1
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF MICHIGAN 38-3313951
State of Incorporation I.R.S. Employer I.D. No.
260 EAST BROWN STREET
SUITE 200
BIRMINGHAM, MICHIGAN 48009
(248) 644-5470
(Address of principal executive offices and telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
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
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As of December 15, 1999, the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant was approximately $12,630,189,
determined in accordance with the highest price at which the stock was sold on
such date as reported by the Nasdaq SmallCap Market.
As of December 15, 1999, there were 2,528,473 shares of the Registrant's common
stock issued and outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
Bingham Financial Services Corporation (the "Company") is a specialized
financial services company, providing financing for new and previously owned
manufactured homes and commercial lending and mortgage servicing for
income-producing properties.
The Company's executive office is located at 260 East Brown Street, Suite 200,
Birmingham, Michigan 48009 and its telephone number is (248) 644-5470. The
Company, which is a Michigan corporation, employed 90 people as of September 30,
1999.
HISTORY OF THE COMPANY
The Company was incorporated in August 1996 by Sun Communities, Inc. ("Sun"), a
fully integrated publicly held real estate investment trust ("REIT"), and began
transacting business in January of 1997. When the Company completed its initial
public offering in November of 1997, the Company's business was focused
primarily on providing financing for new and previously owned manufactured homes
by making conventional loans under installment loan contracts collateralized by
borrowers' manufactured homes ("Contracts"), primarily to residents in
manufactured home communities owned and managed by Sun ("Sun Communities"). In
addition to providing financing to residents in Sun Communities, the Company has
expanded its manufactured home lending business to originate loans through
manufactured home dealers and loan originators and has expanded its business
into the commercial lending and mortgage servicing industry. Sun does not
currently own any shares of the Company's common stock.
In March 1998, the Company, through two wholly owned subsidiaries, acquired (the
"Bloomfield Transaction") Bloomfield Acceptance Company, L.L.C. ("Bloomfield")
and its mortgage servicing affiliate Bloomfield Servicing Company, L.L.C.
("Bloomfield Servicing"), expanding the Company's business into commercial
lending and servicing. As consideration for the Bloomfield Transaction, the
Company issued 272,727 shares of Bingham common stock to the members of
Bloomfield and Bloomfield Servicing and an additional 9,091 shares of Bingham
common stock to certain members to be held in escrow for a period of three years
from the closing of the Bloomfield Transaction in accordance with the terms of
an escrow agreement. In addition, on March 31, 2000, the Company will be
required to issue up to that number of shares of Bingham common stock equal in
value to $500,000 as additional consideration for Bloomfield and Bloomfield
Servicing successfully meeting certain operating and financial requirements.
STRUCTURE OF THE COMPANY
Sun assisted in forming the Company by loaning the Company amounts required to
fund the Company's Contracts pursuant to a demand note which was paid in full
with the proceeds from the Company's initial public offering. In connection with
the Subordinated Debt Facility (defined
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below), the Company issued common stock purchase warrants to Sun to purchase up
to 400,000 shares of common stock at the initial public offering price of $10
per share. Sun also entered into an arrangement with the Company, whereby Sun
offers the Company as the only preferred financing source to home purchasers and
home owners in Sun Communities. This arrangement was modified in April 1999 to
provide that for Sun's services, Sun shall receive a fee of 1% of the loans
originated in Sun Communities rather than an annual fee based on average loan
balances. For the year ended September 30, 1999, Sun received $217,000. When the
Company and Sun entered into this arrangement, the Company granted Sun 330,000
options to purchase common stock of the Company which will vest in eight equal
annual amounts beginning in January 2001. The Company paid Sun a fee of $75,000
for the year ended September 30, 1999 as reimbursement for general and
administrative expenses.
In 1997, Sun through its operating subsidiary, Sun Communities Operating Limited
Partnership (collectively, "Sun") provided a subordinated debt facility
consisting of a $4 million term loan and a $6 million revolving credit loan (the
"Subordinated Debt Facility"). In June 1999, the Company eliminated the $6
million five-year revolving credit facility that was part of the Subordinated
Debt Facility and raised the existing $12 million demand line of credit to $18
million. In December 1999, that line of credit was increased to $50 million. Sun
continues to provide financing to the Company through a $4 million term loan, a
$10 million demand line of credit and the $50 million demand line of credit (the
balance of which on December 15, 1999 was approximately $38 million).
The operations of the Company are carried on through certain subsidiaries (the
"Subsidiaries"), including MHFC, Inc., a Michigan corporation ("MHFC"), I.J.K.
Insurance Agency, Inc., MHFC of New Mexico, Inc., Hartger & Willard Mortgage
Associates, Inc., a Michigan corporation, ("Hartger & Willard"), Bloomfield and
Bloomfield Servicing. Substantially all of the Company's assets are held by or
through MHFC and Bloomfield, of which the Company is the sole shareholder and
sole member, respectively.
MAJOR ACQUISITIONS
On June 30, 1999, Bingham acquired all of the issued and outstanding stock of
Hartger & Willard from DMR Financial Services, Inc. ("DMRFS"), an affiliate of
Detroit Mortgage and Realty Company ("DMR"). The Company issued 66,667 shares of
its common stock to DMRFS as consideration for the transaction. In addition, the
Company loaned $1.5 million to DMRFS under a promissory note dated July 31,
1999. The loan was guaranteed by DMR and secured by the pledge of the Company's
common stock that DMRFS received in the acquisition. The Company has a right to
cause DMRFS to surrender the pledge shares in full payment of the principal
amount of the loan and has demanded their surrender. Hartger & Willard provides
mortgage banking services and arranges permanent mortgage financing on a variety
of commercial and industrial properties.
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OTHER EVENTS
OTS Application
In March of 1999, the Company filed an application with the United States Office
of Thrift Supervision (the "OTS") to convert to a unitary thrift holding company
and for the formation of a federally chartered savings bank subsidiary. At this
time, the Company's application is still under review by the OTS.
Private Equity Raise
In April, 1999, the Company sold 800,330 shares at a price per share of $15 for
a total of approximately $12 million. Purchasers in the private placement
included certain directors and stockholders of the Company and their families as
well as several new investors. The Company raised the capital to fund existing
operations and to provide increased capital for the Company's planned
operations.
FINANCING AND OTHER ACTIVITIES
MANUFACTURED HOUSING
The Company originates conventional loans that generally range in size from
$4,500 to $90,000 and have a term of 5-25 years. The Company initially focused
its marketing efforts principally through manufactured home community owners and
operators, specifically targeting Sun Communities, where the Company's services
are offered as the preferred source of financing. While the Company continues to
market its services in Sun Communities, the Company is now originating
approximately 75% of its loans through manufactured home dealers and loan
originators.
Dealers and Originators
Each loan submitted to the Company by a dealer or originator is subject to
Company-established criteria relating to loan terms, advance amounts, down
payment requirements and other pertinent program parameters. These loans are
originated in various states across the country. The Company performs annual
reviews of dealers and originators it does business with to ensure that the
criteria they use in originating loans conform to the Company's standards.
Dealers are provided a rate and term schedule that establishes a customer buy
rate for each particular loan being submitted. Monthly loan volume target
incentives have been established for the loan originators to maximize loan
generation for the Company.
Monthly reports are generated to track dealer/originator performance.
Performance factors that are tracked include loan approval rates, booking rates,
dealer delinquency, dealer chargeoff activity and volume of loans booked.
Company-established dealer performance goals are then
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monitored and relationships with non-performing dealers are terminated.
Underwriting
The Company is responsible for processing credit applications for potential
borrowers and adheres to a set of uniform underwriting guidelines and industry
standards to maintain an acceptable level of credit risk with respect to its
growing portfolio of loans. The Company has a continually-refined scoring model
that uses a statistically based automated credit scoring system and quantifies
responses using variables obtained from the applicant's credit application and
credit report. This scoring model is based on empirical historical data which
helps the Company determine the probability of loan failure and assess what
changes in loan terms would make the loan an acceptable risk. The most
significant criteria in the scoring model are the applicant's payment history
and income. While the scoring model is based on objective criteria, the
underwriter has the discretion to award a limited number of points to an
applicant for certain credit and value factors.
Loan Collateral
The Company retains a security interest in any manufactured home it finances. To
perfect its security interest in a manufactured home located in a manufactured
home community, the Company delivers the application for a new certificate of
title to the applicable state agency for processing. Once either the new
certificate of title or a stamped application form is received by the Company,
its security interest is deemed "perfected" under applicable state law.
Procedures for perfecting security interests under "land/home" loans (loans on
manufactured homes not located in manufactured home communities) vary by state.
Servicing
Beginning in April 1999, the Contracts have been serviced by Bloomfield
Servicing. Bloomfield Servicing collects principal and interest payments from
borrowers and remits them to investors as required under the relevant servicing
contract. Bloomfield Servicing also processes collections on delinquent
accounts.
Financing
The Company's ability to finance Contracts depends on its availability of funds.
In June 1999, Sun increased its $12 million line of credit to Bingham to $18
million while at the same time, eliminating the six year revolving line of
credit from the Subordinated Debt Facility. As consideration for raising the
line of credit, the loan agreement and note were amended to provide that the
note shall bear interest at a per annum rate equal to LIBOR plus 235 basis
points, rather than 140 basis points. The line of credit was increased to $50
million in December 1999. The loan is now secured and with full recourse. In
addition, the Company continues to draw from funds available under the
Subordinated Debt Facility and its $10 million line of credit with Sun which is
also now secured. The Company has entered into a repurchase arrangement with an
unrelated party and has also sold a significant number of Contracts to unrelated
financial institutions without retaining
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servicing, in some cases with full recourse to the Company in the event of a
default by the borrower.
COMMERCIAL MORTGAGE BANKING BUSINESS
GENERAL
Through Bloomfield, Bloomfield Servicing and Hartger & Willard, the Company
participates and is active in all aspects of commercial real estate mortgage
banking, including originating, underwriting, placing, securitizing, and
servicing commercial real estate loans. Bloomfield acts as both a direct lender,
making commercial real estate loans for its own portfolio as well as for
accumulation and securitization, and as a traditional mortgage banker, placing
commercial real estate loans with institutional investors.
A portion of Bloomfield's activities are focused on the manufactured housing
industry and the Company believes that Bloomfield is one of the largest
originators of loans on manufactured home communities in the country. For the
year ended September 30, 1999, Bloomfield had originated approximately $72
million of loans on manufactured home communities.
LENDING
Bloomfield sources lending opportunities on a nationwide basis from direct
borrower inquiry as well as from mortgage bankers and brokers. Loan applications
are processed at the Company's offices in Birmingham, Michigan where due
diligence is performed, including an analysis of property operating history,
appraisal report, environmental report, borrower creditworthiness, credit
history and experience. Bloomfield performs on-site property inspection and
local market analysis.
Bloomfield funds primarily through a repurchase agreement with a Wall Street
investment bank. It is expected that Bloomfield will fund the bulk of its future
direct lending activities through similar arrangements. A portion of
Bloomfield's direct lending activities will remain on the Company's balance
sheet.
As of the end of the fiscal year, Bloomfield maintained a portfolio of $53
million of loans.
TRADITIONAL MORTGAGE BANKING
Bloomfield places commercial real estate mortgage loans with institutional
investors, primarily life insurance companies that it represents on an exclusive
or semi-exclusive basis. The bulk of these activities take place in Michigan.
The acquisition of Hartger & Willard has enhanced the Company's commercial
mortgage banking business by adding two new offices, loan officers and new
investors, including the Federal Home Loan Mortgage Corporation.
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SERVICING
Bloomfield Servicing services loans that Bloomfield originates and began
servicing loans for MHFC and Hartger & Willard in April 1999 and July 1999,
respectively. Hartger & Willard has consolidated with Bloomfield to effectively
operate as one unit. Historically, the majority of the loans made on a direct
lending basis were serviced until the loan was securitized, at which time
Bloomfield Servicing received a servicing termination fee. In May 1998,
Bloomfield Servicing began retaining the servicing of its direct loans and it is
expected that the size of Bloomfield Servicing's servicing portfolio will
increase.
