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U.S. Securities and Exchange Commission
Washington, D.C.  20549

 

Form 10-Q

 

ý

Quarterly Report Pursuant To Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

 

 

For the Quarter Ended June 30, 2002

 

 

 

Or

 

 

o

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
Incorporation or Organization)

 

(IRS mployer 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 ý     Noo

 

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 July 31, 2002

 

Common stock, $0.01 Par value …………………………….. 4,439,691 Shares

 

 



 

Index

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

 

 

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2002 and 2001

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

 

 

Item 2.

Changes in Securities and Use of Proceeds

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Shareholders

 

 

 

 

 

 

Item 5.

Other Information

 

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

2



 

PELICAN FINANCIAL, INC.
Consolidated Balance Sheets

 

 

 

June 30,
2002

 

December 31,
2001

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

Cash and cash equivalents

 

 

 

 

Cash and demand deposits due from banks

 

$

4,636,801

 

$

2,847,105

Federal funds sold

 

37,879,000

 

2,958,000

Total cash and cash equivalents

 

42,515,801

 

5,805,105

Accounts receivable, net

 

8,327,295

 

7,420,360

Securities available for sale

 

6,185,753

 

5,085,142

Federal Reserve & Federal Home Loan Bank Stock

 

1,330,000

 

1,070,000

Loans held for sale

 

92,286,182

 

231,514,620

Loans receivable, net

 

100,607,897

 

94,460,119

Mortgage servicing rights, net

 

18,961,898

 

14,832,785

Other real estate owned

 

901,983

 

199,687

Premises and equipment, net

 

2,027,007

 

1,394,353

Other assets

 

2,140,878

 

1,691,898

 

 

 

 

 

 

 

$

275,284,694

 

$

374,553,594

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

Liabilities

 

 

 

 

Deposits

 

 

 

 

Noninterest-bearing

 

$

54,106,547

 

$

36,195,274

Interest-bearing

 

77,609,927

 

67,277,136

Total deposits

 

131,716,474

 

103,472,410

Due to bank

 

17,295,230

 

32,604,902

Notes payable

 

32,189,623

 

71,980,487

Repurchase agreements

 

33,009,049

 

109,594,673

Federal Home Loan Bank borrowings

 

20,000,000

 

16,000,000

Other liabilities

 

10,503,169

 

12,717,415

Total liabilities

 

244,713,545

 

346,369,887

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

Preferred stock, 200,000 shares authorized; none outstanding

 

 

 

 

Common stock, $.01 par value 10,000,000 shares authorized; 4,439,691 and 4,393,194 outstanding at June 30, 2002 and December 31, 2001 respectively

 

44,397

 

43,932

Additional paid in capital

 

15,342,080

 

15,187,942

Retained earnings

 

15,162,044

 

12,951,072

Accumulated other comprehensive income, net of tax

 

22,628

 

761

Total shareholders’ equity

 

30,571,149

 

28,183,707

 

 

 

 

 

 

 

$

275,284,694

 

$

374,553,594

 

 

3



 

PELICAN FINANCIAL, INC.
Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2002

 

2001

 

2002

 

2001

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,373,744

 

$

6,398,184

 

$

10,376,294

 

$

11,472,195

 

Investment securities, taxable

 

180,401

 

92,301

 

292,240

 

192,116

 

Federal funds sold and overnight accounts

 

78,691

 

72,381

 

119,503

 

170,633

 

Total interest income

 

4,632,836

 

6,562,866

 

10,788,037

 

11,834,944

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

850,761

 

996,971

 

1,742,569

 

2,068,656

 

Other borrowings

 

1,273,732

 

2,846,186

 

2,935,773

 

5,014,229

 

Total interest expense

 

2,124,493

 

3,843,157

 

4,678,342

 

7,082,885

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

2,508,343

 

2,719,709

 

6,109,695

 

4,752,059

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

80,000

 

142,000

 

230,000

 

262,000

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

2,428,343

 

2,577,709

 

5,879,695

 

4,490,059

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

Gain on sales of securities

 

50,070

 

 

50,070

 

 

Service charges on deposit accounts

 

31,302

 

23,575

 

72,122

 

47,555

 

Servicing income

 

1,649,970

 

606,844

 

2,919,617

 

1,179,486

 

Gain on sales of mortgage servicing rights and loans, net

 

2,956,481

 

7,217,725

 

11,793,457

 

10,247,795

 

Other income

 

165,623

 

522,578

 

227,506

 

874,344

 

Total noninterest income

 

4,853,446

 

8,370,722

 

15,062,772

 

12,349,180

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

2,782,718

 

4,308,733

 

8,012,540

 

7,462,575

 

Occupancy and equipment

 

452,175

 

391,957

 

824,986

 

779,977

 

Telephone

 

141,926

 

