-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pzj4qJ+whzWuvI98kT2Lktavs93cMejHFjznXscBTm2fV75xmUDZbBlzihF4oYgX /FJDNITlwd8cD7AjGM/0bw== 0000912057-00-024477.txt : 20000516 0000912057-00-024477.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PELICAN FINANCIAL INC CENTRAL INDEX KEY: 0001037652 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 582298215 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14986 FILM NUMBER: 632673 BUSINESS ADDRESS: STREET 1: 315 E EISENHOWER STREET 2: 800-765-5562 CITY: ANN ARBOR STATE: MI ZIP: 48108 BUSINESS PHONE: 7346629733 MAIL ADDRESS: STREET 1: 315 EAST EISENHOWER CITY: ANN ARBOR STATE: MI ZIP: 48108 FORMER COMPANY: FORMER CONFORMED NAME: PN HOLDINGS INC DATE OF NAME CHANGE: 19990324 10-Q 1 FORM 10-Q U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q /X/ Quarterly Report Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2000 Or / / Transition Report Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number 000-26601 Pelican Financial, Inc. (Exact name of registrant as specified in its charter) Delaware 58-2298215 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 315 East Eisenhower Parkway Ann Arbor, Michigan 48108 (Address of Principal Executive Offices) 734-662-9733 (Registrant's Telephone Number, Including Area Code) 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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock Outstanding as of April 30, 2000 Common stock, $0.01 Par value ................. 3,992,836 Shares Index Part I. Financial Information Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3 Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19-20 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Shareholders 20 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21
2 PELICAN FINANCIAL, INC. Consolidated Balance Sheets (Unaudited)
March 31, December 31, 2000 1999 ---- ---- ASSETS Cash and cash equivalents $ 7,636,871 $ 1,883,472 Accounts receivable, net 3,282,000 2,289,682 Securities available for sale 5,717,193 5,877,013 Federal Reserve and Federal Home Loan Bank Stock 730,000 680,000 Loans Held for Sale 71,272,489 60,535,699 Loans receivable, net 66,961,625 68,582,378 Mortgage servicing rights, net 10,433,648 11,028,468 Mortgage loans in foreclosure and other real estate 161,178 539,869 Premises and equipment, net 915,864 863,815 Federal income taxes receivable 348,996 265,545 Other assets 2,848,791 3,307,011 ------------ ------------ $170,308,655 $155,852,952 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 4,379,574 $ 3,911,558 Interest-bearing 57,582,596 58,398,604 ------------ ------------ Total Deposits 61,962,170 62,310,162 Due to bank 16,774,991 12,095,538 Notes payable 25,379,341 25,333,610 Repurchase agreements 28,387,832 21,844,801 Federal Home Loan Bank borrowings 11,000,000 8,000,000 Other Liabilities 5,635,762 5,277,485 ------------ ------------ Total liabilities 149,140,096 134,861,596 Commitments and Contingencies Shareholders' equity Preferred stock, 200,000 shares authorized; none outstanding Common stock, 10,000,000 shares authorized; 3,992,836 outstanding at March 31, 2000 and December 31, 1999. 39,928 39,928 Additional paid in capital 13,631,156 13,631,156 Retained earnings 7,678,842 7,504,631 Accumulated other comprehensive (loss), net of tax (181,367) (184,359) ------------ ------------ Total shareholders' equity 21,168,559 20,991,356 ------------ ------------ $170,308,655 $155,852,952 ============ ============
3 PELICAN FINANCIAL, INC. Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 2000 1999 Interest Income Loans, including fees $ 3,631,337 $ 3,510,053 Investment securities, taxable 110,749 109,259 Federal funds sold and overnight accounts 26,030 38,518 ----------- ----------- 3,768,116 3,657,830 Interest Expense Deposits 747,188 314,812 Short-term borrowings 1,255,531 2,148,196 ----------- ----------- Total interest expense 2,002,719 2,463,008 Net interest income 1,765,397 1,194,822 Provision for loan losses 90,000 7,990 ----------- ----------- Net interest income after provision for loan losses 1,675,397 1,186,832 Noninterest income Service charges on deposit accounts 10,463 9,386 Other income 202,633 452,034 Servicing income 775,829 859,224 Gain on sales of mortgage servicing rights and loans, net 1,725,627 5,487,493 ----------- ----------- Total noninterest income 2,714,552 6,808,137 Noninterest expense Compensation and employee benefits 2,250,826 3,721,077 Occupancy and equipment 377,636 393,922 Telephone 95,361 110,841 Postage 90,982 141,515 Amortization of mortgage servicing rights 548,439 659,328 Mortgage servicing rights valuation adjustment (56,653) (298,966) Other noninterest expense 814,529 1,028,493 ----------- ----------- Total noninterest expense 4,121,120 5,756,210 Income before income taxes and cumulative effect of change in accounting principle 268,829 2,238,759 Provision for income taxes 94,618 745,203 ----------- ----------- Income before cumulative effect of change in accounting principle 174,211 1,493,556 Cumulative effect of change in accounting principle - (97,119) ----------- ----------- Net income $ 174,211 $ 1,396,437 =========== =========== Comprehensive income $ 177,203 $ 1,373,141 =========== =========== Basic and diluted earnings per share before cumulative effect of change in accounting principle $ 0.04 $ 0.49 Per share cumulative effect of change in accounting principle $ - $ (0.03) ----------- ----------- Basic and diluted earnings per share $ 0.04 $ 0.46 =========== ===========
4 PELICAN FINANCIAL, INC. Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31,
2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities $(14,755,347) $(11,346,671) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Loan originations, net 1,587,419 (9,560,240) Proceeds from sales of mortgage servicing rights 4,669,819 14,839,920 Change in loans in foreclosure and other real estate, net 378,691 150,608 Property and equipment expenditures, net (153,129) (245,630) Purchase of securities available for sale - (2,016,777) Proceeds from maturities and principal repayments of securities available for sale 155,723 1,158,978 Purchase of Federal Reserve Stock (50,000) (72,300) ------------ ------------ Net cash (used in)provided by investing activities 6,588,523 4,254,559 CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in noninterest-bearing deposits 468,016 (732,600) Increase (decrease) in interest-bearing deposits (816,008) 3,657,480 Increase in due to bank 4,679,453 7,026,175 Increase (decrease) in notes payable due on demand 45,731 (2,679,651) Advances on Federal Home Loan Bank borrowings 3,000,000 - Increase (decrease) in repurchase agreements 6,543,031 (7,392,610) ------------ ------------ Net cash provided by (used in) financing activities 13,920,223 (121,206) ------------ ------------ Net change in cash and cash equivalents 5,753,399 (7,213,318) Cash and cash equivalents at beginning of period 1,883,472 10,180,034 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,636,871 $ 2,966,716 ============ ============ Cash and equivalents is composed of: Cash and demand deposits due from banks $ 4,726,871 $ 1,428,250 Interest-bearing deposits in banks 97,000 547,466 Federal funds sold 2,813,000 991,000 ------------ ------------ Total cash and cash equivalents $ 7,636,871 $ 2,966,716 ============ ============ Supplemental cash disclosures Interest paid $ 1,976,565 $ 2,577,957 Income taxes paid - -
