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, 2001
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, 2001
Common stock, $0.01 Par value ................................... 3,992,836 Shares
Index
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income and Comprehensive Income for the Three Months
Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Shareholders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
2
PELICAN FINANCIAL, INC.
Consolidated Balance Sheets
March 31, December 31,
2001 2000
(Unaudited)
------------------ -------------------
ASSETS
Cash and cash equivalents $ 16,729,549 $ 10,174,294
Accounts receivable, net 7,165,205 5,510,387
Securities available for sale 3,824,567 5,863,928
Federal Reserve & Federal Home Loan Bank Stock 970,000 970,000
Loans held for sale 140,698,797 80,062,256
Loans receivable, net 94,315,070 88,933,374
Mortgage servicing rights, net 9,614,302 6,796,597
Other real estate owned 162,588 117,489
Premises and equipment, net 986,324 878,913
Other assets 2,165,910 1,929,105
------------------ -------------------
$ 276,632,312 $ 201,236,343
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
NonInterest-bearing $ 13,649,821 $ 12,512,146
Interest-bearing 78,497,910 69,496,306
------------------ -------------------
Total deposits 92,147,731 82,008,452
Due to bank 35,069,248 12,507,351
Notes payable 44,902,552 27,815,712
Repurchase agreements 64,066,095 38,981,233
Federal Home Loan Bank borrowings 14,000,000 14,000,000
Other liabilities 5,261,843 4,559,518
------------------ -------------------
Total liabilities 255,447,469 179,872,266
Commitments and contingencies
Shareholders' equity
Preferred stock, 200,000 shares authorized; none outstanding
Common stock, $.01 par value 10,000,000 shares authorized; 3,992,836
outstanding at March 31, 2001 and December 31, 2000 39,928 39,928
Additional paid in capital 13,631,156 13,631,156
Retained earnings 7,530,324 7,724,926
Accumulated other comprehensive income (loss), net of tax (16,565) (31,933)
------------------ -------------------
Total shareholders' equity 21,184,843 21,364,077
------------------ -------------------
$ 276,632,312 $ 201,236,343
================== ===================
See accompanying notes to financial statements
3
PELICAN FINANCIAL, INC.
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three Months Ended March 31,
2001 2000
--------------------------------------
INTEREST INCOME
Loans, including fees $ 5,074,011 $ 3,631,337
Investment securities, taxable 99,815 110,749
Federal funds sold and overnight accounts 98,252 26,030
--------------------------------------
Total interest income 5,272,078 3,768,116
INTEREST EXPENSE
Deposits 1,071,685 747,188
Other borrowings 2,168,043 1,255,531
--------------------------------------
Total interest expense 3,239,728 2,002,719
--------------------------------------
NET INTEREST INCOME 2,032,350 1,765,397
Provision for loan losses 120,000 90,000
--------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,912,350 1,675,397
Noninterest income
Service charges on deposit accounts 23,980 10,463
Servicing income 572,642 775,829
Gain on sales of mortgage servicing rights and loans, net 3,030,070 1,725,627
Other income 351,766 202,633
--------------------------------------
Total noninterest income 3,978,458 2,714,552
Noninterest expense
Compensation and employee benefits 3,153,843 2,250,826
Occupancy and equipment 388,020 377,636
Telephone 144,205 95,361
Postage 150,567 90,982
Amortization of mortgage servicing rights 360,214 548,439
Mortgage servicing rights valuation adjustment 597,095 (56,653)
Other noninterest expense 747,578 814,528
--------------------------------------
Total noninterest expense 5,541,522 4,121,119
--------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 349,286 268,830
Provision for income taxes 123,393 94,619
--------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 225,893 174,211
Cumulative effect of change in accounting principle, net of tax (420,495) -
--------------------------------------
NET INCOME (LOSS) $ (194,602) $ 174,211
======================================
Basic and diluted earnings per share before cumulative effect
of change in accounting principle $ 0.06 $ 0.04
Per share cumulative effect of change in accounting principle (0.11) -
--------------------------------------
Basic and diluted earnings (loss) per share $ (0.05) $ 0.04
======================================
COMPREHENSIVE INCOME (LOSS) $ (179,234) $ 177,203
======================================
See accompanying notes to financial statements
4
PELICAN FINANCIAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2001 2000
-------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided (used) by operating activities $ (71,388,690) $ (14,755,347)