In addition to servicing loans for Bloomfield, MHFC and Hartger & Willard,
Bloomfield Servicing services commercial real estate loans on behalf of
twenty-seven institutional investors. The majority of these loans are in
Michigan.
As of September 30, 1999, with the addition of MHFC and Hartger & Willard,
Bloomfield Servicing's servicing portfolio totaled approximately $900 million.
The entire commercial loan portfolio was current.
DELINQUENCY AND REPOSSESSION
COMMERCIAL MORTGAGE LOANS
Bloomfield Servicing is responsible for all commercial mortgage loans from the
time of funding until the loan is paid in full. No commercial mortgage serviced
by Bloomfield Servicing was delinquent as of September 30, 1999. If a commercial
mortgage loan becomes delinquent, the borrower is contacted by late notice
letter and by telephone. If the loan continues to be delinquent for more than 30
days, a default and acceleration letter is sent, specifying the legal period to
cure the default. During the cure period every attempt is made to obtain payment
or to modify and workout the loan terms to a payment plan that is satisfactory
to the lender and borrower and would bring the loan current. If the borrower and
lender do not agree to a workout arrangement during the cure period, local
counsel is retained to institute foreclosure proceedings and the property is
offered at a foreclosure sale. Bloomfield Servicing or its representative must
make a bid at the foreclosure sale to insure an appropriate upset price is
obtained upon foreclosure. If the lender is the successful bidder, the property
is turned over to the lender to liquidate against the loan balance. If the
successful bidder is a third party, the proceeds of the sale are applied to the
outstanding balance of the loan. All costs of foreclosure are the responsibility
of the lender and the lender absorbs any losses.
Manufactured Home Loans
Bloomfield Servicing is responsible for the servicing of Contracts from the time
of funding until the loan is paid in full. This servicing includes processing
payments and issuing delinquent letters of 15 days and 21 days, and a 32 day
default letter. The Company is responsible for collecting loans that are over 30
days delinquent and it hires a local attorney after the expiration of the 32 day
default letter. Next a 30 day demand letter is issued, at which time full
payment must be made on all arrearages including late fees and attorney fees.
The Company generally repossesses the manufactured home after payments have
become 60 to 90 days delinquent if the
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Company is not able to work out a satisfactory arrangement with the borrower.
For those loans originated in Sun Communities, Sun and an affiliate of Sun may
assist with foreclosure and the sale of the manufactured home after
repossession.
The Company maintains a reserve for estimated credit losses on Contracts owned
by the Company or sold to third parties with full recourse. The Company provides
for credit losses in amounts necessary to maintain the reserves at levels the
Company believes are sufficient to provide for future losses based on the
Company's historical loss experience, current economic conditions and portfolio
performance measures. For fiscal 1999 and 1998, as a result of expenses incurred
due to defaults and repossessions, $580,000 and $39,000, respectively, was
charged to the reserve for losses on credit sales. The Company's reserve for
losses on credit sales at September 30, 1999 was $258,000 as compared to
$185,000 at September 30, 1998.
In fiscal 1999 and 1998, the Company repossessed 66 and 15 manufactured homes,
respectively. The Company's inventory of repossessed homes was 50 homes at
September 30, 1999 as compared to 8 homes at September 30, 1998. The estimated
net realizable value of the repossessed homes in inventory at September 30, 1999
was approximately $1.3 million and at September 30, 1998, was approximately
$194,000.
The net losses resulting from charge offs of Company originated loans as a
percentage of the average principal amount of such loans outstanding for fiscal
1999 and 1998 was .52% and .23%, respectively.
At September 30, 1999 and September 30, 1998, delinquent installment sales
contracts and loans expressed as a percentage of the total number, and of the
total amount, of installment sales contracts and loans which the Company
services, or has sold with full recourse and are serviced by others, were as
follows:
TOTAL DELINQUENCY PERCENTAGE
NUMBER OF SEPTEMBER 30, 1998
CONTRACTS AND ------------------------------------------------------------
LOANS
-------------
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans 803 3.9% 2.2% 2.0% 8.2%
(Manufactured Home loans)
Contracts and loans sold with full 382 0.0% 0.0% 0.0% 0.0%
--- ---- ---- ---- ----
recourse serviced by others
1,185 2.6% 1.5% 1.4% 5.5%
Company-serviced contracts and loans 13 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
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TOTAL NUMBER DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1999
AND LOANS -----------------------------------------------------------
------------
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans 2,190 2.7% 0.9% 1.8% 5.4%
(Manufactured Home loans)
Contracts and loans sold with full 925 1.5% 0.5% 0.3% 2.3%
--- ---- ---- ---- ----
recourse serviced by others
3,115 2.4% 0.9% 1.5% 4.8%
Company-serviced contracts and loans 20 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
TOTAL AMOUNT DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1998
AND LOANS -----------------------------------------------------------
------------
(Dollars in thousands)
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans $22,674 3.2% 2.2% 1.6% 7.0%
(Manufactured Home loans)
Contracts and loans sold with full $11,218 0.0% 0.0% 0.0% 0.0%
------- ---- ---- ---- ----
recourse serviced by others
$33,892 2.2% 1.5% 0.5% 4.2%
Company-serviced contracts and loans $65,546 0.0% 0.0% 0.0% 0.0%
(Commercial loans)
TOTAL AMOUNT DELINQUENCY PERCENTAGE
OF CONTRACTS SEPTEMBER 30, 1999
AND LOANS -----------------------------------------------------------
------------
(Dollars in thousands)
30 DAYS 60 DAYS 90 DAYS TOTAL
------- ------- ------- -----
Company-serviced contracts and loans $64,501 2.7% 1.1% 1.5% 5.3%
(Manufactured Home loans)
Contracts and loans sold with full $27,609 1.3% 1.2% 0.5% 3.0%
------- ---- ---- ---- ----
recourse serviced by others
$92,110 2.3% 1.1% 1.2% 4.6%
Company-serviced contracts and loans
(Commercial loans) $52,904 0.0% 0.0% 0.0% 0.0%
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INSURANCE
I.J.K. Insurance Agency, Inc., a subsidiary of the Company, is a licensed agent
placing property and casualty, credit life and warranty insurance, primarily for
the Company's manufactured home loans.
COMPETITION
The manufactured housing finance industry is very fragmented and highly
competitive. There are numerous non-traditional consumer finance sources serving
this market. Several of these financing sources are larger than the Company and
have greater financial resources. In addition, some of the manufactured housing
industry's larger manufacturers maintain their own finance subsidiaries to
provide financing for purchasers of their manufactured homes. Historically,
traditional financing sources (commercial banks, savings and loans, credit
unions and other consumer lenders), many of which have significantly greater
resources than the Company and may be able to offer more attractive terms to
potential customers, have not consistently served this market.
The Company believes that its relationship with Sun, its focus on community
owners and operators, its prompt and consistent review of credit applications
and its emphasis on providing a high level of service enable it to compete
effectively for the purchase price financing and refinancing of manufactured
homes. However, to the extent that traditional and non-traditional lenders
significantly expand their activity in this market, the Company may be adversely
affected. There is no assurance that the Company will be able to effectively
compete against its existing competitors or any future competitors.
The Company's manufactured home finance business is generally subject to
seasonal trends, reflecting the general pattern of sales of manufactured homes
peaking during the spring and summer months and declining to lower levels from
mid-November through January.
The Company's commercial lending business is highly competitive and Bloomfield
and Hartger & Willard operate on a nationwide basis against a host of local,
regional and national lenders. Many of their competitors are larger and have
greater financial resources than the Company. Traditionally, the Company's
competitors included banks and thrifts, life insurance companies, mortgage
bankers and credit companies. More recently, the competition has expanded to
encompass Wall Street brokerage houses, either directly or through proxies or
"conduits." The Company believes that the industry is in a state of transition
and rapid consolidation and while the Company believes that it is
well-positioned to compete effectively in this environment, there can be no
assurances that it will do so.
REGULATION AND SUPERVISION
The Company is subject to regulation and licensing under various federal and
state statutes and regulations. The Company's manufactured home finance business
currently is conducted in the states of Alabama, Arizona, Colorado, Delaware,
Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Missouri,
New Jersey, North Carolina, Ohio, Oregon, South Carolina, Tennessee, Texas and
Virginia, and the
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Company currently intends to operate in the states of California, Idaho, Nevada,
North Dakota, New Mexico, Utah and Washington. Most states where the Company
operates: (i) limit the interest rate and other charges that may be imposed
under, or prescribe certain other terms of, the Contracts; (ii) regulate the
sale and type of insurance products that the Company may offer and the insurers
for which it will act as agent; and (iii) define the Company's rights to
repossess and sell collateral. The Company is licensed to conduct its finance
operations in the states of Alabama, Colorado, Delaware, Florida, Indiana,
Kansas, Michigan, Missouri, North Carolina, Ohio, Texas and Virginia. No license
is required to conduct the Company's manufactured home finance operations in
Arizona, Georgia, Illinois, Oregon and South Carolina.
The Company is subject to numerous federal laws, including the Truth in Lending
Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the
rules and regulations promulgated thereunder, and certain rules of the Federal
Trade Commission. These laws require the Company to provide certain disclosures
to applicants, prohibit misleading advertising and protect against
discriminatory financing or unfair credit practices. The Truth in Lending Act
and Regulation Z promulgated thereunder require disclosure of, among other
things, the terms of repayment, the final maturity, the amount financed, the
total finance charge and the annual percentage rate charged on each Contract.
The Equal Credit Opportunity Act prohibits creditors from discriminating against
loan applicants (including retail installment contract obligors) on the basis of
race, color, sex, age or marital status. Under the Equal Credit Opportunity Act,
creditors are required to make certain disclosures regarding consumer rights and
advise consumers whose credit applications are not approved of the reasons for
the rejection. The Fair Credit Reporting Act requires the Company to provide
certain information to consumers whose credit applications are not approved on
the basis of a report obtained from a consumer reporting agency. The rules of
the Federal Trade Commission limit the types of property a creditor may accept
as collateral to secure a consumer loan and its holder in due course rules
provide for the preservation of the consumer's claims and defenses when a
consumer obligation is assigned to a subject holder. The Credit Practices Rule
of the Federal Trade Commission imposes additional restrictions on loan
provisions and credit practices.
The sale of insurance products by the Company is subject to various state
insurance laws and regulations which govern allowable charges and other
practices.
The regulatory procedures discussed above are subject to changes by the
regulatory authorities. There are no assurances that future regulatory changes
will not occur. These regulatory changes could place additional burdens on the
Company.
ITEM 2. PROPERTIES
FACILITY
The Company's corporate headquarters is approximately 14,800 square feet, which
terminates on October 31, 2001, and is located in Birmingham, Michigan. The
lease on this space currently provides for monthly rent of $35,000 per month,
including base rent and a pro rata share of operating expenses and real estate
taxes. The Company has an option to renew the lease for an
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additional 3 years. The Company also leases space in Grand Rapids, Michigan for
a portion of its commercial mortgage servicing and origination operations. The
lease covers approximately 4,300 square feet with a monthly rent of $5,300. The
Company also subleases space to a tenant in Bloomfield Hills, Michigan. The
sublease covers a space of approximately 2,100 square feet with a monthly rent
of $3,900. The lease agreement expires in August, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or other
proceedings to which the Company is a party or of which any of its property is
the subject.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 4, 1999, the Company held its Annual Meeting of Shareholders. The only
matter voted upon at the meeting was the election of three directors to serve
until the 2002 Annual Meeting of Shareholders or until their respective
successors shall be elected and shall qualify. The results of the election
appear below:
Votes Against Abstentions or
Name Votes For or Withheld Broker Non-Votes
- ---- --------- ----------- ----------------
Ronald A. Klein 2,195,728 2,350 224,406
Arthur A. Weiss 2,195,728 2,350 224,406
Creighton J. Weber 2,195,728 2,350 224,406
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq SmallCap Market
("Nasdaq") since May 11, 1998 under the symbol "BFSC" and was previously traded
on the NASD OTC Bulletin Board. On December 15, 1999, the closing sales price of
the Common Stock was $7.25 and the Common Stock was held by approximately fifty
(50) holders of record. The following table sets forth, for the periods
indicated, the range of the high and low sales prices.