5 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) Three Months Ended March 31, 2000 and March 31, 1999 NOTE 1 - PRINCIPLES OF CONSOLIDATION The unaudited consolidated financial statements as of and for the three months ended March 31, 2000 and 1999, include the accounts of Pelican Financial Inc. ("Pelican Financial") and it's wholly owned subsidiaries Pelican National Bank ("Pelican National") and Washtenaw Mortgage Company ("Washtenaw") for all periods. All references herein to Pelican Financial include the consolidated results of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Assets held in an agency or fiduciary capacity are not assets of Pelican Financial and, accordingly, are not included in the accompanying consolidated financial statements. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, all adjustments, consisting of normal recurring accruals, which, in the opinion or management, are necessary for fair presentation of the consolidated financial statements have been included. The results of operations for the period ended March 31, 2000, are not necessarily indicative of the results which may be expected for the entire fiscal year or for any other period. For further information, refer to consolidated financial statements and footnotes thereto for the year ended December 31, 1999 included in Pelican Financial's Form 10-K. NOTE 3 - NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING PRINCIPLES New Accounting Pronouncement: Beginning January 1, 2001, a new accounting standard (SFAS No. 133) will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. The effect will depend on derivative holdings when this standard applies. Cumulative Effect of Change in Accounting Principle: In 1998, the Accounting Standards Executive Committee(AcSEC)of the American Institute of Certified Public Accountants promulgated Statement of Position (SOP) 98-5. This SOP provides guidance on the financial reporting of start-up costs and organization cost. It requires cost of start-up activities and organization costs to be expensed as incurred. Initial application of this SOP should be reported as a cumulative effect of a change in accounting principle. Pelican Financial adopted the provisions of SOP 98-5 on January 1, 1999. Included in the March 31, 1999 Consolidated Statement of Income is a charge to operations of $97,119 reported as a cumulative effect of change in accounting principle. Reclassifications: Certain prior year amounts have been reclassified to conform to the 2000 presentation. NOTE 4 - EARNINGS PER SHARE At March 31, 2000, Pelican Financial had 10,000,000 shares of $.01 par value common stock authorized with 3,992,836 shares issued and outstanding, and 200,000 shares of preferred stock authorized with none issued or outstanding. At March 31, 1999, Pelican Financial had 5,000,000 shares of $.01 par value common stock authorized with 3,032,836 shares issued and outstanding, and 200,000 shares of preferred stock authorized with none issued or outstanding. 6 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) Three Months Ended March 31, 2000 and March 31, 1999 NOTE 4 - EARNINGS PER SHARE (Continued) The following summarizes the computation of basic and diluted earnings (loss) per share.
Three Months Three Months ended ended March 31, March 31, 2000 1999 ------------ ----------- Basic earnings per share Net income $ 174,211 $1,396,437 Weighted average shares outstanding 3,992,836 3,032,836 ---------- ---------- Basic earnings per share $ 0.04 $ 0.46 ========== ========== Diluted earnings per share Net income $ 174,211 $1,396,437 Weighted average shares outstanding 3,992,836 3,032,836 Dilutive effect of assumed exercise of stock options 1,062 6,775 ---------- ---------- Diluted average shares outstanding 3,993,898 3,039,611 Diluted earnings (loss) per share $ 0.04 $ 0.46 ========== ==========
NOTE 5 - SEGMENT INFORMATION Pelican Financial's operations include two primary segments: mortgage banking and retail banking. The mortgage banking segment involves the origination and purchase of single-family residential mortgage loans in approximately 41 states; the sale of such loans in the secondary market, generally on a pooled and securitized basis; and the servicing of mortgage loans for investors. The retail-banking segment involves attracting deposits from the general public and using such funds to originate and purchase existing consumer, commercial, commercial real estate, residential construction, and single-family residential mortgage loans, from its offices in Naples and Fort Myers, Florida. Pelican Financial's reportable segments are its two subsidiaries. Washtenaw comprises the mortgage-banking segment, with gains on sales of mortgage servicing rights (MSR) and loans, as well as loan servicing income accounting for its primary revenues. Pelican National comprises the retail-banking segment, with net interest income from loans, investments and deposits accounting for its primary revenues. 7 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) Three Months Ended March 31, 2000 and March 31, 1999 NOTE 5 - SEGMENT INFORMATION (Continued) The following segment financial information has been derived from the internal financial statements of Washtenaw and Pelican National, which are used by management to monitor and manage the financial performance of Pelican Financial. The accounting policies of the two segments are the same as those of Pelican Financial. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary difference between segment amounts and consolidated totals, and are reflected in the Other column below, along with minor amounts to eliminate transactions between segments. Dollars in thousands -------------------------------------------------------------- Mortgage Retail Consolidated Banking Banking Other Totals -------- ------- ----- ------------ THREE MONTHS ENDED MARCH 31, 2000 Net interest income $ 510 $ 1,298 $ (43) $ 1,765 Gain on sales of MSR and loans, net 1,722 4 - 1,726 Servicing income 771 5 - 776 Noncash items: Provision for loan losses - 90 - 90 MSR amortization and valuation 492 - - 492 Provision for income taxes (53) 193 (45) 95 Segment profit/loss (111) 371 (86) 174 Segment assets 87,648 82,491 170 170,309 THREE MONTHS ENDED MARCH 31, 1999 Net interest income $ 746 $ 486 $ (38) $ 1,194 Gain on sales of MSR and loans, net 5,440 47 - 5,487 Servicing income 858 1 - 859 Noncash items: Provision for loan losses - 8 - 8 MSR amortization and valuation 359 1 - 360 Provision for income taxes 764 4 (23) 745 Segment profit/loss 1,431 7 (42) 1,396 Segment assets 206,558 43,365 (7) 249,916
8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis relates to the financial condition and results of operations of Pelican Financial, Inc. (Pelican Financial) for the three months ended March 31, 2000. Management's discussion and analysis of earnings and related financial data are presented herein to assist investors in understanding the financial condition of Pelican Financial at March 31, 2000 and the results of operations of Pelican Financial for the three months ended March 31, 2000 and 1999. This discussion should be read in conjunction with the Consolidated Financial Statements and the notes included in this Form 10-Q. Forward Looking Statements This discussion and other sections of this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections about the financial services industry, the economy and about the Pelican Financial itself. