<PAGE>
As Filed with the Securities and Exchange Commission on April 22, 1999.
Registration Statement No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PN HOLDINGS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 6035
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(State or Other Jurisdiction (Primary Standard Industrial
of Incorporation or Organization) Classification Code Number)
58-2298215
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(I.R.S. Employer
Identification Number)
315 East Eisenhower
Ann Arbor, Michigan 48108
(800) 765-5562
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Mr. Charles C. Huffman
Chairman and Chief Executive Officer
315 East Eisenhower
Ann Arbor, Michigan 48108
(800) 765-5562
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(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
Edward L. Lublin, Esq. Frank N. Fleischer, Esq.
Michael W. Zarlenga, Esq. Schifino & Fleischer, P.A.
Manatt, Phelps & Phillips, LLP One Tampa City Center, Suite 2700
1501 M Street, N.W., Suite 700 Tampa, FL 33602-5174
Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
--------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to Offering Price Per Unit Aggregate Offering Price Registration
to Be Registered Be Registered (1) (2) (2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.02 par value per share... 1,380,000 shares $9.00 $12,420,000 $3,452.76
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</TABLE>
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(1) Includes 180,000 shares that the underwriter has the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED __________ __, 1999
PROSPECTUS
PN HOLDINGS, INC.
1,200,000 Shares
Common Stock
PN Holdings, Inc. is the holding company for Pelican National Bank and
Washtenaw Mortgage Company. We are registered with the Board of Governors of the
Federal Reserve System as a bank holding company under the Bank Holding Company
Act of 1956. Pelican National Bank is a full service community bank offering a
wide range of deposit and loan product to its customers in Naples, Florida.
Washtenaw Mortgage Company has been ranked among the top 30 wholesalers of
residential mortgage loans nationally since 1997 and is primarily engaged in the
origination, acquisition, and servicing of mortgage loans and the sale of those
loans and servicing to the secondary market.
This is an initial public offering of 1,200,000 shares of our common
stock. In addition, one of our shareholders has granted to the underwriter an
option to purchase up to 180,000 shares to cover over-allotments. No person
together with associates of or groups of persons acting in concert with a person
may purchase in the offering a number of shares that equals 10% or more of our
outstanding common stock upon completion of the offering
There is currently no public market for our common stock, but we have
applied for the common stock to be listed on the Nasdaq SmallCap Market under
the symbol "_____." We expect that the initial public offering price will be
between $7.00 and $9.00 per share.
See "Risk Factors" beginning on page 1 for a discussion of factors that
you should consider before you invest in our common stock.
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TERMS OF THE OFFERING
<TABLE>
<CAPTION>
Per Share Total
------------- -----------
<S> <C> <C>
Public offering price......................... $ $
Underwriting discounts and commissions $ $
and other expenses.........................
Proceeds to the Company....................... $ $
Proceeds to the Selling Stockholder........... $ $
</TABLE>
One of our stockholders has granted the underwriter an option to
purchase up to 180,000 shares of common stock to cover over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus _______________ __, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................................................i
The Company.................................................................................i
Mortgage Banking............................................................................i
Retail Banking.............................................................................ii
The Offering...............................................................................ii
Dividend Policy...........................................................................iii
Selected Consolidated Financial and Other Data......................................................iv
Risk Factors.........................................................................................1
The Company..........................................................................................6
Use of Proceeds......................................................................................7
Dividend Policy......................................................................................7
Market for the Common Stock..........................................................................8
Capitalization.......................................................................................9
Dilution.............................................................................................9
Management's Discussion and Analysis of Financial Condition and Results of Operations...............11
Business............................................................................................29
Regulation..........................................................................................51
Management..........................................................................................57
Description of Capital Stock........................................................................64
Certain Restrictions on Acquisition of the Company..................................................65
Selling Stockholder.................................................................................66
Underwriting........................................................................................66
Legal Matters.......................................................................................67
Experts.............................................................................................67
Changes in and Disagreements with Accountants on Accounting and Financial Matters...................68
Available Information...............................................................................68
Index to Consolidated Financial Statements.........................................................F-1
</TABLE>
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION
IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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Our principal executive office is located at 315 East Eisenhower, Ann
Arbor, Michigan 48108 and our telephone number at that address is (800)
765-5562. Washtenaw Mortgage Company maintains a website on the Internet at
www.washtenawmortgage.com. Information contained in our website is not part of
this prospectus.
Our fiscal year ends on December 31. During our 1997 fiscal year, we
changed from a fiscal year end of January 31 to our current fiscal year. Unless
otherwise stated, the information for the 11 month period from January 31, 1997
to December 31, 1997 is not annualized.
Unless otherwise stated, all information in this prospectus assumes
that (1) the shares of common stock will be sold to the public at $8.00 per
share, and (2) the underwriter will not exercise its over-allotment option.
Pelican National Bank was formed in 1997 at the direction of Washtenaw
Mortgage. As part of the formation of Pelican National Bank, PN Holdings, Inc.
was also formed. Unless otherwise stated, references to the "Company" prior to
the formation of PN Holdings, Inc. relate solely to Washtenaw Mortgage Company.
All references to the Company after the formation of PN Holdings, Inc. relate to
PN Holdings, Inc., consolidated with Washtenaw Mortgage Company and Pelican
National Bank. References to "WMC" relate to Washtenaw Mortgage Company and
references to the "Bank" refer to Pelican National Bank.
All per share information in this prospectus has been adjusted to take
into account the formation of the Company in 1997. In addition, all per share
information has also been adjusted to show the effect of a two-for-one stock
split on October 13, 1998 and an additional two-for-one stock split declared
March 31, 1999, which has not yet been distributed.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus, including some statements in
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," are
forward-looking statements about what may happen in the future. They include
statements regarding our current beliefs, goals, and expectations about matters
such as our expected financial position and operating results, our business
strategy, and our financing plans. These statements can sometimes be identified
by our use of forward-looking words such as "anticipate," "estimate," "expect,"
"intend," "may," "will," and similar expressions. We cannot guarantee that our
forward-looking statements will turn out to be correct or that our beliefs and
goals will not change. Our actual results could be very different from and worse
than our expectations for various reasons, including those discussed in "Risk
Factors."
<PAGE>
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, especially "Risk Factors" and the financial
statements and notes to the financial statements before making any decision to
invest in our common stock.
THE COMPANY
The Company was incorporated in Delaware on March 3, 1997 to own and
control all of the capital stock of the Bank and WMC. We are registered with the
Board of Governors of the Federal Reserve System as a bank holding company under
the Bank Holding Company Act of 1956. Because we are a bank holding company, our
primary federal regulator is the Federal Reserve Board. We have no employees
other than executive officers who do not receive compensation for serving as
employees of the Company. We conduct no business other than managing our
investments in the Bank and WMC.
We currently operate in both the retail banking and mortgage banking
segments through our wholly-owned subsidiaries. Our mortgage banking operations
are primarily conducted by WMC, which was formed in February 1981. Most of our
revenues (net interest income and non-interest income) and earnings before
income taxes are attributable to this mortgage banking segment. Our retail
banking operations are primarily conducted by the Bank, which opened for
business in August 1997. We believe that our retail banking business can provide
us with a strategic advantage as the Bank grows. One of these advantages may be
access to funding sources for our mortgage origination business which would not
otherwise be available. These additional funding sources include low cost retail
deposits and escrowed funds. See "Business."
MORTGAGE BANKING
Our mortgage banking operations, which have historically generated
substantially all of our earnings, originate residential mortgages on a
wholesale basis through a network of approximately 1,340 independent mortgage
brokers in 42 states. These independent mortgage brokers originate loans using
our underwriting systems and standards and close the loans using funds advanced
by us. WMC also purchases mortgage loans on a regular basis from independent
mortgage lenders, commercial banks, savings and loan associations, and other
financial institutions with whom we have established a correspondent
relationship. See "Business."
WMC's mortgage loan production totaled $2.4 billion for the year ended
December 31, 1998, $732.7 million for the eleven months ended December 31, 1997,
and $588.2 million for the year ended January 31, 1997.
WMC is an approved Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and Government National
Mortgage Association ("GNMA") seller/servicer, and an approved Federal Housing
Administration ("FHA") and Veterans Administration ("VA") lender. This means
that WMC can originate mortgage loans under approved programs of FNMA, FHLMC,
FHA, and VA that can be sold or insured depending on the program under which the
loan was originated. Mortgage banking involves the origination and sale of
mortgage loans for the purpose of generating income on the sale of the loans and
mortgage servicing rights, and to a lesser extent, fee income. WMC limits its
mortgage banking lending activities to mortgage loans on oneto four-family
properties, however, a limited number of non-one- to four-family loans may
occasionally be originated and sold. Mortgage banking generates income primarily
from the sale of loans (which may be sold either servicing-retained or
servicing-released) and from servicing fees from loans sold on a
servicing-retained basis. WMC also generates a substantial amount of income from
the sales of mortgage servicing rights from loans that WMC has previously sold
but which WMC had retained servicing. To a lesser extent, mortgage banking also
generates income from origination and loan fees. Generally, the level of loan
and
i
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<PAGE>
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servicing sales activity and, therefore, their contribution to the Company's
profitability depends on maintaining a sufficient volume of loan originations
and purchases. Changes in the level of interest rates and the economy affect the
amount of loans originated and purchased by WMC and, thus, the amount of loan
and servicing sales as well as origination and loan fees earned. All mortgage
banking operations are conducted from the offices of WMC located in Ann Arbor,
Michigan and a new office recently opened in Pleasant Hill, California.
WMC's loan servicing portfolio totaled $1.7 billion at December 31,
1998, $824.6 at December 31, 1997, and $786.1 million at January 31, 1997,
substantially all of which related to conventional loans.
RETAIL BANKING
Through the Bank, we provide a full range of retail banking services to
consumers and small businesses in western Collier County, Florida. The Bank,
which opened in August 1997, operates as a full-service community bank, offering
a variety of financial services to meet the needs of its market area. Those
services include accepting time and demand deposits from the general public and
together with other funds, using the proceeds to originate secured and unsecured
commercial and consumer loans, finance commercial transactions, and provide
construction and mortgage loans, as well as home equity and personal lines of
credit. Other services offered by the Bank include the sale of money orders,
traveler's checks, cashier's checks, and savings bonds, wire transfer and direct
deposit services, and safe deposit boxes.
The Bank's primary service area includes the communities located in
western Collier County, Florida. These communities include North Naples, Central
Naples, East Naples, South Naples, Golden Gate, Marco Island, and the portion of
Bonita Springs which is in Collier County, which make up an area locally known
as the "greater Naples area." Collier County has, and continues to experience a
significant increase in population growth and has a significant economic
diversity. This increase and diversity has contributed to an equally significant
increase in the wholesale, retail, service, and construction sectors of the
economy. See "Business."
At December 31, 1998, the Bank had assets of $4050 million and deposits
of $35.1 million, of which $12.5 million were escrow deposits held by the Bank
for WMC.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by the
Company .................................1,200,000 shares of common stock (1)
Common stock to be
outstanding immediately
after the offering.......................4,232,836 shares of common stock (1)(2)
Estimated Net Proceeds to the
Company .................................$8,550,000 (1) (2) (3)
Use of Proceeds...........................See "Use of Proceeds."
Nasdaq SmallCap
Symbol .................................
Risk Factors..............................See "Risk Factors" for a discussion of
certain material factors that should
be considered in connection with an
investment in the common stock offered
hereby.
</TABLE>
ii
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<PAGE>
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(1) A stockholder of the Company has granted the underwriter an option to
purchase up to 180,000 shares of common stock to cover over-allotments, if
any. See "Underwriting."
(2) Excludes shares issuable upon exercise of options to be issued to employees
of the Company. See "Management - Benefits - Stock Option Plan."
(3) The Company will not receive any proceeds from the exercise of the option
granted by the Selling Stockholder to the underwriter to cover
over-allotments, if any. See "Use of Proceeds." Estimated proceeds to the
Selling Stockholder assuming the full exercise of the over-allotment option
would total $1.3 million.
DIVIDEND POLICY
We do not anticipate paying any cash dividends in the foreseeable
future. Because we do not conduct any operations other than managing our
investment in the Bank and WMC, we are dependent for income on dividends
received from the Bank and WMC, which are intending to reinvest earnings in
their respective businesses. We are also subject to certain regulatory
restrictions imposed by the Federal Reserve Board on the payment of dividends to
our stockholders. Declaration of dividends by the Board of Directors of the Bank
will depend upon a number of factors, including, but not limited to, investment
opportunities available to the Bank, capital requirements, regulatory
limitations, and general economic conditions. Prospective investors should not
view an investment in the common stock as a source of income. See "Risk Factors
- - Company's Dependence on Bank for Funding of Dividend Payments" and "Dividend
Policy."
iii
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<PAGE>
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
We are providing the following information to aid you in your analysis
of the financial aspects of this offering. We derived this financial information
presented below from the audited consolidated financial statements of the
Company. The information is only a summary and you should read it in conjunction
with our historical financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.
SUMMARY FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At December 31, At January, 31
------------------------- -------------------------------------
1998 1997 (1) 1997 (1) 1996 1995
------------ ------------ ------------ ------------ -----------
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $246,409 $120,756 $48,220 $45,070 $26,423
Cash and cash equivalents (2).................. 10,180 4,376 0 0 0
Total loans, net............................... 203,328 100,774 41,253 35,539 10,386
Mortgage-backed securities and investment
securities available for sale.............. 5,592 6,984 0 0 0
Mortgage-backed securities and investment
securities held to maturity................ 261 180 0 0 0
Nonperforming loans(3)......................... 913 1,675 1,279 615 331
Real estate acquired through foreclosure....... 778 499 665 76 451
Total nonperforming assets(3).................. 1,691 2,174 1,944 691 782
Deposits....................................... 35,064 17,578 0 0 0
Short-term borrowings(4)....................... 95,985 60,980 27,680 17,746 1,376
Notes payable.................................. 58,226 20,673 3,964 4,456 11,416
Total liabilities ............................. 234,009 112,243 41,860 39,239 21,553
Stockholders' equity........................... 12,400 8,514 6,360 5,831 4,870
Shares outstanding............................. 3,032,836 3,032,836 2,400,000 2,400,000 2,400,000
Book value per share(5)........................ 4.09 2.81 2.65 2.43 2.03
OTHER DATA:
Number of:
Full-service retail banking facilities..... 1 1 0 0 0
Regional wholesale/correspondent lending
offices................................. 1 1 1 1 1
Full-time equivalent employees............. 187 130 109 109 124
</TABLE>
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(1) The Company changed its fiscal year from January 31 to December 31. The
Company was formed on March 3, 1997.
(2) Cash and cash equivalents include cash, amounts due from banks,
certificates of deposit with other banks, and short term investments with
maturities of less than three months (such as federal funds sold and
securities purchased pursuant to resale agreements.)
(3) Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets consist
of nonperforming loans, restructured loans, real estate acquired through
foreclosure or deed-in-lieu thereof and repossessions (such as
automobiles), net of chargeoffs and writedowns.
(4) Short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase ("reverse repurchase agreements").
(5) On an equivalent basis for prior periods.
iv
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SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period from
For the February 1, For the Year Ended
Year Ended 1997 to January 31,
December 31, December 31, --------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest and dividend income........... $ 12,146 $ 3,420 $ 3,015 $ 3,181 $ 3,042
Interest expense....................... 8,831 2,455 2,048 2,249 957
------------ ------------ ---------- ---------- ----------
Net interest income.................... 3,315 965 968 932 2,085
Provision for loan losses.............. 62 65 0 0 0
------------ ------------ ---------- ---------- ----------
Net interest income after provision for
loan losses.......................... 3,253 900 968 932 2,085
Noninterest income..................... 22,550 7,733 7,644 11,077 11,368
Noninterest expense.................... 19,875 8,822 7,751 10,571 11,439
------------ ------------ ---------- ---------- ----------
Earnings (loss) before provision for
income taxes....................... 5,928 (189) 861 1,438 2,014
Provision for income taxes............. 2,041 (52) 332 476 770
------------ ------------ ---------- ---------- ----------
Net earnings (loss).................... $ 3,887 $ (137) $ 529 $ 962 $ 1,244
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
PER SHARE DATA:
Basic and diluted earnings per share(1) $ 1.28 $ (0.05) $ 0.22 $ 0.40 $ 0.52
Weighted Average number of shares
outstanding........................ 3,039,611 2,974,100 2,400,000 2,400,000 2,400,000
</TABLE>
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(1) On an equivalent basis for prior periods.
v
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KEY OPERATING RATIOS
<TABLE>
<CAPTION>
For the
Period from
For the February 1, For the Year Ended
Year Ended 1997 to January 31,
December 31, December 31, --------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets............... 1.82% (0.26)% 0.90% 1.70% 2.50%
Return on average common equity........ 37.68 (2.86) 9.22 19.80 14.66
Interest rate spread................... 1.56 0.73 0.76 0.12 3.24
Net interest margin.................... 1.68 1.78 1.86 1.85 5.16
Noninterest expense to average
assets............................. 9.32 15.06 13.19 18.66 22.97
Efficiency ratio....................... 66.48 90.65 82.51 67.88 69.59
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at
end of period...................... 0.69 1.80 4.03 1.53 2.96
Nonperforming loans to total gross
loans at end of period.............. 0.45 1.66 3.10 1.73 3.17
Allowance for loan losses to total
gross loans at end of period........ 0.06 0.07 0.00 0.00 0.70
Allowance for loan losses to
nonperforming loans at end 7.45 3.01 0.00 0.00 9.40
of period...........................
MORTGAGE ORIGINATION AND SERVICING
DATA:
Mortgage loans originated or
purchased........................... $2,409,695 $732,556 $588,237 $644,760 $805,682
Mortgage loans sold.................... 2,307,239 673,872 583,831 619,791 847,746
Mortgage loans serviced for others..... 1,464,496 557,011 569,601 854,061 2,307,239
Capitalized value of mortgage
servicing rights.................... 15,510 4,340 3,478 5,533 5,495
</TABLE>
- ----------
* Annualized where appropriate.
vi
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<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information contained in this prospectus, you should
carefully consider the following risk factors before purchasing our common
stock.
INCREASING INTEREST RATES MAY HURT OUR PROFITS
Changes in interest rates can have a variety of effects on our
business. In particular, changes in interest rates may impact the volume of
mortgage loans we originate, the interest spread we earn on mortgage loans held
for sale, the amount of gain or loss on the sale of our mortgage loans and
mortgage servicing rights, and the market value of our mortgage servicing
portfolio.
During periods of declining interest rates, such as occurred during
1998, we typically experience an increase in mortgage loan originations. This is
particularly due to the refinancing of existing mortgages. An increase in, or
stabilization of, interest rates for an extended period of time would adversely
affect the demand for refinancing existing mortgages. A decrease in
refinancings, could adversely effect our loan production volume. This may cause
profits to decrease from loan production. Conversely, the value of mortgage
servicing rights typically increases during periods of rising or stable interest
rates thus offsetting decreases in loan production. Therefore, declining
interest rates may adversely affect the market value of, and earnings from, our
mortgage loan servicing portfolio. Mortgage loan prepayments typically increase
as a result of declining interest rates due to refinancing activity. As a
result, the income stream from our current mortgage loan servicing portfolio may
be smaller. In that case, we may be required to amortize the capitalized cost of
the mortgage loan servicing portfolio. This may result in decreased profits from
the sale of mortgage loan servicing. See "Business - Mortgage Loan Servicing
Activities." In order to be profitable in our mortgage banking activities, we
must balance the changes in the value of mortgage servicing rights with changes
in loan production caused by fluctuations in interest rates.
Our net interest income is the difference between the interest income
we earn on interest-earning assets and the interest expense we pay on our
interest-bearing liabilities used to fund our interest-earning assets.
Interest-earning assets consist primarily of the loans we originate and
purchase. Interest-bearing liabilities consists primarily of borrowings under
our lines of credit and deposits. The profitability of our mortgage loan
origination business is in part a function of the spread between long-term
interest rates (the rates on the loans we hold, whether for investment or for
sale in the secondary market) and short-term interest rates (the rates at which
we fund mortgage loan originations and purchases). This spread is called the
interest rate spread. To the extent that there is a convergence of long-term and
short-term interest rates in the future, our interest rate spread may decrease.
This may cause profits to decrease.
In order for us to be profitable in our retail banking business, we
have to earn more money in interest and fees than we pay to our depositors in
interest. Most of our interest-earning assets, such as our loans, reprice at
specific intervals. In contrast, the interest we owe on our interest-bearing
liabilities generally is for deposits and may be changed more frequently.
When interest rates rise, we must pay more in interest to maintain our
deposit customers while our interest income remains more fixed. This causes
profits to decrease and is known as interest rate risk. For a further
discussion of how changes in interest rates could impact us, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk and Market Risk Analysis." In
our mortgage banking operations, we are also exposed to interest rate risk
from the time we commit to an interest rate on a mortgage loan through the
time we sell or commit to sell the mortgage loan. On a daily basis, we
analyze various economic and market factors. Based upon these analyses, we
project the amount of
1
<PAGE>
mortgage loans we expect to sell for delivery at a future date. The actual
amount of loans sold will be a percentage of the number of mortgage loans on
which we have issued binding commitments (and thereby locked in the interest
rate) but which have not yet actually closed. These loans are called pipeline
loans and the process by which we sell a percentage of our loans is a form of
hedging. If interest rates change in an unanticipated fashion, the actual
percentage of pipeline loans that close may differ from the projected
percentage. The resultant mismatching of commitments to fund mortgage loans
and commitments to sell mortgage loans may cause our profits to decrease. For
instance, a sudden increase in interest rates can cause a higher percentage
of pipeline loans to close than projected. To the degree that this is not
anticipated, we will not have made commitments to sell these additional
pipeline loans. As a result, we may incur significant losses upon sale of the
loans because the market rate of interest will be higher than the mortgage
interest rate committed to by us on such loans causing the value of the loan
to decrease. To the extent that our hedging strategy is not successful, our
profitability may be adversely affected. See "Business - Secondary Market
Activities."
LIMITED HISTORY OF OPERATIONS LIMITS PRIOR PERFORMANCE AS AN INDICATOR OF FUTURE
PERFORMANCE
The Company was incorporated in Delaware on March 3, 1997 to own and
control all of the capital stock of the Bank and WMC. As a result, prospective
investors have only limited access to operating results of the Company on a
consolidated basis, which do not reflect the results of our operations on a
consolidated basis for periods prior to March 3, 1997. The results of operations
prior to March 3, 1997 only reflect the operations of WMC. In addition, we
currently conduct no business other than managing our investment in our
wholly-owned subsidiaries. As such, we are initially dependent on the results of
operations of the Bank and WMC. The Bank did not commence business until August
1997. The Bank incurred losses of $490,000 for the period from August 1997 until
December 31, 1997 and $244,000 for the year ended December 31, 1998. Although
WMC has been profitable for each fiscal period presented herein and we have
experienced substantial growth in mortgage loan originations and total revenues,
our profitability since our formation has been dependent on the profitability of
WMC. There can be no assurance that the Bank will be profitable in the future or
that the rates of growth for the Bank and WMC will be sustainable or indicative
of future results. Any decline in future profitability or growth rates may
adversely affect the market price for our common stock.
LOSING ACCESS TO THE SECONDARY MORTGAGE MARKET MAY LOWER OUR PROFITABILITY
Our ability to continue the mortgage banking segment of our operations
is dependent upon our continued access to an active secondary market in which to
sell our mortgage loans. We currently sell substantially all of the mortgage
loans that we originate through our mortgage banking operations. An active
secondary market is largely dependent upon the continuation of programs
administered by FNMA, FHLMC, and GNMA, which facilitate the issuance of
mortgage-backed securities, as well as our continued eligibility in these
programs. For the fiscal year ended December 31, 1998, approximately 88.50% of
all the loans we originated were sold to FNMA, while 0.75% were sold to FHLMC
and the remaining 10.75% were sold to a variety of other investors. Although we
are not aware of any proposed actions, a discontinuation of or a significant
reduction in the operations of these programs may decrease our profitability.
FNMA, FHLMC, and GNMA account for a substantial portion of the
secondary market in residential mortgage loans. Some of the largest participants
in the secondary market, including FHLMC and FNMA, are government-sponsored
enterprises whose activities are governed by federal law. Any future changes in
those laws could limit the activity of these government sponsored enterprises or
change the terms on which they acquire loans. In turn, this could decrease our
profitability. We expect that our mortgage banking operations will continue to
remain eligible to participate in these programs but any significant impairment
of our eligibility could adversely affect the operations of the WMC. Further,
the criteria for loans that are acceptable to FNMA, FHLMC, and GNMA may be
changed from time to time by the sponsoring entity. The profitability of
participating in specific
2
<PAGE>
programs may vary depending on a number of factors, including our administrative
costs in originating and purchasing qualifying loans.
LOSS FROM LOAN DELINQUENCIES AND DEFAULTS ON LOANS MAY REDUCE OUR PROFITABILITY
From the time that we fund a mortgage loan we originate until the time
we sell the loan, generally 10 to 40 days, we are at risk for any loan defaults.
Once we sell the mortgage loan, the risk of loss from loan defaults and
foreclosure generally passes to the purchaser or insurer of the loan. In
connection with the sale of a loan, we typically make certain representations
and warranties to the purchasers and insurers of the loan. These representations
and warranties generally provide that the origination and servicing of the loan
prior to sale was in substantial conformance with the laws of the state of
origination and applicable investor guidelines and program eligibility
standards. We rely upon our underwriting department to ascertain compliance with
individual investor standards prior to sale of the loans in the secondary
market. The underwriting department relies on its quality control department to
test sold loans on a sample basis for compliance. See "Business Underwriting"
and "- Quality Control."
We may become liable for the unpaid principal balance and interest on a
defaulted loan if we breached a representation or warranty to the purchaser. In
addition, the purchaser may request that we repurchase a loan from the purchaser
if we breach a representation or warranty even if the loan is not in default.
During 1998, we sold approximately $2.2 billion in single family mortgage loans
in the secondary market. No loans sold during 1998 were required to be
repurchased during the year end December 31, 1998. We repurchased single family
mortgage loans during 1998 of approximately $283,000 related to loans sold
during the eleven months ended December 31, 1997, and approximately $321,000
related to loans sold prior to January 31, 1997. Of the mortgage loans
repurchased during the year ended December 31,1998, approximately $80,000 were
non-performing at the time of repurchase. At December 31, 1998, total
non-performing loans were $913,000 and total other real estate owned was
$778,000. For more information regarding nonperforming assets, see "Business -
Asset Quality."
We are also affected by loan delinquencies and defaults on mortgage
loans that we service. At December 31, 1998, approximately 1.14% of the loans we
were servicing were delinquent (including foreclosures). Under some types of
servicing contracts to which we are a party, we must advance all or part of the
scheduled payments to the owner of the loan, even when loan payments are
delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require us to advance mortgage and hazard insurance and tax
payments on schedule even if sufficient escrow funds are not available. We are
typically reimbursed by the mortgage owner or from liquidation proceeds for
payments advanced. However, the timing of these reimbursement is typically
uncertain. In the interim, we must absorb the cost of funds advanced. Further,
we must bear the costs of attempting to collect on delinquent and defaulted
loans. We also forego servicing income from the time a loan becomes delinquent
until foreclosure, at which time these amounts, if any, may be recovered.
CHANGES IN ECONOMY AND BUSINESS CONDITIONS IN THE MIDWEST AND SOUTHEAST MAY
ADVERSELY EFFECT THE COMPANY
Historically, our single-family mortgage loans purchased and serviced
have been concentrated in certain geographic regions, particularly Michigan,
Ohio, Indiana, Florida, Georgia, and Illinois, based upon the location of the
property collateralizing the mortgage loan. Because borrowers of single-family
mortgage loans usually reside on the collateral property, changes in economic
and business conditions in the Midwest or the Southeast can affect the borrower
and thus have an effect on the demand for new mortgage loans and the performance
of existing loans. As of December 31, 1998, approximately 64.3% of our mortgage
loan production was collateralized by property located in Michigan, Ohio,
Florida, Georgia, and Illinois, of which 23.3% were in Michigan and 21.4% were
in Ohio. In addition, as of December 31, 1998, approximately 67.3% of our
mortgage
3
<PAGE>
servicing was collateralized by property located in Michigan, Ohio, Indiana,
Florida, and Georgia, of which 23.3% were in Michigan and 21.4% were in Ohio. As
a result, unfavorable or worsened economic conditions may limit our ability to
purchase or originate new loans in the Midwest or the Southeast and may cause
the cost of maintaining our mortgage servicing portfolio to increase. This may
decrease our profitability. Although we continue to diversify our loan and
mortgage serving portfolios geographically to minimize this risk, there can be
no guaranty that we will be successful in this effort. See "Business - Lending
Activities."
THE SEASONAL NATURE OF MORTGAGE BANKING BUSINESS MAY CAUSE FLUCTUATIONS IN OUR
PROFITS
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes.
Sales and resales of homes typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February. In addition,
delinquency rates typically rise in the winter months, which results in higher
servicing costs. These seasonal trends materially affect our quarter-to-quarter
operating results, thereby causing short-term fluctuations in our profits.
THE RETAIL AND MORTGAGE BANKING BUSINESS IS VERY COMPETITIVE
We compete in the retail banking business primarily with commercial
banks and thrift institutions located in the greater Naples area. Competitors
for deposits include thrift institutions, commercial banks, credit unions, full
service and discount broker dealers, and other investment alternatives, such as
mutual funds, money market funds, and savings bonds or other government
securities. We compete with our peers primarily on price at which we offer our
products and on customer service. However, many of our retail banking
competitors have significantly greater resources than the Bank. See
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations - Financial Condition."
We compete in the mortgage banking business for mortgage originations
with thrift institutions, commercial banks, insurance companies, and mortgage
companies, many of which operate nationwide mortgage origination networks
similar to that of WMC. We primarily compete for mortgage originations by
providing quality service, maintaining relationships with builders, mortgage
brokers, real estate brokers and investors, and by offering competitive products
and rates and fees. Many of our mortgage banking competitors are, or are
affiliated with, organizations with substantially larger asset and capital bases
(including regional and multi-national banks and bank holding companies). We
believe we have positioned ourselves with a product mix that attracts business
from mortgage companies, credit unions, and thrifts which may not have
sufficient loan origination volume to obtain preferential pricing directly in
the secondary market.
We cannot make any guaranty that we will be able to compete
successfully against current or future competitors. The competitive pressures
that we face may negatively affect our business, financial condition, and
profits.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND VOTING CONTROL
OF MANAGEMENT MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN THE CERTIFICATE OF INCORPORATION OF THE COMPANY.
Provisions in our Certificate of Incorporation may discourage potential proxy
contests and other potential takeover attempts, particularly those which have
not been negotiated with our board of directors. As a result, these provisions
generally may serve to perpetuate existing management. Provisions of the
Certificate of Incorporation, among other things, (i) authorize the issuance of
additional shares of common stock and serial preferred stock; (ii) classify the
Board of Directors into three classes, each of which will serve for staggered
three year periods; (iii) provide that a director of the Company may be removed
by the stockholders only for cause; (iv) provide that only the Board of
Directors or Chairman of the Board of the Company may call special meetings of
the stockholders; (v) provide that the
4
<PAGE>
stockholders must comply with certain advance notice procedures in order to
nominate candidates for director to the Board of Directors or to place
stockholder proposals on the agenda for communication at stockholders meetings;
and (vi) provide that the stockholders may amend or repeal any of the foregoing
provisions of the Articles of Incorporation or Bylaws only by a vote of 80% of
the stock entitled to vote generally in the election of directors. In addition,
we are subject to various anti-takeover provisions under the Delaware General
Corporation Law. For a more detailed discussion of these provisions, see
"Restrictions on Acquisitions of the Company and the Bank."
VOTING CONTROL OF CHARLES C. HUFFMAN. Immediately following the
offering, Mr. Huffman will own 42.80% of the outstanding shares of common stock
(assuming the sale of 1,200,000 shares), or approximately 38.55% if the
underwriter exercises the over-allotment option in full. Accordingly, following
completion of the offering, Mr. Huffman will have substantial influence in the
election of the Board of Directors and thus be able to influence the Company's
affairs, including decisions regarding acquisitions and other business
opportunities, the declaration of dividends, and the issuance of additional
shares of common stock and other securities. In addition, Mr. Huffman's level of
ownership would enable him to defeat any stockholder matter that required a vote
of two-thirds of the outstanding shares of common stock. For a detailed
discussion of these provisions, see "Restrictions on Acquisition of the Company
- - Restrictions in the Company's Certificate of Incorporation and Bylaws."
NEW STOCKHOLDERS WILL EXPERIENCE AN IMMEDIATE DILUTION IN BOOK VALUE PER SHARE
Purchasers of common stock in the offering will experience immediate
and substantial dilution, and present stockholders will receive a substantial
increase in the book value of their shares of common stock. See "Dilution." The
substantial dilution may adversely affect the market price of the common stock.
WE HAVE NEVER SOLD STOCK TO THE PUBLIC AND CANNOT GUARANTY THAT A PUBLIC TRADING
MARKET WILL DEVELOP
Prior to the offering, there has been no public market for our common
stock. We cannot guaranty that an active trading market will develop or that
purchasers of the common stock will be able to resell their common stock at
prices equal to or greater than the initial public offering price. The initial
public offering price was determined through negotiations between the Company
and the underwriter and may not reflect the market price of the common stock
after the offering. The development of a public market having the desirable
characteristics of depth, liquidity, and orderliness depends upon the presence
in the marketplace of a sufficient number of willing buyers and sellers at any
given time. We do not have any control whether there will be sufficient numbers
of buyers and seller. Accordingly, we cannot guarantee that an established and
liquid market for the common stock will develop or be maintained. The market
price of the common stock could be subject to significant fluctuations in
response to our operating results and other factors. In addition, the stock
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of individual companies. These fluctuations, and general economic and market
conditions, may adversely affect the market price of the common stock. See
"Market for the Common Stock" and "Underwriting."
ADDITIONAL SALES OF STOCK BY MR. HUFFMAN OR ADDITIONAL ISSUANCES OF STOCK
PURSUANT TO OPTIONS MAY ADVERSELY EFFECT THE STOCK PRICE
We will have 4,232,836 shares of common stock outstanding immediately
following consummation of the offering. Mr. Huffman will beneficially own
1,811,650 shares (adjusted to give effect to the transfer by Mr. Huffman of
588,350 shares of common stock to two trusts for the benefit of his adult
children), representing approximately 42.80% of the outstanding shares of common
stock if the over-allotment option granted to the underwriter is not exercised.
If the over-allotment option granted by Mr. Huffman to the underwriter is
exercised,
5
<PAGE>
Mr. Huffman will beneficially own 1,631,650 shares, representing approximately
38.55% of the outstanding shares of common stock. In addition, we have reserved
an additional 400,000 shares of common stock for issuance pursuant to our stock
option plan . Of the outstanding shares upon consummation of the offering, the
1,200,000 shares of common stock offered hereby will be freely tradeable by
non-affiliates of the Company without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"). In addition,
1,207,850 shares of common stock held by non-affiliates that were issued in 1997
will also be freely tradeable. The remaining 1,824,986 shares of capital stock
held by Mr. Huffman and other affiliates of the Company are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. Restricted securities held by Mr. Huffman and affiliates of the Company
will be eligible for sale under Rule 144 ninety days after the effective date of
the Registration Statement. Rule 144 imposes certain restriction as to volume
and timing of sales of restricted securities. The Company and Mr. Huffman have
agreed not to sell any shares of stock or any rights to acquire stock for a
period of at least 180 days following the date of this Prospectus without the
consent of the underwriter. See "Underwriting." Following this offering, sales
of substantial amounts of the common stock in the public market, whether under
Rule 144 or otherwise, or the potential for such sales, could adversely affect
the prevailing market prices for the our common stock and impair our ability to
raise capital through the sale of additional equity securities.
IF OUR COMPUTER SYSTEMS DO NOT WORK PROPERLY WITH YEAR 2000 DATA, OUR BUSINESS
OPERATIONS WILL BE SIGNIFICANTLY DISRUPTED
We could experience a significant disruption to our business operations
and, as a result, a significant adverse impact on our financial condition and
results of operations if our computer systems and the computer systems operated
by third party vendors on which we rely are not able to properly handle problems
created by the year 2000. We are actively working to make sure as best we can
that this does not happen or, at least, that the effects are lessened as much as
possible; but we cannot give any assurances that our efforts will be successful.
THE COMPANY
The Company was incorporated in Delaware on March 3, 1997 to own and
control all of the capital stock of the Bank and WMC. The Company is registered
with the Federal Reserve Board as a bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended. As a registered bank holding company,
the Company's primary federal regulator is the Federal Reserve Board. The
Company has no employees other than executive officers who do not receive
compensation from the Company for serving in such capacity. The Company conducts
no business other than managing its investments in the Bank and WMC.
The Company's results of operations are dependent on the operations of
the Bank and WMC. The Bank's results of operations are primarily dependent on
its net interest income, which is the difference between interest income earned
on its loan and investment securities portfolios and other interest earning
assets, and its cost of funds consisting of interest expense paid on its
deposits and other interest bearing liabilities. Net interest income is also
affected by the relative amounts (volume) of interest earning assets and
liabilities. The Bank's net income is also impacted by its provision for loan
losses, as well as, other operating income and other operating expense. Other
operating income consists principally of loan origination fees derived from
loans that are sold by the Bank, while other operating expense is comprised of
salaries and wages, occupancy expenses, and other general and administrative
expenses. Earnings of the Bank are also impacted by general economic,
competitive, and regulatory conditions, particularly changes in market interest
rates, government policy, and actions of regulatory agencies. The profitability
of WMC depends primarily on managing the volume of loan originations and sales
and the expenses associated with loan originations so that gains on the sale of
loans together with fee income exceeds the costs of this activity. Changes in
the level of interest rates and the condition of the local and national
economies affect the amount of loans originated by WMC and demanded by investors
to whom the loans are sold.
6
<PAGE>
Generally, WMC's loan origination and sale activity and, therefore, its results
of operations, may be adversely affected by an increasing interest rate
environment to the extent such environment results in decreased loan demand by
borrowers and/or investors. Accordingly, the volume of loan originations and the
profitability of this activity can vary significantly from period to period.
USE OF PROCEEDS
The net proceeds to the Company from the offering (after deduction of
the underwriting discounts and commissions and estimated offering expenses) are
estimated to be approximately $8.55 million. The Company will receive no
proceeds from the offering of common stock by the Selling Stockholder if the
underwriter exercises the over-allotment option granted by the Selling
Stockholder. The Company intends to use approximately $3.2 million of the net
proceeds to reduce the indebtedness of the Company and WMC and $1.0 million will
be contributed to the capital of WMC to be used for general corporate purposes.
Substantially all of the remaining net proceeds received by the Company will be
contributed to the capital of the Bank to be used for general corporate purposes
and to provide additional capital to the Bank to support growth in its
businesses, including possible expansions in its banking operations through the
acquisition or establishment of new bank branches. Neither the Bank nor the
Company has any current arrangements, understandings, or agreements regarding
any such opportunities or transactions.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends in the
foreseeable future. Because the Company does not conduct any operations other
the managing its investment in the Bank and WMC, the Company is dependent for
income on dividends received from the Bank and WMC. The Company is also subject
to certain regulatory restrictions imposed by the Federal Reserve Board on the
payment of dividends to its stockholders. Declaration of dividends by the Board
of Directors of the Bank will depend upon a number of factors, including, but
not limited to, investment opportunities available to the Bank, capital
requirements, regulatory limitations, and general economic conditions.
Generally, the Bank may not declare or pay dividends on its capital stock if
such payment would cause its regulatory capital to be reduced below the minimum
requirements imposed by regulations of the Office of the Comptroller of the
Currency ("OCC"). In addition, declaration of dividends by the Board of
Directors of WMC will depend upon a number of factors, including, but not
limited to, investment opportunities available to WMC, capital needs, and
general economic conditions. Furthermore, a portion of the initial
capitalization of the Bank was borrowed by the Company and WMC from an
unaffiliated third party. Provisions of the loan agreement require WMC to meet
certain financial covenants and limit the amount of dividends that WMC may pay
to the Company. Although the Company expects to repay this loan out of the
proceeds of this offering, for the foreseeable future, WMC plans to reinvest its
earnings in its operations, thus limiting the amount of dividends WMC
anticipates paying in the future. Prospective investors should not view an
investment in the common stock as a source of income.
MARKET FOR THE COMMON STOCK
The Company's outstanding shares of common stock are currently held by
approximately 65 shareholders of record. Of these shareholders, Mr. Huffman owns
approximately 42.80% of the outstanding shares. Prior to this offering, the
Company has never issued shares to the public. Consequently, there is no market
for the Company's capital stock. The Company has applied to have the common
stock listed on the Nasdaq SmallCap System under the symbol "____." An approval
of the listing application will be subject to various conditions, including sale
of the stock and the presence of at least two registered and active market
makers. The Company will seek to encourage and assist at least two market makers
to make a market in its common stock. Making a market involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities to those quoted prices, subject to various securities laws
and other regulatory requirements.
