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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest
event reported): February 21, 1999
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 0-23381 38-3313951
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
260 East Brown Street, Suite 200, Birmingham, Michigan 48009
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (248) 644-5470
(Former name or former address, if changed since last report.)
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ITEM 5. OTHER EVENTS.
APPLICATION TO CONVERT TO THRIFT HOLDING COMPANY AND
FORMATION OF FEDERALLY CHARTERED SAVINGS BANK
Bingham Financial Services Corporation ("Bingham" or the "Company") has
filed an application with the United States Office of Thrift Supervision ("OTS")
to convert Bingham to a unitary thrift holding company and for the formation of
a federally chartered savings bank subsidiary, to be known as Bingham Bank (the
"Bank"). The application sets forth the Company's plan to reorganize its
manufactured home residential mortgage lending, commercial mortgage lending and
related insurance agency business operations (the "Reorganization"), currently
run through separate subsidiaries of Bingham, such that the operating companies
would become subsidiaries of Bingham Bank. If the application is approved by
regulatory authorities, Bingham is targeting completion of the Reorganization by
September 30, 1999, the end of the Company's current fiscal year. There can be
no assurance, however, that the OTS or Bingham will meet this time schedule.
In connection with the Reorganization, the Company announced the
reconstitution of its Board of Directors and changes in management to better
comply with bank regulatory requirements and to prepare for operations after the
Reorganization is completed. These moves included the resignation as directors
of Jeffrey P. Jorissen and Milton Shiffman, CFO and a director, respectively, of
Sun Communities, Inc., a former parent of the Company, to avert potential
regulatory issues with interlocking directorates. In addition, Mr. Jorissen
resigned as CEO but will retain his position as President and CFO until a
replacement is hired.
Bingham's Board of Directors was increased to nine directors and the
vacancies created by the resignations and the increase in size were filled by
the appointment of Ronald A. Klein, Mark Gordon and James Raiskin. Mr. Klein was
also appointed CEO of Bingham, and the Company has commenced a search for a
person with significant banking experience to serve as COO of the Bank. Mr.
Klein has been active in the real estate and finance fields for over 15 years,
including acquisition, development, debt financing, and project management of
commercial, multifamily and single-family real estate; he holds a law degree
from the University of Michigan Law School. Mr. Gordon is Assistant General
Counsel of a $2 billion revenue automotive parts manufacturer and previously
served as President of that firm's financial services affiliate; he is a CPA and
has a law degree and MBA from the University of Michigan. Mr. Raiskin has been
with a large wholesaler, processor and distributor of steel products for more
than twenty years and has been President and CEO of that company for more than
ten years.
IMPORTANT CONSIDERATIONS
All statements made in this document and in any other communication
regarding Bingham that are not statements of historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and the Company intends that such forward-looking
statements be subject to the "safe harbors" created thereby. The words
"believe," "expect," "anticipate," and similar expressions are examples of words
that identify forward-looking statements, which may include, without limitation,
statements regarding Bingham's future financial position, business strategy and
expected cost savings or synergies. Each forward-looking statement is subject to
risks, uncertainties and other factors, that could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statement. Important factors that could cause actual results to
differ materially from the results expressed or implied by any forward-looking
statements include the risk that the Company's application with the OTS and
other regulators will not be approved for any reason, general economic
conditions with particular emphasis on certain interest rates, the ability to
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efficiently integrate acquired businesses, competition and other factors. All
subsequent written and oral forward-looking statements relating to Bingham and
attributable to Bingham or to persons acting on its behalf are expressly
qualified in their entirety by these Important Considerations. Bingham
undertakes no obligation to update or revise these forward-looking statements,
publicly or otherwise, to reflect new information or future events.
