U.S. Securities and Exchange Commission

Washington, D.C.  20549

 

Form 10-Q

 

ý

 

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

 

 

 

For the Quarter Ended June 30, 2005

 

 

 

Or

 

 

 

o

 

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

 

Commission file number  001-14986

 

Pelican Financial, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

58-2298215

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer
Identification No.)

 

3767 Ranchero Drive

Ann Arbor, Michigan  48108

(Address of Principal Executive Offices)

 

734-662-9733

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

Yes  o    No  ý

 

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

 

Common Stock Outstanding as of July 31, 2005

 

Common stock, $0.01 Par value

4,494,365 Shares

 

 



 

Index

 

Part I. Financial Information

 

 

 

 

 

Item 1. Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2005 and June 30, 2004

4

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and June 30, 2004

5

 

 

 

 

Notes to Consolidated Financial Statements

6-9

 

 

 

 

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

10-17

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

17

 

 

 

 

Item 4. Controls and Procedures

17

 

 

 

Part II. Other Information

 

 

 

 

 

Item 1. Legal Proceedings

17

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

17

 

 

 

 

Item 3. Defaults Upon Senior Securities

18

 

 

 

 

Item 4. Submission of Matters to a Vote of Security Holders

18

 

 

 

 

Item 5. Other Information

18

 

 

 

 

Item 6. Exhibits

19

 



 

PELICAN FINANCIAL, INC.

Consolidated Balance Sheets

 

 

 

June 30,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

Cash and due from banks

 

$

857,136

 

$

2,831,621

 

Interest-bearing deposits

 

2,076,800

 

275,800

 

Federal funds sold

 

11,905,968

 

7,384,068

 

Total cash and cash equivalents

 

14,839,904

 

10,491,489

 

Securities available for sale

 

68,352,128

 

69,385,545

 

Federal Reserve & Federal Home Loan Bank Stock

 

2,489,900

 

2,669,700

 

Loans receivable, net

 

113,566,613

 

110,830,985

 

Other real estate owned

 

67,255

 

 

Premises and equipment, net

 

3,526,186

 

3,713,200

 

Other assets

 

1,929,536

 

1,724,659

 

 

 

 

 

 

 

 

 

$

204,771,522

 

$

198,815,578

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-bearing

 

$

18,142,900

 

$

15,200,340

 

Interest-bearing

 

132,003,470

 

125,508,431

 

Total deposits

 

150,146,370

 

140,708,771

 

Federal Home Loan Bank borrowings

 

38,500,000

 

41,500,000

 

Other liabilities

 

431,553

 

319,057

 

Total liabilities

 

189,077,923

 

182,527,828

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, 200,000 shares authorized; none outstanding

 

 

 

Common stock, $.01 par value 10,000,000 shares authorized; 4,494,365 outstanding at June 30, 2005 and December 31, 2004

 

44,943

 

44,943

 

Additional paid in capital

 

15,574,767

 

15,574,767

 

Retained earnings

 

388,687

 

932,726

 

Accumulated other comprehensive (loss), net of tax

 

(314,798

)

(264,686

)

Total shareholders’ equity

 

15,693,599

 

16,287,750

 

 

 

 

 

 

 

 

 

$

204,771,522

 

$

198,815,578

 

 

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,

 

 

 

2005

 

2004

 

2005

 

2004

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

1,878,216

 

$

1,902,121

 

$

3,826,021

 

$

3,901,826

 

Investment securities, taxable

 

691,440

 

771,950

 

1,227,858

 

1,271,182

 

Federal funds sold and overnight accounts

 

64,244

 

82,288

 

135,934

 

171,828

 

Total interest income

 

2,633,900

 

2,756,359

 

5,189,813

 

5,344,836

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

876,230

 

990,771

 

1,682,829

 

1,867,230

 

Other borrowings

 

377,328

 

162,814

 

734,637

 

325,856

 

Total interest expense

 

1,253,558

 

1,153,585

 

2,417,466

 

2,193,086

 

Net interest income

 

1,380,342

 

1,602,774

 

2,772,347

 

3,151,750

 

Provision for loan losses

 

 

 

 

75,000

 

Net interest income after provision for loan losses

 

1,380,342

 

1,602,774

 

2,772,347

 

3,076,750

 

Noninterest income

 

 

 

 

 

 

 

 

 

Gain on sales of securities, net

 

