<PAGE>
As Filed with the Securities and Exchange Commission on June 30, 1999.
Registration Statement No. 333-76841
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
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)
<TABLE>
<S> <C> <C>
DELAWARE 6035 58-2298215
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(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
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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. / /
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
PELICAN FINANCIAL, INC.
1,200,000 Shares
Common Stock
Pelican Financial, Inc. We operate as a wholesale mortgage company
315 East Eisenhower and a community oriented national bank
Ann Arbor, Michigan 48108 through Washtenaw Mortgage Company and
1-800-765-5562 Pelican National Bank, our two
subsidiaries.
This is an initial public offering of 1,200,000 shares of our common
stock. 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
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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 Pelican Financial............................. $ $
Proceeds to Mr. Huffman................................... $ $
</TABLE>
We have entered into a firm commitment underwriting agreement with
William R. Hough & Co. for the sale of the shares in this offering. Mr. Huffman,
our Chairman and Chief Executive Officer, has granted the underwriter an option
to purchase up to 180,000 shares of common stock owned by him to cover
over-allotments.
- --------------------------------------------------------------------------------
Although we currently have 3,032,836 shares outstanding, there is
currently no public market for our common stock. We have applied for the common
stock to be listed on the Nasdaq National Market under the symbol "_____." We
expect that the initial public offering price will be between $7.00 and $9.00
per share. The initial public offering price may not reflect the market price of
our shares after this offering.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
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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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WILLIAM R. HOUGH & CO.
The date of this Prospectus _______________ __, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................................................3
Summary Selected Consolidated Financial Data.............................................5
Risk Factors.............................................................................6
Pelican Financial.......................................................................12
Use of Proceeds.........................................................................13
Dividend Policy.........................................................................14
Market for the Common Stock.............................................................14
Capitalization..........................................................................15
Dilution ...............................................................................15
Special Note Regarding Forward-Looking Statements.......................................16
Selected Consolidated Financial and Other Data..........................................17
Management's Discussion and Analysis of Financial Condition and Results of Operations...20
Business ...............................................................................41
Regulation..............................................................................63
Management..............................................................................69
Description of Capital Stock............................................................76
Restrictions on Acquisition of Pelican Financial........................................77
Selling Stockholder.....................................................................78
Underwriting............................................................................79
Legal Matters...........................................................................80
Experts ...............................................................................80
Changes in and Disagreements with Accountants on Accounting and Financial Matters.......80
Available Information...................................................................81
Index to Consolidated Financial Statements.............................................F-1
</TABLE>
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. THESE 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."
- --------------------------------------------------------------------------------
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 the shares of common stock will be sold to the public at $8.00 per share,
and the underwriter will not exercise its over-allotment option.
Pelican National Bank was formed in 1997 at the direction of Washtenaw.
As part of the formation of Pelican National, PN Holdings, Inc. was also formed.
PN Holdings, Inc. changed its name to Pelican Financial, Inc. on July __, 1999.
Unless otherwise stated, references to "Pelican Financial" prior to its
formation relate solely to Washtenaw Mortgage Company. All references to Pelican
Financial after its formation relate to Pelican Financial, Inc., consolidated
with Washtenaw and Pelican National. References to "Washtenaw" relate to
Washtenaw Mortgage Company and references to "Pelican National" refer to Pelican
National Bank.
All per share information in this prospectus has been adjusted to take
into account the formation of Pelican Financial 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
effective March 31, 1999.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
financial statements and notes to the financial statements before making any
decision to invest in our common stock.
PELICAN FINANCIAL
- Incorporated in Delaware on March 3, 1997.
- Owns and controls all of the capital stock of Pelican National and
Washtenaw.
- Currently conducts no business other than through its wholly-owned
subsidiaries.
MORTGAGE BANKING BUSINESS
- Primarily conducted by Washtenaw Mortgage Company from its offices
located in Ann Arbor, Michigan and a new office recently opened in
Pleasant Hill, California.
- Commenced operations in February 1981.
- Historically generated substantially all of our earnings.
- Originates residential mortgages on a wholesale basis through a
network of approximately 1,340 independent mortgage brokers in 42
states.
- 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.
- Sells loans and mortgage servicing rights into the secondary
mortgage market.
RETAIL BANKING BUSINESS
- Primarily conducted by Pelican National Bank from its office
located in Naples, Florida.
- Opened for business in August 1997.
- Second branch office expected to open in Fort Myers, Florida in
October 1999.
- Provides a full range of retail banking services to consumers and
small businesses.
- Primarily serves the communities located in western Collier
County, Florida, which 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."
THE OFFERING
Common stock offered by
Pelican Financial................ 1,200,000 shares of common stock, not
including the over-allotment option.
Common stock to be
outstanding immediately
after the offering............... 4,232,836 shares of common stock, not
including the over-allotment option or shares
issuable upon the exercise of options issued
to employees and directors of Pelican
Financial.
3
<PAGE>
Estimated Net Proceeds to
Pelican Financial................ $8,550,000
<TABLE>
Summary of Estimated
Use of Net Proceeds....... AMOUNT DESCRIPTION OF USE
-------------------------------------------------
<S> <C>
$1,200,000 Repay outstanding note payable.
1,000,000 Contributed to Washtenaw to
increase capital.
4,250,000 Contributed to Pelican National to
increase regulatory capital.
2,000,000 Repay outstanding term loan,
contribute to Pelican National to
increase regulatory capital, or use
for possible acquisitions.
100,000 Retained by Pelican Financial for
general corporate purposes.
$8,550,000 Total net proceeds
</TABLE>
Reason for the Offering..... We believe that the current environment in the
equity capital markets can provide us funds at a
lower cost than other forms of financing. The
elimination of a portion of our debt and the
increase in the capital of Pelican National and
Washtenaw will improve our capital structure and
provide us greater flexibility for the future. See
"Use of Proceeds."
Nasdaq National Market
Symbol....................
4
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31, AT JANUARY, 31
------------ --------------- --------------
1999 1998 1998 1997 (1) 1997 (1) 1996 1995
---- ---- ---- -------- -------- ---- ----
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $249,916 $170,558 $246,409 $120,756 $48,220 $45,070 $26,423
Total loans, net.......................... 218,763 150,710 203,328 100,774 41,253 35,539 10,386
Total nonperforming assets(2)............. 1,655 1,553 1,494 1,974 1,798 577 614
Deposits.................................. 37,989 19,415 35,064 17,578 0 0 0
Short-term borrowings(3).................. 88,592 70,694 95,985 60,980 27,680 17,746 1,376
Notes payable............................. 55,546 31,950 58,226 20,673 3,964 4,456 11,416
Total liabilities ........................ 236,143 161,551 234,009 112,243 41,860 39,239 21,553
Stockholders' equity...................... 13,773 9,007 12,400 8,514 6,360 5,831 4,870
Shares outstanding........................ 3,032,836 3,032,836 3,032,836 3,032,836 2,400,000 2,400,000 2,400,000
Book value per share(4)................... $4.54 $2.97 $4.09 $2.81 $2.65 $2.43 $2.03
</TABLE>
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE PERIOD FROM
MONTHS ENDED FOR THE FEBRUARY 1, FOR THE YEAR ENDED
MARCH 31, YEAR ENDED 1997 TO JANUARY 31,
---------------------- DECEMBER 31, DECEMBER 31, -------------------------------
1999 1998 1998 1997 1997 1996 1995
--------- --------- ----------- ----------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net interest income......... $1,207 $460 $3,315 $965 $968 $932 $2,085
Net interest income after
provision for loan losses 1,199 433 3,253 900 968 932 2,085
Noninterest income.......... 6,780 4,029 22,550 7,733 7,644 11,077 11,368
Noninterest expense......... 5,642 3,697 19,875 8,822 7,751 10,571 11,439
Net earnings (loss)....... 1,396 493 3,887 (137) 529 962 1,244
Basic and diluted earnings
per share(4)............ 0.46 0.16 1.28 (0.05) 0.22 0.40 0.52
Weighted Average number of
shares outstanding(5).... 3,039,611 3,037,563 3,039,611 2,974,100 2,400,000 2,400,000 2,400,000
PERFORMANCE RATIOS: (6)
Return on average assets.... 2.26% 1.36% 1.82% (0.26)% 0.90% 1.70% 2.50%
Return on average common
equity................... 42.94 22.65 37.68 (2.86) 9.22 19.80 14.66
Interest rate spread........ 1.10 0.43 1.56 0.73 0.76 0.12 3.24
Net interest margin......... 2.18 1.36 1.68 1.78 1.86 1.85 5.16
Noninterest expense to
average assets.......... 9.12 10.15 9.32 15.06 13.19 18.66 22.97
Efficiency ratio............ 66.13 71.77 66.48 90.65 82.51 67.88 69.59
</TABLE>
- --------------
(1) Pelican Financial changed its fiscal year from January 31 to December 31.
Pelican Financial incorporated on March 3, 1997.
(2) 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.
(3) Short-term borrowings include federal funds purchased and securities sold
pursuant to agreements to repurchase.
(4) On an equivalent basis for prior periods.
(5) Assumes dilution.
(6) Annualized where appropriate.
5
<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.
OUR PROFIT WILL BE HURT IF WE
FAIL TO MANAGE OUR
INTEREST RATE RISK............... Changes in interest rates effect 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.
If we fail to effectively manage interest
rate risk, our profits will be hurt. 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.
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. For a
further discussion of how changes in
interest rates impact us, see
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations - Management of Interest Rate
Risk and Market Risk Analysis."
OUR LIMITED OPERATING HISTORY
LIMITS YOUR ABILITY TO ANALYZE
AN INVESTMENT IN OUR
COMMON STOCK..................... Pelican Financial incorporated in Delaware
on March 3, 1997 to own and control all of
the capital stock of Pelican National and
Washtenaw. Pelican Financial conducts no
other operations other than to manage its
investments in its subsidiaries.
Prospective investors have only limited
access to operating results of Pelican
Financial on a consolidated basis. The
results of operations prior to March 3,
1997 only reflect the operations of
Washtenaw. Although Washtenaw has been
profitable for each fiscal period
presented and we have experienced
substantial growth in mortgage loan
originations and total revenues, our
profitability since our formation depended
on the profitability of Washtenaw. We
cannot be certain that Pelican National
will be profitable in the future or that
the rates of growth for Pelican National
and Washtenaw will be sustainable or
indicative of future results. Any decline
in future profitability or growth rates
may hurt the market price for our common
stock.
OUR PROFITS WILL BE HURT IF WE
CANNOT BUY AND SELL LOANS AND
MORTGAGE SERVICING RIGHTS........ In our mortgage banking operations, we
currently originate through correspondents
or brokers or buy all of the mortgage
loans we produce. We generally sell
substantially all of the mortgage loans
that we produce into the secondary
mortgage market. An active secondary
mortgage market depends primarily on the
demand for mortgage-backed securities in
the bond markets and the continuation of
programs administered by Fannie Mae,
Freddie Mac, and Ginnie Mae, which
facilitate the issuance
6
<PAGE>
of these mortgage-backed securities. Our
participation in the secondary mortgage
market also depends on our continued
eligibility in these programs. Although we
are not aware of any proposed actions, a
discontinuation of or a significant
reduction in the operations of Fannie Mae,
Freddie Mac, or Ginnie Mae or a change in
the programs they administer may decrease
our profitability. For a discussion of our
activities in the secondary mortgage
market, see "Business Secondary Market
Activities."
OUR PROFITS WILL BE HURT IF WE
CANNOT MANAGE OUR LOAN
UNDERWRITING AND QUALITY
CONTROL.......................... 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. In
connection with the sale of a loan, we
also typically make 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. 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. From the time that
we fund a mortgage loan we originate until
the time we sell the loan, we are at risk
for any loan defaults. If we fail to
manage our underwriting and quality
control and more loans then we anticipate
default, our profits will be hurt.
LOAN DELINQUENCIES AND DEFAULTS
ON LOANS THAT WE SERVICE
MAY HURT OUR PROFITS............. Loan delinquencies and defaults on
mortgage loans that we service effect our
profits. If delinquencies and defaults
rates are higher than we anticipate, our
profits may be hurt. Pursuant to some
types of servicing contracts, 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.
7
<PAGE>
LOAN DELINQUENCIES AND DEFAULTS
ON LOANS THAT WE OWN MAY
HURT OUR PROFITS................. The risk of nonpayment of loans is an
inherent risk of our business. Loan
delinquencies and defaults on mortgage
loans that we own effect our profits. If
delinquencies and defaults rates are
higher than we anticipate, our profits may
be hurt. We must bear the costs of
attempting to collect on delinquent and
defaulted loans. We must also bear the
cost of foreclosing on and selling the
underlying collateral if a borrower cannot
cure the deficiency. To the extent that
the underlying collateral is not
sufficient to cover the amount of
principal and interest owed on a loan, we
incur a loss. For more information on the
risks of nonpayment of loans and our
monitoring and procedures, see "Business -
Asset Quality."
OUR BUSINESS MAY BE HARMED
IF CHANGES OCCUR IN ECONOMY
OR BUSINESS CONDITIONS IN THE
MIDWEST AND SOUTHEAST............ 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. Adverse changes
in the economy or business conditions
effects the demand for new mortgage loans
and the performance of existing loans. 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, we cannot be certain that we will be
successful in this effort. See "Business -
Lending Activities."
THE MARKET PRICE OF OUR COMMON
STOCK MAY FLUCTUATE DUE TO THE
SEASONAL FLUCTUATIONS IN HOME
BUYING PRACTICES................. The mortgage banking industry generally
experiences 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. Our
quarter-to-quarter operating results will
reflect these seasonal trends, thereby
causing short-term fluctuations in our
profits. Fluctuations in our profits may
also cause corresponding fluctuations in
the market price of our common stock.
8
<PAGE>
THE RETAIL AND MORTGAGE BANKING
BUSINESSES ARE VERY COMPETITIVE.
OUR BUSINESS WILL BE HARMED
IF WE CANNOT COMPETE
EFFECTIVELY...................... Many of our retail banking competitors
have significantly greater resources and
operate in a larger geographic area than
Pelican National. In addition, many of our
mortgage banking competitors operate
nationwide mortgage origination networks
similar to that of Washtenaw. We cannot be
certain that we will be able to compete
successfully against current or future
competitors. The competitive pressures
that we face may harm our business,
financial condition, and profits. See
"Business - Competition."
ANTI-TAKEOVER PROVISIONS IN OUR
CERTIFICATE OF INCORPORATION MAY
DISCOURAGE TAKEOVER ATTEMPTS
RESULTING IN A LOWER MARKET PRICE
FOR THE COMMON STOCK AND
A REDUCED LIKELIHOOD OF A
TAKEOVER PREMIUM................. 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 serve to perpetuate
existing management and may reduce the
market price at which the common stock
trades. Furthermore, these provisions will
reduce the likelihood of a takeover
premium and may result in foregoing an
acquisition desired by some shareholders.
In addition, various anti-takeover
provisions pursuant to the Delaware
General Corporation Law apply to us. For a
detailed discussion of these provisions,
see "Restrictions on Acquisition of
Pelican Financial - Restrictions in
Pelican Financial's Certificate of
Incorporation and Bylaws."
BECAUSE CHARLES C. HUFFMAN WILL
RETAIN SIGNIFICANT CONTROL AFTER
THIS OFFERING, NEW INVESTORS WILL
NOT HAVE AS MUCH INFLUENCE IN
CORPORATE DECISIONS AS THEY
WOULD IF CONTROL WERE
LESS CONCENTRATED.................. Immediately following the offering
assuming the sale of 1,200,000 shares, Mr.
Huffman will own 42.80% of the outstanding
shares of common stock, 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 Pelican Financial'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. The
interests of Mr. Huffman may conflict with
the interests of other stockholders, and
the actions that he takes or approves may
be contrary to those desired by other
shareholders. This concentration of
ownership may
9
<PAGE>
have the effect of delaying, preventing or
deterring an acquisition by a third party.
For a detailed discussion of these
provisions, see "Restrictions on
Acquisition of Pelican Financial."
NEW STOCKHOLDERS WILL EXPERIENCE
AN IMMEDIATE DILUTION IN BOOK
VALUE PER SHARE.................. Purchasers of common stock in the offering
will experience immediate dilution of
$2.73 per share in book of the common
stock. Conversely, present stockholders
will receive an increase of $0.73 per
share in the book value of their shares of
common stock. See "Dilution." The
substantial dilution may hurt the market
price of the common stock following this
offering.
YOU MAY NOT BE ABLE TO SELL YOUR
COMMON STOCK IF A PUBLIC
TRADING MARKET DOES NOT
DEVELOP.......................... Prior to the offering, there has been no
public market for our common stock. We
cannot be certain that an active trading
market will develop. We also cannot be
certain that purchasers of the common
stock in this offering 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 Pelican Financial 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 sellers. Accordingly, we cannot be
certain that an established and liquid
market for the common stock will develop
or be maintained. The market price of the
common stock could experience 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 hurt
the market price of the common stock. See
"Market for the Common Stock" and
"Underwriting."
IF THE COMMON STOCK IS NOT LISTED
ON THE NASDAQ NATIONAL
MARKET, OR IF IT IS DELISTED IN THE
FUTURE, YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES............... We applied to have the common stock listed
for quotation on the Nasdaq National
Market. We cannot be certain that our
listing application will be approved. In
addition, in order to maintain our
listing, certain conditions have to be
maintained, including there being at least
two market makers. While we will believe
we qualify for initial listing and intend
to satisfy the conditions for continued
listing, some of the conditions are
outside of our control. We cannot be
certain that we will qualify for continued
listing even if we are approved for
initial listing. We also cannot be certain
that purchasers of the common stock in
this offering will be able to resell their
10
<PAGE>
common stock at prices equal to or greater
than the initial public offering price.
See "Market for the Common Stock" and
"Underwriting."
ADDITIONAL SALES OF COMMON STOCK
BY MR. HUFFMAN OR THE ISSUANCE
OF ADDITION SHARES BY US MAY
HURT THE MARKET PRICE OF THE
COMMON STOCK..................... Following this offering, sales of
substantial amounts of the common stock in
the public market, or the potential for
these sales, could hurt the prevailing
market price for our common stock. We will
have 4,232,836 shares of common stock
outstanding immediately following this
offering only 1,200,000 of which will be
as a result of this offering. Our
certificate of incorporation authorizes us
to issue 5,000,000 shares of common stock
which can be issued at any time without
the prior approval of shareholders.
Furthermore, Mr. Huffman will own
1,811,650 shares, which is 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, Mr. Huffman will own
1,631,650 shares, which is approximately
38.55% of the outstanding shares of common
stock. Mr. Huffman can begin selling his
shares 180 days after the end of this
offering. In addition, we have reserved an
additional 400,000 shares of common stock
for issuance pursuant to our stock option
plan.
1,207,850 shares of common stock that is
currently outstanding is held by
non-affiliates. These shares are freely
tradeable immediately. The remaining
1,824,986 shares of capital stock held by
Mr. Huffman and our other affiliates are
restricted securities. Restricted
securities will be eligible for sale
pursuant to Rule 144 ninety days after the
effective date of the Registration
Statement. Rule 144 imposes restrictions
as to volume and timing of sales of
restricted securities. For additional
details on restrictions imposed on us and
Mr. Huffman be the underwriter, see
"Underwriting."
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, our financial condition and
results of operations could be
significantly harmed 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.
11
<PAGE>
WE HAVE NOT ALLOCATED A SIGNIFICANT
PORTION OF THE NET PROCEEDS FROM
THIS OFFERING. THE VALUE OF YOUR
COMMON STOCK MAY DECREASE IF
WE ARE NOT SUCCESSFUL IN
UTILIZING THE NET PROCEEDS....... The initial public offering is being
conducted at this time because we believe
that the current environment in the equity
capital markets can provide us funds at a
lower cost than other forms of financing.
However, of the estimated net proceeds,
only $1.2 million or 32.43% is
specifically designated to repay our
existing debt. We retain broad discretion
as to the allocation of the remaining
proceeds of $5.35 million or 62.57%. If we
cannot successfully utilize the remaining
net proceeds, the value of your common
stock may decrease.
CHANGES IN THE LAW REGULATIONS
AND REGULATIONS MAY HURT
OUR PROFITS...................... We are subject to extensive state and
federal supervision and regulation. This
regulation is primarily for the benefit of
depositors of Pelican National and the
protection of the Bank Insurance Fund and
not for the protection of shareholders.
Any future changes in the law or
regulations may increase our costs and
hurt our profits. For more information,
see "Regulation."
PELICAN FINANCIAL, INC
We formed Pelican Financial as a corporation in Delaware on March 3,
1997 for the purpose of owning and controlling all of the capital stock of
Pelican National and Washtenaw. We are registered with the Federal Reserve Board
pursuant to the Bank Holding Company Act of 1956. As a registered 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 from us
for serving as our executive officers. We currently conduct no business other
than managing its investments in Pelican National and Washtenaw.
12
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the offering, after deduction of
the underwriting discounts and commissions and estimated offering expenses, to
be approximately $8.55 million. We will receive no proceeds from the offering of
common stock by Mr. Huffman if the underwriter exercises the over-allotment
option granted by Mr. Huffman. Net proceeds may vary because total expenses of
the offering may be more or less than those estimated. While we cannot predict
with certainty how the proceeds of this offering will be used, we currently
intend to use them approximately as follows:
<TABLE>
<CAPTION>
PERCENT OF GROSS
AMOUNT OFFERING PROCEEDS
------ -----------------
<S> <C> <C>
Gross offering proceeds................................... $9,600,000 100.00%
Offering expenses:
Underwriting discounts and commissions................. 672,000 7.00
Estimated other expenses............................... 378,000 3.94
---------- -----
Net offering proceeds.............................. $8,550,000 89.06%
---------- -----
---------- -----
Use of net offering proceeds:
Repay outstanding note payable......................... $1,200,000 12.50%
Contributed to Pelican National to increase
regulatory capital................................... 4,250,000 44.27
Contributed to Washtenaw to increase capital........... 1,000,000 10.42
Repay outstanding term loan, contribute to
Pelican National to increase regulatory capital,
or use for possible acquisitions..................... 2,000,000 20.83
Retained by Pelican Financial for general
corporate purposes................................... 100,000 1.04
---------- -----
Total use of net offering proceeds................. $8,550,000 89.06%
---------- -----
---------- -----
</TABLE>
In July 1997, we established a term loan in the amount of $2.0 million,
the proceeds of which were contributed to the capital of Pelican National. 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 7.60% at
December 31, 1998 and 8.30% at December 31, 1997. Depending upon market
conditions and other factors, we may determine upon the completion of this
offering to use the $2.0 million to repay some or all of the term loan, or to
retain the $2.0 million at the holding company level for possible future
contribution to the regulatory capital of Pelican National or for possible
acquisitions. In the short term, we expect to invest the $2.0 million in
deposits of Pelican National and other short-term liquid investments.
We also have a subordinated note payable with a balance of $1.2
million. The note requires monthly interest payments of 4.50% per annum over the
prime interest rate, which resulted in an effective rate of 12.25% at December
31, 1998 and 13.00% at December 31, 1997. The note matures in December 1999. We
intend to use $1.2 million of the net proceeds of this offering to repay this
note.
Also as shown above, we intend to contribute $4.25 million of net
proceeds to the regulatory capital of Pelican National. Pending their investment
into longer term assets, the proceeds are expected to be used by Pelican
National to make investments in mortgages or other loans, U.S. Government and
federal agency securities, federal funds, certificates of deposit, mortgage-back
securities, and other investments. The proceeds
13
<PAGE>
are expected to strengthen Pelican National's regulatory capital position to
provide an additional source for funding longer term assets. The amount of
proceeds contributed to Pelican National will be evaluated as part of Pelican
National's overall asset/liability mix and may be used to support expansion
through the acquisition or establishment of new bank branches. Other than the
signing of a lease on a new branch in Fort Myers, Florida in May 1999, we
currently do not have any arrangements, understandings, or agreements regarding
any similar opportunities or transactions. The proceeds from this offering are
not expected to be used to fund the new branch.
We have decided to conduct our initial public offering at this time
because we believe that the current environment in the equity capital markets
can provide us funds at a lower cost than other forms of financing. The
elimination of a portion of our debt and the increase in the capital of Pelican
National and Washtenaw will improve our capital structure and provide us greater
flexibility for the future. Because the decision of how to use the net proceeds
of the offering will be made upon completion of the offering, after considering
all relevant information, we retain broad discretion as to the allocation of the
net proceeds.
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 Pelican National and Washtenaw, we are dependent for income on
dividends received from Pelican National and Washtenaw. Also applicable to us
are 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 Pelican National will depend upon a number of factors,
including, but not limited to, investment opportunities available to Pelican
National, capital requirements, regulatory limitations, and general economic
conditions. Generally, Pelican National may not declare or pay dividends on its
capital stock if the 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. In addition, declaration of dividends by the Board
of Directors of Washtenaw will depend upon a number of factors, including, but
not limited to, investment opportunities available to Washtenaw, capital needs,
and general economic conditions. Furthermore, a portion of the initial
capitalization of Pelican National was borrowed by us and Washtenaw from an
unaffiliated third party. Provisions of the loan agreement require Washtenaw to
meet certain financial covenants and limit the amount of dividends that
Washtenaw may pay to us. Although we expect to repay this loan out of the
proceeds of this offering, for the foreseeable future, Washtenaw plans to
reinvest its earnings in its operations, thus limiting the amount of dividends
Washtenaw 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
Our outstanding shares of common stock are currently held by
approximately 65 shareholders of record. Of these shareholders, Mr. Huffman owns
approximately 59.73% of the outstanding shares. Prior to this offering, we have
never issued shares to the public. Consequently, there is no public market for
our capital stock. We have applied to have the common stock listed on the Nasdaq
National Market under the symbol "____." An approval of the listing application
will contain various conditions, including sale of the stock and the presence of
at least three registered and active market makers. We will seek to encourage
and assist at least three market makers to make a market in our common stock
following the offering. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities to those quoted prices, conditioned on compliance with various
securities laws and other regulatory requirements. William R. Hough & Co. has
agreed to make a market in the common stock, although it has no obligation to do
so. We cannot be certain that the common stock will be able to meet the
applicable listing criteria in order to maintain its quotation on the Nasdaq
National Market or that an active and liquid trading market will develop or, if
developed, will be maintained. A public market having the desirable
14
<PAGE>
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 our control. We cannot be certain
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 contains information on our historical
capitalization at March 31, 1999 and our adjusted capitalization at March 31,
1999 after giving effect to the offering. We estimate that the net proceeds from
this offering, after deduction of the underwriting discounts and commissions and
estimated offering expenses, will be approximately $8.55 million. We will
receive no proceeds from the offering of common stock by Mr. Huffman should the
underwriter exercise the over-allotment option.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
------------------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(In thousands, except per share data)
<S> <C> <C>
Deposits............................................. $37,989 $37,989
Long-term borrowings (1)............................. 2,re000 0
Subordinated debt.................................... 1,200 0
------- -------
Total deposits, long-term borrowings, and
subordinated debt (1)............................. $41,189 $37,989
------- -------
------- -------
Shareholders' Equity:
Preferred stock (2)............................... $ 0 $ 0
Common stock (3).................................. 30 42
Additional paid-in capital........................ 8,292 16,831
Retained earnings................................. 5,472 5,472
Accumulated other comprehensive
income, net of tax.............................. (21) (21)
------- -------
Total shareholders' equity.................. $13,773 $22,324
------- -------
Ratio of equity to assets............................ 5.51% 8.93%
------- -------
------- -------
Book value per common share.......................... $ 4.54 $ 5.27
------- -------
------- -------
</TABLE>
- --------------
(1) Assumes that proceeds will be used to repay borrowings. Depending upon
market conditions, we may determine not to repay these borrowings.
(2) Our certificate of incorporation authorizes 200,000 shares of preferred
stock, none of which are issued and outstanding.
(3) Our certificate of incorporation authorizes 5,000,000 shares of common
stock, of which 3,032,836 were issued and outstanding at March 31,
1999. Assuming the sale of 1,200,000 shares of common stock in the
offering, we will have 4,232,836 shares issued and outstanding.
DILUTION
The net tangible book value of our common stock as of March 31, 1999
was approximately $13.8 million or $4.54 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.
15
<PAGE>
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 us in this offering. After giving effect to the sale of 1,200,000
shares of common stock in this offering and after deducting the underwriting
discount and estimated offering expenses, our pro forma net tangible book value
as of March 31, 1999 would have been $22.3 million or $5.27 per share,
representing an immediate increase in net tangible book value of $0.73 per share
to existing stockholders and an immediate dilution of $2.73 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).......... $4.54
Increase in net tangible book value per share attributable
to new investors (3)............................................. 0.73
-----
Pro forma net tangible book value per share after the
offering (3)..................................................... 5.27
-----
Dilution per share to new investors....................... $2.73
-----
-----
</TABLE>
- -------------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of this offering.
(2) Includes mortgage servicing rights. See Notes 1 and 5 of Notes to
Consolidated Financial Statements.
(3) After deducting estimated underwriting discounts and commissions and
estimated expenses of this offering.
The following table contains on a pro forma basis at March 31, 1999 the
number of shares of common stock sold by us, the total consideration paid to us,
and the average price per share paid by the existing stockholders in 1997 and
new investors purchasing shares of common stock in this offering.
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE TOTAL
PUBLIC OFFERING CONSIDERATION WEIGHTED
--------------------------- ---------------------------- AVERAGE
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 3,032,836 71.65% $11,373,135 54.23% $3.75
New investors................... 1,200,000 28.35 9,600,000 45.77 8.00
--------- ------ ----------- ------ -----
Total.................. 4,232,836 100.00% $20,973,135 100.00% $4.95
--------- ------ ----------- ------ -----
--------- ------ ----------- ------ -----
</TABLE>
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."
16
<PAGE>
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 Pelican
Financial. 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 MARCH 31, AT DECEMBER 31, AT JANUARY, 31
----------------------- --------------------------- --------------------------
1999 1998 1998 1997 (1) 1997 (1) 1996 1995
----------- ----------- ----------- ---------- ---------- ----------- -------
(Dollars in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $249,916 $170,558 $246,409 $120,756 $48,220 $45,070 $26,423
Cash and cash equivalents (2)............. 2,967 3,123 10,180 4,376 0 0 0
Total loans, net.......................... 218,763 150,710 203,328 100,774 41,253 35,539 10,386
Mortgage-backed securities and investment
securities available for sale......... 6,413 5,409 5,592 6,984 0 0 0
Nonperforming loans(3).................... 1,224 1,291 913 1,675 1,279 615 331
Real estate acquired through foreclosure.. 431 262 581 299 519 (38) 283
Total nonperforming assets(3)............. 1,655 1,553 1,494 1,974 1,798 577 614
Deposits.................................. 37,989 19,415 35,064 17,578 0 0 0
Short-term borrowings(4).................. 88,592 70,694 95,985 60,980 27,680 17,746 1,376
Notes payable............................. 55,546 31,950 58,226 20,673 3,964 4,456 11,416
Total liabilities ........................ 236,143 161,551 234,009 112,243 41,860 39,239 21,553
Stockholders' equity...................... 13,773 9,007 12,400 8,514 6,360 5,831 4,870
Shares outstanding........................ 3,032,836 3,032,836 3,032,836 3,032,836 2,400,000 2,400,000 2,400,000
Book value per share(5)................... $4.54 $2.97 $4.09 $2.81 $2.65 $2.43 $2.03
OTHER DATA:
Number of:
Full-service retail banking facilities 1 1 1 1 0 0 0
Regional wholesale/correspondent lending
offices............................ 2 1 1 1 1 1 1
Full-time equivalent employees........ 200 136 187 130 109 109 124
</TABLE>
- ----------
(1) Pelican Financial changed its fiscal year from January 31 to December
31. Pelican Financial 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 pursuant to agreements to repurchase.
(5) On an equivalent basis for prior periods.