RISKS ASSOCIATED WITH OPERATING A FEDERAL SAVINGS BANK
General. Upon the planned Reorganization, the Bank that Bingham
proposes to establish will be subject to extensive regulation by state and
federal banking authorities that will govern its general operations as well as
mortgage origination, processing, underwriting, selling and servicing. Many of
these regulations are intended to protect depositors, the public or the FDIC and
were not adopted for the direct benefit of Bingham's shareholders. Regulatory
requirements will affect lending practices, capital structure, investment
practices, dividend policy and growth. Some changes in these regulatory
requirements could adversely affect Bingham. Bingham's operations may also be
affected by the rules and regulations of quasi-governmental agencies that
purchase, guarantee or insure mortgage loans. As a federally-chartered savings
institution, the Bank generally will not be subject to those provisions of state
law governing state chartered financial institutions or to the jurisdiction of
state bank regulators. However, the Bank will remain subject to certain usury
laws in some states. Subsidiary institutions of a savings and loan holding
company, such as the Bank, are subject to certain restrictions imposed by the
Federal Reserve Act on any extension of credit to the holding company or any of
its subsidiaries, on investment in the stock or other securities thereof, and on
the taking of such stock or securities as collateral for loans to any borrower.
In addition, a holding company (such as Bingham after the proposed
Reorganization), and its subsidiaries, are prohibited from engaging in certain
tying arrangements in connection with any extension of credit or provision of
any property or services. Listed below are descriptions of specific regulatory
issues relating to the planned establishment of a federally-chartered savings
bank.
OTS Supervision. Subject to receipt of the necessary approvals of its
pending applications, the Bank will operate as a federal savings bank
incorporated under the laws of the United States and subject to examination by
the OTS. The OTS will regulate or monitor virtually all areas of the Bank's
operations, including adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends to Bingham, establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training to carry on
safe lending and deposit gathering practices. The OTS will require the Bank to
maintain certain capital ratios and will impose limitations on the Bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The Bank will be required by the OTS to prepare quarterly reports on the Bank's
financial condition and to conduct an annual audit of its financial affairs in
compliance with minimum standards and procedures prescribed by the OTS. OTS
regulations generally provide that federal savings banks must be examined no
less frequently than every 18 months. The Bank also will be subject to
assessments by the OTS to cover the costs of such examinations. The Bank also
will bear a portion of the administrative costs of the OTS through an assessment
based on the level of the Bank's total assets.
Capital Requirements. OTS regulations require that federal savings
banks maintain specific levels of "tangible capital," "core capital" and
risk-based capital. OTS regulations also include an interest-rate risk component
in the risk-based capital requirement. The OTS risk-based capital standards also
regulate, among other things, concentration of credit risk, risk from
nontraditional activities and actual performance, and expected risk of loss on
multi-family mortgages. In addition, capital requirements higher than the
generally applicable minimum requirement may be established for a particular
savings association if the OTS determines that the institution's capital was or
may become inadequate in view of its particular circumstances.
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Deposit Insurance. Deposits at the Bank will be insured to a maximum of
$100,000 for each insured depositor by the FDIC. The FDIC establishes rates for
the payment of premiums by the Bank for deposit insurance. A separate Savings
Association Insurance Fund is maintained for savings banks with insurance
premiums from the industry used to offset losses from insurance payouts when
savings banks fail. Insured depository institutions pay for deposit insurance
under a risk-based premium system. Increases in deposit insurance premiums or
changes in risk classification will increase the Bank's cost of funds, and there
can be no assurance that such cost can be passed on the Bank's customers. As an
insurer, the FDIC issues its own regulations, conducts examinations and
generally supervises the operations of its insured institutions. Any insured
institution which does not operate in accordance with or conform to FDIC
regulations, policies and directives may be sanctioned for non-compliance. The
FDIC has the authority to suspend or terminate insurance of deposits upon the
finding that the institution has engaged in unsafe or unsound practices, is
operating in an unsafe or unsound condition, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC, although deposits
continue to be insured by the FDIC for a period of two years following the date
of termination. The FDIC requires an annual audit by independent accountants and
also periodically makes its own examinations of insured institutions.
Transactions With Affiliates and Insiders. The Bank will be subject to
the provisions of Section 23A of the Federal Reserve Act, which place limits on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. The Bank
will also be subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibit an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, the Bank will be subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests.