5,625

 

529

 

5,625

 

2,859

 

Service charges on deposit accounts

 

59,746

 

35,961

 

117,788

 

66,490

 

Gain on sale of loans, net

 

4,064

 

10,117

 

5,721

 

19,758

 

Net gain on foreclosed assets and other income

 

48,057

 

10,425

 

51,967

 

69,395

 

Total noninterest income

 

117,492

 

57,032

 

181,101

 

158,502

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

903,333

 

929,236

 

1,778,149

 

1,866,910

 

Occupancy and equipment

 

374,712

 

316,393

 

753,478

 

587,199

 

Legal

 

39,734

 

57,825

 

107,571

 

107,450

 

Accounting and auditing

 

55,123

 

31,028

 

105,426

 

91,150

 

Data processing

 

74,236

 

43,430

 

147,478

 

91,632

 

Marketing and advertising

 

38,487

 

25,452

 

82,952

 

57,605

 

Loan and other real estate owned

 

100,440

 

78,360

 

166,985

 

201,639

 

Other noninterest expense

 

241,113

 

284,895

 

635,012

 

581,359

 

Total noninterest expense

 

1,827,178

 

1,766,619

 

3,777,051

 

3,584,944

 

Income (loss) before income taxes

 

(329,344

)

(106,813

)

(823,603

)

(349,692

)

Income tax expense (benefit)

 

(111,725

)

(35,596

)

(279,564

)

(118,051

)

Net Income (loss)

 

$

(217,619

)

$

(71,217

)

$

(544,039

)

$

(231,641

)

Basic earnings (loss) per share

 

$

(0.05

)

$

(0.02

)

$

(0.12

)

$

(0.05

)

Diluted earnings (loss) per share

 

$

(0.05

)

$

(0.02

)

$

(0.12

)

$

(0.05

)

Comprehensive income (loss)

 

$

119,083

 

$

(1,141,236

)

$

(594,151

)

$

(944,914

)

 

See accompanying notes to the financial statements

 

4



 

PELICAN FINANCIAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30,

 

 

 

Six months ended June 30,

 

 

 

2005

 

2004

 

Cash flows from operating activities

 

 

 

 

 

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

 

$

(281,329

)

$

(86,197

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Loan originations, net

 

(2,802,883

)

4,542,935

 

Sale of real estate owned

 

 

332,857

 

Property and equipment expenditures, net

 

(48,499

)

(944,768

)

Purchase of securities available for sale

 

(31,778,327

)

(75,973,646

)

Proceeds from sales of securities available for sale

 

2,005,625

 

13,000,000

 

Proceeds from maturities and principal repayments of securities available for sale

 

30,636,429

 

3,956,357

 

Redemption (purchase) of Federal Home Loan Bank stock

 

179,800

 

(243,200

)

Net cash (used) in investing activities

 

(1,807,855

)

(55,329,465

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Increase in deposits

 

9,437,599

 

38,605,233

 

Cash dividends

 

 

 

Decrease in note payable due on demand

 

 

(291,665

)

Repayments on Federal Home Loan Bank borrowings

 

(3,000,000

)

 

Net cash provided by financing activities

 

6,437,599

 

38,313,568

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

4,348,415

 

(17,102,094

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

10,491,489

 

55,419,717

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

14,839,904

 

$

38,317,623

 

 

 

 

 

 

 

Transfers from:

 

 

 

 

 

Loans to other real estate owned

 

$

67,255

 

$

 

 

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, 2005 and June 30,2004, 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 subsidiary.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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,

 

 

 

2005

 

2004

 

Net income (loss) as reported

 

$

(217,619

)

$

(71,217

)

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

 

4,547

 

3,825

 

Pro forma net income (loss)

 

$

(222,166

)

$

(75,042

)

 

 

 

 

 

 

Basic earnings (loss) per share as reported

 

$

(0.05

)

$

(0.02

)

Pro forma basic earnings (loss) per share

 

(0.05

)

(0.02

)

 

 

 

 

 

 

Diluted earnings (loss) per share as reported

 

$

(0.05

)

$

(0.02

)

Pro forma diluted earnings (loss) per share

 

(0.05

)

(0.02

)

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

Net income (loss) as reported

 

$

(544,039

)

$

(231,641

)

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

 

9,094

 

7,268

 

Pro forma net income (loss)

 

$

(553,133

)