7
<PAGE>
William R. Hough & Co. has agreed to make a market in the common stock. There
can be no assurance that the common stock will be able to meet the applicable
listing criteria in order to maintain its quotation on the Nasdaq SmallCap
System or that an active and liquid trading market will develop or, if
developed, will be maintained. A public market having the desirable
characteristics of depth, liquidity, and orderliness, however, depends upon the
presence in the marketplace of both willing buyers and sellers of common stock
at any given time, which is not within the control of the Company. No assurance
can be given that an investor will be able to resell the common stock at or
above the purchase price of the common stock.
CAPITALIZATION
The following table sets forth (a) the historical capitalization of the
Company at December 31, 1998 and (b) the adjusted capitalization of the Company
at December 31, 1998 after giving effect to the offering. The net proceeds to
the Company from the offering (after deduction of the underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$8.55 million. The Company will receive no proceeds from the offering of common
stock by the Selling Stockholder should the underwriter exercise the
over-allotment option.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------
Historical as Adjusted
------------------ -------------------
(In thousands, except per share data)
<S> <C> <C>
Deposits ........................................ $35,064 $35,064
Long-term borrowings ............................ 2,000 0
Subordinated debt ............................... 1,200 0
------- --------
Total deposits, long-term borrowings, and
subordinated debt ............................ $38,264 $35,064
------- --------
------- --------
Shareholders' Equity:
Preferred stock (1) .......................... $ 0 $ 0
Common stock (2) ............................. 30 85
Additional paid-in capital ................... 8,292 16,787
Retained earnings ............................ 4,076 4,076
Net unrealized appreciation on
securities available for sale, net ......... 2 2
------- --------
Total shareholders' equity .............. $12,400 $20,950
------- --------
------- --------
Ratio of equity to assets ....................... 5.03% 8.50%
------- --------
------- --------
Book value per common share ..................... $ 4.09 $ 4.95
------- --------
------- --------
</TABLE>
- --------------
(1) The Company has authorized 200,000 shares of preferred stock, none of which
are issued and outstanding.
(2) The Company has authorized 5,000,000 shares of common stock, of which
3,032,836 were issued and outstanding at December 31, 1998. Assuming the
sale of 1,200,000 shares of common stock in the offering, the Company will
have 4,232,836 shares issued and outstanding.
8
<PAGE>
DILUTION
The net tangible book value of the Company's common stock as of
December 31, 1998 was approximately $12.4 million or $4.09 per share. Net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of the common stock
outstanding.
Dilution per share to new investors purchasing common stock in the
offering represents the difference between the amount per share paid and the net
tangible book value per share of common stock immediately after the offering.
Shares used in the computation of per share amounts below include 3,032,836
shares outstanding immediately prior to the offering and 1,200,000 shares to be
issued by the Company in the offering. After giving effect to the sale of
1,200,000 shares of common stock offered by the Company hereby (after deducting
the underwriting discount and estimated offering expenses), the pro forma net
tangible book value of the Company as of December 31, 1998 would have been $21.0
million or $4.95 per share, representing an immediate increase in net tangible
book value of $0.86 per share to existing stockholders and an immediate dilution
of $3.05 per share to new investors purchasing shares at the estimated public
offering price of $8 per share. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Estimated public offering price per share(1)......................... $8.00
Net tangible book value per share before the offering(2)............. $4.09
Increase in net tangible book value per share attributable
to new investors................................................... 0.86
------
Pro forma net tangible book value per share after the
offering........................................................... 4.95
-----
Dilution per share to new investors......................... $3.05
-----
-----
</TABLE>
- ----------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the offering payable by the Company.
(2) Includes mortgage servicing rights and excludes core deposit intangibles.
See Notes 1 and 5 of Notes to Consolidated Financial Statements.
The following table sets forth on a pro forma basis at December 31,
1998 the number of shares of common stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders in 1997 and new investors purchasing shares of common
stock in the offering.
<TABLE>
<CAPTION>
Shares Owned after the Total Weighted
Public Offering Consideration Average
----------------------- -------------------- Price Per
Number Percent Amount Percent Share
--------- --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 3,032,836 71.65% $11,373,120 54.23% $3.75
--------- ------ ----------- ------ -----
New investors............... 1,200,000 28.35 9,600,000 45.77 8.00
--------- ------ ----------- ------ -----
Total.............. 4,232,836 100.00% $20,973,120 100.00% $4.95
--------- ------ ----------- ------ -----
--------- ------ ----------- ------ -----
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company serves as the holding company of the Bank and WMC. The
Company's operations involve both mortgage banking and retail banking. The
mortgage banking segment involves the origination and purchase of single-family
residential mortgage loans in approximately 42 states, the sale of such 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 such funds to originate
consumer, commercial, commercial real estate, residential construction, and
single-family residential mortgage loans, from its sole office in Naples,
Florida.
The tables below set forth certain information for the Company's
business segments for the periods shown. Prior to August 1997, the Company did
not have retail banking operations.
<TABLE>
<CAPTION>
Mortgage
Banking Retail Banking
Segment Segment Consolidated
--------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
REVENUES
Year ended:
December 31, 1998 ................................ $32,580 $2,543 $34,696
Period Ended:
December 31, 1997 ................................ 10,898 376 11,154
EARNINGS (LOSS) BEFORE INCOME TAXES
Year ended:
December 31, 1998 ................................ 6,499 (370) 5,928
Period ended:
December 31, 1997 ................................ 635 (743) (189)
</TABLE>
The Company's earnings are 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 the Company'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 yield curve (that is, the
difference between prevailing short-term and long-term interest rates), as well
as changes in the volume of mortgage originations nationwide and prepayments of
outstanding mortgages.
MANAGEMENT STRATEGY
The Company's strategy is to primarily take advantage of the existing
natural synergies that exist between a mortgage company and a community based
bank. The senior management of both WMC and the Bank is strongly oriented toward
mortgage based lending. The Bank's location, in Naples, Florida, is a growing
market for mortgage loan products. The Bank's affiliation with a large mortgage
company, such as WMC, enables the Bank to offer a greater array of mortgage loan
products than similarly situated community banks. WMC also provides a stable
market for the mortgage loans originated by the Bank at predictable prices. This
enables the
10
<PAGE>
Bank to determine the price at which a loan can be sold prior to the closing of
the loan. Use of WMC's computer assisted underwriting also provides the Bank
more uniform underwriting of its mortgage loan products. The Bank is able to
provide same day approval for its customers. WMC is also able to provide
mortgage investment opportunities to the Bank at yields not locally available
and in geographically diverse regions of the country, thus reducing the risk of
a concentrated loan portfolio. Lastly, WMC enables the Bank to achieve economies
of scale unavailable to many competing community banks.
At the same time, WMC benefits from the Bank as a depository for escrow
deposits in connection with its loan production and servicing activities. To the
extent the Bank desires, the Bank may invest excess funds in mortgage loan
products that WMC has available. In addition, certain aspects of the mortgage
banking operations of WMC are cash intensive, such as investments in mortgage
servicing rights and loan originations other than mortgage lending. The Company
believes that these activities should be housed in the Bank. The Company is
hopeful that as the synergies between the Bank and WMC are realized more fully,
the Bank can act as a warehouse for purchased commercial real estate loans.
The Company's current strategy focuses on maintaining profitability
while limiting its credit and interest rate risk exposure. To accomplish these
objectives, the Company has sought to:
o Control credit risk by emphasizing the origination and purchase of
single-family, owner-occupied residential mortgage loans.
o Control interest rate risk by selling a substantial portion of its
loan production and loan servicing into the secondary market.
o Control credit and interest rate risk by purchasing
mortgage-related assets to hold in its portfolio.
o Control operating expenses.
o Offer superior service, competitive interest rates, and a variety
of loan and deposit products.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE INFORMATION ABOUT MARKET RISK. The principal objective of
the Company's interest rate risk management is to evaluate the interest rate
risk included in balance sheet accounts, determine the level of risk appropriate
given the Company's business strategy, operating environment, capital and
liquidity requirements and performance objectives, and manage the risk
consistent with the Company's Interest Rate Risk Management Policy. Through such
management, the Company seeks to reduce the vulnerability of its operations to
changes in interest rates. The Board of Directors of the Company is responsible
for reviewing asset/liability policies and interest rate risk position. The
Board of Directors reviews the interest rate risk position on a quarterly basis.
In connection with such review, the Board of Directors evaluates the Company's
business activities and strategies, the effect of those strategies on the
Company's net interest margin, the market value of the loan, servicing, and
securities portfolios, and the effect the changes in interest rates will have on
the Company's loan, servicing, and securities portfolios and exposure limits.
The continuous movement of interest rates is certain, however, the
extent and timing of such movements is not always predictable. Any movements in
interest rates has an affect of the Company's profitability. The value of loans,
which the Company 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
11
<PAGE>
decreasing in value as interest rates fall. The Company also faces the risk that
rising interest rates could cause the cost of interest-bearing liabilities, such
as loans and borrowings, to rise faster than the yield on interest-earning
assets, such as loans and investments. The Company's interest rate spread and
interest rate margin may be negatively impacted in a declining interest rate
environment even though the Company 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. The
Company'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 effects the prepayment speed of loans underlying the Company's mortgage
servicing rights.
Because it is unlikely that any particular movement in interest rates
could effect only one aspect of the Company's business, many of the Company's
products are naturally self-hedging to each other. For instance, the decrease in
the value of the Company'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.
The Company 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, the Company 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 the
Company 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. The
Company 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.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The primary market risk
facing the Company is interest rate risk. From an enterprise perspective, the
Company manages this risk by striving to balance its loan origination and loan
servicing businesses, which are counter cyclical in nature. In addition, the
Company utilizes various hedging techniques to manage the interest rate risk
related specifically to its committed pipeline loans, mortgage loan inventory,
and mortgage servicing rights. The overall objective of the Company's interest
rate risk management policies is to offset changes in the values of these items
resulting from changes in interest rates. The Company does not speculate on the
direction of interest rates in its management of interest rate risk.
The matching of maturity or repricing of interest-earing assets and
interest-bearing liabilities may be analyzed by examining the extent to which
such assets and liabilities are interest rate sensitive and by monitoring the
Company's interest rate sensitivity gap. An interest-earning asset or
interest-bearing liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The difference
between rate-sensitive assets and rate-sensitive liabilities represents the
Company's interest sensitivity gap.
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding on December 31, 1998, which are
expected to reprice or mature in each of the future periods shown. The amount of
assets or liabilities shown which reprice or mature during a particular period
may differ from contractual terms due to repayment assumptions.
12
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------
Over 1
3 months year
Less than Through Through Over
3 Months 12 Months 5 Years 5 Years Total
--------- ---------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments(1) ............... $ 7,359 $ 2,142 $ 0 $ 0 $ 9,501
Investment Securities(2) ................ 0 0 4,499 1,354 5,853
Loans .................................... 178,791 1,213 4,143 19,308 203,455
-------- -------- -------- ------- --------
Total interest-earning assets ......... 186,150 3,355 8,642 20,662 218,809
Interest-bearing liabilities:
Savings deposits ......................... 22,409 0 0 0 22,409
Certificates of deposit .................. 825 11,669 145 16 12,655
Borrowings(3) ........................... 191,270 0 0 1,200 192,470
-------- -------- -------- ------- --------
Total interest bearing liabilities ..... 214,504 11,669 145 1,216 $227,534
--------
--------
Interest rate sensitivity gap .............. $(28,354) $ (8,314) $ 8,497 $19,446
--------- --------- -------- -------
--------- --------- -------- -------
Cumulative gap ............................. (28,354) (36,668) (28,171) (8,725)
Cumulative gap to interest-earning assets .. (15)% (1,093)% (326)% (42)%
Ratio of interest-earning assets to interest
bearing liabilities ...................... 87% 29% 5,960% 1,699%
</TABLE>
- ----------
(1) Includes federal funds sold.
(2) Investment securities are stated at amortized cost.
(3) Includes federal funds purchased and other short-term borrowings.
As shown above, at December 31, 1998, the Company had a negative gap
position based on contractual maturities and repayment assumptions for the next
twelve months. This means that the Company's interest-earning assets reprice
more slowly than its interest-bearing liabilities. In a declining interest rate
environment, the cost of the Company's interest-bearing liabilities may be
expected to decrease faster than amounts received on interest-earning assets,
thus increasing the Company's interest rate spread. In an increasing interest
rate environment, the negative gap means that the amounts received on
interest-earning assets may be expected to increase more slowly than amount paid
on the Company's interest-bearing liabilities, thus decreasing the Company's
interest rate spread.
Certain shortcomings are inherent in the method of analysis presented
in the table above. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates.
The above analysis incorporates the following assumptions: (1) federal
funds are considered to reprice within 90 days; (2) savings deposits are
considered to have a repricing period of less than 90 days; (3) certificates of
deposit reprice according to their stated maturity; (4) short-term borrowings
are considered to mature within 90 days except where contractually different;
and (5) loans are shown in the period in which they contractually reprice or
mature. The interest rate sensitivity of the Company's assets and liabilities
could vary substantially if different assumptions were used or if actual
experience differs from the assumptions used.
13
<PAGE>
AVERAGE BALANCE SHEET. The following tables set forth for the periods
indicated information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.
<TABLE>
<CAPTION>
Year Ended December 31, Period from February 1, 1997 to Year Ended January 31,
1998 December 31, 1997 1997
----------------------------- ------------------------------- --------------------------
Average Average Average
Volume Interest Yield/cost Volume Interest Yield/cost* Volume Interest Yield/cost
-------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold..................... $ 9,685 $ 390 4.03% $ 2,057 $ 113 6.01% $ 0 $ 0 0.00%
Investment securities.................. 6,016 479 7.95 1,025 78 8.23 0 0 0.00
Loans receivable, net.................. 181,874 11,277 6.20 51,094 3,230 6.90 52,151 3,015 5.78
-------- ------- ------- ------ ------- ------
Total interest-earning assets......... 197,575 12,146 6.15 54,176 3,421 6.89 52,151 3,015 5.78
------- ----- ------ ---- ------ ----
Noninterest-earning assets:
Cash and due from banks................ 5,943 486 0
Allowance for loan losses.............. (106) (45) (54)
Other assets........................... 9,784 3,945 6,637
-------- ------- -------
Total assets.......................... $213,196 $58,562 $58,734
-------- ------- -------
-------- ------- -------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts........................... $ 6,016 138 2.29 $ 581 $ 29 4.99 $ 0 0 0.00
Money market accounts.................. 4,060 178 4.38 264 11 4.17 0 0 0.00
Savings deposits....................... 2,406 60 2.47 4 1 2.16 0 0 0.00
Time deposits.......................... 9,548 558 5.85 2,196 135 6.69 0 0 0.00
Short-term borrowings.................. 170,413 7,897 4.63 40,909 2,280 6.08 40,806 2,048 5.02
-------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 192,443 8,831 4.59 43,954 2,456 6.09 40,806 2,048 5.02
------- ----- ------ ---- ------ ----
Noninterest-bearing liabilities:
Demand deposits........................ 4,223 932 0
Other liabilities...................... 6,085 8,429 12,190
Stockholders' equity................... 10,445 5,247 5,738
-------- ------- -------
Total liabilities and stockholders'
equity............................... $213,196 $58,562 $58,734
-------- ------- -------
-------- ------- -------
Interest rate spread.............. 1.56% 0.80% 0.62%
---- ---- ----
---- ---- ----
Net interest income and net interest
margin.......................... $ 3,315 1.68% $ 965 1.94% $ 967 1.81%
------- ----- ------ ---- ------ ----
------- ----- ------ ---- ------ ----
</TABLE>
- ----------
* Annualized.
14
<PAGE>
RATE/VOLUME ANALYSIS. Changes in net interest income are attributable
to three factors: (1) a change in the volume of an interest-earning asset or
interest-bearing liability, (2) a change in interest rates, or (3) a change
attributable to a combination of changes in volume and rate. The following table
sets forth certain information regarding changes in interest income and interest
expense of the Company for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (a) changes in volume (changes in volume multiplied
by the old interest rate); and (b) changes in rates (changes in interest rates
multiplied by the old average volume).
<TABLE>
<CAPTION>
Year Ended December 31, Eleven Months Ended
1998 vs. Eleven Months Ended December 31, 1997 v. Year Ended Year Ended January 31,
December 31, 1997 January 31, 1997 1997 Vs. 1996
----------------------------- ------------------------------- ------------------------------
Total Changes Due to Total Changes Due to Total Changes Due To
Change Volume(1) Rates(1) Change Volume(1) Rates(1) Change Volume(1) Rates(1)
------ --------- -------- ------ --------- -------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold ............ $ 277 $ 254 $ 23 $113 $113 $ 0 $ 0 $ 0 $ 0
Investment securities ......... 401 398 3 78 78 0 0 0 0
Loans receivable, net ......... 8,047 7,742 305 215 21 194 166 49 117
------ ------ ---- ---- ---- ---- ---- ---- ----
Total interest income 8,725 8,394 331 406 212 194 166 49 117
------ ------ ---- ---- ---- ---- ---- ---- ----
INTEREST-BEARING LIABILITIES:
NOW accounts .................. 109 103 6 29 0 0 0 0 0
Money market accounts ......... 167 166 1 11 11 0 0 0 0
Savings deposits .............. 59 59 0 1 1 0 0 0 0
Time deposits ................. 423 408 15 135 135 0 0 0 0
Short term borrowings ......... 5,617 5,224 393 232 2 230 201 80 121
------ ------ ---- ---- ---- ---- ---- ---- ----
Total interest expense 6,375 5,960 415 408 178 230 201 80 121
------ ------ ---- ---- ---- ---- ---- ---- ----
NET CHANGE IN INTEREST
INCOME ...................... $2,350 $2,434 $(84) $ (2) $ 34 $ (36) $ (35) $(31) $ (4)
------ ------ ---- ---- ---- ---- ---- ---- ----
------ ------ ---- ---- ---- ---- ---- ---- ----
</TABLE>
- ----------
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
15
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
ELEVEN MONTH PERIOD ENDED DECEMBER 31, 1997
GENERAL. The operating results and financial condition of the Company
as of and for the year ended December 31, 1998 primarily reflect the operating
results and financial condition of WMC. The Bank was formed in August 1997,
therefore, the year ended December 31, 1998 constitutes the Bank's first full
year of operations. Net income for the year ended December 31, 1998 totaled $3.9
million compared to a net loss of $138,000 ($150,000 annualized) for the eleven
months ended December 31, 1997, or an increase on an annualized basis of
approximately $4.0 million or 371%. This increase was primarily due to a smaller
loss from operations of the Bank and a substantial increase in loan production
for WMC.
LOAN PRODUCTION. The volume of loans produced for the year ended
December 31, 1998 totaled $2.4 billion, as compared to $732.7 million ($799.3
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $1.7 billion or approximately
230%. The increase in loan production was primarily due to generally lower
interest rates that prevailed during 1998 compared to 1997, as well as to the
continuing expansion of the markets the Company serves and the types of loan
products the Company offers. Refinancings totaled $1.9 billion, or 79.17% of
total loan production, for the year ended December 31, 1998, as compared to
$476.5 million, or 65.03% of total loan production for the eleven months ended
December 31, 1997 ($519.8 million on an annualized basis). Fixed-rate mortgage
loan production totaled $2.2 billion, or 91.67% of total loan production, for
the year ended December 31, 1998, as compared to $545.8 million, or 74.50% of
total loan production for the eleven months ended December 31, 1997 ($596.0
million on an annualized basis).
At December 31, 1998 and 1997, the Company's pipeline of loans in
process was $144.0 million and $57.7 million, respectively. Historically,
approximately 75% to 90% of the pipeline of loans in process has funded. For the
year ended December 31, 1998, the Company received 34,164 new loan applications
compared to 12,090 new loan application received for the eleven months ended
December 31, 1997 (13,189 new loan applications on an annualized basis). These
new loan applications result in an average daily rate of applications of $14.2
million and $4.8 million, respectively. The factors that affect the percentage
of applications received and funded during a given time period include the
movement and direction of interest rates, the average length of loan commitments
issued, the creditworthiness of applicants, the Company's loan processing
efficiency, and loan pricing decisions.
NET INTEREST INCOME. Net interest income (interest earned net of
interest charges) totaled $3.3 million for the year ended December 31, 1998, as
compared to $900,000 ($1.0 million annualized) for the eleven months ended
December 31, 1997, or an increase on an annualized basis of approximately $2.3
million or approximately 230%. Net interest income is principally a function of:
(i) interest income earned from the Company's loan portfolio; (ii) interest
expense related to the Company's investment in servicing rights, (iii) interest
income earned from the custodial balances associated with the Company's
servicing portfolio, and (iv) interest expense related to the Bank's deposits.
The Company earns interest on, and incurs interest expense to carry, mortgage
loans held in its warehouse. The increase in net interest income from the
mortgage loans warehoused was primarily attributed to higher loan production
levels resulting from expanding the markets in which the Company conducts
operations as well as the addition of new products. The increase in interest
expense on the investment in servicing rights resulted primarily from increase
in the volume of loan production. The increase in net interest income earned
from the custodial balances was related to an increase in the average balance of
custodial balances due to the increase in the average balance of the loan
servicing portfolio.
LOAN SERVICING. At December 31, 1998, the Company serviced $1.7 billion
of loans compared to $824.6 million at December 31, 1997, a 106% increase. At
December 31, 1998 and 1997, with the exception of servicing related to loans
held for sale in the Company's loan portfolio and servicing sold but not yet
delivered,
16
<PAGE>
all loan servicing was servicing for others. See "Business - Mortgage Loan
Servicing Activities." The increase in the Company's servicing portfolio during
the year ended December 31, 1998 was the result of a substantial increase in
loan production volume, partially offset by prepayments, partial prepayments,
and scheduled amortization of mortgage loans and the sale of mortgage servicing
rights. The weighted average interest rate of the mortgage loans in the
Company's servicing portfolio at December 31, 1998 was 7.04% compared to 7.59%
at December 31, 1997. The decrease in the weighted average interest rate of
mortgage loans in the Company's servicing portfolio is primarily the result of
portfolio turnover. In order to limit the risk of fluctuations in the value of
the servicing portfolio as interest rates decline, the Company seeks to package
servicing on mortgage loans with high interest rates and 80% or lower loan to
value ratios along with a portion of its servicing at current interest rates due
to the higher risk of refinancing of these loans. This strategy, when combined
with the decreasing interest rate environment experienced in 1998, resulted in a
lower weighted average interest rate. It is the Company's strategy to retain its
servicing portfolio at approximately $1 billion. The Company believes that this
outstanding balance is adequate to produce some economy of scale. The Company
manages the size of its servicing portfolio in conjunction with its other asset
and liability management. It is not the Company's strategy to grow the servicing
portfolio. Rather, the Company attempts to act as an accumulator of mortgage
servicing rights. As an accumulator, the Company sells the servicing rights to a
large national servicer under a contract with quarterly best efforts delivery.
During the year ended December 31, 1998, the prepayment rate of the
Company's servicing portfolio was 32.20%, compared to 12.63% for the eleven
months ended December 31, 1997 (13.78% on an annualized basis). In general, the
prepayment rate is affected by the level of refinance activity, which in turn is
driven by the relative level of mortgage interest rates, and activity in the
home purchase market. The prepayment rate on the Company's servicing portfolio
remains relatively low because the Company typically sells servicing for loans
that are more than one year old. Generally, the rate at which loans that are
less than one year old prepay is lower than more mature loans.
The Company recorded amortization and net impairment of its mortgage
servicing rights for the year ended December 31, 1998 of $2.7 million
(consisting of amortization amounting to $1.8 million and impairment of
$885,000), compared to $1.1 million of amortization and impairment (consisting
of amortization amounting to $1.0 million and impairment of $77,000) for the
eleven months ended December 31, 1997. The factors affecting the amount of
amortization and impairment of mortgage servicing rights recorded in an
accounting period include the loan type (conventional fixed or adjustable rate),
the term (15, 20, or 30 year or balloon), the date of loan acquisition, the cost
of servicing the loans based on the industry, and the actual and assumed
prepayment and interest rates. For further information related to the
amortization and impairment of mortgage servicing rights, see Note 1 to the
Company's Notes to Consolidated Financial Statements under the subheading
"Mortgage Servicing Rights, Net."
COMPENSATION AND EMPLOYEE BENEFITS EXPENSE. Compensation and benefits
totaled $10.6 million for the year ended December 31, 1998 compared to $4.6
million ($5.0 million annualized) for the eleven months ended December 31, 1997,
or an increase on an annualized basis of approximately $5.6 million or 112%. The
increase during 1998 was primarily the result of an increase in the number of
full time equivalent employees from 130 at December 31, 1997 to 187 at December
31, 1998 and ordinary and customary increases in salary and benefits. The
increase in employees is primarily attributable to the opening of the Bank and
the increase of employees at WMC to staff its strategy to geographically
diversify its operations and offer a wider range of mortgage products.
OCCUPANCY AND EQUIPMENT EXPENSE. Occupancy and equipment totaled $1.9
million for the year ended December 31, 1998 compared to $1.4 million ($1.5
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $400,000 or 26.70%. The
increase
17
<PAGE>
during 1998 was primarily the result of the Bank occupying its office for an
entire year and an increase in office space and equipment by WMC to accommodate
the increase in employees.
OTHER NONINTEREST EXPENSE. Other noninterest expenses totaled $3.3
million for the year ended December 31, 1998 compared to $1.5 million ($1.6
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $1.7 or 106%. Other noninterest
expense primarily consists of office and computer supplies, express mail
expenses, and servicing foreclosure expenses. The increase during 1998 was
primarily the result of the Bank being opened for the entire fiscal 1998 and the
expanded operations of WMC.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the year ended
December 31, 1998, the Company's pre-tax earnings from the mortgage banking
activities were $6.7 million. For the eleven months ended December 31, 1997, the
Company's comparable pre-tax earnings were $635,000 ($693,000 on an annualized
basis). The annualized increase of $6.0 million or 866% primarily is
attributable to increased loan production as a result of expanding the Company's
operations into new markets and new product lines offered by the Company. The
primary sources of increased pre-tax revenue was gain on sale of loans and
mortgage servicing rights, servicing income, interest income and miscellaneous
other income.
For the year ended December 31, 1998, the gain on sale of loans and
mortgage servicing rights totaled $18.1 million. For the eleven months ended
December 31, 1997, gain on sale of loans and mortgage servicing rights was $5.4
million ($5.89 million annualized). The annualized $12.2 million increase
represents a 207% increase between periods.
Interest revenue for the period ending December 31, 1998, was $10.5
million. For the eleven months ending December 31, 1997 Interest Revenue was
$3.0 million (annualized $3.7 million). The annualized increase of $6.8 million
or 183% is attributable to increased loan inventory.
Income from servicing operations totaled $2.6 million for the year
ending December 31, 1998. For the eleven months ending December 31, 1997,
servicing income was $1.8 million ($1.9 million annualized). The $800,000 or 42%
increase is derived from increased servicing activity.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the year ended December
31, 1998, the Company's pre-tax loss from retail banking activities primarily
conducted by the Bank was $370,000. For the period from inception until December
31, 1997, the Company's comparable pre-tax loss was $743,000 ($2.1 million on an
annualized basis). The annualized decrease in loss of $1.7 million or 83% was
primarily attributable to the board of directors of the Bank replacing prior
bank management with Michael D. Surgen, the current President and Chief
Executive Officer of the Bank. Within three months of Mr. Surgen's appointment,
the Bank became profitable on a monthly basis. The Bank's pre-tax loss through
August 31, 1998 was $570,00, which decreased to a pre-tax loss $370,000 by
December 31, 1998. Additionally, the decrease in the pre-tax loss was due to the
decrease in the organization and pre-opening costs of the Bank, a majority of
which were expensed as incurred in fiscal 1997, and an increase in net interest
income to $918,000 for the year ended December 31, 1998 compared to $195,000 for
the year ended December 31, 1997 resulting from growth in the Bank's
interest-earning assets in excess of its interest-bearing liabilities. At or for
the year ended December 31, 1998, the Bank had noninterest expenses of $1.9
million, deposits of $35.1 million, and the provision for loan losses totaled
$62,000 compared to noninterest expenses of $878,000, deposits of $17.6 million,
and the provision for loan losses totaled $66,000 at or for the period from
inception through December 31, 1997.
18
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE ELEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 AND THE YEAR ENDED JANUARY 31, 1997
GENERAL. The operating results and financial condition of the Company
as of and for the eleven months ended December 31, 1997 primarily reflect the
operating results and financial condition of WMC. The Bank was formed in August
1997, therefore, only a portion of the results for the eleven months ended
December 31, 1997 reflect the operations of the Bank. The operating results and
financial condition of the Company as of and for the year ended January 31, 1997
only relate to the operations of WMC. Net loss for the eleven months ended
December 31, 1997 totaled $138,000 ($150,000 annualized) compared to a net
profit of $529,000 for the year ended January 31, 1997, or a decrease on an
annualized basis of approximately $679,000 or 128.4%. This decrease was
primarily due to the expenses related to the start-up of the Bank, which
recorded a pre-tax loss for the eleven months ended December 31, 1997 of
$743,000.
LOAN PRODUCTION. The volume of loans produced for the eleven months
ended December 31, 1997 totaled $732.7 million ($799.3 million annualized)
compared to $588.2 million for the year ended January 31, 1997, or an increase
on an annualized basis of approximately $211.1 million or 34.04%. The increase
in loan production was primarily due to generally lower interest rates that
prevailed during 1997, as well as to the continuing expansion of the markets the
Company serves and the types of loan products the Company offers. Refinancings
totaled $476.5 million, or 65.93% of total loan production, for the eleven
months ended December 31, 1997 ($519.8 million on an annualized basis), as
compared to $335.0 million, or 56.95% of total loan production for the year
ended January 31, 1997. Fixed-rate mortgage loan production totaled $545.8
million, or 74.50% of total loan production, for the eleven months ended
December 31, 1997 ($596.0 million on an annualized basis), as compared to $530.6
million, or 90.20% of total loan production for the year ended January 31, 1997.
At December 31, 1997 and January 31, 1997, the Company's pipeline of
loans in process was $57.7 million and $25.8 million, respectively.
Historically, approximately 75% to 90% of the pipeline of loans in process has
funded. For the eleven months ended December 31, 1997, the Company received
11,478 new loan applications (12,515 new loan applications on an annualized
basis) compared to 12,064 new loan application received for the year ended
January 31, 1997. These new loan applications result in an average daily rate of
applications of $4.8 million and $4.0 million, respectively. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average length
of loan commitments issued, the creditworthiness of applicants, the Company's
loan processing efficiency, and loan pricing decisions.
NET INTEREST INCOME. Net interest income (interest earned net of
interest charges) for the eleven months ended December 31, 1997 totaled $965,000
($1.1 million annualized) compared to $968,000 for the year ended January 31,
1997, or an increase on an annualized basis of approximately $85,000 or 8.8%.
Net interest income is principally a function of: (i) net interest income earned
from the Company's loan portfolio; (ii) interest expense related to the
Company's investment in servicing rights, (iii) interest income earned from the
custodial balances associated with the Company's servicing portfolio, and (iv)
interest expense related to the Bank's deposits. The Company earns interest on,
and incurs interest expense to carry, mortgage loans held in its warehouse. The
annualized increase in net interest income from the mortgage loan warehouse was
primarily attributed to an increase in the volume of loan production from $588.2
million for the year ended January 31, 1997 to $799.3 million (annualized) for
the eleven months ended December 31, 1997. The increase in interest expense on
the investment in servicing rights resulted primarily from an increase in the
capitalized value of mortgage servicing rights of $3.8 million for the year
ended January 31, 1997 to $4.4 million (annualized) for the eleven months ended
December 31, 1997. The decrease in net interest income earned from the custodial
balances was related to a decrease in the average balance of the loan servicing
portfolio.
19
<PAGE>
LOAN SERVICING. At December 31, 1997, the Company serviced $824.6
million of loans compared to $786.1 million at January 31, 1997, a 5.0%
increase. At December 31, 1997 and January 31, 1997, with the exception of
servicing related to loans held for sale in the Company's loan portfolio and
servicing sold but not yet delivered, all loan servicing was servicing for
others. The increase in the Company's servicing portfolio during the eleven
months ended December 31, 1997 was the result of increased loan production
volume, partially offset by prepayments, partial prepayments and scheduled
amortization of mortgage loans. The weighted average interest rate of the
mortgage loans in the Company's servicing portfolio at December 31, 1997 was
7.59% compared to 7.70% at January 31, 1997. The decrease in the weighted
average interest rate of mortgage loans in the Company's servicing portfolio is
primarily the result of portfolio turnover.
During the eleven months ended December 31, 1997, the prepayment rate
of the Company's servicing portfolio was 12.63% (13.78% on an annualized basis),
compared to 11.41% for the year ended January, 31, 1997. In general, the
prepayment rate is affected by the level of refinance activity, which in turn is
driven by the relative level of mortgage interest rates, and activity in the
home purchase market. The prepayment rate on the Company's servicing portfolio
remains relatively low because the Company typically sells servicing for most
loans that are more than one year old. Generally, the rate at which loans that
are less than one year old prepay is lower than more mature loans.
The Company recorded amortization and net impairment of its mortgage
servicing rights of $1.1 million of amortization and impairment (consisting of
amortization amounting to $1.0 million and impairment of $78,000) for the eleven
months ended December 31, 1997, compared to $2.0 million of amortization and
impairment (consisting of amortization amounting to $1.3 million and impairment
of $660,000) for the year ended January 31, 1997. The factors affecting the
amount of amortization and impairment of mortgage servicing rights recorded in
an accounting period include the loan type (conventional fixed or adjustable
rate), the term (15, 20, or 30 year or balloon), the date of loan acquisition,
the cost of servicing the loans based on the industry, and the actual and
assumed prepayment and interest rates.
COMPENSATION AND EMPLOYEE BENEFITS EXPENSE. Compensation and employee
benefits totaled $4.6 million for the eleven months ended December 31, 1997
($5.0 million annualized), compared to $4.1 million for the year ended January
31, 1997, or an increase on an annualized basis of approximately $882,000 or
21.5%. The increase during the eleven months ended was primarily the result of
normal salary increases as well as the addition of new employees from the
start-up and opening of the Bank in August 1997.
OCCUPANCY AND EQUIPMENT EXPENSE. Occupancy and equipment totaled $1.4
million for the eleven months ended December 31, 1997 ($1.5 million annualized),
compared to $1.4 million for the year ended January 31, 1997, or an increase on
an annualized basis of approximately $68,000 or 4.8%. The increase during the
eleven months ended was primarily the result of additional occupancy and
equipment expenses related to the start-up and opening of the Bank in August
1997. The Bank leases its offices in Naples, Florida.
OTHER NONINTEREST EXPENSE. Other noninterest expense totaled $1.5
million for the eleven months ended December 31, 1997 ($1.6 million annualized),
compared to $1.2 million for the year ended January 31, 1997, or an increase on
an annualized basis of approximately $420,000 or 35.1%. Other noninterest
expense primarily consists of office and computer supplies, express mail
expenses, and servicing foreclosure expenses. The increase during the eleven
months ended December 31, 1997 was primarily attributable to the WMC's strategy
to geographically diversify its operations and offer a wider range of mortgage
products.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the eleven months
ended December 31, 1997, the Company's pre-tax earnings from the mortgage
banking activities were primarily conducted by WMC because the Bank was not open
until late August of 1997. For the eleven months ended December 31, 1997, the
Company's comparable pre-tax revenue was $11.1 million ($12.2 million on an
annualized basis). For the year
20
<PAGE>
ended January 31, 1997, the Company's comparable pre-tax revenue from mortgage
banking was $10.7 million. The annualized increase of $1.5 million or 12.3% is
primarily attributable to gain on sale of loans and mortgage servicing rights
which increased to $5.4 million ($5.9 million annualized) from $4.5 million for
these respective periods.
Servicing revenue for the eleven months ending December 31, 1997
actually fell to $ 1. 8 million ($1.9 million annualized) from $2.7 million for
the year ending January 31, 1997. The annualized drop of $800,000 or 42% was due
to reductions in the servicing portfolio from the sales of mortgage servicing
rights discussed above.
Interest income for the eleven months ending December 31, 1997, totaled
$3.4 million ($3.7 million annualized). For the year ending January 31, 1997,
interest income was $3.0 million. The annualized increase was $700,000 or 23%
due primarily to increased loans in inventory.
Gain on sale of loans and mortgage servicing rights for the eleven
months ending December 31, 1997, was $5.4 million ($5.9 million annualized). For
the year ending January 31, 1997, gain on sale of loans was $4.5 million. The
annualized increase was $1.4 million or 3 1 %, attributable to a greater loan
origination volume.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund
operations on a timely and cost-effective basis. The Company conducts no
business other the business conducted through the Bank and WMC. The Company's
primary source of funds is dividends paid by WMC and the Bank. In July 1997, the
Company established a term loan in the amount of $2.0 million, the proceeds of
which were contributed to the capital of the Bank. The term loan is payable on
demand and the interest rate is the weighted average Federal Funds Rate plus
2.75%, which resulted in an effective rate of 7.6% at December 31, 1998 and 8.3%
at December 31, 1997. As of December 31, 1998, the only dividends received by
the Company have been to make payments under the term loan. The Company expects
to repay the term loan from the proceeds of this offering. Dividends paid to the
Company by WMC are also limited by the terms of WMC's warehouse line of credit
discussed below.
WMC's sources of cash flow include cash from gains on sale of mortgage
loans and servicing, net interest income, servicing fees, and borrowings. WMC
sells its mortgage loans generally on a monthly basis to generate cash for
operations. WMC's uses of cash in the short-term include the funding of mortgage
loan purchases and originations and purchases of mortgage servicing rights,
payment of interest, repayment of amounts borrowed under 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.
WMC 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 of
limit of $90.0 million, of which $5.0 million represents a working capital
sublimit. Borrowing under the warehouse line of credit totaled $55.0 million at
December 31, 1998, $17.4 million at December 31, 1997, and $2.6 million at
January 31, 1997. The interest rate on the warehouse line of credit is the
Federal Funds Rate plus 1.50% resulting in an effective rate of 6.52% at
December 31, 1998, 7.19% at December 31, 1997, and 6.98% at January 31, 1997.
The interest rate on the working capital portion of the line of credit is the
Federal Funds Rate plus 1.875%. The warehouse line of credit is payable on
demand. The terms of the warehouse line of credit impose certain limitations on
the operations of WMC. Pursuant to the warehouse line of credit, WMC must
maintain a minimum servicing portfolio of $500.0 million, a minimum net worth of
$7.5 million calculated in accordance with generally accepted accounting
principles, and a minimum adjusted tangible net worth of $10.0 million. For
purposes of the warehouse line of credit, adjusted tangible net
21
<PAGE>
worth is defined as the excess of total assets over total liabilities, with
certain additions and subtractions as specified in the warehouse line of credit.
WMC also enters into sales of mortgage loans under agreements to
repurchase. These agreements typically have terms of less than 90 days and are
treated as a source of financing. The weighted average interest rate on these
agreements to repurchase was 6.3% at December 31, 1998 and 1997, and January 31,
1997.
The Company'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 under the warehouse facility, thereby creating
borrowing capacity to fund new purchases and originations. The value of and
market for the Company'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 year ended
December 31, 1998, the eleven months ended December 31, 1997, and the year ended
January 31, 1997, the Company used cash of $2.5 billion, $726.4 million, and
$591.1 million, respectively, for the purchase of mortgage loans and mortgage
servicing right and the origination of mortgage loans. During the same periods,
the Company received cash proceeds from the sale of loans and mortgage servicing
rights of $2.5 billion, $670.4 million and $594.3 million, respectively. The
Company received cash proceeds from the premiums on such sale of loans of $17.7
million, $5.4 million, and $7.4 million, respectively, the year ended December
31, 1998, the eleven months ended December 31, 1997, and the year ended January
31, 1997, respectively. A significant amount of the Company's loan production in
any month is funded during the last several business days of that month.
The Company generally grants commitments to fund mortgage loans for up
to 30 days at a specified term and interest rate ("rate-lock commitments"). At
December 31, 1998, the Company had outstanding rate-lock commitments to lend
$144.5 million for mortgage loans, along with outstanding commitments to make
other types of loans totaling $352,000. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of December 31, 1998, the Company had outstanding
commitments to sell $108.8 million of mortgage loans. These commitments will be
funded within 90 days.
At December 31, 1998, the Bank exceeded all applicable regulatory
minimum capital requirements as well as the requirement to be considered "well
capitalized" for regulatory purposes. The Company exceeded its regulatory
minimum capital requirements with respect to Tier 1 capital to risk-weighted
assets and Tier 1 capital to average assets, however, the Company failed to meet
its total capital to risk-weighted asset requirement at December 31, 1998.
Proceeds of the offering are expected to increase the capitalization of the
Company for regulatory capital purposes to an amount in excess of the Company's
minimum capital requirements. For a detailed discussion of the regulatory
capital requirements to which the Company and the Bank are subject, and for a
tabular presentation of compliance with such requirements, see "Regulation - The
Company," "Regulation - The Bank - Capital Requirements," and Note 13 of Notes
to Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing computer application software programs and operating
systems can accommodate this date value. Many existing application software
products are designed to accommodate only two digits for the date. If not
corrected, many computer applications and systems could fail or create erroneous
results by or at the year 2000 by interpreting the year 2000 as the year 1900.