-------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originations, net (5,501,697) 1,587,419
Proceeds from sales of mortgage servicing rights 6,752,737 4,669,819
Other real estate owned, net (45,099) 378,691
Property and equipment expenditures, net (198,357) (153,129)
Proceeds from maturities and principal repayments
of securities available for sale 2,063,483 155,723
Purchase of Federal Reserve Stock - (50,000)
-------------------- ------------------------
Net cash provided by investing activities 3,071,067 6,588,523
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 10,139,279 (347,992)
Increase in due to bank 22,561,897 4,679,453
Increase in notes payable due on demand 17,086,840 45,731
Advances on Federal Home Loan Bank borrowings - 3,000,000
Increase in repurchase agreements 25,084,862 6,543,031
-------------------- ------------------------
Net cash provided by financing activities 74,872,878 13,920,223
-------------------- ------------------------
Net change in cash and cash equivalents 6,555,255 5,753,399
Cash and cash equivalents at beginning of period 10,174,294 1,883,472
-------------------- ------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,729,549 $ 7,636,871
==================== ========================
CASH AND EQUIVALENTS IS COMPOSED OF:
Cash and demand deposits due from banks $ 4,383,549 $ 4,726,871
Interest-bearing deposits in banks - 97,000
Federal funds sold 12,346,000 2,813,000
-------------------- ------------------------
Total cash and cash equivalents $ 16,729,549 $ 7,636,871
==================== ========================
Supplemental cash disclosures
Interest paid $ 3,045,066 $ 1,976,565
Income taxes paid 95,000 -
See accompanying notes to financial statements
5
PELICAN FINANCIAL, INC.
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three month
period ended March 31, 2001 and 2000, 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 of management, are necessary
for fair presentation of the consolidated financial statements have been
included. The results of operations for the period ended March 31, 2001, 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 the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2000 included in Pelican Financial's Form 10-K.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, December 31,
2001 2000
----------------- ----------------
Commercial, financial and agricultural $ 573,124 $ 1,115,718
Commercial real estate 30,613,485 32,363,539
Residential real estate 53,531,106 50,713,118
Installment loans 10,159,977 5,248,512
----------------- ----------------
94,877,692 89,440,887
Deduct allowance for loan losses (562,622) (507,513)
----------------- ----------------
Loans receivable, net $ 94,315,070 $ 88,933,374
================= ================
Activity in the allowance for loan losses for the quarters ended March 31, are
as follows:
2001 2000
------------------- ----------------
Balance at beginning of period $ 507,513 $ 373,879
Provision for loan losses 120,000 90,000
Loans charged-off (65,438) (56,666)
Recoveries 546 -
------------------- ----------------
Balance at end of period $ 562,621 $ 407,213
6
PELICAN FINANCIAL, INC.
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 4 - EARNINGS PER SHARE
At March 31, 2001 and 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.
The following summarizes the computation of basic and diluted earnings (loss)
per share.
Three Months Three Months
ended ended
March 31, March 31,
2001 2000
----------- -----------
Basic earnings (loss) per share
Net income (loss) .................................. $ (194,602) $ 174,211
Weighted average shares outstanding ................ 3,992,836 3,992,836
----------- -----------
Basic earnings (loss) per share .................... $ (0.05) $ 0.04
=========== ===========
Diluted earnings (loss) per share
Net income (loss) .................................. $ (194,602) $ 174,211
Weighted average shares outstanding ................ 3,992,836 3,992,836
Dilutive effect of assumed exercise of stock options -- --
----------- -----------
Diluted average shares outstanding ................. 3,992,836 3,992,836
----------- -----------
Diluted earnings (loss) per share ................ $ (0.05) $ 0.04
=========== ===========
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, Sarasota and Fort Myers, Florida.
Of the two segments, Pelican National comprises the retail-banking segment, with
net interest income from loans, investments and deposits accounting for its
primary revenues. 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.
The following segment financial information has been derived from the internal
financial statements of Pelican National and Washtenaw, which are used by
management to monitor and manage the financial performance of Pelican Financial.
