1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999.
OR
| | Transition pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-3313951
(State of Incorporation) (I.R.S. Employer Identification No.)
260 East Brown Street
Suite 200 48009
Birmingham, Michigan (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (248) 644-5470
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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
2,489,151 shares of Common Stock, no par value as of July 31, 1999
Page 1 of 19
2
BINGHAM FINANCIAL SERVICES CORPORATION
INDEX
---------
PAGES
-----
PART I
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and
September 30, 1998 3
Consolidated Statements of Operations for the Three Months and Nine
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-17
PART II
Item 1 Legal Proceedings 18
Item 6 (a) Exhibits Required by Item 601 of Regulation S-K 18
Signatures 19
Exhibit Index 20
2
3
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30 1999 AND SEPTEMBER 30, 1998
----------
JUNE 30, SEPTEMBER 30,
ASSETS 1999 1998
---------------- ----------------
(In thousands, except share data)
(Unaudited)
Cash and cash equivalents $ 632 $ 1,979
Restricted cash 3,940 2,253
Loans receivable, net 71,277 86,075
Property and equipment, net 880 655
Other assets 5,592 3,897
---------------- ----------------
Total assets $ 82,321 $ 94,859
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Advances by mortgagors $ 3,921 $ 2,238
Accounts payable and accrued expenses 239 636
Advances under repurchase agreements 36,287 56,892
Subordinated debt, net of debt discount
of $452 and $510, respectively 3,548 3,490
Notes payable 11,022 17,848
---------------- ----------------
Total liabilities 55,017 81,104
---------------- ----------------
Minority interest 234 298
---------------- ----------------
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, no par value, 10,000,000 shares
authorized; 2,422,154 and 1,576,818 shares issued
and outstanding at June and Sept., respectively 25,634 13,608
Paid-in capital 572 533
Retained earnings (deficit) 864 (684)
---------------- ----------------
Total stockholders' equity 27,070 13,457
---------------- ----------------
Total liabilities and stockholders'
equity $ 82,321 $ 94,859
================ ================
The accompanying notes are an integral part of the financial statements.
3
4
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
----------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------------------------- -------------------------
REVENUES: (In thousands, except earnings per share)
------------------------------- -------------------------
Interest income $ 2,521 $ 819 $ 7,256 $ 1,535
Mortgage origination and servicing fees 888 973 1,441 1,112
Sale of mortgage servicing rights -- 324 -- 324
Gain on sale of loans 1,126 -- 4,089 --
Other income 58 70 150 161
------- ------- ------- -------
Total revenues 4,593 2,186 12,936 3,132
------- ------- ------- -------
COSTS AND EXPENSES:
Interest expense 1,953 405 5,494 692
Provision for credit losses 72 42 232 92
General and administrative 1,259 463 2,719 791
Other operating expenses 845 616 2,205 683
------- ------- ------- -------
Total costs and expenses 4,129 1,526 10,650 2,258
------- ------- ------- -------
Income before income taxes 464 660 2,286 874
Provision for income taxes 160 225 737 297
------- ------- ------- -------
Net income $ 304 $ 435 $ 1,549 $ 577
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 2,167 1,577 1,773 1,170
======= ======= ======= =======
Diluted 2,373 1,948 1,991 1,404
======= ======= ======= =======
Earnings per share:
Basic $ 0.14 $ 0.28 $ 0.87 $ 0.49
======= ======= ======= =======
Diluted $ 0.13 $ 0.22 $ 0.78 $ 0.41
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
4
5
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
----------
NINE MONTHS ENDED
JUNE 30,
1999 1998
----------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 1,549 $ 577
Adjustments to reconcile net income to net
cash used for operating activities:
Provision for credit losses 232 78
Depreciation and amortization 888 156
Originations of loans held for sale (92,527) (46,772)
Principal collections on loans held for sale 2,390 1,342
Proceeds from sale of loans held for sale 108,494 --
Gain on sale of investment securities -- (14)
Gain on sale of loans (4,089) --
Increase in other assets (4,193) (2,391)
Increase in other liabilities 3,305 1,667
--------- ---------
Net cash provided by (used for) operating activities 16,049 (45,357)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of investment securities -- 71
Capital expenditures (297) (27)
--------- ---------
Net cash provided by (used for) investing activities (297) 44
--------- ---------
Cash flows from financing activities:
Issuance of common stock 11,978 13,618
Proceeds from issuance of subordinated debt,
and related warrants -- 4,000
Advances under repurchase agreements 64,658 24,365
Repayment of advances under repurchase agreements (85,263) --
Proceeds from notes payable 68,630 15,225
Repayment of notes payable (77,102) (9,748)
--------- ---------
Net cash provided by (used for) financing activities (17,099) 47,460
--------- ---------
Net change in cash and cash equivalents (1,347) 2,147
Cash and cash equivalents, beginning of period 1,979 --
--------- ---------
Cash and cash equivalents, end of period $ 632 $ 2,147
========= =========
The accompanying notes are an integral part of the financial statements.
