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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, 2004

 

 

 

 

 

 

 

 

 

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 Employer
Identification No.)

 

3767 Ranchero Drive

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   No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes   o   No   ý

 

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, 2004

 

Common stock, $0.01 Par value

4,488,351 Shares

 

 



 

Index

 

Part I. Financial Information

 

 

 

 

 

Item 1.  Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2004 and 2003

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003

 

 

 

 

 

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

 

 

 

 

 

Item 4.  Controls and Procedures

 

 

 

 

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

 

 



 

PELICAN FINANCIAL, INC.

Consolidated Balance Sheets

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

Cash and due from banks

 

$

7,366,929

 

$

6,354,416

 

Interest-bearing deposits

 

3,514,574

 

45,639,288

 

Federal funds sold

 

27,436,120

 

3,426,013

 

Total cash and cash equivalents

 

38,317,623

 

55,419,717

 

Securities available for sale

 

107,434,443

 

49,729,994

 

Federal Reserve & Federal Home Loan Bank Stock

 

1,192,200

 

949,000

 

Loans held for sale

 

 

141,200

 

Loans receivable, net

 

105,180,322

 

109,798,257

 

Other real estate owned

 

 

332,857

 

Premises and equipment, net

 

3,479,880

 

2,658,018

 

Other assets

 

3,175,562

 

2,486,592

 

 

 

 

 

 

 

 

 

$

258,780,030

 

$

221,515,635

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing

 

$

72,475,879

 

$

74,004,969

 

Interest-bearing

 

158,041,948

 

117,907,625

 

Total deposits

 

230,517,827

 

191,912,594

 

Note payable

 

 

291,665

 

Federal Home Loan Bank borrowings

 

12,000,000

 

12,000,000

 

Other liabilities

 

316,829

 

421,088

 

Total liabilities

 

242,834,656

 

204,625,347

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, 200,000 shares authorized; none outstanding

 

 

 

Common stock, $.01 par value 10,000,000 shares authorized; 4,488,351 outstanding at June 30, 2004 and December 31, 2003

 

44,884

 

44,884

 

Additional paid in capital

 

15,568,593

 

15,568,593

 

Retained earnings

 

951,905

 

1,183,546

 

Accumulated other comprehensive income (loss), net of tax

 

(620,008

)

93,265

 

Total shareholders’ equity

 

15,945,374

 

16,890,288

 

 

 

 

 

 

 

 

 

$

258,780,030

 

$

221,515,635

 

 

See accompanying notes to the financial statements

 

3



 

PELICAN FINANCIAL, INC.

Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2004

 

2003

 

2004

 

2003

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

1,902,121

 

$

2,468,711

 

$

3,901,826

 

$

4,885,101

 

Investment securities, taxable

 

771,950

 

125,779

 

1,271,182

 

204,261

 

Federal funds sold and overnight accounts

 

82,288

 

145,002

 

171,828

 

245,017

 

Total interest income

 

2,756,359

 

2,739,492

 

5,344,836

 

5,334,379

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

990,771

 

548,019

 

1,867,230

 

1,132,734

 

Other borrowings

 

162,814

 

267,374

 

325,856

 

533,044

 

Total interest expense

 

1,153,585

 

815,393

 

2,193,086

 

1,665,778

 

Net interest income

 

1,602,774

 

1,924,099

 

3,151,750

 

3,668,601

 

Provision for loan losses

 

 

290,000

 

75,000

 

370,000

 

Net interest income after provision for loan losses

 

1,602,774

 

1,634,099

 

3,076,750

 

3,298,601

 

Noninterest income

 

 

 

 

 

 

 

 

 

Gain on sales of securities, net

 

529

 

57,708

 

2,859

 

129,360

 

Service charges on deposit accounts

 

35,961

 

47,615

 

66,490

 

100,209

 

Gain on sale of loans, net

 

10,117

 

46,427

 

19,758

 

70,804

 

Net gain on foreclosed assets and other income

 

10,425

 

23,041

 

69,395

 

60,522

 

Total noninterest income

 

57,032

 

174,791

 

158,502

 

360,895

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

929,236

 

1,136,682

 

1,866,910

 

1,883,490

 

Occupancy and equipment

 

316,393

 

252,735

 

587,199

 

475,765

 

Legal

 

57,825

 

157,507

 

107,450

 

202,359

 

Accounting and auditing

 

31,028

 

34,500

 

91,150

 

65,944

 

Data processing

 

43,430

 

28,506

 

91,632

 

57,667

 

Marketing and advertising

 

25,452

 

37,503

 

