U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
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Quarterly Report Pursuant To
Section 13 or 15 (d) of the |
For the Quarter Ended June 30, 2004
Or
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Transition Report Pursuant To
Section 13 or 15 (d) of the |
Commission file number 1-31795
The Washtenaw Group, Inc.
(Exact name of registrant as specified in its charter)
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Michigan |
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20-0126218 |
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(State or Other Jurisdiction of |
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(IRS Employer |
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3767 Ranchero Drive |
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(Address of Principal Executive Offices) |
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734-662-9733 |
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(Registrant’s Telephone Number, Including Area Code) |
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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
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Common stock, $0.01 Par value |
4,488,351 Shares |
Index
THE WASHTENAW GROUP, INC.
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June 30, |
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December 31, |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
100,000 |
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$ |
100,000 |
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Accounts receivable, net |
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4,971,299 |
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5,340,932 |
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Loans held for sale |
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60,144,176 |
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97,687,823 |
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Mortgage servicing rights, net |
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23,561,036 |
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24,614,381 |
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Other real estate owned |
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1,036,772 |
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925,839 |
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Premises and equipment, net |
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1,648,790 |
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1,480,988 |
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Other assets |
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1,353,269 |
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1,030,653 |
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$ |
92,815,342 |
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$ |
131,180,616 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Liabilities |
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Due to bank |
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10,869,782 |
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11,074,372 |
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Notes payable |
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28,648,842 |
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33,211,685 |
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Repurchase agreements |
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17,050,428 |
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43,926,901 |
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GNMA repurchase liability |
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7,359,982 |
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8,599,700 |
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Other liabilities |
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9,629,825 |
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12,162,996 |
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Total liabilities |
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73,558,859 |
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108,975,654 |
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Shareholders’ equity |
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Preferred stock, $.01 par value 1,000,000 shares authorized; none outstanding |
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— |
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— |
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Common stock, $.01 par value 9,000,000 shares authorized 4,488,351 outstanding at June 30, 2004 and December 31, 2003 |
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44,884 |
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44,884 |
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Additional paid in capital |
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1,994,033 |
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1,955,932 |
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Retained earnings |
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17,217,566 |
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20,204,146 |
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Total shareholders’ equity |
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19,256,483 |
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22,204,962 |
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$ |
92,815,342 |
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$ |
131,180,616 |
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See accompanying notes to consolidated financial statements
3
THE WASHTENAW GROUP, INC.
Consolidated Statements of Income (Unaudited)
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Three Months Ended |
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Six Months Ended |
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2004 |
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2003 |
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2004 |
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2003 |
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Interest income |
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$ |
1,205,151 |
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$ |
3,997,158 |
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$ |
2,413,992 |
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$ |
7,059,173 |
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Interest expense |
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845,919 |
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1,957,119 |
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1,667,681 |
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3,496,696 |
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Net interest income |
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359,232 |
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2,040,039 |
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746,311 |
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3,562,477 |
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Noninterest income |
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Servicing income |
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2,222,773 |
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1,714,144 |
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4,611,651 |
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3,434,101 |
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Gain on sales of mortgage servicing rights and loans, net |
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1,879,114 |
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15,038,244 |
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4,628,091 |
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26,473,046 |
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Other income |
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291,292 |
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355,643 |
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576,834 |
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562,212 |
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Total noninterest income |
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4,393,179 |
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17,108,031 |
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9,816,576 |
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30,469,359 |
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Noninterest expense |
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Compensation and employee benefits |
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2,632,013 |
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6,491,306 |
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5,965,099 |
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11,792,450 |
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Occupancy and equipment |
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452,490 |
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444,563 |
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871,838 |
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839,866 |
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Telephone |
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76,827 |
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156,704 |
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155,207 |
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285,904 |
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Postage |
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112,370 |
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207,782 |
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260,294 |
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392,140 |
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Amortization of mortgage servicing rights |
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1,967,709 |
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1,457,514 |
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3,920,936 |
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2,641,298 |
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Mortgage servicing rights valuation adjustment |
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(3,943,903 |
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2,830,175 |