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," and variations of such word and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("future factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, Pelican Financial undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. General Pelican Financial serves as the holding company of Pelican National and Washtenaw. Pelican Financial's business involves two segments: mortgage banking and retail banking. The mortgage banking segment involves the origination and purchase of single-family residential mortgage loans in approximately 41 states and the District of Columbia, the sale of these loans, usually on a pooled and securitized basis, in the secondary market and the servicing of mortgage loans for investors. The retail-banking segment involves attracting deposits from the general public and using these funds to originate and purchase consumer, commercial, commercial real estate, residential construction, and single-family residential mortgage loans. Pelican Financial's profitability is primarily dependent upon three sources: net interest income, which is the difference between interest earned on interest-earning assets (including loans held for sale in Pelican Financial's mortgage banking operations as well as loans held for investment) and interest paid on interest-bearing liabilities; fee income from servicing mortgages held by investors; and gains realized on sales of mortgage loans and mortgage servicing rights. These revenues are in turn significantly affected by factors such as changes in prevailing interest rates and in the difference between prevailing short-term and long-term interest rates, as well as changes in the volume of mortgage origination's and prepayments of outstanding mortgages. LIQUIDITY AND CAPITAL RESOURCES Liquidity Management The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments and to capitalize on opportunities for business expansion. Liquidity management addresses the ability to meet deposit withdrawals either on demand or by contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise. To date Pelican Financial has conducted no business other than managing its investments in Pelican National and Washtenaw. Pelican Financial's source of funds is dividends paid by Washtenaw and Pelican National. Washtenaw's sources of funds include cash from gains on sales of mortgage loans and servicing, net interest income, servicing fees and borrowings. Washtenaw sells its mortgage loans generally on a monthly basis to generate cash for operations. Washtenaw's uses of cash in the short-term include the funding of mortgage loan purchases and origination's and purchases of mortgage servicing rights, payment of interest, repayment of amounts borrowed pursuant to warehouse lines of credit, operating and administrative expenses, income taxes and capital expenditures. Long term uses of cash 9 may also include the funding of securitization activities or portfolios of loan or servicing assets. Washtenaw funds its business through the use of a warehouse line of credit and the use of agreements to repurchase. The warehouse line of credit has a limit of $100 million, of which $15 million represents a sublimit for servicing under contract for sale, and $6 million represents a working capital sublimit. Borrowing pursuant to the warehouse line of credit totaled $23.4 million at March 31, 2000 and $23.3 million at December 31, 1999. The interest rate on the warehouse line of credit is the Federal Funds Rate plus 1.50% resulting in an effective rate of 7.81% at March 31, 2000 and 6.25% at December 31, 1999. Washtenaw also enters into sales of mortgage loans pursuant to agreements to repurchase. These agreements typically have terms of less than 90 days and are treated as a source of financing. The effective interest rate on these agreements to repurchase was 7.21% at March 31, 2000 and 5.65% at December 31, 1999. Pelican National's sources of funds include net increases in deposits, principal and interest payments on loans, proceeds from sales of loans held for sale, proceeds from maturities and sales and calls of available for sale securities. The liquidity reserve may consist of cash on hand, cash on demand deposits with other correspondent banks, and other investments and short-term marketable securities as determined by the rules of the Office of the Comptroller of the Currency("OCC"), such as federal funds sold and United States securities and securities guaranteed by the United States. At March 31, 2000, Pelican Financial had a liquidity ratio of 5.01%. Liquidity, as measured in the form of cash and cash equivalents totaled $7.6 million at March 31, 2000, an increase of 305.47% from December 31, 1999 to March 31, 2000. Cash flows from investing (primarily in mortgage servicing rights, loans and securities available for sale) and from financing (primarily through deposit generation and short and long term borrowings) are in excess of cash flows from operations. For the three months ended March 31, 2000, the cash flow used by operations totaled $14.8 million compared to the cash flow used of $11.4 million for the same period in 1999. Cash flows from investing activities reflect a decrease in loan origination's and sales of mortgage servicing rights. The cash flows from financing activities at March 31, 2000 reflect increased advances from the Federal Home Loan Bank, repurchase agreements, noninterest-bearing deposits and due to banks offset slightly by decreased interest bearing deposits. Pelican Financial's ability to continue to purchase loans and mortgage servicing rights and to originate new loans is dependent in large part upon its ability to sell the mortgage loans at par or for a premium or to sell the mortgage servicing rights in the secondary market in order to generate cash proceeds to repay borrowings pursuant to the warehouse facility, thereby creating borrowing capacity to fund new purchases and origination's. The value of and market for Pelican Financial's loans and mortgage servicing rights are dependent upon a number of factors, including the borrower credit risk classification, loan-to-value ratios and interest rates, general economic conditions, warehouse facility interest rates and governmental regulations. During the three months ended March 31, 2000 and the three months ended March 31, 1999, Pelican Financial used cash of $262.6 million and $762.4 million, respectively, for the purchase and origination of mortgage loans. During the same periods, Pelican Financial received cash proceeds from the sale of mortgage loans in the amount of $253.7 million and $761.7 million, respectively. Pelican Financial received cash proceeds from the sale of mortgage servicing rights of $4.7 million and $14.8 million for the periods ended March 31, 2000 and March 31, 1999 respectively. A significant amount of Pelican's loan production in any month is typically funded during the last several days of that month. Washtenaw generally grants commitments to fund mortgage loans for up to 30 days at a specified term and interest rate. The commitments are commonly known as rate-lock commitments. At March 31, 2000, Washtenaw had outstanding rate-lock commitments to lend $65.0 million for mortgage loans. Because these commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, as of March 31, 2000, Washtenaw had outstanding commitments to sell $112.1 million of mortgage loans. These commitments usually are funded within 90 days. Capital Resources The Board of Governors of the Federal Reserve System's (FRB) capital adequacy guidelines mandate that minimum ratios be maintained by bank holding companies such as Pelican Financial. Pelican National is governed by capital adequacy guidelines mandated by the OCC. 10 Based upon their respective regulatory capital ratios at March 31, 2000 Pelican Financial and Pelican National are both well capitalized, based upon the definitions in the regulations issued by the Federal Reserve Board and the Office of the Comptroller of the Currency setting forth the general capital requirements mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991. The table below indicates the regulatory capital ratios of Pelican Financial and Pelican National and the regulatory categories for a well capitalized and adequately capitalized bank under the regulatory framework for prompt corrective action (all three capital ratios) at March 31, 2000 and December 31, 1999, respectively:
Actual ------------------------------- March 31, December 31, 2000 1999 Required to be --------- ------------ -------------------------- Pelican Pelican Pelican Pelican Adequately Well National Financial National Financial Capitalized Capitalized -------- --------- -------- --------- ----------- ----------- Total Tier 1 Capital to risk-weighted assets 14.35% 20.44% 17.77% 21.23% 8.00% 10.00% Total Equity Capital to risk-weighted assets 15.07% 20.85% 18.52% 21.63% 4.00% 6.00% Tier 1 Capital to adjusted total assets 9.87% 12.69% 11.32% 11.52% 4.00% 5.00%
