------------------
                                           1998               1997               1996               1995               1994
                                   ----------------------------------------------------------------------------------------------
                                               % of               % of               % of               % of               % of
                                     Amount    loans    Amount    loans    Amount    loans    Amount    loans    Amount    loans
                                             to total           to total           to total           to total           to total
                                   ----------------------------------------------------------------------------------------------
                                                                        (Dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>     <C>      <C>       <C>      <C>       <C>     <C>         <C>      <C>        <C> 
General allowances:
Residential mortgages..............  $   --   49%      $   --    54%     $   11     57%     $  642       63%     $  634      63%
Mortgages on income-producing                                                                2,680
property...........................      --   10          767     9       1,275     10                   11       4,332      17
Commercial loans...................      --    4           --     3          --      1          --        1         --       --
Consumer loans.....................   4,065   37        3,303    34       2,681     32       1,616       25         810      20
                                   ----------------------------------------------------------------------------------------------
 
Total general allowances...........   4,065   100%      4,070    100%     3,967     100%     4,938      100%       5,776     100%

Specific allowances:
Residential mortgages..............     --        --        --        --        --        --        --        --       --        --
Mortgages on income-producing
property...........................  1,145        --       145        --       385        --        --        --      860        --
Commercial loans...................     --        --        --        --        --        --        --        --       --        --
Consumer loans.....................     --        --        --        --        --        --        --        --       --        --
                                  --------------------------------------------------------------------------------------------------
 Total specific allowances.........  1,145                 145                 385                  --                860
Unallocated allowances.............  5,785               6,334               6,690               5,143              1,713
                                  --------------------------------------------------------------------------------------------------
  Total allowance for loans....... $10,995      100%   $10,549       100%  $11,042      100%   $10,081      100%   $8,349       100%
                                  ==================================================================================================
</TABLE>

The following table summarizes the graded loan categories used in the allocation
of the allowance for loan losses among the Company's loans in each of the past
three years.
<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                               ----------------------------------------------------
                                                      1998             1997              1996
---------------------------------------------------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                              <C>              <C>              <C>
Graded loan categories:........................
Pass (Superior, High and Satisfactory).........       $1,322,513       $1,292,006        $1,042,541
Special mention................................            4,579           10,812            13,303
Substandard....................................           11,906            8,545            10,652
Doubtful.......................................               --               --                37
Loss...........................................            1,145              145               385
                                               ----------------------------------------------------         
  Total loans..................................       $1,340,143       $1,311,508        $1,066,918
                                               ====================================================
</TABLE>

Each element of the general allowance for December 31, 1998 was determined as
adequate by applying the following risk percentages to each grade: Pass -
residential: 0%, commercial: 0%, consumer: 0.80%; Special mention - residential:
0%, commercial: 0%, consumer  0.83%; Substandard - residential: 0%, commercial:
0%, consumer: 1.66%; Doubtful - 50%; and loss - 100%.  the risk percentages are
developed by the Company in consultation with regulatory authorities, actual
loss experience and peer group loss experience, and are adjusted for current
economic conditions.  the risk percentages are considered a prudent measurement
of the risk of the Company's loan portfolio.

The Company periodically reviews each commercial loan and assigns a grade based
on loan type, collateral value, financial condition of the borrower and payment
history.  Delinquent residential mortgage and installment loans are reviewed and
assigned a rating based on their payment history, financial condition of the
borrower and collateral values.  Specific mortgage and installment loans are
also reviewed in conjunction with the previously described review of any related
commercial loan.

Based upon these reviews, the Company determines the grades for its loan
portfolio on a quarterly basis and reviews the adequacy of the allowance for
loan losses.  Management believes this periodic review provides a mechanism that
results in loans being graded in the proper category and accordingly, assigned
the proper risk loss percentage in computing the general and specific reserve.

The provision for loan losses increased to $2.5 million during 1998 from $1.4
million in 1997.  Additional provision was necessary as a result of the growth
of $79 million, or 13%, in consumer and business-related loans.  In recognition
of this dynamic, the Company increased its loan loss provision for the higher
potential of losses typically associated with these types of loans.  In 1997,
the provision for loan losses increased to $1.4 million from $1.1 million, with
the increased volume of consumer and commercial loans being the relevant factor
for the change.