17
<PAGE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE PERIOD FROM
MONTHS ENDED FOR THE FEBRUARY 1, FOR THE YEAR ENDED
MARCH 31, YEAR ENDED 1997 TO JANUARY 31,
------------------------- DECEMBER 31, DECEMBER 31, ----------------------------------
1999 1998 1998 1997 1997 1996 1995
------------ ------------ --------------- ------------ ------------ ------------ --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest and dividend
income................ $3,670 $1,672 $12,146 $3,420 $3,016 $3,181 $3,042
Interest expense.......... 2,463 1,212 8,831 2,455 2,048 2,249 957
------ ---- ------ ----- ---- ---- ------
Net interest income....... 1,207 460 3,315 965 968 932 2,085
Provision for loan losses. 8 27 62 65 0 0 0
------ ---- ------ ----- ---- ---- ------
Net interest income after
provision for loan
losses................ 1,199 433 3,253 900 968 932 2,085
Noninterest income........ 6,780 4,029 22,550 7,733 7,644 11,077 11,368
Noninterest expense....... 5,642 3,697 19,875 8,822 7,751 10,571 11,439
------ ---- ------ ----- ---- ---- ------
Earnings (loss) before
provision for income
taxes and cumulative
effect of change in
accounting principle . . 2,337 765 5,928 (189) 861 1,438 2,014
Cumulative effect of
change in accounting
principle . . . . . . . (97) 0 0 0 0 0 0
------ ---- ------ ----- ---- ---- ------
Earnings (loss) before
provision for income
taxes................. 2,240 765 5,928 (189) 861 1,438 2,014
Provision for income
taxes................. 844 272 2,041 (52) 332 476 770
------ ---- ------ ----- ---- ---- ------
Net earnings (loss)..... $1,396 $493 $3,887 $(137) $529 $962 $1,244
------ ---- ------ ----- ---- ---- ------
------ ---- ------ ----- ---- ---- ------
PER SHARE DATA:
Basic and diluted earnings
per share(1).......... $0.46 $0.16 $1.28 $(0.05) $0.22 $0.40 $0.52
Weighted Average
number of shares
outstanding(2)........ 3,039,611 3,037,563 3,039,611 2,974,100 2,400,000 2,400,000 2,400,000
</TABLE>
- ----------
(1) On an equivalent basis for prior periods.
(2) Assumes dilution.
18
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
FOR THE THREE FOR THE FEBRUARY 1,
MONTHS ENDED YEAR ENDED 1997 TO FOR THE YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, JANUARY 31,
------------------- ------------ ------------ ------------------------------
1999* 1998* 1998 1997* 1997 1996 1995
-------- -------- ------------ ------------ -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets .. 2.26% 1.36% 1.82% $ (0.26)% 0.90% 1.70% 2.50%
Return on average
common equity .......... 42.94 22.65 37.68 (2.86) 9.22 19.80 14.66
Interest rate spread ...... 1.10 0.43 1.56 0.73 0.76 0.12 3.24
Net interest margin ....... 2.18 1.36 1.68 1.78 1.86 1.85 5.16
Noninterest expense to
average assets ......... 9.12 10.15 9.32 15.06 13.19 18.66 22.97
Efficiency ratio .......... 66.13 71.77 66.48 90.65 82.51 67.88 69.59
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets at end of
period ................. 0.66 0.91 0.61 1.63 3.73 1.28 2.32
Nonperforming loans to
total gross loans at end
of period .............. 0.56 0.86 0.45 1.66 3.10 1.73 3.17
Allowance for loan losses
to total gross loans at
end of period .......... 0.06 0.06 0.06 0.07 0.00 0.00 0.70
Allowance for loan losses
to nonperforming loans
at end of period ....... 11.03 7.20 13.91 3.94 0.00 0.00 22.36
MORTGAGE ORIGINATION
AND SERVICING DATA:
Mortgage loans originated
or purchased ........... $ 781,287 $339,187 $2,420,176 732,869 $588,237 $644,760 $ 805,682
Mortgage loans sold ....... 760,879 289,833 2,307,239 673,872 583,831 619,791 848,159
Mortgage loans serviced
for others ............. 1,170,961 801,283 1,464,496 557,011 569,601 854,061 2,307,239
Capitalized value of
mortgage servicing
rights ................. 15,629 7,098 15,510 4,340 3,478 5,509 5,401
</TABLE>
- ----------
* Annualized where appropriate.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pelican Financial serves as the holding company of Pelican National and
Washtenaw. Pelican Financial'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 these loans, usually on a pooled and securitized basis, in the
secondary market, and the servicing of mortgage loans for investors. The retail
banking segment involves attracting deposits from the general public and using
these funds to originate consumer, commercial, commercial real estate,
residential construction, and single-family residential mortgage loans, from its
sole office in Naples, Florida.
The tables below contains certain information for Pelican Financial's
business segments for the periods shown. Prior to August 1997, Pelican Financial
did not have retail banking operations.
<TABLE>
<CAPTION>
Mortgage
Banking Retail Banking
Segment Segment Consolidated
------- ------- ------------
(In thousands)
<S> <C> <C> <C>
REVENUES
Three Months Ended
March 31, 1999 ........... $ 9,653 $ 861 $ 10,451
March 31, 1998 ........... 5,440 419 5,701
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
Three Months Ended
March 31, 1999 ........... 2,293 11 2,240
March 31, 1998 ........... 1,116 (300) 765
Year ended:
December 31, 1998 ........ 6,498 (370) 5,928
Period ended:
December 31, 1997 ........ 635 (743) (189)
</TABLE>
Pelican Financial'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 Pelican Financial's
mortgage banking operations as well as loans held for investment) and interest
paid on interest-bearing liabilities; fee income from servicing mortgages held
by investors; and gains realized on sales of mortgage loans and mortgage
servicing rights. These revenues are in turn significantly affected by factors
such as changes in prevailing interest rates and in the 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.
20
<PAGE>
MANAGEMENT STRATEGY
Pelican Financial'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 Washtenaw and Pelican National is
strongly oriented toward mortgage based lending. Pelican National's location, in
Naples, Florida, is a growing market for mortgage loan products. Pelican
National's affiliation with a large mortgage company, such as Washtenaw, enables
Pelican National to offer a greater array of mortgage loan products than
similarly situated community banks. Washtenaw also provides a stable market for
the mortgage loans originated by Pelican National at predictable prices. This
enables Pelican National to determine the price at which a loan can be sold
prior to the closing of the loan. Use of Washtenaw's computer assisted
underwriting also provides Pelican National more uniform underwriting of its
mortgage loan products. Pelican National is able to provide same day approval
for its customers. Washtenaw is also able to provide mortgage investment
opportunities to Pelican National at yields not locally available and in
geographically diverse regions of the country, thus reducing the risk of a
concentrated loan portfolio. Lastly, Washtenaw enables Pelican National to
achieve economies of scale unavailable to many competing community banks.
At the same time, Washtenaw benefits from Pelican National as a
depository for escrow deposits in connection with its loan production and
servicing activities. To the extent Pelican National desires, Pelican National
may invest excess funds in mortgage loan products that Washtenaw has available.
Pelican National has purchased approximately $7.4 million of loans from
Washtenaw with a total weighted average interest rate of 8.41%. In addition,
certain aspects of the mortgage banking operations of Washtenaw are cash
intensive, such as investments in mortgage servicing rights and loan
originations other than mortgage lending. Pelican Financial believes that these
activities should be housed in Pelican National. Pelican Financial is hopeful
that as the synergies between Pelican National and Washtenaw are realized more
fully, Pelican National can act as a warehouse for purchased commercial real
estate loans.
Pelican Financial's current strategy focuses on maintaining
profitability while limiting its credit and interest rate risk exposure. To
accomplish these objectives, Pelican Financial has sought to:
- Control credit risk by emphasizing the origination and purchase of
single-family, owner-occupied residential mortgage loans.
- Control interest rate risk by selling a substantial portion of its
loan production and loan servicing into the secondary market.
- Control credit and interest rate risk by purchasing
mortgage-related assets to hold in its portfolio.
- Control operating expenses.
- Offer superior service, competitive interest rates, and a variety
of loan and deposit products.
In addition, management believes that additional retail branches
located in cities along the west coast of Florida would be very advantageous. In
May 1999, Pelican National signed a lease for a new branch in Fort Myers,
Florida. The new branch is expected to open in October 1999.
Finally, management believes that communication over the internet is an
important current and future aspect of its wholesale mortgage banking business.
Since 1995, Washtenaw has used its proprietary computer network, WMCNET, to
communicate with approximately 1,340 of its mortgage brokers and correspondents.
21
<PAGE>
WMCNET permits brokers to lock interest rates and provides computerized
underwriting and approval of individual loans. Management believes that it
has distinguished itself from other wholesale mortgage companies by providing
a rapid response to the broker community. Washtenaw is currently developing
the capability to provide retail loan services by use of the internet.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE INFORMATION ABOUT MARKET RISK. The principal objective of
Pelican Financial's interest rate risk management is to evaluate the interest
rate risk included in balance sheet accounts, determine the level of risk
appropriate given Pelican Financial's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with Pelican Financial's Interest Rate Risk Management Policy.
Through this management, Pelican Financial seeks to reduce the vulnerability of
its operations to changes in interest rates. The Board of Directors of Pelican
Financial 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 this review, the Board of
Directors evaluates Pelican Financial's business activities and strategies, the
effect of those strategies on Pelican Financial'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 Pelican Financial's loan, servicing,
and securities portfolios and exposure limits.
The continuous movement of interest rates is certain, however, the
extent and timing of these movements is not always predictable. Any movements in
interest rates has an affect of Pelican Financial's profitability. The value of
loans, which Pelican Financial has either originated or purchased or committed
to originate or purchase, decreases as interest rates rise and conversely, the
value increases as interest rates fall. The value of mortgage servicing rights
tends to move inversely to the value of loans, increasing in value as interest
rates rise and decreasing in value as interest rates fall. Pelican Financial
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. Pelican
Financial's interest rate spread and interest rate margin may be negatively
impacted in a declining interest rate environment even though Pelican Financial
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. Pelican Financial'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 Pelican Financial's mortgage servicing rights.
Because it is unlikely that any particular movement in interest rates
could effect only one aspect of Pelican Financial's business, many of Pelican
Financial's products are naturally self-hedging to each other. For instance, the
decrease in the value of Pelican Financial'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.
Pelican Financial 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, Pelican Financial 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
Pelican Financial 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. For more information on the strategies used to limit fluctuations in the
value of the servicing portfolio due to change in interest rates, see "-
Comparison of Operating Results for the three months ended March 31, 1999 and
March 31, 1998 - Loan Servicing." Pelican Financial further
22
<PAGE>
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 Pelican Financial is interest rate risk. From an enterprise perspective,
Pelican Financial manages this risk by striving to balance its loan origination
and loan servicing businesses, which are counter cyclical in nature. In
addition, Pelican Financial utilizes various hedging techniques to manage the
interest rate risk related specifically to its committed pipeline loans,
mortgage loan inventory, and mortgage servicing rights. Pelican Financial
primarily utilizes forward sales of mortgage-backed securities and purchases of
mortgage-backed securities put options. These instruments most closely track the
performance of Pelican Financial's committed pipeline of loans because the loans
themselves can be delivered directly into these contracts. Pelican Financial may
also use other hedging techniques, including the use of forward U.S. treasury
notes and bond sales and purchases (long/short OTC cash forward contracts); U.S.
treasury futures contracts (long/short CBOT futures); U.S. treasury futures
options contracts (long/short CBOT futures options); private mortgage conduit
mandatory forward sales (mandatory rate locks); and private mortgage conduit
best-effort rate locks (best-effort rate locks).
The overall objective of Pelican Financial's interest rate risk
management policies is to offset changes in the values of these items resulting
from changes in interest rates. Pelican Financial does not speculate on the
direction of interest rates in its management of interest rate risk.
The matching of maturity or repricing of interest-earning assets and
interest-bearing liabilities may be analyzed by examining the extent to which
these assets and liabilities are interest rate sensitive and by monitoring
Pelican Financial'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 Pelican
Financial's interest sensitivity gap.
The following tables contain the amount of interest-earning assets and
interest-bearing liabilities outstanding on March 31, 1999 and 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.
<TABLE>
<CAPTION>
Over 1
3 months year
Less than through through Over
3 months 12 months 5 years 5 years Total
----------- --------- --------- ------- -------
(Dollars in thousands)
AT MARCH 31, 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments (1) .......... $ 991 $ 547 $ 0 $ 0 $ 1,538
Investment Securities (2) ........... 0 496 3,488 2,429 6,413
Loans ............................... 187,448 8,364 6,407 16,679 218,898
-------- -------- -------- -------- ---------
Total interest-earning assets .... 188,439 9,407 9,895 19,108 226,849
Interest-bearing liabilities:
Savings deposits .................... 13,720 0 0 0 13,720
Certificates of deposit ............. 2,923 17,479 1,325 0 21,727
Borrowings (3) ...................... 188,224 1,200 0 0 189,424
-------- -------- -------- -------- --------
Total interest bearing liabilities 204,867 18,679 1,325 0 $224,871
Interest rate sensitivity gap ......... $(16,428) $ (9,272) $ 8,570 $ 19,108
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
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>
Cumulative gap ........................ (16,428) (25,700) (17,130) 1,978
Cumulative gap to interest-earning
assets .............................. (9)% (273)% (173)% 10%
Ratio of interest-earning assets to
interest bearing liabilities ........ 92% 50% 747% 0%
AT DECEMBER 31, 1998
----------------------------------------------------------------
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................................ 180,371 1,549 4,556 16,979 203,455
-------- -------- -------- -------- --------
Total interest-earning assets...... 187,730 3,691 9,055 18,333 218,809
Interest-bearing liabilities:
Savings deposits..................... 19,129 0 0 0 19,129
Certificates of deposit.............. 825 11,669 145 16 12,655
Borrowings (3)....................... 191,270 1,200 0 0 192,470
-------- -------- -------- -------- --------
Total interest bearing
liabilities........................ 211,224 12,869 145 16 $224,254
--------
--------
Interest rate sensitivity gap.......... $(23,494) $ (9,178) $ 8,910 $ 18,317
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative gap......................... (23,494) (32,672) (23,762) (5,445)
Cumulative gap to interest-
earning assets....................... (13)% (885)% (262)% (30)%
Ratio of interest-earning assets to
interest bearing liabilities......... 89% 29% 6,245% 114,581%
</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 March 31, 1999 and December 31, 1998, Pelican
Financial had a negative gap position based on contractual maturities and
repayment assumptions for the next twelve months. This means that Pelican
Financial's interest-earning assets reprice more slowly than its
interest-bearing liabilities. In a declining interest rate environment, the cost
of Pelican Financial's interest-bearing liabilities may be expected to decrease
faster than amounts received on interest-earning assets, thus increasing Pelican
Financial'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 Pelican Financial's
interest-bearing liabilities, thus decreasing Pelican Financial'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:
24
<PAGE>
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 held for sale, consisting primarily of loans held by
Washtenaw, are shown in the period in which they are expected to
be sold and all other loans, consisting primarily of loans held at
Pelican National are shown in the period in which they
contractually reprice or mature.
The interest rate sensitivity of Pelican Financial's assets and
liabilities could vary substantially if different assumptions were used or if
actual experience differs from the assumptions used.
25
<PAGE>
AVERAGE BALANCE SHEET. The following tables contain 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>
Three Months Ended March 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------------
Average Volume Interest Yield/cost* Average Volume Interest Yield/cost*
-------------- -------- ----------- -------------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold........................ $ 3,283 $ 39 4.75% $ 5,051 $ 69 5.46%
Investment securities..................... 7,368 109 5.92 4,734 68 5.75
Loans receivable, net..................... 211,045 3,522 6.68 125,742 1,535 4.88
-------- ------ -------- ------
Total interest-earning assets........... 221,696 3,670 6.62 135,527 1,672 4.93
------ ---- ------ ----
Noninterest-earning assets:
Cash and due from banks................. 1,769 1,054
Allowance for loan losses............... (131) (79)
Other assets............................ 24,130 9,155
-------- --------
Total assets......................... $247,464 $145,657
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts.............................. $875 5 2.29 $ 5,753 35 2.43
Money market accounts..................... 3,941 38 3.86 2,128 24 4.51
Savings deposits.......................... 9,748 60 2.46 35 0 0.00
Time deposits............................. 15,779 212 5.37 9,056 136 6.01
Short-term borrowings..................... 147,974 2,148 5.81 90,571 1,017 4.49
-------- ------ -------- ------
Total interest-bearing liabilities...... 178,317 2,463 5.52 107,543 1,212 4.50
------ ---- ------ ----
------ ---- ------ ----
Noninterest-bearing liabilities:
Demand deposits........................... 3,198 1,587
Other liabilities......................... 52,941 27,767
Stockholders' equity....................... 13,008 8,760
-------- --------
Total liabilities and stockholders'
equity ................................... $247,464 $145,657
-------- --------
-------- --------
Interest rate spread........................ 1.10% 0.43%
----- ----
----- ----
Net interest income and net interest
margin.................................... $1,207 2.18% $ 460 1.36%
------ ---- ------ ----
------ ---- ------ ----
</TABLE>
- ----------
* Annualized.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Period from February 1, 1997 to
1998 December 31, 1997
------------------------------- ----------------------------------
Average Average
Volume Interest Yield/cost Volume Interest Yield/cost*
------ -------- ---------- ------ -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold........................ $ 9,685 $ 390 4.03% $ 2,057 $ 113 6.01%
Investment securities..................... 6,016 479 7.95 1,025 78 8.23
Loans receivable, net..................... 181,874 11,277 6.20 51,094 3,230 6.90
-------- ------- ------- ------
Total interest-earning assets........... 197,575 12,146 6.15 54,176 3,421 6.89
------- ----- ------ ----
Noninterest-earning assets:
Cash and due from banks................. 5,943 486
Allowance for loan losses............... (106) (45)
Other assets............................ 9,784 3,945
-------- -------
Total assets......................... $213,196 $58,562
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts.............................. 6,016 138 2.29 $ 581 $ 29 4.99
Money market accounts..................... 4,060 178 4.38 264 11 4.17
Savings deposits.......................... 2,406 60 2.47 4 1 2.16
Time deposits............................. 9,548 558 5.85 2,196 135 6.69
Short-term borrowings..................... 170,413 7,897 4.63 40,909 2,280 6.08
-------- ------- ------- ------
Total interest-bearing liabilities...... 192,443 8,831 4.59 43,954 2,456 6.09
------- ----- ------ ----
Noninterest-bearing liabilities:
Demand deposits........................... 4,223 932
Other liabilities......................... 6,085 8,429
Stockholders' equity...................... 10,445 5,247
-------- -------
Total liabilities and stockholders' equity $213,196 $58,562
-------- -------
-------- -------
Interest rate spread........................ 1.56% 0.80%
---- ----
---- ----
Net interest income and net interest
margin.................................... $ 3,315 1.68% $ 965 1.94%
------- ---- ------ ----
------- ---- ------ ----
</TABLE>
<TABLE>
<CAPTION>
Year Ended January 31,
1997
--------------------------------
Average
Volume Interest Yield/cost
------ -------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold........................ $ 0 $ 0 0.00%
Investment securities..................... 0 0 0.00
Loans receivable, net..................... 52,151 3,015 5.78
------- ------
Total interest-earning assets........... 52,151 3,015 5.78
------ ----
Noninterest-earning assets:
Cash and due from banks................. 0
Allowance for loan losses............... (54)
Other assets............................ 6,637
-------
Total assets......................... $58,734
-------
-------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts.............................. 0 0 0.00
Money market accounts..................... 0 0 0.00
Savings deposits.......................... 0 0 0.00
Time deposits............................. 0 0 0.00
Short-term borrowings..................... 40,806 2,048 5.02
------- ------
Total interest-bearing liabilities...... 40,806 2,048 5.02
----
Noninterest-bearing liabilities:
Demand deposits........................... 0
Other liabilities......................... 12,190
Stockholders' equity....................... 5,738
-------
Total liabilities and stockholders' equity $58,734
-------
-------
Interest rate spread........................ 0.76%
----
----
Net interest income and net interest
margin.................................... $ 967 1.85%
------ ----
------ ----
</TABLE>
- ----------
* Annualized.
27
<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 contains certain information regarding changes in
interest income and interest expense of Pelican Financial 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>
Three Months Ended March 31, Year Ended December 31, Eleven Months Ended
1999 vs. Three Months Ended 1998 vs. Eleven Months Ended December 31, 1997 v. Year Ended
March 31, 1998 December 31, 1997 January 31, 1997
----------------------------- ---------------------------- --------------------------------
Changes Due to Changes Due to Changes Due to
Total ------------------- Total ------------------- Total -------------------
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 ............ $ (30) $ (22) $ (8) $ 277 $ 254 $ 23 $ 113 $ 113 $ 0
Investment securities ......... 41 39 2 401 398 3 78 78 0
Loans receivable, net ......... 1,987 1,289 698 8,047 7,742 305 215 21 194
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income ....... 1,998 1,306 692 8,725 8,394 331 406 212 194
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts .................. (30) (28) (2) 109 103 6 29 29 0
Money market accounts ......... 14 12 2 167 166 1 11 11 0
Savings deposits .............. 60 60 0 59 59 0 1 1 0
Time deposits ................. 76 67 9 423 408 15 135 135 0
Short term borrowings ......... 1,132 773 359 5,617 5,224 393 232 2 230
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ...... 1,252 884 368 6,375 5,960 415 408 178 230
------- ------- ------- ------- ------- ------- ------- ------- -------
NET CHANGE IN INTEREST
INCOME ...................... $ 746 $ 422 $ 324 $ 2,350 $ 2,434 $ (84) $ (2) $ 34 $ (36)
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Year Ended January 31,
1997 VS. 1996
------------------------------
Changes Due to
Total -------------------
Change Volume(1) Rates(1)
------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold ............ $ 0 $ 0 $ 0
Investment securities ......... 0 0 0
Loans receivable, net ......... 166 49 117
------- ------- -------
Total interest income ....... 166 49 117
------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts .................. 0 0 0
Money market accounts ......... 0 0 0
Savings deposits .............. 0 0 0
Time deposits ................. 0 0 0
Short term borrowings ......... 201 80 121
------- ------- -------
Total interest expense ...... 201 80 121
------- ------- -------
NET CHANGE IN INTEREST
INCOME ...................... $ (35) $ (31) $ (4)
------- ------- -------
------- ------- -------
</TABLE>
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
28
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
THE THREE MONTHS ENDED MARCH 31, 1998
GENERAL. The operating results and financial condition of Pelican
Financial as of and for the three months ended March 31, 1998 primarily reflect
the operating results and financial condition of Washtenaw. Pelican National was
formed in August 1997, therefore, the three months ended March 31, 1998
constitutes only Pelican National's second full quarter of operations. Net
income for the three months ended March 31, 1999 totaled $1.4 million compared
to net income of $493,000 for the three months ended March 31, 1998, or an
increase of approximately $903,000 or 183%. This increase was primarily due to a
smaller loss from operations of Pelican National and a substantial increase in
loan production for Washtenaw.
LOAN PRODUCTION. The volume of loans produced for the three months
ended March 31, 1999 totaled $781.8 million, as compared to $339.2 million for
the three months ended March 31, 1998, or an increase of approximately $442.6
million or approximately 130%. The increase in loan production was primarily due
to a strong refinance environment, as well as to the continuing expansion of the
markets Pelican Financial serves and the types of loan products Pelican
Financial offers. Refinancings totaled $648.1 million, or 82.9% of total loan
production, for the three months ended March 31, 1999, as compared to $286.7
million, or 84.5% of total loan production for the three months ended March 31,
1998. Fixed-rate mortgage loan production totaled $738.5 million, or 94.5% of
total loan production, for the three months ended March 31, 1999, as compared to
$277.1 million, or 81.7% of total loan production for the three months ended
March 31, 1998.
At March 31, 1999 and 1998, Pelican Financial's pipeline of loans in
process was $165.3 million. Historically, approximately 75% to 90% of the
pipeline of loans in process has funded. For the three months ended March 31,
1999, Pelican Financial received 10,855 new loan applications compared to 6,865
new loan application received for the three months ended March 31, 1998. These
new loan applications result in an average daily rate of applications of $18.4
million and $11.2 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, Pelican Financial's loan processing
efficiency, and loan pricing decisions.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the allowance for loan losses to a level deemed appropriate by
management. Management considers many factors in its determination of the
overall level of the allowance for loan losses 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. During the three months ended March 31, 1999, the provision for
loan losses was $8,000 compared to $27,000 for the three months ended March 31,
1998. As of March 31, 1999, the allowance for loan losses was 0.06% of total
loans. For more information on the allowance for loan losses, see "Business -
Asset Quality."
NET INTEREST INCOME. Net interest income (interest earned net of
interest charges) totaled $1.2 million for the three months ended March 31,
1999, as compared to $460,000 for the three months ended March 31, 1998, or an
increase of approximately $747,000 or approximately 162%. Net interest income is
principally a function of:
* interest income earned from Pelican Financial's loan portfolio;
* interest expense related to Pelican Financial's investment in
servicing rights;
* interest income earned from the custodial balances associated with
Pelican Financial's servicing portfolio, and
* interest expense related to Pelican National's deposits.
29
<PAGE>
Pelican Financial 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 Pelican
Financial 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 March 31, 1999, Pelican Financial serviced $1.4
billion of loans compared to $837.9 million at March 31, 1998, a 55.1% increase.
At March 31, 1999 and 1998, with the exception of servicing related to loans
held for sale in Pelican Financial's loan portfolio and servicing sold but not
yet delivered, all loan servicing was servicing for others. See "Business -
Mortgage Loan Servicing Activities." The increase in Pelican Financial's
servicing portfolio during the three months ended March 31, 1999 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 Pelican Financial's servicing portfolio at March 31, 1999
was 7.10% compared to 7.56% at March 31, 1998. The decrease in the weighted
average interest rate of mortgage loans in Pelican Financial'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, Pelican Financial 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 Pelican Financial's strategy to retain its servicing portfolio at
approximately $1 billion. Pelican Financial believes that this outstanding
balance is adequate to produce some economy of scale. Pelican Financial manages
the size of its servicing portfolio in conjunction with its other asset and
liability management. It is not Pelican Financial's strategy to grow the
servicing portfolio. Rather, Pelican Financial attempts to act as an accumulator
of mortgage servicing rights. As an accumulator, Pelican Financial sells the
servicing rights to a large national servicer pursuant to a contract with
quarterly best efforts delivery.
During the three months ended March 31, 1999, the prepayment rate of
Pelican Financial's servicing portfolio was 2.6%, compared to 5.7% for the three
months ended March 31, 1998. 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 Pelican Financial's servicing portfolio remains relatively
low because Pelican Financial 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.
Pelican Financial recorded amortization and net impairment of its
mortgage servicing rights for the three months ended March 31, 1999 of $360,000
(consisting of amortization amounting to $659,000 and impairment of $299,000),
compared to $474,000 of amortization and impairment (consisting of amortization
amounting to $312,000 and impairment of $162,000) for the three months ended
March 31, 1998. 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 Pelican Financial's Notes to Consolidated
Financial Statements under the subheading "Mortgage Servicing Rights, Net."
COMPENSATION AND EMPLOYEE BENEFITS EXPENSE. Compensation and benefits
totaled $3.8 million for the three months ended March 31, 1999 compared to $2.0
million for the three months ended March 31, 1998, or an increase of
approximately $1.8 million or 90%. The increase during the three months ended
March 31,
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1998 was primarily the result of an increase in the number of full time
equivalent employees to 200 at March 31, 1999 from 136 at March 31, 1998 and
ordinary and customary increases in salary and benefits. The increase in
employees is primarily attributable to an increase of employees at Washtenaw 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
$408,000 for the three months ended March 31, 1999 compared to $324,000 for the
three months ended March 31, 1998, or an increase of approximately $84,000 or
26%. The increase for the three months ended March 31, 1999 was primarily the
result of an increase in office space and equipment by Washtenaw to accommodate
the increase in employees.
OTHER NONINTEREST EXPENSE. Other noninterest expenses totaled $648,000
for the three months ended March 31, 1999 compared to $37,000 for the three
months ended March 31, 1998, or an increase of approximately $611,000 or 1.651%.
Other noninterest expense primarily consists of office and computer supplies,
express mail expenses, and servicing foreclosure expenses.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the three months
ended March 31, 1999, Pelican Financial's pre-tax earnings from the mortgage
banking activities were $2.3 million. For the three months ended March 31, 1998,
Pelican Financial's comparable pre-tax earnings were $1.1 million. The increase
of $1.2 million or 109% primarily is attributable to increased loan production
as a result of expanding Pelican Financial's operations into new markets and new
product lines offered by Pelican Financial. 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 three months ended March 31, 1999, the gain on sale of loans
and mortgage servicing rights totaled $3.4 million. For the three months ended
March 31, 1998, gain on sale of loans and mortgage servicing rights was $3.3
million. The $100,000 increase represents a 3% increase between periods. When
Pelican Financial sells loans with servicing retained, the mortgage servicing
rights are either retained by Pelican Financial to service or the servicing
rights are sold to a national servicer concurrently with the sale of the loans.
Mortgage servicing rights retained by Pelican Financial to service are generally
accumulated and then sold in bulk on a quarterly basis. Gains on the sale of
mortgage loans servicing sold in bulk totaled $516,000 for the three months
ended March 31, 1999. The mortgage servicing rights sold in bulk related to
servicing of loans with an aggregate principal balance of approximately $659.8
million. For the three months ended March 31, 1998, Pelican Financial did not
sell any mortgage servicing rights in bulk.
Gains on the sale of mortgage servicing rights sold concurrently with
the sale of the underlying loans are included with gains on the loans sold,
because the mortgage servicing rights are sold in the same month the underlying
loans are sold. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $5.2 million for the three months ended March 31,
1999. The gains resulted from the sale of approximately $760.6 million of
mortgage loans. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $3.3 million for the three months ended March 31,
1998. The gains resulted from the sale of approximately $173.9 million of
mortgage loans sold. The increase in the gain on loans sold of $1.9 million was
primarily the result of an increase in amount of loans sold of approximately
$586.7 million as a result of increase loan production.
Interest revenue for the three months ended March 31, 1999, was $2.9
million. For the three months ended March 31, 1998 interest revenue was $1.3
million. The increase of $1.6 million or 123% is attributable to increased loan
inventory.
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Income from servicing operations totaled $500,000 for the three months
ended March 31, 1999. For the three months ended March 31, 1998, servicing
income was $121,000. The $379,000 or 313.2% increase is derived from increased
servicing activity.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the three months
ended March 31, 1999, Pelican Financial's pre-tax earnings from retail
banking activities primarily conducted by Pelican National totaled $11,000.
For the three months ended March 31, 1998, Pelican Financial's comparable
pre-tax loss was $300,000. The decrease in loss of $311,000 or 104% was
primarily attributable to the board of directors of Pelican National
replacing prior bank management with Michael D. Surgen, the current President
and Chief Executive Officer of Pelican National. Additionally, the decrease
in the pre-tax loss was due to an increase in net interest income to $500,000
for the three months ended March 31, 1999 compared to $180,000 for the three
months ended March 31, 1998 resulting from growth in Pelican National's
interest-earning assets in excess of its interest-bearing liabilities. At or
for the three months ended March 31, 1999, Pelican National had noninterest
expenses of $450,000, deposits of $38 million, and the provision for loan
losses totaled $8,000 compared to noninterest expenses of $497,000, deposits
of $19 million, and the provision for loan losses totaled $27,000 at or for
the three months ended March 31, 1998.
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 Pelican
Financial as of and for the year ended December 31, 1998 primarily reflect the
operating results and financial condition of Washtenaw. Pelican National was
formed in August 1997, therefore, the year ended December 31, 1998 constitutes
Pelican National'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 2,700%. This
increase was primarily due to a smaller loss from operations of Pelican National
and a substantial increase in loan production for Washtenaw.
