<PAGE>
Filed pursuant to
Rule 424(b)(4)
File No. 333-76841
PROSPECTUS
PELICAN FINANCIAL, INC.
960,000 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 960,000 shares of our common stock.
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TERMS OF THE OFFERING
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<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................ $ 7.00 $6,720,000
Underwriting discounts and commissions $ 1.11 $1,056,600
and other expenses................................
Proceeds to Pelican Financial........................ $ 5.89 $5,654,400
</TABLE>
We have entered into a firm commitment underwriting agreement with The
First American Investment Banking Corporation, Stanford Group Company,
and First Colonial Securities Group, Inc. for the sale of the shares in this
offering. We have granted the underwriters an option to purchase up to
144,000 shares of common stock to cover over-allotments. We have also agreed
to grant First American a warrant to purchase up to 5% of the common stock
sold by us in this offering at an exercise price equal to 120% of the
offering price.
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Although we currently have 3,032,836 shares outstanding, there is
currently no public market for our common stock. The common stock has been
conditionally approved for listing on the American Stock Exchange under the
symbol "PFI". 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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THE FIRST AMERICAN INVESTMENT BANKING CORPORATION
STANFORD GROUP COMPANY
FIRST COLONIAL SECURITIES GROUP, INC.
The date of this prospectus November 10, 1999
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary....................................................... 3
Summary Selected Consolidated Financial Data............................. 5
Risk Factors............................................................. 6
Pelican Financial, Inc................................................... 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
Recent Developments...................................................... 42
Business ................................................................ 47
Regulation............................................................... 69
Management............................................................... 75
Description of Capital Stock............................................. 82
Restrictions on Acquisition of Pelican Financial......................... 83
Underwriting............................................................. 84
Legal Matters............................................................ 86
Experts ................................................................ 86
Changes in and Disagreements with Accountants on Accounting and
Financial Matters....................................................... 87
Available Information.................................................... 87
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."
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2
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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.
We adjusted all per share information in this prospectus to take into
account the formation of Pelican Financial in 1997. In addition, we also
adjusted all per share information 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.
Unless otherwise stated, all information in this prospectus assumes
that the underwriters will not exercise their over-allotment option.
PELICAN FINANCIAL
-- Originally incorporated in Delaware on March 3, 1997 as PN Holdings,
Inc.
-- Changed name on July 6, 1999 to Pelican Financial
-- Owns and controls all of the capital stock of Pelican National Bank
and Washtenaw Mortgage Company.
-- Currently conducts no business other than through its wholly-owned
subsidiaries.
MORTGAGE BANKING BUSINESS
-- Primarily conducted by Washtenaw 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.
-- Sells loans and mortgage servicing rights in the secondary mortgage
market to investors who purchase or make a market in loans and
mortgage servicing rights.
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
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Offering price ......... $7.00 per share of common stock.
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3
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<TABLE>
<CAPTION>
<S> <C>
Common stock offered by
Pelican Financial............ 960,000 shares of common stock, not including the
over-allotment option.
Common stock to be
outstanding immediately
after the offering........... 3,992,836 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.
Estimated Net Proceeds to
Pelican Financial........... $5,654,400, assuming the over-allotment option is not exercised.
<CAPTION>
<S> <C> <C>
Summary of Estimated
Use of Net Proceeds......... AMOUNT DESCRIPTION OF USE
----------------- -----------------------------------
$1,200,000 Repay outstanding note payable.
800,000 Contributed to Washtenaw to
increase capital.
3,000,000 Contributed to Pelican National to
increase regulatory capital.
500,000 Repay outstanding term loan,
contribute to Pelican National to
increase regulatory capital, or use
for possible acquisitions.
154,400 Retained by Pelican Financial for
---------- general corporate purposes.
$5,654,400 Total net proceeds
----------
----------
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."
Purchase Limitation........... We are limiting the amount of common stock that any person together
with associates or other persons acting together may purchase in the
offering to 399,284 shares of common stock.
American Stock Exchange
Symbol...................... PFI
</TABLE>
4
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SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
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
<TABLE>
<CAPTION>
AT JUNE 30, 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 ..................... $ 216,482 $ 260,320 $ 246,409 $ 120,756 $ 48,220 $ 45,070 $ 26,423
Total loans, net ................. 175,668 227,768 203,328 100,774 41,253 35,539 10,386
Total nonperforming assets(2) .... 1,806 1,535 1,494 1,974 1,798 577 614
Deposits ......................... 48,405 20,898 35,064 17,578 0 0 0
Short-term borrowings(3) ......... 54,448 158,351 95,985 60,980 27,680 17,746 1,376
Notes payable .................... 56,990 42,569 58,226 20,673 3,964 4,456 11,416
Total liabilities ................ 200,991 250,562 234,009 112,243 41,860 39,239 21,553
Stockholders' equity ............. 15,491 9,758 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) .......... $ 5.11 $ 3.22 $ 4.09 $ 2.81 $ 2.65 $ 2.43 $ 2.03
</TABLE>
<TABLE>
<CAPTION>
For the
For the Six Period from
Months Ended For the February 1, For the Year Ended
June 30, 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 ... $ 2,387 $ 999 $ 3,315 $ 965 $ 968 $ 932 $ 2,085
Net interest income
after provision
for loan losses ...... 2,374 972 3,253 900 968 932 2,085
Noninterest income .... 15,213 9,524 22,550 7,733 7,644 11,077 11,368
Noninterest expense ... 12,568 8,603 19,875 8,822 7,751 10,571 11,439
Net earnings (loss) ... 3,212 1,246 3,887 (137) 529 962 1,244
Basic and diluted
earnings per
share(4) ............. 1.06 0.41 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 ............... 2.70% 1.35% 1.82% (0.26)% 0.90% 1.70% 2.50%
Return on average
common equity ........ 46.25 27.40 37.68 (2.86) 9.22 19.80 14.66
Interest rate spread .. 1.16 0.17 1.56 0.73 0.76 0.12 3.24
Net interest margin ... 1.15 0.58 1.68 1.78 1.86 1.85 5.16
Noninterest expense
to average assets .... 10.58 9.36 9.32 15.06 13.19 18.66 22.97
Efficiency ratio ...... 66.01 69.73 66.48 90.65 82.51 67.88 69.59
</TABLE>
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(1) 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.
5
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(6) Annualized where appropriate.
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 BUSINESS DEPENDS UPON
OUR BEING ABLE TO BUY AND
SELL LOANS AND MORTGAGE
SERVICING RIGHTS .............. In our mortgage banking operations, we
currently buy all of the mortgage loans we
produce from correspondents or brokers. We
generally sell substantially all of the
mortgage loans that we produce into the
secondary mortgage market and sell all of
our mortgage servicing rights to investors.
Our business and profitability depend upon
our being able to buy and sell loans and
mortgage servicing rights in the secondary
market.
An active market for loans and mortgage
servicing rights 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 of these mortgage-backed
securities. Our participation in the
secondary mortgage market also depends on
our continued eligibility in these programs.
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 ability to originate and sell loans and
mortgage servicing rights. For a discussion
of our activities in the secondary mortgage
market, see "Business Secondary Market
Activities."
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.
WE MUST CAREFULLY MANAGE
OUR INTEREST RATE RISK TO
6
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BE PROFITABLE.................. In our mortgage banking business, changes in
interest rates affect our ability to offer
interest rate commitments. In addition, we
typically offer interest rate commitments
that result in the ultimate sale of the
loans thirty or more days after the date of
the commitment. If we fail to effectively
manage interest rate risk during the period
between the issuance of the commitment and
the date of the sale of the loan, our
profits will be hurt.
In our retail banking business, in order for
us to be profitable, we have to earn more
money in interest income and fee revenues
than we pay to our depositors in interest.
If we fail to effectively manage the
interest rates that we pay on our deposits
and earn on our investments and loans, our
profits will be hurt. 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."
IF WE FAIL TO ADEQUATELY MANAGE
OUR LOAN UNDERWRITING AND
QUALITY, OUR MORTGAGE
COSTS WILL INCREASE............ If we fail to comply with individual
investor standards in our loan underwriting,
we may become liable to repurchase the loan
and we may be liable for unpaid principal
and interest if the loan defaults. This
would increase our mortgage costs. We rely
upon our underwriting department to
ascertain compliance with individual
investor standards prior to sale of the
loans to the investors. The underwriting
department relies on its quality control
department to test sold loans on a sample
basis for compliance. For more information
on loan underwriting and quality control,
see "Business - Underwriting" and "- Quality
Control."
LOAN DELINQUENCIES AND DEFAULTS
ON LOANS THAT WE SERVICE
HAVE A DIRECT AFFECT ON
OUR PROFITS.................... Loan delinquencies and defaults on mortgage
loans that we service affect 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 HAVE A
DIRECT EFFECT ON 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 affect 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."
CHANGES TO THE ECONOMY OR
BUSINESS CONDITIONS IN THE
MIDWEST AND SOUTHEAST MAY
AFFECT OUR LOAN DEMAND AND
LOAN DEFAULT RATES............. 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 affect 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 960,000 shares, Mr. Huffman
will own 45.37% of the outstanding shares of
common stock, or approximately 43.79% if the
underwriters exercise 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 have the
effect of
9
<PAGE>
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 $2.70
per share in book of the common stock.
Conversely, present stockholders will
receive an increase of $0.19 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 underwriters 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 AMERICAN STOCK EXCHANGE,
OR IF IT IS DELISTED IN THE
FUTURE, YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES............. We have been approved for listing on the
American Stock Exchange subject to us
providing to the American Stock Exchange
a notice that we have issued the shares.
We cannot guaranty that our listing on
the American Stock Exchange will result
in an active or liquid trading market
developing. Also, continued listing is
subject to various conditions. It is not
possible for us to determine whether we
will continue to meet the conditions for
continued listing. 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
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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 3,992,836 shares of common stock
outstanding immediately following this
offering only 960,000 of which will be as
a result of this offering. Our certificate
of incorporation authorizes us to issue
10,000,000 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 45.37% of the outstanding
shares of common stock, if the
over-allotment option granted to the
underwriters is not exercised. 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 by the underwriters,
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.
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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 21.22% of the net proceeds,
is specifically designated to repay our
existing debt. We retain broad discretion
as to the allocation of the remaining
proceeds of $4.5 million or 78.78% of the
net proceeds. 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 AFFECT
OUR ABILITY TO DO BUSINESS,
OUR COSTS, AND 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
affect our ability to do business and
increase our costs. 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 $5.7 million. If the underwriters exercise the
over-allotment option granted by Pelican Financial in full, Pelican Financial
will receive additional net proceeds of approximately $992,000. 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 (assuming the over-allotment option is not exercised):
<TABLE>
<CAPTION>
Percent of gross
Amount offering proceeds
---------- -----------------
<S> <C> <C>
Gross offering proceeds ............................. $6,720,000 100.00%
Offering expenses:
Underwriting discounts and commissions ........... 537,600 8.00
Estimated other expenses ......................... 528,000 7.86
---------- ------
Net offering proceeds ........................ $5,654,400 84.14%
---------- ------
---------- ------
Use of net offering proceeds:
Repay outstanding note payable ................... $1,200,000 17.86%
Contributed to Pelican National to increase
regulatory capital ............................. 3,000,000 44.64
Contributed to Washtenaw to increase capital ..... 800,000 11.90
Repay outstanding term loan, contribute to
Pelican National to increase regulatory capital,
or use for possible acquisitions ............... 500,000 7.44
Retained by Pelican Financial for general
corporate purposes ............................. 154,400 2.30
---------- ------
Total use of net offering proceeds ........... $5,654,400 84.14%
---------- ------
---------- ------
</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 $3.0 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 been approved to have the common stock
listed on the American Stock Exchange under the symbol "PFI" subject to us
providing the American Stock Exchange with a notice of issuance. We cannot be
certain that an active and liquid trading market will develop or, if
developed, will be maintained. A public market having the desirable
characteristics of depth, liquidity, and orderliness, however, depends upon
the presence in the marketplace of both willing buyers
14
<PAGE>
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 June 30, 1999 and our adjusted capitalization at June 30,
1999 after giving effect to the offering (assuming the over-allotment option
is not exercised). We estimate that the net proceeds from this offering,
after deduction of the underwriting discounts and commissions and estimated
offering expenses, will be approximately $5.7 million. If the underwriters
exercise the over-allotment option in full, we will receive additional net
proceeds of approximately $992,000.
<TABLE>
<CAPTION>
At June 30, 1999
---------------------------
Historical As Adjusted
---------- -----------
(In thousands, except per share data)
<S> <C> <C>
Deposits ................................... $ 48,405 $ 48,405
Long-term borrowings (1) ................... 2,000 0
Subordinated debt .......................... 1,200 0
-------- --------
Total deposits, long-term borrowings, and
subordinated debt (1) ................... $ 51,605 $ 48,405
-------- --------
-------- --------
Shareholders' Equity:
Preferred stock (2) ..................... $ 0 $ 0
Common stock (3) ........................ 30 40
Additional paid-in capital .............. 8,292 13,937
Retained earnings ....................... 7,288 7,288
Accumulated other comprehensive
income, net of tax .................... (119) (119)
-------- --------
Total shareholders' equity ........ $ 15,491 $ 21,146
-------- --------
-------- --------
Ratio of equity to assets .................. 7.16% 9.77%
-------- --------
-------- --------
Book value per common share ................ $ 5.11 $ 5.30
-------- --------
-------- --------
</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 10,000,000 shares of common
stock, of which 3,032,836 were issued and outstanding at June 30, 1999.