High Low
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 1999
First Quarter ended 12/31/98................................... 18 9
Second Quarter ended 3/31/99................................... 18 1/2 13 5/8
Third Quarter ended 6/30/99.................................... 16 1/2 12
Fourth Quarter ended 9/30/99................................... 14 1/2 8.438
FISCAL YEAR ENDED SEPTEMBER 30, 1998
First Quarter ended 12/31/97 10 3/8 9
Second Quarter ended 3/31/98 16 9 3/8
Third Quarter ended 6/30/98 22 3/4 16 1/8
Fourth Quarter ended 9/30/98 28 1/2 13 1/4
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.
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RECENT SALES OF UNREGISTERED SECURITIES
On October 27, 1997, the Company issued 25,000 shares to an affiliate for a
purchase price of $10.00 per share. On March 5, 1998, the Company issued an
aggregate of 281,818 shares to certain individuals in exchange for their
membership interests in Bloomfield and Bloomfield Servicing. On September 25,
1998, the Company issued, as compensation, an aggregate of 35,336 shares of
Common Stock to a certain employee, which shares are restricted by the terms of
a certain Restricted Stock Award Agreement
On April 27, 1999, the Company issued an aggregate of 800,330 shares of common
stock to certain officers, directors, stockholders and new investors for a
purchase price of $15 per share. On January 4, 1999, the Company issued, as
compensation, an aggregate of 10,713 shares of Common Stock to certain of its
employees, which shares are restricted by the terms of certain Restricted Stock
Award Agreements. On April 1, 1999, the Company issued, as compensation, an
aggregate of 652 shares of Common Stock to certain of its employees, which
shares are restricted by the terms of certain Restricted Stock Award Agreements.
On April 14, 1999, the Company issued, as compensation, an aggregate of 10,000
shares of Common Stock to an officer of the Company, which shares are restricted
by the terms of a certain Restricted Stock Award Agreement. On June 30, 1999,
the Company issued, as compensation, an aggregate of 7,312 shares of Common
Stock to a certain employee, which shares are restricted by the terms of a
certain Restricted Stock Award Agreement. On July 1, 1999, the Company issued,
as compensation, an aggregate of 3,092 shares of common stock to certain of its
employees, which shares are restricted by the terms of certain Restricted Stock
Award Agreements. On July 2, 1999, the Company issued 66,667 shares of common
stock to DMRFS in consideration for the acquisition of all of the outstanding
shares of capital stock of Hartger & Willard. On August 9, 1999, the Company
issued, as compensation, an aggregate of 8,421 shares of Common Stock to a
certain employee, which shares are restricted by the terms of a certain
Restricted Stock Award Agreement. On September 3, 1999, the Company issued, as
compensation, an aggregate of 9,132 shares of Common Stock to a certain
employee, which shares are restricted by the terms of a certain Restricted Stock
Award Agreement.
All of the above shares of common stock were issued in private placements in
reliance on Section 4(2) of the Securities Act of 1933, as amended, including
Regulation D promulgated thereunder. No underwriters were used in connection
with any of such issuances.
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16
ITEM 6. SELECTED FINANCIAL DATA
PERIOD
YEAR ENDED JANUARY 2 TO
SEPTEMBER 30, SEPTEMBER, 30
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Income Statement Data:
Revenue $ 16,277 $ 6,141 $ 280
Earnings (loss) before income taxes 1,217 (793) (110)
Net earnings (loss) 776 (574) (110)
Earnings (loss) per common share, diluted 0.36 (0.46) -
Dividends paid - - -
Balance Sheet Data:
Total assets $ 132,698 $ 94,859 $ 9,652
Total debt 101,070 78,230 9,747
Stockholders' equity 26,068 13,457 (110)
Selected Ratios
Return on average assets 0.85% (1.23%) (2.28%)
Return on average equity (deficiency) 5.36% (4.13%) (100.00%)
Average equity (deficiency) to average assets 15.87% 29.77% (1.14%)
-16-
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company commenced operations in January 1997, for the primary purpose of
originating loans on manufactured home "Contracts" located within the
communities owned by Sun. The Company was formed by Sun in response to the
growing need to provide timely and competitive financing to residents in
manufactured home communities. The Company has expanded its manufactured home
lending activities through the use of "dealer networks" to communities not owned
and operated by Sun to the extent that now 75% of the Company's manufactured
home lending is done outside the Sun owned and operated communities. The Company
provides financing for new and previously owned manufactured homes to borrowers
whose credit needs may or may not be met by traditional financial institutions
due to credit expectations or other factors. The Company through one of its
subsidiaries also provides warranty, credit life and disability insurance on the
contracts it finances.
Through acquisitions the Company's business has expanded to include commercial
lending and mortgage servicing for income producing properties. The Company
expects to extend its business to include other types of installment loans,
expand its mortgage servicing operations and engage in other related businesses
through the initiation of new businesses or through the acquisition of existing
ones.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998. The Company had income before federal income tax of $1.2
million on gross revenues of $16.3 million and expenses of $15.1 million in 1999
compared to a loss before federal income tax benefit of $793,000 for the year
ended September 30, 1998 on gross revenues of $6.1 million and expenses of $6.9
million. The large increase in gross revenues is primarily related to the
significant increase in interest income as a result of a much larger average
outstanding portfolio balance and the gain on sale of loans. The large increase
in gross expenses relates to increased interest expense and a large increase in
personnel costs.
Interest income on loans increased to $9.5 million in 1999, or approximately
188% over interest income of $3.3 million in 1998. The large increase is
primarily due to an increase in the average outstanding loan receivable balance
of $111.7 million in 1999 versus $51.5 million in 1998, an increase of 116.9%
The increase in interest income as a result of the higher average outstanding
receivable balance was slightly offset by a decrease in the average yield on the
loan receivable portfolio of 8.48% in 1999 versus 8.60% in 1998.
Interest expense for the year ended September 30, 1999 was $6.9 million as
compared to $1.9 million, an increase of 263% for the comparable period ended
September 30, 1998. The increase in interest expense is driven by the increase
in the average outstanding balance of debt used to finance the loan receivables
and fund operations. Average outstanding debt increased to $100.7
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18
million, or 118.22% in 1999 versus $46.1 million 1998. Offsetting some of the
increase in average outstanding debt was a decrease in the cost of borrowings to
6.81% in 1999 compared to 7.52% in 1998.
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:
YEAR AND PERIOD ENDED SEPTEMBER 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 $111,715 $51,480 8.48% 8.60% $9,477 $3,296 $6,181 $6,315 (134)
Cash and equivalents 4,283 3,839 2.33% 3.75% 100 84 16 77 (61)
--------------------------------------------------------------------------------
115,998 55,319 8.80% 8.26% 9,577 3,380 6,197 6,392 (195)
--------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 4,000 11.68% 11.75% 467 392 75 - 75
Revolving line of credit 20,879 9,540 7.62% 7.00% 1,591 668 923 794 129
Loans sold under repurchase 75,784 32,549 6.33% 7.15% 4,797 873 3,924 4,545 (621)
--------------------------------------------------------------------------------
100,663 46,089 6.81% 7.52% 6,855 1,933 4,922 5,339 (417)
--------------------------------------------------------------------------------
Interest rate spread 1.99% .74%
Excess average earning assets 15,335 9,230 8.80% 8.26%
====================================
Net interest margin 2.35% 2.00% $2,722 $1,447 $1,275 $1,053 $ 222
=============================================================
Mortgage origination fees are related to commercial mortgage loans originated
and placed with outside investors. Placement fees increased 32% to $1.6 million
on placed commercial mortgage loans of $155 million for 1999 compared to $1.2
million in fees on placed commercial mortgage loans of $140 million in 1998.
Origination of commercial mortgage loans and related placement fees for 1998
cover the period from March 1, 1998, the date of the acquisition of Bloomfield,
through September 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 for loans that are
prepaid in the first twelve months after the date of sale on loans sold with
recourse. For the year ended September 30, 1999 the gain on sale of loans also
includes a recovery of $2.4 million related to the valuation of the loan
portfolio and related hedge positions. In 1999 the Company sold approximately
$20.4 million of manufactured home loans and securitized and sold approximately
$80.3 million of commercial mortgage loans resulting in gains of $4.4 million as
compared to sales of $11.6 million of manufactured home loans resulting in gains
of $.7 million for the comparable period in 1998.
Provision for credit losses is recorded in amounts sufficient to maintain an
allowance at a level considered adequate to cover losses from liquidating
manufactured home loans and loans sold
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with recourse. Provision for credit losses increased approximately 344% to
$653,000 in 1999 compared to $147,000 in 1998. The large increase is primarily
related to a 184% increase in outstanding principal balance of manufactured home
loans which was $64.5 million at September 30, 1999 as compared to $22.7 million
at September 30, 1998. The provision increase is also affected by the increase
in nonperforming manufactured home loans which were 2.59% of the manufactured
home loan outstanding principal balance at September 30, 1999 versus .85% of the
outstanding principal balance for the comparable period in 1998.
General and administrative and other operating expenses totaled approximately
$7.6 million in 1999. This was an increase of $5.1 million or 204% over general
and administrative expenses in 1998 of $2.5 million. The largest part of the
increase is directly related to personnel costs. The Company increased its
number of full time employees to 90 at September 30, 1999 resulting in personnel
costs of $3.9 million for the year or an increase of 179%. This is compared to
25 full time employees with personnel costs of $1.4 million for the year ended
September 30, 1998. These increases reflect the costs of the Company's expanding
its manufactured home lending operations to communities outside those owned and
operated by Sun and the expansion of its commercial mortgage lending business
through the acquisition of Hartger & Willard in the fourth quarter of 1999.
The increase in personnel resulted in an increase in occupancy and office
expenses to $817,000 for 1999 or 233% increase over the comparable period in
1998 of $245,000.
1998 COMPARED TO 1997. The Company had a loss before federal income tax benefit
of $793,000 for the year ended September 30, 1998 on gross revenues of $6.1
million and expenses of $6.9 million. This is compared to a loss of $110,000 on
gross revenues of $280,000 and expenses of $390,000 for the period January 2,
1997 (date of inception) through September 30, 1997. Net loss for the Company
increased $464,000 versus the $110,000 loss for 1997.
The large increase in total gross income was due to a greater number of loans
originated in the manufactured home loan portfolio and through the acquisition
of a commercial mortgage loan originator in March, 1998. Interest income on
manufactured home loans increased to $2.2 million from $280,000 for the year
ended September 30, 1998 versus the period ended September 30, 1997. Interest
income on the commercial mortgage loan portfolio for the period March 1, 1998
through September 30, 1998 was $1.1 million.
Interest expense for the year ended September 30, 1998 was $1.9 million versus
$195,000 for the period ended September 30, 1997. The Company maintained a
significantly higher level of borrowings to fund its increased manufactured home
loan originations and commercial mortgage portfolio.