$

(238,909

)

 

 

 

 

 

 

Basic earnings (loss) per share as reported

 

$

(0.12

)

$

(0.05

)

Pro forma basic earnings (loss) per share

 

(0.12

)

(0.05

)

 

 

 

 

 

 

Diluted earnings (loss) per share as reported

 

$

(0.12

)

$

(0.05

)

Pro forma diluted earnings (loss) per share

 

(0.12

)

(0.05

)

 

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 Mortgage Company (“Washtenaw”), which prior to the spin-off was a wholly owned subsidiary of Pelican Financial.  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 quarterly period ended June 30, 2005, 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, 2004 included in Pelican Financial’s Form 10-K.

 

Certain prior year amounts have been reclassified to conform to the 2005 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’s new parent company, The Washtenaw Group, 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 was no longer a subsidiary of Pelican Financial.  During the periods presented in the financial statements, Pelican Financial did not incur any expenses on behalf of Washtenaw.

 

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,
2005

 

December 31,
2004

 

Commercial, financial and agricultural

 

$

5,959,912

 

$

1,967,687

 

Commercial real estate

 

33,456,371

 

38,751,936

 

Residential real estate

 

48,242,937

 

46,689,250

 

Marine

 

20,949,216

 

17,823,612

 

Consumer

 

5,938,979

 

6,552,454

 

 

 

114,547,415

 

111,784,939

 

Less: allowance for loan losses

 

(980,802

)

(953,954

)

 

 

 

 

 

 

Loans receivable, net

 

$

113,566,613

 

$

110,830,985

 

 

7



 

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

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Balance at beginning of period

 

$

971,838

 

$

1,445,272

 

Provision for loan losses

 

 

 

Loans charged-off

 

(12,416

)

(242,143

)

 

 

 

 

 

 

Recoveries

 

21,380

 

24,924

 

 

 

 

 

 

 

Balance at end of period

 

$

980,802

 

$

1,228,053

 

 

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

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Balance at beginning of period

 

$

953,954

 

$

1,330,112

 

Provision for loan losses

 

 

75,000

 

Loans charged-off

 

(38,764

)

(242,143

)

 

 

 

 

 

 

Recoveries

 

65,612

 

65,084

 

 

 

 

 

 

 

Balance at end of period

 

$

980,802

 

$

1,228,053

 

 

8



 

NOTE 5 - EARNINGS PER SHARE

 

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

 

 

 

Three Months Ended June 30, 2005

 

Three Months Ended June 30, 2004

 

Basic earnings (loss) per share

 

 

 

 

 

Net income (loss) applicable to common stock

 

$

(217,619

)

$

(71,217

)

 

 

 

 

 

 

Weighted average shares outstanding

 

4,494,365

 

4,488,351

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.05

)

$

(0.02

)

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

Net income (loss) applicable to common stock

 

$

(217,619

)

$

(71,217

)

 

 

 

 

 

 

Weighted average shares outstanding

 

4,494,365

 

4,488,351

 

Dilutive effect of assumed exercise of stock options

 

 

 

Diluted average shares outstanding

 

4,494,365

 

4,488,351

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.05

)

$

(0.02

)

 

 

 

Six Months Ended June 30, 2005

 

Six Months Ended June 30, 2004

 

Basic earnings (loss) per share

 

 

 

 

 

Net income (loss) applicable to common stock

 

$

(544,039

)

$

(231,641

)

 

 

 

 

 

 

Weighted average shares outstanding

 

4,494,365

 

4,488,351

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.12

)

$

(0.05

)

 

 

 

 

 

 

Diluted earnings (loss) per share

 

 

 

 

 

Net income (loss) applicable to common stock

 

$

(544,039

)

$

(231,641

)

 

 

 

 

 

 

Weighted average shares outstanding

 

4,494,365

 

4,488,351

 

Dilutive effect of assumed exercise of stock options

 

 

 

Diluted average shares outstanding

 

4,494,365

 

4,488,351

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

(0.12

)

$

(0.05

)

 

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.  Pelican Financial’s operations focus on retail banking.  Retail banking 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 six offices in Naples, Fort Myers, Bonita Springs and Cape Coral, Florida.

 

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 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.

 

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 aggressively marketed a money market deposit account in its local markets during the first nine months of 2004.  During the fourth quarter, management decided to reduce the interest rate being paid on the money market accounts in an effort to increase its interest margin.