LOAN PRODUCTION. The volume of loans produced for the year ended
December 31, 1998 totaled $2.4 billion, as compared to $733.1 million ($799.7
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $1.6 billion or approximately
200%. 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 Pelican Financial serves and the types of
loan products Pelican Financial 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 65.00% 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 $561.1
million, or 76.58% of total loan production for the eleven months ended December
31, 1997 ($612.1 million on an annualized basis).
At December 31, 1998 and 1997, Pelican Financial'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, Pelican Financial 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, Pelican
Financial's loan processing efficiency, and loan pricing decisions.
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PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the allowance for loan losses to a level deemed appropriate by
management. During the year ended December 31, 1998, the provision for loan
losses was $62,000 compared to $65,000 for the eleven months ended December 31,
1997. As of December 31, 1998, the allowance for loan losses was 0.06% of total
loans. For more information on the allowance for loan losses, see "Business -
Asset Quality."
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 $965,000 ($1.1 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%. 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 Pelican Financial 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, Pelican Financial 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 Pelican Financial's loan portfolio and servicing sold
but not yet delivered, all loan servicing was servicing for others. See
"Business - Mortgage Loan Servicing Activities." The increase in Pelican
Financial'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 Pelican Financial'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 Pelican Financial's
servicing portfolio is primarily the result of portfolio turnover.
During the year ended December 31, 1998, the prepayment rate of Pelican
Financial'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 Pelican Financial's servicing
portfolio remains relatively low because Pelican Financial 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.
Pelican Financial 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
$914,000), compared to $936,000 of amortization and impairment (consisting of
amortization amounting to $1.0 million and a reduction of impairment of $78,000)
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 Pelican
Financial'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
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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 Pelican National and the increase of employees at
Washtenaw 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 during 1998 was primarily the result of Pelican National occupying its
office for an entire year and an increase in office space and equipment by
Washtenaw 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 million 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 Pelican National being opened for the entire fiscal 1998
and the expanded operations of Washtenaw.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the year ended
December 31, 1998, Pelican Financial's pre-tax earnings from the mortgage
banking activities were $6.7 million. For the eleven months ended December 31,
1997, Pelican Financial'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 Pelican
Financial's operations into new markets and new product lines offered by Pelican
Financial. 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 ($5.9 million annualized). The annualized $12.2 million increase
represents a 207% increase between periods. When Pelican Financial sells loans
with servicing retained, the mortgage servicing rights are either retained by
Pelican Financial to service or the servicing rights are sold to a national
servicer concurrently with the sale of the loans. Mortgage servicing rights
retained by Pelican Financial to service are generally accumulated and then sold
in bulk on a quarterly basis. Gains on the sale of mortgage loans servicing sold
in bulk totaled $412,000 for the year ended December 31, 1998. The mortgage
servicing rights sold in bulk related to servicing of loans with an aggregate
principal balance of approximately $769.5 million. Gains on the sale of mortgage
loans servicing sold in bulk totaled $1.0 million for the eleven months ended
December 31, 1997. The mortgage servicing rights sold in bulk related to
servicing of loans with an aggregate principal balance of approximately $142.8
million. The decrease in the gains on sales of mortgage servicing rights was
$612,000 or 59.7%. In the declining interest rate environment that existed in
1998, Pelican Financial sold servicing related to more seasoned loans that it
had held in its mortgage loan servicing portfolio in order to reduce the risks
associated with prepayment.
Gains on the sale of mortgage servicing rights sold concurrently with
the sale of the underlying loans are included with gains on the loans sold,
because the mortgage servicing rights are sold in the same month the underlying
loans are sold. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $17.6 million for the year ended December 31, 1998.
The gains resulted from the sale of approximately $2.3 billion of mortgage
loans. Gains on loans sold, including concurrent sales of mortgage servicing
rights, totaled $4.4 million for the eleven months ended December 31, 1997. The
gains resulted from the sale of approximately $674.6 million of mortgage loans
sold. The increase in gains on loans sold of $13.2 million or 301% is primarily
attributable to increased loan production as well as improved prices for new
mortgage servicing rights sold.
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Interest revenue for the year ended December 31, 1998, was $12.1
million. For the eleven months ended December 31, 1997 interest revenue was $3.4
million (annualized $3.7 million). The annualized increase of $8.7 million or
256% is attributable to increased loan inventory.
Income from servicing operations totaled $2.8 million for the year
ended December 31, 1998. For the eleven months ended December 31, 1997,
servicing income was $1.8 million ($1.9 million annualized). The $900,000 or 47%
increase is derived from increased servicing activity.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the year ended December
31, 1998, Pelican Financial's pre-tax loss from retail banking activities
primarily conducted by Pelican National was $370,000. For the period from
inception until December 31, 1997, Pelican Financial'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 81% was primarily attributable to the Board of directors
of Pelican National replacing prior bank management with Michael D. Surgen, the
current President and Chief Executive Officer of Pelican National. Within three
months of Mr. Surgen's appointment, Pelican National became profitable on a
monthly basis. Pelican National's pre-tax loss through August 31, 1998 was
$570,000, 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 Pelican National, 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
eleven months ended December 31, 1997 resulting from growth in Pelican
National's interest-earning assets in excess of its interest-bearing
liabilities. At or for the year ended December 31, 1998, Pelican National 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
$943,000, 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.
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 Pelican
Financial as of and for the eleven months ended December 31, 1997 primarily
reflect the operating results and financial condition of Washtenaw. Pelican
National commenced business in August 1997, therefore, only a portion of the
results for the eleven months ended December 31, 1997 reflect the operations of
Pelican National. The operating results and financial condition of Pelican
Financial as of and for the year ended January 31, 1997 only relate to the
operations of Washtenaw. 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 Pelican National, 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 $733.1 million ($799.7 million annualized)
compared to $588.2 million for the year ended January 31, 1997, or an increase
on an annualized basis of approximately $211.5 million or 35.96%. 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
Pelican Financial serves and the types of loan products Pelican Financial
offers. Refinancings totaled $476.5 million, or 65.00% 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
$561.1 million, or 76.58% of total loan production, for the eleven months ended
December 31, 1997 ($612.1 million on an annualized basis), as compared to $530.3
million, or 90.15% of total loan production for the year ended January 31, 1997.
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At December 31, 1997 and January 31, 1997, Pelican Financial'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, Pelican Financial
received 11,478 new loan applications (12,521 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, Pelican
Financial's loan processing efficiency, and loan pricing decisions.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the allowance for loan losses to a level deemed appropriate by
management. During the eleven months ended December 31, 1997, the provision for
loan losses was $65,000 compared to $0 for the year ended January 31, 1997. As
of December 31, 1997, the allowance for loan losses was 0.07% of total loans.
For more information on the allowance for loan losses, see "Business - Asset
Quality."
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%.
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 resulted primarily from an increase in the investment in
servicing rights. The capitalized value of mortgage servicing rights increased
from $3.5 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.
LOAN SERVICING. At December 31, 1997, Pelican Financial 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 Pelican Financial's loan portfolio
and servicing sold but not yet delivered, all loan servicing was servicing for
others. The increase in Pelican Financial'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 Pelican Financial'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 Pelican Financial's
servicing portfolio is primarily the result of portfolio turnover.
During the eleven months ended December 31, 1997, the prepayment rate
of Pelican Financial'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 Pelican Financial's servicing
portfolio remains relatively low because Pelican Financial 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.
Pelican Financial recorded amortization and net impairment of its
mortgage servicing rights of $936,000 of amortization and impairment (consisting
of amortization amounting to $1.0 million and a reduction of impairment of
$78,000) for the eleven months ended December 31, 1997, compared to $645,000 of
amortization and impairment (consisting of amortization amounting to $1.3
million and a reduction in impairment of $660,000) for the year ended January
31, 1997. The factors affecting the amount of amortization and
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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 Pelican National 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 Pelican National in
August 1997. Pelican National 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 Washtenaw'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, Pelican Financial's pre-tax earnings from the mortgage
banking activities were primarily conducted by Washtenaw because Pelican
National was not open until late August of 1997. For the eleven months ended
December 31, 1997, Pelican Financial's comparable pre-tax revenue was $11.1
million ($12.2 million on an annualized basis). For the year ended January 31,
1997, Pelican Financial'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.
For the eleven months ending December 31, 1997, the gain on sale of
loans and mortgage servicing rights was $5.4 million ($5.9 million annualized).
For the year ending January 31, 1997, the gain on sale of loans was $4.5
million. The annualized increase was $1.4 million or 31.1%, attributable to a
greater loan origination volume. Gains on the sale of mortgage loans servicing
sold in bulk totaled $1.0 million for the eleven months ended December 31, 1997.
The mortgage servicing rights sold in bulk related to servicing of loans with an
aggregate principal balance of approximately $142.8 million. Gains on the sale
of mortgage loans servicing sold in bulk totaled $1.7 million for the year ended
January 31, 1997. The mortgage servicing rights sold in bulk related to
servicing of loans with an aggregate principal balance of approximately $380.8
million. The decrease of $645,000 or 38% resulted from management's decision to
sell fewer seasoned mortgage servicing rights.
Gains on the sale of mortgage servicing rights sold concurrently with
the sale of the underlying loans are included with gains on the loans sold,
because the mortgage servicing rights are sold in the same month the underlying
loans are sold. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $4.4 million for the eleven months ended December 31,
1997. The gains resulted from the sale of approximately $674.7 million of
mortgage loans. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $2.8 million for the year ended January 31, 1997. The
gains resulted from the sale of approximately $584.0 million of mortgage loans
sold. The increase of $1.6 million or 55% resulted from an increase in loan
production and improved prices for new mortgage servicing rights sold.
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<PAGE>
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.
Income from servicing operations totaled $1.8 million ($1.9 million
annualized) for the eleven months ending December 31, 1997. Income from
servicing operations totaled $2.7 million for the year ending January 31, 1997.
The annualized decrease of $800,000 or 30% was due to reductions in the
servicing portfolio from the sales of mortgage servicing rights discussed above.
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. Pelican Financial conducts no
business other the business conducted through Pelican National and Washtenaw.
Pelican Financial's primary source of funds is dividends paid by Washtenaw and
Pelican National. In July 1997, Pelican Financial established a term loan in the
amount of $2.0 million, the proceeds of which were contributed to the capital of
Pelican National. 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 Pelican Financial have been to
make payments pursuant to the term loan. Pelican Financial expects to repay the
term loan from the proceeds of this offering. Dividends paid to Pelican
Financial by Washtenaw are also limited by the terms of Washtenaw's warehouse
line of credit discussed below.
Washtenaw's sources of cash flow include cash from gains on sale of
mortgage loans and servicing, net interest income, servicing fees, and
borrowings. Washtenaw sells its mortgage loans generally on a monthly basis to
generate cash for operations. Washtenaw's uses of cash in the short-term include
the funding of mortgage loan purchases and originations and purchases of
mortgage servicing rights, payment of interest, repayment of amounts borrowed
pursuant to warehouse lines of credit, operating and administrative expenses,
income taxes and capital expenditures. Long-term uses of cash may also include
the funding of securitization activities or portfolios of loan or servicing
assets.
Washtenaw funds its business through the use of a warehouse line of
credit and the use of agreements to repurchase. The warehouse line of credit has
of limit of $90.0 million, of which $5.0 million represents a working capital
sublimit. Borrowing pursuant to 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 Washtenaw. Pursuant to the warehouse line of credit, Washtenaw
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
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.
Washtenaw also enters into sales of mortgage loans pursuant to
agreements to repurchase. These agreements typically have terms of less than 90
days and are treated as a source of financing. The weighted average interest
rate on these agreements to repurchase was 6.3% at December 31, 1998 and 1997,
and January 31, 1997.
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Pelican Financial's ability to continue to purchase loans and mortgage
servicing rights and to originate new loans is dependent in large part upon its
ability to sell the mortgage loans at par or for a premium or to sell the
mortgage servicing rights in the secondary market in order to generate cash
proceeds to repay borrowings pursuant to the warehouse facility, thereby
creating borrowing capacity to fund new purchases and originations. The value of
and market for Pelican Financial's loans and mortgage servicing rights are
dependent upon a number of factors, including the borrower credit risk
classification, loan-to-value ratios and interest rates, general economic
conditions, warehouse facility interest rates, and governmental regulations.
During the year ended December 31, 1998, the eleven months ended December 31,
1997, and the year ended January 31, 1997, Pelican Financial used cash of $2.5
billion, $726.4 million, and $591.1 million, respectively, for the purchase of
mortgage loans and mortgage servicing rights and the origination of mortgage
loans. During the same periods, Pelican Financial received cash proceeds from
the sale of loans and mortgage servicing rights of $2.5 billion, $670.4 million
and $594.3 million, respectively. Pelican Financial received cash proceeds from
the premiums on the sale of loans of $18.1 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 Pelican Financial's loan production in any month is funded
during the last several business days of that month.
Pelican Financial generally grants commitments to fund mortgage loans
for up to 30 days at a specified term and interest rate. The commitments are
commonly known as rate-lock commitments. At December 31, 1998, Pelican Financial
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 these commitments may expire without being drawn upon, they do
not necessarily represent future cash commitments. Also, as of December 31,
1998, Pelican Financial had outstanding commitments to sell $239.2 million of
mortgage loans. These commitments will be funded within 90 days.
At December 31, 1998, Pelican National exceeded all applicable
regulatory minimum capital requirements as well as the requirement to be
considered "well capitalized" for regulatory purposes. Pelican Financial
exceeded its regulatory minimum capital requirements with respect to Tier 1
capital to risk-weighted assets and Tier 1 capital to average assets, however,
Pelican Financial 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 Pelican Financial for regulatory capital purposes
to an amount in excess of Pelican Financial's minimum capital requirements. For
a detailed discussion of the regulatory capital requirements to which Pelican
Financial and Pelican National are subject, and for a tabular presentation of
compliance with these requirements, see "Regulation - Pelican Financial,"
"Regulation - Pelican National - 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.
All year 2000 issues for Pelican Financial, including testing, are expected to
be addressed and any problems remedied by June 30, 1999. Pelican Financial has
also provided brochures to its customers to make them aware of the year 2000
issue.
Pelican National has identified its mission critical systems to include
only its core data processing system, primarily the deposit, lending, and
general ledger applications that are provided by its third party data processing
vendor, and the related computer systems that interface with the third party
data processor. All internal aspects of Pelican National's mission critical
systems have been tested and validated by an independent source. All
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<PAGE>
required updates have been installed. Testing has been successful on all
external aspects of Pelican National's mission critical systems.
Wahtenaw has identified its mission critical systems to include third
party software packages for the production of its closing documents, its
qualitative risk management system, and its loan servicing system, as well as
its proprietary software for loan processing and tracking developed internally
by Washtenaw. Washtenaw has year 2000 software upgrades installed and in service
for all of its applications. All mission critical third-party software packages
have been successfully tested for year 2000 compliance. All mission critical
proprietary systems are in the process of being tested, which is expected to be
completed by June 30, 1999.
Pelican Financial formed a year 2000 committee in March 1998 and has
adopted a year 2000 policy for Pelican Financial and Washtenaw. The committee
has been identifying potential problems associated with the year 2000 issue and
has implemented a plan designed to ensure that all software used in connection
with Pelican Financial'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 the data.
In addition, Pelican Financial recognizes that its ability to be year
2000 compliant is dependent upon the cooperation of its vendors. Pelican
Financial is requiring its computer systems and software vendors to represent
that the products provided are or will be year 2000 compliant. All hardware and
software vendors of Washtenaw have sent written disclosure statements confirming
their commitment to be year 2000 compliant. These written statements generally
contain clauses that disclaim all liability for not being year 2000 compliant.
Pelican National has also adopted a year 2000 plan. The plan has been
prepared in accordance with the Federal Financial Institutions Examination
Council guidelines on year 2000 compliance. Pelican National also recognizes
that the impact of the year 2000 issue will depend not only on corrective
actions taken by Pelican National, but also on the way in which year 2000 issues
are addressed by government agencies, businesses, and other third parties with
whom Pelican National has a relationship.
Pelican National 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. Pelican National 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. Pelican
National 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 lending activities of Pelican Financial are concentrated almost
exclusively in owner occupied residential mortgage loans. 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 Pelican Financial. Because Pelican
Financial plans to continue its emphasis on owner-occupied residential mortgage
loans, year 2000 compliance of potential borrowers will not be a major issue. If
Pelican Financial were to entertain loan applications from significant
multi-family or commercial borrowers, Pelican Financial would request statements
concerning year 2000 readiness from the potential borrowers.
Pelican Financial has prepared a contingency plan if there are any
system interruptions. Pelican Financial maintains software formerly used on its
systems. This software is year 2000 compliant and can be placed into service
should existing software not function properly. In addition, Pelican Financial
maintains a staff of five programmers which will be available to resolve any
year 2000 problems. Also, as part of the contingency plan, Pelican Financial
intends to engage alternative third-party suppliers or other vendors if its
current significant suppliers or vendors fail to meet year 2000 operating
requirements. We cannot be certain, however, that this plan
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<PAGE>
or the performances by any of Pelican Financial suppliers and vendors will be
effective to remedy all potential problems. Pelican Financial does not have any
agreements, understandings, or arrangements with any alternative suppliers or
vendors. Pelican Financial is relying on the existence of sufficient suppliers
with excess capacity currently in the market as its source for believing that
alternative suppliers and vendors will be available should Pelican Financial's
suppliers or vendors fail to be year 2000 compliant. We cannot be certain that
the services rendered by alternative suppliers or vendors will not be at a
significantly higher cost. To the extent that Pelican Financial is not able to
engage alternative suppliers or vendors or that it is not economically feasible
to engage these suppliers or vendors, a worst case scenario would be that
Washtenaw and Pelican National would be required to process customer loan
applications and deposit transactions and perform interest and other
computations by hand or using less efficient software programs.
Pelican Financial 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. Pelican Financial believes that the costs associated with
achieving year 2000 compliance and any related technology systems upgrade will
not materially alter the amount Pelican Financial currently spends on technology
upgrades. Material costs, if any, that may arise from the failure to achieve
year 2000 compliance by either Pelican Financial's management information
systems or Pelican National's third party data processing vendor or its
significant suppliers and other vendors is not currently determinable. To the
extent that Pelican Financial's systems are not fully year 2000 compliant, we
cannot be certain that potential systems interruptions or the cost necessary to
update software would not have a materially adverse effect on Pelican
Financial's business, financial condition, results of operations, cash flows, or
business prospects. If Pelican Financial's progress towards becoming year 2000
compliant is deemed inadequate, regulatory action may be undertaken.
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 Pelican
Financial has not yet determined whether the adoption of SFAS No. 133 will have
a material impact on its results of operations or financial position when
adopted, however, the effect will depend on derivative holdings at the time the
standard is applied.
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 Pelican Financial'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 Pelican National's results of operations or financial
position when adopted.
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IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented in
this prospectus 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 Pelican Financial's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of Pelican Financial are monetary in nature. As a result, interest
rates have a greater impact on Pelican Financial'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
Pelican Financial was incorporated in Delaware on March 3, 1997 to own
and control all of the outstanding capital stock of Pelican National and
Washtenaw. Pelican Financial has no employees other than executive officers who
do not receive compensation from Pelican Financial for serving in this capacity.
See "Management - Director and Executive Officer Compensation." Pelican
Financial engages in no other operations other than the management of its
investments in Pelican National and Washtenaw.
Pelican Financial is registered with the Board of Governors of the
Federal Reserve System pursuant to the Bank Holding Company Act of 1956. Because
Pelican Financial is a bank holding company, its primary federal regulator is
the Federal Reserve Board.
Pelican Financial currently operates in both the retail banking and
mortgage banking segments through its wholly-owned subsidiaries. As of March 31,
1999, most of Pelican Financial's revenues (net interest income and non-interest
income) and earnings before income taxes are attributable to the mortgage
banking segment, primarily conducted by Washtenaw. Pelican Financial believes
that the retail banking business, primarily conducted by Pelican National, can
provide Pelican Financial with a strategic advantage as Pelican National grows.
One of these advantages may be access to funding sources for Pelican Financial's
mortgage origination business which would not otherwise be available. These
additional funding sources include low cost retail deposits and escrowed funds.
At March 31, 1999, total assets of Pelican Financial were $249.9
million, of which $206.6 million were assets of Washtenaw and $43.4 million were
assets of Pelican National. For the year ended December 31, 1998, net income was
$3.9 million, of which $4.3 million was net income of Washtenaw, $244,000 was a
loss of Pelican National, and $132,000 was a loss at the holding company level.
For the three months ended March 31, 1999, net income was $1.4 million, of which
$1.4 million was net income of Washtenaw, $7,000 was a loss of Pelican National,
and $42,000 was a loss at the holding company level.
MARKET AREA
The mortgage banking activities of Pelican Financial are located in Ann
Arbor, Michigan and Pleasant Hill, California. Washtenaw is a national wholesale
lender as well as a retail mortgage originator. Washtenaw 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 number of loan purchases for Washtenaw are
Michigan (27%), Ohio (22%), Florida (7%), Georgia (6%), and Illinois (4%).
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The retail banking operations of Pelican Financial are located in
Naples, Florida. Pelican National is a community-oriented banking institution
offering a variety of financial products and services to meet the needs of the
communities it serves. Pelican National's primary service area for attracting
deposits and making loans 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
population growth greater than the national and Florida averages. The population
of Collier County is estimated to increase 45% from the 1990 census through the
year 2000 and is estimated to reach 250,000 people by the year 2005.
Because of its year-round subtropical climate and pristine beaches,
Collier County attracts approximately 2.8 million visitors per year. As a
result, the service sector is the largest employer in Collier County,
particularly hotels such as Marriott Corporation, Hilton, and Radisson. Small
businesses which employ less than five persons also make up approximately 68% of
the service sector. The next largest sector is retail trade followed by
construction and the government. Per capita personal income in the Naples area
is approximately 69% higher than the per capita income of Florida and the United
States. According to the Department of Housing and Urban Development, median
family income in the Naples area was $54,000 in 1998.
COMPETITION
Pelican Financial faces significant competition both in generating
loans and in attracting deposits. The mortgage banking operations of Pelican
Financial 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
Pelican Financial. 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. 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 Pelican Financial have sought economies of scale through an emphasis on
wholesale originations and the introduction of automated processing systems.
Therefore, Pelican Financial primarily seeks to distinguish itself by providing
quality service through automated processing of loan applications at a price
that is below the average of its competition.
Pelican National 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 Pelican National 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.
Pelican National's primary market area is also highly competitive and
Pelican National 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. Pelican National's most direct competition for
deposits has historically come from savings banks and associations, commercial
banks and credit unions. In addition, Pelican National faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in instruments such 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. Pelican National primarily
seeks to distinguish
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itself from the competition based on the level of service offered and its
variety of loan products. As a full-service community bank, Pelican National
believes that it can better serve individuals and small businesses that have
become disenfranchised with the narrow guidelines of large national and regional
banks. Pelican National also has the ability, through its affiliation with
Washtenaw, to offer loan products other small community banks may not be able to
access.
LENDING ACTIVITIES
GENERAL. Pelican Financial originates or acquires loans primarily
through the wholesale, correspondent, and retail loan production of its mortgage
banking operations. To a lesser extent, Pelican Financial originates or acquires
loans through its retail banking operations. Loans are either held for
investment in Pelican Financial'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 Pelican Financial (I.E., table funding) and the transfer of
these loans to Pelican Financial upon closing. Correspondent mortgage loan
production occurs through the purchase of loans by Pelican Financial 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 Pelican Financial's retail loan origination office in
Ann Arbor, Michigan. For the year ended December 31, 1998, Pelican Financial's
combined wholesale and correspondent loan production totaled $2.3 billion and
its retail loan production totaled $76.0 million. For the three months ended
March 31, 1999, Pelican Financial's combined wholesale and correspondent loan
production totaled $755.6 million and its retail loan production totaled $26.2
million.
In addition to mortgage loan production, Pelican Financial engages
to a limited extent in the origination of commercial, commercial real estate,
construction, and consumer loans, primarily through Pelican National.
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The following table contains selected data relating to the composition
of Pelican Financial's loan portfolio by type of loan at the dates indicated.
This table includes mortgage loans available for sale and mortgage loans held
for investment. At March 31, 1999 and December 31, 1998, Pelican Financial had
no concentrations of loans exceeding 10% of total loans that are not otherwise
disclosed below.
<TABLE>
<CAPTION>
March 31, December 31,
---------------- ---------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to four units...... $209,077 95.86 $192,703 95.21 $100,513 99.81%
Residential, multifamily............ 0 0.00 0 0.00 0 0.00
Commercial and industrial
real estate........................ 6,442 2.95 7,631 3.77 0 0.00
Construction........................ 1,360 0.62 898 0.44 0 0.00
-------- ------ -------- ------ ------- ------
Total real estate loans............ 216,879 99.43 201,232 99.42 100,513 99.81
Other loans:
Business, commercial................ 1,085 0.50 824 0.41 0 0.00
Automobile.......................... 105 0.05 341 0.17 193 0.19
Other consumer...................... 46 0.02 2 0.00 0 0.00
-------- ------ -------- ------ ------- ------
Total other loans.................. 1,236 0.57 1,167 0.58 193 0.19
-------- ------ -------- ------ ------- ======
Total gross loans................ 218,115 100.00% 202,399 100.00% 100,706 100.00%
-------- ------ -------- ------ ------- ------
-------- ------ -------- ------ ------- ------
Unearned fees, premiums and
discounts, net...................... 783 1,056 134
Allowance for loan losses............ (135) (127) (66)
Total Loans net (1)................ $218,763 $203,328 $100,774
-------- -------- --------
-------- -------- --------
<CAPTION>
January 31,
---------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to four units...... $41,240 100.00% $35,351 100.00% $10,334 100.00%
Residential, multifamily............ 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
------- ------ ------- ------ ------- ------
Total real estate loans........... $41,240 100.00% $35,351 100.00% $10,334 100.00%
Other loans:
Business, commercial................ 0 0.00 0 0.00 0 0.00
Automobile.......................... 0 0.00 0 0.00 0 0.00
Other consumer...................... 0 0.00 0 0.00 0 0.00
------- ------ ------- ------ ------- ------
Total other loans.................. 0 0.00 0 0.00 0 0.00
------- ------ ------- ------ ------- ------
Total gross loans................ $41,240 100.00% $35,351 100.00% $10,334 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Unearned fees, premiums and
discounts, net...................... 13 188 126
Allowance for loan losses............ 0 0 (74)
Total Loans net (1)................ $41,253 $35,539 $10,386
------- ------- -------
------- ------- -------
</TABLE>
- ----------
(1) Includes loans held for sale and loans receivable, net.
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The table below summarizes Pelican Financial's loan production for the
periods indicated.
<TABLE>
<CAPTION>
For the three For the period from
months ended For the year ended February 1, 1997 to For the year ended
March 31, 1999 December 31, 1998 December 31, 1997 January 31, 1997
-------------- ----------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Single Family:
Retail ............................ $ 23,535 $ 74,085 $ 28,509 $ 14,499
Wholesale ......................... 755,639 2,335,772 704,360 573,738
---------- ---------- -------- --------
Total single family ............ 779,174 2,409,857 732,869 588,237
Commercial and industrial real estate 1,856 9,601 0 0
Construction ........................ 258 717 0 0
Business, commercial ................ 141 916 0 0
Consumer ............................ 389 408 193 0
Other ............................... 0 0 0 0
---------- ---------- -------- --------
Total loan production .......... $ 781,818 $2,421,499 $733,062 $588,237
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
The following table contains information on the loan production of
single family mortgage loans for the periods presented by the nature of the
loan:
<TABLE>
<CAPTION>
For the three For the period from
months ended For the year ended February 1, 1997 to For the year ended
March 31, 1999 December 31, 1998 December 31, 1997 January 31, 1997
-------------- ----------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Government (FHA).................... $ 12,313 $ 19,840 $ 0 $ 0
Conventional (FNMA and FHLMC)....... 752,535 2,324,455 698,493 573,390
Jumbo/nonconforming................. 14,326 65,562 34,376 14,847
-------- ---------- --------
Total loan production............. $779,174 $2,409,857 $732,869 $588,237
-------- ---------- --------
-------- ---------- --------
</TABLE>
In its wholesale and correspondent lending, Pelican Financial competes
nationwide by offering a wide variety of mortgage products designed to respond
to consumer needs and tailored to address market competition. Pelican Financial
primarily originates conforming, fixed rate 30-year mortgage loans, which
collectively represented 60.9% of its total loan production for the three months
ended March 31, 1999, 96.58% of its total loan production for the year ended
December 31, 1998, 91.67% for the eleven months ended December 31, 1997, and
76.58% for the year ended January 31, 1997. In addition, Pelican Financial
offers other products, such as adjustable-rate, 5-year and 7-year balloons, and
jumbo mortgages as well as loans pursuant to various Federal Housing
Administration programs. Mortgage loans originated are primarily for the
purchase of single-family residences, although these loans are also originated
for refinancing of existing mortgages.
During the three months ended March 31, 1999, the year ended December
31, 1998, the eleven months ended December 31, 1997, and the year ended January
31, 1997, approximately 83.2%, 79.17%, 66.03%, and 56.95%, respectively, of the
single-family mortgage loans originated were refinancings of outstanding
mortgage loans.
46
<PAGE>
The following table contains certain information at March 31, 1999
regarding the maturity of Pelican Financial'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............ $ 14 $ 0 $ 845 $ 189 $ 215 $ 25 $ 1,288
3 months to 1 year......... 6,865 0 1,256 0 192 51 8,364
-------- ---- ------ ------ ------ ----- --------
Total due within 1 year. 6,879 0 2,101 189 407 76 9,652
-------- ---- ------ ------ ------ ----- --------
After 1 year:
1 to 3 years............. 1,401 0 2,260 1,171 624 0 5,456
3 to 5 years............. 332 0 490 0 54 75 951
5 to 10 years ........... 4,772 0 902 0 0 0 5,674
10 to 15 years........... 46,909 0 0 0 0 0 46,909
Over 15 years............ 149,567 0 689 0 0 0 150,256
-------- ---- ------ ------ ------ ----- --------
Total due after 1 year.. 202,981 0 4,341 1,171 678 75 209,246
-------- ---- ------ ------ ------ ----- --------
Total................... $209,860 $ 0 $6,442 $1,360 $1,085 $ 151 $218,898
-------- ---- ------ ------ ------ ----- --------
-------- ---- ------ ------ ------ ----- --------
Allowance for loan
losses............. $ 70 $ 0 $ 47 $ 4 $ 14 $ 0 $ 135
-------- ---- ------ ------ ------ ----- --------
-------- ---- ------ ------ ------ ----- --------
Fixed rate................... $187,784 $ 0 $3,039 $ 0 $ 57 $ 75 $190,955
Variable rate................ 15,197 0 1,302 1,171 621 0 18,291
-------- ---- ------ ------ ------ ----- --------
Total due after 1 year.. $202,981 $ 0 $4,341 $1,171 $ 678 $ 75 $209,246
-------- ---- ------ ------ ------ ----- --------
-------- ---- ------ ------ ------ ----- --------
</TABLE>
47
<PAGE>
The following table contains information on the activity in Pelican
Financial's mortgage loans available for sale and its loans held for investment
in its portfolio.