160,058

 

289,180

 

304,263

 

Postage

 

134,869

 

171,196

 

279,761

 

321,763

 

Amortization of loan servicing rights

 

1,197,376

 

480,057

 

2,126,862

 

840,271

 

Loan servicing rights valuation adjustment

 

2,718,506

 

338,219

 

2,881,523

 

935,314

 

Other noninterest expense

 

1,482,877

 

1,518,784

 

3,165,019

 

2,266,363

 

Total noninterest expense

 

8,910,447

 

7,369,004

 

17,579,871

 

12,910,526

 

 

 

 

 

 

 

 

 

 

 

Income  before income taxes and cumulative effect of change in accounting principle

 

(1,628,658

)

3,579,427

 

3,362,596

 

3,928,713

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(549,306

)

1,229,887

 

1,151,624

 

1,353,280

 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

 

(1,079,352

)

2,349,540

 

2,210,972

 

2,575,433

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax

 

 

 

 

(420,495

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,079,352

)

$

2,349,540

 

$

2,210,972

 

$

2,154,938

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share before cumulative effect of change in accounting principle

 

$

(0.24

)

$

0.53

 

$

0.50

 

$

0.59

 

 

 

 

 

 

 

 

 

 

 

Per share cumulative effect of change in accounting principle

 

 

 

 

(0.10

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.24

)

$

0.53

 

$

0.50

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.24

)

$

0.53

 

$

0.49

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(1,028,246

)

$

2,351,070

 

$

2,232,839

 

$

2,171,836

 

 

 

4



 

PELICAN FINANCIAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,

 

 

 

2002

 

2001

 

Cash flows from operating activities

 

 

 

 

 

Net cash provided (used) by operating activities

 

$

127,989,757

 

$

(138,277,818

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Loans receivable originations, net

 

(6,377,778

)

(16,285,341

)

Proceeds from sales of mortgage servicing rights

 

6,176,072

 

20,318,471

 

Other real estate owned, net

 

(702,296

)

(324,504

)

Property and equipment expenditures, net

 

(887,440

)

(394,253

)

Purchase of securities available for sale

 

(12,000,000

)

(4,560,000

)

Proceeds from sales of  securities available for sale

 

9,610,070

 

 

Proceeds from maturities and principal repayments
of securities available for sale

 

1,370,279

 

4,128,931

 

Purchase of Federal Reserve Stock

 

(260,000

)

 

Net cash provided (used) by investing activities

 

(3,071,093

)

2,883,304

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Increase in deposits

 

28,244,064

 

11,466,394

 

Increase (decrease) in due to bank

 

(15,309,672

)

26,353,766

 

Increase (decrease) in notes payable due on demand

 

(39,790,864

)

28,786,822

 

Advances on Federal Home Loan Bank borrowings

 

4,000,000

 

 

Proceeds from exercise of stock options

 

154,603

 

 

Increase (decrease) in repurchase agreements

 

(76,585,624

)

64,418,343

 

Net cash provided (used) by financing activities

 

(99,287,493

)

131,025,325

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

25,631,171

 

(4,369,189

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

16,884,630

 

10,174,294

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

42,515,801

 

$

5,805,105

 

 

 

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 and six months periods ended June 30, 2002 and 2001, include the accounts of Pelican Financial Inc. (“Pelican Financial”) and its 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 June 30, 2002, 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, 2001 included in Pelican Financial’s Form 10-K.

 

Certain prior year amounts have been reclassified to conform to the 2002 presentation.

 

NOTE 3 - LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

 

 

June 30,
2002

 

December 31,
2001

 

Commercial, financial and agricultural

 

$

669,173

 

$

703,468

 

Commercial real estate

 

51,428,425

 

34,923,223

 

Residential real estate

 

46,949,819

 

55,951,132

 

Installment loans

 

2,617,373

 

3,738,512

 

 

 

101,644,790

 

95,316,335

 

Deduct allowance for loan losses

 

(1,056,893

)

(856,216

)

 

 

 

 

 

 

Loans receivable, net

 

$

100,607,897

 

$

94,460,119

 

 

Activity in the allowance for loan losses for the quarter ended June 30, are as follows:

 

 

2002

 

2001

 

 

 

 

 

 

 

Balance at beginning of period

 

$

976,964

 

$

562,622

 

Provision for loan losses

 

80,000

 

142,000

 

Loans charged-off

 

(356

)

(15,281

)

Recoveries

 

285

 

938

 

 

 

 

 

 

 

Balance at end of period

 

$

1,056,893

 

$

690,279

 

 

 

6



 

Activity in the allowance for loan losses for the six months ended June 30, are as follows:

 

 

2002

 

2001

 

 

 

 

 

 

 

Balance at beginning of period

 

$

856,216

 

$

507,513

 

Provision for loan losses

 

230,000

 

262,000

 

Loans charged-off

 

(31,206

)

(80,719

)

Recoveries

 

1,883

 

1,485

 

 

 

 

 

 

 

Balance at end of period

 

$

1,056,893

 

$

690,279

 

 

NOTE 4 - EARNINGS PER SHARE

 

The following summarizes the computation of basic and diluted earnings (loss) per share.

