10-Q 1 a10-q.txt 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 June 30, 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 July 31, 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 June 30, 2000 and December 31, 1999 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 9-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Part II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Shareholders 17-18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18
2 PELICAN FINANCIAL, INC. Consolidated Balance Sheets
June 30, December 31, 2000 1999 (Unaudited) ASSETS Cash and cash equivalents $ 12,271,360 $ 1,883,472 Accounts receivable, net 3,875,694 2,289,682 Securities available for sale 5,706,041 5,877,013 Federal Reserve and Federal Home Loan Bank Stock 730,000 680,000 Loans Held for Sale 87,254,032 60,535,699 Loans receivable, net 78,539,825 68,582,378 Mortgage servicing rights, net 10,367,775 11,028,468 Mortgage loans in foreclosure and other real estate 72,524 539,869 Premises and equipment, net 893,481 863,815 Federal income taxes receivable 432,004 265,545 Other assets 1,900,384 3,307,011 ------------ ------------ $202,043,120 $155,852,952 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 8,293,192 $ 3,911,558 Interest-bearing 68,192,695 58,398,604 ------------ ------------ Total deposits 76,485,887 62,310,162 Due to bank 14,677,871 12,095,538 Notes payable 41,995,879 25,333,610 Repurchase agreements 30,781,880 21,844,801 Federal Home Loan Bank borrowings 11,000,000 8,000,000 Other liabilities 5,982,941 5,277,485 ------------ ------------ Total liabilities 180,924,458 134,861,596 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 June 30, 2000 and December 31, 1999. 39,928 39,928 Additional paid in capital 13,631,156 13,631,156 Retained earnings 7,628,967 7,504,631 Accumulated other comprehensive loss, net of tax (181,389) (184,359) ------------ ------------ Total shareholders' equity 21,118,662 20,991,356 ------------ ------------ $202,043,120 $155,852,952 ============ ============
3 PELICAN FINANCIAL, INC. Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 Interest income Loans, including fees $3,857,254 $3,527,676 $7,488,591 $ 7,050,201 Investment securities, taxable 107,574 118,043 218,323 227,302 Federal funds sold and overnight accounts 173,388 34,319 199,418 72,837 ---------- ---------- ---------- ----------- Total interest income 4,138,216 3,680,038 7,906,332 7,350,340 Interest expense Deposits 856,258 421,624 1,603,446 736,436 Short-term borrowings 1,726,059 2,078,567 2,981,590 4,226,763 ---------- ---------- ---------- ----------- Total interest expense 2,582,317 2,500,191 4,585,036 4,963,199 Net interest income 1,555,899 1,179,847 3,321,296 2,387,141 Provision for loan losses 37,000 5,155 127,000 13,145 ---------- ---------- ---------- ----------- Net interest income after provision for loan losses 1,518,899 1,174,692 3,194,296 2,373,996 Noninterest income Service charges on deposit accounts 15,585 12,976 26,048 22,362 Servicing income 719,941 1,169,426 1,495,770 2,028,650 Gain on sales of mortgage servicing rights and loans, net 1,703,415 6,458,942 3,429,042 11,933,963 Other income 215,947 398,604 418,580 850,638 ---------- ---------- ---------- ----------- Total noninterest income 2,654,888 8,039,948 5,369,440 14,835,613 Noninterest expense Compensation and employee benefits 2,106,516 4,243,659 4,357,342 7,964,736 Occupancy and equipment 375,523 355,084 753,159 749,006 Telephone 113,050 140,270 208,411 251,111 Postage 92,761 141,716 183,743 283,231 Amortization of mortgage servicing rights 557,285 823,674 1,105,724 1,483,002 Mortgage servicing rights valuation adjustment (28,255) (233,862) (84,908) (532,828) Other noninterest expense 1,017,514 964,055 1,832,043 1,992,548 ---------- ---------- ---------- ----------- Total