FINANCIAL CONDITION General At March 31, 2000, total assets of Pelican Financial were $170.3 million as compared to $155.9 million at December 31, 1999, an increase of $14.4 million or 9.2%. This increase is primarily due to increases in the loans held for sale at March 31, 2000, which increased from $60.5 million at December 31, 1999 to $ 71.3 million at March 31, 2000, an increase of $10.8 million or 17.9%. Lending Activities A significant source of income for Pelican Financial is the interest earned on loans and the gain on sales of mortgage servicing rights and loans. At March 31, 2000, Pelican Financial's net loans were $138.2 million or 81.2% of total assets. At December 31, 1999, Pelican Financial's net loans were $129.1 million or 82.8% of total assets. Pelican Financial, through it's mortgage banking segment Washtenaw, originates or acquires loans primarily through the wholesale, correspondent, and retail loan production of its mortgage banking operations. To a lesser extent, Pelican Financial originates or acquires loans through its retail banking operations. Loans are either held for investment in Washtenaw's portfolio or held available for sale in the secondary market. Wholesale mortgage loan production involves the origination of loans by a nationwide network of independent mortgage brokers with funding provided directly by Washtenaw and the transfer of these loans to Washtenaw upon closing. Correspondent mortgage loan production occurs through the purchase of loans by Washtenaw from independent mortgage lenders, commercial banks, savings and loan associations and other financial intermediaries that originate loans in their own name using their own source of funds. Retail mortgage loan production for mortgage banking operations occurs through Washtenaw's retail loan origination office in Ann Arbor, MI. For the three months ended March 31, 1999, Washtenaw's combined wholesale and correspondent loan production totaled $764.5 million and its retail loan production totaled $8.9 million. For the three months ended March 31, 2000, Washtenaw's combined wholesale and correspondent loan production totaled $260.8 million and its retail loan production totaled $1.9 million. In addition to mortgage loan production, Washtenaw engages to a limited extent in the origination of commercial, commercial real estate, construction and consumer loans, primarily through its retail banking operation. The following table contains selected data relating to the composition of Pelican Financial's loan portfolio by type of loan at the dates indicated. This table includes mortgage loans available for sale and mortgage loans held for investment. 11 At March 31, 2000 and December 31, 1999, Pelican Financial had no concentration of loans exceeding 10% of total loans that are not otherwise disclosed below.
March 31, 2000 December 31, 1999 ----------------------- ------------------- % of % of Amount Total Amount Total ------ ----- ------ ----- (Dollars In thousands) Real estate loans: Residential, one to four units......................... $ 117,357 83.89% $111,646 84.49% Residential, multifamily............................... - 0.00% - 0.00% Commercial and industrial real estate.................. 18,150 12.97% 16,987 12.86% Construction........................................... 2,478 1.77% 1,706 1.29% --------- ------ -------- ------ Total real estate loans................................ 137,985 98.63% 130,339 98.64% Other loans: Business, commercial................................... 726 0.52% 679 0.51% Automobile............................................. 121 0.09% 106 0.08% Other consumer......................................... 1,064 0.76% 1,015 0.77% --------- ------ -------- ------ 1,911 1.37% 1,800 1.36% --------- ------ -------- ------ 139,896 100.00% 132,139 100.00% ====== ======== ====== Unearned fees, premiums and discounts, net............. (1,255) (2,647) Allowance for loan losses.............................. (407) (374) --------- -------- Total Loans net (1)................................... $ 138,234 $129,118 ========= ========
(1) Includes loans held for sale and loans receivable, net Asset Quality Pelican Financial is exposed to certain credit risks related to the value of the collateral that secures loans held in its portfolio and the ability of borrowers to repay their loans during the term thereof. Pelican Financial's senior officers closely monitor the loan and real estate owned portfolios for potential problems on a continuing basis and report to the Board of Directors of Pelican Financial at regularly scheduled meetings. These officers regularly review the classification of loans and the allowance for losses. Pelican Financial also has a quality control department, the function of which is to provide the Board of Directors with an independent ongoing review and evaluation of the quality of the process by which lending assets are generated. Pelican Financial seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. As of March 31, 2000 and December 31, 1999 approximately 98% of the total loans held in its portfolio was collateralized by commercial and residential real estate mortgages. The level of delinquent loans and real estate owned also is relevant to the credit quality of a loan portfolio. As of March 31, 2000 total non-performing assets were $241,000 or 0.14% of total assets. As of December 31, 1999, total non-performing assets were $1.6 million or 1.04% of total assets. The decrease in total non-performing assets to total assets ratio was due primarily to the sale of $4.9 million of loans by Pelican National. Included in this loan sale were $1.0 million of nonperforming loans. Commercial loans also entail risks because repayment is usually dependent upon the successful operation of the commercial enterprise. This type of loan is also subject to adverse conditions in the economy. Commercial loans are generally riskier than mortgage loans because they are typically underwritten on the basis of the ability to repay from cash flow of a business rather than the ability of the borrower or grantor to repay. Further, the collateral underlying a commercial loan may depreciate over time, cannot be appraised with as much precision as real estate, and may fluctuate in value based on the success of the business. Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Pelican National, on a routine basis, monitors these concentrations in order to consider adjustments in its lending practices to reflect economic conditions, loan to deposit ratios, and industry trends. Concentration of loans in the following categories constituted the total loans 12 receivable portfolio as of March 31, 2000: Commercial loans 1.08% Real estate mortgage loans 97.16% Installment and other loans 1.76%
Washtenaw relies upon its underwriting department to ascertain compliance with individual investor standards prior to the sale of loans in the secondary market, and it relies upon its quality control department to test sold loans on a sample basis for compliance. During the three months ended March 31, 2000, Washtenaw sold approximately $251.8 million in single-family mortgage loans into the secondary market, of which only 2 loans were repurchased during the three months ended March 31, 2000, representing 0.07% of the 2,745 loans originated during that same time period. The 2 loans repurchased during the three months ended March 31, 2000 were non-performing. Washtenaw considers loan repurchases an inherent risk of originating and purchasing loans for ultimate resale in the secondary market notwithstanding the ongoing review by its quality control department. Losses arising from repurchases depend upon whether repurchased loans are or become non-performing and, if so, whether Washtenaw is able to recover all of the loan principal and interest otherwise due. The following table sets forth certain information on nonperforming loans and other real estate owned, the ratio of such loans and other real estate owned to total loans and total assets as of the dates indicated.