 

 

 

Three Months ended June 30, 2002

 

Three Months ended June 30, 2001

 

Basic earnings (loss) per share

 

 

 

 

 

Net income (loss)

 

$

(1,079,352

)

$

2,349,540

 

Weighted average shares outstanding

 

4,410,673

 

4,392,119

 

Basic earnings (loss) per share

 

$

(0.24

)

$

0.53

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

Net income (loss)

 

$

(1,079,352

)

$

2,349,540

 

Weighted average shares outstanding

 

4,410,673

 

4,392,119

 

Dilutive effect of assumed exercise of stock options

 

 

 

Diluted average shares outstanding

 

4,410,673

 

4,392,119

 

Diluted earnings (loss) per share

 

$

(0.24

)

$

0.53

 

 

 

7



 

 

 

Six Months
ended
June 30,
2002

 

Six Months
ended
June 30,
2001

 

 

 

 

 

 

Basic earnings (loss) per share

 

 

 

 

Net income (loss)

 

$

2,210,972

 

$

2,154,938

Weighted average shares outstanding

 

4,401,982

 

4,392,119

Basic earnings (loss) per share

 

$

0.50

 

$

0.49

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

Net income (loss)

 

$

2,210,972

 

$

2,154,938

Weighted average shares outstanding

 

4,401,982

 

4,392,119

Dilutive effect of assumed exercise of stock options

 

65,566

 

Diluted average shares outstanding

 

4,467,548

 

4,019,308

Diluted earnings (loss) per share

 

$

0.49

 

$

0.49

 

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.

 

 

8



 

NOTE 6 - SEGMENT INFORMATION (CONTINUED)

 

 

 

Dollars in thousands

 

Three Months Ended June 30, 2002

 

Retail
Banking

 

Mortgage
Banking

 

Other

 

Consolidated
Totals

 

Net interest income

 

$

1,577

 

$

937

 

$

(6

)

$

2,508

 

Gain on sales of MSR and loans, net

 

110

 

2,846

 

 

2,956

 

Servicing income

 

3

 

1,647

 

 

1,650

 

Noncash items:

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

80

 

 

 

80

 

MSR amortization & valuation

 

3

 

3,913

 

 

3,916

 

Provision for income taxes

 

256

 

(765

)

(40

)

(549

)

Segment profit/(loss), before cumulative effect of change in accounting principle

 

496

 

(1,496

)

(79

)

(1,079

)

Segment assets

 

166,317

 

109,020

 

(52

)

275,285

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2001

 

 

 

 

 

 

 

 

 

Net interest income

 

$

1,148

 

$

1,598

 

$

(26

)

$

2,720

 

Gain on sales of MSR and loans, net

 

47

 

7,171

 

 

7,218

 

Servicing income

 

 

607

 

 

607

 

Noncash items:

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

142

 

 

 

142

 

MSR amortization & valuation

 

2

 

816

 

 

818

 

Provision for income taxes

 

71

 

1,211

 

(52

)

1,230

 

Segment profit/(loss), before cumulative effect of change in accounting principle

 

136

 

2,316

 

(102

)

2,350

 

Segment assets

 

118,489

 

220,050

 

(68

)

338,471

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars in thousands

 

Six Months Ended June 30, 2002

 

Retail
Banking

 

Mortgage
Banking

 

Other

 

Consolidated
Totals

 

Net interest income

 

$

3,096

 

$

3,027

 

$

(13

)

$

6,110

 

Gain on sales of MSR and loans, net

 

222

 

11,571

 

 

11,793

 

Servicing income

 

5

 

2,915

 

 

2,920

 

Noncash items:

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

230

 

 

 

230

 

MSR amortization & valuation

 

5

 

5,003

 

 

5,008

 

Provision for income taxes

 

463

 

801

 

(112

)

1,152

 

Segment profit/(loss), before cumulative effect of change in accounting principle

 

897

 

1,532

 

(218

)

2,211

 

Segment assets

 

166,317

 

109,020

 

(52

)

275,285

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2001

 

 

 

 

 

 

 

 

 

Net interest income

 

$

2,480

 

$

2,334

 

$

(62

)

$

4,752

 

Gain on sales of MSR and loans, net

 

57

 

10,237

 

(46

)

10,248

 

Servicing income

 

2

 

1,177

 

 

1,179

 

Noncash items:

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

262

 

 

 

262

 