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(1,041,589 |
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4,635,179 |
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Loss and provision for loss on loan repurchases and other real estate |
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2,248,651 |
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1,249,498 |
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2,865,485 |
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2,166,839 |
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Other noninterest expense |
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1,045,101 |
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1,118,517 |
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2,015,570 |
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2,051,306 |
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Total noninterest expense |
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4,591,258 |
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13,956,059 |
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15,012,840 |
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24,804,982 |
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Income (loss) before income taxes |
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161,153 |
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5,192,011 |
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(4,449,953 |
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9,226,854 |
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Provision for income taxes |
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44,397 |
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1,786,421 |
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(1,463,372 |
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3,162,240 |
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Net income (loss) |
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$ |
116,756 |
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$ |
3,405,590 |
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$ |
(2,986,581 |
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$ |
6,064,614 |
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Basic and diluted earnings (loss) per share |
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$ |
0.03 |
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$ |
0.76 |
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$ |
(0.67 |
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$ |
1.36 |
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See accompanying notes to consolidated financial statements
4
THE WASHTENAW GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
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2004 |
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2003 |
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Cash flows from operating activities |
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Net cash provided (used) by operating activities |
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$ |
23,350,342 |
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$ |
(8,152,976 |
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Cash flows from investing activities |
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Proceeds from sales of mortgage servicing rights |
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8,852,931 |
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5,242,923 |
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Other real estate owned, net |
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(110,933 |
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140,001 |
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Property and equipment expenditures |
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(448,434 |
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(207,057 |
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Net cash provided by investing activities |
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8,293,564 |
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5,175,867 |
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Cash flows from financing activities |
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Increase (decrease) in due to bank |
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(204,590 |
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15,017,873 |
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Cash dividends |
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— |
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(676,688 |
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Increase (decrease) in notes payable due on demand |
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(4,562,843 |
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12,839,446 |
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Decrease in repurchase agreements |
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(26,876,473 |
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(24,203,522 |
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Net cash provided (used) by financing activities |
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(31,643,906 |
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2,977,109 |
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Net change in cash and cash equivalents |
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— |
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— |
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Cash and cash equivalents at beginning of period |
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100,000 |
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100,000 |
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Cash and cash equivalents at end of period |
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$ |
100,000 |
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$ |
100,000 |
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See accompanying notes to consolidated financial statements
5
THE WASHTENAW GROUP, 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 six month period ended June 30, 2004 and 2003, include the accounts of The Washtenaw Group, Inc. (“The Washtenaw Group”) and its wholly owned subsidiary Washtenaw Mortgage Company (“Washtenaw”) for all periods. All references herein to The Washtenaw Group include the consolidated results of its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Operating Segments:
Washtenaw’s operations include one primary segment: mortgage banking.
Stock Compensation:
Compensation expense under stock options is reported using the intrinsic value method. Stock-based compensation reflected in net income for the three and six months ended June 30, 2004 is $12,782 and $38,101, respectively as options granted had an exercise price less than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
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Three Months Ended June 30, |
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2004 |
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2003 |
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Net income as reported |
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$ |
116,756 |
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$ |
3,405,590 |
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Deduct: Incremental stock-based compensation expense (benefit) determined under fair value based method |
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(3,078 |
) |
— |
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Pro forma net income |
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$ |
119,834 |
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$ |
3,405,590 |
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Basic earnings per share as reported |
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$ |
0.03 |
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$ |
0.76 |
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Pro forma basic earnings per share |
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0.03 |
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0.76 |
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Diluted earnings per share |
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$ |
0.03 |
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$ |
0.76 |
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Pro forma diluted earnings per share |
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0.03 |
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0.76 |
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Six Months Ended June 30, |
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2004 |
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2003 |
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Net income (loss) as reported |
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$ |
(2,986,581 |
) |
$ |
6,064,614 |
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Deduct: Incremental stock-based compensation expense (benefit) determined under fair value based method |
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(2,280 |
) |
— |
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Pro forma net income (loss) |
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$ |
(2,984,571 |
) |
$ |
6,064,614 |
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Basic earnings (loss) per share as reported |
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$ |
(0.67 |
) |
$ |
1.36 |
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Pro forma basic earnings (loss) per share |
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(0.67 |
) |
1.36 |
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Diluted earnings (loss) per share |
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$ |
(0.67 |
) |
$ |
1.36 |
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Pro forma diluted earnings (loss) per share |
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(0.67 |
) |
1.36 |
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Due to the spin-off (see Note 3), options outstanding of Pelican Financial 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 21,470 options on stock of The Washtenaw Group at an exercise price of $3.25. These options were granted with an intrinsic value (market value per share, less option exercise price) substantially equal to the intrinsic value of the cancelled Pelican Financial options.
