<PAGE>   1
                                  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, 1997

[ ]      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 10, 1998, there were issued and outstanding 9,120,324 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
10, 1998, was $208,862,000. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.) 

                      DOCUMENTS INCORPORATED BY REFERENCE

     PARTS II and IV of Form 10-K - Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1997.

     PART III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders to be held in 1998.

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


<PAGE>   2



                                     PART I
ITEM 1.  BUSINESS

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

         The Bank was founded in 1889 and operated as a state-chartered mutual
savings and loan association until February 1984, when it converted to a federal
charter. In 1985, the Bank converted to a stock association, and in 1986,
converted to a federal savings bank. The Bank adopted a holding company
structure in July 1988. With total assets of $1.82 billion at December 31, 1997,
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 37 full-service community banking offices, including its main office in
Hancock, Michigan, seven savings agency offices which provide depository
services and four mortgage banking offices. The Bank's deposits are insured up
to the maximum extent permitted by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
The Bank is subject to supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the FDIC.

         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."


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

                                      - 2 -


<PAGE>   3



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 disclaim 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
$411.9 million or 50% of the Bank's total loans, excluding loans held for sale,
secured by real estate as of December 31, 1997, 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
                           ----------------------------------------------------------------------------------------------------
                                    1997                 1996                 1995                1994               1993
                           ------------------    ------------------   ------------------    -----------------  ----------------
                           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              $ 703,580  54.08%  $ 600,923     56.91%   $ 597,892    62.78%  $ 526,572    64.07% $ 387,252   59.89%
     Construction              13,864   1.07      13,201      1.25       19,982     2.10       2,159     0.26      2,083    0.32
Income producing property
     Permanent                 81,830   6.29      85,619      8.11       89,176     9.36     115,162    14.01    131,372   20.31
 
     Construction              42,582   3.27      26,472      2.51       21,074     2.21      17,741     2.16     10,475    1.62
                          ----------- ------   ---------    ------     --------   ------   ---------    ------ ---------  ------ 
Total real estate loans       841,856  64.71     726,215     68.78      728,124    76.45     661,634    80.50    531,182   82.14
</TABLE>


                                      - 3 -


<PAGE>   4
<TABLE>
<CAPTION>

<S>                              <C>              <C>       <C>           <C>        <C>         <C>      <C>           <C>      
CONSUMER LOANS
     Automobile loans               198,505        15.26      141,056     13.36       81,885      8.60      46,711        5.68    
     Home equity                     99,122         7.62       82,305      7.79       60,003      6.30      39,939        4.86    
     Home improvement                47,845         3.68       46,545      4.41       41,542      4.36      39,279        4.78    
     Mobile home loans                  213         0.02          289      0.03          417      0.04         619        0.08    
     Unsecured                       12,395         0.95       15,172      1.44       19,637      2.06      22,197        2.70    
     Other                           91,471         7.03       53,901      5.10       35,975      3.78      22,194        2.70    
                                 ----------       ------   ----------    ------     --------   -------    --------      ------    
Total consumer loans                449,551        34.56      339,268     32.13      239,459     25.14     170,939       20.80    
                                                                                                                                  
COMMERCIAL LOANS                                                                                                                  
     Revolving business loans        11,363         0.87        2,363      0.22        1,119      0.12          --          --
     Term business loans             27,072         2.08        9,982      0.95        6,650      0.70       4,748        0.58    
                                 ----------       ------   ----------    ------     --------   -------    --------      ------    
Total commercial loans               38,435         2.95       12,345      1.17        7,769      0.82       4,748        0.58    
                                 ----------       ------   ----------    ------     --------   -------    --------      ------
Loans receivable, gross           1,329,842       102.22    1,077,828    102.08      975,352    102.41     837,321      101.88    

Less:
     Discounts (premiums)
           on loans purchased        (2,356)       (0.18)      (2,035)    (0.19)      (1,709)    (0.18)        999        0.12    
     Allowance for losses            10,549         0.81       11,042      1.05       10.081      1.06       8,349        1.02 
     Undisbursed portion                                                                                                           
          of  loan proceeds          20,315         1.56       12,085      1.14       13,198      1.38       4,213        0.51 
     Deferred income                    375         0.03          860      0.08        1,423      0.15       1,885        0.23     
                                -----------       ------   ----------    ------     --------    ------    --------      ------    
                                     28,883         2.22       21,952      2.08       22,993      2.41      15,446        1.88     
                                -----------       ------   ----------    ------     --------    ------    --------      ------    
                                                                                                                                   
Loans receivable, net           $ 1,300,959       100.00%  $1,055,876    100.00%    $952,359    100.00%   $821,875      100.00%
                                ===========       =======  ==========    ======     ========    ======    ========      ======    

</TABLE>


<TABLE>
<S>                                             <C>         <C> 
CONSUMER LOANS
     Automobile loans                             34,220        5.29
     Home equity                                  23,058        3.57
     Home improvement                             40,017        6.19
     Mobile home loans                               776        0.12
     Unsecured                                    20,328        3.14
     Other                                        16,245        2.51
                                                --------     -------   
Total consumer loans                             134,644       20.82
                    
COMMERCIAL LOANS                    
     Revolving business loans                         --          --   
     Term business loans                              --          --     
                                                --------     -------   
Total commercial loans                                --          --     
                                                --------     -------
Loans receivable, gross                          665,826      102.96

Less:
     Discount (premiums)
        on loans purchased                         2,896        0.45             
     Allowance for losses                         11,570        1.79             
     Undisbursed portion               
        of loan proceeds                           2,750        0.43            
     Deferred income                               1,901        0.29 
                                                --------     ------- 
                                                  19,117        2.96 
                                                --------     ------- 
Loans receivable, net                           $646,709      100.00%
                                                ========     =======
</TABLE>







         LOAN MATURITIES. The following schedule illustrates the maturity
structure of the Company's loan portfolio at December 31, 1997. 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              Consumer Loans             Total
Amounts            -----------------    ------------------    ------------------      ------------------     ---------------- 
 Due in
 Years                     Weighted              Weighted               Weighted               Weighted              Weighted
Ending                     Average               Average                Average                 Average               Average
December 31,      Amount    Rate         Amount   Rate        Amount      Rate         Amount     Rate       Amount    Rate
------------      -------  --------      ------  --------     -------   ---------      -------  -------      -------  -------
                                                              (Dollars in thousands)
<S>              <C>         <C>       <C>         <C>        <C>          <C>       <C>          <C>     <C>         <C>
1998             $ 13,973    9.53%      $ 12,441   8.70%       $ 28,177     9.24%    $   87,562    9.17%  $  142,153   9.18%
1999                4,218    9.20         17,641   8.51           4,981     9.84         89,431    8.99      116,271   8.96
2000                5,135    9.32         44,017   7.65          10,083     9.87         86,825    9.03      146,060   8.68
2001-2002          10,363    9.39         55,478   8.42          10,038    10.30        139,265    9.17      215,144   9.04
2003-2007           3,803    9.43         57,255   7.99           1,903     9.24         35,091    9.13       98,052   8.48
2008-2012             571    8.79         91,861   7.86             833     9.32          8,743    8.24      102,008   7.91
Thereafter            101    8.87        502,650   7.77              --       --            165    8.03      502,916   7.76
                 --------               --------               --------              ----------           ----------

  Total          $ 38,164    9.40%      $781,343   7.86%       $ 56,015     9.60%     $ 447,082    9.08%  $1,322,604   8.39%
                 ========               ========               ========               =========
</TABLE>


                                      - 4 -
<PAGE>   5


<TABLE>
<S>                                                                   <C>
Plus:
  Accrued interest receivable,
   net of reserve for uncollected
   interest                                                                7,311

  Deferred income and premiums                                             1,908

Less:
  Loans in process                                                        20,315
  Loss and valuation allowances                                           10,549
                                                                      ----------
                                                                      $1,300,959
                                                                      ==========
</TABLE>

         The total amount of loans, excluding loans held for sale, due after
December 31, 1998 which have fixed interest rates is $403.8 million, while the
amount of loans due after such date having floating or adjustable rates is
$771.3 million.