With the exception of the Bank, which outsources data processing to a third
party vendor, the Company maintains an internal computer system for most
operating functions. The Company formed a Year 2000 Committee (the "Y2K
Committee") in March 1998 and has adopted a Year 2000 Policy. The Y2K Committee
has been identifying potential problems associated with the Year 2000 issue and
has implemented
22
<PAGE>
a plan designed to ensure that all software used in connection with the
Company's business will manage and manipulate data involving the transition from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. The Company has prepared a critical issues
schedule with a timeline and assigned responsibilities. In addition, the Company
recognizes that its ability to be Year 2000 compliant is dependent upon the
cooperation of its vendors. The Company is requiring its computer systems and
software vendors to represent that the products provided are or will be Year
2000 compliant and has planned a program of testing for compliance. The Bank has
received representations from its primary third party data processing vendor
that it has resolved any Year 2000 problems in its software and is Year 2000
compliant. The Bank has participated in Year 2000 testing with its primary third
party data processing vendor. The validation process revealed no material
problems with the third party processor. The Bank has also participated in
integration and proxy testing of the third party data processor with Automated
Teller Machine (ATM), Electronic Funds Transfer (EFT), and check processing
systems. The Company anticipates that all of its vendors also will have resolved
any Year 2000 problems in their software or hardware by June 30, 1999. The
Company has completed testing of its minor hardware and software systems. The
results indicated that most applications were Year 2000 compliant. All Year 2000
issues for the Company, including testing, are expected to be addressed and any
problems remedied by June 30, 1999. The Company has also provided brochures to
its customers to make them aware of the Year 2000 issue.
The Company's operations may also be affected by the Year 2000
compliance of its significant suppliers and other vendors, including those
vendors that provide non-information and technology systems. The Company has
begun the process of requesting information related to the Year 2000 compliance
of its significant suppliers and other vendors. However, the Company does not
currently have complete information concerning the compliance status of its
significant suppliers and other vendors. In the event that any of the Company's
significant suppliers or other vendors do not successfully achieve Year 2000
compliance in a timely manner, the Company's business or operations could be
adversely affected. The Company has prepared a contingency plan in the event
that there are any system interruptions. As part of the contingency plan, the
Company intends to engage alternative suppliers or other vendors if its current
significant suppliers or vendors fail to meet Year 2000 operating requirements.
There can be no assurances, however, that such plan or the performances by any
of the Company suppliers and vendors will be effective to remedy all potential
problems.
The lending activities of the Company are concentrated almost
exclusively in one- to four-family mortgage lending. Due to the small individual
and aggregate balances of loans to multi-family and commercial borrowers, it has
been determined that customer Year 2000 readiness issues should have an
insignificant impact on the Company. Because the Company plans to continue its
emphasis on one- to four-family mortgage loans, Year 2000 compliance of
potential borrowers will not be a major issue. If the Company were to entertain
loan applications from significant multi-family or commercial borrowers, the
Company would request statements concerning Year 2000 readiness from the
potential borrowers.
The Company is constantly engaged in upgrades to its technology systems
as a means of offering better service and a wider range of products to its
customers. The Company believes that the costs associated with achieving Year
2000 compliance and any related technology systems upgrade will not materially
alter the amount the Company currently spends on technology upgrades. Material
costs, if any, that may arise from the failure to achieve Year 2000 compliance
by either the Company's management information systems or the Bank's third party
data processing vendor or its significant suppliers and other vendors is not
currently determinable. To the extent that the Company's systems are not fully
Year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a
materially adverse effect on the Company's business, financial condition,
results of operations, cash flows, or business prospects. In the event that the
Company's progress towards becoming Year 2000 compliant is deemed inadequate,
regulatory action may be undertaken.
23
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Management of the Bank
has not yet determined whether the adoption of SFAS No. 133 will have a material
impact on the Bank's results of operations or financial position when adopted.
In October 1998, FASB issued SFAS No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. SFAS No. 134 amends SFAS No. 65,
ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES, which establishes accounting
and reporting standards for certain activities of mortgage banking enterprises
and other enterprises that conduct operations that are substantially similar.
SFAS No. 134 requires that after the securitization of mortgage loans held for
sale, the resulting mortgage-backed securities and other retained interests
should be classified in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, based on the company's ability and
intent to sell or hold those investments. SFAS No. 134 is effective for the
first fiscal quarter beginning after December 15, 1998. The statement did not
have a material impact on the Bank's results of operations or financial position
when adopted.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
BUSINESS
GENERAL
The Company was incorporated in Delaware on March 3, 1997 to own and
control all of the outstanding capital stock of the Bank and WMC. The Company
has no employees other than executive officers who do not receive compensation
from the Company for serving in such capacity. See "Management - Director and
Executive Officer Compensation." The Company engages in no other operations
other than the management of its investments in the Bank and WMC.
The Company is registered with the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") as a bank holding company under the
Bank Holding Company Act of 1956, as amended ("BHC Act"). Because the Company is
a bank holding company, its primary federal regulator is the Federal Reserve
Board.
24
<PAGE>
The Company currently operates in both the retail banking and mortgage
banking segments through its wholly-owned subsidiaries. As of December 31, 1998,
most of the Company's revenues (net interest income and non-interest income) and
earnings before income taxes are attributable to the mortgage banking segment,
primarily conducted by WMC. The Company believes that the retail banking
business, primarily conducted by the Bank, can provide the Company with a
strategic advantage as the Bank grows. One of these advantages may be access to
funding sources for the Company's mortgage origination business which would not
otherwise be available. These additional funding sources include low cost retail
deposits and escrowed funds.
At December 31, 1998, total assets of the Company were $246.4 million,
of which $205.9 million were assets of WMC and $40.5 million were assets of the
Bank. At December 31, 1998, net income was $3.9 million, of which $4.3 million
was net income of WMC, $244,000 was a loss of the Bank, and $132,000 was a loss
at the holding company level.
MARKET AREA
The mortgage banking activities of the Company are located in Ann
Arbor, Michigan and Pleasant Hill, California. The Company is one of the top
five secondary market participants headquartered in Michigan and has ranked in
the top 30 wholesalers nationally since 1997 and the top 50 wholesalers
nationally since 1991. WMC does business with over 1,340 correspondent lenders
in 42 states. For the year ended December 31, 1998, the top five states in terms
of loan purchases for WMC are Michigan (26%), Ohio (21%), Georgia (9%), Florida
(9%), and Illinois (7%).
The retail banking operations of the Company are located in Naples,
Florida. The Bank is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Bank's primary service area includes the communities located in
western Collier County, Florida. These communities make up an area locally known
as the "greater Naples area." Collier County has, and continues to experience a
significant increase in population growth and has a significant economic
diversity. This increase and diversity has contributed to an equally significant
increase in the wholesale, retail, service, and construction sectors of the
economy.
COMPETITION
The Company faces significant competition both in generating loans and
in attracting deposits. The mortgage banking operations of the Company compete
on a national basis with local, regional, and national mortgage lenders,
insurance companies, and financial institutions. Many of these competitors are
significantly larger and have greater financial resources than the Company.
Mortgage banking is a highly competitive market. The underwriting guidelines and
servicing requirements set by the participants in the secondary markets are
standardized. As a result, mortgage banking products (I.E., mortgage loans and
the servicing of these loans) have become difficult to differentiate. Therefore,
mortgage bankers compete primarily on the basis of price or service, making
effective cost management essential. Mortgage bankers generally seek to develop
cost efficiencies in one of two ways: economies of scale or specialization.
Large, full-service national or regional mortgage bankers such as the Company
have sought economies of scale through an emphasis on wholesale originations and
the introduction of automated processing systems.
The Bank's primary market area is also highly competitive and the Bank
faces direct competition for loans from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. The Bank's most direct competition for deposits has
historically come from savings banks and associations, commercial banks and
credit unions. In addition, the Bank faces increasing competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such instruments
25
<PAGE>
as short-term money market funds, corporate and government securities funds,
mutual funds, and annuities. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
GENERAL. The Company originates or acquires loans primarily through the
wholesale, correspondent, and retail loan production of its mortgage banking
operations. To a lesser extent, the Company originates or acquires loans through
its retail banking operations. Loans are either held for investment in the
Company'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 the Company (I.E., table funding) and the transfer of such loans to
the Company upon closing. Correspondent mortgage loan production occurs through
the purchase of loans by the Company 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 the Company's retail loan origination office in Ann Arbor, Michigan. For
the year ended December 31, 1998, the Company's combined wholesale and
correspondent loan production totaled $2.3 billion and its retail loan
production totaled $76.0 million.
In addition to mortgage loan production, the Company engages to a
limited extent in the origination of commercial, commercial real estate,
construction, and consumer loans, primarily through the Bank.
26
<PAGE>
The following table sets forth selected data relating to the
composition of the Company'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. At December 31, 1998, the Company had no
concentrations of loans exceeding 10% of total loans that are not otherwise
disclosed below.
<TABLE>
<CAPTION>
December 31, January 31,
--------------------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995
----------------- ----------------- ---------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to four units... $192,872 95.33% $100,513 99.81% $41,240 100.00% $35,351 100.00% $10,334 100.00%
Residential, multifamily......... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Commercial and industrial 7,631 3.77 0 0.00 0 0.00 0 0.00 0 0.00
real estate..................
Construction..................... 642 0.32 0 0.00 0 0.00 0 0.00 0 0.00
-------- ------ -------- ------ -------- ------- ------- ------ ------ ------
Total real estate loans....... 201,145 98.92 100,513 99.81 41,240 100.00 35,351 100.00 10,334 100.00
Other loans:
Business, commercial............. 824 0.41 0 0.00 0 0.00 0 0.00 0 0.00
Automobile....................... 343 0.17 193 0.19 0 0.00 0 0.00 0 0.00
Other consumer................... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
-------- ------ -------- ------ ------- ------- ------- ------ ------ ------
Total other loans............. 1,167 0.58 193 0.19 0 0.00 0 0.00 0 0.00
-------- ------ -------- ------ ------- ------- ------- ------ ------ ------
Total gross loans.... 202,312 100.00% 100,706 100.00% 41,240 100.00% 35,351 100.00% 10,334 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Unearned fees, premiums and
discounts, net................... 1,143 134 13 188 126
Allowance for loan losses........... (127) (66) 0 0 (74)
------ ----- ------- ------- -------
Total Loans net (1)............ $203,328 $100,774 $41,253 $35,539 $10,386
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
</TABLE>
- -------------
(1) Includes loans held for sale and loans receivable, net.
27
<PAGE>
Set forth below is a table summarizing the Company's loan production
for the periods indicated.
<TABLE>
<CAPTION>
For the period from
For the year ended February 1, 1997 to For the year ended
December 31, 1998 December 31, 1997 January 31, 1997
------------------ ------------------- ------------------
(In thousands)
<S> <C> <C> <C>
Single Family:
Retail................................. $ 64,322 $ 28,196 $ 14,499
Wholesale.............................. 2,335,772 704,360 573,738
----------- --------- ---------
Total single family................. 2,400,094 732,556 588,237
Commercial and industrial real estate.... 9,601 0 0
Construction............................. 717 0 0
Business, commercial..................... 916 0 0
Consumer................................. 408 193 0
Other.................................... 0 0 0
----------- --------- ---------
Total loan production............... $2,411,736 $732,749 $588,237
----------- --------- ---------
----------- --------- ---------
</TABLE>
The following table sets forth the loan production of single family
mortgage loans for the periods presented by the nature of the loan:
<TABLE>
<CAPTION>
For the period from
For the year ended February 1, 1997 to For the year ended
December 31, 1998 December 31, 1997 January 31, 1997
------------------ ------------------- ------------------
(In thousands)
<S> <C> <C> <C>
Government (FHA)......................... $ 19,840 $ 0 $ 0
Conventional (FNMA and FHLMC)............ 2,314,692 698,180 573,390
Jumbo/nonconforming...................... 65,562 34,376 14,847
---------- --------- --------
Total loan production.................. $2,400,094 $732,556 $588,237
---------- --------- --------
---------- --------- --------
</TABLE>
In its wholesale and correspondent lending, the Company competes
nationwide by offering a wide variety of mortgage products designed to respond
to consumer needs and tailored to address market competition. The Company
primarily originates conforming, fixed rate 30-year mortgage loans, which
collectively represented 96.58% of its total loan production for the year ended
December 31, 1998, 90.80% for the eleven months ended December 31, 1997, and
76.60% for the year ended January 31, 1997. In addition, the Company offers
other products, such as adjustable-rate, 5-year and 7-year balloons, and jumbo
mortgages as well as loans under various FHA programs. Mortgage loans originated
are primarily for the purchase of single-family residences, although such loans
are also originated for refinancing of existing mortgages.
During the year ended December 31, 1998, and the eleven months ended
December 31, 1997, and the year ended January 31, 1997, approximately 80.53%,
66.93%, and 56.95%, respectively, of the single-family mortgage loans originated
were refinancings of outstanding mortgage loans.
28
<PAGE>
The following table sets forth certain information at December 31, 1998
regarding the maturity of the Company's loan portfolio along with the dollar
amounts of loans due after one year which have fixed and variable rates. All
loans are shown maturing based upon contractual maturities and includes
scheduled payments but not potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Loan balances have not been reduced for
undisbursed loan proceeds, unearned discounts, and the allowance for loan
losses. Scheduled contractual principal repayments are not necessarily
predictive of the actual maturities of loans because of prepayments. The average
life of mortgage loans, particularly fixed-rate loans, tends to increase when
prevailing mortgage loan interest rates are substantially higher than interest
rates on existing mortgage loans, and conversely, decrease when interest rates
on existing mortgages are substantially higher than prevailing mortgage rates.
<TABLE>
<CAPTION>
1 to 4 Commercial
Family Multi-Family & Industrial Business,
Real Estate Real Estate Real Estate Construction Commercial Consumer Total
----------- ---------- ------------ ------------ ---------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans ................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
------- -- ----- --- ---- --- -------
Amounts Due:
Within 3 months ................. $ 0 $ 0 $ 0 $ 481 $ 43 $ 38 $ 562
3 months to 1 year .............. 0 0 1,383 161 35 0 1,579
------- -- ----- --- ---- --- -------
Total due within 1 year ...... 0 0 1,383 642 78 38 2,141
------- -- ----- --- ---- --- -------
After 1 year:
1 to 3 years .................. 0 0 2,443 0 384 36 2,863
3 to 5 years .................. 0 0 908 0 296 220 1,424
5 to 10 years ................. 2,356 0 2,205 0 66 49 4,676
10 to 15 years ................ 50,603 0 0 0 0 0 50,603
Over 15 years ................. 139,913 0 692 0 0 0 140,605
------- -- ----- --- ---- --- -------
Total due after 1 year ....... 192,872 0 6,248 0 746 305 200,171
------- -- ----- --- ---- --- -------
Total ........................ $192,872 $ 0 $ 7,631 $ 642 $ 842 $ 343 $202,312
------- -- ----- --- ---- --- -------
------- -- ----- --- ---- --- -------
Allowance for loan
losses .................. $ 122 $ 0 $ 4 $ 0 $ 1 $ 0 $ 127
------- -- ----- --- ---- --- -------
------- -- ----- --- ---- --- -------
Fixed rate ........................ $189,607 $ 0 $ 4,870 $ 642 $ 757 $ 343 $196,219
Variable rate ..................... 3,265 0 2,761 0 67 0 6,093
------- -- ----- --- ---- --- -------
Total due after 1 year ....... $192,872 $ 0 $ 7,631 $ 642 $ 824 $ 343 $202,312
------- -- ----- --- ---- --- -------
------- -- ----- --- ---- --- -------
</TABLE>
29
<PAGE>
The following table sets forth the activity in the Company's mortgage
loans available for sale and its loans held for investment in its portfolio.
<TABLE>
<CAPTION>
For the period
from
For the year February 1, For the year
ended 1997 to ended
December 31, December 31, January 31,
1998 1997 1997
--------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Available for Sale:
Beginning balance........................ $ 98,658 $ 39,974 $ 35,539
Originations............................. 2,389,106 721,637 588,237
Repurchases.............................. 0 0 0
Net sales:
Sales.................................. 2,307,133 674,182 588,950
Deferred fees - current year........... (1,056) (1,115) (336)
Deferred fees - prior year............. 1,116 336 188
---------- --------- --------
Net sales............................ 2,307,193 673,403 583,801
Transfers (to) from available for sale... (1,117) 0 0
---------- --------- --------
Ending balance........................ $ 178,932 $ 88,207 $ 39,974
---------- --------- --------
---------- --------- --------
Held for Investment:
Beginning balance........................ $ 1,675 $ 1,279 $ 615
Originations............................. 20,589 0 0
Repurchases.............................. 11,084 1,226 1,624
Repayments/adjustments................... (12) (46) (15)
Payoffs.................................. (21,051) (44) (60)
Sales.................................... (46) 0 (30)
Transfers to repossessed assets.......... (903) (740) (855)
Transfers (to) from available for sale... 1,117 0 0
---------- --------- --------
Ending balance........................ $ 12,453 $ 1,675 $ 1,279
---------- --------- --------
---------- --------- --------
</TABLE>
MORTGAGE BANKING OPERATIONS. The Company actively participates in the
mortgage banking market on a national basis. Mortgage banking generally involves
the origination or purchase of single-family mortgage loans for sale in the
secondary mortgage market. The secondary mortgage market and its evolution have
been significantly influenced by two government-sponsored enterprises, FNMA and
FHLMC, and one government agency, GNMA. Through these entities, the United
States government provides support and liquidity to the market for residential
mortgage debt.
Mortgage originators sell their loans directly to FNMA and FHLMC either
as whole loans or, more typically, as pools of loans used to collateralize
mortgage-backed securities issued or guaranteed by these entities. Similarly,
the originators can issue mortgage-backed securities collateralized by pools of
30
<PAGE>
loans that are guaranteed by GNMA. In order to arrange these sales or obtain
these guarantees, the originator must underwrite its loans to conform with
standards established by FNMA and FHLMC or by the FHA in the case of GNMA. All
loans other than FHA loans are considered conventional loans. Loans with
principal balances exceeding agency guidelines, currently those in excess of
$240,000 for single-family mortgage loans (I.E., "jumbo" or "nonconforming
loans"), are sold to private investors.
The Company pursues its loan production strategy as part of its
mortgage banking operations through the Company's wholesale and correspondent
loan production outlets and, to a limited extent, through direct solicitation of
commercial banks, savings associations and credit unions and retail loan
production.
WHOLESALE LOAN PRODUCTION. Under its wholesale operations, the Company
funds mortgage loans originated by a network of approximately 1,340 independent
mortgage brokers nationwide. Approximately 802 of these brokers originate
mortgage loans for the Company on a monthly basis and the remainder originate
mortgage loans for the Company on a quarterly basis. This network is maintained
by the Company's approximately 14 account executives, who are compensated
through a salary and commission package. Many of the larger brokers are provided
with loan data entry software by the Company for the entry of loan applicant
data in a format familiar to the Company's underwriters and for transmission to
the Company's automated underwriting systems for review. All loans originated
through brokers are underwritten according to the Company's standards.
The Company's underwriters or contract representatives review the loan
data provided by the loan applicant, including the review of appropriate loan
documentation, and request additional information as necessary from the broker.
Loans originated by such brokers are typically funded directly by the Company
through table funding arrangements. In a majority of cases, the loan is closed
in the broker's name and thereafter transferred to the Company together with
related mortgage servicing rights for which the Company generally pays a
servicing release premium which is included in the loan price paid to the broker
by the Company. However, in certain states, the broker is required to close the
loan in the Company's name. Broker participants in this program are prequalified
on the basis of creditworthiness, mortgage lending experience, and reputation.
Each broker is subject to annual and ongoing reviews by the Company.
CORRESPONDENT LOAN PRODUCTION. In addition, the Company acquires
mortgage loans from mortgage lenders, commercial banks, savings and loan
associations, and other financial intermediaries. The Company's selection of
correspondents is subject to a separate approval process with higher net worth
requirements than wholesale brokers and correspondents who must use their own
source of funds to close loans. The prices of such loan acquisitions are
separately negotiated. Warehouse lines of credit, typically obtained from third
parties, may be used by the mortgage lenders to finance their respective
mortgage loan originations. The Company does not provide warehouse lines of
credit for its correspondents. All loans acquired from correspondents are
expected to satisfy the Company's underwriting standards and may be subject to
repurchase by the correspondent in the event of default of the loan due to fraud
or misrepresentation in the origination process and for certain other reasons,
including the failure to satisfy underwriting requirements imposed by the
Company.
RETAIL LOAN PRODUCTION. The Company's retail loan production involves
the origination of loans directly from WMC or the Bank. The Company has no
retail loan origination offices other than its main office in Ann Arbor,
Michigan and the Bank office located in Naples, Florida. The retail loan
activity of the Company primarily involves the origination of single-family
mortgage loans and, to a lesser extent, the Bank originates construction,
consumer, and commercial loans. Such retail loan originations generally provide
the Company with a source of loan production at a lower cost per loan than loans
acquired through brokers or correspondents because the cost of generating such
loans is more than offset by cost savings through the Company's ability to avoid
payment of the servicing release premium for the related mortgage servicing
rights.
31
<PAGE>
SECONDARY MARKET ACTIVITIES
The Company sells substantially all of the mortgage loans that it
originates or purchases through its mortgage banking operations while retaining
the servicing rights to such loans. During the year ended December 31, 1998, the
eleven months ended December 31, 1997, and the year ended January 31, 1997, the
Company originated or purchased $2.4 billion, $732.7 million, and $588.2 million
in total mortgage loans, respectively, and sold $2.3 billion, $674.0 million,
and $583.8 million of mortgage loans, respectively, in the secondary market.
Mortgage loans are aggregated into pools and sold, or are sold as individual
mortgage loans, to investors principally at prices established at the time of
sale or under forward sales commitments. Conforming conventional mortgage loans
are generally pooled and exchanged under the purchase and guarantee programs
sponsored by FNMA, FHLMC, and GNMA or for FNMA, FHLMC, or GNMA mortgage-backed
securities, and are generally sold to investment banking firms. A limited number
of mortgage loans are sold to other institutional and non-institutional
investors. For the year ended December 31, 1998, a significant portion of such
loans were exchanged for FNMA and FHLMC mortgage-backed securities, which
securities were then sold to investment banking firms. The remainder were sold
to other institutional and non-institutional investors.
The Company exchanges and sells mortgage loans on a non-recourse basis.
In connection with the Company's loan exchanges and sales, the Company makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations and program standards, and to
accuracy of information. In the event of a breach of those Company
representations and warranties, the Company typically corrects such flaws. If
the flaws cannot be corrected, the Company may be required to repurchase such
loans. In cases where loans are acquired from a broker or correspondent and
there have been material misrepresentations made to the Company, the Company
generally has the right to resell the flawed loan back to the broker or
correspondent pursuant to the agreement between the Company and the broker or
correspondent. Otherwise, the Company is indemnified against loss on such loans
by the broker. In addition, the Company relies upon contract underwriters for a
portion of its loan production, and these underwriters must indemnify the
Company against loss for loans which are eventually determined to have been
flawed by "blatant fraud" upon origination.
The Company assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these commitments based upon a number of factors, including the remaining
term of the commitment, the interest rate at which the commitment was provided,
current interest rates and interest rate volatility. These factors are monitored
on a daily basis, and the Company adjusts its hedging on a daily basis as
needed. The Company hedges its "available for sale" mortgage loan portfolio and
its interest rate risk inherent in its unfunded mortgage commitments primarily
through the use of forward sale commitments. Under such commitments, the Company
enters into commitments with terms of not more than 90 days to sell these loans
to FHLMC, FNMA, and GNMA. The Company does not use financial derivatives in its
hedging activities, nor does it generate any financial derivatives for its
balance sheet from the sale of loans or any other activity.
ASSET QUALITY
The Company 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. The Company's senior
officers closely monitor the loan and real estate owned portfolios for potential
problems on a continuing basis and reports to the Board of Directors of the
Company at regularly scheduled meetings. These officers regularly review the
classification of loans and the allowance for losses. The Company also has a
quality control department, the function of which is to provide the Board of
Directors of the Company with an independent ongoing review and evaluation of
the quality of the process by which lending assets are generated.
32
<PAGE>
Nonperforming assets consist of nonaccrual loans and real estate owned.
Loans are usually placed on nonaccrual status when the loan is past due 90 days
or more, or the ability of a borrower to repay principal and interest is in
doubt. Real estate acquired by the Company as a result of foreclosure is
classified as other real estate owned until such time as it is sold. The Company
generally tries to sell the property at a price no less than its net book value,
but will consider discounts where appropriate to expedite the return of the
funds to an earning status. When such property is acquired, it is recorded at
its fair value less estimated costs of sale. Any required write-down of the loan
to its appraised fair market value upon foreclosure is charged against the
allowance for losses.
The Company establishes an allowance for 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 borrowers' abilities to
comply with repayment terms. If actual losses exceed the amount of the allowance
for losses, earnings could be adversely affected. As the Company's provision for
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
losses represents general, rather than specific, reserves.
The following table sets forth nonperforming loans, other real estate
owned, and restructured loans at the periods indicated:
<TABLE>
<CAPTION>
December 31, January 31,
------------------ -------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................... $ 0 $ 0 $ 0 $ 0 $ 0
Loans past due 90 days or more but not on
nonaccrual.................................. 913 1,675 1,279 615 331
------ ------ ------ ---- ----
Total nonperforming loans................. 913 1,675 1,279 615 331
Restructured loans............................. 0 0 0 0 0
Other real estate owned........................ 778 499 665 76 451
------ ------ ------ ---- ----
Total nonperforming assets................ $1,691 $2,174 $1,944 $691 $782
------ ------ ------ ---- ----
------ ------ ------ ---- ----
Total nonperforming assets to total assets..... 0.69% 1.80% 4.03% 1.53% 2.96%
Allowance for loan losses to
nonperforming loans.......................... 7.54% 3.01% 0.00% 0.00% 9.40%
Nonperforming loans to total assets............ 0.45% 1.66% 3.10% 1.73% 3.17%
</TABLE>
The Company relies upon its underwriting department to ascertain
compliance with individual investor standards prior to sale of the 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 year ended December 31, 1998,
the Company sold approximately $2.3 billion in single-family mortgage loans into
the secondary market, of which only eight loans were repurchased during 1998,
representing less than 0.1 percent of 14,400 loans originated in 1998. The
Company views loan repurchases as an inherent risk of originating and purchasing
loans for ultimate resale in the secondary market notwithstanding the ongoing
reviews by its quality control department. Seven of the eight loans repurchased
during 1998 were nonperforming. Losses arising from repurchases depend upon
whether repurchased loans are or become nonperforming and, if so, whether the
Company is able to recover all of the loan principal and interest otherwise due.
33
<PAGE>
It has been the Company's experience that nonperforming loans do not
necessarily result in an ultimate loss to the Company. All of the Company's
nonperforming loans at December 31, 1998, December 31, 1997, and January 31,
1997 were residential mortgage loans, which generally represent minimal risk of
ultimate loss because of the nature of the underlying collateral, private
mortgage insurance for loans with over-80% loan to value ratios, and insurance
or guarantees on certain loans from the FHA. In addition, the Company may also
have the right to sell the repurchased loan back to the broker or correspondent
which originated it, or to seek indemnity from the applicable mortgage insurance
company in the case of loans which are underwritten on a contract basis for the
Company by such insurers.
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, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to make additional provisions for
estimated loan losses based upon their judgments about information available to
them at the time of their examination. The Company will continue to monitor and
modify its allowance for loan losses as conditions dictate. While management
believes the Company's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Company's level of allowance for loan losses will be sufficient to cover loan
losses incurred by the Company 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 level of the allowance for loan losses.
34
<PAGE>
The following table sets forth information with respect to the
Company's allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
At or for the
At or for the Year Period from At or for the Year Ended January 31,
Ended February 1, 1997 ----------------------------------
December 31, to December 31,
1998 1997 1997 1996 1995
-------- ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding........................... $181,874 50,102 $52,151 $50,371 $40,400
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Total loans outstanding at end of period............ $203,455 $100,839 $41,253 $35,539 $10,460
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Allowance balance at beginning of period............ $ 65 $ 0 $ 0 $ 74 0
Provision for loan losses........................... 62 65 0 0 74
Actual charge-offs:
1-4 family residential real estate............... 0 0 0 74 0
Other............................................ 0 0 0 0 0
-------- -------- ------- ------- -------
Total charge-offs.......................... 0 0 0 74 0
-------- -------- ------- ------- -------
Recoveries:
Total recoveries........................... 0 0 0 0 0
-------- -------- ------- ------- -------
Net chargeoffs........................ 0 0 0 74 0
-------- -------- ------- ------- -------
Allowance balance at end of period.................. $ 127 $ 65 $ 0 $ 0 $ 74
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net chargeoffs as a percent of average loans........ 0.00% 0.00% 0.00% 0.15% 0.00%
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Allowance for loan losses to total gross loans
at end of period................................. 0.06% 0.07% 0.00% 0.00% 0.70%
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
</TABLE>
35
<PAGE>
The following table summarizes the allocation of the allowance for loan
losses by loan type and the percent of loans in each category compared to total
loans at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997
------------------------- -------------------------
Percent of Percent of
Loans in Loans in
Each Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
--------- ----------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1-4 family residential real
estate........................ $ 63 95.33% $63 99.81%
Multifamily real estate........ 0 0.00 0 0.00
Commercial and industrial real ------ -------
estate........................ 44 3.77 0 0.00
Construction................... 4 0.32 0 0.00
Business, commercial........... 14 0.41 0 0.00
Automobile..................... 0 0.17 0 0.19
Other.......................... 2 0.00 2 0.00
------ ------
Unallocated.................... 0 0
---- ----
Total......................... $127 100.00% $65 100.00%
----- ------ ---- ------
----- ------ ---- ------
</TABLE>
<TABLE>
<CAPTION>
January 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------- ----------- ---------- ------------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1-4 family residential real
estate........................ $0 100.00% $0 100.00% $74 100.00%
Multifamily real estate........ 0 0.00 0 0.00 0 0.00
Commercial and industrial real
estate........................ 0 0.00 0 0.00 0 0.00
Construction................... 0 0.00 0 0.00 0 0.00
Business, commercial........... 0 0.00 0 0.00 0 0.00
Automobile..................... 0 0.00 0 0.00 0 0.00
Other.......................... 0 0.00 0 0.00 0 0.00
------ ------ ------
Unallocated.................... 0 0 0
---- ---- ---
Total......................... $0 100.00% $0 100.00% $74 100.00%
---- ------ ---- ------ --- ------
---- ------ ---- ------ --- ------
</TABLE>
36
<PAGE>
UNDERWRITING
The Company's mortgage loans are underwritten either in accordance with
applicable FNMA, FHLMC or FHA guidelines or with requirements set by other
investors. Although the Company is qualified to underwrite VA loans, the Company
does not make such loans.
All mortgage loans originated or acquired by the Company, whether
through its retail banking operations or through its wholesale or
correspondent networks, must satisfy the Company's underwriting standards.
The Company permits a few originating correspondent lenders operating under
the Company's delegated underwriting program to perform initial underwriting
reviews. The Company employs an automated underwriting process on most loans
that is based upon data provided through the Company's initial loan data
entry software and is available from FNMA through its Desktop Underwriter-TM-
software. This process incorporates credit scoring, which in turn employs
rules-based and statistical technologies to evaluate the borrower, the
property, and the sale of the loan in the secondary market. This process is
intended to reduce processing and underwriting time, to improve overall loan
approval productivity, to improve credit quality, and to reduce potential
investor repurchase requests. Approximately one-third of loans underwritten
by the Company are initially underwritten on a contractual basis by mortgage
insurance companies, in their capacity as contract underwriters. The contract
underwriter may be required to repurchase loans that are determined not to be
in compliance with such underwriting criteria.
Loans underwritten directly by the Company are subject to a complete
review of all information prior to loan approval. This process involves the
transfer of loan data to the Company by brokers or correspondents using loan
data entry software provided by the Company plus certain other physical
documentation or through the physical transfer of loan files to the Company.
Commercial and residential loans originated by the Bank are underwritten by the
Bank's senior management.
To a limited extent, the Company delegates underwriting authority to
select correspondent lenders who meet financial strength, delinquency,
underwriting. and quality control standards. The lenders may be required to
agree to repurchase loans that later become delinquent or to indemnify the
Company from loss.
QUALITY CONTROL
The Company maintains a quality control department that, among other
things reviews compliance and quality assurance issues relating to loan
production and underwriting. For its production compliance process, prior to
funding a loan, the Company reviews all submissions from new brokers or
correspondents. Typically, the first five loans are reviewed. If there are no
discrepancies found, the broker or correspondent is removed from the pre-funding
audits list. If any discrepancies are noted, the broker or correspondent remains
subject to pre-funding audits until such time as the broker or correspondent has
shown that they is capable of underwriting loans to the standards of the Company
on a consistent basis. All new underwriting staff of the Company also has his or
her work audited post funding until he or she has shown that they are capable of
underwriting loans to the standards of the Company on a consistent basis.
Additionally, the Company randomly selects a statistical sample of
generally at least 10% of all loans closed each month. This review includes a
new credit report review and re-underwriting the loan; reverifying funds,
employment, and other information in the loan application; and reviewing the
data integrity of the information entered into the Company's automated
underwriting system. The Company also orders a second appraisal on 10% of the
statistical sample (I.E., 1% of all loans closed each month). The Company uses
Desktop Underwriter-TM- software developed by FNMA to automate the underwriting
process and provides some brokers and correspondents with Desktop Originator-TM-
software, a similar product for use by brokers and correspondents of companies .
In completing an audit, documentation review is performed to ensure regulatory
compliance.
37
<PAGE>
The Company also monitors the performance of delegated underwriters
through quality assurance reports prepared by the quality control department,
FHA reports and audits, reviews and audits by regulatory agencies, investor
reports, and mortgage insurance company audits. Deficiencies in loans are
generally corrected; otherwise the Company may exercise its right to require
that the loan be repurchased by the originating broker or correspondent, or the
Company may insist that the broker who originated the loan indemnify the Company
against any loss.
MORTGAGE LOAN SERVICING ACTIVITIES
The Company derives a portion of its revenues from the servicing of
mortgage loans for others. For the year ended December 31, 1998, the eleven
months ended December 31, 1997, and the year ended January 31, 1997, the Company
realized servicing fee income, net of amortization and impairment, from its
mortgage loan servicing operations of $63,000, $840,000, and $2.0 million,
respectively, which represented 0.28%, 10.86%, and 26.16% of the Company's
non-interest income for the respective periods. Servicing arises in connection
with mortgage loans originated or purchased and then sold in the secondary
market with mortgage servicing rights retained. With the exception of servicing
that has been sold but not yet delivered, the Company does not subservice loans
for others.
Mortgage loan servicing includes collecting payments of principal and
interest from borrowers, remitting aggregate mortgage loan payments to
investors, accounting for principal and interest payments, holding escrow funds
for payment of mortgage related expenses such as taxes and insurance, making
advances to cover delinquent payments, inspecting the mortgaged premises as
required, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults, and other
miscellaneous duties related to loan administration. The Company collects
servicing fees from monthly mortgage payments generally ranging from 0.25%
(I.E., 25 basis points) to 0.75% (I.E., 75 basis points) of the declining
principal balances of the loans per annum. At December 31, 1998 and December 31,
1997, the weighted average servicing fee on the servicing for others portfolio
was 0.38% and 0.27%, respectively. The Company utilizes lock box and debit
services of a major bank to expedite the collection and processing of the
monthly mortgage payments. Approximately 85% of the payments are processed
through this service.
The Company services mortgage loans nationwide. The geographic
distribution of the Company's servicing portfolio reflects the national scope of
the Company's loan originations and acquisitions. The Company actively monitors
the geographic distribution of its servicing portfolio to maintain a mix that it
deems appropriate to balance its risks and makes adjustments as it deems
necessary. At December 31, 1998, the Company's servicing portfolio consisted of
$1.6 billion of conventional servicing. Such amounts were in addition to loans
serviced by the Company which were recorded on its books as loans receivable
(I.E., available for sale and held for investment).
The value of the Company's mortgage servicing rights is subject to
prepayment risk in the event that declining interest rates provide borrowers
with refinancing opportunities. At December 31, 1998, December 31, 1997, and
January 31, 1997, the amounts of the mortgage servicing rights recorded on the
Company's books were $15.5 million, $4.3 million, and $3.8 million,
respectively. For further information, see Note 5 of Notes to Consolidated
Financial Statements. During the year ended December 31, 1998, the Company sold
mortgage servicing rights for gains amounting to $16.1 million. Also, the
Company occasionally enters into forward sale commitments of its mortgage
servicing rights. Beginning in the fall of 1998, WMC entered into a best efforts
forward bulk servicing sales contract with a national purchaser of mortgage
servicing rights. This arrangement is designed to secure a price for WMC's
conventional servicing rights for quarterly sales for one year (and may be
extended by mutual agreement of the parties), while providing a positive spread
over WMC's borrowing costs. This approach is in contrast to the method that WMC
used throughout most of 1998, in that previous flow or forward servicing sales
occurred concurrently with the formation of the mortgage-backed securities being
serviced. Management believes that growth in this form of servicing and
servicing sales will provide an excellent opportunity for the deployment of
capital and retained earnings.
Gains on the sale of mortgage servicing rights are affected by changes
in interest rates as well as the amount of mortgage servicing rights capitalized
at the time of the loan origination or acquisition of the mortgage servicing
rights.
38
<PAGE>
Purchasers of mortgage servicing rights analyze a variety of factors, including
prepayment sensitivity, to assess the purchase price they are willing to pay.
Lower market interest rates prompt an increase in prepayments as consumers
refinance their mortgages at lower rates of interest. As prepayments increase,
the life of the servicing portfolio is reduced, decreasing the servicing fee
revenue that will be earned over the life of that portfolio and the price third
party purchasers are willing to pay. The fair value of servicing is also
influenced by the supply and demand of servicing available for purchase at any
point in time. Conversely, as interest rates rise, prepayments generally
decrease, resulting in an increase in the value of the servicing portfolio as
well as the gains on sales of the mortgage servicing rights.
The Company originates and purchases mortgage servicing rights
nationwide. The geographic distribution of the Company's mortgage servicing
portfolio reflects the national scope of the Company's mortgage loan
originations and acquisitions. The five largest states accounted for
approximately 62% of the total number of mortgage loans serviced and
approximately 64% of the dollar value of the mortgage loans serviced, at
December 31, 1998, while the largest volume by state was Ohio with approximately
22% and 21% of the mortgage loans serviced by number and value, respectively.
The Company's mortgage servicing portfolio includes servicing for
adjustable rate, balloon payment, and fixed rate fully amortizing loans. At
December 31, 1998, 3.7% of the mortgage servicing rights related to adjustable
rate loans, which had a weighted average coupon rate of 6.85%; 1.10% related to
fixed rate balloon payment loans, which had a weighted average coupon rate of
6.97%; and the remaining 95.20% related to fixed rate fully amortizing loans,
which had a weighted average coupon rate of 7.05%. At December 31, 1998, the
Company's mortgage servicing portfolio had an aggregate weighted average coupon
rate of 7.04%.
The following table sets forth, as of December 31, 1998, the percentage
of fixed-rate, single-family mortgage loans being serviced for others by the
Company, by interest rate category.
<TABLE>
<CAPTION>
Coupon Range Percentage of Portfolio
----------------------------------------- -------------------------
<S> <C>
Less than 6.00%........................ 3.5%
6.01--7.00%............................ 55.7
7.01--8.00%............................ 27.3
8.01--9.00%............................ 8.9
9.01--10.00%........................... 4.1
10.01% & above......................... 0.5
-----
Total..................... 100.0%
-----
-----
</TABLE>
39
<PAGE>
The following table sets forth information regarding the mortgage loan
servicing portfolio, broken down by state.
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------
Percentage of
Number of Number of
Mortgage Loans Mortgage Loans Total Mortgage Percentage of Total
Serviced Serviced Amount Mortgage Amount
--------------- -------------- -------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Ohio.................... 4,002 21.7% $ 344,070 20.8%
Michigan................ 3,824 20.7 375,345 22.7
Indiana................. 1,612 8.7 122,948 7.4
Florida................. 1,482 8.0 129,805 7.8
Georgia................. 1,273 6.9 110,387 6.7
Illinois................ 652 3.5 76,633 4.6
Minnesota............... 625 3.4 64,871 3.9
Kentucky................ 497 2.7 43,654 2.6
South Carolina.......... 431 2.3 37,498 2.3
Pennsylvania............ 412 2.2 25,924 1.6
Wisconsin............... 399 2.2 41,041 2.5
North Carolina.......... 392 2.1 31,675 2.9
Louisiana............... 332 1.8 27,531 1.7
Iowa.................... 267 1.4 22,682 1.4
Alabama................. 252 1.4 16,163 1.0
Missouri................ 225 1.2 17,261 1.0
Tennessee............... 223 1.2 18,438 1.1
Other................... 1,552 8.3 149,300 9.0
------ ----- ---------- -----
Total.......... 18,452 100.0% $1,655,226 100.0%
------ ----- ---------- -----
------ ----- ---------- -----
</TABLE>
At December 31, 1998, the Company was servicing approximately 18,000
loans with an aggregate unpaid principal balance of $1.7 billion. None of the
loans were subserviced for others. Of such loans, 1.14% were delinquent and an
additional 0.50% were in foreclosure. The Company may be materially affected by
loan delinquencies and defaults on loans that it services for others. Under a
portion of its servicing contracts, the Company must advance all or part of the
scheduled payments to the owner of the loan, even when loan payments are
delinquent. At December 31, 1998, the Company's delinquency rates on loans
serviced for FHLMC and FNMA were 1.33% and 1.53%, respectively. Also, to protect
their liens on mortgage properties, owners of loans usually require a servicer
to advance scheduled mortgage and hazard insurance and tax payments even if
sufficient escrow funds are not available. The Company is generally reimbursed
by the mortgage owner or from liquidation proceeds for payments advanced that
the servicer is unable to recover from the mortgagor, although the timing of
such reimbursement is typically uncertain. In the interim, the Company absorbs
the cost of funds advanced during the time the advance is outstanding. Further,
the Company bears the costs of collection activities on delinquent and defaulted
loans.