Assuming the sale of 960,000 shares of common stock in the offering, we
will have 3,992,836 shares issued and outstanding.
DILUTION
The net tangible book value of our common stock as of June 30, 1999 was
approximately $15.5 million or $5.11 per share. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of the common stock outstanding.
Dilution per share to new investors purchasing common stock in the offering
represents the difference between the amount per share paid and the net tangible
book value per share of common stock immediately after
15
<PAGE>
the offering. Shares used in the computation of per share amounts below
include 3,032,836 shares outstanding immediately prior to the offering and
960,000 shares to be issued by us in this offering. After giving effect to
the sale of 960,000 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 June 30, 1999 would have been $21.1
million or $5.30 per share, representing an immediate increase in net
tangible book value of $0.19 per share to existing stockholders and an
immediate dilution of $2.70 per share to new investors purchasing shares at
the estimated public offering price of $7.00 per share. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Estimated public offering price per share (1) .... $ 7.00
Net tangible book value per share before the
offering (2) ................................... $ 5.11
Increase in net tangible book value per share
attributable to new investors (3) .............. 0.19
--------
Pro forma net tangible book value per share
after the offering (3) ......................... 5.30
--------
Dilution per share to new investors ..... $ 2.70
--------
--------
</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 June 30, 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 Total Weighted
the Public Offering Consideration Average
------------------- ------------------ Price per
Number Percent Amount Percent Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 3,032,836 75.96% $11,373,135 62.86% $ 3.75
New investors .......... 960,000 24.04 6,720,000 37.14 7.00
--------- ------ ----------- ------ ------
Total ......... 3,992,836 100.00% $18,093,135 100.00% $ 4.53
--------- ------ ----------- ------ ------
--------- ------ ----------- ------ ------
</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 June 30, 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 ................... $ 216,482 $ 260,320 $ 246,409 $ 120,756 $ 48,220 $ 45,070 $ 26,423
Cash and cash equivalents (2) .. 4,431 10,366 10,180 4,376 0 0 0
Total loans, net ............... 175,668 227,675 203,328 100,774 41,253 35,539 10,386
Mortgage-backed securities
and investment securities
available for sale ............ 6,112 9,800 5,592 6,984 0 0 0
Nonperforming loans(3) ......... 1,489 1,199 913 1,675 1,279 615 331
Real estate acquired through
foreclosure ................... 317 336 581 299 519 (38) 283
Total nonperforming assets(3) .. 1,806 1,535 1,494 1,974 1,798 577 614
Deposits ....................... 48,405 20,898 35,064 17,578 0 0 0
Short-term borrowings(4) ....... 54,448 158,351 95,985 60,980 27,680 17,746 1,376
Notes payable .................. 56,990 42,569 58,226 20,673 3,964 4,456 11,416
Total liabilities .............. 200,991 250,562 234,009 112,243 41,860 39,239 21,553
Stockholders' equity ........... 15,491 9,758 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) ........ $ 5.11 $ 3.22 $ 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 ................... 221 147 187 130 109 109 124
</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 Six Period from
Months Ended For the February 1, For the Year Ended
June 30, 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 ....................... $ 7,350 $ 4,573 $ 12,146 $ 3,420 $ 3,016 $ 3,181 $ 3,042
Interest expense .............. 4,963 3,574 8,831 2,455 2,048 2,249 957
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income ........... 2,387 999 3,315 965 968 932 2,085
Provision for loan losses ..... 13 27 62 65 0 0 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses .................. 2,374 972 3,253 900 968 932 2,085
Noninterest income ............ 15,213 9,524 22,550 7,733 7,644 11,077 11,368
Noninterest expense ........... 12,568 8,603 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 ......... 5,019 1,893 5,928 (189) 861 1,438 2,014
Provision for income
taxes ........................ 1,710 647 2,041 (52) 332 476 770
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
cumulative effect of
change in accounting
principle .................... 3,309 1,246 3,887 (137) 529 962 1,244
Cumulative effect of
change in accounting
principle .................... 97 0 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ........... $ 3,212 $ 1,246 $ 3,887 $ (137) $ 529 $ 962 $ 1,244
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
PER SHARE DATA:
Basic and diluted earnings
(loss) per share before
cumulative effect of
change in accounting
principle (1) ................ $ 1.09 $ 0.41 $ 1.28 $ (0.05) $ 0.22 $ 0.40 $ 0.52
Basic and diluted earnings
(loss) per share(1) .......... $ 1.06 $ 0.41 $ 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>
For the
For the Six Period from
Months Ended For the February 1, For the Year Ended
June 30, Year Ended 1997 to January 31,
------------------------ December 31, December 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 ..... 2.70% 1.35% 1.82% (0.26)% 0.90% 1.70% 2.50%
Return on average
common equity ............... 46.25 27.40 37.68 (2.86) 9.22 19.80 14.66
Interest rate spread ......... 1.16 0.17 1.56 0.73 0.76 0.12 3.24
Net interest margin .......... 1.15 0.58 1.68 1.78 1.86 1.85 5.16
Noninterest expense to
average assets .............. 10.58 9.36 9.32 15.06 13.19 18.66 22.97
Efficiency ratio ............. 66.01 69.73 66.48 90.65 82.51 67.88 69.59
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets at end of
period ...................... 0.83 0.59 0.61 1.63 3.73 1.28 2.32
Nonperforming loans to
total gross loans at end
of period ................... 0.85 0.53 0.45 1.66 3.10 1.73 3.17
Allowance for loan losses
to total gross loans at
end of period ............... 0.08 0.04 0.06 0.07 0.00 0.00 0.70
Allowance for loan losses
to nonperforming loans
at end of period ............ 9.40 6.06 13.91 3.94 0.00 0.00 22.36
MORTGAGE ORIGINATION
AND SERVICING DATA:
Mortgage loans originated
or purchased ................ $1,478,446 $ 989,166 $2,436,846 $732,869 $ 588,237 $ 644,760 $ 805,682
Mortgage loans sold .......... 1,493,796 862,476 2,323,909 673,872 583,831 619,791 848,159
Mortgage loans serviced
for others .................. 1,055,897 813,599 1,464,496 557,011 569,601 854,061 2,307,239
Capitalized value of
mortgage servicing
rights....................... 12,329 8,728 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 Retail
Banking Banking
Segment Segment Consolidated
-------- ------- ------------
(In thousands)
<S> <C> <C> <C>
REVENUES
Six Months Ended
June 30, 1999.............. $20,091 $1,965 $21,915
June 30, 1998.............. 13,447 929 14,194
Three Months Ended
June 30, 1999.............. 10,437 1,105 11,465
June 30, 1998.............. 8,533 510 9,020
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
Six Months Ended
June 30, 1999.............. 4,843 274 5,019
June 30, 1998.............. 2,502 (515) 1,893
Three Months Ended
June 30, 1999.............. 2,550 187 2,681
June 30, 1998.............. 1,347 (214) 1,089
Year ended:
December 31, 1998.......... 6,498 (370) 5,928
Period ended:
December 31, 1997.......... 635 (743) (189)
</TABLE>
20
<PAGE>
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.
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.
21
<PAGE>
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.
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 effect 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
affect 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 some
degree of increase in new mortgage loan production, which may offset the
decrease in the value of the mortgage servicing portfolio.
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
22
<PAGE>
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 six months ended June 30, 1999 and June
30, 1998 - Loan Servicing." Pelican Financial further attempts to mitigate the
effects of changes in interest rates through the use of forward sales of
anticipated loan closings and diligent asset and liability management.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The primary market risk facing
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.
23
<PAGE>
The following tables contain the amount of interest-earning assets and
interest-bearing liabilities outstanding on June 30, 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 JUNE 30, 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments (1) .............. $ 3,198 $ 99 $ 0 $ 0 $ 3,297
Investment Securities (2) ............... 0 0 3,904 2,208 6,112
Loans ................................... 135,340 10,342 8,076 22,051 175,809
--------- --------- --------- --------- ---------
Total interest-earning assets ........ 138,538 10,441 11,980 24,259 185,218
Interest-bearing liabilities:
Savings deposits ........................ 18,717 0 0 0 18,717
Certificates of deposit ................. 8,175 14,345 1,906 0 24,426
Borrowings (3) .......................... 141,475 1,200 0 0 142,675
--------- --------- --------- --------- ---------
Total interest bearing liabilities .... 168,367 15,545 1,906 0 $ 185,818
---------
---------
Interest rate sensitivity gap ............. $ (29,829) $ (5,104) $ 10,074 $ 24,259
--------- --------- --------- ---------
--------- --------- --------- ---------
Cumulative gap ............................ $ (29,829) $ (34,933) $ (24,859) $ (600)
Cumulative gap to interest-earning
assets ................................... (22)% (335)% (208)% (2)%
Ratio of interest-earning assets to
interest bearing liabilities ............. 82% 67% 629% n/a
<CAPTION>
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.
24
<PAGE>
As shown above, at June 30, 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:
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>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
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 .............. $ 3,097 $ 73 4.71% $ 6,852 $ 188 5.49%
Investment securities ........... 6,074 227 7.47 5,151 165 6.41
Loans receivable, net ........... 199,253 7,050 7.08 159,720 4,220 5.28
--------- --------- ---------- -------
Total interest-earning assets.. 208,424 7,350 7.05 171,723 4,573 5.33
--------- --------- ---- ---------- ------- ----
Noninterest-earning assets:
Cash and due from banks ....... 2,763 815
Allowance for loan losses ..... (135) (84)
Other assets .................. 26,551 11,424
--------- ---------
Total assets ............... $ 237,603 $ 183,878
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts .................... $ 849 9 2.12 $ 7,121 82 2.30
Money market accounts ........... 3,765 73 3.88 2,315 54 4.67
Savings deposits ................ 11,062 136 2.46 37 1 2.22
Time deposits ................... 19,471 518 5.32 8,956 268 6.00
Short-term borrowings ........... 133,262 4,227 6.34 127,206 3,169 4.98
--------- --------- ---------- -------
Total interest-bearing
liabilities .................. 168,409 4,963 5.89 145,635 3,574 4.91
--------- --------- ---- ---------- ------- ----
Noninterest-bearing liabilities:
Demand deposits ................. 3,211 2,041
Other liabilities ............... 52,095 27,109
Stockholders' equity ............. 13,888 9,093
--------- ---------
Total liabilities and
stockholders' equity ........... $ 237,603 $ 183,878
--------- ---------
--------- ---------
Interest rate spread .............. 1.16% 0.42%
---- ----
---- ----
Net interest income and
net interest margin .............. $2,387 1.15% $ 999 0.58%
------ ---- ------- ----
------ ---- ------- ----
</TABLE>
- ----------------
* Annualized.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Period from February 1, 1997 to Year Ended January 31,
1998 December 31, 1997 1997
------------------------------ ------------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Volume Interest Cost Volume Interest Cost* Volume Interest Cost
--------- --------- ------ --------- -------- ------ --------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold .............. $ 9,685 $ 390 4.03% $ 2,057 $ 113 6.01% $ 0 $ 0 0.00%
Investment securities ........... 6,016 479 7.95 1,025 78 8.23 0 0 0.00
Loans receivable, net ........... 181,874 11,277 6.20 51,094 3,230 6.90 52,151 3,015 5.78
--------- --------- --------- ------- --------- ------
Total interest-earning assets.. 197,575 12,146 6.15 54,176 3,421 6.89 52,151 3,015 5.78
--------- ---- ------- ---- ------ ----
Noninterest-earning assets:
Cash and due from banks ....... 5,943 486 0
Allowance for loan losses ..... (106) (45) (54)
Other assets .................. 9,784 3,945 6,637
--------- --------- ---------
Total assets ............... $ 213,196 $58,562 $ 58,734
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts .................... $ 6,016 138 2.29 $ 581 $ 29 4.99 0 0 0.00
Money market accounts ........... 4,060 178 4.38 264 11 4.17 0 0 0.00
Savings deposits ................ 2,406 60 2.47 4 1 2.16 0 0 0.00
Time deposits ................... 9,548 558 5.85 2,196 135 6.69 0 0 0.00
Short-term borrowings ........... 170,413 7,897 4.63 40,909 2,280 6.08 40,806 2,048 5.02
--------- --------- --------- ------- --------- ------
Total interest-bearing
liabilities .................. 192,443 8,831 4.59 43,954 2,456 6.09 40,806 2,048 5.02
--------- ---- ------- ---- --------- ----
Noninterest-bearing liabilities:
Demand deposits ................. 4,223 932 0
Other liabilities ............... 6,085 8,429 12,190
Stockholders' equity ............. 10,445 5,247 5,738
--------- --------- ---------
Total liabilities and
stockholders' equity ........... $ 213,196 $58,562 $ 58,734
--------- --------- ---------
--------- --------- ---------
Interest rate spread .............. 1.56% 0.80% 0.76%
---- ---- ----
---- ---- ----
Net interest income and net
interest margin .................. $ 3,315 1.68% $ 965 1.94% $ 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>
Six Months Ended June 30, Year Ended December 31,
1999 vs. Six Months Ended 1998 vs. Eleven Months Ended
June 30, 1998 December 31, 1997
--------------------------------- --------------------------------
Changes Due to Changes Due to
Total ---------------------- Total ---------------------
Change Volume (1) Rates (1) Change Volume (1) Rates (1)
------- ---------- --------- ------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold .......... $ (115) $ (91) $ (24) $ 277 $ 254 $ 23
Investment securities ....... 62 32 30 401 398 3
Loans receivable, net ....... 2,830 1,194 1,636 8,047 7,742 305
------- ------- ------- ------- ------- -------
Total interest income ... 2,777 1,135 1,642 8,725 8,394 331
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts ................ (73) (67) (6) 109 103 6
Money market accounts ....... 19 15 4 167 166 1
Savings deposits ............ 135 135 0 59 59 0
Time deposits ............... 250 228 22 423 408 15
Short term borrowings ....... 1,058 157 901 5,617 5,224 393
------- ------- ------- ------- ------- -------
Total interest expense .. 1,389 468 921 6,375 5,960 415
------- ------- ------- ------- ------- -------
NET CHANGE IN INTEREST
INCOME ..................... $ 1,388 $ 667 $ 721 $ 2,350 $ 2,434 $ (84)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
<CAPTION>
Eleven Months Ended
December 31, 1997 v. Year Ended Year Ended January 31,
January 31, 1997 1997 vs. 1996
---------------------------------- --------------------------------
Changes Due to Changes Due to
Total ---------------------- Total ---------------------
Change Volume (1) Rates (1) Change Volume (1) Rates (1)
------- ---------- --------- ------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold .......... $ 113 $ 113 $ 0 $ 0 $ 0 $ 0
Investment securities ....... 78 78 0 0 0 0
Loans receivable, net ....... 215 21 194 166 49 117
------- ------- ------- ------- ------- -------
Total interest income ... 406 212 194 166 49 117
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts ................ 29 29 0 0 0 0
Money market accounts ....... 11 11 0 0 0 0
Savings deposits ............ 1 1 0 0 0 0
Time deposits ............... 135 135 0 0 0 0
Short term borrowings ....... 232 2 230 201 80 121
------- ------- ------- ------- ------- -------
Total interest expense .. 408 178 230 201 80 121
------- ------- ------- ------- ------- -------
NET CHANGE IN INTEREST
INCOME ..................... $ (2) $ 34 $ (36) $ (35) $ (31) $ (4)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
- ----------------
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
28
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND THE
SIX MONTHS ENDED JUNE 30, 1998
GENERAL. The operating results and financial condition of Pelican Financial
as of and for the six months ended June 30, 1998 primarily reflect the operating
results and financial condition of Washtenaw. Pelican National was formed in
August 1997, therefore, the six months ended June 30, 1998 constitutes only
Pelican National's third full quarter of operations. Net income for the six
months ended June 30, 1999 totaled $3.2 million compared to net income of $1.2
million for the six months ended June 30, 1998, or an increase of approximately
$2.0 million or 167%. 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 six months ended June
30, 1999 totaled $1.5 billion, as compared to $989.2 million for the six months
ended June 30, 1998, or an increase of approximately $0.5 billion or
approximately 51%. 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 $1.1 billion, or 76.5% of total loan production,
for the six months ended June 30, 1999, as compared to $774.0 million, or 78.2%
of total loan production for the six months ended June 30, 1998. Fixed-rate
mortgage loan production totaled $1.4 billion, or 90.3% of total loan
production, for the six months ended June 30, 1999, as compared to $834.1
million, or 84.3% of total loan production for the six months ended June 30,
1998.
