<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
OR
[ ] Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-3313951
(State of Incorporation) (I.R.S. Employer Identification No.)
260 East Brown Street
Suite 200
Birmingham, Michigan 48009
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 644-5470
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
1,576,818 shares of Common Stock, no par value as of January 31, 1999
Page 1 of 18
<PAGE> 2
BINGHAM FINANCIAL SERVICES CORPORATION
INDEX
---------
PAGES
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PART I
- ------
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1998 3
Consolidated Statements of Operations for the Three Months Ended
December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14-15
PART II
- -------
Item 1 Legal Proceedings 16
Item 6 (a) Exhibits Required by Item 601 of Regulation S-K 16
Signatures 17
Exhibit Index 18
2
<PAGE> 3
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
----------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,029 $ 1,979
Restricted cash 3,198 2,253
Loans receivable, net 112,937 86,075
Property and equipment, net 800 655
Other assets 6,686 3,897
-------- --------
Total assets $124,650 $ 94,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Advances by mortgagors $ 3,191 $ 2,238
Accounts payable and accrued expenses 420 636
Advances under repurchase agreements 92,242 56,892
Subordinated debt, net of debt discount
of $491 and $510, respectively 3,509 3,490
Notes payable 10,773 17,848
-------- --------
Total liabilities 110,135 81,104
-------- --------
Minority interest 272 298
-------- --------
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; 1,576,818 shares issued
and outstanding at Dec and Sept, respectively 13,608 13,608
Paid-in capital 555 533
Retained earnings (deficit) 80 (684)
-------- --------
Total stockholders' equity 14,243 13,457
-------- --------
Total liabilities and stockholders'
equity $124,650 $ 94,859
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
REVENUES: ------------------------
<S> <C> <C>
Interest income $ 2,118 $ 316
Mortgage origination and servicing fees 352 --
Unrealized gain on loans held for sale, net 1,250 --
Gain on sale of loans 289 --
Other income 47 --
---------- ----------
Total revenues 4,056 316
---------- ----------
COSTS AND EXPENSES:
Interest expense 1,699 151
Provision for credit losses 97 21
General and administrative 563 88
Other operating expenses 624 22
---------- ----------
Total costs and expenses 2,983 282
---------- ----------
Income before income taxes 1,073 34
Provision for income taxes 309 12
---------- ----------
Net income $ 764 $ 22
========== ==========
Weighted average common shares outstanding:
Basic 1,576,818 568,400
========== ==========
Diluted 1,772,526 568,400
========== ==========
Earnings per share:
Basic $ 0.48 $ 0.04
========== ==========
Diluted $ 0.43 $ 0.04
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 764 $ 22
Adjustments to reconcile net income to net
cash used for operating activities:
Unrealized gain on loans held for sale, net (1,250) --
Provision for credit losses 97 21
Depreciation and amortization 211 36
Originations of loans held for sale (30,678) (4,820)
Principal collections on loans held for sale 719 252
Proceeds from sale of loans held for sale 5,445 --
Gain on sale of loans (289) --
Increase in other assets (4,526) (73)
Increase in other liabilities 944 729
-------- --------
Net cash used for operating activities (28,563) (3,833)
-------- --------
Cash flows from investing activities:
Capital expenditures (167) --
-------- --------
Net cash used in investing activities (167) --
-------- --------
Cash flows from financing activities:
Issuance of common stock -- 11,584
Issuance of subordinated debt, including discount -- 4,000
Advances under repurchase agreements 36,395 --
Repayment of advances under repurchase agreements (1,045) --
Advances on notes payable 15,715 --
Repayment of notes payable (23,285) (9,748)
-------- --------
Net cash provided by financing activities 27,780 5,836
-------- --------
Net change in cash and cash equivalents (950) 2,003
Cash and cash equivalents, beginning of period 1,979 --
-------- --------
Cash and cash equivalents, end of period $ 1,029 $ 2,003
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. BASIS OF PRESENTATION:
The unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, which are necessary to present
fairly Bingham Financial Services Corporation's ("the Company") financial
condition and results of operations on a basis consistent with that of the
Company's prior audited consolidated financial statements. Pursuant to rules
and regulations of the Securities and Exchange Commission applicable to
quarterly reports on Form 10-Q, certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") have been condensed or omitted. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. Results for interim periods are not
necessarily indicative of the results that may be expected for a full year.
