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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1999
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OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
_____________
Commission file number _______________
PELICAN FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-2298215
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
315 EAST EISENHOWER, ANN ARBOR, MICHIGAN 48108
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(Address of Principal Executive Offices) (Zip Code)
(800) 765-5562
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The issuer's voting stock trades on the American Stock Exchange under the
symbol "PFI." The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sale price of the
registrant's common stock on March 15, 2000, was $6,034,588 ($3.88 per share
based on 1,555,247 shares of common stock outstanding).
As of March 15, 2000, there were issued and outstanding 3,992,836 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Definitive Proxy Statement in connection with the Annual
Meeting of Stockholders for the Fiscal Year Ended December 31, 1999 (Part II).
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TABLE OF CONTENTS
PART I. PAGE
----
Item 1. Business...................................................................................3
Item 2. Properties................................................................................33
Item 3. Legal Proceedings.........................................................................34
Item 4. Submission of Matters to a Vote of Security Holders.......................................35
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................35
Item 6. Selected Financial Data...................................................................36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................50
Item 8. Financial Statements and Supplementary Data...............................................53
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................................81
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................81
Item 11. Executive Compensation....................................................................81
Item 12. Security Ownership of Certain Beneficial Owners and Management............................81
Item 13. Certain Relationships and Related Transactions............................................81
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................81
SIGNATURES
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report and Form 10-K, including
some statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business," are forward-looking statements about
what may happen in the future. They include statements regarding our current
beliefs, goals, and expectations about matters such as our expected financial
position and operating results, our business strategy, and our financing plans.
These statements can sometimes be identified by our use of forward-looking words
such as "anticipate," "estimate," "expect," "intend," "may," "will," and similar
expressions. We cannot guarantee that our forward-looking statements will turn
out to be correct or that our beliefs and goals will not change. Our actual
results could be very different from and worse than our expectations for various
reasons, including those discussed in "Business - Factors that May Affect Future
Results." You are urged to carefully consider these factors, as well as other
information contained in this Annual Report and Form 10-K and in our other
periodic reports and documents filed with the Securities and Exchange
Commission.
2
PART I
ITEM 1. BUSINESS
GENERAL
Pelican Financial was incorporated in Delaware on March 3, 1997 to own
and control all of the outstanding capital stock of Pelican National and
Washtenaw. Pelican Financial has no employees other than executive officers who
do not receive compensation from Pelican Financial for serving in this capacity.
See "Management - Director and Executive Officer Compensation." Pelican
Financial engages in no other operations other than the management of its
investments in Pelican National and Washtenaw.
Pelican Financial is registered with the Board of Governors of the
Federal Reserve System pursuant to the Bank Holding Company Act of 1956. Because
Pelican Financial is a bank holding company, its primary federal regulator is
the Federal Reserve Board.
Pelican Financial currently operates in both the retail banking and
mortgage banking segments through its wholly-owned subsidiaries. As of December
31, 1999, most of Pelican Financial's revenues (net interest income and
non-interest income) and earnings before income taxes are attributable to the
mortgage banking segment, primarily conducted by Washtenaw. Pelican Financial
believes that the retail banking business, primarily conducted by Pelican
National, can provide Pelican Financial with a strategic advantage as Pelican
National grows. One of these advantages may be access to funding sources for
Washtenaw's mortgage origination business which would not otherwise be
available. These additional funding sources include low cost retail deposits and
escrowed funds.
At December 31, 1999, total assets of Pelican Financial were $155.9
million, of which approximately $76.1 million were assets of Washtenaw and
approximately $79.6 million were assets of Pelican National. For the year ended
December 31, 1999, net income was $3.4 million, of which $3.1 million was net
income of Washtenaw, $589,000 was net income of Pelican National, and $234,000
was net loss at the holding company level.
MARKET AREA
The mortgage banking offices of Washtenaw are located in Ann Arbor,
Michigan and Pleasant Hill, California. From these offices, Washtenaw operates
its national wholesale lending as well as its retail mortgage origination
business. Washtenaw does business with over 1,593 correspondent lenders in
approximately 41 states. For the year ended December 31, 1999, the top five
states in terms of number of loan purchases for Washtenaw are Michigan (23%),
Ohio (23%), Florida (10%), Indiana (7%), and Georgia (5%).
The retail banking operations of Pelican National are primarily located
in Naples, Florida and Fort Myers, Florida. Pelican National is a
community-oriented banking institution offering a variety of financial products
and services to meet the needs of the communities it serves. Pelican National's
primary service area for attracting deposits and making loans includes the
communities located in western Collier County, Florida. These communities
include North Naples, Central Naples, East Naples, South Naples, Golden Gate,
Marco Island, and the portion of Bonita Springs which is in Collier County,
which make up an area locally known as the "greater Naples area." Collier County
has, and continues to experience population growth greater than the national and
Florida averages. The population of Collier County is estimated to increase 45%
from the 1990 census through the year 2000 and is estimated to reach 250,000
people by the year 2005.
3
As a result of the opening of our first branch office in Fort Myers,
Florida, Pelican National Bank's secondary service area for attracting deposits
and making loans includes the communities located in western Lee County,
Florida. These communities include North Fort Myers, Central Fort Myers, East
Fort Myers, South Fort Myers, Fort Myers Beach, Sanibel Island, Captiva Island,
Cape Coral, Lehigh Acres, and Pine Island. Lee County has, and continues to
experience population growth greater than the national and Florida averages. The
population of Lee County is estimated to increase 26% from the 1990 census
through the year 2000 and is estimated to reach 463,000 people by the year 2005.
Because of its year-round subtropical climate and pristine beaches,
Collier County attracts approximately 2.8 million visitors per year. As a
result, the service sector is the largest employer in Collier County,
particularly hotels such as Marriott Corporation, Hilton, and Radisson. Small
businesses which employ less than five persons also make up approximately 68% of
the service sector. The next largest sector is retail trade followed by
construction and the government. Per capita personal income in the Naples area
is approximately 69% higher than the per capita income of Florida and the United
States. According to the Department of Housing and Urban Development, median
family income in the Naples area was $54,000 in 1998.
Lee County also has a year round subtropical climate and pristine
beaches and attracts approximately 1.6 million visitors per year. As a result,
the service sector is the largest employer in Lee County, particularly resorts
such as South Seas Resort Company, Sanibel Harbour Resort and Gasparilla Inn
Corporation. Small businesses, which employ less than ten persons, also make up
approximately 80% of the service sector. The next largest sector is retail trade
followed by the government and construction. Per capita personal income is
approximately 1.5% higher than the per capita income of Florida. According to
the University of Florida Bureau of Economic and Business Research, median
family income in the Fort Myers area was $34,680 in 1998.
COMPETITION
Pelican Financial faces significant competition both in generating
loans at Washtenaw and in attracting deposits and making loans at Pelican
National.
The mortgage banking operations of Washtenaw compete on a national
basis with local, regional, and national mortgage lenders, insurance companies,
and financial institutions. Many of these competitors are significantly larger
and have greater financial resources than Washtenaw. Mortgage banking is a
highly competitive market. The underwriting guidelines and servicing
requirements set by the participants in the secondary markets are standardized.
As a result, mortgage banking products (I.E., mortgage loans and the servicing
of these loans) have become difficult to differentiate. Mortgage bankers compete
primarily on the basis of price or service, making effective cost management
essential. Mortgage bankers generally seek to develop cost efficiencies in one
of two ways: economies of scale or specialization. Washtenaw has sought
economies of scale through an emphasis on wholesale originations and the
introduction of automated processing systems which allow Washtenaw to request
and receive credit reports directly into its computer system and then to
transmit and receive mortgage approvals and rejections online. Therefore,
Washtenaw primarily seeks to distinguish itself by providing quality service
through automated processing of loan applications at a price that is below the
average of its competition.
Washtenaw has historically been in the wholesale mortgage origination
business. It originates only a minor amount of retail mortgages. Wholesale
mortgage sources provide Washtenaw economies of scale by allowing Washtenaw to
choose economically favorable geographic markets and purchase loans without
leased space or personnel other than individual account executives. All services
remain centralized in the home office and one regional office.
4
Pelican National operates as a full-service community bank, offering a
variety of financial services to meet the needs of its market area. Those
services include accepting time and demand deposits from the general public and
together with other funds, using the proceeds to originate secured and unsecured
commercial and consumer loans, finance commercial transactions, and provide
construction and mortgage loans, as well as home equity and personal lines of
credit. Other services offered by Pelican National include the sale of money
orders, traveler's checks, cashier's checks, and savings bonds, wire transfer
and direct deposit services, and safe deposit boxes.
Pelican National's primary market area is also highly competitive and
Pelican National faces direct competition for loans from a significant number of
financial institutions, many with a state wide or regional presence and, in some
cases, a national presence. Pelican National's most direct competition for
deposits has historically come from savings banks and associations, commercial
banks and credit unions. In addition, Pelican National faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in instruments such as short-term money market funds,
corporate and government securities funds, mutual funds, and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. Pelican National primarily
seeks to distinguish itself from the competition based on the level of service
offered and its variety of loan products. As a full-service community bank,
Pelican National believes that it can better serve individuals and small
businesses that have become disenfranchised with the narrow guidelines of large
national and regional banks. Pelican National also has the ability, through its
affiliation with Washtenaw, to offer loan products other small community banks
may not be able to access.
LENDING ACTIVITIES
GENERAL. Washtenaw originates or acquires loans primarily through the
wholesale, correspondent, and retail loan production of its mortgage banking
operations. Loans are held available for sale in the secondary market .
Wholesale mortgage loan production involves the origination of loans by a
nationwide network of independent mortgage brokers with funding provided
directly by Washtenaw (I.E., table funding) and the transfer of these loans to
Washtenaw upon closing. Correspondent mortgage loan production occurs through
the purchase of loans by Washtenaw from independent mortgage lenders, commercial
banks, savings and loan associations, and other financial intermediaries that
originate loans in their own name using their own source of funds. Retail
mortgage loan production for mortgage banking operations occurs through
Washtenaw's retail loan origination office in Ann Arbor, Michigan.
Pelican National originates or acquires loans through its retail
banking operations. Loans are either held for investment or held available for
sale in the secondary market. In addition to mortgage loan production, Pelican
National engages to a limited extent in the origination of commercial,
commercial real estate, construction, and consumer loans. Pelican National also
purchases loan packages from the FDIC to supplement its loan portfolio.
For the year ended December 31, 1999, Pelican Financial's combined
wholesale and correspondent loan production totaled $2.2 billion and its retail
loan production totaled $61.8 million.
5
The following table contains selected data relating to the composition
of Pelican Financial's loan portfolio by type of loan at the dates indicated.
This table includes mortgage loans available for sale and mortgage loans held
for investment. At December 31, 1999 and 1998, Pelican Financial had no
concentrations of loans exceeding 10% of total loans that are not otherwise
disclosed below.
December 31,
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1999 1998
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Amount Percent Amount Percent
------------ ----------- ---------- ------------
(Dollars in thousands)
Real estate loans:
Residential, one to four units ...... $ 111,646 84.49% $ 192,703 95.21%
Residential, multifamily ............ 0 0.00 0 0.00
Commercial and industrial
real estate ..................... 16,987 12.86 7,631 3.77
Construction ........................ 1,706 1.29 898 0.44
--------- ----- --------- -----
Total real estate loans .......... 130,339 98.64 201,232 99.42
Other loans:
Business, commercial ................ 679 0.51 824 0.41
Automobile .......................... 106 0.08 341 0.17
Other consumer ...................... 1,015 0.77 2 0.00
--------- ----- --------- -----
Total other loans ................ 1,800 1.36 1,167 0.58
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Total gross loans ............. 132,139 100.00% 202,399 100.00%
====== ======
Unearned fees, premiums and
discounts, net ...................... (2,647) 1,056
Allowance for loan losses .............. (374) (127)
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Total Loans net (1) ................. $ 129,118 $ 203,328
========= =========
December 31, January 31,
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1997 1997
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Amount Percent Amount Percent
---------- --------- --------- ---------
(Dollars in thousands)
Real estate loans:
Residential, one to four units ...... $ 100,513 99.81% $ 41,240 100.00%
Residential, multifamily ............ 0 0.00 0 0.00
Commercial and industrial
real estate ..................... 0 0.00 0 0.00
Construction ........................ 0 0.00 0 0.00
--------- ----- --------- ------
Total real estate loans .......... 100,513 99.81 41,240 100.00
Other loans:
Business, commercial ................ 0 0.00 0 0.00
Automobile .......................... 193 0.19 0 0.00
Other consumer ...................... 0 0.00 0 0.00
--------- ----- --------- ------
Total other loans ................ 193 0.19 0 0.00
--------- ----- --------- ------
Total gross loans ............. 100,706 100.00% 41,240 100.00%
====== ======
Unearned fees, premiums and
discounts, net ...................... 134 13
Allowance for loan losses .............. (66) 0
----------- ---------
Total Loans net (1) ................. $ 100,774 $ 41,253
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January 31,
--------------------------------
1996
--------------------------------
Amount Percent
---------- ----------
(Dollars in thousands)
Real estate loans:
Residential, one to four units ...... $ 35,351 100.00%
Residential, multifamily ............ 0 0.00
Commercial and industrial
real estate ..................... 0 0.00
Construction ........................ 0 0.00
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Total real estate loans .......... 35,351 100.00
Other loans:
Business, commercial ................ 0 0.00
Automobile .......................... 0 0.00
Other consumer ...................... 0 0.00
--------- ------
Total other loans ................ 0 0.00
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Total gross loans ............. 35,351 100.00%
======
Unearned fees, premiums and
discounts, net ...................... 188
Allowance for loan losses .............. 0
----------
Total Loans net (1) ................. $ 35,539
==========
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1) Includes loans held for sale and loans receivable, net.
6
In its wholesale and correspondent lending, Washtenaw competes
nationwide by offering a wide variety of mortgage products designed to respond
to consumer needs and tailored to address market competition. Washtenaw
primarily originates conforming, fixed rate 30-year mortgage loans, which
collectively represented 59.66% of its total loan production for the year ended
December 31, 1999, 61.06% of its total loan production for the year ended
December 31, 1998, and 55.32% for the eleven months ended December 31, 1997. In
addition, Washtenaw offers other products, such as adjustable-rate, 5-year and
7-year balloons, and jumbo mortgages as well as loans pursuant to various
Federal Housing Administration programs. Mortgage loans originated are primarily
for the purchase of single-family residences, although these loans are also
originated for refinancing of existing mortgages.
During the year ended December 31, 1999, the year ended December 31,
1998, and the eleven months ended December 31, 1997, approximately 67.86%,
79.17%, and 66.03%, respectively, of the single-family mortgage loans originated
were refinancings of outstanding mortgage loans.
7
The following table contains certain information at December 31, 1999
regarding the maturity of Pelican Financial's loan portfolio along with the
dollar amounts of loans due after one year which have fixed and variable rates.
All loans are shown maturing based upon contractual maturities and includes
scheduled payments but not potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Loan balances have not been reduced for
undisbursed loan proceeds, unearned discounts, and the allowance for loan
losses. Scheduled contractual principal repayments are not necessarily
predictive of the actual maturities of loans because of prepayments. The average
life of mortgage loans, particularly fixed-rate loans, tends to increase when
prevailing mortgage loan interest rates are substantially higher than interest
rates on existing mortgage loans, and conversely, decrease when interest rates
on existing mortgages are substantially higher than prevailing mortgage rates.
1 to 4 Commercial
Family Multi-family & Industrial Business,
Real Estate Real Estate Real Estate Construction Commercial Consumer Total
-------- -------- -------- -------- -------- -------- --------
(In thousands)
Non-accrual loans ................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======== ======== ======== ========
Amounts Due:
Within 3 months ................. $ 4,860 $ 0 $ 2,891 $ 601 $ 102 $ 385 $ 8,839
3 months to 1 year .............. 11,961 0 1,052 574 31 2 13,620
-------- -------- -------- -------- -------- -------- --------
Total due within 1 year ...... 16,821 0 3,943 1,175 133 387 22,459
-------- -------- -------- -------- -------- -------- --------
After 1 year:
1 to 3 years ................. 6,337 0 4,289 0 182 274 11,082
3 to 5 years ................. 3,244 0 7,100 0 192 209 10,745
5 to 10 years ................ 733 0 2,154 0 24 251 3,162
10 to 15 years ............... 8,456 0 0 0 0 0 8,456
Over 15 years ................ 73,588 0 0 0 0 0 73,588
-------- -------- -------- -------- -------- -------- --------
Total due after 1 year ..... 92,358 0 13,543 0 398 734 107,033
-------- -------- -------- -------- -------- -------- --------
Total ........................ $109,179 $ 0 $ 17,486 $ 1,175 $ 531 $ 1,121 $129,492
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses ......... $ 138 $ 0 $ 85 $ 11 $ 132 $ 8 $ 374
======== ======== ======== ======== ======== ======== ========
Fixed rate ........................ $ 77,918 $ 0 $ 6,699 0 $ 398 $ 712 $ 85,727
Variable rate ..................... 14,440 0 6,844 0 0 22 21,306
-------- -------- -------- -------- -------- -------- --------
Total due after 1 year .......... $ 92,358 $ 0 $ 13,543 $ 0 $ 398 $ 734 $107,033
======== ======== ======== ======== ======== ======== ========
8
The following table contains information on the activity in Pelican
Financial's mortgage loans available for sale and its loans held for investment
in its portfolio.
For the year ended For the period from
December 31, February 1, 1997 to
-------------------------------------- December 31,
1999 1998 1997
------------------- ----------------- --------------------
(In thousands)
Available for Sale:
Beginning balance............................. $ 179,454 $ 98,658 $ 39,974
Originations.................................. 2,244,022 2,405,776 732,556
Repurchases................................... 0 0 0
Net sales:
Sales....................................... 2,362,237 2,323,803 674,651
Deferred fees - current year................ (482) (1,056) (1,115)
Deferred fees - prior year.................. 1,056 1,116 336
------------ ----------- ---------
Net sales................................. 2,362,811 2,323,863 673,872
Transfers (to) from available for sale........ (129) (1,117) 0
------------ ----------- ---------
Ending balance............................. $ 60,536 $ 179,454 $ 98,658
============ =========== =========
Held for Investment:
Beginning balance............................. 24,100 $ 2,181 $ 1,279
Originations and purchases.................... 62,130 32,393 506
Repurchases................................... 146 11,084 1,226
Repayments/adjustments........................ (17,205) (12) (46)
Payoffs....................................... (123) (21,714) (44)
Sales......................................... (31) (46) 0
Transfers to repossessed assets............... (146) (903) (740)
Transfers (to) from available for sale........ 129 1,117 0
------------ ----------- ---------
Ending balance............................. $ 69,000 $ 24,100 $ 2,181
============ =========== =========
MORTGAGE BANKING OPERATIONS. Washtenaw actively participates in the
mortgage banking market on a national basis. Mortgage banking generally involves
the origination or purchase of single-family mortgage loans for sale in the
secondary mortgage market. The secondary mortgage market and its evolution have
been significantly influenced by two government-sponsored enterprises, Federal
National Mortgage Association (commonly referred to as Fannie Mae) and Federal
Home Loan Mortgage Corporation (commonly referred to as Freddie Mac), and one
government agency, Government National Mortgage Association (commonly referred
to as Ginnie Mae). Through these entities, the United States government provides
support and liquidity to the market for residential mortgage debt.
Mortgage originators sell their loans directly to Fannie Mae and
Freddie Mac either as whole loans or, more typically, as pools of loans used to
collateralize mortgage-backed securities issued or guaranteed by these entities.
Similarly, the originators can issue mortgage-backed securities collateralized
by pools of loans that are guaranteed by Ginnie Mae. In order to arrange these
sales or obtain these guarantees, the originator must underwrite its loans to
conform with standards established by Fannie Mae and Freddie Mac or by the
Federal Housing Administration in the case of Ginnie Mae. All loans other than
Federal Housing Administration loans are considered conventional loans. Loans
with principal balances exceeding agency guidelines, currently those in excess
of $240,000 for single-family mortgage loans (I.E., "jumbo" or "nonconforming
loans"), are sold to private investors.
Washtenaw pursues its loan production strategy as part of its mortgage
banking operations through Washtenaw's wholesale and correspondent loan
production outlets and, to a limited extent, through direct solicitation of
commercial banks, savings associations and credit unions and retail loan
production.
9
WHOLESALE LOAN PRODUCTION. Under its wholesale operations,
Washtenaw funds mortgage loans originated by a network of approximately 1,593
independent mortgage brokers nationwide. Approximately 802 of these brokers
originate mortgage loans for Washtenaw on a monthly basis and the remainder
originate mortgage loans for Washtenaw on a quarterly basis. This network is
maintained by Washtenaw's approximately 24 business consultants, who are
compensated through a salary and commission package. Many of the larger brokers
are provided with loan data entry software by Washtenaw for the entry of loan
applicant data in a format familiar to Washtenaw's underwriters and for
transmission to Washtenaw's automated underwriting systems for review. All
loans originated through brokers are underwritten according to Washtenaw's
standards.
Washtenaw's underwriters or contract representatives review the
loan data provided by the loan applicant, including the review of appropriate
loan documentation, and request additional information as necessary from the
broker. Loans originated by these brokers are typically funded directly by
Washtenaw through table funding arrangements. In a majority of cases, the loan
is closed in the broker's name and thereafter transferred to Washtenaw together
with related mortgage servicing rights for which Washtenaw generally pays a
servicing release premium which is included in the loan price paid to the broker
by Washtenaw. However, in certain states, the broker is required to close the
loan in Washtenaw's name. Broker participants in this program are prequalified
on the basis of creditworthiness, mortgage lending experience, and reputation.
Each broker undergoes annual and ongoing reviews by Washtenaw.
CORRESPONDENT LOAN PRODUCTION. In addition, Washtenaw acquires
mortgage loans from mortgage lenders, commercial banks, savings and loan
associations, and other financial intermediaries. Washtenaw's selection of
correspondents is subject to a separate approval process with higher net worth
requirements than wholesale brokers and correspondents who must use their own
source of funds to close loans. The prices of these loan acquisitions are
separately negotiated. Warehouse lines of credit, typically obtained from third
parties, may be used by the mortgage lenders to finance their respective
mortgage loan originations. Washtenaw does not provide warehouse lines of credit
for its correspondents. All loans acquired from correspondents are expected to
satisfy Washtenaw's underwriting standards and may be repurchased by the
correspondent if there is a default of the loan due to fraud or
misrepresentation in the origination process and for certain other reasons,
including the failure to satisfy underwriting requirements imposed by Washtenaw.
RETAIL LOAN PRODUCTION. Pelican Financial's retail loan production
involves the origination of loans directly from Washtenaw or Pelican National.
Pelican Financial has no retail loan origination offices other than its main
office in Ann Arbor, Michigan and Pelican National offices located in Naples and
Fort Myers, Florida. The retail loan activity of Pelican Financial primarily
involves the origination of single-family mortgage loans and, to a lesser
extent, Pelican National originates construction, consumer, and commercial
loans. These retail loan originations generally provide Pelican Financial with a
source of loan production at a lower cost per loan than loans acquired through
brokers or correspondents because the cost of generating these loans is more
than offset by cost savings through Pelican Financial's ability to avoid payment
of the servicing release premium for the related mortgage servicing rights.
SECONDARY MARKET ACTIVITIES
Pelican Financial sells substantially all of the mortgage loans that it
originates or purchases through its mortgage banking operations while retaining
the servicing rights to the loans. During the years ended December 31, 1999 and
1998 and the eleven months ended December 31, 1997, Pelican Financial originated
or purchased $2.3 billion, $2.4 billion, and $732.6 million in total mortgage
loans, respectively, and sold $2.4 billion, $2.3 billion, and $673.9 million of
mortgage loans, respectively, in the secondary market. Mortgage loans are
aggregated into pools and sold, or are sold as individual mortgage
10
loans, to investors principally at prices established at the time of sale or
pursuant to forward sales commitments. Conforming conventional mortgage loans
are generally pooled and exchanged pursuant to the purchase and guarantee
programs sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae or for Fannie Mae,
Freddie Mac, or Ginnie Mae mortgage-backed securities, and are generally sold to
investment banking firms. A limited number of mortgage loans are sold to other
institutional and non-institutional investors. For the years ended December 31,
1999 and 1998, a significant portion of these loans were exchanged for Fannie
Mae and Freddie Mac mortgage-backed securities, which securities were then sold
to investment banking firms. The remainder were sold to other institutional and
non-institutional investors.