40
<PAGE>
INVESTMENT ACTIVITIES
Since the start of the Company's retail banking activities, primarily
conducted through the Bank, deposit in-flows to the Bank have exceeded the
Bank's loan demand. In addition, the Bank sells a substantial portion of its
loans into the secondary market, thus replenishing its liquidity on a regular
basis. The Bank currently invests excess liquidity in a variety of
interest-earning assets. The investment policy related to the retail banking
operations of the Company, as approved by the Board of Directors of the Bank,
requires management to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk, and to
complement the Company's lending activities. The Company primarily utilizes
investments in securities for liquidity management and as a method of deploying
excess funding not utilized for investment in loans. Generally, the Company's
investment policy is more restrictive than applicable regulations allow and,
accordingly, the Company 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, the Company has
established an investment portfolio of securities that are categorized as
held-to-maturity, available-for-sale, or held for trading. At December 31, 1998,
all of the investment securities held in the Company's investment portfolio were
classified as available for sale.
At December 31, 1998, the Company had invested $1.1 million in FNMA,
FHLMC, and GNMA mortgage-backed securities, or 0.44% of total assets. In
addition, $4.5 million, or 1.8%, 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 such instruments thereby changing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities or in the event such securities are redeemed
by the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated. At December 31, 1998, the market
value of the Company's investment portfolio totaled $5.9 million. During the
periods indicated and except as otherwise noted, the Company had no securities
of a single issuer that exceeded 10% of stockholders' equity.
<TABLE>
<CAPTION>
At December 31,
----------------- At January 31,
1998 1997 1997
------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury .......................... $ 0 $1,499 $0
U.S. Government agency (1) ............. 4,499 5,485 0
Mortgage-backed securities ............. 1,093 0 0
FHLB stock ............................. 261 0 0
------ ------ -----
Total investment securities (2) $5,853 $6,984 $0
------ ------ -----
------ ------ -----
</TABLE>
- ----------
(1) At December 31, 1998, includes a $2.0 million investment in a Federal Home
Loan Bank bond with a carrying value of $2.0 million.
(2) Excludes time deposits held in other financial institutions.
41
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of the Company's investment securities
portfolio at December 31, 1998.
<TABLE>
<CAPTION>
After Five Years
After One Year But But Within
Within One Year Within Five Years Ten Years After Ten Years Total
--------------- ------------------ ---------------- --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agency ... $0 0.00% $4,499 5.98% $0 0.00% $ 0 0.00% $4,499 5.98%
Mortgage-backed securities 0 0.00 0 0.00 0 0.00 1,093 7.18 1,093 7.18
Other .................... 0 0.00 0 0.00 0 0.00 261 5.00 261 5.00
------ ------ ------ ------ ------
Total ............... $0 0.00% $4,499 5.98% $0 0.00% $1,354 6.76% $5,853 6.16%
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
</TABLE>
42
<PAGE>
SOURCE OF FUNDS
The Company funds its mortgage banking activities through the use of a
warehouse line of credit and the use of agreements to repurchase. The following
table sets forth information pertaining to short-term borrowings for the periods
indicated.
<TABLE>
<CAPTION>
Period from
Year ended February 1, 1997 Year ended
December 31, to December 31, January 31,
1998 1997 1997
------------ ---------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Short-term borrowings:
Average balance outstanding during the period .......................... $ 95,052 $39,232 $32,889
Maximum amount outstanding at
any month-end during the period ...................................... $158,351 $54,603 $44,527
Weighted average interest rate during the period ....................... 5.44% 4.01% 4.46%
Total short-term borrowings at period end .............................. $ 95,985 $60,979 $27,680
Weighted average interest rate at period end ........................... 5.34% 3.99% 4.42%
</TABLE>
The Company conducts its operations utilizing leased premises and
occasionally utilizing equipment under operating leases. The terms of the leases
ranged from 12 months to 36 months with remaining lives ranging from 3 months to
29 months. The obligations remaining under the terms of these agreements totaled
$1.1 million at December 31, 1998.
The Company funds its retail banking activities primarily with
deposits, loan repayments and prepayments, and cash flows generated from
operations. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of checking, money
market, savings, NOW, and certificate of deposit accounts. Approximately 36.1%
of the funds deposited in the Company are in certificate of deposit accounts. At
December 31, 1998, core deposits (savings, NOW, and money market) represented
63.9% of total deposits. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Company's deposits are obtained predominantly from
the area around its office in Naples, Florida. The Company 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 the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including print media and generally does not solicit deposits from
outside its market area. The Company does not actively solicit certificate
accounts in excess of $100,000 or use brokers to obtain deposits. At December
31, 1998, $12.5 million, or 98.7% of the Company's certificate of deposit
accounts were to mature within one year. The Company 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, the Company believes that
it has sufficient resources to fund such withdrawals.
43
<PAGE>
The following table sets forth the amount and maturity of jumbo
certificates of deposit (I.E, certificates of deposit of $100,000 or more) at
December 31, 1998.
<TABLE>
<CAPTION>
Jumbo
Certificates
Time Remaining Until Maturity of Deposit
------------------------------ --------------
(In thousands)
<S> <C>
Less than 3 Months..................................... $ 300
3 Months to 6 Months................................... 1,258
6 Months to 12 Months.................................. 1,835
Greater than 12 Months................................. 0
------
Total............................................. $3,393
------
------
</TABLE>
EMPLOYEES
At December 31, 1998, the Company had no employees other than executive
officers. At December 31, 1998, WMC had 172 full-time employees and no part-time
employees and the Bank had 15 full-time employees and no part-time employees.
None of the employees of the Company or its subsidiaries were represented by a
collective bargaining agreement. Management of the Company considers its
relationship with its employees to be satisfactory.
PROPERTIES
The Company owns no real property but utilizes the office of the WMC.
The Company pays no rent or other consideration for use of this facility. The
mortgage banking activities of the Company are conducted primarily from the
offices of WMC located at 315 East Eisenhower, Ann Arbor, Michigan 48108 and
wholesale mortgage banking operations are also conducted from a branch office of
WMC located at 2300 Contra Costa Boulevard, Pleasant Hill, California 94523. The
retail banking activities of the Company are primarily conducted from the
offices of the Bank located at 811 Anchor Rode Drive, Naples, Florida 33940. All
office locations are leased by the Company.
SUBSIDIARY ACTIVITIES
The Company conducts business through its wholly-owned subsidiaries:
WMC and the Bank. WMC is a corporation organized on February 5, 1981 under the
laws of the State of Michigan. The Bank is a national banking association
organized on March 7, 1997 under the laws of the United States. Neither WMC nor
the Bank has any subsidiaries.
LEGAL PROCEEDINGS
At December 31, 1998, neither the Company nor the Bank was involved in
any material legal proceedings. Below is a brief description of material pending
legal proceedings to which WMC is a party:
CHANDLER, ET AL, V. HILTON MORTGAGE CORPORATION AND WASHTENAW MORTGAGE
CO., Civil Action No. 94-A-1418-N, U. S. District Court for the Middle District
Alabama ("CHANDLER"). On November 4, 1994, WMC was named as a defendant in a
class action lawsuit relating to its method of calculating finance charges in
lending disclosures required by the Federal Truth in Lending Act ("TILA"). The
complaint was subsequently amended to remove the TILA claim and add a claim
under the Real Estate Settlement Procedures Act ("RESPA"), a request for
declaratory judgement, and a fraud claim. The amended complaint alleges that the
yield spread premium payments from WMC to mortgage brokers were either payments
for the referral of business, or duplicative payments. The suit seeks
unspecified damages. On July 29,
44
<PAGE>
1998, the court denied class certification. The Company believes that WMC is
and has been in compliance with applicable federal and state laws. In the
opinion of management, the resolution of this matter is not expected to have
a material impact on the financial position of the Company. See Note 17 of
Notes to Consolidated Financial Statements.
ROSE, ET AL V. WASHTENAW MORTGAGE CO., Case No. 4:98cv33-B-B, U.S.
District Court for the Northern District of Mississippi. On February 10, 1998,
WMC was named as a defendant in a class action lawsuit alleging that the yield
spread premium payments from WMC to mortgage brokers were either payments for
the referral of business, or duplicative payments. The suit seeks unspecified
damages. On June 2, 1998, plaintiffs filed a motion for class certification. On
August 4, 1998, WMC filed a motion to stay the action, citing the order denying
class certification in CHANDLER and on September 11, 1998, the court ordered all
proceedings stayed pending a final judgment in CHANDLER. The Company believes
that WMC is and has been in compliance with applicable federal and state laws.
In the opinion of management, the resolution of this matter is not expected to
have a material impact on the financial position of the Company.
HEARN, ET AL V. WASHTENAW MORTGAGE CO., Case No. 4:98-CV-78 (JRE), U.S.
District Court for the Middle District of Georgia. On February 19, 1998, WMC was
named as a defendant in a class action lawsuit alleging that the yield spread
premium payments from WMC to mortgage brokers were either payments for the
referral of business, or duplicative payments. The suit seeks unspecified
damages. On June 22, 1998, WMC filed its answer denying all liability, asserting
affirmative defenses, and further asserting that a class should not be
certified. There have been no addition proceedings in this matter other than
limited discovery. The Company believes that WMC is and has been in compliance
with applicable federal and state laws. In the opinion of management, the
resolution of this matter is not expected to have a material impact on the
financial position of the Company.
WASHTENAW MORTGAGE CO. V. HALLMARK MORTGAGE MANAGEMENT SERVICES, INC.
AND DAVID JACKSON HOLCOMB, Civil Action No. 4:98 CV 207, U.S. District Court for
the Eastern District of Texas. This lawsuit filed on July 19, 1998 relates to a
Stock Purchase Agreement dated June 1, 1998 between WMC and David Jackson
Holcomb in which WMC agreed to purchase 22,500 shares of Hallmark Mortgage
Management Services, Inc. ("Hallmark") from Mr. Holcomb, constituting 45% of the
then outstanding stock of Hallmark. WMC paid $100,000 at the time of execution
of the Stock Purchase Agreement and agreed to pay an additional amount in the
event certain financial benchmarks were met. Those benchmarks were not met and
within approximately two weeks of the closing of the purchase, WMC began to have
serious operational problems with Mr. Holcomb and Hallmark. Within one month of
the closing of the purchase WMC filed this lawsuit seeking a receiver and
unspecified damages as a result of fraud, misrepresentation, and breach of
contract, and seeking a declaratory judgment. The defendants filed a
counterclaim for breach of contract, defamation, and civil conspiracy. No
specific damage amount was plead by defendants. On July 23, 1998, the court
granted WMC motion to have a receiver appointed. In the opinion of management,
the resolution of this matter is not expected to have a material adverse impact
on the financial position of the Company.
KASH V. WASHTENAW MORTGAGE CO., Civil Action No. CV-97-433, Shelby
County Circuit Court, Alabama. On June 3, 1997, WMC was named as a defendant in
a class action lawsuit alleging that WMC had failed to discharge plaintiffs'
mortgages once the mortgages had been paid in full, rendering WMC liable under
an Alabama statute for a $200 penalty. The class is asserted to be all Alabama
residents who, within the last 10 years, did not have their mortgages discharged
after the mortgages were paid, asserting the $200 penalty per occurrence. The
Company believes that WMC is and has been in compliance with applicable state
lending laws. In the opinion of management, the resolution of this matter is not
expected to have a material impact on the financial position of the Company.
45
<PAGE>
REGULATION
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most bank holding companies, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by the Company on interest-bearing liabilities,
such as borrowings, and the interest rates received by the Bank on its
interest-earning assets, such as loans originated or purchased by the Company or
investment securities held in the investment portfolio, comprise a significant
portion of the Company's earnings. In addition, the Company's profitability is
also dependent on the value of its mortgage servicing portfolio, which is also
highly sensitive to changes in interest rates. Interest rates are highly
sensitive to many factors that are beyond the control of the Company, such as
inflation, recession, and unemployment, and the impact which future changes in
domestic and foreign economic conditions might have on the Company and cannot be
predicted.
The business of the Company is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Federal Reserve Board. The Federal Reserve Board
implements national monetary policies (with objectives such as curbing inflation
and combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas influence
the growth of loans, investments, and deposits and also affect interest rates
earned on interest-earning assets and paid on interest-bearing liabilities. The
nature and impact on the Company of any future changes in monetary and fiscal
policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have the effect of increasing the cost of doing business, limiting
or expanding permissible activities, or affecting the competitive balance
between financial institutions, mortgage companies, and other financial services
providers. Proposals to change the laws and regulations governing the operations
and taxation of financial institutions, bank holding companies, mortgage
companies, and other financial services providers are frequently made in the
U.S. Congress, in the state legislatures and before various regulatory agencies.
GENERAL
Bank holding companies and bank and nonbank subsidiaries are
extensively regulated under both federal and state law. This regulation is
intended primarily for the protection of depositors and the deposit insurance
fund and not for the benefit of stockholders of the Company. Set forth below is
a summary description of the material laws and regulations which relate to the
operations of the Company, WMC, and the Bank. The description does not purport
to be complete and is qualified in its entirety by reference to the applicable
laws and regulations.
In recent years, significant legislative proposals and reforms
affecting the financial services industry have been discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the BHC Act, to expand permissible activities for banks, principally to
facilitate the convergence of commercial and investment banking. Certain
proposals also sought to expand insurance activities of banks. It is unclear
whether any of these proposals, or any form of them introduced in the current
Congress, will become law. Consequently, it is not possible to determine what
effect, if any, they may have on the Company and the Bank.
46
<PAGE>
REGULATION - THE COMPANY
The Company, is a registered bank holding company, subject to
regulation under the BHC Act. The Company is required to file periodic reports
and annual reports with the Federal Reserve Board and such additional
information as the Federal Reserve Board may require pursuant to the BHC Act.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness, or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board,
a bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease, or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. Generally, the capital requirements of the Federal Reserve Board mirror
those of the OCC applicable to the Bank, with certain exceptions. For additional
information on the capital levels of the Bank, see "- Regulation - The Bank -
Capital Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any activities, or acquire
shares of companies engaged in activities that are deemed by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. The validity of the source of strength doctrine
has been and is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
REGULATION - WMC
The mortgage banking operations of WMC are subject to extensive
regulation by federal and state governmental authorities and are subject to
various laws and judicial and administrative decisions. WMC is subject to the
rules and
47
<PAGE>
regulations of the Department of Housing and Urban Development ("HUD"), FHA, VA,
FNMA, FHLMC, and GNMA with respect to originating, underwriting, processing,
securitizing, selling, and servicing mortgage loans. Those rules and
regulations, among other things, prohibit discrimination, provide for
inspections and appraisals, require credit reports on prospective borrowers and
fix maximum loan amounts. Moreover, lenders such as WMC are required annually to
submit audited financial statements to FNMA, FHLMC, and HUD and to comply with
each regulatory entity's own financial requirements, policies, and procedures.
WMC's activities are also subject to, among other federal laws, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act, Home Mortgage Disclosure Act, and
the Real Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination, require the disclosure of certain
basic information to mortgagors concerning credit and settlement costs, limit
payment for settlement services to the reasonable value of the services rendered
and require the maintenance and disclosure of information regarding the
disposition of mortgage applications based on race, gender, geographical
distribution, and income level.
Additionally, various state laws and regulations affect WMC. WMC is
licensed as a mortgage banker or regulated lender in those states in which it
believes it is required to be licensed. Conventional mortgage operations may
also be subject to state usury statutes. FHA and VA loans are exempt from the
effect of such statutes. Under state statutes and licensing requirements, states
may have the right to conduct financial and regulatory audits of loans under
their jurisdiction and to determine compliance with state disclosure
requirements and usury laws.
REGULATION - THE BANK
GENERAL. The Bank, as a national banking association, is subject to
primary supervision, examination, and regulation by the OCC. If, as a result of
an examination of the Bank, the OCC should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or that
the Bank or its management is violating or has violated any law or regulation,
various remedies are available to the OCC. Such remedies include the power to
enjoin "unsafe or unsound practices," to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary penalties,
and to remove officers and directors. The FDIC has similar enforcement
authority, in addition to its authority to terminate a bank's deposit insurance,
in the absence of action by the OCC and upon a finding that a bank is in an
unsafe or unsound condition, is engaging in unsafe or unsound activities, or
that its conduct poses a risk to the deposit insurance fund or may prejudice the
interest of its depositors.
The deposits of the Bank will be insured by the FDIC in the manner and
to the extent provided by law. For this protection, the Bank will pay a
quarterly statutory assessment. See "- Premiums for Deposit Insurance." Various
other requirements and restrictions under the laws of the United States affect
the operations of the Bank. Federal statutes and regulations relate to many
aspects of the Bank's operations, including reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices, capital requirements, and
disclosure obligations to depositors and borrowers. Further, the Bank is
required to maintain certain levels of capital. See "- Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE COMPANY BY THE BANK. The
Company is a legal entity separate and distinct from the Bank. The prior
approval of the OCC is required if the total of all dividends declared by the
Bank in any calendar year exceeds the Bank's net profits (as defined) for that
year combined with its retained net profits (as defined) for the preceding two
years, less any transfers to surplus. In addition, as a condition to the
issuance of the Bank's charter by the OCC and the approval of deposit insurance
by the FDIC, both agencies have restricted the use of Bank funds to service the
$2.0 million loan used to initially capitalize the Bank. This restriction could
adversely effect the ability of the Company to service the loan if dividends
from WMC do not at least equal the loan payment. In addition, covenants of the
loan agreement require WMC to maintain a specified level of capitalization and
could restrict the ability of WMC to dividend to the Company sufficient funds to
meet its loan obligation. The restrictions contained in the approvals of the OCC
and the FDIC as well as the covenants in the loan agreement are anticipated to
expire after the
48
<PAGE>
consummation of the offering as the Company intends to use a portion of the
proceeds from the offering to repay the loan used to initially capitalize the
Bank.
The OCC also has authority to prohibit the Bank from engaging in
activities that, in the OCC's opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank may pay to the
Company. See "- Prompt Corrective Regulatory Action and Other Enforcement
Mechanisms" and "- Capital Standards" for a discussion of these additional
restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "- Prompt Corrective Action and
Other Enforcement Mechanisms."
CAPITAL STANDARDS. The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long-term preferred stock, eligible term
subordinated debt, and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio, of 4%.
49
<PAGE>
The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements of the Federal Reserve Board as of December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------------------------
Excess (Deficiency) over
Required to be Excess (Deficiency) over Required to be Required to be Well
Actual Adequately Capitalized Minimum Required Well Capitalized Capitalized
-------------- ---------------------- ------------------------ ---------------- -----------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- -------- -------- -------- -------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets) ...... $9,321 7.25% $10,288 8.00% $ (967) (0.75)% $12,860 10.00% $(3,539) (2.75)%
Tier 1 Capital (to Risk-
Weighted Assets) ...... 9,193 7.15 5,144 4.00 4,049 3.15 7,716 6.00 1,477 1.15
Tier 1 Capital (to Average
Assets) ............... 9,193 4.42 8,321 4.00 872 0.42 10,402 5.00 (1,208) (0.58)
</TABLE>
Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Under OCC and FDIC regulations, an
institution is generally considered "well capitalized" if it has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, and a Tier 1 capital (leverage) ratio of at least 5%. Federal law
generally requires full-scope on-site annual examinations of all insured
depository institutions by the appropriate federal bank regulatory agency
although the examination may occur at longer intervals for small
well-capitalized or state chartered banks. Initially, the Bank is expected to be
considered well capitalized, however, no assurance can be given that the Bank
will remain well capitalized or even meet its minimum regulatory capital
requirements. The following table presents the amounts of regulatory capital and
the capital ratios for the Bank, compared to its minimum regulatory capital
requirements of the OCC as of December 31, 1998.
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------------------------------------------------
Required to be
Actual Adequately Capitalized Excess
-------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------- -------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based ratio..... $5,394 23.8% $1,815 8.0% $3,579 15.8%
Tier 1 risk-based ratio.... 5,186 22.9 908 4.0 4,278 18.9
Leverage ratio............. 5,186 18.1 1,146 4.0 4,040 14.1
</TABLE>
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. Federal law
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized.
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an
50
<PAGE>
unsafe or unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as critically undercapitalized unless its capital ratio actually
warrants such treatment.
In addition to restrictions and sanctions imposed under the prompt
corrective action provisions, commercial banking organizations may be subject to
potential enforcement actions by the federal regulators for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS. In July 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
and compensation, fees, and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety and
soundness standards that the agencies will use to identify and address problems
at insured depository institutions before capital becomes impaired. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE. The Bank's deposit accounts are insured
by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the
maximum permitted by law. Insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC or the
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits,
which as of December 31, 1998, ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment. Pursuant to the Economic
Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at
January 1, 1997, the Bank began paying, in addition to its normal deposit
insurance premium as a member of the BIF, an amount equal to approximately 1.3
basis points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the
FDIC is not permitted to establish SAIF assessment rates that are lower than
comparable BIF assessment rates. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and the
SAIF. The Paperwork Reduction Act also provided for the merging of the BIF and
the SAIF by January 1, 1999 provided there were no financial institutions still
chartered as savings associations at that time. However, as of January 1, 1999,
there were still financial institutions chartered as savings associations.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
INTERSTATE BANKING AND BRANCHING. In September 1994, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
became law. Under the Interstate Act, beginning one year
51
<PAGE>
after the date of enactment, a bank holding company that is adequately
capitalized and managed may obtain approval under the BHC Act to acquire an
existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may increase or
decrease the percentage of total deposits that may be held in that state by any
one bank or bank holding company if application of such percentage does not
discriminate against out-of-state banks. An out-of-state bank holding company
may not acquire a state bank in existence for less than a minimum length of time
that may be prescribed by state law except that a state may not impose more than
a five year existence requirement.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), as implemented by OCC regulations, a bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OCC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The OCC evaluates an institution's CRA performance utilizing a four
tiered descriptive rating system, resulting in a rating of outstanding,
satisfactory, needs to improve, or substantial non-compliance.
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The Company's certificate of
incorporation and bylaws provide for staggered terms for the Board of Directors
while directors of the Bank are elected annually. The Board of Directors of the
Company has been divided into three classes so that, after their initial terms,
approximately one-third of the directors are elected to a three-year term at
each annual shareholders meeting. The Company currently has one vacancy in Class
III which the Company expects to fill shortly, subject to any required
regulatory approvals. Pursuant to the Certificate of Incorporation of the
Company, the Board of Directors may fill the vacancy by a two-thirds vote of the
directors remaining in office. Pursuant to the Certificate of Incorporation, a
person selected by the Board to fill a vacancy shall have a term expiring at the
annual meeting of stockholders at which the term of the class to which the
director has been chosen expires or until the director's successor is elected
and qualified.
<TABLE>
<CAPTION>
Beneficial
Current Term Ownership of Percent of
Name of Individual Age (1) Position With Company Expires Company(2) Total
- ------------------ ------- --------------------- ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Charles C. Huffman 55 Chief Executive Officer and 2000 2,400,000(3) 79.13%
Chairman of the Board
Michael D. Surgen 44 Director 2000 0(4) 0.00
Michael L. Hogan 46 Vice President, Chief 2001 0 0.00
Financial Officer, and
Director
Koula M. Kovach 39 Vice President, Secretary, 2001 9,336(5) 0.44
and Director
Raleigh E. Allen, Jr. 58 Director 2002 0 0.00
Ernest G. Merlanti 68 Director 2002 8,000 0.26
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Current Term Ownership of Percent of
Name of Individual Age (1) Position With Company Expires Company(2) Total
- ------------------ ------- --------------------- ------- ---------- -----
<S> <C> <C> <C> <C> <C>
All directors and
executive officers as 2,417,336(6) 79.55
a group (6 persons)
</TABLE>
- ----------
(1) As of December 31, 1998.
(2) As of December 31, 1998. Unless otherwise indicated, includes all shares
held directly by the named individuals as well as by spouses, minor
children in trust, and other forms of indirect ownership, over which shares
the named individual effectively exercises sole voting and investment power
with respect to the indicated shares.
(3) Excludes 2,000 shares of common stock subject to options that are not
exercisable within 60 days of December 31, 1998. Includes 588,350 shares of
common stock which were transferred on April 13, 1999 to two trusts for the
benefit of his two adult children. Mr. Huffman disclaims beneficial
ownership of such shares.
(4) Excludes 64,000 shares of common stock subject to options not exercisable
within 60 days of December 31, 1998.
(5) Includes 4,000 shares of common stock subject to options exercisable within
60 days of December 31, 1998.
(6) Includes 6,000 shares of common stock subject to options exercisable within
60 days of December 31, 1998. Includes 588,350 shares of common stock which
were transferred on April 13, 1999 to two trusts for the benefit of Mr.
Huffman's two adult children.
BIOGRAPHICAL INFORMATION
The business experience of each director and executive officer of the
Company is set forth below. All directors and executive officers have held their
present positions for a minimum of five years unless otherwise stated.
CHARLES C. HUFFMAN has served as the Chief Executive Officer and
Chairman of the Board of the Company since its formation in March 1997. Mr.
Huffman is also Chairman of the Board of WMC and has served in that capacity
since founding the company in 1981. Mr. Huffman became Chairman of the Board of
the Bank upon completion of its formation. Mr. Huffman is a long time member of
the Mortgage Bankers Association of America as well as various state
associations. Mr. Huffman also serves on the Secondary Marketing Advisory
Council of FNMA.
MICHAEL D. SURGEN has been a director of the Company since October 1998
and has served as the President and a director of the Bank since 1998. Prior to
joining the Company and the Bank, from 1996 to 1998, Mr. Surgen was
self-employed managing his own investments. From 1981 to 1996, Mr. Surgen was
employed by Eastern Savings Bank, FSB, Hunt Valley, Maryland, serving as
President from 1992 to 1996 and as an Executive Vice President from 1981 to
1992. Mr. Surgen is a member of the Economic Development Committee of Collier
County and the Naples Chamber of Commerce.
MICHAEL L. HOGAN has served as a Vice President and the Chief Financial
Officer of the Company since January 1999. Prior to joining the Company, Mr.
Hogan served in 1998 as the Regional Financial Officer for Regions Financial
Corp. and as a Senior Vice President and Chief Financial Officer Regions Bank,
N.A., Regions Financial Corp.'s national bank subsidiary. From 1996 to 1998, Mr.
Hogan served as Vice President, Treasurer, and SEC Compliance Officer for Key
Florida Bancorp, Inc. From 1989 to 1996, Mr. Hogan was a certified public
accountant practicing with Purvis, Gray and Company, an independent public
accounting firm headquartered in Florida. Mr. Hogan is a member of the American
Institute of Certified Public Accountants and the Florida Institute of Certified
Public Accountants as well as the Manatee and Sarasota Counties Gator Clubs.
KOULA M. KOVACH has been a director and Vice President of the Company
since its formation in March 1997. Ms. Kovach has been employed by WMC since
1981 and has served as its President since June 1998. Ms. Kovach has worked,
developed, and managed most areas of the WMC and since 1988, Ms. Kovach has
managed the Underwriting, Closing, Post Closing, Quality Control and Human
Resource Departments of WMC.
53
<PAGE>
Ms. Kovach has also served on the Risk Management Advisory Council and the
Product Development Customer Advisory Group of FNMA. Ms. Kovach is also a member
of the Association of Professional Mortgage Women.
RALEIGH E. ALLEN, JR. has been a director of the Company since March
1999. Mr. Allen has been employed by the Mortgage Guaranty Insurance Corporation
since 1973, most recently serving as an Account Manager for Eastern Michigan.
Mr. Allen currently serves as a board member of the Mortgage Bankers Association
of Michigan, the Deaf, Hearing and Signing Center, and the Eastern Mortgage
Brokers Association. Mr. Allen has also served as a board member of the Michigan
Mortgage Brokers Association and the Wisconsin Mortgage Bankers Association and
is a former member of the New Berlin Public School Board.
ERNEST G. MERLANTI has been a director of the Company since March 1999.
Mr. Merlanti has been employed as a Vice President--Consulting Services for
Personnel Systems, Inc., Ann Arbor, Michigan since 1970, a company which he
jointly owns with his spouse. See also, "- Certain Relationships and Related
Transactions."
COMMITTEES OF THE BOARD OF DIRECTORs
The Board of Directors of the Company generally meets on a quarterly
basis, as needed. During the year ended December 31, 1998, the Board of
Directors of the Company met two times. No director attended fewer than 75% in
the aggregate of the total number of such Board meetings held while such
director was a member during the year ended December 31, 1998 and the total
number of meetings held by committees on which such director served during such
year.
The Company's full Board of Directors acts as a nominating committee
for the annual selection of its nominees for election as directors of the
Company. While the Board of Directors will consider nominees recommended by
stockholders, it has not actively solicited recommendations from the Company's
stockholders for nominees nor, subject to the procedural requirements set forth
in the Company's Certificate of Incorporation, established any procedures for
this purpose. The Company's Board of Directors met once in its capacity as the
nominating committee during 1998.
The Bank's and WMC's full Boards of Directors act as a compensation
committees for both WMC and the Bank, respectively. WMC's Board met one time in
this capacity during 1998 and the Bank's Board met one times in this capacity
during 1998 to examine the performance and approve the compensation of the
officers. Employee members of the Boards of Directors do not participate in the
consideration of their own compensation.
The Company's Audit Committee consists of directors Raleigh E. Allen,
Jr., Ernest G. Merlanti, and Michael L. Hogan, who is also the Chief Financial
Officer of the Company. The Audit Committee is responsible for reviewing the
Company's auditing programs, overseeing the quarterly regulatory reporting
process, overseeing internal compliance audits as necessary, receiving and
reviewing the results of each external audit, and reviewing management's
response to auditors' recommendations. The Audit Committee did not meet in 1998.
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
DIRECTOR COMPENSATION. Non-employee directors of the Company receive
$400 per meeting of the Board of Directors attended. Each member of the Board of
Directors of the Bank receives a fee of $400 per month. Additionally, each
non-employee member of a committee of the Board of Directors of the Bank
receives a fee of $100 per committee meetings. Members of the Board of Directors
of WMC do not receive a fee for service on the Board of WMC. Directors are also
eligible to receive stock options and stock appreciation rights pursuant to the
Company's stock option and incentive plan. See "- Stock Option and Incentive
Plan."
54
<PAGE>
EXECUTIVE OFFICER COMPENSATION. The Company has no full time employees,
but will rely on the employees of WMC and the Bank for the limited services
required by the Company. All compensation paid to officers and employees of the
Company is paid by WMC or the Bank, as appropriate.
The following table sets forth the cash and non-cash compensation
awarded to or earned by the Chief Executive Officer of the Company and each
executive officer of the Company that earned a salary and bonus in excess of
$100,000 during the fiscal year ended December 31, 1998, the eleven months ended
December 31, 1997, and the year ended January 31, 1997. No other executive
officer of the Company or person performing a similar policy making function for
the Company had a salary and bonus in excess of $100,000 during these same
periods for services rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------- -----------
Other Securities
Period Annual Underlying All other
Name and Principal Position Ended Salary Bonus Compensation(1) Options(#) Compensation
- --------------------------- ----- ------ ----- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Huffman 12/31/98 $225,543 $645,303 $0 2,000 $2,400(2)
Chief Executive Officer and
Chairman of the Board of
the Company; Chairman of the
Board of the Bank and WMC
12/31/97 198,462 64,692 0 0 4,476(2)
01/31/97 215,000 83,353 0 0 9,184(3)
Koula M Kovach 12/31/98 110,000 307,995 0 0 2,400(4)
Director of the Company;
President of WMC
12/31/97 89,108 73,626 0 4,000 2,166(4)
01/31/97 81,744 23,922 0 0 1,654(4)
</TABLE>
- ----------
(1) For the year December 31, 1998, the eleven months ended December 31, 1997,
and the year ended January 31, 1997, there were no (a) perquisites over the
lesser of $50,000 or 10% of any of the above named executive officers'
total salary and bonus; (b) payments of above-market preferential earnings
on deferred compensation; (c) tax payment reimbursements; or (d)
preferential discounts on stock.
(2) Represents amounts contributed to the Company's 401(k) plan for the account
of Mr. Huffman.
(3) Represents $4,729 contributed to the Company's 401(k) plan for the account
of Mr. Huffman and $4,455 paid by the Company for term life insurance for
the benefit of Mr. Huffman.
(4) Represents amounts contributed to the Company's 401(k) plan for the account
of Ms. Kovach.
EMPLOYMENT AGREEMENT. The Bank entered into an employment agreement in
March 31, 1998 (the "Employment Agreement") with Michael D. Surgen, President
and Chief Executive Officer of the Bank and a director of the Company and the
Bank. The Employment Agreement provides for a term of five years, with an annual
base salary payable by the Bank in the amount of $120,000. The Employment
Agreement will terminate upon Mr. Surgen's death or medical or legal disability
and is terminable by the Bank for "just cause" as defined in the Employment
Agreement. In the event of termination for just cause, no severance benefits are
available. If the Bank terminates Mr. Surgen without just cause, Mr. Surgen will
be entitled to a severance payment in the amount of 25% of his base salary then
in effect and the Bank must repurchase or arrange for the sale of any common
stock owned by Mr. Surgen at the book value thereof.
The employment agreement also provides that Mr. Surgen will be granted
incentive stock options to purchase 80,000 shares of common stock pursuant to
the Company's stock option and incentive plan upon the achievement of certain
performance goals in the first five years of the Bank's operation. Mr. Surgen
will forfeit options related to 20,000 shares per year in which the performance
goals are not met. In addition, Mr. Surgen is also entitled to be granted
options to purchase an additional 20,000 shares per year through the sixth year
of the Bank's operations for superior performance, which is defined in the
Employment Agreement as a return on equity in excess of 13.5% and a return on
assets in excess of 1.10%.
55
<PAGE>
OTHER BENEFITS
401(K) SAVINGS PLAN. WMC sponsors a tax-qualified defined contribution
savings plan ("401(k) Plan") for the benefit of its employees and the employees
of the Company and the Bank. Employees become eligible to participate under the
401(k) Plan after reaching age 21 and completing one year (including 1,000
hours) of service. Under the 401(k) Plan, employees may voluntarily elect to
defer compensation, not to exceed applicable limits under the Code (I.E.,
$10,000 in calendar year 1998). WMC matches 50% of the employee contributions up
to 3.0% of contributions by the employee. Matching contributions vest over a six
year period beginning after the second year at a rate of 20% per year, or become
100% vested upon termination of employment due to death, disability, or
retirement. WMC may make additional contributions. Employee contributions are
immediately vested.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
age 65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code. For the year
ended December 31, 1998, the eleven months ended December 31, 1997, and the year
ended January 31, 1997, the Company incurred expenses of approximately $77,000,
$33,000, and $38,000, respectively relating to the plan.
STOCK OPTION AND INCENTIVE PLAN. The Boards of Directors of the
Company, the Bank, and WMC adopted the 1997 Stock Option and Incentive Plan (the
"Option Plan") upon completion of the organization of the Bank. 400,000 shares
of common stock were reserved for issuance by the Company upon exercise of stock
options to be granted to officers, directors, and employees of the Company, the
Bank, and WMC from time to time under the Option Plan. The purpose of the Option
Plan is to provide additional performance and retention incentives to certain
officers, directors, and employees by facilitating their purchase of a stock
interest in the Company. The Option Plan provides for a term of 10 years, after
which no awards could be made, unless earlier terminated by the Board of
Directors of the Company pursuant to the Option Plan. Directors and executive
officers of the Company, the Bank, and WMC received an initial grant of options
upon the consummation of the organization of the Bank. The options vest over a
period determined by the Option Plan Committee. Options are granted based upon
several factors, including seniority, job duties and responsibilities, job
performance, and the Company's performance.
The Company receives no monetary consideration for the granting of
stock options under the Option Plan, however, the Company receives the option
price for each share issued to optionees upon the exercise of such options.
Shares issued as a result of the exercise of options will be either authorized
but unissued shares or shares purchased in the open market by the Company,
however, no purchases in the open market will be made that would violate
applicable regulations restricting purchases by the Company. The exercise of
options and payment for the shares received would contribute to the equity of
the Company.
During the year ended December 31, 1998, the Company granted 92,000
options under the Option Plan. At December 31, 1998, 104,000 shares of common
stock were subject to outstanding options under the Option Plan. As of December
31, 1998, no options granted under the Option Plan have been exercised.
The following table shows the number of shares with respect to which
options under the Option Plan for the year ended December 31, 1998 to each of
the named persons, together with the percentage of all grants to employees which
the grant to the named person represents, the exercise price of such option and
the expiration date of the option.
56
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Number of Assumed Annual Rate of
Securities Percent of Total Stock Price Appreciation for
Underlying Options/SARs Option Term
Options/SARs Granted to Exercise or Base Expiration ----------------------------
Name Granted (#) Employees Price ($/Sh) Date 5%($) 10%($)
- ------------------- ------------ ---------------- ---------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Huffman 2,000 1.52% $5.50 11-19-08 $ 5,280 $14,940
</TABLE>
The following table sets forth the number of shares acquired by any of
the named persons upon exercise of stock options during the year ended December
31, 1998, the value realized through the exercise of such options, and the
number of unexercised options held by such person, including both those which
are presently exercisable and those which are not presently exercisable.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of unexercised
Shares unexercised in-the-money
acquired Value options options
Name on exercise realized exercisable/unexercisable exercisable/unexercisable
- ------------------------------- ------------ ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Charles C. Huffman........... 0 $0 0 / 2,000 $ 0 / $ 0
Koula M. Kovach.............. 0 $0 4,000 / 0 $5,000 / $ 0
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank, like many financial institutions, has adopted a policy
regarding the making of loans to officers and directors. The policy provides
that such loans (a) will be made in the ordinary course of business, (b) will be
made on substantially the same terms and conditions, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
the Bank's other customers, and (c) will not involve more than the normal risk
of collectibility or present other unfavorable features. All loans by the Bank
to its directors and executive officers are subject to regulations restricting
loans and other transactions with affiliated persons of the Bank.
WMC has adopted a policy giving employees, including officers and
directors, discounts on mortgage loans. WMC makes such loans on terms that yield
no profit or loss to WMC upon the sale of the loan to the secondary market. The
following table sets forth the indebtedness of executive officers, directors,
and members of the immediate family of an executive officer or director of the
Company who are or were indebted to WMC at any time since February 1, 1997 in an
amounts in excess of $60,000.
57
<PAGE>
The information set forth below includes amounts originated before
December 31, 1998.
<TABLE>
<CAPTION>
Largest Amount
Date of Type of Outstanding Since Balance At Interest
Name and Position Loan Loan February 1, 1997 December 31, 1998 Rate
- ------------------------ ---------- --------- ----------------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Charles C. Huffman 3-17-98 Mortgage $141,800 $ 0 6.125%
President, CEO, and
Chairman of the
Company; Chairman of
WMC and the Bank
Koula M. Kovach 10-17-96 Bridge Loan 92,617 0 7.750
Director of the
Company; President of 9-11-98 Mortgage 147,500 147,429 6.25
WMC
Michael D. Surgen 7-22-98 Mortgage 150,000 0 7.125
Director of the
Company; President of 7-24-98 Home Equity 150,000 35,000 7.750
the Bank
R. Charles Huffman 5/29/96 Mortgage 84,000 0 5.500
Relation to Charles C.
Huffman, President, 3-13-97 Construction 75,374 0 8.250
CEO, and Chairman of
the Company; 6-13-97 Mortgage 214,600 0 6.250
Chairman of WMC and
the Bank 8-25-98 Mortgage 227,150 0 6.000
</TABLE>
WMC holds a subordinated note payable to a former shareholder with a
balance of $1.2 million at January 31, 1997. The note requires quarterly
interest payments at 4.5% per annum over the prime interest rate. The note
became due on June 19, 1997, but historically, the maturity of the note has been
extended for successive one year periods. As of December 31, 1998, the maturity
date of the note, as extended, is June 19, 1999. It is anticipated that this
note will be repaid in full from the proceeds of the offering.