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:
-19-
20
YEAR AND PERIOD ENDED SEPTEMBER 30, 1998 AND 1997
--------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST INCREASE VARIANCE DUE TO:
--------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 (DECREASE) VOLUME RATE
--------------------------------------------------------------------------------
Interest-earning assets:
Loans $51,480 $3,879 8.60% 10.83% $3,296 $ 280 $3,016 $2,991 $ 25
Cash and equivalents 3,839 - 3.75% - 84 - 84 84 -
---------------------------------------------------------------------------------
55,319 3,879 8.26% 10.83% 3,380 280 3,100 3,075 25
---------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 3,727 11.75% 6.98% 392 195 197 20 177
Revolving line of credit 9,540 - 7.00% - 668 - 668 668 -
Loans sold under 32,549 - 7.15% - 873 - 873 873 -
agreement to repurchase
---------------------------------------------------------------------------------
46,089 3,727 7.52% 6.98% 1,933 195 1,738 1,561 177
---------------------------------------------------------------------------------
Interest rate spread 0.74% 3.85%
Excess average earning assets 9,230 152 8.26% 10.83%
==================================
Net interest margin 2.00% 4.12% $1,447 $ 85 $1,362 $1,514 (152)
==============================================================
Mortgage origination and refinance fees totaled $1.2 million for fiscal 1998 on
the placed commercial mortgage loans. The sale of mortgage servicing rights in
connection with the commercial mortgage loans originated and serviced resulted
in gross revenues of approximately $600,000. No comparable is reported for
fiscal 1997 as this is the first year of commercial mortgage origination for the
Company.
Gain on sale of loans represents the gross income from the sale of approximately
$11.2 million of manufactured home loans on a servicing released basis. This is
the first year in which the Company has sold a portion of its manufactured home
loan portfolio.
During the latter part of the fourth quarter of 1998, the Company incurred
losses due to unprecedented market conditions related to commercial mortgage
backed securities and related instruments. The Company recorded $2.4 million of
losses related to mark-to-market valuations of commercial mortgage loans held
for sale and the related hedge positions.
Provision for credit losses increased to $147,000 or 153% in 1998 from $58,000
in 1997 due to the large increase in the manufactured home loan portfolio.
Provision for loan losses is recorded in amounts sufficient to maintain an
allowance at a level considered adequate to cover losses from liquidating
manufactured home loans and loans sold with recourse.
General and administrative and other operating expenses increased to $2.5
million in fiscal 1998 as compared to $137,000 for the period ended September
30, 1997. The large increase was the result of underwriting and originating
significantly higher manufactured home loan volumes in fiscal 1998, operations
for the full year rather than the shorter period from inception to September 30,
1997, and through the acquisition of Bloomfield and Bloomfield Servicing with
the related underwriting, originating and servicing of commercial mortgage
loans. The largest increase in general and administrative expenses related to
the increase in the number of
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21
employees from 4 to 25, including the increase through acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to have adequate cash or
access to cash at all times in order to meet financial obligations when due as
well as to fund corporate expansion or other activities. The Company expects to
meet its liquidity requirements through a combination of working capital
provided by operating activities, 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. The Company may also
issue additional shares of capital stock when it believes existing shareholders
are likely to benefit from such offerings.
During the year ended September 30, 1999 the Company issued 800,330 shares of
its common stock in private equity raises. The stock issuance resulted in
proceeds of approximately $12 million
In connection with its initial public offering the Company entered into the
Subordinated Debt Facility with Sun, which is subordinated to all senior debt of
the Company. The Subordinated Debt Facility consists of a $4 million term loan
with an annual interest rate of 9.75%. As of September 30, 1999, the Company
also had an $18 million demand line of credit and a $10 million demand line of
credit with Sun, both of which provide for an annual interest rate equal to the
one month "LIBOR" rate plus 235 basis points. At September 30, 1999 and 1998 the
Company owed Sun $32.0 million and $21.3 million respectively under the
Subordinated Debt Facility and the revolving line of credit facilities.
In accordance with the subordinated loan agreement the Company issued detachable
warrants to Sun covering 400,000 shares of common stock at a price of $10.00 per
warrant share. The detachable warrants have a term of seven years and may be
exercised at any time after the fourth anniversary of the issuance.
In March 1998 the Company's commercial mortgage originating subsidiary entered
into a one year master repurchase agreement with a lender to finance fixed rate
commercial loans secured by real estate. In September of 1998 that agreement was
amended to include financing of manufactured home, floor plan and bridge loans.
At September 30,1999 the maximum financing limits on the facility were $50.0
million for commercial mortgage and bridge loans and $50.0 million for
manufactured home and floor plan loans . The annual interest rate on the
facility is a variable rate of interest equal to "LIBOR" plus a spread,
dependent on the advance rate and the asset class. As of September 30, 1999 and
1998 approximately $69.0 million and $56.9 million of borrowings respectively
were outstanding under the facility.
During the years ended September 30, 1999 and 1998, the Company completed the
sale of approximately $20.4 million and $11.6 million in outstanding principal
balance amount of loans from its manufactured home loan portfolio. These sales
resulted in approximate proceeds to the company of $21.6 million and $12.5
million respectively. In 1999 the Company also sold through securitization and
whole loan sales approximately $91.6 million of outstanding principal balance of
its commercial mortgage loan portfolio. The securitization and sales resulted in
proceeds to the Company of $91.8 million. There were no sales of commercial
mortgage loans in 1998.
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MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company's market risk arises from interest rate risk
inherent in its financial instruments. The Company is not currently subject to
foreign currency exchange rate risk or commodity price risk.
In the normal course of business, the Company also faces risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk and
legal risk and are not included in the following table.
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 negative 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)
Assets:
Cash and equivalents $ 730 $ - $ - $ - $ 730
Restricted cash 975 2,926 - - 3,901
Loans receivable 3,683 9,253 49,659 55,292 117,887
Servicing rights 93 280 1,135 612 2,120
Other assets 3,048 2,109 1,232 1,671 8,060
----------------------------------------------------------------
TOTAL ASSETS $ 8,529 $ 14,568 $ 52,026 $ 57,575 $ 132,698
================================================================
Liabilities:
Advances by mortgagors $ 971 $ 2,911 $ - $ - $ 3,882
Accounts payable and accrued expenses 1,216 258 - - 1,474
Advances under repurchase agreement 35,892 33,134 - - 69,026
Subordinated debt (19) (57) 3,643 - 3,567
Notes Payable - 28,477 - - 28,477
Other liabilities - - - 204 204
----------------------------------------------------------------
TOTAL LIABILITIES 38,060 64,723 3,643 204 106,630
----------------------------------------------------------------
Stockholders' Equity
Common stock - - - 25,576 25,576
Paid-in-capital - - - 704 704
Accumulated other comprehensive income - - (304) - (304)
Retained earnings - - - 92 92
================================================================
TOTAL LIABILITIES AND EQUITY $ 38,060 $ 64,723 $ 3,339 $ 26,576 $ 132,698
================================================================
Reprice difference $ (29,531) $(50,155) $ 48,687 $ 30,999
Cumulative gap $ (29,531) $(79,686) $(30,999) $ -
Percent of total assets (22.25%) (60.05%) (23.36%) -
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23
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 fiscal 2000. 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 G to the
Consolidated Financial Statements, 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, Treasury rate locks and forward interest rate swaps to
hedge a portion of the fixed rate loans in the commercial loan portfolio. The
Company uses these instruments in an attempt to reduce risk by essentially
creating offsetting market exposures.
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.
A forward interest rate swap is an obligation to enter into a swap or cash
settlement on a future date for the difference between the market rate on that
date and an agreed upon swap rate. This transaction is similar to a Treasury
rate lock in that it allows the Company to lock in a rate starting in the
future. The difference is that you will be locking in a future swap rate, not a
forward treasury yield. A forward interest rate swap allows the positive or
negative effect of a change in the value of the underlying loans to be offset by
the positive or negative payment on the settlement of the hedging transaction.
If interest rates rise the value of the loan portfolio will have decreased but
the decrease will be offset by an increase in the value of the hedge equal to
approximately the present value of decrease in value of the hedged loan
portfolio. If interest rates are declining the reverse would hold true, The
value of the loan portfolio will increase and be offset by a decrease in the
value of the swap approximately equal to the present value of the hedged loan
portfolio
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24
increase.
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 September 30, 1999.
CONTRACTUAL
MATURITY
--------------------------------------------------------------------------------------------
TOTAL
2000 2001 2002 2003 2004 THEREAFTER FAIR VALUE
--------------------------------------------------------------------------------------------
Interest sensitive assets:
Loans receivable $ 13,119 $ 10,762 $ 8,631 $ 9,603 $10,681 $ 66,753 $119,549
Average interest rate 8.80% 8.80% 8.80% 8.80% 8.80% 8.80% 8.80%
Interest bearing deposits 4,283 - - - - - 4,283
Average interest rates 2.33% - - - - - 2.33%
Hedging transactions - - - - - 22,639 22,639
Average interest rate - - - - - 6.31% 6.31%
--------------------------------------------------------------------------------------------
Total interest sensitive assets $ 17,402 $10,762 $ 8,631 $ 9,603 $ 10,681 $ 89,392 $146,471
============================================================================================
Interest sensitive liabilities:
Borrowings:
Advances under repurchase $ 69,026 $ - $ - $ - $ - $ - $ 69,026
Average interest rate 6.33% - - - - - 6.33%
Subordinated debt - - - - - 3,567 3,567
Average interest rate - - - - - 11.68% 11.68%
Note payable 27,966 - - - - - 28,477
Average interest rate 7.62% - - - - - 7.62%
--------------------------------------------------------------------------------------------
Total interest sensitive liabilities $ 96,992 $ - $ - $ - $ - $ 3,567 $101,070
============================================================================================
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report on Form 10-K, 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
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25
addition, past financial and operational performance of the Company is not
necessarily indicative of future financial and operational performance.
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. The
Company 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 affect 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 $65,000. 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
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26
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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
September 30, 1999 those costs totaled approximately $682,000. Any remaining
unamortized balance at will be expensed.
In June 1998 Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS 133
requires all derivative instruments to be recorded on the balance sheet at
estimated fair value. Changes in the fair value of derivative instruments are to
be recorded each period either in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, on the type of hedge transaction. SFAS 133 is
effective for the year 2001. The Company is currently evaluating the impact of
SFAS 133; at present the Company does not believe it will have a material effect
on the consolidated financial position or results of operations.
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27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BINGHAM FINANCIAL SERVICES CORPORATION
FINANCIAL STATEMENTS FURNISHED PURSUANT TO
THE REQUIREMENTS OF FORM 10-K
AND
REPORTS OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS AND PERIOD ENDED SEPTEMBER 30, 1999, 1998 AND 1997
-27-
28
BINGHAM FINANCIAL SERVICES CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Accountants..........................................................29
Financial Statements:
Consolidated Balance Sheets - September 30, 1999 and 1998...................................31
Consolidated Income Statements for the years and period ended
September 30, 1999, 1998 and 1997..................................................32
Consolidated Statements of Changes in Stockholders' Equity for the
years and period ended September 30, 1999, 1998 and 1997...........................33
Consolidated Statements of Cashflows for the years and period ended
September 30, 1999, 1998 and 1997..................................................34
Notes to Consolidated Financial Statements..................................................35
-28-
29
Independent Auditor's Report
To the Board of Directors
Bingham Financial Services Corporation
We have audited the accompanying consolidated balance sheet of Bingham Financial
Services Corporation as of September 30, 1999 and the related consolidated
statements of changes in stockholders' equity, income and cash flows for the
year ended September 30, 1999. These consolidated financial statements are the
responsibility of the corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bingham
Financial Services Corporation as of September 30, 1999 and the consolidated
results of their operations and their cash flows for the year ended September
30, 1999, in conformity with generally accepted accounting principles.