5
6
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, which are necessary to present
fairly Bingham Financial Services Corporation's ("the Company") financial
condition and results of operations on a basis consistent with that of the
Company's prior audited consolidated financial statements. Pursuant to rules
and regulations of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") have been condensed or omitted.
These unaudited consolidated financial statements should be read in
conjunction with the audited Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. Results for interim periods are not
necessarily indicative of the results that may be expected for a full year.
2. EARNINGS PER SHARE:
Basic earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period.
The Company has issued warrants, stock options and restricted stock awards
which are considered to be potentially dilutive to common stock. Diluted
earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period adjusted for these
potentially dilutive warrants, options and stock awards.
The following table sets forth the computation of per share earnings and
illustrates the dilutive effect of warrants, options and stock awards
outstanding:
Three months ended June 30,
--------------------------------------------------------------
1999 1998
--------------------------------------------------------------
(In thousands, except earnings per share)
Earnings Earnings
Shares per share Shares per share
--------------------------------------------------------------
Basic EPS 2,167 $ 0.14 1,577 $ 0.28
Net dilutive effect of:
Options and awards 25 - 48 (0.01)
Warrants 181 (0.01) 323 (0.05)
--------------------------------------------------------------
Diluted EPS 2,373 $ 0.13 1,948 $ 0.22
==============================================================
6
7
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
Nine months ended June 30,
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
(In thousands, except earnings per share)
Earnings Earnings
Shares per share Shares per share
------------------------------------------------------------------
Basic EPS 1,773 $ 0.87 1,170 $ 0.49
Net dilutive effect of:
Options and awards 28 (0.01) 29 (0.01)
Warrants 190 (0.08) 205 (0.07)
------------------------------------------------------------------
Diluted EPS 1,991 $ 0.78 1,404 $ 0.41
==================================================================
3. OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprensive Income," was adopted effective on June 30, 1999. SFAS
establishes standards for reporting comprehensive income. Other
comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles have previously been reported
as separate components of equity in the Company's consolidated financial
statements.
Net income $304,000
Other comprehensive income net of tax:
Unrealized gains on securities:
Unrealized holding gains during period 31,000
--------
Comprehensive income $335,000
========
4. ALLOWANCE FOR LOAN LOSSES:
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well
as the remainder of the loan portfolio. The allowance for loan losses is
based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay and
collateral values.
Changes in allowance for loan losses are summarized as follows:
Three months ended June 30, Nine months ended June 30,
1999 1998 1999 1998
---------------------------------- ----------------------------------
(In thousands)
Balance at beginning of period $ 284 $ 109 $ 185 $ 58
Provision for loan losses 72 42 232 92
Net losses (86) (15) (147) (14)
---------------------------------- ----------------------------------
Balance at end of period $ 270 $ 136 $ 270 $ 136
================================== ==================================
7
8
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
5. DEBT:
At the time of its initial public offering in November 1997 the Company
entered into a subordinated debt facility with Sun Communities ("Sun"). The
facility consisted of a $4.0 million term loan and a five-year revolving line
of credit for up to $6.0 million. In accordance with the subordinated debt
loan agreement the Company has issued detachable warrants to Sun covering
400,000 shares of common stock at a price of $10 per warrant share. The
detachable warrants have a term of seven years and may be exercised at any
time after the fourth anniversary of issuance. In March 1998 Sun provided a
line of credit of up to $12.0 million payable upon demand and in March 1999
they provided an additional line of credit of up to $10.0 million also
payable upon demand.