Pelican Financial exchanges and sells mortgage loans on a
non-recourse basis. In connection with Pelican Financial's loan exchanges and
sales, Pelican Financial makes representations and warranties customary in the
industry relating to, among other things, compliance with laws, regulations and
program standards, and to accuracy of information. If there is a breach of the
representations and warranties by Pelican Financial, Pelican Financial typically
corrects these flaws. If the flaws cannot be corrected, Pelican Financial may be
required to repurchase these loans. In cases where loans are acquired from a
broker or correspondent and there have been material misrepresentations made to
Pelican Financial, Pelican Financial generally has the right to resell the
flawed loan back to the broker or correspondent pursuant to the agreement
between Pelican Financial and the broker or correspondent. Otherwise, Pelican
Financial is indemnified against loss on these flawed loans by the broker. In
addition, Pelican Financial relies upon contract underwriters for a portion of
its loan production, and these underwriters must indemnify Pelican Financial
against loss for loans which are eventually determined to have been flawed by
"blatant fraud" upon origination.
Pelican Financial assesses the interest rate risk associated with
outstanding commitments that it has extended to fund loans and hedges the
interest rate risk of these commitments based upon a number of factors,
including the remaining term of the commitment, the interest rate at which the
commitment was provided, current interest rates and interest rate volatility.
These factors are monitored on a daily basis, and Pelican Financial adjusts its
hedging on a daily basis as needed. Pelican Financial hedges its "available for
sale" mortgage loan portfolio and its interest rate risk inherent in its
unfunded mortgage commitments primarily through the use of forward sale
commitments. Pursuant to these commitments, Pelican Financial enters into
commitments with terms of not more than 90 days to sell these loans to Freddie
Mac, Fannie Mae, and Ginnie Mae.
ASSET QUALITY
Pelican Financial is exposed to certain credit risks related to the
value of the collateral that secures loans held in its portfolio and the ability
of borrowers to repay their loans during the term thereof. Pelican Financial's
senior officers closely monitor the loan and real estate owned portfolios for
potential problems on a continuing basis and reports to the Board of Directors
of Pelican Financial at regularly scheduled meetings. These officers regularly
review the classification of loans and the allowance for losses. Pelican
Financial also has a quality control department, the function of which is to
provide the Board of Directors of Pelican Financial with an independent ongoing
review and evaluation of the quality of the process by which lending assets are
generated.
Nonperforming assets consist of nonaccrual loans and real estate
owned. Loans are usually placed on nonaccrual status when the loan is past due
90 days or more, or the ability of a borrower to repay principal and interest is
in doubt. Real estate acquired by Pelican Financial as a result of foreclosure
is classified as other real estate owned until the time as it is sold. Pelican
Financial generally tries to sell the property at a price no less than its net
book value, but will consider discounts where appropriate to expedite the return
of the funds to an earning status. When the property is acquired, it is
11
recorded at its fair value less estimated costs of sale. Any required write-down
of the loan to its appraised fair market value upon foreclosure is charged
against the allowance for losses.
Pelican Financial establishes an allowance for losses based upon a
quarterly or more frequent evaluation by management of various factors including
the estimated market value of the underlying collateral, the growth and
composition of the loan portfolio, current delinquency trends and prevailing and
prospective economic conditions, including property values, employment and
occupancy rates, interest rates, and other conditions that may affect borrowers'
abilities to comply with repayment terms. If actual losses exceed the amount of
the allowance for losses, earnings could be adversely affected. As Pelican
Financial's provision for losses is based on management's assessment of the
general risk inherent in the loan portfolio based on all relevant factors and
conditions, the allowance for losses represents general, rather than specific,
reserves.
The following table summarizes nonperforming loans, other real estate
owned, and restructured loans at the periods indicated. During the periods
indicated, Pelican National did not have any nonperforming assets and Pelican
Financial had no restructured loans.
December 31, January 31,
---------------------------------- --------------------------
1999 1998 1997 1997 1996
--------- --------- ---------- ---------- ------------
(Dollars in thousands)
Nonaccrual loans.............................. $ 0 $ 0 $ 0 $ 0 $ 0
Loans past due 90 days or more but not on
nonaccrual................................... 2,291 913 1,675 1,279 615
------- ------- ------- ------- -------
Total nonperforming loans.................. 2,291 913 1,675 1,279 615
Other real estate owned........................ 538 581 299 519 (38)
------- ------- ------- ------- -------
Total nonperforming assets................. $ 2,829 $ 1,494 $ 1,974 $ 1,798 $ 577
======= ======= ======= ======= =======
Total nonperforming assets to total assets..... 1.82% 0.61% 1.63% 3.73% 1.28%
Allowance for loan losses to nonperforming loans 16.32% 13.91% 3.94% 0.00% 0.00%
Nonperforming loans to total assets............ 1.47% 0.37% 1.39% 2.65% 1.36%
Pelican Financial relies upon its underwriting department to ascertain
compliance with individual investor standards prior to sale of the loans in the
secondary market, and it relies upon its quality control department to test sold
loans on a sample basis for compliance. During the year ended December 31, 1999,
Pelican Financial sold approximately $2.4 billion in single-family mortgage
loans into the secondary market, of which only five loans were repurchased
during 1999, representing less than 0.1 percent of 22,502 loans originated in
1999. Pelican Financial views loan repurchases as an inherent risk of
originating and purchasing loans for ultimate resale in the secondary market
notwithstanding the ongoing reviews by its quality control department. All five
of the loans repurchased during 1999 were nonperforming. Losses arising from
repurchases depend upon whether repurchased loans are or become nonperforming
and, if so, whether Pelican Financial is able to recover all of the loan
principal and interest otherwise due.
It has been Pelican Financial's experience that nonperforming loans do
not necessarily result in an ultimate loss to Pelican Financial. In addition,
Pelican Financial may also have the right to sell the repurchased loan back to
the broker or correspondent which originated it, or to seek indemnity from the
applicable mortgage insurance company in the case of loans which are
underwritten on a contract basis for Pelican Financial by these insurers. It has
been management's policy not to provide a general or specific allowance for loan
losses on nonperforming loans of Washtenaw because the ultimate risk of loss is
low. As a nonperforming loan progresses through the foreclosure process and
becomes other real estate owned, Washtenaw evaluates the underlying collateral
for salability and determines at that time whether a reserve against other real
estate owned is necessary.
12
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Pelican Financial's allowance for loan
losses. These agencies may require Pelican Financial to make additional
provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. Pelican
Financial will continue to monitor and modify its allowance for loan losses as
conditions dictate. While management believes Pelican Financial's allowance for
loan losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that Pelican Financial's level of allowance for
loan losses will be sufficient to cover loan losses incurred by Pelican
Financial or that adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
13
The following table contains information with respect to Pelican
Financial's allowance for loan losses for the periods indicated:
At or for the
At or for the Year Ended Period from
December 31, February 1, 1997
----------------------------------- to December 31,
1999 1998 1997
----------------- ----------------- ----------------
(Dollars in thousands)
Average loans outstanding, net .............................................. $170,949 $181,874 $ 51,094
======== ======== ========
Total gross loans outstanding at end of period .............................. $129,492 $203,455 $100,839
======== ======== ========
Allowance balance at beginning of period .................................... $ 127 $ 65 $ 0
Provision for loan losses ................................................... 255 62 65
Actual charge-offs:
1-4 family residential real estate ........................................ 0 0 0
Other ..................................................................... 8 0 0
-------- -------- --------
Total charge-offs ...................................................... 8 0 0
-------- -------- --------
Recoveries:
Total recoveries ....................................................... 0 0 0
-------- -------- --------
Net chargeoffs ....................................................... 8 0 0
-------- -------- --------
Allowance balance at end of period .......................................... $ 374 $ 127 $ 65
======== ======== ========
Net chargeoffs as a percent of average loans ................................ 0.01% 0.00%
===== =====
Allowance for loan losses to total gross loans at end of period ............. 0.29% 0.06%
===== =====
At or for the Year Ended
January 31,
----------------------------
1997 1996
--------------- -----------
Dollars in thousands)
Average loans outstanding, net .............................................. $ 52,151 $ 50,371
======== ========
Total gross loans outstanding at end of period .............................. $ 41,253 $ 35,539
======== ========
Allowance balance at beginning of period .................................... $ 0 $ 74
Provision for loan losses ................................................... 0 0
Actual charge-offs:
1-4 family residential real estate ........................................ 0 74
Other ..................................................................... 0 0
-------- --------
Total charge-offs ...................................................... 0 74
-------- --------
Recoveries:
Total recoveries ....................................................... 0 0
-------- --------
Net chargeoffs ....................................................... 0 74
-------- --------
Allowance balance at end of period .......................................... $ 0 $ 0
======== ========
Net chargeoffs as a percent of average loans ................................ 0.00% 0.15%
===== =====
Allowance for loan losses to total gross loans at end of period ............. 0.00% 0.00%
===== =====
14
The following table summarizes the allocation of the allowance for loan
losses by loan type and the percent of loans in each category compared to total
loans at the dates indicated:
December 31,
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -----------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------- ----------- ----------- ------------- ----------- -------------
(Dollars in thousands)
1-4 family residential real estate ......... $138(1) 84.49% $ 63(1) 95.21% $ 63(2) 99.81%
Multifamily real estate .................... 0 0.00 0 0.00 0 0.00
Commercial and industrial real estate ...... 85 12.86 44 3.77 0 0.00
Construction ............................... 11 1.29 4 0.44 0 0.00
Business, commercial ....................... 132 0.51 14 0.41 0 0.00
Automobile ................................. 0 0.08 0 0.17 0 0.19
Other ...................................... 8 0.77 2 0.00 2 0.00
Unallocated ................................ 0 ------ 0 ------- 0 ------
----- ----- -----
Total .................................. $374(1) 100.00% $127(1) 100.00% $ 65(2) 100.00%
===== ====== ===== ======= == ======
JANUARY 31,
-----------------------------------------------------
1997 1996
------------------------ -------------------------
Percent of Percent of
Loans in Loans in
Each Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
---------- ------------- ----------- ------------
(Dollars in thousands)
1-4 family residential real estate ......... $ 0 100.00% $ 0 100.00%
Multifamily real estate .................... 0 0.00 0 0.00
Commercial and industrial real estate ...... 0 0.00 0 0.00
Construction ............................... 0 0.00 0 0.00
Business, commercial ....................... 0 0.00 0 0.00
Automobile ................................. 0 0.00 0 0.00
Other ...................................... 0 0.00 0 0.00
---- ------- ---- -------
Unallocated ................................ 0 0
---- ----
Total .................................. $ 0 100.00% $ 0 100.00%
==== ====== ==== ======
- ----------------
(1) None of the allowance amount is allocated to available-for-sale loans.
(2) $42,000 of the allowance amount is allocated to available-for-sale loans.
15
UNDERWRITING
Pelican Financial's mortgage loans are underwritten either in
accordance with applicable Fannie Mae, Freddie Mac or Federal Housing
Administration guidelines or with requirements set by other investors. Although
Pelican Financial is qualified to underwrite Veteran's Administration loans,
Pelican Financial does not make these loans.
All mortgage loans originated or acquired by Pelican Financial, whether
through its retail banking operations or through its wholesale or correspondent
networks, must satisfy Pelican Financial's underwriting standards. Pelican
Financial permits a few originating correspondent lenders operating pursuant to
Pelican Financial's delegated underwriting program to perform initial
underwriting reviews. Pelican Financial employs an automated underwriting
process on most loans that is based upon data provided through Pelican
Financial's initial loan data entry software and is available from Fannie Mae
through its Desktop Underwriter(TM) software. This process incorporates credit
scoring, which in turn employs rules-based and statistical technologies to
evaluate the borrower, the property, and the sale of the loan in the secondary
market. This process is intended to reduce processing and underwriting time, to
improve overall loan approval productivity, to improve credit quality, and to
reduce potential investor repurchase requests. Approximately one-third of loans
underwritten by Pelican Financial are initially underwritten on a contractual
basis by mortgage insurance companies, in their capacity as contract
underwriters. The contract underwriter may be required to repurchase loans that
are determined not to be in compliance with these underwriting criteria.
A complete review of all information is conducted on loans underwritten
directly by Pelican Financial prior to loan approval. This process involves the
transfer of loan data to Pelican Financial by brokers or correspondents using
loan data entry software provided by Pelican Financial plus certain other
physical documentation or through the physical transfer of loan files to Pelican
Financial. Commercial and residential loans originated by Pelican National are
underwritten by Pelican National's senior management.
To a limited extent, Pelican Financial delegates underwriting authority
to select correspondent lenders who meet financial strength, delinquency,
underwriting. and quality control standards. The lenders may be required to
agree to repurchase loans that later become delinquent or to indemnify Pelican
Financial from loss.
QUALITY CONTROL
Pelican Financial maintains a quality control department that, among
other things reviews compliance and quality assurance issues relating to loan
production and underwriting. For its production compliance process, prior to
funding a loan, Pelican Financial reviews all submissions from new brokers or
correspondents. Typically, the first five loans are reviewed. If there are no
discrepancies found, the broker or correspondent is removed from the pre-funding
audits list. If any discrepancies are noted, the broker or correspondent remains
on the pre-funding audits list until the broker or correspondent has shown that
they are capable of underwriting loans to the standards of Pelican Financial on
a consistent basis. All new underwriting staff of Pelican Financial also has his
or her work audited post funding until he or she has shown that they are capable
of underwriting loans to the standards of Pelican Financial on a consistent
basis.
Additionally, Pelican Financial randomly selects a statistical sample
of generally at least 10% of all loans closed each month. This review includes a
new credit report review and re-underwriting the loan; reverifying funds,
employment, and other information in the loan application; and reviewing the
data integrity of the information entered into Pelican Financial's automated
underwriting system. Pelican
16
Financial also orders a second appraisal on 10% of the statistical sample (I.E.,
1% of all loans closed each month). Pelican Financial uses Desktop
Underwriter(TM) software developed by Fannie Mae to automate the underwriting
process and provides some brokers and correspondents with Desktop Originator(TM)
software, a similar product for use by brokers and correspondents of companies .
In completing an audit, documentation review is performed to ensure regulatory
compliance.
Pelican Financial also monitors the performance of delegated
underwriters through quality assurance reports prepared by the quality control
department, Federal Housing Administration reports and audits, reviews and
audits by regulatory agencies, investor reports, and mortgage insurance company
audits. Deficiencies in loans are generally corrected; otherwise Pelican
Financial may exercise its right to require that the loan be repurchased by the
originating broker or correspondent, or Pelican Financial may insist that the
broker who originated the loan indemnify Pelican Financial against any loss.
MORTGAGE LOAN SERVICING ACTIVITIES
Pelican Financial derives a portion of its revenues from the servicing
of mortgage loans for others. For the years ended December 31, 1999 and 1998,
and the eleven months ended December 31, 1997, Pelican Financial realized
servicing fee income, net of amortization and impairment, from its mortgage loan
servicing operations of $1.6 million, $447,000, and $840,000, respectively,
which represented 7.48%, 2.07%, and 10.86% of Pelican Financial's non-interest
income for the respective periods. Servicing arises in connection with mortgage
loans originated or purchased and then sold in the secondary market with
mortgage servicing rights retained. With the exception of servicing that has
been sold but not yet delivered, Pelican Financial does not subservice loans for
others.
Mortgage loan servicing includes collecting payments of principal and
interest from borrowers, remitting aggregate mortgage loan payments to
investors, accounting for principal and interest payments, holding escrow funds
for payment of mortgage related expenses such as taxes and insurance, making
advances to cover delinquent payments, inspecting the mortgaged premises as
required, contacting delinquent mortgagors, supervising foreclosures and
property dispositions if there are unremedied defaults, and other miscellaneous
duties related to loan administration. Pelican Financial collects servicing fees
from monthly mortgage payments generally ranging from 0.25% (I.E., 25 basis
points) to 0.75% (I.E., 75 basis points) of the declining principal balances of
the loans per annum. At December 31, 1999, 1998, and 1997, the weighted average
servicing fee on the servicing for others portfolio was 0.29%, 0.38%, and 0.27%,
respectively. Pelican Financial utilizes lock box and debit services of a major
bank to expedite the collection and processing of the monthly mortgage payments.
Approximately 85% of the payments were processed through this service at
December 31. 1999.
Pelican Financial services mortgage loans nationwide. The geographic
distribution of Pelican Financial's servicing portfolio reflects the national
scope of Pelican Financial's loan originations and acquisitions. Pelican
Financial actively monitors the geographic distribution of its servicing
portfolio to maintain a mix that it deems appropriate to balance its risks and
makes adjustments as it deems necessary. At December 31, 1999 and 1998, Pelican
Financial's servicing portfolio consisted of $1.1 billion and $1.6 billion of
conventional servicing, respectively. These amounts were in addition to loans
serviced by Pelican Financial which were recorded on its books as loans
receivable (I.E., available for sale and held for investment).
There is prepayment risk related to the value of Pelican Financial's
mortgage servicing rights if declining interest rates provide borrowers with
refinancing opportunities. At December 31, 1999, 1998, and 1997, the total
amount of the mortgage servicing rights recorded by Pelican Financial was $11.0
million, $15.5 million, and $4.3 million, respectively. For further information,
see Note 5 of Notes to Consolidated Financial Statements. During the year ended
December 31, 1999, Pelican Financial sold
17
mortgage servicing rights for gains amounting to $3.1 million. Also, Pelican
Financial occasionally enters into forward sale commitments of its mortgage
servicing rights. Beginning in the fall of 1998, Washtenaw entered into a best
efforts forward bulk servicing sales contract with a national purchaser of
mortgage servicing rights. This arrangement is designed to secure a price for
Washtenaw's conventional servicing rights for quarterly sales for one year (and
may be extended by mutual agreement of the parties), while providing a positive
spread over Washtenaw's borrowing costs. This approach is in contrast to the
method that Washtenaw used throughout most of 1998, in that previous flow or
forward servicing sales occurred concurrently with the formation of the
mortgage-backed securities being serviced. The best efforts contract is intended
to minimize the risks of Washtenaw's inability to originate or purchase a
sufficient amount of servicing. Management believes that growth in this form of
servicing and servicing sales will provide an excellent opportunity for the
deployment of capital and retained earnings.
Gains on the sale of mortgage servicing rights are affected by changes
in interest rates as well as the amount of mortgage servicing rights capitalized
at the time of the loan origination or acquisition of the mortgage servicing
rights. Purchasers of mortgage servicing rights analyze a variety of factors,
including prepayment sensitivity, to assess the purchase price they are willing
to pay. Lower market interest rates prompt an increase in prepayments as
consumers refinance their mortgages at lower rates of interest. As prepayments
increase, the life of the servicing portfolio is reduced, decreasing the
servicing fee revenue that will be earned over the life of that portfolio and
the price third party purchasers are willing to pay. The fair value of servicing
is also influenced by the supply and demand of servicing available for purchase
at any point in time. Conversely, as interest rates rise, prepayments generally
decrease, resulting in an increase in the value of the servicing portfolio as
well as the gains on sales of the mortgage servicing rights.
Pelican Financial originates and purchases mortgage servicing rights
nationwide. The geographic distribution of Pelican Financial's mortgage
servicing portfolio reflects the national scope of Pelican Financial's mortgage
loan originations and acquisitions. The five largest states accounted for
approximately 66% of the total number of mortgage loans serviced and
approximately 66% of the dollar value of the mortgage loans serviced, at
December 31, 1999, while the largest volume by state was Michigan with
approximately 22% and 26% of the mortgage loans serviced by number and value,
respectively.
Pelican Financial's mortgage servicing portfolio includes servicing for
adjustable rate, balloon payment, and fixed rate fully amortizing loans. At
December 31, 1999, 13.4% of the mortgage servicing rights related to adjustable
rate loans, which had a weighted average coupon rate of 6.7%; 1.1% related to
fixed rate balloon payment loans, which had a weighted average coupon rate of
7.0%; and the remaining 85.5% related to fixed rate fully amortizing loans,
which had a weighted average coupon rate of 7.5%. At December 31, 1999, Pelican
Financial's mortgage servicing portfolio had an aggregate weighted average
coupon rate of 7.3%.
The following table contains information, as of December 31, 1999, on
the percentage of fixed-rate, single-family mortgage loans being serviced for
others by Pelican Financial, by interest rate category.
Coupon Range Percentage of Portfolio
-------------------------------------------- -------------------------
Less than 6.00%........................ 1.9%
6.01--7.00%............................ 35.3
7.01--8.00%............................ 37.3
8.01--9.00%............................ 19.4
9.01--10.00%........................... 5.6
10.01% & above......................... 0.5
-----
Total.............................. 100.0%
=====
18
The following table contains information regarding the mortgage loan
servicing portfolio, broken down by state.
At December 31, 1999
----------------------------------------------------------------------------------
Percentage of
Number of Number of
Mortgage Loans Mortgage Loans Total Mortgage Percentage of Total
Serviced Serviced Amount Mortgage Amount
-------------- -------------- -------------- -------------------
(Dollars in thousands)
Michigan................ 2,807 22.3% $287,711,235 26.0%
Ohio.................... 2,659 21.1% 216,770,287 19.6%
Florida................. 1,122 8.9% 91,702,059 8.3%
Indiana................. 931 7.4% 65,604,827 5.9%
Georgia................. 837 6.6% 68,090,870 6.1%
Illinois................ 569 4.5% 69,905,381 6.3%
Minnesota............... 363 2.9% 35,360,302 3.2%
Pennsylvania............ 359 2.8% 21,264,752 1.9%
Kentucky................ 315 2.5% 27,405,967 2.5%
South Carolina.......... 296 2.3% 25,329,555 2.3%
North Carolina.......... 259 2.1% 20,443,691 1.8%
Louisiana............... 263 2.1% 20,587,130 1.9%
Alabama................. 211 1.7% 12,669,587 1.1%
Wisconsin............... 182 1.4% 16,161,465 1.5%
Tennessee............... 163 1.3% 12,646,868 1.1%
Iowa.................... 151 1.2% 12,372,288 1.1%
Missouri................ 152 1.2% 10,097,336 0.9%
Other................... 954 7.7% 93,787,227 8.5%
------ ----- -------------- -----
Total................ 12,593 100.0% $1,107,910,827 100.0%
====== ===== ============== =====
At December 31, 1999, Pelican Financial was servicing approximately
12,593 loans with an aggregate unpaid principal balance of $1.1 billion. Of
these loans, 2.0% were delinquent and an additional 0.1% were in foreclosure.
Pelican Financial may be materially affected by loan delinquencies and defaults
on loans that it services for others. Under a portion of its servicing
contracts, Pelican Financial must advance all or part of the scheduled payments
to the owner of the loan, even when loan payments are delinquent. At December
31, 1999, Pelican Financial's delinquency rates on loans serviced for Freddie
Mac and Fannie Mae were 1.4% and 1.8%, respectively. Also, to protect their
liens on mortgage properties, owners of loans usually require a servicer to
advance scheduled mortgage and hazard insurance and tax payments even if
sufficient escrow funds are not available. Pelican Financial is generally
reimbursed by the mortgage owner or from liquidation proceeds for payments
advanced that the servicer is unable to recover from the mortgagor, although the
timing of this reimbursement is typically uncertain. In the interim, Pelican
Financial absorbs the cost of funds advanced during the time the advance is
outstanding. Further, Pelican Financial bears the costs of collection activities
on delinquent and defaulted loans.
INVESTMENT ACTIVITIES
Since the start of Pelican Financial's retail banking activities,
primarily conducted through Pelican National, deposit in-flows to Pelican
National have exceeded Pelican National's loan demand. In addition, Pelican
National sells a substantial portion of its loans into the secondary market,
thus replenishing its liquidity on a regular basis. Pelican National currently
invests excess liquidity in a variety of interest-earning assets. The investment
policy related to the retail banking operations of Pelican Financial, as
approved by the Board of Directors of Pelican National, requires management to
maintain adequate liquidity, generate a favorable return on investments without
incurring undue interest rate and credit risk, and to complement Pelican
Financial's lending activities. Pelican Financial primarily
19
utilizes investments in securities for liquidity management and as a method of
deploying excess funding not utilized for investment in loans. Generally,
Pelican Financial's investment policy is more restrictive than applicable
regulations allow and, accordingly, Pelican Financial has invested primarily in
U.S. government and agency securities, federal funds, and U.S. government
sponsored agency issued mortgage-backed securities. As required by SFAS No. 115,
Pelican Financial has established an investment portfolio of securities that are
categorized as held-to-maturity, available-for-sale, or held for trading. At
December 31, 1998, all of the investment securities held in Pelican Financial's
investment portfolio were classified as available for sale.