6
Mortgage Servicing Right Hedging:
Beginning April 1, 2004, Washtenaw’s interest rate risk management activities include the hedging of MSR’s. Washtenaw utilizes derivatives extensively in connection with its interest rate risk management activities. Washtenaw is exposed to interest rate risk on its mortgage servicing rights. As market rates increase or decrease, the market value of mortgage servicing rights will increase or decline. To offset this interest rate risk, Washtenaw enters into derivatives, including ten-year treasury futures contracts and ten-year treasury put and call options. In accordance with SFAS 133, all derivative instruments are recorded at fair value. Accordingly, ten year treasury futures contracts and ten year treasury put and call options contracts are carried at fair value, as determined by the amount payable or receivable to/from the counterparty as if the derivatives were settled at the balance sheet date. The fair value is based on the end of the period pricing from brokerage houses. Changes in fair value are included in the mortgage servicing rights valuation adjustment in the income statement.
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 that 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 The Washtenaw Group’s Form 10-K.
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. 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 these financial statements.
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.
7
NOTE 4 - EARNINGS PER SHARE
The following summarizes the computation of basic and diluted earnings per share.
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Three Months |
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Three Months |
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Basic earnings per share |
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Net income |
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$ |
116,756 |
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$ |
3,405,590 |
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Weighted average shares outstanding |
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4,488,351 |
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4,463,221 |
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Basic earnings per share |
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$ |
0.03 |
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$ |
0.76 |
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Diluted earnings per share |
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Net income |
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$ |
116,756 |
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$ |
3,405,590 |
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Weighted average shares outstanding |
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4,488,351 |
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4,463,221 |
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Dilutive effect of assumed exercise of stock options |
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2,509 |
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— |
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Diluted average shares outstanding |
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4,490,860 |
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4,463,221 |
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Diluted earnings per share |
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$ |
0.03 |
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$ |
0.76 |
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Six Months |
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Six Months |
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Basic earnings (loss) per share |
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|
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Net income (loss) |
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$ |
(2,986,581 |
) |
$ |
6,064,614 |
|
|
Weighted average shares outstanding |
|
4,488,351 |
|
4,463,221 |
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Basic earnings (loss) per share |
|
$ |
(0.67 |
) |
$ |
1.36 |
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|
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|
|
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Diluted earnings (loss) per share |
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|
|
|
|
||
|
Net income (loss) |
|
($2,986,581 |
) |
$ |
6,064,614 |
|
|
|
Weighted average shares outstanding |
|
4,488,351 |
|
4,463,221 |
|
||
|
Dilutive effect of assumed exercise of stock options |
|
— |
|
— |
|
||
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Diluted average shares outstanding |
|
4,488,351 |
|
4,463,221 |
|
||
|
Diluted earnings (loss) per share |
|
$ |
(0.67 |
) |
$ |
1.36 |
|
For the six months ended June 30, 2004 there were 21,470 stock options outstanding that were not considered dilutive. There were no options outstanding during 2003.
8
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 The Washtenaw Group’s investments and operations.