Dividends. The Bank will be subject to regulatory restrictions on the
payment of dividends to Bingham, including a prohibition of payment of dividends
from its capital without OTS permission, except to the extent the Bank is
considered well capitalized under applicable regulations. The Bank must also
notify the OTS prior to the payment of any dividends to Bingham from earnings
or from surplus capital. In addition, the Bank may not pay a dividend if, after
paying the dividend, the Bank would be undercapitalized.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, a financial institution's primary federal regulator
(in the Bank's case, the OTS) evaluate the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
Liquidity. Under applicable federal regulations, savings associations
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings association's net withdrawable
deposits plus short-term borrowings. Savings institutions also are required to
maintain an average daily balance of short-term liquid assets at a specified
percentage of the total of the average daily balance of its net withdrawable
deposits and short-term borrowings.
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Qualified Thrift Lender Requirement. A federal savings bank is deemed
to be a qualified thrift lender ("QTL") as long as its "qualified thrift
investments" equal or exceed 65% of its "portfolio assets" on a monthly average
basis in nine out of every twelve months. Qualified thrift investments generally
consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans,
manufactured home loans, home equity loans and mortgage-backed securities), (ii)
certain obligations of the FDIC, and (iii) shares of stock issued by any FHLB,
the FHLMC or the FNMA. For purposes of the QTL test, the term "portfolio assets"
means the savings institution's total assets minus goodwill and other intangible
assets, the value of property used by the savings institution to conduct its
business, and liquid assets held by the savings institution in an amount up to
20% of its total assets. OTS regulations provide that any savings association
that fails to meet the definition of a QTL must either convert to a national
bank charter or limit its future investments and activities (including branching
and payments of dividends) to those permitted for both savings associations and
national banks. Further, within one year of the loss of QTL status, a holding
company of a savings association that does not convert to a bank charter must
register as a bank holding company and will be subject to all statutes
applicable to bank holding companies. In order to exercise the powers granted to
federally chartered savings associations and maintain full access to FHLB
advances, the Bank must meet the QTL test.
Other Regulation. The Bank's loan operations will also be subject to
certain federal laws applicable to credit transactions, such as: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution will be fulfilling its obligation to
help meet the housing needs of the community it serves; the Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit; the Fair Credit Reporting Act of 1978,
governing the use and provision of information to credit reporting agencies; the
Fair Debt Collection Practices Act, governing the manner in which consumer debts
may be collected by collection agencies; and the rules and regulations of the
various federal agencies charged with the responsibility of implementing such
federal laws. The deposit operations of the Bank will also be subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that act,
which governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Enforcement Powers. Civil and criminal penalties available to the
federal regulatory agencies against depository institutions and certain
'institution-affiliated parties' (primarily including management, employees,
agents of a financial institution, independent contractors such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs), for unsafe and unsound practices that contribute to
losses in the institution, including the failure to timely file required reports
or the filing of false or misleading information or the submission of inaccurate
reports, may be as high as $1,000,000 a day for such violations and up to 20
years imprisonment. In addition, regulators have significant flexibility to
commence enforcement actions against institutions and institution-affiliated
parties. Possible enforcement actions include the termination of deposit
insurance. Furthermore, certain agencies possess the power to issue
cease-and-desist orders that may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
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RISK OF LOSS ON MORTGAGE LOANS
Default Risks. Bingham acquires, accumulates, borrows against and sells
and/or securitizes mortgage loans as part of its business strategy. While
holding mortgage loans, Bingham will be subject to risks of borrower defaults,
bankruptcies, fraud and losses and special hazard losses that are not covered by
standard hazard insurance. Also, the costs of financing and hedging the loans
could exceed the interest income from such loans. In the event of any default
under loans held by Bingham, Bingham will bear the risk of loss of principal to
the extent of any deficiency between the value of the mortgage collateral and
the principal amount of the loan. It may not be possible or economical for
Bingham to sell or securitize all of the Mortgage Loans which it acquires, in
which case Bingham will continue to hold the loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, Bingham may retain recourse liability on mortgage loans it sells to
third parties, in which case it will retain substantially all of these risks.
Commercial Loans Involve a Greater Risk of Loss. Commercial real estate
lending is considered to involve a higher degree of risk than single-family
residential lending because of a variety of factors, including generally larger
loan balances, dependency for repayment on successful operation of the mortgaged
property and tenant businesses operating therein, and loan terms that include
amortization schedules longer than the stated maturity which provide for balloon
payments at stated maturity rather than periodic principal payments. In
addition, the value of commercial real estate can be affected significantly by
the supply and demand in the market for that type of property.