At December 31, 1999, Pelican Financial had invested $2.1 million in
Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities, or 1.3% of
total assets. In addition, at December 31, 1999, $3.8 million, or 2.4%, of total
assets, were debt obligations issued by federal agencies which generally have
stated maturities from one year to twenty five years. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to these instruments thereby changing the net yield on these
securities. There is also reinvestment risk associated with the cash flows from
these securities or if these securities are redeemed by the issuer. In addition,
the market value of these securities may be adversely affected by changes in
interest rates.
The following table contains information on the carrying value of
Pelican Financial's investment portfolio at the dates indicated. At December 31,
1999, the market value of Pelican Financial's investment portfolio totaled $6.6
million. During the periods indicated and except as otherwise noted, Pelican
Financial had no securities of a single issuer that exceeded 10% of
stockholders' equity.
At December 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
U.S. Treasury.............................. $ 0 $ 0 $ 1,499
U.S. Government agency (1)................. 3,820 4,499 5,485
Mortgage-backed securities................. 2,057 1,093 0
Federal Reserve Bank and FHLB stock........ 680 261 0
------- ------- -------
Total investment securities (2)........ $ 6,557 $ 5,853 $ 6,984
======= ======= =======
- -------------
(1) At December 31, 1999 and 1998, includes a $2.0 million investment in
a Federal Home Loan Bank bond with a carrying value of $2.0 million.
(2) Excludes time deposits held in other financial institutions.
20
The following table contains certain information regarding the carrying
values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of Pelican Financial's investment
securities portfolio at December 31, 1999
After Five Years
After One Year But But Within
Within One Year Within Five Years Ten Years After Ten Years Total
--------------- ----------------- --------------- --------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government Agency............ $ 0 0.00% $3,820 6.01% $ 0 0.00% $ 0 0.00% $3,820 6.01%
Mortgage-backed securities........ 0 0.00 0 0.00 0 0.00 2,057 6.44 2,057 6.44
Other............................. 0 0.00 0 0.00 0 0.00 680 6.83 680 6.83
--- ------ --- ------ ------
Total......................... $ 0 0.00% $3,820 6.01% $ 0 0.00% $2,737 6.50% $6,557 6.20%
=== ===== ====== ===== === ===== ====== ===== ====== =====
21
SOURCE OF FUNDS
Pelican Financial funds its mortgage banking activities through the use
of a warehouse line of credit and the use of agreements to repurchase. The
following table contains information pertaining to short-term borrowings for the
periods indicated.
Year ended Period from
December 31, February 1, 1997
----------------------- to December 31,
1999 1998 1997
-------- -------- ----------------
(Dollars in thousands)
Short-term borrowings and notes payable
Average balance outstanding during the period $103,113 $95,052 $39,232
Maximum amount outstanding at any month-end during
the period $169,089 $215,029 $78,454
Weighted average interest rate during the period 7.47% 5.44% 4.01%
Total short-term borrowings at period end $47,134 $95,985 $60,980
Weighted average interest rate at period end 6.03% 5.34% 3.99%
Pelican Financial conducts its operations utilizing leased premises and
occasionally utilizing equipment pursuant to operating leases. The terms of the
leases ranged from 12 months to 60 months with remaining lives ranging from 2
months to 57 months. The obligations remaining under the terms of these
agreements totaled $1.1 million at December 31, 1999.
Pelican National funds its retail banking activities primarily with
deposits, loan repayments and prepayments, and cash flows generated from
operations. Pelican National offers a variety of deposit accounts with a range
of interest rates and terms. Pelican National's deposits consist of checking,
money market, savings, NOW, and certificate of deposit accounts. At December 31,
1999, approximately 71.8% of the funds deposited in Pelican National were in
certificate of deposit accounts. At December 31, 1999, core deposits (savings,
NOW, and money market) represented 21.9% of total deposits. The flow of deposits
is influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. Pelican National's
deposits are obtained predominantly from the area around its office in Naples,
Florida. Pelican National has relied primarily on customer service and
competitive rates to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
Pelican National's ability to attract and retain deposits. Pelican National uses
traditional means of advertising its deposit products, including print media and
generally does not solicit deposits from outside its market area. Pelican
National does not actively solicit certificate accounts in excess of $100,000 or
use brokers to obtain deposits. At December 31, 1999, $27.3 million, or 63.2% of
Pelican National's certificate of deposit accounts were to mature within one
year. Pelican National believes that substantially all of the certificate of
deposit accounts that mature within one year will be rolled-over into new
certificate of deposit accounts. To the extent that certificate of deposit
accounts are not rolled-over, Pelican National believes that it has sufficient
resources to fund these withdrawals.
The following table contains information on the amount and maturity of
jumbo certificates of deposit (I.E, certificates of deposit of $100,000 or more)
at December 31, 1999.
Jumbo Certificates
Time Remaining Until Maturity of Deposit
----------------------------- ------------------
(In thousands)
Less than 3 Months $1,900
3 Months to 6 Months 2,410
6 Months to 12 Months 6,435
Greater than 12 Months 5,626
-------
Total $16,371
=======
22
EMPLOYEES
At December 31, 1999, Pelican Financial had no employees other than
executive officers. At December 31, 1999, Washtenaw had 163 full-time employees
and no part-time employees and Pelican National had 19 full-time employees and
no part-time employees. None of the employees of Pelican Financial or its
subsidiaries were represented by a collective bargaining agreement. Management
of Pelican Financial considers its relationship with its employees to be
satisfactory.
SUBSIDIARY ACTIVITIES
Pelican Financial conducts business through its wholly-owned
subsidiaries: Washtenaw and Pelican National. Washtenaw is a corporation
organized on February 5, 1981 pursuant to the laws of the State of Michigan.
Pelican National is a national banking association organized on March 7, 1997
pursuant to the laws of the United States. Neither Washtenaw nor Pelican
National has any subsidiaries.
REGULATION
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
Pelican Financial's profitability, like most bank holding companies, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by Pelican Financial on interest-bearing
liabilities, such as borrowings, and the interest rates received by Pelican
National on its interest-earning assets, such as loans originated or purchased
by Pelican Financial or investment securities held in the investment portfolio,
comprise a significant portion of Pelican Financial's earnings. In addition,
Pelican Financial's profitability is also dependent on the value of its mortgage
servicing portfolio, which is also highly sensitive to changes in interest
rates. Interest rates are highly sensitive to many factors that are beyond the
control of Pelican Financial, such as inflation, recession, and unemployment,
and the impact which future changes in domestic and foreign economic conditions
might have on Pelican Financial and cannot be predicted.
The business of Pelican Financial is also influenced by the monetary
and fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Federal Reserve Board. The Federal Reserve Board
implements national monetary policies (with objectives such as curbing inflation
and combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions required to comply with its reserve requirements and by varying the
target federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas influence
the growth of loans, investments, and deposits and also affect interest rates
earned on interest-earning assets and paid on interest-bearing liabilities. The
nature and impact on Pelican Financial of any future changes in monetary and
fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have the effect of increasing the cost of doing business, limiting
or expanding permissible activities, or affecting the competitive balance
between financial institutions, mortgage companies, and other financial services
providers. Proposals to change the laws and regulations governing the operations
and taxation of financial institutions, bank holding companies, mortgage
companies, and other financial services providers are frequently made in the
U.S. Congress, in the state legislatures and before various regulatory agencies.
The nature and impact on Pelican Financial of any future changes in the law or
regulations cannot be predicted.
23
GENERAL
Bank holding companies and bank and nonbank subsidiaries are
extensively regulated pursuant to both federal and state law. This regulation is
intended primarily for the protection of depositors and the deposit insurance
fund and not for the benefit of stockholders of Pelican Financial. Below is a
summary description of the material laws and regulations which relate to the
operations of Pelican Financial, Washtenaw, and Pelican National. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
FINANCIAL SERVICES MODERNIZATION LEGISLATION. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (also known
as the Financial Services Modernization Act). The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director, or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the BHCA framework
to permit a holding company system to engage in a full range of financial
activities through a new entity known as a Financial Holding Company. "Financial
activities" is broadly defined to include not only banking, insurance, and
securities activities, but also merchant banking and additional activities that
the Federal Reserve Board, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial activities,
or complementary activities that do not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many
federal and state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o Provides a uniform framework for the functional regulation
of the activities of banks, savings institutions, and their holding companies;
o Broadens the activities that may be conducted by national
banks, banking subsidiaries of bank holding companies, and their financial
subsidiaries;
o Provides an enhanced framework for protecting the privacy
of consumer information;
o Adopts a number of provisions related to the
capitalization, membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the
Community Reinvestment Act ("CRA"), and
o Addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions.
24
In order for Pelican Financial to take advantage of the ability to
affiliate with other financial services providers, Pelican Financial must become
a "Financial Holding Company" as permitted under an amendment to the BHCA. To
become a Financial Holding Company, Pelican Financial would file a declaration
with the Federal Reserve Board, electing to engage in activities permissible for
Financial Holding Companies and certifying that it is eligible to do so because
all of its insured depository institution subsidiaries are well-capitalized and
well-managed. See "- Regulation - Pelican National - Capital Standards." In
addition, the Federal Reserve Board must also determine that each insured
depository institution subsidiary of Pelican Financial has at least a
"satisfactory" CRA rating. See "- Regulation - Pelican National - Community
Reinvestment Act." Pelican Financial currently meets the requirements to make an
election to become a Financial Holding Company. Management of Pelican Financial
has not determined at this time whether it will seek an election to become a
Financial Holding Company. Pelican Financial is examining its strategic business
plan to determine whether, based on market conditions, the relative financial
conditions of Pelican Financial and its subsidiaries, regulatory capital
requirements, general economic conditions, and other factors, Pelican Financial
desires to utilize any of its expanded powers provided in the Financial Services
Modernization Act.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
REGULATION - PELICAN FINANCIAL
Pelican Financial, is a registered bank holding company, required to
comply with regulations issued pursuant to the Bank Holding Company Act. Pelican
Financial is required to file periodic reports and annual reports with the
Federal Reserve Board and any additional information as the Federal Reserve
Board may require. The Federal Reserve Board may conduct examinations of Pelican
Financial and its subsidiaries.
The Federal Reserve Board may require that Pelican Financial terminate
an activity or terminate control of or liquidate or divest certain subsidiaries
or affiliates when the Federal Reserve Board believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness, or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on the debt. In certain circumstances, Pelican
Financial must file written notice and obtain approval from the Federal Reserve
Board prior to purchasing or redeeming its equity securities.
A bank holding company and its nonbanking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease, or sale of property or furnishing of services. Further, Pelican
Financial is required by the Federal Reserve Board to maintain certain levels of
25
capital. Generally, the capital requirements of the Federal Reserve Board mirror
those of the Office of the Comptroller of the Currency applicable to Pelican
National, with certain exceptions. For additional information on the capital
levels of Pelican National, see "- Regulation - Pelican National - Capital
Standards."
Pelican Financial is required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the outstanding
shares of any class of voting securities or substantially all of the assets of
any bank or bank holding company. Prior approval of the Federal Reserve Board is
also required for the merger or consolidation of Pelican Financial and another
bank holding company.
Pelican Financial is prohibited, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or furnishing
services to its subsidiaries. However, Pelican Financial, conditioned on the
prior approval of the Federal Reserve Board, may engage in any activities, or
acquire shares of companies engaged in activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Pursuant to Federal Reserve Board regulations, a bank holding company
is required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. The validity of the source of strength doctrine
has been and is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
REGULATION - WASHTENAW
The mortgage banking operations of Washtenaw are extensively regulated
by federal and state governmental authorities and are required to comply with
various laws and judicial and administrative decisions. Washtenaw is required to
comply with the rules and regulations of the Department of Housing and Urban
Development (HUD), Federal Housing Administration, Veteran's Administration,
Fannie Mae, Freddie Mac, and Ginnie Mae with respect to originating,
underwriting, processing, securitizing, selling, and servicing mortgage loans.
Those rules and regulations, among other things, prohibit discrimination,
provide for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts. Moreover, lenders such as Washtenaw are
required annually to submit audited financial statements to Fannie Mae, Freddie
Mac, and the Department of Housing and Urban Development and to comply with each
regulatory entity's own financial requirements, policies, and procedures.
Washtenaw's activities must also comply with, among other federal laws, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Home Mortgage
Disclosure Act, and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which prohibit discrimination, require the
disclosure of certain basic information to mortgagors concerning credit and
settlement costs, limit payment for settlement services to the reasonable value
of the services rendered and require the maintenance and disclosure of
information regarding the disposition of mortgage applications based on race,
gender, geographical distribution, and income level.
26
Additionally, various state laws and regulations affect Washtenaw.
Washtenaw is licensed as a mortgage banker or regulated lender in those states
in which it believes it is required to be licensed. Conventional mortgage
operations may also be required to comply with state usury statutes. Federal
Housing Administration and Veteran's Administration loans are exempt from the
effect of these statutes. Pursuant to state statutes and licensing requirements,
states may have the right to conduct financial and regulatory audits of loans
under their jurisdiction and to determine compliance with state disclosure
requirements and usury laws.
REGULATION - PELICAN NATIONAL
GENERAL. The Office of the Comptroller of the Currency is primarily
responsible for the supervision, examination, and regulation of Pelican
National, because Pelican National is a national banking association. If, as a
result of an examination of Pelican National, the OCC should determine that the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of Pelican National's operations are
unsatisfactory or that Pelican National or its management is violating or has
violated any law or regulation, various remedies are available to the OCC. These
remedies include the power to enjoin "unsafe or unsound practices," to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict the growth of Pelican National, to
assess civil monetary penalties, and to remove officers and directors. The FDIC
has similar enforcement authority, in addition to its authority to terminate a
bank's deposit insurance, in the absence of action by the OCC and upon a finding
that a bank is in an unsafe or unsound condition, is engaging in unsafe or
unsound activities, or that its conduct poses a risk to the deposit insurance
fund or may prejudice the interest of its depositors.
The deposits of Pelican National will be insured by the FDIC in the
manner and to the extent provided by law. For this protection, Pelican National
will pay a quarterly statutory assessment. See "- Premiums for Deposit
Insurance." Various other requirements and restrictions under the laws of the
United States affect the operations of Pelican National. Federal statutes and
regulations relate to many aspects of Pelican National's operations, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices, capital requirements, and disclosure obligations to depositors
and borrowers. Further, Pelican National is required to maintain certain levels
of capital. See "- Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO PELICAN FINANCIAL BY PELICAN
NATIONAL. Pelican Financial is a legal entity separate and distinct from Pelican
National. The prior approval of the OCC is required if the total of all
dividends declared by Pelican National in any calendar year exceeds Pelican
National's net profits (as defined) for that year combined with its retained net
profits (as defined) for the preceding two years, less any transfers to surplus.
In addition, as a condition to the issuance of Pelican National's charter by the
OCC and the approval of deposit insurance by the FDIC, both agencies have
restricted the use of Bank funds to service the $2.0 million loan used to
initially capitalize Pelican National. This restriction could adversely affect
the ability of Pelican Financial to service the loan if dividends from Washtenaw
do not at least equal the loan payment. In addition, covenants of the loan
agreement require Washtenaw to maintain a specified level of capitalization and
could restrict the ability of Washtenaw to dividend to Pelican Financial
sufficient funds to meet its loan obligation. The restrictions contained in the
approvals of the OCC and the FDIC as well as the covenants in the loan agreement
are anticipated to expire after the consummation of the offering as Pelican
Financial intends to use a portion of the proceeds from the offering to repay
the loan used to initially capitalize Pelican National.
The OCC also has authority to prohibit Pelican National from engaging
in activities that, in the OCC's opinion, constitute unsafe or unsound practices
in conducting its business. It is possible,
27
depending upon the financial condition of the financial institution in question
and other factors, that the OCC could assert that the payment of dividends or
other payments might, in some circumstances, be an unsafe or unsound practice.
Further, the OCC and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards in
these guidelines and the restrictions that are or may be imposed pursuant to the
prompt corrective action provisions of federal law could limit the amount of
dividends which Pelican National may pay to Pelican Financial. See "- Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms" and "- Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
Pelican National is required to comply with certain restrictions
imposed by federal law on any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, Pelican Financial or other
affiliates, the purchase of or investments in stock or other securities thereof,
the taking of these securities as collateral for loans and the purchase of
assets of Pelican Financial or other affiliates. These restrictions prevent
Pelican Financial and other affiliates from borrowing from Pelican National
unless the loans are secured by marketable obligations of designated amounts.
Further, these secured loans and investments by Pelican National to or in
Pelican Financial or to or in any other affiliate is limited to 10% of Pelican
National's capital and surplus (as defined by federal regulations) and these
secured loans and investments are limited, in the aggregate, to 20% of Pelican
National's capital and surplus (as defined by federal regulations). Additional
restrictions on transactions with affiliates may be imposed on Pelican National
pursuant to the prompt corrective action provisions of federal law. See "-
Prompt Corrective Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS. The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Pursuant to these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long-term preferred stock, eligible term
subordinated debt, and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital conditioned on certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total average assets, referred to as the leverage ratio, of
4%.
The following table presents the amounts of regulatory capital and the
capital ratios for Pelican Financial, compared to its minimum regulatory capital
requirements of the Federal Reserve Board as of December 31, 1999.
28
December 31, 1999
-------------------------------------------------------------------------------------------------------
Excess over
Required to be Excess over Required to be Required to be Well
Actual Adequately Capitalized Minimum Required Well Capitalized Capitalized
------------------- ----------------------- -------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- -------- ---------- ------------ --------- ---------- --------- -------- --------- ---------
(Dollars in thousands)
Total Capital (to Risk-
Weighted Assets) $19,897 21.63% $7,358 8.00% $12,539 13.63% $9,198 10.00% $10,699 11.63%
Tier 1 Capital (to Risk-
Weighted Assets) 19,523 21.23 3,679 4.00 15,844 17.23 5,519 6.00 14,004 15.23
Tier 1 Capital (to
Average Assets) 19,523 11.52 6,779 4.00 12,744 7.52 8,474 5.00 11,049 6.52
Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Pursuant to OCC and FDIC
regulations, an institution is generally considered "well capitalized" if it has
a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, and a Tier 1 capital (leverage) ratio of at least 5%.
Federal law generally requires full-scope on-site annual examinations of all
insured depository institutions by the appropriate federal bank regulatory
agency although the examination may occur at longer intervals for small
well-capitalized or state chartered banks. Initially, Pelican National is
expected to be considered well capitalized, however, no assurance can be given
that Pelican National will remain well capitalized or even meet its minimum
regulatory capital requirements. The following table presents the amounts of
regulatory capital and the capital ratios for Pelican National, compared to its
minimum regulatory capital requirements of the OCC as of December 31, 1999.
As of December 31, 1999
-----------------------------------------------------------------------------
Required to be
Actual Adequately Capitalized Excess
------------------------ ------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
Total risk-based ratio $9,226 18.52% $3,985 8.00% $5,241 10.52%
Tier 1 risk-based ratio 8,852 17.77 1,992 4.00 6,860 13.77
Leverage ratio 8,852 11.32 3,127 4.00 5,725 7.32
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Any change could
affect the ability of Pelican National to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. Federal law
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized.
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants this
treatment. At each successive lower capital category, an insured depository
institution is required to comply with more restrictions. The federal banking
agencies, however, may not treat an institution as critically undercapitalized
unless its capital ratio actually warrants this treatment.
29
In addition to restrictions and sanctions imposed pursuant to the
prompt corrective action provisions, the federal regulators may institute
enforcement actions against commercial banking organizations for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease and desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of a depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution-affiliated parties and the enforcement of these actions
through injunctions or restraining orders based upon a judicial determination
that the agency would be harmed if this equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS. In July 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness. The guidelines contain operational and managerial standards relating
to internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees, and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety and
soundness standards that the agencies will use to identify and address problems
at insured depository institutions before capital becomes impaired. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE. Pelican National's deposit accounts are
insured by Pelican National Insurance Fund ("BIF"), as administered by the FDIC,
up to the maximum permitted by law. Insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule, order, or condition imposed by
the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits,
which as of December 31, 1998, ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment. Pursuant to the Economic
Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"),
effective January 1, 2000, Pelican National began paying, in addition to its
normal deposit insurance premium as a member of the BIF, an amount equal to
approximately 2.12 basis points per $100 of insured deposits toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. For the year ended
December 31, 1999, Pelican National paid an amount equal to approximately 1.3
basis points toward the retirement of the Fico Bonds. Pursuant to the Paperwork
Reduction Act, the FDIC is not permitted to establish Savings Association
Insurance Fund ("SAIF") assessment rates that are lower than comparable BIF
assessment rates. The Paperwork Reduction Act also provided for the merging of
the BIF and the SAIF by January 1, 1999 provided there were no financial
institutions still chartered as savings associations at that time. While
legislation was proposed to eliminate the savings association charter, as of
January 1, 1999, there were still financial institutions chartered as savings
associations.
INTERSTATE BANKING AND BRANCHING. A bank holding company that is
adequately capitalized and managed may obtain approval to acquire an existing
bank located in another state without regard to state law. A bank holding
company would not be permitted to make an acquisition if, upon consummation, it
would control more than 10% of the total amount of deposits of insured
depository institutions in the
30
United States or 30% or more of the deposits in the state in which Pelican
National is located. A state may increase or decrease the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of the percentage does not discriminate against out-of-state
banks. An out-of-state bank holding company may not acquire a state bank in
existence for less than a minimum length of time that may be prescribed by state
law except that a state may not impose more than a five year existence
requirement.
COMMUNITY REINVESTMENT ACT. Pursuant to the Community Reinvestment Act
("CRA"), as implemented by OCC regulations, a bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OCC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
this record into account in its evaluation of certain applications by the
institution. The OCC evaluates an institution's CRA performance utilizing a four
tiered descriptive rating system, resulting in a rating of outstanding,
satisfactory, needs to improve, or substantial non-compliance.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses factors which may adversely affect Pelican
Financial's results and operations, in addition to those factors that generally
affect financial services companies and the financial services industry in
general. You should carefully consider these factors in evaluating us and our
business.
OUR BUSINESS DEPENDS UPON OUR BEING ABLE TO BUY AND SELL LOANS AND
MORTGAGE SERVICING RIGHTS. In our mortgage banking operations, we currently buy
all of the mortgage loans we produce from correspondents or brokers. We
generally sell substantially all of the mortgage loans that we produce into the
secondary mortgage market and sell all of our mortgage servicing rights to
investors. Our business and profitability depend upon our being able to buy and
sell loans and mortgage servicing rights in the secondary market.
An active market for loans and mortgage servicing rights depends
primarily on the demand for mortgage-backed securities in the bond markets and
the continuation of programs administered by Fannie Mae, Freddie Mac, and Ginnie
Mae, which facilitate the issuance of these mortgage-backed securities. Our
participation in the secondary mortgage market also depends on our continued
eligibility in these programs. A discontinuation of or a significant reduction
in the operations of Fannie Mae, Freddie Mac, or Ginnie Mae or a change in the
programs they administer may decrease our ability to originate and sell loans
and mortgage servicing rights.
WE MUST CAREFULLY MANAGE OUR INTEREST RATE RISK TO BE PROFITABLE. In
our mortgage banking business, changes in interest rates affect our ability to
offer interest rate commitments. In addition, we typically offer interest rate
commitments that result in the ultimate sale of the loans thirty or more days
after the date of the commitment. If we fail to effectively manage interest rate
risk during the period between the issuance of the commitment and the date of
the sale of the loan, our profits will be hurt.
In our retail banking business, in order for us to be profitable, we
have to earn more money in interest income and fee revenues than we pay to our
depositors in interest. If we fail to effectively manage the interest rates that
we pay on our deposits and earn on our investments and loans, our profits
31
will be hurt. For a further discussion of how changes in interest rates impact
us, see "Item 7A - Quantitative and Qualitative Disclosures About Market Risk."