There have been no changes in the Company's adequacy reviews or estimation
methods since 1996.

                                      -17-
<PAGE>
 
INVESTMENT ACTIVITIES

     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

                                      -18-
<PAGE>
 
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1998, the Bank's average
liquidity ratio (liquid assets as a percentage of net withdrawable deposits and
current borrowings) was 36.1%, 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 E 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
                                               --------------------------------------------------------------
                                                      1998                    1997                     1996
                                               --------------------------------------------------------------
                                                 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...........          $     --        --     $ 33,299  $ 33,369  $ 40,757   $ 40,801
U.S. Treasury available for sale.....            10,237    10,246       44,764    44,860    57,996     58,000
Commercial paper available for sale..            89,851    89,851           --        --        --         --
Valuation allowance..................                 9        --           96        --         4         --
                                               --------------------------------------------------------------
                                                100,097   100,097       78,159    78,229    98,757     98,801
Investment in Federal Home Loan           
 Bank stock..........................            28,651    28,651       23,200    23,200    19,959     19,959
Other equity securities..............                27        27           25        25        23         23
Other equity securities available         
 for sale............................             1,282     1,297        1,236     1,252     1,032      1,038
Valuation allowance..................                15        --           16        --         6         --
                                               --------------------------------------------------------------
                                               $130,072  $130,072     $102,636  $102,706  $119,777   $119,821
                                               ==============================================================
</TABLE>
 
    The book value and market value of investment securities at December 31,
1998, 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...................              $ 10,237    $ 10,246       6.03%
Commercial paper maturing:                                                 
  In one year or less...................                89,851      89,851       6.18
Valuation allowance.....................                     9          --         --
                                                      -------------------------------
                                                       100,097     100,097       6.16
Equity securities.......................                29,960      29,975       7.81
Valuation allowance.....................                    15          --         --
                                                      -------------------------------
                                                      $130,072    $130,072       6.54%
                                                      ===============================
</TABLE>

                                      -19-
<PAGE>
 
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,
other borrowings, reverse repurchase agreements, and at times has derived funds
from 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 J of Notes to Consolidated Financial Statements. At December 31,
1998, 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. 

<TABLE>
<CAPTION>
                                                                              December 31
                                             ---------------------------------------------------------------------------
                                                      1998                       1997                      1996
                                             ---------------------------------------------------------------------------
                                                            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,
       1.50% - 4.98%.....................    $  237,600       18.80%       $163,119      15.64%   $  149,226       15.48%
  Checking and NOW accounts,
          0.00% - 2.50%..................       166,802       13.19         119,412      11.45       107,550       11.16
  Money market accounts,
     variable............................       103,878        8.22          92,314       8.85        89,321        9.26
                                             ---------------------------------------------------------------------------
             Total regular accounts......       508,280       40.21         374,845      35.94       346,097       35.90
</TABLE>

                                      -20-
<PAGE>
 
<TABLE>
<S>                                <C>          <C>      <C>            <C>      <C>          <C> 
Certificates:
          0.00 - 2.99%...........       9,318     0.74        8,100       0.78      9,864       1.02
          3.00 - 4.99%...........      86,470     6.84       19,955       1.91     74,620       7.74
          5.00 - 6.99%...........     640,591    50.67      600,035      57.52    476,651      49.44
          7.00 - 8.99%...........      14,567     1.15       35,368       3.39     52,073       5.40
          9.00 - 10.99%..........       3,371     0.27        3,746       0.36      3,894       0.40
                                   -----------------------------------------------------------------
Total certificates...............     754,317    59.67      667,204      63.96    617,102      64.00
Accrued interest.................       1,543     0.12        1,118       0.10        934       0.10
                                   -----------------------------------------------------------------

          Total deposits.........  $1,264,140   100.00%  $1,043,167     100.00%  $964,133     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
                             -----------------------------------------------
                                1998               1997              1996
                             -----------------------------------------------
                                             (In thousands)
<S>                          <C>               <C>               <C>
Opening balance.........     $ 1,043,167       $   964,133       $   922,932
Deposits................       4,900,609         3,111,891         2,425,493
Withdrawals.............      (4,726,376)       (3,075,490)       (2,422,882)
Interest credited.......          46,315            42,449            39,115
Accrued interest........             425               184              (525)
                             -----------------------------------------------

