<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, 1999.
OR
|_| Transition pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER 0-23381
BINGHAM FINANCIAL SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-3313951
(State of Incorporation) (I.R.S. Employer Identification No.)
260 East Brown Street
Suite 200
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:
2,542,758 shares of Common Stock, no par value as of January 31, 2000
Page 1 of 21
<PAGE> 2
BINGHAM FINANCIAL SERVICES CORPORATION
INDEX
-----------
<TABLE>
<CAPTION>
PAGES
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<S> <C>
PART I
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 1999 3
Consolidated Statements of Operations for the Three Months Ended
December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-18
PART II
Item 1 Legal Proceedings 19
Item 6 (a) Exhibits Required by Item 601 of Regulation S-K 19
Signatures 20
Exhibit Index 21
</TABLE>
2
<PAGE> 3
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
----------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1999 1999
(UNAUDITED)
-------------------------------------
(In thousands except, for shares)
<S> <C> <C>
Cash and equivalents $ -- $ 730
Restricted cash
4,275 3,901
Loans receivable
141,453 117,887
Servicing rights
9,736 2,120
Property and equipment, net
3,029 1,100
Other assets
10,006 6,960
--------- ---------
Total assets $ 168,499 $ 132,698
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Advances by mortgagors $ 4,228 $ 3,882
Accounts payable and accrued expenses
11,810 1,131
Deferred revenue
1,398 343
Advances under repurchase agreements
80,469 69,026
Subordinated debt, net of debt discount
of $414 and $433, respectively
3,586 3,567
Note payable
40,747 28,477
--------- ---------
Total liabilities
142,238 106,426
--------- ---------
Minority Interest
122 204
--------- ---------
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; 2,539,716 and 2,528,473 shares
issued and outstanding at December 31, 1999 and
September 30, 1999, respectively
26,799 26,696
Paid-in capital
641 619
Accumulated other comprehensive loss
(106) (304)
Unearned stock compensation
(1,102) (1,035)
Retained earnings (deficit)
(93) 92
--------- ---------
Total stockholders equity
26,139 26,068
--------- ---------
Total liabilities and stockholders' equity $ 168,499 $ 132,698
========= =========
</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, 1999 AND 1998
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
-------------------------------------
(In thousands, except for shares)
<S> <C> <C>
REVENUES
Interest income on loans 4,069 2,118
Mortgage origination and servicing fees 1,319 352
Gain on sale of loans 1,603 1,539
Other income 75 47
----------- -----------
Total revenues 7,066 4,056
----------- -----------
COSTS AND EXPENSES
Interest expense 2,832 1,699
Provision for credit losses 362 97
General and administrative 2,352 563
Other operating expenses 944 624
----------- -----------
Total costs and expenses 6,490 2,983
----------- -----------
Income (loss) before income tax expense 576 1,073
Federal income tax expense 198 309
----------- -----------
Income (loss) before cumulative effect of
change in accounting principle 378 764
Cumulative effect of change in accounting
principle, net of tax (563) --
----------- -----------
Net Income (Loss) (185) 764
=========== ===========
Weighted average common shares outstanding,
Basic 2,539,716 1,576,818
=========== ===========
Diluted 2,539,716 1,917,915
=========== ===========
Earnings (loss) per share before cumulative
effect of change in accounting principle:
Basic $ 0.15 $ 0.48
=========== ===========
Diluted $ 0.15 $ 0.40
=========== ===========
Cumulative effect of change in accounting
Principle
Basic $ (0.22) $ --
=========== ===========
Diluted $ (0.22) $ --
=========== ===========
Net income
Basic $ (0.07) $ 0.48
=========== ===========
Diluted $ (0.07) $ 0.40
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
BINGHAM FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided (used) by operating activities (26,965) (28,563)
-------- --------
Cash flows from investing activities:
Purchase of Dynex Financial, Inc. (4,001) --
Capital expenditures (99) (167)
-------- --------
Net cash used in investing activities (4,100) (167)
-------- --------
Cash flows from financing activities:
Advances under repurchase agreements 102,876 36,395
Repayment of advances under repurchase agreements (91,434) (1,045)
Advances on note payable 104,634 15,715
Repayment of note payable (85,741) (23,285)
-------- --------
Net cash provided by financing activities 30,335 27,780
-------- --------
Net change in cash and cash equivalents (730) (950)
Cash and cash equivalents, beginning of period 730 1,979
-------- --------
Cash and cash equivalents, end of period -- 1,029
======== ========
</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 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, 1999. 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 are computed by dividing net income available to
common shareholders by the weighted average common shares outstanding. At
December 31, 1999 there were potential shares of common stock from stock
options and warrants outstanding. Had these stock options and warrants been
exercised they would have had an anti-dilutive effect on the net loss per
share calculation. The effect of the anti-dilutive shares is not included
in the earnings per share calculation for the period ended December 31, 1999.