Construction, Bridge and Mezzanine Loans Involve Greater Risks of Loss
than Conventional Commercial Mortgage Loans. Bingham may also originate
construction loans, bridge loans and mezzanine investments. These types of loans
are considered to involve a higher degree of risk than long-term senior mortgage
lending secured by income-producing real property, and may therefore have a
relatively lower secondary market value. This is because of a variety of
factors, including, in the case of construction loans, dependency on successful
completion and operation of the project for repayment, difficulties in
estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. In the case of
bridge loans, the factors would include, among other things, dependency on
successful lease-up or conduct of operation of the project for repayment and
difficulties in estimating project start-up costs. In the case of mezzanine
investments, the factors would include, among other things, dependency on the
success of the project and that a foreclosure by the holder of the senior loan
could result in a mezzanine investment becoming unsecured; accordingly, the
lender may not recover some or all of its investment.
Manufactured Home Loans and Sub-prime Residential Loans. Bingham
originally began its business by focusing on making loans to consumers for the
purchase or refinancing of manufactured homes. While Bingham has expanded its
business to other mortgage loan sectors and intends to continue its
diversification, the origination of manufactured home loans, which are secured
by liens on the manufactured homes, remains a significant part of Bingham's
business. Manufactured home loans are generally considered to involve relatively
higher credit risk as compared with conventional single-family residential
mortgage loans, and consequently, these loans generally bear a higher rate of
interest and carry higher servicing fees. Similarly, Bingham may originate
sub-prime residential mortgage loans, which are considered to involve relatively
greater risk and therefore yield relatively higher interest rates than otherwise
identical, conventional residential mortgage loans.
Volatility of Values of Mortgaged Properties. Commercial property
values and net operating income derived therefrom are subject to volatility and
may be affected adversely by a
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number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by plant closings, industry
slowdowns and other factors); local real estate conditions (such as an
oversupply of housing, retail, industrial, office or other commercial space);
changes or continued weakness in specific industry segments; perceptions by
prospective tenants, retailers and shoppers of the safety, convenience, services
and attractiveness of the property; the willingness and ability of the
property's owner to provide capable management and adequate maintenance;
construction quality, age and design; demographic factors; retroactive changes
to building or similar codes; and increases in operating expenses (such as
energy costs).
Liabilities for Certain Representations and Warranties Concerning
Mortgage Loans. When Bingham originates mortgage loans and then sells them to
investors, it must make certain representations and warranties concerning those
mortgages. These representations and warranties cover such matters as title to
mortgaged property, lien priority, environmental reviews and certain other
matters. When making these representations and warranties, Bingham relies in
part on similar representations and warranties made by the borrower or others.
If the representations made by a borrower or others are false, Bingham will have
a claim against the borrower or other party, but Bingham's ability to recover
its damages depends on the financial condition of the party that made the false
representation. In addition, Bingham makes some representations and warranties
even though it does not receive similar representations and warranties from
borrowers or others. If those representations are later found to be false,
Bingham would have to pay for any losses resulting from the investors' reliance
on those representations and would not have a claim against another party.
SENSITIVITY TO INTEREST RATE FLUCTUATIONS
Bingham's net interest income or loss is the difference between the
interest income it earns on the loans it originates and the interest expense it
pays on its interest-bearing liabilities to fund such loans. Bingham's
profitability is determined largely by the difference, or "spread," between the
rate of interest at which Bingham funds such loans and the fixed rate of
interest charged to and collected from borrowers pursuant to their loan
contracts. There can be no assurance that Bingham's cost of funds will not rise
to a level that adversely affects its ability to maintain profitability with
respect to the loans it holds or sells. Bingham may also be adversely affected
by declines in interest rates. If interest rates decline and loan prepayments
therefore increase due to refinancing activity, the income stream from Bingham's
currently held loan portfolio may decline. This may, in turn, adversely affect
Bingham's operating results and financial condition. Changes in the relationship
between short-term and long-term interest rates could also affect Bingham's
profitability. Between the time Bingham funds a loan and the time it sells the
loan, Bingham earns net interest income, which is based on the long-term rate
earned on a loan minus the short-term borrowing costs to finance the loan. If
long-term interest rates decrease and short-term interest rates do not decrease
by the same amount, then Bingham's net interest income may decline. If long-term
interest rates drop below the short-term rates, Bingham could incur a net
interest expense instead of earning net interest income.