The Washtenaw Group, Inc. serves as the holding company of Washtenaw Mortgage Company. The Washtenaw Group’s operations involve correspondent, wholesale and retail mortgage banking. The operation involves the origination and purchase of single-family residential mortgage loans in approximately 40 states, the sale of these loans, usually on a pooled and securitized basis, in the secondary market, and the servicing of mortgage loans for investors.
The Washtenaw Group’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 servicing mortgages held by investors; and gains realized on sales of mortgage loans and mortgage servicing rights. These revenues are in turn significantly affected by factors such as changes in prevailing interest rates and in the yield curve (that is, the difference between prevailing short-term and long-term interest rates), as well as changes in the volume of mortgage originations nationwide and prepayments of outstanding mortgages.
In 2004, competition for new loans has increased, which has resulted in a reduction of loan originations and the profit per loan for Washtenaw. As a result, in the current interest rate environment, it is unlikely Washtenaw will be profitable from operations for the remainder of 2004. On a positive note, Washtenaw retained a significant portion of mortgage loan servicing during 2003, at relatively low capitalized values, which has increased in value as mortgage interest rates increased. Management is planning to sell a portion of the loan servicing portfolio in the third quarter to generate cash for general operating purposes.
The focus in 2004 will continue to be loan quality. As the loan brokers become more desperate for production, Washtenaw will typically see an increase in loans with misrepresentation in varying levels. Management will continue to focus on implementing procedures to improve asset quality and thereby reduce the costs associated with loan repurchases. Loan repurchases are the greatest challenge management currently faces in improving financial performance.
CRITICAL ACCOUNTING POLICIES
Beginning April 1, 2004, Washtenaw’s interest rate risk management activities include the hedging of MSR’s. Washtenaw utilizes derivatives extensively in connection with its interest rate risk management activities. Washtenaw is exposed to interest rate risk on its mortgage servicing rights. As market rates increase or decrease, the market value of mortgage servicing rights will increase or decline. To offset this interest rate risk, Washtenaw enters into derivatives, including ten year treasury futures contracts and ten year treasury put and call options. In accordance with SFAS 133, all derivative instruments are recorded at fair value. Accordingly, ten-year treasury futures contracts and ten-year treasury put and call options contracts are carried at fair value, as determined by the amount payable or receivable to/from the counterparty as if the derivatives were settled at the balance sheet date. The fair value is based
9
on the end of the period pricing from brokerage houses. Changes in fair value are included in the mortgage servicing rights valuation adjustment in the income statement.
The Washtenaw Group reported net income of $117,000 for the three months ended June 30, 2004 compared to net income of $3.4 million for the three months ended June 30, 2003. Basic and diluted earnings per share was $0.03 per share compared to earnings of $0.76 per share for the quarter ended June 30, 2004 and 2003 respectively. The Washtenaw Group reported net loss of $3.0 million for the six months ended June 30, 2004 compared to net income of $6.1 million for the six months ended June 30, 2003. Basic and diluted earnings per share was a loss of $0.67 per share compared to earnings of $1.36 per share for the six months ended June 30, 2004 and 2003 respectively.
Loan Production
Loan production was $600.4 million and $1.3 billion for the three months ended June 30, 2004 and 2003, respectively. The volume of loans produced for the six months ended June 30, 2004 totaled $778 million as compared to $2.2 billion for the six months ended June 30, 2003, a decrease of $1.4 billion or 64%. The decrease was the result of rising interest rates during the six months ended June 30, 2004.
Noninterest Income
Noninterest income was $4.4 million and $17.1 million for the three months ended June 30, 2004 and 2003, respectively. Total noninterest income for the six months ended June 30, 2004 was $9.8 million, compared to $30.5 million for the six months ended June 30, 2003, a decrease of $20.7 million or 68%. This decrease was primarily due to an 83% decrease in the gain on sales of mortgage servicing rights and loans. The decrease in gain on sale of mortgage servicing rights and loans was primarily due to a decrease in the overall new loan origination volume in the first six months of 2004. In addition, the gains on sale of mortgage servicing rights and loans was affected by reduced profit margins on each new loan origination as a result of the current interest rate environment.