Ending balance..........     $ 1,264,140       $ 1,043,167       $   964,133
                             ===============================================
</TABLE>

     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
                                      -------------------------------------
                                          1998          1997        1996
                                      -------------------------------------
                                                  (In thousands)
<S>                                   <C>            <C>           <C>
Savings accounts....................  $  74,481      $ 13,893      $   (502)
Checking and NOW accounts...........     47,390        11,862        15,929
Money market accounts...............     11,564         2,993         3,241
Certificates with maturities:
  7 to 91 days......................      1,639           (76)        8,319
  92 days to 6 months...............     39,008         9,211         1,133
  6 months to 1 year................     35,010        55,669        33,200
  1 year to 1 1/2 years.............     28,604        22,838        16,156
</TABLE>
 

                                      -21-
<PAGE>
 
<TABLE>
  <S>                                                <C>            <C>             <C>
     1 1/2 years to 3 years......................       (17,575)      (38,039)        (15,179)
     3 years to 10 years.........................       (11,151)       (6,105)        (26,232)
  Negotiable rate certificates...................        11,578         6,604           5,661
                                                   ------------------------------------------
     Increase (decrease).........................       220,548        78,850          41,726
  Change in accrued interest.....................           425           184            (525)
                                                   ------------------------------------------

     Total increase (decrease)...................     $ 220,973      $ 79,034        $ 41,201
                                                   ==========================================
</TABLE>

 
     The following table shows rate and maturity information for the Bank's
deposits as of December 31, 1998.

<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........................   $  237,600     18.80%        --            --         --         --       --
Checking and NOW accounts...............      166,802     13.19         --            --         --         --       --
Money market accounts...................      103,878      8.22         --            --         --         --       --
                                           ----------------------------------------------------------------------------
                                              508,280     40.21         --            --         --         --       --
Certificate accounts
 maturing in quarter ending:
03/31/99................................      175,953     13.92        469        15,134    155,117      3,608    1,625
06/30/99................................      222,861     17.63      2,399        28,707    187,146      2,990    1,619
09/30/99................................       90,154      7.13      1,162         5,997     82,517        372      106
12/31/99................................      116,376      9.20      2,001        27,270     86,808        297       --
03/31/00................................       29,656      2.35      1,500         1,465     24,872      1,819       --
06/30/00................................       29,685      2.35        175         4,026     22,544      2,940       --
09/30/00................................       20,815      1.65        464           369     19,915         67       --
12/31/00................................       11,308      0.89        180         1,123      9,781        224       --
03/31/01................................        6,599      0.52        322           448      5,717        112       --
06/30/01................................        5,676      0.45          5           639      5,023          9       --
09/30/01................................        6,568      0.52        125           153      5,595        695       --
12/31/01................................        5,958      0.47         32           553      5,151        222       --
Maturity over 3 years...................       32,708      2.59        484           586     30,405      1,212       21
                                           ----------------------------------------------------------------------------
  Total.................................   $  754,317     59.67   $  9,318      $ 86,470   $640,591   $ 14,567   $3,371
                                                                 ======================================================
Interest accrued........................        1,543      0.12
                                           --------------------
Total deposits..........................   $1,264,140    100.00%
                                           ====================
</TABLE> 

          The following table shows the scheduled maturities of certificates of
 deposit of $100,000 or greater as of December 31, 1998.


<TABLE>
<CAPTION>
                                                                        December 31, 1998
                                                                        -----------------
                                                                          (In thousands)
          <S>                                                           <C>
          Certificates with maturities:
           Three months or less........................................       $ 36,943
           Over three through six months...............................         46,171
           Over six through twelve months..............................         34,431
           Over twelve months..........................................         17,493
                                                                              --------

               Total...................................................       $135,038
                                                                              ========
</TABLE>

                                      -22-
<PAGE>
 
     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".