IF WE FAIL TO ADEQUATELY MANAGE OUR LOAN UNDERWRITING AND QUALITY, OUR
MORTGAGE COSTS WILL INCREASE. If we fail to comply with individual investor
standards in our loan underwriting, we may become liable to repurchase the loan
and we may be liable for unpaid principal and interest if the loan defaults.
This would increase our mortgage costs. We rely upon our underwriting department
to ascertain compliance with individual investor standards prior to sale of the
loans to the investors. The underwriting department relies on its quality
control department to test sold loans on a sample basis for compliance.
LOAN DELINQUENCIES AND DEFAULTS ON LOANS THAT WE SERVICE HAVE A DIRECT
AFFECT ON OUR PROFITS. If delinquencies and defaults rates are higher than we
anticipate, our profits may be hurt. Pursuant to some types of servicing
contracts, we must advance all or part of the scheduled payments to the owner of
the loan, even when loan payments are delinquent. Also, to protect their liens
on mortgaged properties, owners of loans usually require us to advance mortgage
and hazard insurance and tax payments on schedule even if sufficient escrow
funds are not available. We are typically reimbursed by the mortgage owner or
from liquidation proceeds for payments advanced. However, the timing of these
reimbursement is typically uncertain. In the interim, we must absorb the cost of
funds advanced. Further, we must bear the costs of attempting to collect on
delinquent and defaulted loans. We also forego servicing income from the time a
loan becomes delinquent until foreclosure, at which time these amounts, if any,
may be recovered.
LOAN DELINQUENCIES AND DEFAULTS ON LOANS THAT WE OWN HAVE A DIRECT
EFFECT ON OUR PROFITS. The risk of nonpayment of loans is an inherent risk of
our business. If delinquencies and defaults rates are higher than we anticipate,
our profits may be hurt. We must bear the costs of attempting to collect on
delinquent and defaulted loans. We must also bear the cost of foreclosing on and
selling the underlying collateral if a borrower cannot cure the deficiency. To
the extent that the underlying collateral is not sufficient to cover the amount
of principal and interest owed on a loan, we incur a loss.
CHANGES TO THE ECONOMY OR BUSINESS CONDITIONS IN THE MIDWEST AND
SOUTHEAST MAY AFFECT OUR LOAN DEMAND AND LOAN DEFAULT RATES. Historically, our
single-family mortgage loans purchased and serviced have been concentrated in
certain geographic regions, particularly Michigan, Ohio, Indiana, Florida,
Georgia, and Illinois, based upon the location of the property collateralizing
the mortgage loan. Because borrowers of single-family mortgage loans usually
reside on the collateral property, changes in economic and business conditions
in the Midwest or the Southeast can affect the borrower. Adverse changes in the
economy or business conditions affect the demand for new mortgage loans and the
performance of existing loans. As a result, unfavorable or worsened economic
conditions may limit our ability to purchase or originate new loans in the
Midwest or the Southeast and may cause the cost of maintaining our mortgage
servicing portfolio to increase. This may decrease our profitability. Although
we continue to diversify our loan and mortgage serving portfolios geographically
to minimize this risk, we cannot be certain that we will be successful in this
effort.
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE DUE TO THE SEASONAL
FLUCTUATIONS IN HOME BUYING PRACTICES. The mortgage banking industry generally
experiences seasonal trends. These trends reflect the general national pattern
of sales and resales of homes. Sales and resales of homes typically peak during
the spring and summer seasons and decline to lower levels from mid-November
through February. In addition, delinquency rates typically rise in the winter
months, which results in higher servicing costs. Our quarter-to-quarter
operating results will reflect these seasonal trends, thereby causing short-term
fluctuations in our profits. Fluctuations in our profits may also cause
corresponding fluctuations in the market price of our common stock.
32
THE RETAIL AND MORTGAGE BANKING BUSINESSES ARE VERY COMPETITIVE. OUR
BUSINESS WILL BE HARMED IF WE CANNOT COMPETE EFFECTIVELY. Many of our retail
banking competitors have significantly greater resources and operate in a larger
geographic area than Pelican National. In addition, many of our mortgage banking
competitors operate nationwide mortgage origination networks similar to that of
Washtenaw. We cannot be certain that we will be able to compete successfully
against current or future competitors. The competitive pressures that we face
may harm our business, financial condition, and profits.
CHANGES IN THE LAW REGULATIONS AND REGULATIONS MAY AFFECT OUR ABILITY
TO DO BUSINESS, OUR COSTS, AND OUR PROFITS. We are subject to extensive state
and federal supervision and regulation. This regulation is primarily for the
benefit of depositors of Pelican National and the protection of the Bank
Insurance Fund and not for the protection of shareholders. Any future changes in
the law or regulations may affect our ability to do business and increase our
costs.
ITEM 2. PROPERTIES
(a) Properties.
Pelican Financial owns no real property but utilizes the offices of
Washtenaw. Pelican Financial pays no rent or other consideration for use of this
facility. The mortgage banking activities of Pelican Financial are conducted
primarily from the offices of Washtenaw located at 315 East Eisenhower, Ann
Arbor, Michigan 48108 and wholesale mortgage banking operations are also
conducted from a branch office of Washtenaw located at 2300 Contra Costa
Boulevard, Pleasant Hill, California 94523. The retail banking activities of
Pelican Financial are primarily conducted from the offices of Pelican National
located at 811 Anchor Rode Drive, Naples, Florida 33940. All office locations
are leased by Pelican Financial. In May 1999, Pelican National signed a lease
for a new branch office located at 12730 New Brittany Boulevard, Fort Myers,
Florida 33907. The branch opened in October 1999.
(b) Investment Policies.
See "Item 1. Business" above for a general description of Pelican
National's and Washtenaw's investment policies and any regulatory or board of
directors' percentage of assets limitations regarding certain investments. All
investment policies are reviewed and approved by the board of directors, and
these policies, subject to regulatory restrictions (if any), can be changed
without a vote of stockholders. Pelican National's and Washtenaw's investments
are primarily acquired to produce income, and to a lesser extent, possible
capital gain.
(1) Investments in Real Estate or Interests in Real Estate.
See "Item 1. Business - Lending Activities," "Item 1. Business - Secondary
Market Activities," "Item 1. Business - Mortgage Loan Servicing Activities,"
"Item 1. Business - Regulation," and "Item 2. Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1.
Business - Lending Activities," "Item 1. Business - Secondary Market
Activities," "Item 1. Business - Mortgage Loan Servicing Activities," "Item 1.
Business - Regulation."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See See "Item 1. Business - Lending
Activities," "Item 1. Business - Secondary Market Activities," "Item 1. Business
- - Mortgage Loan Servicing Activities," "Item 1. Business - Regulation."
33
(c) Description of Real Estate and Operating Data.
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1999, neither Pelican Financial nor Pelican National
was involved in any material legal proceedings. Below is a brief description of
material pending legal proceedings to which Washtenaw is a party:
CHANDLER, ET AL, V. HILTON MORTGAGE CORPORATION AND WASHTENAW MORTGAGE
CO., Civil Action No. 94- A-1418-N, U. S. District Court for the Middle District
Alabama ("CHANDLER"). On November 4, 1994, Washtenaw was named as a defendant in
a class action lawsuit relating to its method of calculating finance charges in
lending disclosures required by the Federal Truth in Lending Act ("TILA"). The
complaint was subsequently amended to remove the TILA claim and add a claim
under the Real Estate Settlement Procedures Act ("RESPA"), a request for
declaratory judgement, and a fraud claim. The amended complaint alleges that the
yield spread premium payments from Washtenaw to mortgage brokers were either
payments for the referral of business, or duplicative payments. The suit seeks
unspecified damages. On July 29, 1998, the court denied class certification.
However, at the request of the plaintiff, the court has permitted plaintiff to
refile the motion for class certification. Pelican Financial believes that
Washtenaw is and has been in compliance with applicable federal and state laws.
In the opinion of management, the resolution of this matter is not expected to
have a material impact on the financial position or results of operations of
Pelican Financial. See Note 18 of Notes to Consolidated Financial Statements.
HEARN, ET AL V. WASHTENAW MORTGAGE CO., Case No. 4:98-CV-78 (JRE), U.S.
District Court for the Middle District of Georgia. On February 19, 1998,
Washtenaw was named as a defendant in a class action lawsuit alleging that the
yield spread premium payments from Washtenaw to mortgage brokers were either
payments for the referral of business, or duplicative payments. The suit seeks
unspecified damages. On June 22, 1998, Washtenaw filed its answer denying all
liability, asserting affirmative defenses, and further asserting that a class
should not be certified. There have been no addition proceedings in this matter
other than limited discovery. Pelican Financial believes that Washtenaw is and
has been in compliance with applicable federal and state laws. In the opinion of
management, the resolution of this matter is not expected to have a material
impact on the financial position or results of operations of Pelican Financial.
WASHTENAW MORTGAGE CO. V. HALLMARK MORTGAGE MANAGEMENT SERVICES, INC.
AND DAVID JACKSON HOLCOMB, Civil Action No. 4:98 CV 207, U.S. District Court for
the Eastern District of Texas. This lawsuit filed on July 19, 1998 relates to a
Stock Purchase Agreement dated June 1, 1998 between Washtenaw and David Jackson
Holcomb in which Washtenaw agreed to purchase 22,500 shares of Hallmark Mortgage
Management Services, Inc. ("Hallmark") from Mr. Holcomb, constituting 45% of the
then outstanding stock of Hallmark. Washtenaw paid $100,000 at the time of
execution of the Stock Purchase Agreement and agreed to pay an additional amount
if certain financial benchmarks were met. Those benchmarks were not met and
within approximately two weeks of the closing of the purchase, Washtenaw began
to have serious operational problems with Mr. Holcomb and Hallmark. Within one
month of the closing of the purchase Washtenaw filed this lawsuit seeking a
receiver and unspecified damages as a result of fraud, misrepresentation, and
breach of contract, and seeking a declaratory judgment. The defendants filed a
counterclaim for breach of contract, defamation, and civil conspiracy. No
specific damage amount was plead by defendants. On July 23, 1998, the court
granted Washtenaw motion to have a receiver appointed. This case has been
dismissed by the federal court because Mr.
34
Holcomb filed for bankruptcy, however, it appears that Washtenaw will not
recover anything from Mr. Holcomb. Washtenaw has filed a proof of loss with its
insurer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders for a vote during the quarter
ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 15, 2000, there were 3,992,836 shares of common stock of
Pelican Financial outstanding held by approximately 81 shareholders of record.
The following table sets forth the high and low sales prices of the common stock
for the period indicated. The prices do not include retail markups, markdowns,
or commissions. Our common stock trades on the American Stock Exchange under the
symbol "PFI."
QUARTER ENDED HIGH LOW
---------------------------------------- ------------------ ------------------
December 31, 1999 (1)................... $7.50 $3.63
- -------------
(1) Pelican Financial completed its initial public offering of common stock
on November 10, 1999, at which time the common stock began trading on the
American Stock Exchange. Prior to this date, there was no public market for the
common stock.
We have never paid a cash dividend and do not anticipate paying any
cash dividends in the foreseeable future. Because we do not conduct any
operations other than managing our investment in Pelican National and Washtenaw,
we are dependent for income on dividends received from Pelican National and
Washtenaw. Also applicable to us are certain regulatory restrictions imposed by
the Federal Reserve Board on the payment of dividends to our stockholders.
Declaration of dividends by the Board of Directors of Pelican National will
depend upon a number of factors, including, but not limited to, investment
opportunities available to Pelican National, capital requirements, regulatory
limitations, and general economic conditions. Generally, Pelican National may
not declare or pay dividends on its capital stock if the payment would cause its
regulatory capital to be reduced below the minimum requirements imposed by
regulations of the Office of the Comptroller of the Currency. In addition,
declaration of dividends by the Board of Directors of Washtenaw will depend upon
a number of factors, including, but not limited to, investment opportunities
available to Washtenaw, capital needs, and general economic conditions.
Furthermore, a portion of the initial capitalization of Pelican National was
borrowed by us and Washtenaw from an unaffiliated third party. Provisions of the
loan agreement require Washtenaw to meet certain financial covenants and limit
the amount of dividends that Washtenaw may pay to us. For the foreseeable
future, Washtenaw plans to reinvest its earnings in its operations, thus
limiting the amount of dividends Washtenaw anticipates paying in the future.
35
ITEM 6. SELECTED FINANCIAL DATA
We are providing the following information to aid you in your analysis
of Pelican Financial, Inc.. We derived this financial information presented
below from the audited consolidated financial statements of Pelican Financial.
The information is only a summary and you should read it in conjunction with our
historical financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing in Item
7 below.
SUMMARY FINANCIAL AND OTHER DATA
At December 31, At January, 31
------------------------------------------ -----------------------
1999 1998 1997 (1) 1997 (1) 1996
------------- ------------- ------------- ------------- ---------
(Dollars in thousands, except per share information)
BALANCE SHEET DATA:
Total assets......................... $155,853 $246,409 $120,756 $48,220 $45,070
Cash and cash equivalents (2)........ 1,883 10,180 4,376 0 0
Total loans, net..................... 129,118 203,328 100,774 41,253 35,539
Mortgage-backed securities and
securities available for sale....... 5,877 5,592 6,984 0 0
Nonperforming loans(3)............... 2,291 913 1,675 1,279 615
Real estate acquired through
foreclosure......................... 293 581 299 519 (38)
Total nonperforming assets(3)........ 2,584 1,494 1,974 1,798 577
Deposits............................. 62,310 35,064 17,578 0 0
Short-term borrowings(4)............. 21,845 95,985 60,980 27,680 17,746
Notes payable........................ 25,334 58,226 20,673 3,964 4,456
Total liabilities ................... 134,862 234,009 112,243 41,860 39,239
Stockholders' equity................. 20,991 12,400 8,514 6,360 5,831
Shares outstanding................... 3,992,836 3,032,836 3,032,836 2,400,000 2,400,000
Book value per share(5).............. $5.26 $4.09 $2.81 $2.65 $2.43
OTHER DATA:
Number of:
Full-service retail banking facilities 2 1 1 0 0
Wholesale/correspondent lending
offices............................ 2 1 1 1 1
Full-time equivalent employees...... 182 187 130 109 109
- ------------------
(1) Pelican Financial changed its fiscal year from January 31 to
December 31. Pelican Financial was formed on March 3, 1997.
(2) Cash and cash equivalents include cash, amounts due from banks,
certificates of deposit with other banks, and short term investments
with maturities of less than three months (such as federal funds sold
and securities purchased pursuant to resale agreements.)
(3) Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets
consist of nonperforming loans, restructured loans, real estate
acquired through foreclosure or deed-in-lieu thereof and repossessions
(such as automobiles), net of chargeoffs and writedowns.
(4) Short-term borrowings include federal funds purchased and securities
sold pursuant to agreements to repurchase.
(5) On an equivalent basis for prior periods.
36
SUMMARY OF OPERATIONS
For the Year Ended For the Period For the Year Ended
December 31, from February 1, January 31,
--------------------------------- 1997 to ---------------------------------
December 31,
1999 1998 1997 1997 1996
--------------- ---------------- ------------------ ---------------- ---------------
(In thousands, except per share data)
OPERATIONS DATA:
Interest and dividend income. $15,327 $12,351 $3,420 $ 3,016 $ 3,181
Interest expense............. 9,727 8,831 2,455 2,048 2,249
------- ------- ------ ------- -------
Net interest income.......... 5,600 3,520 965 968 932
Provision for loan losses.... 255 62 65 0 0
------- ------- ------ ------- -------
Net interest income after
provision for loan losses.. 5,345 3,458 900 968 932
Noninterest income........... 21,404 21,582 7,733 7,644 11,077
Noninterest expense.......... 21,433 19,112 8,822 7,751 10,571
------- ------- ------ ------- -------
Earnings (loss) before
provision for income taxes
and cumulative effect of
change in accounting
principle.................. 5,316 5,928 (189) 861 1,438
Provision for income taxes... 1,791 2,041 (52) 332 476
------- ------- ------ ------- -------
Earnings (loss) before
cumulative effect of change
in accounting principle.... 3,525 3,887 (137) 529 962
Cumulative effect of change in
accounting principle....... 97 0 0 0 0
------- ------- ------ ------- -------
Net earnings (loss).......... $ 3,428 $ 3,887 $ (137) $ 529 $ 962
======= ======= ====== ======= =======
PER SHARE DATA:
Basic and diluted earnings
(loss) per share before
cumulative effect of change
in accounting principle (1) $1.11 $1.28 $(0.05) $0.22 $0.40
Basic and diluted earnings
(loss) per share(1)........ $1.08 $1.28 $(0.05) $0.22 $0.40
Weighted Average number of
shares outstanding(2)...... 3,169,262 3,039,611 2,974,100 2,400,000 2,400,000
- ---------------
(1) On an equivalent basis for prior periods.
(2) Assumes dilution.
37
KEY OPERATING RATIOS
For the For the Period
Year Ended from February For the Year Ended
December 31, 1, 1997 to January 31,
------------------------- ---------------------------
December 31,
1999 1998 1997* 1997 1996
------------ ------------ ------------------- ------------- -------------
(Dollars in thousands)
PERFORMANCE RATIOS:
Return on average assets........ 1.66% 1.82% (0.26)% 0.90% 1.70%
Return on average
common equity................... 21.90 37.68 (2.86) 9.22 19.80
Interest rate spread............ 1.83 1.56 0.73 0.76 0.12
Net interest margin............. 3.10 1.68 1.78 1.86 1.85
Noninterest expense to
average assets.................. 10.37 9.32 15.06 13.19 18.66
Efficiency ratio................ 71.31 66.48 90.65 82.51 67.88
ASSET QUALITY RATIOS:
Nonperforming assets to total
assets at end of period....... 1.66 0.61 1.63 3.73 1.28
Nonperforming loans to total
gross loans at end of period... 1.77 0.45 1.66 3.10 1.73
Allowance for loan losses to
total gross loans at end of
period......................... 0.29 0.06 0.07 0.00 0.00
Allowance for loan losses to
nonperforming loans at end of
period......................... 16.32 13.91 3.94 0.00 0.00
MORTGAGE ORIGINATION AND SERVICING
DATA:
Mortgage loans originated or
purchased...................... $2,305,584 $2,436,846 $732,869 $588,237 $644,760
Mortgage loans sold............. 2,362,843 2,323,909 673,872 583,831 619,791
Mortgage loans serviced for others 1,028,194 1,464,496 557,011 569,601 854,061
Capitalized value of mortgage
servicing rights............... 11,028 15,510 4,340 3,478 5,509
- --------------
* Annualized where appropriate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
GENERAL
Pelican Financial serves as the holding company of Pelican National and
Washtenaw. Pelican Financial's operations involve both mortgage banking and
retail banking. The mortgage banking segment involves the origination and
purchase of single-family residential mortgage loans in approximately 41 states,
the sale of these loans, usually on a pooled and securitized basis, in the
secondary market, and the servicing of mortgage loans for investors. The retail
banking segment involves attracting deposits from the general public and using
these funds to originate consumer, commercial, commercial real estate,
residential construction, and single-family residential mortgage loans, from its
offices in Naples and Fort Myers, Florida.
38
The tables below contains certain information for Pelican Financial's
business segments for the periods shown. Prior to August 1997, Pelican Financial
did not have retail banking operations.
Mortgage
Banking Retail Banking
Segment Segment Consolidated
------------- --------------------- -----------------
(In thousands)
REVENUES
Year ended:
December 31, 1999................................. $31,587 $5,406 $36,731
December 31, 1998................................. 31,719 2,543 32,933
Period Ended:
December 31, 1997................................. 10,898 376 11,154
EARNINGS (LOSS) BEFORE INCOME TAXES
Year ended:
December 31, 1999................................. 4,683 892 5,219
December 31, 1998................................. 6,498 (370) 5,928
Period ended:
December 31, 1997................................. 635 (743) (189)
Pelican Financial's earnings are primarily dependent upon three
sources: net interest income, which is the difference between interest earned on
interest-earning assets (including loans held for sale in Pelican Financial's
mortgage banking operations as well as loans held for investment) and interest
paid on interest-bearing liabilities; fee income from servicing mortgages held
by investors; and gains realized on sales of mortgage loans and mortgage
servicing rights. These revenues are in turn significantly affected by factors
such as changes in prevailing interest rates and in the yield curve (that is,
the difference between prevailing short-term and long-term interest rates), as
well as changes in the volume of mortgage originations nationwide and
prepayments of outstanding mortgages.
MANAGEMENT STRATEGY
Pelican Financial's strategy is primarily to take advantage of the
existing natural synergies that exist between a mortgage company and a community
based bank. The senior management of both Washtenaw and Pelican National is
strongly oriented toward mortgage based lending. Management believes that
Pelican National's offices are growing markets for mortgage loan products.
Pelican National's affiliation with a large mortgage company, such as Washtenaw,
enables Pelican National to offer a greater array of mortgage loan products than
similarly situated community banks. Washtenaw also provides a stable market for
the mortgage loans originated by Pelican National at predictable prices. This
enables Pelican National to determine the price at which a loan can be sold
prior to the closing of the loan. Use of Washtenaw's computer assisted
underwriting also provides Pelican National more uniform underwriting of its
mortgage loan products. Pelican National is able to provide same day approval
for its customers. Washtenaw is also able to provide mortgage investment
opportunities to Pelican National at yields not locally available and in
geographically diverse regions of the country, thus reducing the risk of a
concentrated loan portfolio. Lastly, Washtenaw enables Pelican National to
achieve economies of scale unavailable to many competing community banks.
At the same time, Washtenaw benefits from Pelican National as a
depository for escrow deposits in connection with its loan production and
servicing activities. To the extent Pelican National desires, Pelican National
may invest excess funds in mortgage loan products that Washtenaw has available.
Pelican National has purchased approximately $7.4 million of loans from
Washtenaw with a total weighted average interest rate of 8.41%. In addition,
certain aspects of the mortgage banking operations of Washtenaw are cash
intensive, such as investments in mortgage servicing rights and loan
originations other than mortgage lending. Pelican Financial believes that these
activities should be housed in Pelican
39
National. Pelican Financial is hopeful that as the synergies between Pelican
National and Washtenaw are realized more fully, Pelican National can act as a
warehouse for purchased commercial real estate loans.
Pelican Financial's current strategy focuses on maintaining
profitability while limiting its credit and interest rate risk exposure. To
accomplish these objectives, Pelican Financial has sought to:
- Control credit risk by emphasizing the origination and purchase of
single-family, owner- occupied residential mortgage loans.
- Control interest rate risk by selling a substantial portion of its
loan production and loan servicing into the secondary market.
- Control credit and interest rate risk by purchasing
mortgage-related assets to hold in its portfolio.
- Control operating expenses.
- Offer superior service, competitive interest rates, and a variety
of loan and deposit products.
In addition, management believes that additional retail branches
located in cities along the west coast of Florida would be very advantageous. In
May 1999, Pelican National signed a lease for a new branch in Fort Myers,
Florida. The new branch opened in October 1999.
Finally, management believes that communication over the internet is an
important current and future aspect of its wholesale mortgage banking business.
Since 1995, Washtenaw has used its proprietary computer network, WMCNET, to
communicate with approximately 1,593 of its mortgage brokers and correspondents.
WMCNET permits brokers to lock interest rates and provides computerized
underwriting and approval of individual loans. Management believes that it has
distinguished itself from other wholesale mortgage companies by providing a
rapid response to the broker community. Washtenaw is currently developing the
capability to provide retail loan services by use of the internet.
40
AVERAGE BALANCE SHEET. The following tables contain for the periods
indicated information regarding the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amount of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, and the net yield on interest-earning
assets.