The following table presents a reconciliation of the numerator (income
applicable to common shareholders) and denominator (weighted average common
shares outstanding) for the basic income (loss) per share calculation:
<TABLE>
<CAPTION>
Three months ended December 31,
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
(In thousands except earnings (loss) per share
Earnings (loss) Earnings (loss)
Shares per share Shares per share
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share before
cumulative effect of change in
accounting principle 2,540 $ 0.15 1,577 $ 0.48
Cumulative effect of change in
accounting principle (0.22) -- --
Net dilutive effect of:
Options and awards -- -- 25 (0.01)
Warrants -- -- 171 (0.04)
-----------------------------------------------------------------------
Diluted earnings (loss) per share 2,540 $ (0.07) 1,773 $ 0.43
=======================================================================
</TABLE>
6
<PAGE> 7
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. OTHER COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," establishes standards for reporting comprehensive
income. Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles have previously
been reported as separate components of equity in the Company's consolidated
financial statements.
<TABLE>
<S> <C>
Net loss $ (185,000)
Other comprehensive income net of tax:
Unrealized gains on securities:
Unrealized holding gains during period 198,000
-----------
Comprehensive income $ 13,000
===========
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES:
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well
as the remainder of the loan portfolio. The allowance for loan losses is
based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay and
collateral values.
Changes in allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three months ended December 31,
1999 1998
-------------------------------
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 258 $ 58
Provision for loan losses 362 21
Net losses (346) --
-------------------------
Balance at end of period $ 274 $ 79
=========================
</TABLE>
The Company periodically sells portions of its manufactured home loan
portfolio with recourse whereby it is required to repurchase loans that meet
certain delinquency and default criteria. The Company recognizes estimated
recourse obligations to absorb potential losses on these loans. The balance
of that recourse obligation was approximately $375,000 at December 31, 1999.
5. DEBT:
At the time of its initial public offering the Company entered into a
subordinated loan agreement that currently provides for a subordinated debt
facility which consists of a $4 million term loan. The Company also has a $10
million demand line of credit and a $50 million demand line of credit which
indebtedness
7
<PAGE> 8
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
shall be subordinated to all senior debt of the Company. The $4 million term
loan has an annual interest rate of 9.75% and the demand lines of credit
have an annual interest rate equal to the one month "LIBOR" rate plus a
spread. In accordance with the subordinated loan agreement the Company issued
detachable warrants 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 and has been periodically renewed. At December 31,1999 the
Company was renegotiating the maximum financing limits on the facility. 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 82- 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, 1999 and September 30, 1999 debt outstanding was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30,
--------------------------------
1999 1999
--------------------------------
(In thousands)
<S> <C> <C>
Loans sold under repurchase $ 80,469 $ 69,026
Demand line of credit 40,747 28,477
Term loan, net of discount 3,586 3,567
================================
$ 124,802 $101,070
================================
</TABLE>
6. FINANCIAL INSTRUMENTS:
The Company hedges a portion of its commercial mortgage loan portfolio as part
of its interest rate risk management strategy and as a condition of the related
repurchase agreement, which finances the portfolio. The Company attempts to
hedge the interest rate risk on its portfolio by entering into Treasury security
rate locks and forward interest rate swaps. The Company classifies these
transactions as hedges on specific loan receivables. Any gross unrealized gains
or losses on these hedge positions are an adjustment to the basis of the
mortgage loan portfolio and are used in the lower of cost or market valuation to
establish a valuation allowance.
The following table identifies the gross unrealized gains/losses of the interest
rate swaps and Treasury rate locks as of December 31, 1999 and September 30,
1999:
8
<PAGE> 9
BINGHAM FINANCIAL SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------
1999 1999
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
TYPE REFERENCE RATE/TREASURY GAINS (LOSSES) GAINS (LOSSES)
- ----------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Treasury Lock U.S. Treasury 4.750% - 11/08 $ -- $ 126
Treasury Lock U.S. Treasury 5.625% - 5/08 -- 115
Treasury Lock U.S. Treasury 5.500% - 5/09 -- 6
Treasury Lock 10 Year Treasury -- 2
Interest Rate Swap 10 Year Swap 609 (146)
</TABLE>
6. ACQUISITIONS:
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 borrowings on the Company's
demand lines of credit. 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.