MSR amortization & valuation

 

4

 

1,772

 

 

1,776

 

Provision for income taxes

 

184

 

1,269

 

(100

)

1,353

 

Segment profit/(loss), before cumulative effect of change in accounting principle

 

353

 

2,416

 

(194

)

2,575

 

Segment assets

 

118,489

 

220,050

 

(68

)

338,471

 

 

 

9



 

NOTE 7 — NEW ACCOUNTING PRONOUNCEMENTS

 

The Derivative Implementation Group (DIG) of the Financial Accounting Standards Board (FASB) issued guidance on mortgage loan rate lock commitments to borrowers.  The guidance categorizes rate lock commitments intended for sale as derivatives and is effective July 1, 2002.  Subsequent to adopting this guidance on July 1, the Company will record the fair value of rate lock commitments as derivatives, and, depending on the amount and attributes of derivatives held at the time, the resulting fair value adjustments would be expected to partially or largely, offset the fair value adjustments on forward sales commitments that are currently carried as derivatives.  Effective July 1, 2002, this guidance requires the Company to record a cumulative effect of change in accounting principle adjustment.  Pelican Financial will record an adjustment of approximately $375,000, net of tax, to reflect the fair value of rate lock commitments outstanding on July 1, 2002.

 

Effective January 1, 2002, the Company is required to adopt a new accounting standard for goodwill and other intangible assets arising from prior and future business combinations.  Since the Company currently has no goodwill or intangible assets, the adoption of this new standard had no effect on the financial statements.

 

Effective January 1, 2002, the Company adopted a new accounting standard on impairment and disposal of long-lived assets.  The adoption of this new standard had no effect on the financial statements.

 

A new accounting standard regarding asset retirement obligations will apply for 2003.  Management does not believe this standard will have a material effect on the Company’s financial statements.

 

 

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 of $1.1 million for the quarter ended June 30, 2002, a decrease of $3.4 million when compared to net income of $2.3 million for the same period in 2001.  Earning per share, basic and diluted, were a net loss of $0.24 per share compared to net income of $0.53 per share for the three months ended June 30, 2002 and 2001 respectively.  The primary cause for the net loss was the mortgage servicing right valuation adjustment of $2.7 million.  This is the result of a decrease in mortgage loan interest rates which increase the likelihood that the loans in the mortgage loan servicing portfolio would be refinanced.  Since the change occurred at the end of the quarter, Washtenaw was not able to offset the loss through the anticipated increase in mortgage loan originations.

 

For the six months ended June 30, 2002 Pelican Financial reported net income of $2.2 compared to $2.2 million for the same period in 2001.  The 2001 earnings include a $420,000 after tax charge as the result of a cumulative effect of change in accounting principle.  Basic earnings per share were $0.50 per share while diluted earnings per share were $0.49 for the six months ended June 30, 2002 compared to $0.49, basic and diluted, for the six months ended June 30, 2001.

 

For further explanation of the earnings performance, please see the discussion on the retail and mortgage banking segments to follow.

 

 

10



 

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 June 30, 2002, Pelican Financial’s net income from retail banking activities primarily conducted by Pelican National totaled $496,000. For the three months ended June 30, 2001 Pelican National’s comparable net income was $136,000.  For the six months ended June 30, 2002, Pelican Financial’s net income from retail banking activities primarily conducted by Pelican National totaled $897,000. For the six months ended June 30, 2001 Pelican National’s comparable net income was $353,000.

 

The increase in net income for both the three and six month periods was primarily attributable to an increase in net interest income and noninterest income.  This is due primarily to the increase in average loans outstanding and the sale of several  small loan packages.

 

Net Interest Income

Net Interest Income was $1.6 million and $1.1 million for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001 net interest income was $3.1 million and $2.5 million respectively.  The increase in net interest income was due primarily to an increase in the average interest bearing assets outstanding as well as a decrease in the cost of funds.  This was offset by a decrease in yield on interest earning assets.

 

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 June 30,

 

 

 

2002

 

2001

 

 

 

Average
Volume

 

Interest

 

Yield/Cost

 

Average
Volume

 

Interest

 

Yield/Cost

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

18,626

 

$

79

 

1.70

%

$

6,240

 

$

72

 

4.62

%

Securities

 

11,172

 

180

 

6.44

 

5,720

 

92

 

6.43

 

Loans held for sale

 

131,869

 

2,308

 

7.00

 

206,027

 

4,207

 

8.17

 

Loans receivable, net

 

104,543

 

2,066

 

7.90

 

100,866

 

2,192

 

8.69

 

Total interest-earning assets

 

266,210

 

4,633

 

6.96

 

318,853

 

6,563

 

8.23

 

Non-earning assets

 

38,471

 

 

 

 

 

15,431

 

 

 

 

 