57,605

 

90,857

 

Loan and other real estate owned

 

78,360

 

176,313

 

201,639

 

306,499

 

Other noninterest expense

 

284,895

 

215,212

 

581,359

 

400,885

 

Total noninterest expense

 

1,766,619

 

2,038,958

 

3,584,944

 

3,483,466

 

Income (loss) from continuing operations before income taxes

 

(106,813

)

(230,068

)

(349,692

)

176,030

 

Income tax expense (benefit)

 

(35,596

)

(77,457

)

(118,051

)

60,779

 

Income (loss) from continuing operations

 

$

(71,217

)

$

(152,611

)

$

(231,641

)

$

115,251

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from operations of discontinued mortgage subsidiary

 

 

5,198,287

 

 

9,239,406

 

Income tax

 

 

1,788,555

 

 

3,166,508

 

Income from discontinued operations

 

 

3,409,732

 

 

6,072,898

 

Net income (loss)

 

$

(71,217

)

$

3,257,121

 

$

(231,641

)

$

6,188,149

 

Basic earnings (loss) per share from continuing operations

 

$

(0.02

)

$

(0.03

)

$

(0.05

)

$

0.03

 

Diluted earnings (loss) per share from continuing operations

 

(0.02

)

(0.03

)

(0.05

)

0.03

 

 

 

 

 

 

 

 

 

 

 

Per share effect of discontinued operations

 

 

0.76

 

 

1.36

 

Basic earnings (loss) per share

 

$

(0.02

)

$

0.73

 

$

(0.05

)

$

1.39

 

Diluted earnings (loss) per share

 

$

(0.02

)

$

0.73

 

$

(0.05

)

$

1.39

 

Comprehensive income

 

$

(1,141,236

)

$

3,394,568

 

$

(944,914

)

$

6,179,632

 

 

See accompanying notes to the financial statements

 

4



 

PELICAN FINANCIAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

2004

 

2003

 

Cash flows from operating activities

 

 

 

 

 

Net cash provided (used) by operating activities of continuing operations

 

$

(86,197

)

$

18,576,632

 

Net cash (used) by operating activities of discontinued operations

 

 

(77,794,332

)

Net cash provided (used) by operating activities

 

$

(86,197

)

$

(59,217,700

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Loan originations, net

 

4,542,935

 

(59,449

)

Sale of real estate owned

 

332,857

 

 

 

Property and equipment expenditures, net

 

(944,768

)

(198,427

)

Purchase of securities available for sale

 

(75,973,646

)

(44,775,000

)

Proceeds from sales of securities available for sale

 

13,000,000

 

42,457,589

 

Proceeds from maturities and principal repayments of securities available for sale

 

3,956,357

 

10,127

 

Purchase and redemption of Federal Home Loan Bank stock

 

(243,200

)

100,000

 

Investing activities of discontinued operations

 

 

15,678,454

 

Net cash provided (used) by investing activities

 

(55,329,465

)

13,213,294

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Increase in deposits

 

38,605,233

 

43,252,505

 

Cash dividends

 

 

(888,131

)

Decrease in note payable due on demand

 

(291,665

)

(250,000

)

Proceeds from exercise of stock options

 

 

 

6,233

 

Financing activities of discontinued operations

 

 

66,024,053

 

Net cash provided by financing activities

 

38,313,568

 

108,144,660

 

Net change in cash and cash equivalents

 

(17,102,094

)

62,140,254

 

Cash and cash equivalents at beginning of period

 

55,419,717

 

57,361,935

 

Cash and cash equivalents at end of period

 

$

38,317,623

 

$

119,502,189

 

 

 

 

 

 

 

Non-cash investing activities

 

 

 

 

 

Decrease in real estate owned, net

 

 

(920,236

)

 

See accompanying notes to the financial statements

 

5



 

PELICAN FINANCIAL, INC.

Notes to the Consolidated Financial Statements (Unaudited)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation:

The unaudited consolidated financial statements as of and for the three and six month periods ended June 30, 2004 and 2003, include the accounts of Pelican Financial Inc. (“Pelican Financial”) and its wholly owned subsidiary Pelican National Bank (“Pelican National”).  All references herein to Pelican Financial include the consolidated results of its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The Washtenaw Group (“Washtenaw”) is included in the 2003 financial statements as a discontinued operation (See Note 3).