The accounting policies of the two segments are the same as those of Pelican
Financial.
The evaluation process for segments does not include holding company income and
expense. Holding company amounts are the primary difference between segment
amounts and consolidated totals, and are reflected in the "Other" column below,
along with minor amounts to eliminate transactions between segments.
7
PELICAN FINANCIAL, INC.
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 5 - SEGMENT INFORMATION (CONTINUED)
DOLLARS IN THOUSANDS
Retail Mortgage Consolidated
THREE MONTHS ENDED MARCH 31, 2001 Banking Banking Other Totals
---------------------------------- --------------- --------------- ---------------- ---------------
Net interest income $ 1,332 $ 736 $ (36) $ 2,032
Gain on sales of MSR and loans, net 11 3,065 (46) 3,030
Servicing income 3 570 - 573
Noncash items:
Provision for loan losses 120 - - 120
MSR amortization & valuation 2 955 - 957
Provision for income taxes 113 58 (48) 123
Segment profit, before cumulative effect
of change in accounting principle 218 100 (92) 226
Segment assets 116,956 159,669 7 276,632
THREE MONTHS ENDED MARCH 31, 2000
Net interest income $ 1,298 $ 510 $ (43) $ 1,765
Gain on sales of MSR and loans, net 4 1,722 - 1,726
Servicing income 5 771 - 776
Noncash items:
Provision for loan losses 90 - - 90
MSR amortization & valuation - 492 - 492
Provision for income taxes 193 (53) (45) 95
Segment profit, before cumulative effect
of change in accounting principle 371 (111) (86) 174
Segment assets 82,491 87,648 170 170,309
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENT
Beginning January 1, 2001, a new accounting standard (SFAS No. 133) requires 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.
At January 1 and March 31, 2001 derivatives held included forward contracts
to deliver loans and mortgage backed securities and U.S. Treasury options.
Forward contracts and Treasury options are used to manage interest rate risk
on loans held for sale and the pipeline of loans in-process. Under SFAS 133,
forward contracts and Treasury options will be carried at fair value, while
the change in fair value of loans held for sale will be recorded to offset
the value of forward contracts designated as a hedge. The effect of adopting
SFAS 133 at January 1, 2001 was a pre-tax expense of $635,495, consisting of
$689,152 of expense to record the loss on the forward contracts offset by
income of $53,657 on hedged loans held for sale. The expense at adoption was
recorded as a cumulative effect of change in accounting principle. During the
quarter ended March 31, 2001, an additional pre-tax expense of $134,438 was
recorded under SFAS 133, primarily to reflect the loss on forward contracts,
and is included in gain on sales of mortgage servicing rights and loans, net.
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Certain information in this Form 10-Q may constitute forward-looking information
that involves risks and uncertainties that could cause actual results to differ
materially from those estimated. Persons are cautioned that such forward-looking
statements are not guarantees of future performance and are subject to various
factors that could cause actual results to differ materially from those
estimated. These factors include, but are not limited to, changes in general
economic and market conditions, legislative and regulatory changes, monetary and
fiscal policies of the federal government, demand for loan and deposit products
and the development of an interest rate environment that adversely affects the
interest rate spread or other income from Pelican Financial's investments and
operations.
EARNINGS PERFORMANCE
Pelican Financial reported a net loss, including a $420,000 after tax charge as
the result of a cumulative effect of a change in accounting principle, of
$195,000 for the quarter ended March 31, 2001 compared to net income of $174,000
for the same period in 2000, a decrease of $369,000. Earnings per share, basic
and diluted, was a loss of $0.05 per share compared to income of $0.04, per
share for the three months ended March 31, 2001 and 2000 respectively.
Net income on operations, before the cumulative effect of change in accounting
principle, for the three months ended March 31, 2001 was $226,000 which, when
compared to the same period in 2000, represents an increase of $52,000 or 30%.
The cumulative effect of a change in accounting principle is the result of the
adoption of a new accounting standard (SFAS No. 133) that requires 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. Forward contracts and Treasury options are used
to manage interest rate risk on loans held for sale and the pipeline of loans
in-process. Under SFAS 133, forward contracts and Treasury options will be
carried at fair value, while the change in fair value of loans held for sale
will be recorded to offset the value of forward contracts designated as a hedge.