At March 31, -------------------------- At December 31, 2000 1999 1999 ---- ---- ---- (Dollars in thousands) Nonaccrual loans .................................................. $ - $ - $ - Loans past due 90 days or more but not on nonaccrual ................................................... 80 106 1,084 Restructured loans ................................................ - - - ---------- --------- --------- Total nonperforming loans ............................. 80 106 1,084 Other real estate owned ........................................... 161 431 538 ---------- --------- --------- Total nonperforming assets ............................ $ 241 $ 537 $ 1,622 ========== ========= ========= Total nonperforming assets to total assets ........................ 0.14% 0.21% 1.04% Allowance for loan losses to nonperforming loans ........................................ 508.75% 127.80% 0.24% Nonperforming loans to total assets ............................... 0.05% 0.04% 0.69%
Allowance for Loan Losses Pelican National establishes an allowance for loan losses based upon a quarterly or more frequent evaluation by management of various factors including the estimated market value of the underlying collateral, the growth and composition of the loan portfolio, current delinquency trends and prevailing and prospective economic conditions, including property values, employment and occupancy rates, interest rates, and other conditions that may affect the borrowers' ability to comply with repayment terms. If actual losses exceed the amount of the allowance for loan losses, earnings could be adversely affected. As Pelican National's provision for loan losses is based on management's assessment of the general risk inherent in the loan portfolio based on all relevant factors and conditions, the allowance for loan losses represents general, rather than specific reserves. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The allowance is based upon a number of factors, including current economic conditions, actual loss experience and industry trends. In addition, the Comptroller of the Currency, as an integral part of their examination process, periodically reviews Pelican National's allowance for loan losses. These agencies may require Pelican National to make additional provisions for estimated loan losses based upon their judgments about information available to them at the time of their examination. Pelican National will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes the 13 allowance for loan losses is sufficient to cover losses inherent in it portfolio at this time, no assurances can be given that Pelican National's level of allowance for loan losses will be sufficient to cover loan losses incurred by Pelican National or that adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current amount of the allowance for loan losses. The allowance for loan losses represented 0.29% of total loans outstanding as of March 31, 2000 compared with 0.29% of the total gross loans as of December 31, 1999. The amount of the provision for loan losses charged to expense in each of these periods represents management's best estimate during those periods of the addition necessary to establish appropriate allowances for estimated credit losses. Such estimates were based on management's assessment of the current and future general economic conditions in Pelican National's market areas, the risk levels associated with the particular composition of the loan portfolio during such periods, and Pelican National's past collection experience. On a quarterly basis management performs a calculation of its required loan loss reserve using its historical loan loss rate and giving weight to risk related loans by loan pool groups. Pelican National analyzes the reserve requirements and based on this analysis, which again gives relative risk weight to loan pools, Pelican National has determined that its reserve balance was adequate at March 31, 2000. Source of Funds Washtenaw funds it mortgage banking activities through the use of a warehouse line of credit and the use of agreements to repurchase. Pelican National funds its retail banking activities with deposits, Federal Home Loan Bank borrowings, loan repayments and prepayments, and cash flows generated from operations. Deposits are attracted principally from Pelican National's primary market areas of Fort Myers and Naples, Florida. Pelican National's deposits consist of checking, money market, savings, NOW, and certificate of deposit accounts. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Pelican National has relied primarily on customer service and competitive rates to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect Pelican National's ability to attract and retain deposits. Time deposits included individual retirement accounts (IRA) totaling $2.1 million and $2.5 million as of March 31, 2000 and December 31, 1999, respectively, all of which are in the form of certificates of deposit. Pelican National's deposits decreased $348,000 or .56% to $62.0 million as of March 31, 2000, from $62.3 million as of December 31, 1999. This decrease was primarily attributable to the decrease in time deposits offset by an increase in savings deposits. Pelican National uses traditional means of advertising its deposit products, including print media and generally does not solicit deposits from outside its market area. Pelican National does not actively solicit certificate of deposit accounts in excess of $100,000 or use brokers to obtain deposits. At March 31, 2000, $26.0 million, or 61% of Pelican National's certificate of deposit accounts were to mature within one year. Pelican National believes that substantially all of the certificate of deposit accounts that mature within one year will be rolled-over into new certificate of deposit accounts. To the extent that certificate of deposit accounts are not rolled-over, Pelican National believes that it has sufficient resources to fund these withdrawals. Investment Securities Since the start of Pelican Financial's retail banking activities, primarily conducted through Pelican National, deposit in-flows to Pelican National have exceeded Pelican National's loan demand. In addition, Pelican National sells a substantial portion of its loans into the secondary market, thus replenishing its liquidity on a regular basis. Pelican National currently invests excess liquidity in a variety of interest-earnings assets. The investment policy related to Pelican National, as approved by the Board of Directors of Pelican National, requires Pelican National's management to maintain adequate liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement Pelican National's lending activities. Pelican National primarily utilizes investments in securities for liquidity management and as a method of deploying excess funding not utilized for investment in loans. Generally, Pelican National's investment policy is more restrictive than applicable regulations allow and, accordingly, Pelican National has invested primarily in U. S. government and agency securities, federal funds, and U. S. government sponsored agency issued mortgage-backed securities. As required by SFAS No. 115, Pelican National classifies 14 securities as held-to-maturity, available-for-sale, or trading. At March 31, 2000 and at December 31, 1999, all of the investment securities held in Pelican National's investment portfolio were classified as available for sale. At March 31, 2000, Pelican Financial had invested $1.4 million in Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities, or 0.82% of total assets. In addition, $3.8 million or 2.23% of total assets were debt obligations issued by federal agencies which generally have stated maturities from one year to twenty five years. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to these instruments thereby changing the net yield on these securities. There is also reinvestment risk associated with the cash flows from these securities or if these securities are redeemed by the issuer. In addition, the market value of these securities may be adversely affected by changes in interest rates. The following table contains information on the carrying value of Pelican National's investment portfolio at the dates indicated. At March 31, 2000, the market value of Pelican National's investment portfolio totaled $6.4 million. During the periods indicated and except as otherwise noted, Pelican National had no securities of a single issuer that exceeded 10% of stockholders' equity.