 

Management is attempting to increase the growth rate of Pelican National’s loan portfolio.  The approach includes recruiting seasoned loan officers, purchase of loans or participations within its lending area and aggressive pricing to attract high quality loans.

 

EARNINGS PERFORMANCE

 

Pelican Financial reported a net loss from continuing operations of $218,000 for the quarter ended June 30, 2005, compared to a net loss of $71,000 for the quarter ended June 30, 2004.  Basic and diluted earnings per share from continuing operations was $0.05 and $0.02 loss per share for the three months ended June 30, 2005 and June 30, 2004, respectively.

 

For the six months ended June 30, 2005, Pelican Financial reported a net loss from continuing operations of $544,000 compared to a net loss of $232,000 for the same period in 2004.  Basic and diluted earnings per share from continuing operations was $0.12 and $0.05 loss per share for the six months ended June 30, 2005 and June 30, 2004, respectively.

 

10



 

RESULTS OF OPERATIONS

 

Net Interest Income

Net interest income was $1.4 million and $1.6 million for the three months ended June 30, 2005 and June 30, 2004, respectively.  For the six months ended June 30, 2005 and June 30, 2004, net interest income was $2.8 million and $3.2 million respectively.  Net interest income decreased primarily as a result of the decrease in the average balance on interest-earning assets and the change in the overall deposit structure.  Both of these were a direct result of the large withdrawal of deposits that occurred during the fourth quarter of 2004.   The non-interest bearing deposits were replaced with Federal Home Loan Bank (“FHLB”) advances with various maturities.   Also as a result of the withdrawal of the deposits, the average balance in both federal funds sold and securities available for sale decreased.

 

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,

 

 

 

2005

 

2004

 

 

 

Average
Volume

 

Interest

 

Yield/Cost

 

Average
Volume

 

Interest

 

Yield/Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

9,260

 

$

64

 

2.76

%

$

32,906

 

$

82

 

1.00

%

Securities

 

72,819

 

692

 

3.80

 

103,454

 

772

 

2.98

 

Loans held for sale

 

 

 

 

 

 

 

Loans receivable

 

111,674

 

1,878

 

6.73

 

108,366

 

1,902

 

7.02

 

Total interest-earning assets

 

193,753

 

2,634

 

5.44

 

244,726

 

2,756

 

4.50

 

Non-earning assets

 

8,550

 

 

 

 

 

13,561

 

 

 

 

 

Total assets

 

$

202,303

 

 

 

 

 

$

258,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

5,138

 

6

 

0.47

 

$

1,342

 

3

 

0.89

 

Money market accounts

 

49,744

 

271

 

2.18

 

104,062

 

553

 

2.13

 

Savings deposits

 

12,481

 

47

 

1.51

 

8,714

 

30

 

1.38

 

Time deposits

 

60,339

 

552

 

3.66

 

37,198

 

405

 

4.36

 

Other borrowings

 

38,500

 

378

 

3.93

 

12,000

 

163

 

5.43

 

Total interest-bearing liabilities

 

166,202

 

1,254

 

3.02

 

163,316

 

1,154

 

2.83

 

Noninterest-bearing liabilities

 

21,267

 

 

 

 

 

78,812

 

 

 

 

 

Shareholders’ equity

 

14,834

 

 

 

 

 

16,159

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

202,303

 

 

 

 

 

$

258,287

 

 

 

 

 

Interest rate spread

 

 

 

 

 

2.42

%

 

 

 

 

1.67

%

Net interest income and net interest margin

 

 

 

$

1,380

 

2.85

%

 

 

$

1,602

 

2.62

%

 

11



 

 

 

Six months ended June 30,

 

 

 

2005

 

2004

 

 

 

Average
Volume

 

Interest

 

Yield/Cost

 

Average
Volume

 

Interest

 

Yield/Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

11,014

 

$

136

 

2.47

%

$

34,556

 

$

171

 

0.99

%

Securities

 

72,372

 

1,228

 

3.39

 

84,251

 

1,272

 

3.02

 

Loans held for sale

 

 

 

 

78

 

2

 

5.13

 

Loans receivable

 

112,549

 

3,826

 

6.80

 

109,751

 

3,900

 

7.11

 

Total interest-earning assets

 

195,935

 

5,190

 

5.30

 

228,636

 