RISKS OF LOSS ON INTEREST HEDGING INSTRUMENTS
Bingham attempts to manage its exposure to adverse changes in interest
rates through the use of forward sales of U.S. Treasury securities, as a hedge
against its interest rate risk in its anticipated commercial mortgage loan
originations and securitizations. Because the typical commercial mortgage loan
made by Bingham is a fixed rate loan with an annual interest rate equal to a
spread over the U.S. Treasury yield, Bingham uses these instruments to reduce
risk by creating what amount to offsetting market exposures. Bingham currently
uses forward-sale hedging instruments only as a defense to adverse fluctuations
in interest rates, and currently only uses hedging instruments as required by
the agreements governing its warehouse line of credit.
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However, Bingham may undertake other types of hedging transactions, including
interest rate swaps, in the future. An effective interest rate risk management
strategy is complex and no such strategy can completely insulate Bingham from
interest rate changes. The nature and timing of hedging transactions may impact
the effectiveness of hedging strategies. Poorly designed strategies or
improperly executed transactions may increase rather than mitigate risk. In
addition, hedging involves transaction and other costs. Such costs could
increase as the period covered by the hedging protection increases.
While Bingham has no current plans to do so, it may in the future
engage in other hedging transactions, including interest rate caps, floors and
swaps, mandatory forward sales, mandatory or optional sales of futures and other
financial futures transactions including U.S. Treasury obligations. The nature
and quantity of such future hedging transactions would be determined by Bingham
based on various factors, including market conditions, expected duration of
commercial mortgages and the expected securitization of commercial mortgages.
RISKS OF SECURITIZATION
Securitization is the process of pooling closed loans and selling them
to a trust for a cash purchase price and in some cases an interest in the loans
securitized. The cash purchase price is raised through an offering of securities
by the trust. Generally, Bingham contributes certain loans into a larger
securitization pool and receives a share of profits from the securitization,
based on the value of loans it contributes. After the securitization, the
purchasers of the securities receive principal and interest on their securities.
Securitization transactions may be affected by a number of factors, some of
which are beyond Bingham's control, including among other things, conditions in
the securities markets in general, conditions in the asset-backed securitization
market and the conformity of loan pools to rating agency requirements and, when
monoline insurance is used, the requirements of such insurers. Failure to obtain
acceptable rating agency ratings or insurance company credit enhancements, if
required, could decrease the efficiency or affect the timing of any
securitization. In addition, any delay in the sale of a loan pool would postpone
the recognition of gain on such loans until their sale. If Bingham were unable
to securitize loans due to changes in the secondary market or the unavailability
of credit enhancements, it might be required to sell its loans in the secondary
market for lower than desired prices.
POTENTIAL LOSSES RELATED TO LOANS HELD FOR SALE FOR WHICH BINGHAM DOES NOT HAVE
INVESTOR COMMITMENTS
Bingham in some instances sells loans to third-party mortgage investors
at predetermined prices before it funds or purchases the loan. However,
sometimes Bingham originates or purchases a mortgage loan before an investor has
agreed to purchase it from Bingham. During the period between Bingham's
origination or purchase of a loan and the sale of the loan to an investor (the
"holding period"), Bingham must bear the interest rate risk and credit risk
associated with that loan. If the holding period is long, Bingham's risks are
higher. Adverse changes in interest rates, the market for mortgage-backed
securities, or the value of assets securing the mortgages could impair Bingham's
ability to sell loans and securities, increasing Bingham's holding period and
potential losses. If Bingham is unable to sell its loans for a long period of
time, its business and results of operations could be materially adversely
affected.
RISK OF DECLINE IN VALUE OF SERVICING RIGHTS
Bingham treats its servicing rights as an asset, in accordance with
generally accepted accounting principles. The fair value of the servicing rights
may be adversely affected by factors such as: changes in mortgage prepayments,
which tend to increase as long-term interest rates decline and tend to decrease
as interest rates rise; prepayment penalty terms, including lockout
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and yield maintenance requirements; higher than expected rate of loan defaults;
and the underlying loans' average custodial balances (the amount deposited by
borrowers for taxes, deposits and replacement reserves). Bingham may also incur
losses upon the termination of certain servicing contracts which are terminable,
with certain restrictions, by the owners of the underlying loans.