In March 1998 the Company's commercial mortgage subsidiary entered into a
one-year master repurchase agreement with a lender to finance up to $150
million of fixed rate commercial loans collateralized by real estate. In
September 1998 that agreement was amended and restated to include
manufactured home and floor plan loans. The borrowing limit was also
increased to $250 million. The loans are financed at 85% to 92% of the then
current face value, depending on the asset class and certain concentration
constraints. The repurchase transactions are for 30 days and may be rolled
over for up to nine months. In March 1999 the Company amended the master
repurchase agreement reducing the borrowing limit to $100 million. This will
allow the Company to reduce its overall committed facility costs and
accommodates the Company's strategy of reducing the holding time of the loan
portfolio. The borrowing limit can be increased with the consent of both
parties should the need arise.
At June 30, 1999 and September 30, 1998 debt outstanding was as follows:
June 30 September 30
----------------------------------------
1999 1998
------------------------------------------------------------------------------------------------------
(In thousands)
Loans sold under agreements to repurchase $ 36,287 $ 56,892
Revolving line of credit............ 11,022 17,848
Term loan, net of discount.......... 3,548 3,490
----------- ----------
$ 50,857 $ 78,230
=========== ==========
6. FINANCIAL INSTRUMENTS:
The Company hedges a portion of its commercial mortgage loan portfolio as part
of its interest rate risk management strategy and as a condition of the related
repurchase agreement, which finances the portfolio. The Company hedges the
interest rate risk on its portfolio by entering into forward sales of U.S.
Treasury Securities and U.S. Treasury rate locks. The Company classifies these
forward sales and rate locks as hedges on specific loan receivables. Any gross
unrealized gains or losses on these hedge positions are an adjustment to the
basis of the mortgage loan portfolio and are used in the lower of cost or market
valuation to establish a valuation allowance.
The following table identifies the gross unrealized gains/losses of the
forward sales and rate locks as of June 30, 1999 and September 30, 1998:
June 30, 1999 September 30, 1998
Gross Unrealized Gross Unrealized
Security Description Gains (Losses) Losses
-------------------------------------------------------------------------------------
8
9
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
(Dollars in thousands)
TREASURY RATE LOCKS:
U.S. Treasury 4.750% - 11/08 $ 112 $ --
U.S. Treasury 5.625% - 5/08 102 --
U.S. Treasury 5.500% - 5/09 (1) --
FORWARD SALES:
U.S. Treasury 6.125% - 8/07 -- (2,019)
U.S. Treasury 6.375% - 8/27 -- (294)
U.S. Treasury 5.500% - 2/08 -- (1,649)
U.S. Treasury 5.625% - 5/08 -- (321)
----------------------------
$ 213 $(4,283)
============================
9
10
BINGHAM FINANCIAL SERVICES CORPORATION
----------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information on material
factors affecting the Company's results of operations and significant
balance sheet changes. This discussion should be read in conjunction with
the consolidated financial statements and notes included herein and the 1998
Form 10-K of Bingham Financial. Results of operations for the three-month
and nine-month periods presented are not necessarily indicative of results
which may be expected for the entire year.
RESULTS OF OPERATIONS
The Company reported net income of $304,000 for the quarter ended June 30,
1999 compared to net income of $435,000 in the quarter ended June 30, 1998.
The decrease in net income is due primarily to an increase in general and
administrative expenses and other operating expenses of approximately $1.2
million. The significant increase in general and administrative expenses is
the result of the continued growth in the size of the Company to
approximately 70 fulltime employees at June 30, 1999. The large increase in
general operating expenses was offset by $1.1 million increase in gain on
loan sales.
Net income for the nine months ended June 30, 1999 was $1.5 million versus
net income of $577,000 for the nine months ended June 30, 1998. The primary
reasons for the increased income were the increase in net interest income of
$900,000 and an increase in gain on loan sales of approximately $4.1
million. Offsetting the increases in income were increases in general and
administrative expenses and other operating expenses of $3.5 million.
Interest income earned on the manufactured home and commercial mortgage loan
portfolios increased to $2.5 million for the quarter ended June 30, 1999
from $819,000 for the comparable quarter in 1998. The increase was due to
significant increase in origination volume in manufactured home and
commercial mortgage loans.