         LOAN ORIGINATIONS, PURCHASES AND SALES. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. D&N has originated residential mortgage loans
secured by property both within and outside the State of Michigan. D&N has also
purchased residential mortgage loans secured by property located in various
states. In addition, the Company has originated income producing property loans
secured by real estate located in the State of Michigan and has purchased such
loans secured by property located in Michigan and elsewhere. Since 1990, the
Bank has chosen to focus the activities of its community banking offices on loan
originations in their market areas. At December 31, 1997, 73% 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, 1997. See "- Classified Assets, Loan
Delinquencies and Defaults" for a discussion of other real estate owned.


<TABLE>
<CAPTION>

                                                   Outstanding Balance
                                                            at
                                                    December 31, 1997
                                                  --------------------
                                                     (In thousands)
<S>                                                    <C>
MICHIGAN
  One- to four-family residential....................   $506,959
  Apartments.........................................     14,803
  Mini warehouse, storage ...........................      1,440
  Mobile home parks..................................      2,063
  Motels/hotels .....................................     11,160
  Shopping centers and retail .......................     17,195
  Office buildings ..................................      7,304
</TABLE>


                                      - 5 -


<PAGE>   6


<TABLE>
<CAPTION>

                                                                     Outstanding Balance
                                                                              at
                                                                     December 31, 1997
                                                                     -------------------      
                                                                       (In thousands)
<S>                                                                   <C>
  Industrial .................................................             4,788
  Condominiums and land development ..........................            31,694
  Other ......................................................            17,785
                                                                         -------
                                                                         615,191
CALIFORNIA ...................................................                 .
  One- to four-family residential ............................            23,466
  Apartments .................................................             6,325
  Mobile home parks ..........................................                55
  Shopping centers & retail ..................................             3,482
  Office buildings ...........................................               681
  Industrial .................................................               372
  Other ......................................................                93
                                                                         -------
                                                                          34,474
MASSACHUSETTS
  One- to four-family residential ............................            19,889
                                                                         -------
                                                                          19,889
NEW YORK
  One- to four-family residential ............................             4,958
  Apartments .................................................               805
                                                                         -------
                                                                           5,763
NORTH CAROLINA
  One- to four-family residential ............................             7,514
                                                                         -------
                                                                           7,514
TEXAS
  One- to four-family residential ............................            12,110
                                                                         -------
                                                                          12,110
PENNSYLVANIA
  One- to four-family residential ............................             5,652
  Apartments .................................................               241
  Industrial .................................................               114
  Other ......................................................                50
                                                                         -------
                                                                           6,057
FLORIDA
One-to four-family residential ...............................             5,192
                                                                         -------
                                                                           5,192
 OTHER (31 STATES)
  One- to four-family residential ............................           123,812
  Apartments .................................................               138
  Motels/hotels ..............................................               331
  Shopping centers and retail ................................             1,951
</TABLE>



                                      - 6 -


<PAGE>   7


<TABLE>
<CAPTION>

                                                                    Outstanding Balance
                                                                           at
                                                                     December 31, 1997
                                                                   --------------------
                                                                     (In thousands)
<S>                                                                   <C>
  Office buildings ............................................              66
  Other .......................................................             250
                                                                      ---------
                                                                        126,548
Rated conventional residential
 participation certificates ...................................           4,621
                                                                      ---------
Total .........................................................         837,359

Plus:
  Loan control and clearing ...................................             298
  Accrued interest receivable, net of reserve for
      uncollected interest ....................................           4,199

Less:
   Deferred income, discounts and premiums ....................          (1,131)
   Loans in process ...........................................          20,315
   Loss and valuation allowances ..............................           5,955
                                                                      ---------
     Total ....................................................       $ 816,717
                                                                      =========
</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 1997, total loan originations
increased $120.2 million, or 24% as a result of a significant increase in
consumer lending activity. Consumer loan originations alone increased $52.1
million, or 19%.

         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, 1997, the Bank had $5.3 million
of net loans held for sale consisting of 15 and 30 year fixed rate loans. These
sales have provided additional funds for loan originations and investments and
also generated income. The Bank generally continues, after the sale, to service
the loans and loan participations sold. Loan sales are made on a yield basis
with a portion of the difference between the yield to the purchaser and the
amount paid by the borrower constituting servicing income to D&N. On occasion,
the Bank also purchased mortgage loan servicing rights from others in order to
maintain its loan servicing portfolio economies of scale.

         The weighted average servicing fee for loans serviced for others was 
 .31% at December 31, 1997.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Noninterest Income."  At

                                      - 7 -


<PAGE>   8



December 31, 1997, D&N serviced for others approximately $519 million in
loans and loan participations.  See also Note A of Notes to Consolidated
Financial Statements "Summary of Significant Accounting Policies - Mortgage
Servicing Rights".

         The Bank's investment in mortgage servicing rights ("MSRs") totaled
$2.1 million at December 31, 1997. The following table details the value of the
Bank's investment in MSRs.

<TABLE>
<CAPTION>

                                                                             Year Ended December 31
                                                              --------------------------------------------
                                                                  1997             1996             1995
                                                              ------------   --------------       --------
                                                                           (In thousands)
<S>                                                             <C>             <C>               <C>
Balance at beginning of year                                    $ 1,443          $ 1,113           $   968
Additions:
  Capitalized servicing                                           1,236              630               621
Reductions:
  Scheduled amortization                                            321              267               169
  Additional amortization due to
    changes in prepayment assumptions                               222               33                71
  Impairment                                                         --               --               234
  Sales                                                              --               --                --
  Transfers to loan portfolio under
    recourse and other provisions                                    --               --                 2
                                                                -------          -------           -------
    Total                                                           543              300               476
                                                                -------          -------           -------
Balance at end of year                                          $ 2,136          $ 1,443           $ 1,113
                                                                =======          =======           =======
Fair market value at end of year                                $ 2,389          $ 1,770           $ 1,161
                                                                =======          =======           =======
</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
                                         ----------------------------------------------------------------    
                                               1997        1996           1995          1994       1993
                                            --------   ----------    -----------   -----------  --------
                                                                  (In thousands)
<S>                                          <C>          <C>           <C>              <C>        <C>
ORIGINATIONS
Real estate:
   One- to four-family residential .....     $215,452    $194,357       $182,800    $ 81,279     $147,246
   Income producing property ...........       45,594      33,816         17,614      17,350       13,014
 Non-real estate:
   Consumer ............................      323,676     271,622        195,109     132,836       95,129
   Commercial ..........................       46,708      11,437          3,739       4,748        --
                                           ----------    --------       --------    --------     --------
     Total originations.................      631,430     511,232        399,262     236,213      255,389


PURCHASES
 Real estate:
   One- to four-family residential......      234,886     148,405        103,524     188,481       72,125
   Income producing property............       --          --              --          1,852        --
   Mortgage-backed securities...........      107,400      58,892          --         68,391      108,749
                                            ---------   ---------       --------    --------     --------
     Total purchases ...................      342,286     207,297        103,524     258,724      180,874
                                            ---------   ---------       --------    --------     -------- 
     Total additions....................      973,716     718,529        502,786     494,937      436,263