 

Stock Compensation:

Compensation expense under stock options is reported using the intrinsic value method.  No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.  The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

 

 

 

Three Months Ended June 30,

 

 

 

2004

 

2003

 

Net income (loss) as reported

 

$

(71,217

)

$

3,257,121

 

Stock-based compensation expense (benefit), net of forfeitures, using fair value method

 

3,825

 

(9,778

)

Pro forma net income (loss)

 

$

(75,042

)

$

3,266,899

 

 

 

 

 

 

 

Basic earnings (loss) per share as reported

 

$

(0.02

)

$

0.73

 

Pro forma basic earnings (loss) per share

 

(0.02

)

0.74

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.02

)

$

0.73

 

Pro forma diluted earnings (loss) per share

 

(0.02

)

0.73

 

 

 

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

Net income (loss) as reported

 

$

(231,641

)

$

6,188,149

 

Stock-based compensation expense (benefit), net of forfeitures, using fair value method

 

7,268

 

(724

)

Pro forma net income (loss)

 

$

(238,909

)

$

6,188,873

 

 

 

 

 

 

 

Basic earnings (loss) per share as reported

 

$

(0.05

)

$

1.39

 

Pro forma basic earnings (loss) per share

 

(0.05

)

1.39

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.05

)

$

1.39

 

Pro forma diluted earnings (loss) per share

 

(0.05

)

1.39

 

 

Due to the spin-off (see Note 3), options outstanding at December 31, 2003 included 10,735 options that were held by employees of Washtenaw.  These options were cancelled during the first quarter of 2004 and replaced with options on stock of The Washtenaw Group.  While employees and directors of Pelican Financial and Pelican National held the remaining options, the intrinsic value (market value per share, less option exercise price) of these options was significantly reduced by the effect of the spin-off.  As a result of the spin-off, the number and exercise price of these options was modified in January 2004 to restore the options to substantially the same intrinsic value as existed at the date of the spin-off.    Accordingly, the options outstanding at December 31, 2003 were replaced with 288,385 options at an exercise price of $3.45.  Since the options were modified to offset the effect of the spin-off on the stock price per share, no compensation expense has been recognized for the modification.

 

6



 

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 U.S. 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, 2004, 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, 2003 included in Pelican Financial’s Form 10-K.

 

Certain prior year amounts have been reclassified to conform to the 2003 presentation.

 

NOTE 3 – SPIN-OFF

 

On December 31, 2003, Pelican Financial, the former parent company of Washtenaw, distributed all of the outstanding shares of Washtenaw to the holders of Pelican Financial common stock on a share for share basis (based on Pelican Financial shareholders of record on December 22, 2003).  Upon completion of the distribution on December 31, 2003, Washtenaw is no longer a subsidiary of Pelican Financial.  The consolidated statements of income and consolidated statements of cash flows, include the activity of Washtenaw as a discontinued operation during 2003.

 

During the periods presented in the financial statements, Pelican Financial did not incur any expenses on behalf of Washtenaw and no allocation of parent company expenses has been reflected in discontinued operations.

 

Following the distribution certain individuals continue to serve as officers of both Washtenaw and Pelican Financial.  Washtenaw pays their salaries and all other compensation, and Pelican Financial reimburses Washtenaw, as part of the transitional services agreement, for time spent on Pelican Financial matters.  Prior to 2004, Pelican did not reimburse Washtenaw for these services.  Beginning in 2004, officers and other employees providing services to both companies maintain records of their time spent on the affairs of each company as a basis for determining the reimbursements.

 

NOTE 4 – LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

 

 

June 30,
2004

 

December 31,
2003

 

Commercial, financial and agricultural

 

$

1,972,615

 

$

1,619,450

 

Commercial real estate

 

40,713,052

 

43,850,625

 

Residential real estate

 

39,515,954

 

45,056,027

 

Consumer loans

 

24,206,754

 

20,602,267

 

 

 

106,408,375

 

111,128,369

 

Deduct allowance for loan losses

 

(1,228,053

)

(1,330,112

)

 

 

 

 

 

 

Loans receivable, net

 

$

105,180,322

 

$

109,798,257

 

 

7



 

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

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,445,272

 

$

1,046,243

 

Provision for loan losses

 

 

290,000

 

Loans charged-off

 

(242,143

)

(208,106

)

Recoveries

 

24,924

 

 

 

 

 

 

 

 

Balance at end of period

 

$

1,228,053

 

$

1,128,137

 

 

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

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,330,112

 

$

1,062,109

 

Provision for loan losses

 

75,000

 

370,000

 

Loans charged-off

 

(242,143

)

(314,110

)

Recoveries

 

65,084

 

10,138

 

 

 

 

 

 

 

Balance at end of period

 

$

1,228,053

 

$

1,128,137

 

 