The DFI acquisition was accounted for using the purchase method. The
consideration and acquisition costs for the DFI acquisition have been
allocated to the acquired assets and assumed liabilities, resulting in
excess of the fair value of the acquired net assets over the purchase price
of approximately $3.2 million which has been recognized as a reduction in
the amount allocated to purchased loan servicing rights. As discussed
below, the Company is in the process of finalizing its plan to exit certain
of DFI's activities and the related purchase price allocation will be
adjusted when those plans are finalized in 2000.
In connection with the DFI acquisition, the Company recognized accrued
liabilities of $5.0 million related to its plans to close certain of DFI's
regional and district offices and terminate or relocate certain of its
employees. The Company is in the process of finalizing its assessment of
the offices and employees that will be affected and any adjustments
resulting from the completion of the assessment and the resulting actions
will result in an adjustment to the purchase price allocation. There were
no amounts paid related to theses liabilities in the period ended December
31, 1999.
9
<PAGE> 10
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
(In thousands, except earnings per share)
<S> <C> <C>
Revenues $ 9,114 $ 8,838
Income before cumulative effect of
change in accounting principle (3,438) 1,390
Cumulative effect of change in accounting
principle, net of tax (576) --
Net Income (2,704) 1,177
Basic earnings (loss) per share $ (1.06) $ 0.93
Diluted earnings (loss) per share $ (1.06) $ 0.77
</TABLE>
7. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
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. In the period ended December 31, 1999 the
Company expensed, approximately $563,000 net of federal income tax benefit
of $290,000 for previously capitalized organization costs.
10
<PAGE> 11
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 1999
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
The Company reported a net loss of $185,000 for the quarter ended December
31, 1999 compared to net income of $764,000 in the quarter ended December
31, 1998. The decrease in net income is due primarily to the cumulative
effect of a change in accounting principle of $853,000 and an increase in
general and administrative expenses of approximately $1.8 million. The
change in accounting principle relates to start up costs that were
previously capitalized and amortized over five years but are now required to
be expensed as incurred. The change is retroactive and the Company was
required to expense currently all previously capitalized start up costs. The
significant increase in general and administrative expenses is the result of
the continued growth in the size of the Company including the acquisition of
DFI.
Interest income on loans increased to $4.0 million for the period, or
approximately 92% over interest income of $2.1 million in the comparable
period in 1998. The large increase is primarily due to an increase in the
average outstanding loan receivable balance of $153.8 million for the three
months ended December 31,1999 versus $97.6 million for the three months
ended December 31, 1998, an increase of 57.6%. The increase in interest
income was also the result of an increase in the average yield on the loan
receivable portfolio of 10.6% for the period in 1999 versus 8.7% in 1998.
This was due to a larger percentage of the loan portfolio being made up of
higher yielding manufactured home loans versus commercial mortgage loans.
Interest expense for the three months ended December 31, 1999 was $2.8
million as compared to $1.7 million, an increase of 65%, for the comparable
period ended December 31, 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 $137.9 million, or 47.2% for the period in 1999 versus $93.0 million in
the comparable period in 1998. Adding to the increase in interest expense
was an increase in the cost of borrowings to 8.3% for the quarter ended
December 31, 1999 compared to 7.3% in the same period 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.
