Washington, D.C.  20549

 

Form 10-Q

 

 

 

3767 Ranchero Drive

Ann Arbor, Michigan 48108

(Address of Principal Executive Offices)

 

734-662-9733

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

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

Yes   o   No   ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

Common Stock Outstanding as of July 31, 2004

 

Common stock, $0.01 Par value

4,488,351 Shares

 

 

Index

 

Part I. Financial Information
	Item 1.  Financial Statements (unaudited)
		Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
		Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2004 and 2003
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
		Notes to Consolidated Financial Statements
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk
	Item 4.  Controls and Procedures
Part II.      Other Information
	Item 1.  Legal Proceedings
	Item 2.  Changes in Securities and Use of Proceeds
	Item 3.  Defaults Upon Senior Securities
	Item 4.  Submission of Matters to a Vote of Shareholders
	Item 5.  Other Information
	Item 6.  Exhibits and Reports on Form 8-K

 

 

PELICAN FINANCIAL, INC.

Consolidated Balance Sheets

 

		June 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Cash and cash equivalents
Cash and due from banks		$	7,366,929		$	6,354,416
Interest-bearing deposits		3,514,574			45,639,288
Federal funds sold		27,436,120			3,426,013
Total cash and cash equivalents		38,317,623			55,419,717
Securities available for sale		107,434,443			49,729,994
Federal Reserve & Federal Home Loan Bank Stock		1,192,200			949,000
Loans held for sale		—			141,200
Loans receivable, net		105,180,322			109,798,257
Other real estate owned		—			332,857
Premises and equipment, net		3,479,880			2,658,018
Other assets		3,175,562			2,486,592
		$	258,780,030		$	221,515,635
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing		$	72,475,879		$	74,004,969
Interest-bearing		158,041,948			117,907,625
Total deposits		230,517,827			191,912,594
Note payable		—			291,665
Federal Home Loan Bank borrowings		12,000,000			12,000,000
Other liabilities		316,829			421,088
Total liabilities		242,834,656			204,625,347
Shareholders’ equity
Preferred stock, 200,000 shares authorized; none outstanding		—			—
Common stock, $.01 par value 10,000,000 shares authorized; 4,488,351 outstanding at June 30, 2004 and December 31, 2003		44,884			44,884
Additional paid in capital		15,568,593			15,568,593
Retained earnings		951,905			1,183,546
Accumulated other comprehensive income (loss), net of tax		(620,008		)	93,265
Total shareholders’ equity		15,945,374			16,890,288
		$	258,780,030		$	221,515,635

 

See accompanying notes to the financial statements

 

3

 

PELICAN FINANCIAL, INC.

Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Interest income
Loans, including fees		$	1,902,121		$	2,468,711		$	3,901,826		$	4,885,101
Investment securities, taxable		771,950			125,779			1,271,182			204,261
Federal funds sold and overnight accounts		82,288			145,002			171,828			245,017
Total interest income		2,756,359			2,739,492			5,344,836			5,334,379
Interest expense
Deposits		990,771			548,019			1,867,230			1,132,734
Other borrowings		162,814			267,374			325,856			533,044
Total interest expense		1,153,585			815,393			2,193,086			1,665,778
Net interest income		1,602,774			1,924,099			3,151,750			3,668,601
Provision for loan losses		—			290,000			75,000			370,000
Net interest income after provision for loan losses		1,602,774			1,634,099			3,076,750			3,298,601
Noninterest income
Gain on sales of securities, net		529			57,708			2,859			129,360
Service charges on deposit accounts		35,961			47,615			66,490			100,209
Gain on sale of loans, net		10,117			46,427			19,758			70,804
Net gain on foreclosed assets and other income		10,425			23,041			69,395			60,522
Total noninterest income		57,032			174,791			158,502			360,895
Noninterest expense
Compensation and employee benefits		929,236			1,136,682			1,866,910			1,883,490
Occupancy and equipment		316,393			252,735			587,199			475,765
Legal		57,825			157,507			107,450			202,359
Accounting and auditing		31,028			34,500			91,150			65,944
Data processing		43,430			28,506			91,632			57,667
Marketing and advertising		25,452			37,503			57,605			90,857
Loan and other real estate owned		78,360			176,313			201,639			306,499
Other noninterest expense		284,895			215,212			581,359			400,885
Total noninterest expense		1,766,619			2,038,958			3,584,944			3,483,466
Income (loss) from continuing operations before income taxes		(106,813		)	(230,068		)	(349,692		)	176,030
Income tax expense (benefit)		(35,596		)	(77,457		)	(118,051		)	60,779
Income (loss) from continuing operations		$	(71,217	)	$	(152,611	)	$	(231,641	)	$	115,251
Discontinued operations:
Income from operations of discontinued mortgage subsidiary		—			5,198,287			—			9,239,406
Income tax		—			1,788,555			—			3,166,508
Income from discontinued operations		—			3,409,732			—			6,072,898
Net income (loss)		$	(71,217	)	$	3,257,121		$	(231,641	)	$	6,188,149
Basic earnings (loss) per share from continuing operations		$	(0.02	)	$	(0.03	)	$	(0.05	)	$	0.03
Diluted earnings (loss) per share from continuing operations		(0.02		)	(0.03		)	(0.05		)	0.03
Per share effect of discontinued operations		—			0.76			—			1.36
Basic earnings (loss) per share		$	(0.02	)	$	0.73		$	(0.05	)	$	1.39
Diluted earnings (loss) per share		$	(0.02	)	$	0.73		$	(0.05	)	$	1.39
Comprehensive income		$	(1,141,236	)	$	3,394,568		$	(944,914	)	$	6,179,632