ESCROW REQUIREMENTS
Certain states require that interest be paid to mortgagors on funds
deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has been introduced
in the past that would, if enacted, revise current escrow regulations and
establish a uniform escrow calculation methodology in all states. If such
federal legislation were enacted or if other states enact legislation relating
to payment of, or increases in the rate of, interest on escrow balances, or if
such legislation were retroactively applied to loans in Bingham's servicing
portfolio, Bingham's earnings may be adversely affected.
EFFECT OF GENERAL ECONOMIC CONDITIONS
Bingham's business is affected by a number of factors beyond its
control, including sales activity in the new and used manufactured housing
market, commercial construction starts, office and retail occupancy rates and
employment levels, all of which may be affected by the general condition of the
economy and interest rate levels. An economic slowdown will generally reduce
Bingham's origination and sales of loans, and may also increase the risk that
borrowers will default on loans. In addition, periods of economic slowdown or
recession may be accompanied by decreased demand for commercial, multifamily and
residential properties. That in turn may result in declining values for the
properties securing outstanding loans, and decreased property values weaken
Bingham's collateral coverage and increase the possibility of losses in the
event of default. If more properties are for sale during recessionary periods,
Bingham may receive lower prices when it sells foreclosed properties, or it may
have to delay such sales.
FUTURE BINGHAM ACQUISITIONS
Bingham has an announced strategy to continue to pursue acquisitions
of complementary businesses. Future acquisitions by Bingham may present any of
the following risks:
- Future acquisitions may present increased difficulties in
integrating the operations of new businesses into Bingham;
- Bingham may be unable to retain key employees of the future
acquisitions;
- Future acquisitions may not perform at their historical or expected
levels;
- Bingham may incur additional debt in future acquisitions;
- Future acquisitions may result in increased amortization expenses;
- Bingham's current systems, procedures and controls may not be
adequate to support the company's operations as they are combined with
future acquisitions; and
- The addition of new acquisitions will impose significant added
responsibilities on members of senior management, including the need
to identify, recruit and integrate new senior level managers and
executives.
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UNCERTAINTY OF FUTURE PROFITABILITY
Bingham has experienced net losses, including a net loss of $110,000
for the fiscal year ended September 30, 1997 and a net loss of $574,000 for the
fiscal year ended September 30, 1998, although Bingham reported unaudited net
income of $764,000 for the last three months of 1998. There can be no assurance
that Bingham's recent profitability will continue. Whether or not the proposed
federal savings bank application with the OTS is approved, Bingham may generate
net losses in the future.
COMPETITION FROM LARGER COMPETITORS
Competition in Bingham's lines of business is intense and is expected
to increase. In most cases, competitors of Bingham are larger than Bingham, have
longer operating histories, have more financial, technical, research, marketing,
sales, distribution and other resources, and have greater name recognition and
larger customer bases than Bingham. These disparities of size, along with larger
competitors' somewhat easier or less costly access to capital, put Bingham at a
competitive disadvantage.
NEED FOR ADDITIONAL CAPITAL
Bingham's ability to conduct its business and to operate the proposed
Bank depends to a significant degree on its ability to incur indebtedness and
obtain equity capital. Bingham needs financing primarily to fund its loan
originations and to pursue new acquisitions. To meet these needs, Bingham
current uses a warehouse line of credit, as well as a subordinated loan and
revolving credit facility from Sun Communities, Inc. Bingham may at any time
need additional capital to meet its working capital requirements. There can be
no assurance that such capital will be available on favorable terms, if at all.
Factors which could affect Bingham's access to the capital markets, or the cost
of such capital, include changes in interest rates, general economic conditions,
and investors' perceptions of Bingham's business, results of operations,
leverage, financial condition and business prospects. Economic, financial,
competitive and other matters strongly influence each of these factors, and
Bingham may not be able to control those influences. In addition, covenants
under Bingham's existing or future debt securities and credit facilities may
significantly restrict its ability to incur additional indebtedness. Bingham's
ability to repay its outstanding debts on time may depend on its ability to
refinance those debts. Bingham may not be able to refinance debt if it is unable
to sell additional debt or equity securities on satisfactory terms.