The effect of adopting SFAS 133 at January 1, 2001 was a pre-tax expense of
$635,495, consisting of $689,152 of expense to record the loss on the forward
contracts offset by income of $53,657 on hedged loans held for sale. The effect
of adopting SFAS 133 on earnings from operations for the period ended March 31,
2001 was a pre-tax expense of $134,438, primarily consisting of expense to
record the loss on the forward contracts. This was included as part of the gain
on sales of mortgage servicing rights and loans.
For further explanation of the earnings performance, please see the discussion
on the retail and mortgage banking segments to follow.
RESULTS OF OPERATIONS
RETAIL BANKING
The following discussion provides information that relates specifically to
Pelican Financial's retail banking line of business.
For the three months ended March 31, 2001, Pelican Financial's net income from
retail banking activities primarily conducted by Pelican National totaled
$218,000. For the three months ended March 31, 2000 Pelican National's
comparable net income was $371,000. The decrease in net income for the period
was primarily attributable to an increase in noninterest expense.
Net Interest Income
Net Interest Income was $1.3 million for the three months ended March 31, 2001
and 2000, respectively. Net interest income was consistent as the reduction of
the interest rate spread from 4.40% at March 31,2000 to 2.24% at March 31, 2001
was offset by the increase in average loans receivable.
9
Average Balance Sheet
The following tables summarizes the average yields earned on interest-earning
assets and the average rates paid on interest-bearing liabilities for Pelican
Financial. With the exception of loans held for sale and other borrowings, the
interest earning-assets and interest-bearing liabilities are attributable to
Pelican National.
Three months ended March 31,
2001 2000
-----------------------------------------------------------------------------
Average Average
Volume Interest Yield/Cost Volume Interest Yield/Cost
------- -------- ---------- -------- -------- ----------
ASSETS
Interest-earning assets:
Federal funds sold........................... $ 6,882 $ 100 5.81% $ 1,832 $ 26 5.68%
Securities................................... 6,368 98 6.16 6,972 111 6.37
Loans held for sale.......................... 134,141 2,738 8.16 63,530 1,630 10.26
Loans receivable, net........................ 91,494 2,336 10.21 70,354 2,001 11.38
------ ----- ------ -----
Total interest-earning assets.............. 238,885 5,272 8.83 142,688 3,768 10.56
Non-earning assets........................... 21,695 18,336
------ ------
Total assets............................ $260,580 $161,024
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts................................. $ 1,988 11 2.21 $ 876 5 2.28
Money market accounts........................ 3,455 41 4.75 2,686 26 3.87
Savings deposits............................. 14,468 161 4.45 10,719 86 3.21
Time deposits................................ 52,200 859 6.58 43,296 630 5.77
Other borrowings............................. 124,688 2,168 6.95 72,519 1,256 8.56
------- ----- ------ -----
Total interest-bearing liabilities......... 196,799 3,240 6.59 130,096 2,003 6.87
----- ---- ----- ----
Noninterest-bearing liabilities.............. 43,130 9,591
Stockholders' equity......................... 20,651 21,337
------ ------
Total liabilities and stockholders' equity. $260,580 $161,024
======= =======
Interest rate spread........................... 2.24% 4.40%
==== ====
Net interest income and net interest margin.... $2,032 3.40% $ 1,765 4.95%
===== ==== ======= ====
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, 2001 was $42,000
compared to $22,000 for the same period in 2000, an increase of $20,000 or 91%.
This increase was primarily due to the increase in the number of accounts at
Pelican National that are eligible for service charges. The number of accounts
has grown due to normal growth and a second full service bank branch in Fort
Myers, Florida being opened during 2000.
Noninterest Expense
Total noninterest expense for the three months ended March 31, 2001 was
$923,000, compared to $667,000 for the same period in 2000, an increase of
$256,000 or 38%. This increase was primarily due to increases in compensation
and employee benefits expense of $124,000 or 39%, occupancy and equipment
expense of $31,000 or 26% and other operating expenses of $86,000 or 41%. The
increases were the result of adding additional support staff due to the growth
of the bank and the opening of a loan production office in Sarasota, Florida.