2. EARNINGS PER SHARE:
Basic earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period.
The Company has issued warrants and stock options which are considered to be
potentially dilutive to common stock. Diluted earnings per share is
calculated by dividing net income by the average number of shares outstanding
during the applicable period adjusted for these potentially dilutive warrants
and options.
The following table sets forth the computation of per share earnings and
illustrates the dilutive effect of warrants and options outstanding:
<TABLE>
<CAPTION>
Three months ended December 31,
--------------------------------------------------
1998 1997
--------------------------------------------------
(In thousands, except earnings per share)
Earnings Earnings
Shares per share Shares per share
--------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS 1,577 $ 0.48 568 $ 0.04
Net dilutive effect of:
Options 25 (0.01) -- --
Warrants 171 (0.04) -- --
--------------------------------------------------
Diluted EPS 1,773 $ 0.43 568 $ 0.04
==================================================
</TABLE>
3. ALLOWANCE FOR LOAN LOSSES:
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well
as the remainder of the loan portfolio. The allowance for loan losses is
based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay and
collateral values.
6
<PAGE> 7
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Changes in allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three months ended December 31,
1998 1997
---------------------------
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 185 $ 58
Provision for loan losses 97 21
Net losses (34) --
----- -----
Balance at end of period $ 248 $ 79
===== =====
</TABLE>
4. DEBT:
At the time of its initial public offering the Company entered into a
subordinated debt facility with Sun Communities. The facility consisted of a
$4.0 million term loan and a five-year revolving line of credit for up to
$6.0 million. In accordance with the subordinated debt loan agreement the
Company has issued detachable warrants to Sun covering 400,000 shares of
common stock at a price of $10 per warrant share. The detachable warrants
have a term of seven years and may be exercised at any time after the fourth
anniversary of issuance. In March 1998 Sun provided an additional line of
credit of up to $12.0 million payable upon demand.
In March 1998 the Company's commercial mortgage subsidiary entered into a
one-year master repurchase agreement with a lender to finance up to $150
million of fixed rate commercial loans collateralized by real estate. In
September 1998 that agreement was amended and restated to include
manufactured home and floor plan loans. The borrowing limit was also
increased to $250 million. The loans are 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 December 31, 1998 and September 30, 1998 debt outstanding was as follows:
<TABLE>
<CAPTION>
December 31 September 30
---------------------------------
1998 1998
- ---------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Loans sold under agreements to repurchase $ 92,242 $ 56,900
Revolving line of credit............. 10,773 17,800
Term loan, net of discount........... 3,509 3,500
-------- --------
$106,524 $ 78,200
======== ========
</TABLE>
5. 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 lending. Loans
originated by Bloomfield primarily consist of fixed rate loans collateralized
by mortgages on commercial
7
<PAGE> 8
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
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 over the two year
period following the date of merger.
Each of the acquisitions was accounted for as a purchase and the aggregate
purchase price 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.
The following table summarizes pro forma unaudited results of operations as
if each of the acquisitions completed had occurred at the beginning of fiscal
1998.
<TABLE>
<CAPTION>
Three months ended
December 31, 1997
-----------------
(In thousands, except earnings per share)
<S> <C>
Revenues $1,866
Income before income taxes 450
Net income 296
Basic and diluted earnings per share $ 0.35
</TABLE>
6. 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. The Company classifies these forward sales as hedges on specific
loan receivables. Any gross unrealized gains or losses on these forward sales
are an adjustment to the basis of the mortgage loan portfolio and are used in
the lower of cost or market valuation to establish a valuation allowance.