noninterest expense 4,234,394 6,434,596 8,355,514 12,190,806 Income (loss) before income taxes and cumulative effect of change in accounting principle (60,607) 2,780,044 208,222 5,018,803 Provision for income taxes (10,733) 964,713 83,886 1,709,916 ---------- ---------- ---------- ----------- Income(loss) before cumulative effect of change in accounting principle (49,874) 1,815,331 124,336 3,308,887 Cumulative effect of change in accounting principle - - - (97,119) ---------- ---------- ---------- ----------- Net income(loss) $ (49,874) $1,815,331 $ 124,336 $ 3,211,768 ========== ========== ========== =========== Comprehensive income(loss) $ (49,897) $1,717,807 $ 127,305 $ 3,090,948 ========== ========== ========== =========== Basic and diluted earnings per share before cumulative effect of change in accounting principle $ (0.01) $ 0.60 $ 0.03 $ 1.06 Per share cumulative effect of change in accounting principle $ - $ - $ - $ (0.03) ---------- ---------- ---------- ----------- Basic and diluted earnings per share $ (0.01) $ 0.60 $ 0.03 $ 1.03 ========== ========== ========== ===========
4 PELICAN FINANCIAL, INC. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30,
2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in) operating activities $(34,806,495) $ 18,130,929 CASH FLOWS FROM INVESTING ACTIVITIES Loan originations, net (9,996,152) (18,571,585) Proceeds from sales of mortgage servicing rights 9,458,960 32,051,170 Change in loans in foreclosure and other real estate, net 467,345 264,871 Property and equipment expenditures, net (235,164) (396,426) Purchase of securities available for sale - (2,016,777) Proceeds from maturities and principal repayments of securities available for sale 191,988 1,311,853 Purchase of Federal Reserve Stock (50,000) (72,300) ------------ ------------ Net cash (used in)provided by investing activities (163,023) 12,570,806 CASH FLOWS FROM FINANCING ACTIVITIES Increase in noninterest-bearing deposits 4,381,634 1,981,900 Increase (decrease) in interest-bearing deposits 9,794,091 11,353,580 Increase in due to bank 2,582,333 (7,023,100) Increase (decrease) in notes payable due on demand 16,662,269 (1,226,927) Advances on Federal Home Loan Bank borrowings 3,000,000 - Increase (decrease) in repurchase agreements 8,937,079 (41,536,644) ------------ ------------ Net cash provided by (used in) financing activities 45,357,406 (36,451,191) ------------ ------------ Net change in cash and cash equivalents 10,387,888 (5,749,456) Cash and cash equivalents at beginning of period 1,883,472 10,180,034 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,271,360 $ 4,430,578 ============ ============ Cash and equivalents is composed of: Cash and demand deposits due from banks $ 2,467,360 $ 1,133,578 Interest-bearing deposits in banks 97,000 99,000 Federal funds sold 9,707,000 3,198,000 ------------ ------------ Total cash and cash equivalents $ 12,271,360 $ 4,430,578 ============ ============ Supplemental cash disclosures Interest paid $ 4,444,548 $ 5,153,015 Income taxes paid 72,000 -
5 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) NOTE 1 - PRINCIPLES OF CONSOLIDATION The unaudited consolidated financial statements as of and for the three and six months periods ended June 30, 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 June 30, 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. Reclassifications: Certain prior year amounts have been reclassified to conform to the 2000 presentation. NOTE 3 - EARNINGS PER SHARE At June 30, 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 June 30, 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. The following summarizes the computation of basic and diluted earnings (loss) per share before cumulative effect of change in accounting principle.