8



 

NOTE 5 - EARNINGS PER SHARE

 

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

 

 

 

Three Months Ended June 30, 2004

 

Three Months Ended June 30, 2003

 

Basic earnings (loss) per share

 

 

 

 

 

Loss from continuing operations

 

$

(71,217

)

$

(152,611

)

Income from discontinued operations

 

 

3,409,732

 

Net income (loss) applicable to common stock

 

(71,217

)

3,257,121

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,488,351

 

4,440,930

 

 

 

 

 

 

 

Loss from continuing operations per share

 

$

(0.02

)

$

(0.03

)

Income from discontinued operations per share

 

 

0.76

 

Basic earnings (loss) per share

 

$

(0.02

)

$

0.73

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

Loss from continuing operations

 

$

(71,217

)

$

(152,611

)

Income from discontinued operations

 

 

3,409,732

 

Net income (loss) applicable to common stock

 

(71,217

)

3,257,121

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,488,351

 

4,440,930

 

Dilutive effect of assumed exercise of stock options

 

 

37,560

 

Diluted average shares outstanding

 

4,488,351

 

4,478,490

 

 

 

 

 

 

 

Loss from continuing operations per share

 

$

(0.02

)

$

(0.03

)

Income from discontinued operations per share

 

 

0.76

 

Diluted earnings (loss) per share

 

$

(0.02

)

$

0.73

 

 

 

 

Six Months Ended June 30, 2004

 

Six Months Ended June 30, 2003

 

Basic earnings (loss) per share

 

 

 

 

 

Income (loss) from continuing operations

 

$

(231,641

)

$

115,251

 

Income from discontinued operations

 

 

6,072,898

 

Net income (loss) applicable to common stock

 

(231,641

)

6,188,149

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,488,351

 

4,440,560

 

 

 

 

 

 

 

Income (loss) from continuing operations per share

 

$

(0.05

)

$

0.03

 

Income from discontinued operations per share

 

 

1.36

 

Basic earnings (loss) per share

 

$

(0.05

)

$

1.39

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

Income (loss) from continuing operations

 

$

(231,641

)

$

115,251

 

Income from discontinued operations

 

 

6,072,898

 

Net income (loss) applicable to common stock

 

(231,641

)

6,188,149

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,488,351

 

4,440,560

 

Dilutive effect of assumed exercise of stock options

 

 

22,968

 

Diluted average shares outstanding

 

4,488,351

 

4,463,528

 

 

 

 

 

 

 

Income (loss) from continuing operations per share

 

$

(0.05

)

$

0.03

 

Income from discontinued operations per share

 

 

1.36

 

Diluted earnings (loss) per share

 

$

(0.05

)

$

1.39

 

 

9



 

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.

 

OVERVIEW

 

Pelican Financial currently serves as the holding company of Pelican National and until the distribution on December 31, 2003, Washtenaw Mortgage Company.  Pelican National business activities involves attracting deposits from the general public and using these funds to originate consumer, commercial, commercial real estate, residential construction, and single-family residential mortgage loans, from its offices in Naples, Fort Myers (two), Bonita Springs and San Carlos, Florida.  A sixth branch in Cape Coral is scheduled to open in July, 2004.

 

Pelican Financial’s earnings are primarily dependent upon three sources: net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities; fee income from customers; and gains realized on sales of loans.  These revenues are in turn significantly affected by factors such as changes in prevailing interest rates and in the yield curve (that is, the difference between prevailing short-term and long-term interest rates).

 

The earnings performance of the continuing operations of Pelican Financial is a concern to management.  Management is attempting to improve this by a variety of factors including liquidity management, cross selling of products and managing operating expenses.  Pelican National achieved a small operating profit during the quarter ended June 30, 2004 which was offset by various holding company expenses resulting in an overall net loss.

 

Management is also focusing on increasing core deposits to allow the opportunity to cross sell other products and services.  As part of this objective, Pelican National has aggressively marketed a money market deposit account in its local markets.  The account pays an interest rate higher than the majority of the local competitors.

 

EARNINGS PERFORMANCE

 

Pelican Financial reported a net loss from continuing operations of $71,000 for the quarter ended June 30, 2004 compared to a net loss of $152,000 for the quarter ended June 30, 2003.  Basic and diluted earnings per share from continuing operations was $0.02 and $0.03 loss per share for the three months ended June 30, 2004 and 2003 respectively.

 

For the six months ended June 30, 2004 Pelican Financial reported a net loss from continuing operations of $232,000 compared to net income of $115,000 for the same period in 2003.  Basic and diluted earnings per share were a loss of $0.05 for the six months ended June 30, 2004 compared to earnings of $0.03 for the six months ended June 30, 2003.