8
<PAGE> 9
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The following table identifies the gross unrealized losses of the forward sales
as of December 31, 1998 and September 30, 1998:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
Gross Unrealized Gross Unrealized
Security Description Losses Losses
- ----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury 6.125% - 8/07 $(1,182) $(2,019)
U.S. Treasury 6.375% - 8/27 (243) (294)
U.S. Treasury 5.500% - 2/08 (1,448) (1,649)
U.S. Treasury 5.625% - 5/08 (282) (321)
U.S. Treasury 4.75% - 11/08 (92) --
--------------------------------------
$(3,247) $(4,283)
======================================
</TABLE>
9
<PAGE> 10
BINGHAM FINANCIAL SERVICES CORPORATION
----------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information on material
factors affecting the Company's results of operations and significant
balance sheet changes. This discussion should be read in conjunction with
the consolidated financial statements and notes included herein and the 1998
Form 10-K of Bingham Financial. Results of operations for the three month
periods presented are not necessarily indicative of results which may be
expected for the entire year.
RESULTS OF OPERATIONS
Net Income
The Company reported net income of $764,000 for the quarter ended
December 31, 1998 compared to net income of $22,000 in the quarter ended
December 31, 1997. The increase in net income is due primarily to a
significant increase in interest income of $1.8 million, mortgage
origination and servicing fees of $352,000, gain on sale of loans of
$289,000 and a recovery of $1.25 million related to the valuation of the
loan portfolio. These increases in income were partially offset by increases
in interest expense of $1.5 million, provision for credit losses of $76,000
and operating expenses of $1.08 million.
Interest income earned on the manufactured home and commercial mortgage loan
portfolios increased to $2.1 million for the quarter ended December 31, 1998
from $316,000 for the comparable quarter in 1997. The increase was due to
increased origination volume in the manufactured home loan portfolio and the
addition of a commercial mortgage loan portfolio through the acquisition of
Bloomfield Acceptance Company in March, 1998. Bloomfield Acceptance is an
originator of primarily fixed rate loans collateralized by mortgages on
commercial real estate.
Interest expense increased to $1.7 million in the first quarter of fiscal
1999 as compared to $151,000 in the first quarter of fiscal 1998. The large
increase is due to the substantial increase in borrowings to fund
originations of manufactured home loans and commercial mortgage loans held
for sale net of a decrease in the Company's average borrowing rate. The
weighted average interest rate on borrowings was 7.30% and 8.28% during the
first fiscal quarters of 1999 and 1998 respectively.
Net interest margin has decreased to 1.79% for the quarter ended
December 31, 1998 as compared to 5.64% for the quarter ended December 31,
1997. This is primarily due to the addition of the commercial mortgage loans
which represent approximately 77% of the loan portfolio and have a lower
weighted average interest rate.
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.
<TABLE>
<CAPTION>
Three months ended December 31, 1998 and 1997
-------------------------------------------------------------------------------------------------
Average Balance Average Rate Interest Increase Variance due to:
----------------------------------------------------------------
1998 1997 1998 1997 1998 1997 (Decrease) Volume Rate
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 97,550 $ 11,695 8.68% 10.81% $ 2,118 $ 316 $ 1,802 $ 1,849 $ (47)
Cash and equivalents 4,331 -- 3.42% -- 37 -- 37 37 --
------------------------------------------------------------------------------------------------
101,881 11,695 8.46% 10.35% 2,155 316 1,839 1,886 (47)
------------------------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 2,000 11.68% 9.75% 117 49 68 58 10
</TABLE>
10
<PAGE> 11
BINGHAM FINANCIAL SERVICES CORPORATION
-----------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revolving line of credit 20,262 5,294 8.13% 7.06% 412 102 310 296 14
Loans sold under repurchase 68,797 -- 6.81% -- 1,170 -- 1,170 1,170 --
------------------------------------------------------------------------------------------------
93,059 7,294 7.30% 8.28% 1,699 151 1,548 1,524 24
------------------------------------------------------------------------------------------------
Interest rate spread 1.16% 2.07%
Excess average earning assets $ 8,822 $ 4,401 8.46% 10.35%
==========================================
Net interest margin 1.79% 5.64% $ 456 $ 165 $ 291 $ 362 $ (71)
=========================================================================
</TABLE>
Mortgage origination and servicing fees are related to the commercial mortgage
loans originated and simultaneously sold with the servicing retained by
Bloomfield Acceptance. Origination fees for the quarter ended December 31, 1998
totaled approximately $279,000 on commercial mortgage loans originated and sold
of $24.5 million. Servicing fees collected by Bloomfield Servicing on the
current retained servicing portfolio were $73,000 for the quarter. There is no
comparison of mortgage origination and servicing fees to the corresponding
quarter of the 1997 as Bloomfield Acceptance and Bloomfield Servicing were both
acquired by Bingham in March of 1998.