<TABLE>
<CAPTION>
For the period
from
For the three For the year February 1, For the year
months ended ended 1997 to ended
March 31, December 31, December 31, January 31,
1999 1998 1997 1997
------------- ------------ -------------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Available for Sale:
Beginning balance......................... $179,454 $ 98,658 $ 39,974 $ 35,539
Originations.............................. 766,730 2,389,106 732,556 588,237
Repurchases............................... 0 0 0 0
Net sales:
Sales................................... 760,626 2,307,133 674,651 583,950
Deferred fees - current year............ (835) (1,056) (1,115) (336)
Deferred fees - prior year.............. 1,056 1,116 336 188
-------- ----------- --------- ---------
Net sales............................. 760,847 2,307,193 673,872 583,802
Transfers (to) from available for sale.... 0 (1,117) 0 0
-------- ----------- --------- ---------
Ending balance......................... $185,337 $ 179,454 $ 98,658 $ 39,974
-------- ----------- --------- ---------
-------- ----------- --------- ---------
Held for Investment:
Beginning balance......................... $ 24,100 $ 2,181 $ 1,279 $ 615
Originations.............................. 15,087 32,393 506 0
Repurchases............................... 146 11,084 1,226 1,624
Repayments/adjustments.................... (5,595) (12) (46) (15)
Payoffs................................... -- (21,714) (44) (60)
Sales..................................... (31) (46) 0 (30)
Transfers to repossessed assets........... (146) (903) (740) (855)
Transfers (to) from available for sale.... -- 1,117 0 0
-------- ----------- --------- ---------
Ending balance......................... $ 33,561 $ 24,100 $ 2,181 $ 1,279
-------- ----------- --------- ---------
-------- ----------- --------- ---------
</TABLE>
MORTGAGE BANKING OPERATIONS. Pelican Financial 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,
Federal National Mortgage Association (commonly referred to as Fannie Mae) and
Federal Home Loan Mortgage Corporation (commonly referred to as Freddie Mac),
and one government agency, Government National Mortgage Association (commonly
referred to as Ginnie Mae). Through these entities, the United States government
provides support and liquidity to the market for residential mortgage debt.
48
<PAGE>
Mortgage originators sell their loans directly to Fannie Mae and
Freddie Mac 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 loans that are guaranteed by Ginnie Mae. In order to arrange these
sales or obtain these guarantees, the originator must underwrite its loans to
conform with standards established by Fannie Mae and Freddie Mac or by the
Federal Housing Administration in the case of Ginnie Mae. All loans other than
Federal Housing Administration 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.
Pelican Financial pursues its loan production strategy as part of its
mortgage banking operations through Pelican Financial'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, Pelican
Financial funds mortgage loans originated by a network of approximately 1,340
independent mortgage brokers nationwide. Approximately 802 of these brokers
originate mortgage loans for Pelican Financial on a monthly basis and the
remainder originate mortgage loans for Pelican Financial on a quarterly basis.
This network is maintained by Pelican Financial'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 Pelican
Financial for the entry of loan applicant data in a format familiar to Pelican
Financial's underwriters and for transmission to Pelican Financial's automated
underwriting systems for review. All loans originated through brokers are
underwritten according to Pelican Financial's standards.
Pelican Financial'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 these brokers are typically funded directly by
Pelican Financial through table funding arrangements. In a majority of cases,
the loan is closed in the broker's name and thereafter transferred to Pelican
Financial together with related mortgage servicing rights for which Pelican
Financial generally pays a servicing release premium which is included in the
loan price paid to the broker by Pelican Financial. However, in certain states,
the broker is required to close the loan in Pelican Financial's name. Broker
participants in this program are prequalified on the basis of creditworthiness,
mortgage lending experience, and reputation. Each broker is undergoes annual and
ongoing reviews by Pelican Financial.
CORRESPONDENT LOAN PRODUCTION. In addition, Pelican Financial acquires
mortgage loans from mortgage lenders, commercial banks, savings and loan
associations, and other financial intermediaries. Pelican Financial'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 these 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. Pelican Financial does not provide warehouse lines
of credit for its correspondents. All loans acquired from correspondents are
expected to satisfy Pelican Financial's underwriting standards and may be
repurchased by the correspondent if there is a 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 Pelican
Financial.
RETAIL LOAN PRODUCTION. Pelican Financial's retail loan production
involves the origination of loans directly from Washtenaw or Pelican National.
Pelican Financial has no retail loan origination offices other than its main
office in Ann Arbor, Michigan and Pelican National office located in Naples,
Florida. The retail loan activity of Pelican Financial primarily involves the
origination of single-family mortgage loans and, to a lesser
49
<PAGE>
extent, Pelican National originates construction, consumer, and commercial
loans. These retail loan originations generally provide Pelican Financial with a
source of loan production at a lower cost per loan than loans acquired through
brokers or correspondents because the cost of generating these loans is more
than offset by cost savings through Pelican Financial's ability to avoid payment
of the servicing release premium for the related mortgage servicing rights.
SECONDARY MARKET ACTIVITIES
Pelican Financial sells substantially all of the mortgage loans that it
originates or purchases through its mortgage banking operations while retaining
the servicing rights to the loans. During the three months ended March 31, 1999,
the year ended December 31, 1998, the eleven months ended December 31, 1997, and
the year ended January 31, 1997, Pelican Financial originated or purchased
$781.3 million, $2.4 billion, $732.6 million, and $588.2 million in total
mortgage loans, respectively, and sold $760.9 million, $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 pursuant to forward sales commitments. Conforming conventional
mortgage loans are generally pooled and exchanged pursuant to the purchase and
guarantee programs sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae or for
Fannie Mae, Freddie Mac, or Ginnie Mae 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 three
months ended March 31, 1998 and the year ended December 31, 1998, a significant
portion of these loans were exchanged for Fannie Mae and Freddie Mac
mortgage-backed securities, which securities were then sold to investment
banking firms. The remainder were sold to other institutional and
non-institutional investors.
Pelican Financial exchanges and sells mortgage loans on a non-recourse
basis. In connection with Pelican Financial's loan exchanges and sales, Pelican
Financial 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. If there is a breach of the
representations and warranties by Pelican Financial, Pelican Financial typically
corrects these flaws. If the flaws cannot be corrected, Pelican Financial may be
required to repurchase these loans. In cases where loans are acquired from a
broker or correspondent and there have been material misrepresentations made to
Pelican Financial, Pelican Financial generally has the right to resell the
flawed loan back to the broker or correspondent pursuant to the agreement
between Pelican Financial and the broker or correspondent. Otherwise, Pelican
Financial is indemnified against loss on these loans by the broker. In addition,
Pelican Financial relies upon contract underwriters for a portion of its loan
production, and these underwriters must indemnify Pelican Financial against loss
for loans which are eventually determined to have been flawed by "blatant fraud"
upon origination.
Pelican Financial 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 Pelican Financial adjusts its
hedging on a daily basis as needed. Pelican Financial 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. Pursuant to these commitments, Pelican Financial enters into
commitments with terms of not more than 90 days to sell these loans to Freddie
Mac, Fannie Mae, and Ginnie Mae.
ASSET QUALITY
Pelican Financial is exposed to certain credit risks related to the
value of the collateral that secures loans held in its portfolio and the ability
of borrowers to repay their loans during the term thereof. Pelican
50
<PAGE>
Financial'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 Pelican Financial at regularly scheduled meetings. These
officers regularly review the classification of loans and the allowance for
losses. Pelican Financial also has a quality control department, the function of
which is to provide the Board of Directors of Pelican Financial with an
independent ongoing review and evaluation of the quality of the process by which
lending assets are generated.
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 Pelican Financial as a result of foreclosure is
classified as other real estate owned until the time as it is sold. Pelican
Financial 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 the 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.
Pelican Financial 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 Pelican
Financial'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 summarizes nonperforming loans, other real estate
owned, and restructured loans at the periods indicated. During the periods
indicated, Pelican National did not have any nonperforming assets.
<TABLE>
<CAPTION>
December 31, January 31,
March 31, ------------------ --------------------------------
1999 1998 1997 1997 1996 1995
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Loans past due 90 days or more but not on
nonaccrual.................................... 1,224 913 1,675 1,279 615 331
------ ------ ------ ------ ----- ------
Total nonperforming loans................... 1,224 913 1,675 1,279 615 331
Restructured loans............................... 0 0 0 0 0 0
Other real estate owned.......................... 431 581 299 519 (38) 283
------ ------ ------ ------ ----- ------
Total nonperforming assets.................. $1,655 $1,494 $1,974 $1,798 $ 577 $ 614
------ ------ ------ ------ ----- ------
------ ------ ------ ------ ----- ------
Total nonperforming assets to total assets....... 0.66% 0.61% 1.63% 3.73% 1.28% 2.32%
Allowance for loan losses to
nonperforming loans............................ 11.03% 13.91% 3.94% 0.00% 0.00% 22.36%
Nonperforming loans to total assets.............. 0.49% 0.37% 1.39% 2.65% 1.36% 1.25%
</TABLE>
Pelican Financial 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,
51
<PAGE>
Pelican Financial 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 24,200 loans originated in
1998. Pelican Financial 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 Pelican Financial is able to recover all of the loan
principal and interest otherwise due.
It has been Pelican Financial's experience that nonperforming loans do
not necessarily result in an ultimate loss to Pelican Financial. All of Pelican
Financial's nonperforming loans at March 31, 1999, December 31, 1998 and 1997,
and January 31, 1997 were residential mortgage loans of Washtenaw, 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 Federal
Housing Administration. In addition, Pelican Financial 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
Pelican Financial by these insurers. It has been management's policy not to
provide a general or specific allowance for loan losses on nonperforming loans
of Washtenaw because the ultimate risk of loss is low. As a nonperforming loan
progresses through the foreclosure process and becomes other real estate owned,
Washtenaw evaluates the underlying collateral for salability and determines at
that time whether a reserve against other real estate owned is necessary.
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 Pelican Financial's allowance for loan
losses. These agencies may require Pelican Financial to make additional
provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. Pelican
Financial will continue to monitor and modify its allowance for loan losses as
conditions dictate. While management believes Pelican Financial's allowance for
loan losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that Pelican Financial's level of allowance for
loan losses will be sufficient to cover loan losses incurred by Pelican
Financial 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.
52
<PAGE>
The following table contains information with respect to Pelican
Financial's allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
At or for the
At or for the Three At or for the Year Period from
Months Ended Ended February 1, 1997
March 31, December 31, to December 31,
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Average loans outstanding, net..................... $211,045 $181,874 $ 51,094
-------- -------- --------
-------- -------- --------
Total loans outstanding at end of period........... 218,898 $203,455 $100,839
-------- -------- --------
-------- -------- --------
Allowance balance at beginning of period........... 127 $ 65 $ 0
Provision for loan losses.......................... 8 62 65
Actual charge-offs:
1-4 family residential real estate.............. 0 0 0
Other........................................... 0 0 0
-------- -------- --------
Total charge-offs......................... 0 0 0
-------- -------- --------
Recoveries:
Total recoveries.......................... 0 0 0
-------- -------- --------
Net chargeoffs....................... 0 0 0
-------- -------- --------
Allowance balance at end of period................. $ 135 $ 127 $ 65
-------- -------- --------
-------- -------- --------
Net chargeoffs as a percent of average loans....... 0.00% 0.00% 0.00%
-------- -------- --------
-------- -------- --------
Allowance for loan losses to total gross loans
at end of period................................ 0.06% 0.06% 0.07%
-------- -------- --------
-------- -------- --------
<CAPTION>
At or for the Year Ended January 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average loans outstanding, net..................... $52,151 $50,371 $40,400
------- ------- -------
------- ------- -------
Total loans outstanding at end of period........... $41,253 $35,539 $10,460
------- ------- -------
------- ------- -------
Allowance balance at beginning of period........... $ 0 $ 74 $ 0
Provision for loan losses.......................... 0 0 74
Actual charge-offs:
1-4 family residential real estate.............. 0 74 0
Other........................................... 0 0 0
------- ------- -------
Total charge-offs......................... 0 74 0
------- ------- -------
Recoveries:
Total recoveries.......................... 0 0 0
------- ------- -------
Net chargeoffs....................... 0 74 0
------- ------- -------
Allowance balance at end of period................. $ 0 $ 0 $ 74
------- ------- -------
------- ------- -------
Net chargeoffs as a percent of average loans....... 0.00% 0.15% 0.00%
------- ------- -------
------- ------- -------
Allowance for loan losses to total gross loans
at end of period................................ 0.00% 0.00% 0.71%
------- ------- -------
------- ------- -------
</TABLE>
53
<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,
March 31, ---------------------------------------------
1999 1998 1997
--------------------- --------------------- -----------------------
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.... $70 95.86% $ 63 95.21% $63 99.81%
Multifamily real estate............... 0 0.00 0 0.00 0 0.00
Commercial and industrial real estate. 47 2.95 44 3.77 0 0.00
Construction.......................... 4 0.62 4 0.44 0 0.00
Business, commercial.................. 14 0.50 14 0.41 0 0.00
Automobile............................ 0 0.05 0 0.17 0 0.19
Other................................. 0 0.02 2 0.00 2 0.00
------ ------ ------
Unallocated........................... 0 0 0
---- ---- ----
Total........................ $135 100.00% $127 100.00% $65 100.00%
---- ------ ---- ------ ---- ------
---- ------ ---- ------ ---- ------
<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>
54
<PAGE>
UNDERWRITING
Pelican Financial's mortgage loans are underwritten either in
accordance with applicable Fannie Mae, Freddie Mac or Federal Housing
Administration guidelines or with requirements set by other investors. Although
Pelican Financial is qualified to underwrite Veteran's Administration loans,
Pelican Financial does not make these loans.
All mortgage loans originated or acquired by Pelican Financial, whether
through its retail banking operations or through its wholesale or correspondent
networks, must satisfy Pelican Financial's underwriting standards. Pelican
Financial permits a few originating correspondent lenders operating pursuant to
Pelican Financial's delegated underwriting program to perform initial
underwriting reviews. Pelican Financial employs an automated underwriting
process on most loans that is based upon data provided through Pelican
Financial's initial loan data entry software and is available from Fannie Mae
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 Pelican Financial 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 these underwriting criteria.
A complete review of all information is conducted on loans underwritten
directly by Pelican Financial prior to loan approval. This process involves the
transfer of loan data to Pelican Financial by brokers or correspondents using
loan data entry software provided by Pelican Financial plus certain other
physical documentation or through the physical transfer of loan files to Pelican
Financial. Commercial and residential loans originated by Pelican National are
underwritten by Pelican National's senior management.
To a limited extent, Pelican Financial 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 Pelican
Financial from loss.
QUALITY CONTROL
Pelican Financial 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, Pelican Financial 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
on the pre-funding audits list until the broker or correspondent has shown that
they is capable of underwriting loans to the standards of Pelican Financial on a
consistent basis. All new underwriting staff of Pelican Financial 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 Pelican Financial on a consistent
basis.
Additionally, Pelican Financial 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 Pelican Financial's automated
underwriting system. Pelican Financial also orders a second appraisal on 10% of
the statistical sample (I.E., 1% of all loans closed each month). Pelican
Financial uses Desktop Underwriter-TM- software developed by Fannie Mae to
automate the underwriting process
55
<PAGE>
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.
Pelican Financial also monitors the performance of delegated
underwriters through quality assurance reports prepared by the quality control
department, Federal Housing Administration reports and audits, reviews and
audits by regulatory agencies, investor reports, and mortgage insurance company
audits. Deficiencies in loans are generally corrected; otherwise Pelican
Financial may exercise its right to require that the loan be repurchased by the
originating broker or correspondent, or Pelican Financial may insist that the
broker who originated the loan indemnify Pelican Financial against any loss.
MORTGAGE LOAN SERVICING ACTIVITIES
Pelican Financial derives a portion of its revenues from the servicing
of mortgage loans for others. For the three months ended March 31, 1999, the
year ended December 31, 1998, the eleven months ended December 31, 1997, and the
year ended January 31, 1997, Pelican Financial realized servicing fee income,
net of amortization and impairment, from its mortgage loan servicing operations
of $139,000, $121,000, $840,000, and $2.0 million, respectively, which
represented 2.05%, 0.54%, 10.86%, and 26.16% of Pelican Financial'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, Pelican Financial 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 if there are unremedied defaults, and other miscellaneous
duties related to loan administration. Pelican Financial 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 March 31, 1999 and December 31, 1998 and 1997, the
weighted average servicing fee on the servicing for others portfolio was 0.35%,
0.38%, and 0.27%, respectively. Pelican Financial 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.
Pelican Financial services mortgage loans nationwide. The geographic
distribution of Pelican Financial's servicing portfolio reflects the national
scope of Pelican Financial's loan originations and acquisitions. Pelican
Financial 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 March 31, 1999 and December 31,
1998, Pelican Financial's servicing portfolio consisted of $1.4 billion and $1.6
billion of conventional servicing, respectively. These amounts were in addition
to loans serviced by Pelican Financial which were recorded on its books as loans
receivable (I.E., available for sale and held for investment).
There is prepayment risk related to the value of Pelican Financial's
mortgage servicing rights if declining interest rates provide borrowers with
refinancing opportunities. At March 31, 1999, December 31, 1998 and 1997, and
January 31, 1997, the amounts of the mortgage servicing rights recorded on
Pelican Financial's books were $15.6 million, $15.5 million, $4.3 million, and
$3.5 million, respectively. For further information, see Note 5 of Notes to
Consolidated Financial Statements. During the three months ended March 31, 1999,
Pelican Financial sold mortgage servicing rights for gains amounting to
$516,000. Also, Pelican Financial occasionally enters into forward sale
commitments of its mortgage servicing rights. Beginning in the
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<PAGE>
fall of 1998, Washtenaw 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 Washtenaw'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 Washtenaw's borrowing
costs. This approach is in contrast to the method that Washtenaw 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. The best efforts contract is intended to minimize the risks of
Washtenaw's inability to originate or purchase a sufficient amount of servicing.
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. 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.
Pelican Financial originates and purchases mortgage servicing rights
nationwide. The geographic distribution of Pelican Financial's mortgage
servicing portfolio reflects the national scope of Pelican Financial's mortgage
loan originations and acquisitions. The five largest states accounted for
approximately 67% of the total number of mortgage loans serviced and
approximately 66% of the dollar value of the mortgage loans serviced, at March
31, 1999, while the largest volume by state was Ohio with approximately 23% and
22% of the mortgage loans serviced by number and value, respectively.
Pelican Financial's mortgage servicing portfolio includes servicing for
adjustable rate, balloon payment, and fixed rate fully amortizing loans. At
March 31, 1999, 6.8% of the mortgage servicing rights related to adjustable rate
loans, which had a weighted average coupon rate of 6.8%; 1.7% related to fixed
rate balloon payment loans, which had a weighted average coupon rate of 6.9%;
and the remaining 91.5% related to fixed rate fully amortizing loans, which had
a weighted average coupon rate of 7.1%. At March 31, 1999, Pelican Financial's
mortgage servicing portfolio had an aggregate weighted average coupon rate of
7.1%.
The following table contains information, as of March 31, 1999, on the
percentage of fixed-rate, single-family mortgage loans being serviced for others
by Pelican Financial, by interest rate category.
<TABLE>
<CAPTION>
Coupon Range Percentage of Portfolio
------------ -----------------------
<S> <C>
Less than 6.00%........................... 4.0%
6.01--7.00%............................... 56.3
7.01--8.00%............................... 26.2
8.01--9.00%............................... 9.1
9.01--10.00%.............................. 3.4
10.01% & above............................ 1.0
-----
Total........................ 100.0%
-----
-----
</TABLE>
57
<PAGE>
The following table contains information regarding the mortgage loan
servicing portfolio, broken down by state.
<TABLE>
<CAPTION>
At March 31, 1999
-----------------------------------------------------------------------------------------
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....................... 3,538 22.9% $ 301,328 22.2%
Michigan................... 2,971 19.2 286,065 21.1
Indiana.................... 1,298 8.4 95,039 7.0
Florida.................... 1,421 9.2 122,418 9.0
Georgia.................... 1,112 7.2 95,449 7.0
Illinois................... 608 3.9 69,959 5.2
Minnesota.................. 551 3.6 60,619 4.5
Kentucky................... 423 2.7 36,329 2.7
South Carolina............. 420 2.7 35,348 2.6
Pennsylvania............... 444 2.9 27,455 2.0
Wisconsin.................. 246 1.6 23,178 1.7
North Carolina............. 340 2.2 28,204 2.1
Louisiana.................. 281 1.8 22,410 1.7
Iowa....................... 201 1.3 17,170 1.3
Alabama.................... 270 1.7 17,248 1.3
Missouri................... 209 1.3 15,113 1.1
Tennessee.................. 195 1.3 15,618 1.2
Other...................... 940 6.1 88,170 6.3
------- ----- ---------- -----
Total............. 15,468 100.0% $1,357,120 100.0%
------- ----- ---------- -----
------- ----- ---------- -----
</TABLE>
At March 31, 1999, Pelican Financial was servicing approximately 15,000
loans with an aggregate unpaid principal balance of $1.4 billion. Of these
loans, 0.8% were delinquent and an additional 0.2% were in foreclosure. Pelican
Financial may be materially affected by loan delinquencies and defaults on loans
that it services for others. Under a portion of its servicing contracts, Pelican
Financial must advance all or part of the scheduled payments to the owner of the
loan, even when loan payments are delinquent. At March 31, 1999, Pelican
Financial's delinquency rates on loans serviced for Freddie Mac and Fannie Mae
were 1.1% and 0.9%, 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. Pelican Financial 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 this reimbursement
is typically uncertain. In the interim, Pelican Financial absorbs the cost of
funds advanced during the time the advance is outstanding. Further, Pelican
Financial bears the costs of collection activities on delinquent and defaulted
loans.
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<PAGE>
INVESTMENT ACTIVITIES
Since the start of Pelican Financial's retail banking activities,
primarily conducted through Pelican National, deposit in-flows to Pelican
National have exceeded Pelican National's loan demand. In addition, Pelican
National sells a substantial portion of its loans into the secondary market,
thus replenishing its liquidity on a regular basis. Pelican National currently
invests excess liquidity in a variety of interest-earning assets. The investment
policy related to the retail banking operations of Pelican Financial, as
approved by the Board of Directors of Pelican National, requires management to
maintain adequate liquidity, generate a favorable return on investments without
incurring undue interest rate and credit risk, and to complement Pelican
Financial's lending activities. Pelican Financial primarily utilizes investments
in securities for liquidity management and as a method of deploying excess
funding not utilized for investment in loans. Generally, Pelican Financial's
investment policy is more restrictive than applicable regulations allow and,
accordingly, Pelican Financial has invested primarily in U.S. government and
agency securities, federal funds, and U.S. government sponsored agency issued
mortgage-backed securities. As required by SFAS No. 115, Pelican Financial 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 Pelican Financial's investment
portfolio were classified as available for sale.
At March 31, 1999, Pelican Financial had invested $2.4 million in
Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities, or 1.0% of
total assets. In addition, $4.0 million, or 1.6%, of total assets, were debt
obligations issued by federal agencies which generally have stated maturities
from one year to twenty five years. Investments in mortgage-backed securities
involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to these
instruments thereby changing the net yield on these securities. There is also
reinvestment risk associated with the cash flows from these securities or if
these securities are redeemed by the issuer. In addition, the market value of
these securities may be adversely affected by changes in interest rates.
The following table contains information on the carrying value of
Pelican Financial's investment portfolio at the dates indicated. At March 31,
1999, the market value of Pelican Financial's investment portfolio totaled $6.4
million. During the periods indicated and except as otherwise noted, Pelican
Financial had no securities of a single issuer that exceeded 10% of
stockholders' equity.
<TABLE>
<CAPTION>
At December 31,
At March 31, --------------------------- At January 31,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury............................... $ 0 $ 0 $1,499 $ 0
U.S. Government agency (1).................. 3,984 4,499 5,485 0
Mortgage-backed securities.................. 2,429 1,093 0 0
FHLB stock.................................. 333 261 0 0
------ ------ -------- ---
Total investment securities (2).... $6,746 $5,853 $6,984 $ 0
------ ------ -------- ---
------ ------ -------- ---
</TABLE>
- -------------
(1) At March 31, 1999 and 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.
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<PAGE>
The following table contains certain information regarding the carrying
values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of Pelican Financial's investment
securities portfolio at March 31, 1999.
<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............. $496 5.84% $3,488 5.84% $ 0 0.00% $ 0 0.00% $3,984 5.84%
Mortgage-backed securities......... 0 0.00 0 0.00 0 0.00 2,429 6.49 2,429 6.49
Other.............................. 0 0.00 0 0.00 0 0.00 333 5.51 333 5.51
----- -------- ---- ---- ------ ------
Total......................... $496 5.84% $3,488 5.84% $ 0 0.00% $2,762 6.37% $6,746 6.06%
----- -------- ---- ---- ------ ------
----- -------- ---- ---- ------ ------
</TABLE>
60
<PAGE>
SOURCE OF FUNDS
Pelican Financial funds its mortgage banking activities through the use
of a warehouse line of credit and the use of agreements to repurchase. The
following table contains information pertaining to short-term borrowings for the
periods indicated.
<TABLE>
<CAPTION>
Three months Period from
ended Year ended February 1, 1997 Year ended
March 31, December 31, to December 31, January 31,
1999 1998 1997 1997
------------ ----------- ---------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Short-term borrowings:
Average balance outstanding during the period.. $145,974 $ 95,052 $39,232 $32,889
Maximum amount outstanding at
any month-end during the period.............. $139,938 $215,029 $78,454 $54,994
Weighted average interest rate during the period 5.64% 5.44% 4.01% 4.46%
Total short-term borrowings at period end...... $139,938 $ 95,985 $60,980 $27,680
Weighted average interest rate at period end.. 5.89% 5.34% 3.99% 4.42%
</TABLE>
Pelican Financial conducts its operations utilizing leased premises and
occasionally utilizing equipment pursuant to 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 $840,000 at March 31, 1999.
Pelican Financial funds its retail banking activities primarily with
deposits, loan repayments and prepayments, and cash flows generated from
operations. Pelican Financial offers a variety of deposit accounts with a range
of interest rates and terms. Pelican Financial's deposits consist of checking,
money market, savings, NOW, and certificate of deposit accounts. At March 31,
1999, approximately 57.2% of the funds deposited in Pelican Financial were in
certificate of deposit accounts. At March 31, 1999, core deposits (savings, NOW,
and money market) represented 42.8% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. Pelican Financial's deposits
are obtained predominantly from the area around its office in Naples, Florida.
Pelican Financial has relied primarily on customer service and competitive rates
to attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect Pelican
Financial's ability to attract and retain deposits. Pelican Financial uses
traditional means of advertising its deposit products, including print media and
generally does not solicit deposits from outside its market area. Pelican
Financial does not actively solicit certificate accounts in excess of $100,000
or use brokers to obtain deposits. At March 31, 1999, $20.4 million, or 93.9% of
Pelican Financial's certificate of deposit accounts were to mature within one
year. Pelican Financial believes that substantially all of the certificate of
deposit accounts that mature within one year will be rolled-over into new
certificate of deposit accounts. To the extent that certificate of deposit
accounts are not rolled-over, Pelican Financial believes that it has sufficient
resources to fund these withdrawals.
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<PAGE>
The following table contains information on the amount and maturity of
jumbo certificates of deposit (I.E, certificates of deposit of $100,000 or more)
at March 31, 1999.
<TABLE>
<CAPTION>
Jumbo
Certificates
Time Remaining Until Maturity of Deposit
(In thousands)
- ----------------------------- --------------
<S> <C>
Less than 3 Months....................................... $1,203
3 Months to 6 Months..................................... 1,658
6 Months to 12 Months.................................... 4,093
Greater than 12 Months................................... 303
------
Total............................................... $7,257
------
------
</TABLE>
EMPLOYEES
At March 31, 1999, Pelican Financial had no employees other than
executive officers. At March 31, 1999, Washtenaw had 183 full-time employees and
7 part-time employees and Pelican National had 17 full-time employees and 0
part-time employees. None of the employees of Pelican Financial or its
subsidiaries were represented by a collective bargaining agreement. Management
of Pelican Financial considers its relationship with its employees to be
satisfactory.
PROPERTIES
Pelican Financial owns no real property but utilizes the office of the
Washtenaw. Pelican Financial pays no rent or other consideration for use of this
facility. The mortgage banking activities of Pelican Financial are conducted
primarily from the offices of Washtenaw located at 315 East Eisenhower, Ann
Arbor, Michigan 48108 and wholesale mortgage banking operations are also
conducted from a branch office of Washtenaw located at 2300 Contra Costa
Boulevard, Pleasant Hill, California 94523. The retail banking activities of
Pelican Financial are primarily conducted from the offices of Pelican National
located at 811 Anchor Rode Drive, Naples, Florida 33940. All office locations
are leased by Pelican Financial. In May 1999, Pelican National signed a lease
for a new branch office located at 12730 New Brittany Boulevard, Fort Meyers,
Florida 33907. The branch is expected to open in October 1999.
SUBSIDIARY ACTIVITIES
Pelican Financial conducts business through its wholly-owned
subsidiaries: Washtenaw and Pelican National. Washtenaw is a corporation
organized on February 5, 1981 pursuant to the laws of the State of Michigan.
Pelican National is a national banking association organized on March 7, 1997
pursuant to the laws of the United States. Neither Washtenaw nor Pelican
National has any subsidiaries.
LEGAL PROCEEDINGS
At March 31, 1999, neither Pelican Financial nor Pelican National was
involved in any material legal proceedings. Below is a brief description of
material pending legal proceedings to which Washtenaw 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, Washtenaw was named as a defendant in
a class action lawsuit relating to its method of calculating finance
62
<PAGE>
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 Washtenaw to mortgage brokers were either
payments for the referral of business, or duplicative payments. The suit seeks
unspecified damages. On July 29, 1998, the court denied class certification.
Pelican Financial believes that Washtenaw 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 or results of operations of Pelican Financial. 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,
Washtenaw was named as a defendant in a class action lawsuit alleging that the
yield spread premium payments from Washtenaw 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, Washtenaw 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. Pelican Financial believes that Washtenaw 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 or results of operations of Pelican Financial.
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,
Washtenaw was named as a defendant in a class action lawsuit alleging that the
yield spread premium payments from Washtenaw to mortgage brokers were either
payments for the referral of business, or duplicative payments. The suit seeks
unspecified damages. On June 22, 1998, Washtenaw 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. Pelican Financial believes that Washtenaw 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 or results of operations of Pelican Financial.
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 Washtenaw and David Jackson
Holcomb in which Washtenaw 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. Washtenaw paid $100,000 at the time of
execution of the Stock Purchase Agreement and agreed to pay an additional amount
if certain financial benchmarks were met. Those benchmarks were not met and
within approximately two weeks of the closing of the purchase, Washtenaw began
to have serious operational problems with Mr. Holcomb and Hallmark. Within one
month of the closing of the purchase Washtenaw 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 Washtenaw 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 or results of operations of Pelican
Financial.
63
<PAGE>
REGULATION
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
Pelican Financial's profitability, like most bank holding companies, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by Pelican Financial on interest-bearing
liabilities, such as borrowings, and the interest rates received by Pelican
National on its interest-earning assets, such as loans originated or purchased
by Pelican Financial or investment securities held in the investment portfolio,
comprise a significant portion of Pelican Financial's earnings. In addition,
Pelican Financial'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 Pelican Financial, such as inflation, recession, and unemployment,
and the impact which future changes in domestic and foreign economic conditions
might have on Pelican Financial and cannot be predicted.
The business of Pelican Financial 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 required to comply with 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 Pelican Financial 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.
The nature and impact on Pelican Financial of any future changes in the law or
regulations cannot be predicted.
GENERAL
Bank holding companies and bank and nonbank subsidiaries are
extensively regulated pursuant to 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 Pelican Financial. Below is a
summary description of the material laws and regulations which relate to the
operations of Pelican Financial, Washtenaw, and Pelican National. 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. These proposals include legislation to revise the Glass-Steagall Act
and the Bank Holding Company 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 Pelican Financial and Pelican National.
64
<PAGE>
REGULATION - PELICAN FINANCIAL
Pelican Financial, is a registered bank holding company, required to
comply with regulations issued pursuant to the Bank Holding Company Act. Pelican
Financial is required to file periodic reports and annual reports with the
Federal Reserve Board and any additional information as the Federal Reserve
Board may require. The Federal Reserve Board may conduct examinations of Pelican
Financial and its subsidiaries.