Plante & Moran, LLP
Southfield, Michigan
December 22, 1999
-29-
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Bingham Financial Services Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and changes in stockholders' equity and of
cash flows, as included in 1999 Form 10K present fairly, in all material
respects, the financial position of Bingham Financial Services Corporation and
its subsidiaries at September 30, 1998 and the results of their operations and
their cash flows for the year ended September 30, 1998 and for the period from
January 2, 1997 (date of inception) through September 30, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan
December 18, 1998
-30-
31
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARES)
SEPTEMBER 30,
---------------------------------------------------------
ASSETS 1999 1998
---------------------------------------------------------
Cash and equivalents $ 730 $ 1,979
Restricted cash 3,901 2,253
Loans receivable 117,887 86,075
Servicing rights 2,120 156
Property and equipment, net 1,100 655
Other assets 6,960 3,741
-------------- ---------------
Total assets $ 132,698 $ 94,859
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Advances by mortgagors $ 3,882 $ 2,238
Accounts payable and accrued expenses 1,474 636
Advances under repurchase agreements 69,026 56,892
Subordinated debt, net of debt discount of $433 3,567 3,490
Note payable 28,477 17,848
-------------- ---------------
Total liabilities 106,426 81,104
-------------- ---------------
Minority Interest
204 298
-------------- ---------------
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; 2,528,473 and 1,576,818 shares issued
and outstanding at 1999 and 1998, respectively 26,696 13,608
Paid-in capital 619 533
Accumulated other comprehensive loss (304) -
Unearned stock compensation (1,035) -
Retained earnings (deficit) 92 (684)
-------------- ---------------
Total stockholders equity 26,068 13,457
-------------- ---------------
Total liabilities and stockholders' equity $ 132,698 $ 94,859
============== ===============
The accompanying notes are an integral part of these financial statements.
-31-
32
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS AND PERIOD ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARES)
PERIOD
YEAR ENDED JANUARY 2 TO
SEPTEMBER 30, SEPTEMBER 30,
REVENUES 1999 1998 1997
----------------------------------------------------
Interest income on loans $ 9,477 $ 3,296 $ 280
Mortgage origination and servicing fees 2,069 1,361 -
Gain on sale of loans 4,399 738 -
Sale of servicing rights - 618 -
Other income 332 128 -
----------------------------------------------------
Total revenues 16,277 6,141 280
----------------------------------------------------
COSTS AND EXPENSES
Interest expense 6,856 1,933 195
Provision for credit losses 653 147 58
Provision for unrealized hedge loss - 2,400 -
General and administrative 5,215 1,250 -
Other operating expenses 2,336 1,204 137
----------------------------------------------------
Total costs and expenses 15,060 6,934 390
----------------------------------------------------
Income (loss) before income tax expense (benefit) 1,217 (793) (110)
Federal income tax expense (benefit) 441 (219) -
----------------------------------------------------
Net income (loss) $ 776 $ (574) $ (110)
====================================================
Weighted average common shares outstanding 1,966,288 1,261,031
===============================
Weighted average common shares outstanding,
Diluted 2,145,939
============
Earnings (loss) per share:
Basic $ 0.39 $ (0.46)
================================
Diluted $ 0.36 $ (0.46)
================================
The accompanying notes are an integral part of these financial statements.
-32-
33
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS AND PERIOD ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT FOR SHARES)
ACCUMULATED
OTHER UNEARNED RETAINED TOTAL
COMMON PAID-IN COMPREHENSIVE STOCK EARNINGS STOCKHOLDER'S
STOCK CAPITAL LOSS COMPENSATION (DEFICIT) EQUITY
------------------------------------------------------------------------------------------
Balance January 2, 1997 $ - $ - $ - $ $ - $ -
Issuance of 100 shares
of common stock
Comprehensive loss:
Net loss (110) (110)
------------------------------------------------------------------------------------------
Balance, October 1, 1997 - - - (110) (110)
Issuance of 1,295,000 shares
of common stock 11,583 11,583
Issuance of 281,818 shares of
common stock in conjunction
with acquisition 2,025 (119) 1,906
Issuance of 400,000 warrants
with subordinated debt 577 577
Option amortization 75 75
Comprehensive loss:
Net loss (574) (574)
------------------------------------------------------------------------------------------
Balance, September 30, 1998 13,608 533 - (684) 13,457
Issuance of 867,001 shares
of common stock 11,968 11,968
Issuance of 84,658 restricted
stock awards 1,120 - - (1,120) - -
Restricted stock award amortization - 85 85
Option amortization 86 86
Net income 776 776
Comprehensive income:
Unrealized loss on securities
available for sale, net of tax (304) (304)
-----------------
Total comprehensive income 472
------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 26,696 $ 619 $ (304) $ (1,035) $ 92 $ 26,068
==========================================================================================
The accompanying notes are an integral part of these financial statements.
-33-
34
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE YEARS AND PERIOD ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(IN THOUSANDS)
PERIOD
YEAR ENDED JANUARY 2 TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------------------------------------------------------
Cash flows from operating activities:
Net income $ 776 $ (574) $ (110)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for unrealized hedge (gain) loss (2,400) 2,400
Provision for credit losses 653 147 58
Depreciation and amortization 1,135 516 18
Originations of loans held for sale (144,344) (92,806) (9,844)
Principal collections on loans held for sale 3,256 2,191 244
Proceeds from sale of loans held for sale 113,494 12,513
Gain on sale of investment securities (3) (13) -
Gain on sale of loans (1,999) (738) -
Increase in other assets (5,320) (2,386) (129)
Increase in other liabilities 3,860 115 210
-------------------------------------------------
Net cash provided (used) by operating
activities (39,892) (78,635) (9,553)
-------------------------------------------------
Cash flows from investing activities:
Purchase of Hartger & Willard (1,900) - -
Purchase of investment securities (1,529) - -
Proceeds from the sale of investment securities 369 71 -
Capital expenditures (486) (27) -
-------------------------------------------------
Net cash used in investing activities (3,545) 44 -
-------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 11,968 11,582 -
Issuance of subordinated debt, including discount - 4,000 -
Advances under repurchase agreements 98,990 56,892 -
Repayment of advances under repurchase agreements (86,855)
Advances on note payable 109,164 30,117 9,553
Repayment of note payable (100,079) (22,021) -
-------------------------------------------------
Net cash provided by financing activities 33,188 80,570 9,553
-------------------------------------------------
Net change in cash and cash equivalents (1,249) 1,979 -
Cash and cash equivalents, beginning of period 1,979 - -
-------------------------------------------------
Cash and cash equivalents, end of period $ 730 $ 1,979 $ -
=================================================
The accompanying notes are an integral part of these financial statements.
-34-
35
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Company was incorporated for the purpose of
providing financing to residents living in manufactured housing communities
for the purchase of new and used manufactured homes. The Company originates
conventional loans that generally range in size from $4,500 to $90,000 and
have a term of 5-25 years. The Company has focused its marketing efforts
principally through manufactured home community owners and operators. This
effort has traditionally been targeted at Sun Communities, where the
Company's services are offered as the preferred source of financing.
However, the Company has expanded its manufactured home lending activities
through the use of "dealer networks" to communities not owned and operated
by Sun to the extent that now 75% of manufactured home lending is done
outside the Sun owned and operated communities. The Company continues to
take the steps necessary to capture a greater share of the loans generated
by home purchasers and owners in Sun Communities as well as dealer
generated loans.
The Company also participates and is active in all aspects of commercial
real estate mortgage banking, including originating, underwriting, placing,
securitizing, and servicing commercial real estate loans through Bloomfield
and Bloomfield Servicing. Bloomfield acts as both a direct lender, making
commercial real estate loans for its own portfolio as well as for
accumulation and securitization, and as a traditional mortgage banker,
placing commercial real estate loans with institutional investors.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts and transactions of the Company and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
For purposes of income statement and cashflow comparison, the Company does
not have a period covering the twelve months ended September 30, 1997.
Information presented covers the period from January 2, 1997 (date of
inception) through September 30, 1997. The Company's initial public
offering of common stock did not take place until the quarter ended
December 31, 1997.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents represent short-term
highly liquid investments with original maturities of three months or less
and include cash and interest bearing deposits at banks. The Company has
restricted cash related to serviced loans held by others that is held in
trust for subsequent payment to the owners of those loans.
-35-
36
LOANS RECEIVABLE: Loans receivable consist of commercial real estate loans
and manufactured home loans. The commercial loans primarily consist of
fixed rate loans collateralized by mortgages on commercial property.
Commercial loans originated are either sold immediately to permanent
investors or held for sale. Manufactured home loans are conventional fixed
rate loans under contracts collateralized by the borrowers' manufactured
homes. Manufactured home loans are also held for sale.
-36-
37
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Loans receivable are carried at the lower of cost or market value
determined on an aggregate basis. Loans receivable include accrued interest
and are net of deferred hedging gains or losses and an allowance for
expected losses.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses forward sales of U.S.
Treasury securities, Treasury rate locks and forward interest rate swaps to
hedge a portion its commercial mortgage loan portfolio. These instruments
are used as a means to hedge interest rate risk connected to anticipated
sales or securitizations of the commercial mortgage loans. The Company's
accounting for derivative financial instruments that are used to manage
risk is in accordance with the concepts established in SFAS No. 80,
"Accounting for Futures Contracts".
Deferral (hedge) accounting is applied if the derivative reduces the risk
of the underlying hedged item and is designated at inception as a hedge
with respect to the hedged item. Additionally, the derivative must result
in payoffs that are expected to be inversely correlated to the hedged item.
Derivatives are measured for effectiveness both at inception and on an
ongoing basis. If a derivative instrument ceases to meet the criteria for
deferral accounting, any subsequent gains and losses are currently
recognized in income.
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, loans sold with recourse and 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.
SERVICING RIGHTS: The Company accounts for servicing rights in accordance
with SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 requires
that a separate asset or liability be recorded representing the right or
obligation to service loans for others. A servicing asset or liability is
determined by allocating the loans' previous carrying amount between the
servicing asset and the loans that were sold, based on their relative fair
values at the date of sale. The fair value of the servicing asset or
liability is based on an analysis of discounted cash flows that
incorporates estimates of market servicing costs, projected ancillary
servicing revenue, projected prepayment rates and market profit margins.
Servicing rights are periodically assessed for impairment based on the fair
value of those rights calculated on a discounted basis. This assessment is
performed on a disaggregated basis, stratified by mortgage type and term.
Identified impairments are recognized through a valuation allowance.
INTEREST ON LOANS: Interest on loans is credited to income when earned. An
allowance for interest on loans is provided when a loan becomes more than
75 days past due as the collection of these loans is considered doubtful.
-37-
38
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
LOAN FEES: Loan origination fees and certain direct loan origination costs
are deferred and recognized over the expected lives of the related loans as
an adjustment of the yields using a level-yield method.
REPOSESSED HOMES: Manufactured homes acquired through foreclosure or
similar proceedings are recorded at the lower of the related loan balance
plus any operating expenses of such homes or the estimated fair value of
the home at acquisition date.
OTHER COMPREHENSIVE INCOME: The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," as of January 1, 1998. Accounting principles
generally require that recognized revenue, expenses, gains and losses be
included in net income. Certain changes in assets and liabilities, however,
such as unrealized gains and losses on available-for-sale securities, are
reported as a direct adjustment to the equity section of the balance sheet.
Such items, along with net income, are considered components of
comprehensive income under the new standard.
Accumulated other comprehensive income at September 30, 1999 is comprised
solely of unrealized losses on available-for-sale securities, net of tax
benefit of $158,000.
OTHER ASSETS: Other assets is comprised of margin deposits with brokers,
organization and licensing costs, prepaid expenses, investment securities
deferred financing costs, goodwill and other miscellaneous receivables.
Organization and licensing costs are amortized on a straight-line basis
over a five-year life. Deferred financing costs are capitalized and
amortized over the life of the corresponding line of credit.
LOANS SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into sales of
loans under agreements to repurchase the loans. The agreements are
short-term and are accounted for as secured borrowings. The obligations to
repurchase the loans sold are reflected as a liability, and the loans that
collateralize the agreements are reflected as assets in the balance sheet.
DEPRECIATION: Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of office properties
and equipment, as follows: leasehold improvements - life of the lease;
furniture and fixtures - seven years; capitalized software - five years;
computers - five years.
INCOME TAXES: The Company uses the liability method in accounting for
income taxes. Under this method, deferred income taxes result from
temporary differences between the tax bases of assets and liabilities and
the bases reported in consolidated financial statements. The deferred taxes
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
GOODWILL: Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, generally 25 years.