10
MORTGAGE BANKING
The following discussion provides information that relates specifically to
Pelican Financial's mortgage banking line of business.
For the three months ended March 31, 2001, Pelican Financial's net operating
income from mortgage banking activities primarily conducted by Washtenaw totaled
$100,000. Including the cumulative effect of a change in accounting principle,
the net loss was $320,000. For the three months ended March 31, 2000 Washtenaw's
net loss was $111,000. The increase in the operating income was primarily
attributable to an increase in mortgage loan production as a result of the
decrease in mortgage interest rates.
The volume of loans produced for the three months ended March 31, 2001 totaled
$586.0 million as compared to $262.6 million for the three months ended March
31, 2000, an increase of $323.4 million or 123%. The decrease in mortgage
interest rates increased the amount of loan refinancing that occurred in the
first three months of 2001.
Noninterest Income
Total noninterest income for the three months ended March 31, 2001 was $4.0
million, compared to $2.7 million for the three months ended March 31, 2000, an
increase of $1.3 million or 48%. This increase was primarily due to a 78%
increase in the gain on sales of mortgage servicing rights and loans of $1.3
million.
The increase in gain on sale of mortgage servicing rights and loans was
primarily due to an increase in the overall new loan origination volume in the
first three months of 2001. In addition, the gains on sale of mortgage servicing
rights and loans was affected by the improved profit margins on each new loan
origination as a result of the current interest rate environment. The increase
in new loan originations are the result of the decrease in mortgage interest
rates and increased market share by Washtenaw primarily in the western part of
the United States.
Loan Servicing
At March 31, 2001, Washtenaw serviced $920.0 million of loans compared to $1.1
billion at March 31, 2000, a 14% 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. In addition,
Washtenaw transferred approximately $100 million of servicing related to a bulk
sale during the quarter. This reduced the size of the servicing portfolio and
thereby reduced servicing revenue. At March 31, 2001 and 2000, with the
exception of servicing related to loans held for sale in Washtenaw's loan
portfolio and servicing sold but not yet delivered, all loan servicing was
serviced for others. Service fee income, net of amortization was $212,000 and
$223,000 for the three months ended March 31, 2001 and 2000 respectively.
Noninterest Expense
Total noninterest expense for the three months ended March 31, 2001 was $4.6
million, compared to $3.4 million for the same period in 2000, an increase of
$1.2 million or 35%. This increase was primarily due to the increase in employee
compensation and benefits expenses of approximately $779,000 and an increase in
the mortgage servicing rights valuation adjustment of $653,000. The increase in
employee compensation and benefits was primarily the result of an increase in
personnel and overtime as well as an increase in total commissions paid to the
existing sales force as a result of the increase in new loan originations.
Washtenaw's sales force is comprised primarily of commission based business
consultant's who are paid a percentage of the loan production from their
customers. The mortgage servicing rights valuation adjustment increased due to
the decrease in mortgage interest rates. As mortgage interest rates drop, the
value of the mortgage servicing rights asset decreases because of the higher
likelihood the loans will be refinanced.
11
BALANCE SHEET ANALYSIS
The following is a discussion of the consolidated balance sheet of Pelican
Financial.
ASSETS
At March 31, 2001, total assets of Pelican Financial equaled $276.6 million as
compared to $201.2 million at December 31, 2000, an increase of $75.4 million or
37%. This increase is primarily due to increases in cash and cash equivalents,
accounts receivable, loans held for sale and loans receivable.
Cash and Cash Equivalents
Cash and cash equivalents were $16.7 million at March 31, 2001 compared to $10.2
million at December 31, 2000. The increase of $6.5 million or 64% was primarily
the result of an increase in federal funds sold of $5.3. Pelican National had
excess liquidity that will be used to fund loan origination's in the future. The
excess liquidity was caused by increased payoffs of outstanding loans and the
increase of outstanding deposit balances of Washtenaw's custodial accounts at
Pelican National.
Accounts Receivable
Accounts receivable were $7.2 million at March 31, 2001 compared to $5.5 million
at December 31, 2000. The increase of $1.7 million or 31% was primarily the
result of an increase in receivables related to the sale of servicing by
Washtenaw. Due to increased production during the first quarter, the amount of
receivable related to providing the purchaser of Washtenaw's mortgage servicing
rights final documents has increased.