Years Ended December 31,
-------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
Average Average
Volume Interest Yield/Cost Volume Interest Yield/Cost
---------- ---------- ----------- --------- --------- -------------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold........................... $ 3,438 $ 178 5.18% $ 9,685 $ 390 4.03%
Securities................................... 6,458 443 6.86 6,016 479 7.95
Loans receivable, net........................ 170,949 14,706 8.60 181,874 11,482 6.31
------- ------ ------- ------
Total interest-earning assets.............. 180,845 15,327 8.48 197,575 12,351 6.25
------ ---- ------ ----
Noninterest-earning assets:
Cash and due from banks.................... 1,628 5,943
Allowance for loan losses.................. (210) (106)
Other assets............................... 24,359 9,784
-------- --------
Total assets............................ $206,622 $213,196
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts................................. $ 781 18 2.30 $ 6,016 138 2.29
Money market accounts........................ 3,627 142 3.92 4,060 178 4.38
Savings deposits............................. 11,660 318 2.73 2,406 60 2.47
Time deposits................................ 27,084 1,472 5.43 9,548 558 5.85
Short-term borrowings........................ 103,182 7,777 7.54 170,413 7,897 4.63
------- ------ ------- ------
Total interest-bearing liabilities......... 146,334 9,727 6.65 192,443 8,831 4.59
------ ---- ------ ----
Noninterest-bearing liabilities:
Demand deposits.............................. 3,652 4,223
Other liabilities............................ 40,983 6,085
Stockholders' equity.......................... 15,653 10,445
-------- --------
Total liabilities and stockholders' equity... $206,622 $213,196
======== ========
Interest rate spread........................... 1.83% 1.66%
==== ====
Net interest income and net interest
margin....................................... $ 5,600 3.10% $ 3,520 1.78%
======= ==== ======= ====
Period from February 1, 1997 to
December 31, 1997
---------------------------------
Average
Volume Interest Yield/Cost*
-------- ---------- -------------
ASSETS
Interest-earning assets:
Federal funds sold........................... $ 2,057 $ 113 6.01%
Securities................................... 1,025 78 8.23
Loans receivable, net........................ 51,094 3,230 6.90
------ -----
Total interest-earning assets.............. 54,176 3,421 6.89
----- ----
Noninterest-earning assets:
Cash and due from banks.................... 486
Allowance for loan losses.................. (45)
Other assets............................... 3,945
-------
Total assets............................ $ 58,562
========
LIABILITIES AND STOCKHOLDERS EQUITY
Interest-bearing liabilities:
NOW accounts................................. $ 581 $ 29 4.99
Money market accounts........................ 264 11 4.17
Savings deposits............................. 4 1 2.16
Time deposits................................ 2,196 135 6.69
Short-term borrowings........................ 40,909 2,280 6.08
------ -----
Total interest-bearing liabilities......... 43,954 2,456 6.09
----- ----
Noninterest-bearing liabilities:
Demand deposits.............................. 932
Other liabilities............................ 8,429
Stockholders' equity.......................... 5,247
--------
Total liabilities and stockholders' equity... $ 58,562
========
Interest rate spread........................... 0.80%
====
Net interest income and net interest
margin....................................... $ 965 1.94%
====== ====
- ----------------
* Annualized.
41
RATE/VOLUME ANALYSIS. Changes in net interest income are attributable
to three factors:
1. a change in the volume of an interest-earning asset or
interest-bearing liability,
2. a change in interest rates, or
3. a change attributable to a combination of changes in volume
and rate.
The following table contains certain information regarding changes in
interest income and interest expense of Pelican Financial for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to:
A. changes in volume (changes in volume multiplied by the old
interest rate); and
B. changes in rates (changes in interest rates multiplied by the
old average volume).
Year Ended December 31, Year Ended December 31,
1999 vs. Year Ended 1998 vs. Eleven Months Ended
December 31, 1998 December 31, 1997
---------------------------------------------------------------------
Total Changes Due to Total Changes Due To
------------------------- -----------------------
Change Volume (1) Rates (1) Change Volume (1) Rates (1)
---------- ------------------------- -------- -----------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Federal funds sold........................ $(212) $ (301) $ 89 $ 277 $ 254 $ 23
Securities................................ (36) 34 (70) 401 398 3
Loans receivable, net..................... 3,224 (725) 3,949 8,047 7,742 305
----- ---- ----- ----- ----- ---
Total interest income.................. 2,976 (992) 3,968 8,725 8,394 331
----- ---- ----- ----- ----- ---
INTEREST-BEARING LIABILITIES:
NOW accounts.............................. (120) (121) 1 109 103 6
Money market accounts..................... (36) (18) (18) 167 166 1
Savings deposits.......................... 258 252 6 59 59 0
Time deposits............................. 914 956 (42) 423 408 15
Short term borrowings..................... (120) (3,870) 3,750 5,617 5,224 393
---- ------ ----- ----- ----- ---
Total interest expense................. 896 (2,801) 3,697 6,375 5,960 415
---- ------ ----- ----- ----- ---
Net change in interest income.................$2,080 1,809 271 $2,350 $2,434 $ (84)
====== ===== === ====== ====== ======
- ----------------
(1) Changes in interest income/expense not arising from volume or rate variances
are allocated proportionately to rate and volume.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
GENERAL. Pelican Financial's net income for the year ended December 3l,
1999 was $3.4 million or $1.08 per share, diluted, compared to $3.9 million or
$1.28 per share, diluted, for the year ended December, 31, 1998. The decrease of
$500,000 for the year ended December 31, 1999 was primarily the result of
decreases in noninterest income as well as increases in noninterest expense and
the provision for loan losses offset partially by increases in net interest
income and decreases in the provision for income taxes.
LOAN PRODUCTION The volume of loans produced for the year ended
December 31, 1999 totaled $2.3 billion, as compared to $2.4 billion for the year
ended December 31, 1998, or a decrease of $100 million, or approximately 4.2%.
The decrease in loan production was due to a decrease in loan production at
Washtenaw during the third and fourth quarters of 1999. Washtenaw's decrease in
loan production was not unique to Washtenaw but was a result of the rising
mortgage interest rates within the mortgage banking industry.
At December 31, 1999 and 1998, Pelican Financial's pipeline of loans in
process was $51.7 million and $144.5 million, respectively. Historically,
approximately 75% to 90% of the pipeline of loans in process have funded. For
the year ended December 31, 1999 Pelican Financial received 32,246 new loan
applications compared to 34,164 new loan applications received for the year
ended December 31,
42
1998. These new loan applications result in an average daily rate of
applications of $13.6 million and $14.2 million, respectively. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average length
of loan commitments issued, the creditworthiness of applicants, Pelican
Financial's loan processing efficiency, and loan pricing decisions.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the allowance for loan losses to a level deemed appropriate by
management. During the year ended December 31, 1999, the provision for loan
losses was $255,000 compared to $62,000 for the year ended December 31, 1998. As
of December 31, 1999, the allowance for loan losses was 0.54% of total gross
loans at the end of the period. For more information on the allowance for loan
losses, see "Business-Asset Quality."
NET INTEREST INCOME. Net interest income (interest earned net of
interest charges) totaled $5.6 million for the year ended December 31, 1999, as
compared to $3.5 million for the year ended December 31, 1998, or an increase of
$2.1 million or approximately 60%. The change was primarily due to rates on
interest-earning assets increasing more than rates on interest-bearing
liabilities and a larger deployment of interest-earning assets into loans, which
are higher yielding. The interest rate spread increased from 1.66% at December
31, 1998 to 1.83% at December 31, 1999.
LOAN SERVICING. At December 31, 1999, Pelican Financial serviced $1.1
billion of loans compared to $1.7 billion at December 31, 1998, a decrease of
35.3%. At December 31, 1999 and 1998, with the exception of servicing related to
loans held for sale in Pelican Financial's loan portfolio and servicing sold but
not yet delivered, all loan servicing was servicing for others. See "Business -
Mortgage Loan Servicing Activities." The decrease in Pelican Financial's
servicing portfolio during the year ended December 31, 1999 was the result of
loan originations decreasing industry wide thus causing Washtenaw's mortgage
servicing portfolio to decrease. The weighted-average interest rate of mortgage
loans in Pelican Financial's servicing portfolio at December 31, 1999 was 7.33%
compared to 7.04% at December 31, 1998. The increase in the weighted average
interest rate of mortgage loans in Pelican Financial's servicing portfolio is
primarily the result of portfolio turnover during an industry-wide increasing
interest rate environment.
During the year ended December 31, 1999, the prepayment rate of Pelican
Financial's servicing portfolio was 10.41%, compared to 32.20% for the year
ended December 31, 1998. In general, the prepayment rate is affected by the
level of refinance activity, which in turn is driven by the relative level of
mortgage interest rates, and activity in the home purchase market. The
prepayment on Pelican Financial's servicing portfolio remains relatively low
because Pelican Financial typically sells servicing for loans that are more than
one year old. Generally, the rate at which loans less than one year old prepay
is lower than more mature loans.
Pelican Financial recorded amortization and net impairment of its
mortgage servicing rights for the year ended December 31, 1999 of $2.2 million
(consisting of amortization amounting to $2.8 million and a reduction of
impairment of $600,000), compared to $2.7 million (consisting of amortization
amounting to $1.8 million and impairment of $914,000) for the year ended
December 31, 1998. The factors affecting the amount of amortization and
impairment of mortgage servicing rights recorded in an accounting period include
the loan type (conventional fixed or adjustable rate), the term (15, 20, or 30
year or balloon), the date of loan acquisition, the cost of servicing the loans
based on the industry, and the actual and assumed prepayment and interest rates.
For further information related to the amortization and impairment of mortgage
servicing rights, see Note 1 to Pelican Financial's Notes to Consolidated
Financial Statements under the subheading "Mortgage Servicing Rights, Net."
COMPENSATION AND EMPLOYEE BENEFITS EXPENSE. Compensation and benefits
totaled $12.8 million for the year ended December 31, 1999 compared to $11.1
million for the year ended December
43
31, 1998, or an increase of approximately $1.7 million or 15.3%. The increase
during 1999 was primarily the result of an increase in the full time equivalent
employees from 187 at December 31, 1998 to 221 at June 30, 1999 and decreasing
to 182 at December 31, 1999 as mortgage loan originations decreased industry
wide in the second half of 1999. The increase was also attributable to ordinary
and customary increases in salary), and benefits. During the fourth quarter of
1999 Washtenaw reduced its workforce to respond to the industry-wide decrease in
mortgage loan originations in the latter portion of 1999.
OCCUPANCY AND EQUIPMENT EXPENSE. Occupancy and equipment expense
totaled $1.5 million for the year ended December 31, 1999 compared to $1.1
million for the year ended December 31, 1998, or an increase of $400,000 or
36.4%. The increase during 1999 was primarily the result of an increase in
office space and equipment by Washtenaw to accommodate the increase in employees
during the first half of the year and the increase in equipment expense at
Pelican National during the fourth quarter when its Fort Myers branch opened.
OTHER NONINTEREST EXPENSE. Other noninterest expenses totaled $5.0
million for the year ended December 31, 1999 compared to $4.3 million for the
year ended December 31, 1998, or an increase of $700,000 or 16.3%. Other
noninterest expense consists primarily of office and computer supplies, express
mail expenses, and servicing foreclosure expenses. The increase during 1999 was
primarily attributable to the expanded operations and staffing levels of
Washtenaw during the first half of the year caused by the increase in loan
production, and to the opening of the California branch at the end of the second
quarter of 1999.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the year ended
December 31, 1999, Pelican Financial's pre-tax earnings from the mortgage
banking activities were $4.7 million compared to $6.5 million for the year ended
December 31, 1998. The decrease of $1.8 million or 27.7% was primarily due to
the decrease in mortgage loan originations industry wide during the latter half
of the year. Due to a rising mortgage interest rate environment, revenues from
loan originations of the mortgage banking activities, including Washtenaw, have
decreased in the latter half of the year.
Gains on sales of loans and mortgage servicing rights for the year
ended December 31, 1999 totaled $16.1 million. For the year ended December 31,
1998, gain on sale of loans and mortgage servicing rights was $17.0 million. The
$900,000 decrease represents a 5.3% decrease between periods. The overall cost
of purchasing servicing rights increased during the third and fourth quarters of
1999 as the industry volume of new loan originations decreased. The variability
of mortgage interest rates in the latter half of 1999, contributed to higher
fallout rates of the mortgage pipeline. 23.2% of the loans given rate locks and
hedged by Washtenaw for the year ended December 31, 1999 were not ultimately
funded, compared to 24.8% for the year ended December 31, 1998, a decrease of
1.6%. Additionally, Washtenaw made concessions on pricing to the new California
branch in order to attract new accounts that were previously unfamiliar with
Washtenaw.
Gain on sale of mortgage loans servicing rights totaled $3.1 million
for the year ended December 31, 1999, compared to $412,000 for the year ended
December 31, 1998. The gain on sale of mortgage servicing rights related to
servicing of loans with an aggregate principal balance of approximately $2.2
billion for the year ended December 31, 1999 and $769.5 million for the year
ended December 31, 1998. For the year ended December 31, 1999 Washtenaw sold
servicing rights on current production with the loans in a concurrent transfer.
The gain on sale of mortgage servicing rights for the year ended December 31,
1998 related to a bulk sale of servicing.
Gain on loans sold for the year ended December 31, 1999 was $13.0
million. The gains resulted from the sale of approximately $2.4 billion of
mortgage loans. Gains on loans, including concurrent sales of mortgage servicing
rights for the year ended December 31, 1998, were $17.6 million. The gains
resulted from the sale of approximately $2.3 billion of mortgage loans.
44
Interest revenue for the year ended December 31, 1999, was $10.3
million. For the year ended December 31, 1998 interest revenue was $10.5
million. The decrease of $200,000 is attributable to a decrease in loan
inventory, which was primarily due to the industry-wide decrease in loan
originations during the latter half of 1999.
Income from servicing operations totaled $3.7 million for the year
ended December 31, 1999. For the year ended December 31, 1998, servicing income
was $2.9 million. The $800,000 increase was primarily attributable to increased
servicing activity during the first half of 1999.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the year ended December
31, 1999, Pelican Financial's pre-tax earnings from retail banking activities
primarily conducted by Pelican National totaled $892,000. For the year ended
December 31, 1998 Pelican National's pre-tax loss was $370,000. The decrease in
the pre-tax loss of $1.3 million or 341% was primarily attributable to an
increase in net interest income of $2.0 million from $1.1 million for the year
ended December 31, 1998 to $3.1 million for the year ended December 31, 1999.
This increase was the result of the growth of the bank's assets and to rates on
interest-earning assets increasing more than rates on interest-bearing
liabilities and a larger deployment of interest-earning assets into loans which
are higher yielding.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
ELEVEN MONTH PERIOD ENDED DECEMBER 31, 1997
GENERAL. The operating results and financial condition of Pelican
Financial as of and for the year ended December 31, 1998 primarily reflect the
operating results and financial condition of Washtenaw. Pelican National was
formed in August 1997, therefore, the year ended December 31, 1998 constitutes
Pelican National's first full year of operations. Net income for the year ended
December 31, 1998 totaled $3.9 million compared to a net loss of $138,000
($150,000 annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $4.0 million or 2,700%. This
increase was primarily due to a smaller loss from operations of Pelican National
and a substantial increase in loan production for Washtenaw.
LOAN PRODUCTION. The volume of loans produced for the year ended
December 31, 1998 totaled $2.4 billion, as compared to $733.1 million ($799.7
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $1.6 billion or approximately
200%. The increase in loan production was primarily due to generally lower
interest rates that prevailed during 1998 compared to 1997, as well as to the
continuing expansion of the markets Pelican Financial serves and the types of
loan products Pelican Financial offers. Refinancings totaled $1.9 billion, or
79.17% of total loan production, for the year ended December 31, 1998, as
compared to $476.5 million, or 65.00% of total loan production for the eleven
months ended December 31, 1997 ($519.8 million on an annualized basis).
Fixed-rate mortgage loan production totaled $2.2 billion, or 91.67% of total
loan production, for the year ended December 31, 1998, as compared to $561.1
million, or 76.58% of total loan production for the eleven months ended December
31, 1997 ($612.1 million on an annualized basis).
At December 31, 1998 and 1997, Pelican Financial's pipeline of loans in
process was $144.0 million and $57.7 million, respectively. Historically,
approximately 75% to 90% of the pipeline of loans in process has funded. For the
year ended December 31, 1998, Pelican Financial received 34,164 new loan
applications compared to 12,090 new loan application received for the eleven
months ended December 31, 1997 (13,189 new loan applications on an annualized
basis). These new loan applications result in an average daily rate of
applications of $14.2 million and $4.8 million, respectively. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average length
of loan commitments issued, the creditworthiness of applicants, Pelican
Financial's loan processing efficiency, and loan pricing decisions.
45
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to bring the allowance for loan losses to a level deemed appropriate by
management. During the year ended December 31, 1998, the provision for loan
losses was $62,000 compared to $65,000 for the eleven months ended December 31,
1997. As of December 31, 1998, the allowance for loan losses was 0.06% of total
loans. For more information on the allowance for loan losses, see "Business -
Asset Quality."
NET INTEREST INCOME. Net interest income (interest earned net of
interest charges) totaled $3.5 million for the year ended December 31, 1998, as
compared to $965,000 ($1.1 million annualized) for the eleven months ended
December 31, 1997, or an increase on an annualized basis of approximately $2.3
million or approximately 230%. The increase in net interest income from the
mortgage loans warehoused was primarily attributed to higher loan production
levels resulting from expanding the markets in which Pelican Financial conducts
operations as well as the addition of new products. The increase in interest
expense on the investment in servicing rights resulted primarily from increase
in the volume of loan production. The increase in net interest income earned
from the custodial balances was related to an increase in the average balance of
custodial balances due to the increase in the average balance of the loan
servicing portfolio.
LOAN SERVICING. At December 31, 1998, Pelican Financial serviced $1.7
billion of loans compared to $824.6 million at December 31, 1997, a 106%
increase. At December 31, 1998 and 1997, with the exception of servicing related
to loans held for sale in Pelican Financial's loan portfolio and servicing sold
but not yet delivered, all loan servicing was servicing for others. See
"Business - Mortgage Loan Servicing Activities." The increase in Pelican
Financial's servicing portfolio during the year ended December 31, 1998 was the
result of a substantial increase in loan production volume, partially offset by
prepayments, partial prepayments, and scheduled amortization of mortgage loans
and the sale of mortgage servicing rights. The weighted average interest rate of
the mortgage loans in Pelican Financial's servicing portfolio at December 31,
1998 was 7.04% compared to 7.59% at December 31, 1997. The decrease in the
weighted average interest rate of mortgage loans in Pelican Financial's
servicing portfolio is primarily the result of portfolio turnover.
During the year ended December 31, 1998, the prepayment rate of Pelican
Financial's servicing portfolio was 32.20%, compared to 12.63% for the eleven
months ended December 31, 1997 (13.78% on an annualized basis). In general, the
prepayment rate is affected by the level of refinance activity, which in turn is
driven by the relative level of mortgage interest rates, and activity in the
home purchase market. The prepayment rate on Pelican Financial's servicing
portfolio remains relatively low because Pelican Financial typically sells
servicing for loans that are more than one year old. Generally, the rate at
which loans that are less than one year old prepay is lower than more mature
loans.
Pelican Financial recorded amortization and net impairment of its
mortgage servicing rights for the year ended December 31, 1998 of $2.7 million
(consisting of amortization amounting to $1.8 million and impairment of
$914,000), compared to $936,000 of amortization and impairment (consisting of
amortization amounting to $1.0 million and a reduction of impairment of $78,000)
for the eleven months ended December 31, 1997. The factors affecting the amount
of amortization and impairment of mortgage servicing rights recorded in an
accounting period include the loan type (conventional fixed or adjustable rate),
the term (15, 20, or 30 year or balloon), the date of loan acquisition, the cost
of servicing the loans based on the industry, and the actual and assumed
prepayment and interest rates. For further information related to the
amortization and impairment of mortgage servicing rights, see Note 1 to Pelican
Financial's Notes to Consolidated Financial Statements under the subheading
"Mortgage Servicing Rights, Net."
COMPENSATION AND EMPLOYEE BENEFITS EXPENSE. Compensation and benefits
totaled $10.6 million for the year ended December 31, 1998 compared to $4.6
million ($5.0 million annualized) for the eleven months ended December 31, 1997,
or an increase on an annualized basis of approximately $5.6 million or 112%. The
increase during 1998 was primarily the result of an increase in the number of
full time equivalent employees from 130 at December 31, 1997 to 187 at
December 31, 1998 and ordinary
46
and customary increases in salary and benefits. The increase in employees is
primarily attributable to the opening of Pelican National and the increase of
employees at Washtenaw to staff its strategy to geographically diversify its
operations and offer a wider range of mortgage products.
OCCUPANCY AND EQUIPMENT EXPENSE. Occupancy and equipment totaled $1.9
million for the year ended December 31, 1998 compared to $1.4 million ($1.5
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $400,000 or 26.70%. The
increase during 1998 was primarily the result of Pelican National occupying its
office for an entire year and an increase in office space and equipment by
Washtenaw to accommodate the increase in employees.
OTHER NONINTEREST EXPENSE. Other noninterest expenses totaled $3.3
million for the year ended December 31, 1998 compared to $1.5 million ($1.6
million annualized) for the eleven months ended December 31, 1997, or an
increase on an annualized basis of approximately $1.7 million or 106%. Other
noninterest expense primarily consists of office and computer supplies, express
mail expenses, and servicing foreclosure expenses. The increase during 1998 was
primarily the result of Pelican National being opened for the entire fiscal 1998
and the expanded operations of Washtenaw.
PROFITABILITY OF MORTGAGE BANKING ACTIVITIES. For the year ended
December 31, 1998, Pelican Financial's pre-tax earnings from the mortgage
banking activities were $6.7 million. For the eleven months ended December 31,
1997, Pelican Financial's comparable pre-tax earnings were $635,000 ($693,000 on
an annualized basis). The annualized increase of $6.0 million or 866% primarily
is attributable to increased loan production as a result of expanding Pelican
Financial's operations into new markets and new product lines offered by Pelican
Financial. The primary sources of increased pre-tax revenue was gain on sale of
loans and mortgage servicing rights, servicing income, interest income and
miscellaneous other income.
For the year ended December 31, 1998, the gain on sale of loans and
mortgage servicing rights totaled $18.1 million. For the eleven months ended
December 31, 1997, gain on sale of loans and mortgage servicing rights was $5.4
million ($5.9 million annualized). The annualized $12.2 million increase
represents a 207% increase between periods. When Pelican Financial sells loans
with servicing retained, the mortgage servicing rights are either retained by
Pelican Financial to service or the servicing rights are sold to a national
servicer concurrently with the sale of the loans. Mortgage servicing rights
retained by Pelican Financial to service are generally accumulated and then sold
in bulk on a quarterly basis. Gains on the sale of mortgage loans servicing sold
in bulk totaled $412,000 for the year ended December 31, 1998. The mortgage
servicing rights sold in bulk related to servicing of loans with an aggregate
principal balance of approximately $769.5 million. Gains on the sale of mortgage
loans servicing sold in bulk totaled $1.0 million for the eleven months ended
December 31, 1997. The mortgage servicing rights sold in bulk related to
servicing of loans with an aggregate principal balance of approximately $142.8
million. The decrease in the gains on sales of mortgage servicing rights was
$612,000 or 59.7%. In the declining interest rate environment that existed in
1998, Pelican Financial sold servicing related to more seasoned loans that it
had held in its mortgage loan servicing portfolio in order to reduce the risks
associated with prepayment.
Gains on the sale of mortgage servicing rights sold concurrently with
the sale of the underlying loans are included with gains on the loans sold,
because the mortgage servicing rights are sold in the same month the underlying
loans are sold. Gains on loans sold, including concurrent sales of mortgage
servicing rights, totaled $17.6 million for the year ended December 31, 1998.
The gains resulted from the sale of approximately $2.3 billion of mortgage
loans. Gains on loans sold, including concurrent sales of mortgage servicing
rights, totaled $4.4 million for the eleven months ended December 31, 1997. The
gains resulted from the sale of approximately $674.6 million of mortgage loans
sold. The increase in
47
gains on loans sold of $13.2 million or 301% is primarily attributable to
increased loan production as well as improved prices for new mortgage servicing
rights sold.
Interest revenue for the year ended December 31, 1998, was $12.1
million. For the eleven months ended December 31, 1997 interest revenue was $3.4
million (annualized $3.7 million). The annualized increase of $8.7 million or
256% is attributable to increased loan inventory.
Income from servicing operations totaled $2.8 million for the year
ended December 31, 1998. For the eleven months ended December 31, 1997,
servicing income was $1.8 million ($1.9 million annualized). The $900,000 or 47%
increase is derived from increased servicing activity.