The Federal Reserve Board may require that Pelican Financial 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 the debt. In certain circumstances, Pelican
Financial must file written notice and obtain approval from the Federal Reserve
Board prior to purchasing or redeeming its equity securities.
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, Pelican
Financial 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 Pelican National, with certain exceptions. For
additional information on the capital levels of Pelican National, see
"Regulation - Pelican National - Capital Standards."
Pelican Financial 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 Pelican Financial and another
bank holding company.
Pelican Financial is prohibited, 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, Pelican Financial, conditioned on 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.
Pursuant to 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.
65
<PAGE>
REGULATION - WASHTENAW
The mortgage banking operations of Washtenaw are extensively regulation
by federal and state governmental authorities and are required to comply with
various laws and judicial and administrative decisions. Washtenaw is required to
comply with the rules and regulations of the Department of Housing and Urban
Development (HUD), Federal Housing Administration, Veteran's Administration,
Fannie Mae, Freddie Mac, and Ginnie Mae 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 Washtenaw are
required annually to submit audited financial statements to Fannie Mae, Freddie
Mac, and the Department of Housing and Urban Development and to comply with each
regulatory entity's own financial requirements, policies, and procedures.
Washtenaw's activities must also comply with, 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 Washtenaw.
Washtenaw 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 required to comply with state usury statutes. Federal
Housing Administration and Veteran's Administration loans are exempt from the
effect of these statutes. Pursuant to 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 - PELICAN NATIONAL
GENERAL. The Office of the Comptroller of the Currency is primarily
responsible for the supervision, examination, and regulation of Pelican
National, because Pelican National is a national banking association. If, as a
result of an examination of Pelican National, the OCC should determine that the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of Pelican National's operations are
unsatisfactory or that Pelican National or its management is violating or has
violated any law or regulation, various remedies are available to the OCC. These
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 Pelican National, 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 Pelican National will be insured by the FDIC in the
manner and to the extent provided by law. For this protection, Pelican National
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 Pelican National. Federal statutes and
regulations relate to many aspects of Pelican National'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, Pelican National is required to maintain certain levels
of capital. See "- Capital Standards."
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<PAGE>
RESTRICTIONS ON TRANSFERS OF FUNDS TO PELICAN FINANCIAL BY PELICAN
NATIONAL. Pelican Financial is a legal entity separate and distinct from Pelican
National. The prior approval of the OCC is required if the total of all
dividends declared by Pelican National in any calendar year exceeds Pelican
National'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 Pelican National'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 Pelican National. This restriction could adversely effect
the ability of Pelican Financial to service the loan if dividends from Washtenaw
do not at least equal the loan payment. In addition, covenants of the loan
agreement require Washtenaw to maintain a specified level of capitalization and
could restrict the ability of Washtenaw to dividend to Pelican Financial
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 consummation of the offering as Pelican
Financial intends to use a portion of the proceeds from the offering to repay
the loan used to initially capitalize Pelican National.
The OCC also has authority to prohibit Pelican National 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 financial institution in question and other factors, that the
OCC could assert that the payment of dividends or other payments might, in some
circumstances, be 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 in these guidelines and
the restrictions that are or may be imposed pursuant to the prompt corrective
action provisions of federal law could limit the amount of dividends which
Pelican National may pay to Pelican Financial. See "- Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and "- Capital Standards"
for a discussion of these additional restrictions on capital distributions.
Pelican National is required to comply with 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, Pelican Financial or other
affiliates, the purchase of or investments in stock or other securities thereof,
the taking of these securities as collateral for loans and the purchase of
assets of Pelican Financial or other affiliates. These restrictions prevent
Pelican Financial and other affiliates from borrowing from Pelican National
unless the loans are secured by marketable obligations of designated amounts.
Further, these secured loans and investments by Pelican National to or in
Pelican Financial or to or in any other affiliate is limited to 10% of Pelican
National's capital and surplus (as defined by federal regulations) and these
secured loans and investments are limited, in the aggregate, to 20% of Pelican
National's capital and surplus (as defined by federal regulations). Additional
restrictions on transactions with affiliates may be imposed on Pelican National
pursuant to 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. Pursuant to 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
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<PAGE>
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 conditioned on 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 average assets, referred to as the leverage ratio, of
4%.
The following table presents the amounts of regulatory capital and the
capital ratios for Pelican Financial, compared to its minimum regulatory capital
requirements of the Federal Reserve Board as of March 31, 1999.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------------------------------------------------------
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)
Total Capital (to Risk-
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Assets) ...... $11,896 9.01% $10,559 8.00% $1,337 1.01% $13,199 10.00% $(1,303) (0.99)%
Tier 1 Capital (to Risk-
Weighted Assets) ...... 11,761 8.71% 5,279 4.00 6,482 4.81% 7,919 6.00 3,842 2.91 %
Tier 1 Capital (to Average
Assets) ............... 11,761 4.78% 9,846 4.00 1,915 0.78% 12,308 5.00 (547) (0.22)%
</TABLE>
Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Pursuant to 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, Pelican National is
expected to be considered well capitalized, however, no assurance can be given
that Pelican National 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 Pelican National, compared to its
minimum regulatory capital requirements of the OCC as of March 31, 1999.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------------------------------------------------------
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..... $5,405 20.89% $2,070 8.0% $3,335 12.89%
Tier 1 risk-based ratio.... 5,270 20.37 1,035 4.0 4,235 16.37%
Leverage ratio............. 5,270 13.68 1,540 4.0 3,730 9.68
</TABLE>
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Any change could
affect the ability of Pelican National to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
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<PAGE>
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 unsafe or unsound practice warrants this
treatment. At each successive lower capital category, an insured depository
institution is required to comply with more restrictions. The federal banking
agencies, however, may not treat an institution as critically undercapitalized
unless its capital ratio actually warrants this treatment.
In addition to restrictions and sanctions imposed pursuant to the
prompt corrective action provisions, the federal regulators may institute
enforcement actions against commercial banking organizations 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 these actions
through injunctions or restraining orders based upon a judicial determination
that the agency would be harmed if this 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 contain 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. Pelican National's deposit accounts are
insured by Pelican National 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, Pelican National 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. Pursuant
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<PAGE>
to 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 became law. Pursuant to
this law, beginning one year after the date of enactment, a bank holding company
that is adequately capitalized and managed may obtain approval to acquire an
existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make an acquisition if, upon
consummation, it would control more than 10% of the total amount of deposits of
insured depository institutions in the United States or 30% or more of the
deposits in the state in which Pelican National 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 the 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. Pursuant to 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
this record into account in its evaluation of certain applications by the
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
Pelican Financial's certificate of incorporation and bylaws provide for
staggered terms for the Board of Directors while directors of Pelican National
are elected annually. The Board of Directors of Pelican Financial 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. Pelican Financial currently has one vacancy in Class III
which Pelican Financial expects to fill shortly, in compliance with any required
regulatory approvals. Pursuant to the Certificate of Incorporation of Pelican
Financial, 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.
The following table contains certain information with respect each
person that is known to Pelican Financial to beneficially own more than 5% of
the outstanding common shares and with respect to the directors and executive
officers of Pelican Financial. The address of each director and executive
officer listed below is c/o Pelican Financial, Inc., 315 East Eisenhower, Ann
Arbor, Michigan 48108.
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<PAGE>
<TABLE>
<CAPTION>
Beneficial
Current Term Ownership of Percent of
Name of Individual Age (1) Position With Pelican Financial Expires Pelican Financial (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 Financial 2001 0 0.00
Officer, and Director
Koula M. Kovach 39 Vice President, Secretary, and 2001 13,336 (5) 0.44
Director
Raleigh E. Allen, Jr. 58 Director 2002 0 0.00
Ernest G. Merlanti 68 Director 2002 8,000 0.26
All directors and executive officers as a 2,421,336 (6) 79.83
group (6 persons)
</TABLE>
- --------------------
(1) As of December 31, 1998.
(2) As of March 31, 1999. 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 underlying options that are not
exercisable within 60 days of March 31, 1999. 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 these shares.
(4) Excludes 64,000 shares of common stock underlying options not
exercisable within 60 days of March 31, 1999.
(5) Includes 8,000 shares of common stock underlying options exercisable
within 60 days of March 31, 1999.
(6) Includes 6,000 shares of common stock underlying options exercisable
within 60 days of March 31, 1999. 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
Pelican Financial is summarized 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 Pelican Financial since its formation in March 1997.
Mr. Huffman is also Chairman of the Board of Washtenaw and has served in that
capacity since founding Pelican Financial in 1981. Mr. Huffman became Chairman
of the Board of Pelican National 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 Fannie Mae.
MICHAEL D. SURGEN has been a director of Pelican Financial since
October 1998 and has served as the President and a director of Pelican National
since 1998. Prior to joining Pelican Financial and Pelican National, 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 Pelican Financial since January 1999. Prior to joining Pelican
Financial, 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,
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<PAGE>
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 Pelican
Financial since its formation in March 1997. Ms. Kovach has been employed by
Washtenaw since 1981 and has served as its President since June 1998. Ms. Kovach
has worked, developed, and managed most areas of the Washtenaw and since 1988,
Ms. Kovach has managed the Underwriting, Closing, Post Closing, Quality Control
and Human Resource Departments of Washtenaw. Ms. Kovach has also served on the
Risk Management Advisory Council and the Product Development Customer Advisory
Group of Fannie Mae. Ms. Kovach is also a member of the Association of
Professional Mortgage Women.
RALEIGH E. ALLEN, JR. has been a director of Pelican Financial 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 Pelican Financial 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 Pelican Financial generally meets on a
quarterly basis, as needed. During the year ended December 31, 1998, the Board
of Directors of Pelican Financial met two times. No director attended fewer than
75% in the aggregate of the total number of Board meetings held while the
director was a member during the year ended December 31, 1998 and the total
number of meetings held by committees on which the director served during the
year.
Pelican Financial's full Board of Directors acts as a nominating
committee for the annual selection of its nominees for election as directors of
Pelican Financial. While the Board of Directors will consider nominees
recommended by stockholders, it has not actively solicited recommendations from
Pelican Financial's stockholders for nominees nor, conditioned on compliance
with the procedural requirements contained in Pelican Financial's Certificate of
Incorporation, established any procedures for this purpose. Pelican Financial's
Board of Directors met once in its capacity as the nominating committee during
1998.
Pelican National's and Washtenaw's full Boards of Directors act as a
compensation committees for both Washtenaw and Pelican National, respectively.
Washtenaw's Board met one time in this capacity during 1998 and Pelican
National'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.
Pelican Financial'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 Pelican Financial. The Audit Committee is responsible for
reviewing Pelican Financial's auditing programs, overseeing the quarterly
regulatory reporting
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<PAGE>
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 Pelican Financial
receive $400 per meeting of the Board of Directors attended. Each member of the
Board of Directors of Pelican National receives a fee of $400 per month.
Additionally, each non-employee member of a committee of the Board of Directors
of Pelican National receives a fee of $100 per committee meetings. Members of
the Board of Directors of Washtenaw do not receive a fee for service on the
Board of Washtenaw. Directors are also eligible to receive stock options and
stock appreciation rights pursuant to Pelican Financial's stock option and
incentive plan. See "- Stock Option and Incentive Plan."
EXECUTIVE OFFICER COMPENSATION. Pelican Financial has no full time
employees, but will rely on the employees of Washtenaw and Pelican National for
the limited services required by Pelican Financial. All compensation paid to
officers and employees of Pelican Financial is paid by Washtenaw or Pelican
National, as appropriate.
The following table contains information on the cash and non-cash
compensation awarded to or earned by the Chief Executive Officer of Pelican
Financial and each executive officer of Pelican Financial 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 Pelican Financial or person performing a similar
policy making function for Pelican Financial had a salary and bonus in excess of
$100,000 during these same periods for services rendered in all capacities to
Pelican Financial.
<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 12/31/97 198,462 64,692 0 0 4,476 (2)
Pelican Financial; Chairman of
the Board of Pelican National 01/31/97 215,000 83,353 0 0 9,184 (3)
and Washtenaw
Koula M Kovach 12/31/98 110,000 307,995 0 0 2,400 (4)
Director of Pelican Financial; 12/31/97 89,108 73,626 0 4,000 2,166 (4)
President of Washtenaw 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 Pelican Financial's 401(k) plan for
the account of Mr. Huffman.
(3) Represents $4,729 contributed to Pelican Financial's 401(k) plan for
the account of Mr. Huffman and $4,455 paid by Pelican Financial for
term life insurance for the benefit of Mr. Huffman.
(4) Represents amounts contributed to Pelican Financial's 401(k) plan for
the account of Ms. Kovach.
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<PAGE>
EMPLOYMENT AGREEMENT. Pelican National entered into an employment
agreement in March 31, 1998 with Michael D. Surgen, President and Chief
Executive Officer of Pelican National and a director of Pelican Financial and
Pelican National. The employment agreement provides for a term of five years,
with an annual base salary payable by Pelican National 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 Pelican National for "just
cause" as defined in the Employment Agreement. If there is a termination for
just cause, no severance benefits are available. If Pelican National 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 Pelican
National 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
Pelican Financial's stock option and incentive plan upon the achievement of
certain performance goals in the first five years of Pelican National'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 Pelican National'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%.
OTHER BENEFITS
401(K) SAVINGS PLAN. Pelican Financial, Inc. sponsors a tax-qualified
defined contribution savings plan (commonly known as a 401(k) Plan) for the
benefit of its employees and the employees of Washtenaw and Pelican National.
Employees become eligible to participate in the 401(k) Plan after reaching age
21 and completing one year (including 1,000 hours) of service. Pursuant to 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).
Pelican Financial, Inc. matches 50% of the employee contributions up to 1.5% of
the participant's contribution. 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.
Pelican Financial, Inc. 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 pursuant to the 401(k)
Plan is age 65. Additionally, funds in 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 ("ERISA"), and
the requirements of Section 401(a) of the Code. For the three months ended March
31, 1999, the year ended December 31, 1998, the eleven months ended December 31,
1997, and the year ended January 31, 1997, Pelican Financial incurred expenses
of approximately $19,000, $77,000, $33,000, and $38,000, respectively relating
to the plan.
STOCK OPTION AND INCENTIVE PLAN. The Boards of Directors of Pelican
Financial, Pelican National, and Washtenaw adopted the 1997 Stock Option and
Incentive Plan upon completion of the organization of Pelican National. 400,000
shares of common stock were reserved for issuance by Pelican Financial upon
exercise of stock options to be granted to officers, directors, and employees of
Pelican Financial, Pelican National, and Washtenaw from time to time pursuant to
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 Pelican
Financial. 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
Pelican Financial pursuant to the option plan. Directors and executive officers
of Pelican Financial, Pelican National, and Washtenaw received an initial grant
of options upon the consummation of the organization of Pelican
74
<PAGE>
National. 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 Pelican Financial's
performance.
Pelican Financial receives no monetary consideration for the granting
of stock options pursuant to the option plan, however, Pelican Financial
receives the option price for each share issued to optionees upon the exercise
of the 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
Pelican Financial, however, no purchases in the open market will be made that
would violate applicable regulations restricting purchases by Pelican Financial.
The exercise of options and payment for the shares received would contribute to
the equity of Pelican Financial.
During the year ended December 31, 1998, Pelican Financial granted
92,000 options pursuant to the option plan. At December 31, 1998, there were
options covering 104,000 shares of common stock outstanding pursuant to the
option plan. As of December 31, 1998, no options granted pursuant to the option
plan have been exercised.
The following table shows the number of shares with respect to which
options granted pursuant to 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
the option and the expiration date of the option.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Securities Percent of Total Potential Realizable Value at
Underlying Options/SARs Assumed Annual Rate of
Options/SARs Granted to Exercise or Base Expiration Stock Price Appreciation for
Name Granted (#) Employees Price ($/Sh) Date Option Term
- --------------------- ------------ ---------------- ---------------- ---------- -----------------------------
5% ($) 10% ($)
------ -------
<S> <C> <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 contains information on 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 any
options, and the number of unexercised options held by the 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 $2,000 / $ 0
</TABLE>
75
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pelican Financial has adopted a policy that all transactions between
Pelican Financial and its officers, directors, and shareholders owning 5% or
more of the common stock will be made on terms no less favorable than could be
obtained from third parties.
Pelican National, like many financial institutions, has adopted a
policy regarding the making of loans to officers and directors. The policy
provides that these loans:
* will be made in the ordinary course of business,
* 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 Pelican
National's other customers, and
* will not involve more than the normal risk of collectibility
or present other unfavorable features.
All loans by Pelican National to its directors and executive officers
are required to comply with regulations restricting loans and other transactions
with affiliated persons of Pelican National.
Washtenaw has adopted a policy giving all employees, including officers
and directors, discounts on mortgage loans. Washtenaw makes these loans on terms
that yield no profit or loss to Washtenaw upon the sale of the loan to the
secondary market. The following table contains information regarding the
indebtedness of executive officers, directors, and members of the immediate
family of an executive officer or director of Pelican Financial who are or were
indebted to Washtenaw at any time since February 1, 1997 in an amounts in excess
of $60,000.
The information 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 Pelican
Financial; Chairman of
Washtenaw and Pelican
National
Koula M. Kovach 10-17-96 Bridge Loan 92,617 0 7.750
Director of Pelican 9-11-98 Mortgage 147,500 0 6.25
Financial; President of
Washtenaw
Michael D. Surgen 7-22-98 Mortgage 150,000 0 7.125
Director of Pelican
Financial; President of
Pelican National
7-24-98 Home 34,652 34,400 7.750
Equity
</TABLE>
76
<PAGE>
<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>
R. Charles Huffman 5/29/96 Mortgage 84,000 0 6.00
Relation to Charles C.
Huffman, President, 3-13-97 Construction 75,374 0 8.250
CEO, and Chairman of
Pelican Financial; 6-13-97 Mortgage 214,600 0 6.250
Chairman of
Washtenaw and Pelican 8-25-98 Mortgage 227,150 0 6.000
National
</TABLE>
Washtenaw holds a subordinated note payable to a former shareholder
with a balance of $1.2 million at December 31, 1998. 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. The current maturity of the note is
December 1999. It is anticipated that this note will be repaid in full from the
proceeds of the offering.
Ernest Merlanti, a director of Pelican Financial, and his spouse own
Personnel Systems, Inc., a personnel consulting company which provides
consulting services to Washtenaw. Arbor Temporaries, Inc., a wholly-owned
subsidiary of Personnel Systems, Inc., provides temporary staffing for
Washtenaw. During the year ended December 31, 1998, Washtenaw 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 Pelican Financial consists of 5,000,000
shares of common stock, par value $0.01 per share and 200,000 shares of
preferred stock, par value $0.10 per share. As of March 31, 1999, 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 pursuant to this offering will be validly issued, 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 Pelican Financial, the holders of common stock are entitled to
share pro rata in Pelican Financial's net assets after payment or provision for
payment of all debts and liabilities of Pelican Financial, and after provisions
for any class of preferred stock or other senior security which may be issued by
Pelican Financial.
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. The exclusive voting power for all purposes is
vested in the holders of the common stock, except as to voting rights that may
have been provided to the holders of preferred stock, if any. 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.
77
<PAGE>
PREFERRED STOCK
Pelican Financial 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 series and with preferences,
limitations, and relative rights as may be determined by the Board of Directors
for purposes and for 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. Preferred stock may be issued that is convertible into common
stock, which may adversely affect the voting power of the holders of common
stock.
The creation and issuance of any series of preferred stock and the
relative rights, designations, and preferences of these series, if and when
established, will depend upon, among other things, the future capital needs of
Pelican Financial, 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, Pelican Financial has no arrangements,
undertakings, or plans with respect to the issuance of preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.
RESTRICTIONS ON ACQUISITION OF PELICAN FINANCIAL
GENERAL. Pelican Financial'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 Pelican Financial
to deal with attempts to acquire control of Pelican Financial. 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 Pelican Financial (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 the 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 the person
was appointed.
REMOVAL OF DIRECTORS. Any director or the entire Board of Directors of
Pelican Financial 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 Pelican Financial 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 Pelican Financial, the director may be removed in accordance with
the DGCL.
78
<PAGE>
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 Pelican Financial entitled to vote in the election of director in
order for Pelican Financial 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 Pelican Financial'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 Pelican Financial or
its subsidiaries) who beneficially owns, directly or indirectly, 15% or more of
the outstanding shares of voting stock of Pelican Financial.
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. a provisions in the Certificate of Incorporation limiting
personal liability of directors (Art. XV) and providing
indemnification to directors, officers, and employees of
Pelican Financial (Art. XIV) in certain circumstances,
including actions on behalf of Pelican Financial.
AMENDMENT OF GOVERNING INSTRUMENTS. The Certificate of Incorporation of
Pelican Financial 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 Pelican Financial, 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 Pelican Financial 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 Pelican Financial or by a vote of two-thirds of
the members of the Board of Directors.
SELLING STOCKHOLDER
Charles C. Huffman, Chief Executive Officer and Chairman of the Board
of Pelican Financial and Washtenaw, and a director of Pelican National
beneficially owns 1,811,650 shares of common stock, or 59.73% 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). Mr. Huffman also holds 2,000 options to purchase common stock at
$5.50 per share, none of which are exercisable.
The following table contains information, as of the date of this
Prospectus, regarding the ownership of the common stock by Mr. Huffman, and the
stock which will be owned following the offering (assuming that the
over-allotment option is exercised).
79
<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 59.73% 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 Mr. Huffman
is exercised. Also assumes that there will be no purchases by Mr.
Huffman of any shares in the offering.
UNDERWRITING
Pursuant to the terms and conditions in an underwriting agreement
between the underwriter, William R. Hough & Co., Pelican Financial, and Mr.
Huffman, the underwriter has agreed to purchase from Pelican Financial and Mr.
Huffman the number of shares of common stock listed below. The underwriter has
agreed to purchase the shares of common stock at the initial offering price less
the underwriting discounts and commission contained on the cover page of this
Prospectus. This means that the underwriter is committed to accept and pay for
all of the common stock offered hereby, if any shares are taken.
<TABLE>
<CAPTION>
Number of Shares to be Number of Shares to be
Purchased by Underwriter Purchased by Underwriter
Underwriter From Pelican Financial From Mr. Huffman (1)
- ----------- ---------------------- --------------------
<S> <C> <C>
William R. Hough & Co................... 1,200,000 180,000
</TABLE>
- -------------
(1) Assumes that the over-allotment option granted by Mr. Huffman is exercised.
The underwriter proposes to offer the shares of common stock directly
to the public at the initial offering price on the cover page of this Prospectus
and to certain dealers at this price less a concession not in excess of $__ per
share. The underwriter has informed Pelican Financial 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 another
person may purchase in the offering a number of shares that equals 10% or more
of Pelican Financial's outstanding common stock upon consummation of the
offering
Mr. Huffman 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 Pelican Financial, at the initial public
offering price, less the underwriting discount, on the cover page of this
Prospectus, to cover over-allotments, if any. The underwriter may exercise this
option only to cover over-allotments made in connection with the sale of shares
of common stock offered in this offering.
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
80
<PAGE>
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 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 Pelican Financial, Mr. Huffman, 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
Pelican Financial, market valuations of other companies engaged in activities
similar to Pelican Financial, estimates of the business potential and prospects
of Pelican Financial, the present state of Pelican Financial's business
operations and Pelican Financial's management.
Pelican Financial and Mr. Huffman have agreed to indemnify the
underwriter against and contribute toward certain liabilities, including
liabilities pursuant to the Securities Act. Pelican Financial 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 in this offering and certain
other legal matters will be passed upon for Pelican Financial by Manatt, Phelps
& Phillips, LLP, Washington, D.C. Certain other legal matters will be passed
upon for Mr. Huffman 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 Pelican Financial 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 Crowe Chizek & Company LLP
given upon their authority as experts in accounting and auditing. The
consolidated financial statements of Pelican Financial 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,
auditors, as stated in their report appearing elsewhere in this prospectus and
are included in reliance upon the report of Deloitte & Touche 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 Pelican Financial
resolved to engage the accounting firm of Crowe Chizek & Company LLP as Pelican
Financial's independent accountant for its fiscal year ending December 31, 1998.
Effectively, the services of Pelican Financial's former independent accountant,
Deloitte & Touche, was simultaneously terminated. Deloitte & Touche informed
Pelican Financial that it declined to stand for re-election.
Deloitte & Touche'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 & Touche on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, or any reportable events.
81
<PAGE>
AVAILABLE INFORMATION
Pelican Financial has filed with the SEC a registration statement on
Form S-1 pursuant to the Securities Act with respect to the common stock offered
in this offering. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information 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, Pelican Financial will register its
common stock with the SEC pursuant to Section 12(g) of the Exchange Act and,
upon such registration, Pelican Financial and the holders of its stock will
become be required to comply with 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.
82
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements for the three months ended March 31,
1999 and 1998 (Unaudited)
Consolidated Balance Sheets (Unaudited).........................................................................F-
Consolidated Statements of Income (Unaudited)..........................................................F-
Consolidated Statement of Shareholders' Equity (Unaudited).............................................F-
Consolidated Statement of Cash Flows (Unaudited).......................................................F-
Notes to Consolidated Financial Statements................................................................F- --F-
Independent Auditors' Report of Crowe Chizek & Company LLP......................................................F-
Independent Auditors' Report of Deloitte & Touche LLP...........................................................F-
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 Sheets............................................................................F-
Consolidated Statements of Income......................................................................F-
Consolidated Statement of Shareholders' Equity.........................................................F-
Consolidated Statement of Cash Flows...................................................................F-
Notes to Consolidated Financial Statements................................................................F- --F-
</TABLE>
F-1
<PAGE>
PELICAN FINANCIAL INC.
Consolidated Balance Sheets (Unaudited)
March 31, 1999 (unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,966,716 $ 10,180,034
Accounts receivable 2,250,823 7,087,170
Securities available for sale 6,413,340 5,591,983
Loans held for sale 185,337,002 179,454,160
Loans receivable, net 33,425,920 23,873,670
Mortgage servicing rights, net 15,629,395 15,509,678
Mortgage loans in foreclosure and other real estate 430,777 581,385
Premises and equipment, net 1,013,504 884,443
Federal income taxes receivable 1,566,895 1,392,624
Other assets 881,766 1,854,119
--------------- ----------------
$ 249,916,138 $ 246,409,266
--------------- ----------------
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 2,541,972 $ 3,280,064
Interest-bearing 35,446,986 31,784,014
--------------- ----------------
Total deposits 37,988,958 35,064,078
Due to bank 45,286,004 38,259,829
Notes payable 54,345,853 57,025,504
Repurchase agreements 88,592,234 95,984,844
Other liabilities 8,729,934 6,474,997
Subordinated note payable 1,200,000 1,200,000
--------------- ----------------
Total liabilities 236,142,983 234,009,252
Commitments and contingencies
Shareholders' equity
Preferred stock, 200,000 authorized; none outstanding
Common stock, 5,000,000 authorized; 3,032,836 outstanding
at March 31, 1999 and December 31, 1998 30,328 60,656
Additional paid in capital 8,291,656 8,261,328
Retained earnings 5,472,599 4,076,162
Accumulated other comprehensive income, net of tax (21,428) 1,868
--------------- ----------------
Total shareholders' equity 13,773,155 12,400,014
--------------- ----------------
$ 249,916,138 $ 246,409,266
--------------- ----------------
--------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PELICAN FINANCIAL INC.
Consolidated Statements of Income (Unaudited)
Three months ended March 31, 1999 and March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,522,524 $ 1,534,736
Investment securities, taxable 109,260 68,075
Federal funds sold and overnight accounts 38,518 68,843
-------------- ---------------
Total interest income 3,670,302 1,671,654
INTEREST EXPENSE
Deposits 314,812 195,455
Short-term borrowings 2,148,196 1,016,016
-------------- ---------------
Total interest expense 2,463,008 1,211,471
-------------- ---------------
NET INTEREST INCOME 1,207,294 460,183
Provision for loan losses 7,990 27,252
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,199,304 432,931
Noninterest income
Service charges on deposit accounts 9,386 6,892
Other income 2,881,431 1,331,338
Servicing income 500,013 120,859
Gain on sales of mortgage servicing rights and loans, net 3,389,517 2,043,657
-------------- ---------------
Total noninterest income 6,780,347 3,502,746
Noninterest expense
Compensation and employee benefits 3,834,842 2,138,242
Occupancy and equipment 408,127 323,650
Bank fees 45,755 38,625
Loan processing fees 344,627 120,027
Amortization of mortgage servicing rights 659,328 312,205
Mortgage servicing rights valuation adjustment (298,966) 161,932
Other noninterest expense 648,484 37,402
-------------- ---------------
Total noninterest expense 5,642,197 3,132,083
-------------- ---------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,337,454 803,594
Cumulative effect of change in accounting principle (97,119) -
-------------- ---------------
INCOME BEFORE INCOME TAXES 2,240,335 803,594
Provision for income taxes 843,898 310,510
-------------- ---------------
NET INCOME $ 1,396,437 $ 493,084
-------------- ---------------
-------------- ---------------
Basic and diluted earnings per share $ .46 $ .16
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PELICAN FINANCIAL INC.
Consolidated Statements of Comprehensive Income (Unaudited)
Three months ended March 31, 1999 and March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income $ 1,396,437 $ 493,084
Other comprehensive income, net of tax
Change in unrealized gains or losses on securities (23,296) 181
-------------- ---------------
Comprehensive income $ 1,373,141 $ 493,265
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PELICAN FINANCIAL INC.
Consolidated Statements of Shareholders' Equity
Three months ended March 31, 1999 (Unaudited) and year ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
------ ----- ------- --------
<S> <C> <C> <C> <C>
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
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale - - - -
--------- ------------ -------------- -----------
BALANCE AT DECEMBER 31, 1998 3,032,836 60,656 8,261,328 4,076,162
Net income - - - 1,396,437
Change in par value from $.02 to $.01 - (30,328) 30,328 -
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale - - - -
--------- ------------ -------------- -----------
BALANCE AT MARCH 31, 1999 3,032,836 $ 30,328 $ 8,291,656 $ 5,472,599
--------- ------------ -------------- -----------
--------- ------------ -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Shareholders'
Income Equity
------ ------
<S> <C> <C>
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
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale (873) (873)
------------ ---------------
BALANCE AT DECEMBER 31, 1998 1,868 12,400,014
Net income - 1,396,437
Change in par value from $.02 to $.01 - -
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale (23,296) (23,296)
------------ ---------------
BALANCE AT MARCH 31, 1999 $ (21,428) $ 13,773,155
------------ ---------------
------------ ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PELICAN FINANCIAL INC.