Ernest Merlanti, a director of the Company, and his spouse own
Personnel Systems, Inc., a personnel consulting company which provides
consulting services to WMC. Arbor Temporaries, Inc., a wholly-owned subsidiary
of Personnel Systems, Inc., provides temporary staffing for WMC. During the year
ended December 31, 1998, WMC paid fees for consulting to Personnel Systems, Inc.
of $8,860 and for temporary services to Arbor Temporaries, Inc. of $232,000.
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of 5,000,000 shares of
common stock, par value $0.02 per share and 200,000 shares of preferred stock,
par value $0.10 per share (the "Preferred Stock"). As of December 31, 1998,
there were 3,032,836 shares of common stock issued and outstanding and no shares
of Preferred Stock were issued and outstanding. The shares of common stock to be
issued hereby will be fully paid and non-assessable.
COMMON STOCK
The holders of common stock are entitled to receive dividends when and
as declared by the Board out of funds legally available therefor. Upon
dissolution of the Company, the holders of common stock are entitled
58
<PAGE>
to share pro rata in the Company's net assets after payment or provision for
payment of all debts and liabilities of the Company, and after provisions for
any class of Preferred Stock or other senior security which may be issued by the
Company.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and may not cumulate their votes
for the election of directors. Subject to the voting rights of the holders of
Preferred Stock, if any, the exclusive voting power for all purposes is vested
in the holders of the common stock. Each share of common stock is entitled to
participate on a pro rata basis in dividends and other distributions. The
holders of common stock do not have preemptive rights to subscribe for
additional shares that may be issued by, and no share is entitled in any manner
to any preference over any other share.
PREFERRED STOCK
The Company has the authority, exercisable by its Board of Directors
without shareholder approval, to issue, in one or more series, shares of
Preferred Stock from time to time and in such series and with such preferences,
limitations, and relative rights as may be determined by the Board of Directors
for such purposes and for such consideration as it may deem advisable.
Accordingly, the Board of Directors, without shareholder approval, may authorize
the issuance of one or more series of Preferred Stock with the same voting power
as the holders of common stock.
The creation and issuance of any series of Preferred Stock and the
relative rights, designations, and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, then existing market conditions and other factors that, in the
judgment of the Board of Directors, might warrant the issuance of Preferred
Stock. As of the date of this Prospectus, the Company has no arrangements,
undertakings, or plans with respect to the issuance of Preferred Stock.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
GENERAL. The Company's Certificate of Incorporation and Bylaws and the
Delaware General Corporation Law (the "DGCL") contain certain provisions
designed to enhance the ability of the Board of Directors of the Company to deal
with attempts to acquire control of the Company. These provisions, and the
ability of the Board of Directors to issue shares of Preferred Stock and to set
the voting rights, preferences, and other terms thereof, may be deemed to have
an anti-takeover effect and may discourage takeover attempts that have not been
approved by the Board of Directors of the Company (including takeovers which
certain shareholders may deem to be in their best interest). These provisions
also could discourage or make more difficult a merger, tender offer, or proxy
contest, even though such transaction may be favorable to the interests of
shareholders, and could potentially adversely affect the market price of the
common stock.
The following briefly summarizes protective provisions contained in the
Certificate of Incorporation and Bylaws and provided by the DGCL. This summary
is necessarily general and is not intended to be a complete description of all
the features and consequences of those provisions, and is qualified in its
entirety by reference to the Certificate of Incorporation and Bylaws and the
statutory provisions contained in the DGCL.
STAGGERED TERMS FOR MEMBERS OF THE BOARD OF DIRECTORS. The Bylaws
provide that the Board of Directors be divided into three classes as nearly
equal in number as possible, with one class to be elected annually for a term of
three years and until their successors are elected and qualified. Vacancies
occurring in the Board of Directors, including vacancies created by an increase
in the number of directors, may only be filled by a two-thirds vote of directors
then in office, and any directors so chosen shall hold office until the
expiration of the term of office of the class of directors to which such person
was appointed.
59
<PAGE>
REMOVAL OF DIRECTORS. Any director or the entire Board of Directors of
the Company may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of not less than 66.67% of outstanding shares of
capital stock of the Company entitled to vote generally in the election of
directors. Whenever, the holders of one or more series of Preferred Stock have
the right to vote, voting separately as a class, to elect one or more directors
of the Company, the director may be removed in accordance with the DGCL.
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS. Certain provisions of the
DGCL may require the affirmative vote of at least 66.67% of the outstanding
shares of the Company entitled to vote in the election of director in order for
the Company to engage in or enter into certain "Business Combinations," with any
"Interested Stockholder" or any affiliates of the Interested Stockholder, unless
the proposed transaction has been approved in advance by the Company's Board of
Directors, excluding those who were not directors prior to the time the
Interested Stockholder became the Interested Stockholder. The term "Interested
Stockholder" is defined to include any person and the affiliates and associates
of the person (other than the Company or its subsidiaries) who beneficially
owns, directly or indirectly, 15% or more of the outstanding shares of voting
stock of the Company.
OTHER PROVISIONS. Other provisions in the Certificate of Incorporation
and Bylaws effect the rights of shareholders including: (1) a provision in the
Certificate of Incorporation and Bylaws stating that only the Board of
Directors, a committee of the Board, or the Chairman of the Board can the call a
special meeting of shareholders (Art. X, Sec. B of Certificate), (2) a provision
in the Certificate of Incorporation requiring not less than 30 days nor more
than 60 days advance notice for shareholder nominations of directors and
shareholder proposals (Art. XI ), and (3) provisions in the Certificate of
Incorporation limiting personal liability of directors (Art. XV) and providing
indemnification to directors, officers, and employees of the Company (Art. XIV)
under certain circumstances, including actions on behalf of the Company.
AMENDMENT OF GOVERNING INSTRUMENTS. The Certificate of Incorporation of
the Company provides that certain provision of the Certificate of Incorporation
may only be repealed, altered or amended unless the approved by the affirmative
vote of the holders of not less than 80% of the outstanding shares of capital
stock entitled to vote generally in the election of directors. If the amendment,
alteration, or repeal is first approved by the Board of Directors of the
Company, thereafter a majority of the votes cast by the holders of the
outstanding capital stock may amend, alter, or repeal a provision. The Bylaws of
the Company provide that the Bylaws may be altered, amended, or repealed by the
affirmative vote of the holders of two-thirds of the outstanding shares of
capital stock entitled to vote generally in the election of directors of the
Company or by a vote of two-thirds of the members of the Board of Directors.
SELLING STOCKHOLDER
The Selling Stockholder is Charles C. Huffman, Chief Executive Officer
and Chairman of the Board of the Company and WMC, and a director of the Bank.
The Selling Stockholder beneficially owns 1,811,650 shares of common stock, or
42.80% of the outstanding common stock before this offering (adjusted to give
effect to the transfer of 588,350 shares of common stock to two trusts for the
benefit of his adult children). The Selling Stockholder also holds 2,000 options
to purchase common stock at $5.50 per share, none of which are exercisable.
The following table sets forth information, as of the date of this
Prospectus, regarding the ownership of the common stock by the Selling
Stockholder, and the stock which will be owned following the offering (assuming
that the over-allotment option is exercised).
60
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Shares of Shares of
Common Stock Common Common Common Stock
Stock Percent Owned Stock Stock Percent Owned
Name of Beneficial Owned Before Before the Offered Owned After After the
Owner the Offering(1) Offering Hereby(2) the Offering(1) Offering(2)
- ----------------------- ----------------- ----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Charles C. Huffman 1,811,650 42.80% 180,000 1,631,650 38.55%
</TABLE>
- ----------
(1) Includes all shares held directly by Mr. Huffman as well as other forms of
indirect ownership, over which shares Mr. Huffman effectively exercises
sole voting and investment power.
(2) Assumes 4,232,836 shares of common stock will be outstanding following the
offering and that the over-allotment option granted by the Selling
Stockholder is exercised. Also assumes that there will be no purchases by
the Selling Stockholder of any shares in the offering.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement between the underwriter, William R. Hough & Co., the Company, and the
Selling Stockholder, the underwriter has agreed to purchase from the Company and
the Selling Stockholder the number of shares of common stock set forth below.
The underwriter has agreed to purchase the shares of common stock at the initial
offering price less the underwriting discounts and commission set forth on the
cover page of this Prospectus.
<TABLE>
<CAPTION>
Number of Shares to be Number of Shares to be
Purchased by Underwriter Purchased by Underwriter
Underwriter from the Company from the Selling Stockholder (1)
----------- ------------------------ --------------------------------
<S> <C> <C>
William R. Hough & Co................
</TABLE>
- ----------
(1) Assumes that the over-allotment option granted by the Selling Stockholder
is exercised.
The underwriter proposes to offer the shares of common stock directly
to the public at the initial offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $__ per share. The underwriter has informed the Company that it does not
intend to confirm sales to any accounts over which they exercise discretionary
authority. After the initial public offering of the shares, the offering price
and other selling terms may from time to time be varied by the underwriter. No
person together with associates of or groups of persons acting in concert with
such person may purchase in the offering a number of shares that equals 10% or
more of the Company's outstanding common stock upon consummation of the offering
The Selling Stockholder has granted to the underwriter an option,
exercisable no later than 30 days after the date of this Prospectus, to purchase
up to 180,000 additional shares of common stock from the Company, at the initial
public offering price, less the underwriting discount, set forth on the cover
page of this Prospectus, to cover over-allotments, if any. The underwriter may
exercise such option only to cover over-allotments made in connection with the
sale of shares of common stock offered hereby.
In connection with the offering, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriter may over allot. In addition, the
underwriter may bid for, and purchase, shares of common stock in the open market
to cover syndicate short positions created in connection with the offering or to
stabilize the price of the common stock. Finally, the underwriting syndicate, if
any, may reclaim selling concessions allowed for distributing the common stock
in the
61
<PAGE>
offering if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriter is not required to engage
in these activities, and may end any of these activities at anytime.
Prior to the offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among the Company, the Selling Stockholder, and the underwriter.
The factors to be considered in determining the initial public offering price
will be prevailing market and economic conditions, the revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations and the
Company's management.
The Company and the Selling Stockholder have agreed to indemnify the
underwriter against and contribute toward certain liabilities, including
liabilities under the Securities Act. The Company has agreed to reimburse the
underwriter for certain expenses and legal fees related to the sale of the
Securities.
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for the Company by Manatt, Phelps & Phillips, LLP,
Washington, D.C. Certain other legal matters will be passed upon for the Selling
Stockholder by Manatt, Phelps & Phillips, LLP, Washington, D.C. Certain legal
matters will be passed upon for the underwriter by Schifino & Fleischer, P.A.,
Tampa, Florida.
EXPERTS
The consolidated financial statements of the Company as and for the
year ended December 31, 1998, included in this Prospectus have been audited by
Crowe Chizek & Company LLP, independent certified public accountants, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing. The consolidated financial
statements of the Company as of and for the eleven months ended December 31,
1997 and as of and for the year ended January 31, 1997 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent certified
public accountants ("Deloitte"), and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 4, 1998, the Board of Directors of Company resolved to
engage the accounting firm of Crowe Chizek & Company LLP as the Company's
independent accountant for its fiscal year ending December 31, 1998.
Effectively, the services of the Company's former independent accountant,
Deloitte, was simultaneously terminated. Deloitte informed the Company that it
no longer desired to continue with the engagement because it no longer provided
mortgage banking audit services in Michigan.
Deloitte's report on the financial statements for the eleven months
ended December 31, 1997 and the year ended January 31, 1997 contained no adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During this same period and
subsequent to December 31, 1997, there have been no disagreements with Deloitte
on any matter of accounting principles or practices, financial statement
disclosure, auditing scope or procedure, or any reportable events.
62
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the registration statement. Such
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. Information on
the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. This Prospectus and
all exhibits to the registration statement electronically filed with the SEC are
available at the SEC's web site. This Prospectus contains a description of the
material terms and features of all material contracts, reports, or exhibits to
the registration statement required to be disclosed in the Prospectus. You
should obtain and review any exhibit for full information regarding such
exhibit.
In connection with the offering, the Company will register its common
stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements, and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
and the annual and periodic reporting and other requirements of the Exchange
Act.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report of Crowe Chizek & Company LLP......................................................F-2
Independent Auditors' Report of Deloitte & Touche LLP...........................................................F-3
Consolidated Financial Statements for the Year Ended December 31,
1998, the Eleven Months Ended December 31, 1997, and the Year Ended
January 31, 1997
Consolidated Balance Sheet.............................................................................F-4
Consolidated Statements of Income......................................................................F-5
Consolidated Statement of Shareholders' Equity.........................................................F-7
Consolidated Statement of Cash Flows...................................................................F-8
Notes to Consolidated Financial Statements..................................................................F-9--F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PN Holdings, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheet of PN Holdings, Inc.
(The "Company"), as of December 31, 1998, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of the Company as of December 31, 1997 and January 31, 1997 and for the eleven
months ended December 31, 1997 and year ended January 31, 1997 were audited by
other auditors whose report dated March 20, 1998 expressed an unqualified
opinion on those statements.
We conducted our audit of the consolidated financial statements in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 11, 1999, except for Note 2 as to
which the date is April 16, 1999
F-2
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE] Suite 900
600 Renaissance Center
Detroit, Michigan 48243-1704
INDEPENDENT AUDITORS' REPORT
PN Holdings, Inc.
Ann Arbor, Michigan:
We have audited the accompanying consolidated balance sheet of PN Holdings, Inc.
and subsidiaries (the "Company") as of December 31, 1997 and January 31, 1997,
and the related consolidated statement of income, shareholders' equity and cash
flows for the eleven months ended December 31, 1997 and the year ended January
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and January 31, 1997, and the results of their operations and their cash flows
for the eleven months ended December 31, 1997 and the year ended January 31,
1997 in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental
consolidating information is presented for the purpose of additional analysis of
the basic consolidated financial statements rather than to present the financial
position and results of operations of the individual companies, and is not a
required part of the basic consolidated financial statements. This supplemental
consolidating information is the responsibility of the Company's management.
Such information has been subjected to the auditing procedures applied in our
audits of the basic consolidated financial statements and, in our opinion, is
fairly stated in all material respects when considered in relation to the basic
consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
March 20, 1998
F-3
<PAGE>
PN HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,180,034 $ 4,376,631
Accounts receivable 7,087,170 2,652,951
Securities available for sale 5,591,983 6,983,501
Loans held for sale 179,454,160 98,657,962
Loans receivable, net 23,873,670 2,115,960
Mortgage servicing rights, net 15,509,678 4,340,178
Mortgage loans in foreclosure and other real estate 581,385 299,152
Premises and equipment, net 884,443 604,208
Federal income taxes receivable 1,392,624 245,848
Other assets 1,854,119 480,049
--------------- ----------------
$ 246,409,266 $ 120,756,440
--------------- ----------------
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 3,280,064 $ 1,872,928
Interest-bearing 31,784,014 15,705,304
--------------- ----------------
Total deposits 35,064,078 17,578,232
Due to bank 38,259,829 10,703,042
Notes payable 57,025,504 19,473,428
Repurchase agreements 95,984,844 60,980,404
Other liabilities 6,474,997 2,307,827
Subordinated note payable 1,200,000 1,200,000
--------------- ----------------
Total liabilities 234,009,252 112,242,933
Shareholders' equity
Preferred stock
Common stock 60,656 75,821
Additional paid in capital 8,261,328 8,246,163
Retained earnings 4,076,162 188,782
Net unrealized appreciation on securities
available for sale, net of tax 1,868 2,741
--------------- ----------------
Total shareholders' equity 12,400,014 8,513,507
--------------- ----------------
$ 246,409,266 $ 120,756,440
--------------- ----------------
--------------- ----------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Consolidated Statements of Income
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 11,277,489 $ 3,229,789 $ 3,015,337
Investment securities, taxable 478,520 77,292 -
Federal funds sold and overnight accounts 390,019 113,417 -
-------------- -------------- ---------------
Total interest income 12,146,028 3,420,498 3,015,337
INTEREST EXPENSE
Deposits 933,407 175,152 -
Short-term borrowings 7,897,153 2,280,252 2,047,816
-------------- -------------- ---------------
Total interest expense 8,830,560 2,455,404 2,047,816
-------------- -------------- ---------------
NET INTEREST INCOME 3,315,468 965,094 967,521
Provision for loan losses 61,966 65,509 -
-------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,253,502 899,585 967,521
Noninterest income
Securities gains 16,402 - -
Service charges on deposit accounts 29,320 412 -
Other income 1,651,281 537,161 476,419
Servicing income 2,800,950 1,776,571 2,654,754
Gain on sales of mortgage servicing rights
and loans, net 18,052,119 5,419,177 4,513,141
-------------- -------------- ---------------
Total noninterest income 22,550,072 7,733,321 7,644,314
Noninterest expense
Compensation and employee benefits 10,579,724 4,573,870 4,108,047
Occupancy and equipment 1,927,550 1,350,018 1,405,221
Bank fees 466,611 153,411 141,030
Loan processing fees 945,626 327,779 256,427
Amortization of mortgage servicing rights 1,766,031 1,014,469 1,305,584
Mortgage servicing rights valuation adjustment 914,061 (77,579) (660,209)
Other noninterest expense 3,275,517 1,479,971 1,194,708
-------------- -------------- ---------------
Total noninterest expense 19,875,120 8,821,939 7,750,808
-------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 5,928,454 (189,033) 861,027
Provision for income taxes 2,041,074 (51,516) 332,024
-------------- -------------- ---------------
NET INCOME (LOSS) $ 3,887,380 $ (137,517) $ 529,003
-------------- -------------- ---------------
-------------- -------------- ---------------
Basic and diluted earnings (loss) per share $ 1.28 $ (.05) $ .22
-------------- -------------- ---------------
-------------- -------------- ---------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Consolidated Statements of Comprehensive Income
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 3,887,380 $ (137,517) $ 529,003
Other comprehensive income, net of tax
Change in unrealized gains or losses on securities (873) 2,741 -
-------------- -------------- ---------------
Comprehensive income (loss) $ 3,886,507 $ (134,776) $ 529,003
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Consolidated Statements of Shareholders' Equity
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
------ ----- ------- --------
<S> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1996 - WMC 510 $ 510 $ 306 $ 5,829,769
Net income 529,003
--------- ------- -------------- -------------
BALANCE AT JANUARY 31, 1997 - WMC 510 510 306 6,358,772
WMC shares acquired and retired (510) (510) (306) (6,032,473)
Shares issued of PN Holdings, Inc. 758,209 75,821 8,246,163
Net loss (137,517)
Change in net unrealized gain on securities available for sale
--------- ------- -------------- -------------
BALANCE AT DECEMBER 31, 1997 758,209 75,821 8,246,163 188,782
Issuance of 758,209 shares from declaration of
2 for 1 stock split and change in par value from $.10 to $.02 758,209 (45,493) 45,493
Issuance of 1,516,418 shares from declaration of 2 for 1 stock split 1,516,418 30,328 (30,328)
Net income 3,887,380
--------- ------- -------------- -------------
Change in net unrealized gain on securities available for sale
BALANCE AT DECEMBER 31, 1998 3,032,836 $ 60,656 $ 8,261,328 $ 4,076,162
--------- ------- -------------- -------------
--------- ------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) Total
on Shareholders'
Securities Equity
---------- ------
<S> <C> <C>
BALANCE AT FEBRUARY 1, 1996 - WMC $ 5,830,585
Net income 529,003
---------- -------------
BALANCE AT JANUARY 31, 1997 - WMC 6,359,588
WMC shares acquired and retired (6,033,289)
Shares issued of PN Holdings, Inc. 8,321,984
Net loss (137,517)
Change in net unrealized gain on securities available for sale $ 2,741 2,741
---------- -------------
BALANCE AT DECEMBER 31, 1997 2,741 8,513,507
---------- -------------
Issuance of 758,209 shares from declaration of
2 for 1 stock split and change in par value from $.10 to $.02
Issuance of 1,516,418 shares from declaration of 2 for 1 stock split
Net income 3,887,380
Change in net unrealized gain on securities available for sale (873) (873)
---------- -------------
BALANCE AT DECEMBER 31, 1998 $ 1,868 $ 12,400,014
---------- -------------
---------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Consolidated Statements of Cash Flows
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year ended Eleven months ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,887,380 $ (137,517) $ 529,003
Adjustments to reconcile net income (loss) to
net cash from operating activities
Accretion of securities, net (2,398) - -
Amortization of mortgage servicing rights 1,766,031 1,014,469 1,305,584
Mortgage servicing rights valuation adjustment 914,061 (77,579) (660,209)
Gain on sales of mortgage servicing rights
and loans, net (18,052,119) (5,419,177) (7,391,719)
Gain on sale of securities (16,402) - -
Provision for loan losses 61,966 65,509 -
Depreciation 372,519 230,236 271,862
Loss on sale of equipment 761 3,460 1,396
Purchases of mortgage loans (2,496,696,359) (722,755,816) (588,237,190)
Proceeds from sale of mortgage loans 2,417,825,382 661,049,821 583,801,726
Changes in assets and liabilities that
(used) provided cash
Accounts receivable (5,727,689) (692,153) 113,960
Federal income taxes receivable (1,146,776) - -
Other liabilities 2,292,887 (326,105) 802,479
Deferred taxes 1,873,321 200,125 (377,757)
---------------- ----------------- -----------------
Net cash used in operating activities (92,647,435) (66,844,727) (9,840,865)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net (21,819,676) (902,712) (1,278,757)
Purchases of mortgage servicing rights (27,730,631) (2,719,727) (1,584,446)
Proceeds from sales of mortgage servicing rights 30,007,937 9,404,849 10,485,794
Loans in foreclosure and other real estate, net (282,233) 219,699 58,090
Property and equipment expenditures, net (653,515) (373,432) (35,781)
Purchase of securities available for sale (9,936,732) (7,966,160) -
Proceeds from sales of securities available for sale 1,516,402 - -
Proceeds from maturities and principal repayments
of securities available for sale 9,830,737 1,000,000 -
Purchase of Federal Reserve Stock (80,600) (180,000) -
---------------- ----------------- -----------------
Net cash used in investing activities (19,148,311) (1,517,483) 7,644,900
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits 1,791,568 1,639,836 -
Increase in interest-bearing deposits 15,694,278 15,938,396 -
Increase (decrease) in due to bank 27,556,787 2,919,872 (7,244,116)
Proceeds from issuance of common stock - 2,230,000 -
Increase (decrease) in notes payable due on demand 37,552,076 16,826,048 (311,375)
Increase in repurchase agreements 35,004,440 33,300,837 9,932,947
Principal payments under capital lease obligations - (116,148) (181,491)
---------------- ----------------- -----------------
Net cash provided by financing activities 117,599,149 72,738,841 2,195,965
---------------- ----------------- -----------------
Net change in cash and cash equivalents 5,803,403 4,376,631 --
Cash and cash equivalents at beginning of year 4,376,631 -- --
---------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,180,034 $ 4,376,631 $ -
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Cash and equivalents is composed of:
Cash and demand deposits due from banks $ 678,799 $ 576,631 $ --
Interest-bearing deposits in banks 2,142,235 -- --
Federal funds sold 7,359,000 3,800,000 --
---------------- ----------------- -----------------
Total cash and cash equivalents $ 10,180,034 $ 4,376,631 $ --
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Supplemental cash disclosures
Interest paid $ 7,679,301 $ 2,374,631 $ 2,126,176
Income taxes paid 1,375,000 650,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: PN Holdings, Inc. ("PNH") is a registered bank holding
company incorporated during 1997. PNH owns Washtenaw Mortgage Company ("WMC")
and Pelican National Bank ("PNB" or the "Bank").
WMC is a Michigan corporation which engages in mortgage banking activities and,
as such, acquires, sells and services one-to-four unit residential mortgage
loans. WMC acquires and services residential mortgage loans in 42 states.
PNB was incorporated on March 7, 1997 and commenced operations as a national
bank in Naples, Florida on August 25, 1997. The Bank presently operates one full
service banking facility and engages primarily in the business of attracting
deposits from the general public and using such deposits, together with other
funds, to originate and purchase loans secured by residential real estate for
sale in the secondary market and for holding in its own portfolio.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements for the year
ended December 31, 1998, eleven months ended December 31, 1997, and year ended
January 31, 1997 include the accounts of PNH beginning March 3, 1997 (date of
inception), PNB beginning March 7, 1997 (date of inception) and WMC for all
periods. All references herein to the "Company" 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 the Company and, accordingly, are not included in the
accompanying consolidated financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures and actual results could differ from those estimates.
The fair value of financial instruments, the valuation of mortgage servicing
rights, and the allowance for loan losses are particularly subject to change.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
federal funds sold, interest-bearing deposits in banks, and funds due from
banks. The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. The Company was in a
book overdraft position at December 31, 1998 and 1997, which is shown in the
accompanying balance sheet as due to bank.
ACCOUNTS RECEIVABLE: Periodically the Company sells mortgage servicing rights.
The Company records the sale at the time all of the following conditions have
been met: (1) title has passed, (2) substantially all risks and rewards of
ownership have irrevocably passed to the buyer, and (3) any protection
provisions retained by the Company are minor and can be reasonably estimated. If
the sale requires the Company to finance a portion of the sales price, the
Company records the transaction as a sale only when an adequate nonrefundable
down payment has been received and the receivable allows the Company full
recourse to the buyer.
This line item included $6,181,140 and $1,757,999 at December 31, 1998 and 1997,
respectively, of receivables from sales of mortgage servicing rights. Further,
the line item was net of an allowance for doubtful accounts and minor
contingencies of $175,000 and $24,809 at December 31, 1998 and 1997,
respectively.
SECURITIES AVAILABLE FOR SALE: Debt securities are classified as available for
sale. Securities classified as available for sale are reported at their fair
value and the related unrealized holding gain or loss is reported, net of
related income tax effects, as a separate component of shareholders' equity,
until realized.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Unrealized gain or losses on securities available for sale and realized gains or
losses on the sales of securities available for sale are based on the specific
identification method. Premiums and discounts on all securities are amortized to
expense and accreted to income over the life of the securities using the
interest method.
LOANS HELD FOR SALE: Balances include deferred origination fees and costs and
are stated at the lower of cost or market in aggregate. The market value of
mortgage loans held for sale is based on market prices and yields at year-end in
normal market outlets used by the Company.
The Company purchases forward contracts and U.S. Treasury options to manage its
interest rate exposure. Realized and unrealized gains and losses on forward
contracts are deferred to the extent they act as a hedge and are included in the
valuation of mortgage loans held for sale. Such gains and losses are recognized
upon delivery of the underlying mortgage loans and are included in gains on
sales of mortgage loans. U.S. Treasury options are carried at market value, with
realized and unrealized gains and losses recognized currently in gains on sales
of mortgage servicing rights and mortgage loans. There were no open positions in
Treasury options at December 31, 1998 or 1997.
LOANS RECEIVABLE: Loans receivable are reported at the principal balance
outstanding, net of an allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established through
a provision for loan losses charged to operations. The allowance is the amount
that management believes will be adequate to absorb probable credit losses
inherent in existing loans, based on evaluations of collectibility and prior
loss experience on loans. The evaluations take into consideration such factors
as the nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans and economic conditions that may affect
the borrower's ability to repay the loan. Estimates of loan losses are
subjective and are frequently based on future events beyond the Company's
control. Therefore, actual loan losses in future periods could differ materially
from amounts provided in the current period and could result in a material
adjustment to future results of operations.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral.
Nonaccrual loans are loans on which the accrual of interest has been
discontinued because a reasonable doubt exists as to the full collection of
interest or principal. A nonaccrual loan may not have an anticipated loss
associated with it because of the collateral supporting the credit and,
therefore, not be considered impaired. An impaired loan is anticipated to have a
loss and may or may not be on nonaccrual. When a loan is placed on nonaccrual
status, all interest previously accrued, but not collected, is reversed against
current period interest income. Interest income on nonaccrual loans and impaired
loans is recognized only to the extent cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such loans
only when they are brought fully current with respect to interest and principal
and when, in management's judgment, the loans are estimated to be fully
collectible as to both principal and interest.
MORTGAGE SERVICING RIGHTS, NET: The Company purchases and originates mortgage
loans for sale to the secondary market, and sells the loans on either a
servicing retained or servicing released basis. Servicing rights are recognized
as assets for purchased rights and for the allocated value of retained servicing
rights on loans sold. The capitalized cost of loan servicing rights is amortized
in proportion to, and over the period of, estimated net future servicing
revenue. The expected period of the estimated net servicing income is based, in
part, on the expected prepayment rate of the underlying mortgages.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate), term (15 year, 20
year, 30 year or balloon), and date of loan acquisition. Impairment represents
the excess of amortized cost of an individual stratum over its estimated fair
value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time. Changes
in these underlying assumptions could cause the fair value of mortgage servicing
rights, and the related valuation allowance, to change significantly in the
future.
LOANS IN FORECLOSURE AND OTHER REAL ESTATE: Loans in foreclosure and other real
estate are initially recorded at the lower of fair value, less estimated cost to
sell or the balance of the related loan. If fair value declines, a valuation
allowance is recorded through expense. Costs relating to the development and
improvement of real estate are capitalized, whereas those costs relating to
holding the real estate are charged to expense.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed using either an accelerated
or straight-line method over the estimated useful lives of the related assets.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
INCOME TAXES: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. To the extent current available evidence raises doubt
about the future realization of a deferred tax asset, a valuation allowance is
established.
REVENUE RECOGNITION: Mortgage loans held for sale are generally committed for
sale to secondary market investors under firm agreements at or prior to the
closing date of the individual loan. Loan sales and the related gains or losses
are recorded at the settlement date.
Loan origination fees and costs are deferred as a component of the balance of
loans held for sale. Since mortgage loans originated or acquired for sale are
generally sold within 60 days, any related fees and costs are not amortized
during that period, but are effectively recognized when the loan is ultimately
sold.
Loan administration fees earned for servicing loans for investors are generally
calculated based on the outstanding principal balances of the loans serviced and
are recorded as revenue when received.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income on loans receivable is reported on the interest method. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days.
Payments received on such loans are reported as principal reductions.
COMPREHENSIVE INCOME: Under a new accounting standard, comprehensive income is
now reported for all periods. Comprehensive income includes both net income and
other comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available for sale. Reclassification
adjustments and tax effects were immaterial in 1998 and the periods ended
December 31, and January 31, 1997.
EARNINGS (LOSS) PER SHARE: Basic earnings per share is computed based on the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is computed based on the weighted average number of common
shares and common share equivalents during the year. Weighted average shares for
periods prior to the formation of PNH and pooling with WMC (see Note 2)
represent PNH equivalent shares as if the PNH shares used to acquire WMC had
been outstanding for all periods. Weighted average shares are restated for all
stock splits through the date of the issue of the financials.
CONCENTRATION OF CREDIT RISK: The Bank grants commercial, residential and
consumer loans primarily to customers in Collier County, Florida. Although the
Bank has diversified the loan portfolio, a substantial portion of its debtors
are dependent upon the real estate economic sector.
IMPACT OF INTEREST RATE FLUCTUATIONS: Interest rate fluctuations generally have
a direct impact on a mortgage banking institution's financial performance.
Significant increases in interest rates may make it more difficult for potential
borrowers to purchase residential property and to qualify for mortgage loans. As
a result, the volume and related income from loan originations may be reduced.
Significant increases in interest rates will also generally increase the value
of the Company's servicing portfolio as a result of slower anticipated
prepayment activity. Significant decreases in interest rates may enable more
potential borrowers to qualify for a mortgage loan, resulting in higher income
related to the loan originations. However, significant decreases in interest
rates may result in higher anticipated loan prepayment activity and, therefore,
reduce the value of the loan servicing portfolio.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new accounting
standard 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.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 will allow classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements.
RECLASSIFICATION: Certain prior year amounts have been reclassified to conform
to the 1998 presentation.
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS COMBINATION
PNH was incorporated on March 3, 1997 as a registered bank holding company. PNH
was created to form PNB and to acquire WMC. On June 22, 1997, PNH acquired all
the common stock of WMC in exchange for 600,000 shares of PNH's $0.10 par value
common stock. The transaction has been accounted for as a pooling of interests
and, accordingly, the consolidated financial statements include the accounts of
WMC prior to the acquisition by PNH. PNH had no operations prior to the
acquisition of WMC. As of the acquisition date, WMC had recorded revenues of
$3,460,376 and a net loss of $326,299. There were no material intercompany
transactions between WMC and PNH prior to the acquisition. WMC's fiscal year-end
has been changed from January 31 to December 31 to conform to PNH's fiscal
year-end.
During 1997, PNH also offered a private placement of stock and issued 158,209
shares of $0.10 par value shares of common stock for approximately $2.3 million.
At December 31, 1997, the Company had 1,000,000 shares of $0.10 par value common
stock authorized with 758,209 shares issued and outstanding, and 200,000 shares
of preferred stock authorized with none issued or outstanding.
Common stock amounts, market values and per share disclosures related to
stock-based compensation plans and earnings and dividends per share disclosures
have been retroactively restated for the two-for-one stock split effected in the
form of a 100% stock dividend which was declared on March 30, 1999, with an
effective date of March 31, 1999. At December 31, 1998, the Company had
5,000,000 shares of $.02 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.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities available for sale consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1998
U.S. Government Agencies $ 4,500,000 $ 782 $ (1,407) $ 4,499,375
Mortgage Backed Securities 1,089,153 3,455 - 1,092,608
-------------- ----------- ----------- ---------------
$ 5,589,153 $ 4,237 $ (1,407) $ 5,591,983
-------------- ----------- ----------- ---------------
-------------- ----------- ----------- ---------------
1997
U.S. Treasury Notes $ 1,496,146 $ 2,448 $ - $ 1,498,594
U.S. Government Agencies 5,484,614 439 (146) 5,484,907
-------------- ----------- ----------- ---------------
$ 6,980,760 $ 2,887 $ (146) $ 6,983,501
-------------- ----------- ----------- ---------------
-------------- ----------- ----------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
The amortized cost and estimated market value of securities available for sale
at December 31, 1998, by contractual maturity, are shown below. Mortgage-backed
securities are not due at a single maturity date and are shown separately.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 4,500,000 4,499,375
Mortgage Backed Securities 1,089,153 1,092,608
-------------- ---------------
$ 5,589,153 $ 5,591,983
-------------- ---------------
-------------- ---------------
</TABLE>
Proceeds on sale of securities available for sale in 1998 were $1,516,402. Gross
gains of $16,402 and no gross losses were recognized on those sales. No
securities were sold in 1997 or 1996.
Other assets include $260,600 and $180,000 of Federal Reserve stock at December
31, 1998 and 1997. Federal Reserve stock is restricted stock carried at cost
that is required by regulators to be maintained by the Bank.
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 824,000 $ 1,675,119
Real estate 22,834,087 313,815
Installment loans 343,058 192,535
-------------- ---------------
24,001,145 2,181,469
Deduct allowance for loan losses (127,475) (65,509)
-------------- ---------------
Loans receivable - net $ 23,873,670 $ 2,115,960
-------------- ---------------
-------------- ---------------
</TABLE>
No loan losses were charged against the allowance for loan losses during 1998
and 1997. The Company had no loans on nonaccrual status or that were considered
impaired as of December 31, 1998 and 1997.
Loans to related parties:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Beginning of year $ -
New loans 150,000
Repayments -
--------------
End of year $ 150,000
--------------
--------------
</TABLE>
There was no related party loan activity during 1997.
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 5 - MORTGAGE LOANS SERVICED
MORTGAGE SERVICING RIGHTS: Activity related to mortgage servicing rights is
summarized below:
<TABLE>
<CAPTION>
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 4,696,038 $ 3,911,384 $ 6,776,949
Additions 27,730,631 2,719,727 1,584,446
Sales (13,909,878) (921,466) (3,144,427)
Amortization (1,766,031) (1,013,607) (1,305,584)
-------------- -------------- ---------------
Balance at end of period 16,750,760 4,696,038 3,911,384
Valuation allowance at beginning of period (355,860) (433,439) (1,267,646)
Adjustment for impairment (914,061) 77,579 660,209
Adjustment for sale of servicing rights 28,839 - 173,998
-------------- -------------- ---------------
Valuation allowance at end of period (1,241,082) (355,860) (433,439)
-------------- -------------- ---------------
Net $ 15,509,678 $ 4,340,178 $ 3,477,945
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The estimated fair value of mortgage servicing rights as of December 31, 1998
and 1997 was $15,844,000 and $5,000,000, respectively.
SERVICING OF MORTGAGE LOANS: The Company sells mortgage loans to secondary
market investors. The Company collects monthly principal and interest payments
and performs certain escrow services for investors. The Company's servicing
portfolio is comprised of loans principally in Colorado, Florida, Illinois,
Indiana, Kentucky, Michigan, Ohio, Georgia, Minnesota, Missouri and Wisconsin.
The Company's aggregate servicing portfolio was approximately $1,655,226,000 and
$824,623,000 at December 31, 1998 and 1997, respectively, which includes
temporary subservicing relating to servicing sales of $355,395,000 ($13,174,000
of which WMC was servicing for PNB) and $179,376,000 at December 31, 1998 and
1997, respectively. During 1998 and 1997 respectively, WMC transferred to PNB
loans held for sale at cost of $90,920,000 and $36,677,000.
During the periods ended December 31, 1998 and 1997, the Company did not service
any FHA/VA insured/guaranteed mortgage loans.
The Company is responsible for establishing and maintaining escrow and custodial
funds aggregating approximately $24,701,000 ($12,472,000 held at PNB) and
$11,747,000 ($5,781,000 held at PNB) at December 31, 1998 and 1997,
respectively. These funds are placed on deposit at a Federal Deposit Insurance
Corporation ("FDIC") insured bank and are not included in the assets and
liabilities of the Company. As is customary in the mortgage banking industry,
these funds may be considered by the banks in which such funds are deposited,
together with other balances maintained in the banks by the Company, when
negotiating credit lines available for the Company's use.
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment includes the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Computer equipment and software $ 2,008,440 $ 1,439,164
Furniture and fixtures 1,008,099 949,434
Automobiles 51,985 51,986
Leasehold improvements 33,166 32,274
-------------- ---------------
3,101,690 2,472,858
Accumulated depreciation and amortization (2,217,247) (1,868,650)
-------------- ---------------
$ 884,443 $ 604,208
-------------- ---------------
-------------- ---------------
</TABLE>
NOTE 7 - DEPOSITS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing $ 3,280,064 $ 1,872,928
Interest -bearing demand 1,373,765 4,890,802
Savings 17,755,697 1,894,841
-------------- ---------------
22,409,526 8,658,571
Certificates of deposit:
Under $100,000 9,110,218 5,717,947
Over $100,000 3,191,576 2,981,019
IRAs 352,758 220,695
-------------- ---------------
Total certificates 12,654,552 8,919,661
-------------- ---------------
$ 35,064,078 $ 17,578,232
-------------- ---------------
-------------- ---------------
</TABLE>
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
1999 $ 12,493,552
2000 145,000
2001 -
2002 -
2003 and thereafter 16,000
--------------
$ 12,654,552
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE
The Company currently has a warehouse line of credit of $90,000,000, of which
$7,000,000 represents a sub-limit for servicing under contract for sale, and
$5,000,000 represents a working capital sub-limit. The Company also has a
$2,000,000 term loan. All of the borrowings are payable on demand. The interest
rate terms vary and are tied to the federal funds rate (FFR), which was 5.00%
and 6.75% at December 31, 1998 and 1997. Notes payable are summarized as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 Terms 1997 Terms
---- ----- ---- -----
<S> <C> <C> <C> <C>
Warehouse line $ 43,025,504 FFR+1.50% $ 16,718,428 FFR+1.35%
Servicing under contract for
sale sub-limit 7,000,000 FFR+1.875% -
Working capital sub-limit 5,000,000 FFR+2.25% 755,000 FFR+2.25%
Term Loan 2,000,000 FFR+2.75% 2,000,000 FFR+2.75%
-------------- --------------
$ 57,025,504 $ 19,473,428
-------------- --------------
-------------- --------------
</TABLE>
The line of credit agreement contains restrictive covenants, among others,
requiring the Company to maintain certain minimum net worth levels and a minimum
debt to net worth ratio as defined in the agreement.
Borrowings on the warehouse line of credit agreement are collateralized by
mortgage loans held for sale at WMC. Borrowings on the working capital sub-limit
and servicing under contract for sale sub-limit are collateralized by servicing
rights relating to WMC's servicing portfolio.
NOTE 9 - REPURCHASE AGREEMENTS
The Company enters into sales of mortgage loans under agreements to repurchase
(repurchase agreements). Such agreements have original terms of less than 90
days and are treated as financings, with the obligation to repurchase the loans
sold reflected as a liability in the balance sheet. The dollar amount of loans
underlying the agreements remains in the mortgage loans held for sale account.
The weighted average interest rate on these repurchase agreements was 6.338% and
6.30% at December 31, 1998 and 1997.
NOTE 10 - SUBORDINATED NOTE PAYABLE
The Company has a subordinated note payable with a balance of $1,200,000 at
December 31, 1998 and 1997. The note requires monthly interest payments at 4.5%
per annum over the prime interest rate, which was 7.75% and 8.50% at December
31, 1998 and 1997. In June 1998, this note was renewed for a full year. The note
matures in June 1999.