MANUFACTURED HOME LENDING STRATEGY
Bingham's strategy includes marketing its manufactured home lending
services through manufactured home community owners, operators, managers,
brokers and dealers, including Sun Communities, Inc. Bingham is currently the
preferred financing source offered to purchasers and homeowners in the
communities owned and operated by Sun Communities. Bingham's ability to maintain
or increase this portion of its loan portfolio depends in part upon: (i)
continued new home sales activity, resale activity of previously owned homes and
to a lesser extent, refinancing activity within Sun Communities and in other
communities where Bingham has established or establishes a relationship; (ii)
Bingham's ability to continue market share within Sun Communities; and (iii) its
ability to continue to expand its services to manufactured home community owners
and operators other than Sun Communities. While Bingham has achieved significant
success in diversifying its sources of manufactured home lending outside of Sun
Communities, Sun Communities remains an important source for new manufactured
home loans.
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OWNERSHIP INTEREST OF SUN COMMUNITIES, INC.
Sun Communities, Inc. holds participants options and detachable
warrants in Bingham, in connection with certain types of debt; however, in
accordance with Bingham's thrift holding company application and because banking
regulations restrict any entity or group of affiliates from owning more than 10%
of a savings and loan holding company, Sun Communities has pledged to contribute
its participants options and detachable warrants into a liquidating trust such
that they could not ordinarily be exercised by Sun Communities. If Bingham's
application with the OTS were not approved for any reason and Sun Communities
therefore retained its participants options and detachable warrants, Sun
Communities would in such case retain the ability to become a significant
stockholder of Bingham in the future. Nonetheless, because applicable REIT
requirements restrict the percentage ownership Sun Communities may have in
Bingham to 10%, it is not anticipated that Sun Communities and its affiliates
will own more than 10% of Bingham at any time, regardless of whether the OTS
application is approved.
YEAR 2000 ISSUES
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.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as "Year 2000 Problem". The
Year 2000 Problem could affect computers, software and other equipment used and
operated by Bingham.
Bingham has engaged a consulting firm to undertake a three-stage
process to evaluate, make recommendations on and correct any Year 2000
Problems that it finds, as well as to coordinate independent certification
of Bingham's Year 2000 compliance. In stage one, which is nearly complete, the
consultant surveyed all of Bingham's hardware and software resources, obtained
compliance certifications and/or patches from manufacturers of critical
packages, and contacted all vendors supplying material services to evaluate
their respective Year 2000 readiness. In stage two, which is also nearly
complete, the consultant implemented upgrades or patches recommended by software
manufacturers or, where necessary, recommended replacement software packages.
The consultant has identified specific software that requires attention, and
Bingham anticipates that substantially all of the software will be corrected by
March 31, 1999. The consultant has also certified that all of Bingham's computer
hardware is Year 2000 compliant. In stage three, which is underway, the
consultant will verify compliance through independent third-party certification
that Bingham's systems are fully functional, and will follow up with testing to
ascertain that full functionality will be available. Bingham currently
anticipates that stage three will be completed by May 31, 1999.
Through its consultant's efforts, Bingham expects to identify and
resolve all Year 2000 Problems that could materially adversely affect business
operations. However, management believes it is not possible to determine with
complete certainty that all Year 2000 Problems affecting Bingham have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. As a result,
management expects that Bingham could possibly suffer the following
consequences: (i) a significant number of operational inconveniences and
inefficiencies for Bingham and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and (ii) a lesser number of serious system failures that may require
significant efforts by Bingham to prevent or alleviate material business
disruptions.
The discussion of Bingham's efforts, and management's expectations,
relating to Year 2000
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compliance are forward-looking statements. Bingham's ability to achieve Year
2000 compliance and the level of incremental costs associated therewith, 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.