At June 30, 1999 and 1998, Pelican Financial's pipeline of loans in process
was $146.0 million. Historically, approximately 75% to 90% of the pipeline of
loans in process has funded. For the six months ended June 30, 1999, Pelican
Financial received 20,054 new loan applications compared to 14,514 new loan
application received for the six months ended June 30, 1998. These new loan
applications result in an average daily rate of applications of $16.9 million
and $12.0 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. 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 six months ended June 30, 1999, the provision for
loan losses was $13,000 compared to $27,000 for the six months ended June 30,
1998. As of June 30, 1999, the allowance for loan losses was 0.08% 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 $2.4 million for the six months ended June 30, 1999, as
compared to $1.0 million for the six months ended June 30, 1998, or an increase
of approximately $1.4 million or approximately 140%. 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 June 30, 1999, Pelican Financial serviced $1.2 billion
of loans compared to $1.0 billion at June 30, 1998, a 20% increase. At June 30,
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
six months ended June 30, 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 June 30, 1999 was 7.04% compared to 7.42% at
June 30, 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 six months ended June 30, 1999, the prepayment rate of Pelican
Financial's servicing portfolio was 12.22% per annum, compared to 27.76% per
annum for the six months ended June 30, 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 six months ended June 30, 1999 of $950,000 (consisting
of amortization amounting to $1,480,000 and impairment of $(530,000), compared
to $1,360,000 of amortization and impairment (consisting of amortization
amounting to $846,000 and impairment of $514,000) for the six months ended June
30, 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 $7.6 million for the six months ended June 30, 1999 compared to $4.5
million for the six months ended June 30,
30
<PAGE>
1998, or an increase of approximately $3.1 million or 69%. The increase during
the six months ended June 30, 1998 was primarily the result of an increase in
the number of full time equivalent employees to 221 at June 30, 1999 from 147 at
June 30, 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 $1,410,000
for the six months ended June 30, 1999 compared to $936,000 for the six months
ended June 30, 1998, or a increase of approximately $474,000 or 50.6%. The
increase for the six months ended June 30, 1999 was primarily the result of
Washtenaw's new California office.
OTHER NONINTEREST EXPENSE. Other noninterest expenses totaled $2.0 million
for the six months ended June 30, 1999 compared to $1.3 million for the six
months ended June 30, 1998, or an increase of approximately $700,000 or 53.85%.
Other noninterest expense primarily consists of office and computer supplies,
express mail expenses, and servicing foreclosure expenses.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the six months ended June
30, 1999, Pelican Financial's pre-tax earnings from the mortgage banking
activities were $4.8 million. For the six months ended June 30, 1998, Pelican
Financial's comparable pre-tax earnings from the mortgage banking activities
were $2.5 million. The increase of $2.3 million or 92% primarily is attributable
to increased loan production as a result of expanding Pelican Financial's
operations into new markets and offering new product lines. 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 six months ended June 30, 1999, the gain on sale of loans and
mortgage servicing rights totaled $12.3 million. For the six months ended June
30, 1998, gain on sale of loans and mortgage servicing rights was $7.7 million.
The $4.6 million increase represents a 59.74% 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 $2.2 million for the six months
ended June 30, 1999. The mortgage servicing rights sold in bulk related to
servicing of loans with an aggregate principal balance of approximately $1.4
billion. For the six months ended June 30, 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 $10.1 million for the six months ended June 30, 1999. The gains
resulted from the sale of approximately $1.5 billion of mortgage loans. Gains on
loans sold, including concurrent sales of mortgage servicing rights, totaled
$7.7 million for the six months ended June 30, 1998. The gains resulted from the
sale of approximately $1.0 billion of mortgage loans sold. The increase in the
gain on loans sold of $2.4 million was primarily the result of an increase in
amount of loans sold of approximately $500 million as a result of increased loan
production.
Interest revenue for the six months ended June 30, 1999, was $5.6 million.
For the six months ended June 30, 1998 interest revenue was $3.9 million. The
increase of $1.7 million or 44% is attributable to increased loan inventory.
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Income from servicing operations totaled $2.0 million for the six months
ended June 30, 1999. For the six months ended June 30, 1998, servicing income
was $1.2 million. The $800,000 or 66.67% increase is derived from an increase
in the average servicing portfolio balance for the six month period.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the six months ended June
30, 1999, Pelican Financial's pre-tax earnings from retail banking activities
primarily conducted by Pelican National totaled $274,000. For the six months
ended June 30, 1998, Pelican Financial's comparable pre-tax loss was $515,000.
The decrease in loss of $789,000 or 153% was primarily attributable to an
increase in net interest income to $1,141,000 for the six months ended June 30,
1999 compared to $357,000 for the six months ended June 30, 1998 resulting from
growth in Pelican National's interest-earning assets in excess of its
interest-bearing liabilities. Additionally, this positive change is due 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, and changes he has implemented. At or for the six months ended June
30, 1999, Pelican National had noninterest expenses of $941,000, deposits of
$48.5 million, and the provision for loan losses totaled $13,000 compared to
noninterest expenses of $1,011,000, deposits of $20.9 million, and the provision
for loan losses totaled $27,000 at or for the six months ended June 30, 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 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. This improvement is also partially 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,
and the changes he has implemented. 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. 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 impairment
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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 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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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 $80.0 million, of which $12.0 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.
Washtenaw 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
and the proprietary systems have been successfully tested for year 2000
compliance.
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. As a
result, we are unable to determine whether the assurances received from vendors
are legally enforceable.
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 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 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
40
<PAGE>
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.
Pelican Financial has reviewed the various non-technology systems at its
facilities for year 2000 compliance. The alarm system, vault door locks, and
heating and air conditioning have been reviewed and are not date sensitive. The
phone lines and electric power cannot be specifically validated by Pelican
Financial, however, each of these service providers has publicly assured its
customers as to year 2000 compliance.
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, 2000. 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 Financial's results of operations or financial
position when adopted.
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<PAGE>
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.
RECENT DEVELOPMENTS
The following tables present selected consolidated financial
information and other data about Pelican Financial through September 30, 1999.
This information at September 30, 1999 is derived from unaudited financial data
but, in our opinion, reflects all adjustments (which comprise only normal
recurring accruals) necessary for a fair presentation of our financial condition
and results of operations at that date and for those periods. The information at
December 31, 1998 is derived from and should be read in conjunction with and is
qualified by reference to the audited consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
At September 30, 1999 At December 31,1998
--------------------- -------------------
(In thousands)
<S> <C> <C>
Total assets....................................... $164,448 $246,409
Total loans, net................................... 127,867 203,328
Cash and cash equivalents ......................... 5,871 10,180
Mortgage-backed securities and investments
available for sale.............................. 6,024 5,592
Nonperforming loans................................ 1,509 913
Real estate acquired through foreclosure........... 255 581
Total nonperforming assets......................... 1,764 1,494
Deposits........................................... 50,254 35,064
Short-term borrowings.............................. 26,248 95,985
Notes payable...................................... 42,680 58,226
Total liabilities.................................. 148,838 234,009
Stockholders' equity............................... 15,610 12,400
</TABLE>
42
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income............................. $3,908 $3,169 $11,258 $ 7,743
Interest expense............................ 2,518 2,275 7,481 5,850
----- ----- ------ ------
Net interest income before provision for
loan losses................................. 1,390 894 3,777 1,893
Provision for loan losses................... 132 17 145 44
----- ----- ------ ------
Net interest income after provision for loan
losses...................................... 1,258 877 3,632 1,849
Noninterest income.......................... 4,049 6,224 19,262 15,748
Noninterest expense......................... 5,124 5,591 17,692 14,194
----- ----- ------ ------
Income before income taxes and
cumulative effect of change in accounting
principle................................... 183 1,510 5,202 3,403
Income taxes................................ 66 510 1,776 1,157
----- ----- ------ ------
Income before cumulative effect of change
in accounting principle..................... 117 1,000 3,426 2,246
Cumulative effect of change in accounting
principle................................... 0 0 97 0
----- ----- ------ ------
Net income.................................. $ 117 $1,000 $ 3,329 $ 2,246
===== ===== ====== ======
Basic and diluted earnings per share
before cumulative effect of change in
accounting principle........................ $0.04 $0.33 $1.13 $0.74
Basic and diluted earnings per share........ $0.04 $0.33 $1.10 $0.74
Weighted average number of shares 3,039,611 3,037,563 3,039,611 3,037,563
outstanding.................................
PERFORMANCE RATIOS
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets.................... 0.25% 1.83% 2.33% 1.64%
Return on average equity.................... 3.00% 38.96% 31.00% 31.48%
Interest rate spread........................ 2.42% 0.74% 1.48% 0.39%
Net interest margin......................... 3.50% 1.74% 2.63% 1.47%
Noninterest expense to assets............... 10.76% 11.74% 10.76% 10.39%
Efficiency ratio............................ 82.74% 69.61% 69.96% 69.69%
</TABLE>
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<PAGE>
ASSET QUALITY RATIOS
<TABLE>
<CAPTION>
SEPTEMBER 30, At
-----------------------
December 31,
1999 1998 1998
----------- --------- ------------
<S> <C> <C> <C>
Nonperforming assets to total assets 1.07% 0.83% 0.61%
Nonperforming loans to total loans 1.18% 0.72% 0.45%
Allowance for loan losses to total loans 0.21% 0.07% 0.06%
Allowance for loan losses to nonperforming loans 18.07% 10.44% 13.91%
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
GENERAL. The operating results and financial condition of Pelican
Financial as of and for the nine months ended September 30, 1999 and 1998
reflect the operating results and financial condition of Washtenaw and Pelican
National. Net income for the nine months ended September 30, 1999 totaled $3.3
million compared to net income of $2.2 million for the nine months ended
September 30, 1998, or an increase of approximately $1.1 million or 50.0%. This
increase was due to Pelican National achieving profitability in September 1999
and a substantial increase in loan production for Washtenaw.