5,345

 

4.68

 

Non-earning assets

 

7,354

 

 

 

 

 

11,897

 

 

 

 

 

Total assets

 

$

203,289

 

 

 

 

 

$

240,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

2,861

 

11

 

0.79

 

$

1,521

 

6

 

0.81

 

Money market accounts

 

57,853

 

586

 

2.03

 

91,902

 

982

 

2.14

 

Savings deposits

 

12,632

 

90

 

1.42

 

9,280

 

64

 

1.37

 

Time deposits

 

55,628

 

996

 

3.58

 

37,650

 

815

 

4.33

 

Other borrowings

 

39,627

 

735

 

3.71

 

12,000

 

326

 

5.43

 

Total interest-bearing liabilities

 

168,601

 

2,418

 

2.87

 

152,353

 

2,193

 

2.88

 

Noninterest-bearing liabilities

 

19,704

 

 

 

 

 

71,702

 

 

 

 

 

Shareholders’ equity

 

14,984

 

 

 

 

 

16,478

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

203,289

 

 

 

 

 

$

240,533

 

 

 

 

 

Interest rate spread

 

 

 

 

 

2.43

%

 

 

 

 

1.80

%

Net interest income and net interest Margin

 

 

 

$

2,772

 

2.83

%

 

 

$

3,152

 

2.76

%

 

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, 2005 was $117,000 compared to $57,000 for the same period in 2004, an increase of $60,000 or 105%.  This increase was primarily due to the increase in service charges on deposit accounts of $24,000 and the increase in the net gain on foreclosed assets and other income of $38,000.   The increase in service charges on deposit accounts resulted from an increase in overall deposit relationships due to the increased branch presence in the market.  The increase in gain on foreclosed assets was attributable to a profitable disposal of assets.

 

For the six months ended June 30, 2005, noninterest income was $181,000, compared to $159,000 for the same period in 2004.  The increase of $22,000, or 14%, was primarily the result of fluctuations in operations as described above.

 

Noninterest Expense

Total noninterest expense for the three months ended June 30, 2005 and June 30, 2004 was $1.8 million.  For the six months ended June 30, 2005, noninterest expense was $3.8 million compared to $3.6 million for the same period in 2004.  The significant fluctuations are detailed below.

 

Compensation and Employee Benefits Expense

Compensation and benefits decreased $26,000 and $89,000 for the three and six month periods, ended June 30, 2005, respectively.  The reduction is primarily due to the departure of several high cost employees.  Their responsibilities were subsequently shared among the remaining management team.

 

12



 

Occupancy and Equipment Expense

Occupancy and equipment expense increased $58,000 and $166,000 for the three and six month periods, ended June 30, 2005, respectively. The increase was due to Pelican National opening two bank branches during second half of the year in 2004.

 

Data Processing

Data Processing expense increased $31,000 and $56,000 for the three and six month periods, ended June 30, 2005, respectively.  The increase is due to the increased costs on the core systems contract due to the additional depositor relationships established during 2005.

 

Marketing and Advertising

Marketing and Advertising expense increased $13,000 and $25,000 for the three and six month periods, ended June 30, 2005, respectively.  The increase in expenditures was due to increased advertising and promotional activity.

 

Other Noninterest Expense

Other noninterest expenses decreased to $241,000, compared to $285,000 for the quarters ended June 30, 2005 and 2004, respectively.  The decrease is due to management’s focused effort on reducing costs to improve profitability.  For the six months period ended June 30, 2005, other noninterest expense increased $54,000.  This was the result of two lawsuits that were settled for approximately $135,000.  Although these suits were not considered significant, management determined it would be more cost effective to settle these cases than to continue the litigation process.

 

BALANCE SHEET ANALYSIS

 

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

 

ASSETS

 

At June 30, 2005, total assets of Pelican Financial equaled $204.8 million compared to $198.8 million at December 31, 2004, an increase of $6.0 million or 3%. The increase is primarily due to the increase 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, 2005, and at December 31, 2004, 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, 2005, the market value of Pelican National’s investment portfolio totaled $70.8 million. During the periods indicated and except as otherwise noted, Pelican National had no securities of a single issuer that exceeded 10% of shareholders’ equity.