 

RESULTS OF OPERATIONS

 

Net Interest Income

Net interest income was $1.6 million and $1.9 million for the three months ended June 30, 2004 and 2003, respectively.  For the six months ended June 30, 2004 and 2003 net interest income was $3.2 million and $3.7 million respectively.  Net interest income decreased primarily as a result of the decrease in the yield on interest-earning assets.  This was due to the payoff of high interest rate loans being replaced with lower yielding loans and investment securities.  This was partially offset by a decrease in the cost of funds due to lower cost money market deposits replacing higher cost time deposits and other borrowings.  In addition, the custodial deposits from Washtenaw negatively impacted net interest margin.  While Pelican National was able to earn a positive spread, the volatility in

 

10



 

the balance of the accounts results in Pelican National investing the Washtenaw deposits primarily in federal funds sold and investment securities.  The increase in the federal funds sold rate by the Federal Reserve Board is expected to improve the yield earned by Pelican National and improve net interest margin.

 

Average Balance Sheet

The following tables summarize the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities for Pelican Financial.

 

 

 

Three months ended June 30,

 

 

 

2004

 

2003

 

 

 

Average
Volume

 

Interest

 

Yield/Cost

 

Average
Volume

 

Interest

 

Yield/Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

32,906

 

$

82

 

1.00

%

$

46,383

 

$

145

 

1.25

%

Securities

 

103,454

 

772

 

2.98

 

9,760

 

126

 

5.16

 

Loans held for sale

 

 

 

 

17,817

 

240

 

5.39

 

Loans receivable

 

108,366

 

1,902

 

7.02

 

108,848

 

2,228

 

8.19

 

Total interest-earning assets

 

244,726

 

2,756

 

4.50

 

182,208

 

2,739

 

5.99

 

Non-earning assets

 

13,561

 

 

 

 

 

31,327

 

 

 

 

 

Total assets

 

$

258,287

 

 

 

 

 

$

214,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

1,342

 

3

 

0.89

 

$

1,494

 

3

 

0.80

 

Money market accounts

 

104,062

 

553

 

2.13

 

13,406

 

48

 

1.43

 

Savings deposits

 

8,714

 

30

 

1.38

 

12,840

 

44

 

1.37

 

Time deposits

 

37,198

 

405

 

4.36

 

47,809

 

453

 

3.79

 

Other borrowings

 

12,000

 

163

 

5.43

 

18,594

 

267

 

5.74

 

Total interest-bearing liabilities

 

163,316

 

1,154

 

2.83

 

94,143

 

815

 

3.46

 

Noninterest-bearing liabilities

 

78,812

 

 

 

 

 

103,544

 

 

 

 

 

Stockholders’ equity

 

16,159

 

 

 

 

 

16,448

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

258,287

 

 

 

 

 

$

214,135

 

 

 

 

 

Interest rate spread

 

 

 

 

 

1.67

%

 

 

 

 

2.53

%

Net interest income and net interest margin

 

 

 

$

1,602

 

2.62

%

 

 

$

1,924

 

4.21

%

 

11



 

 

 

Six months ended June 30,

 

 

 

2004

 

2003

 

 

 

Average
Volume

 

Interest

 

Yield/Cost

 

Average
Volume

 

Interest

 

Yield/Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

34,556

 

$

171

 

0.99

%

$

38,952

 

$

245

 

1.26

%

Securities

 

84,251

 

1,272

 

3.02

 

7,957

 

204

 

5.13

 

Loans held for sale

 

78

 

2

 

5.13

 

13,997

 

382

 

5.46

 

Loans receivable

 

109,751

 

3,900

 

7.11

 

112,213

 

4,503

 

8.03

 

Total interest-earning assets

 

228,636

 

5,345

 

4.68

 

173,119

 

5,334

 

6.16

 

Non-earning assets

 

11,897

 

 

 

 

 

26,376

 

 

 

 

 

Total assets

 

$

240,533

 

 

 

 

 

$

199,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

1,521

 

6

 

0.81

 

$

1,463

 

7

 

0.89

 

Money market accounts

 

91,902

 

982

 

2.14

 

10,579

 

81

 

1.53

 

Savings deposits

 

9,280

 

64

 

1.37

 

12,854

 

102

 

1.59

 

Time deposits

 

37,650

 

815

 

4.33

 

48,176

 

943

 

3.92

 

Other borrowings

 

12,000

 

326

 

5.43

 