Loan Servicing
At June 30, 2004, Washtenaw serviced $2.5 billion of loans compared to $2.4 billion at June 30, 2003, a 4% increase. Washtenaw has an agreement to sell the servicing rights related to mortgage loan production on a monthly basis. During the six months ended June 30, 2004, Washtenaw was selling approximately 86% of its mortgage servicing rights under this agreement. The remainder of the loan servicing rights created are retained in the mortgage loan servicing portfolio.
At June 30, 2004 and 2003, with the exception of servicing related to loans held for sale in Washtenaw’s loan portfolio and servicing sold but not yet delivered, all loan servicing was performed for others. Service fee income, net of amortization was $255,000 and $257,000 for the three months ended and $691,000 and $793,000 for the six months ended June 30, 2004 and 2003 respectively. Servicing income increased $508,000 and $1.2 million due to the increase in the servicing portfolio; however, the increase in amortization of mortgage servicing rights more than offset the increase in income. The increase in amortization is related to the effect of the low interest rate environment, which has increased actual and expected prepayment rates used to determine amortization rates.
Noninterest Expense
Noninterest expense was $4.6 million and $14.0 million for the three months ended June 30, 2004 and 2003, respectively. Total noninterest expense for the six months ended June 30, 2004 was $15.0 million, compared to $24.8 million for the same period in 2003, a decrease of $9.8 million or 39%. The decrease was primarily due to the decrease in employee compensation and benefits expenses and a favorable mortgage servicing rights valuation, offset by an increase in the amortization of mortgage servicing rights and an increase in the loss and provision for loss on loan repurchases and other real estate. The decrease in employee compensation and benefits was the result of a decrease in operations staff due to attrition, closing the operations center in California, a reduction in overtime expense, a reduction in commission compensation paid to the sales staff and the reduction in management bonus compensation. The positive mortgage servicing rights valuation adjustment was due to an increase in mortgage interest rates during the period, resulting in decreases in expected prepayment speeds, which project the expected runoff of the mortgage loan servicing portfolio based on comparing the interest rates of the loans in the portfolio
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against current market interest rates. The increase in amortization of mortgage servicing rights is the result of the increase in mortgage loan servicing portfolio and the increased speed in which the asset is being amortized due to the higher prepayment speeds when the servicing asset was created.
The increase in the loss and provision for loss on loan repurchases and other real estate was due to an increase in repurchase requests and an increase in the expected loss on repurchase requests as a result of historical experience. Typically, these loans are non-performing. Washtenaw continues the rebuttal of these loans on a loan-by-loan basis. The reserve is established based on historical repurchase experience and current repurchase requests. Also, Washtenaw establishes a reserve for repurchases based on mortgage loan production. For the periods ended June 30, 2004 and December 31, 2003, the pending possible repurchases totaled 63 and 80 loans with a total principal balance of $5.5 million and $6.7 million. The reserve for loan repurchases at the periods ended June 30, 2004 and December 31, 2003 was $3.7 million. Management believes the liability established is sufficient to cover the estimated losses on the loans subject to repurchase.
BALANCE SHEET ANALYSIS
The following is a discussion of the consolidated balance sheet of The Washtenaw Group.
At June 30, 2004, total assets of The Washtenaw Group equaled $92.8 million as compared to $131.2 million at December 31, 2003, a decrease of $38.4 million or 29%. The decrease is primarily due to the decrease in loans held for sale and mortgage servicing rights.
Loans Held for Sale
Loans held for sale were $60.1 million at June 30, 2004 compared to $97.7 million at December 31, 2003. This decrease of $37.6 million or 38% was the result of a decrease in mortgage loan production.