PER SHARE DATA: Basic earnings per share are computed by dividing net
income available to common shareholders by the weighted average common
shares outstanding. In the computation of fully diluted earnings per share,
the treasury stock method of determining weighted average shares is
required, which assumes the exercise of existing stock options and the
repurchase of shares with the proceeds. At September 30, 1998 there were
approximately 260,000 potential shares of common stock from stock options
and warrants outstanding. Had these stock options and warrants been
exercised in 1998 they would have had an anti-dilutive effect on the net
loss. The effect of the anti-dilutive shares is not included in the
earnings per share calculation for 1998.
The following table presents a reconciliation of the numerator (income
applicable to common shareholders) and denominator (weighted average common
shares outstanding) for the basic loss per share calculation:
-38-
39
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
SEPTEMBER 30,
--------------------------------------------------------------
1999 1998
--------------------------------------------------------------
(In thousands, except earnings per share)
Earnings Earnings (loss)
Shares per share Shares per share
--------------------------------------------------------------
Basic earnings (loss) per share 1,966 $ 0.39 1,261 $ (0.46)
Net dilutive effect of:
Options 22 - - -
Warrants 158 (0.03) - -
--------------------------------------------------------------
Diluted earnings (loss) per share 2,146 $ 0.36 1,261 $ (0.46)
==============================================================
SECURITIES: All securities owned as of September 30, 1999 are classified as
securities available for sale. Using the specific identification method,
such securities are carried at market value with a corresponding market
value adjustment carried as a separate component of the equity section of
the balance sheet on a net of tax basis. The adjusted cost of the
securities would be used to compute realized gains or losses if the
securities are sold.
RECENT ACCOUNTING PRONOUNCEMENTS: 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 and
start up 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 September 30, 1999 those costs totaled approximately $682,000.
Any remaining unamortized balance at October 1, 1999 will be expensed.
In June 1998 Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued. SFAS 133 requires all derivative instruments to be recorded on
the balance sheet at estimated fair value. Changes in the fair value of
derivative instruments are to be recorded each period either in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, on the type of
hedge transaction. SFAS 133 is effective for the year 2000. The Company is
currently evaluating the impact of SFAS 133; at present the Company does
not believe it will have a material effect on the consolidated financial
position or results of operations.
B. ACQUISITIONS
In March 1998 the Company acquired 100% of the outstanding stock of
Bloomfield Acceptance Company, L.L.C. ("Bloomfield") and Bloomfield
Servicing Company, L.L.C. ("Bloomfield Servicing") for 281,818 shares of
the Company's common stock valued at approximately $2.1 million. Bloomfield
is engaged in the business of the origination of mortgages and real estate
-39-
40
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
lending. Loans originated by Bloomfield primarily consist of fixed rate
loans secured by mortgages on commercial property. Bloomfield Servicing was
formed to service the loans originated by Bloomfield and other investors.
In addition to the shares of common stock issued to the former owners of
Bloomfield and Bloomfield Servicing, additional consideration of up to
$500,000, in the form of the Company's common stock, will be paid to the
owners subject to the performance of the merged entities after a two year
period following the date of merger.
Each of the acquisitions was accounted for as a purchase. The results of
operations for the year ended September 30, 1998 include the results of
operations for each of the acquired companies since the date of their
respective acquisitions.
The aggregate purchase price for the acquisitions completed for the year
ended September 30, 1998, was $2.1 million. The purchase price was
allocated to the assets acquired and liabilities assumed based on the
related fair values at the date of acquisition. The excess of the aggregate
purchase price over the fair values of the assets acquired and liabilities
assumed has been allocated to goodwill and is being amortized on a
straight-line method over 25 years.
On July 1, 1999 pursuant to a Reorganization Agreement dated as of June 30,
1999 (the "Reorganization Agreement") the Company acquired all of the
issued and outstanding stock of Hartger and Willard Mortgage Associates,
Inc. ("Hartger & Willard") from DMR Financial Services, Inc. ("DMRFS"), an
affiliate of Detroit Mortgage and Realty Company ("DMR"). Pursuant to the
terms of the agreement, 66,667 shares of Bingham common stock, without par
value, were issued to DMRFS.
In connection with the acquisition of Hartger & Willard the Company loaned
$1.5 million to DMRFS pursuant to a Promissory Note dated July 31, 1999.
The loan was guaranteed by DMR and secured by the pledge of the 66,667
shares of Bingham common stock DMRFS received in the acquisition. The
Company has the right to cause DMRFS to surrender the pledged shares in
full payment of the principal amount of the loan and has demanded their
surrender. The effect of this transaction is that the Company has acquired
the Hartger & Willard shares for $1.5 million in cash.
The Hartger & Willard acquisition was accounted for as a purchase. The
results of operations for the year ended September 30, 1999 include the
results of operations for the acquired company since the date of the
acquisition.
The aggregate purchase price for the acquisition of $1.9 million, including
expenses of the acquisition, was allocated to the assets acquired and
liabilities assumed based on the related fair values at the date of
acquisition. The excess of the aggregate purchase price over the fair
values of the assets acquired and liabilities assumed has been allocated to
goodwill and is being amortized on a straight-line method over 20 years.
-40-
41
In conjunction with the acquisition in July, 1999, liabilities assumed and
other non-cash consideration was as follows (in thousands, unaudited):
Fair value of assets acquired $ 1,753
Goodwill 151
Cash paid in consideration and expenses of company acquired (1,900)
-----------------
Liabilities assumed $ 4
=================
-41-
42
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table summarizes pro forma unaudited results of operations as
if the acquisition completed during 1999 had occurred at the beginning of
each year presented:
SEPTEMBER 30,
-----------------------------------------
1999 1998
------------------------------------------------------------------------------------------
(In thousands, except earnings per share)
Revenues $ 16,933 $ 8,074
Income before income taxes 1,158 (521)
Net income 733 (400)
Basic earnings (loss) per share $ 0.37 $ (0.32)
Diluted earnings (loss) per share 0.34 (0.32)
C. LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of the
following:
SEPTEMBER 30,
---------------------------------------------------------------
1999 1998
---------------------------------------------------------------
Book Value Market Value Book Value Market Value
-------------------------------------------------------------------------------------------------------------
( In thousands)
Manufactured home loans $ 64,501 $ 66,114 $ 22,674 $ 24,098
Commercial loans 52,904 52,695 65,546 61,722
Accrued interest receivable 740 740 440 440
Valuation allowance - - - (2,400)
Reserve for credit loss (258) - (185) -
---------------------------------------------------------------
$ 117,887 $ 119,549 $ 86,075 $ 86,260
===============================================================
The carrying amount of loans receivable includes a valuation allowance as a
result of the inclusion of the loss on the hedge positions. The entire loss
was recovered in 1999. The following table shows the valuation allowance
and any related additions or deductions:
1999 1998
------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 2,400 $ 0
Recovery adjustment (2,400) 2,400
----------------------------------
Balance at end of year $ - $ 2,400
==================================
-42-
43
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table sets forth the average loan balance, weighted average
loan yield and weighted average initial term of the loan portfolio:
SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------
Manufactured Home Commercial Mortgage
-----------------------------------------------------------------------------------------------------------
Principal balance loans receivable, net $ 64,730 $ 22,673 $ 53,157 $ 61,978
Number of loans receivable 2,190 803 20 13
Average loan balance $ 29 $ 29 $ 2,645 4,767
Weighted average loan yield 11.33% 10.9% 8.5% 7.6%
Weighted average initial term 22 Years 22 years 5.8 years 9.7 years
The following table sets forth the concentration by state of the loan
portfolio:
SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------
Manufactured Home Commercial Mortgage
-----------------------------------------------------------------------------------------------
Principal % Principal % Principal % Principal %
-----------------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Michigan 25,102 38.9% 9,177 40.5% 11,338 21.4% 29,107 44.4%
Indiana 10,128 15.7% 5,729 25.3% - - - -
Arizona - - - - 17,431 32.9% 9,953 15.2%
Texas 5,516 8.6% 1,859 8.2% 1,807 3.4% - -
Florida 6,142 9.5% 1,805 8.0% 5,980 11.3% 14,260 21.8%
California - - - - 4,651 8.8% 8,504 0.13
Other 17,613 27.3% 4,104 18.1% 11,697 22.1% 3,722 5.6%
The manufactured home contracts are collateralized by manufactured homes
which range in age from 1963 to 1999, with approximately 60% of the
manufactured homes built since 1997.
The following table sets forth the number and value of loans for various
terms for the manufactured home loan portfolio:
SEPTEMBER 30,
----------------------------------------------------------
TERM 1999 1998
-------------------------------------------------------------------------
Number of Principal Number of Principal
Loans Balance Loans Balance
----------------------------------------------------------
(Dollars in thousands)
5 or less 55 $ 393 27 $ 209
6-10 210 2,488 88 1,073
11-12 9 148 9 100
13-15 274 4,542 104 1,876
16-20 503 12,603 210 6,020
21-25 1,102 42,833 363 13,291
26-30 37 1,494 2 105
-43-
44
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The commercial mortgage loans have amortization terms of between 25 and 30
years. In most cases they also have a hyper-amortization feature that
takes effect if the loan is not repaid on its anticipated repayment date.
At that time the interest rate increases and any excess cash flows from the
project are used to pay down the principal balance.
Delinquency statistics for the manufactured home loan portfolio are as
follows:
SEPTEMBER 30
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Days No. of Principal % of No. of Principal % of
Delinquent Loans Balance Portfolio Loans Balance Portfolio
----------------------------------------------------------------------------------------
(Dollars in thousands)
31-60 60 $ 1,748 2.7% 31 $ 730 3.2%
61-90 20 706 1.1% 18 508 2.2%
Greater than 90 40 988 1.5% 16 357 1.6%
No commercial mortgage loans were delinquent as of September 30, 1999 or
1998.
D. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses and related additions and deductions to the
allowance for the years ended September 30, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
----------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 185 $ 58 $ -
Provision for loan losses 653 166 58
Net losses (580) (39) -
--------------------------------------
Balance at end of year $ 258 $ 185 $ 58
======================================
E. SERVICING RIGHTS
Changes in servicing rights are summarized as follows:
1999 1998
------------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 156 $ -
Addition through acquisition of Bloomfield Servicing - 552
Purchased servicing rights 1,376 104
Originated serving rights 735
Amortization (94) (28)
Sales (53) (472)
-------------------------
Balance at end of year $ 2,120 $ 156
=========================
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45
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Bloomfield Servicing ("BSC") the Company's loan servicing subsidiary,
services commercial real estate loans that Bloomfield Acceptance originates
as well as commercial real estate loans on behalf of twenty seven
institutional investors. BSC also acts as the sub-servicer on the
approximately $80 million of commercial mortgage loans the Company
securitized and sold in June 1999. As of September 30, 1999 and 1998, BSC's
commercial mortgage loan servicing portfolio totaled approximately $900
million and $374 million respectively.
BSC also services the manufactured home loans originated by the Company and
held in its loan portfolio as well as manufactured home loans originated by
the Company and sold with the servicing rights retained. The manufactured
home loan servicing portfolio totaled $83 million at September 30, 1999.
There were no manufactured home loans serviced by BSC as of September 30,
1998.
F. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
SEPTEMBER 30,
------------------------
1999 1998
----------------------------------------------------------------------------------
(In thousands)
Cost:
Furniture and fixtures $ 327 $ 159
Leasehold improvements 46 33
Capitalized Software 322 322
Computer equipment 556 175
------------------------
1,251 689
Less accumulated depreciation 151 34
------------------------
$ 1,100 $ 655
========================
Depreciation expense was $116,000 and $33,700 in 1999 and 1998
respectively.
G. DEBT
In connection with its initial public offering The Company entered into a
subordinated loan agreement with Sun. The subordinated loan agreement
currently provides for a subordinated debt facility which indebtedness
shall be subordinated to all senior debt of the Company. The facility
consists of a $4 million term loan with an annual interest rate of 9.75%.