Total assets

 

$

304,681

 

 

 

 

 

$

334,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

859

 

2

 

0.93

 

$

1,049

 

6

 

2.29

 

Money market accounts

 

5,720

 

34

 

2.38

 

3,270

 

37

 

4.53

 

Savings deposits

 

10,778

 

64

 

2.38

 

17,824

 

78

 

1.75

 

Time deposits

 

61,552

 

751

 

4.88

 

54,308

 

876

 

6.45

 

Other borrowings

 

122,030

 

1,274

 

4.18

 

190,036

 

2,846

 

5.99

 

Total interest-bearing liabilities

 

200,939

 

2,125

 

4.23

 

266,487

 

3,843

 

5.77

 

Noninterest-bearing liabilities

 

72,001

 

 

 

 

 

45,531

 

 

 

 

 

Stockholders’ equity

 

31,741

 

 

 

 

 

22,266

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

304,681

 

 

 

 

 

$

334,284

 

 

 

 

 

Interest rate spread

 

 

 

 

 

2.73

%

 

 

 

 

2.46

%

Net interest income and net interest margin

 

 

 

$

2,508

 

3.77

%

 

 

$

2,720

 

3.41

%

 

 

11



 

 

 

Six months ended June 30,

 

 

 

2002

 

2001

 

 

 

Average Volume

 

Interest

 

Yield/Cost

 

Average Volume

 

Interest

 

Yield/Cost

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

14,292

 

$

120

 

1.68

%

$

6,560

 

$

171

 

5.21

%

Securities

 

9,359

 

292

 

6.24

 

6,015

 

192

 

6.38

 

Loans held for sale

 

174,809

 

6,071

 

6.95

 

170,283

 

6,945

 

8.16

 

Loans receivable, net

 

105,170

 

4,305

 

8.19

 

96,206

 

4,527

 

9.41

 

Total interest-earning assets

 

303,630

 

10,788

 

7.11

 

279,064

 

11,835

 

8.48

 

Non-earning assets

 

34,747

 

 

 

 

 

18,572

 

 

 

 

 

Total assets

 

$

338,377

 

 

 

 

 

$

297,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

865

 

4

 

0.92

 

$

1,516

 

17

 

2.24

 

Money market accounts

 

6,043

 

74

 

2.45

 

3,362

 

78

 

4.64

 

Savings deposits

 

10,857

 

152

 

2.80

 

16,155

 

239

 

2.96

 

Time deposits

 

60,660

 

1,512

 

4.99

 

53,260

 

1,735

 

6.52

 

Other borrowings

 

157,873

 

2,936

 

3.72

 

158,895

 

5,014

 

6.31

 

Total interest-bearing liabilities

 

236,298

 

4,678

 

3.96

 

233,188

 

7,083

 

6.07

 

Noninterest-bearing liabilities

 

70,789

 

 

 

 

 

42,990

 

 

 

 

 

Stockholders’ equity

 

31,290

 

 

 

 

 

21,458

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

338,377

 

 

 

 

 

$

297,636

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.15

 

 

 

 

 

2.41

 

Net interest income and net interest Margin

 

 

 

$

6,110

 

4.02

%

 

 

$

4,752

 

3.41

%

 

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 June 30, 2002 was $211,000, compared to $78,000 for the same period in 2001, an increase of $133,000 or 171%.  This increase was primarily due to the increase in net gains on sales of mortgage servicing rights and loans and the gain on sale of securities.   The gain on sales of mortgage servicing rights and loans increased from $47,000 for the three months ended June 30, 2001, to $110,000 for the same period of 2002, an increase of $63,000, or 134%.  The gain on sale of securities was $50,000 for the three months ended June 30, 2002 compared with zero in the prior year.  Management was able to take advantage of interest rate fluctuations during the quarter and sell a portion of its investment portfolio.

 

For the six months ended June 30 2002, noninterest income was $387,000 compared to $121,000 for the same period in 2001.  The increase of $266,000, or 220%, was primarily the result of an increase in gain on sale of mortgage servicing rights and loans of $166,000.  The increase in the gain on sale of mortgage servicing right and loans is due to the sale of several small marine loan packages.  In addition, service charges on deposit accounts increased $22,000 resulting from the increase in number of deposit accounts.  The gain on sale of securities was $50,000 for the six months ended June 30, 2002 compared with zero in the prior year.

 

Noninterest Expense

Total noninterest expense for the three months ended June 30, 2002 was $957,000, compared to $878,000 for the same period in 2001, an increase of $79,000 or 9%. This increase was primarily due to the following; increases in

 

 

 

12



 

compensation and employee benefits of $77,000 or 20%.  The increases were the result of expenses related to additional support staff hired due to the growth of the bank.