Investment Securities
Pelican National primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funding not utilized for
investment in loans. Pelican National has invested primarily in U. S. government
and agency securities, federal funds, and U. S. government sponsored agency
issued mortgage-backed securities. As required by SFAS No. 115, Pelican National
classifies securities as held-to-maturity, available-for-sale, or trading. At
March 31, 2001 and at December 31, 2000, all of the investment securities held
in Pelican National's investment portfolio were classified as available for
sale. During the quarter, $2.1 million of securities were called.
The following table contains information on the carrying value of Pelican
National's investment portfolio at the dates indicated. At March 31, 2001, the
market value of Pelican National's investment portfolio totaled $4.8 million.
During the periods indicated and except as otherwise noted, Pelican National had
no securities of a single issuer that exceeded 10% of stockholders' equity.
At At
March 31, December 31,
2001 2000
(Dollars in thousands)
U. S. Government agency (1) .............................. $ 2,002 $ 3,984
Mortgage-backed securities .............................. 1,823 1,880
Federal Reserve Bank and Federal Home Loan Bank Stock..... 970 970
------------ ------------
Total investment securities................. $ 4,795 $ 6,834
============ ============
Loans Held for Sale
Loans held for sale were $140.7 million at March 31, 2001 compared to $80.1
million at December 31, 2000. This increase of $60.6 million or 76% was caused
by the increased refinance activity at Washtenaw resulting from the decrease in
mortgage interest rates.
Loans Receivable
Total loans receivable were $94.3 million at March 31, 2001, an increase of $4.4
million or 5% from $88.9 at December 31, 2000. This increase resulted primarily
from increases in commercial, residential real estate and boat lending
production at Pelican National. This was offset by a higher level of loans that
paid in full due to the declining interest rate environment.
12
The following table contains selected data relating to the composition of
Pelican Financial's loan portfolio by type of loan at the dates indicated. This
table includes mortgage loans available for sale and mortgage loans held for
investment. Pelican Financial had no concentration of loans exceeding 10% of
total loans that are not otherwise disclosed below.
March 31, 2001 December 31, 2000
--------------------- --------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
Real estate loans:
Residential, one to four units.......... $191,545 81.13 % $128,913 75.71%
Commercial and industrial real estate... 26,482 11.22 28,662 16.83
Construction............................ 7,336 3.11 6,339 3.72
---------- ---------- ---------- ----------
Total real estate loans.............. 225,363 95.46 163,914 96.26
Other loans:
Business, commercial.................... 573 0.24 1,116 0.66
Automobile.............................. 277 0.12 268 0.16
Boat.................................... 6,923 2.93 2,731 1.60
Other consumer.......................... 2,960 1.25 2,249 1.32
---------- ---------- ---------- ----------
Total other loans.................... 10,733 4.54 6,364 3.74
---------- ---------- ---------- ----------
Total gross loans................. 236,096 100.00% 170,278 100.00%
========== ==========
Unearned fees, premiums and
discounts, net.......................... (520) (775)
Allowance for loan losses.................. (563) (507)
---------- ----------
Total Loans net (1)..................... $235,013 $168,996
========== ==========
(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.
13
The following table sets forth certain information on nonperforming loans and
other real estate owned, the ratio of such loans and other real estate owned to
total loans and total assets as of the dates indicated.