Three Months Three Months ended ended June 30, June 30, 2000 1999 ------------ ------------ Basic earnings per share Net income (loss) $ (49,874) $1,815,331 ---------- ---------- Weighted average shares outstanding 3,992,836 3,032,836 ---------- ---------- Basic earnings (loss) per share $ (0.01) $ 0.60 ========== ========== Diluted earnings per share Net income (loss) $ (49,874) $1,815,331 ---------- ---------- Weighted average shares outstanding 3,992,836 3,032,836 ---------- ---------- Dilutive effect of assumed exercise of stock options 196 6,775 ---------- ---------- Diluted average shares outstanding 3,993,032 3,039,611 ---------- ---------- Diluted earnings (loss) per share $ (0.01) $ 0.60 ========== ==========
6 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) NOTE 3 - EARNINGS PER SHARE (CONTINUED)
Six Months Six Months ended ended June 30, June 30, 2000 1999 ---------- ---------- Basic earnings per share Net income $ 124,336 $3,211,768 ---------- ---------- Weighted average shares outstanding 3,992,836 3,032,836 ---------- ---------- Basic earnings per share $ 0.03 $ 1.06 ========== ========== Diluted earnings per share Net income $ 124,336 $3,211,768 ---------- ---------- Weighted average shares outstanding 3,992,836 3,032,836 ---------- ---------- Dilutive effect of assumed exercise of stock options 390 6,775 ---------- ---------- Diluted average shares outstanding 3,993,226 3,039,611 ---------- ---------- Diluted earnings per share $ 0.03 $ 1.06 ========== ==========
NOTE 4 - 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. 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. 7 PELICAN FINANCIAL, INC. Notes to the Consolidated Financial Statements (Unaudited) NOTE 4 - SEGMENT INFORMATION (CONTINUED)
Dollars in thousands Mortgage Retail Consolidated Banking Banking Other Totals THREE MONTHS ENDED JUNE 30, 2000 Net interest income $ 552 $ 1,050 $ (46) $ 1,556 Gain on sales of MSR and loans, net 1,690 15 - 1,705 Servicing income 720 - - 720 Noncash items: Provision for loan losses - 37 - 37 MSR amortization and valuation 529 - - 529 Provision for income taxes (74) 130 (67) (11) Segment profit /(loss ) (172) 251 (129) (50) Segment assets 104,440 97,466 137 202,043 THREE MONTHS ENDED JUNE 30, 1999 Net interest income $ 575 $ 642 $ (37) $ 1,180 Gain on sales of MSR and loans, net 6,434 25 - 6,459 Servicing income 1,168 1 - 1,169 Noncash items: Provision for loan losses - 5 - 5 MSR amortization and valuation 589 1 - 590 Provision for income taxes 920 63 (18) 965 Segment profit/loss 1,728 123 (36) 1,815 Segment assets 162,301 54,279 (98) 216,482
Dollars in thousands Mortgage Retail Consolidated Banking Banking Other Totals SIX MONTHS ENDED JUNE 30, 2000 Net interest income $ 1,061 $ 2,348 $ (88) $ 3,321 Gain on sales of MSR and loans, net 3,412 17 - 3,429 Servicing income 1,491 5 - 1,496 Noncash items: Provision for loan losses - 127 - 127 MSR amortization and valuation 1,021 - - 1,021 Provision for income taxes (128) 323 (111) 84 Segment profit/loss (283) 622 (215) 124 Segment assets 104,440 97,466 137 202,043 SIX MONTHS ENDED JUNE 30, 1999 Net interest income $ 1,321 $ 1,141 $ (75) $ 2,387 Gain on sales of MSR and loans, net 11,875 59 - 11,934 Servicing income 2,026 3 - 2,029 Noncash items: Provision for loan losses - 13 - 13 MSR amortization and valuation 948 2 - 950 Provision for income taxes 1,683 67 (40) 1,710 Segment profit/loss 3,160 130 (78) 3,212 Segment assets 162,301 54,279 (98) 216,482
8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Certain information in this Form 10-Q may constitute forward-looking information that involves risks and uncertainties that could cause actual results to differ materially from those estimated. Persons are cautioned that such forward-looking statements are not guarantees of future performance and are subject to various factors that could cause actual results to differ materially from those estimated. These factors include, but are not limited to, changes in general economic and market conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, demand for loan and deposit products and the development of an interest rate environment that adversely affects the interest rate spread or other income from Pelican Financial's investments and operations. EARNINGS PERFORMANCE Pelican Financial reported a net loss of $49,874 for the quarter ended June 30, 2000, a decrease of $1.9 million when compared to net income for the same period in 1999. Earning per