     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
                                                                    -------------------------------
                                                                      1998          1997       1996
                                                                    -------------------------------
                                                                              (In thousands)
     <S>                                                            <C>        <C>        <C>
     Maximum Balance:
       Advances from FHLB...................................        $573,003   $464,003   $338,003
       Securities sold under                                
        agreements to repurchase............................         148,639    181,055     74,621
       Other borrowings.....................................          29,979     14,643     13,385
                                                       
     Average Balance:                                       
       Advances from FHLB...................................         524,433    381,787    259,694
       Securities sold under                                
        agreements to repurchase............................          80,106     98,471     40,095
       Other borrowings.....................................           6,317      7,993      9,720
</TABLE> 

                                      -23-
<PAGE>
 
     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 L of Notes to Consolidated Financial
Statements.

<TABLE> 
<CAPTION> 
                                                                         At December 31
                                                                   -----------------------------
                                                                    1998        1997      1996
                                                                   -----------------------------
                                                                       (Dollars in thousands)
<S>                                                                <C>        <C>        <C> 
     Advances from FHLB..........................................  $530,003   $464,003   $338,003
                                                              
     Securities sold under agreements                              
         to repurchase...........................................    18,153    149,092     58,040
                                                              
     Other borrowings............................................    29,979      6,428      7,994
                                                                   --------   --------   --------
                                                              
         Total borrowings........................................  $578,135   $619,523   $404,037
                                                                   ========   ========   ========
 
Weighted average interest
 rate of advances from FHLB                                            5.80%      5.91%      5.59%
                                                                   
Weighted average interest rate                                     
 of securities sold under agreements                               
 to repurchase                                                         5.50       5.80       5.66
                                                                   
Weighted average interest                                          
 rate of other borrowings                                              6.18      10.04       9.76
                                                                   
Weighted average interest                                          
 rate of total borrowings                                              5.81       5.93       5.68
</TABLE> 
 
     The following table sets forth the Bank's maturity and rate structure of
FHLB advances as of December 31, 1998.

<TABLE> 
<CAPTION> 
                                                     Weighted
                                                     Average
                                                       Rate        Amount
                                                  ------------------------ 
                                                    (Dollars in thousands)
<S>                                               <C>            <C> 
Matures within:
  One year.......................................     5.99%      $179,000
  Two years......................................     5.78        145,000
  Three years....................................     5.64        205,000
  Four years.....................................       --             --
  Thereafter.....................................     4.00          1,003
                                                  --------       --------
    Total FHLB advances..........................     5.80%      $530,003
                                                  ========       ========
 </TABLE>

                                      -24-
<PAGE>
 
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, 1998, the Bank's investment in stock of and loans to its
subsidiaries (other than its special-purpose finance subsidiary and its Real
Estate Investment Trust) was in compliance with the regulations and totaled $5.6
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, 1998. 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, 1998,
the Company had a $300,000 investment in Enterprises and loans totaling
approximately $1.9 million to the subsidiary.

     Enterprises entered into a joint venture arrangement, 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.

     Quincy Insurance Agency, Inc. ("Quincy") was formed in 1995 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.  In Michigan, MIMLIC's mortgage life insurance policies are
marketed and sold primarily through Michigan savings institutions.  During 1998,
Quincy's parent D&N Holdings, Inc. was dissolved, leaving a small investment in
Quincy Insurance Agency, Inc.

     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

                                      -25-
<PAGE>
 
restarting operations, D&N Mortgage Corporation has originated loans mainly for
the Bank's portfolio.  D&N Mortgage Corporation currently has five origination
offices located in Michigan's lower peninsula in the cities of Grand Rapids,
Hastings, West Bloomfield, St. Joseph, and Ann Arbor.  At December 31, 1998, the
Bank had $2.4 million invested in this subsidiary and loans totaling
approximately $1.0 million to the 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 participation
certificates.  D&N Bank reinvested the proceeds from the sale of the CMOs in
residential and commercial mortgage loans.

REAL ESTATE INVESTMENT TRUST

     D&N Capital Corporation ("D&N Capital") is a Delaware corporation
incorporated on March 18, 1997 for the purpose of acquiring and holding real
estate assets and is a Real Estate Investment Trust ("REIT").  All shares of
common stock of D&N Capital are owned by D&N Bank.