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1999 and March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,396,437 $ 493,084
Adjustments to reconcile net income to
net cash from operating activities
Accretion of securities, net 1,145 (15,870)
Amortization of mortgage servicing rights 659,328 312,205
Mortgage servicing rights valuation adjustment (298,966) 161,932
Gain on sales of mortgage servicing rights and loans, net (5,706,206) (3,250,848)
Provision for loan losses 7,990 27,252
Depreciation and amortization 116,569 85,537
Purchases and origination of mortgage loans held for sale (762,383,180) (339,186,730)
Proceeds from sale of mortgage loans 761,690,447 289,832,571
Changes in assets and liabilities that (used) provided cash
Accounts receivable 5,881,000 (258,708)
Federal income taxes receivable (174,271) 245,848
Other liabilities 1,934,302 1,272,853
Deferred taxes 332,636 60,300
----------------- -----------------
Net cash provided by (used in) operating activities 3,457,231 (50,220,574)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net (9,560,240) (400,563)
Purchases of mortgage servicing rights (14,803,902) (3,232,518)
Proceeds from sales of mortgage servicing rights 14,839,920 3,041,659
Loans in foreclosure and other real estate, net 150,608 36,860
Property and equipment expenditures, net (245,630) (44,263)
Purchase of securities available for sale (2,016,777) (2,971,027)
Proceeds from maturities and principal repayments
of securities available for sale 1,158,978 4,561,265
Purchase of Federal Reserve Stock (72,300) -
----------------- -----------------
Net cash (used in) provided by investing activities (10,549,343) 991,413
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in noninterest-bearing deposits (738,092) (533,321)
Increase in interest-bearing deposits 3,662,972 2,370,039
Increase (decrease) in due to bank 7,026,175 25,148,471
Increase (decrease) in notes payable (2,679,651) 11,276,733
Increase (decrease) in repurchase agreements (7,392,610) 9,713,230
----------------- -----------------
Net cash (used in) provided by financing activities (121,206) 47,975,152
----------------- -----------------
Net change in cash and cash equivalents (7,213,318) (1,254,009)
Cash and cash equivalents at beginning of period 10,180,034 4,376,631
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,966,716 $ 3,122,622
----------------- -----------------
----------------- -----------------
Cash and cash equivalents is composed of:
Cash and demand deposits due from banks $ 1,428,250 $ 457,622
Interest-bearing deposits in banks 547,466 -
Federal funds sold 991,000 2,665,000
----------------- -----------------
Total cash and cash equivalents $ 2,966,716 $ 3,122,622
----------------- -----------------
----------------- -----------------
Supplemental cash disclosures
Interest paid $ 2,577,957 $ 1,110,868
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION: The unaudited consolidated balance sheet as of
March 31, 1999 and the related unaudited consolidated statements of income,
shareholders' equity and cash flows for the three months ended March 31, 1999
have been prepared in a manner consistent with the audited financial information
presented. Management believes that all necessary adjustments, which were all of
a normal and recurring nature, have been recorded to the best of its knowledge
and that the unaudited consolidated financial information fairly presents the
financial position and results of operations and cash flows of the Company in
accordance with generally accepted accounting principles.
NATURE OF OPERATIONS: Pelican Financial 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 three
months ended March 31, 1999 and 1998, and the year ended December 31, 1998,
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 March 31, 1999 and December 31, 1998, 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.
- --------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
This line item included $221,812 and $6,181,140 at March 31, 1999 and December
31, 1998, respectively, of receivables from sales of mortgage servicing rights.
Further, the line item was subject to an allowance for doubtful accounts and
minor contingencies of $666,223 and $930,623 at March 31, 1999 and December 31,
1998, 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.
Unrealized gains 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: In 1998, the Accounting
Standards Executive Committee (AcSEC) of the American Institute of Certified
Public Accountants promulgated Statement of Position (SOP) 98-5. This SOP
provides guidance on the financial reporting of start-up costs and organization
costs. It requires cost of start-up activities and organization costs to be
expensed as incurred. Initial application of this SOP should be reported as a
cumulative effect of a change in accounting principle. The Company elected to
adopt the provisions of SOP 98-5 on January 1, 1999. Included in the March 31,
1999 Consolidated Statement Of Income is a charge to operations of $97,119
reported as a cumulative effect of change in accounting principle.
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 period end
in normal market outlets used by the Company.
The Company purchases forward contracts of mortgage-backed securities and U.S.
Treasury options to manage its interest rate exposure. The loans held for sale
are generally sold into the forward contracts. 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 March 31, 1999, or December
31, 1998.
Management determines whether the forward contracts act as a hedge against the
loans held for sale based on the similarity of the characteristics and risk
exposure of the forward contracts.
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.
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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. Leasehold improvements are depreciated (or amortized)
over the lesser of the term of the related lease or the estimated useful lives
of the assets. Depreciation is computed using either an accelerated or
straight-line method over the estimated useful lives of the related assets.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 (SFAS No. 130),
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
at March 31, 1999 and December 31, 1998.
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.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 (SFAS No. 133) will require all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. The effect will depend on derivative holdings when this standard
applies.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 (SFAS No. 134) 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 period amounts have been reclassified to conform
to the current presentation.
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 common stock for approximately $2.3 million.
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 March 31, 1999 and December 31, 1998, the
Company had 5,000,000 shares of $.01 and $.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.
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
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>
MARCH 31, 1999
U.S. Government Agencies $ 4,000,000 $ - $ (16,094) $ 3,983,906
Mortgage Backed Securities 2,445,806 2,946 (19,318) 2,429,434
-------------- ----------- ----------- ---------------
$ 6,445,806 $ 2,946 $ (35,412) $ 6,413,340
-------------- ----------- ----------- ---------------
-------------- ----------- ----------- ---------------
DECEMBER 31, 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
-------------- ----------- ----------- ---------------
-------------- ----------- ----------- ---------------
</TABLE>
The amortized cost and estimated market value of securities available for sale
at March 31, 1999, 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 $ 500,000 $ 496,250
Due after one year through five years 3,500,000 3,487,656
Mortgage Backed Securities 2,445,806 2,429,434
-------------- ---------------
$ 6,445,806 $ 6,413,340
-------------- ---------------
-------------- ---------------
</TABLE>
No securities were sold during the three months ended March 31, 1999 and
March 31, 1998.
Other assets include $332,900 and $260,600 of Federal Reserve Bank stock and
Federal Home Loan Bank stock at March 31, 1999 and December 31, 1998,
respectively. Federal Reserve Bank stock is restricted stock carried at cost
that is required by regulators to be maintained by the Bank.
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 1,085,353 $ 824,000
Real estate 32,324,901 22,834,087
Installment loans 151,131 343,058
-------------- ---------------
33,561,385 24,001,145
Deduct allowance for loan losses (135,465) (127,475)
-------------- ---------------
Loans receivable - net $ 33,425,920 $ 23,873,670
-------------- ---------------
-------------- ---------------
</TABLE>
No loan losses were charged against the allowance for loan losses during the
three months ended March 31, 1999 and 1998. The Company had no loans on
nonaccrual status or that were considered impaired as of March 31, 1999 and
December 31, 1998.
Loans to related parties:
<TABLE>
<CAPTION>
March 31,
1999
----
<S> <C>
Beginning of year $ 34,400
New loans 6,800
Repayments -
--------------
March 31, 1999 $ 41,200
--------------
--------------
</TABLE>
NOTE 5 - MORTGAGE LOANS SERVICED
MORTGAGE SERVICING RIGHTS: Activity related to mortgage servicing rights is
summarized below:
<TABLE>
<CAPTION>
Three months
ended Year ended
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 16,750,760 $ 4,696,038
Additions 14,803,902 27,730,631
Sales (14,323,823) (13,909,878)
Amortization (659,328) (1,766,031)
-------------- ---------------
Balance at end of period 16,571,511 16,750,760
Valuation allowance at beginning of period (1,241,082) (355,860)
Adjustment for impairment 298,966 (914,061)
Adjustment for sale of servicing rights - 28,839
-------------- ---------------
Valuation allowance at end of period (942,116) (1,241,082)
-------------- ---------------
Net $ 15,629,395 $ 15,509,678
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - MORTGAGE LOANS SERVICED (Continued)
The estimated fair value of mortgage servicing rights as of March 31, 1999 and
December 31, 1998 was $13,661,000 and $15,844,000, 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 $1,357,120,000 and
$1,655,226,000 at March 31, 1999 and December 31, 1998, respectively, which
includes temporary subservicing relating to servicing sales of $17,546,000 and
$355,395,000 ($17,546,000 and $13,174,000 of which WMC was servicing for PNB).
During the three months ended March 31, 1999, WMC transferred to PNB loans held
for sale at cost of $4,347,200.
During the period ended March 31, 1999 and year ended December 31, 1998, 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 $9,102,000 ($281,000 held at PNB) and
$24,701,000 ($12,472,000 held at PNB) at March 31, 1999 and December 31, 1998,
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.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment includes the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Computer equipment and software $ 2,166,155 $ 2,008,440
Furniture and fixtures 1,087,674 1,008,099
Automobiles 51,985 51,985
Leasehold improvements 41,506 33,166
-------------- ---------------
3,347,320 3,101,690
Accumulated depreciation and amortization (2,333,816) (2,217,247)
-------------- ---------------
$ 1,013,504 $ 884,443
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing $ 2,541,972 $ 3,280,064
Interest -bearing demand 1,294,124 1,373,765
Savings 12,426,162 17,755,697
-------------- ---------------
16,262,258 22,409,526
Certificates of deposit:
Under $100,000 13,812,612 9,110,218
Over $100,000 7,256,587 3,191,576
IRAs 657,501 352,758
-------------- ---------------
Total certificates 21,726,700 12,654,552
-------------- ---------------
$ 37,988,958 $ 35,064,078
-------------- ---------------
-------------- ---------------
</TABLE>
At March 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
March 31, 2000 $ 20,402,000
March 31, 2001 1,231,000
March 31, 2002 -
March 31, 2003 -
March 31, 2004 and thereafter 93,700
--------------
$ 21,726,700
--------------
--------------
</TABLE>
NOTE 8 - NOTES PAYABLE
The Company currently has a warehouse line of credit of $70,000,000, of which
$5,000,000 represents a sub-limit for servicing under contract for sale, and
$5,000,000 represents a working capital sub-limit. The mortgage servicing rights
sublimit may be increased to $7,000,000 for 90 days per calendar year. 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 4.81% and 5.00% at March 31, 1999 and December 31, 1998. Notes
payable are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 TERMS 1998 TERMS
---- ----- ---- -----
<S> <C> <C> <C> <C>
Warehouse line $ 51,345,853 FFR+1.50% $ 43,025,504 FFR+1.50%
Servicing under contract for
sale sub-limit 1,000,000 FFR+1.875% 7,000,000 FFR+1.875%
Working capital sub-limit - 5,000,000 FFR+2.25%
Term Loan 2,000,000 FFR+2.75% 2,000,000 FFR+2.75%
-------------- --------------
$ 54,345,853 $ 57,025,504
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE (Continued)
The line of credit agreement contains restrictive covenants, among others,
requiring the Company to maintain certain minimum net worth levels, a minimum
servicing portfolio 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 6.666% and
6.338% at March 31, 1999 and December 31, 1998, respectively.
NOTE 10 - SUBORDINATED NOTE PAYABLE
The Company has a subordinated note payable with a balance of $1,200,000 at
March 31, 1999 and December 31, 1998. The note requires monthly interest
payments at 4.5% per annum over the prime interest rate, which was 7.75% at
March 31, 1999 and December 31, 1998. In June 1998, this note was renewed for a
full year. The note matures in June 1999.
NOTE 11 - LEASES
The Company leases office facilities under noncancelable operating leases.
Future minimum lease payments at March 31, 1999 under noncancelable leases are
as follows:
<TABLE>
<S> <C>
March 31, 2000 $ 205,336
March 31, 2001 365,313
March 31, 2002 269,758
-------------
$ 840,407
-------------
-------------
</TABLE>
For periods ended March 31, 1999 and 1998, rental expense under operating leases
was approximately $66,000 and $101,000, respectively.
- --------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12 - 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 March 31, 1999, 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.
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>
MARCH 31, 1999
Total capital (to risk weighted assets)
Consolidated $ 11,896 9.01% $ 10,559 8.00% $ 13,199 10.0%
Bank 5,405 20.89 2,070 8.00 2,587 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 11,761 8.71 5,279 4.00 7,919 6.0
Bank 5,270 20.37 1,035 4.00 1,552 6.0
Tier 1 capital (to average assets)
Consolidated 11,761 4.78 9,846 4.00 12,308 5.0
Bank 5,270 13.68 1,540 4.00 1,926 5.0
DECEMBER 31, 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
</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 were available for
payments of dividends to PNH at March 31, 1999 or December 31, 1998.
WMC has a covenant in its warehouse credit agreement which limits the amount of
dividends WMC may pay to PNH to $600,000 for 1999.
- --------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - 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 $19,413, $13,737
and $76,641 relating to the plan during the periods ended March 31, 1999 and
1998, and December 31, 1998, respectively.
NOTE 14 - 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 $165,279,000 and
$144,486,000 at March 31, 1999 and December 31, 1998, respectively, along with
outstanding commitments to make other types of loans totaling approximately
$1,503,000 and $352,000 at March 31, 1999 and December 31, 1998, 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 March 31, 1999 and December 31, 1998,
the Company had approximately $251,358,000 and $239,185,000, 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 March 31, 1999. 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 15 - 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.
- --------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE
The following summarizes the computation of basic and diluted earnings per
share. Weighted average shares have been restated for all stock splits,
including a 2-for-1 split in March 1999.
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
Basic earnings per share
Net income $ 1,396,437 $ 493,084
Weighted average shares outstanding 3,032,836 3,032,836
------------- --------------
Basic earnings per share $ .46 $ .16
------------- --------------
------------- --------------
Diluted earnings per share
Net income $ 1,396,437 $ 493,084
Weighted average shares outstanding 3,032,836 3,032,836
Dilutive effect of assumed exercise of stock options 6,775 4,727
------------- --------------
Diluted average shares outstanding 3,039,611 3,037,563
------------- --------------
Diluted earnings per share $ .46 $ .16
------------- --------------
------------- --------------
</TABLE>
NOTE 17 - 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-19
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 17 - 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.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
Mortgage Retail Consolidated
THREE MONTHS ENDED MARCH 31, 1999 Banking Banking Other Totals
- --------------------------------- ------- ------- ----- ------
<S> <C> <C> <C> <C>
Net interest income $ 746 $ 499 $ (38) $ 1,207
Gain on sales of MSR and loans, net 3,355 35 - 3,390
Servicing income 499 1 - 500
Noncash items:
Provision for loan losses - 8 - 8
MSR amortization & valuation 359 1 - 360
Provision for income taxes 862 4 (22) 844
Segment profit 1,431 7 (42) 1,396
Segment assets 206,558 43,365 (7) 249,916
THREE MONTHS ENDED MARCH 31, 1998
Net interest income $ 322 $ 180 $ (42) $ 460
Gain on sales of MSR and loans, net 3,251 3 (130) 3,124
Servicing income 531 30 - 561
Noncash items:
Provision for loan losses - 27 - 27
MSR amortization & valuation 440 34 1 475
Provision for income taxes 393 (104) (17) 272
Segment profit 723 (196) (34) 493
Segment assets 144,104 25,461 993 170,558
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 18 - PELICAN FINANCIAL INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,492 $ 5,492
Investment in WMC 10,428,670 9,034,480
Investment in PNB 5,251,176 5,267,429
Other assets 216,742 116,182
-------------- ---------------
Total assets $ 15,902,080 $ 14,423,583
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,000,000 $ 2,000,000
Accrued expenses and other liabilities 128,925 23,569
Shareholders' equity 13,773,155 12,400,014
-------------- ---------------
Total liabilities and shareholders' equity $ 15,902,080 $ 14,423,583
-------------- ---------------
-------------- ---------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Dividends from WMC $ 37,188 $ 41,368
Other expense 43,547 50,630
-------------- ---------------
Income (loss) before income tax, undistributed
subsidiary income and cumulative effect of
change in accounting principle (6,359) (9,262)
Cumulative effect of change in accounting principle (20,065) -
Income tax benefit 21,628 17,216
Equity in undistributed subsidiary income 1,401,233 485,130
-------------- ---------------
Net income 1,396,437 493,084
Other comprehensive income:
Unrealized gain (loss) on securities, net of tax and
classification effects (23,296) 181
-------------- ---------------
Comprehensive income $ 1,373,141 $ 493,265
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 18 - PELICAN FINANCIAL INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,396,437 $ 493,084
Adjustments
Equity in undistributed subsidiary income (1,401,233) (485,130)
Change in other assets (1,562) (9,110)
Change in other liabilities 105,356 (18)
-------------- ---------------
Net cash from operating activities 98,998 (1,174)
CASH FLOWS FROM FINANCING ACTIVITIES
Capitalized stock offering costs (98,998) -
-------------- ---------------
Net cash from financing activities (98,998) -
-------------- ---------------
Net change in cash and cash equivalents - (1,174)
Cash and cash equivalents at beginning of period 5,492 19,207
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,492 $ 18,033
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pelican Financial Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheet of Pelican Financial
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.
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-23
<PAGE>
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 the related
consolidated statements of income, comprehensive 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 1997 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and the results of its operations and its cash flows for the eleven months
ended December 31, 1997 and the year ended January 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCH LLP
/s/ Deloitte & Touch LLP
Detroit, Michigan
March 20, 1998
(April 29, 1999 as to the consolidated statements of comprehensive income and
Notes 2, 20, and 21)
F-24
<PAGE>
PELICAN FINANCIAL 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
Commitments and contingencies
Shareholders' equity
Preferred stock, 200,000 shares authorized; none outstanding Common stock,
5,000,000 shared authorized; 3,032,836
outstanding at December 31, 1998 and 1997 60,656 75,821
Additional paid in capital 8,261,328 8,246,163
Retained earnings 4,076,162 188,782
Accumulated other comprehensive income, 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-25
<PAGE>
PELICAN FINANCIAL INC.
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-26
<PAGE>
PELICAN FINANCIAL INC.
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-27
<PAGE>
PELICAN FINANCIAL INC.
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
Shares Stock Capital
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1996 - WMC 510 $ 510 $ 306
Net income
--------- ----------- ------------
BALANCE AT JANUARY 31, 1997 - WMC 510 510 306
WMC shares acquired and retired (510) (510) (306)
Shares issued of Pelican Financial Inc. 758,209 75,821 8,246,163
Net loss
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale
--------- ----------- ------------
BALANCE AT DECEMBER 31, 1997 758,209 75,821 8,246,163
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
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale
--------- ----------- ------------
BALANCE AT DECEMBER 31, 1998 3,032,836 $ 60,656 $ 8,261,328
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Shareholders'
Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1996 - WMC $ 5,829,769 $ 5,830,585
Net income 529,003 529,003
------------- --------------
BALANCE AT JANUARY 31, 1997 - WMC 6,358,772 6,359,588
WMC shares acquired and retired (6,032,473) (6,033,289)
Shares issued of Pelican Financial Inc. 8,321,984
Net loss (137,517) (137,517)
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale $ 2,741 2,741
------------- ------------ --------------
BALANCE AT DECEMBER 31, 1997 188,782 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 3,887,380
Other comprehensive income, net of tax:
Unrealized loss on securities available for sale (873) (873)
------------- ------------ --------------
BALANCE AT DECEMBER 31, 1998 $ 4,076,162 $ 1,868 $ 12,400,014
------------- ------------ --------------
------------- ------------ --------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
PELICAN FINANCIAL INC.
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 and origination of mortgage loans
held for sale (2,405,776,234) (732,555,816) (588,237,190)
---------------- ----------------- -----------------
Proceeds from sale of mortgage loans held for sale 2,326,905,257 670,849,821 583,801,726
---------------- ----------------- -----------------
---------------- ----------------- -----------------
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 2,291,475 (324,693) 802,479
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Deferred taxes 1,874,733 198,713 (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) provided by 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-29
<PAGE>
PELICAN FINANCIAL 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: Pelican Financial Inc. ("PF") is a registered bank holding
company incorporated during 1997. PF 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 PF 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 $930,623 and $45,884 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-30
<PAGE>
PELICAN FINANCIAL 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 of mortgage-backed securities and U.S.
Treasury options to manage its interest rate exposure. The loans held for sale
are generally sold into the forward contracts. 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.
Management determines whether the forward contracts act as a hedge against the
loans held for sale based on the similarity of the characteristics and risk
exposure of the forward contracts.
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.
- -------------------------------------------------------------------------------
(Continued)
F-31
<PAGE>
PELICAN FINANCIAL 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, 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.
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. Leasehold improvements are depreciated (or amortized)
over the lesser of the term of the related lease or the estimated useful lives
of the assets. 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-32
<PAGE>
PELICAN FINANCIAL 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 (SFAS No. 130),
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 PF and pooling with WMC (see Note 2) represent
PF equivalent shares as if the PF 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value is presented in Note 16. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded. Accordingly, the
aggregate fair value amounts presented do not represent the value of the
Company.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new accounting
standard (SFAS No. 133) will require all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. The effect will depend on derivative holdings when this standard
applies.
- -------------------------------------------------------------------------------
(Continued)
F-33
<PAGE>
PELICAN FINANCIAL 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 loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 (SFAS No. 134) 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.
NOTE 2 - BUSINESS COMBINATION
PF was incorporated on March 3, 1997 as a registered bank holding company. PF
was created to form PNB and to acquire WMC. On June 22, 1997, PF acquired all
the common stock of WMC in exchange for 600,000 shares of PF'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 PF. PF 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 PF prior to the acquisition. WMC's fiscal year-end
has been changed from January 31 to December 31 to conform to PF's fiscal
year-end.
During 1997, PF 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 $0.02 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-34
<PAGE>
PELICAN FINANCIAL 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 34,400
Repayments -
--------------
End of year $ 34,400
--------------
--------------
</TABLE>
There was no related party loan activity during 1997.
- -------------------------------------------------------------------------------
(Continued)
F-35
<PAGE>
PELICAN FINANCIAL 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-36
<PAGE>
PELICAN FINANCIAL 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-37
<PAGE>
PELICAN FINANCIAL 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, a minimum
servicing portfolio 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-38
<PAGE>
PELICAN FINANCIAL 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-39
<PAGE>
PELICAN FINANCIAL 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.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
- -------------------------------------------------------------------------------
(Continued)
F-40
<PAGE>
PELICAN FINANCIAL 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 PF at December 31, 1998.
WMC has a covenant in its warehouse credit agreement which limits the amount of
dividends WMC may pay to PF to $600,000 for 1999.
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-41
<PAGE>
PELICAN FINANCIAL 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, along with outstanding
commitments to make other types of loans totaling $352,000 at December 31, 1998.
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-42
<PAGE>
PELICAN FINANCIAL 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.
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-43
<PAGE>
PELICAN FINANCIAL 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 PF, 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-44
<PAGE>
PELICAN FINANCIAL 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-45
<PAGE>
PELICAN FINANCIAL 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-46
<PAGE>
PELICAN FINANCIAL 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.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
Mortgage Retail Consolidated
Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
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-47
<PAGE>
PELICAN FINANCIAL 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 - PELICAN FINANCIAL 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 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 (loss) 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)
Other comprehensive income:
Unrealized gain (loss) on securities, net of tax and
classification effects (873) 2,741
-------------- ---------------
Comprehensive income $ 3,886,507 $ (134,776)
-------------- ---------------
-------------- ---------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-48
<PAGE>
PELICAN FINANCIAL 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 - PELICAN FINANCIAL 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>
- -------------------------------------------------------------------------------
(Continued)
F-49
<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 this offering, and, if given or made, such other
information or representation must not be relied upon as having been authorized
by Pelican Financial, Washtenaw, Pelican National, 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 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 Pelican
Financial, Washtenaw, or Pelican National since any of the dates as of which
information is furnished in this prospectus or since the date of this
prospectus.
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary...................................3
Summary Selected Consolidated Financial Data.........5
Risk Factors.........................................6
Pelican Financial...................................12
Use of Proceeds.....................................13
Dividend Policy.....................................14
Market for the Common Stock.........................14
Capitalization......................................15
Dilution............................................15
Special Note Regarding Forward-Looking Statements...16
Selected Consolidated Financial and Other Data......17
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....20
Business............................................41
Regulation..........................................63
Management..........................................69
Description of Capital Stock........................76
Restrictions on Acquisition of Pelican Financial....77
Selling Stockholder.................................78
Underwriting........................................79
Legal Matters.......................................80
Experts.............................................80
Changes in and Disagreements with Accountants on
Accounting and Financial Matters..................80
Available Information...............................81
Index to Consolidated Financial Statements.........F-1
</TABLE>
- ------------------------------------------------------
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.
------------------------------------------------------------------------------
PELICAN FINANCIAL,
INC.
$______________
1,200,000 SHARES OF COMMON STOCK
PROSPECTUS
WILLIAM R. HOUGH & CO.
The date of this Prospectus is
__________ ____, 1999
THE SECURITIES OFFERED IN THIS
OFFERING ARE NOT DEPOSITS OR
ACCOUNTS AND ARE NOT
FEDERALLY INSURED OR
GUARANTEED.
------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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 Pelican Financial 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 Pelican
Financial or is or was serving at the request of Pelican Financial 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 Pelican Financial would have the power to
indemnify the person against such liability under the provisions of the
Certificate of Incorporation.
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 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**
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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 Pelican Financial, 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.**
16 Letter of Deloitte & Touche LLP re: Change in Certifying Accountant
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.
** Previously filed.
*** 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 Pelican Financial 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.
<PAGE>
(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. If there is 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.
<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 .
PN HOLDINGS, INC.
By: /s/ Charles C. Huffman
---------------------------
Charles C. Huffman
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Representative)
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 .
/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
- -------------
* Signed pursuant to power of attorney.
<PAGE>
As Filed with the Securities and Exchange Commission on June 30, 1999.
Registration Statement No.333-76841
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
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>
DELAWARE 6035 58-2298215
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
(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 Pelican Financial, 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.**
16 Letter of Deloitte & Touche LLP re: Change in Certifying
Accountant
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.
** Previously filed.
*** Contained in electronically filed version only.
<PAGE>
Exhibit 1.1
1,200,000 SHARES
PN HOLDINGS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
________________ ___, 1999
WILLIAM R. HOUGH & CO.
as representative of the several
underwriters (the "Representative")
c/o William R. Hough & Co.
100 Second Avenue South, Suite 800
St. Petersburg, FL 33701-4386
Dear Sirs:
Subject to the terms and conditions stated herein, (i) Pelican
Financial, Inc., a Delaware corporation (the "Company"), proposes to issue and
sell to the Underwriters named in Schedule I (the "Underwriters") an aggregate
of 1,200,000 shares (the "Firm Shares") of the Company's authorized common
stock, par value $.002 per share. Furthermore, at the election of the
Underwriters and subject to the terms and conditions stated herein, Charles C.
Huffman (the "Selling Shareholder") proposes to sell to the Underwriters an
aggregate of 180,000 additional shares of Common Stock (the "Optional Shares").
The Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are collectively called the "Shares." All shares of
common stock of the Company, including the Shares, are hereinafter referred to
as "Common Stock."
1
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
a. The Company represents and warrants to and agrees with each
Underwriter that:
(i) A registration statement on Form S-1 (File No. 333-76841) with
respect to the Shares, including a preliminary form of prospectus, has
been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the applicable
Rules and Regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Act and has been
filed with the Commission, and such amendments to such registration
statement as may have been required prior to the date hereof have been
filed with the Commission, and such amendments have been similarly
prepared, including any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"). Copies of such registration statement and amendment
or amendments and of each related prospectus have been delivered to
you, including copies of any filings pursuant to EDGAR. Such
registration statement, including the prospectus, Part II, and all
financial schedules and exhibits and all other documents filed as a
part thereof or incorporated by reference and all information deemed
to be a part thereof as of such time of effectiveness, including if
applicable any subsequent prospectus filed pursuant to paragraph (b)
of Rule 430(A) of the Rules and Regulations, is herein referred to as
the "Registration Statement," and the prospectus included as part of
the Registration Statement on file with the Commission that discloses,
if applicable, all the information that was omitted from the
prospectus on the effective date pursuant to Rule 430A of the Rules
and Regulations or any subsequent Prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations by the Company
with your consent after the effective date of the Registration
Statement, is herein referred to as the "Final Prospectus." In the
event a prospectus is not filed pursuant to Rule 430A and Rule 424(b)
then, the prospectus included as part of the Registration Statement on
the date when the Registration Statement became effective is deemed to
be the Final Prospectus. Any prospectus included in the Registration
Statement of the Company and in any amendments thereto prior to the
effective date of the Registration Statement is referred to herein as
a "Preliminary Prospectus."
<PAGE>
(ii) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the Rules and Regulations;
when the Registration Statement becomes effective and at all times
subsequent thereto up to and at the Closing Date (hereinafter defined)
and any later date on which Option Shares are to be purchased, (i) the
Registration Statement and any post-effective amendment thereto, the
Final Prospectus and amendments or supplements thereto, in all
material respects conformed and will conform to the requirements of
the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Final Prospectus, nor any amendment or
supplement thereto, included or will include any untrue statement of a
material fact or omitted or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein in light of the circumstances under which they were made not
misleading; provided, however, that none of the representations and
warranties contained in this subparagraph shall apply to information
contained in or omitted from the Registration Statement, the
Preliminary Prospectus or the Final Prospectus or any such amendment
or supplement in reliance upon, and in conformity with, written
information furnished to the Company by any Underwriter, directly or
through you, specifically for inclusion therein.
(iii) Each of the Company's subsidiaries and the percentage of
outstanding shares of capital stock of each of its subsidiaries owned
by the Company are listed on Schedule III hereto. Each of the Company
and its subsidiaries is incorporated and existing as a corporation in
good standing under the laws of its jurisdiction of organization, with
the corporate power and corporate authority to own, lease and operate
its properties and conduct its business as described in the Final
Prospectus and each is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions, if any, where
the ownership or leasing of properties or the conduct of its business
requires such qualification; each of the Company and its subsidiaries
now hold, and at the Closing Date and any later date on which Optional
Shares are to be purchased will hold, all licenses, certificates,
permits and approvals from state, Federal and other regulatory
authorities that are required for the Company to lawfully own, lease
and operate its properties and conduct its business as described in
the Final Prospectus or that are material to the Company's business
operations, properties, assets, condition (financial or otherwise) or
prospects, and all such licenses, certificates, permits and approvals
are valid and in full force and effect; each of the Company and its
subsidiaries are conducting its business, including but not limited to
lending activities, in compliance with all material laws, rules and
regulations of each jurisdiction in which it conducts its business;
neither the Company nor its subsidiaries are in violation of its
charter or By-laws or, is in default in the performance or observance
of any material obligation, agreement, covenant or condition contained
in any bond,
<PAGE>
debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, joint venture or other agreement
or instrument to which the Company or any of its subsidiaries are a
party or by which they or any of their properties are bound or in
violation of any law, order, rule, regulation, writ, injunction or
decree of any government, governmental instrumentality or court,
domestic or foreign, which defaults or violations, singly or in the
aggregate, would have a material adverse effect on the business,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its subsidiaries taken as a
whole. The Company does not own or control, directly or indirectly any
corporation, association or other entity other than its subsidiaries.
(iv) This Agreement has been authorized, executed and delivered by an
authorized representative of the Company and is a valid and binding
agreement on the part of the Company, enforceable in accordance with
its terms; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, (i) any indenture, mortgage, deed of trust, loan
agreement, bond, debenture, note agreement or other evidence of
indebtedness, or any lease, contract or other agreement or instrument
to which the Company is a party or by which its properties or its
subsidiaries' properties are bound, (ii) the Company's charter or
By-laws, or (iii) any applicable statute, rule or regulation, or any
order of any court or governmental agency or body having jurisdiction
over the Company or its subsidiaries or over their properties, which
defaults or violations, singly or in the aggregate, would have a
material adverse effect on the business, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and its subsidiaries taken as a whole; and no consent,
approval, authorization or order of any court or governmental agency
or body is required for the consummation by the Company of the
transactions on its part herein contemplated, except such as may have
been obtained by the Closing Date (as hereinafter defined) or such as
may be required under the Act or under state or other securities or
Blue Sky laws.
(v) Other than as disclosed in the Final Prospectus, there is no
pending or, to the Company's knowledge, threatened action, suit, claim
or proceeding against Company or its subsidiaries or any of their
officers or any of their properties, assets or rights before any court
or governmental agency or body or otherwise which might result in any
material adverse change in the business, properties, assets, rights
operations, condition (financial or otherwise) or prospects of the
Company and its subsidiaries taken as a whole, or prevent consummation
of the transactions contemplated hereby.
(vi) There are no contracts or documents of the Company or its
subsidiaries that would be required to be described in the Final
Prospectus or to be filed as exhibits to the Registration Statement by
the Act or by the
<PAGE>
Rules and Regulations that have not been accurately described in all
material respects in the Final Prospectus or filed as exhibits to the
Registration Statement.