</TABLE>






                                      - 8 -


<PAGE>   9


<TABLE>
<S>                                        <C>          <C>          <C>         <C>        <C>            
SALES
 Real estate:
   One- to four-family residential......       85,778      68,024       107,080     45,311    106,167
   Mortgage-backed securities(1)........       23,555         --          4,210     50,658    126,932
   Non-real estate:                                                    
   Consumer loans.......................        2,383       2,810         2,976      2,894      2,229
                                             --------    --------     ---------  ---------    -------
     Total sales........................      111,716      70,834       114,266     98,863    235,328
 Principal repayments...................      504,972     426,291       288,485    239,816    316,624
                                             --------    --------     ---------  ---------  ---------
     Total reductions...................      616,688     497,125       402,751    338,679    551,952
 Transfers to other real estate owned...         (961)     (3,373)       (1,936)    (2,861)    (9,380)
 Increase (decrease) in other items, net       (3,944)      9,033         8,801      1,079    (19,622)
                                             --------    --------     ---------  ---------  ---------
     Net increase (decrease)............     $352,123    $227,064     $ 106,900  $ 154,476  ($144,691)
                                             ========    ========     =========  =========  =========
</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, 1997
amounted to $38.6 million for one- to four-family residential real estate loans
and $40.1 million for commercial real estate loans.   See "Regulation - Federal
Savings Association Regulation."

         RESIDENTIAL MORTGAGE LOANS. At December 31, 1997, the Bank had $717.4
million in residential mortgage loans representing 55.1% of the Bank's total
loan portfolio. This amount represents a 16.8% increase in the dollar value of
the residential loan portfolio. However, it also represents a 3.1% 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 and mortgage banking offices. Substantially all of
the residential loans being originated by the Bank are in a form which permits
their sale in the secondary market.

         The Bank's first mortgages customarily include "due-on-sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid. In general, the Bank enforces due-on-sale clauses in its first
mortgages.


                                      - 9 -



<PAGE>   10



         In the case of conventional mortgage loans intended for sale, the
Bank's policy is to lend a maximum of 95% of the appraised value of
single-family residences. The Bank generally does not lend more than 90% of the
appraised value of the property on those loans it intends to hold. Private
mortgage insurance is required if the loan amount exceeds 80% of the appraised
value, in an amount sufficient to reduce the Bank's exposure to 75% or less of
the appraised value of the property. Property securing real estate loans made by
the Bank is appraised by independent appraisers selected by the Bank and whose
appraisals are reviewed by D&N personnel or other independent appraisers.

         Loans up to the maximum limits for single family homes of the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA") 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 Sliwinski). Loans in excess of $2 million must also be approved by the
Bank's Board of Directors.

         Title, fire and casualty insurance as well as surveys are generally
required on all mortgage loans.

         D&N Bank also offers a variety of Adjustable Rate Mortgages, ("ARM")
loans which offer adjustable rates of interest, payments, loan balances or terms
to maturity which vary according to specified indices. The Bank's ARMs generally
have a loan term of 30 years with rate adjustments every year or every three
years during the term of the loan. ARMs currently originated by the Bank contain
a 2% limit as to the maximum amount of change in the interest rate at any
adjustment period and a 6% limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. At December 31, 1997, residential ARMs
totaled $328 million, or 47% of the Bank's total residential one- to four-family
mortgage loan portfolio. Of this total ARM portfolio, $197 million or 60% were
purchased from others. Due to consumer demand, residential loans originated
during 1997 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 1997, the Company

                                     - 10 -


<PAGE>   11



purchased $107.5 million of fixed rate Collateralized Mortgage Obligations
("CMO") with expected average lives of 2.7 to 4.3 years. CMOs are
securitiesderived 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 1997 are backed by pass-through securities of either
FHLMC, FNMA or Government National Mortgage Association ("GNMA").

         The Bank has in the past invested in interest only strip securities
("IOs") and principal only strip securities ("POs") as part of its
asset/liability management strategy. At December 31, 1997, D&N had IOs with a
book value and a market value of $1.4 million, and had no POs at that date.

         The following table sets forth information concerning the composition
of D&N's mortgage-backed securities portfolio in dollar amounts and percentages,
by type of security. See also Note F of Notes to Consolidated Financial
Statements.

<TABLE>
<CAPTION>
                                                                    December 31
                             -----------------------------------------------------------------------------------------------------
                                  1997                1996                 1995                 1994                   1993
 MORTGAGE-BACKED             ----------------    ---------------       ---------------     ----------------     ------------------
     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 ........   $ 356,079   99.38%    $ 249,186   99.18%   $ 125,264   98.09%     147,988     97.81%   $166,284   96.69%
                                                                                          
Interest only                                                                             
    certificates ......       1,456    0.41         2,070    0.82        2,456    1.92        3,886      2.57       4,321    2.51
                          ---------   -----     ---------  ------    ---------  ------     --------    ------    --------  ------
Mortgage-backed                                                                           
    securities, gross..     357,535   99.79       251,256  100.00      127,720  100.01      151,874    100.38     170,605   99.20
                                                                                                       
Net (discounts)                                                                           
    premiums ..........         761    0.21          --      --            (11)  (0.01)        (581)    (0.38)      1,378    0.80
                          ---------  ------     ---------  ------     --------  ------     --------    ------    --------  ------
                                                                                          
Mortgage-backed                                                                           
    securities, net ...   $ 358,296  100.00%    $ 251,256  100.00%    $127,709  100.00%    $151,293   $100.00%   $171,983  100.00%
                          =========  ======     =========  ======     ========  ======     ========   =======    ========  ======

</TABLE>



         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, 1997, $16.5 million of D&N's portfolio of income
producing property loans were purchased loans.


                                     - 11 -


<PAGE>   12



       The following table shows the composition of the Bank's income producing
property and land development loans at December 31, 1997.   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   $  20,111        19.54%         $   207      
Other income producing property:                                                      
     Motels/hotels                          11,605        11.27             --        
     Offices                                 6,974         6.78             --        
     Mobile home parks                       2,139         2.08              103      
     Shopping centers                       22,406        21.77              184      
     Industrial                              4,822         4.68             --        
     Nursing homes                           5,344         5.19               18      
     Condominium development                 4,282         4.16             --        
     Other                                   4,431         4.30             --        
                                         ---------       ------          -------      
     Total                                  82,114        79.77              512      
                                                                                      
Land development loans and other            42,298        41.09             --        
                                         ---------       ------          -------      
     Total                                 124,412       120.86          $   512      
                                                                         =======      
Allowance for losses                        (5,387)       (5.23)
Loans in process, deferred income and
     other miscellaneous credits           (16,091)      (15.63)
                                         ---------       ------     
          Total                          $ 102,934       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 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

                                     - 12 -


<PAGE>   13



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, 1997, consumer loans totaled $449.6 million or 35% of the
Bank's loan portfolio, an increase of $110.3 million or 33% from December 31,
1996.

         During 1997, net consumer loan charge-offs were $1,276,000 compared to
$926,000 in 1996, $642,000 in 1995, $411,000 in 1994 and $354,000 in 1993.

         Indirect loan originations totaled $172.3 million in 1997. Indirect
receivables amounted to $235.2 million at December 31, 1997 and make up 53% 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 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, 1997, the Bank's loans to

                                     - 13 -


<PAGE>   14



one borrower limit was approximately $19.8 million.  See "Regulation - Federal
Regulation".  At December 31, 1997, the Bank had no loans to one borrower in
excess of its lending limit.


CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS

         The Bank's collection procedures provide that when a residential
mortgage loan is 15 days past due, the borrower is contacted by mail and payment
is requested. For loans secured by income producing property, the borrower is
contacted by telephone when the loan is 15 days past due. If the delinquency
continues, subsequent efforts are made by telephone and mail to contact the
delinquent borrower. In certain instances, the Bank may modify the loan or grant
a limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs. If the loan continues in a delinquent status for 90 days or
more, the Bank generally initiates foreclosure proceedings.

         The process of non-judicial foreclosure in Michigan takes approximately
six weeks. A sheriff's sale is then held at which the Bank normally bids for the
purchase of the property. A conditional sheriff's deed is then awarded to the
highest bidder, usually the Bank, and the customer is given six months (or in
certain circumstances, one year) to redeem the conditional deed by repaying the
bid amount in full. During this redemption period, the borrower may occupy and
use the property as he sees fit. If he fails to redeem the sheriff's 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, 1997. 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                    5    $   298        90     $4,283        5     $ 7,301       562       $ 3,963
    60 - 89 days                    1        145        18        765        1          68       219         1,186
    90 days and over                2         72        44      2,110        5         512       153           804
                              -------    -------      ----     ------    -----     -------      ----       -------

    Total delinquent loans          8    $   515       152     $7,158       11     $ 7,881       934       $ 5,953
                              =======    =======      ====     ======   ======     =======      ====       =======

</TABLE>



                                     - 14 -


<PAGE>   15



         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, 1997, $8.5 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 $3.4 million of classified assets and
apartments account for $2.0 million. The balance of classified assets consists
of loans and real estate owned of various income producing properties, land,
residential real estate and consumer loans. Classified assets amounting to $2.0
million, or 10% of total classified assets, are secured by real estate located
in the state of California.


NONPERFORMING ASSETS AND RISK ELEMENTS

         Nonperforming assets, including other real estate owned, decreased to
$5.3 million at December 31, 1997 compared to $8.1 million at December 31, 1996.
The ratio of nonperforming assets to total assets was 0.29% at December 31, 1997
compared to 0.55% at December 31, 1996. Allowances for losses represented 199%
of nonperforming assets at December 31, 1997.

         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 1997, the Bank would have recorded interest income of $369,000 if
nonaccrual and restructured loans had performed in accordance with their
original terms. The Bank recognized $52,000 of interest income on these loans in
1997.

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






                                     - 15 -



<PAGE>   16



<TABLE>
<CAPTION>

                                                              December 31
                                          ------------------------------------------------
                                           1997      1996       1995        1994      1993
                                          ------    ------     ------      -----      ----
                                                   (Dollars in thousands)

<S>                                      <C>       <C>         <C>         <C>       <C>    
Nonaccruing loans                        $ 3,552    $ 6,621    $ 8,225    $17,995    $30,102
Accruing loans delinquent
   more than 90 days                         274       --           24          5         13
Restructured loans                          --         --         --         --          166
                                         -------    -------    -------    -------    -------

   Total nonperforming loans               3,826      6,621      8,249     18,000     30,281
 Other real estate owned (OREO)            1,474      1,470      1,452      6,520     13,312
                                         -------    -------    -------    -------    -------

   Total nonperforming assets            $ 5,300    $ 8,091    $ 9,701    $24,520    $43,593
                                         =======    =======    =======    =======    =======

Nonperforming loans as a
   percentage of total loans                0.29%      0.62%      0.86%      2.17%      4.60%
                                         =======    =======    =======    =======    =======

Nonperforming assets as a
    percentage of total assets              0.29%      0.55%      0.79%      2.17%      4.04%
                                         =======    =======    =======    =======    =======

Allowance for loan losses as a
    percentage of  nonperforming loans    275.72%    166.77%    122.21%     46.38%     38.21%
                                         =======    =======    =======    =======    =======

Allowances for loan and OREO losses
   as a percentage of
   nonperforming assets                   199.04%    136.47%    105.29%     35.40%     28.03%
                                         =======    =======    =======    =======    =======
</TABLE>


OTHER REAL ESTATE OWNED

         Other real estate owned, net of reserves, totaled $1.5 million at
December 31, 1997, the same as at December 31, 1996. Other real estate owned
consisted of single family homes, multi-family dwelling units and commercial
real estate. At foreclosure, real estate is recorded at estimated fair value
less disposal costs. Any difference between estimated fair value and the loan
balance is charged to the allowance for loan losses.

         The largest asset in other real estate owned is a residential property
located in Indiana. This asset had a carrying value of approximately $314,000 at
December 31, 1997.


OTHER LOANS OF CONCERN

         In addition to nonperforming assets, the Bank has other loans of
concern aggregating $14.1 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.


                                     - 16 -


<PAGE>   17



         Included in other loans of concern at December 31, 1997, are two income
producing property loans located in California and one in Michigan totaling $4.8
million that have all paid as agreed but, for various reasons, indicate
potential payment concerns.


ALLOWANCE FOR LOAN LOSSES

         The allowance for loan losses is established at levels considered
appropriate based on management's judgment of potential losses in residential,
income producing and consumer loan portfolios. The loan portfolios are reviewed
at least quarterly for changes in performance, collateral value and overall
quality. Allocated allowances are established for problem loans with expected
losses, and in addition, allowances are established for unidentified potential
losses. Regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
A $1.4 million provision for potential loan losses was made in 1997, compared to
$1.1 million in 1996 and $2.4 million in 1995. Management's judgment in
determining the level of the allowance for loan losses is influenced by several
factors during the quarterly reviews. These factors include, but are not limited
to, past loan performance and loss experience, current economic and market
conditions, collateral location and market values, industry and geographic
concentrations and delinquency statistics and ratios. Management also considers
the different levels of risk between income producing property loans,
installment loans and one- to four-family residential loans. In addition,
management considers the level of nonperforming assets and classified assets,
the level of lending activity and the overall size of the loan portfolio.

         Income-producing property charge-offs were primarily due to writedowns
of loans to estimated fair value. Consumer loan charge-offs increased somewhat,
but charge-off ratios decreased as the consumer loan portfolio grew at a faster
rate. See "Lending Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

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

<TABLE>
<CAPTION>
                                                                         Year Ended December 31
                                             -------------------------------------------------------------------- 
                                               1997           1996            1995          1994            1993   
                                             --------------------------------------------------------------------
                                                                              (Dollars in thousands)
<S>                                           <C>          <C>              <C>            <C>            <C>       
Balance at beginning of year................  $11,042        $10,081        $ 8,349        $11,570        $15,611
Charge-offs:
  Residential mortgages.....................      290            314            169            110          1,136
  Mortgages on income producing property....      277           --            1,019          3,109          2,584
  Consumer loans............................    1,616          1,216            999            773            681
                                              -------------------------------------------------------------------
                                                2,183          1,530          2,187          3,992          4,401

</TABLE>
                                     - 17 -


<PAGE>   18


<TABLE>
<S>                                                          <C>             <C>            <C>            <C>             <C>
Recoveries:
  Residential mortgages..............................          --                 3             917               9              25
  Mortgages on income producing property.............          --             1,098             245             300               8
  Consumer loans.....................................           340             290             357             362             327
                                                           ------------------------------------------------------------------------
                                                                340           1,391           1,519             671             360
                                                           ------------------------------------------------------------------------
                          
Net charge-offs......................................         1,843             139             668           3,321           4,041
Provision charged to operations......................         1,350           1,100           2,400             100            --
                                                           ------------------------------------------------------------------------

Balance at end of year...............................       $10,549         $11,042         $10,081         $ 8,349         $11,570
                                                           ========================================================================

Net charge-offs as a percentage
  of average loans...................................          0.15%           0.01%           0.07%           0.43%           0.59%
                                                           ========================================================================