 

See accompanying notes to the financial statements

 

4

 

PELICAN FINANCIAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

 

		2004			2003
Cash flows from operating activities
Net cash provided (used) by operating activities of continuing operations		$	(86,197	)	$	18,576,632
Net cash (used) by operating activities of discontinued operations		—			(77,794,332		)
Net cash provided (used) by operating activities		$	(86,197	)	$	(59,217,700	)
Cash flows from investing activities
Loan originations, net		4,542,935			(59,449		)
Sale of real estate owned		332,857
Property and equipment expenditures, net		(944,768		)	(198,427		)
Purchase of securities available for sale		(75,973,646		)	(44,775,000		)
Proceeds from sales of securities available for sale		13,000,000			42,457,589
Proceeds from maturities and principal repayments of securities available for sale		3,956,357			10,127
Purchase and redemption of Federal Home Loan Bank stock		(243,200		)	100,000
Investing activities of discontinued operations		—			15,678,454
Net cash provided (used) by investing activities		(55,329,465		)	13,213,294
Cash flows from financing activities
Increase in deposits		38,605,233			43,252,505
Cash dividends		—			(888,131		)
Decrease in note payable due on demand		(291,665		)	(250,000		)
Proceeds from exercise of stock options					6,233
Financing activities of discontinued operations		—			66,024,053
Net cash provided by financing activities		38,313,568			108,144,660
Net change in cash and cash equivalents		(17,102,094		)	62,140,254
Cash and cash equivalents at beginning of period		55,419,717			57,361,935
Cash and cash equivalents at end of period		$	38,317,623		$	119,502,189
Non-cash investing activities
Decrease in real estate owned, net		—			(920,236		)

 

See accompanying notes to the financial statements

 

5

 

PELICAN FINANCIAL, INC.

Notes to the Consolidated Financial Statements (Unaudited)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation:

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

 

Stock Compensation:

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

 

		Three Months Ended June 30,
		2004			2003
Net income (loss) as reported		$	(71,217	)	$	3,257,121
Stock-based compensation expense (benefit), net of forfeitures, using fair value method		3,825			(9,778		)
Pro forma net income (loss)		$	(75,042	)	$	3,266,899
Basic earnings (loss) per share as reported		$	(0.02	)	$	0.73
Pro forma basic earnings (loss) per share		(0.02		)	0.74
Diluted earnings (loss) per share		$	(0.02	)	$	0.73
Pro forma diluted earnings (loss) per share		(0.02		)	0.73

 