Mortgage Servicing Rights
Mortgage servicing rights were $23.6 million at June 30, 2004, a decrease of $1.1 million or 4% from $24.6 million at December 31, 2003. This is the result of a bulk servicing sale of $275 million in the quarter ended June 30, 2004. The mortgage servicing right asset was decreased by $2.8 million as a result of the sale. In addition $3.9 million of amortization was recorded for the six months ended June 30, 2004. The decreases were offset by Washtenaw retaining the mortgage servicing rights on a portion of current mortgage loan production and an increase in the value of the mortgage servicing rights of $4.4 million as mortgage interest rates increased. In general, servicing right values tend to decline in a falling interest rate environment and increase in a rising interest rate environment. Management cannot predict future market interest rate levels or the magnitude of future servicing valuation adjustments; however, the potential for further impairment charges exist depending on the mortgage interest rate environment.
In April 2004, Washtenaw began hedging a portion of its mortgage loan servicing portfolio. During the quarter, management has used ten-year treasury futures contracts and ten-year treasury put and call options to hedge against the reduction in the value of the mortgage servicing rights due to a decline in mortgage interest rates. The derivative instruments were purchased to protect between 20% and 25% of the servicing rights that can be hedged against declining interest rates. All fixed rate loan servicing may be hedged, while arms and balloons are not. For the three months ended June 30, 2004, Washtenaw recognized a $4.4 million favorable mortgage servicing right valuation adjustment. During the same period, Washtenaw incurred a $467,000 loss on mortgage servicing rights hedging activity.
Washtenaw intends to sell approximately $500 million in mortgage servicing rights during the quarter ended September 30, 2004. Management anticipates this will reduce the mortgage servicing rights asset by approximately $5.0 million at the sale date. At the time of the sale, management will reduce its hedge position accordingly in an effort to hedge the same overall percentage of the mortgage servicing rights.
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At June 30, 2004, the total liabilities of The Washtenaw Group were $73.6 million as compared to $109.0 million at December 31, 2003, a decrease of $35.4 million or 33%. This decrease was primarily due to decreases in repurchase agreements, notes payable and other liabilities.
Notes Payable
Notes payable was $28.6 million at June 30, 2004 compared to $33.2 million at December 31, 2003. This decrease of $4.6 million or 14% was primarily caused by the significant decrease in loan originations during the quarter ended June 30, 2004. The notes payable represent the warehouse line of credit that Washtenaw uses to fund its loan production until such time that the loans are sold to the secondary market.
Repurchase Agreements
Repurchase agreements were $17.1 million at June 30, 2004 compared to $43.9 million at December 31, 2003. This decrease of $26.9 million or 61% was primarily the result of decreased loan originations during the quarter ended June 30, 2004. Also, Washtenaw is selling more loans to investors that do not allow the transfer to repurchase agreements. The use of the repurchase agreements is limited to loans sold to the Federal National Mortgage Association (“FNMA”).
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.
To date The Washtenaw Group has conducted no business other than managing its investments in Washtenaw. The Washtenaw Group’s source of funds is dividends paid by Washtenaw. Washtenaw’s sources of funds include cash from gains on sales of mortgage loans and servicing, net interest income, servicing fees and borrowings. Washtenaw sells its mortgage loans generally on a monthly basis to generate cash for operations. Washtenaw’s uses of cash in the short-term include the funding of mortgage loan purchases and originations and purchases of mortgage servicing rights, payment of interest, repayment of amounts borrowed pursuant to warehouse lines of credit, operating and administrative expenses, income taxes and capital expenditures. Long-term uses of cash may also include the funding of securitization activities or portfolios of loan or servicing assets.
Washtenaw funds its business through the use of a warehouse line of credit and the use of agreements to repurchase. The agreements to repurchase typically have terms of less than 90 days and are treated as a source of financing. The warehouse line of credit has a limit of $80 million, of which $9.0 million represents a sublimit for servicing under contract for sale, and $4.8 million represents a working capital sublimit. Borrowing pursuant to the warehouse line of credit totaled $28.6 million at June 30, 2004 and $33.2 million at December 31, 2003. Included in the total warehouse line borrowing at June 30, 2004 and December 31, 2003 was $5.1 million and zero under the sublimit for servicing under contract for sale. The interest rate on the warehouse line of credit is the Federal Funds Rate plus 1.50% resulting in an effective rate of 2.75% at June 30, 2004 and 2.50% at December 31, 2003. The effective interest rate on the agreements to repurchase was 2.15% at June 30, 2004 and 1.90% at December 31, 2003.