share, basic and diluted, were a loss of $ 0.01 per share compared to income of $0.60 per share for the for the three months ended June 30, 2000 and 1999 respectively. For the six months ended June 30, 2000 Pelican Financial reported net income of $124,336 compared to $3.2 million for the same period in 1999. Earnings per share, basic and diluted, were $ 0.03 per share compared to $1.06 for the six months ended June 30, 2000 and 1999 respectively. For further explanation of the earnings performance, please see the discussion on the retail and mortgage banking segments to follow. RESULTS OF OPERATIONS RETAIL BANKING The following discussion provides information that relates specifically to Pelican Financial's retail banking line of business. For the three months ended June 30, 2000, Pelican Financial's net income from retail banking activities primarily conducted by Pelican National totaled $251,000. For the three months ended June 30, 1999 Pelican National's comparable net income was $123,000. For the six months ended June 30, 2000, Pelican Financial's net income from retail banking activities primarily conducted by Pelican National totaled $622,000. For the six months ended June 30, 1999 Pelican National's comparable net income was $130,000. The increase in net income for both the three months and six months periods was primarily attributable to an increase in net interest income which was partially offset by an increase in total noninterest expense. Net Interest Income Net Interest Income was $1.0 million and $642,000 for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999 net interest income was $2.3 million and $1.1 million respectively. The increase in net interest income 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 increase in the overall balance of loans outstanding. The increase in the yield of the average earning assets was 2.51% offset by an increase in the cost of the average interest bearing liabilities of .86% for the three months ended June 30, 2000 as compared to the three months ended June 30, 1999. For the six months ended June 30, 2000 as compared to the six months ended June 30, 1999, the increase in the yield of average earning assets was 2.88% which was offset by a an increase of the average interest bearing liabilities of .46%. Average Balance Sheet The following tables summarizes the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities: 9
Three Months Ended June 30, dollars in thousands 2000 1999 ---------------------------------- ---------------------------------- Summary of average rates/interest Average Average earning assets: Volume Interest Yield/Cost Volume Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Federal funds sold ......................... $ 12,319 $ 173 5.62% $ 2,911 $ 34 4.67% Investment securities ..................... 6,255 107 6.84% 7,681 118 6.15% Loans receivable, net(1) .................. 156,034 3,858 9.89% 201,215 3,540 7.04% -------- ------ -------- ------ Total interest-earning assets ............. 174,608 4,138 9.48% 211,807 3,692 6.97% ------ ----- ------ ----- Non-earning assets ........................ 20,651 30,692 - -------- -------- Total average assets ...................... $195,259 $242,499 ======== ======== Interest bearing liabilities: NOW accounts .............................. $ 1,017 6 2.36% $ 823 4 1.94% Money market accounts ..................... 2,576 26 4.04% 3,591 35 3.90% Savings deposits .......................... 15,958 187 4.69% 12,362 76 2.46% Time deposits ............................. 42,549 637 5.99% 23,122 306 5.29% Short-term borrowings ..................... 11,000 170 6.18% - - Long-term borrowings....................... 82,355 1,556 7.56% 133,171 2,079 6.24% -------- ------ -------- ------ Total interest bearing liabilities .......... 155,455 2,582 6.64% 173,069 2,500 5.78% ------ ----- ------ ----- Non-interest bearing liabilities .......... 18,737 54,838 Stockholders' equity ...................... 21,067 14,592 -------- -------- Total liabilities and stockholders' equity ..................................... $195,259 $242,499 Net interest income & net interest spread ..................................... $ 1,556 2.84% $ 1,192 1.19% ======== ===== ======== ===== Net interest margin ......................... 3.56% 2.25% ===== =====
(1) The balance includes the total from Washtenaw. The average balance related to Washtenaw loans totaled $85.1million and $164.9 for the periods ended June 30, 2000 and 1999 respectively.