(vii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Final Prospectus under the caption
"Capitalization" as of the date stated therein; all outstanding shares
of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable and were not issued in
violation of any preemptive right or other rights to purchase such
shares, and the capital stock of the Company conforms in all material
respects to the statements in relation thereto contained in the Final
Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); and the Firm
Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable and no person has preemptive or other rights to purchase
any of the Shares. No further approval or authorization of any
stockholder, the Board of Directors or others is required for the
issuance and sale of the Firm Shares to the several Underwriters,
except as may be required under the Act or under state or other
securities or Blue Sky laws.
(viii) Crowe Chizek & Company LLP, which has examined the consolidated
financial statements of the Company as of December 31, 1998, and
Deloitte & Touche LLP, which has examined the consolidated financial
statement of the Company for the eleven months ended December 31,
1997, and the year ended January 31, 1997, together with the related
schedules and notes (the "Audited Financial Statements") and whose
reports appear as part of the Final Prospectus, are independent
accountants within the meaning of the Act and the Rules and
Regulations.
(ix) The Audited Financial Statements and the three-month unaudited
financial information forming part of the Registration Statement or
Final Prospectus (collectively, the "Financial Statements"), fairly
present the consolidated financial position, results of operations and
cash flow of the Company at the respective dates and for the
respective periods to which they apply; and the Audited Financial
Statements and the unaudited financial information filed with the
Commission as part of the Registration Statement and included as part
of the Final Prospectus have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods shown, except as may otherwise be stated
therein.
<PAGE>
(x) Subsequent to the latest date of the Financial Statements there
has not been (i) any material adverse change in the business,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its subsidiaries taken as a
whole, (ii) any transaction that is material to the Company and its
subsidiaries taken as a whole, except transactions in the ordinary
course of business, (iii) any obligation that is material to the
Company and its subsidiaries taken as a whole, direct or contingent,
incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change that is
material to the Company and its subsidiaries taken as a whole in the
capital stock or outstanding indebtedness of the Company, or (v) any
dividend or distribution of any kind declared, paid or made on the
capital stock of the Company, except for the two-for-one stock split
declared March 30, 1999, effective March 31, 1999 and paid
____________, 1999.
(xi) The Company or its subsidiaries have good and marketable title to
all properties and assets described in the Final Prospectus as owned
by it, free and clear of any liens, charges, encumbrances or
restrictions other than as set forth in the Final Prospectus, such as
are not material to the business, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and its subsidiaries taken as a whole; the agreements to which
the Company is a party described in the Final Prospectus are valid and
enforceable in accordance with their terms by the Company, except as
enforcement may be limited by applicable bankruptcy, insolvency and
other similar laws affecting creditors' rights and rules of law
governing specific performance, injunctive relief and other equitable
remedies and, to its knowledge, the other contracting party or parties
thereto are not in breach or default under any of such agreements,
except for such breaches or defaults which would not singly or in the
aggregate, have a material adverse effect on the business, properties,
assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and its subsidiaries taken as a whole; and
the Company has valid and enforceable leases for the properties
described in the Final Prospectus as leased by it, except as
enforcement may be limited by applicable bankruptcy, insolvency and
other similar laws affecting creditors' rights and rules of law
governing specific performance, injunctive relief and other equitable
remedies.
(xii) The Company has filed all necessary federal, state, local and
foreign tax returns, as applicable and has paid all taxes as due
unless such taxes are being contested in good faith and, to the
Company's best knowledge, there is no tax deficiency that has been or
might be asserted against the Company that would materially and
adversely affect its business, properties, assets, rights, operations,
condition (financial or otherwise) or prospects; all tax liabilities
are adequately provided for on the books of the Company.
<PAGE>
(xiii) The Company maintains insurance of the types and in the amounts
required by law and reasonably necessary to operate its business
including, but not limited to, insurance covering real and personal
property owned or leased by the Company against theft, damage,
destruction, acts of vandalism, general and product liability and all
other risks customarily insured against, all of which insurance is in
full force and effect.
(xiv) The Company and each of the Subsidiaries has generally enjoyed a
satisfactory employer-employee relationship with its employees and is
in material compliance with all federal, state, local, and foreign
laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours. To the
Company's knowledge there are no pending investigations involving the
Company or any of the Subsidiaries by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such
federal, state, local, or foreign laws and regulations. There is no
unfair labor practice charge or complaint against the Company or any
of the Subsidiaries pending before the National Labor Relations Board
or any strike, picketing boycott, dispute, slowdown or stoppage
pending or to the Company's knowledge threatened against or involving
the Company or any of the Subsidiaries, and none has ever occurred. No
representation question exists respecting the employees of the Company
or any of the Subsidiaries, and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company or
any of the Subsidiaries. No grievance or arbitration proceedings is
pending under any expired or existing collective bargaining agreements
of the Company or any of the Subsidiaries. No labor dispute with the
employees of the Company or any of the Subsidiaries exists, or is
imminent.
(xv) The Company is familiar with the Investment Company Act of 1940,
as amended (the "1940 Act"), and the rules and regulations thereunder,
and has in the past conducted, and intends in the future to continue
to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" within the meaning of the 1940 Act and
such rules and regulations.
(xvi) Except as disclosed in the Final Prospectus, neither the Company
nor any of the Subsidiaries maintains, sponsors or contributes to any
program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" as such
terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). Neither the Company nor any of the
subsidiaries maintains or contributes, now or at any time previously,
to a defined benefit plan, as defined in Section 3(35) of ERISA. No
ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of
<PAGE>
ERISA of Section 4975 of the Code, which could subject the Company to
any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all
reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. The Company has never completely
or partially withdrawn from a "multiemployer plan."
(xvii) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules
and Regulations) of any of the foregoing has taken or will take,
directly ro indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares
or otherwise.
(xviii) Except as disclosed in the Final Prospectus, none of the
patents, patent applications, trademarks, service marks, service
names, trade names and copyrights, and none of the licenses and rights
to the foregoing presently owned or held by the Company or any of the
Subsidiaries are in dispute, including without limitation, rights to
the names "Washtenaw Mortgage Company" and "Pelican National Bank" or,
to the Company's knowledge, are in any conflict with the right of any
other person or entity. Except as disclosed in the Prospectus, the
Company and each of the Subsidiaries (i) owns or has the right to use,
free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, or to the Company's knowledge, defects or other
restrictions or equities of any kind whatsoever, all patents, patent
applications, trademarks, service marks, service names, trade names
and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or
proposed with respect to the foregoing, without, to the Company's
knowledge, infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or
with respect to any of the foregoing and (ii) is not obligated or
under any liability whatsoever to make any payment by way or
royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, patent application, trademark, service mark,
service names, trade name, copyright, know-how, technology of its
business or otherwise. There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, pending or to the Company's knowledge
threatened against the Company or any of the Subsidiaries which
challenges the exclusive rights of the Company or any of the
Subsidiaries with respect to any trademarks, trade names, service
marks, service names, copyrights, patents, patent applications or
licenses or rights to the foregoing used in the conduct of its
business, or which challenge the right of the Company or any of the
Subsidiaries to use any technology presently used or contemplated to
be used in the conduct of its business.
<PAGE>
(xix) The Company and each of the Subsidiaries owns and has the right
to use all trade secrets, know-how (including all other unpatented
and/or unpatentable proprietary or confidential information, systems
or procedures), inventions, technology, designs, processes, works of
authorship, computer programs and technical data and information
(collectively herein "intellectual property") that are material to the
development, operation and sale of all products and services sold or
proposed to be sold by the Company or any of the Subsidiaries, without
violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that
the possibility exists that other persons or entities, completely
independently of the Company, or its employees or agents, could have
developed trade secrets or items of technical information similar or
identical to those of the Company. Neither the Company nor any of the
Subsidiaries is aware of any such development of similar or identical
trade secrets or technical information by others.
(xx) Except as disclosed in the Final Prospectus, there are no
outstanding (i) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (ii)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company to
issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options.
(xxi) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right
to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or
to require the Company to file a registration statement under the Act
and no person or entity holds any anti-dilution rights with respect to
any securities of the Company.
(xxii) All offers and sales of the Company's capital stock prior to
the date hereof were at all relevant times duly registered under the
Act or exempt from the registration requirements of the Act and were
duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or blue
sky laws, and the Company has taken all actions reasonably necessary
for it to assure that such exemptions from registration would continue
to be operative during all applicable periods of time required by law.
(xxiii) Neither the Company nor any of its Subsidiaries, nor, to the
knowledge of the Company or any of its Subsidiaries, any director,
officer, agent, employee, Affiliate or other person associated with or
acting on
<PAGE>
behalf of the Company or any of its Subsidiaries has, directly or
indirectly, used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political
activity, or established or maintained any unlawful or unrecorded
funds in violation of Section 30A of the Exchange Act; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback or other payment unlawful under the laws
of the United States or any foreign jurisdiction.
(xxvi) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to their respective
lending activities, including, without limitation, rules and
regulations of the Federal Housing Administration or the Office of the
Comptroller of the Currency and applicable banking laws, rules and
regulations, except for any such violation of law or regulation which
would not have a material adverse effect on the business, prospects,
properties, operations, condition (financial or other) or results of
operations of the Company and its subsidiaries taken as a whole or
which is described in or contemplated by the Registration Statement
and Final Prospectus.
(xxvii) The minute books of the Company and each of the Subsidiaries
have been made available to the Underwriters and contain a complete
summary of all meetings and actions of the directors, stockholders,
audit committee, compensation committee and any other committee of the
Board of Directors of the Company and each of the Subsidiaries,
respectively, since January 1, 1994 or such later date on which the
Company or any Subsidiary was formed, and reflects all transactions
referred to in such minutes accurately in all material respects.
(xxviii) The Company and each of its Subsidiaries makes and keeps
accurate books and records reflecting its assets and maintains
internal accounting controls that provide reasonable assurance that
(i) transactions are executed in accordance with management's
authorization, (ii) transactions are recorded as necessary to permit
preparation of the Company's financial statements in accordance with
generally accepted accounting principles and to maintain
accountability for the assets of the Company, (iii) access to the
assets of the Company is permitted only in accordance with
management's authorization, and (iv) the recorded accountability for
assets of the Company is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xxix) Except for the shares of capital stock of each of the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation owned by the Company and its Subsidiaries, neither the
Company nor its Subsidiaries own any shares of stock or any other
equity securities of any
<PAGE>
corporation nor has any equity interest in any firm, partnership,
association or other entity, except as described in or contemplated by
the Final Prospectus.
(xxx) The Company has filed a registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to register the Common Stock.
(xxxi) The Shares have been duly authorized for listing on the NASDAQ
NMS, subject to official notice of issuance.
(xxxii) None of the Company, any Subsidiary or, to the knowledge of
the Company, any officer or director purporting to act exclusively
on behalf of the Company or any Subsidiary has at any time (i) made
any contributions to any candidate for political office, or failed
to disclose fully any such contributions, in violation of law; (ii)
made any payment to any federal, state, local or foreign
governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required
or allowed by applicable law; (iii) made any payment in violation
of law outside the ordinary course of business to any purchasing or
selling agent or person charged with similar duties of any entity
to which the Company or any Subsidiary sells or from which the
Company or any Subsidiary buys products for the purpose of
influencing such agent or person to buy products from or sell
products to the Company or any Subsidiary; or (iv) engaged in any
material transaction, maintained any material bank account or used
any material corporate funds except for transactions, bank accounts
and funds which have been and are reflected in the normally
maintained books and records of the Company and its Subsidiaries,
taken as a whole, and except for any of the foregoing, the
occurrence of which would not be reasonably likely to result in a
material adverse effect or the Company as a whole.
(xxxiii) The Company and its Subsidiaries are in compliance with
Florida blue sky law relating to disclosure of issuers doing business
with Cuba. Neither the Company nor any of its Subsidiaries is
presently doing business with the government of Cuba or with any
person or affiliate located in Cuba and will notify the Florida
Department of Banking and Finance, Division of Securities and Investor
Protection, if the Company or any such Subsidiary commences doing
business with the government of Cuba or any person or affiliate
located in Cuba.
(xxxiv) The Company and its Subsidiaries are not in default in any of
the restrictive covenants set forth in the Warehouse Credit Facility
between Washtenaw Mortgage Company and National City Bank of Kentucky
(the "Credit Facility") including, among others, that the Company and
its Subsidiaries maintain certain minimum net worth levels and a
minimum debt of net worth ratio as defined in the Credit Facility.
<PAGE>
(xxxv) The description of the secondary market activities effected by
the Company and its Subsidiaries, as contained in the Registration
Statement and the Final Prospectus, is true and complete in all
material respects and to the Company's best knowledge, no event or
series of events has occurred that would result in any of the
securities issued in connection with any of such secondary market
activities being downgraded or placed on a watch list with negative
implications by any rating agency or similar organization, or that
would impair the Company's or its Subsidiaries' ability to consummate
future secondary market activities upon economic terms consistent with
past secondary market activities or otherwise cause the Company and
its Subsidiaries to suffer any material adverse change with respect to
any past or future secondary market activities (other than any such
event or series of events described in the Final Prospectus).
(xxxvi) The description of whole loan sales effected by the Company
and its Subsidiaries, as contained in the Registration Statement and
the Final Prospectus, is true and complete in all material respects
and to the Company's knowledge no event or series of events has
occurred that would result in any of the securities issued in
securitizations using such loans being downgraded or placed on a watch
list with negative implications by any rating agency or similar
organization, or that would impair the Company's or its Subsidiaries'
ability to consummate future whole loan sales or to securitize such
loans itself upon economic terms consistent with past whole loan sales
and securitizations of such loans or otherwise cause the Company and
its Subsidiaries to suffer any material adverse change with respect to
any past or future whole loan sale or securitization (other than any
such event or series of events described in the Final Prospectus).
(xxxvii) Except as disclosed in the Final Prospectus, there are no
costs or liabilities associated with Environmental Laws (including,
without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws
or any permit, license or approval, any related constraints on
operating activities and any potential liabilities to third parties)
which would, singly or in the aggregate, have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
(xxxviii) Neither the Company nor any affiliate of the Company has
incurred any liability for a fee, commission or other compensation on
account of the employment or engagement of a broker or finder in
connection with the transactions contemplated by this Agreement not
disclosed in the Registration Statement and Final Prospectus, other
than as contemplated herein.
(xxxix) There are no business relationships or related-party
transactions involving the Company or any Subsidiary or any other
person required to be described in the Final Prospectus which have not
been described as required.
<PAGE>
b. The Selling Shareholder represents and warrants to, and agrees with,
each Underwriter that:
(i) Such Selling Shareholder has provided the Underwriters with a
written agreement (a "Lock-up Letter") that for a period of 180 days
from the date of the Final Prospectus, other than the Optional Shares,
he will not, without the prior written consent of William R. Hough &
Co., on behalf of the Underwriters, offer, pledge, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to purchase or
other disposition), directly or indirectly, any shares of Common Stock
or securities convertible into, or exercisable or exchangeable for,
shares of Common Stock.
(ii) Such Selling Shareholder has full right, power and authority to
enter into the Lock-up Letter and this Agreement, the Power of
Attorney and the Custody Agreement in the forms heretofore furnished
to you (the "Power of Attorney and the Custody Agreement") and on the
date hereof such Selling Shareholder has and, at the time of delivery
of the Optional Shares to the Underwriters hereunder, such Selling
Shareholder will have full right, power and authority to sell and
deliver the Optional Shares to be sold by such Selling Shareholder to
the Underwriters, and at the date hereof such Selling Shareholder is,
and at the time of delivery of the Optional Shares to the Underwriters
such Selling Shareholder will be, the lawful owner of and has and will
have marketable title to the Optional Shares to be sold by such
Selling Shareholder free and clear of any claims, liens, encumbrances
or security interests. Further, delivery of the Optional Shares to be
sold by such Selling Shareholder pursuant to this Agreement will pass
title to such shares free and clear of any security interests, claims,
liens, equities and other encumbrances.
(iii) The performance of the Lock-up Letter, this Agreement, the Power
of Attorney and the Custody Agreement, and the consummation of the
transactions herein and therein contemplated, will not conflict with
or result in a breach of, or default under, any agreement, indenture
or other instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder is bound, or any law, rule,
administrative regulation or court decree. The Lock-up Letter, this
Agreement, the Power of Attorney and the Custody Agreement have been
validly authorized, executed and delivered by such Selling Shareholder
and each constitutes a legal, valid and binding obligation of such
Selling Shareholder enforceable against such Selling Shareholder in
accordance with its terms.
(iv) No consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or
governmental agency or body is required for the sale of the Shares to
be sold by such Selling Shareholder or the consummation of the
transactions contemplated by the
<PAGE>
Lock-up Letter, this Agreement, the Power of Attorney or the Custody
Agreement, except the registration of Shares under the Act (which, if
the Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this Agreement) and
such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of such Shares by the
Underwriters.
(v) When the Registration Statement becomes effective and at all times
subsequent thereto, the Registration Statement, any post-effective
amendment thereto and the Final Prospectus as amended and
supplemented, did not and will not contain any untrue statement of a
material fact regarding such Selling Shareholder or omit to state a
material fact regarding such Selling Shareholder required to be stated
therein or necessary in order to make the statements therein not
misleading, and such Selling Shareholder is, and shall be, unaware of
any untrue statement of a material fact in such documents or the
omission from such documents of any material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(vi) Certificates in negotiable form representing all of the Optional
Shares to be sold by such Selling Shareholder have been placed in
custody under the Power of Attorney and the Custody Agreement duly
executed and delivered by such Selling Shareholder to and appointing,
____________________________, as custodian (the "Custodian"), with
authority to deliver and receive payment for the Optional Shares to be
sold by such Selling Shareholder hereunder, and appointing
____________________ and _______________________, or either of them,
as the Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact")
with authority to execute and delivery this Agreement and any other
documents necessary or desirable in connection with the transactions
contemplated hereby on behalf of such Selling Shareholder, and
otherwise to act on behalf of such Selling Shareholder and take all
actions that may be necessary or desirable in connection with the
transactions contemplated by this Agreement, the Power of Attorney and
the Custody Agreement.
<PAGE>
(vii) The Optional Shares represented by the certificates held in
custody for such Selling Shareholder under the Power of Attorney and
the Custody Agreement are subject to the interests of the Underwriters
hereunder, and the arrangements made by such Selling Shareholder for
such custody, as well as the appointment by such Selling Shareholder
of the Attorney-in-Fact, are, to that extent, irrevocable. The Selling
Shareholder specifically agrees that the obligations of the Selling
Shareholder hereunder shall not be terminated by operation of law,
whether by the death or incapacity of such Selling Shareholder or by
the occurrence of any other event. If the Selling Shareholder should
die or become incapacitated, or if any other similar event should
occur before the delivery of the Optional Shares hereunder,
certificates representing such Shares shall be delivered by or on
behalf of such Selling Shareholder in accordance with the terms and
conditions of this Agreement and of the Power of Attorney and the
Custody Agreement, and the actions taken by the Attorney-in-Fact
pursuant to the Power of Attorney and the Custody Agreement shall be
as valid as if such death, incapacity or other event had not occurred,
whether or not the Custodian or the Attorney-in-Fact shall have
received notice of such death, incapacity or other event.
(viii) In order to document the Underwriters' compliance with the
reporting withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, the
Selling Stockholder agrees to deliver to you prior to or on the
Optional Closing Date (as hereinafter defined), a properly completed
and executed United States Treasury Department Form W-8 or W-9 (or
other applicable form of statement specified by Treasury Department
regulations in lieu thereof).
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions herein set
forth, (i) the Company agrees to sell to the Underwriters that number of Firm
Shares set forth opposite the name of the Company in Schedule II annexed hereto,
and (ii) each of the Underwriters agrees, severally and not jointly, to purchase
from the Company, at a purchase price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter on Schedule I annexed
hereto.
The Selling Shareholder hereby grants to the Underwriters the right to
purchase at their election in whole or in part up to 180,000 Optional Shares at
the purchase price per share set forth in clause (i) in the paragraph above for
the sole purpose of covering over-allotments in the sale of Firm Shares. If the
option granted hereby is exercised in whole or in part, then the respective
number of Optional Shares to be purchased by each of the Underwriters shall be
determined by multiplying the total number of Optional Shares as to which such
election shall have been exercised by the Underwriters by a fraction, the
numerator of which is the maximum number of Optional Shares such Underwriter is
entitled to purchase as set forth opposite the name of such Underwriter in
Schedule I hereto and the denominator of which is the maximum number of Optional
Shares that all Underwriters are entitled to purchase hereunder (with the
resulting number to be adjusted by the Underwriters so as to eliminate
fractional shares). Any such election to purchase
<PAGE>
Optional Shares may be exercised by written notice from the Underwriters to the
Selling Shareholder, given within a period of 30 calendar days after the date of
this Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by the Underwriters but in no event earlier than the First Time of
Delivery or, unless the Underwriters and the Company otherwise agree, to furnish
or cause to be furnished to the Underwriters the certificates, letters and
opinions, and to satisfy all conditions, set forth in Section 6 hereof at the
Subsequent Time of Delivery.
After the Registration Statement becomes effective, the several
Underwriters intend to offer the Shares to the public as set forth in the
Prospectus.
3. DELIVERY OF SHARES; CLOSING. Certificates in definitive form for the
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as William R. Hough & Co. may request upon at least
48 hours prior notice to the Company, shall be delivered by or on behalf of the
Company to the Underwriters for the account of such Underwriter, against payment
by such Underwriter on its behalf as provided herein. Payment shall be made with
respect to the purchase price for the Firm Shares, to the Company, by wire
transfer or official bank check or checks payable to the order of the Company,
in next day available funds against delivery of the certificates for the Firm
Shares. The closing of the sale and purchase of the Shares shall be held at the
offices of William R. Hough & Co., 100 2nd Avenue South, Suite 800, St.
Petersburg, Florida 33701, (the "Representative's Office"), or at such location
in Tampa, Florida as the Representatives may designate, except that physical
delivery of certificates for the Shares shall be made at the direction of the
Underwriters either at the Representative's Office or at the office of
________________, ___________________ (the "_________ Office"), or shall be made
to The Depository Trust Company ("DTC"), 55 Water Street, New York, New York
10041, for the account of the Underwriters or for such other accounts as the
Underwriters shall specify to DTC. The time and date of such delivery and
payment shall be, with respect to the Firm Shares, at 10:00 a.m., Eastern time,
on the third full business day after this Agreement is executed or at such other
time and date as the Underwriters and the Company may agree upon in writing ,
and, with respect to the Optional Shares, 10:00 a.m., Eastern time, on the date
specified by the Underwriters in the written notice given by the Underwriters of
the Underwriters' election to purchase all or part of such Optional Shares, or
at such other time and date as the Underwriters, and the Attorney-in-Fact,
pursuant to the Power of Attorney and Custody Agreement with the Selling
Shareholder, on behalf of the Selling Shareholder, may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the "First
Time of Delivery," and such time and date for delivery of any Optional Shares,
if not the First Time of Delivery, is herein called a "Subsequent Time of
Delivery," and each such time and date for delivery of any Optional Shares, if
not the First Time of Delivery, is herein called a "Subsequent Time of
Delivery," and each such time and date for delivery is herein called a "Time of
Delivery." The Company will make certificates for the Shares available for
checking and packaging at least 24 hours prior to each Time of Delivery at the
___________ Office or the office of DTC in New York, New York or at such other
location in New York, New York specified by the Underwriters in writing at least
48 hours prior to such Time of Delivery.
<PAGE>
4. COVENANTS.
a. The Company covenants and agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto, if not effective at the time and
date that this Agreement is executed and delivered by the parties
hereto, to become effective. If the Registration Statement has become
or becomes effective pursuant to Rule 430A of the Rules and
Regulations, or the filing of the Final Prospectus is otherwise
required under Rule 424(b) of the Rules and Regulations, the Company
will file the Final Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing; the Company will notify
you, promptly after it shall receive notice thereof, of the time when
the Registration Statement or any post-effective amendment to the
Registration Statement has become effective or any amendment or
supplement to the Final Prospectus has been filed.
(ii) The Company will notify you promptly of any request by the
Commission to amend or supplement the Registration Statement or Final
Prospectus or for additional information; promptly upon your request,
the Company will prepare and file with the Commission amendments or
supplements to the Registration Statement or Final Prospectus which,
in the reasonable opinion of, Schifino & Fleischer, P.A., counsel for
the several Underwriters, may be necessary or advisable in connection
with the distribution of Shares by the Underwriters; the Company will
fully and completely comply with the provisions of Rule 430A of the
Rules and Regulations with respect to information omitted from the
Registration Statement in reliance upon such Rule; the Company will
promptly prepare and file with the Commission, and promptly notify you
of the filing of, any amendment or supplement to the Registration
Statement or Final Prospectus that may be necessary to correct any
statements or omissions if, at any time a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have
occurred as a result of which the Final Prospectus would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus within the nine-month
period referred to in Section 10(a)(3) of the Act in connection with
the sale of the Shares, the Company will prepare promptly upon request
of such Underwriters, at the expense of the Company, such amendment or
amendments to the Registration Statement and the Final Prospectus as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the Act, and it will file no amendment or supplement to
the Registration Statement or the Final Prospectus that shall not
previously have been submitted to you a reaonsable time prior to the
proposed filing thereof or to which you shall reasonably object in
writing, subject, however, to
<PAGE>
compliance with the Act and the Rules and Regulations thereunder and
the provisions of this Agreement.
(iii) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order
by the Commission suspending the effectiveness of the Registrations
Statement or of the initiation or threat of any proceeding for that
purpose; and the Company shall promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such a stop order should be issued.
(iv) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so
long as may be required for purposes of the distribution of the
Shares, except that the Company shall not be required in connection
therewith or as a condition thereof to qualify as a foreign
corporation or to execute a general consent to service of process in
any jurisdiction or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the shares have
qualified as above provided, the Company will make and file such
statements and reports in each year as are or may be reasonable
required by the laws of such jurisdiction.
(v) The Company has furnished to you all Registration Statements filed
with the Commission prior to the date hereof and will furnish to you,
as soon as available, three copies of the Registration Statement
(including all exhibits), each Preliminary Prospectus or the Final
Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section
10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request.
(vi) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the 45th day
following the end of the fiscal quarter first occurring after the
first anniversary of the "effective date of the Registration
Statement" (as defined in Rule 158(c) of the Rules and Regulations),
an earnings statement (which will be in reasonable detail but need not
be audited) complying with the provisions of Section 11(a) of the Act
and covering a twelve-month period beginning after the effective date
of the Registration Statement.
(vii) During a period of five years after the date hereof if required
by law or the applicable rules of the Commission, any securities
exchange or the National Association of Securities Dealers Inc. (the
"NASD"), the Company will furnish to its stockholders, as soon as
practicable after the end of each respective period, annual reports
(including financial statements audited by independent public
accountants) and unaudited quarterly reports of operations for each of
the first three quarters of the fiscal year, and will
<PAGE>
furnish to you and the other several Underwriters hereunder, upon
request, (i) concurrently, if required (when available if not), with
furnishing such reports to its stockholders, statements of operations
of the Company for each of the first three quarters in the form
furnished to the Company's stockholders; (ii) concurrently with
furnishing to its stockholders, an annual report; (iii) as soon as
they are available, copies of all other reports (financial or other)
mailed to the Company's Stockholders; (iv) as soon as they are
available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v)
every material press release in respect of the Company or its affairs
which was released or prepared by the Company; and (vi) any additional
information of a public nature concerning the Company or its business
that you may reasonably request. During such five-year period, if the
Company shall have active Subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the
accounts of the Company and its Subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any
significant Subsidiaries that is not so consolidated.
(viii) The Company shall not, during the 180 days following the date
on which the Shares are first released by you for sale to the public,
except with the prior written consent of William R. Hough & Co., offer
for sale, sell, distribute or otherwise dispose of any shares of
Common Stock, or sell or grant options, rights or warrants with
respect to any shares of Common Stock (other than the grant of options
pursuant to option plans existing on the date hereof or the issuance
Common Stock upon exercise of outstanding options or Warrants), or any
securities convertible or exchangeable into Common Stock, except for
securities issued in connection with an acquisition.
(ix) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use
of Proceeds" in the Final Prospectus.
b. The Selling Shareholder covenants and agrees with the several
Underwriters that:
(i) Such Selling Shareholder will not (i) take, directly or
indirectly, prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to cause or to
result in, or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Shares, (ii)
sell, bid for, purchase or pay anyone any compensation for soliciting
purchases of, the Shares or (iii) pay to or agree to pay any person
any compensation for soliciting another to purchase any other
securities of the Company.
<PAGE>
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, with respect to the transactions herein
contemplated, the Selling Shareholder agrees to deliver to the
Underwriters prior to or at the First Time of Delivery a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
5. EXPENSES.
a. The Company will pay and bear all costs and expenses in connection
with (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits), Preliminary Prospectuses,
Final Prospectus and any amendments or supplements thereto; (ii) the
printing of this Agreement, the Blue Sky Memoranda and any instruments
related to any of the foregoing, issuance and delivery of the Shares
hereunder to the several Underwriters, including taxes and the cost of all
stock certificates representing the Shares; fees and charges of the
Transfer Agent; fees and disbursements of counsel for the Company and
Selling Shareholder; (iii) all fees and other charges of the Company's
independent public accountants; (iv) the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectuses, Final Prospectus and any amendments or
supplements to any of the foregoing; (v) NASD filing fees and the cost of
qualifying the Shares under the laws of the jurisdictions as you may
reasonably designate; (vi) the costs and expenses of the Company relating
to investor presentations on any "road show" undertaken in connection with
marketing the offering of the Shares, including, without limitation, travel
and lodging expenses of the Representatives and officers of the Company and
in connection with the road show (limited with respect to the
Representatives to the extent set forth in subparagraph 5(b) below); and
(vii) other expenses directly incurred by the Company in connection with
the performance of its obligations hereunder.
b. If the transactions contemplated hereby are not consummated by reason
of any refusal or inability on the part of the Company or Selling
Shareholder, to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder, of if the Company shall terminate the Agreement
under Section 10(a) hereof, the Company will reimburse the several
Underwriters for all reasonable out-of-pocket expenses (including any and
all reasonable fees and disbursements of Underwriters' Counsel) up to
$75,000 incurred by the Underwriters in preparing to market or marketing
the Shares.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS
<PAGE>
The obligations of the several Underwriters to purchase and pay for the
Shares as provided herein, shall be subject to the material accuracy, as of the
date hereof and the Closing Date and any later date on which Optional Shares are
to be purchased, as the case may be, of the representations and warranties of
the Company and Selling Shareholder herein, to the performance by the Company of
its obligations hereunder and to the following additional conditions:
a. The Registration Statement shall have become effective; if the filing
of the Final Prospectus, or any supplement thereto, is required pursuant to
Rule 424(b) of the Rules and Regulations, the Final Prospectus shall have
been filed in the manner and within the time period required by Rule 424(b)
of the Rules and Regulations; and no stop order suspending the
effectiveness thereof shall have been issued and no proceeding for that
purpose shall have been initiated or, to the knowledge of the Company or
any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Final Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
b. All corporate proceedings and other legal matters in connection with
this Agreement, the form of Registration Statement, all Preliminary
Prospectuses, the Final Prospectus, and the registration, authorization,
issue, sale and delivery of the Shares shall have been satisfactory to
Underwriters' Counsel and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them
to pass upon the matters referred to in this subsection.
c. You shall have received on the Closing Date and any later date on
which Option Shares are purchased, as the case may be, the following
opinions of opinions, certificates and letters, dated the Closing Date or
such later date, addressed to the Underwriters and with reproduced copies
or signed counterparts thereof for each of the Underwriters:
(i) the opinion of Manatt, Phelps & Phillips, LLP, counsel for the
Company to the effect that:
(a) Each of the Company and its Subsidiaries is a corporation
validly existing and in good standing under the corporate laws of
its jurisdiction of organization;
<PAGE>
(b) Each of the Company and its Subsidiaries have the corporate
power and corporate authority (corporate and other) to own, lease
and operate its properties and conduct its business as described
in the Final Prospectus and each of the Company and its
Subsidiaries are qualified to do business as a foreign
corporation in good standing in all jurisdictions, if any, where
the ownership or leasing of properties or the conduct of its
business requires such qualification, except where a failure to
qualify would not have a material adverse effect upon the
condition, financial or otherwise, of the Company and the
Subsidiaries taken as a whole.