 

For the six months ended June 30 2002, noninterest expense was $1.9 million compared to $1.8 million for the same period in 2001.  The increase of $100,000 or 6% was also attributable to the aforementioned expense incurred as a result of the overall growth of the bank.

 

 

Mortgage Banking

The following discussion provides information that relates specifically to Pelican Financial’s mortgage banking line of business.

 

For the three months ended June 30, 2002, Pelican Financial’s net loss from mortgage banking activities primarily conducted by Washtenaw totaled $1.5 million. For the three months ended June 30, 2001 Washtenaw’s comparable net income was $2.3 million.  For the six months ended June 30, 2002, the net income from mortgage banking activities totaled $1.5 million compared to net income of $2.0 million for the same period in 2001. The decrease in the net income for both periods was primarily attributable to an increase in the loan servicing rights valuation adjustment and other noninterest expenses.

 

The volume of loans produced for the three months ended June 30, 2002 totaled $492 million as compared to $840 million for the three months ended June 30, 2001, a decrease of $348 million or 41%.  For the six months ended June 30, loan production totaled $1.2 billion and $1.4 billion for 2002 and 2001 respectively.  This represents a decrease of $200 million or 14%.  While mortgage interest rates remained low, it appears that the quantity of people who are willing and able to refinance has decreased due to the extended period of historically low mortgage interest rates.

 

Noninterest Income

Total noninterest income for the three months ended June 30, 2002 was $4.6 million, compared to $8.3 million for the three months ended June 30, 2001, a decrease of $3.7 million or 44%. This decrease was primarily due to a 62% decrease in the gain on sales of mortgage servicing rights and loans of $4.4 million.  This was offset by an increase of $1.0 million in servicing income.  For the six months ended June 30, 2002 noninterest income was $14.7 million, compared to $12.3 million for the six months ended June 30, 2001, an increase of $2.4 million or 20%. This increase was primarily due to the increase in the gain on sales of mortgage servicing rights and loans and servicing income.

 

The decrease in noninterest income for the three months ended was primarily due to the decrease in new loan originations during the quarter ended June 30, 2002.  The increase in gain on sale of mortgage servicing rights and loans for the six month period was primarily due to an increase in profit margins on each new loan origination during 2002.  This was particularly true in the first quarter of 2002.  The increase in servicing income is the result of the increase in size of the mortgage loan servicing portfolio.

 

Loan Servicing

At June 30, 2002 and 2001, Washtenaw serviced $2.4 and $1.1 billion of loans.  Washtenaw has retained the servicing on a portion of its new production to offset the normal portfolio runoff that occurs when mortgage interest rates decline.   This includes both fixed and variable rate conventional loans as well loans insured by the Government National Mortgage Association.  At June 30, 2002 and 2001, 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 $452,000 and $129,000 for the three months ended June 30, 2002 and 2001 respectively.  For the six months ended June 30, 2002 and 2001, service fee income net of amortization was $793,000 and $341,000 respectively.

 

Noninterest Expense

Total noninterest expense for the three months ended June 30, 2002 was $7.8 million, compared to $6.4 million for the same period in 2001, an increase of $1.4 million or 22%. This increase was primarily due to the increase in loan servicing right valuation adjustment of $2.4 million and the increase in amortization of loan servicing right of $716,000.  These were offset by the decrease in employee compensation and benefits expenses of approximately $1.6 million.  The decrease in employee compensation and benefits was primarily the result of a decrease in personnel and

 

 

13



 

overtime as well as a decrease in total commissions paid to the existing sales force as a result of the decrease in new loan originations.  Washtenaw’s sales force is comprised primarily of commission based business consultants 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.  The increase in amortization expense was the result of the growth in the mortgage loan servicing portfolio.

 

For the six months ended June 30, 2002 and 2001, noninterest expense was $15.4 million and $10.9 million, a difference of $4.5 million between the comparable periods.  As previously discussed, the mortgage servicing rights valuation adjustment increased $1.9 due to the decrease in mortgage interest rates.  In addition, amortization of loan servicing rights increased by $1.3 million due to the increase in the mortgage loan servicing portfolio

 

BALANCE SHEET ANALYSIS

 

The following is a discussion of the consolidated balance sheet of Pelican Financial.

 

ASSETS

At June 30, 2002, total assets of Pelican Financial equaled $275.3 million as compared to $374.6 million at December 31, 2001, a decrease of $99.3 million or 27%. This decrease is primarily due to the decrease in loans held for sale, offset by increases in loans receivable, loan servicing rights and cash and cash equivalents.

 

Cash and Cash Equivalents

Cash and cash equivalents were $42.5 million at June 30, 2002 compared to $16.9 million at December 31, 2001. The increase of $25.6 million or 151% was primarily the result of an increase in federal funds sold of $23.8 million.  The increase is the result of the increase in the balance of custodial accounts related to the mortgage loan servicing portfolio at Washtenaw.  These custodial accounts are maintained at Pelican National.  In addition, the increase occurred due to additional Federal Home Loan Bank Borrowings and increased loan prepayments at Pelican National.