A recovery of $1.25 million related to the valuation of the loan portfolio and
related hedge positions was recorded for the quarter ended December 31, 1998.
The hedge positions are used in an attempt to mitigate the risk of loss arising
from adverse changes in market prices and interest rates associated with the
fixed rate loans in the commercial mortgage loan portfolio. There are no
comparable gains or losses on valuations of the loan portfolio and hedge
positions for the quarter ended December 31, 1997.
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 reserve for the potential refund of any premium paid for loans that
prepay in the first twelve months after the date of the sale. The Company sold
approximately $5 million in manufactured home loans in one bulk sale and
recorded a gain on sale of loans of $289,000 for the three months ended
December 31, 1998. There were no loan sales in the comparable quarter of the
previous year.
A provision for credit losses is charged to income in amounts sufficient to
maintain an allowance level considered adequate to cover losses from liquidating
manufactured home loans. The allowance level is determined based on a formal
review of the size and quality of the manufactured home loan portfolio in
conjunction with the current market and prevailing economic conditions.
The Company recorded a provision for credit losses of $97,000 and $21,000 for
the three months ended December 31, 1998 and 1997 respectively. The large
increase was due to the substantial increase in the size of the manufactured
home loan portfolio.
General and administrative expenses and other operating expenses have increased
in recent periods as a result of the increased loan origination volume and the
acquisition of the Bloomfield Companies.
The largest increase has been in personnel costs which were $587,000 and $13,000
for three months ended December 31, 1998 and 1997 respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability to meet financial obligations when due. The
Company expects to meet its short term liquidity requirements through working
capital provided by operating activities. The Company expects to meet its long
term liquidity requirements through additional equity offerings, draws on its
revolving lines of credit of $18 million, advances under its master repurchase
agreement of $250 million, whole loan sales and possible future periodic
securitizations of its loan portfolio.
11
<PAGE> 12
BINGHAM FINANCIAL SERVICES CORPORATION
-----------
Total borrowings increased $28.3 million during the period to $106.5 million at
December 31, 1998. The increased borrowings were primarily for the funding of
new loan originations. The increased borrowings are net of approximately $5.4
million in proceeds from loan sales used to repay revolving lines of credit.
Loans Receivable
Net loans receivable increased $26.9 million to $112.9 million at December 31,
1998. Commercial mortgage loans originated and held for sale were $22.4 million
and manufactured home loan originations were $8.3 million for the period. New
loan originations were partially offset by sales of $5 million of manufactured
home loans.
The following table sets forth the average loan balance, weighted average loan
yield and weighted average initial term of the loan portfolio:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------
Manufactured Commercial
Home Loans
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Principal balance loans receivable, net $25,883 $88,204
Number of loans..................... 884 19
Average loan balance................ $ 29 $ 4,642
Weighted average loan yield......... 10.9% 7.6%
Weighted average initial term....... 22 years 8.9 years
</TABLE>
Delinquency statistics at December 31,1998 for the manufactured home loan
portfolio are as follows:
<TABLE>
<CAPTION>
Number of Greater
loans 31-60 61-90 Than 90 Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manufactured home loans 869 3.3% 0.4% 1.5% 5.2%
Manufactured home loans
sold with full recourse 535 1.9% 1.5% 5.2% 8.6%
---------------------------------------------------
1,404 2.8% 0.8% 2.9% 6.5%
===================================================
<CAPTION>
Gross Principal Greater
Balance 31-60 61-90 than 90 Total
- ----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Manufactured home loans 25,903 2.8% 0.5% 1.4% 4.7%
Manufactured home loans
sold with full recourse 15,426 2.0% 0.9% 4.8% 7.7%
---------------------------------------------------
41,329 2.5% 0.6% 2.7% 5.8%
===================================================
</TABLE>
There were no delinquent commercial mortgage loans at December 31, 1998.