11
<PAGE> 12
BINGHAM FINANCIAL SERVICES CORPORATION
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------------------------
AVERAGE BALANCE AVERAGE RATE INTEREST INCREASE VARIANCE DUE TO:
------------------------------------------------------------
1999 1998 1999 1998 1999 1998 (DECREASE) VOLUME RATE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $153,758 $ 97,550 10.59% 8.68% $4,069 $ 2,118 $ 1,951 $ 1,485 466
Cash and equivalents 3,923 4,331 2.44% 3.42% 24 37 (13) (2) (11)
-------------------------------------------------------------------------------------------------
157,681 101,881 10.38% 8.46% 4,093 2,155 1,938 1,483 455
-------------------------------------------------------------------------------------------------
Interest-bearing Liabilities
Term loan 4,000 4,000 11.68% 11.68% 117 117 -- -- --
Revolving line of credit 41,881 20,262 7.88% 8.13% 825 412 413 426 (13)
Loans sold under repurchase 91,066 68,797 8.30% 6.81% 1,890 1,170 720 464 256
-------------------------------------------------------------------------------------------------
136,947 93,059 8.27% 7.30% 2,832 1,699 1,133 889 244
-------------------------------------------------------------------------------------------------
Interest rate spread 2.11% 1.16%
Excess average earning 20,734 8,822 10.38% 8.46%
assets ==========================================
Net interest margin 3.20% 1.79% $1,261 $ 456 $ 805 $ 593 212
==========================================================================
</TABLE>
Mortgage origination fees are related to commercial mortgage loans
originated and placed with outside investors. Placement fees increased 173%
to $762,000 on placed commercial mortgage loans of $105.9 million for three
months ended December 31, 1999 compared to $279,000 in fees on placed
commercial mortgage loans of $24.5 million in the comparable period in 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 loss due to repossession and ultimate
charge-off of loans sold with recourse that are required to be repurchased.
For the quarter ended December 31, 1999 the company sold approximately $100
million of its manufactured home loan receivables resulting in a net gain of
$1.6 million as compared to sales of $5 million of manufactured home loan
receivables resulting in gains of $289,000 for the comparable period in
1998. The quarter ended December 31, 1998 also included a recovery of $1.25
million related to the valuation of the loan portfolio and related hedge
positions.
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 with recourse. Provision for credit
losses increased approximately 273% to $362,000 for the three months ended
December 31, 1999 compared to $97,000 for the same period in 1998. The large
increase is primarily related to a 274% increase in average outstanding
principal balance of manufactured home loans which was $95.7 million for the
period ended December 31, 1999 as compared to $25.6 million for the period
ended December 31, 1998. The provision increase is also affected by the
increase in non-performing manufactured home loans which were 2.95% of the
manufactured home loan outstanding principal balance at December 31, 1999
versus .25% of the outstanding principal balance for the comparable period
in 1998.
12
<PAGE> 13
BINGHAM FINANCIAL SERVICES CORPORATION
----------
General and administrative and other operating expenses totaled
approximately $3.3 million for the quarter ended December 31, 1999. This was
an increase of $2.1 million or 175% over general and administrative expenses
in the comparable quarter in 1998 of $1.2 million. The largest part of the
increase is directly related to personnel costs. The Company increased its
number of existing full time employees to 95 and also added approximately
200 full time employees with its acquisition of Dynex Financial in
mid-December 1999 resulting in personnel costs of $2.2 million for the
quarter or an increase of 277%. This is compared to 40 full time employees
with personnel costs of $583,000 for the quarter ended December 31, 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 $470,000 for the period ended December 31, 1999 or 123%
increase over the comparable period in 1998 of $211,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability to meet financial obligations when due. The
Company expects to meet its short-term liquidity requirements through
working capital provided by operating activities. The Company expects to
meet its long-term liquidity requirements through a combination of
additional equity offerings, draws on its revolving lines of credit,
advances under its master repurchase agreement, whole loan sales and
possible future periodic securitizations of its loan portfolio.
During the three month period ended December 31, 1999 total borrowings
increased to $124.8 from $101.1 at September 30, 1999. The increased
borrowings are net of approximately $100.8 in proceeds from the sale of a
portion of the Company's manufactured home loan portfolio that were used to
pay down its demand lines of credit and repurchase facility. The increased
borrowings were primarily for the funding of new loan originations and
the acquisition of DFI.
During the period ended December 31, 1999 the Company increased its
available borrowings under its demand lines of credit to a total of $60
million and is currently negotiating an increase in available limits under
its repurchase facility.
LOANS RECEIVABLE
Net loans receivable increased $23.6 million from $117.8 million at
September 30, 1999 to $141.5 million at December 31, 1999. Commercial
mortgage loans originated and held for sale were $11.8 million and
manufactured home loan originations were $35.2 million for the three months
ended December 31, 1999. The Company also purchased approximately $72
million in manufactured home and floor plan loans during the period from
DFI prior to its acquisition in December 1999.
New loan originations were offset by the sale of approximately $100 million
of manufactured home loans in one bulk sale in December 1999.