     On July 17, 1997, D&N Capital sold 1.21 million shares of its 9.0%
noncumulative preferred stock, Series A with a liquidation preference of $25.00
per share (totaling $30,250,000). The Series A Preferred Shares are generally
not redeemable prior to July 21, 2002. On or after July 21, 2002, the Series A
Preferred Shares may be redeemed for cash at the option of the Bank, in whole or
in part, at a redemption price of $25.00 per share. As part of this transaction,
D&N Capital received $28,719,000 in net proceeds, after offering costs of
$1,531,000. The net proceeds, along with the proceeds received from the sale of
D&N Capital common stock to D&N Bank, were used to purchase $60,524,000 of
mortgage loans from D&N Bank. The interest on these loans is being used to fund
the dividends on D&N Capital's preferred and common stock.

     The preferred shares are treated as Tier-1 Capital by the Bank, and are
traded on Nasdaq as DNFCP.  During 1998, D&N Capital declared and paid preferred
dividends totaling $2,722,500.

COMPETITION

     At December 31, 1998, the Bank ranked second among all savings institutions
headquartered in the State of Michigan with respect to total assets.

                                      -26-
<PAGE>
 
D&N is the largest financial institution based in the Upper Peninsula of
Michigan.

     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, 1998, the Bank had 575 employees, including 94 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.

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

                                      -27-
<PAGE>
 
wholly owned subsidiary, other than the Chief Executive Officer, who do not
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 53. 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.

     Frank R. Donnelly, age 58, is Senior Vice President/Commercial Lending of
the Bank. He has been employed by the Bank in various capacities since 1965 and
is presently responsible for the business and commercial real estate loan
development for the Bank.

     Daniel D. Greenlee, age 46, 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.

     Kenneth R. Janson, age 47, 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.

     Robert J. Krupka, age 37, is Senior Vice President/Chief Credit Officer of
the Bank. Prior to joining D&N Bank in March 1997, he was Commercial Loan
Officer and Credit Manager with Old Kent Bank. Mr. Krupka is responsible for the
commercial loan credit analysis and operations functions.

     Peter L. Lemmer, age 41, 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.

                                      -28-
<PAGE>
 
     Susan D. Obermeyer, age 35, is Assistant Vice President/Assistant Treasurer
of the Bank. Prior to joining the Bank in September of 1992, she was the Cash
Management Specialist and Accountant with Fifth Third Bank. Ms. Obermeyer is
responsible for cash and liquidity management, investments, and wholesale
funding of the Bank.

     Donald W. Schulze, age 48, 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.

     Alfred J. Sliwinski, age 52, was Executive Vice President/Community
Banking.  He had been employed by D&N Bank in various community banking
capacities since May 1977 and was most recently  responsible for the community
banking function of the Bank.  In January 1999, Mr. Sliwinski resigned from the
Bank.

     Richard E. West, age 52, is Executive 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,
consumer lending, bank operations and information systems functions of the Bank.

                                      -29-
<PAGE>
 
                                  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  examination of the Bank was as of  June 30, 1998.
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 or the FDIC, the examiners may require the Bank to provide for higher
general or specific loan loss reserves.

     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, 1998, the Bank's lending limit under this restriction was $21.3
million.  The Bank is in compliance with the loans-to-one-borrower limitation.

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

                                      -30-
<PAGE>
 
is authorized to conduct examinations of and to require reporting by FDIC-
insured institutions.  It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the FDIC.  The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.

     The FDIC's deposit insurance premiums are assessed through a risk- based
system under which all insured institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium.  Risk classification of all insured institutions will
be made by the FDIC for each semi-annual assessment period.

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits.  In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC.  In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.

     D&N Bank, will continue to be subject to an assessment to fund repayment of
the Financing Corporation's 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

                                      -31-
<PAGE>
 
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, 1998, the Bank
had $4,822,000 of unamortized MSRs, $415,000 of which was required to be
deducted from tangible capital.