		Six Months Ended June 30,
		2004			2003
Net income (loss) as reported		$	(231,641	)	$	6,188,149
Stock-based compensation expense (benefit), net of forfeitures, using fair value method		7,268			(724		)
Pro forma net income (loss)		$	(238,909	)	$	6,188,873
Basic earnings (loss) per share as reported		$	(0.05	)	$	1.39
Pro forma basic earnings (loss) per share		(0.05		)	1.39
Diluted earnings (loss) per share		$	(0.05	)	$	1.39
Pro forma diluted earnings (loss) per share		(0.05		)	1.39

 

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

 

6

 

NOTE 2 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles.  However, all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for fair presentation of the consolidated financial statements have been included.  The results of operations for the period ended June 30, 2004, are not necessarily indicative of the results which may be expected for the entire fiscal year or for any other period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2003 included in Pelican Financial’s Form 10-K.

 

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

 

NOTE 3 – SPIN-OFF

 

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

 

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

 

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

 

NOTE 4 – LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

		June 30, 2004			December 31, 2003
Commercial, financial and agricultural		$	1,972,615		$	1,619,450
Commercial real estate		40,713,052			43,850,625
Residential real estate		39,515,954			45,056,027
Consumer loans		24,206,754			20,602,267
		106,408,375			111,128,369
Deduct allowance for loan losses		(1,228,053		)	(1,330,112		)
Loans receivable, net		$	105,180,322		$	109,798,257

 

7

 

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

 

		2004			2003
Balance at beginning of period		$	1,445,272		$	1,046,243
Provision for loan losses		—			290,000
Loans charged-off		(242,143		)	(208,106		)
Recoveries		24,924			—
Balance at end of period		$	1,228,053		$	1,128,137

 

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

 

		2004			2003
Balance at beginning of period		$	1,330,112		$	1,062,109
Provision for loan losses		75,000			370,000
Loans charged-off		(242,143		)	(314,110		)
Recoveries		65,084			10,138
Balance at end of period		$	1,228,053		$	1,128,137

 

8

 

NOTE 5 - EARNINGS PER SHARE

 

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

 

		Three Months Ended June 30, 2004			Three Months Ended June 30, 2003
Basic earnings (loss) per share
Loss from continuing operations		$	(71,217	)	$	(152,611	)
Income from discontinued operations		—			3,409,732
Net income (loss) applicable to common stock		(71,217		)	3,257,121
Weighted average shares outstanding		4,488,351			4,440,930
Loss from continuing operations per share		$	(0.02	)	$	(0.03	)
Income from discontinued operations per share		—			0.76
Basic earnings (loss) per share		$	(0.02	)	$	0.73
Diluted earnings (loss) per share
Loss from continuing operations		$	(71,217	)	$	(152,611	)
Income from discontinued operations		—			3,409,732
Net income (loss) applicable to common stock		(71,217		)	3,257,121
Weighted average shares outstanding		4,488,351			4,440,930
Dilutive effect of assumed exercise of stock options		—			37,560
Diluted average shares outstanding		4,488,351			4,478,490
Loss from continuing operations per share		$	(0.02	)	$	(0.03	)
Income from discontinued operations per share		—			0.76
Diluted earnings (loss) per share		$	(0.02	)	$	0.73

 

		Six Months Ended June 30, 2004			Six Months Ended June 30, 2003
Basic earnings (loss) per share
Income (loss) from continuing operations		$	(231,641	)	$	115,251
Income from discontinued operations		—			6,072,898
Net income (loss) applicable to common stock		(231,641		)	6,188,149
Weighted average shares outstanding		4,488,351			4,440,560
Income (loss) from continuing operations per share		$	(0.05	)	$	0.03
Income from discontinued operations per share		—			1.36
Basic earnings (loss) per share		$	(0.05	)	$	1.39
Diluted earnings (loss) per share
Income (loss) from continuing operations		$	(231,641	)	$	115,251
Income from discontinued operations		—			6,072,898
Net income (loss) applicable to common stock		(231,641		)	6,188,149
Weighted average shares outstanding		4,488,351			4,440,560
Dilutive effect of assumed exercise of stock options		—			22,968
Diluted average shares outstanding		4,488,351			4,463,528
Income (loss) from continuing operations per share		$	(0.05	)	$	0.03
Income from discontinued operations per share		—			1.36
Diluted earnings (loss) per share		$	(0.05	)	$	1.39

 

9

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

Certain information in this Form 10-Q may constitute forward-looking information that involves risks and uncertainties that could cause actual results to differ materially from those estimated.  Persons are cautioned that such forward-looking statements are not guarantees of future performance and are subject to various factors that could cause actual results to differ materially from those estimated.  These factors include, but are not limited to, changes in general economic and market conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, demand for loan and deposit products and the development of an interest rate environment that adversely affects the interest rate spread or other income from Pelican Financial’s investments and operations.