The following table sets forth the average loan balance, weighted average
loan yield and weighted average initial term of the manufactured home and
commercial loan portfolio:
13
<PAGE> 14
BINGHAM FINANCIAL SERVICES CORPORATION
----------
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
Manufactured Home Commercial
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Principal balance loans................
receivable, net........................ $ 71,630 $ 65,930
Number of loans........................ 1,907 27
Average loan balance................... $ 38 $ 2,442
Weighted average loan yield............ 10.9% 9.8%
Weighted average initial term.......... 25 years 6.5 years
</TABLE>
Delinquency statistics at December 31,1999 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 1,907 5.0% 2.7% 2.4% 10.1%
Manufactured home loans
sold with full recourse 1,327 2.0% 0.0% 0.0% 2.0%
---------------------------------------------------------------
3,234 3.7% 1.6% 1.4% 6.7%
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Principal Greater
Balance 31-60 61-90 than 90 Total
--------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Manufactured home loans $ 71,429 4.1% 2.5% 1.9% 8.5%
Manufactured home loans
sold with full recourse 41,641 1.4% 0.0% 0.0% 1.4%
----------------------------------------------------------------------
$113,070 3.1% 1.6% 1.2% 5.9%
======================================================================
</TABLE>
There were no delinquent commercial mortgage loans at December 31, 1999.
YEAR 2000 READINESS
Some computers, software, and other equipment include a programming code in
which calendar year data was abbreviated to only two digits. As a result of
this design decision, some of these systems could have failed to operate or
failed to produce correct results if "00" was 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 was completed prior to December
31, 1999. 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 were corrected. There were no systems that required
complete replacement. All non-compliant hardware had been replaced. Any new
systems or hardware to be acquired are verified to be year 2000 compliant.
Phase II also included testing of updated systems and hardware for
compliance. This portion of the project was completed prior to December 31,
1999.
14
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BINGHAM FINANCIAL SERVICES CORPORATION
----------
The Company continues to obtain statements of compliance from its external
vendors and business relationships to verify that they are year 2000
compliant. While the Company has received statements of compliance from the
majority of its outside vendors, it has not received all statements
requested. Bingham will continue to obtain the necessary statements of
compliance from vendors and outside business relationships that it has
defined as critical.
Year 2000 compliance costs incurred totaled approximately $45,000. The
majority of the cost was incurred for MIS personnel expense required for
identifying, testing and, where necessary, updating critical systems. The
cost also included the replacement of some non-compliant hardware. The
Company estimates the total costs of the year 2000 project will not be
material to its financial position or results of operations.
The company has experienced no significant problems related to the year 2000
issue but continues to monitor both its internal systems and external
vendors to attempt to prevent any future potential problems that may occur.
SUBSEQUENT EVENTS
On February 4, 2000, the Board of Directors of Bingham Financial Services
Corporation ("Bingham") approved the change in its fiscal year end from
September 30 to December 31. Accordingly, Bingham's 2000 fiscal year will
end on December 31, 2000 and its first quarter will cover the three-month
period ending March 31, 2000. Bingham will file a report covering the
three-month transition period from October 1, 1999 through December 31, 1999
on Form 10-Q.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including statements relating to the Company's strategic objectives and
future performance, which are not historical fact, may be deemed to be
forward-looking statements under the federal securities laws. There are many
important factors that could cause the Company's actual results to differ
materially from those indicated. Such factors include, but are not limited
to general economic conditions; interest rate risk; demand for the Company's
services; the impact of certain covenants in loan agreements of the Company;
the degree to which the Company is leveraged; the continued availability of
the Company's credit facilities; the risk of margin calls on the Company's
credit facilities and hedge positions; the performance of the Company's
subsidiaries; the Company's year 2000 issues; and other risks identified in
the Company's Securities and Exchange Commission filings. In addition, past
financial and operational performance of the Company is not necessarily
indicative of future financial and operational performance.
15
<PAGE> 16
BINGHAM FINANCIAL SERVICES CORPORATION
----------
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table shows the Company's expected maturity dates of its
assets and liabilities. For each maturity category in the table the
difference between interest-earning assets and interest-bearing liabilities
reflects an imbalance between repricing opportunities for the two sides of
the balance sheet. The consequences of a 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.