Allowance for loan losses as a
  percentage of total loans..........................          0.80%           1.03%           1.05%           1.01%           1.76%
                                                           ========================================================================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                            December 31
                         ---------------------------------------------------------------------------------------------------------
                                 1997                   1996                   1995                  1994                1993
                         --------------------   ----------------------- -------------------- --------------------- ---------------
                                      Percent                 Percent              Percent              Percent            Percent
                                     of Loans                of Loans             of Loans              of Loans          of Loans
                         Amount      to Total    Amount      to Total   Amount    to Total   Amount     to Total   Amount to Total
                         ------     ----------   ------     ----------- ------    ---------- ------    ----------- ------ ---------
                                                                    (Dollars in thousands)
<S>                      <C>          <C>      <C>          <C>         <C>        <C>      <C>        <C>     <C>         <C>
Residential mortgages    $   569        54%   $   859          57%      $ 1,170        63%   $   813      63%   $   429        60%
Mortgages on income     
   producing property      5,386         9      6,314          10         6,115        11      6,423      17      9,617        19
Commercial loans             400         3        400           1           400         1         --      --         --        --
Consumer loans             4,194        34      3,469          32         2,396        25      1,113      20      1,524        21
                         ---------------------------------------------------------------------------------------------------------
            Total        $10,549       100%   $11,042         100%      $10,081       100%   $ 8,349     100%   $11,570       100%
                         ==================   ====================      ==================   ================   ==================

</TABLE>


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
potential deposit outflows. Cash flow is regularly reviewed and updated to
maintain adequate liquidity. For the month of December 1997, the Bank's average
liquidity ratio (liquid assets as a percentage of net withdrawable deposits and
current borrowings) was 13.9%, which was in excess of regulatory requirements.


                                     - 18 -


<PAGE>   19



         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
                                                   ----------------------------------------------------------------------       
                                                            1997                     1996                  1995
                                                   ----------------------------------------------------------------------
                                                      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    $ 35,100    $ 35,229
U.S. Treasury available for sale............           44,764      44,860      57,996      58,000      40,656      40,899
Valuation allowance.........................               96        --             4        --           244       --
                                                     --------------------------------------------------------------------   
                                                       78,159      78,229      98,757      98,801      76,000      76,128
Investment in Federal Home Loan
   Bank stock...............................           23,200      23,200      19,959      19,959      19,953      19,953
Other equity securities.....................               25          25          23          23         186         186
Other equity securities available
   for sale.................................            1,236       1,252       1,032       1,038         110         298
Valuation allowance.........................               16        --             6        --           187          --
                                                     --------------------------------------------------------------------
                                                     $102,636    $102,706    $119,777    $119,821    $ 96,436    $ 96,565
                                                     ====================================================================
</TABLE>


        The book value and market value of investment securities at December 31,
 1997, 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...................................          $ 67,859        $   67,987          5.95%
     After one year through five years.....................            10,204            10,242          6.04
Valuation allowance........................................                96                --            --
                                                                     -----------------------------------------
                                                                                                                       
                                                                       78,159            78,229          5.95
Equity securities..........................................            24,461            24,477          7.85
Valuation allowance........................................                16                --            --
                                                                     -----------------------------------------
                                                                     $102,636        $  102,706          6.40%
                                                                     ========================================
</TABLE>


SOURCE OF FUNDS

         GENERAL. Deposits are an important source of the Bank's funds for use
in lending and for other general business purposes. In addition to deposits, the
Bank derives funds from loan repayments, advances from the FHLB of Indianapolis,
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

                                     - 19 -



<PAGE>   20



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, 1997, 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
                                          -------------------------------------------------------------------------   
                                                   1997                  1996                     1995
                                          -------------------------------------------------------------------------
                                                        Percent                  Percent                  Percent
                                                          of                       of                       of
                                          Amount         Total      Amount        Total         Amount     Total
                                          -------------------------------------------------------------------------
                                                                (Dollars in thousands)
<S>                                       <C>             <C>       <C>           <C>         <C>          <C>  
Regular Accounts:
  Savings accounts,
       1.75% - 5.07% .................    $  163,119      15.64%     $149,226      15.48%     $149,728       16.22%
  Checking and NOW accounts,
     0.00% - 2.50%....................       119,412      11.45       107,550      11.16        91,621        9.93
  Money market accounts,
     variable.........................        92,314       8.85        89,321       9.26        86,080        9.33
                                          ------------------------------------------------------------------------
         Total regular accounts.......       374,845      35.94       346,097      35.90       327,429       35.48
 Certificates:
     0.00 - 2.99%.....................         8,100       0.78         9,864       1.02         6,218        0.67
     3.00 - 4.99%.....................        19,955       1.91        74,620       7.74        67,887        7.36
     5.00 - 6.99%.....................       600,035      57.52       476,651      49.44       443,782       48.08
     7.00 - 8.99%.....................        35,368       3.39        52,073       5.40        59,847        6.48
     9.00 - 10.99%....................         3,746       0.36         3,894       0.40        16,310        1.77
                                         -------------------------------------------------------------------------
         Total certificates...........       667,204      63.96       617,102      64.00       594,044       64.36

 Accrued interest.....................         1,118       0.10           934       0.10         1,459        0.16
                                         -------------------------------------------------------------------------

        Total deposits................   $ 1,043,167     100.00%     $964,133     100.00%     $922,932      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



                                     - 20 -

<PAGE>   21
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
                                                       ------------------------------------------------------
                                                               1997               1996               1995
                                                       ------------------------------------------------------
                                                                            (In thousands)

<S>                                                     <C>                <C>                 <C>         
Opening balance..............................             $    964,133       $    922,932        $    817,674
Deposits.....................................                3,111,891          2,425,493           1,992,613
Withdrawals..................................               (3,075,490)        (2,422,882)         (1,922,325)
Interest credited............................                   42,449             39,115              34,801
Accrued interest.............................                      184               (525)                169
                                                          ------------       ------------        ------------

Ending balance...............................             $  1,043,167       $    964,133        $    922,932
                                                          ============       ============        ============
</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
                                                           ----------------------------------------------------
                                                                1997               1996                 1995
                                                           ----------------------------------------------------
                                                                              (In thousands)
<S>                                                        <C>                 <C>                 <C>      
Savings accounts...................................         $   13,893          $    (502)          $  19,431
Checking and NOW accounts...........................            11,862             15,929                 137
Money market accounts...............................             2,993              3,241              (9,493)
Certificates with maturities:
   7 to 91 days.....................................               (76)             8,319              (2,162)
   92 days to 6 months..............................             9,211              1,133              12,448
   6 months to 1 year...............................            55,669             33,200              21,925
   1 year to 1 1/2 years............................            22,838             16,156              15,004
   1 1/2 years to 3 years...........................           (38,039)           (15,179)             34,840
   3 years to 10 years..............................            (6,105)           (26,232)              7,655
Negotiable rate certificates........................             6,604              5,661               5,304
                                                            -------------------------------------------------
   Increase (decrease)..............................            78,850             41,726             105,089
Change in accrued interest..........................               184               (525)                169
                                                            -------------------------------------------------

   Total increase (decrease)........................        $   79,034           $ 41,201           $ 105,258
                                                            =================================================
</TABLE>



                                     - 21 -


<PAGE>   22



         The following table shows rate and maturity information for the Bank's
deposits as of December 31, 1997.