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit) $ 166,341 $ (250,229) $ 709,781
Deferred provision (benefit) 1,874,733 198,713 (377,757)
-------------- ------------- --------------
$ 2,041,074 $ (51,516) $ 332,024
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The net deferred tax liability is comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
Deferred tax assets
Loan origination costs $ 141,684 $ 80,697
Loan mark to market 215,334 -
Loan loss reserve 152,704 105,338
Other 128,520 38,961
------------- --------------
638,242 224,996
Deferred tax liabilities
Mortgage servicing rights (3,485,440) (1,244,833)
Depreciation (11,891) (15,586)
Unrealized gain on securities (962) (1,412)
Other (62,437) (11,370)
------------- --------------
(3,560,730) (1,273,201)
------------- --------------
Net deferred tax liability $ (2,922,488) $ (1,048,205)
------------- --------------
------------- --------------
</TABLE>
There was no valuation allowance for deferred taxes in 1998 or 1997.
The difference between the financial statement tax expense and amounts computed
by applying the statutory federal rate of 34% to pretax income is reconciled as
follows:
<TABLE>
<CAPTION>
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before taxes $ 2,015,674 $ (64,271) $ 292,749
Add (Deduct)
Effect of nondeductible expenses 25,161 14,455 20,816
Other 239 (1,700) 18,459
-------------- ------------- --------------
Income tax expense $ 2,041,074 $ (51,516) $ 332,024
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 12 - LEASES
The Company leases office facilities under noncancelable operating leases.
Future minimum lease payments at December 31, 1998 under noncancelable leases
are as follows:
<TABLE>
<S> <C>
1999 $ 404,453
2000 412,379
2001 320,750
-------------
$ 1,137,582
-------------
-------------
</TABLE>
For periods ended December 31, 1998, 1997 and January 31, 1997, rental expense
under operating leases was approximately $404,000, $319,000 and $381,000,
respectively.
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS
The Company and PNB are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and PNB must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and prompt corrective action classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Company and PNB meet all
capital adequacy requirements to which they are subject and are categorized as
adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Company and PNB must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since that
date that management believes have changed PNB's categories.
- --------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (Continued)
Actual consolidated and PNB capital amounts (in thousands) and ratios are as
follows:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk weighted assets)
Consolidated $ 12,398 9.64% $ 10,288 8.0% $ 12,860 10.0%
Bank 5,394 23.77 1,815 8.0 2,268 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 12,271 9.55 5,144 4.0 7,716 6.0
Bank 5,186 22.86 908 4.0 1,361 6.0
Tier 1 capital (to average assets)
Consolidated 12,271 5.90 8,321 4.0 10,402 5.0
Bank 5,186 18.11 1,146 4.0 1,432 5.0
1997
Total capital (to risk weighted assets)
Bank $ 5,578 62.90% $ 710 8.0% $ 887 10.0%
Tier 1 capital (to risk weighted assets)
Bank 5,412 61.00 355 4.0 532 6.0
Tier 1 capital (to average assets)
Bank 5,412 26.40 819 4.0 1,024 5.0
</TABLE>
The declaration of dividends by PNB is limited to PNB's retained net profit for
the current and prior two years. As a result, no amounts are available for
payments of dividends to PNH at December 31, 1998.
NOTE 14 - RETIREMENT PLAN
The Company has a profit sharing plan established under Section 401(k) of the
Internal Revenue Code. The plan generally covers employees having at least one
year of service. Employees may contribute up to 15% of their compensation. The
Company contributes one-half of the participant's contribution up to 1.5% of the
participant's compensation. The Company incurred expenses of $76,641, $33,479
and $38,300 relating to the plan during the periods ended December 31, 1998,
1997 and January 31, 1997, respectively.
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 15 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into commitments to
purchase residential mortgage loans. The commitments are short term in nature
and, if drawn on by the counterparty, result in a fixed or variable rate loan
collateralized by residential real estate. The Company has committed to lend at
a stipulated interest rate and assumes the risk of a subsequent rise in rates
prior to the loan funding. Outstanding commitments approximated $144,486,000 and
$57,682,000 at December 31, 1998 and 1997, respectively. The Company manages its
interest rate exposure on such commitments by entering into sales commitments in
the cash forward placement market.
Forward contracts represent future commitments to sell securities and whole
loans at a specified price and date. As of December 31, 1998 and 1997, the
Company had approximately $239,185,000 and $101,677,000, respectively, of
forward rate agreements to sell. These agreements were commitments to sell
securitized and whole loans to another party at a specified price and specified
date in the future. The risk associated with the forward rate agreements is that
the Company is unable to deliver according to the terms of the agreement. The
Company does not anticipate any material losses as a result of the forward rate
agreements.
These instruments also contain an element of risk in the event that the
counterparties may be unable to meet the terms of such agreements. In the event
the parties to all delivery commitments were unable to fulfill their
obligations, the Company would not incur any additional cost by replacing the
positions at market rates in effect on December 31, 1998. The Company minimizes
its risk of exposure by limiting the counterparties to those major banks and
financial institutions who meet established credit and capital guidelines.
Management does not expect any counterparty to default on their obligations and
therefore, does not expect to incur any cost due to counterparty default.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments are made at a specific point in
time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. No ready market exists for certain portions of
the Company's financial instruments, therefore, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and value of assets and liabilities that are not considered financial
instruments. Tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimated and have
not been considered in these estimates.
The information presented is based on pertinent information available to
management as of December 31, 1998 and 1997. Although management is not aware of
any factors, other than changes in interest rates, that would significantly
affect the estimated fair values, the current estimated fair value of these
instruments may have changed significantly since that point in time.
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value of the Company's financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 10,180,034 $ 10,180,034 $ 4,376,631 $ 4,376,631
Accounts receivable 7,087,170 7,087,170 2,652,951 2,652,951
Securities available for sale 5,591,983 5,591,983 6,983,501 6,983,501
Loans held for sale 179,454,160 180,712,486 98,657,962 98,855,881
Loans receivable, net 23,873,670 23,926,322 2,115,960 2,115,960
Accrued interest receivable 1,360,636 1,360,636 56,455 56,455
LIABILITIES
Deposits 35,064,078 35,176,836 17,578,323 17,578,323
Due to bank 38,259,829 38,259,829 10,703,042 10,703,042
Notes payable 57,025,504 57,025,504 19,473,428 19,473,428
Repurchase agreements 95,984,844 95,984,844 60,980,404 60,980,404
Subordinated note payable 1,200,000 1,200,000 1,200,000 1,200,000
OFF-BALANCE SHEET COMMITMENTS
Commitments to fund residential
mortgage loans at fixed rates - 607,348 - 6,826
Commitments to sell residential
mortgage loans and securities at
fixed rates - (351,718) - (428,360)
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS - The carrying amount is a reasonable estimate of fair
value as such amounts are short term.
ACCOUNTS RECEIVABLE AND ACCRUED INTEREST RECEIVABLE- The carrying amount is a
reasonable estimate of fair value as such receivables are short term.
SECURITIES AVAILABLE FOR SALE - Fair values are based on quoted market prices or
dealer quotes.
LOANS HELD FOR SALE - The fair value of mortgage loans held for sale is
estimated based on sales commitments or secondary market quotes for the related
loans or similar loans.
LOANS RECEIVABLE, NET- The estimated fair value is determined by discounting
contractual cash flows from the loans using current lending rates for new loans
with similar remaining maturities. The resulting value is reduced by an estimate
of losses inherent in the portfolio.
- --------------------------------------------------------------------------------
(Continued)
F-22
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
DEPOSITS - The carrying amount is a reasonable estimate of fair value for demand
and savings deposits subject to immediate withdrawal.
The fair value of time deposits is estimated by discounting the future cash
flows to be paid, using the current rates at which similar deposits with similar
remaining maturities would be issued.
DUE TO BANK - The carrying amount is a reasonable estimate of fair value as the
borrowings are short term.
NOTES PAYABLE AND SUBORDINATED NOTE PAYABLE - The carrying amount is a
reasonable estimate of fair value as the borrowings are variable rate and
payable on demand.
REPURCHASE AGREEMENTS - The carrying amount is a reasonable estimate of fair
value as the borrowings are based upon variable rates which approximate market
value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - The fair value of the Company's
forward commitments to fund and sell residential real estate loans are
separately estimated using the cost of fulfilling these commitments or otherwise
settling the obligations with counterparties at the reporting date.
NOTE 17 - LITIGATION
On November 4, 1994, WMC was named as defendant in a class action lawsuit
regarding its method for calculating finance charges in lending disclosures
required by the Federal Truth in Lending Act. The disclosure issue involved is
applicable to the mortgage banking industry as a whole, and the issue is
presently the subject of numerous class action suits throughout the United
States. The Company believes WMC is and has been in complete compliance with
applicable Federal and State laws. In the opinion of the Company's management,
the resolution of this matter is not expected to have material adverse impact on
the financial position of the Company.
NOTE 18 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The Company adopted a Stock Option and Incentive Plan (the "Plan") in October
1997. Pursuant to the Plan, 400,000 (adjusted for 1998 and March 1999 stock
splits) shares of the Company's common stock were made available for grant
through stock options to key employees and non-employee directors of PNH, WMC
and PNB. Each option granted under the Plan vests as specified by the Stock
Option Committee and has a term of not more than ten years. The exercise price
of options granted is equal to market value at the date of grant. The Company
accounts for stock options in accordance with APB Opinion No. 25, and,
therefore, has recorded no compensation expense relating to options granted. The
compensation that would have been recorded had the company accounted for stock
options as required by SFAS No. 123 would not have reduced basic or diluted
earnings per share by more than $0.01.
- --------------------------------------------------------------------------------
(Continued)
F-23
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 18 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (Continued)
The Plan also provides for granting of stock appreciation rights ("SARS"). SARS
may be granted in connection with any or all of the stock options that may be
granted subject to certain conditions and limitations imposed by the Stock
Option Committee. The exercise of a SAR will entitle the holder to payment from
the Company of an amount equal to the difference between the fair value of such
shares on the date the SAR was originally granted and the fair value of such
shares at the exercise date of the SAR. This payment may be made in cash, in
shares or partly in each. To date, no SARs have been granted.
All outstanding awards shall become immediately exercisable in the event of a
change in control of the Company.
The following is a summary of stock option activity for the periods ended
December 31 (adjusted for 1998 and March 1999 stock splits):
<TABLE>
<CAPTION>
Year ended Eleven months ended
December 31, December 31,
----------1998----------- ----------1997-----------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding beginning of year 40,000 $ 3.75 - $ -
Granted 92,000 5.58 40,000 3.75
Exercised - - - -
Forfeited (8,000) 3.75 - -
Canceled (20,000) 5.00 - -
----------- -------- ----------- --------
Outstanding end of year 104,000 $ 4.11 40,000 $ 3.75
----------- -------- ----------- --------
----------- -------- ----------- --------
Exercisable at end of year 32,000 $ 3.75 - $ 3.75
----------- -------- ----------- --------
----------- -------- ----------- --------
</TABLE>
Options outstanding at December 31, 1998 have a weighted average life of 8.3
years, with exercise prices ranging from $3.75 to $5.50.
- --------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 19 - EARNINGS (LOSS) PER SHARE
The following summarizes the computation of basic and diluted earnings (loss)
per share. Weighted average shares have been restated for all stock splits,
including a 2-for-1 split in March 1999. Stock options are anti-dilutive for the
eleven months ended December 31, 1997 due to the net loss.
<TABLE>
<CAPTION>
Eleven months
Year ended ended Year ended
December 31, December 31, January 31,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings (loss) per share
Net income (loss) $ 3,887,380 $ (137,517) $ 529,003
Weighted average shares outstanding 3,032,836 2,974,100 2,400,000
-------------- ------------- --------------
Basic earnings (loss) per share $ 1.28 $ (.05) $ .22
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per share
Net income (loss) $ 3,887,380 $ (137,517) $ 529,003
Weighted average shares outstanding 3,032,836 2,974,100 2,400,000
Dilutive effect of assumed exercise of stock options 6,775 - -
-------------- ------------- --------------
Diluted average shares outstanding 3,039,611 2,974,100 2,400,000
-------------- ------------- --------------
Diluted earnings (loss) per share $ 1.28 $ (.05) $ .22
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 20 - SEGMENT INFORMATION
The Company'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 42 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 consumer, commercial, commercial real estate,
residential construction, and single-family residential mortgage loans, from its
sole office in Naples, Florida.
The Company's reportable segments are its two subsidiaries. WMC 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.
PNB comprises the retail banking segment, with net interest income from loans,
investments and deposits accounting for its primary revenues.
- --------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 20 - SEGMENT INFORMATION (Continued)
The following segment financial information has been derived from the internal
financial statements of WMC and PNB, which are used by management to monitor and
manage the financial performance of the Company. The accounting policies of the
two segments are the same as those described in the summary of significant
accounting policies. The evaluation process for segments do 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
<TABLE>
<CAPTION>
Mortgage Retail Consolidated
YEAR ENDED DECEMBER 31, 1998 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net interest income $ 2,580 $ 903 $ (168) $ 3,315
Gain on sales of MSR and loans, net 17,892 160 - 18,052
Servicing income 2,614 187 - 2,801
Noncash items:
Provision for loan losses - 62 - 62
MSR amortization & valuation 2,549 131 - 2,680
Provision for income taxes 2,235 (126) (68) 2,041
Segment profit 4,263 (244) (132) 3,887
Segment assets 205,873 40,537 (1) 246,409
ELEVEN MONTHS ENDED DECEMBER 31, 1997
Net interest income $ 845 $ 195 $ (75) $ 965
Gain on sales of MSR and loans 5,488 - (69) 5,419
Servicing income 1,777 - - 1,777
Noncash items:
Provision for loan losses - 66 - 66
MSR amortization & valuation 936 - 1 937
Provision for income taxes 229 (253) (28) (52)
Segment profit 406 (490) (54) (138)
Segment assets 97,514 23,498 (256) 120,756
YEAR ENDED JANUARY 31, 1997
Net interest income $ 968 $ - $ - $ 968
Gain on sales of MSR and loans 4,513 - - 4,513
Servicing income 2,655 - - 2,655
Noncash items:
Provision for loan losses - - - -
MSR amortization & valuation 645 - - 645
Provision for income taxes 332 - - 332
Segment profit 529 - - 529
Segment assets 48,220 - - 48,220
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-26
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 21 - PN HOLDINGS, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,492 $ 19,207
Investment in WMC 9,034,480 4,936,406
Investment in PNB 5,267,429 5,512,477
Other assets 116,182 59,626
-------------- ---------------
Total assets $ 14,423,583 $ 10,527,716
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,000,000 $ 2,000,000
Accrued expenses and other liabilities 23,569 14,209
Shareholders' equity 12,400,014 8,513,507
-------------- ---------------
Total liabilities and shareholders' equity $ 14,423,583 $ 10,527,716
-------------- ---------------
-------------- ---------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Eleven months
Year ended ended
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Dividends from WMC $ 165,707 $ 1,829,302
Other expense 200,342 81,372
-------------- ---------------
Income before income tax and undistributed subsidiary income (34,635) 1,747,930
Income tax benefit 68,117 28,000
Equity in undistributed subsidiary income 3,853,898 (1,913,447)
-------------- ---------------
Net income 3,887,380 (137,517)
Change in unrealized gain (loss) on securities,
net of tax and classification effects (873) 2,741
-------------- ---------------
Comprehensive income $ 3,886,507 $ (134,776)
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-27
<PAGE>
PN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998, eleven months ended
December 31, 1997 and year ended January 31, 1997
- --------------------------------------------------------------------------------
NOTE 21 - PN HOLDINGS, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eleven months
Year ended ended
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,887,380 $ (137,517)
Adjustments
Equity in undistributed subsidiary income (3,853,898) 1,913,446
Change in other assets (56,556) (59,626)
Change in other liabilities 9,359 14,209
-------------- ---------------
Net cash from operating activities (13,715) 1,730,512
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in PNB - (6,000,000)
-------------- ---------------
Net cash from investing activities - (6,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issue - 2,288,695
Purchase of common stock advances on line of credit - 2,000,000
-------------- ---------------
Net cash from financing activities - 4,288,695
-------------- ---------------
Net change in cash and cash equivalents (13,715) 19,207
Cash and cash equivalents at beginning of year 19,207 -
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,492 $ 19,207
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
F-28
<PAGE>
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesman or any other person has been
authorized to give any information or to make any
representation other than as contained in this
Prospectus in connection with the offering made
hereby, and, if given or made, such other information
or representation must not be relied upon as having
been authorized by the Company, WMC, the Bank, or
William R. Hough & Co. This Prospectus does not
constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby to
any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to
do so, or to any person to whom it is unlawful to
make such offer or solicitation in such
jurisdiction. Neither the delivery of this
Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has
been no change in the affairs of the Company, WMC, or
the Bank since any of the dates as of which
information is furnished herein or since the date
hereof.
- -------------------------------------------------------
TABLE OF CONTENTS
Prospectus Summary................................i
Selected Consolidated Financial and Other Data...iv
Risk Factors......................................1
The Company.......................................6
Use of Proceeds...................................7
Dividend Policy...................................7
Market for the Common Stock.......................8
Capitalization....................................9
Dilution..........................................9
Management's Discussion and Analysis of
Financial Condition and Results of Operations..11
Business.........................................29
Regulation.......................................51
Management.......................................57
Description of Capital Stock.....................64
Certain Restrictions on Acquisition of the
Company........................................65
Selling Stockholder..............................66
Underwriting.....................................66
Legal Matters....................................67
Experts..........................................67
Changes in and Disagreements with Accountants on
Accounting and Financial Matters...............68
Available Information............................68
Index to Consolidated Financial Statements......F-1
- -------------------------------------------------------
Until __________ __, 1999, all dealers that effect
transactions in these securities, whether or not
participating in this offering, may be required to
deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
PN HOLDINGS, INC.
$______________
1,200,000 SHARES OF COMMON STOCK
----------------------------------------------------
PROSPECTUS
WILLIAM R. HOUGH & CO.
The date of this Prospectus is
__________ ____, 1999
- -------------------------------------------------------
THE SECURITIES OFFERED HEREBY
ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED
OR GUARANTEED.
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the sale and distribution of the securities being registered
hereby, other than underwriting discounts and commissions. All such expenses are
to be paid by the Registrant.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
------------------------------------------------------------ ----------------------
<S> <C>
SEC registration fee....................................... $ 3,453
NASD filing fee............................................ 1,742
Nasdaq listing fee......................................... 9,413
* Blue Sky filing fees and expenses.......................... 10,000
* Accounting fees and expenses............................... 50,000
* Legal fees and expenses.................................... 125,000
* Underwriter's legal fees and expenses...................... 75,000
* Printing, postage, and mailing............................. 75,000
* Stock transfer agent fees and certificates................. 10,000
* Other...................................................... 28,292
--------
* Total............................................. $378,000
--------
--------
</TABLE>
- ----------
* Estimated
ITEM 14..INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees, and agents may be
insured or indemnified against liability which they may incur in their
capacities as such.
The Certificate of Incorporation of the Company attached as Exhibit 3.1
hereto, requires indemnification of directors, officers, and employees to the
fullest extent permitted by Delaware law.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the Company or
is or was serving at the request of the Company as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise against any liability asserted against the person and incurred
by the person in any such capacity or arising out of his status as such, whether
or not the Company would have the power to indemnify the person against such
liability under the provisions of the Certificate of Incorporation.
II-1
<PAGE>
The registrant believes that these provisions assist the registrant in,
among other things, attracting and retaining qualified persons to serve the
registrant and its subsidiary. However, a result of such provisions could be to
increase the expenses of the registrant and effectively reduce the ability of
stockholders to sue on behalf of the registrant since certain suits could be
barred or amounts that might otherwise be obtained on behalf of the registrant
could be required to be repaid by the registrant to an indemnified party.
ITEM 15..RECENT SALES OF UNREGISTERED SECURITIES.
In August 1997, the Company issued and sold approximately 158,209
shares of Common Stock to various accredited and nonaccredited investors for an
aggregate of approximately $2.37 million. The issuance was exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering.
ITEM 16..EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is the list of exhibits filed as part of this
Registration Statement and also serves as the Exhibit Schedules:
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement *
1.2 Form of Custody Agreement *
1.3 Form of Selling Stockholder Power of Attorney *
3.1 Certificate of Incorporation of the Registrant and Amendments Thereto
3.2 Bylaws of the Registrant
4.1 Specimen Common Stock Certificate of Registrant
5.1 Opinion of Manatt, Phelps & Phillips, LLP re: Legality of Securities being
Registered*
10.1 Employment Agreement with Michael D. Surgen
10.2 PN Holdings, Inc. Stock Option and Incentive Plan and Forms of Agreements
10.3 Master Agreement between Federal National Mortgage Association and Washtenaw
Mortgage Corporation dated December 21, 1998.
21 Subsidiaries of the Registrant
23.1 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1)*
23.2 Consent of Deloitte & Touche LLP*
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.3 Consent of Crowe Chizek & Company LLP
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
</TABLE>
-----------------------------
* To be filed by amendment.
** Contained in electronically filed version only.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the required
information is not applicable or is included in the Financial
Statements of the Company and the related notes.
(C) NOT APPLICABLE.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in
the Underwriting Agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ann Arbor,
State of Michigan, on April 22, 1999
PN HOLDINGS, INC.
By: /s/ Charles C. Huffman
-------------------------------
Charles C. Huffman
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Representative)
We the undersigned directors and officers of PN Holdings, Inc. do
hereby severally constitute and appoint Charles C. Huffman and Michael L. Hogan
our true and lawful attorney and agent, to do any and all things and acts in our
names in the capacities indicated below and to execute all instruments for us
and in our names in the capacities indicated below which said attorneys may deem
necessary or advisable to enable PN Holdings, Inc. to comply with the Securities
Act of 1933, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with the registration
statement on Form S-1 relating to the offering of PN Holdings, Inc. common
stock, including specifically but not limited to, power and authority to sign
for us or any of us in our names in the capacities indicated below the
registration statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that attorneys shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of April 22, 1999.
/s/ Charles C. Huffman /s/ Michael L. Hogan
- ------------------------------- ---------------------------------------------
Charles C. Huffman Michael L. Hogan
Chairman of the Board and Vice President, Chief Financial Officer,
Chief Executive Officer and Director
(principal executive officer) (principal financial and accounting officer)
/s/ Raleigh E. Allen, Jr. /s/ Koula M. Kovach
- ------------------------------- ---------------------------------------------
Raleigh E. Allen, Jr. Koula M. Kovach
Director Director
/s/ Ernest Merlanti /s/ Michael D. Surgen
- ------------------------------- ---------------------------------------------
Ernest Merlanti Michael D. Surgen
Director Director
II-4
<PAGE>
As Filed with the Securities and Exchange Commission on April 22, 1999.
Registration Statement No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
PN HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6035 58-2298215
- -------------------------------------------------------------------------------------------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
315 East Eisenhower
Ann Arbor, Michigan 48108
(800) 765-5562
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Mr. Charles C. Huffman
Chairman and Chief Executive Officer
315 East Eisenhower
Ann Arbor, Michigan 48108
(800) 765-5562
- --------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
Edward L. Lublin, Esq. Frank N. Fleischer, Esq.
Michael W. Zarlenga, Esq. Schifino & Fleischer, P.A.
Manatt, Phelps & Phillips, LLP 1 Tampa City Center, Suite 2700
1501 M Street, N.W., Suite 700 Tampa, FL 33602-5174
Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- --------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement *
1.2 Form of Custody Agreement *
1.3 Form of Selling Stockholder Power of Attorney *
3.1 Certificate of Incorporation of the Registrant and Amendments Thereto
3.2 Bylaws of the Registrant
4.1 Specimen Common Stock Certificate of Registrant
5.1 Opinion of Manatt, Phelps & Phillips, LLP re: Legality of Securities being Registered*
10.1 Employment Agreement with Michael D. Surgen
10.2 PN Holdings, Inc. Stock Option and Incentive Plan and Forms of Agreements
10.3 Master Agreement between Federal National Mortgage Association and Washtenaw Mortgage
Corporation dated December 21, 1998.
21 Subsidiaries of the Registrant
23.1 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1)*
23.2 Consent of Deloitte & Touche LLP*
23.3 Consent of Crowe Chizek & Company LLP
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
</TABLE>
- -------------------
* To be filed by amendment.
** Contained in electronically filed version only.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
PN HOLDINGS, INC.
ARTICLE I
NAME
The name of the corporation is PN Holdings, Inc. (herein the "Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle 19801.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE III
POWERS
The purpose for which the Corporation is organized is to engage in any
lawful business for which corporations may be incorporated pursuant to the laws
of the State of Delaware. The Corporation shall have all the powers of a
corporation organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
TERM
The Corporation is to have perpetual existence.
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator are as follows:
NAME MAILING ADDRESS
Edward L. Lublin 1501 M Street, N.W.
Suite 700
Washington, D.C. 20005
1
<PAGE>
ARTICLE VI
INITIAL DIRECTORS
The number of directors constituting the initial Board of Directors of
the Corporation is four (4) and the names and addresses of the persons who are
to serve as directors until their successors are elected and qualified together
with the classes of directorships to which such persons have been assigned are:
<TABLE>
<CAPTION>
NAME ADDRESS CLASS
<S> <C> <C>
Charles C. Huffman 5281 Gallagher Road I
Whitmore Lake, Michigan 48189
Karen A. Heinrichs 48771 E. Hillcrest Court II
Plymouth, Michigan 48170
Koula M. Kovach 45420 Harmony Lane II
Belleville, Michigan 48111
Robert M. Spellman 3641 Barry Knoll Drive III
Ann Arbor, Michigan 48108
</TABLE>
ARTICLE VII
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 1,200,000 of which 1,000,000 are to be
shares of common stock, $0.10 par value per share, and of which 200,000 are to
be shares of serial preferred stock, $0.10 par value per share. The shares may
be issued by the Corporation from time to time as approved by the Board of
Directors of the Corporation without the approval of the stockholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange if applicable. The consideration for the issuance of the shares shall
be paid to or received by the Corporation in full before their issuance and
shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property, or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the judgment of the Board of Directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration, such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, the
part of the surplus of the Corporation that is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be the
consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences, and rights of the shares of each
2
<PAGE>
class and series (if any) of capital stock, and the qualifications, limitations
or restrictions thereof, are as follows:
A. COMMON STOCK. Except as provided in this Certificate, the holders of
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holder, except as otherwise expressly set forth in this Certificate.
Whenever there shall have been paid or declared and set aside for
payment to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, in which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock, and on any class
or series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the Board of Directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences, and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation, except as otherwise expressly
set forth in this Certificate.
B. SERIAL PREFERRED STOCK. Except as provided in this Certificate, the
Board of Directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations or restrictions
thereof, including, but not limited to determination of any of the following:
(1) the distinctive serial designation and the number of shares
constituting such series;
(2) the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date or dates, the payment date or dates for
dividends, and the participating or other special rights, if any,
with respect to dividends;
(3) the voting powers, full or limited, if any, of the shares of such
series;
3
<PAGE>
(4) whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon
which such shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and, if so entitled, the
amount of such fund and the manner of its application, including
the price or prices at which such shares may be redeemed or
purchased through the application of such funds;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any
other series of the same or any other class or classes of stock
of the Corporation and, if so convertible or exchangeable, the
conversion price or prices, or the rate or rates of exchange, and
the adjustments thereof, if any, at which such conversion or
exchange may be made, and any other terms and conditions of such
conversion or exchange;
(8) the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
(9) whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences, and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE VIII
PREEMPTIVE RIGHTS
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates or indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates or indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the Board of Directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its sole discretion.
4
<PAGE>
ARTICLE IX
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
Board of Directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debenture, notes,
script, warranties, obligations, evidences of indebtedness, or other securities
of the Corporation in such manner, upon such terms, and in such amounts as the
Board of Directors shall determine: subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE X
MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of this Certificate or the
bylaws of the Corporation, any action required to be taken or which may be taken
at any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted, and shall be
delivered to the principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors or the
Chairman of the Board of Directors of the Corporation, or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose powers and authorities, as provided in a resolution of the Board of
Directors or in the bylaws of the Corporation, include the power and authority
to call such meetings, but such special meetings may not be called by any other
person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the bylaws may
provide.
ARTICLE XI
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the Board of Directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days
5
<PAGE>
nor more than sixty days prior to the date of any such meeting; provided,
however, that if less than forty days notice of the meeting is given to
stockholders, such written notice shall be delivered or mailed, as prescribed,
to the Secretary of the Corporation not later than the close of business on the
tenth day following the day on which notice of the meeting was mailed to
stockholders. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice; (ii) the principal occupation or employment of each such nominee;
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee. In addition, the stockholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation or as required by law.
B. Each such notice given by a stockholder to the Secretary with
respect to business proposals to be brought before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no new business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may,
if the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding special or annual meeting of the stockholders taking place thirty
days or more thereafter. This provision shall not require the holding of any
adjourned or special meeting of stockholders for the purpose of considering such
defective nomination or proposal.
ARTICLE XII
DIRECTORS
A. NUMBER; VACANCIES. The number of directors of the Corporation shall
be such number, not less than three (3) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws, provided that no action shall be taken to decrease or
increase the number of directors unless at least two-thirds of the directors
then in office shall concur in said action. Vacancies in the Board of Directors
of the Corporation, however caused, and newly created directorships shall be
filled by a vote of two-thirds of the directors then in office, whether or not a
quorum, and any director so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which the
director has been chosen expires and when the director's successor is elected
and qualified.
B. CLASSIFIED BOARD. The Board of Directors of the Corporation shall be
divided into three classes of directors which shall be designated Class I, Class
II, and Class III. The members of
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<PAGE>
each class shall be elected for a term of three years and until their successors
are elected and qualified. Such classes shall be as nearly equal in number as
the then total number of directors constituting the entire Board of Directors
shall permit, with the terms of office of all members of one class expiring each
year. Subject to the provisions of this Article XII, should the number of
directors not be equally divisible by three, the excess director or directors
shall be assigned to Classes I or II as follows: (i) if there shall be an excess
of one directorship over a number equally divisible by three, such extra
directorship shall be classified in Class II; and (ii) if there shall be an
excess of two directorships over a number equally divisible by three, one shall
be classified in Class I and the other in Class II. At the first annual meeting
of stockholders, directors of Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding annual meeting thereafter. At the
third annual meeting of stockholders, directors of Class III shall be elected to
hold office for a term expiring at the third succeeding annual meeting
thereafter. Thereafter, at each succeeding annual meeting, directors of each
class shall be elected for three year terms. Notwithstanding the foregoing, the
director whose term shall expire at any annual meeting shall continue to serve
until such time as a successor to the director shall have been elected and shall
have qualified unless the position of the director on the Board of Directors
shall have been abolished by action taken to reduce the size of the Board of
Directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the Board of Directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided in this Article XII. Notwithstanding the foregoing, and except as
otherwise may be required by law or by the terms and provisions of the preferred
stock of the Corporation, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE XIII
REMOVAL OF DIRECTORS
Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, any director or the entire Board of Directors of the
Corporation may be removed, at anytime, but only for cause and only by the
affirmative vote of the holders of not less than 66.67% of the
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<PAGE>
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose.
Notwithstanding the foregoing, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the preceding
provisions of this Article XIII shall not apply with respect to the director or
directors elected by such holders of preferred stock.
ARTICLE XIV
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, by reason of the fact that
such person is or was, or has agreed to become, a director or officer of the
Corporation, is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer, or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust, or other
enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person or on such person's behalf in connection with
such action, suit, or proceeding and any appeal therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the Indemnitee to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification under this Article XIV, which undertaking may be accepted
without reference to the financial ability of such person to make such
repayment.
The Corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of Directors
of the Corporation.
The indemnification rights provided in this Article XIV (i) shall not
be deemed exclusive of any other rights to which Indemnitees may be entitled
under any law, agreement, or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors, and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article XIV.
8
<PAGE>
ARTICLE XV
LIMITATIONS ON DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived any
improper personal benefit. If the General Corporation Law of the State of
Delaware or other Delaware law is amended or enacted after the date of filing of
this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE XVI
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation,
ARTICLE XVII
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend, or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII, XIII, XIV, XV, XVI, and this Article XVII may not
be repealed, altered, amended, or rescinded in any respect unless the same is
approved by the affirmative vote of the holders of not less than 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment, or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment, or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the directors of
the Corporation.
9
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I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 3RD day of MARCH , 1997.
/s/ EDWARD L. LUBLIN
------------------------------------
Edward L. Lublin
Incorporator
10
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PN HOLDINGS, INC.
In accordance with Section 242 of the Delaware General Corporation Law,
the undersigned DOES HEREBY CERTIFY:
1. The name of the corporation is PN Holdings, Inc. (hereinafter the
"Corporation")
2. The board of directors of the Corporation, by unanimous written
consent pursuant to Section 141 of the Delaware General Corporation Law, adopted
the following resolution on SEPTEMBER 22 , 1998, declaring its advisability. A
majority of the outstanding stock entitled to vote thereon, and a majoirty of
the outstanding stock of each class entitled to vote thereon, adopted the
following resolution at an annual meeting duly held pursuant to the notice
requirements of Section 222 of the Delaware General Corporation Law.
"RESOLVED, That the Amended and Restated Certificate of Incorporation
of the Corporation is hereby amended as follows:
I. That first paragraph of Article VI of the Certificate of
Incorporation is deleted in its entirety and there shall be
substituting therefor the following new paragraph:
The aggregate number of shares of all classes of capital
stock which the Corporation has authority to issue is
5,200,000 of which 5,000,000 are to be shares of common stock,
$0.02 par value per share, and of which 200,000 are to be
shares of serial preferred stock, $0.10 par value per share.
The shares may be issued by the Corporation from time to time
as approved by the Board of Directors of the Corporation
without the approval of the stockholders except as otherwise
provided in this Article VII or the rules of a national
securities exchange if applicable. The consideration for the
issuance of the shares shall be paid to or received by the
Corporation in full before their issuance and shall not be
less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered,
personal property (tangible or intangible), real property,
leases of real property, or any combination of the foregoing.
In the absence of actual fraud in the transaction, the
judgment of the Board of Directors as to the value of such
consideration shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid
and nonassessable. In the case of a stock dividend, the part
of the surplus of the Corporation that is transferred to
stated capital upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
<PAGE>
II. Article XVI of the Certificate of Incorporation is hereby
renumbered Article XIX and the following provision is added as Article
XVI-Approval of Business Combinations:
A. GENERAL REQUIREMENT. The affirmative vote of the
holders of not less than sixty-six and two-thirds percent (66
2/3%) of the outstanding shares of "Voting Stock" (as
hereinafter defined) shall be required for the approval or
authorization of any "Business Combination," as defined and
set forth below:
1. Any merger, reorganization, or consolidation of the
Corporation or any of its "Affiliates" (as hereinafter
defined) with or into any Principal Shareholder (as
hereinafter defined);
2. Any sale, lease, exchange, mortgage, pledge,
transfer, or other disposition (in one transaction or in a
series of related transactions) of all or a "Substantial Part"
(as hereinafter defined) of the assets of the Corporation or
any of its Affiliates to any Principal Shareholder;
3. Any sale, lease, exchange, or other transfer (in one
transaction or in a series of related transactions) by any
Principal Shareholder to the Corporation or any of the
Corporation's Affiliates of any assets, cash, or securities in
exchange for shares of Voting Stock (or of shares of stock of
any of the Corporation's Affiliates entitled to vote in the
election of directors of such Affiliate or securities
convertible into or exchangeable for shares of Voting Stock or
such stock of an Affiliate, or options, warrants, or rights to
purchase shares of Voting Stock or such stock of an
Affiliate);
4. The adoption at any time when there exists any
Principal Shareholder of any plan or proposal for the
liquidation or dissolution of the Corporation; and
5. Any reclassification of securities (including any
reverse stock split), recapitalization, or other transaction
at any time when there exists any Principal Shareholder if
such reclassification, recapitalization, or other transaction
would result in a decrease in the number of holders of the
outstanding shares of Voting Stock.
The affirmative vote required by this Article XVI
shall be in addition to the vote of the holders of any class
or series of stock of the Corporation otherwise required by
law, by any other Article of this Certificate, as amended, by
any resolution of the board of directors providing for the
issuance of a class or series of stock, or by any agreement
between the Corporation and any national securities exchange.
B. CERTAIN DEFINITIONS. For the purposes of this
Article XVI:
<PAGE>
1. "Affiliate" shall have the meaning ascribed to it
in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on the date of
filing of this Certificate.
2. The term "Principal Shareholder" shall mean and
include any individual, corporation, partnership, or other
person or entity which, together with its "Affiliates" and
"Associates" (as defined at Rule 12b-2 under the Securities
Exchange Act of 1934), "beneficially owns" (as hereinafter
defined) in the aggregate ten percent (10%) or more of the
outstanding shares of Voting Stock, and any Affiliate or
Associate of any such individual, corporation, partnership, or
other person or entity, other than an individual, corporation,
partnership, or other person or entity that beneficially owned
ten percent (10%) or more of the outstanding shares of Voting
Stock, or any Affiliate or Associate thereof, at the time of
adoption of this Article XVI. The term "Principal Shareholder"
shall also not include an individual, corporation,
partnership, or other person that beneficially owns in the
aggregate ten percent (10%) or more of the outstanding shares
of Voting Stock, and any Affiliate or Associate thereof if
such ownership is purchased or otherwise transferred from any
individual, corporation, partnership, or other person or
entity that beneficially owned ten percent (10%) or more of
the outstanding shares of Voting Stock, or any Affiliate or
Associate thereof, at the time of adoption of this Article
XVI; provided, however, that additional acquisitions of Voting
Shares by such person (other then pro rata distributions to
all shareholders) shall have the effect of making such person
a "Principal Shareholder."
3. The term "Substantial Part" shall mean more than
twenty-five percent (25%) of the fair market value of the
total assets of the Corporation, as of the end of its most
recent fiscal quarter ending prior to the time the
determination is being made.
4. The term "Voting Stock" shall mean the stock of the
Corporation entitled to vote in the election of directors.
5. Any corporation, partnership, person, or entity
will be deemed to be a "Beneficial Owner" of or to own
beneficially any share or shares of stock of the Corporation:
(a) which it owns directly, whether or not of record; or (b)
which it has the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement or arrangement or understanding or
upon exercise of conversion rights, exchange rights, warrants
or options, or otherwise, or which it has the right to vote
pursuant to any agreement, arrangement, or understanding; or
(c) which are owned directly or indirectly (including shares
deemed to be owned through application of clause (b) above) by
any Affiliate or Associate; or (d) which are owned directly or
indirectly (including shares deemed to be
<PAGE>
owned through application of clause (b) above) by any other
corporation, person, or entity with which it or any of its
Affiliates or Associates have any agreement or arrangement or
understanding for the purpose of acquiring, holding, voting,
or disposing of Voting Stock.
For the purpose only of determining the percentage of
the outstanding shares of Voting Stock which any corporation,
partnership, person, or other entity beneficially owns,
directly or indirectly, the outstanding shares of Voting Stock
will be deemed to include any shares of Voting Stock which
such corporation, partnership, person or other entity
beneficially owns pursuant to the foregoing provisions of this
subsection (whether or not such shares of Voting Stock are in
fact issued or outstanding), but shall not include any other
shares of Voting Stock which may be issuable either
immediately or at some future date pursuant to any agreement,
arrangement, or understanding or upon exercise of conversion
rights, exchange rights, warrants, options, or otherwise.
C. EXCEPTIONS. The provisions of this Article XVI
shall not apply to a Business Combination that is approved by
two-thirds of those members of the board of directors who were
directors prior to the time when the Principal Shareholder
became a Principal Shareholder (the "Continuing Directors").
The provisions of this Article XVI also shall not apply to a
Business Combination which (a) does not change any
shareholder's percentage ownership in the shares of stock
entitled to vote in the election of directors of any successor
of the Corporation from the percentage of the shares of Voting
Stock owned by such shareholder; (b) provides for the
provisions of this Article XVI, without any amendment, change,
alteration, or deletion, to apply to any successor to the
Corporation; and (c) does not transfer all or a Substantial
Part of the Corporation's assets other than to a wholly-owned
subsidiary of the Corporation.
D. ADDITIONAL PROVISIONS. Nothing contained in this
Article XVI, shall be construed to relieve a Principal
Shareholder from any fiduciary obligation imposed by law. In
addition, nothing contained in this Article XVI shall prevent
any shareholders of the Corporation from objecting to any
Business Combination and from demanding any appraisal rights
which may be available to such Principal Shareholder.
III. The following provision is added as Article XVII-Fair
Price Requirements:
A. GENERAL REQUIREMENT. No "Business Combination" (as
defined in Article XVI) shall be effected unless all of the
following conditions, to the extent applicable, are fulfilled.