Year 2000 Compliance
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
12
<PAGE> 13
BINGHAM FINANCIAL SERVICES CORPORATION
---------------
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.
The first phase 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 MIS staff developed solutions or implemented
vendor provided solutions to remedy all year 2000 non-compliant issues. The
majority of 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 or
has been identified and will be replaced in early 1999. 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 on going and is expected to be completed by the second quarter of
1999. 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 is also expected to be completed by the second quarter of
1999.
Year 2000 compliance costs to date have totaled approximately $12,000. 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 us. While the Company is in the process of testing and correcting
identified year 2000 problems, these procedures are limited to matters over
which we are reasonably able to exercise control. The Company's ability to
achieve year 2000 compliance 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, vendor's ability to modify proprietary
software and unanticipated problems identified in the on going compliance
review.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including
statements relating to the Company's strategic objectives and future
performance, which are not historical fact, may be deemed to be forward-looking
statements under the federal securities laws. There are many important factors
that could cause the Company's actual results to differ materially from those
indicated. Such factors include, but are not limited to general economic
conditions; interest rate risk; demand for the Company's services; the impact of
certain covenants in loan agreements of the Company; the degree to which the
Company is leveraged; the continued availability of the Company's credit
facilities; the risk of margin calls on the Company's credit facilities and
hedge positions; the performance of the Company's subsidiaries; the Company's
year 2000 issues; and other risks identified in the Company's Securities and
Exchange Commission filings. In addition, it should be noted that past financial
and operational performance of the Company is not necessarily indicative of
future financial and operational performance.
13
<PAGE> 14
BINGHAM FINANCIAL SERVICES CORPORATION
--------------
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table shows the Company's expected maturity dates of its assets
and liabilities. For each maturity category in the table the difference between
interest-earning assets and interest-bearing liabilities reflects an imbalance
between repricing opportunities for the two sides of the balance sheet. The
consequences of a positive cumulative gap at the end of one year suggests that,
if interest rates were to rise, liability costs would increase more quickly than
asset yields, placing negative pressure on earnings.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Cash and equivalents................... $ 1,029 $ -- $ -- $ -- $ 1,029
Restricted cash ....................... 960 2,238 -- -- 3,198
Loans receivable ...................... 268 687 17,547 94,435 112,937
Other assets .......................... 802 4,800 1,375 509 7,486
-------------------------------------------------------------
TOTAL ASSETS $ 3,059 $ 7,725 $ 18,922 $ 94,944 $124,650
=============================================================
Advances by mortgagors................. $ 957 $ 2,234 $ -- $ -- $ 3,191
Accounts payable and accrued expenses.. 294 126 -- -- 420
Advances under repurchase agreement.... 243 91,999 92,242
Subordinated debt...................... (19) (57) 3,585 -- 3,509
Notes Payable.......................... -- -- -- 10,773 10,773
Other liabilities...................... -- -- -- 272 272
-------------------------------------------------------------
TOTAL LIABILITIES 1,475 94,302 3,585 11,045 110,407
-------------------------------------------------------------
Common stock........................... -- -- -- 13,608 13,608
Paid-in-capital........................ -- -- -- 555 555
Retained earnings...................... -- -- -- 80 80
------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 1,475 $ 94,302 $ 3,585 $ 25,288 $124,650
============================================================
Reprice difference..................... $ 1,584 $(86,577) $ 15,337 $ 69,656
Cumulative gap......................... $ 1,584 $(84,993) $ (69,656) $ --
Percent of total assets................ 1.27% (68.19%) (55.88%) --
</TABLE>
Management believes the negative effect of a rise in interest rates is reduced
by the anticipated short duration of the Company's loan receivables. Management
intends that the loan receivables will be securitized or sold as part of a whole
loan sale prior to the end of 1999. Proceeds from the securitization or whole
loan sales would be used to pay down the corresponding debt. If the company were
unable to securitize or sell the loans it would be necessary to renegotiate the
master repurchase agreement 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 to hedge the fixed rate loans in the commercial loan
portfolio. In a forward sale the Company has agreed to sell a Treasury security
at a future date with a predetermined price. If interest rates on Treasury
Securities drop, the price to the Company to purchase the security in order to
meet its settlement obligation will have risen, and thus the Company will have
suffered an unrealized loss on the hedge transaction. Coversely, if interest
14
<PAGE> 15
BINGHAM FINANCIAL SERVICES CORPORATION
--------------
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. The Company uses these
instruments in an attempt to reduce risk by essentially creating offsetting
market exposures.