<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...................      $ 163,119     15.64%        $ --       $   --     $   --         $  --    $  --
Checking and NOW accounts..........        119,412     11.45           --           --         --            --       --
Money market accounts..............         92,314      8.85           --           --         --            --       --
                                         --------------------------------------------------------------------------------
                                           374,845     35.94           --           --         --            --       --
Certificate accounts 
  maturing in quarter ending:
03/31/98...........................        185,397     17.77             702      5,405     171,969         7,220     101
06/30/98...........................        152,006     14.57           2,630      3,696     139,056         6,498     126
09/30/98...........................        105,222     10.09           1,787      4,306      95,950         3,070     109
12/31/98...........................         89,006      8.53           1,781      2,765      80,540         3,729     191
03/31/99...........................         34,083      3.27             408      1,291      27,004         3,789   1,591
06/30/99...........................         26,515      2.54             171        793      20,983         3,037   1,531
09/30/99...........................          9,997      0.96            --          522       8,984           374      97
12/31/99...........................          7,236      0.69               4        210       6,739           283     --
03/31/2000.........................          7,204      0.69             180        229       4,785         2,010     --
06/30/2000.........................          9,282      0.89             120        226       6,028         2,908     --
09/30/2000.........................          6,092      0.58             189        138       5,699            66     --
12/31/2000.........................          3,677      0.35            --           26       3,438           213     --
Maturity over 3 years .............         31,507      3.02             128        348      28,860         2,171     --
                                       ---------------------         ----------------------------------------------------
   Total...........................    $   667,204     63.95         $ 8,100    $19,955    $600,035       $35,368  $3,746
                                                                     ====================================================

Interest accrued...................          1,118      0.10
                                       ---------------------

   Total deposits..................    $ 1,043,167    100.00%
                                       =====================
</TABLE>


         The following table shows the scheduled maturities of certificates of
deposit of $100,000 or greater as of December 31, 1997.

<TABLE>
<CAPTION>
                                                        December 31, 1997
                                                        -----------------
                                                          (In thousands)
<S>                                                       <C>     
Certificates with maturities:
   Three months or less.............................        $ 39,016
   Over three through six months....................          20,366
   Over six through twelve months...................          21,915
   Over twelve months...............................          12,836
                                                            --------

         Total......................................        $ 94,133
                                                            ========
</TABLE>


         BORROWINGS. The FHLB of Indianapolis functions as a central reserve
bank, providing credit for savings institutions within its assigned region. As a
member of the FHLB of Indianapolis, D&N Bank is required to own capital stock in
the FHLB of Indianapolis and is authorized to apply for advances on the security
of such stock and certain of its residential mortgage loans and


                                     - 22 -


<PAGE>   23



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
                                                                  -------------------------------------
                                                                   1997           1996          1995
                                                                  -------------------------------------
                                                                             (In thousands)
<S>                                                             <C>            <C>           <C>     
Maximum Balance:
   Advances from FHLB..................................           $464,003       $338,003      $226,003
   Securities sold under
     agreements to repurchase..........................            181,055         74,621        52,579
   Other borrowings....................................             14,643         13,385        12,368

Average Balance:.......................................
   Advances from FHLB..................................            381,787        259,694       200,770
   Securities sold under
     agreements to repurchase..........................             98,471         40,095        24,020
   Other borrowings....................................              7,993          9,720        11,504
</TABLE>


         The following table sets forth certain information as to the Bank's
FHLB advances, securities sold under agreements to repurchase and other
borrowings at the dates indicated. See also Note L of Notes to Consolidated
Financial Statements.

<TABLE>
<CAPTION>
                                                                               At December 31
                                                                  -------------------------------------
                                                                   1997           1996           1995
                                                                  -------------------------------------
                                                                           (Dollars in thousands)
<S>                                                             <C>            <C>           <C>     
   Advances from FHLB..................................           $464,003       $338,003      $226,003
</TABLE>




                                     - 23 -


<PAGE>   24
<TABLE>
<S>                                                             <C>            <C>           <C>     
Securities sold under agreements
     to repurchase.....................................            149,092         58,040          --

Other borrowings.......................................              6,428          7,994        10,292
                                                                  -------------------------------------

     Total borrowings..................................           $619,523       $404,037      $216,295
                                                                  =====================================

Weighted average interest
  rate of advances from FHLB...........................               5.91%          5.59%         5.82%

Weighted average interest rate
  of securities sold under agreements
  to repurchase........................................               5.80           5.66          --

Weighted average interest
  rate of other borrowings ............................              10.04           9.76          9.59

Weighted average interest
  rate of total borrowings.............................               5.93           5.68          6.00
</TABLE>


         The following table sets forth the Bank's maturity and rate structure
of FHLB advances as of December 31, 1997.

<TABLE>
<CAPTION>
                                                     Weighted
                                                      Average
                                                        Rate              Amount
                                                    -------------------------------             
                                                         (Dollars in thousands)
<S>                                                    <C>            <C>     
Matures within:
   One year.....................................         5.85%          $214,000(1)
   Two years....................................         5.99            179,000
   Three years..................................         5.92             70,000
   Four years...................................           --                 --
   Thereafter...................................         4.00              1,003
                                                       -------------------------
     Total FHLB advances.......................          5.91%          $464,003
                                                       =========================
</TABLE>

         (1) Includes variable rate advances which adjust quarterly.


SERVICE CORPORATION ACTIVITIES

         The Bank is permitted to invest an amount equal to 2% of its assets
(excluding those of its subsidiaries) in its service corporations. Up to an
additional 1% of assets may be invested in service corporations provided that
such amount is used for certain types of community development projects. In
addition, federal regulations permit institutions to make specified types of
loans to such subsidiaries (other than special-purpose finance subsidiaries) in
which the institution owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the institution's total capital as defined below.

                                     - 24 -


<PAGE>   25



As of December 31, 1997, 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, 1997. 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, 1997, the Company had a $300,000 investment in Enterprises and
loans totaling approximately $1.5 million to the subsidiary.

         Enterprises entered into the Northside Joint Venture in March 1989 to
acquire and develop commercial sites in Shelby Township, Michigan. Enterprises
is in the process of marketing this property in its entirety.

         D&N Holdings, Inc. ("Holdings") was formed in 1985 and is involved in
the sale of mortgage life insurance through its investment in Minnesota Mutual
Life Insurance Company ("MIMLIC") and also offers insurance products and annuity
contracts through Quincy Insurance Agency, Inc., a subsidiary of Holdings formed
in 1995. In Michigan, MIMLIC's mortgage life insurance policies are marketed and
sold primarily through Michigan savings institutions. At December 31, 1997, D&N
Bank's investment in Holdings totaled approximately $200,000.

         MORTGAGE BANKING. On May 1, 1984, D&N Bank established a mortgage
banking operation through a subsidiary, D&N Mortgage Corporation ("DNMC"). This
subsidiary was relatively dormant from 1992 until 1995. Since restarting
operations, D&N Mortgage Corporation has originated loans mainly for the Bank's
portfolio. D&N Mortgage Corporation currently has four origination offices
located in Michigan's lower peninsula in the cities of Grand Rapids, Hastings,
West Bloomfield and St. Joseph. At December 31, 1997, the Bank had $2.4 million
invested in this subsidiary.

         FINANCE SUBSIDIARY. In 1986, D&N Bank incorporated a special-purpose
finance subsidiary, D&N Funding I Corp. ("Funding"). Funding was established
solely for the purpose of issuing collateralized mortgage obligations ("CMOs").
In August 1986, Funding pledged $61.5 million in principal amount of FHLMC
participation certificates to collateralize the issuance and sale of the CMOs
from which the Bank received $56.4 million in net proceeds. The CMOs were sold
through a third party conduit and were secured by the pledge of the

                                     - 25 -


<PAGE>   26



participation certificates.  D&N Bank reinvested the proceeds from the sale of
the CMOs in residential and commercial mortgage loans.