<PAGE>
1. The ratio of (a) the aggregate amount of the cash
and the fair market value of the other consideration to be
received per share by the holders of the common stock of the
Corporation in the Business Combination to (b) the "Market
Price" (as hereinafter defined) of the common stock of the
Corporation immediately prior to the announcement of the
Business Combination or the solicitation of the holders of the
common stock of the Corporation regarding the Business
Combination, whichever is first, shall be at least as great as
the ratio of (x) the highest price per share previously paid
by the "Principal Shareholder" (as herein defined) (whether
before or after it became a Principal Shareholder) for any of
the shares of common stock of the Corporation at any time
Beneficially Owned, directly, or indirectly, by the Principal
Shareholder to (y) the Market Price of the common stock of the
Corporation on the trading date immediately prior to the
earliest date on which the Principal Shareholder (whether
before or after it became a Principal Shareholder) purchased
any shares of common stock of the Corporation during the two
year period prior to the date on which the Principal
Shareholder acquired the shares of common stock of the
Corporation at any time owned by it for which it paid the
highest price per share (or, if the Principal Shareholder did
not purchase any shares of common stock of the Corporation
during the two year period, the Market Price of the common
stock of the Corporation on the date of two years prior to the
date on which the Principal Shareholder acquired the shares of
common stock of the Corporation at any time owned by it for
which it paid the highest price per share).
2. The aggregate amount of the cash and the fair
market value of the other consideration to be received per
share by the holders of the common stock of the Corporation in
the Business Combination shall be not less than the highest
price per share previously paid by the Principal Shareholder
(whether before or after it became a Principal Shareholder)
for any of the shares of common stock of the Corporation at
any time Beneficially Owned, directly or indirectly, by the
Principal Shareholder.
3. The consideration to be received by the holders of
the common stock of the Corporation in the Business
Combination shall be in the same form and of the same kind as
the consideration paid by the Principal Shareholder in
acquiring the majority of the shares of common stock of the
Corporation already Beneficially Owned, directly or
indirectly, by the Principal Shareholder.
The conditions imposed by this Article XVII shall be
in addition to all other conditions (including, without
limitation, the vote of the holders of any class or series of
stock of the Corporation) otherwise imposed by law, by any
other Article of this Certificate, by any resolution of the
board of directors
<PAGE>
providing for the issuance of a class or series of stock, or
by any agreement between the Corporation and any national
securities exchange.
B. CERTAIN DEFINITIONS. For the purpose of this
Article XV, the definitions of "Business Combination,"
"Principal Shareholder," "Substantial Part," "Voting Stock,"
and "Beneficial Owner" set forth in Article XVI will apply to
this Article XVII.
The "Market Price" of the common stock of the
Corporation shall be the mean between the high "bid" and the
low "asked" prices of the common stock in the over-the-counter
market on the day on which such value is to be determined or,
if no shares were traded on such date, on the next preceding
day on which such shares were traded, as reported by the
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") or other national quotation service. If the
common stock of the Corporation is not regularly traded in the
over-the-counter market but is registered on a national
securities exchange or traded in the national over-the-counter
market, the market value of the common stock shall mean the
closing price of the common stock on such national securities
exchange or market on the day on which such value is to be
determined or, if no shares were traded on such day, on the
next preceding day on which shares were traded, as reported by
National Quotation Bureau, Incorporated or other national
quotation service. If no such quotations are available, the
fair market value of the date in question of a share of such
stock as determined by the board of directors in good faith;
and in the case of property other than cash or stock, the fair
market value of such property other than cash or stock, the
fair market value of such property on the date in question as
determined by the board of directors in good faith.
C. EXCEPTIONS. The provisions of this Article XVII
shall not apply to a Business Combination which was approved
by two-thirds of those members of the board of directors of
the Corporation who were directors prior to the time when the
Principal Shareholder became a Principal Shareholder. The
provisions of which this Article XVII also shall not apply to
a Business Combination which (a) does not change any
shareholder's percentage ownership in the shares of stock
entitled to vote in the election of directors of any successor
of the Corporation from the percentage of the shares of Voting
Stock Beneficially Owned by such shareholder; (b) provides for
the provisions of this Article XVII, without any amendment,
change alteration, or deletion, to apply to any successor to
the Corporation; and (c) does not transfer all or a
Substantial Part of the Corporation's assets other than to a
wholly-owned subsidiary of the Corporation; provided, however,
that nothing contained in this Article XVII shall permit the
Corporation to issue any of its shares of Voting Stock or to
transfer any of its assets to a wholly-owned subsidiary of the
Corporation if such issuance of shares of
<PAGE>
Voting Stock or transfer of assets is part of a plan to
transfer such shares of Voting Stock or assets to a Principal
Shareholder.
D. ADDITIONAL PROVISIONS. Nothing contained in this
Article XVII shall be construed to relieve a Principal
Shareholder from any fiduciary obligation imposed by law. In
addition, nothing contained in this Article XVII shall prevent
any shareholders of the Corporation from objecting to any
Business Combination and from demanding any appraisal rights
which may be available to such shareholders.
IV. The following provision is added as Article
XVIII-Evaluation of Offers:
The board of directors of the Corporation, when
evaluating any offer to (A) make a tender or exchange offer
for any equity security of the Corporation, (B) merge or
consolidate the Corporation with another corporation or
entity, or (C) purchase or otherwise acquire all or
substantially all of the properties and assets of the
Corporation, may, in connection with the exercise of its
judgment in determining what is in the best interest of the
Corporation and its stockholders, give due consideration to
all relevant factors, including, without limitation, the
social and economic effect of acceptance of such offer: on the
Corporation's present and future customers and employees and
those of its subsidiaries; on the communities in which the
Corporation and its subsidiaries operate or are located; on
the ability of the Corporation to fulfill its corporate
objectives as a financial institution holding company; and on
the ability of its subsidiary financial institution(s) to
fulfill the objectives of a federally insured financial
institution under applicable statutes and regulations.
V. Article XVI of the Certificate of Incorporation is deleted
in its entirety and there shall be substituting therefor Article XX-Amendment
of Certificate of Incorporation:
The Corporation reserves the right to repeal, alter,
amend, or rescind any provision contained in this Certificate
in the manner now or hereafter prescribed by law, and all
rights conferred on stockholders herein are granted subject to
this reservation. Notwithstanding the foregoing, the
provisions set forth in Articles X, XI, XII, XIII, XIV, XV,
XVI, XVII, XVIII, XIX, and this Article XX may not be
repealed, altered, amended, or rescinded in any respect, and
no provision may be adopted in the Certificate of
Incorporation or Bylaws of the Corporation that is
inconsistent with such Articles, unless the same is approved
by the affirmative vote of the holders of not less than 80% of
the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors
(considered for this purpose as a single class) cast at a
meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment, or
rescission is included in the notice of such meeting); except
that such repeal, alteration,
<PAGE>
amendment, or rescission may be made by the affirmative vote
of the holders of a majority of the outstanding shares of
capital stock of the Corporation entitled to vote generally in
the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of
the directors of the Corporation."
I, THE UNDERSIGNED, being the Chief Executive Officer of PN Holdings,
Inc., do make, file, and record this Certificate of Amendment, do affirm,
acknowledge, and certify, under penalty of perjury, that the facts stated herein
are true, and, accordingly, have set my hand this 1ST day of DECEMBER , 1998.
/s/ CHARLES C. HUFFMAN
---------------------------------
Charles C. Huffman
Chief Executive Officer
(duly authorized representative)
<PAGE>
BYLAWS
OF
PN HOLDINGS, INC.
ARTICLE I
PRINCIPAL EXECUTIVE OFFICE
The principal executive office of PN Holdings, Inc. (the "Corporation")
shall be at 315 East Eisenhower, Ann Arbor, Michigan 48108. The Corporation may
also have offices at such other places within or without the State of Michigan
as the board of directors shall from time to time determine.
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
stockholders shall be held at the principal executive office of the Corporation
or at such other place within or without the State of Delaware as the board of
directors may determine and as designated in the notice of such meeting.
SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. SPECIAL MEETING. Special meetings of the stockholders for
any purpose or purposes may be called at any time by the board of directors, the
chairman of the board of directors, or by a committee of the board of directors
in accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with these Bylaws or as otherwise prescribed by the
board of directors. The chairman or the chief executive officer of the
Corporation shall preside at such meetings.
SECTION 5. NOTICE OF MEETING. Written notice stating the place, day,
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing duties of the
secretary, not less than ten days nor more than fifty days before the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the stockholder at the address of the stockholder as it appears on
the stock transfer books or records of the Corporation as of the record date
prescribed in Section 6 of this Article II, with postage thereon prepaid. If a
stockholder is present at a meeting, or in writing waives notice thereof before,
during, or after the meeting, notice of the meeting to the stockholder shall be
unnecessary. When any meeting of stockholders, either annual or special, is
adjourned for thirty days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting. It shall not be necessary to give
any notice of the time and place of any meeting adjourned for less than thirty
days or of the business to be transacted at such adjourned meeting, other than
an announcement at the meeting at which the
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adjournment is taken, unless the board of directors has determined a new record
date in accordance with Section 6 of this Article II.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. A record date in any case shall
be not more than sixty days, and in case of a meeting of stockholders not less
than ten days, prior to the date on which the particular action requiring a
determination of stockholders of record, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof, unless a new record date shall have been fixed by the board of
directors.
SECTION 7. VOTING LISTS. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten days
before each meeting of stockholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. The record, for a period of ten days
before such meeting, shall be kept on file at the principal office of the
Corporation whether within or outside the State of Michigan, and shall be
subject to inspection by any stockholder for any purpose germane to the meeting
at any time during usual business hours. Such record shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any stockholder for any purpose germane to the meeting during the
whole time of the meeting. The original stock transfer books shall be prima
facie evidence as to who are the stockholders entitled to examine the record or
transfer books or to vote at any meeting of stockholders.
SECTION 8. QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. With respect to any matter,
any shares for which a broker indicates on a proxy that it does not have
discretionary authority as to such shares to vote on such matter will not be
considered present for purposes of determining whether a quorum is present. If
less than a majority of the outstanding shares are represented at a meeting, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 9. PROXIES. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by the authorized
attorney in fact of the stockholder. Proxies solicited on behalf of the
management shall be voted as directed by the stockholder or, in the absence of
such direction, as determined by a majority of the board of directors. No proxy
shall be valid after eleven months from the date of its execution unless
otherwise provided in the proxy.
SECTION 10. VOTING. At each election for directors and for every other
matter requiring a vote of stockholders, every stockholder entitled to vote at
such election shall be entitled to one vote
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for each share of stock held. Unless otherwise provided by the Certificate of
Incorporation, by statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter, except in the election of directors, which election shall be determined
by a plurality of the votes of the shares present in person or by proxy at the
meeting and entitled to vote on the election of directors.
SECTION 11. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at the meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by such person,
either in person or by proxy, without a transfer of the shares into such
person's name. Shares standing in the name of a trustee may be voted by the
trustee, either in person or by proxy, but no trustee shall be entitled to vote
shares held by the trustee without a transfer of such shares into name of the
trustee. Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the name of the receiver if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the chairman of the board or the board of directors may appoint
any persons, other than nominees for office, as inspectors of election to act at
such meeting or any adjournment thereof. The number of inspectors shall be
either one or three. If the board of directors so appoints either one or three
inspectors, that appointment shall not be altered at the meeting. If inspectors
of election are not so appointed, the chairman of the board may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment in
advance of the meeting or at the meeting by the chairman of the board or the
president.
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Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share; the shares of stock represented at the meeting; the
existence of a quorum; the authenticity, validity, and effect of proxies;
receiving votes, ballots, or consents; hearing and determining all challenges
and questions in any way arising in connection with the right to vote; counting
and tabulating all votes or consents; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. NOMINATING COMMITTEE. The board of directors or a committee
appointed by the board of directors shall act as a nominating committee for
selecting the management nominees for election as directors. Except in the case
of a nominee substituted as a result of the death or other incapacity of a
management nominee, the nominating committee shall deliver written nominations
to the secretary at least twenty days prior to the date of the annual meeting.
Provided such committee makes such nominations, no nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by stockholders are made in writing and
delivered to the secretary of the Corporation in accordance with the provisions
of the Corporation's Certificate of Incorporation.
SECTION 15. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be under the direction of its board of directors. The chairman shall
preside at all meetings of the board of directors.
SECTION 2. NUMBER, TERM, AND ELECTION. The number of directors
constituting the whole board shall be established by resolution of the Board of
Directors. The board shall be divided into three classes as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected or qualified. The board of
directors shall be classified in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held at such time and place as shall be determined by
resolution of the board of directors without other notice than such resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the chairman, the chief executive officer,
or one-third of the directors. The person calling the special meeting of the
board of directors may fix any place as the place for holding any special
meeting of the board of directors called by such person.
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SECTION 5. TELEPHONIC MEETINGS. Members of the board of directors may
participate in regular or special meetings by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person.
SECTION 6. NOTICE. Written notice of any special meeting shall be given
to each director at least two days previous thereto delivered personally or by
telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid if mailed or when delivered to the telegraph
company if sent by telegram. Any director may waive notice of any meeting by a
writing filed with the secretary either before, during, or after the meeting.
The attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any meeting of the board of directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by
Section 2 shall constitute a quorum for the transaction of business at any
meeting of the board of directors, but if less than a majority is present at a
meeting, a majority of the directors present may adjourn the meeting from time
to time. Notice of any adjourned meeting shall be given in the same manner as
prescribed by Section 6 of this Article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the entire
board of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the General Corporation Law of the State of
Delaware.
SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Corporation
addressed to the chairman. Unless otherwise specified therein such resignation
shall take effect upon receipt and acceptance thereof by the chairman.
SECTION 11. VACANCIES. Any vacancy occurring in the board of directors
and any directorship to be filled by reason of an increase in the number of
directors may be filled by the affirmative vote of two-thirds of the directors
then in office. The term of such director shall be in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 12. REMOVAL OF DIRECTORS. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
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SECTION 13. COMPENSATION. Directors, as such, may receive compensation
for service on the board of directors. Members of either standing or special
committees may be allowed such compensation as the board of directors may
determine.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution, and procedures thereof. Each committee
shall consist of one or more directors of the Corporation appointed by a
majority of the whole board. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
The board shall have power at any time to change the members of, to
fill vacancies in, and to discharge any committee of the board. Any member of
any such committee may resign at any time by giving notice to the Corporation;
provided, however, that notice to the board, the chairman of the board, the
chief executive officer, the chairman of such committee, or the secretary shall
be deemed to constitute notice to the Corporation. Such resignation shall take
effect upon receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective. Any member of any such committee may be removed
at any time, either with or without cause, by the affirmative vote of a majority
of the authorized number of directors at any meeting of the board called for
that purpose.
ARTICLE V
OFFICERS
SECTION 1. POSITION. The officers of the Corporation shall be a
chairman, a president, one or more vice presidents, a secretary, and a
treasurer, each of whom shall be elected by the board of directors. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Corporation may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers and
duties as generally pertain to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until a successor to
the officer shall have been elected and qualified or until death or until the
officer shall resign or shall have been removed in the manner hereinafter
provided. Election or appointment of an officer, employee, or agent shall not of
itself create contract rights. The board of directors may authorize the
Corporation to enter into an employment contract with any officer in accordance
with state laws, but no such contract shall impair the right of the board of
directors to remove any officer at any time in accordance with Section 3 of this
Article V.
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SECTION 3. REMOVAL. Any officer may be removed by vote of two-thirds of
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be
fixed from time to time by the board of directors, and no officer shall be
prevented from receiving such salary by reason of the fact that the officer is
also a director of the Corporation.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
or the executive committee may authorize any officer, employee, or agent of the
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be general or
confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees, or
agents of the Corporation in such manner, including in facsimile form, as shall
from time to time be determined by resolution of the board of directors.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its authorized depositories as the board of directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. The shares of the Corporation shall
be represented by certificates signed by the chairman of the board of directors
or the president or a vice president and by the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the Corporation, and may
be sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. If any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be
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such officer before the certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of its
issue.
SECTION 2. FORM OF SHARE CERTIFICATES. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any stockholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
That the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares; the
designation of the series, if any, which such certificate represents; and the
par value of each share represented by such certificate, or a statement that the
shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. PAYMENT FOR SHARES. No certificate shall be issued for any
share until such share is fully paid.
SECTION 4. FORM OF PAYMENT FOR SHARES. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. TRANSFER OF SHARES. Transfer of shares of capital stock of
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only the holder of record thereof or by the legal
representative of the holder of record thereof, who shall furnish proper
evidence of such authority, or by an attorney thereunto authorized by power of
attorney executed and filed with the Corporation. Such transfer shall be made
only upon the surrender for cancellation of the certificate for such shares. The
person in whose name shares of capital stock stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes.
SECTION 6. LOST CERTIFICATES. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or the legal representative of such person, to give the Corporation
a bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen, or destroyed.
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ARTICLE VIII
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the last day of January
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
DIVIDENDS
Dividends upon the stock of the Corporation, subject to the provisions
of the Certificate of Incorporation, if any, may be declared by the board of
directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property, or in the Corporation's own stock.
ARTICLE X
CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
ARTICLE XI
AMENDMENTS
These Bylaws may be repealed, altered, amended, or rescinded by the
stockholders of the Corporation by vote of not less than 66.67% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment, or rescission is
included in the notice of such meeting). In addition, in accordance with the
Corporation's Certificate of Incorporation, the board of directors may repeal,
alter, amend, or rescind these Bylaws by vote of two-thirds of the board of
directors at a legal meeting held in accordance with the provisions of these
Bylaws.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK PN HOLDINGS, INC. CUSIP
CERTIFICATE NO.
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE REGISTERED HOLDER OF:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$0.02 PAR VALUE PER SHARE OF
PN Holdings, Inc.
The shares represented by this certificate are transferable only on the
stock transfer books of the corporation by the holder of record hereof in
person, or by his duly authorized attorney or legal representative, upon the
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all the provisions
contained in the corporation's official corporate papers filed with the
Secretary of the State of Delaware (copies of which are on file with the
Transfer Agent), to all of the provisions the holder by acceptance hereof,
assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
In Witness Whereof, Credit Management Solutions, Inc. has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.
DATED:
- ------------------------------- -----------------------------
PRESIDENT SECRETARY
SEAL
Incorporated 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PN HOLDINGS, INC.
The Board of Directors of the corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations, and
restrictions thereof. The corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The shares represented by this certificate may not be cumulatively
voted in the election of directors of the corporation. The affirmative vote of
not less than two-thirds of the corporation's voting stock is required to amend
the provisions of the Certificate of Incorporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
Custodian
--------------- ---------------
(Cus) (Minor)
under Uniform Gifts to Minors Act
-----------------------------
(State)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
OR VALUE RECEIVED hereby sell, assign and transfer unto
--------------------
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the common stock represented by the within certificate and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within named
corporation with full power of substitution in the premises.
Dated X
---------------------- ----------------------------------------
X
----------------------------------------
NOTICE: The signatures to this assignment must correspond with the
name(s) as written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
-----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS, AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Countersigned and Registered:
Transfer Agent and Registrar
- ------------------------------
Authorized Signature
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on MARCH 31 ,
1998 by and between Pelican National Bank (hereinafter referred to as "Bank"),
and Michael D. Surgen (hereinafter referred to as "Executive").
W I T N E S S E T H
WHEREAS, PN Holdings, Inc. (hereinafter referred to as "Bancorp") is a
holding company which owns the Bank.
WHEREAS, in order to insure the successful management of Bank, Bank
desires to avail itself of the experience, skills, abilities and knowledge of
Executive; and
WHEREAS, both Bank and Executive desire to embody the terms and
conditions of Executive's employment in this written agreement which supersedes
all prior agreements, whether written or oral; and
WHEREAS, the employment, the duration thereof, the compensation to be
paid to Executive, and other terms and conditions of employment provided in this
Agreement were duly fixed, stated, approved and authorized for and on behalf of
Bank, by action of its Board of Directors.
NOW, THEREFORE, in consideration of the mutual covenants, terms and
conditions hereinafter set forth, the sufficiency of which is acknowledged, the
parties hereto covenant and agree as follows:
1. TERM
Effective March __, 1998, the Bank agrees to employ Executive as
President and Chief Executive Officer of Bank, and Executive hereby accepts
employment with the Bank ("Commencement Date") and shall continue for a period
of five (5) years from and after the Commencement Date. This period of
employment shall be referred to herein as "the Term". The Bank agrees to give
the Executive notice three (3) months prior to the end of the Term if it does
not intend to extend or enter into a new Agreement with the Executive.
2. DUTIES
2.1 Generally. Executive shall serve as President and Chief
Executive Officer of Bank, subject to the powers by law vested in the Board of
Directors of the Bank, and in Bank's shareholders. Executive shall also serve as
a member of the Board of Directors of the Bank. During the Term of this
Agreement, Executive shall perform his duties faithfully, diligently and to the
best of his ability, consistent with the highest and best standards of the
banking industry and in compliance with all applicable laws and Bank's Articles
of Association and Bylaws.
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2.2 Performance. Except as provided in Paragraph 6.1 herein,
Executive's employment after Commencement Date shall devote substantially his
full energies, interest, abilities and productive time to the business of Bank.
Executive shall at all times loyally and conscientiously perform all of these
duties and obligations hereunder and shall at all times strictly adhere to and
obey, and instruct and require all those working under and with his strictly to
adhere and obey, all applicable federal and state laws, statutes, rules and
regulations to the end that Bank shall at all times be in full compliance with
such laws, statues, rules and regulations.
3. COMPENSATION
3.1 Operating Period. During the Term, Executive shall receive
an annual salary in the amount of One Hundred and Twenty Thousand Dollars
($120,000.00) payable in accordance with the normal payroll periods at Bank. The
Executive's annual salary shall be increased (but not decreased) during each
year of the Term of this Agreement solely in the discretion of the Board of
Directors of the Bank. The Executive shall not be paid any further compensation
for serving as a Director of the Bank or on committees of the Board of Directors
of the Bank.
3.2 Bonus. In addition to the annual salary set forth in
Section 3.1 hereof, during the Term, Executive may receive such bonuses, if any,
as the Board of Directors of the Bank, in its sole discretion, may determine.
4. EXECUTIVE BENEFITS
4.1 Group Medical Benefits. The Bank shall provide the
Executive, at the Bank's expense, group medical benefits to the same extent that
such benefits are available to other employees of the Bank. The Bank shall
provide the Executive, at the Bank's expense, with dental benefits and benefits
for all family members living at home. Health benefits for children of the
Executive, currently in college, shall be made available at the Executive's
expense.
4.2 The Bank shall provide the Executive, at the Bank's
expense, with a $250,000 term life insurance policy.
4.3 Business Expense. Executive shall be entitled to
reimbursement by the Bank for any ordinary and necessary business expenses
incurred by Executive in the performance of Executive's duties and in acting for
the Bank during the Term, which type of expenditures shall be determined by the
Board of Directors of the Bank, provided that:
(a) Each such expenditure is of a nature qualifying it as a
proper deduction on the federal and state income tax returns of the Bank as a
business expense and not as deductible compensation to Executive; and
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(b) Executive furnishes to the Bank adequate records and
other documentary evidence required by federal and state statutes and
regulations issued by the appropriate taxing authorities for the substantiation
of such expenditures as deductible business expenses of the Bank and not as
deductible compensation to Executive.
(c) Such expenses shall not exceed the sum of Fifteen
Hundred Dollars ($1,500.00) per month during the Term of this Agreement.
4.3 Automobile. Executive shall receive an automobile
allowance in the sum of Five Hundred Dollars ($500.00) per month.
4.4 Vacation. Executive shall be entitled to a vacation and
personal days in each year during the Term, which vacation and personal days
shall be 15 business days during each year of the Term of this Agreement. Any
vacation time and personal days not used during any year of the Term may be
accrued for use in future years.
4.5 Sick Leave and Retirement Benefits. Executive shall be
entitled to participate in all Bank sick leave and retirement policies and plans
if otherwise eligible.
4.6 Moving Expenses. The Bank will reimburse the Executive for
moving expenses up to $7,000 upon completion of the Executive's move to Naples,
Florida. In addition, the Bank will pay for two trips for the Executive's wife
to Naples, Florida to find a residence for the Executive and his family.
5. PROPERTY RIGHTS
5.1 Trade Secrets. During the Term, Executive may have access
to and become acquainted with various trade secrets which are owned by the
Bancorp and the Bank and which may regularly be used in the operation of the
Bank. Executive shall not disclose any such trade secrets, directly or
indirectly, or use them in any way, during the Term or at any time thereafter,
except as required pursuant to the provisions of this Agreement. All such trade
secrets, including, but not by way of limitation, any and all files, records,
documents, specifications, equipment, customer lists and similar items relating
to the business of the Bancorp and the Bank, whether prepared by Executive or
otherwise coming into Executive's possession, shall remain the exclusive
property of the Bancorp and the Bank and shall not be removed from the premises
of the Bancorp and the Bank under any circumstances whatsoever without the prior
written consent of the applicable Board.
5.2 Other Property. Upon termination of this Agreement,
Executive shall immediately deliver to the applicable Board any and all property
in Executive's possession or under Executive's control belonging to the Bancorp
and the Bank, in good condition, ordinary wear and tear and damage by any cause
beyond Executive's reasonable control excepted.
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6. ADDITIONAL OBLIGATIONS
6.1 Covenant Not to Compete. During the Term of this Agreement
and upon the expiration of any payments under Section 7 of this Agreement and
for a period of one year thereafter, Executive shall not, directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer of director, or in any other individual
or representative capacity, engage or participate in any business or activity
that is in any way in competition in any manner whatsoever with the business of
the Bancorp and the Bank in Collier County, Florida.
7. TERMINATION.
Pursuant to the provisions of 12 U.S.C. Section 24 and any and all
other provisions of this Agreement to the contrary notwithstanding, Executive's
employment hereunder may be terminated:
7.1 Without Cause. In the sole and absolute discretion of the
Board of Directors of the Bank may, without cause, terminate Executive's
employment; provided, however, that if such termination occurs during the Term,
and is for any cause other than as described in Sections 7.2, 7.3, 7.4, 7.5, 7.6
or 7.7 hereof, Executive shall receive a severance payment in the amount of 25%
of the Executive's base salary then in effect under Section 3.1 of this
Agreement. In addition, the Bank agrees to repurchase or arrange for the sale of
any Common Stock owned by the Executive at the book value thereof as of the
nearest quarter after termination pursuant to this Article 7.
7.2 Death or Disability. Upon Executive's death or medical or
legal disability to continue his duties hereunder, this Agreement shall
automatically and without notice terminate as of the date of such death or
disability.
7.3 Termination for Cause. (a) The Board of Directors of the
Bank may for cause terminate Executive's employment at any time during the Term
of this Agreement. In such event, all of Executive's rights under this Agreement
shall terminate and Executive shall have no right to receive compensation or
other benefits for any period after the effective date of such termination for
cause. Termination for cause shall be defined as your personal dishonesty,
willful misconduct, breach of fiduciary duty involving personal profit,
continuing intentional or habitual failure to perform stated duties, violation
of any law (other than minor traffic violations or similar misdemeanor
offenses), rule or regulation adopted by the Office of the Comptroller of the
Currency, Federal Deposit Insurance Corporation or other regulatory agency with
jurisdiction over the Bank, any judgment, ruling or decree by any court of
competent jurisdiction or administrative body that precludes or impairs
Executive's ability to perform the services contemplated by this Agreement or
any material breach by Executive of any provision of this Agreement.
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7.3 (b) The Board of Directors of the Bank shall provide the
Executive with written notice and the reasons for any termination for cause,
which termination shall be effective in accordance with Section 10.1 of this
Agreement, provided, however, if the reason for termination for cause involves
continuing intentional or habitual failure to perform stated duties or the
violation of any law, rule or regulation adopted by the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation or other
regulatory agencies with jurisdiction over the Bank, where such regulatory
authority provides, in writing, for an opportunity to cure or any material
breach by Executive. The Executive shall have a period of thirty (30) days from
the date of such notice to cure such breach provided, further, that the
determination of whether or not such breach has been cured shall be the sole
determination of a majority of the members of the Board of Directors of the
Bank, excluding the Executive, and such determination shall be binding upon the
Executive.
7.4 Compliance with Law and Regulation. Executive and the Bank
expressly acknowledge and agree that any payments made to Executive pursuant to
this Agreement or otherwise are subject to and conditioned upon compliance with
12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
7.5 Suspension and Removal Orders. If Executive is suspended
and/or temporarily prohibited from participating in the conduct of the Bank's
affairs by notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. Section 1818(e)(3) and (g)(1)), the Bank's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion: (i) pay Executive's all or part of the compensation
withheld while its obligations under this Agreement were suspended; and (ii)
reinstate (in whole or in part) any of its obligations which were suspended. If
Executive is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Section 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or
(g)(1)), all obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the parties shall not be
affected.
7.6 Termination by Default. If the Bank is in default (as
defined in Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1813(x)(1)), all obligations under this Agreement shall terminate as of
the date of default, but vested rights of the parties shall not be affected.
7.7 Supervisory Assistance or Merger. All obligations under
this Agreement shall be terminated, except to the extent that it is determined
that continuation of the Agreement is necessary for the continued operation of
the Bank: (i) by the Director of the Office of the Comptroller of the Currency
(the "Director") or his or her designee, at the time that the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act (12 U.S.C. Section 1823(c)); or (ii) by the Director or
his or her
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designee, at the time that the Director or his or her designee approves a
supervisory merger to resolve problems related to the operation of the Bank or
when the Bank is in an unsafe or unsound condition. All rights of the parties
that have already vested, however, shall not be affected by such action.
7.8 General Release of Claims. As a material inducement to the
Bank to enter into this Agreement including payment of severance pay as stated
in Section 7.1, the Executive hereby irrevocably and unconditionally releases,
acquits, and forever discharges the Bancorp and the Bank and each of its owners,
shareholders, predecessors, successors, assigns, agents, directors, officers,
employees, representatives, attorneys, divisions, subsidiaries, affiliates (and
agents, directors, officers, employees, representatives and attorneys of such
divisions, subsidiaries and affiliates), and all persons acting by, through,
under or in concert with any of them (collectively "Releasees"), or any of them,
from any and all complaints, claims, liabilities, obligations, promises,
agreements, controversies, damages, costs, losses, debts and expenses (including
attorney's fees and costs actually incurred), of any nature whatsoever, ("Claim"
or "Claims"), which Executive now has, owns, or holds, or claims to have, own or
hold, or which Employee at any time heretofore had, owned, or held, or claimed
to have, own, or hold, or which Employee at any time hereinafter may have, own,
or hold, or claim to have, own, or hold, against each or any of the Releasees.
8. STOCK OPTIONS.
The Bancorp has determined to implement a stock option plan to
cover Directors, Officers and employees of the Bancorp and its subsidiaries,
including the Bank.
(a) The Bank hereby agrees to grant Executive a bonus of 5,000
incentive stock options to buy shares of Common Stock of the Bancorp at a price
of $15 per share, if both the Bank's Return on Equity ("ROE") is in excess of 2%
and the Bank's Return on Assets ("ROA") is in excess of 0.35% at the end of the
Bank's second year of operations in accordance with the bank's business plan. If
the Bank's earnings meet the test set forth in the previous sentence, the
Executive will receive options to purchase an additional 5,000 shares per year
in each of the third, fourth and fifth years of the Executive's employment by
the Bank. The options shall vest in accordance with the Bancorp's Stock Option
and Incentive Plan over a five year period.
(b) The Bank hereby agrees to grant Executive an additional bonus
for superior performance of up to a maximum of options to purchase an additional
5,000 shares of Common Stock of the Bancorp, in the discretion of the Board in
each year in which both the Bank's ROE is in excess of 13.5% and the Bank's ROA
is in excess of 1.10%. This bonus will be applicable for years three through
six. These options shall vest in accordance with the Bancorp's Stock Option and
Incentive Plan over a five year period.
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9. MISCELLANEOUS.
9.1 Ratification. This Agreement is subject to ratification by
the Board of Directors of the Bank and the Office of the Comptroller of the
Currency (the "OCC") and, if not ratified by the Board of Directors of the Bank
and by the OCC by June 1, 1998 shall be void and of no further force and effect
and the Bank shall have no further obligations to the Executive other than to
pay the compensation provided for under Section 3.1 of this Agreement for the
period the Executive actually works for the Bank.
9.2 Notice. Any and all notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
delivered personally or forty-eight (48) hours after being mailed, certified or
registered mail, return receipt requested, postage prepaid, to the addresses set
forth above or to such addresses as may from time to time be designated in
writing.
9.3 Time. Time is of the essence of this Agreement with respect
to each and every provision of this Agreement in which time is a factor.
9.4 Entire Agreement. This Agreement sets forth the entire
agreement between Executive and the Bank pertaining to the subject matter
hereof, fully supersedes any and all prior agreements or understandings between
Executive and any other persons on behalf of the Bank pertaining to the subject
matter hereof and no change in modification of or addition, amendment or
supplement to this Agreement shall be valid unless set forth is writing and
signed and dated by Executive and the Bank.
9.5 Further Assurances. Executive and the Bank, without the
necessity of any further consideration, agree to execute and deliver such other
documents and take such other action as may be necessary to consummate more
effectively the purposes and subject matter of this Agreement.
9.6 Applicable Law. The existence, validity, construction and
operational effect of this Agreement, any and all of these covenants,
agreements, representations, warranties, terms and conditions and the rights and
obligations of Executive and the Bank hereunder shall be determined in
accordance with the regulations of the Comptroller provided, however, that any
provision of this Agreement which may be prohibited by law or otherwise held
invalid shall be ineffective only to the extent of such prohibition or
invalidity and shall not invalidate or otherwise render ineffective any or all
of the remaining provisions of this Agreement.
9.7 Controversy. In the event of any controversy, claim, or
dispute between Executive, Bancorp and the Bank arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover as costs from
the non-prevailing party reasonable expenses, including, but not by way of
limitation, attorneys' fees and accountant's fees.
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9.8 Arbitration. Any dispute regarding any aspect of this
Agreement, including but not limited to its formation, performance or breach
("arbitrable dispute") , shall be submitted to arbitration in Collier County,
Florida, before a single experienced employment arbitrator licensed to practice
law in Florida and selected in accordance with the Employment Dispute Resolution
Rules of the American Arbitration Association, as the exclusive forum for
resolving such claims or dispute. The arbitrator shall not have authority to
modify or change the Agreement in any respect. The prevailing party in any such
arbitration shall be awarded its costs, expenses, and actual attorneys' fees
incurred in connection with the arbitration. The Bank and Executive shall each
be responsible for payment of one-half the amount of the arbitrator's fee(s).
The arbitrator's decision and/or award will be fully enforceable and subject to
an entry of judgment by the appropriate Court of the State of Florida for the
County of Collier. Should any part to this Agreement hereafter institute any
legal action or administrative proceeding against the other with respect to any
Claim waived by this Agreement or pursue any arbitrable dispute by any method
other than arbitration, the responding party shall recover from the initiating
party all damages, costs, expenses, and attorneys' fees incurred as a result of
such action.
9.9 Headings and Gender. The section headings used in this
Agreement are intended solely for the convenience of reference and shall not in
any way or manner amplify, limit, modify or otherwise be used in the
interpretation of any of the provisions of this Agreement and the masculine,
feminine or neuter gender and the singular or plural number shall be deemed to
include the others whenever the context so indicates or requires.
9.10 Successors. The covenants, agreements, representations,
warranties, terms and conditions contained in this Agreement shall be binding
upon and insure to the benefit of the successors and assigns of Executive and
the Bank; provided, however, that Executive may not assign any or all of his
rights or duties hereunder except upon the prior written consent of the Board in
its sole and absolute discretion.
DATED: MARCH 31 , 1998
-----------------------------
PELICAN NATIONAL BANK
By:/s/ CHARLES C. HUFFMAN
------------------------
DATED: MARCH 31 , 1998
-----------------------------
/s/ MICHAEL D. SURGEN
- -------------------------------------------
MICHAEL D. SURGEN
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PN HOLDINGS, INC.
STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of this PN Holdings, Inc. Stock Option and Incentive Plan
(the "Plan") is to advance the interests of the Company through providing select
key Employees and Directors of the Company, the Bank, WMC, and their Affiliates
with the opportunity to acquire Shares. By encouraging such stock ownership, the
Company seeks to attract, retain, and motivate the best available personnel for
positions of substantial responsibility and to provide additional incentive to
Directors and key Employees of the Company or any Affiliate to promote the
success of the business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code, and any other subsidiary corporations of a
parent corporation of the Company.
(b) "Agreement" shall mean a written agreement entered into in
accordance with Paragraph 5(c).
(c) "Award" shall mean collectively, Options and SARs, unless the
context clearly indicates a different meaning.
(d) "Bank" shall mean Pelican National Bank, a wholly owned subsidiary
of the Company.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean the common stock, par value $0.10 per
share, of the Company.
(i) "Company" shall mean PN Holdings, Inc.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case of
sick leave, military leave, or any other leave of absence approved by the
Company or in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate, or a successor.
(k) "Control" shall have the meaning ascribed to such term in 12 C.F.R.
Part 225. "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company; (ii) a merger or recapitalization in the
Company whereby the Company is not the surviving entity; (iii) a change in
Control of the Company as defined in 12 C.F.R. Part 225 or as otherwise defined
by the Board of Governors of the Federal Reserve System, or any successor
thereto; or (vi) the acquisition, directly or indirectly, of the beneficial
ownership (within the
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meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Company by any
person, entity, or group; provided, however, that a change in Control of the
Company shall not include the acquisition or disposition of securities of the
Company by any person in Control of the Company at the time of the adoption of
this Plan and shall not include any subsequent acquisition or disposition of the
securities of the Company by any person owned or Controlled by, or under common
Control with, a person in Control of the Company at the time of the adoption of
this Plan. This definition shall not apply to the purchase of Shares by
underwriters in connection with a public offering of securities of the Company,
or the purchase of shares of up to 25% of any class of securities of the Company
by a tax-qualified employee stock benefit plan which is exempt from the approval
requirements of 12 C.F.R. Part 225. The term "person" refers to an individual or
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization, or any other form of entity
not listed. The decision of the Committee as to whether a change in Control has
occurred shall be conclusive and binding.
(l) "Director" shall mean any member of the Board, and any member of
the board of directors of any Affiliate that the Board has by resolution
designated as being eligible for participation in this Plan.
(m) "Effective Date" shall mean the date specified in Paragraph 15
hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank,
WMC, or an Affiliate who is an employee for federal tax purposes.
(o) "Exercise Price" shall mean the price per Optioned Share at which
an Option may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common
Stock, as determined under Paragraph 7(b) hereof.
(r) "Measurement Price" shall mean the price of the Common Stock to be
utilized to determine the extent of stock appreciation. The Measurement Price as
to any particular SAR shall not be less than the Market Value on the date of
grant.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "Participant" shall mean any key Employee or other person who
receives an Award pursuant to the Plan.
(w) "Plan" shall mean this PN Holdings, Inc. Stock Option and Incentive
Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
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(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(aa) "WMC" shall mean Washtenaw Mortgage Company, a wholly owned
subsidiary of the Company.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect for a term of
10 years from the Effective Date or the date the Plan is adopted by the Board
(whichever period ends earlier), unless sooner terminated pursuant to Paragraph
17 hereof. No Award shall be granted under the Plan after such ten year term.
(b) Term of Awards. The term of each Award granted under the Plan shall
be established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more than
10% of the outstanding Common Stock at the time an ISO is granted, the term of
such ISO shall not exceed five years, subject to the provisions of Section 8(e)
hereof.
4. SHARES SUBJECT TO THE PLAN.
(a) General Rule. Except as otherwise required by the provisions of
Paragraph 12 hereof, the aggregate number of Shares deliverable pursuant to
Awards shall not exceed 100,000. Such Shares may either be authorized but
unissued Shares or Shares held in treasury. If any Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised or
becoming vested in full, the Optioned Shares shall, unless the Plan shall have
been terminated, be available for the grant of additional Awards under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which a
SAR is granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of a SAR, shall be charged
against the aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of a SAR granted in conjunction with an
option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 10 hereof, shall not be available for the grant of further Options
under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two (2) members of the Board.
Members of the Committee shall serve at the pleasure of the Board. In the
absence at any time of a duly appointed Committee, the Plan shall be
administered by the members of the Board.
(b) Powers of the Committee. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion, subject to compliance
with applicable regulations of the Office of the Comptroller of the Currency
("OCC") and the Board of Governors of the Federal Reserve System ("FRB") (i) to
select Participants and grant Awards, (ii) to determine the form and content of
Awards to be issued in the form of Agreements under the Plan, (iii) to interpret
the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan, and (v) to make other determinations necessary or advisable for the
administration of the Plan. The Committee shall have and may exercise such other
power and authority as may be delegated to it by the Board from time to time. A
majority of the entire Committee
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shall constitute a quorum and the action of a majority of the members present at
any meeting of the committee at which a quorum is present, or acts approved in
writing by a majority of the Committee without a meeting, shall be deemed the
action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The terms
of each such Agreement shall be in accordance with the Plan, but each Agreement
may include such additional provisions and restrictions determined by the
Committee, in its discretion, subject to compliance with applicable regulations,
provided that such additional provisions and restrictions are not inconsistent
with the terms of the Plan. In particular, the Committee shall set forth in each
Agreement (i) the Exercise Price of an Option or SAR, (ii) the number of Shares
subject to, and the expiration date of, the Award, (iii) the manner, time, and
rate (cumulative or otherwise) of exercise or vesting of such Award, (iv) the
restrictions, if any, to be placed upon such Award, or upon Shares which may be
issued upon exercise of such Award, and (v) whether the Option is intended to be
an ISO or a Non-ISO.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations,
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit, or
proceeding relating to any action taken or failure to act under or in connection
with the Plan or any Award, granted hereunder to the full extent provided for
under the Certificate of Incorporation of the Company with respect to the
indemnification of Directors.