18,657

 

533

 

5.71

 

Total interest-bearing liabilities

 

152,353

 

2,193

 

2.88

 

91,729

 

1,666

 

3.63

 

Noninterest-bearing liabilities

 

71,702

 

 

 

 

 

92,472

 

 

 

 

 

Stockholders’ equity

 

16,478

 

 

 

 

 

15,294

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

240,533

 

 

 

 

 

$

199,495

 

 

 

 

 

Interest rate spread

 

 

 

 

 

1.80

 

 

 

 

 

2.53

 

Net interest income and net interest Margin

 

 

 

$

3,152

 

2.76

%

 

 

$

3,668

 

4.24

%

 

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 FHLB borrowings, 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, 2004 was $57,000 compared to $175,000 for the same period in 2003, a decrease of $118,000 or 67%.  This decrease was primarily due to the decrease in gain on sale of securities of approximately $57,000; the decrease in gain on sale of loans of $36,000; the $12,000 decrease in service charges on deposit accounts and the decrease in the net gain on foreclosed assets and other income of $13,000.  The decrease in the gain on sale of securities resulted from the reduction in the sale of securities for liquidity purposes.  The decrease in gain on sales loans, net resulted from the reduction in the origination and sale of loans during 2004.  The decrease in service charges on deposit accounts resulted from a reduction in insufficient fund charges on checking accounts.

 

For the six months ended June 30 2004, noninterest income was $159,000 compared to $361,000 for the same period in 2003.  The decrease of $202,000, or 56%, was primarily the result of fluctuations in operations as described above.

 

Noninterest Expense

 

Total noninterest expense for the three months ended June 30, 2004 was $1.8 million, compared to $2.0 million for the same period in 2003, a decrease of approximately $200,000 or 10%. The decrease is primarily related to the cost of employee compensation and benefits that decreased $207,000; legal expenses that decreased $100,000 and loan and other real estate owned that decreased $98,000.  The decrease in employee compensation was the result a $300,000 severance payment in 2003 offset by the costs of additional staff for the new branch in Fort Myers, Florida and existing branches as well as to increase the loan sales and operations staff.   Legal expenses decreased due to work performed as a result of the services provided related to the spin-off of Washtenaw during 2003.  The decreases

 

12



 

were offset by occupancy and equipment expense that increased $64,000 and other expense that increased $70,000. The increases were due primarily to the increase in number of employees and branches.

 

For the six months ended June 30, 2004, noninterest expense was $3.6 million compared to $3.5 million for the same period in 2003.  The increase of $101,000 or 3% was also attributable to the aforementioned expenses.

 

BALANCE SHEET ANALYSIS

 

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

 

ASSETS

At June 30, 2004, total assets of Pelican Financial equaled $258.8 million compared to $221.5 million at December 31, 2003, an increase of $37.3 million or 17%. The increase is primarily due to the increase in securities available for sale offset by the decrease in cash and cash equivalents and loans receivable.

 

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 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 June 30, 2004 and at December 31, 2003, 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, 2004, the market value of Pelican National’s investment portfolio totaled $108.6 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.

 

 

 

(dollars in thousands)

 

 

 

At June 30, 2004

 

At December 31, 2003

 

U. S. Government agency

 

$

66,850

 

$

25,403

 

Mortgage-backed securities

 

40,585

 

24,327

 

Federal Reserve Bank and Federal Home Loan Bank Stock

 

1,192

 

949

 

Total investment securities

 

$

108,627

 

$

50,679

 

 

The increase in securities available for sale is the result of managements’ attempt to maximize the yield earned on the additional deposits at Pelican National.  Management is using the investment portfolio as an alternative to investing in loans receivable due to new loan originations trailing deposit growth.

 

Cash and Cash Equivalents

Cash and cash equivalents were $38.3 million at June 30, 2004 compared to $55.4 million at December 31, 2003.  The decrease of $17.1 million or 31% was primarily the result of a $5.1 million decrease in deposits attributed to Washtenaw maintaining all of the investor accounts related to its servicing portfolio at Pelican National and a larger percentage of these deposits being invested in investment securities.  This was offset by an increase in money market account deposits resulting from a program Pelican National Bank began offering in August, 2003 that has raised the amount of core deposits at Pelican National.  The balances at December 31, 2003 increased as loan payoffs from Washtenaw’s servicing portfolio decreased.  Due to the fluctuation in balances of these accounts, Pelican National typically invested a substantial portion of the deposits in interest-bearing deposits and federal funds sold.  These increases were partially offset by the use of cash to purchase securities available for sale.