GENERAL REGULATORY AND LEGAL COMPLIANCE
Bingham is subject to regulation and licensing under various federal
and state statutes and regulations. Bingham's business is currently conducted in
several states, each of which has laws and regulations that govern Bingham's
operations. Most states where Bingham operates: (i) limit the interest rate and
other charges that may be imposed by, or prescribe certain other terms of, the
loan contracts into which Bingham enters; (ii) regulate the sale and type of
insurance products that Bingham presently anticipates it will offer and the
insurers for which it acts as agent; and (iii) define Bingham's rights to
repossess and sell collateral. In addition, Bingham is required to be licensed
to conduct its finance operations in certain states. If Bingham expands its
operations into additional jurisdictions, it will be required to comply with the
laws of such jurisdictions.
In addition, Bingham 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 Bingham to provide
certain disclosures to applicants, prohibit misleading advertising and protect
against discriminatory financing or unfair credit practices. An adverse change
in, modification to, or interpretation of any of these existing laws or
regulations, or the promulgation of any additional laws or regulations could
have a material adverse effect on Bingham. The cost of complying with these
regulations is significant and a failure to comply with these regulations could
have a material adverse effect on Bingham.
Each of the states in which Bingham operates prohibit it from charging
a finance charge in excess of statutory maximum rates. Finance charges typically
include interest and fees charged in connection with marketing the loan. Bingham
believes its forms are in compliance with all applicable laws. If a material
number of Bingham's loan contracts involved violations of applicable lending
laws, Bingham's financial position could be materially adversely affected and a
continuing pattern of violation by Bingham could have a material adverse effect
on Bingham's future prospects. A violation of state usury laws, for instance,
typically carries a penalty of loss of all interest collected or to be collected
on the loan.
CONTROL AND ANTI-TAKEOVER CONSIDERATIONS
Bingham's articles of incorporation and bylaws contain certain
provisions which could impede a non-negotiated change in control of Bingham and
thereby adversely affect the holders of common stock. These provisions include a
grant of authority to issue, without shareholder approval, up to 10,000,000
shares of preferred stock in one or more series, with such preferences,
limitations and relative rights as are determined by the Board of Directors at
the time of issuance. The Michigan Business Corporation Act also contains
provisions which will impede a change of control not approved by the Board of
Directors. Bingham's Board of Directors has been divided into three classes of
directors with staggered terms. The staggered terms for directors may affect the
stockholders' ability to change control of Bingham even if a change in control
were in the stockholders' interest. As a savings and loan holding company, the
prior permission of the OTS is required before any person, entity or group of
affiliates acquires more than 10% ownership of Bingham.
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RELIANCE ON KEY PERSONNEL
Bingham depends on the efforts and abilities of a number of its current
key management, including Chief Executive Officer Ronald A. Klein and Vice
Presidents Daniel E. Bober and Creighton J. Weber, and to a lesser extent
Chairman of the Board Gary A. Shiffman and current Chief Financial Officer
Jeffrey P. Jorissen. Bingham also depends significantly on the efforts and
abilities of its loan officers. Bingham's success depends largely on its ability
to retain and continue to attract key employees, including but not limited to
the future Chief Operating Officer of the Bank and a new CFO of Bingham, through
its compensation plans, including employee stock options. If Bingham loses
certain key employees or cannot retain or attract key employees in the future,
its operations could be adversely affected.
BINGHAM'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
Trading volume and prices for Bingham common stock has been subject to
relatively wide fluctuations during the past year and may continue to fluctuate
in response to quarterly variations in operations, results, announced earnings
and other factors. Bingham cannot always foresee or predict such events. Other
factors that may affect stock prices include the sale or attempted sale of a
large amount of securities in the public market, the registration for resale of
any shares of common stock, and the effect on Bingham's earnings of equity-based
compensation awards to management.
BINGHAM DOES NOT ANTICIPATE PAYING DIVIDENDS ON COMMON STOCK
Bingham does not plan to pay cash dividends on its common stock in the
foreseeable future. The Board of Directors will decide, in the exercise of its
business judgment, whether to apply legally available funds to the payment of
dividends. The Board will consider Bingham's results of operations and financial
condition, any existing or proposed commitments for the use of available funds,
and its obligations to its creditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BINGHAM FINANCIAL SERVICES CORPORATION
/s/ Ronald A. Klein
------------------------------------
Name: Ronald A. Klein
Title: Chief Executive Officer
Dated: March 9, 1999
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