Six Months Ended June 30, dollars in thousands 2000 1999 ---------------------------------- ---------------------------------- Summary of average rates/interest Average Average earning assets: Volume Interest Yield/Cost Volume Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- Interest-earning assets: Federal funds sold ......................... $ 7,075 $ 199 5.63% $ 3,097 $ 73 4.71% Investment securities ..................... 6,592 218 6.61% 6,074 227 7.47% Loans receivable, net(1) .................. 145,473 7,489 10.30% 199,118 7,050 7.08% -------- ------ -------- ------ Total interest-earning assets ............. 159,140 7,906 9.94% 208,289 7,350 7.06% ------ ----- ------ ----- Non-earning assets ........................ 19,026 29,314 - -------- -------- Total average assets ...................... $178,166 $237,603 ======== ======== Interest bearing liabilities: NOW accounts .............................. $ 946 11 2.33% $ 849 9 2.12% Money market accounts ..................... 2,632 52 3.95% 3,765 73 3.88% Savings deposits .......................... 13,338 273 4.09% 11,062 136 2.46% Time deposits ............................. 43,126 1,267 5.88% 19,471 518 5.32% Short-term borrowings ..................... 10.011 309 6.17% - - - Long-term borrowings....................... 74,303 2,673 7.19% 133,262 4,227 6.34% -------- ------ -------- ------ Total interest bearing liabilities ........ 144,356 4,585 6.35% 168,409 4,963 5.89% ------ ----- ------ ----- Non-interest bearing liabilities .......... 12,473 55,306 Stockholders' equity ...................... 21,337 13,888 -------- -------- Total liabilities and stockholders' equity ..................................... $178,166 $237,603 Net interest income & net interest spread ..................................... $ 3,321 3.59% $ 2,387 1.17% ======== ===== ======== ===== Net interest margin ......................... 4.17% 2.29% ===== =====
(1) The balance includes the total from Washtenaw. The average balance related to Washtenaw loans totaled $75.6 million and $167.9 for the periods ended June 30, 2000 and 1999 respectively. 10 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 June 30, 2000 was $34,000, compared to $41,000 for the same period in 1999, a decrease of $7,000 or 17%. This decrease was primarily due to the decrease in net gains on sales of mortgage servicing rights and loans, which decreased from $25,000 for the three months ended June 30, 1999, to $13,000 for the same period of 2000, a decrease of $12,000, or 48%. This was offset by an increase in service fees on deposit accounts, which increased from $13,000 for the three months ended June 30, 1999, to $16,000 for the same period of 2000, an increase of $3,000 or 23%. For the six months ended June 30 2000, noninterest income was $56,000 compared to $88,000 for the same period in 1999. The decrease of $32,000, or 36%, was the result of a decrease in gain on sale of mortgage servicing rights and loans of $42,000. The decrease in the gain on sale of mortgage servicing right and loans is due to Pelican National focusing on the origination of loans which will be held in the portfolio as opposed to being sold to the secondary market. The decrease was offset by an increase in service charges on deposit accounts of approximately $4,000 and other income by approximately $6,000. Noninterest Expense Total noninterest expense for the three months ended June 30, 2000 was $666,000, compared to $491,000 for the same period in 1999, an increase of $175,000 or 36%. This increase was primarily due to the following; increases in compensation and employee benefits of $52,000 or 19%, occupancy and equipment expense of $55,000 or 77%, and other operating expenses of $63,000 or 48%. The increases were the result of the growth of the bank and the opening of the second branch located in Fort Myers, Florida. For the six months ended June 30 2000, noninterest expense was $1.3 million compared to $941,000 for the same period in 1999. The increase of $359,000 or 38% was also attributable to the expenses incurred as a result of the overall growth of the bank and the opening of the Fort Myers, Florida branch location. MORTGAGE BANKING The following discussion provides information that relates specifically to Pelican Financial's mortgage banking line of business. For the three months ended June 30, 2000, Pelican Financial's net loss from mortgage banking activities primarily conducted by Washtenaw totaled $172,000. For the three months ended June 30, 1999 Washtenaw's comparable net income was $1.7 million. For the six months ended June 30, 2000, the net loss from mortgage banking activities totaled $283,000 compared to net income of $3.2 million for the same period in 1999. The decrease in the pre-tax income for both periods was primarily attributable to a decrease in mortgage loan production as a result of the increase in mortgage interest rates. The volume of loans produced for the three months ended June 30, 2000 totaled $302.5 million as compared to $684.7 million for the three months ended June 30, 1999, a decrease of $382.2 million or 56%. For the six months ended June 30, loan production totaled $565.1 million and $1.4 billion for 2000 and 1999 respectively. This represents a decrease of $834.9 million or 60%. The increase in mortgage interest rates reduced the amount of loan refinancing that occurred in the first six months of 2000. This is the primary factor for the decrease in loan volume. Noninterest Income Total noninterest income for the three months ended