6. GRANT OF OPTIONS.
(a) General Rule. On and after the Effective Date, key Employees and
Non-Employee Directors shall be eligible to receive discretionary grants of
Options (or other Awards) pursuant to the Plan; provided that such grant shall
not be made to an Employee or Non-Employee Director whose Continuous Service
terminates on or before the date of grant.
(b) The Option granted to the optionee hereunder (i) shall become
vested and exercisable in accordance with the Agreement regarding such Option,
(ii) shall have a term of not more than 10 years from the date of the Award, and
(iii) shall be subject to the general rule set forth in Paragraph 8(c) with
respect to the effect of an optionee's termination of Continuous Service on the
Optionee's right to exercise his or her Options.
(c) Special Rules for ISOs.
(1) The Option granted to the optionee hereunder (i) shall
become vested and exercisable, on a cumulative basis, with respect to
20% of the Optioned Shares upon each of the first five anniversary
dates of the date of grant, provided that vesting shall not occur on a
particular date if the Optionee's Continuous Service has terminated on
or before such date and (ii) shall have a term of 10 years from the
date of the Award.
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(2) The aggregate Market Value, as of the date the Option is
granted, of the Shares with respect to which ISOs are exercisable for
the first time by an Employee during any calendar year (under all
incentive stock option plans, as defined in Section 422 of the Code, of
the Company or any present or future Parent or Subsidiary of the
Company) shall not exceed $100,000. Notwithstanding the foregoing, the
Committee may grant Options in excess of the foregoing limitations, in
which case such Options granted in excess of such limitation shall be
Options which are Non-ISOs.
7. EXERCISE PRICE FOR OPTIONS AND MEASUREMENT PRICE FOR SARS.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option and the Measurement Price for any particular SAR shall not be
less than 100% of the Market Value of the Optioned Shares on the date of grant
without taking into account any restrictions on the Optioned Shares. In the case
of an Employee who owns Shares representing more than 10% of the Company's
outstanding Shares of Common Stock at the time an ISO is granted, the Exercise
Price shall not be less than 110% of the Market Value of the Optioned Shares at
the time the ISO is granted.
(b) Standards for Determining Exercise Price or Measurement Price. If
the Common Stock is listed on a national securities exchange (including the
Nasdaq National Market or SmallCap System) on the date in question, then the
Market Value per Share shall be the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such date,
then the Exercise Price or Measurement Price shall be the mean between the bid
and asked price on such date. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the Market value per
Share shall be the mean between the bid and asked price on such date, or, if
there is no bid and asked price on such date, then on the next prior business
day on which there was a bid and asked price. If no such bid and asked price is
available, then the Market Value per Share shall be its fair market value as
determined by the Committee, in its sole and absolute discretion.
8. EXERCISE OF OPTIONS.
(a) Generally. Subject to (e) below, any Option granted hereunder shall
be exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and of the Agreement granted to a Participant. An
Option may not be exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the Company's
executive offices. Common Stock utilized in full or partial payment of the
Exercise Price for options shall be valued at its Market Value at the date of
exercise.
(c) Period of Exercisability. Except to the extent otherwise provided
in more restrictive terms of an Agreement, an Option may be exercised by a
Participant only with respect to the vested portion of such Option and only
while a Participant is an Employee or Director that has maintained Continuous
Service from the date of the grant of the Option, or within three months after
termination of such Continuous Service (but not later than the date on which the
Option would otherwise expire), except if the Employee's or Director's
Continuous Service terminates by reason of:
5
<PAGE>
(1) "Just Cause" which for purposes hereof shall have the
meaning set forth in any unexpired employment agreement between the
Participant and the Company, the Bank, and/or WMC (and, in the absence
of any such agreement, shall mean termination because of the Employee's
or Director's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure
to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order), then the Participant's rights to exercise such
Option shall expire on the date of such termination;
(2) death, then all Options of the deceased Participant shall
become immediately exercisable and may be exercised within two years
from the date of his death (but not later than the date on which the
Option would otherwise expire) by the personal representatives of such
person's estate or person or persons to whom such person's rights under
such Option shall have passed by will or by laws of descent and
distribution;
(3) Permanent and Total Disability (as such term is defined in
Section 22(e)(3) of the Code), then all Options of the disabled
Participant shall become immediately exercisable and may be exercised
within one year from the date of such Permanent and Total Disability,
but not later than the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
(e) Vesting of all Options shall cease immediately upon the termination
of employment or directorship of an optionee. The vesting schedule for ISOs set
forth in Section 6(c)(1) of this Plan is the most rapid vesting permitted under
the Plan for ISOs, except in the case of death or disability (which shall be
governed by Paragraphs 8(c)(2) and (3) above) or a change in control (which
shall be governed by Paragraph 11).
9. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Automatic Grants. Notwithstanding any other provisions of this
Plan, each Director who is not an Employee but is a Director on the Effective
Date shall receive, on said date, Non-ISOs to purchase 2,500 Shares. Such
Non-ISOs shall have an Exercise Price per Share equal to the Market Value of a
Share on the date of grant.
Each Director who joins the Board after the Effective Date and who is
not then an Employee shall be eligible to receive, on the date of joining the
Board, a discretionary grant of Non-ISOs in accordance with Section 6 of the
Plan at an Exercise Price per Share equal to the Market Value of a Share on the
date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph may be exercised in accordance with Paragraph 8 above.
10. SARS (STOCK APPRECIATION RIGHTS)
(a) Granting of SARs. In its sole discretion, subject to compliance
with applicable regulations, the Committee may from time to time grant SARs to
Employees either in conjunction with, or independently of, any Options granted
under the Plan. A SAR granted in conjunction with an Option may be an
alternative right wherein the exercise of the Option terminates the SAR to the
extent of the number of shares purchased upon exercise of the Option and,
correspondingly, the exercise of the SAR terminates the Option to the extent of
the number of Shares with respect to which the SAR is exercised. Alternatively,
a SAR granted in conjunction with an Option may be an additional right wherein
both the SAR and the Option may be exercised. A SAR may not
6
<PAGE>
be granted in conjunction with an ISO under circumstances in which the exercise
of the SAR affects the right to exercise the ISO or vice versa, unless the SAR,
by its terms, meets all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the
Exercise Price of the ISO and the Market Value of the Shares subject to
the ISO at the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable,
and under the same conditions;
(4) The SAR may be exercised only when the ISO may be
exercised; and
(5) The SAR may be exercised only when the Market Value of the
Shares subject to the ISO exceeds the Exercise Price of the ISO.
(b) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
In no event, however, may a SAR be exercised within the six-month period
following the date of its grant.
The provisions of Paragraphs 8(c) and 8(e) regarding the period of
exercisability and vesting of Options are incorporated by reference herein, and
shall determine the period of exercisability and vesting of SARs.
(c) Exercise of SARs. A SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that a SAR may
not be exercised for a fractional Share. Upon exercise of a SAR, the Participant
shall be entitled to receive, without payment to the Company except for
applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate
Measurement Price of such number of Optioned Shares. This amount shall be
payable by the Company, in the discretion of the Committee, in cash or in Shares
valued at the then Market Value thereof, or any combination thereof.
(d) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. CHANGE IN CONTROL.
All outstanding Awards shall become immediately exercisable in the
event of a change in Control of the Company, as determined by the Committee in
its sole discretion. In the event of a change in Control, the Committee and the
Board of Directors, at their discretion, will take one or a combination of the
following actions to be effective as of the date of such change in Control:
(1) provide that such Awards shall be assumed, or equivalent Awards
shall be substituted ("Substitute Awards") by the acquiring or succeeding
corporation (or an Affiliate thereof), provided that (a) any such Substitute
Award exchanged for ISOs shall meet the requirements of Section 424(a) of the
Code, and (b) the shares of stock issuable upon the exercise of such Substitute
Award shall constitute securities registered in
7
<PAGE>
accordance with the Securities Act of 1933, as amended ("Securities Act"), or
such securities shall be exempt from such registration in accordance with
Sections 3(a)(2) or 3(a)(5) of the Securities Act, or
(2) provide that the Participants will receive upon the consummation of
the change in Control transaction a cash payment for each Award surrendered
equal to the difference between (1) the Market Value of the consideration to be
received for each share of Common Stock in the change in Control transaction
times the number of Shares subject to a surrendered Award, and (2) the aggregate
exercise price of such surrendered Awards. Awards to which the Committee or the
Board has determined to provide a cash payment in lieu of the Award pursuant to
this section shall be and become, upon the change in Control the right to
receive the cash payment only and shall cease to be an Award.
The individual agreements concerning Awards under this Plan or other
agreements between Participants and the Company, the Bank, and/or WMC, or any
Affiliate thereof, may provide restrictions on Awards in the case of a change in
Control in order to avoid adverse tax results under Section 280G and/or Section
4999 of the Code. This section shall not apply to the purchase of Shares by
underwriters in connection with a public offering of securities of the Company,
or the purchase of shares of up to 25% of any class of securities of the Company
by a tax-qualified employee stock benefit plan which is exempt from the approval
requirements of 12 C.F.R. Part 225.
12. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards (and the Exercise Price thereof in the case of Options and
the Measurement Price in the case of SARs), shall be proportionately adjusted
for any increase, decrease, change, or exchange of Shares for a different number
or kind of shares or other securities of the Company which results from a
merger, consolidation, recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in which the number
or kind of shares is changed without the receipt or payment of consideration by
the Company.
(b) Special Rule for ISOs. Any adjustment made pursuant to subparagraph
(a) hereof shall be made in such a manner as not to constitute a modification,
within the meaning of Section 424(h) of the Code, of outstanding ISOs.
(c) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this Paragraph,
a Participant becomes entitled to new, additional, or different shares of stock
or securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions that were
applicable to the Shares pursuant to the Award before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Paragraph,
the issuance by the Company or an Affiliate of shares of stock of any class, or
of securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, Exercise Price, or Measurement
Price of Shares then subject to Awards or reserved for issuance under the Plan.
13. NON-TRANSFERABILITY OF AWARDS.
Awards may not be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations
8
<PAGE>
order" (within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder). An Award may be exercised only by a Participant, the
Participant's personal representative, or a permitted transferee.
14. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be the later of
the date on which the Committee makes the determination of granting such Award,
and the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
15. EFFECTIVE DATE.
The Plan shall become effective immediately upon its approval by the
Board; provided, however, that the Plan shall be approved by a favorable vote of
stockholders owning at least a majority of the Shares cast at a meeting duly
held in accordance with applicable laws within 12 months of the adoption of the
Plan by the Board. If such approval of stockholders is not obtained within 12
months of the adoption of the Plan, all ISOs granted pursuant to the Plan shall
become Non-ISOs.
16. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the modification of
any outstanding Award, provided no such modification shall confer on the holder
of said Award any right or benefit which could not be conferred on such person
by the grant of a new Award at such time, or impair the Award without the
consent of the holder of the Award.
17. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan, subject to
compliance with applicable regulations, and, with respect to any Shares at the
time not subject to Awards, suspend or terminate the Plan; provided that the
provisions of Paragraph 9 may not be amended more than once every six months
(other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder).
Shareholder approval must be obtained for any amendment of the Plan
that would change the number of Shares subject to the Plan (except in accordance
with Section 13 above), change the category of persons eligible to be
Participants, or materially increase the benefits under the Plan.
No amendment, suspension, or termination of the Plan shall, without the
consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
18. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common Stock shall not
be issued with respect to any Award unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed. The
Plan is intended to comply with Rule 16b-3, and any provision of the Plan which
the Committee determines in its sole and absolute discretion to be inconsistent
with said Rule shall, to the extent of such inconsistency, be inoperative and
null and void, and shall not affect the validity of the remaining provisions of
the Plan.
9
<PAGE>
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority, subject to compliance with applicable regulations, to impose in
Agreements such restrictions on Shares as it may deem appropriate or desirable,
including but not limited to the authority to impose a right of first refusal or
to establish repurchase rights or both of these restrictions.
19. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the Plan.
20. WITHHOLDING TAX.
The Company's obligation to deliver Shares upon exercise of Options
and/or SARs shall be subject to the Participant's satisfaction of all applicable
federal, state, and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that the Participant
already owns, having a value equal to the amount required to be withheld. The
value of Shares to be withheld, or delivered to the Company, shall be based on
the Market Value of the Shares on the date the amount of tax to be withheld is
to be determined. As an alternative, the Company may retain, or sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
21. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create any legal
or equitable right of the Employee, Director, or any other party to continue
service with the Company, the Bank, WMC, or any Affiliate of such corporations.
Except to the extent provided in Paragraphs 6(b) and 9(a), no Employee or
Director shall have a right to be granted an Award or, having received an Award,
the right to again be granted an Award. However, an Employee or Director who has
been granted an Award may, if otherwise eligible, be granted an additional Award
or Awards.
22. GOVERNING LAW.
The Plan shall be governed by and construed in accordance with the laws
of the State of Delaware, except to the extent that federal law shall be deemed
to apply.
10
<PAGE>
PN HOLDINGS, INC.
STOCK OPTION AND INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
, Optionee:
- -----------------------------------
PN Holdings, Inc. (the "Company"), pursuant to its Stock
Option and Incentive Plan (the "Plan"), granted to you, the Optionee named
above, an Option to purchase shares of the common stock of the Company ("Common
Stock"). You have been awarded this Option in connection with your services to
the Company, to the Company's wholly-owned subsidiaries, Pelican National Bank
or Washtenaw Mortgage Company, or to another Affiliate of the Company (as
"Affiliate" is defined in the Plan). This Option is intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The date of grant of this Option
within the meaning of the Plan is .
The details of your Option are as follows:
1. The total number of shares subject to this Option is
( ). Subject to the foregoing
-------------------- -----
and the limitations contained herein, this Option shall
be exercisable, on a cumulative basis, with respect to
each installment shown below on or after the date of
vesting applicable to such installment, as follows:
Number of Shares Date of Earliest
(INSTALLMENT) EXERCISE (VESTING)
2. (a) The Exercise Price of this Option is _____________
($_____) per share, which the Committee believes is not less than the Market
Value of the Common Stock on the date of the grant of this Option, except that
if you own stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, then such Exercise Price is
not less than one hundred ten percent (110%) of the Market Value of the Common
Stock on the date of grant of this Option.
<PAGE>
(b) The Exercise Price per share shall be paid upon
exercise of all or any part of each installment which has become exercisable by
you at the time the Option is exercised in cash or a check payable to the order
of the Company, in Common Stock, or a combination of Common Stock and cash or a
check.
3. The minimum number of shares with respect to which this
Option may be exercised at any one time is one hundred
(100) except as to an installment subject to exercise, as
set forth in paragraph 1, for which fewer than one hundred
(100) shares are unexercised, in which case, as to the
exercise of that installment, the number of shares in such
installment remaining unexercised shall be the minimum
number of shares. This Option may not be exercised so as to
purchase fractional shares.
4. The term of this Option commences on the date of the
grant hereof and, unless sooner terminated as set forth
below or in the Plan, terminates on the date which is ten
(10) years from the date of the grant of the Award as
defined in the Plan. This Option shall terminate prior to
the expiration of its term as follows: three months after
the termination of your Continuous Service with the Company
and its Affiliates for any reason other than Just Cause,
unless (a) such termination of Continuous Service is due to
your death while Options granted hereunder are still in
force and unexpired, in which case the vesting of any
unvested installments of the Option shall be accelerated
and such Option shall be exercisable for a period of two
years following your date of death by the personal
representative of your estate or by the person or persons
to whom your rights under this Option pass by will or by
the laws of descent and distribution in full without regard
to the installment exercise provisions in paragraph 1
hereof; or (b) you terminate your Continuous Service
because of your Permanent and Total Disability while
Options granted hereunder are still in force and unexpired,
in which case the vesting of any unvested installments of
the Option shall be accelerated and such Option shall be
exercisable for a period of one year from the date of the
termination of your Continuous Service due to such
Permanent and Total Disability in full without regard to
the installment exercise provisions of paragraph 1 hereof.
However, except in the case of your death or Permanent and
Total Disability, this Option may be exercised following
termination of Continuous Service only as to that number of
shares as to which it was exercisable on the date of
termination of Continuous Service under the provisions of
paragraph 1 of this Option. Notwithstanding the foregoing
provisions of this paragraph 4, no Option shall be
exercisable later than the date on which the Option
otherwise would expire pursuant to the first sentence of
this paragraph 4. In the case of your termination of
Continuous Service for Just Cause, your right to exercise
this Option shall expire completely and immediately on the
date of such termination.
- 2 -
<PAGE>
5. This Option may be exercised, to the extent specified
above, by delivering ten (10) days written notice of
exercise together with the Exercise Price to the Secretary
of the Company, or to such other person as the Company may
designate, during regular business hours, together with
such additional documents as the Company may then require.
6. This Option is not transferable, except by will or by
the laws of descent and distribution or pursuant to a
"qualified domestic relations order" within the meaning of
Section 414(p) of the Code, and is exercisable during your
life only by you, your personal representative, or a
permitted transferee. The terms of this Option shall be
binding upon the beneficiaries, executors, administrators,
heirs, and successors of the Optionee.
7. Any notices provided for in this Option or the Plan
shall be given in writing and shall be deemed effectively
given upon receipt or, in the case of notices delivered by
the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at
the address specified below or at such other address as you
hereafter designate by written notice to the Company.
8. This Option is subject to all the provisions of the
Plan, a copy of which is attached hereto, and all of the
Plan's provisions are hereby made a part of this Option,
and is further subject to all interpretations, amendments,
rules and regulations which may from time to time be
promulgated and adopted pursuant to the Plan. In the event
of any conflict between the provisions of this Option and
those of the Plan, the provisions of the Plan shall
control. Terms used in this Option Agreement shall have the
same meanings as the definitions of those terms in the
Plan.
9. The Company is not providing you with advice,
warranties, or representations regarding any of the legal,
tax, or business effects to you with respect to the Plan or
this grant. You are encouraged to seek legal, tax, and
business advice from your own legal, tax, and business
advisers as soon as possible. By accepting the grant of
this Award and the shares of Common Stock covered hereby,
you acknowledge that you have not relied on legal, tax or
business advice from the law firm of Manatt, Phelps &
Phillips, LLP (or any of its partners, employees, or
independent contractors) with respect to the Plan or this
Award and that such law firm represented solely the Company
and its Affiliates with respect to the Plan and this Award.
You specifically waive any actual or apparent conflict of
interest of, and release from any liability, such law firm
(and its partners, employees, and independent contractors)
with respect to the Plan and this Award.
- 3 -
<PAGE>
10. By accepting this grant and the shares of Common Stock
covered hereby, and by signing this instrument, you
acknowledge that you are familiar with the terms of the
grant and the Plan, that you have been encouraged by the
Company to discuss the grant and the Plan with your own
legal, tax, and business advisers, and that you agree to be
bound by the terms of the grant and the Plan.
11. You acknowledge that federal and state income tax
withholding and payroll tax may apply upon exercise of this
Option or upon certain other events related to the shares
acquired upon exercise of this Option. You agree that such
withholding may be accomplished with respect to the cash
compensation (if any) due to you from the Company or its
Affiliates. If withholding pursuant to the foregoing
sentence is insufficient (in the sole judgment of the
Company) to satisfy the full withholding obligation, you
agree that at the election of the Company either: (a) you
will pay over to the Company the amount of cash or, if
permitted by applicable law and acceptable to the Company,
property with a value necessary to satisfy such remaining
withholding obligation on the date the Option is exercised
or at a time thereafter specified in writing by the
Company; or (b) the Company may, if permitted by applicable
law, withhold an amount of Optioned Shares equal in value
(as of the date of Option exercise) to the amount of the
remaining withholding obligation. Upon due notice to you
and if permitted by applicable law, the Company may satisfy
the entire withholding obligation by withholding shares as
provided in (b) above in lieu of withholding from your cash
compensation.
Dated this day of .
---- -------------
Very truly yours,
PN HOLDINGS, INC.
By:
-----------------------------------------
Duly authorized on behalf of the Stock Option
Committee of the Board of Directors
- 4 -
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing Option and
understands that all rights and liabilities with respect to this Option are set
forth in this Option Agreement and the Plan;
(b) Agrees that, in consideration of the grant of
this Option, Optionee will comply with all the terms and conditions of this
Agreement and the Plan;
(c) Certifies that Optionee does not own stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any of its Affiliates; and
(d) Acknowledges that as of the date of grant of this
Option, this Agreement sets forth the entire understanding between the
undersigned Optionee and the Company and its Affiliates regarding the
acquisition of stock in the Company and supersedes all prior oral and written
agreements on that subject.
-------------------------------------------------
Optionee
Address:
------------------------------
-------------------------------------------------
Attachment:
PN Holdings, Inc. Stock Option and Incentive Plan
<PAGE>
PN HOLDINGS, INC.
STOCK OPTION AND INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
, Optionee:
- ------------------------------------
PN Holdings, Inc. (the "Company"), pursuant to its Stock
Option and Incentive Plan (the "Plan"), granted to you, the Optionee named
above, an Option to purchase shares of the common stock of the Company ("Common
Stock"). You have been awarded this Option in connection with your services to
the Company, to the Company's wholly-owned subsidiaries, Pelican National Bank
and Washtenaw Mortgage Company, or to another Affiliate of the Company (as
"Affiliate" is defined in the Plan). This Option is not intended to qualify as
an "incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The date of grant of this Option
within the meaning of the Plan is .
The details of your Option are as follows:
1. The total number of shares subject to this Option is
______________ (_____). Subject to the foregoing and the limitations contained
herein, this Option shall be exercisable, on a cumulative basis, with respect to
each installment shown below on or after the date of vesting applicable to such
installment, as follows:
Number of Shares Date of Earliest
(INSTALLMENT) EXERCISE (VESTING)
2. (a) The Exercise Price of this Option is _________ ($_____)
per share, which the Committee believes is not less than the Market Value of the
Common Stock on the date of the grant of this Option.
<PAGE>
(b) The Exercise Price per share shall be paid upon
exercise of all or any part of each installment which has become exercisable by
you at the time the Option is exercised in cash or a check payable to the order
of the Company, in Common Stock, or a combination of Common Stock and cash or a
check.
3. The minimum number of shares with respect to which this
Option may be exercised at any one time is one hundred (100) except as to an
installment subject to exercise, as set forth in paragraph for which fewer than
one hundred (100) shares are unexercised, in which case, as to the exercise of
that installment, the number of shares in such installment remaining unexercised
shall be the minimum number of shares. This Option may not be exercised so as to
purchase fractional shares.
4. The term of this Option commences on the date of the grant
hereof and, unless sooner terminated as set forth below or in the Plan,
terminates on the date which is ten (10) years from the date of the grant of the
Award as defined in the Plan. This Option shall terminate prior to the
expiration of its term as follows: three months after the termination of your
Continuous Service with the Company and its Affiliates for any reason other than
Just Cause, unless (a) such termination of Continuous Service is due to your
death while Options granted hereunder are still in force and unexpired, in which
case the vesting of any unvested installments of the Option shall be accelerated
and such Option shall be exercisable for a period of two years following your
date of death by the personal representative of your estate or by the person or
persons to whom your rights under this Option pass by will or by the laws of
descent and distribution in full without regard to the installment exercise
provisions of paragraph 1 hereof; or (b) you terminate your Continuous Service
because of your Permanent and Total Disability while Options granted hereunder
are still in force and unexpired, in which case the vesting of any unvested
installments of the Option shall be accelerated and such Option shall be
exercisable for a period of one year from the date of the termination of your
Continuous Service due to such Permanent and Total Disability in full without
regard to the installment exercise provisions of paragraph 1 hereof. However,
except in the case of your death or Permanent and Total Disability, this Option
may be exercised following termination of Continuous Service only as to that
number of shares as to which it was exercisable on the date of termination of
Continuous Service under the provisions of paragraph 1 of this Option.
Notwithstanding the foregoing provisions of this paragraph 4, no Option shall be
exercisable later than the date on which the Option would otherwise expire
pursuant to the first sentence of this paragraph 4. In the case of your
termination of Continuous Service for Just Cause, your right to exercise this
Option shall expire completely and immediately on the date of such termination.
5. This Option may be exercised, to the extent specified
above, by delivering ten (10) days written notice of exercise together with the
Exercise Price to the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together with such
additional documents as the Company may then require.
6. This Option is not transferable, except by will or by the
laws of descent and distribution or pursuant to the terms of a "qualified
domestic relations order" within the meaning of Section 414(p) of the Code, and
is exercisable during your life only by you, your personal
- 2 -
<PAGE>
representative, or a permitted transferee. The terms of this Option shall be
binding upon the beneficiaries, executors, administrators, heirs, and successors
of the Optionee.
7. Any notices provided for in this Option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after deposit
in the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.
8. This Option is subject to all the provisions of the Plan, a
copy of which is attached hereto, and all of the Plan's provisions are hereby
made a part of this Option, and is further subject to all interpretations,
amendments, rules, and regulations which may from time to time be promulgated
and adopted pursuant to the Plan. In the event of any conflict between the
provisions of this Option and those of the Plan, the provisions of the Plan
shall control. Terms used in this Option Agreement shall have the same meanings
as the definitions of those terms in the Plan.
9. The Company is not providing you with advice, warranties,
or representations regarding any of the legal, tax or business effects to you
with respect to the Plan or this grant. You are encouraged to seek legal, tax,
and business advice from your own legal, tax, and business advisers as soon as
possible. By accepting the grant of this Award and the shares of Common Stock
covered thereby, you acknowledge that you have not relied on legal, tax or
business advice from the law firm of Manatt, Phelps & Phillips, LLP (or any of
its partners, employees, or independent contractors) with respect to the Plan or
this Award and that such law firm represented solely the Company and its
Affiliates with respect to the Plan and this Award. You specifically waive any
actual or apparent conflict of interest of, and release from any liability, such
law firm (and its partners, employees, and independent contractors) with respect
to the Plan and this Award.
10. By accepting this grant and the shares of Common Stock
covered thereby, and by signing this instrument, you acknowledge that you are
familiar with the terms of the grant and the Plan, that you have been encouraged
by the Company to discuss the grant and the Plan with your own legal, tax, and
business advisers, and that you agree to be bound by the terms of the grant and
the Plan.
11. You acknowledge that federal and state income tax
withholding and payroll tax may apply upon exercise of this Option or upon
certain other events related to the shares acquired upon exercise of this
Option. You agree that such withholding may be accomplished with respect to the
cash compensation (if any) due to you from the Company or its Affiliates. If
withholding pursuant to the foregoing sentence is insufficient (in the sole
judgment of the Company) to satisfy the full withholding obligation, you agree
that at the election of the Company either: (a) you will pay over to the Company
the amount of cash or, if permitted by applicable law and acceptable to the
Company, property with a value necessary to satisfy such remaining withholding
obligation on the date the Option is exercised or at a time thereafter specified
in writing by the Company; or (b) the Company may, if permitted by applicable
law, withhold an amount of Optioned Shares equal in value (as of the date of
Option exercise) to the amount of the remaining withholding obligation. Upon due
notice to
- 3 -
<PAGE>
you and if permitted by applicable law, the Company may satisfy the entire
withholding obligation by withholding shares as provided in (b) above in lieu of
withholding from your cash compensation.
Dated this day of .
-------- -------------
Very truly yours,
PN HOLDINGS, INC.
By:
---------------------------------------------
Duly authorized on behalf of the Stock Option
Committee of the Board of Directors
- 4 -
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing Option and
understands that all rights and liabilities with respect to this Option are set
forth in this Option Agreement and the Plan attached hereto;
(b) Agrees that, in consideration of the grant of this
Option, Optionee will comply with all the terms and conditions of this Agreement
and the Plan; and
(c) Acknowledges that as of the date of grant of this
Option, this Agreement sets forth the entire understanding between the
undersigned Optionee and the Company and its Affiliates regarding the
acquisition of stock in the Company and supersedes all prior oral and written
agreements on that subject.
-------------------------------------
Optionee
Address:
------------------------------
---------------------------------------
Attachment:
PN Holdings, Inc. Stock Option and Incentive Plan
<PAGE>
Exhibit 10.3
[FANNIE MAE LOGO] One South Wacker Drive
Suite 1300
Chicago, IL 60606-4667
312 368 6200
CONFIDENTIAL
MASTER AGREEMENT
December 21, 1998
Mr. Chuck Huffman, Jr.
Vice President
Washtenaw Mortgage Company
315 East Eisenhower
Suite 12
Ann Arbor, MI 48108
Dear Mr. Huffman:
This letter shall constitute the master agreement ("Master Agreement") between
Fannie Mae and WASHTENAW MORTGAGE COMPANY (the "Lender") to enter into one or
more transactions for the sale by the Lender and purchase by Fannie Mae of
residential mortgage loans ("Mortgages"). The obligations of the Lender and
Fannie Mae regarding each such transaction shall be governed by the terms and
conditions contained herein (including Exhibit A and each of the Attachments
attached hereto and incorporated herein by reference) and by the terms and
conditions of the applicable Fannie Mae purchase program ("Program").
The Lender will sell to Fannie Mae, beginning on the Effective Date and ending
on the Expiration Date (as those terms are defined in Exhibit A), Mortgages with
an aggregate outstanding principal balance equal to the Agreed Amount (as
defined in Exhibit A) under one or more of the following Programs:
(a) Fannie Mae's Mortgage-Backed Securities Program, under terms mutually
acceptable to the Lender and Fannie Mae and which will be set forth herein and
under the applicable MBS Pool Purchase Contract obtained through the Lenders
Fannie Mae lead regional office, or
(b) Fannie Mae's Negotiated Transaction Program for cash purchase under terms
mutually acceptable to Lender and Fannie Mae and which will be set forth herein
and when applicable, under a special commitment obtained through the Lender's
Fannie Mae lead regional office, or
(c) Fannie Mae's Standard Portfolio (cash) purchase commitment Program, under
the then-current terms and conditions applying thereto.
If the Agreed Amount is not sold to Fannie Mae prior to the Expiration Date, the
Lender shall pay Fannie Mae the Backend Buyout Fee, as indicated in Exhibit A.
(The undelivered and uncommitted portion of the Agreed Amount shall be the
difference between (a) the Agreed Amount (taking into account the minus 5%
delivery tolerance, as specified in Exhibit A), and (b) a sum equal to the
aggregate outstanding principal balance of Mortgages (for each Mortgage, as of
the time of sale of the Mortgage) that the Lender has sold to Fannie Mae
Master No. Mc02419
MA - 1
December 21, 1998
<PAGE>
under this Master Agreement, plus the principal balance of Mortgages that the
Lender is still obligated to sell under any existing mandatory delivery
contracts for sale and purchase between the Lender and Fannie Mae.) This fee
will be drafted by Fannie Mae from the Lender's designated account immediately
following the Expiration Date of this Master Agreement. However, should Fannie
Mae decline to enforce payment of this fee, such action will not imply a waiver
of its right to collect a similar fee at a subsequent time. Fannie Mae's right
to receive such a fee is in addition to any rights and remedies of Fannie Mae
provided by law or the applicable Program, and the receipt of such fee shall not
affect or impair any such rights and remedies.
All Mortgages shall conform to the requirements of the Mortgage Selling and
Servicing Contract between Fannie Mae and the Lender, the Fannie Mae Selling
Guide ("Selling Guide"), and the Fannie Mae Servicing Guide ("Servicing Guide"),
as applicable, as they may be amended from time to time, except as modified by
the variances contained in this Master Agreement and in the applicable Contracts
(defined below) entered into pursuant to this Master Agreement. (Any Pool
purchase CONTRACTS OR VOICE RECORDINGS OF AMENDMENTS TO POOL PURCHASE CONTRACTS,
in the case of MBS transactions, and cash commitment contracts or voice
recordings, in the case of cash transactions, are referred to herein as a
"Contract.")
Each Contract entered into Lender this Master Agreement constitutes: (i) an
agreement by the Lender to sell the Mortgages to, and service such Mortgages
for, Fannie Mae and (ii) an agreement by Fannie Mae to purchase the Mortgages
and, in the case of MBS transactions, to issue its Guaranteed Mortgage Pass
Through Securities (the "Securities") backed by such Mortgages to the Lender or
its designee(s). By execution of this Master Agreement, the Lender and Fannie
Mae agree to the terms and conditions set forth herein and in any Contract
entered into simultaneously with this Master Agreement.
Each Mortgage delivered Lender this Master Agreement that has been submitted for
underwriting analysis by Fannie Mae's Desktop Underwriter TM shall conform to
the requirements of the Guide to Underwriting with Desktop Underwriter TIVI, as
amended from time to time (the "Desktop Underwriter TM Guide"), Section 5 of the
Desktop Underwriter TM Seller/Servicer Software License and Subscription
Agreement, and this Master Agreement.
The form, terms, and provisions of this Master Agreement, as well as all
information regarding the negotiation of the form, terms, and provisions of this
Master Agreement, are confidential. The Lender shall not disclose or
disseminate, directly or indirectly, the form, terms, or provisions of this
Master Agreement, or such other information regarding the negotiation of this
Master Agreement, to any party other than the Lender's employees or agents who
need to know the same in order to perform their duties for the Lender and who
are legally obligated not to further disclose or disseminate such form, terms,
provisions, and information upon receipt thereof The Lender shall take all
necessary and reasonable action to preserve the confidentiality of such form,
terms, provisions, and information and shall use at least the same degree of
care in such efforts as it employs when preserving the confidentiality of its
own information of a similar nature. Such necessary and reasonable action that
must be taken by the Lender shall include, without limitation, providing
instruction to such employees and agents regarding the confidential nature of
the form, terms, and provisions of this Master Agreement and the negotiations
surrounding this Master Agreement.
Notwithstanding the provisions of the immediately preceding paragraph, the
Lender may disclose or disseminate such form, terms, provisions, and information
if it is required to do so by law (including a subpoena, or judicial
Master No. Mc02419
MA - 2
December 21, 1998
<PAGE>
or governmental requirement or order) and has given Fannie Mae prior written
notice of such requirement and of the information required to be disseminated or
disclosed.
The Lender acknowledges that the unauthorized disclosure or dissemination of the
form, terms, or provisions of the Master Agreement, or other information
regarding the negotiation of the Master Agreement, is likely to cause
irreparable harm to Fannie Mae and that monetary damages may be inadequate to
compensate Fannie Mae for such breach. Accordingly, in addition to and not in
limitation of any other rights and remedies available to Fannie Mae at law or in
equity, Fannie Mae shall be entitled to injunctive relief in order to prevent or
restrain such unauthorized disclosure or dissemination. The obligations of the
Lender regarding confidentiality shall survive termination of this Master
Agreement.
The Lender's right to sell, and Fannie Mae's obligation to purchase, Mortgages
Lender this Master Agreement may be terminated by Fannie Mae prior to the
Expiration Date of the Master Agreement if the Lender has breached the Mortgage
Selling and Servicing Contract it has entered into with Fannie Mae, or any of
the provisions of this Master Agreement, or any Contract entered into pursuant
to this Master Agreement. If the Agreed Amount, as adjusted by the minus 5%
delivery tolerance, is not sold to Fannie Mae prior to the Expiration Date of
the Master Agreement, Lender shall be in breach of the provisions of the Master
Agreement. The Lender's responsibilities and liabilities under this Master
Agreement shall survive the expiration or earlier termination of the Lender's
right to sell, and Fannie Mae's obligation to purchase Mortgages under this
Master Agreement. This Master Agreement and any Contract entered into pursuant
to this Master Agreement may only be amended by the mutual agreement of Fannie
Mae and the Lender. Each amendment to this Master Agreement, each amendment to a
cash commitment contract, and each amendment to a pool purchase contract (except
those amendments to pool purchase contracts where Fannie Mae and Lender amend
the pool purchase contract by a voice recorded amendment) shall be in writing
and shall consist of a transmittal letter from Fannie Mae to the Lender
generally describing the amended provisions of the Master Agreement or the
Contract, together with the newly revised pages of the Master Agreement or the
Contract. The revised pages of the Master Agreement or the Contract should be
added to the Master Agreement as described in the transmittal letter. The Lender
shall acknowledge its acceptance of the amended terms and conditions by
returning to Fannie Mae a duly executed copy of the transmittal letter. With
respect to each amendment to a pool purchase contract where Fannie Mae and
Lender amend the contract by a voice recording, the amendment will consist of a
voice recording between Fannie Mae and Lender. Subsequent to the voice
recording, Fannie Mae will send to Lender a transmittal letter describing the
amended provisions of the pool purchase contract together with the newly revised
page(s) of the pool purchase contract. The revised page(s) of the pool purchase
contract should be added to the pool purchase contract by Lender as described in
the transmittal letter.
The Lender may not assign this Master Agreement or any rights or obligations
hereunder. The Lender may not assign any Contract entered into pursuant to this
Master Agreement or any rights or obligations thereunder.
The Lender hereby confirms, by checking the appropriate section below, that:
X It is NOT a federally-insured institution or an affiliate or subsidiary of a
federally-insured institution.
___ It is a federally-insured institution or an affiliate or subsidiary of a
federally-insured institution, and
Master No. Mc02419
MA - 3
December 21, 1998
<PAGE>
(a) the sale to, and (if applicable) servicing for, Fannie Mae of the Mortgages
delivered to Fannie Mae pursuant to this Master Agreement has either been (i)
specifically approved by the board of directors of the Lender and such approval
is reflected in the minutes of the meetings of such board of directors, or (ii)
approved by an officer of the Lender who was daily authorized by the board of
directors to enter into such types of transactions and such authorization is
reflected in the minutes of the board of directors' meetings; and
(b) this Master Agreement and any Contracts or amendments pursuant hereto,
together with the applicable Fannie Mae Guides and the Mortgage Selling and
Servicing Contract between the Lender and Fannie Mae, constitute the "written
agreement" governing the Lender's sale to, and servicing for, Fannie Mae of the
Mortgages delivered pursuant to this Master Agreement, and the Lender (or any
successor thereto) shall continuously maintain all components of such "written
agreement" as an official record.
The Lender must accept this Master Agreement by returning a duly-executed
duplicate original to Fannie Mae within ten business days of the date of this
Master Agreement. If the executed Master Agreement is not received by Fannie Mae
within ten business days from the date hereof, Fannie Mae may at its option
declare this Master Agreement null and void.
Sincerely,
FANNIE MAE
By: /s/ TIM J. RYAN
--------------------------------------------------
Tim J. Ryan
Vice President - Marketing
Agreed, acknowledged, and accepted.
WASHTENAW MORTGAGE COMPANY
By:
--------------------------------------------------
Name:
--------------------------------------------------
Title:
--------------------------------------------------
Date:
Master No. Mc02419
MA - 4
December 21, 1998
<PAGE>
EXHIBIT A
<TABLE>
<S> <C>
Master Agreement Number: MC02419
Effective Date: APRIL 1, 1999
Expiration Date: June 30, 1999
Parties to Agreement: Washtenaw Mortgage Company and Fannie Mae
Lender Number: 20338-000-3
Agreed Amount: $1,250,000,000, PLUS OR MINUS 5% (MANDATORY)
Back-end Buyout Fee: The greater of $1000.00 or 12.5 basis points (.125%)
multiplied by the undelivered and uncommitted portion
of the Mandatory Agreed Amount.
</TABLE>
Master No. Mc02419
MA - 5
April 15, 1999
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Jurisdiction of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
<S> <C>
Washtenaw Mortgage Company Michigan
Pelican National Bank United States
</TABLE>
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated March 11, 1999, on the
consolidated financial statements of PN Holdings, Inc. for the year ended
December 31, 1998, to be included within the Registration Statement on Form S-1
and Prospectus of PN Holdings, Inc. We also consent to the use of our name as
"Experts" in the Prospectus.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
April 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 678,799
<INT-BEARING-DEPOSITS> 2,142,235
<FED-FUNDS-SOLD> 7,359,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 5,591,983
<LOANS> 203,455,305
<ALLOWANCE> 127,475
<TOTAL-ASSETS> 246,409,266
<DEPOSITS> 35,064,078
<SHORT-TERM> 191,270,177
<LIABILITIES-OTHER> 6,474,997
<LONG-TERM> 1,200,000
0
0
<COMMON> 60,656
<OTHER-SE> 12,339,358
<TOTAL-LIABILITIES-AND-EQUITY> 246,409,266
<INTEREST-LOAN> 11,277,489
<INTEREST-INVEST> 478,520
<INTEREST-OTHER> 390,019
<INTEREST-TOTAL> 12,146,028
<INTEREST-DEPOSIT> 933,407
<INTEREST-EXPENSE> 8,830,560
<INTEREST-INCOME-NET> 3,315,468
<LOAN-LOSSES> 61,966
<SECURITIES-GAINS> 16,402
<EXPENSE-OTHER> 19,875,120
<INCOME-PRETAX> 5,928,454
<INCOME-PRE-EXTRAORDINARY> 5,928,454
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,887,380
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 6.15
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 65,509
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 127,475
<ALLOWANCE-DOMESTIC> 127,475
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