Similarly, interest income for the nine months ended June 30, 1999 increased
to $7.3 million as compared to $1.5 million for the nine months ended June
30, 1998. The same factors that accounted for the increase in the third
quarter were also present in the year-to-date increases. The average balance
of the loan portfolio held for sale increased approximately $97 million for
the nine months ended June 30, 1999 versus the nine months ended June 30,
1998
Interest expense increased to approximately $2.0 million in the third
quarter of fiscal 1999 as compared to $405,000 in the third quarter of
fiscal 1998. The large increase is due to the substantial increase in
borrowings to fund originations of manufactured home loans and commercial
mortgage loans held for sale net of a decrease in the Company's average
borrowing rate.
Interest expense for the nine-month period ended June 30, 1999 increased to
$5.5 million from $692,000 for the comparable nine months in the previous
year. As with the quarterly period, an increase in total borrowings net of a
decrease in the average borrowing rate accounted for the differences in the
comparable periods.
Net interest margin, which is net interest income divided by the average
outstanding balance of interest earning assets, has decreased to 1.75% for
the quarter ended June 30, 1999 as compared to 3.3% for the quarter ended
June 30, 1998. This is primarily due to the increase in average outstanding
balance of commercial mortgage loans, which represent approximately 71% of
the loan portfolio and have a lower weighted average interest rate.
10
11
BINGHAM FINANCIAL SERVICES CORPORATION
-----------
The following table sets forth the extent to which the Company's net interest
income has been affected by changes in average interest rates and average
balances of interest-earning assets and interest bearing liabilities.
Three months ended June 30, 1999 and 1998
---------------------------------------------------------------------------------------
Average Balance Average Rate Interest Increase Variance due to:
----------------------------------------------------
1999 1998 1999 1998 1999 1998 (Decrease) Volume Rate
---------------------------------------------------------------------------------------
Interest-earning assets:
Loans $133,054 34,580 7.58% 9.47% $ 2,521 $ 819 $ 1,702 $ 2,331 $ (629)
Cash and equivalents 4,471 3,833 2.83% 2.63% 32 25 7 4 3
---------------------------------------------------------------------------------------
137,525 38,413 7.43% 8.79% 2,553 844 1,709 2,335 (626)
---------------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 4,000 11.68% 11.68% 117 117 - - -
Revolving line of credit 22,406 9,999 7.61% 6.68% 426 167 259 207 52
Loans sold under repurchase 91,471 14,371 6.17% 6.76% 1,410 121 1,289 1,425 (136)
---------------------------------------------------------------------------------------
117,877 28,370 6.63% 7.43% 1,953 405 1,548 1,632 (84)
---------------------------------------------------------------------------------------
Interest rate spread .80% 1.36%
Excess average earning assets $ 19,648 $10,043 7.43% 8.79%
====================================
Net interest margin 1.75% 3.30% $ 600 $ 439 $ 161 $ 703 $ (542)
====================================================================
Nine months ended June 30, 1999 and 1998
---------------------------------------------------------------------------------------
Average Balance Average Rate Interest Increase Variance due to:
----------------------------------------------------
1999 1998 1999 1998 1999 1998 (Decrease) Volume Rate
----------------------------------------------------------------------------------------
Interest-earning assets:
Loans $117,825 $ 20,868 8.21% 9.81% $ 7,256 $ 1,535 $ 5,721 $ 7,133 $(1,412)
Cash and equivalents 4,390 2,994 2.25% 2.86% 74 29 45 65 (20)
----------------------------------------------------------------------------------------
122,215 23,862 8.00% 8.94% 7,330 1,564 5,766 7,198 (1,432)
----------------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 3,333 11.68% 11.29% 350 282 68 57 11
Revolving line of credit 21,228 5,542 6.81% 7.11% 1,084 263 821 773 48
Loans sold under repurchase 84,382 14,371 6.26% 6.76% 3,962 121 3,841 4,158 (317)
----------------------------------------------------------------------------------------
109,610 23,246 6.56% 7.50% 5,396 666 4,730 4,988 (258)
----------------------------------------------------------------------------------------
Interest rate spread 1.43% 1.44%
Excess average earning assets $ 12,605 $ 616 8.00% 8.94%
====================================
Net interest margin 2.11% 1.63% $ 1,934 $ 898 $ 1,036 $ 2,210 $(1,174)
=====================================================================
Mortgage origination fees are related to the commercial mortgage loans
originated and placed with outside investors. Placement fees for the quarter
ended June 30, 1999 totaled approximately $734,000 compared to placement
fees of $904,000 for the quarter ended June 30, 1998. The slight decrease is
due to more loans being originated and held for sale as opposed to
immediately being placed with outside investors.