June 30, 2000 was $2.7 million, compared to $8.0 million for the three months ended June 30, 1999, a decrease of $5.3 million or 68%. This decrease was primarily due to a 74% decrease in the gain on sales of mortgage servicing rights and loans of $4.7 million and a 38% decrease in other income 11 of $448,000. For the six months ended June 30, 2000 noninterest income was $5.3 million, compared to $14.8 million for the six months ended June 30, 1999, a decrease of $9.5 million or 64%. This decrease was primarily due to a 71% decrease in the gain on sales of mortgage servicing rights and loans of $8.5 million and a 26% decrease in other income of $534,000. The decrease in gain on sale of mortgage servicing rights and loans and the decrease in other income was primarily due to a decrease in the overall new loan origination volume in the first six months of 2000. In addition, the gains on sale of mortgage servicing rights and 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 originations and the reduced profit margins are the result of the increase in mortgage interest rates and pricing concessions being made by Washtenaw in the California market in order to attract new accounts from that region. Loan Servicing At June 30, 2000, Washtenaw serviced $1.1 billion of loans compared to $1.9 billion at June 30, 1999, a 42% 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 June 30, 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. Service fee income, net of amortization and impairment was $163,000 and $346,000 for the three months ended June 30, 2000 and 1999 respectively. For the six months ended June 30, 2000 and 1999, service fee income net of amortization and impairment was $385,000 and $545,000 respectively. The decrease was the result of the reduction in the size of the servicing portfolio as previously discussed. Noninterest Expense Total noninterest expense for the three months ended June 30, 2000 was $4.2 million, compared to $5.9 million for the same period in 1999, a decrease of $1.7 million or 29%. This decrease was primarily due to the decrease in employee compensation and benefits expenses of approximately $1.9 million. For the six months ended June 30, 2000 and 1999, noninterest expense was $6.8 million and $11.2 million, a difference of $4.4 million between the comparable periods. The decrease was primarily the result of a reduction in personnel and a reduction in total commissions paid to the existing sales force as a result of the decrease in new loan originations. BALANCE SHEET ANALYSIS The following is a discussion of the consolidated balance sheet of Pelican Financial. ASSETS At June 30, 2000, total assets of Pelican Financial equaled $202.0 million as compared to $155.9 million at December 31, 1999, an increase of $46.1 million or 30%. This increase is primarily due to increases in cash and cash equivalents, loans held for sale and loans receivable. Cash and Cash Equivalents Cash and cash equivalents were $12.3 million at June 30, 2000 compared to $1.9 million at December 31, 1999. The increase of $10.4 million or 547% was primarily the result of an increase in federal funds sold of $8.9 million. Pelican National had excess liquidity resulting from increased deposits that will be used to fund loan origination's in the future. Investment Securities Pelican National primarily utilizes investments in securities for liquidity management and as a method of deploying excess funding not utilized for investment in loans. 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 securities as held-to-maturity, available-for-sale, or trading. At June 30, 2000 and at December 31, 1999, all of the investment securities held in Pelican National's investment portfolio were classified as available for sale. 12 The following table contains information on the carrying value of Pelican National's investment portfolio at the dates indicated. At June 30, 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 June 30, December 31, 2000 1999 (Dollars in thousands) U. S. Government agency (1) ..................... $3,855 $3,820 Mortgage-backed securities ...................... 1,851 2,057 Federal Reserve Bank and Federal Home Loan Bank Stock .............................. 730 680 ------ ------ Total investment securities ............. $6,436 $6,557 ====== ======
(1) At June 30, 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. Loans Held for Sale Loans held for sale were $87.3 million at June 30, 2000 compared to $60.5 million at December 31, 1999. This increase of $26.8 million or 44% was caused by an increase of loan production that will be sold to private investors. The length of time required to prepare and sell loans to these investors is typically longer than the length of time it takes to sell loans to Fannie Mae or Freddie Mac. In addition, Washtenaw introduced a new product during the second quarter. This loan product is for borrowers with credit scores that fail to meet the conforming loan investor criteria. At June 30, 2000 Washtenaw had $3.3 million of these loans that will be sold in the third quarter. Portfolio Loans Total portfolio loans were $78.5 million at June 30, 2000, an increase of $9.9 million or 14% from $68.6 at December 31, 1999. This increase resulted primarily from increases in commercial, residential real estate and boat lending production at Pelican National. 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. Pelican Financial had no concentration of loans exceeding 10% of total loans that are not otherwise disclosed below.