Washtenaw intends to sell approximately $500 million in mortgage servicing rights during the quarter ended September 30, 2004. Management anticipates this will generate approximately $4.0 to $5.0 million in cash depending on the sales price. A portion of the proceeds will be received at the sale date while the remainder is received upon transfer of the loans, typically thirty to sixty days later.
Washtenaw purchases its loans either by wiring funds to the closing agent or sending a draft. The decision is based on the requirements of the state where the loan is being purchased. When a draft is used, Washtenaw begins earning
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interest on the day the draft is issued but does not incur any cost of funds until the draft is presented to the bank. When the draft clears the bank, Washtenaw will either borrow money on its warehouse line of credit or through its agreements to repurchase depending on the type of loan. Outstanding drafts totaled $10.9 million at June 30, 2004 and $11.1 million at December 31, 2003.
The Washtenaw Group’s ability to continue to purchase loans and mortgage servicing rights and to originate new loans is dependent in large part upon its ability to sell the mortgage loans at par or for a premium or to sell the mortgage servicing rights in the secondary market in order to generate cash proceeds to repay borrowings pursuant to the warehouse facility, thereby creating borrowing capacity to fund new purchases and originations. The value of and market for The Washtenaw Group’s loans and mortgage servicing rights are dependent upon a number of factors, including the borrower credit risk classification, loan-to-value ratios and interest rates, general economic conditions, warehouse facility interest rates and governmental regulations.
Washtenaw generally grants commitments to fund mortgage loans for up to 30 days at a specified term and interest rate. The commitments are commonly known as rate-lock commitments. At June 30, 2004, Washtenaw had outstanding rate-lock commitments to lend $96.7 million for mortgage loans. Because these commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, as of June 30, 2004, Washtenaw had outstanding commitments to sell $89.5 million of mortgage loans. These commitments usually are funded within 90 days.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
For a discussion of The Washtenaw Group’s asset/liability management policies as well as the potential impact of interest rate changes upon the market value of The Washtenaw Group’s portfolio, see The Washtenaw Group’s Annual Report to Shareholders and Form 10-K. Management believes that there has been no material change in The Washtenaw Group’s asset/liability position or the market value of The Washtenaw Group’s portfolio since December 31, 2003.
Item 4: Controls and Procedures
Washtenaw, 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 Washtenaw’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by Washtenaw 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 Washtenaw 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. Washtenaw conducts periodic evaluations to enhance, where necessary, its procedures and controls.
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There have been no material changes to the pending legal proceedings to which The Washtenaw Group is a party since the filing of the registrant’s Form 10-K, nor have there been any material legal proceedings to which The Washtenaw Group is a party instituted since that date.
Item 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Shareholders
The Washtenaw Group, Inc 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.
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For |
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Against |
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Abstentions |
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Robert C. Huffman |
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3,883,048 |
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6,200 |
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0 |
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Scott D. Miller |
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3,883,048 |
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6,200 |
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0 |
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Howard M. Nathan |
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3,883,048 |
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6,200 |
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0 |
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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: 3,874,134 for, 100 against, and 15,034 abstained.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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31.1 |
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Certification of Principal Executive Officer |
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31.2 |
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Certification of Principal Financial Officer |
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32 |
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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 24, 2004 to announce the financial results of the quarter ended March 31, 2004.
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The Washtenaw Group, Inc. and Subsidiary
Signatures
Under 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.
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Date: August 13, 2004 |
/s/ Charles C. Huffman |
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Charles C. Huffman |
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President and Chief Executive Officer |
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Date: August 13, 2004 |
/s/ Howard M. Nathan |
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Howard M. Nathan |
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Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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