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