 

 

 

(dollars in thousands)

 

 

 

At June 30, 2005

 

At December 31, 2004

 

U. S. Government agency

 

$

27,255

 

$

49,934

 

Mortgage-backed securities

 

41,097

 

19,452

 

Federal Reserve Bank and Federal Home Loan Bank Stock

 

2,490

 

2,670

 

Total investment securities

 

$

70,842

 

$

72,056

 

 

The decrease in securities available for sale is the result of management’s attempt to maximize the yield earned on the 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.

 

13



 

Cash and Cash Equivalents

Cash and cash equivalents were $14.8 million at June 30, 2005, compared to $10.5 million at December 31, 2004.  The increase of $4.3 million or 41% was primarily the result of a $9.4 million increase in deposits. These deposits have not been fully invested in higher yielding loans or securities and were primarily being invested in federal funds sold.  Management is currently assessing the best strategy for these deposits in terms of investing in additional securities or paying down the short-term FHLB borrowings.

 

Loans Receivable

Total loans receivable were $113.6 million at June 30, 2005, compared to $110.8 million at December 31, 2004.  The slight increase in balance is the result of new loan production being offset by loan payoffs and principal reductions.  New loan production for the three and six months ended June 30, 2005 was $19.6 million and $34.5 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, 2005

 

December 31, 2004

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Residential, one to four units

 

$

45,700

 

40.01

%

$

46,331

 

41.55

%

Commercial and industrial real estate

 

33,456

 

29.29

 

37,457

 

33.59

 

Construction

 

2,301

 

2.02

 

1,381

 

1.24

 

Total real estate loans

 

81,457

 

71.32

 

85,169

 

76.38

 

Other loans:

 

 

 

 

 

 

 

 

 

Business, commercial

 

5,869

 

5.14

 

1,968

 

1.77

 

Automobile

 

415

 

0.36

 

348

 

0.31

 

Boat

 

20,949

 

18.34

 

17,823

 

15.98

 

Other consumer

 

5,524

 

4.84

 

6,205

 

5.56

 

Total other loans

 

32,757

 

28.68

 

26,344

 

23.62

 

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

114,214

 

100.00

%

111,513

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Unearned fees, premiums and discounts, net

 

334

 

 

 

272

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(981

)

 

 

(954

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans net

 

$

113,567

 

 

 

$

110,831

 

 

 

 

Asset Quality

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

 

14



 

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

 

 

 

At June 30,

 

At December 31,

 

 

 

2005

 

2004

 

2004

 

 

 

(Dollars in thousands)

 

Nonaccrual loans

 

$

684

 

$

219

 

$

450

 

Loans past due 90 days or more but not on nonaccrual

 

44

 

 

109

 

Total nonperforming loans

 

728

 

219

 

559

 

 

 

 

 

 

 

 

 

Other real estate owned

 

67

 

 

 

Total nonperforming assets

 

$

795

 

$

219

 

$

559

 

 

 

 

 

 

 

 

 

Total nonperforming assets to total assets

 

0.39

%

0.08

%

0.28

%

Allowance for loan losses to nonperforming loans

 

134.77

%

560.73

%

170.83

%

Nonperforming loans to total assets

 

0.36

%

0.08

%

0.28

%

 

Provision and Allowance for Loan Losses

The allowance for loan losses as of June 30, 2005 was $981,000, or 0.86% of total portfolio loans, compared to $954,000, or 0.86% of total loans at December 31, 2004. The 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. The 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, 2005 the allowance for loan losses increased by $9,000 and $27,000, respectfully.  This was due to the recoveries on previously charged off loans exceeding new charge-offs.  The small fluctuation in the allowance was deemed appropriate due to no significant change in loans on the banks “criticized asset report” and a modest increase in overall loan portfolio.

 

Criticized assets decreased from $4.5 million at December 31, 2004 to $4.3 million at June 30, 2005.  These loans represent loans with one or more underwriting deficiencies as identified by bank management or the bank’s regulatory agency.  Management is in the process of corrective actions on the criticized loans in an effort to improve the rating on the criticized assets.  Criticized assets may or may not be delinquent.

 

15



 

LIABILITIES

 

At June 30, 2005, the total liabilities of Pelican Financial were $189.1 million as compared to $182.5 million at December 31, 2004, an increase of $6.6 million or 4%. This increase was primarily due to an increase in deposits, which was offset by the repayments of FHLB borrowings.