 

OVERVIEW

 

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

 

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

 

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

 

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

 

EARNINGS PERFORMANCE

 

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

 

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

 

RESULTS OF OPERATIONS

 

Net Interest Income

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

 

10

 

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

 

Average Balance Sheet

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

 

		Three months ended June 30,
		2004								2003
		Average Volume			Interest			Yield/Cost		Average Volume			Interest			Yield/Cost
ASSETS
Interest-earning assets:
Federal funds sold		$	32,906		$	82		1.00	%	$	46,383		$	145		1.25	%
Securities		103,454			772			2.98		9,760			126			5.16
Loans held for sale		—			—			—		17,817			240			5.39
Loans receivable		108,366			1,902			7.02		108,848			2,228			8.19
Total interest-earning assets		244,726			2,756			4.50		182,208			2,739			5.99
Non-earning assets		13,561								31,327
Total assets		$	258,287							$	214,135
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW accounts		$	1,342		3			0.89		$	1,494		3			0.80
Money market accounts		104,062			553			2.13		13,406			48			1.43
Savings deposits		8,714			30			1.38		12,840			44			1.37
Time deposits		37,198			405			4.36		47,809			453			3.79
Other borrowings		12,000			163			5.43		18,594			267			5.74
Total interest-bearing liabilities		163,316			1,154			2.83		94,143			815			3.46
Noninterest-bearing liabilities		78,812								103,544
Stockholders’ equity		16,159								16,448
Total liabilities and stockholders’ equity		$	258,287							$	214,135
Interest rate spread								1.67	%							2.53	%
Net interest income and net interest margin					$	1,602		2.62	%				$	1,924		4.21	%

 

11

 

		Six months ended June 30,
		2004								2003
		Average Volume			Interest			Yield/Cost		Average Volume			Interest			Yield/Cost
ASSETS
Interest-earning assets:
Federal funds sold		$	34,556		$	171		0.99	%	$	38,952		$	245		1.26	%
Securities		84,251			1,272			3.02		7,957			204			5.13
Loans held for sale		78			2			5.13		13,997			382			5.46
Loans receivable		109,751			3,900			7.11		112,213			4,503			8.03
Total interest-earning assets		228,636			5,345			4.68		173,119			5,334			6.16
Non-earning assets		11,897								26,376
Total assets		$	240,533							$	199,495
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW accounts		$	1,521		6			0.81		$	1,463		7			0.89
Money market accounts		91,902			982			2.14		10,579			81			1.53
Savings deposits		9,280			64			1.37		12,854			102			1.59
Time deposits		37,650			815			4.33		48,176			943			3.92
Other borrowings		12,000			326			5.43		18,657			533			5.71
Total interest-bearing liabilities		152,353			2,193			2.88		91,729			1,666			3.63
Noninterest-bearing liabilities		71,702								92,472
Stockholders’ equity		16,478								15,294
Total liabilities and stockholders’ equity		$	240,533							$	199,495
Interest rate spread								1.80								2.53
Net interest income and net interest Margin					$	3,152		2.76	%				$	3,668		4.24	%

 

Net interest income represents the excess of income on interest-earning assets over interest expense on interest bearing liabilities.  The principal interest-earning assets are federal funds sold, investment securities and loans receivable.  Interest-bearing liabilities primarily consist of FHLB borrowings, time deposits, interest-bearing checking accounts (NOW accounts), savings, deposits and money market accounts.  Funds attracted by these interest-bearing liabilities are invested in interest-earning assets.  Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest bearing liabilities and the interest rates earned or paid on them.