<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>
Assets:
Cash and equivalents -- -- -- -- --
Restricted cash 1,069 3,206 -- -- 4,275
Loans receivable 4,244 11,316 59,410 66,483 141,453
Servicing rights 389 1,266 5,257 2,823 9,736
Other assets 4,953 3,389 1,955 2,737 13,035
----------------------------------------------------------------------------------
TOTAL ASSETS 10,655 19,177 66,623 72,044 168,499
==================================================================================
Liabilities:
Advances by mortgagors 1,057 3,171 -- -- 4,228
Accounts payable and accrued expenses 9,684 2,126 -- -- 11,810
Advances under repurchase agreement 41,844 38,625 80,469
Subordinated debt (25) (82) 3,694 -- 3,586
Notes Payable -- 40,747 -- -- 40,747
Other liabilities -- -- -- 1,520 1,520
----------------------------------------------------------------------------------
TOTAL LIABILITIES 52,560 84,586 3,694 1,520 142,360
----------------------------------------------------------------------------------
Stockholders' Equity
Common stock -- -- -- 25,697 25,697
Paid-in-capital -- -- -- 641 641
Accumulated other comprehensive loss -- -- (106) -- (106)
Retained earnings -- -- -- (93) (93)
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 52,560 $ 84,586 $ 3,588 $ 27,765 $ 168,499
==================================================================================
Reprice difference $ (41,905) $ (65,409) $ 63,035 $ 44,279
Cumulative gap $ (41,905) $(107,314) $ (44,279) $ --
Percent of total assets (24.87%) (63.69%) (26.28%) --
</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 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
to extend the maturity date of the advances under repurchase. The
instruments
16
<PAGE> 17
BINGHAM FINANCIAL SERVICES CORPORATION
----------
held by the Company are held for purposes other than trading.
The Company also currently manages interest rate risk through the use of
Treasury security 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.
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 you 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 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 December 31, 1999.
17
<PAGE> 18
BINGHAM FINANCIAL SERVICES CORPORATION
----------
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------
TOTAL
2000 2001 2002 2003 2004 THEREAFTER FAIR VALUE
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Loans receivable $ 15,013 $ 12,315 $ 9,877 $ 10,990 $ 12,223 $ 76,386 $136,804
Average interest rate 10.59% 10.59% 10.59% 10.59% 10.59% 10.59% 10.59%
Interest bearing deposits 4,275 -- -- -- -- -- 4,275
Average interest rates 2.44% -- -- -- -- -- 2.44%
Hedging transactions -- -- -- -- -- 26,287 26,287
Average interest rate -- -- -- -- -- 6.77% 6.77%
------------------------------------------------------------------------------------------
Total interest sensitive assets $ 19,288 $ 12,315 $ 9,877 $ 10,990 $ 12,223 $ 102,673 $ 167,366
==========================================================================================
Interest sensitive liabilities:
Borrowings:
Advances under repurchase $ 80,469 $ -- $ -- $ -- $ -- $ -- $ 80,469
Average interest rate 8.30% -- -- -- -- -- 8.30%
Subordinated debt -- -- -- -- -- 3,586 3,586
Average interest rate -- -- -- -- -- 11.68% 11.68%
Note payable 40,747 -- -- -- -- -- 40,747
Average interest rate 7.88% -- -- -- -- -- 7.88%
------------------------------------------------------------------------------------------
Total interest sensitive liabilities $121,216 $ -- $ -- $ -- $ -- $ 3,586 $ 124,802
==========================================================================================
</TABLE>
18
<PAGE> 19
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
The Company filed a report on Form 8-K disclosing a change in
its fiscal year end to December 31. The report was filed on
February 11, 2000.
19
<PAGE> 20
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 11, 2000
BINGHAM FINANCIAL SERVICES CORPORATION
BY: /s/ Ronald A. Klein
-------------------------------------------
Ronald A. Klein, Chief Executive Officer
20
<PAGE> 21
EXHIBIT INDEX
PAGE
FILED NUMBER
EXHIBIT NO. DESCRIPTION HEREWITH HEREIN
- ----------- ------------ --------- ------
27 Financial Data Schedule X X
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 141,453
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 168,499
<CURRENT-LIABILITIES> 142,360
<BONDS> 0
0
0
<COMMON> 26,799
<OTHER-SE> (660)
<TOTAL-LIABILITY-AND-EQUITY> 168,499
<SALES> 0
<TOTAL-REVENUES> 7,066
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,296
<LOSS-PROVISION> 362
<INTEREST-EXPENSE> 2,832
<INCOME-PRETAX> 576
<INCOME-TAX> 198
<INCOME-CONTINUING> 378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (563)
<NET-INCOME> (185)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