At At March 31, December 31, 2000 1999 --------- ------------ (Dollars in thousands) U. S. Government agency (1) ................................... $3,843 $3,820 Mortgage-backed securities .................................... 1,874 2,057 Federal Reserve Bank and Federal Home Loan Bank Stock ............................................ 730 680 ------ ------ Total investment securities (2) ................. $6,447 $6,557 ====== ======
(1) At March 31, 2000 and December 31, 1999, includes a $2.0 million investment in a Federal Home Loan Bank bond with a carrying value of $1.9 million. (2) Excludes time deposits held in other financial institutions. Comparison of Results of Operations for the Three Months Ended March 31, 2000 and 1999 General Pelican Financial's net income for the three months ended March 31, 2000 was $174,000 or $0.04 per share, diluted, compared to $1.4 million or $0.46 per share, diluted, for the same period in 1999. The decrease of $1.2 million for the three months ended March 31, 2000 was primarily due to a decrease in gains on sales of loans and mortgage servicing rights at Washtenaw partially offset by the increase in net income of Pelican National. (See-Profitability of Mortgage Banking Activities). 15 Business Segment Information Pelican Financial's operations include two business segments, Pelican National Bank and Washtenaw Mortgage Company. Each of these are a separate corporate entity and wholly owned subsidiary of the Company. The following are the results of operations for these two segments for the three months ended March 31, 2000 and 1999:
Three Months Ended March 31, --------------------------------------------------------------------------- 2000 1999 ---------------------------------- ------------------------------------- (dollars in thousands) Retail Mortgage Consolidated Retail Mortgage Consolidated Banking Banking Totals Banking Banking Totals ------- ------- ------ ------- ------- ------ Interest income $ 2,184 $ 1,627 $ 3,768 $ 801 $ 2,913 $ 3,658 Interest expense 886 1,117 2,003 315 2,167 2,463 ------- ------- ------- ------- ------- ------- Net interest income 1,298 510 1,765 486 746 1,195 Loan loss provision 90 - 90 8 - 8 ------- ------- ------- ------- ------- ------- Net interest income after loan loss provision 1,208 510 1,675 478 746 1,187 Noninterest income 22 2,698 2,715 60 6,756 6,808 Noninterest expense 666 3,372 4,121 450 5,307 5,756 ------- ------- ------- ------- ------- ------- Income before income taxes and cumulative effect of change in accounting principle 564 (164) 269 88 2,195 2,239 Provision for income taxes 193 (53) 95 4 764 746 Income before cumulative effect of change in accounting principle 371 (111) 174 84 1,431 1,493 Cumulative effect of change in accounting principle - - - (77) - (97) ------- ------- ------- ------- ------- ------- Net Income $ 371 $ (111) $ 174 $ 7 $ 1,431 $ 1,396 ======= ======= ======= ======= ======= =======
Loan Production The volume of loans produced for the three months ended March 31, 2000 totaled $269.0 million as compared to $768.6 million for the three months ended March 31, 1999, a decrease of approximately $499.6 million or approximately 65.0%. The decrease in loan production was primarily due to an increase in mortgage interest rates. Provision for Loan Losses The provision for loan losses for the three months ended March 31, 2000 was $90,000. The provision for loan losses for the three months ended March 31, 1999 was $7,990. See Business- Asset Quality for a discussion of management's procedures in monitoring the adequacy of the allowance for loan losses. Results of Operations Related to Mortgage Banking Activities The following discussion provides information that relates specifically to the Pelican Financial's mortgage banking line of business which is conducted primarily through Washtenaw. For the three months ended March 31, 2000, Pelican Financial's pre-tax loss from the mortgage banking activities of Washtenaw was $172,518. For the three months ended March 31, 1999, Pelican Financial's comparable pre-tax earnings from the mortgage banking activities were $2.3 million. The decrease of $2.5 million is primarily attributable to decreased loan production in the three months ended March 31, 2000. Due to a rising interest rate environment revenues from loan originations of the mortgage banking activities, including Washtenaw, have decreased significantly in the first quarter of 2000. Noninterest Income Total noninterest income for the three months ended March 31, 2000 was $2.7 million, compared to $6.8 million for the three months ended March 31, 1999, a decrease of $4.1 million or 60%. This decrease was primarily due to a 69% decrease in the gain on sales of mortgage servicing rights and loans of $3.7 million and a 55% decrease in other income of $253,000. The decrease in gain on sale of mortgage servicing rights and loans was primarily due to a decrease in the overall new loan origination volume in the first quarter of 2000. In addition, the gains on sale of mortgage loans was effected by a reduction of the profit margins on each new loan origination as a result of the increased competition for the existing loan origination volume. The decrease in new loan origination's and the reduced profit margins are the 16 result of the increase mortgage interest rates. Gains on sales of loans and mortgage servicing rights for the three months ended March 31, 2000 totaled $1.7 million. For the three months ended March 31, 1999, gain on sale of loans and mortgage servicing rights was $5.4 million. The $3.7 million decrease represents a 68.5% decrease between periods. The overall cost of purchasing servicing rights has decreased in the three months ended March 31, 2000 over the three months ended March 31, 1999 as the industry volume of new loan origination's decrease. The variability of interest rates in the three months ended March 31, 2000, contributed to higher fallout rates of the mortgage pipeline. 25.5% of the loans given rate locks and hedged by Washtenaw in the three months ended March 31, 2000 were not ultimately funded, compared to 22.3% for the same period of 1999, an increase of 3.2%. Additionally, Washtenaw made concessions on pricing to the new California branch in order to attract new accounts that were previously unfamiliar with Washtenaw. The loss on sale of mortgage loan servicing sold totaled $50,000 for the three months ended March 31, 2000, compared to a gain of $516,000 for the three months ended March 31, 1999. This is due to the decrease in the sales price being received for the mortgage servicing rights sold and the higher price being paid to acquire the servicing initially. The mortgage servicing rights sold related to servicing of loans with an aggregate principal balance of approximately $218.5 million for the three months ended March 31, 2000 and $659.8 million for the three months ended March 31, 1999. In the three months ended March 31, 2000, Washtenaw sold servicing rights on current production with the loans in a concurrent transfer. In the three months ended march 31, 1999, Washtenaw sold the mortgage servicing rights in one bulk sale. Loan Servicing At March 31, 2000, Washtenaw serviced $1.1 billion of loans compared to $1.2 billion at March 31, 1999, a 9.1% decrease. The decrease in the servicing portfolio reflects the normal portfolio runoff and management's decision to sell the majority of new production in monthly concurrent transfers. At March 31, 2000 and 1999, with the exception of servicing related to loans held for sale in Washtenaw's loan portfolio and servicing sold but not yet delivered, all loan servicing was serviced for others. During a period of rising interest rates, the prepayment rate of the mortgage servicing portfolio has slowed, the portfolio is retaining