11
12
BINGHAM FINANCIAL SERVICES CORPORATION
-------------
For the nine months ended June 30, 1999 placement fees were $1.1 million
versus $1.0 million for the comparable nine month period for the previous
year even though the Company had only been originating commercial mortgage
loans for four months of the nine month period in 1998. As with the quarter
ended June 30, 1999 the Company has been originating more loans to hold for
sale rather than immediately placing with outside investors.
A recovery of $2.4 million related to the valuation of the loan portfolio
and related hedge positions was recognized for the nine month period ended
June 30, 1999. The hedge positions are used by management in an attempt to
mitigate the risk of loss arising from adverse changes in market prices and
interest rates associated with the fixed rate loans in the commercial
mortgage loan portfolio. There are no comparable gains or losses on
valuations of the loan portfolio and hedge positions for the nine months
ended June 30, 1998.
Gain on sale of loans represents the difference between the proceeds from
sale and the allocated carrying cost of the loans sold. The gain is also net
of required reserves for the potential refund of any premium paid for loans
that are prepaid in the first twelve months after the date of the sale on
loans sold with recourse. The Company sold approximately $10 million in
manufactured home loans in one bulk sale and securitzed and sold
approximately $80 million of commercial mortgage loans and recorded a gain
on sale of loans of $1.1 million for the three months ended June 30, 1999.
There were no loan sales in the comparable quarter of the previous year.
For the nine months ended June 30, 1999 the Company has sold approximately
$20.4 million of manufactured home loans and securitized and sold
approximately $80 million of commercial mortgage loans recognizing gains on
loan sales of approximately $4.1 million. The $4.1 million in gain includes
a $2.4 million recovery in the loan portfolio values, including hedges.
There were no loan sales in the comparable nine-month period of 1998.
A provision for credit losses is charged to income in amounts sufficient to
maintain an allowance level estimated to cover losses from liquidating
manufactured home loans. The allowance level is determined based on a formal
review of the size and quality of the manufactured home loan portfolio in
conjunction with the current market and prevailing economic conditions.
The Company recorded a provision for credit losses of $72,000 and $42,000
for the three-month periods ended June 30, 1999 and 1998, respectively. The
increase was due to the increase in the size of the manufactured home loan
portfolio. For the nine-month periods ended June 30, 1999 and 1998,
provision for credit losses was $232,000 and $92,000, respectively.
General and administrative expenses and other operating expenses have
increased in recent periods as a result of the expansion of both the
manufactured home and commercial mortgage lending operations. The largest
increase has been in personnel costs that were approximately $994,000 and
$580,000 for three months ended June 30, 1999 and 1998, respectively. For
the nine months ended June 30, 1999 and 1998, personnel costs have been $2.5
million and $806,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability to meet financial obligations when due. The
Company expects to meet its short-term liquidity requirements through
working capital provided by operating activities. The Company expects to
meet its long-term liquidity requirements through a combination of
additional equity offerings, draws on its revolving lines of credit,
advances under its master repurchase agreement, whole loan sales and
possible future periodic securitizations of its loan portfolio.
12
13
BINGHAM FINANCIAL SERVICES CORPORATION
--------------
During the three month period ended June 30, 1999 the Company issued 800,330
shares of its common stock in a private equity raise. The stock issuance
resulted in proceeds of approximately $12.0 million.
Total borrowings decreased $27.3 million during the three-month period ended
June 30, 1998 to $50.8 million at June 30, 1999. The decreased borrowings
were due primarily to approximately $108.4 million in proceeds from the
securitization and sale of approximately $80.0 million of commercial
mortgage loans and $20.4 million of manufactured home loans. Decreased
borrowings are net of approximately $92.5 million for the funding of new
loan originations.
LOANS RECEIVABLE
Net loans receivable decreased $14.9 million from September 30, 1998 to
$71.2 million at June 30, 1999. Commercial mortgage loans originated and
held for sale were $55.0 million and manufactured home loan originations
were $18.6 million for the three months ended June 30, 1999. New loan
originations were partially offset by sales of $20.4 million of manufactured
home loans and $80.0 million of commercial mortgage loans.