(c) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Final Prospectus under the caption
"Capitalization" as of the date stated therein; and the issued
and outstanding shares of capital stock of the Company have been
legally issued, are fully-paid and non-assessable, and were not
issued in violation of any preemptive right or, to such counsel's
knowledge, other rights to purchase such shares;
(d) The Shares are validly authorized, and when issued, paid for
and delivered in accordance with the provisions of this
Agreement, will be validly issued, fully paid and non-assessable,
without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive
rights to shareholders;
(e) The Company has filed all documents and has satisfied all
conditions that the staff of The NASDAQ SmallCap Market has
advised the Company are required to be filed or satisfied by the
Company in connection with the listing of the Common Stock on The
NASDAQ NMS;
(f) The specimen stock certificate of the Company filed as an
exhibit to the Registration Statement is in due and proper form
to evidence shares of Common Stock, has been duly authorized and
approved by the Board of Directors of the Company and complies
with all legal requirements applicable under the Michigan General
Corporation Law; and the description of the Company's stock
option and other stock plans or arrangements, and the options or
other rights granted and executed thereunder, as set forth in the
Final Prospectus accurately and firmly present the information
required to be shown with respect to such plans, arrangements,
options and rights.
(g) All of the issued shares of capital stock of each Subsidiary
of the Company have been duly and validly authorized and issued,
are fully paid and nonassessable. The Company owns one
<PAGE>
hundred percent (100%) of the issued and outstanding capital
stock of (i) Wastenaw Mortgage Company, a Delaware corporation
and (ii) Pelican National Bank, a national bank;
(h) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and duly executed and
delivered by an authorized representative of the Company and,
assuming due authorization, execution and delivery by you, is a
valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except insofar as the
enforceability of indemnification and contribution provisions may
be limited by applicable law or equitable principles, and except
as enforceability may be limited by bankruptcy, reorganization,
moratorium or similar laws affecting the enforceability of
creditors' rights generally and rules of law governing
performance, injunctive relief and other equitable remedies;
(i) The Registration Statement has become effective under the
Act and, to counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted and are
pending or contemplated under the Act; any required filing of the
Final Prospectus and any supplement thereto pursuant to Rule
424(b) of the Rules and Regulations have been made in the manner
and within the time period required by such Rule 424(b);
(j) The Registration Statement and the Final Prospectus, and
each amendment or supplement thereto (other than the financial
statements, financial data and supplemental schedules included
therein, as to which such counsel need express no opinion),
complies as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations;
(k) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof
contained in the Registration Statement and the Final Prospectus,
and the information in the Final Prospectus under the caption
"Description of Capital Stock."
(l) To such counsel's knowledge, the performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of
the terms and provisions, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, or
any lease, contract or other agreement or instrument to which the
Company is a party or by which its properties are bound and which
breach or violation
<PAGE>
would have a material adverse effect upon the condition,
financial or otherwise, of the Company; the Company's Certificate
of Incorporation or By-laws; or, any statute, rule or regulation
or, to such counsel's knowledge after due inquiry, any order,
writ or decree of any court or governmental agency or body having
jurisdiction over the Company or over any of its properties or
operations;
(m) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the
consummation of the transactions herein contemplated except such
as have been obtained under the Act or such as may be required
under state or other securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters;
(n) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened of a character
that are required to be disclosed in the Registration Statement,
by the Act or the applicable Rules and Regulations;
(o) To such counsel's knowledge, the Company is not presently in
breach of, or in default under any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness or any other agreement or instrument
which would have a material adverse effect on the Company's
financial condition or to which the Company is a party or by
which any of its properties is bound;
(p) To such counsel's knowledge, except as described in the
Prospectus, no person, corporation, trust, partnership,
association or other entity has the right to include and/or
register any securities of the Company in the Registration
Statement, require the Company to file any registration
statement or, if filed, to include any security in such
registration statement;
(q) The descriptions of whole loan sales effected by the
Company, as contained in the Registration Statement and the Final
Prospectus, are true and complete in all material respects and no
event or series of events has occurred that would result in any
of the securities issued in securitizations using such loans
being downgraded or placed on a watch list with negative
implications by any rating agency or similar organization, or
that would impair the Company's or its Subsidiaries' ability to
consummate future whole loan sales or to securitize such loans
itself upon economic terms consistent with past whole loan sales
and securitizations of such loans or otherwise cause the Company
and its Subsidiaries to suffer any material adverse change with
respect to any past or future whole loan sale or securitization
(other than any such event or series of events described in the
Final Prospectus).
<PAGE>
(r) To such counsel's knowledge, the description of the
secondary market activities effected by the Company, as set forth
in the Registration Statement and the Final Prospectus, is true
and complete in all material respects and to such counsel's
knowledge, no event or series of events has occurred that would
result in any of the securities issued in connection with any of
such secondary market activities being downgraded or placed on a
watch list with negative implications by any rating agency or
similar organization, or that would impair the Company's or its
Subsidiaries' ability to consummate future secondary market
activities upon economic terms consistent with past secondary
market activities or otherwise cause the Company and its
Subsidiaries to suffer any material adverse effect with respect
to any past or future secondary market activities (other than any
such event or series of events described in the Final
Prospectus).
(s) No Default or Event of Default (as defined in the Credit
Facility) has occurred and, to the best of the such counsel's
knowledge, there is no event which, with the giving of notice or
the passage of time or both, would give rise to such an event.
(t) The Company is not, after receiving the proceeds from the
sale of the Company Shares, an "investment company" within the
meaning of the 1940 Act.
(u) The statements in the Prospectus under the captions entitled
"BUSINESS," "REGULATION," "MANAGEMENT," "DESCRIPTION OF CAPITAL
STOCK," "CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY," and
"SELLING STOCKHOLER" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects;
(v) Based upon the description of the Company's business in the
Final Prospectus, each of the Company and its Subsidiaries hold
all material licenses, certificates, permits and approvals from
all state, Federal and other regulatory authorities that are
required for the Company to lawfully own, lease and operate its
properties and conduct its business as described in the Final
Prospectus, and to such counsel's knowledge, each of the Company
and its Subsidiaries are conducting its business in compliance
with all of the material laws, rules and regulations of each
jurisdiction in which it conducts its business.
(w) To such counsel's knowledge, there are no agreements,
contracts or other documents required by the Act to be described
in
<PAGE>
the Registration Statement and the Final Prospectus and filed as
exhibits to the Registration Statement other than those described
in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in
whole or in part, by reference therein) and to such counsel's
knowledge the exhibits which have been filed are correct copies
of the documents of which they purport to be copies.
(x) Except as described in the Final Prospectus, to such
counsel's knowledge, the Company does not (i) maintain, sponsor
or contribute to any ERISA Plans, (ii) maintain or contribute,
now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA, and (iii) has never completely
or partially withdrawn from a "multiemployer plan."
In rendering such opinions, such counsel may rely (i) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (ii) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company, and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and that the
Representatives and they are justified in relying thereon. Such opinion shall
also state that the Underwriters' Counsel is entitled to rely thereon.
In addition, such counsel shall provide a letter addressed to the
Underwriters stating that although such counsel has not verified the accuracy or
completeness of the statements contained in the Registration Statement or the
Final Prospectus, nothing has come to the attention of such counsel that caused
such counsel to believe that, (a) at the time the Registration Statement became
effective, the Registration Statement (except as to financial statements,
financial data and supporting schedules contained therein, which need not be
addressed by such counsel) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (b) at the Closing Date or any
later date on which the Optional Shares are to be purchased, as the case may be,
the Registration Statement or the Final Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(ii) The counsel for the Selling Shareholder shall have furnished to
you their written opinion with respect to the Selling Shareholder for whom
they are
<PAGE>
acting as counsel, dated the Closing Date, in form substance satisfactory
to you, to the effect that:
(a) This Agreement has been duly executed and delivered by such
Selling Shareholder.
(b) A Power of Attorney and Custody Agreement have been duly
authorized, executed and delivered by or on behalf of the Selling
Shareholder.
(c) The performance of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of
any of the terms and provisions, or constitute a default under,
any indenture mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, or
any lease, contract or other agreement or instrument known to
such counsel to which the Selling Shareholder is a party or by
which its properties are bound or to such counsel's knowledge,
any order, writ or decree of any court or governmental agency or
body having jurisdiction over Selling Shareholder or over any of
his properties;
(d) The Underwriters are acquiring the Optional Shares free of
any adverse claim (except for any restrictions on transfer that
may be imposed by law pursuant to federal or state securities
laws and except for claims created by or through the
Underwriters). The Selling Shareholder has the full right, power
and authority to sell, assign, transfer and deliver the Optional
Shares.
In rendering these opinions, such counsel may rely upon a certificate
of the Selling Shareholder as to matters of fact. The opinions rendered by
such counsel may contain normal assumptions, qualifications and limitations
with respect to the matters set forth therein.
(iii) You shall have received from Underwriters' Counsel an opinion or
opinions, dated the Closing Date, in form and substances satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions
contemplated hereby as you may reasonably require, and the Company shall
have furnished to such counsel such documents as it may have requested for
the purpose of enabling it to pass upon such matters.
(iv) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in
form and substance satisfactory in all respects to the Underwriters and the
Underwriters' Counsel, from Crowe Chizek & Company, LLP;
<PAGE>
(a) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the
Act and the applicable Rules and Regulations;
(b) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in
the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act
and the Rules and Regulations thereunder and that the
Representatives may rely upon the opinion of Crowe Chizek &
Company, LLP with respect to such financial statements and
supporting schedules included in the Registration Statement;
(c) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim
financial statements of the Company, a reading of the latest
available minutes of the stockholders and board of directors and
the various committees of the boards of directors of the Company,
consultations with officers and other employees of the Company
responsible for financial and accounting matters, nothing has
come to their attention which would lead them to believe that (i)
the pro forma financial information contained in the Registration
Statement and Prospectus does not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or is not fairly presented
in conformity with generally accepted accounting principles
applied on a basis consistent with that of the audited financial
statements of the Company, (ii) the unaudited financial
statements and supporting schedules of the Company included in
the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements of the Company included in the
Registration Statement, or (iii) at a specified date not more
than five (5) days prior to the effective date of the
Registration Statement, or the most recent month end, there has
been any change in the capital stock of the Company, any change
in the long-term debt of the Company or any decrease in the
stockholders' equity of the Company or any decrease in the net
current assets or net assets of the Company as compared with
amounts shown in the March 31, 1999 balance sheet included in the
Registration Statement other than as set forth in or contemplated
by the Registration Statement, or the most recent month ended,
or, if there was any change or decrease, setting forth the amount
of such change or decrease, and (iv) during the period from March
31, 1999 to a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there was any
decrease in net
<PAGE>
revenues or net earnings of the Company or decrease in net
earnings per common share of the Company, in each case as
compared with the corresponding period beginning March 31, 1998,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the
amount of such decrease;
(d) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, or the most recent
month ended, the amount of liabilities of the Company (including
a break-down of non-interest bearing and interest bearing
deposits, warehouse line of credit, notes payable and repurchase
agreement);
(e) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the
Company set forth in the Prospectus in each case to the extent
that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be
in agreement; and
(f) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may
request.
(v) At the Time of Delivery, if any, the Underwriters shall have
received from Crowe Chizek & Company, LLP a letter, dated as of the
Time of Delivery, as the case may be, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection
(iv) of this Section hereof except that the specified date referred to
shall be a date not more than five days prior to the respective Times
of Delivery, if any, and, if the Company has elected to rely on Rule
430A of the Rules and Regulations, to the further effect that they
have carried out procedures as specified in clause (iv) of subsection
(i) of this Section with respect to certain amounts, percentages and
financial information as specified by the Representatives and deemed
to be a part of the Registration Statement pursuant to Rule 430A(b)
and have found such amounts, percentages and financial information to
be in agreement with the records specified in such clause (iv).
<PAGE>
(vi) You shall have received on the Closing Date and on any later date
on which Optional Shares are purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date,
signed by the President and Chief Financial Officer of the Company, to
the effect that, and you shall be satisfied that:
(a) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Optional Shares are to be
purchased; and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on
which Optional Shares are to be purchased;
(b) To the best of their knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued, and
no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(c) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Final Prospectus and any
amendments or supplements thereto contained all statements and
information required to be included therein or necessary to make
the statements therein in light of the circumstances under which
they were made, not misleading and neither the Registration
Statement nor the Final Prospectus nor any amendment or
supplement thereto included any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary to make the statement therein not misleading
and, since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an
amended or supplemented Prospectus that has not been so set
forth;
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Final Prospectus,
and except as contemplated in the Final Prospectus, the Company
has not incurred any direct or contingent liabilities or
obligations material to the Company not in the ordinary course of
business, or entered into any transactions material to the
Company not in the ordinary course of business, and there has not
been any change in the capital stock or outstanding indebtedness
of the Company material to, or any material adverse change in,
the business, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole; and
<PAGE>
(e) Subsequent to the respective dates as of which
information is given in the Registration Statement
and the Final Prospectus, the Company has not
sustained any material loss of or damages to its
properties, whether or not insured.
(vii) You shall have received on the date on which Optional
Shares are purchased, a certificate, dated such date, signed
by or on behalf of Selling Shareholder, to the effect that the
representations and warranties of such Selling Shareholder in
this Agreement are materially correct on and as of the date of
this Agreement and on and as of such date, as if made on and
as of such date, and that such Selling Shareholder complied
with all of the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to such
date.
(viii) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request
(including certificates of officers of the Company) as to the
accuracy of the representations and warranties of the Company
herein, as to the performance by the Company of their
respective obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the
Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
d. The shares have been approved for trading upon notice of issuance on
The NASDAQ NMS.
e. The Lockup Letter shall have been delivered to the Underwriters and
the Company shall have noted the restrictions contained in such Lockup
Letters on the books and records of the Company relating to stock transfers
and on any certificates representing shares of Common Stock held by such
person.
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) any untrue statement
or alleged untrue statement made by the Company in Section 1(a) of this
Agreement; (ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus, Final Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the
<PAGE>
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"); or
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, Final
Prospectus or any amendment or supplement thereto, or any Application, a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any Amendment thereto, any Preliminary
Prospectus, Final Prospectus or any amendment or supplement thereto or any
Application, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter expressly for use therein. The
obligations of the Company to indemnify the Underwriters (and any
controlling person of each Underwriter) pursuant to this Agreement is
subject to the condition that, insofar as such indemnity agreement shall
not inure to the benefit of any Underwriter from whom the person asserting
such losses, liabilities, claims, damages or expenses purchased the Shares
in the Offering, if (i) such Underwriter failed to deliver a copy of the
Final Prospectus to such person at or prior to the time delivery is
required by the Act, unless such failure was due to the failure by the
Company to provide copies of the Final Prospectus to such Underwriter; and
(ii) the delivery of such Final Prospectus to such person would have
constituted a complete defense to the losses, claims, damages, liabilities
or expenses asserted by such person. The Company will not, without the
prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding (or related cause of action or portion thereof) in
respect of which indemnification may be sought hereunder (whether or not
such Underwriter is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional
release of such Underwriter from all liability that arises out of such
claim, action, suit or proceeding (or related cause of action or portion
thereof).
b. The Selling Shareholder agrees to indemnify and hold harmless the
Company and each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which the Company or such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon: (i) any untrue statement or alleged untrue statement made by
such Selling Shareholder in Section 1(b) of this Agreement; or (ii) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus the Final Prospectus or any amendment or supplement thereto, or
any Application, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided such
missing or untrue information was included in reliance upon or conformity
with written information furnished to the Company by the Selling
Shareholder expressly for use therein. The Selling Shareholder agrees to
reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating, defending
against or appearing as a third-party witness in connection with any such
loss, claim, damage, liability or action; provided, however, that such
Selling Shareholder shall be liable in any such case only to the extent
that any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any amendment
thereto, any Preliminary Prospectus the Final
<PAGE>
Prospectus or any amendment or supplement thereto or any Application, in
reliance upon and in conformity with written information furnished to the
Company by such Selling Shareholder expressly for use therein. The
obligations of the Selling Shareholder to indemnify the Underwriters (or
any controlling person of such Underwriter) pursuant to this indemnity
agreement is subject to the condition that, insofar as such losses, claims,
damages, liabilities or expenses relate to any such untrue statement,
alleged untrue statement, omission or alleged omission made in a
Preliminary Prospectus that is corrected in the Final Prospectus, such
indemnity agreement shall not inure to the benefit of any Underwriter from
whom the person asserting such losses, liabilities, claims, damages or
expenses purchased the Shares in the Offering, if (i) such Underwriter
failed to deliver a copy of the Final Prospectus to such person at or prior
to the time delivery of such Final Prospectus is required by the Act,
unless such failure was due to the failure by the Company to provide copies
of the Prospectus to such Underwriter; and (ii) the delivery of such Final
Prospectus to such person would have constituted a complete defense to the
losses, claims, damages, liabilities or expenses asserted by such person.
The Selling Shareholder will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding (or related
cause of action or portion thereof) in respect of which indemnification may
be sought hereunder (whether or not such Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of such Underwriter from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof). Notwithstanding the foregoing
provisions of this Section 7(b), the Underwriters shall not be entitled to
indemnity or contribution from the Selling Shareholder in excess of the net
proceeds of the offering (before deducting expenses) received by such
Selling Shareholder.
c. Each Underwriter, severally but not jointly, agrees to indemnify and
hold harmless the Company and the Selling Shareholder and their directors
and officers who sign the Registration Statement and any person who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities
to which the Company or the Selling Shareholder may become subject under
the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(a) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Final Prospectus, or any amendment or
supplement thereto, or any Application, or which arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter expressly for use
therein or (b) the negligence or willful misconduct by such Underwriter,
and will reimburse the Company and the Selling Shareholder and their
directors and officers who sign the Registration Statement and any person
who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, for any legal or other expenses reasonably
incurred by the Company or such Selling Shareholder and their directors and
officers who sign the Registration Statement and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, in connection with investigating or defending any such
loss, claim, damage, liability or action.
<PAGE>
d. Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party); provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded based upon written advice
of counsel that there may be one or more legal defenses available to it or
other indemnified parties that are different from or additional to those
available to the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such action on behalf of such
indemnified party and such indemnified party shall have the right to select
separate counsel to defend such action on behalf of such indemnified party,
provided, further, however, that the Company shall be liable for the fees
and expenses of only one separate firm of attorneys for all indemnified
parties at any time in connection with any action, suit or proceeding or in
a series of separate but substantially similar or related actions, suits or
proceedings arising out of the same general allegations and circumstances.
After such notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence or (ii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. Nothing in this Section 7(d) shall preclude an
indemnified party from participating at its own expense in the defense of
any such action so assumed by the indemnifying party.
e. If the indemnification provided for in this Section 7 is unavailable
to or insufficient to hold harmless an indemnified party under subsection
(a), (b), (c) or (d) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Selling Shareholder on the one hand and the Underwriters on the other
from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law, then
each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company and
the Selling Shareholder on the one hand and the Underwriters on the other
in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Shareholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company and the Selling Shareholder bear to the total
underwriting discounts and
<PAGE>
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Selling Shareholder on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholder and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
subsection (e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, (ii) the Selling
Shareholder shall not be required to contribute any amount in excess of the
amount by which the net proceeds received by such Selling Shareholder from
the sale of Shares exceeds the damages which such Selling Shareholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and (iii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
f. The obligations of the Company and the Selling Shareholder under this
Section 7 shall be in addition to any liability which the Company or such
Selling Shareholder may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters
under this Section 7 shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and any
Selling Shareholder and to each person, if any, who controls the Company or
the Selling Shareholder within the meaning of the Act.
8. INDEMNITY, REPRESENTATIONS AND WARRANTIES TO SURVIVE DELIVERY. The
indemnity and contribution provisions contained in this Section 7 and the
representations, warranties and other statements of the Company and the Selling
Shareholder contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Selling Shareholder or any person controlling the Selling
Shareholder, or the Company, its officers or directors or any person controlling
the Company and (iii) acceptance of and payment for any of the Shares.
<PAGE>
9. DEFAULT BY UNDERWRITERS. If any Underwriter or Underwriters shall fail to
take up and pay for the number of Firm Shares agreed by such Underwriter of
Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof and the aggregate number of Firm Shares that
such defaulting Underwriter or Underwriters so agreed but failed to purchase
does not exceed 10% of the Firm Shares, the remaining Underwriters shall be
obligated severally in proportion to their respective commitments hereunder, to
take up and pay for the Firm Shares of such defaulting Underwriter or
Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares that such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
that the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares that the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters to substitute within
twenty-four hours (including non-business hours) another underwriter or
underwriters (which may include any nondefaulting Underwriter) satisfactory to
the Company. If no such underwriter or underwriters shall have been substituted
as aforesaid by such postponed Closing Date, the Closing Date may, at the option
of the Company, be postponed for a further twenty-four hours, if necessary, to
allow the Company to find another underwriter or underwriters, satisfactory to
you, to purchase the Firm Shares that the defaulting Underwriter or Underwriters
so agreed but failed to purchase. If it shall be arranged for the remaining
Underwriter or substituted Underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven full business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Final Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statements or supplements to the Final
Prospectus that may thereby be made necessary, and (ii) the respective number of
Firm Shares to be purchased by the remaining Underwriters and substituted
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section, the Company shall not be liable to any Underwriter
(except as provided in Section 5 and in Section 7 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Section 7 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section.
<PAGE>
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION
a. This Agreement shall become effective immediately as to Sections 5, 7,
9, 10 and 11 and, as to all other provisions (i) if at the time of
execution of this Agreement the Registration Statement has not become
effective, at 9:00 A.M., Eastern time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at
the time of execution of this Agreement the Registration Statement has been
declared effective, at 9:00 A.M., Eastern time, on the first business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the
Company or by release of any of the Shares of sale to the public. For the
purposes of this Section 10, the Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Shares or upon the release by you of telegrams (i) advising
the Underwriters that the Shares are released for public offering, or (ii)
offering of Shares for sale to securities dealers, whichever may occur
first. By giving notice as set forth in Section 11 before the time this
Agreement becomes effective, you, as the Representatives of the several
Underwriters, or the Company, may prevent this Agreement from becoming
effective without liability of any party to any other party, except that
the Company shall remain obligated to pay costs and expenses to the extent
provided in Section 5a and 5b hereof.
b. You shall have the right to terminate this Agreement by giving notice
as hereinafter specified at any time on or prior to the Closing Date or on
or prior to any later date on which the Option Shares are to be purchased
as the case may be (i) if the Company or Selling Shareholder shall have
failed, refused or been unable, on or prior to the Closing Date, or on or
prior to any later date on which the Option Shares are to be purchased, as
the case may be, to perform any agreement on its part to be performed, or
because any other condition of the Underwriters' obligations hereunder
required to be fulfilled by the Company is not fulfilled, or (ii) if
trading on the New York Stock Exchange shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required on the New York
Stock Exchange, by the New York Stock Exchange or by order of the
Commission or any other governmental authority having jurisdiction, or if a
banking moratorium shall have been declared by federal or New York or
California authorities, or (iii) if at or prior to the Closing Date, or on
or prior to any later date on which Option Shares are to be purchased, as
the case may be, the Company shall have sustained a loss by strike, fire,
flood, accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured, or (iv) if
at or prior to the Closing Date, or on or prior to any later date on which
Option Shares are to be purchased, as the case may be, there shall have
been an outbreak or escalation of hostilities in which the United States is
involved or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated to such extent, in the judgment of the
Representatives, as to have a material adverse effect on the financial
markets of the United States, or to make it impracticable or inadvisable to
proceed with completion of the sale of and payment for the Shares. Any such
termination shall be without liability or any party to any other party
except as provided in Sections 5a and 5b hereof and except that in the
event of termination solely pursuant to Section 10(b)(i) hereof, the
Company shall remain obligated to pay costs and expenses pursuant to
Section 5a and b hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10, the Company shall be
notified promptly by you by telephone or telegram,
<PAGE>
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, you shall be notified promptly by the Company by telephone
or telegram, confirmed by letter.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered or telegraphed and confirmed to William R. Hough & Co., 100
2nd Avenue, Suite 800, St. Petersburg, FL, 33701, Attention: William R. Hough,
with a copy sent to Frank N. Fleischer, Esq., Schifino & Fleischer, P.A., 201 N.
Franklin Street, Suite 2700, Tampa, FL 33602; if sent to the Company shall be
mailed, delivered or telegraphed and confirmed to PN Holdings, Inc., 315 East
Eisenhower, Ann Arbor, Michigan 48108, Attention: Charles C. Huffman, with a
copy sent to Edward L. Lublin, Esq., Manatt, Phelps & Phillips, LLP, 1501 M
Street, N. W., Washington, D.C. 20005-1702.
12. PARTIES. This Agreement shall inure to the benefit of and be binding upon
the several Underwriters, the Company and Selling Shareholder and their
respective successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective successors and assigns and
the controlling persons, officers and directors referred to in Section 7 hereof,
any legal or equitable rights, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or corporation. No purchaser
of any of the shares from any Underwriter shall be construed a successor or
assign by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement, request, notice or agreement on behalf of each
of the several Underwriters as if the same shall have been made or given in
writing by you.
13. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Florida.
14. COUNTERPARTS. This Agreement may be signed in several counterparts, each of
which will constitute an original.
15. INFORMATION PROVIDED BY UNDERWRITERS. The information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters) and under "Underwriting" in any Preliminary Prospectus and in the
Final Prospectus constitutes the only information furnished by the Underwriters
to the Company for inclusion in any Preliminary Prospectus, the Final Prospectus
or the Registration Statement, and you on behalf of the respective Underwriters,
represent and warrant to the Company that the statements made therein do not
contain an untrue statement of a material fact and do not fail to state any
material fact required to be stated therein in order to make such statements in
light of the circumstances under which they were made not misleading.
[Remainder of page intentionally left blank.]
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the several Underwriters and the Selling Shareholder please so indicate in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, the several Underwriters and the Selling
Shareholder.
Very truly yours,
PN HOLDINGS, INC.
By:
----------------------------------------
THE SELLING SHAREHOLDER
CHARLES C. HUFFMAN
By:
ATTORNEY-IN-FACT
Accepted as of the date first above written:
William R. Hough & Co.
on their behalf and on behalf of each of the
Several Underwriters named in Schedule I hereto.
By: William R. Hough & Co.
By:
William R. Hough, Chairman
<PAGE>
SCHEDULE I
MAXIMUM
NUMBER NUMBER OF
OF FIRM SHARES OPTIONAL
TO BE SHARES TO BE
UNDERWRITER PURCHASED PURCHASED
- --------------------------------------------------------------------------------
William R. Hough & Co.
<PAGE>
SCHEDULE II
NUMBER OF NUMBER OF
FIRM SHARES OPTIONAL SHARES
TO BE SOLD TO BE SOLD
-------------- ---------------
The Company............................ 1,200,000 0
Charles C. Huffman..................... 0 180,000
-------------- --------
1,200,000 180,000
<PAGE>
SCHEDULE III
SUBSIDIARIES
STATE OR JURISDICTION OF
NAME INCORPORATION % OWNERSHIP
- --------------------------------------------------------------------------------
Wastenaw Mortgage Company Michigan 100%
Pelican National Bank United States 100%
<PAGE>
EXHIBIT 5.1
<PAGE>
----------------
MANATT
----------------
PHELPS
----------------
PHILLIPS
----------------
ATTORNEYS AT LAW
June 29, 1999
Board of Directors
PN Holdings, Inc.
315 East Eisenhower
Ann Arbor, Michigan 48108
Re: REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Ladies and Gentlemen:
This opinion is rendered in connection with the Registration Statement
on Form S-1 filed with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the offer and sale of up to 1,380,000 shares
of common stock, par value $0.02 per share (the "Common Stock"), of PN Holdings,
Inc. (the "Company"). As counsel to the Company, we have reviewed the corporate
proceedings relating to the offering and such other legal matters as we have
deemed appropriate for the purpose of rendering this opinion.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement, when
issued in accordance with the terms of the offering against full payment
therefor, will be validly issued, fully paid, and non-assessable shares of
Common Stock of the Company.
This opinion is given as of the date hereof and we assume no obligation
to advise you of changes that may hereafter be brought to our attention.
We hereby consent to the use of this opinion and to the reference to
our firm appearing in the Company's Prospectus under the heading "Legal
Matters." We also consent to any references to our legal opinion referred to
under the aforementioned heading in the Prospectus.
Manatt, Phelps & Phillips, LLP
/s/ Manatt, Phelps & Phillips, LLP
Manatt Phelps & Phillips, LLP
1501 M Street N. W., Suite 700, Washington, D.C. 20005-1702 - 202-463-4300
- FAX 202-463-4394
Los Angeles - Menlo Park - Nashville - Washington, D.C.
<PAGE>
Exhibit 16
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
June 27, 1999
Securities and Exchange Commission
Mail Stop 11-3
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read the two paragraphs under the heading "Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure" in Amendment No. 1 to
Registration Statement No. 333-76841 of PN Holdings, Inc. We agree with the
statement in the third sentence of the first paragraph and with the statements
in the second paragraph. We have no basis on which to agree or disagree with the
first two sentences of the first paragraph.
Yours truly,
DELOITTE & TOUCHE LLP
Detroit, Michigan
<PAGE>
EXHIBIT 23.2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-76841 of PN Holdings, Inc. of our report dated March 20, 1998 (April 29,
1999 as to the consolidated statements of comprehensive income in Notes 2, 20,
and 21), appearing in the Prospectus, which is part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Detroit, Michigan
June 30, 1999
<PAGE>
EXHIBIT 23.3
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated March 11, 1999, on the
consolidated financial statements of Pelican Financial, Inc. for the year ended
December 31, 1998, to be included within the Registration Statement on Form S-1
and Prospectus of Pelican Financial, 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
June 30, 1999
C:\TEMP\ot84jm03.doc
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED MARCH 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS OF PN HOLDINGS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,428,250
<INT-BEARING-DEPOSITS> 547,466
<FED-FUNDS-SOLD> 991,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,413,340
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 218,898,387
<ALLOWANCE> 135,465
<TOTAL-ASSETS> 249,916,138
<DEPOSITS> 37,988,958
<SHORT-TERM> 188,224,091
<LIABILITIES-OTHER> 9,929,934
<LONG-TERM> 0
0
0
<COMMON> 30,328
<OTHER-SE> 13,742,827
<TOTAL-LIABILITIES-AND-EQUITY> 249,916,138
<INTEREST-LOAN> 3,522,524
<INTEREST-INVEST> 109,260
<INTEREST-OTHER> 38,518
<INTEREST-TOTAL> 3,670,302
<INTEREST-DEPOSIT> 314,812
<INTEREST-EXPENSE> 2,463,008
<INTEREST-INCOME-NET> 1,207,294
<LOAN-LOSSES> 7,990
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,642,197
<INCOME-PRETAX> 2,337,454
<INCOME-PRE-EXTRAORDINARY> 2,337,454
<EXTRAORDINARY> 0
<CHANGES> 97,119
<NET-INCOME> 1,396,437
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 6.62
<LOANS-NON> 0
<LOANS-PAST> 1,224,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 127,475
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 135,465
<ALLOWANCE-DOMESTIC> 135,465
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