June 30, 2000 December 31, 1999 % of % of Amount Total Amount Total (Dollars In thousands) Real estate loans: Residential, one to four units ............... $136,377 81.59% $111,646 84.49% Commercial and industrial real estate ........ 23,849 14.27% 16,987 12.86% Construction ................................. 2,382 1.42% 1,706 1.29% -------- ------ -------- ------ Total real estate loans ...................... 162,608 97.28% 130,339 98.64% Other loans: Business, commercial ......................... 714 0.43% 679 0.51% Automobile ................................... 209 0.12% 106 0.08% Other consumer ............................... 3,620 2.17% 1,015 0.77% -------- ------ -------- ------ 4,543 2.72% 1,800 1.36% -------- ------ -------- ------ 167,151 100.00% 132,139 100.00% ====== -------- ====== Unearned fees, premiums and discounts, net ... (944) (2,647) Allowance for loan losses .................... (413) (374) -------- -------- Total Loans net (1) ......................... $165,794 $129,118 ======== ========
(1) Includes loans held for sale and loans receivable, net 13 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. 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 receivable portfolio as of June 30, 2000: Commercial loans 0.91% Real estate mortgage loans 94.22% Installment and other loans 4.87%
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 June 30, At December 31, 2000 1999 1999 (Dollars in thousands) Nonaccrual loans .................................... $ - $ 246 $ - Loans past due 90 days or more but not on nonaccrual ......................................... 1,027 - 1,084 Restructured loans .................................. - - - ------ ------ ------ Total nonperforming loans ................ 1,027 246 1,084 Other real estate owned ............................. 73 317 538 ------ ------ ------ Total nonperforming assets ............... $1,100 $ 563 $1,622 ====== ====== ====== Total nonperforming assets to total assets .......... 0.54% 0.26% 1.04% Allowance for loan losses to nonperforming loans ............................. 40.21% 57.32% 34.50% Nonperforming loans to total assets ................. 0.51% 0.11% 0.69%
Provision and 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 inherent in the loan portfolio. These factors include the estimated market value of the underlying collateral, the growth and composition of the 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 both general and specific reserves. The provision for loan losses for the three months ended June 30, 2000 was $37,000. The provision for loan losses for the three months ended June 30, 1999 was $5,155. The increase is due to the increase in the size of the loan portfolio and the increase in total nonperforming loans. 14 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 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 .52% of the loans receivable outstanding as of June 30, 2000 compared with .54% of the loans receivable outstanding 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. LIABIILITIES At June 30, 2000, the total liabilities of Pelican Financial were $180.9 million as compared to $134.9 million at December 31, 1999, an increase of $46.0 million or 34%. This increase was primarily due to increases in deposits, notes payable and repurchase agreements. Deposits Total deposits were $76.5 million at June 30, 2000 compared to $62.3 million at December 31, 1999 which represents an increase of $14.2 million or 23%. The increase was primarily due to several factors. Washtenaw transferred approximately $9.0 million of principal and interest related to its servicing portfolio during the second quarter. These deposits were previously at a non-affiliated bank. The transfer was done to provide Pelican National with additional liquidity to generate new loans and to allow Pelican National to earn the interest spread on the additional deposits. Also, Pelican National was able to develop a new relationship that has generated approximately $3.0 million in new deposits. The remaining increase is the result of an increased focus on generating new deposits. Notes Payable Notes payable was $42.0 million at June 30, 2000 compared to $25.3 million at December 31, 1999. This increase of $16.7 million or 66% was primarily caused by an increase of loans held for sale balance. Since the notes payable represent the warehouse