LOAN PRODUCTION. The volume of loans produced for the nine months ended
September 30, 1999 totaled $1.9 billion as compared to $1.5 billion for the nine
months ended September 30, 1998, or an increase of approximately $400 million or
approximately 26.7%. The increase in loan production was primarily due to a
strong refinance environment which continued into the second quarter of 1999.
However, though the comparable periods show an increase in loan production the
third quarter of 1999 experienced a decrease in loan production at Washtenaw.
Washtenaw's decrease in loan production for the third quarter of 1999 was not
unique to Washtenaw but was indicative of the rising mortgage interest rates
within the mortgage banking industry. The volume of loans produced for the third
quarter of 1999 was $449 million as compared to $546 million for the same period
of 1998, a decrease of approximately 17.8%.
At September 30, 1999, Pelican Financial's pipeline of loans in process
was $120.8 million. For the nine months ended September 30, 1999, Pelican
Financial received 26,421 new loan applications compared to 21,877 new loan
applications for the nine months ended September 30, 1998. However, for the
three months ended September 30, 1999 Pelican Financial received 6,367 new loan
applications compared to 7,363 new loan applications for the same period of
1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the
nine months ended September 30, 1999 was $145,000, including $132,000 for the
three months then ended. This increase is due in part to the continued growth
in all categories of our loans receivable, which caused us to increase our
loan loss reserve. The increase in the loan loss reserve was primarily due to
the inherent risks in the loan portfolio especially new, unseasoned loans,
and due in part to an increase in our nonperforming loans at Pelican
National. The provision for loan losses for the nine months ended September
30, 1998 was $44,000. See "Business-Asset Quality" for a discussion of
management's procedures in monitoring the adequacy of the allowance for loan
losses.
NET INTEREST INCOME. Net Interest Income was $3.8 million and $1.9
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in net interest income was due to the $20.2 million increase in the
average balance of interest-earning assets versus the $18.5 million increase in
the average balance of interest-bearing liabilities. Our net interest rate
spread increased from 0.39% at September 30, 1998 to 1.48% at September 30,
1999.
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<PAGE>
LOAN SERVICING. At September 30, 1999, Pelican Financial serviced $1.2
billion of loans compared to $840 million at September 30, 1998, a 42.9%
increase. The increase in the servicing portfolio reflects the increase in
mortgage loan originations during the comparable periods. However, in the third
quarter 1999 as loan originations decreased industry-wide the growth of
Washtenaw's mortgage servicing portfolio slowed. Washtenaw's mortgage servicing
portfolio remained relatively stable totaling $1.2 billion at June 30, 1999 and
September 30, 1999. At September 30, 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 serviced for
others. During a period of rising interest rates, the prepayment speed of the
mortgage servicing portfolio slows and servicing is retained in the portfolio,
even as quarterly loan production volumes decrease.
Generally, the level of refinance and payoff activity, which is
affected by mortgage interest rates, affects the servicing portfolio prepayment
rates. For the nine months ended September 30, 1999, the prepayment rate of
Washtenaw's servicing portfolio was 12.07% per annum, compared to 30.20% per
annum for the nine months ended September 30, 1998.
Pelican Financial recorded amortization and net impairment of its
mortgage servicing rights for the nine months ended September 30, 1999 of $1.6
million (consisting of amortization of $2.2 million and a reduction of
impairment of $600,000), compared to $1.9 million for the nine months ended
September 30, 1998, (consisting of amortization of $1.2 million and impairment
of $700,000). In an increasing mortgage interest rate environment, the valuation
of the mortgage servicing rights will increase as the expected mortgage
servicing portfolio prepayment rate decreases. For the three months ended
September 30, 1999, amortization and impairment of Pelican Financial's mortgage
servicing rights portfolio totaled $624,000 (consisting of amortization of
$694,000 and a reduction of impairment of $70,000). For the three months ended
September 30, 1998, amortization and impairment of the mortgage servicing rights
portfolio totaled $636,000 (consisting of amortization of $494,000 and
impairment of $142,000). The amortization expense was higher for the three
months ended September 30, 1999 because the amount of the mortgage servicing
rights portfolio increased. The decrease in the impairment expense from 1998 to
1999 was a result of the increase in value of the mortgage servings rights
portfolio resulting from a decrease in the portfolio's expected prepayment
rates.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and benefits totaled
$10.2 million for the nine months ended September 30, 1999 compared to $7.5
million for the nine months ended September 30, 1998, or an increase of
approximately $2.7 million or 36.0%. The increase was primarily due to the
increase in the number of full time equivalent employees and ordinary and
customary increases in salaries and benefits.
However, for the three months ended September 30, 1999, compensation
and benefits totaled $2.6 million compared to $3.0 million for the three months
ended September 30, 1998. This decrease of $400,000 or 13% represents the focus
of Washtenaw to adjust its staffing levels as appropriate in changing interest
rate environments.
OCCUPANCY AND EQUIPMENT EXPENSE. Occupancy and equipment expense
totaled $2.0 million for the nine months ended September 30, 1999 compared to
$1.4 million for the nine months ended September 30, 1998, or an increase of
approximately $600,000 or 42.9%.
For the three months ended September 30, 1999, the occupancy and
equipment expense was $634,000 compared to $428,000 for the same period of 1998.
The increase was due in part to the opening of a branch office of
Washtenaw in Pleasant Hill, California which was leased by Washtenaw, as well as
the impact of normal rent adjustments in existing leases. Washtenaw intends to
continue to focus on growing its market share despite the current increasing
mortgage interest rate environment through its California branch. The California
branch which opened in the second quarter of 1999
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<PAGE>
produced 7% of Washtenaw's loan originations at for the three months ended
September 30, 1999 and has added five account executives in the Western United
States to assist in expanding Washtenaw's market share in this area.
OTHER NONINTEREST EXPENSES. Other noninterest expense totaled $3.0
million for the nine months ended September 30, 1999 compared to $2.5 million
for the nine months ended September 30, 1998, or an increase of approximately
$500,000 or 20.0%. Other noninterest expense primarily consists of office and
computer supplies, express mail expenses, and servicing foreclosure expenses.
However, for the three months ended September 30, 1999, other
noninterest expense totaled $1.0 million compared to $1.2 million for the same
period of 1998. This decrease of $200,000 or 16.7% was primarily due to the
variability of some noninterest expenses which have decreased as a result of the
increasing mortgage interest rate environment and the resultant decrease in loan
origination volume.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the nine months ended
September 30, 1999, Pelican Financial's pre-tax earnings from the mortgage
banking activities were $5.0 million. For the nine months ended September 30,
1998, Pelican Financial's comparable pre-tax earnings from the mortgage banking
activities were $4.0 million. The increase of $1.0 million or 25% is primarily
attributable to increased loan production in the first half of 1999. Due to a
rising interest rate environment revenues from loan originations of the mortgage
banking activities, including Washtenaw, have decreased in the third quarter of
1999. The pre-tax earnings of the mortgage banking activities of Washtenaw for
the three months ended September 30, 1999 was $153,000 as compared to $1.5
million for the three months ended September 30, 1998, a decrease of $1.3
million or 89.8%. The decrease was primarily due to the decrease in mortgage
loan originations throughout the mortgage banking industry due to rising
mortgage interest rates.
Gains on sales of loans and mortgage servicing rights for the nine
months ended September 30, 1999 totaled $15.1 million. For the nine months ended
September 30, 1998, gain on sale of loans and mortgage servicing rights was
$12.9 million. The $2.2 million increase represents a 17.1% increase between
periods.
Gains on sales of loans and mortgage servicing rights for the three
months ended September 30, 1999 totaled $2.8 million compared to $5.2 million
for the same period of 1998, a decrease of $2.4 million or 46% for the
comparable period. The overall cost of purchasing servicing rights has increased
in the third quarter of 1999 as compared to the third quarter of 1998 as the
industry volume of new loan originations decreased. The variability of interest
rates in the third quarter of 1999 contributed to higher fallout rates (I.E.,
loans not being funded) of the mortgage pipeline. Of the loan commitments issued
and hedged against by Washtenaw during the three months ended September 30,
1999, 28% did not get funded compared to 22.6% for the same period of 1998, an
increase of 5.4%. Additionally, Washtenaw made concessions on pricing to the new
California branch in order to attract new accounts that were unfamiliar with
Washtenaw.
Gains on sales of mortgage loan servicing sold in bulk totaled $3.0
million for the nine months ended September 30, 1999 compared to $47,000 for the
nine months ended September 30, 1998. The mortgage servicing rights sold in bulk
related to servicing of loans with an aggregate principal balance of
approximately $1.8 billion for the nine months ended September 30, 1999 and
$427.2 million for the nine months ended September 30, 1998. For the nine months
ended September 30, 1998, Washtenaw sold servicing rights on current production
concurrently with the transfer of the underlying loans.
Gains on sales of mortgage servicing totaled $851,000 for the three
months ended September 30, 1999 compared to $47,000 for the three months ended
September 30, 1998. The mortgage servicing rights sold in bulk
46
<PAGE>
related to servicing of loans with an aggregate principal balance of
approximately $399.9 million for the three months ended September 30, 1999 and
$427.2 for the same period of 1998.
Gains on loans sold for the nine months ended September 30, 1999
totaled $12.1 million. These gains resulted from the sale of approximately $2.0
billion of mortgage loans. Gains on loans, which include concurrent sales of
mortgage servicing rights, totaled $12.5 million for the nine months ended
September 30, 1998. These gains resulted from the sale of approximately $1.5
billion of mortgage loans.
Gains on loans sold for the three months ended September 30, 1999
totaled $1.9 million. These gains resulted from the sale of approximately $497
million of mortgage loans. Gains on loans, which include concurrent sales of
mortgage servicing rights, totaled $4.9 million for the three months ended
September 30, 1998. These gains resulted from the sale of approximately $628.8
million of mortgage loans.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the nine months ended
September 30, 1999, Pelican Financial's pre-tax earnings from retail banking
activities primarily conducted by Pelican National totaled $355,000. For the
nine months ended September 30, 1998 Pelican National's comparable pre-tax loss
was $485,000. The decrease in the pre-tax loss of $840,000 or 173% was primarily
attributable to an increase in net interest income to $1.9 million for the nine
months ended September 30, 1999 compared to $632,000 for the nine months ended
September 30, 1998 resulting from growth in Pelican National's interest-earning
assets in excess of its interest-bearing liabilities.
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 June 30,
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 Washtenaw's
mortgage origination business which would not otherwise be available. These
additional funding sources include low cost retail deposits and escrowed funds.
At June 30, 1999, total assets of Pelican Financial were $216.5 million, of
which approximately $162.3 million were assets of Washtenaw and approximately
$54.3 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 six months ended June 30, 1999, net income
was $3.2 million, of which $3.2 million was net income of Washtenaw, $130,000
was a net income of Pelican National, and $78,000 was a loss at the holding
company level.
MARKET AREA
The mortgage banking offices of Washtenaw are located in Ann Arbor,
Michigan and Pleasant Hill, California. From these offices, Washtenaw operates
its national wholesale lending as well as its retail mortgage origination
business. 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%).
47
<PAGE>
The retail banking operations of Pelican National 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 at
Washtenaw and in attracting deposits and making loans at Pelican National.
The mortgage banking operations of Washtenaw 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 Washtenaw. 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 Washtenaw have sought economies of scale
through an emphasis on wholesale originations and the introduction of automated
processing systems which allow Washtenaw to request and receive credit reports
directly into its computer system and then to transmit and receive mortgage
approvals and rejections online. Therefore, Washtenaw 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.
Washtenaw has historically been in the wholesale mortgage origination
business. It originates only a minor amount of retail mortgages. Wholesale
mortgage sources provide Washtenaw economies of scale by allowing Washtenaw to
choose economically favorable geographic markets and purchase loans without
leased space or personnel other than individual account executives. All services
remain centralized in the home office and one regional office.
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.
48
<PAGE>
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 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. Washtenaw originates or acquires loans primarily through the
wholesale, correspondent, and retail loan production of its mortgage banking
operations. Loans are held available for sale in the secondary market .
Wholesale mortgage loan production involves the origination of loans by a
nationwide network of independent mortgage brokers with funding provided
directly by Washtenaw (I.E., table funding) and the transfer of these loans to
Washtenaw upon closing. Correspondent mortgage loan production occurs through
the purchase of loans by Washtenaw from independent mortgage lenders, commercial
banks, savings and loan associations, and other financial intermediaries that
originate loans in their own name using their own source of funds. Retail
mortgage loan production for mortgage banking operations occurs through
Washtenaw's retail loan origination office in Ann Arbor, Michigan.
Pelican National originates or acquires loans through its retail banking
operations. Loans are either held for investment or held available for sale in
the secondary market. In addition to mortgage loan production, Pelican National
engages to a limited extent in the origination of commercial, commercial real
estate, construction, and consumer loans.