NEW BANK SUBSIDIARY

         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 1, 2002. On or after July 1, 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 1997, D&N Capital declared and paid preferred
dividends totaling $1,217,563.


COMPETITION

         At December 31, 1997, the Bank ranked second among all savings
institutions headquartered in the State of Michigan with respect to total
assets. 

         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


                                     - 26 -


<PAGE>   27



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, 1997, the Bank had 513 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
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 52.  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.



                                     - 27 -


<PAGE>   28



         Frank R. Donnelly, age 57, 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 45, 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 46, 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 36, 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 40, 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.

         Donald W. Schulze, age 47, 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 51, is Executive Vice President/Community
Banking. He has been employed by D&N Bank in various community banking
capacities since May 1977 and is presently responsible for the community banking
function of the Bank.

         Richard E. West, age 51, 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.


                                     - 28 -


<PAGE>   29



                                   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, 1997.
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, 1997, the Bank's lending limit under this restriction was $19.8
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 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

                                     - 29 -


<PAGE>   30



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
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

                                     - 30 -


<PAGE>   31



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, 1997, the Bank
had $2,136,000 of unamortized MSRs, none of which was required to be deducted
from tangible capital.

         At December 31, 1997, the Bank had tangible capital of $119.5 million,
or 6.55% of adjusted total assets, which is approximately $92.1 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, 1997, the Bank had core capital equal to $119.5
million, or 6.55% of adjusted total assets, which is $64.7 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, 1997 the Bank had
$10.4 million of general loss reserves which could be counted as supplementary
capital.

         On December 31, 1997, the Bank had total capital of $129.9 million
(including $119.5 million in core capital and $10.4 million in qualifying
supplementary capital) and risk-weighted assets of $1.08 billion (including
$48.0 million in converted off-balance sheet assets); or total capital of 11.98%
of risk-weighted assets. This amount was $43.1 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

                                     - 31 -


<PAGE>   32



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, 1997,
the Bank had a Tier 1 risk-based capital ratio of 11.02%.

         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.

         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

                                     - 32 -


<PAGE>   33



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

         During 1997, the OTS lowered the minimum liquid asset ratio from 5% to
4%, and changed the definition of "liquid assets" to include obligations of the
United States which have a remaining life greater than five years. This allows
the Bank to use substantially all of its investment security and mortgage-backed
security portfolios, which are not otherwise encumbered. The OTS also
discontinued the 1% short-term liquid asset requirement.

         At December 31, 1997, the Bank was in compliance with the liquidity
ratio requirement, with a liquid asset ratio of 13.9%.

                                     - 33 -


<PAGE>   34



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, 1997, the Bank met the test and has always met the test since its
inception.

         Any savings institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If the institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an institution that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings institution and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the institution is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any institution that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "Holding Company Regulation."

                                     - 34 -


<PAGE>   35



COMMUNITY REINVESTMENT ACT

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

         The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1995 and received a rating of "Satisfactory".


HOLDING COMPANY REGULATION

         The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings institution subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings institution as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings institution)
would become subject to such restrictions unless such other institutions each
qualify as a QTL and were acquired in a supervisory acquisition.

         If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within

                                     - 35 -


<PAGE>   36



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, 1997, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "Liquidity."

         Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.


FEDERAL HOME LOAN BANK SYSTEM

         The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administer the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1997, the Bank had $23.2 million in FHLB
stock, which was in compliance with this requirement. In past years,

                                    - 36 -


<PAGE>   37



the Bank has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 7.56% and were 7.99% for
calendar year 1997.

         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, 1997, the dividends paid by the FHLB of
Indianapolis to the Bank totaled $1.6 million. The $447,000 dividend received
for the quarter ended December 31, 1997 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 taken as
a deduction in computing taxable income for federal income tax purposes. This
tax bad debt reserve method available to thrifts institutions was repealed for
tax years beginning after 1995. As a result, the Bank was required to change
from the reserve method to the specific charge-off method to compute its bad
debt deduction. Basically, repeal of the thrift bad debt reserve method puts
large thrifts, such as the Bank, on the tax method used by large commercial
banks.

         Upon repeal, the Bank is required to recapture into income the portion
of its bad debt reserves (other than the supplemental reserve) that exceeds its
base year reserves (i.e. its tax reserves for the last tax year beginning before
1988). The recapture amount resulting from the change in the Bank's method of
accounting for its bad debt reserves is taken into taxable income ratably (on a
straight-line basis) over a six-year period.

         The base year reserve is frozen, not forgiven. Certain events can still
trigger a recapture of the base year reserve. For example, while the base year
reserve will not be recaptured if the thrift converts to a bank charter or is
merged into a bank, it will be recaptured if the thrift ceases to qualify as a
bank for federal income tax purposes. The base year reserves also remain

                                     - 37 -


<PAGE>   38



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, 1993. With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management, any
examination of open returns (including returns of subsidiaries and predecessors
of, or entities merged into, D&N) would not result in a deficiency which could
have a material adverse effect on the financial condition of D&N and its
consolidated subsidiaries. See Note 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
legislation which resolved the recapture status of previously allowed
accelerated deductions for bad debts. Thrift institutions such as the Bank had
been permitted to deduct a portion of their income as bad debt allowances. This
practice was more advantageous than the specific-loss method of deduction which
was mandated for other classes of financial institutions. The opportunity to use
the percentage-of-income method expired in 1995, but the status of previously
accelerated deductions remained in question until the 1996 legislation was
enacted. The presence of unresolved prior deductions was felt to be hindrance to
evolution and consolidation of the financial services industry because thrift
institutions that had recorded such accelerated deductions were required to
repay them before charter conversions or acquisitions by non-thrift institutions
could be approved. The new legislation required that accelerated deductions
recorded after 1987 would have to be repaid, but forgave that portion of
institutions' accelerated loan loss deductions that were recorded before 1988.

         MICHIGAN TAXATION. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a savings bank
or a savings and loan institution less deposits owed to the federal or Michigan
state governments, their agencies or certain other financial institutions. The
Michigan intangibles tax is being phased out over four years

                                     - 38 -


<PAGE>   39



until the tax is fully repealed effective January 1, 1998. The State of Michigan
also imposes a "Single Business Tax." The Single Business Tax is a value-added
type of tax for the privilege of doing business in the State of Michigan. The
major components of the Single Business Tax are federal taxable income,
compensation and depreciation as increased by net operating loss carryforwards,
if any, utilized in arriving at federal taxable income, and decreased by the
cost of acquisition of tangible assets during the year. The tax rate is 2.30% of
the Michigan adjusted tax base.

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


ITEM 2.       PROPERTIES

         At December 31, 1997, the Bank operated through 37 full service
community banking offices, seven savings agency offices and four mortgage
banking offices. The net book value of the land, buildings and leasehold
improvements owned by D&N Bank at that date was $11,686,000, and the net book
value of its office furniture, fixtures and equipment was $4,936,000.

         COMPUTER EQUIPMENT. D&N Bank processes all depositor and borrower
customer files and transactions through a third party data services provider
including general ledger accounting and information reporting. The book value of
all computer equipment and software owned by the Bank was $934,000 at December
31, 1997. 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.

              D&N Bank is a plaintiff, like approximately 120 other
              institutions, in a currently pending claim in the United States
              Court of Federal Claims seeking substantial damages as a result of
              the 1989 Financial Institutions Reform, Recovery and Enforcement
              Act's mandatory phase-out of the regulatory capital treatment of
              supervisory goodwill. The ultimate outcome of these matters cannot
              be ascertained at this time.