 

Noninterest Income

Noninterest income for the three months ended June 30, 2004 was $57,000 compared to $175,000 for the same period in 2003, a decrease of $118,000 or 67%.  This decrease was primarily due to the decrease in gain on sale of securities of approximately $57,000; the decrease in gain on sale of loans of $36,000; the $12,000 decrease in service charges on deposit accounts and the decrease in the net gain on foreclosed assets and other income of $13,000.  The decrease in the gain on sale of securities resulted from the reduction in the sale of securities for liquidity purposes.  The decrease in gain on sales loans, net resulted from the reduction in the origination and sale of loans during 2004.  The decrease in service charges on deposit accounts resulted from a reduction in insufficient fund charges on checking accounts.

 

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

 

Noninterest Expense

 

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

 

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

 

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

 

BALANCE SHEET ANALYSIS

 

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

 

ASSETS

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

 

Investment Securities

Pelican National primarily utilizes investments in securities for liquidity management and as a method of deploying excess funding not utilized for investment in loans.   Pelican National has invested primarily in U. S. government and agency securities and U. S. government sponsored agency issued mortgage-backed securities.  As required by SFAS No. 115, Pelican National classifies securities as held-to-maturity, available-for-sale, or trading.  At June 30, 2004 and at December 31, 2003, all of the investment securities held in Pelican National’s investment portfolio were classified as available for sale.

 

The following table contains information on the carrying value of Pelican National’s investment portfolio at the dates indicated.  At June 30, 2004, the market value of Pelican National’s investment portfolio totaled $108.6 million. During the periods indicated and except as otherwise noted, Pelican National had no securities of a single issuer that exceeded 10% of stockholders’ equity.

 

		(dollars in thousands)
		At June 30, 2004			At December 31, 2003
U. S. Government agency		$	66,850		$	25,403
Mortgage-backed securities		40,585			24,327
Federal Reserve Bank and Federal Home Loan Bank Stock		1,192			949
Total investment securities		$	108,627		$	50,679

 

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

 

Cash and Cash Equivalents

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

 

Loans Receivable

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

 

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

 

The following table contains selected data relating to the composition of Pelican Financial’s loan portfolio by type of loan at the dates indicated.  This table includes mortgage loans held for sale and mortgage loans held for investment.  Pelican Financial had no concentration of loans exceeding 10% of total loans that are not otherwise disclosed below.

 

		June 30, 2004					December 31, 2003
		Amount			Percent		Amount			Percent
Real estate loans:
Residential, one to four units		$	39,245		36.99	%	$	44,094		39.83	%
Commercial and industrial real estate		39,272			37.01		43,151			38.98
Construction		1,400			1.32		1,327			1.19
Total real estate loans		79,917			75.32		88,572			80.00
Other loans:
Business, commercial		1,973			1.86		1,534			1.39
Automobile		415			0.39		478			0.43
Boat		17,538			16.53		14,578			13.17
Other consumer		6,253			5.90		5,546			5.01
Total other loans		26,179			24.68		22,136			20.00
Total gross loans		106,096			100.00	%	110,708			100.00	%
Unearned fees, premiums and discounts, net		312					420
Allowance for loan losses		(1,228		)			(1,330		)
Total Loans net		$	105,180				$	109,798

 

Asset Quality

Pelican Financial is exposed to certain credit risks related to the value of the collateral that secures loans held in its portfolio and the ability of borrowers to repay their loans during the term thereof.  Pelican Financial’s senior officers closely monitor the loan and real estate owned portfolios for potential problems on a continuing basis and report to the Board of Directors of Pelican Financial at regularly scheduled meetings.  These officers regularly review the classification of loans and the allowance for losses.   Pelican Financial also has a quality control department, the function of which is to provide the Board of Directors with an independent ongoing review and evaluation of the quality of the process by which lending assets are generated.

 

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The following table sets forth certain information on nonperforming loans and other real estate owned, the ratio of such loans and other real estate owned to total loans and total assets as of the dates indicated.