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 $102.4 million. For the six months ended June 30, 1999,
Pelican Financial's combined wholesale and correspondent loan production totaled
$1.4 billion and its retail loan production totaled $44.1 million.
49
<PAGE>
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 June 30, 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>
December 31,
June 30, --------------------------------------------------
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.... $ 158,151 90.08% $ 192,703 95.21% $ 100,513 99.81%
Residential, multifamily ......... 0 0.00 0 0.00 0 0.00
Commercial and industrial
real estate .................. 15,017 8. 55 7,631 3.77 0 0.00
Construction ..................... 1,326 0.76 898 0.44 0 0.00
--------- ------ --------- ------ --------- ------
Total real estate loans ....... 174,494 99.39 201,232 99.42 100,513 99.81
Other loans:
Business, commercial ............. 935 0.53 824 0.41 0 0.00
Automobile ....................... 122 0.07 341 0.17 193 0.19
Other consumer ................... 25 0.01 2 0.00 0 0.00
--------- ------ --------- ------ --------- ------
Total other loans ............. 1,082 0.61 1,167 0.58 193 0.19
--------- ------ --------- ------ --------- ------
Total gross loans .......... 175,576 100.00% 202,399 100.00% 100,706 100.00%
------ ------ ------
------ ------ ------
Unearned fees, premiums and
discounts, net ................... 232 1,056 134
Allowance for loan losses ........... (140) (127) (66)
--------- --------- ---------
Total Loans net (1) .............. $ 175,668 $ 203,328 $ 100,774
--------- --------- ---------
--------- --------- ---------
<CAPTION>
January 31,
------------------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
<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.
50
<PAGE>
The table below summarizes Pelican Financial's loan production for the
periods indicated.
<TABLE>
<CAPTION>
For the six For the period from
months ended For the year ended February 1, 1997 to For the year ended
June 30, 1999 December 31, 1998 December 31, 1997 January 31, 1997
------------- ----------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Single Family:
Retail................................. $ 33,983 $ 90,755 $ 28,509 $ 14,499
Wholesale.............................. 1,434,526 2,335,772 704,360 573,738
---------- ---------- -------- --------
Total single family................. 1,468,509 2,426,527 732,869 588,237
Commercial and industrial real estate.... 9,330 9,601 0 0
Construction............................. 258 717 0 0
Business, commercial..................... 156 916 0 0
Consumer................................. 411 408 193 0
Other.................................... 0 0 0 0
---------- ---------- -------- --------
Total loan production............... $1,478,664 $2,438,169 $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 six For the period from
months ended For the year ended February 1, 1997 to For the year ended
June 30, 1999 December 31, 1998 December 31, 1997 January 31, 1997
------------- ------------------ ------------------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Government (FHA).......................... $ 30,132 $ 19,840 $ 0 $ 0
Conventional (FNMA and FHLMC)............. 1,409,436 2,341,125 698,493 573,390
Jumbo/nonconforming....................... 28,941 65,562 34,376 14,847
---------- ---------- -------- --------
Total loan production................... $1,468,509 $2,426,527 $732,869 $588,237
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
In its wholesale and correspondent lending, Washtenaw competes
nationwide by offering a wide variety of mortgage products designed to respond
to consumer needs and tailored to address market competition. Washtenaw
primarily originates conforming, fixed rate 30-year mortgage loans, which
collectively represented 90.3% of its total loan production for the six months
ended June 30, 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, Washtenaw 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 six months ended June 30, 1999, the year ended December 31,
1998, the eleven months ended December 31, 1997, and the year ended January 31,
1997, approximately 76.5%, 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 June 30, 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 $ 246 $ 0 $ 0 $ 0 $ 246
-------- ------- ------- ------ ---- ---- --------
-------- ------- ------- ------ ---- ---- --------
Amounts Due:
Within 3 months............ $ 1,179 $ 0 $ 1,742 $ 0 $ 60 $ 30 $ 3,011
3 months to 1 year......... 1,775 0 2,151 373 28 15 4,342
-------- ------- ------- ------ ---- ---- --------
Total due within 1 year. 2,954 0 3,893 373 88 45 7,353
-------- ------- ------- ------ ---- ---- --------
After 1 year:
1 to 3 years............. 265 0 1,512 147 240 41 2,205
3 to 5 years............. 654 0 2,689 11 431 75 3,860
5 to 10 years ........... 7,754 0 5,156 369 0 68 13,347
10 to 15 years........... 16,214 0 0 0 0 0 16,214
Over 15 years............ 130,921 0 1,482 426 0 0 132,829
-------- ------- ------- ------ ---- ---- --------
Total due after 1 year . 155,808 0 10,839 953 671 184 168,455
-------- ------- ------- ------ ---- ---- --------
Total................... $158,762 $ 0 $14,732 $1,326 $759 $229 $175,808
-------- ------- ------- ------ ---- ---- --------
-------- ------- ------- ------ ---- ---- --------
Allowance for loan
losses............. $ 72 $ 0 $ 49 $ 4 $ 15 $ 0 $ 140
-------- ------- ------- ------ ---- ---- --------
-------- ------- ------- ------ ---- ---- --------
Fixed rate................... $120,324 $ 0 $ 7,749 $ 599 $671 $184 $129,527
Variable rate................ 35,484 0 3,090 354 0 0 38,928
-------- ------- ------- ------ ---- ---- --------
Total due after 1 year.. $155,808 $ 0 $10,839 $ 953 $671 $184 $168,455
-------- ------- ------- ------ ---- ---- --------
-------- ------- ------- ------ ---- ---- --------
</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 six For the year February 1, For the year
months ended ended 1997 to ended
June 30, 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.............................. 1,447,649 2,405,776 732,556 588,237
Repurchases............................... 0 0 0 0
Net sales:
Sales................................... 1,493,203 2,323,803 674,651 583,950
Deferred fees - current year............ (494) (1,056) (1,115) (336)
Deferred fees - prior year.............. 1,056 1,116 336 188
---------- ---------- -------- --------
Net sales............................. 1,493,765 2,323,863 673,872 583,802
Transfers (to) from available for sale.... (102) (1,117) 0 0
---------- ---------- -------- --------
Ending balance......................... $ 133,236 $ 179,454 $ 98,658 $ 39,974
---------- ---------- -------- --------
---------- ---------- -------- --------
Held for Investment:
Beginning balance......................... $ 24,100 $ 2,181 $ 1,279 $ 615
Originations.............................. 31,364 32,393 506 0
Repurchases............................... 146 11,084 1,226 1,624
Repayments/adjustments.................... (12,884) (12) (46) (15)
Payoffs................................... (78) (21,714) (44) (60)
Sales..................................... (31) (46) 0 (30)
Transfers to repossessed assets........... (146) (903) (740) (855)
Transfers (to) from available for sale.... 102 1,117 0 0
---------- ---------- -------- --------
Ending balance......................... $ 42,573 $ 24,100 $ 2,181 $ 1,279
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
MORTGAGE BANKING OPERATIONS. Washtenaw 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.
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
48
<PAGE>
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.
Washtenaw pursues its loan production strategy as part of its mortgage
banking operations through Washtenaw'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, Washtenaw
funds mortgage loans originated by a network of approximately 1,340 independent
mortgage brokers nationwide. Approximately 802 of these brokers originate
mortgage loans for Washtenaw on a monthly basis and the remainder originate
mortgage loans for Washtenaw on a quarterly basis. This network is maintained by
Washtenaw'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 Washtenaw for the entry of loan applicant data in a
format familiar to Washtenaw's underwriters and for transmission to Washtenaw's
automated underwriting systems for review. All loans originated through brokers
are underwritten according to Washtenaw's standards.
Washtenaw'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 Washtenaw
through table funding arrangements. In a majority of cases, the loan is closed
in the broker's name and thereafter transferred to Washtenaw together with
related mortgage servicing rights for which Washtenaw generally pays a servicing
release premium which is included in the loan price paid to the broker by
Washtenaw. However, in certain states, the broker is required to close the loan
in Washtenaw'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 Washtenaw.
CORRESPONDENT LOAN PRODUCTION. In addition, Washtenaw acquires mortgage
loans from mortgage lenders, commercial banks, savings and loan associations,
and other financial intermediaries. Washtenaw'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.
Washtenaw does not provide warehouse lines of credit for its correspondents. All
loans acquired from correspondents are expected to satisfy Washtenaw'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 Washtenaw.
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 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.
49
<PAGE>
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 six months ended June 30, 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 $1.5
billion, $2.4 billion, $732.6 million, and $588.2 million in total mortgage
loans, respectively, and sold $1.5 billion, $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 six months ended June 30,
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 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.
50
<PAGE>
Nonperforming assets consist of nonaccrual loans and real estate owned.
Loans are usually placed on nonaccrual status when the loan is past due 90 days
or more, or the ability of a borrower to repay principal and interest is in
doubt. Real estate acquired by 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,
June 30, -------------------- -------------------------------
1999 1998 1997 1997 1996 1995
------ ------ ------ ------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans................................. $ 246 $ 0 $ 0 $ 0 $ 0 $ 0
Loans past due 90 days or more but not on
nonaccrual.................................... 1,243 913 1,675 1,279 615 331
------ ------ ------ ------ ---- ----
Total nonperforming loans................... 1,489 913 1,675 1,279 615 331
Restructured loans............................... 0 0 0 0 0 0
Other real estate owned.......................... 317 581 299 519 (38) 283
------ ------ ------ ------ ---- ----
Total nonperforming assets.................. $1,806 $1,494 $1,974 $1,798 $577 $614
------ ------ ------ ------ ---- ----
------ ------ ------ ------ ---- ----
Total nonperforming assets to total assets....... 0.83% 0.61% 1.63% 3.73% 1.28% 2.32%
Allowance for loan losses to
nonperforming loans............................ 9.40% 13.91% 3.94% 0.00% 0.00% 22.36%
Nonperforming loans to total assets.............. 0.69% 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,
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.
51
<PAGE>
It has been Pelican Financial's experience that nonperforming loans do
not necessarily result in an ultimate loss to Pelican Financial. Of Pelican
Financial's nonperforming loans at June 30, 1999, December 31, 1998 and 1997,
and January 31, 1997, only one loan in nonaccrual status at June 30, 1999 was a
commercial real estate mortgage of Pelican National, the rest 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 At or for At or for the
the Six the Year Period from At or for
Months Ended Ended February 1, 1997 the Year Ended January 31,
June 30, December 31, to December 31, -----------------------------
1999 1998 1997 1997 1996 1995
-------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average loans outstanding, net.................. $199,253 $181,874 $ 51,094 $52,151 $50,371 $40,400
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
Total loans outstanding at end of period........ 175,808 $203,455 $100,839 $41,253 $35,539 $10,460
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
Allowance balance at beginning of period........ $ 127 $ 65 $ 0 $ 0 $ 74 $ 0
Provision for loan losses....................... 13 62 65 0 0 74
Actual charge-offs:
1-4 family residential real estate........... 0 0 0 0 74 0
Other........................................ 0 0 0 0 0 0
-------- -------- -------- ------- ------- -------
Total charge-offs...................... 0 0 0 0 74 0
-------- -------- -------- ------- ------- -------
Recoveries:
Total recoveries....................... 0 0 0 0 0 0
-------- -------- -------- ------- ------- -------
Net chargeoffs.................... 0 0 0 0 74 0
-------- -------- -------- ------- ------- -------
Allowance balance at end of period.............. $ 140 $ 127 $ 65 $ 0 $ 0 $ 74
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
Net chargeoffs as a percent of average loans.... 0.00% 0.00% 0.00% 0.00% 0.15% 0.00%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Allowance for loan losses to total gross loans
at end of period........................... 0.08% 0.06% 0.07% 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,
June 30, -------------------------------------------------
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.................. $ 72(1) 90.08 $ 63(1) 95.21% $63(2) 99.81%
Multifamily real estate....... 0 0.00 0 0.00 0 0.00
Commercial and industrial
real estate. 49 8.55 44 3.77 0 0.00
Construction.................. 4 0.76 4 0.44 0 0.00
Business, commercial.......... 15 0.53 14 0.41 0 0.00
Automobile.................... 0 0.07 0 0.17 0 0.19
Other......................... 0 0.01 2 0.00 2 0.00
------ ------ ------
Unallocated................... 0 0 0
------ ----- -----
Total................ $140(1) 100.00% $127(1) 100.00% $65(2) 100.00%
------ ------ ----- ------ ----- ------
------ ------ ----- ------ ----- ------
</TABLE>
<TABLE>
<CAPTION>
January 31,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------- ------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1-4 family residential
real estate.................. $ 0 100.00% $ 0 100.00% $74(3) 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(3) 100.00%
---- ------ ---- ------ ----- ------
---- ------ ---- ------ ----- ------
</TABLE>
- ----------------
(1) None of the allowance amount is allocated to available-for-sale loans.
(2) $42,000 of the allowance amount is allocated to available-for-sale loans.
(3) All of the allowance amount is allocated to available-for-sale loans.
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 and provides
55
<PAGE>
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 six months ended June 30, 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
$1.078 million, $121,000, $840,000, and $2.0 million, respectively, which
represented 7.09%, 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 June 30, 1999 and December 31, 1998 and 1997, the
weighted average servicing fee on the servicing for others portfolio was 0.38%,
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 were processed
through this service at June 30. 1999.