 

Investment Securities

Pelican National 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 and U. S. government sponsored agency issued mortgage-backed securities.  Pelican National classifies securities as held-to-maturity, available-for-sale, or trading.  At June 30, 2002 and at December 31, 2001, all of the investment securities held in Pelican National’s investment portfolio were classified as available for sale.

 

The following table contains information on the carrying value of Pelican National’s investment portfolio at the dates indicated.  At June 30, 2002, the market value of Pelican National’s investment portfolio totaled $7.5 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
June 30,
2002

 

At
December 31,
2001

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

U. S. Government agency

 

$

5,014

 

$

570

Mortgage-backed securities

 

1,172

 

1,515

Federal Reserve Bank and Federal Home Loan Bank Stock.

 

1,330

 

1,070

Total investment securities

 

$

7,516

 

$

6,155

 

Loans Held for Sale

Loans held for sale were $92.3 million at June 30, 2002 compared to $231.5 million at December 31, 2001.  This decrease of $139.2 million or 60% was caused by the decreased refinance activity at Washtenaw resulting from the increase in mortgage interest rates.  At the end of the second quarter, there was a significant decrease in mortgage interest rates which management believes may result in increased mortgage origination activity.

 

 

14



 

Loans Receivable

Total loans receivable were $100.6 million at June 30, 2002, an increase of $6.1 million or 6% from $94.5 million at December 31, 2001.  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.

 

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.

 

 

 

 

June 30, 2002

 

December 31, 2001

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Residential, one to four units

 

$

124,944

 

64.43

%

$

269,498

 

82.38

%

Commercial and industrial real estate

 

46,613

 

24.04

 

32,954

 

10.07

 

Construction

 

4,762

 

2.46

 

3,673

 

1.12

 

Total real estate loans

 

176,319

 

90.93

 

306,125

 

93.57

 

Other loans:

 

 

 

 

 

 

 

 

 

Business, commercial

 

669

 

0.35

 

703

 

0.22

 

Automobile

 

202

 

0.10

 

245

 

0.08

 

Boat

 

14,298

 

7.37

 

17,821

 

5.45

 

Other consumer

 

2,416

 

1.25

 

2,242

 

0.68

 

Total other loans

 

17,585

 

9.07

 

21,011

 

6.43

 

Total gross loans

 

193,904

 

100.00

%

327,136

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Unearned fees, premiums and discounts, net

 

47

 

 

 

(305

)

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(1,057

)

 

 

(856

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans net (1)

 

$

192,894

 

 

 

$

325,975

 

 

 

 

(1)     Includes loans held for sale and loans receivable, net

 

Mortgage Servicing Rights

Total mortgage servicing rights were $19.0 million at June 30, 2002, an increase of $4.2 million or 28% from $14.8 million at December 31, 2001.  Washtenaw has retained the servicing rights on a portion of current mortgage loan production.  A portion of the increase relates to the volume of loans sold in June, for which the related servicing rights are recorded as an asset until sale in July under a flow sale agreement.  The increase was offset by an impairment valuation adjustment that resulted from a significant decrease in mortgage interest rates at the end of the quarter ended June 30, 2002.  This charge was due to an increase in expected prepayment speed which project the expected runoff of the mortgage loan servicing portfolio based on comparing the interest rates of the loans in the portfolio against current market interest rates.

 

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.

 

 

15



 

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 June 30,

 

At December 31,

 

 

 

2002

 

2001

 

2001

 

 

 

(Dollars in thousands)

 

Nonaccrual loans

 

$

2,354

 

$

1,232

 

$

1,893

 

Loans past due 90 days or more but not on nonaccrual

 

1,010

 

483

 

1,955

 

Total nonperforming loans

 

3,364

 

1,715

 

3,848

 

 

 

 

 

 

 

 

 

Other real estate owned

 

902

 

442

 

200

 

Total nonperforming assets

 

$

4,266

 

$

2,157

 

$

4,048

 

 

 

 

 

 

 

 

 

Total nonperforming assets to total assets

 

1.54

%

0.64

%

1.08

%

Allowance for loan losses to nonperforming loans

 

31.42

%

40.23

%

22.25

%

Nonperforming loans to total assets

 

1.22

%

0.51

%

1.03

%

 

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 probable incurred losses 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 June 30, 2002 was $80,000 compared to $142,000 for the three months ended June 30, 2001.  The provision for loan losses for the six months ended June 30, 2002 was $230,000.  The provision for loan losses for the six months ended June 30, 2001 was $262,000.  The reduction in provision is attributable to a decline in the growth of the loan portfolio in the respective three and six month periods.