servicing, even as quarterly loan production volumes decrease. Generally, the level of refinance and payoff activity, which is driven by mortgage interest rates, affects the mortgage servicing portfolio prepayment rates. For the three months ended March 31, 2000, the prepayment rate of Washtenaw's mortgage servicing portfolio was 8.97% per annum, compared to 9.99% for the three months ended March 31, 1999. Washtenaw recorded amortization and net impairment of its mortgage servicing rights for the three months ended March 31, 2000 of $492,000 (consisting of amortization amounting to $548,000 and a reduction of impairment of $56,000), compared to $359,000 for the three months ended March 31, 1999, (consisting of amortization of $359,000 and impairment of $0). In an increasing mortgage interest rate environment, the valuation of the mortgage servicing rights will increase as the expected mortgage servicing portfolio prepayment rate decreases. Noninterest Expense Total noninterest expense for the three months ended March 31, 2000 was $3.4 million, compared to $5.3 million for the same period in 1999, a decrease of $1.9 million or 35.8%. This decrease was primarily due to the decrease in employee compensation and benefits expenses of approximately $1.5 million. This decrease was the result of a reduction in personnel and smaller commissions paid to the existing sales force as a result of the decrease in new loan origination's. Results of Operations Related to Retail Banking Activities The remaining disclosures and analysis within Management's Discussion and Analysis regarding Pelican Financial's results of operations and financial condition relate principally to the retail banking line of business. For the three months ended March 31, 2000, Pelican Financial's pre-tax earnings from retail banking activities primarily conducted by Pelican National totaled $564,000. For the three months ended March 31, 1999 Pelican National's comparable pre-tax earnings were $11,000. The increase in the pre-tax income of $553,000 was primarily attributable to an increase in net interest income to $1.3 million for the three months ended March 31, 2000 compared to $478,000 for the three months ended March 31, 1999. This increase was due primarily to rates on earning assets increasing at a greater rate than those on liabilities, a larger deployment of assets in higher yielding loans and an 17 increase in the overall balance of loans outstanding. Net Interest Income Net Interest Income was $1.3 million and $478,000 for the three months ended March 31, 2000 and 1999, respectively. The increase in net interest income was due to the increased rate environment in the first quarter of the year 2000. The increase is also attributable to the increase in the balance of the average earning assets by $40.7 million offset by an increase in the balance of the average interest bearing liabilities of $36.7 million for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999. Average Balance Sheet The following table summarizes the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities for the three months ended March 31, 2000 and 1999 (dollars in thousands):
Three Months Ended March 31, ---------------------------------------------------------------------- 2000 1999 -------------------------------- ---------------------------------- Average Average Volume Interest Yield/Cost Volume Interest Yield/Cost -------------------------------- ---------------------------------- Summary of average rates/interest earning assets: Interest-earning assets: Federal funds sold ............................ $ 1,832 $ 26 5.68% $ 3,283 $ 39 4.75% Investment securities ....................... 6,972 111 6.37% 7,368 109 5.92% Loans receivable, net(1) ................... 133,884 3,631 10.85% 211,045 3,510 6.65% -------- -------- -------- -------- Total interest-earning assets ............... 142,688 3,768 10.56% 221,696 3,658 6.60% -------- -------- -------- Non-earning assets .......................... 18,336 25,768 - -------- -------- Total average assets ........................ $161,024 $247,464 ======== ======== Interest bearing liabilities: NOW accounts ................................ $ 876 5 2.28% $ 875 5 2.29% Money market accounts ....................... 2,689 26 3.87% 3,941 38 3.86% Savings deposits ............................ 10,719 86 3.21% 9,748 60 2.46% Time deposits ............................... 43,296 630 5.82% 15,779 212 5.37% Short-term borrowings ....................... 9,022 139 6.16% 147,974 2,148 5.81% Long-term borrowings ........................ 63,494 1,117 7.04% - - - -------- -------- -------- -------- Total interest bearing liabilities .......... 130,096 2,003 6.16% 178,317 2,463 5.52% -------- -------- -------- -------- Non-interest bearing liabilities ............ 18,613 56,139 Stockholders' equity ........................ 21,337 13,008 -------- -------- Total liabilities and stockholders' equity ...................................... $170,046 $247,464 ======== ======== Net interest income & net interest spread ...................................... $ 1,765 4.40% $ 1,195 1.08% ======== ======== ======== ======== Net interest margin ........................... 4.95% 2.16% ======== ========
(1) The balance includes the total from Washtenaw as well. Net interest income represents the excess of income on interest-earning assets over interest expense on interest bearing liabilities. The principal interest-earning assets are federal funds sold, investment securities and loans receivable. Interest-bearing liabilities primarily consist of notes payable, repurchase agreements, time deposits, interest-bearing checking accounts (NOW accounts), savings, deposits and money market accounts. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest bearing liabilities and the interest rates earned or paid on them. Noninterest Income Noninterest income for the three months ended March 31, 2000 was $98,000, compared to $149,000 for the same period in 1999, a decrease of $51,000 or 34.2%. This decrease was primarily due to the decrease in net gains on sales of mortgage servicing loans, which decreased from $34,000 for the three months ended March 31, 1999, to $3,000 for the same period of 2000, a decrease of $31,000, or 91.2% and decreased other loan fees, which decreased from $102,000 for the three months ended March 31, 1999, to $76,000 for the same period of 2000, a decrease of $26,000 or 25.5%. 18 Noninterest Expense Total noninterest expense for the three months ended March 31, 2000 was $667,000, compared to $527,000 for the same period in 1999, an increase of $140,000 or 26.57%. This increase was primarily due to the following, increases in compensation and employee benefits of $62,000 or 24.1%, occupancy and equipment expense of $56,000 or 84.8%, operating expenses of $20,000 or 44.4%, marketing and advertising of $29,000 or 161.1% and loan and OREO expense of $20,000 or 50%. These increases were offset by decreased other miscellaneous expenses of $48,000 or 39.7%. Item 3: Quantitative and Qualitative Disclosure About Market Risk A principal objective of Pelican Financial's asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is monitored by an Asset and Liability Committee (the ALCO Committee) at Pelican National which establishes policies and monitors results to control interest rate sensitivity. Management evaluates interest rate risk and then formulates guidelines regarding asset generation and repricing funding sources and pricing, and off-balance sheet commitments in order to maintain interest rate risk within target levels for the appropriate level of risk which are determined by the ALCO Committee. The ALCO Committee uses computer models prepared by a third party to measure Pelican National's interest rate sensitivity. From these reports, the ALCO