The following table sets forth the average loan balance, weighted average
loan yield and weighted average initial term of the loan portfolio:
June 30, 1999
---------------------------------------------------
Manufactured Commercial
Home Loans Loans
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Principal balance loans receivable, net $ 38,536 $ 32,635
Number of loans........................ 1,344 11
Average loan balance.................. $ 29 $ 2,967
Weighted average loan yield......... 10.9% 8.15%
Weighted average initial term........ 22.0 years 10.6 years
Delinquency statistics at June 30, 1999 for the manufactured home loan
portfolio are as follows:
Number of Greater
Loans 31-60 61-90 Than 90 Total
--------------------------------------------------------------------------------------------------
Manufactured home loans 1,344 2.2% 1.0% 1.4% 4.6%
Manufactured home loans
sold with full recourse 1,016 1.1% 0.3% 0.1% 1.5%
----------------------------------------------------------------------
2,360 1.7% 0.7% 0.8% 3.2%
======================================================================
Gross Principal Greater
Balance 31-60 61-90 than 90 Total
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
Manufactured home loans $ 38,687 1.9% 0.9% 1.3% 4.1%
Manufactured home loans
sold with full recourse 30,022 1.1% 0.3% 0.1% 1.5%
----------------------------------------------------------------------
$ 68,709 1.5% 0.6% 0.8% 2.9%
======================================================================
There were no delinquent commercial mortgage loans at June 30, 1999.
13
14
BINGHAM FINANCIAL SERVICES CORPORATION
------------
YEAR 2000 READINESS
Some computers, software, and other equipment include a programming code in
which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than
2000. In 1998 the Company initiated a corporate wide program designed to
ensure that all critical computer programs function properly in the year
2000. The Company is also analyzing and working with vendors and other
external businesses to identify and avoid any year 2000 problems related to
the software or services they provide.
Phase I of the Company's year 2000 project is complete. It involved an
assessment of the internal and external critical systems and hardware that
could be affected by the year 2000 problem and the current compliant status
of the system or hardware.
In Phase II of the project the Company's management information systems
staff developed solutions or implemented vendor-provided solutions to remedy
all year 2000 non-compliant issues including non-information technology
systems. All internal critical systems that required a year 2000 update
provided by a vendor have been corrected. To date there have been no systems
that required complete replacement. All non-compliant hardware has been
replaced. Any new systems or hardware to be acquired are verified to be year
2000 compliant. Phase II also includes testing of updated systems and
hardware for compliance. This portion of the project is ongoing. Some
testing needs to be completed on the Company's servicing and origination
systems. At this time the Company has received very specific statements of
compliance on both systems.
The Company continues to obtain statements of compliance from its external
vendors and business relationships to verify that they are year 2000
compliant. This part of Phase II was also expected to be completed by the
second quarter of 1999. While the Company has received statements of
compliance from the majority of its outside vendors, it has not received all
statements requested. Bingham will continue to obtain the necessary
statements of compliance from vendors and outside business relationships
that it has defined as critical.
In the event the Company does not complete any additional phases of Year
2000 readiness, under "worst case scenario" the Company would be required to
process certain transactions manually, which may effect customer service. In
addition, disruptions in the economy generally resulting from Year 2000
issues could materially effect the Company. The Company could be subject to
litigation for equipment shutdown or failure to properly date customer
records. The amount of potential liability and lost revenue cannot be
reasonably estimated at this time.
Year 2000 compliance costs to date have totaled approximately $40,000. The
majority of the cost is estimated MIS personnel expense required for
identifying, testing and, where necessary, updating critical systems. The
cost also includes the replacement of some non-compliant hardware. The
Company currently estimates the total costs of the year 2000 project will
not be material to its financial position or results of operations.
The impact of year 2000 issues depends not only on the corrective actions
the Company takes, but also on the way these issues are handled by
businesses, governmental agencies and other third parties that provide data,
services and utilities to the Company. While the Company is in the process
of testing and correcting identified year 2000 problems, these procedures
are limited to matters over which it is reasonably able to exercise control.
The Company's ability to achieve year 2000
14
15
BINGHAM FINANCIAL SERVICES CORPORATION
--------------
readiness and the level of incremental costs associated with it could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify proprietary
software and unanticipated problems identified in the ongoing compliance
review.