 

The allowance for loan losses represented 1.03% of the loans receivable outstanding as of June 30, 2002 compared with .90% of the loans receivable outstanding as of December 31, 2001.  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 June 30, 2002, the total liabilities of Pelican Financial were $244.7 million as compared to $346.3 million at December 31, 2001, a decrease of $101.6 million or 29%. The decrease was primarily due to decreases in due to bank, notes payable and repurchase agreements offset by and increase in deposits.

 

Deposits

Total deposits were $131.7 million at June 30, 2002 compared to $103.5 million at December 31, 2001 an increase of $28.2 million or 27%.  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 or the size of the loan servicing portfolio increases.

 

 

16



 

Due to Bank

Due to bank was $17.3 million at June 30, 2002 compared to $32.6 million at December 31, 2001.  The decrease of $15.3 million or 47% was due to the decrease 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 $32.2 million at June 30, 2002 compared to $72.0 million at December 31, 2001.  This decrease of $39.8 million or 55% was primarily caused by a decrease in the 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 $33.0 million at June 30, 2002 compared to $109.6 million at December 31, 2001.  This decrease of $76.6 million or 70% in the repurchase agreements was primarily the result of a decrease 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.

 

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 $90 million, of which $13.5 million represents a sublimit for servicing under contract for sale, and $7.2 million represents a working capital sublimit.  Borrowing pursuant to the warehouse line of credit totaled $31.1 million at June 30, 2002 and $70.7 million at December 31, 2001.  The interest rate on the warehouse line of credit is the Federal Funds Rate plus 1.50% resulting in an effective rate of 3.25% at June 30, 2002 and at December 31, 2001.  The effective interest rate on the agreements to repurchase was 2.65% at June 30, 2002 and December 31, 2001.

 

Washtenaw originates 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 $17.3 million at June 30, 2002 and $32.6 million at December 31, 2001.  The decrease is the result of the decrease in mortgage lending activity during the period.

 

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.

 

 

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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 June 30, 2002, Pelican National had a liquidity ratio of 30.6%.  This is calculated by adding all of Pelican National’s cash, unpledged securities and Federal Funds Sold and dividing by its’ total liabilities.

 

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 June 30, 2002, Washtenaw had outstanding rate-lock commitments to lend $117.1 million for mortgage loans.  Because these commitments may expire without being drawn upon, they do not necessarily represent future cash commitments.  Also, as of June 30, 2002, Washtenaw had outstanding commitments to sell $118.9 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 June 30, 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.

 

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 June 30, 2002 and December 31, 2001, respectively:

 

 

 

Actual

 

 

 

 

 

 

 

June 30, 2002

 

December 31, 2001

 

Required to be

 

 

 

Pelican
National

 

Pelican
Financial

 

Pelican
National

 

Pelican
Financial

 

Adequately
Capitalized

 

Well
Capitalized

 

Total Equity Capital to risk-weighted assets

 

13.56

%

16.83

%

14.29

%

12.15

%

8.00

%

10.00

%

Tier 1 Capital to risk-weighted assets

 

12.59

%

16.23

%

13.40

%

11.77

%

4.00

%

6.00

%

Tier 1 Capital to adjusted total assets

 

8.90

%

9.46

%

7.88

%

7.12

%

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 quantitative and qualitative disclosures about market risk since December 31, 2001.

 

 

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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

 

Not Applicable.

 

 

Item 3.   Defaults Upon Senior Securities

 

Not Applicable.

 

 

Item 4.   Submission of Matters to a Vote of Shareholders

 

Pelican Financial held its 2002 Annual Meeting of Shareholders on April 26, 2002.  The following directors were elected at the annual meeting to serve a three year term.

 

 

 

For

 

Against

 

Abstentions

Raleigh E. Allen

 

3,982,440

 

115,730

 

0

Timothy J. Ryan

 

3,982,440

 

115,730

 

0

S. Lynn Stokes

 

3,982,440

 

115,730

 

0

 

A vote was taken to ratify the appointment of Crowe Chizek and Company, LLP as independent auditors for the fiscal year ending December 31, 2002.  The appointment was approved by the following votes:  4,090,213 for, zero against, and 7,957 abstained.

 

Item 5.   Other Information

 

                None

 

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 June 30, 2002.

 

 

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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.  Each of the undersigned signatures certifies pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

                (1)           This Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

                (2)           The information contained in this Report fairly presents, in all material respects, the financial condition and result of operations of the Registrant.

 

Date:  August 13, 2002

/s/ Charles C. Huffman

 

Charles C. Huffman
President and Chief Executive Officer

 

 

 

Date:  August 13, 2002

/s/ Howard M. Nathan

 

Howard M. Nathan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

 

 

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