PROFITABILITY OF RETAIL BANKING ACTIVITIES. For the year ended December
31, 1998, Pelican Financial's pre-tax loss from retail banking activities
primarily conducted by Pelican National was $370,000. For the period from
inception until December 31, 1997, Pelican Financial's comparable pre-tax loss
was $743,000 ($2.1 million on an annualized basis). The annualized decrease in
loss of $1.7 million or 81% was primarily attributable to the decrease in the
organization and pre-opening costs of Pelican National, a majority of which were
expensed as incurred in fiscal 1997, and an increase in net interest income to
$918,000 for the year ended December 31, 1998 compared to $195,000 for the
eleven months ended December 31, 1997 resulting from growth in Pelican
National's interest-earning assets in excess of its interest-bearing
liabilities. This improvement is also partially attributable to the Board of
Directors of Pelican National replacing prior bank management with Michael D.
Surgen, the current President and Chief Executive Officer of Pelican National,
and the changes he has implemented. Within three months of Mr. Surgen's
appointment, Pelican National became profitable on a monthly basis. Pelican
National's pre-tax loss through August 31, 1998 was $570,000, which decreased to
a pre-tax loss $370,000 by December 31, 1998. At or for the year ended December
31, 1998, Pelican National had noninterest expenses of $1.9 million, deposits of
$35.1 million, and the provision for loan losses totaled $62,000 compared to
noninterest expenses of $943,000, deposits of $17.6 million, and the provision
for loan losses totaled $66,000 at or for the period from inception through
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund
operations on a timely and cost-effective basis. Pelican Financial conducts no
business other the business conducted through Pelican National and Washtenaw.
Pelican Financial's primary source of funds is dividends paid by Washtenaw and
Pelican National. In July 1997, Pelican Financial established a term loan in the
amount of $2.0 million, the proceeds of which were contributed to the capital of
Pelican National. The term loan is payable on demand and the interest rate is
the weighted average Federal Funds Rate plus 2.75%, which resulted in an
effective rate of 7.8% at December 31, 1999 and 8.3% at December 31, 1998. As of
December 31, 1999, the only dividends received by Pelican Financial have been to
make payments pursuant to the term loan. Dividends paid to Pelican Financial by
Washtenaw are also limited by the terms of Washtenaw's warehouse line of credit
discussed below.
Washtenaw's sources of cash flow include cash from gains on sale of
mortgage loans and servicing, net interest income, servicing fees, and
borrowings. Washtenaw sells its mortgage loans generally on a monthly basis to
generate cash for operations. Washtenaw's uses of cash in the short-term include
the funding of mortgage loan purchases and originations and purchases of
mortgage servicing rights, payment of interest, repayment of amounts borrowed
pursuant to warehouse lines of credit, operating and administrative expenses,
income taxes and capital expenditures. Long-term uses of cash may also include
the funding of securitization activities or portfolios of loan or servicing
assets.
Washtenaw funds its business through the use of a warehouse line of
credit and the use of agreements to repurchase. The warehouse line of credit has
of limit of $100.0 million, of which $15.0
48
million represents a working capital sublimit. Borrowing pursuant to the
warehouse line of credit totaled $23.3 million at December 31, 1999 and $55.0
million at December 31, 1998. The interest rate on the warehouse line of credit
is the Federal Funds Rate plus 1.50% resulting in an effective rate of 6.25% at
December 31, 1999 and 6.52% at December 31, 1998. The interest rate on the
working capital portion of the line of credit is the Federal Funds Rate plus
2.25%. The warehouse line of credit is payable on demand. The terms of the
warehouse line of credit impose certain limitations on the operations of
Washtenaw. Pursuant to the warehouse line of credit, Washtenaw must maintain a
minimum servicing portfolio of $500.0 million, a minimum net worth of $7.5
million calculated in accordance with generally accepted accounting principles,
and a minimum adjusted tangible net worth of $10.0 million. Washtenaw must also
maintain a ratio of total indebtedness to adjusted tangible net worth of less
than twelve to one and maintain a ratio of adjusted total indebtedness to
adjusted tangible net worth of less than one to one. For purposes of the
warehouse line of credit, adjusted tangible net worth is defined as the excess
of total assets over total liabilities, with certain additions and subtractions
as specified in the warehouse line of credit.
Washtenaw also enters into sales of mortgage loans pursuant to
agreements to repurchase. These agreements typically have terms of less than 90
days and are treated as a source of financing. The weighted average interest
rate on these agreements to repurchase was 5.7% at December 31, 1999 and 6.3% at
December 31, 1998.
Pelican Financial's ability to continue to purchase loans and mortgage
servicing rights and to originate new loans is dependent in large part upon its
ability to sell the mortgage loans at par or for a premium or to sell the
mortgage servicing rights in the secondary market in order to generate cash
proceeds to repay borrowings pursuant to the warehouse facility, thereby
creating borrowing capacity to fund new purchases and originations. The value of
and market for Pelican Financial's loans and mortgage servicing rights are
dependent upon a number of factors, including the borrower credit risk
classification, loan-to-value ratios and interest rates, general economic
conditions, warehouse facility interest rates, and governmental regulations.
During the years ended December 31, 1999 and 1998, and the eleven months ended
December 31, 1997, Pelican Financial used cash of $2.3 billion, $2.5 billion,
and $726.4 million, respectively, for the purchase of mortgage loans and
mortgage servicing rights and the origination of mortgage loans. During the same
periods, Pelican Financial received cash proceeds from the sale of loans and
mortgage servicing rights of $2.4 billion and $2.5 billion, and $670.4 million,
respectively. Pelican Financial received cash proceeds from the premiums on the
sale of loans of $16.9 million, $18.1 million, and $5.4 million, respectively,
for the years ended December 31, 1999 and 1998, and the eleven months ended
December 31, 1997, respectively. A significant amount of Pelican Financial's
loan production in any month is funded during the last several business days of
that month.
Pelican Financial generally grants commitments to fund mortgage loans
for up to 30 days at a specified term and interest rate. The commitments are
commonly known as rate-lock commitments. At December 31, 1999, Pelican Financial
had outstanding rate-lock commitments to lend $44.0 million for mortgage loans,
along with outstanding commitments to make other types of loans totaling $3.9
million. Because these commitments may expire without being drawn upon, they do
not necessarily represent future cash commitments. Also, as of December 31,
1999, Pelican Financial had outstanding commitments to sell $56.3 million of
mortgage loans. These commitments will be funded within 90 days.
At December 31, 1999, Pelican National exceeded all applicable
regulatory minimum capital requirements as well as the requirement to be
considered "well capitalized" for regulatory purposes. Pelican Financial also
exceeded its regulatory minimum capital requirements at December 31, 1999. For a
detailed discussion of the regulatory capital requirements to which Pelican
Financial and Pelican National are subject, and for a tabular presentation of
compliance with these requirements, see "Regulation - Pelican Financial,"
"Regulation - Pelican National - Capital Requirements," and Note 13 of Notes to
Consolidated Financial Statements.
49
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. Management of Pelican
Financial has not yet determined whether the adoption of SFAS No. 133 will have
a material impact on its results of operations or financial position when
adopted, however, the effect will depend on derivative holdings at the time the
standard is applied.
In October 1998, FASB issued SFAS No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. SFAS No. 134 amends SFAS No. 65,
ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES, which establishes accounting
and reporting standards for certain activities of mortgage banking enterprises
and other enterprises that conduct operations that are substantially similar.
SFAS No. 134 requires that after the securitization of mortgage loans held for
sale, the resulting mortgage-backed securities and other retained interests
should be classified in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, based on Pelican Financial's ability
and intent to sell or hold those investments. SFAS No. 134 is effective for the
first fiscal quarter beginning after December 15, 1998. The statement did not
have a material impact on Pelican Financial's results of operations or financial
position when adopted.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented in
this Annual Report and Form 10-K have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of
Pelican Financial's operations. Unlike most industrial companies, nearly all the
assets and liabilities of Pelican Financial are monetary in nature. As a result,
interest rates have a greater impact on Pelican Financial's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE INFORMATION ABOUT MARKET RISK. The principal objective of
Pelican Financial's interest rate risk management is to evaluate the interest
rate risk included in balance sheet accounts, determine the level of risk
appropriate given Pelican Financial's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with Pelican Financial's Interest Rate Risk Management Policy.
Through this management, Pelican Financial seeks to reduce the vulnerability of
its operations to changes in interest rates. The Board of Directors of Pelican
Financial is responsible for reviewing asset/liability policies and interest
rate risk position. The Board of Directors reviews the interest rate risk
position on a quarterly basis. In connection with this review, the Board of
Directors evaluates Pelican Financial's business activities and strategies, the
effect of those strategies on Pelican Financial's net interest margin, the
market value of the loan, servicing, and securities portfolios, and the effect
the changes in interest rates will have on Pelican Financial's loan, servicing,
and securities portfolios and exposure limits.
50
The continuous movement of interest rates is certain, however, the
extent and timing of these movements is not always predictable. Any movements in
interest rates has an effect of Pelican Financial's profitability. The value of
loans, which Pelican Financial has either originated or purchased or committed
to originate or purchase, decreases as interest rates rise and conversely, the
value increases as interest rates fall. The value of mortgage servicing rights
tends to move inversely to the value of loans, increasing in value as interest
rates rise and decreasing in value as interest rates fall. Pelican Financial
also faces the risk that rising interest rates could cause the cost of
interest-bearing liabilities, such as loans and borrowings, to rise faster than
the yield on interest-earning assets, such as loans and investments. Pelican
Financial's interest rate spread and interest rate margin may be negatively
impacted in a declining interest rate environment even though Pelican Financial
generally borrows at short-term interest rates and lends at longer-term interest
rates. This is because loans and other interest-earning assets may be prepaid
and replaced with lower yielding assets before the supporting interest-bearing
liabilities reprice downward. Pelican Financial's interest rate margin may also
be negatively impacted in a flat- or inverse-yield curve environment. Mortgage
origination activity tends to increase when interest rates trend lower and
decrease when interest rates rise. In turn, this effects the prepayment speed of
loans underlying Pelican Financial's mortgage servicing rights.
Because it is unlikely that any particular movement in interest rates
could affect only one aspect of Pelican Financial's business, many of Pelican
Financial's products are naturally self-hedging to each other. For instance, the
decrease in the value of Pelican Financial's mortgage servicing portfolio
associated with a decline in interest rates usually will not occur without some
degree of increase in new mortgage loan production, which may offset the
decrease in the value of the mortgage servicing portfolio.
Pelican Financial's primary strategy to control interest rate risk is
to sell substantially all loan production into the secondary market. This loan
production is typically sold servicing retained. To further control interest
rate risk related to its loan servicing portfolio, Pelican Financial typically
sells the servicing for most of its loans within one year of the origination of
the underlying loan. The turnover in the loan servicing portfolio assists
Pelican Financial in maintaining a constant value of the servicing portfolio by
holding servicing on loans that are least likely to be refinanced in the short
term. Pelican Financial further attempts to mitigate the effects of changes in
interest rates through the use of forward sales of anticipated loan closings and
diligent asset and liability management.
QUANTITATIVE INFORMATION ABOUT MARKET RISK. The primary market risk
facing Pelican Financial is interest rate risk. From an enterprise perspective,
Pelican Financial manages this risk by striving to balance its loan origination
and loan servicing businesses, which are counter cyclical in nature. In
addition, Pelican Financial utilizes various hedging techniques to manage the
interest rate risk related specifically to its committed pipeline loans,
mortgage loan inventory, and mortgage servicing rights. Pelican Financial
primarily utilizes forward sales of mortgage-backed securities and purchases of
mortgage-backed securities put options. These instruments most closely track the
performance of Pelican Financial's committed pipeline of loans because the loans
themselves can be delivered directly into these contracts. Pelican Financial may
also use other hedging techniques, including the use of forward U.S. treasury
notes and bond sales and purchases (long/short OTC cash forward contracts); U.S.
treasury futures contracts (long/short CBOT futures); U.S. treasury futures
options contracts (long/short CBOT futures options); private mortgage conduit
mandatory forward sales (mandatory rate locks); and private mortgage conduit
best-effort rate locks (best-effort rate locks).
The overall objective of Pelican Financial's interest rate risk
management policies is to offset changes in the values of these items resulting
from changes in interest rates. Pelican Financial does not speculate on the
direction of interest rates in its management of interest rate risk.
The matching of maturity or repricing of interest-earning assets and
interest-bearing liabilities may be analyzed by examining the extent to which
these assets and liabilities are interest rate sensitive and by monitoring
Pelican Financial's interest rate sensitivity gap. An interest-earning asset or
interest-
51
bearing liability is interest rate sensitive within a specific time period if it
will mature or reprice within that time period. The difference between
rate-sensitive assets and rate-sensitive liabilities represents Pelican
Financial's interest sensitivity gap.
The following table contains the amounts of interest-earning assets and
interest-bearing liabilities outstanding on December 31, 1999, which are
expected to reprice or mature in each of the future periods shown. The amounts
of assets or liabilities shown which reprice or mature during a particular
period may differ from contractual terms due to repayment assumptions.
At December 31, 1999
-----------------------------------------------------------------------
Over 1
3 months year
Less than through through Over
3 Months 12 Months 5 Years 5 Years Total
------------- ------------- ------------- -------------- ---------
(Dollars in thousands)
Interest-earning assets:
Short-term investments (1)....... $ 771 $ 97 $ 0 $ 0 $ 868
Securities (2)................... 0 0 3,820 2,737 6,557
Loans............................ 70,879 13,849 21,784 22,980 129,492
-- -------- --------- --------- -------- --------
Total interest-earning assets.. 71,650 13,946 25,604 25,717 136,917
Interest-bearing liabilities:
Savings deposits................. 13,685 0 0 0 13,685
Certificates of deposit.......... 6,381 20,910 17,422 0 44,713
Borrowings (3)................... 59,275 0 5,000 3,000 67,275
-- -------- --------- --------- -------- --------
Total interest bearing liabilities 79,341 20,910 22,422 3,000 $125,673
-- -------- --------- --------- -------- ========
Interest rate sensitivity gap....... $ (7,691) $ (6,964) $ 3,182 $ 22,717
======== ========= ========= ========
Cumulative gap...................... $ (7,691) $ (14,655) $ (11,473) $ 11,244
Cumulative gap to interest-earning
assets........................... (11)% (105)% (45)% 44%
Ratio of interest-earning assets to
interest bearing liabilities..... 90% 67% 114% 857%
- --------------
(1) Includes federal funds sold.
(2) Securities are stated at amortized cost.
(3) Includes federal funds purchased and other short-term borrowings.
As shown above, at December 31, 1999, Pelican Financial had a negative
gap position based on contractual maturities and repayment assumptions for the
next twelve months. This means that Pelican Financial's interest-earning assets
reprice more slowly than its interest-bearing liabilities. In a declining
interest rate environment, the cost of Pelican Financial's interest-bearing
liabilities may be expected to decrease faster than amounts received on
interest-earning assets, thus increasing Pelican Financial's interest rate
spread. In an increasing interest rate environment, the negative gap means that
the amounts received on interest-earning assets may be expected to increase more
slowly than amounts paid on Pelican Financial's interest-bearing liabilities,
thus decreasing Pelican Financial's interest rate spread.
Certain shortcomings are inherent in the method of analysis presented
in the table above. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates.
The above analysis incorporates the following assumptions:
1. federal funds are considered to reprice within 90 days;
2. savings deposits are considered to have a repricing period of less
than 90 days;
3. certificates of deposit reprice according to their stated maturity;
52
4. short-term borrowings are considered to mature within 90 days except
where contractually different; and
5. loans held for sale, consisting primarily of loans held by
Washtenaw, are shown in the period in which they are expected to be sold and all
other loans, consisting primarily of loans held at Pelican National are shown in
the period in which they contractually reprice or mature.
The interest rate sensitivity of Pelican Financial's assets and
liabilities could vary substantially if different assumptions were used or if
actual experience differs from the assumptions used.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report of Crowe Chizek & Company LLP.............................................54
Independent Auditors' Report of Deloitte & Touche LLP..................................................55
Consolidated Balance Sheets at December 31, 1999 and 1998..............................................56
Consolidated Statements of Income for the Years Ended December 31, 1999 and 1998,
and the Eleven Months Ended December 31, 1997........................................................57
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
1999 and 1998, and the Eleven Months Ended December 31, 1997........................................58
Consolidated Statement of Shareholders' Equity for the Years Ended December 31,
1999 and 1998, and the Eleven Months Ended December 31, 1997.........................................59
Consolidated Statement of Cash Flows for the Years Ended December 31, 1999 and
1998, and the Eleven Months Ended December 31, 1997..................................................60
Notes to Consolidated Financial Statements.......................................................61 to 80
53
[LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pelican Financial, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of Pelican
Financial, Inc. (The "Company'), as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of the Company for the year
ended December 31, 1997 were audited by other auditors whose report dated March
20, 1998 expressed an unqualified opinion on those statements.
We conducted our audits of the consolidated financial statements in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1999 and 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1999,
in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
----------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 10, 2000
54
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Pelican Financial, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated statement of
income, stockholders' equity, and cash flows of Pelican Financial, Inc. and
subsidiaries (the "Company") for the eleven months ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the results of the Company's operations and
cash flows for the eleven months ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 20, 1998
(April 29, 1999 as to Notes 2, 15, 21, 22)
55
PELICAN FINANCIAL, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
1999 1998
----------------- -------------------
ASSETS
Cash and cash equivalents $ 1,883,472 $ 10,180,034
Accounts receivable, net 2,289,682 7,087,170
Securities available for sale 5,877,013 5,591,983
Federal Reserve & Federal Home Loan Bank Stock 680,000 260,600
Loans held for sale 60,535,699 179,454,160
Loans receivable, net 68,582,378 23,873,670
Mortgage servicing rights, net 11,028,468 15,509,678
Mortgage loans in foreclosure and other real estate 539,869 581,385
Premises and equipment, net 863,815 884,443
Federal income taxes receivable 265,545 1,392,624
Other assets 3,307,011 1,593,519
----------------- -------------------
$ 155,852,952 $ 246,409,266
================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 3,911,558 $ 3,280,064
Interest-bearing 58,398,604 31,784,014
----------------- -------------------
Total deposits 62,310,162 35,064,078
Due to bank 12,095,538 38,259,829
Notes payable 25,333,610 57,025,504
Repurchase agreements 21,844,801 95,984,844
Federal Home Loan Bank borrowings 8,000,000 -
Other liabilities 5,277,485 6,474,997
Subordinated note payable - 1,200,000
----------------- -------------------
Total liabilities 134,861,596 234,009,252
Commitments and contingencies
Shareholders' equity
Preferred stock, 200,000 shares authorized; none outstanding
Common stock, 10,000,000 shares authorized; 3,992,836 and
3,032,836 outstanding at December 31, 1999 and 1998 39,928 60,656
Additional paid in capital 13,631,156 8,261,328
Retained earnings 7,504,631 4,076,162
Accumulated other comprehensive income (loss), net of tax (184,359) 1,868
----------------- -------------------
Total shareholders' equity 20,991,356 12,400,014
----------------- -------------------
$ 155,852,952 $ 246,409,266
================= ===================
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
56
PELICAN FINANCIAL, INC.
Consolidated Statements of Income
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
--------------------- -------------------- ------------------
INTEREST INCOME
Loans, including fees $ 14,706,230 $ 11,482,241 $ 3,229,789
Investment securities, taxable 442,949 478,521 77,292
Federal funds sold and overnight accounts 177,856 390,019 113,417
--------------------- -------------------- ------------------
Total interest income 15,327,035 12,350,781 3,420,498
INTEREST EXPENSE
Deposits 1,950,511 933,407 175,152
Short-term borrowings 7,776,021 7,897,153 2,280,252
--------------------- -------------------- ------------------
Total interest expense 9,726,532 8,830,560 2,455,404
--------------------- -------------------- ------------------
NET INTEREST INCOME 5,600,503 3,520,221 965,094
Provision for loan losses 255,145 61,966 65,509
--------------------- -------------------- ------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,345,358 3,458,255 899,585
Noninterest income
Securities gains - 16,402 -
Service charges on deposit accounts 52,925 29,320 412
Other income 1,384,114 1,118,801 537,161
Servicing income 3,777,987 3,127,408 1,776,571
Gain on sales of mortgage servicing rights
and loans, net 16,189,007 17,289,946 5,419,177
--------------------- -------------------- ------------------
Total noninterest income 21,404,033 21,581,877 7,733,321
Noninterest expense
Compensation and employee benefits 12,817,212 11,094,958 4,573,870
Occupancy and equipment 1,455,229 1,069,882 1,350,018
Telephone 480,587 427,472 256,870
Postage 558,775 481,510 189,030
Loan processing fees - - 327,779
Amortization of mortgage servicing rights 2,793,136 1,766,031 1,013,607
Mortgage servicing rights valuation adjustment (616,163) 914,061 (77,579)
Other noninterest expense 3,943,782 3,357,764 1,188,344
--------------------- -------------------- ------------------
Total noninterest expense 21,432,558 19,111,678 8,821,939
--------------------- -------------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 5,316,833 5,928,454 (189,033)
Provision for income taxes 1,791,245 2,041,074 (51,516)
--------------------- -------------------- ------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 3,525,588 3,887,380 (137,517)
Cumulative effect of change in accounting principle 97,119
--------------------- -------------------- ------------------
NET INCOME (LOSS) $ 3,428,469 $ 3,887,380 $ (137,517)
===================== ==================== ==================
Basic and diluted earnings (loss) per share before cumulative
effect of change in accounting principle $ 1.11 $ 1.28 $ (0.05)
Per share cumulative effect of change in accounting principle (0.03) - -
--------------------- -------------------- ------------------
Basic and diluted earnings (loss) per share $ 1.08 $ 1.28 $ (0.05)
===================== ==================== ==================
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
57
PELICAN FINANCIAL, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
Additional
Common Paid-In Retained
Shares Stock Capital Earnings
------------- ------------- --------------- -------------
Balance at February 1, 1997 - Washtenaw 510 $ 510 $ 306 $ 6,358,772
Washtenaw shares acquired and retired (510) (510) (306) (6,032,473)
Shares issued of Pelican Financial Inc. 758,209 75,821 8,246,163
Net loss (137,517)
Other comprehensive income, net of tax of ($1,412):
Unrealized gain on securities available for sale
Comprehensive loss
------------- ------------- --------------- -------------
Balance at December 31, 1997 758,209 75,821 8,246,163 188,782
Issuance of shares from declaration of 2 for 1 stock
split and change in par value from $.10 to $.02 758,209 (45,493) 45,493
Issuance of shares from declaration of 2 for 1 stock split 1,516,418 30,328 (30,328)
Net income 3,887,380
Other comprehensive loss, net of tax of ($450):
Unrealized loss on securities available for sale
Comprehensive income
------------- ------------- --------------- -------------
Balance at December 31, 1998 3,032,836 60,656 8,261,328 4,076,162
Change in par value from $.02 to $.01 (30,328) 30,328
Issuance of shares from initial public offering Nov. 10, 1999 960,000 9,600 5,339,500
Net income 3,428,469
Other comprehensive loss, net of tax of ($95,935):
Unrealized loss on securities available for sale
Comprehensive income
------------- ------------- --------------- -------------
Balance at December 31, 1999 3,992,836 $ 39,928 $ 13,631,156 $ 7,504,631
============= ============= =============== =============
Accumulated Total
Other Comprehensive Shareholders'
Income (loss) Equity
------------------- ---------------
Balance at February 1, 1997 - Washtenaw $ 6,359,588
Washtenaw shares acquired and retired (6,033,289)
Shares issued of Pelican Financial Inc. 8,321,984
Net loss (137,517)
Other comprehensive income, net of tax of ($1,412):
Unrealized gain on securities available for sale 2,741 2,741
---------------
Comprehensive loss (134,776)
------------------- ---------------
Balance at December 31, 1997 2,741 8,513,507
Issuance of shares from declaration of 2 for 1 stock
split and change in par value from $.10 to $.02
Issuance of shares from declaration of 2 for 1 stock split
Net income 3,887,380
Other comprehensive loss, net of tax of ($450):
Unrealized loss on securities available for sale (873) (873)
---------------
Comprehensive income 3,886,507
------------------- ---------------
Balance at December 31, 1998 1,868 12,400,014
Change in par value from $.02 to $.01 -
Issuance of shares from initial public offering Nov. 10, 1999 5,349,100
Net income 3,428,469
Other comprehensive loss, net of tax of ($95,935):
Unrealized loss on securities available for sale (186,227) (186,227)
---------------
Comprehensive income 3,242,242
------------------- ---------------
Balance at December 31, 1999 $ (184,359) $ 20,991,356
=================== ===============
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
58
PELICAN FINANCIAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
Year ended Year ended Eleven months ended
December 31, December 31, December 31,
1999 1998 1997
----------------- ---------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,428,469 $ 3,887,380 $ (137,517)
Adjustments to reconcile net income (loss) to
net cash from operating activities
Amortization (accretion) of securities, net 1,418 (2,398) -
Amortization of mortgage servicing rights 2,793,136 1,766,031 1,013,607
Mortgage servicing rights valuation adjustment (616,163) 914,061 (77,579)
Gain on sales of mortgage servicing rights
and loans, net (16,189,007) (17,289,946) (5,419,177)
Gain on sale of securities - (16,402) -
Provision for loan losses 255,145 61,966 65,509
Depreciation 510,354 372,519 230,236
Loss on sale of equipment - 761 3,460
Purchases and origination of mortgage loans
held for sale (2,244,719,561) (2,405,776,234) (732,555,816)
Proceeds from sale of mortgage loans held for sale 2,333,495,099 2,299,174,626 668,130,094
Changes in assets and liabilities that
(used) provided cash
Accounts receivable and other assets 2,664,596 (5,727,689) (692,153)
Federal income taxes receivable (1,127,079) (1,146,776) -
Other liabilities 1,416,052 2,291,475 (324,693)
Deferred taxes 155,929 1,874,733 198,713
----------------- ---------------- -------------------
Net cash provided (used) by operating activities 82,068,388 (119,615,893) (69,565,316)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net (44,963,853) (22,581,849) (901,850)
Proceeds from sales of mortgage servicing rights 48,636,167 30,007,937 9,404,849
Loans in foreclosure and other real estate, net 41,516 (282,233) 219,699
Property and equipment expenditures, net (489,726) (653,515) (373,432)
Purchase of securities available for sale (2,016,777) (9,936,732) (7,966,160)
Proceeds from sales of securities available for sale - 1,516,402 -
Proceeds from maturities and principal repayments
of securities available for sale 1,448,167 9,830,737 1,000,000
Purchase of Federal Reserve Stock (419,400) (80,600) (180,000)
----------------- ---------------- -------------------
Net cash provided by investing activities 2,236,094 7,820,147 1,203,106
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in noninterest-bearing deposits 631,494 1,791,568 1,639,836
Increase in interest-bearing deposits 26,614,590 15,694,278 15,938,396
Increase (decrease) in due to bank (26,164,291) 27,556,787 2,919,872
Proceeds from issuance of common stock, net 5,349,100 - 2,230,000
Increase (decrease) in notes payable due on demand (31,691,894) 37,552,076 16,826,048
Advances on Federal Home Loan Bank borrowings 8,000,000 - -
Payoff subordinated debt (1,200,000) - -
Increase (decrease) in repurchase agreements (74,140,043) 35,004,440 33,300,837
Principal payments under capital lease obligations - - (116,148)
----------------- ---------------- -------------------
Net cash provided (used) by financing activities (92,601,044) 117,599,149 72,738,841
----------------- ---------------- -------------------
Net change in cash and cash equivalents (8,296,562) 5,803,403 4,376,631
Cash and cash equivalents at beginning of year 10,180,034 4,376,631 -
----------------- ---------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,883,472 $ 10,180,034 $ 4,376,631
================= ================ ===================
CASH AND EQUIVALENTS IS COMPOSED OF:
Cash and demand deposits due from banks $ 1,015,472 $ 678,799 $ 576,631
Interest-bearing deposits in banks 97,000 2,142,235 -
Federal funds sold 771,000 7,359,000 3,800,000
----------------- ---------------- -------------------
Total cash and cash equivalents $ 1,883,472 $ 10,180,034 $ 4,376,631
================= ================ ===================
Supplemental cash disclosures
Interest paid $ 10,163,967 $ 8,780,853 $ 2,374,631
Income taxes paid 1,451,000 1,375,000 650,000
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
59
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
Pelican Financial, Inc. (Pelican Financial) is a registered bank holding company
incorporated during 1997. Pelican Financial owns Washtenaw Mortgage Company
(Washtenaw) and Pelican National Bank (Pelican National).