At March 31, At December 31,
------------ ---------------
2001 2000 2000
---------- ---------- ----------
(Dollars in thousands)
Nonaccrual loans............................... $ 1,885 $ - $ $975
Loans past due 90 days or more but not on
nonaccrual................................... 483 80 299
---------- ---------- ----------
Total nonperforming loans.................. 2,368 80 1,274
Other real estate owned........................ 163 161 117
---------- ---------- ----------
Total nonperforming assets................. $2,531 $241 $1,391
========== ========== ==========
Total nonperforming assets to total assets..... 0.91% 0.14% 0.69%
Allowance for loan losses to nonperforming loans 23.78% 508.75% 39.80%
Nonperforming loans to total assets............ 0.86% 0.05% 0.63%
Provision and Allowance for Loan Losses
Pelican National establishes an allowance for loan losses based upon a quarterly
or more frequent evaluation by management of various factors inherent in the
loan portfolio. These factors include the estimated market value of the
underlying collateral, the growth and composition of the portfolio, current
delinquency trends and prevailing economic conditions, including property
values, employment and occupancy rates, interest rates, and other conditions
that may affect the borrowers' ability to comply with repayment terms. If actual
losses exceed the amount of the allowance for loan losses, earnings could be
adversely affected. As Pelican National's provision for loan losses is based on
management's assessment of the general risk inherent in the loan portfolio based
on all relevant factors and conditions, the allowance for loan losses represents
both general and specific reserves. The provision for loan losses for the three
months ended March 31, 2001 was $120,000. The provision for loan losses for the
three months ended March 31, 2000 was $90,000. The increase is due to the
increase in the size of the loan portfolio and the increase in total
nonperforming loans.
The Comptroller of the Currency, as an integral part of their examination
process, periodically reviews Pelican National's allowance for loan losses. They
may require Pelican National to make additional provisions for estimated loan
losses based upon their judgments about information available to them at the
time of their examination. Pelican National will continue to monitor and modify
its allowance for loan losses as conditions dictate. While management believes
the allowance for loan losses is sufficient to cover losses inherent in it
portfolio at this time, no assurances can be given that Pelican National's level
of allowance for loan losses will be sufficient to cover loan losses incurred by
Pelican National or that adjustments to the allowance for loan losses will not
be necessary if future economic and other conditions differ substantially from
the current conditions considered by management to determine the amount of the
allowance for loan losses.
The allowance for loan losses represented .59% of the loans receivable
outstanding as of March 31, 2001 compared with .57% of the loans receivable
outstanding as of December 31, 2000. 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, incurred credit losses. Such estimates were based on
management's assessment of the current 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.
LIABILITIES
At March 31, 2001, the total liabilities of Pelican Financial were $255.7
million as compared to $179.9 million at December 31, 2000, an increase of $75.8
million or 42%. This increase was primarily due to increases in deposits, notes
payable and repurchase agreements.
14
Deposits
Total deposits were $92.1 million at March 31, 2001 compared to $82.0 million at
December 31, 2000 an increase of $10.1 million or 12%. The increase was due to
several factors. The primary cause of the increase was due to increased balances
in the custodial accounts at Pelican National for Washtenaw's various investors.
These accounts are for the principal, interest, taxes and insurance collected
from the loans currently being serviced by Washtenaw. The balance in these
accounts typically increase as the balance in loans held for sale increases.
Due to Bank
Due to bank was $35.1 million at March 31, 2001 compared to $12.5 at December
31, 2000. The increase of $22.6 million or 180% was due to the increase of
mortgage loan production at Washtenaw. Due to Bank represents the drafts
provided to fund the loans purchased by Washtenaw that have not yet been
presented and cleared the bank.
Notes Payable
Notes payable was $44.9 million at March 31, 2001 compared to $27.8 million at
December 31, 2000. This increase of $17.1 million or 62% was primarily caused by
an increase of loans held for sale balance. Since the notes payable represent
the warehouse line of credit that Washtenaw uses to fund its loan production
until such time that the loans are sold to the secondary market, the balance
will generally move in direct correlation with the loans held for sale balance.
Repurchase Agreements
Repurchase agreements were $64.1 million at March 31, 2001 compared to $39.0
million at December 31, 2000. This increase of $25.1 million or 64% in the
repurchase agreements was primarily the result of an increase in the balance of
loans held for sale. Washtenaw uses repurchase agreements, in addition to its
warehouse line of credit, as a means to fund the loans that it purchases.
Therefore, much like the notes payable balance, the repurchase agreements
balance will move in direct correlation to the loans held for sale balance.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management
The objective of liquidity management is to ensure the availability of
sufficient resources to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the ability
to 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 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.
Pelican Financial is currently negotiating a $3.0 million line of credit. This
will be used to pay off its existing term loan and fund growth either at
Washtenaw or Pelican National. Management anticipates signing the new loan
agreement in the second quarter.
