U.S. Securities and Exchange Commission

Washington, D.C.  20549

Form 10-Q

Commission file number  001-14986

Pelican Financial, Inc.

(Exact name of registrant as specified in its charter)

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

Index

PELICAN FINANCIAL, INC.

Consolidated Balance Sheets

See accompanying notes to the financial statements

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PELICAN FINANCIAL, INC.

Consolidated Statements of Income and Comprehensive Income (Unaudited)

See accompanying notes to the financial statements

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PELICAN FINANCIAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30,

See accompanying notes to the financial statements

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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.

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.

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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:

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

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

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NOTE 5 - EARNINGS PER SHARE

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

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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.

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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.

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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.

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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.

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.

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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.