 

Loans Receivable

Total loans receivable were $105.2 million at June 30, 2004 compared to $109.8 million at December 31, 2003.  The slight decrease in balance is the result of new loan production being offset by loan payoffs and principal reductions.

 

13



 

New loan production for the three and six months ended June 30, 2004 was $16.2 million and $28.3 million, respectively.

 

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 held 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, 2004

 

December 31, 2003

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Residential, one to four units

 

$

39,245

 

36.99

%

$

44,094

 

39.83

%

Commercial and industrial real estate

 

39,272

 

37.01

 

43,151

 

38.98

 

Construction

 

1,400

 

1.32

 

1,327

 

1.19

 

Total real estate loans

 

79,917

 

75.32

 

88,572

 

80.00

 

Other loans:

 

 

 

 

 

 

 

 

 

Business, commercial

 

1,973

 

1.86

 

1,534

 

1.39

 

Automobile

 

415

 

0.39

 

478

 

0.43

 

Boat

 

17,538

 

16.53

 

14,578

 

13.17

 

Other consumer

 

6,253

 

5.90

 

5,546

 

5.01

 

Total other loans

 

26,179

 

24.68

 

22,136

 

20.00

 

Total gross loans

 

106,096

 

100.00

%

110,708

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Unearned fees, premiums and discounts, net

 

312

 

 

 

420

 

 

 

Allowance for loan losses

 

(1,228

)

 

 

(1,330

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans net

 

$

105,180

 

 

 

$

109,798

 

 

 

 

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.

 

14



 

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,

 

 

 

2004

 

2003

 

2003

 

 

 

(Dollars in thousands)

 

Nonaccrual loans

 

$

219

 

$

871

 

$

455

 

Loans past due 90 days or more but not on nonaccrual

 

 

88

 

 

Total nonperforming loans

 

219

 

959

 

455

 

 

 

 

 

 

 

 

 

Other real estate owned

 

 

996

 

333

 

Total nonperforming assets

 

$

219

 

$

1,955

 

$

788

 

 

 

 

 

 

 

 

 

Total nonperforming assets to total assets

 

0.08

%

1.54

%

0.36

%

Allowance for loan losses to nonperforming loans

 

560.73

%

117.62

%

292.31

%

Nonperforming loans to total assets

 

0.08

%

0.41

%

0.21

%

 

Provision and Allowance for Loan Losses

 

The allowance for loan losses as of June 30, 2004 was $1.2 million, or 1.15% of total portfolio loans, compared to $1.3 million, or 1.20% of total loans at December 31, 2003. Our allowance for loan losses is maintained at a level management considers appropriate based upon our regular, quarterly assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance relies on several key elements, which include specific allowances for identified problem loans, general allocations for graded loans, and general allocations based on historical trends for pools of similar un-graded loans.

 

Specific allowances are established in cases where senior credit management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. The specific allowance is determined by methods prescribed by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”.

 

A general allocation on commercial and commercial real estate loans not considered impaired is calculated by applying loss factors to outstanding loans based on the internal risk grade of such loans.  Loans are assigned a loss allocation factor for each loan classification category. The lower the grading assigned to a loan category, the greater the allocation percentage that is applied. Changes in risk grade of both performing and nonperforming loans affect the amount of the allocation. Loss factors are based on our loss experience and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the analysis date.

 

Groups of homogeneous loans, such as residential real estate and consumer loans, receive an allowance allocation based on loss trends.  We use historical loss trends based on our experience in determining an adequate allowance for these pools of loans. General economic and business conditions, credit quality trends, seasoning of the portfolios and recent loss experience are conditions considered in connection with allocation factors for these similar pools of loans.

 

During the three and six months ended June 30, 2004 the allowance for loan losses decreased by $217,000 and $102,000.  This was due to the reduction in the provision for loan losses and the charge-offs of several impaired loans.  The decrease in the allowance was deemed appropriate due to a decrease in loans on the banks “criticized asset report” and a decrease in overall loan portfolio.

 

Criticized assets decreased from $10.6 million at March 31, 2004 to $8.3 million at June 30, 2004.  These loans represent loans with one or more underwriting deficiencies as identified by bank management or the bank’s regulatory agency.  Management is in the process of corrective actions on the criticized loans in an effort to improve the rating on the criticized assets.  Criticized assets may or may not be delinquent.

 

15



 

LIABILITIES

 

At June 30, 2004, the total liabilities of Pelican Financial were $242.8 million as compared to $204.6 million at December 31, 2003, an increase of $38.2 million or 19%. This increase was primarily due to an increase in deposits.