Washtenaw is a Michigan corporation which engages in mortgage banking activities
and, as such, acquires, sells and services one-to-four unit residential mortgage
loans. Washtenaw acquires and services residential mortgage loans in 41 states.
Pelican National was incorporated on March 7, 1997 and commenced operations as a
national bank in Naples, Florida on August 25, 1997. The Bank presently operates
two full-service banking facilities and engages primarily in the business of
attracting deposits from the general public. The Bank uses such deposits,
together with other funds, to originate and purchase commercial, real estate and
consumer loans for sale in the secondary market and for holding in its own
portfolio.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements for the years ended December 31, 1999 and
1998, and eleven months ended December 31, 1997 include the accounts of Pelican
Financial beginning March 3, 1997 (date of inception) and 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures and actual results could differ from
those estimates. The fair value of financial instruments, the valuation of
mortgage servicing rights, and the allowance for loan losses are particularly
subject to change.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash on hand, federal funds sold,
interest-bearing deposits in banks, and funds due from banks. Pelican Financial
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. Pelican Financial was in a book overdraft
position at December 31, 1999 and 1998, which is shown in the accompanying
balance sheet as due to bank.
ACCOUNTS RECEIVABLE:
Periodically Pelican Financial sells mortgage-servicing rights. Pelican
Financial records the sale at the time all of the following conditions have been
met: (1) title has passed, (2) substantially all risks and rewards of ownership
have irrevocably passed to the buyer, and (3) any protection provisions retained
by Pelican Financial are minor and can be reasonably estimated. If the sale
requires Pelican Financial to finance a portion of the sales price, Pelican
Financial records the transaction as a sale only when an adequate nonrefundable
down payment has been received and the receivable allows Pelican Financial full
recourse to the buyer.
This line item included $1,186,565 and $6,181,140 at December 31, 1999 and 1998,
respectively, of receivables from sales of mortgage servicing rights. Further,
the line item was net of an allowance for doubtful accounts and minor
contingencies of $150,218 and $930,623 at December 31, 1999 and 1998,
respectively.
- --------------------------------------------------------------------------------
(Continued)
60
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES:
Debt securities are classified as available for sale. Securities classified as
available for sale are reported at their fair value and the related unrealized
holding gain or loss is reported, net of related income tax effects, as a
separate component of shareholders' equity, until realized.
Unrealized gain or losses on securities available for sale and realized gains or
losses on the sales of securities available for sale are based on the specific
identification method. Premiums and discounts on all securities are amortized to
expense and accreted to income over the life of the securities using the
interest method.
Federal Reserve and Federal Home Loan Bank (FHLB) stock is restricted stock,
carried at cost, that is required by the Federal Reserve and the FHLB to be
maintained by Pelican National.
LOANS HELD FOR SALE:
Balances include deferred origination fees and costs and are stated at the lower
of cost or market value in aggregate. The market value of mortgage loans held
for sale is based on market prices and yields at year-end in normal market
outlets used by Pelican Financial.
Pelican Financial purchases forward contracts of mortgage-backed securities and
U.S. Treasury options to manage its interest rate exposure. The loans held for
sale are generally sold into the forward contracts. Realized and unrealized
gains and losses on forward contracts are deferred to the extent they act as a
hedge and are included in the valuation of mortgage loans held for sale. Such
gains and losses are recognized upon delivery of the underlying mortgage loans
and are included in gains on sales of mortgage loans. U.S. Treasury options are
carried at the lower of cost or market value, with unrealized losses recognized
currently in gains on sales of mortgage servicing rights and mortgage loans.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
Loans receivable, for which management has the ability and intent to hold for
the foreseeable future or until maturity or payoff, are reported at the
principal balance outstanding, net of deferred fees and costs and an allowance
for loan losses. The allowance for loan losses is established through a
provision for loan losses charged to operations. The allowance is the amount
that management believes will be adequate to absorb probable credit losses
inherent in existing loans, based on evaluations of collectibility and prior
loss experience on loans. The evaluations take into consideration such factors
as the nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans and economic conditions that may affect
the borrower's ability to repay the loan. Estimates of loan losses are
subjective and are frequently based on future events beyond Pelican Financial's
control. Therefore, actual loan losses in future periods could differ materially
from amounts provided in the current period and could result in a material
adjustment to future results of operations.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral.
- --------------------------------------------------------------------------------
(Continued)
61
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Nonaccrual loans are loans on which the accrual of interest has been
discontinued because a reasonable doubt exists as to the full collection of
interest or principal. A nonaccrual loan may not have an anticipated loss
associated with it because of the collateral supporting the credit and,
therefore, not be considered impaired. An impaired loan is anticipated to have a
loss and may or may not be on nonaccrual. When a loan is placed on nonaccrual
status, all interest previously accrued, but not collected, is reversed against
current period interest income. Interest income on nonaccrual loans and impaired
loans is recognized only to the extent cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such loans
only when they are brought fully current with respect to interest and principal
and when, in management's judgment, the loans are estimated to be fully
collectible as to both principal and interest.
MORTGAGE SERVICING RIGHTS, NET:
Pelican Financial purchases and originates mortgage loans for sale to the
secondary market, and sells the loans on either a servicing retained or
servicing released basis. Servicing rights are recognized as assets for
purchased rights and for the allocated value of retained servicing rights on
loans sold. The capitalized cost of loan servicing rights is amortized in
proportion to, and over the period of, estimated net future servicing revenue.
The expected period of the estimated net servicing income is based, in part, on
the expected prepayment of the underlying mortgages.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage-servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate), term (15 year, 20
year, 30 year or balloon), and date of loan acquisition. Impairment represents
the excess of amortized cost of an individual stratum over its estimated fair
value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors, which are subject to change over time.
Changes in these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, to change significantly
in the future.
LOANS IN FORECLOSURE AND OTHER REAL ESTATE:
Loans in foreclosure and other real estate are recorded at the lower of the
carrying amount or fair value, less estimated costs to sell. If fair value
declines, a valuation allowance is recorded through expense. Costs relating to
the development and improvement of real estate are capitalized, whereas those
costs relating to holding the real estate are charged to expense.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, net of accumulated depreciation.
Leasehold improvements are are depreciated (or amortized) over the lesser of the
term of the related lease or the estimated useful lives of the assets.
Depreciation is computed using either an accelerated or straight-line method
over the estimated useful lives of the related assets.
- --------------------------------------------------------------------------------
(Continued)
62
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS CONTINGENCIES:
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
REVENUE RECOGNITION:
Mortgage loans held for sale are generally committed for sale to secondary
market investors under firm agreements at or prior to the closing date of the
individual loan. Loan sales and the related gains or losses are recorded at the
settlement date.
Loan origination fees and costs are deferred as a component of the balance of
loans held for sale. Since mortgage loans originated or acquired for sale are
generally sold within 60 days, any related fees and costs are not amortized
during that period, but are effectively recognized when the loan is ultimately
sold.
Loan administration fees earned for servicing loans for investors are generally
calculated based on the outstanding principal balances of the loans serviced and
are recorded as revenue when received.
Interest income on loans receivable is reported on the interest method. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days. Interest continues to
accrue on loans over 90 days past due if they are well secured and in the
process of collection.
INCOME TAXES:
Income tax expense is the total of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. To the extent current available evidence raises doubt
about the future realization of a deferred tax asset, a valuation allowance is
established.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
In 1998, the Accounting Standards Executive Committee (AcSEC) of the American
Institute of Certified Public Accountants promulgated Statement of Position
(SOP) 98-5. This SOP provides guidance on the financial reporting of start-up
costs and organizational costs, and requires these costs to be expensed as
incurred. Pelican Financial was required to adopt provisions of SOP 98-5 on
January 1, 1999. Included in the December 31, 1999 Consolidated Statement of
Income is a charge to operations of $97,119 reported as a cumulative effect of
change in accounting principle.
COMPREHENSIVE INCOME:
Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income includes the change in unrealized gains and losses on
securities available for sale, which is also reported as a separate component of
shareholders' equity.
STOCK SPLITS:
Common stock amounts, market values and per share disclosures related to
stock-based compensation plans and earnings and dividends per share disclosures
have been retroactively restated for the stock splits.
EARNINGS (LOSS) PER SHARE:
Basic earnings per share are computed based on the weighted-average number of
common shares outstanding during the year. Diluted earnings per share are
computed based on the weighted-average number of common shares and common share
equivalents during the year. Weighted average shares for periods prior to the
formation of Pelican
- --------------------------------------------------------------------------------
(Continued)
63
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial and pooling with Washtenaw (see Note 2) represent Pelican Financial
equivalent shares as if the Pelican Financial shares used to acquire Washtenaw
had been outstanding for all periods. Weighted average shares are restated for
all stock splits through the date of the issue of the financials.
CONCENTRATION OF CREDIT RISK:
Pelican National grants commercial, residential and consumer loans primarily to
customers in Collier and Lee Counties in Florida. Although Pelican National has
diversified the loan portfolio, substantial portions of its debtors are
dependent upon the real estate economic sector. Washtenaw originates and
purchases loans throughout the nation, however over 50% of loan volume is
generated in Michigan, Ohio, Florida, Indiana, and Georgia.
IMPACT OF INTEREST RATE FLUCTUATIONS:
Interest rate fluctuations generally have a direct impact on a mortgage banking
institution's financial performance. Significant increases in interest rates may
make it more difficult for potential borrowers to purchase residential property
and to qualify for mortgage loans. As a result, the volume and related income
from loan originations may be reduced. Significant increases in interest rates
will also generally increase the value of Pelican Financial's servicing
portfolio, as a result of slower anticipated prepayment activity. Significant
decreases in interest rates may enable more potential borrowers to qualify for a
mortgage loan, resulting in higher income related to the loan originations.
However, significant decreases in interest rates may result in higher
anticipated loan prepayment activity and, therefore, reduce the value of the
loan servicing portfolio.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value is presented in a separate Note. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded. Accordingly, the aggregate fair value
amounts presented do not represent the value of Pelican Financial.
NEW ACCOUNTING PRONOUNCEMENTS:
Beginning January 1, 2001, a new accounting standard (SFAS No. 133) will require
all derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value of the
hedged item is not otherwise recorded. The effect will depend on derivative
holdings when this standard applies.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting statement for 1999 (SFAS No. 134) allows classifying
these securities as available for sale, trading, or held to maturity, instead of
the previous requirement to classify as trading. This statement had no material
effect on the 1999 financial statements.
RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
- --------------------------------------------------------------------------------
(Continued)
64
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 2 - BUSINESS COMBINATION
Pelican Financial was incorporated on March 3, 1997 as a registered bank holding
company. Pelican Financial was created to form Pelican National and to acquire
Washtenaw. On June 22, 1997, Pelican Financial acquired all the common stock of
Washtenaw in exchange for 600,000 shares of Pelican Financial's $0.10 par value
common stock. The transaction has been accounted for as a pooling of interests
and, accordingly, the consolidated financial statements include the accounts of
Washtenaw prior to the acquisition by Pelican Financial. As of the acquisition
date, Washtenaw had recorded revenues of $3,460,376 and a net loss of $326,299.
There were no material intercompany transactions between Washtenaw and Pelican
Financial prior to the acquisition. Washtenaw's fiscal year-end was changed from
January 31 to December 31 to conform to Pelican Financial's fiscal year-end.
During 1997, Pelican Financial also offered a private placement of stock and
issued 158,209 shares of $0.10 par value shares of common stock for
approximately $2.3 million.
In November 1999, Pelican Financial sold 960,000 shares of common stock in an
underwritten public offering.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities available for sale consist of the following
at December 31:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------- ------------- -------------- ----------------
1999
- -------------
U.S. Government Agencies $ 4,000,000 $ - $ (180,156) $ 3,819,844
Mortgage Backed Securities 2,156,345 2,909 (102,085) 2,057,169
------------------- ------------- -------------- ----------------
$ 6,156,345 $ 2,909 $ (282,241) $ 5,877,013
=================== ============= ============== ================
1998
- -------------
U.S. Treasury Notes $ 4,500,000 $ 782 $ (1,407) $ 4,499,375
U.S. Government Agencies 1,089,153 3,455 - 1,092,608
------------------- ------------- -------------- ----------------
$ 5,589,153 $ 4,237 $ (1,407) $ 5,591,983
=================== ============= ============== ================
- --------------------------------------------------------------------------------
(Continued)
65
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 3 - SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and estimated market value of securities available for sale
at December 31, 1999, by contractual maturity, are shown below. Mortgage-backed
securities are not due at a single maturity date and are shown separately.
Estimated
Amortized Fair
Cost Value
---------------- ----------------
Due in one year or less $ - $ -
Due after one year through five years 4,000,000 3,819,844
Mortgage-Backed Securities 2,156,345 2,057,169
---------------- ----------------
$ 6,156,345 $ 5,877,013
================ ================
No securities were sold in 1999. Proceeds on sale of securities available for
sale in 1998 were $1,516,402. Gross gains of $16,402 and no gross losses were
recognized on those sales. No securities were sold in 1997.
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, December 31,
1999 1998
---------------- ---------------
Commercial, financial and agricultural $ 664,277 $ 824,000
Commercial real estate 10,832,047 5,750,398
Residential real estate 57,173,433 17,083,689
Installment loans 286,500 343,058
---------------- ---------------
68,956,257 24,001,145
Deduct allowance for loan losses (373,879) (127,475)
---------------- ---------------
Loans receivable, net $ 68,582,378 $ 23,873,670
================ ===============
One loan loss for $8,741 was charged against the allowance for loan losses
during 1999. No loan losses were charged to the allowance for loan losses during
1998 and 1997. Pelican Financial had no loans on nonaccrual status or that were
considered impaired as of December 31, 1999 and 1998. Total loans past due over
90 days totaled $2,291,000 and $913,000 as December 31, 1999 and 1998
respectively.
Loans to related parties:
1999 1998
---------------- ----------------
Beginning of year $ 34,400 $ -
New loans 12,700 34,400
Repayments - -
---------------- ----------------
End of year $ 47,100 $ 34,400
================ ================
- --------------------------------------------------------------------------------
(Continued)
66
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 5 - MORTGAGE LOANS SERVICED
MORTGAGE SERVICING RIGHTS:
Activity related to mortgage servicing rights is summarized below:
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
--------------- ------------------ ---------------
Balance at beginning of period $ 16,750,760 $ 4,696,038 $ 3,911,384
Additions 43,226,357 27,730,631 2,719,727
Sales (45,530,594) (13,909,878) (921,466)
Amortization (2,793,136) (1,766,031) (1,013,607)
--------------- ------------------ ---------------
Balance at end of period 11,653,387 16,750,760 4,696,038
Valuation allowance at beginning of period (1,241,082) (355,860) (433,439)
Adjustment for impairment 616,163 (914,061) 77,579
Adjustment for sale of servicing rights - 28,839 -
--------------- ------------------ ---------------
Valuation allowance at end of period (624,919) (1,241,082) (355,860)
Net $ 11,028,468 $ 15,509,678 $ 4,340,178
=============== ================== ===============
The estimated fair value of mortgage servicing rights as of December 31, 1999
and 1998 was $12,010,000 and $15,844,000, respectively.
SERVICING OF MORTGAGE LOANS:
Pelican Financial sells mortgage loans to secondary market investors. Pelican
Financial collects monthly principal and interest payments and performs certain
escrow services for investors. Pelican Financial's servicing portfolio of loans
is principally in Colorado, Florida, Illinois, Indiana, Kentucky, Michigan,
Ohio, Georgia, Minnesota, Missouri and Wisconsin. Pelican Financial's aggregate
servicing portfolio was approximately $1,108,000,000 and $1,655,000,000 at
December 31, 1999 and 1998, respectively. The servicing portfolio includes
temporary subservicing relating to servicing sales of $18,480,000 (all of which
Washtenaw was servicing for Pelican National) and $355,395,000 ($13,174,000 of
which Washtenaw was servicing for Pelican National) at December 31, 1999 and
1998, respectively. During 1999 and 1998 respectively, Washtenaw transferred to
Pelican National loans held for sale at cost of $6,039,000 and $90,920,000.
During the periods ended December 31, 1999 and 1998, Pelican Financial did not
service any FHA/VA insured/guaranteed mortgage loans.
Pelican Financial is responsible for establishing and maintaining escrow and
custodial funds aggregating approximately $15,428,000 ($7,289,000 held at
Pelican National) and $24,701,000 ($12,472,000 held at Pelican National) at
December 31, 1999 and 1998, respectively. These funds are placed on deposit at a
Federal Deposit Insurance Corporation ("FDIC") insured bank and are not included
in the assets and liabilities of the Company. As is customary in the mortgage
banking industry, these funds may be considered by the banks in which such funds
are deposited, together with other balances maintained in the banks by the
Company, when negotiating credit lines available for Pelican Financial's use.
- --------------------------------------------------------------------------------
(Continued)
67
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment includes the following:
December 31, December 31,
1999 1998
------------------ ----------------
Computer equipment and software $ 2,339,021 $ 2,008,440
Furniture and fixtures 1,144,846 1,008,099
Automobiles 27,471 51,985
Leasehold improvements 56,750 33,166
------------------ ----------------
3,568,088 3,101,690
Accumulated depreciation and amortization (2,704,273) (2,217,247)
------------------ ----------------
$ 863,815 $ 884,443
================== ================
NOTE 7 - DEPOSITS
December 31, December 31,
1999 1998
------------------ ----------------
Noninterest-bearing $ 3,911,558 $ 3,280,064
Interest -bearing demand 792,160 1,373,765
Savings 12,893,734 17,755,697
------------------ ----------------
17,597,452 22,409,526
Certificates of deposit:
Under $100,000 26,954,475 9,110,218
Over $100,000 16,371,000 3,191,576
IRAs 1,387,235 352,758
------------------ ----------------
Total certificates 44,712,710 12,654,552
------------------ ----------------
$ 62,310,162 $ 35,064,078
================== ================
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
2000 $ 27,290,855
2001 6,162,884
2002 4,217,691
2003 291,743
2004 and thereafter 6,749,537
------------------
$ 44,712,710
==================
- --------------------------------------------------------------------------------
(Continued)
68
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 8 - NOTES PAYABLE
Pelican Financial currently has a warehouse line of credit of $100,000,000, of
which $15,000,000 represents a sub-limit for servicing under contract for sale,
and $6,000,000 represents a working capital sub-limit. Pelican Financial also
has a $2,000,000 note. All of the borrowings are payable on demand. The interest
rate terms vary and are tied to the federal funds rate (FFR), which was 4.75%
and 5.00% at December 31, 1999 and 1998. Notes payable are summarized as
follows:
December 31, December 31,
1999 Terms 1998 Terms
------------------ -----------------
Warehouse line $ 23,333,610 FFR+1.50% $ 43,025,504 FFR+1.50%
Servicing under contract for
sale sub-limit FFR+1.875% 7,000,000 FFR+1.875%
Working capital sub-limit - FFR+2.25% 5,000,000 FFR+2.25%
Other note payable 2,000,000 FFR+2.75% 2,000,000 FFR+2.75%
------------------ -----------------
$ 25,333,610 $ 57,025,504
================== =================
The line of credit agreement contains restrictive covenants, among others,
requiring Pelican Financial to maintain certain minimum net worth levels, a
minimum servicing portfolio and a minimum debt to net worth ratio as defined in
the agreement.
Borrowings on the warehouse line of credit agreement are collateralized by
mortgage loans held for sale at Washtenaw. Borrowings on the working capital
sub-limit and servicing under contract for sale sub-limit are collateralized by
servicing rights relating to Washtenaw's servicing portfolio.
NOTE 9 - REPURCHASE AGREEMENTS
Pelican Financial enters into sales of mortgage loans under agreements to
repurchase (repurchase agreements). Such agreements have original terms of less
than 90 days and are treated as financing, with the obligation to repurchase the
loans sold reflected as a liability in the balance sheet. The dollar amount of
loans underlying the agreements remains in the mortgage loans held for sale
account. The weighted-average interest rate on these repurchase agreements was
5.65% and 6.338% at December 31, 1999 and 1998. The maximum month end balances
during 1999 and 1998 was $115,133,920 and $158,350,907, respectively.
NOTE 10 - SUBORDINATED NOTE PAYABLE AND FHLB BORROWINGS
Pelican Financial had a subordinated note payable with a balance of $1,200,000
at December 31, 1998. The note required monthly interest payments at 4.5% per
annum over the prime interest rate, which was 7.75% at December 31, 1998. This
note was paid in full with proceeds from the initial public offering in November
1999.