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 June 30, 1999 and December 31, 1998,
Pelican Financial's servicing portfolio consisted of $1.2 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 June 30. 1999, December 31, 1998 and 1997, and
January 31, 1997, the total amount of the mortgage servicing rights recorded by
Pelican Financial was $12.3 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 six months ended June 30, 1999,
Pelican Financial sold mortgage servicing rights for gains amounting to $2.2
million. Also, Pelican Financial occasionally enters into forward sale
commitments of its mortgage servicing rights. Beginning in the fall of 1998,
56
<PAGE>
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 June
30, 1999, 9.7% of the mortgage servicing rights related to adjustable rate
loans, which had a weighted average coupon rate of 6.63%; 1.2% related to fixed
rate balloon payment loans, which had a weighted average coupon rate of 6.85%;
and the remaining 89.1% related to fixed rate fully amortizing loans, which had
a weighted average coupon rate of 7.1%. At June 30, 1999, Pelican Financial's
mortgage servicing portfolio had an aggregate weighted average coupon rate of
7.0%.
The following table contains information, as of June 30, 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%........................... 3.4%
6.01--7.00%............................... 57.4
7.01--8.00%............................... 31.0
8.01--9.00%............................... 6.1
9.01--10.00%.............................. 2.0
10.01% & above............................ 0.1
-------
Total........................ 100.0%
=====
</TABLE>
57
<PAGE>
The following table contains information regarding the mortgage loan
servicing portfolio, broken down by state.
<TABLE>
<CAPTION>
At June 30, 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....................... 3,047 23.1% $ 265,977 22.0%
Michigan................... 2,788 21.1 288,736 23.9
Indiana.................... 1,219 9.2 109,000 9.0
Florida.................... 1,050 8.0 78,642 6.5
Georgia.................... 830 6.3 74,543 6.2
Illinois................... 548 4.2 66,413 5.5
Minnesota.................. 533 4.0 58,958 4.9
Kentucky................... 400 3.0 34,939 2.9
South Carolina............. 381 2.9 32,968 2.7
Pennsylvania............... 279 2.1 23,565 2.0
Wisconsin.................. 244 1.9 14,751 1.2
North Carolina............. 231 1.8 18,726 1.6
Louisiana.................. 189 1.4 18,350 1.5
Iowa....................... 180 1.4 14,514 1.2
Alabama.................... 155 1.2 12,816 1.1
Missouri................... 145 1.1 14,514 1.2
Tennessee.................. 141 1.1 9,607 0.8
Other...................... 822 6.2 70,974 5.8
------ ----- ---------- -----
Total............. 13,182 100.0% $1,207,993 100.0%
------ ----- ---------- -----
------ ----- ---------- -----
</TABLE>
At June 30, 1999, Pelican Financial was servicing approximately 13,182
loans with an aggregate unpaid principal balance of $1.2 billion. Of these
loans, 0.7% were delinquent and an additional 0.1% 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 June 30, 1999, Pelican
Financial's delinquency rates on loans serviced for Freddie Mac and Fannie Mae
were 0.7% and 0.8%, 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.
58
<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 June 30, 1999, Pelican Financial had invested $2.2 million in Fannie
Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities, or 1.0% of total
assets. In addition, at June 30, 1999, $3.9 million, or 1.8%, of total assets,
were debt obligations issued by federal agencies which generally have stated
maturities from one year to twenty five years. Investments in mortgage-backed
securities involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to 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 June 30,
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 June 30, ---------------------- At January 31,
1999 1998 1997 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury............................... $ 0 $ 0 $1,499 $ 0
U.S. Government agency (1).................. 3,904 4,499 5,485 0
Mortgage-backed securities.................. 2,208 1,093 0 0
FHLB stock (3).............................. 333 261 0 0
------- ------ ------ ----
Total investment securities (2).... $ 6,445 $5,853 $6,984 $ 0
------- ------ ------ ----
------- ------ ------ ----
</TABLE>
- -------------
(1) At June 30, 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.
(3) Included in Other Assets in the accompanying financial statements.
59
<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 June 30, 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...... $483 5.93% $3,421 5.93% $0 0.00% $ 0 0.00% $3,904 5.93%
Mortgage-backed securities.. 0 0.00 0 0.00 0 0.00 2,208 6.30 2,208 6.30
Other....................... 0 0.00 0 0.00 0 0.00 333 7.34 333 7.34
---- ------ ---- ------ ------
Total.................. $483 5.93% $3,421 5.93% $0 0.00% $2,541 6.44% $6,445 6.11%
---- ---- ------ ---- ---- ---- ------ ---- ------ ----
---- ---- ------ ---- ---- ---- ------ ---- ------ ----
</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>
Six Months Period From
Ended Year Ended February 1, 1997 Year Ended
June 30, 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.. $133,262 $ 95,052 $39,232 $32,889
Maximum amount outstanding at
any month-end during the period.............. $169,165 $215,029 $78,454 $54,994
Weighted average interest rate during the
period....................................... 6.44% 5.44% 4.01% 4.46%
Total short-term borrowings at period end...... $110,238 $ 95,985 $60,980 $27,680
Weighted average interest rate at period end... 7.78% 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 $883,000 at June 30, 1999.
Pelican National funds its retail banking activities primarily with
deposits, loan repayments and prepayments, and cash flows generated from
operations. Pelican National offers a variety of deposit accounts with a range
of interest rates and terms. Pelican National's deposits consist of checking,
money market, savings, NOW, and certificate of deposit accounts. At June 30,
1999, approximately 50% of the funds deposited in Pelican National were in
certificate of deposit accounts. At June 30, 1999, core deposits (savings, NOW,
and money market) represented 38.6% 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 National's deposits
are obtained predominantly from the area around its office in Naples, Florida.
Pelican National has relied primarily on customer service and competitive rates
to attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect Pelican
National's ability to attract and retain deposits. Pelican National uses
traditional means of advertising its deposit products, including print media and
generally does not solicit deposits from outside its market area. Pelican
National does not actively solicit certificate accounts in excess of $100,000 or
use brokers to obtain deposits. At June 30, 1999, $22.5 million, or 92.2% of
Pelican National's certificate of deposit accounts were to mature within one
year. Pelican National believes that substantially all of the certificate of
deposit accounts that mature within one year will be rolled-over into new
certificate of deposit accounts. To the extent that certificate of deposit
accounts are not rolled-over, Pelican National believes that it has sufficient
resources to fund these withdrawals.
61
<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 June 30, 1999.
<TABLE>
<CAPTION>
Jumbo
Certificates
Time Remaining Until Maturity of Deposit
- ----------------------------- ----------
(In Thousands)
<S> <C>
Less than 3 Months....................................... $1,670
3 Months to 6 Months..................................... 2,990
6 Months to 12 Months.................................... 3,405
Greater than 12 Months................................... 655
------
Total............................................... $8,720
------
------
</TABLE>
EMPLOYEES
At June 30, 1999, Pelican Financial had no employees other than
executive officers. At June 30, 1999, Washtenaw had 200 full-time employees and
four part-time employees and Pelican National had 18 full-time employees and no
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 offices of
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 Myers,
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 June 30, 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 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
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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. However, at the request of the plaintiff, the
court has permitted plaintiff to refile the motion for 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.
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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.
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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 Office of the Comptroller of
the Currency 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.
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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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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 affect
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 stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain
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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 June 30, 1999.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------------------------------------------------
Excess over
Required to be Excess over Required to be Required to be
Actual Adequately Capitalized Minimum Required Well Capitalized Capitalized
---------------- ------------------- ------------------ -------------------- -------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------ ------- ----- ------ ----- ------- ------ ------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets)... $13,511 10.64% $10,158 8.00% $3,353 2.64% $12,697 10.00% $ 814 0.64%
Tier 1 Capital (to Risk
Weighted Assets)... - 13,370 10.53 5,079 4.00 8,291 6.53 7,619 6.00 5,751 4.53
Tier 1 Capital (to Average 13,370 5.56 9,611 4.00 3,759 1.56 12,014 5.00 1,356 0.56
Assets)............
</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 June 30, 1999.
<TABLE>
<CAPTION>
As of June 30, 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..... $5,534 16.12% $2,746 8.0% $2,788 8.12%
Tier 1 risk-based ratio.... 5,394 15.72 1,373 4.0 4,021 11.72
Leverage ratio............. 5,394 11.22 1,922 4.0 3,472 7.22
</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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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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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. 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 1,811,650(3) 59.73%
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
S. Lynn Stokes 49 Director 2002 0 0.00
All directors and executive officers as a
group (7 persons) 1,832,986(6) 60.43
</TABLE>
- --------------------
(1) As of December 31, 1998.
(2) As of June 30, 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 June 30, 1999. Excludes 588,350 shares of
common stock which are held in 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 June 30, 1999.
(5) Includes 8,000 shares of common stock underlying options exercisable
within 60 days of June 30, 1999.
(6) Includes 6,000 shares of common stock underlying options exercisable
within 60 days of June 30, 1999. Excludes 588,350 shares of common
stock which are held in 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 Washtenaw 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
71
<PAGE>
Officer for Regions Financial Corp. and as a Senior Vice President and Chief
Financial Officer Regions Bank, N.A., Regions Financial Corp.'s national bank
subsidiary. From 1996 to 1998, Mr. Hogan served as Vice President, Treasurer,
and SEC Compliance Officer for Key Florida Bancorp, Inc. From 1989 to 1996, Mr.
Hogan was a certified public accountant practicing with Purvis, Gray and
Company, an independent public accounting firm headquartered in Florida. Mr.
Hogan is a member of the American Institute of Certified Public Accountants and
the Florida Institute of Certified Public Accountants as well as the Manatee and
Sarasota Counties Gator Clubs.
KOULA M. KOVACH has been a director and Vice President of 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 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."
S. LYNN STOKES has been a director of Pelican Financial since July
1999. Mr. Stokes has served as a consultant to the financial institution
industry since 1986 from his office in Sun Center City, Florida. From 1985 to
1986, Mr. Stokes served as Executive Vice President for Corporate Planning and
Development for a $1.2 billion savings and loan association, located in Florida.
Prior to 1985, he was a partner in the Miami office of Deloitte, Haskins and
Sells (now Deloitte & Touche LLP) as the firm's national industry tax
coordinator for savings and loan associations. Mr. Stokes is a contributing
editor for the FEDERAL BANKING LAW REPORTER published by Commerce Clearinghouse,
Inc. He also is a member and past chairman of the Editorial Board of CPA TODAY,
the monthly journal of the Florida Institute of Certified Public Accountants.
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.
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<PAGE>
Pelican National's and Washtenaw's full Boards of Directors act as
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 time 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 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>
Annual Compensation
------------------------------------------
Long Term
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 12/31/97 198,462 64,692 0 0 4,476 (2)
Chairman of the Board of 01/31/97 215,000 83,353 0 0 9,184 (3)
Pelican Financial; Chairman of
the Board of Pelican National
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>
(FOOTNOTES ON NEXT PAGE)
73
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
- ------------------
(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.
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 six months ended June
30, 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 $23,000, $77,000, $33,000, and $38,000, respectively relating
to the plan.
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<PAGE>
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 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. Since December 31, 1998, Pelican Financial granted an
additional 230,750 options pursuant to the option plan of which options for
50,000 shares were granted to Charles C. Huffman and options for 25,000 shares
were granted to Koula M. Kovach. All of these additional options are to be
effective at the date of the offering at the public offering price.
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>
Potential Realizable Value at
Assumed Annual Rate of
Number of Stock Price Appreciation for
Securities Percent of Total Option Term
Underlying Options/SARs ------------------------------
Options/SARs Granted to Exercise or Base Expiration
Name Granted (#) Employees Price ($/Sh) Date 5% ($) 10% ($)
- ------------------ ------------ ---------------- --------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Huffman 2,000 1.52% $5.50 11-19-08 $ 5,280 $ 14,940
</TABLE>
The following table 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.
75
<PAGE>
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>
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
Financial; President of 9-11-98 Mortgage 147,500 0 6.250
Washtenaw
</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>
Michael D. Surgen 7-22-98 Mortgage 150,000 0 7.125
Director of Pelican
Financial; President of 7-24-98 Home 34,652 34,400 7.750
Pelican National Equity
R. Charles Huffman 5/29/96 Mortgage 84,000 0 6.000
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 National 8-25-98 Mortgage 227,150 0 6.000
</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 10,000,000
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 June 30, 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
77
<PAGE>
for additional shares that may be issued by, and no share is entitled in any
manner to any preference over any other share.
PREFERRED STOCK
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.
78
<PAGE>
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.
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 affect 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.
79
<PAGE>
UNDERWRITING
Pursuant to the terms and conditions in an underwriting agreement
between the underwriters, The First American Investment Banking Corporation,
Stanford Group Company, and First Colonial Securities Group, Inc. (the
underwriters), Pelican Financial, and Mr. Huffman, the underwriters have
agreed to purchase from Pelican Financial and Mr. Huffman the number of
shares of common stock listed below. The underwriters have 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 underwriters are committed to accept and pay
for all of the common stock offered hereby, if any shares are taken.
The following table sets forth the number of shares of common stock
to be purchased by each underwriter.