line of credit that Washtenaw uses to fund its loan production until such time that the loans are sold to the secondary market, the balance will generally move in direct correlation with the loans held for sale balance. Repurchase Agreements Repurchase agreements were $30.8 million at June 30, 2000 compared to $21.8 million at December 31, 1999. This increase of $9.0 million or 41% in the repurchase agreements was primarily the result of an increase in the balance of loans held for sale. Washtenaw uses repurchase agreements, in addition to its warehouse line of credit, as a means to fund the loans that it purchases. Therefore, much like the notes payable balance, the repurchase agreements balance will move in direct correlation to the loans held for sale balance. 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 15 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 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 $80 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 $40.0 million at June 30, 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 8.62% at June 30, 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 8.02% at June 30, 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 June 30, 2000, Pelican Financial had a liquidity ratio of 6.76%. Liquidity, as measured in the form of cash and cash equivalents totaled $12.3 million at June 30, 2000, an increase of $10.4 million from December 31, 1999 to June 30, 2000. The increase is primarily the result of an $8.9 million increase in the outstanding federal funds sold at June 30, 2000. 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 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 June 30, 2000, Washtenaw had outstanding rate-lock commitments to lend $48.7 million for mortgage loans. Because these commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, as of June 30, 2000, Washtenaw had outstanding commitments to sell $101.2 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. Based upon their respective regulatory capital ratios at June 30, 2000 Pelican Financial and Pelican National are both well capitalized, based upon the definitions in the regulations issued by the FRB and the OCC setting forth the general capital requirements mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991. 16 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 June 30, 2000 and December 31, 1999, respectively:
Actual June 30, 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 15.79% 17.06% 17.77% 21.23% 8.00% 10.00% Total Equity Capital to risk-weighted assets 16.47% 17.40% 18.52% 21.63% 4.00% 6.00% Tier 1 Capital to adjusted total assets 10.29% 10.43% 11.32% 11.52% 4.00% 5.00%
Item 3: Quantitative and Qualitative Disclosure About Market Risk For a discussion of Pelican Financial's asset/liability management policies as well as the potential impact of interest rate changes upon the market value of Pelican Financial's portfolio, see Pelican Financial's Annual Report to Shareholders and Form 10-K. Management believes that there has been no material change in Pelican Financial's asset/liability position or the market value of Pelican Financial's portfolio since December 31, 1999. 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 Pelican Financial held its 2000 Annual Meeting of Shareholders on April 25, 2000. The following directors were elected at the annual meeting to serve a three year term.
FOR AGAINST ABSTENTIONS Charles C. Huffman 3,402,161 1,480 0 Michael D. Surgen 3,402,161 1,480 0 Brenda L. Jones 3,402,161 1,480 0
17 A vote was taken to ratify the appointment of Crowe Chizek and Company, LLP as independent auditors for the fiscal year ending December 31, 2000. The appointment was approved by the following votes: 3,396,801 for, 1,140 against, and 5,700 abstained. Item 5. Other Information None 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 June 30, 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: August 14, 2000 /s/ Charles C. Huffman -------------------------------------------- Charles C. Huffman President and Chief Executive Officer Date: August 14, 2000 /s/ Howard M. Nathan -------------------------------------------- Howard M. Nathan Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX
Exhibit Number Exhibit -------------- ------- 27 Financial Data Schedule
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