     At December 31, 1998, the Bank had tangible capital of $129.5 million, or
6.40% of adjusted total assets, which is approximately $99.2 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, 1998, the Bank had core capital equal to $129.5 million, or
6.40% of adjusted total assets, which is $68.8 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, 1998 the Bank had
$9.9 million of general loss reserves which could be counted as supplementary
capital.

                                      -32-
<PAGE>
 
     On December 31, 1998, the Bank had total capital of $139.4 million
(including $129.5 million in core capital and $9.9 million in qualifying
supplementary capital) and risk-weighted assets of $1.27 billion (including
$51.4 million in converted off-balance sheet assets); or total capital of 10.94%
of risk-weighted assets. This amount was $37.4 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.  On December 31,
1998, the Bank had a Tier 1 risk-based capital ratio of 10.17%.

     Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of conservator or a receiver.

     If the OTS determines that an institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice, it is authorized to
reclassify a well-capitalized institution as an adequately capitalized
institution and if the institution is adequately capitalized, to impose the
restrictions applicable to an undercapitalized institution.  If the institution
is undercapitalized, the OTS is authorized to impose the restrictions applicable
to a significantly undercapitalized institution.

                                      -33-
<PAGE>
 
     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.

     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."


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

                                      -34-
<PAGE>
 
conditions and savings flows of all savings institutions.  At the present time,
the minimum liquid asset ratio is 4%, as changed during 1997.

     At December 31, 1998, the Bank was in compliance with the liquidity ratio
requirement, with an average liquid asset ratio of 36.1%.


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, 1998, 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

                                      -35-
<PAGE>
 
national bank, and it is limited to national bank branching rights in its home
state.  In addition, the institution is immediately ineligible to receive any
new FHLB borrowings and is subject to national bank limits for payment of
dividends.  If such institution has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank.  In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties.  If any institution that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.  See "Holding Company Regulation."
 
 
COMMUNITY REINVESTMENT ACT

     Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods.  The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.

     The federal banking agencies, including the OTS, have 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 1998
and received a rating of "Satisfactory".


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.

                                      -36-
<PAGE>
 
     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 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, 1998, 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.

                                      -37-
<PAGE>
 
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, 1998, the Bank had $28.7 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 7.49% and were 8.00% for calendar
year 1998.

     Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderate priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects.  These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future.  These contributions
could also have an adverse effect on the value of FHLB stock in the future.  A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
 
     For the year ended December 31, 1998, the dividends paid by the FHLB of
Indianapolis to the Bank totaled $2.1 million.  The $578,000 dividend received
for the quarter ended December 31, 1998 reflects an annualized rate of 8.00%.


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

                                      -38-
<PAGE>
 
taken as a deduction in computing taxable income for federal income tax
purposes. This tax bad debt reserve method available to thrift 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
returns through December 31, 1994.  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 M 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

                                      -39-
<PAGE>
 
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 "Single Business Tax",
that 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.


ITEM 2. PROPERTIES

     At December 31, 1998, the Bank operated through 41 full service community
banking offices, seven savings agency offices and five mortgage banking offices.
The net book value of the land, buildings and leasehold improvements owned by
D&N Bank at that date was $12,665,000, and the net book value of its office
furniture, fixtures and equipment was $6,340,000.

     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

                                      -40-
<PAGE>
 
book value of all computer equipment and software owned by the Bank was
$929,000 at December 31, 1998.  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.

          Page 11 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference, see "Significant Litigation".

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,
1998.

                                    PART II

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

          Page 41 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.


ITEM 6.   SELECTED FINANCIAL DATA

          Page 13 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.

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

          Pages 1 through 12 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.

                                      -41-
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS SUPPLEMENTARY DATA

          Pages 14 through 40 of the attached 1998 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 change of accountants and/or reporting disagreements
on any matter of accounting principle or financial statement disclosure, within
the prior 24 month period.

                                   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 1999, except for
information contained under the heading "Compensation Committee Report"
and "Stock Performance Graph." 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 for the Annual
Meeting of Stockholders to be held in 1999, except for information contained
under the heading "Compensation Committee Report" and "Stock Performance Graph."
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 1999,
except for information contained under the heading "Compensation Committee
Report" and "Stock Performance Graph." A copy of this Proxy Statement will be
filed not later than 120 days after the close of the fiscal year.