 

Deposits

Total deposits were $230.5 million at June 30, 2004 compared to $191.9 million at December 31, 2003, representing an increase of $38.6 million or 20%.  The increase was the result of a focus on developing new deposit relationships with customers.  This was achieved by maintaining the yield paid on its money market account to one of the highest in the local market area.  This resulted in an increase in core deposits of $44.7 million.  This was offset by a decrease in Washtenaw’s deposits attributable to its servicing portfolio by $5.1 million, from $63.5 million at December 31, 2003 to $58.4 million at June 30, 2004, due to decreased loan payoffs.  The loan payoffs are remitted to Washtenaw’s investors within five business days in the subsequent month.  This was further offset by a reduction of approximately $2 million in certificate of deposits obtained from brokers and the Internet.  Pelican National is attempting to reduce the reliance on this source of funds in the future and currently is allowing all certificates of deposits obtained in this manner to mature without replacing the funds.  At June 30, 2004, there were $7.9 million in deposits obtained from brokers and the Internet.

 

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.

 

Pelican Financial’s source of funds is dividends paid by Pelican National.  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 of securities, calls of available for sale securities and Federal Home Loan Bank borrowings.

 

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, 2004, Pelican National had a liquidity ratio of 60%.  This is calculated by adding all of Pelican National’s cash, unpledged securities and federal funds sold and dividing by its’ total liabilities.  Pelican National has available to it several contingent sources of funding.  These include the ability to raise funds through brokered deposits, lines of credit and the sale of loans or participations

 

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, 2004 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 June 30, 2004 and December 31, 2003, respectively:

 

 

 

June 30, 2004

 

December 31, 2003

 

Required to be

 

 

 

Pelican
National

 

Pelican
Financial

 

Pelican
National

 

Pelican
Financial

 

Adequately
Capitalized

 

Well
Capitalized

 

Total Equity Capital to risk-weighted assets

 

14.29

%

15.10

%

13.66

%

15.50

%

8.00

%

10.00

%

Tier 1 Capital to risk-weighted assets

 

13.24

%

14.06

%

12.51

%

14.36

%

4.00

%

6.00

%

Tier 1 Capital to adjusted total assets

 

6.03

%

6.45

%

7.20

%

7.96

%

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, 2003.

 

Item 4:  Controls and Procedures

 

Pelican Financial, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, the principal executive officer and principal financial officer concluded that Pelican Financial’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by Pelican Financial in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

 

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the fiscal quarter that have materially affected or which are reasonably likely to materially affect Internal Control.  Based on that evaluation, the only changes identified were the resignation from Pelican National of the chief financial officer in April 2004.  His duties were reassigned to the other members of senior management.  Also, president announced his retirement effective in September 2004.  In August 2004, Pelican National appointed a new president.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Pelican Financial have been detected.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  Pelican Financial conducts periodic evaluations to enhance, where necessary its procedures and controls.

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

There have been no material changes to the pending legal proceedings to which Pelican Financial is a party since the filing of the registrant’s Form 10-K.

 

Item 2.  Changes in Securities and Use of Proceeds

 

Not Applicable.

 

17



 

Item 3.   Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4.   Submission of Matters to a Vote of Shareholders

 

Pelican Financial held its 2004 Annual Meeting of Shareholders on April 22, 2004.  The following directors were elected at the annual meeting to serve a three year term.

 

 

 

For

 

Against

 

Abstentions

 

Robert C. Huffman

 

3,784,166

 

101,462

 

0

 

Howard M. Nathan

 

3,784,166

 

101,462

 

0

 

Scott D. Miller

 

3,784,166

 

37,462

 

0

 

 

A vote was taken to ratify the appointment of Crowe Chizek and Company LLC as independent auditors for the fiscal year ending December 31, 2004.  The appointment was approved by the following votes:  3,868,584 for, 3,862 against, and 24,797 abstained.

 

Item 5.   Other Information

 

None

 

Item 6.   Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

31.1

 

Certification of Principal Executive Officer

 

 

 

31.2

 

Certification of Principal Financial Officer

 

 

 

32

 

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K

 

April 23, 2004 to announce financial results of quarter ended March 31, 2004.

 

18



 

Pelican Financial, Inc. and Subsidiaries

Signatures

 

Pursuant to 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: August 13, 2004

/s/ Charles C. Huffman

 

 

Charles C. Huffman

 

President and Chief Executive Officer

 

 

 

 

Date: August 13, 2004

/s/ Howard M. Nathan

 

 

Howard M. Nathan

 

Vice President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

19