Year-end advances from the FHLB are as follows:
1999
---------------
6.89% FHLB advance, due October 2004 $ 5,000,000
4.95% FHLB advance, due August 2009 3,000,000
The above advances are at a fixed interest rate. Mortgage Loans and certain
securities, totaling approximately $21,000,000 at December 31, 1999, were
eligible as collateral for these advances under a blanket collateral agreement
with the FHLB.
- --------------------------------------------------------------------------------
(Continued)
69
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 11 - FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following:
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
------------------- ------------------ ---------------
Current provision (benefit) $ 1,635,316 $ 166,341 $ (250,229)
Deferred provision (benefit) 155,929 1,874,733 198,713
------------------- ------------------ ---------------
$ 1,791,245 $ 2,041,074 $ (51,516)
=================== ================== ===============
The net deferred tax liability is comprised of the following:
December 31, December 31,
1999 1998
------------------ ---------------
Deferred tax assets
Loan origination costs $ 66,944 $ 141,684
Loan mark to market 126,096 215,334
Loan loss reserve 191,532 152,704
Unrealized loss on securities 94,971 -
Other 42,234 128,520
------------------ ---------------
521,777 638,242
Deferred tax liabilities
Mortgage servicing rights (3,443,960) (3,485,440)
Depreciation - (11,983)
Unrealized gain on securities - (962)
Other (60,393) (62,437)
------------------ ---------------
(3,504,353) (3,560,822)
------------------ ---------------
Net deferred tax liability $ (2,982,576) $ (2,922,580)
================== ===============
There was no valuation allowance for deferred taxes in 1999 or 1998.
The difference between the financial statement tax expense and amounts computed
by applying the statutory federal rate of 34% to pretax income is reconciled as
follows:
Year ended Year ended Eleven months
December 31, December 31, ended
1999 1998 December 31,
1997
Statutory rate applied to income before taxes $ 1,807,723 $ 2,015,674 $ (64,271)
Add (Deduct)
Effect of nondeductible expenses 48,728 25,161 14,455
Other (65,206) 239 (1,700)
---------------- --------------- -------------
Income tax expense $ 1,791,245 $ 2,041,074 $ (51,516)
================ =============== =============
- --------------------------------------------------------------------------------
(Continued)
70
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 12 - LEASES
Pelican Financial leases office facilities under noncancelable operating leases.
Future minimum lease payments at December 31, 1999 under noncancelable leases
are as follows:
2000 $ 565,751
2001 346,596
2002 59,778
2003 60,305
2004 62,115
----------------
$ 1,094,545
================
For periods ended December 31, 1999, 1998 and 1997, rental expense under
operating leases was approximately $515,000, $404,000 and $319,000,
respectively.
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS
Pelican Financial and Pelican National are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Pelican Financial's consolidated financial statements.
Under capital adequacy guidelines, Pelican Financial and Pelican National must
meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and prompt corrective action
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999, that Pelican Financial and Pelican
National meet all capital adequacy requirements to which they are subject and
are categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, Pelican
Financial and Pelican National must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events since that date that management believes have
changed Pelican Financial's or Pelican National's categories.
- --------------------------------------------------------------------------------
(Continued)
71
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
Actual consolidated and Pelican National capital amounts (in thousands) and
ratios are as follows:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ------------ ----------- ---------- ----------
1999
- -------
Total capital (to risk weighted assets)
Pelican Financial $ 19,897 21.63% $ 7,358 8.00% $ 9,198 10.00%
Pelican National 9,226 18.52 3,985 8.00 4,981 10.00
Tier 1 capital (to risk weighted assets)
Pelican Financial 19,523 21.23 3,679 4.00 5,519 6.00
Pelican National 8,852 17.77 1,992 4.00 2,989 6.00
Tier 1 capital (to average assets)
Pelican Financial 19,523 11.52 6,779 4.00 8,474 5.00
Pelican National 8,852 11.32 3,127 4.00 3,909 5.00
1998
- -------
Total capital (to risk weighted assets)
Pelican Financial $ 12,398 9.64% $10,288 8.00% $ 12,860 10.00%
Pelican National 5,394 23.77 1,815 8.00 2,268 10.00
Tier 1 capital (to risk weighted assets)
Pelican Financial 12,271 9.55 5,144 4.00 7,716 6.00
Pelican National 5,186 22.86 908 4.00 1,361 6.00
Tier 1 capital (to average assets)
Pelican Financial 12,271 5.90 8,321 4.00 10,402 5.00
Pelican National 5,186 18.11 1,146 4.00 1,432 5.00
The declaration of dividends by Pelican National is limited to Pelican
National's retained net profit for the current and prior two years. As a result,
no amounts are available for payments of dividends to Pelican Financial at
December 31, 1999.
Washtenaw has a covenant in its warehouse credit agreement which limits the
amount of dividends Washtenaw may pay to Pelican Financial to 50% of Washtenaw's
net income for any twelve-month period.
NOTE 14 - RETIREMENT PLAN
Pelican Financial has a profit sharing plan established under Section 401(k) of
the Internal Revenue Code. The plan generally covers employees having at least
one year of service. Employees may contribute up to 15% of their compensation.
Pelican Financial contributes one-half of the participant's contribution up to
1.5% of the participant's compensation. Pelican Financial incurred expenses of
$50,751, $76,641 and $33,479 relating to the plan during the periods ended
December 31, 1999, 1998 and 1997, respectively.
NOTE 15 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1999 1998 1997
------------ ----------- ------------
Unrealized holding gains and losses on available for sale securities $ (282,162) $ 15,079 $ 4,153
Less: Reclassification adjustments for gain later recognized in income - (16,402) -
------------ ----------- ------------
Net unrealized gains and losses (282,162) (1,323) 4,153
Tax effect 95,935 450 (1,412)
------------ ----------- ------------
Other comprehensive income $ (186,227) $ (873) $ 2,741
============ =========== ============
- --------------------------------------------------------------------------------
(Continued)
72
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 16 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, Pelican Financial enters into commitments to
purchase residential mortgage loans. The commitments are short term in nature
and, if drawn on by the counterparty, result in a fixed or variable rate loan
collateralized by residential real estate. Pelican Financial has committed to
lend at a stipulated interest rate and assumes the risk of a subsequent rise in
rates prior to the loan funding. Outstanding mortgage commitments approximated
$44,002,000 and $144,486,000 at December 31, 1999 and 1998, respectively, along
with outstanding commitments to make other types of loans totaling $3,864,000
and $352,000 at December 31, 1999 and 1998. Pelican Financial manages its
interest rate exposure on commitments by entering into sales commitments in the
cash forward placement market.
Forward contracts represent future commitments to deliver securities and whole
loans at a specified price and date. As of December 31, 1999 and 1998, Pelican
Financial had approximately $56,283,000 and $239,185,000, respectively, of
forward rate agreements to deliver. These agreements were commitments to deliver
securitized and whole loans to another party at a specified price and specified
date in the future. The risk associated with the forward rate agreements is that
Pelican Financial is unable to deliver according to the terms of the agreement.
Pelican Financial does not anticipate any material losses as a result of the
forward rate agreements.
These instruments also contain an element of risk in the event that the
counterparties may be unable to meet the terms of such agreements. In the event
the parties to all delivery commitments were unable to fulfill their
obligations, Pelican Financial would not incur any significant additional cost
by replacing the positions at market rates in effect on December 31, 1999.
Pelican Financial minimizes its risk of exposure by limiting the counterparties
to those major banks and financial institutions who meet established credit and
capital guidelines. Management does not expect any counterparty to default on
their obligations and therefore, does not expect to incur any cost due to
counterparty default.
U. S. Treasury options are also used to manage Pelican Financial's interest rate
risk. Pelican had $155,000 worth of open positions at December 31, 1999 and no
open positions at December 31, 1998.
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments are made at a specific point in
time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time Pelican Financial's entire holdings of
a particular financial instrument. No ready market exists for certain portions
of Pelican Financial's financial instruments, therefore, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and value of assets and liabilities that are not considered financial
instruments. Tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimated and have
not been considered in these estimates.
The information presented is based on pertinent information available to
management as of December 31, 1999 and 1998. Although management is not aware of
any factors, other than changes in interest rates, that would significantly
affect the estimated fair values, the current estimated fair value of these
instruments may have changed significantly since that point in time.
- --------------------------------------------------------------------------------
(Continued)
73
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of Pelican Financial's financial instruments were as
follows:
December 31, December 31,
1999 1998
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ------------------ ----------------- ------------------
ASSETS
Cash and cash equivalents $ 1,883,472 $ 1,883,472 $ 10,180,034 $ 10,180,034
Accounts receivable 2,289,682 2,289,682 7,087,170 7,087,170
Securities available for sale 5,877,013 5,877,013 5,591,983 5,591,983
Loans held for sale 60,535,699 61,104,337 179,454,160 180,712,486
Loans receivable, net 68,582,378 69,163,542 23,873,670 23,926,322
Accrued interest receivable 1,266,524 1,266,524 1,360,636 1,360,636
LIABILITIES
Deposits 62,310,162 62,529,921 35,064,078 35,176,836
Due to bank 12,095,538 12,095,538 38,259,829 38,259,829
Notes payable 25,333,610 25,333,610 57,025,504 57,025,504
Repurchase agreements 21,844,801 21,844,801 95,984,844 95,984,844
Subordinated note payable - - 1,200,000 1,200,000
FHLB Advances 8,000,000 7,903,767 - -
Accrued interest payable 379,647 379,647 432,262 432,262
U. S. Treasury Options 155,000 220,000 - -
OFF-BALANCE SHEET COMMITMENTS
Commitments to fund residential
mortgage loans at fixed rates - (99,359) - 607,348
Commitments to sell residential
mortgage loans and securities
at fixed rates - (306,999) - (351,718)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Cash and Cash Equivalents - The carrying amount is a reasonable estimate of fair
value as such amounts are short term.
Accounts Receivable and Accrued Interest Receivable - The carrying amount is a
reasonable estimate of fair value as such receivables are short term.
Securities Available for Sale - Fair values are based on quoted market prices or
dealer quotes.
Loans Held for Sale - The fair value of mortgage loans held for sale is
estimated based on sales commitments or secondary market quotes for the related
loans or similar loans.
Loans Receivable, Net - The estimated fair value is determined by discounting
contractual cash flows from the loans using current lending rates for new loans
with similar remaining maturities. The resulting value is reduced by an estimate
of losses inherent in the portfolio.
- --------------------------------------------------------------------------------
(Continued)
74
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits - The carrying amount is a reasonable estimate of fair value for demand
and savings deposits subject to immediate withdrawal. The fair value of time
deposits is estimated by discounting the future cash flows to be paid using the
current rates at which similar deposits with similar remaining maturities would
be issued.
Due to Bank - The carrying amount is a reasonable estimate of fair value as the
borrowings are short term.
Notes Payable and Subordinated Note Payable - The carrying amount is a
reasonable estimate of fair value as the borrowings are variable rate and
payable on demand.
Repurchase Agreements - The carrying amount is a reasonable estimate of fair
value as the borrowings are based upon variable rates which approximate market
value.
FHLB Advances - Fair values are based on current rates available on debt with
similar terms and remaining maturities.
Accrued Interest Payable - The carrying amount is a reasonable estimate of fair
value as such payables are short term.
U. S. Treasury Options - Fair values are based on quoted market prices or dealer
quotes.
Off-Balance-Sheet Financial Instruments - The fair value of Pelican Financial's
forward commitments to fund and sell residential real estate loans are
separately estimated using the cost of fulfilling these commitments or otherwise
settling the obligations with counterparties at the reporting date.
NOTE 18 - LITIGATION
On November 4, 1994, Washtenaw was named as defendant in a class action lawsuit
regarding its method for calculating finance charges in lending disclosures
required by the Federal Truth in Lending Act. The disclosure issue involved is
applicable to the mortgage banking industry as a whole, and the issue is
presently the subject of numerous class action suits throughout the United
States. Pelican Financial believes Washtenaw is and has been in complete
compliance with applicable Federal and State laws. In the opinion of Pelican
Financial's management, the resolution of this matter is not expected to have a
material adverse impact on the financial position of Pelican Financial.
NOTE 19 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Pelican Financial adopted a Stock Option and Incentive Plan (the "Plan") in
October 1997. Pursuant to the Plan, 400,000 shares (adjusted for stock splits)
of Pelican Financial's common stock were made available for grant through stock
options to key employees and non-employee directors of Pelican Financial,
Washtenaw and Pelican National. Each option granted under the Plan vests as
specified by the Stock Option Committee and has a term of not more than ten
years. The exercise price of options granted is at least equal to market value
at the date of grant. Pelican Financial accounts for stock options in accordance
with APB Opinion No. 25, and, therefore, has recorded no compensation expense
for options granted.
Financial Accounting Standards No. 123 Accounting for Stock Based Compensation
(SFAS 123) establishes a fair value based method of accounting for employee
stock options. Accordingly, the pro forma information presents net income and
earnings per share information as if SFAS 123 had been adopted.
- --------------------------------------------------------------------------------
(Continued)
75
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 19 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (CONTINUED)
1999
----------------
Net income as reported $ 3,428,469
Pro forma net income 3,369,124
Basic earnings per share as reported $ 1.08
Pro forma basic earnings per share 1.06
Diluted earnings per share as reported $ 1.08
Pro forma diluted earnings per share 1.06
The compensation that would have been recorded for 1998 and 1997 would not have
reduced basic or diluted earnings per share by more than $.01.
In future years, the pro forma effect under this standard is expected to
increase as additional options are granted.
The fair value of options granted were estimated using the Black-Scholes model
and the following weighted average information: risk free rate of 6.00%;
expected life of 7 years; expected volatility of stock price of 10.53% and no
expected dividends. The fair value of the options granted in 1999 was $2.44.
The Plan also provides for granting of stock appreciation rights ("SARS"). SARS
may be granted in connection with any or all of the stock options that may be
granted subject to certain conditions and limitations imposed by the Stock
Option Committee. The exercise of a SAR will entitle the holder to payment from
Pelican Financial of an amount equal to the difference between the fair value of
such shares on the date the SAR was originally granted and the fair value of
such shares at the exercise date of the SAR. This payment may be made in cash,
in shares or partly in each. To date, no SARs have been granted.
All outstanding awards shall become immediately exercisable in the event of a
change in control of Pelican Financial.
The following is a summary of stock option activity for the periods ended
December 31 (adjusted for stock splits):
Year ended Year ended Eleven months ended
December 31, December 31, December 31,
----------1999---------- ----------1998---------- ----------1997----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ------------ ------------ ----------- ---------- ------------
Outstanding beginning of year 104,000 $ 4.11 40,000 $ 3.75 - $ -
Granted 221,400 6.97 92,000 5.58 40,000 3.75
Exercised - - - - - -
Forfeited (4,000) 3.25 (8,000) 3.75 - -
Canceled - - (20,000) 5.00 - -
------------ ------------------------ ------------ ----------- -------------
Outstanding end of year 321,400 $ 5.88 104,000 $ 4.11 40,000 $ 3.75
============ ======================== ============ =========== =============
Exercisable at end of year 33,400 $ 3.53 32,000 $ 3.75 40,000 $ 3.75
============ ============ ============ =========== =========== =============
Options outstanding at December 31, 1999 have a weighted average life of 9.37
years, with exercise prices ranging from $3.25 to $7.00.
- --------------------------------------------------------------------------------
(Continued)
76
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 20 - EARNINGS (LOSS) PER SHARE
The following summarizes the computation of basic and diluted earnings (loss)
per share. Weighted average shares have been restated for all stock splits.
Stock options are anti-dilutive for the eleven months ended December 31, 1997
due to the net loss.
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
------------- ------------- --------------
Basic earnings (loss) per share
Net income (loss) $ 3,428,469 $ 3,887,380 $ (137,517)
Weighted average shares outstanding 3,166,973 3,032,836 2,974,100
------------- ------------- --------------
Basic earnings (loss) per share $ 1.08 $ 1.28 $ (0.05)
============= ============= ==============
Diluted earnings (loss) per share
Net income (loss) $ 3,428,469 $ 3,887,380 $ (137,517)
Weighted average shares outstanding 3,166,973 3,032,836 2,974,100
Dilutive effect of assumed exercise of stock
options 1,062 6,775 -
------------- ------------- --------------
Diluted average shares outstanding 3,168,035 3,039,611 2,974,100
Diluted earnings (loss) per share $ 1.08 $ 1.28 $ (0.05)
============= ============= ==============
NOTE 21 - 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 consumer, commercial, commercial real estate,
residential construction, and single-family residential mortgage loans, from its
offices in Naples and Fort Myers, Florida.
Pelican Financial's reportable segments are its two subsidiaries. Washtenaw
comprises the mortgage banking segment, with gains on sales of mortgage
servicing rights (MSR) and loans, as well as loan servicing income accounting
for its primary revenues. Pelican National comprises the retail banking segment,
with net interest income from loans, investments and deposits accounting for its
primary revenues.
- --------------------------------------------------------------------------------
77
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 21 - SEGMENT INFORMATION (CONTINUED)
The following segment financial information has been derived from the internal
financial statements of Washtenaw and Pelican National, which are used by
management to monitor and manage the financial performance of Pelican Financial.
The accounting policies of the two segments are the same as those described in
the summary of significant accounting policies. 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.
DOLLARS IN THOUSANDS
Mortgage Retail Consolidated
YEAR ENDED DECEMBER 31, 1999 Banking Banking Other Totals
--------------- --------------- ---------------- ---------------
Net interest income $ 2,631 $ 3,126 $ (157) $ 5,600
Gain on sales of MSR and loans, net 16,103 86 - 16,189
Servicing income 3,750 28 - 3,778
Noncash items:
Provision for loan losses - 255 - 255
MSR amortization & valuation 2,172 5 - 2,177
Provision for income taxes 1,609 303 (121) 1,791
Segment profit 3,074 589 (235) 3,428
Segment assets 76,149 79,621 83 155,853
YEAR ENDED DECEMBER 31, 1998
Net interest income $ 2,580 $ 1,107 $ (167) $ 3,520
Gain on sales of MSR and loans, net 17,029 261 - 17,290
Servicing income 2,940 187 - 3,127
Noncash items:
Provision for loan losses - 62 - 62
MSR amortization & valuation 2,549 131 - 2,680
Provision for income taxes 2,235 (126) (68) 2,041
Segment profit 4,263 (244) (132) 3,887
Segment assets 205,873 40,537 (1) 246,409
ELEVEN MONTHS ENDED DECEMBER 31, 1997
Net interest income $ 845 $ 195 $ (75) $ 965
Gain on sales of MSR and loans 5,488 - (69) 5,419
Servicing income 1,777 - - 1,777
Noncash items:
Provision for loan losses - 66 - 66
MSR amortization & valuation 936 - 1 937
Provision for income taxes 229 (253) (28) (52)
Segment profit 406 (490) (54) (138)
Segment assets 97,514 23,498 (256) 120,756
- --------------------------------------------------------------------------------
78
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 22 - PELICAN FINANCIAL, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
December 31,
---------------------------------
1999 1998
--------------- -----------------
ASSETS
Cash and cash equivalents $ 254,101 $ 5,492
Investment in Washtenaw 13,952,991 9,034,480
Investment in Pelican National 8,670,036 5,267,429
Other assets 250,770 116,182
--------------- -----------------
Total assets $ 23,127,898 $ 14,423,583
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,000,000 $ 2,000,000
Accrued expenses and other liabilities 136,542 23,569
Shareholders' equity 20,991,356 12,400,014
--------------- -----------------
Total liabilities and shareholders' equity $ 23,127,898 $ 14,423,583
=============== =================
CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
----------------- ---------------- -----------------
Dividends from Washtenaw $ 155,497 $ 165,707 $ 1,829,302
Other expense 355,109 200,342 81,372
----------------- ---------------- -----------------
Income (loss) before income tax and undistributed
subsidiary income (199,612) (34,635) 1,747,930
Income tax benefit 120,737 68,117 28,000
Equity in undistributed subsidiary income (loss) 3,507,344 3,853,898 (1,913,447)
----------------- ---------------- -----------------
Net income (loss) 3,428,469 3,887,380 (137,517)
Unrealized gain (loss) on securities, net of
tax and classification effects (186,227) (873) 2,741
----------------- ---------------- -----------------
Comprehensive income (loss) $ 3,242,242 $ 3,886,507 $ (134,776)
================= ================ =================
- --------------------------------------------------------------------------------
79
PELICAN FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999 and 1998,
and eleven months ended December 31, 1997
NOTE 22 - PELICAN FINANCIAL, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Eleven months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,428,469 $ 3,887,380 $ (137,517)
Adjustments
Equity in undistributed subsidiary income (3,507,344) (3,853,898) 1,913,446
Change in other assets (134,589) (56,556) (59,626)
Change in other liabilities 112,973 9,359 14,209
---------------- --------------- ----------------
Net cash provided (used) by operating activities (100,491) (13,715) 1,730,512
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Pelican National - - (6,000,000)
---------------- --------------- ----------------
Net cash used by investing activities - - (6,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issue 5,349,100 - 2,288,695
Contribute capital to affiliates (5,000,000)
Purchase of common stock advances on line of credit - - 2,000,000
---------------- --------------- ----------------
Net cash provided by financing activities 349,100 - 4,288,695
Net change in cash and cash equivalents 248,609 (13,715) 19,207
Cash and cash equivalents at beginning of year 5,492 19,207 -
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 254,101 $ 5,492 $ 19,207
================ =============== ================
- --------------------------------------------------------------------------------
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the caption "Discussion of Proposals
Recommended by the Board - Proposal 1: Election of Directors" in Pelican
Financial's Proxy Statement for the annual meeting of stockholders to be held
April 25, 2000 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Directors and Executive
Officers Compensation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership - Who are
the largest owners of Pelican Financial's common stock?" in
the Proxy Statement.
(b) Security Ownership of Management.
Information required by this item is incorporated herein by
reference to the section captioned "Stock Ownership - How much
stock do Pelican Financial's directors and officers own?" in
the Proxy Statement.
(c) Changes in Control.
Management of Pelican Financial knows of no arrangements,
including any pledge by any person of securities of Pelican
Financial, the operation of which may at a subsequent date
result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits are either attached as part of this Report or incorporated
by reference herein.
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of Pelican Financial, Inc. (1)
3.2 Bylaws of Pelican Financial, Inc. (1)
81
4 Form of Common Stock Certificate of Pelican Financial, Inc. (1)
10.1 Employment Agreement with Michael D. Surgen (1)
10.2 Pelican Financial, Inc. Stock Option and Incentive Plan and Forms of
Agreements (1)
10.3 Master Agreement between Federal National Mortgage Association and
Washtenaw Mortgage Corporation dated December 21, 1998 (1)
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule (2)
- -------------------------
(1) Incorporated by reference to Exhibit bearing the same number in Pelican
Financial's Registration Statement on Form S-1, filed on April 22,
1999, as amended (Reg. No. 333-76841).
(2) Contained in electronically filed version only.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PELICAN FINANCIAL, INC.
March 21, 2000 By: /s/ CHARLES C. HUFFMAN
--------------------------------
Charles C. Huffman
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ------------------------------------ ---------------------------------- ----------------
/s/ CHARLES C. HUFFMAN President, Chief Executive Officer, March 21, 2000
- ------------------------------------
Charles C. Huffman and Chairman of the Board
(Principal Executive Officer)
/s/ MICHAEL L. HOGAN Chief Financial Officer and March 21, 2000
- ------------------------------------
Michael L. Hogan Director
(Principal Financial and
Accounting Officer)
/s/ RALIEGH E. ALLEN, JR. Director March 21, 2000
- ------------------------------------
Raliegh E. Allen, Jr.
/s/ BRENDA L. JONES Director March 21, 2000
- ------------------------------------
Brenda L. Jones
/s/ KOULA M. KOVACH Director March 21, 2000
- ------------------------------------
Koula M. Kovach
/s/ ERNEST MERLANTI Director March 21, 2000
- ------------------------------------
Ernest Merlanti
/s/ S. LYNN STOKES Director March 21, 2000
- ------------------------------------
S. Lynn Stokes
/s/ MICHAEL D. SURGEN Director March 21, 2000
- ------------------------------------
Michael D. Surgen
83