<TABLE>
<CAPTION>
Number of Shares to be
Purchased by Underwriters
Underwriters from Pelican Financial(1)
- ---------------------------------------- -------------------------------
<S> <C>
The First American Investment
Banking Corporation................... 530,000
Stanford Group Company................ 320,000
First Colonial Securities Group, Inc.. 110,000
----------
Total....................... 960,000
----------
----------
</TABLE>
- -------------
(1) Assumes that the over-allotment option granted by Pelican Financial is
not exercised.
First American, Stanford Group, and First Colonial propose 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 $0.56 per share. The underwriters
have informed Pelican Financial that they do 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 underwriters. 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
In connection with this offering, Pelican Financial will issue a
warrant to First American. The warrant permits First American to purchase up
to 5% of the common stock sold by Pelican Financial in this offering, 48,000
shares assuming the sale of 960,000 shares of common stock by Pelican
Financial. The exercise price per share of the warrant is equal to 120% of
the offering price, or $8.40 based on assuming a $7.00 offering price.
Pelican Financial will receive no proceeds from the issuance of the warrant
and will only receive the exercise price per share upon the exercise of the
warrant. The warrant is exercisable for a period beginning on the one year
anniversary date of the offering and ending on the five year anniversary date
of the offering. On and after the ending date, the warrant becomes wholly
void and of no value.
80
<PAGE>
The warrant is subject to transfer restrictions as described in the
warrant. Generally, the warrant may not be sold, transferred, assigned,
pledged, or hypothecated, except it may be transferred, in whole or in part:
- to one or more officers or partners of a holder of the warrant;
- to any other underwriting firm or member of the selling group
which participated in the offering;
- to a successor to the holder of the warrant;
- to a purchaser of substantially all of the assets of the holder
of the warrant; or
- by operation of law.
The term "holder" as defined in the warrant also includes any person who has
been transferred the warrant in accordance with the term of the warrant.
The warrant does not entitle First American to any rights as a
shareholder of Pelican Financial, including voting rights or the right to
receive cash dividends, if paid. To the extent that First American exercises
the warrant, dilution to the interests of Pelican Financial's holders of
common stock will occur. Further, the terms upon which Pelican Financial will
be able to obtain additional equity capital may be adversely affect because
First American would likely exercise the warrant at a time when Pelican
Financial was in a position to obtain additional equity financing on terms
more favorable than the warrant. The warrant is also subject to adjustment in
the event of a stock dividend, stock split, reclassification, reorganization,
consolidation, or merger. Pelican Financial has the right to adjust the
exercise price or the number of shares issuable upon exercise of the warrant
in connection with this adjustment.
Pelican Financial has granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to
purchase up to 144,000 additional shares of common stock, at the initial
public offering price, less the underwriting discount, on the cover page of
this prospectus, to cover over-allotments, if any. The underwriters 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 underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over allot. In addition, the
underwriters may bid for, and purchase, shares of common stock in the open
market to cover syndicate short positions created in connection with the
offering or to stabilize the price of the common stock. Finally, the
underwriting syndicate, if any, may reclaim selling concessions allowed for
distributing the common stock in the 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 underwriters are 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 underwriters. 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
underwriters against and contribute toward certain liabilities, including
liabilities pursuant to the Securities Act. Pelican Financial has agreed to
reimburse the underwriters 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 underwriters 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
81
<PAGE>
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 LLP 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 LLP, ended in September of 1998, when Deloitte & Touche LLP
informed Pelican Financial that it declined to stand for re-election.
Deloitte & Touche LLP'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 LLP on any matter of accounting principles
or practices, financial statement disclosure, auditing scope or procedure, or
any reportable events.
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 six months ended June 30,
1999 and 1998 (Unaudited)
Consolidated Balance Sheets (Unaudited).......................................F-2
Consolidated Statements of Income (Unaudited).................................F-3
Consolidated Statements of Comprehensive Income (Unaudited)...................F-4
Consolidated Statement of Shareholders' Equity (Unaudited)....................F-5
Consolidated Statement of Cash Flows (Unaudited)..............................F-6
Notes to Consolidated Financial Statements.......................................F-7--F-22
Independent Auditors' Report of Crowe Chizek & Company LLP............................F-23
Independent Auditors' Report of Deloitte & Touche LLP.................................F-24
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-25
Consolidated Statements of Income............................................F-26
Consolidated Statements of Comprehensive Income..............................F-27
Consolidated Statement of Shareholders' Equity...............................F-28
Consolidated Statement of Cash Flows.........................................F-29
Notes to Consolidated Financial Statements......................................F-30--F-49
</TABLE>
F-1
<PAGE>
PELICAN FINANCIAL, INC.
Consolidated Balance Sheets (Unaudited)
June 30, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,430,578 $ 10,180,034
Accounts receivable 14,639,405 7,087,170
Securities available for sale 6,111,797 5,591,983
Loans held for sale 133,236,203 179,454,160
Loans receivable, net 42,432,110 23,873,670
Mortgage servicing rights, net 12,329,215 15,509,678
Mortgage loans in foreclosure and other real estate 316,514 581,385
Premises and equipment, net 1,031,808 884,443
Federal income taxes receivable 509,004 1,392,624
Other assets 1,445,482 1,854,119
--------------- ----------------
$ 216,482,116 $ 246,409,266
--------------- ----------------
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 5,261,964 $ 3,280,064
Interest-bearing 43,143,086 31,784,014
--------------- ----------------
Total deposits 48,405,050 35,064,078
Due to bank 31,236,729 38,259,829
Notes payable 55,789,577 57,025,504
Repurchase agreements 54,448,200 95,984,844
Other liabilities 9,911,598 6,474,997
Subordinated note payable 1,200,000 1,200,000
--------------- ----------------
Total liabilities 200,991,154 234,009,252
Commitments and contingencies
Shareholders' equity
Preferred stock, 200,000 authorized; none outstanding
Common stock, 10,000,000 authorized; 3,032,836 outstanding
at June 30, 1999 and December 31, 1998 30,328 60,656
Additional paid in capital 8,291,656 8,261,328
Retained earnings 7,287,930 4,076,162
Accumulated other comprehensive income, net of tax (118,952) 1,868
---------------- ---------------
Total shareholders' equity 15,490,962 12,400,014
--------------- ----------------
$ 216,482,116 $ 246,409,266
--------------- ----------------
--------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
PELICAN FINANCIAL INC.
Consolidated Statements of Income (Unaudited)
Six months ended June 30, 1999 and June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 7,050,200 $ 4,220,350
Investment securities, taxable 227,301 164,599
Federal funds sold and overnight accounts 72,837 188,152
-------------- ---------------
Total interest income 7,350,338 4,573,101
INTEREST EXPENSE
Deposits 736,435 404,898
Short-term borrowings 4,226,764 3,169,403
-------------- ---------------
Total interest expense 4,963,199 3,574,301
-------------- ---------------
NET INTEREST INCOME 2,387,139 998,800
Provision for loan losses 13,145 27,252
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,373,994 971,548
Noninterest income
Service charges on deposit accounts 22,361 13,209
Other income 838,709 633,561
Servicing income 2,028,650 1,219,357
Gain on sales of mortgage servicing rights
and loans, net 12,323,249 7,658,298
-------------- ---------------
Total noninterest income 15,212,969 9,524,425
Noninterest expense
Compensation and employee benefits 7,631,897 4,537,116
Occupancy and equipment 1,410,061 935,754
Bank fees 152,654 146,751
Loan processing fees 407,327 399,777
Amortization of mortgage servicing rights 1,483,002 478,498
Mortgage servicing rights valuation adjustment (532,828) 515,890
Other noninterest expense 2,016,047 1,319,139
-------------- ---------------
Total noninterest expense 12,568,160 8,602,925
-------------- ---------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,018,802 1,893,049
Provision for income taxes 1,709,915 647,280
-------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 3,308,887 1,245,769
Cumulative effect of change in accounting principle 97,119 -
-------------- ---------------
NET INCOME $ 3,211,768 $ 1,245,769
-------------- ---------------
-------------- ---------------
Basic and diluted earnings per share before cumulative effect
of change in accounting principle $ 1.09 $ .41
Per share cumulative effect of change in accounting principle (.03)
-------------- ---------------
Basic and diluted earnings per share $ 1.06 $ .41
-------------- ---------------
-------------- ---------------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PELICAN FINANCIAL INC.
Consolidated Statements of Comprehensive Income (Unaudited)
Six months ended June 30, 1999 and June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 3,211,768 $ 1,245,769
Other comprehensive income, net of tax
Change in unrealized gains or losses on securities (120,820) (120,826)
-------------- ---------------
Comprehensive income $ 3,090,948 $ 1,124,943
-------------- ---------------
-------------- ---------------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PELICAN FINANCIAL, INC.
Consolidated Statements of Shareholders' Equity
Six months ended June 30, 1999 (Unaudited) and year ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Shares Stock Capital Earnings Income Equity
------ ------ ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 758,209 $ 75,821 $ 8,246,163 $ 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 $.02 758,209 (45,493) 45,493 -- -- --
Net income -- -- -- 1,245,769 -- 1,245,769
Other comprehensive income, net
of tax:
Unrealized gain on securities
available for sale -- -- -- -- (867) (867)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1998 1,516,418 $ 30,328 $ 8,291,656 $ 1,434,551 $ 1,874 $ 9,758,409
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 3,032,836 $ 60,656 $ 8,261,328 $ 4,076,162 $ 1,868 $ 12,400,014
Net income -- -- -- 3,211,768 -- 3,211,768
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 -- -- -- -- (120,820) (120,820)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1999 3,032,836 $ 30,328 $ 8,291,656 $ 7,287,930 $ (118,952) $ 15,490,962
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PELICAN FINANCIAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and June 30, 1998
- -----------------------------------------------------------------------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,211,768 $ 1,245,769
Adjustments to reconcile net income to
net cash from operating activities
Accretion of securities, net 1,228 (13,305)
Amortization of mortgage servicing rights 1,483,002 845,284
Mortgage servicing rights valuation adjustment (532,828) 533,723
Gain on sales of mortgage servicing rights and loans, net (12,323,249) (7,755,084)
Provision for loan losses 13,145 27,252
Depreciation and amortization 249,061 140,279
Purchases and origination of mortgage loans held for sale (1,447,649,479) (989,165,614)
Proceeds from sale of mortgage loans 1,504,012,720 862,476,372
Changes in assets and liabilities that (used) provided cash
Accounts receivable (7,071,298) 251,681
Federal income taxes receivable (883,620) 243,820
Other liabilities 4,879,699 2,290,492
Deferred taxes 383,697 60,393
--------------- ---------------
Net cash provided by (used in) operating activities 45,773,846 (128,818,938)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net (18,571,585) (1,879,343)
Purchases of mortgage servicing rights (27,642,917) (5,766,995)
Proceeds from sales of mortgage servicing rights 32,051,170 9,395,150
Loans in foreclosure and other real estate, net 264,871 (36,354)
Property and equipment expenditures, net (396,426) (247,631)
Purchase of securities available for sale (2,016,777) (7,757,454)
Proceeds from maturities and principal repayments
of securities available for sale 1,311,853 5,132,934
Purchase of Federal Reserve Stock (72,300) --
--------------- ---------------
Net cash (used in) provided by investing activities (15,072,111) (1,159,693)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits 1,981,900 1,104,452
Increase in interest-bearing deposits 11,353,580 2,215,326
Increase (decrease) in due to bank (7,023,100) 13,381,500
Increase (decrease) in notes payable (1,226,927) 21,895,934
Increase (decrease) in repurchase agreements (41,536,644) 97,370,503
--------------- ---------------
Net cash (used in) provided by financing activities (36,451,191) 135,967,715
--------------- ---------------
Net change in cash and cash equivalents (5,749,456) 5,989,084
Cash and cash equivalents at beginning of period 10,180,034 4,376,632
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,430,578 $ 10,365,716
--------------- ---------------
--------------- ---------------
Cash and cash equivalents is composed of:
Cash and demand deposits due from banks $ 1,133,578 $ 631,716
Interest-bearing deposits in banks 99,000 --
Federal funds sold 3,198,000 9,734,000
--------------- ---------------
Total cash and cash equivalents $ 4,430,578 $ 10,365,716
--------------- ---------------
--------------- ---------------
Supplemental cash disclosures
Interest paid $ 5,153,015 $ 3,150,517
Income taxes paid 550,000 400,000
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION: The unaudited consolidated balance sheet as of
June 30, 1999 and the related unaudited consolidated statements of income,
shareholders' equity and cash flows for the six months ended June 30, 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. ("PFI") is a registered bank
holding company incorporated during 1997. PFI 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 six
months ended June 30, 1999 and 1998, and the year ended December 31, 1998,
include the accounts of PFI 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 June 30, 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)
Six months ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
This line item included $13,441,950 and $6,181,140 at June 30, 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 $140,706 and $930,623 at June 30, 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 June 30,
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 June 30, 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)
Six months ended June 30, 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. The Company continues to accrue
interest on loans over 90 days past due if they are well secured and in the
process of collection.
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)
Six months ended June 30, 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 June 30, 1999 and December 31, 1998.