 

		At June 30,						At December 31,
		2004			2003			2003
		(Dollars in thousands)
Nonaccrual loans		$	219		$	871		$	455
Loans past due 90 days or more but not on nonaccrual		—			88			—
Total nonperforming loans		219			959			455
Other real estate owned		—			996			333
Total nonperforming assets		$	219		$	1,955		$	788
Total nonperforming assets to total assets		0.08		%	1.54		%	0.36		%
Allowance for loan losses to nonperforming loans		560.73		%	117.62		%	292.31		%
Nonperforming loans to total assets		0.08		%	0.41		%	0.21		%

 

Provision and Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

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

 

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

 

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LIABILITIES

 

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

 

Deposits

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity Management

The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments and to capitalize on opportunities for business expansion.  Liquidity management addresses the ability to meet deposit withdrawals either on demand or by contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise.

 

Pelican Financial’s source of funds is dividends paid by Pelican National.  Pelican National’s sources of funds include net increases in deposits, principal and interest payments on loans, proceeds from sales of loans held for sale, proceeds from maturities and sales of securities, calls of available for sale securities and Federal Home Loan Bank borrowings.

 

The liquidity reserve may consist of cash on hand, cash on demand deposits with other correspondent banks, and other investments and short-term marketable securities as determined by the rules of the Office of the Comptroller of the Currency (“OCC”), such as federal funds sold and United States securities and securities guaranteed by the United States.  At June 30, 2004, Pelican National had a liquidity ratio of 60%.  This is calculated by adding all of Pelican National’s cash, unpledged securities and federal funds sold and dividing by its’ total liabilities.  Pelican National has available to it several contingent sources of funding.  These include the ability to raise funds through brokered deposits, lines of credit and the sale of loans or participations

 

Capital Resources

 

The Board of Governors of the Federal Reserve System’s (FRB) capital adequacy guidelines mandate that minimum ratios be maintained by bank holding companies such as Pelican Financial. Pelican National is governed by capital adequacy guidelines mandated by the OCC.

 

Based upon their respective regulatory capital ratios at June 30, 2004 Pelican Financial and Pelican National are both well capitalized, based upon the definitions in the regulations issued by the FRB and the OCC setting forth the general capital requirements mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991.

 

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The table below indicates the regulatory capital ratios of Pelican Financial and Pelican National and the regulatory categories for a well capitalized and adequately capitalized bank under the regulatory framework for prompt corrective action (all three capital ratios) at June 30, 2004 and December 31, 2003, respectively:

 

		June 30, 2004				December 31, 2003				Required to be
		Pelican National		Pelican Financial		Pelican National		Pelican Financial		Adequately Capitalized		Well Capitalized
Total Equity Capital to risk-weighted assets		14.29	%	15.10	%	13.66	%	15.50	%	8.00	%	10.00	%
Tier 1 Capital to risk-weighted assets		13.24	%	14.06	%	12.51	%	14.36	%	4.00	%	6.00	%
Tier 1 Capital to adjusted total assets		6.03	%	6.45	%	7.20	%	7.96	%	4.00	%	5.00	%

 

Item 3:  Quantitative and Qualitative Disclosure About Market Risk

 

For a discussion of Pelican Financial’s asset/liability management policies as well as the potential impact of interest rate changes upon the market value of Pelican Financial’s portfolio, see Pelican Financial’s Annual Report to Shareholders and Form 10-K.  Management believes that there has been no material change in Pelican Financial’s asset/liability position or the market value of Pelican Financial’s portfolio since December 31, 2003.

 

Item 4:  Controls and Procedures

 

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

 

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

 

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

 

Part II. Other Information

 

Item 1.   Legal Proceedings

 

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

 

Item 2.  Changes in Securities and Use of Proceeds

 

Not Applicable.

 

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Item 3.   Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4.   Submission of Matters to a Vote of Shareholders

 

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

 

		For		Against		Abstentions
Robert C. Huffman		3,784,166		101,462		0
Howard M. Nathan		3,784,166		101,462		0
Scott D. Miller		3,784,166		37,462		0

 

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

 

Item 5.   Other Information

 

None

 

Item 6.   Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

31.1		Certification of Principal Executive Officer
31.2		Certification of Principal Financial Officer
32		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K

 

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

 

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Pelican Financial, Inc. and Subsidiaries

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date: August 13, 2004	/s/ Charles C. Huffman
	Charles C. Huffman
	President and Chief Executive Officer
Date: August 13, 2004	/s/ Howard M. Nathan
	Howard M. Nathan
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

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