SUBSEQUENT EVENTS
In July 1999 the Company acquired all the issued and outstanding stock of
Hartger & Willard Mortgage Associates, Inc. (H&W) from DMR Financial
Servicies, Inc. in exchange for 66,667 shares of the Company's common stock.
Based in Grand Rapids, Michigan, and with an office in Bloomfield Hills,
Michigan, H&W has been in business for fifty years. H&W originated
approximately $122 million of commercial mortgages during the year ended
December 31, 1998. In addition, H&W provided servicing for approximately
$435 million of commercial mortgages as of December 31, 1998.
NEW ACCOUNTING STANDARDS
In April 1998 the Financial Accounting Standards Board issued Statement of
Position Number 98-5 (SOP 98-5) "Reporting on the Cost of Start-Up
Activities". This statement, which is required to be adopted for fiscal
years beginning after December 15, 1998 establishes guidance for the
accounting of start-up activities. It states that the cost of start-up
activities, including organizational costs, should be expensed as incurred.
The Company has deferred organizational costs related to the formation of
its manufactured home lending subsidiary and the filing of its application
to become a unitary thrift holding company and for the formation of a
federally chartered savings bank. As of June 30, 1999 those costs totaled
approximately $645,000. Any remaining unamortized balance at October 1, 1999
will be expensed.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including statements relating to the Company's strategic objectives and
future performance, which are not historical fact, may be deemed to be
forward-looking statements under the federal securities laws. There are many
important factors that could cause the Company's actual results to differ
materially from those indicated. Such factors include, but are not limited
to general economic conditions; interest rate risk; demand for the Company's
services; the impact of certain covenants in loan agreements of the Company;
the degree to which the Company is leveraged; the continued availability of
the Company's credit facilities; the risk of margin calls on the Company's
credit facilities and hedge positions; the performance of the Company's
subsidiaries; the Company's year 2000 issues; and other risks identified in
the Company's Securities and Exchange Commission filings. In addition, past
financial and operational performance of the Company is not necessarily
indicative of future financial and operational performance.
15
16
BINGHAM FINANCIAL SERVICES CORPORATION
-------------
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table shows the Company's expected maturity dates of its
assets and liabilities. For each maturity category in the table the
difference between interest-earning assets and interest-bearing liabilities
reflects an imbalance between repricing opportunities for the two sides of
the balance sheet. The consequences of a positive cumulative gap at the end
of one year suggests that, if interest rates were to rise, liability costs
would increase more quickly than asset yields, placing negative pressure on
earnings.
Maturity
------------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
---------------------------------------------------------------------------------------------------------------
(In thousands)
Cash and equivalents........................... $ 632 $ - $ - $ - $ 632
Restricted cash................................ 985 2,955 - - 3,940
Loans receivable............................... 723 3,961 6,020 60,467 71,171
Other assets................................... 1,076 2,139 1,071 2,292 6,578
------------------------------------------------------------
TOTAL ASSETS $3,416 $ 9,055 $ 7,091 $ 62,759 $ 82,321
============================================================
Advances by mortgagors......................... $ 941 $ 2,980 $ - $ - $ 3,921
Accounts payable and accrued expenses.......... 230 (111) 99 21 239
Advances under repurchase agreement............ 95 36,192 - - 36,287
Subordinated debt.............................. (19) (57) 3,624 - 3,548
Notes Payable.................................. - 6,613 4,409 - 11,022
Other liabilities.............................. - - - 234 234
------------------------------------------------------------
TOTAL LIABILITIES 1,247 45,617 8,132 255 55,251
------------------------------------------------------------
Common stock................................... - - - 25,634 25,634
Paid-in-capital................................ - - - 572 572
Retained earnings.............................. - - - 864 864
------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,247 $ 45,617 $ 8,132 $ 27,325 $ 82,321
============================================================
Reprice difference............................. $2,169 $(36,562) $ (1,041) 35,434
Cumulative gap................................. $2,169 $(34,393) $(35,434) $ -
Percent of total assets........................ 2.63% (41.78%) (43.04%) -
Management believes the negative effect of a rise in interest rates is
reduced by the anticipated short duration of the Company's loan receivables.