As of September 30, 1999 the Company also had a $10 million demand line of
credit and an $18 million demand line of credit with Sun, both of which
provide for an annual interest rate equal to the one month "Libor" rate
plus a spread. At September 30, 1999 the Company had used $32.0 million of
the subordinated debt and demand line of credit facilities. In accordance
with the subordinated loan agreement the Company issued detachable warrants
to Sun covering 400,000 shares of common stock at a price of $10.00 per
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46
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
warrant share. The detachable warrants have a term of seven years and may
be exercised at any time after the fourth anniversary of the issuance.
In March 1998 the Company's commercial mortgage originating subsidiary
entered into a one year master repurchase agreement with a lender to
finance fixed rate commercial loans secured by real estate. In September of
1998 that agreement was amended to include financing of manufactured home,
floor plan and bridge loans. At September 30,1999 the maximum financing
limits on the facility were $50 million for commercial mortgage and bridge
loans and $50 million for manufactured home and floor plan loans. The
annual interest rate on the facility is a variable rate of interest equal
to "LIBOR" plus a spread, dependent on the advance rate and the asset
class. The loans are sold at 85- 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.
At September 30, 1999 and 1998 debt outstanding was as follows:
SEPTEMBER 30,
-------------------------------
1999 1998
-------------------------------
(In thousands)
Loans sold under agreements to repurchase $ 69,026 $ 56,900
Demand line of credit 28,477 17,800
Term loan, net of discount 3,567 3,500
-------------------------------
$ 101,070 $ 78,200
===============================
H. SUN COMMUNITIES AGREEMENT
As of September 30, 1997 the Company entered into an agreement with
Sun Communities. Pursuant to the agreement, options were granted to Sun
September 30, 1997 and will vest if, and only if, Sun is a party to and in
compliance with the terms of the agreement on the vesting date and on
December 31 of the previous year. The options will vest in eight equal
annual amounts, each consisting of 41,250 options, on January 31, 2001
through 2008. The options may be exercised at any time after vesting until
expiration ten years after the date of vesting. Each option vesting January
31, 2001 to 2003 will entitle the holder to purchase one share of common
stock for a purchase price of $10. Each option vesting on January 31, 2004,
2005 and 2006 will entitle the holder to purchase one share of common stock
for $12. Each option vesting on January 31, 2007 and 2008 will entitle the
holder to purchase one share of common stock for $14.
The Company recognizes service costs related to the options based on the
fair value method as prescribed by Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock based Compensation".
Fair value is determined using quoted market prices. Service costs are
amortized based on the vesting periods of the options. Amortization for the
years ended September 30, 1999 and 1998 was $86,400 and $74,700
respectively.
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47
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
I. STOCK OPTION PLAN
The Company has stock option plans in which 248,915 shares of common stock
have been reserved for issuance as of September 30, 1999. Under the plans,
the exercise price of the options will not be less than the fair market
value of the common stock on the date of grant. The date on which the
options are first exercisable is determined by the administrator of the
Company's stock option plan, the Compensation Committee of the Board of
Directors or the entire Board of Directors, and options generally have
vested over a three-year period from the date of grant. The term of an
option may not exceed ten years from the date of grant.
The Company has adopted the disclosure requirements of Statements of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." Accordingly, the fair value of each option
granted in 1999 and 1998 was estimated using the Black-Scholes option
pricing model based on the assumptions stated below:
1999 1998
-------------------------------------------------------------------------------------------
Estimated weighted average fair value
per share of options granted $ 4.39 $ 5.44
Assumptions:
Annualized dividend yield --% --%
Common stock price volatility 50.16% 44.14%
Weighted average risk free rate of return 5.31% 5.83%
Weighted average expected option term (in years)
6.0 6.0
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48
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Company has elected to measure compensation cost using the intrinsic
value method, in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly since all options are granted at a fixed
price not less than the fair market value of the Company's common stock on
the date of grant, no compensation cost has been recognized for its stock
option plan. Had stock option costs of the plan been determined based on
the fair value at the grant dates for awards under those plans consistent
with the methodology of SFAS 123, the pro forma effects on the Company's
net income and earnings per share would be as follows:
1999 1998
------------------------------------------------------------------------------------------
(Dollars in thousands, except earnings per share)
Net income (loss) as reported $ 776 $ (489)
Stock option compensation cost 346 143
-----------------------------
Pro forma net income (loss) $ 430 $ (632)
=============================
Basic income (loss) per share as reported $ 0.39 $ (0.46)
Stock option compensation cost 0.18 0.11
-----------------------------
Pro forma earnings (loss) per share $ 0.21 $ (0.57)
=============================
Diluted earnings (loss) per share as reported $ 0.36 $ (0.46)
Stock option compensation cost 0.16 0.11
-----------------------------
Pro forma fully diluted earnings (loss) per share $ 0.20 $ (0.57)
=============================
The following table sets forth changes in options outstanding:
1999 1998
---------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AMOUNT AVG. PRICE AMOUNT AVG. PRICE
---------------------------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year 109,900 $ 10.65 - $ -
Granted 29,250 13.19 111,850 10.65
Forfeited (1,332) 12.25 (1,950) 13.00
Canceled - - - -
Exercised - - - -
------------------------------------------------------------
Outstanding at end of year 137,818 $ 11.15 109,900 $ 10.65
============================================================
Exercisable at end of year 65,917 $ 10.38 30,000 $ 10.00
============================================================
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49
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table sets forth details of options outstanding at
September 30, 1999 and 1998:
1999
- ------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING RANGE OF NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- ------------------------------------------------------------------------------------------------------------
$ 10.00 85,568 8.17 years $ 10.00 56,926 8.17 Years
10.25 750 9.92 years 12.50 3,246 9.08 Years
11.00 2,500 9.83 years 13.00 5,745 8.42 Years
12.50 10,750 9.17 years
13.00 21,000 8.42 years
13.50 9,500 9.75 years
14.50 6,750 9.58 years
15.25 1,000 9.25 years
- ------------------------------------------------------------------------------------------------------------
$10.00 - 15.25 137,818 8.51 Years $ 10.00 - 13.00 65,917 8.24 Years
============================================================================================================
1998
- ------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER REMAINING RANGE OF NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- ------------------------------------------------------------------------------------------------------------
$ 10.00 85,900 9.08 Years $ 10.00 30,000 9.08 Years
13.00 24,000 9.42 Years
- ------------------------------------------------------------------------------------------------------------
$10.00 - 13.00 109,900 9.15 Years $ 10.00 30,000 9.08 Years
============================================================================================================
There were no options outstanding in 1997.
-49-
50
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
J. FEDERAL INCOME TAXES
Federal income tax expense consisted of the following:
1999 1998
--------------------------------------------------------------------------
(In thousands)
Current tax provision $ (473) $ 683
Deferred tax provision (benefit) 914 (902)
-------------------------
Federal income tax expense (benefit) $ 441 $ (219)
=========================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
1999 1998
--------------------------------------------------------------------------
Statutory tax rate 34.00% (34.00%)
Effect of:
Nondeductible expenses 2.22 -
Other - 6.39
-------------------------
Effective tax rate 36.22% (27.61%)
=========================
There was no federal income tax provision in 1997.
-50-
51
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company believes its deferred tax liabilities and available tax planning
strategies will allow for the recovery of total net deferred tax asset.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
1999 1998
---------------------------------------------------------------------------------------
(In thousands)
Deferred Tax Assets:
Option amortization $ 55 $ 25
Net deferral required by SFAS 91 - 130
Reserve for loan losses 230 14
Unrealized loss on mortgage loans - 816
Other items, net 273 5
-----------------------
Total deferred tax assets 558 990
Deferred Tax Liabilities:
Net deferral required by SFAS 91 169 -
Deferred closing costs 148 88
Gain on sale of servicing rights required by SFAS 125 253 -
-----------------------
Total deferred tax liabilities 570 88
-----------------------
Total net deferred tax assets (liabilities) (12) 902
-----------------------
Total net federal income tax assets (liabilities) $ (12) $ 902
=======================
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52
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
K. STOCKHOLDERS' EQUITY
The Company consummated an initial public offering of 1,200,000 shares of
common stock on November 19, 1997. The initial offering price was $10.00,
which provided approximate proceeds to the Company of $11.2 million. On
December 16, 1997, an additional 70,000 shares were issued which provided
approximate proceeds to the Company of $651,000.
Prior to the initial public offering, on October 27, 1997 the Company sold
25,000 shares to Sun Communities for gross proceeds of $250,000.
In April, 1999 the Company issued 800,330 shares of its common stock in
private equity raises. The stock issuances resulted in proceeds of
approximately $12 million.
During the year ended September 30, 1999 the Company issued stock awards of
84,658 restricted shares to executive officers and senior management.
Compensation costs related to the awards are being amortized over their
respective vesting periods, generally between 3 to 5 years.
L. LITIGATION
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 future
financial position, results of operations or cashflows.
M. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: At September 30, 1999 aggregate minimum rental
commitments under noncancelable leases having terms of more than one year
were $937,000 payable $403,000 (2000), $414,000 (2001), $88,000 (2002) and
$31,000 (2004). Total rental expense for the year ended September 30, 1999
and 1998 was $420,000 and $83,000 respectively. These leases are for office
facilities and equipment and generally contain either clauses for cost of
living increases and/or options to renew or terminate the lease.
LOAN COMMITMENTS: At September 30, 1999 and 1998 the Company had
commitments to originate manufactured home installment contracts
approximating $5.1 million and $4.8 million respectively. Commercial
mortgage loan commitments totaled $73.1 and $14.7 million at September 30,
1999 and 1998 respectively.
N. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITY
FINANCIAL INSTRUMENTS: The Company hedges 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 doing forward
sales of U.S. Treasury Securities, Treasury locks and forward interest rate
swaps.
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53
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Company classifies these transactions as hedges on specific loan
receivables. Any gross unrealized gains or losses on these hedge positions
are determined based on quoted market prices and are an adjustment to the
basis of the mortgage loan portfolio. They are also used in the lower of
cost or market valuation to establish a valuation allowance as shown in
Note C.
-53-
54
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table identifies the gross unrealized gains and losses of the
hedge positions based on quoted market prices as of September 30, 1999 and
1998:
SEPTEMBER 30,
--------------------------------------
1999 1998
--------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
TYPE REFERENCE RATE/TREASURY GAINS (LOSSES) GAINS (LOSSES)
------------------------------------------------------------------------------------------------------------------
(In thousands)
Treasury Lock U.S. Treasury 4.750% - 11/08 $ 126 $ -
Treasury Lock U.S. Treasury 5.625% - 5/08 6 -
Treasury Lock U.S. Treasury 5.500% - 5/09 2 -
Treasury Lock 10 Year Treasury (146) -
Interest Rate Swap 10 Year Swap - (2,019)
Forward Sale U.S. Treasury 6.125% - 8/07 - (294)
Forward Sale U.S. Treasury 6.375% - 8/27 - (1,649)
Forward Sale U.S. Treasury 5.500% - 2/08 - (321)
Forward Sale U.S. Treasury 5.625% - 5/08 -
LOANS SOLD WITH RECOURSE: As of September 30, 1999 and 1998 outstanding
principal on manufactured home loans the Company had sold with recourse
totaled $27.6 and $11.3 million respectively. The Company is required to
repurchase the outstanding principal balance, accrued interest and refund
of any purchase premium of any contract that goes into default, as defined
in the loan agreement, for the life of the loan.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting
Standards No. 107 ("SFAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Balance Sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
The following table shows the carrying amount and estimated fair values of
the Company's Financial instruments:
SEPTEMBER 30,
----------------------------------------------------------------
1999 1998
----------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------------------
(In Thousands)
Assets
Cash and equivalents 730 730 1,979 1,979
Restricted cash 3,901 3,901 2,253 2,253
Loans receivable 117,887 119,548 86,075 86,260
Other 6,960 6,960 3,741 3,741
Liabilities
Advances by mortgages 3,882 3,882 2,238 2,238
Accounts payable and accrued expenses 1,474 1,474 636 636
Advances under repurchase agreements 69,026 69,026 56,892 56,892
Subordinated debt 3,567 3,567 3,490 3,490
Note payable 28,477 28,477 17,848 17,848
The carrying amount for cash and cash equivalents and other assets is a
reasonable estimate of their fair value.