Committee can estimate the net income effect of various interest rate scenarios. As a part of Pelican National's interest rate risk management policy, the ALCO Committee examines the extent to which its assets and liabilities are interest rate sensitive and monitors Pelican National's interest rate sensitivity gap. An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate sensitivity gap is the difference between interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such a time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates a negative gap could tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If the repricing of Pelican National's assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. The principal objective of Pelican National's interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risk appropriate given Pelican National's business strategy, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with Pelican National's Interest Rate Risk Management Policy. Through this management, Pelican National seeks to reduce the vulnerability of its operations to changes in interest rates. The Board of Directors of Pelican National is responsible for reviewing asset/liability policies and interest rate position. The Board of Directors reviews the interest rate position on a quarterly basis. In connection with this review, the Board of Directors evaluates Pelican National's business activities and strategies, the effect of those strategies on Pelican National's net interest margin, the market value of the loan servicing, and securities portfolios and exposure limits. The continuous movement of interest rates is certain, however, the extent and timing of these movements is not always predictable. Any movement in interest rates has an affect on Washtenaw's profitability. The value of loans, which Washtenaw has either originated or purchased or committed to originate or purchase, decreases as interest rates rise and conversely, the value increases as interest rates fall. The value of mortgage servicing rights tends to move inversely to the value of loans, increasing in value as interest rates rise and decreasing as interest rates fall. Washtenaw also faces the risk that rising interest rates could cause the cost of interest-bearing liabilities, such as interest-bearing repurchase agreements and borrowings, to rise faster than the yield on interest-earning assets, such as loans and investments. Washtenaw's interest rate spread and interest rate margin may be negatively impacted in a declining interest rate environment even though Washtenaw generally borrows at short-term interest rates and lends at longer-term interest rates. This is because loans and other interest-earning assets may be prepaid and replaced with lower yielding assets before the supporting interest-bearing liabilities reprice downward. Washtenaw's interest rate margin may also be negatively impacted in a flat- or inverse-yield curve environment. Mortgage origination activity tends to increase when interest rates trend lower and decrease when interest rates rise. In turn, this affects the prepayment speed 19 of loans underlying Washtenaw's mortgage servicing rights. Because it is unlikely that any particular movement in interest rates could affect only one aspect of Washtenaw's business, many of Washtenaw's products are naturally self-hedging to each other. For instance, the decrease in the value of Washtenaw's mortgage servicing portfolio associated with a decline in interest rates usually will not occur without a corresponding and offsetting increase in new mortgage loan production. Washtenaw's primary strategy to control interest rate risk is to sell substantially all loan production into the secondary market. This loan production is typically sold servicing retained. To further control interest rate risk related to its loan servicing portfolio, Washtenaw typically sells the servicing for most of its loans within one year of the origination of the underlying loan. The turnover in the loan servicing portfolio assists Washtenaw in maintaining a constant value of the servicing portfolio by holding servicing on loans that are least likely to be refinanced in the short term. Washtenaw further attempts to mitigate the effects of changes in interest rates through the use of forward sales of anticipated loan closings and diligent asset and liability management. The primary market risk facing Washtenaw is interest rate risk. From an enterprise perspective, Washtenaw manages this risk by striving to balance its loan origination and loan servicing businesses, which are counter cyclical in nature. In addition, Washtenaw utilizes various hedging techniques to manage the interest rate risk related specifically to its committed pipeline loans, mortgage loan inventory and mortgage servicing rights. Washtenaw primarily utilizes forward sales of mortgage-backed securities and purchases of mortgage-backed security put options. These instruments most closely track the performance of Washtenaw's committed pipeline of loans because the loans themselves can be delivered into these contracts. Washtenaw may also use other hedging techniques, including the use of forward U.S. treasury notes and bond sales and purchases (long/short OTC cash forward contracts): U. S. treasury futures contracts (long/short CBOT futures); U. S. treasury futures options contracts (long/short CBOT futures options); private mortgage conduit mandatory forward sales (mandatory rate locks); and private mortgage conduit best-effort rate locks (best-effort rate locks). The overall objective of Washtenaw's interest rate risk management policies is to offset changes in the values of these items resulting from changes in interest rates. Washtenaw does not speculate on the direction of interest rates in its management of interest rate risk. Part II. Other Information Item 1. Legal Proceedings There has been no material changes to the pending legal proceedings to which Pelican Financial is a party since the filing of the registrants Form 10-K. Item 2. Changes in Securities and Use of Proceeds (a) Not Applicable (b) Not Applicable (c) Not Applicable (d) Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Shareholders None 20 Item 5. Other Information The Registrant named Charles C. Huffman President of Washtenaw effective May 8, 2000. Mr. Huffman replaces Koula M. Kovach who resigned effective May 5, 2000. Ms. Kovach will continue to be a director of the Registrant. The Registrant named Howard M. Nathan, CPA, 31, Vice President and Chief Financial Officer on April 4, 2000. Mr. Nathan replaced Michael L. Hogan, as Chief Financial Officer, effective April 25, 2000. Mr. Hogan will continue to be a director of the Registrant. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three month period ending March 31, 2000. Pelican Financial, Inc. and Subsidiaries Signatures Under the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 2000 ____________________________________________ Charles C. Huffman President and Chief Executive Officer Date: May 15, 2000 ____________________________________________ Howard M. Nathan Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) - -------------------------------------------------------------------------------- EXHIBIT INDEX Exhibit Number Exhibit - -------------- ------- 27 Financial Data Schedule 21 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000, CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000, SCHEDULES AND OTHER REQUIRED DISCLOSURES. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 4,727 97 2,813 0 5,717 0 0 138,641 407 170,309 61,962 81,542 5,636 0 0 0 40 21,129 21,169 3,631 111 26 3,768 747 2,003 1,765 90 0 4,121 269 269 0 0 174 .04 .04 4.95 0 80 0 0 374 57 0 407 407 0 0
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