 

Deposits

Total deposits were $150.1 million at June 30, 2005, compared to $140.7 million at December 31, 2004, representing an increase of $9.4 million or 7%.  The increase was the result of a focus on developing new deposit relationships with customers.  In addition the two branches opened during 2004 increased their total deposits by $6.0 million during the six months ended June 30, 2005.

 

During the six months ended June 30, 2005, FHLB borrowings decreased from $41.5 million to $38.5 million.  The decrease of $3.0 million was due to the increase in deposits.  Pelican National borrowed additional funds from the FHLB on a short-term basis until it is able to replace the large withdrawal of deposits that occurred during the fourth quarter of 2004 with core deposits.  Pelican National intends to replace the FHLB borrowings with customer deposits.

 

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 FHLB 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, 2005, Pelican National had a liquidity ratio of 38%.  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, 2005, Pelican Financial and Pelican National are both “well capitalized”, as defined in the regulations issued by the FRB and the OCC setting forth the general capital requirements mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991.

 

16



 

The table below indicates the regulatory capital ratios of Pelican Financial and Pelican National and the regulatory categories for a well capitalized and adequately capitalized bank under the regulatory framework for prompt corrective action (all three capital ratios) at June 30, 2005 and December 31, 2004, respectively:

 

 

 

June 30, 2005

 

December 31, 2004

 

Required to be

 

 

 

Pelican
National

 

Pelican
Financial

 

Pelican
National

 

Pelican
Financial

 

Adequately
Capitalized

 

Well
Capitalized

 

Total Equity Capital to risk-weighted assets

 

14.16

%

14.65

%

15.53

%

16.31

%

8.00

%

10.00

%

Tier 1 Capital to risk-weighted assets

 

13.32

%

13.81

%

14.64

 

15.42

 

4.00

%

6.00

%

Tier 1 Capital to adjusted total assets

 

7.59

%

7.89

%

7.18

 

7.57

 

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 for the fiscal year ended December 31, 2004.  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, 2004.

 

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, there has been no such change during the quarter covered by this report.

 

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

 

During the quarter ended March 31, 2005, Pelican Financial settled two legal proceedings for approximately $135,000.  There has been no other material change to the pending legal proceedings to which Pelican Financial is a party since the filing of the registrant’s Form 10-K for the fiscal year ended December 31, 2004.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Not Applicable.

 

17



 

Item 3.   Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4.   Submission of Matters to a Vote of Shareholders

 

Pelican held its 2005 Annual Meeting of Shareholders on April 28, 2005 at which the shareholders voted (a) to elect three persons to the Board of Directors to serve for a term of three years, and (b) to ratify the appointment of Crowe Chizek and Company, LLC as independent public accountants for the year ending December 31, 2005.

 

(a) The following directors were elected at the annual meeting to serve three-year terms.

 

 

 

For

 

Against

 

Abstentions

 

Raleigh E. Allen

 

3,667,952

 

52,526

 

0

 

Timothy J. Ryan

 

3,668,312

 

52,166

 

0

 

S. Lynn Stokes

 

3,664,747

 

55,371

 

0

 

 

The names of the directors elected whose term of office continued after the annual meeting are as follows:

 

Robert C. Huffman

Charles C. Huffman

Howard B. Montgomery

Scott D. Miller

 

(b) The shareholders ratified the appointment of Crowe Chizek and Company LLC as independent auditors for the fiscal year ending December 31, 2005 by the following votes:  3,688,807 for, 27,201 against, and 4,470 abstained.

 

Item 5.   Other Information

 

(a)                                  Not applicable

 

(b)                                 Not applicable

 

18



 

Item 6.   Exhibits

 

Exhibit Number

 

Description

 

 

 

3.1

 

Certificate of Incorporation of Pelican Financial, Inc. (1)

 

 

 

3.2

 

Bylaws of Pelican Financial, Inc. (1)

 

 

 

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)

 

 

 

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

 

19



 

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 12, 2005

/s/ Charles C. Huffman

 

 

 

Charles C. Huffman

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

Date: August 12, 2005

/s/ Howard M. Nathan

 

 

 

Howard M. Nathan

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

 

20



 

Exhibit Index

 

Exhibit Number

 

Description

 

 

 

3.1

 

Certificate of Incorporation of Pelican Financial, Inc. (1)

 

 

 

3.2

 

Bylaws of Pelican Financial, Inc. (1)

 

 

 

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)

 

 

 

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

 

21