Fair values for the Company's loans are estimated using quoted market
prices for loans with similar interest rates, terms and borrowers credit
quality as those being offered by the Company.
The carrying amount of accrued interest approximates its fair value. Due
to their short maturity, accounts payable and accrued expense carrying
values approximate fair value.
The fair value of the Company's fixed rate subordinated debt is based on
quoted market prices for debt with similar terms and remaining maturities.
The fair value of the variable rate date is based on its carrying amount
since effective rates reflect current market rates.
-54-
55
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
O. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
1999:
Interest income $ 2,118 $ 2,617 $ 2,521 $ 2,221
Interest expense 1,699 1,841 1,953 1,363
Net income (loss) 764 480 304 (772)
Diluted earnings (loss) per share 0.43 0.26 0.13 (0.30)
1998:
Interest income $ 316 $ 433 $ 819 $ 1,797
Interest expense 151 135 405 1,241
Net income (loss) 22 120 435 (1,151)
Diluted earnings (loss) per share 0.04 0.08 0.22 (0.73)
1997:
Interest income $ - $ 10 $ 112 $ 158
Interest expense - 15 70 110
Net (loss) - (62) (3) (45)
P. SUBSEQUENT EVENTS
In December 1999, the Company completed the acquisition of Dynex Financial,
Inc. (DFI) from Dynex Holding, Inc. (DHI), a subsidiary of Dynex Capital,
Inc (DCI). The Company acquired all of the issued and outstanding stock of
DFI and all of the rights to DCI's manufactured home lending business for
approximately $4.0 million in cash funded by bank borrowings. DFI
specializes in lending to buyers of manufactured homes and has regional and
district offices in nine states. In addition DFI provides servicing for
manufactured home and land/home loans.
-55-
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 30, 1999, the Company elected not to continue its relationship
with PricewaterhouseCoopers LLP as its independent accountants. The Company has
engaged Plante & Moran L.L.P. as its new independent accountants as of September
30, 1999. This disclosure has been previously reported as the Company filed a
report on Form 8-K dated September 30, 1999 disclosing this change.
PART III
The information required by Items 10, 11, 12 and 13 will be included in the
Company's proxy statement for its Annual Meeting of Shareholders to be held in
2000, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed herewith as part of this Form 10-K:
(1) A list of the financial statements required to be filed as a part
of this Form 10-K is shown in the "Index to the Financial Statements" included
in Part II, Item 8 of this report.
(2) Schedules other than those listed in the "Index to the Financial
Statements" contained in Part II, Item 8 of this report are omitted because of
the absence of the conditions under which they are required or because the
information required is included in the consolidated financial statements or
notes thereto.
(3) A list of the exhibits required by Item 601 of Regulation S-K to
be filed as a part of this Form 10-K is shown on the "Exhibit Index" filed
herewith.
(b) Reports on Form 8-K
(1) The Company filed a report on Form 8-K announcing it had filed an
application with the OTS to convert the Company to a unitary thrift holding
company and for the formation of a federally chartered savings bank subsidiary.
The date of the report was February 21, 1999.
(2) The Company filed a report on Form 8-K detailing the acquisition
of Hartger & Willard pursuant to a Reorganization Agreement dated as of June 30,
1999. The
-56-
57
date of the Report was June 30, 1999. The required financial statements of the
businesses acquired and the required pro forma financial information were filed
with an amendment to the Form 8-K on September 15, 1999.
(3) The Company filed a report on Form 8-K disclosing a change in its
independent accountants. The date of the report was September 30, 1999.
-57-
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 28, 1999
BINGHAM FINANCIAL SERVICES
CORPORATION
By: /s/ Ronald A. Klein
-----------------------------------------------
Ronald A. Klein, President and
Chief Executive Officer
By: /s/ Jeffrey P. Jorissen
-----------------------------------------------
Jeffrey P. Jorissen, Chief Financial
Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Gary A. Shiffman Chairman of the Board of Directors, December 28, 1999
-------------------------------------------- Secretary ---
Gary A. Shiffman
/s/ Ronald A. Klein President, Chief Executive Officer December 28, 1999
-------------------------------------------- and Director ---
Ronald A. Klein
-58-
59
NAME TITLE DATE
---- ----- ----
/s/ Arthur A. Weiss Director December 28, 1999
-------------------------------------------- ---
Arthur A. Weiss
/s/ Creighton J. Weber Director and Vice President December 28, 1999
-------------------------------------------- ---
Creighton J. Weber
/s/ Mark A. Gordon Director December 28, 1999
-------------------------------------------- ---
Mark A. Gordon
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60
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger dated as of
February 17, 1998 by and among Bingham
Financial Services Corporation, a Michigan
corporation, BAC Acquiring Corp., a
Michigan corporation, BSC Acquiring Corp.,
a Michigan corporation, Bloomfield
Acceptance Company, L.L.C., a Michigan
limited liability company, and Bloomfield
Servicing Company, L.L.C., a Michigan
limited liability company. Omitted from
such exhibit, as filed, are the remaining
exhibits referenced in such agreement. The
Company will furnish supplementally a copy
of any such exhibits to the Commission
upon request. (Incorporated by reference
to the Company's Current Report on Form
8-K dated March 5, 1998)
2.2 Certificate of Merger for BAC Acquiring Corp. and
Bloomfield Acceptance Company, L.L.C., dated March
5, 1998. (Incorporated by reference to the
Company's Current Report on Form 8-K dated March 5,
1998)
2.3 Certificate of Merger for BSC Acquiring Corp. and
Bloomfield Servicing Company, L.L.C., dated March
5, 1998. (Incorporated by reference to the
Company's Current Report on Form 8-K dated March 5,
1998)
2.4 Reorganization Agreement dated as of June 30, 1999,
by and Bingham Financial Services Corporation, DMR
Financial Services, Inc., Hartger & Willard
Mortgage Associates, Inc. and Detroit Mortgage and
Realty Company (Incorporated by reference to the
Company's Current Report on Form 8-K dated June 30,
1999)
3.1 Amended and Restated Articles of Incorporation of
Bingham Financial Services Corporation
(Incorporated by reference to the Company's
Registration Statement on Form S-1; File No.
333-34453)
3.2 Amended and Restated Bylaws of Bingham Financial
Services Corporation (Incorporated by reference to
the Company's registration Statement on Form S-1;
File No. 333-34453)
4.1 Shareholders Agreement dated March 4, 1998
(Incorporated by reference to the Company's Current
Report on Form 8-K dated March 5, 1998)
4.2 Amendment to Merger Agreement, Shareholders
Agreement And Employment Agreements, dated February
21, 1999 (filed herewith)
61
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.3 Bloomfield Shareholders Agreement dated March 5,
1998 (Incorporated by reference to the Company's
Current Report on Form 8-K dated March 5, 1998)
10.1 Participants Support Agreement, by and between
Bingham Financial Services Corporation and Sun
Communities, Inc. (assigned to Sun Communities
Operating Limited Partnership as of December 31,
1997) entered into on September 30, 1997, but
effective as of July 1, 1997 (Incorporated by
reference to the Company's Registration Statement
on Form S-1; File No. 333-34453)
10.2 Amendment to Participants Support Agreement between
Bingham Financial Services Corporation and Sun
Communities Operating Limited Partnership, dated as
of April 1, 1999 (filed herewith)
10.3 Administration Agreement, by and between Bingham
Financial Services Corporation and Sun Communities,
Inc., dated July 1, 1997 (Incorporated by reference
to the Company's Registration Statement on Form
S-1; File No. 333-34453)
10.4 Form of Indemnification Agreement (Incorporated by
reference to the Company's Registration Statement
on Form S-1; File No. 333-34453)
10.5 Employment Agreement dated as of March 4, 1998 by
and between Bingham Financial Services Corporation
and Daniel E. Bober (Incorporated by reference to
the Company's Current Report on Form 8-K dated
March 5, 1998)
10.6 Employment Agreement dated as of March 4, 1998 by
and between Bingham Financial Services Corporation
and Creighton J. Weber (Incorporated by reference
to the Company's Current Report on Form 8-K dated
March 5, 1998)
10.7 Subordinated Loan Agreement dated September 30,
1997 between Bingham Financial Services Corporation
and Sun Communities, Inc. (assigned to Sun
Communities Operating Limited Partnership as of
December 31, 1997) (Incorporated by reference to
the Company's Registration Statement on Form S-1;
File No. 333-34453)
10.8 Form of Line of Credit Promissory Note, dated
September 30, 1997 between Bingham Services
Financial Corporation and Sun Communities, Inc.
(assigned to Sun Communities Operating Limited
Partnership as of December 31, 1997) (Incorporated
by reference to the Company's Registration
Statement on Form S-1; File No. 333-34453)
62
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.9 Form of Term Promissory Note, dated September 30,
1997 between Bingham Financial Services Corporation
and Sun Communities, Inc. (assigned to Sun
Communities Operating Limited Partnership as of
December 31, 1997) (Incorporated by reference to
the Company's Registration Statement on Form S-1;
File No. 333-34453)
10.10 Loan Agreement between Bingham Financial Services
Corporation and Sun Communities Operating Limited
Partnership, dated March 1, 1998 (Incorporated by
reference to the Company's Current Report on Form
10-K, for the year ended September 30, 1998)
10.11 Demand Promissory Note between Bingham Financial
Services Corporation and Sun Communities Operating
Limited Partnership, dated March 1, 1998
(Incorporated by reference to the Company's Current
Report on Form 10-K, for the year ended September
30, 1998)
10.12 Loan Agreement between Bingham Financial Services
Corporation and Sun Communities Operating Limited
Partnership, dated March 30, 1999 (filed herewith)
10.13 Demand Promissory Note between Bingham Financial
Services Corporation and Sun Communities Operating
Limited Partnership, dated March 30, 1999 (filed
herewith)
10.14 Amendment to Loan Agreement dated March 30, 1999,
between Bingham Financial Services Corporation and
Sun Communities Operating Limited Partnership,
dated as of June 11, 1999 (filed herewith)
10.15 Amended Demand Promissory Note between Bingham
Financial Services Corporation and Sun Communities
Operating Limited Partnership of March 30, 1999,
dated as of June 11, 1999 (filed herewith)
10.16 Amendment to Subordinated Loan Agreement between
Bingham Financial Services Corporation and Sun
Communities Operating Limited Partnership, dated as
of June 11, 1999 (filed herewith)
63
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.17 Amended and Restated Master Repurchase Agreement
dated October 5, 1998, by and among Bloomfield
Acceptance Company, L.L.C., MHFC, Inc. and Lehman
Commercial Paper Inc. Omitted from such exhibit, as
filed, are the remaining exhibits referenced in
such agreement. The Company will furnish
supplementally a copy of any such exhibits to the
Commission upon request (Incorporated by reference
to the Company's Current Report on Form 10-K, for
the year ended September 30, 1998)
10.18 Bingham Financial Services Corporation 1997 Stock
Option Plan (Incorporated by reference to the
Company's Registration Statement on Form S-1; File
No. 333-34453)
10.19 Detachable Warrant Agreement, dated September 30,
1997 between Bingham Financial Services Corporation
and Sun Communities, Inc. (assigned to Sun
Communities Operating Limited Partnership as of
December 31, 1997) (incorporated by reference to
the Company's Registration Statement on Form S-1;
File No. 333-34453)
10.20 Form of Detachable Warrant of Bingham Financial
Services Corporation dated September 30, 1997
(Incorporated by reference to the Company's
Registration Statement on Form S-1; File No.
333-34453)
21 List of Subsidiaries (filed herewith)
27 Financial Data Schedule (filed herewith)