                                      -42-
<PAGE>
 
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 1999, except for the
information contained under the heading Compensation Committee Report" and
"Stock Performance Graph." A copy of this Proxy Statement will be filed not
later than 120 days after the close of the fiscal year.

                                    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, 1998, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.

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

Selected Financial Highlights                                 13

Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations                                              1 - 12
 
Report of Independent Auditors                                 14

Consolidated Statements of Condition                           15
 
Consolidated Statements of Income                              16

Consolidated Statements of
  Stockholders' Equity                                         17
 
Consolidated Statements of Cash Flows                          18
 
Notes to Consolidated Financial Statements                   19 - 40

Stockholders' Information                                      41


       (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.

                                      -43-
<PAGE>
 
                                                               (A) (3)  EXHIBITS

<TABLE>
<CAPTION>
                                             Reference to    Sequential
                                             Prior Filing    Page Number
                                              or Exhibit   Where Attached/
Regulation                                      Number       Located in
S-K Exhibit                                    Attached    This Form 10-K
Number                   Document               Hereto         Report
-------------  ----------------------------  ------------  ---------------
<S>            <C>                           <C>           <C>
   3(i)        Articles of Incorporation          *        Not applicable
                                                   
   3(ii)       By-Laws                          3(ii)      Pages 48 - 64
                                                   
   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                    *        Not applicable
               Stock Incentive Plan               
               (1995 Amendment)                   
                                                  
               Employment Agreement of            
               G. Butvilas                        *        Not applicable
 
   11          Statement re:  computation    Not required  Not applicable
               of per share earnings
 
   12          Statement re:  computation    Not required  Not applicable
               of ratios
 
   13          Annual Report to Security     13            Pages 65 - 105
               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            Page 106
 
   22          Published report regarding    None          Not applicable
               matters submitted to vote
               of security holders
 
   23          Consent of Experts and        23            Page 107
               Counsel
</TABLE> 

                                      -44-
<PAGE>
 
<TABLE> 
<S>            <C>                           <C>            <C> 
   24          Power of Attorney             Not required   Not applicable
 
   27          Financial Data Schedule       27             Page 108
 

   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.
     -----

                                      -45-
<PAGE>
 
                                  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


By: /s/ GEORGE J. BUTVILAS              By: /s/ KENNETH R. JANSON
    -----------------------                 ------------------------------    
    GEORGE J. BUTVILAS                      KENNETH R. JANSON
   (Duly Authorized Representative)        (Duly Authorized Representative)

Date       March 16, 1999               Date       March 16, 1999
     ----------------------------           ------------------------------

     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/ MARY P. CAULEY
    -----------------------------           ------------------------------
    GEORGE J. BUTVILAS                      MARY P. CAULEY
   Director, President and                  Director
   Chief Executive Officer
   (Principal Executive Officer)

Date       March 16, 1999               Date       March 16, 1999
     ----------------------------           ------------------------------     


By: /s/ JOSEPH C. BROMLEY               
    -----------------------------           
    JOSEPH C. BROMLEY                        
    Director                                 

Date       March 16, 1999               
     ----------------------------            

                                      -46-
<PAGE>
 
By: /s/ STEVEN COLEMAN                 By:  /s/ STEVEN E. ZACK
    ------------------------------          ------------------------------
    STEVEN COLEMAN                          STEVEN E. ZACK
    Director                                Director

Date  March 16, 1999                   Date       March 16, 1999
    ------------------------------          ------------------------------


By: /s/ RANDOLPH P. PIPER              
    ------------------------------         
    RANDOLPH P. PIPER                      
    Director                               

Date       March 16, 1999              
     -----------------------------          



BY: /s/ PETER VAN PELT                 
    ------------------------------         
    PETER VAN PELT                        
    Director                              

Date       March 16, 1999              
     -----------------------------        
 


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

Date       March 16, 1999
     -----------------------------

                                      -47-
<PAGE>
 
                                 EXHIBIT INDEX

Exhibit
Number
-------

  13        Annual Report

  21        Subsidiaries of Registrant

  23        Consent of Expert and Counsel

  27        Financial Data Schedule