EARNINGS 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 PFI and pooling with WMC (see Note 2) represent PFI
equivalent shares as if the PFI 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)
Six months ended June 30, 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, 2001, a new accounting
standard (SFAS No. 133) will require all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. The effect will depend on derivative holdings when this standard
applies.
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
PFI was incorporated on March 3, 1997 as a registered bank holding company. PFI
was created to form PNB and to acquire WMC. On June 22, 1997, PFI acquired all
the common stock of WMC in exchange for 600,000 shares of PFI'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 PFI. PFI 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 PFI prior to the acquisition. WMC's fiscal year-end
has been changed from January 31 to December 31 to conform to PFI's fiscal
year-end.
During 1997, PFI 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 June 30, 1999. At June 30, 1999 and December 31, 1998, the
Company had 10,000,000 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)
Six months ended June 30, 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
---------- ---------- ---------- ---------
JUNE 30, 1999
<S> <C> <C> <C> <C>
U.S. Government Agencies $ 4,000,000 $ - $ (96,250) $ 3,903,750
Mortgage Backed Securities 2,292,028 2,133 (86,114) 2,208,047
-------------- ----------- ------------ --------------
$ 6,292,028 $ 2,133 $ (182,364) $ 6,111,797
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
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 June 30, 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 $ 483,125
Due after one year through five years 3,500,000 3,420,625
Mortgage Backed Securities 2,292,028 2,208,047
-------------- ---------------
$ 6,292,028 $ 6,111,797
-------------- ---------------
-------------- ---------------
</TABLE>
No securities were sold during the six months ended June 30, 1999 and June 30,
1998.
Other assets include $332,900 and $260,600 of Federal Reserve Bank stock and
Federal Home Loan Bank stock at June 30, 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)
Six months ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Commercial, financial and agricultural $ 935,379 $ 824,000
Real estate 41,490,353 22,834,087
Installment loans 146,998 343,058
------------ ------------
42,572,730 24,001,145
Deduct allowance for loan losses (140,620) (127,475)
------------ ------------
Loans receivable - net $ 42,432,110 $ 23,873,670
------------ ------------
------------ ------------
</TABLE>
No loan losses were charged against the allowance for loan losses during the six
months ended June 30, 1999 and 1998. The Company had one loan of $246,000 on
nonaccrual status as of June 30, 1999 and no loans on nonaccrual status or that
were considered impaired as of December 31, 1998.
Loans to related parties:
June 30,
1999
----
Beginning of year $ 34,400
New loans 7,800
Repayments -
---------
June 30, 1999 $ 42,200
---------
---------
NOTE 5 - MORTGAGE LOANS SERVICED
MORTGAGE SERVICING RIGHTS: Activity related to mortgage servicing rights is
summarized below:
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 16,750,760 $ 4,696,038
Additions 27,642,917 27,730,631
Sales (29,873,206) (13,909,878)
Amortization (1,483,002) (1,766,031)
------------ ------------
Balance at end of period 13,037,469 16,750,760
Valuation allowance at beginning of period (1,241,082) (355,860)
Adjustment for impairment 532,828 (914,061)
Adjustment for sale of servicing rights -- 28,839
------------ ------------
Valuation allowance at end of period (708,254) (1,241,082)
------------ ------------
Net $ 12,329,215 $ 15,509,678
------------ ------------
------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 1999 and 1998
- ------------------------------------------------------------------------------
NOTE 5 - MORTGAGE LOANS SERVICED (Continued)
The estimated fair value of mortgage servicing rights as of June 30, 1999 and
December 31, 1998 was $11,476,000 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 $1,954,258,000 and
$1,655,226,000 at June 30, 1999 and December 31, 1998, respectively, which
includes temporary subservicing relating to servicing sales of $19,114,000 and
$355,395,000 ($19,114,000 and $13,174,000 of which WMC was servicing for PNB).
During the six months ended June 30, 1999, WMC transferred to PNB loans held for
sale at cost of $5,679,900.
During the period ended June 30, 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 $32,498,000 ($16,952,000 held at PNB) and
$24,701,000 ($12,472,000 held at PNB) at June 30, 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
<TABLE>
<CAPTION>
Premises and equipment includes the following:
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Computer equipment and software $ 2,277,566 $ 2,008,440
Furniture and fixtures 1,113,409 1,008,099
Automobiles 51,985 51,985
Leasehold improvements 55,153 33,166
------------ -----------
3,498,113 3,101,690
Accumulated depreciation and amortization (2,466,305) (2,217,247)
----------- -----------
$ 1,031,808 $ 884,443
----------- -----------
----------- -----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 1999 and 1998
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE 7 - DEPOSITS
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing $ 5,261,964 $ 3,280,064
Interest -bearing demand 680,903 1,373,765
Savings 18,036,461 17,755,697
----------- -----------
23,979,328 22,409,526
Certificates of deposit:
Under $100,000 14,992,506 9,110,218
Over $100,000 8,720,000 3,191,576
IRAs 713,216 352,758
----------- -----------
Total certificates 24,425,722 12,654,552
----------- -----------
$ 48,405,050 $ 35,064,078
-------------- ---------------
-------------- ---------------
</TABLE>
<TABLE>
At June 30, 1999, the scheduled maturities of certificates of deposit are as
follows:
<S> <C>
June 30, 2000 $ 22,520,000
June 30, 2001 1,839,000
June 30, 2002 66,722
June 30, 2003 -
June 30, 2004 and thereafter -
--------------
$ 24,425,722
--------------
--------------
</TABLE>
NOTE 8 - NOTES PAYABLE
The Company currently has a warehouse line of credit of $80,000,000, of which
$12,000,000 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 5.50%
and 5.00% at June 30, 1999 and December 31, 1998. Notes payable are summarized
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 TERMS 1998 TERMS
---- ----- ---- -----
<S> <C> <C> <C> <C>
Warehouse line $ 47,389,577 FFR+1.50% $ 43,025,504 FFR+1.50%
Servicing under contract for
sale sub-limit 6,400,000 FFR+1.50% 7,000,000 FFR+1.875%
Working capital sub-limit - 5,000,000 FFR+2.25%
Term Loan 2,000,000 FFR+2.25% 2,000,000 FFR+2.75%
-------------- --------------
$ 55,789,577 $ 57,025,504
-------------- --------------
-------------- --------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 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 5.666% and
6.338% at June 30, 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 June
30, 1999 and December 31, 1998. The note requires monthly interest payments at
4.5% per annum over the prime interest rate, which was 8.00% at June 30, 1999
and December 31, 1998. In June 1998, this note was renewed for a full year. The
note matures in June 2000.
NOTE 11 - LEASES
The Company leases office facilities under noncancelable operating leases.
Future minimum lease payments at June 30, 1999 under noncancelable leases are as
follows:
<TABLE>
<S> <C>
June 30, 2000 $ 194,937
June 30, 2001 397,111
June 30, 2002 290,982
-------------
$ 883,030
-------------
-------------
</TABLE>
For periods ended June 30, 1999 and 1998, rental expense under operating leases
was approximately $133,636 and $203,709, respectively.
- -------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 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 June 30, 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>
JUNE 30, 1999
Total capital (to risk weighted assets)
Consolidated $ 13,511 10.64 % $ 10,158 8.00% $ 12,697 10.0%
Bank 5,534 16.12 2,746 8.00 3,433 10.0
Tier 1 capital (to risk weighted assets)
Consolidated 13,370 10.53 5,079 4.00 7,619 6.0
Bank 5,394 15.72 1,373 4.00 2,060 6.0
Tier 1 capital (to average assets)
Consolidated 13,370 5.56 9,611 4.00 12,014 5.0
Bank 5,394 11.22 1,922 4.00 2,404 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 PFI at June 30, 1999 or December 31, 1998.
WMC has a covenant in its warehouse credit agreement which limits the amount of
dividends WMC may pay to PFI to $600,000 for 1999.
- -------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 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 $21,669, $27,514
and $76,641 relating to the plan during the periods ended June 30, 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 $149,364,000 and
$144,486,000 at June 30, 1999 and December 31, 1998, respectively, along with
outstanding commitments to make other types of loans totaling approximately
$2,205,000 and $352,000 at June 30, 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 June 30, 1999 and December 31, 1998,
the Company had approximately $181,520,000 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 June 30, 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)
Six months ended June 30, 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>
Six months Six months
ended ended
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Basic earnings per share
Net income $ 3,211,768 $ 1,245,769
Weighted average shares outstanding 3,032,836 3,032,836
------------- --------------
Basic earnings per share $ 1.06 $ .41
------------- --------------
------------- --------------
Diluted earnings per share
Net income $ 3,211,768 $ 1,245,769
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 $ 1.06 $ .41
------------- --------------
------------- --------------
</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)
Six months ended June 30, 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
Six Months Ended June 30, 1999 Banking Banking Other Totals
- ------------------------------ ------- ------- ----- ------
<S> <C> <C> <C> <C>
Net interest income $ 1,321 1,141 $ (75) $ 2,387
Gain on sales of MSR and loans, net 12,264 59 - 12,323
Servicing income 2,026 3 - 2,029
Noncash items:
Provision for loan losses - 13 - 13
MSR amortization & valuation 948 2 - 950
Provision for income taxes 1,683 67 (40) 1,710
Segment profit 3,160 130 (78) 3,212
Segment assets 162,301 54,279 (98) 216,482
SIX MONTHS ENDED JUNE 30, 1998
Net interest income $ 726 $ 357 $ (84) $ 999
Gain on sales of MSR and loans, net 7,755 0 (97) 7,658
Servicing income 1,120 99 - 1,219
Noncash items:
Provision for loan losses - 27 - 27
MSR amortization & valuation 1,170 192 - 1,362
Provision for income taxes 858 (179) (32) 647
Segment profit 1,643 (335) (62) 1,246
Segment assets 234,751 26,260 (691) 260,320
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 18 - PELICAN FINANCIAL INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,157 $ 5,492
Investment in WMC 12,118,753 9,034,480
Investment in PNB 5,276,901 5,267,429
Other assets 396,020 116,182
-------------- ---------------
Total assets $ 17,792,831 $ 14,423,583
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,000,000 $ 2,000,000
Accrued expenses and other liabilities 301,869 23,569
Shareholders' equity 15,490,962 12,400,014
-------------- ---------------
Total liabilities and shareholders' equity $ 17,792,831 $ 14,423,583
-------------- ---------------
-------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Six months Six months
ended ended
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Dividends from WMC $ 75,591 $ 83,418
Other expense 98,705 93,768
-------------- ---------------
Income (loss) before income tax, undistributed
subsidiary income and cumulative effect of
change in accounting principle (23,114) (10,350)
Cumulative effect of change in accounting principle (20,065) -
Income tax benefit 40,382 31,881
Equity in undistributed subsidiary income 3,214,565 1,224,238
-------------- ---------------
Net income 3,211,768 1,245,769
Other comprehensive income:
Unrealized gain (loss) on securities, net of tax and
classification effects (120,820) (120,826)
-------------- ---------------
Comprehensive income $ 3,090,948 $ 1,124,943
-------------- ---------------
-------------- ---------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
PELICAN FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
NOTE 18 - PELICAN FINANCIAL INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Six months Six months
ended ended
June 30, June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,211,767 $ 1,245,769
Adjustments
Equity in undistributed subsidiary income (3,214,564) (1,238,430)
Change in other assets (40,753) (22,606)
Change in other liabilities 278,301 13,832
-------------- ---------------
Net cash from operating activities 234,751 (1,435)
CASH FLOWS FROM FINANCING ACTIVITIES
Capitalized stock offering costs (239,086) -
-------------- ---------------
Net cash from financing activities (239,086) -
-------------- ---------------
Net change in cash and cash equivalents (4,335) (1,435)
Cash and cash equivalents at beginning of period 5,492 19,207
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,157 $ 17,772
-------------- ---------------
-------------- ---------------
</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>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
[DETROIT, MICHIGAN]
INDEPENDENT AUDITORS' REPORT
Pelican Financial, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheet of Pelican
Financial, Inc. and subsidiaries (formerly PN Holdings, Inc.) (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
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, The First American Investment Banking Corporation,
Stanford Group Company, or First Colonial Securities
Group, Inc. 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, Inc..............................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
Recent Developments.................................42
Business............................................47
Regulation..........................................69
Management..........................................75
Description of Capital Stock........................82
Restrictions on Acquisition of Pelican Financial....83
Underwriting........................................84
Legal Matters.......................................86
Experts.............................................86
Changes in and Disagreements with Accountants on
Accounting and Financial Matters..................87
Available Information...............................87
Index to Consolidated Financial Statements.........F-1
</TABLE>
- ------------------------------------------------------
Until December 5, 1999, all dealers that affect
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.
- ------------------------------------------------------
<PAGE>
-----------------------------------------------------
PELICAN FINANCIAL, INC.
$6,720,000
960,000 SHARES OF COMMON STOCK
-----------------------------------------------------
PROSPECTUS
The First American Investment
Banking Corporation
Stanford Group Company
First Colonial Securities Group, Inc.
The date of this prospectus is
November 10, 1999
-----------------------------------------------------
THE SECURITIES OFFERED IN THIS
OFFERING ARE NOT DEPOSITS OR
ACCOUNTS AND ARE NOT
FEDERALLY INSURED OR
GUARANTEED.
-----------------------------------------------------