                                     - 39 -


<PAGE>   40



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, 1997.


                                       PART II

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

               Page 52 of the attached 1997 Annual Report to Stockholders is
               herein incorporated by reference.

ITEM 6.        SELECTED FINANCIAL DATA

               Page 4 of the attached 1997 Annual Report to Stockholders is
               herein incorporated by reference.

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

               Pages 12 through 23 of the attached 1997 Annual Report to
               Stockholders are herein incorporated by reference.

ITEM 8.        FINANCIAL STATEMENTS SUPPLEMENTARY DATA

               Pages 24 through 49 of the attached 1997 Annual Report to
               Stockholders are herein incorporated by reference.


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

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

                                     PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               Information concerning Executive Officers of the Company is

                                     - 40 -


<PAGE>   41



              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 1998, except for information contained
              under the heading "Compensation Committee Report" and
              "Stockholder Return Performance Presentation." A copy of this
              Proxy Statement will be filed not later than 120 days after the
              close of the fiscal year.

ITEM 11.      EXECUTIVE COMPENSATION

              Information concerning executive compensation is incorporated
              herein by reference from the Company's definitive Proxy Statement
              or the Annual Meeting of Stockholders to be held in 1998, except
              for information contained under the heading "Compensation
              Committee Report" and "Stockholder Return Performance
              Presentation." A copy of this Proxy Statement will be filed not
              later than 120 days after the close of the fiscal year.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

              Information concerning security ownership of certain beneficial
              owners and management is incorporated herein by reference from the
              Company's definitive Proxy Statement for the Annual Meeting of
              Stockholders to be held in 1998, except for information contained
              under the heading "Compensation Committee Report" and "Stockholder
              Return Performance Presentation." A copy of this Proxy Statement
              will be filed not later than 120 days after the close of the
              fiscal year.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              Information concerning certain relationships and related
              transactions incorporated herein by reference from the Company's
              definitive Proxy Statement for the Annual Meeting of Stockholders
              to be held in 1998, except for the information contained under the
              heading Compensation Committee Report" and "Stockholder Return
              Performance Presentation." A copy of this Proxy Statement will be
              filed not later than 120 days after the close of the fiscal year.


                                     - 41 -


<PAGE>   42



                                   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, 1997, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.

<TABLE>
<CAPTION>
        Annual Report Section                                                 Pages in Annual Report
------------------------------------------------------                        ----------------------
<S>                                                                             <C>
Selected Financial Data                                                                   4

Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations                                                                         12 - 23

Report of Independent Auditors                                                            24

Consolidated Statements of Condition                                                      25

Consolidated Statements of  Income                                                        26

Consolidated Statements of
  Stockholders' Equity                                                                    27

Consolidated Statements of Cash Flows                                                     28

Notes to Consolidated Financial Statements                                              29 - 49

Stockholder Information                                                                   52
</TABLE>

         (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.






                                     - 42 -


<PAGE>   43

                                                              (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                                *                  Not applicable

    4              Instruments defining the               *                  Not applicable
                   rights of security holders,
                   including  debentures

    9              Voting Trust Agreement                None                Not applicable

   10              Material Contracts

                   1993 401(k) Plan & Trust               *                  Not applicable
                   (1994 Amendment)

                   1984 Stock Option Plan                 *                  Not applicable
                    (1995 Amendment)

                   1994 Management                        *                  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                   Filed Herewith 
                   Holders

   16              Letter re: change in                 None                 Not applicable
                   Certifying Accountant

   18              Letter re:  change in                None                 Not applicable
                   accounting principles

   21              Subsidiaries of Registrant           21                   Filed Herewith 

   22              Published report regarding           None                 Not applicable
                   matters submitted to vote
                   of security holders

   23              Consent of Experts and               23                   Filed Herewith 
                   Counsel

   24              Power of Attorney                    Not required         Not applicable
</TABLE>


                                     - 43 -


<PAGE>   44
<TABLE>

<S>              <C>                               <C>                     <C>
   27.1            Financial Data Schedule            27                     Page 104

   27.2            Financial Data Schedule

   27.3            Financial Data Schedule

   27.4            Financial Data Schedule

   27.5            Financial Data Schedule

   27.6            Financial Data Schedule

   27.7            Financial Data Schedule

   27.8            Fiancial Data Schedule

   27.9            Fiancial Data Schedule

   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.








                                     - 44 -


<PAGE>   45






                               SIGNATURES



         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         D&N FINANCIAL CORPORATION


Date       March 25, 1998                By:   /s/ GEORGE J. BUTVILAS
     ---------------------------------         ---------------------------
                                               GEORGE J. BUTVILAS
                                               (Duly Authorized Representative)

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


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

Date       March 25, 1998                Date       March 25, 1998
     ---------------------------------         ---------------------------


By:  /s/ JOSEPH C. BROMLEY               By:   /s/ MARY P. CAULEY
     ---------------------------------         ---------------------------
     JOSEPH C. BROMLEY                         MARY P. CAULEY
     Director                                  Director

Date       March 25, 1998                Date       March 25, 1998
     ---------------------------------         ---------------------------



By:  /s/ STEVEN COLEMAN                  By:   /s/ STANLEY A. JACOBSON
     ---------------------------------         ---------------------------
     STEVEN COLEMAN                            STANLEY A. JACOBSON
     Director                                  Director

Date       March 25, 1998                Date       March 25, 1998
     ---------------------------------         ---------------------------


                                     - 45 -


<PAGE>   46







By:  /s/ RANDOLPH P. PIPER               By:   /s/ B. THOMAS M. SMITH, JR.
     ---------------------------------         ---------------------------
     RANDOLPH P. PIPER                         B. THOMAS M. SMITH, JR.
     Director                                  Director

Date       March 25, 1998                Date        March 25, 1998
     ---------------------------------         ---------------------------


BY:  /s/ PETER VAN PELT                  By:   /s/ STEVEN E. ZACK
     ---------------------------------         ---------------------------
      PETER VAN PELT                           STEVEN E. ZACK
      Director                                 Director

Date       March 25, 1998                Date        March 25, 1998
     ---------------------------------         ---------------------------



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

Date       March 25, 1998
     ---------------------------------    





                                     - 46 -


<PAGE>   47


<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                                *                  Not applicable

    4              Instruments defining the               *                  Not applicable
                   rights of security holders,
                   including  debentures

    9              Voting Trust Agreement                None                Not applicable

   10              Material Contracts

                   1993 401(k) Plan & Trust               *                  Not applicable
                   (1994 Amendment)

                   1984 Stock Option Plan                 *                  Not applicable
                    (1995 Amendment)

                   1994 Management                        *                  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                   Filed Herewith 
                   Holders

   16              Letter re: change in                 None                 Not applicable
                   Certifying Accountant

   18              Letter re:  change in                None                 Not applicable
                   accounting principles

   21              Subsidiaries of Registrant           21                   Filed Herewith 

   22              Published report regarding           None                 Not applicable
                   matters submitted to vote
                   of security holders

   23              Consent of Experts and               23                   Filed Herewith 
                   Counsel

   24              Power of Attorney                    Not required         Not applicable
</TABLE>


                                     - 43 -


<PAGE>   48
<TABLE>

<S>              <C>                               <C>                     <C>
   27.1            Financial Data Schedule            27                   Filed Herewith

   27.2            Financial Data Schedule

   27.3            Financial Data Schedule

   27.4            Financial Data Schedule

   27.5            Financial Data Schedule

   27.6            Financial Data Schedule

   27.7            Financial Data Schedule

   27.8            Fiancial Data Schedule

   27.9            Fiancial Data Schedule

   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.








                                     - 44 -