15
Washtenaw funds its business through the use of a warehouse line of credit and
the use of agreements to repurchase. The agreements to repurchase typically have
terms of less than 90 days and are treated as a source of financing. The
warehouse line of credit has a limit of $80 million, of which $12.0 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 $43.2 million at March 31, 2001 and $26.0 million at December
31, 2000. The interest rate on the warehouse line of credit is the Federal Funds
Rate plus 1.50% resulting in an effective rate of 6.50% at March 31, 2001 and
8.50% at December 31, 2000. The effective interest rate on the agreements to
repurchase was 5.90% at March 31, 2001 and 7.90% at December 31, 2000.
Washtenaw purchases its loans either by wiring funds to the closing agent or
sending a draft. The decision is based on the requirements of the state where
the loan is being purchased. When a draft is used, Washtenaw begins earning
interest on the day the draft is issued but does not incur any cost of funds
until the draft is presented to bank. When the draft clears the bank, Washtenaw
will either borrow money on its warehouse line of credit or through its
agreements to repurchase depending on the type of loan. Outstanding drafts
totaled $35.1 million at March 31, 2001 and $12.5 million at December 31, 2000.
The increase is the result of the increase in mortgage lending activity during
the quarter.
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, 2001, Pelican Financial
had a liquidity ratio of 19.37%. Liquidity, as measured in the form of cash and
cash equivalents totaled $16.7 million at March 31, 2001, an increase of $6.5
million from December 31, 2000 to March 31, 2001. The increase is primarily the
result of an $5.3 million increase in the outstanding federal funds sold at
March 31, 2001.
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.
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, 2001, Washtenaw had outstanding
rate-lock commitments to lend $112.2 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, 2001,
Washtenaw had outstanding commitments to sell $214.2 million of mortgage
loans. These commitments usually are funded within 90 days.
Capital Resources
The Board of Governors of the Federal Reserve System's (FRB) capital adequacy
guidelines mandate that minimum ratios be maintained by bank holding companies
such as Pelican Financial. Pelican National is governed by capital adequacy
guidelines mandated by the OCC.
Based upon their respective regulatory capital ratios at March 31, 2001 Pelican
Financial and Pelican National are both well capitalized, based upon the
definitions in the regulations issued by the FRB and the OCC setting forth the
general capital requirements mandated by the Federal Deposit Insurance
Corporation Improvement Act of 1991.
16
The table below indicates the regulatory capital ratios of Pelican Financial and
Pelican National and the regulatory categories for a well capitalized and
adequately capitalized bank under the regulatory framework for prompt corrective
action (all three capital ratios) at March 31, 2001 and December 31, 2000,
respectively:
Actual
March 31, December 31,
2001 2000
Required to be
Pelican Pelican Pelican Pelican Adequately Well
National Financial National Financial Capitalized Capitalized
Total Equity Capital to risk-weighted assets..... 13.98% 12.60% 14.85% 17.04% 8.00% 10.00%
Total Tier 1 Capital to risk-weighted assets..... 13.25% 12.26% 14.14% 16.64% 4.00% 6.00%
Tier 1 Capital to adjusted total assets ......... 9.55% 8.04% 9.85% 10.50% 4.00% 5.00%
Item 3: Quantitative and Qualitative Disclosure About Market Risk
For a discussion of Pelican Financial's asset/liability management policies as
well as the potential impact of interest rate changes upon the market value of
Pelican Financial's portfolio, see Pelican Financial's Annual Report to
Shareholders and Form 10-K. Management believes that there has been no material
change in Pelican Financial's asset/liability position or the market value of
Pelican Financial's portfolio since December 31, 2000.
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
Item 5. Other Information
The Registrant named Robert C. Huffman President of Washtenaw effective
January 25, 2001. Mr. Huffman replaces Charles C. Huffman who retained his
positions of Chairman of the Board and Chief Executive Officer of Pelican
Financial.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
March 31, 2001.
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 10, 2001 /s/ CHARLES C. HUFFMAN
----------------------
Charles C. Huffman
President and Chief Executive Officer
Date: May10, 2001 /s/ HOWARD M. NATHAN
--------------------
Howard M. Nathan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18