The following table shows the Company's financial instruments and derivative
instruments that are sensitive to changes in interest rates, categorized by
expected maturity and the instruments' fair values at December 31, 1998.
<TABLE>
<CAPTION>
Contractual Maturity
-----------------------------------------------------------------------------------
Total
1999 2000 2001 2002 2003 Thereafter Fair Value
-----------------------------------------------------------------------------------
Interest sensitive assets:
<C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 729 $ 911 $13,364 $ 1,026 $ 1,137 $ 95,787 $ 112,954
Average interest rate 8.25% 8.25% 8.70% 8.25% 8.25% 8.25% 8.32%
Interest bearing deposits 4,220 - - - - - 4,220
Average interest rates 3.52% - - - - - 3.52%
-----------------------------------------------------------------------------------
Total interest sensitive assets $ 4,949 $ 911 $13,364 $ 1,026 $ 1,137 $ 95,787 $ 117,174
===================================================================================
Interest sensitive liabilities:
Borrowings:
Advances under repurchase agreements $ 92,242 $ - $ - $ - $ - $ - $ 92,242
Average interest rate 6.81% - - - - - 6.81%
Forward sales of U.S. Treasury
securities 3,247 - - - - - 3,247
Average coupon rate 5.99% - - - - - 5.99%
Subordinated debt, net - - - - - 3,509 3,509
Average interest rate - - - - - 11.70% 11.70%
Note payable - - - - - 10,773 10,773
Average interest rate
- - - - - 8.20% 8.20%
-----------------------------------------------------------------------------------
Total interest sensitive liabilities $ 95,489 $ - $ - $ - $ - $ 14,282 $ 109,771
===================================================================================
</TABLE>
15
<PAGE> 16
BINGHAM FINANCIAL SERVICES CORPORATION
-------------
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings
arising out of the normal course of business, none of which in
the opinion of management are expected to have a material effect
on the Company's financial position.
ITEM 6.(A) - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
ITEM 6.(B) - REPORTS ON FORM 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 8, 1999
BINGHAM FINANCIAL SERVICES CORPORATION
BY: /s/ Jeffrey P. Jorissen
----------------------------------------
Jeffrey P. Jorissen, President,
Chief Executive Officer, Chief
Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
PAGE
FILED NUMBER
EXHIBIT NO. DESCRIPTION HEREWITH HEREIN
- ----------- ----------- -------- ------
27 Financial Data Schedule X X
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 112,937
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,650
<CURRENT-LIABILITIES> 110,407
<BONDS> 0
0
0
<COMMON> 13,608,000
<OTHER-SE> 635,000
<TOTAL-LIABILITY-AND-EQUITY> 124,650
<SALES> 0
<TOTAL-REVENUES> 4,056,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,187,000
<LOSS-PROVISION> 97,000
<INTEREST-EXPENSE> 1,699,000
<INCOME-PRETAX> 1,073,000
<INCOME-TAX> 309,000
<INCOME-CONTINUING> 764,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764,000
<EPS-PRIMARY> .48
<EPS-DILUTED> .43
</TABLE>