Management intends that the loan receivables will be securitized or sold as
part of a whole loan sale prior to the end of 1999. Proceeds from the
securitization or whole loan sales would be used to pay down the
corresponding debt. If the Company were unable to securitize or sell the
loans it would be necessary to renegotiate the master repurchase agreement
described in Note 4 to the Consolidated Financial Statements above, to
extend the maturity date of the advances under repurchase. The instruments
held by the Company are held for purposes other than trading.
The Company also manages interest rate risk through the use of forward sales
of U.S. Treasury securities and Treasury security rate locks to hedge a
portion of the fixed rate loans in the commercial
16
17
BINGHAM FINANCIAL SERVICES CORPORATION
-----------
loan portfolio. In a forward sale the Company has agreed to sell a Treasury
security at a future date with a predetermined price. If interest rates on
Treasury securities drop, the price to the Company to purchase the security
in order to meet its settlement obligation will have risen, and thus the
Company will have suffered an unrealized loss on the hedge transaction.
Conversely, if interest rates rise, the price to the Company to purchase
Treasury securities will have fallen and there will be an unrealized gain.
The unrealized gain or loss on the hedge transaction should be offset by the
decrease or increase in value of the underlying hedged loans since they are
fixed rate loans that have an annual interest rate equal to a spread over
U.S. Treasuries.
To effect a Treasury rate lock the Company has entered into an agreement
with a counter-party whereby a "locked in" Treasury rate is established,
usually the yield to maturity rate on a U.S. Treasury security. If the
current yield to maturity is greater than the locked in yield to maturity, a
situation that would indicate rising interest rates, the rate lock will have
increased in value and the Company will have an unrealized gain. The
unrealized gain will help off-set the decrease in value of the fixed rate
loans caused by rising interest rates. In a declining interest rate
environment the current yield to maturity on the treasury security would be
less than the locked in rate creating an unrealized loss on the hedge
position. The declining interest rate environment should increase the value
of the loans thereby off-setting the loss on the hedge.
The Company uses these instruments in an attempt to reduce risk by
essentially creating offsetting market exposures.
The following table shows the Company's financial instruments and derivative
instruments that are sensitive to changes in interest rates, categorized by
expected maturity and the instruments' fair values at June 30, 1999.
Contractual Maturity
---------------------------------------------------------------------------------------
Total
1999 2000 2001 2002 2003 Thereafter Fair Value
---------------------------------------------------------------------------------------
Interest sensitive assets:
Loans receivable $ 723 $ 3,961 $ 3,442 $ 628 $ 650 $ 61,767 $ 71,171
Average interest rate 9.60% 9.60% 9.60% 9.60% 9.60% 9.60% 9.60%
Interest bearing deposits
4,572 - - - - - 4,572
Average interest rates 2.83% 2.83%
- - - - -
Treasury rate locks - - - - - 7,123 7,123
Average interest rate 5.27%
- - - - - 5.27%
---------------------------------------------------------------------------------------
Total interest sensitive assets $ 5,295 $ 3,961 $ 3,442 $ 628 $ 650 $ 68,890 $ 82,866
=======================================================================================
Interest sensitive liabilities:
Borrowings:
Advances under repurchase agreements $ 95 $ 36,192 $ - $ - $ - $ - $ 36,287
Average interest rate 6.17% 6.17% - - - - 6.17%
Subordinated debt, net of discount - - - - - 3,548 3,548
Average interest rate 11.68 11.68%
- - - - -
Note payable
- 6,613 4,409 - - - 11,022
Average interest rate - 7.61% 7.61% - - - 7.61%
---------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 95 $ 42,805 $ 4,409 $ - $ - $ 3,548 $ 50,857
=======================================================================================
17
18
BINGHAM FINANCIAL SERVICES CORPORATION
---------------
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings
arising out of the normal course of business, none of which in
the opinion of management are expected to have a material effect
on the Company's financial position.
ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
ITEM 6.(B) - REPORTS ON FORM 8-K
None.
18
19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1999
BINGHAM FINANCIAL SERVICES CORPORATION
BY: /s/ Ronald A. Klein
----------------------------------------------
Ronald A. Klein, Chief Executive Officer
19
20
EXHIBIT INDEX
PAGE
FILED NUMBER
EXHIBIT NO. DESCRIPTION HEREWITH HEREIN
- ----------- ----------- -------- ------
27 Financial Data Schedule X X
20