<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-19391
NAB ASSET CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332956
- ----------------------------------- ---------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
2 Ada, Suite 100, Irvine, CA 92618
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 465-0244
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
--- ---
As of October 30, 1998, there were 5,091,300 shares of common stock, $.10 par
value per share, of the registrant outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAB ASSET CORPORATION and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,293 $ 3,620
Restricted cash 19,783 3,655
Receivables:
Construction loans, net of allowance for loan
losses of $501 at September 30, 1997 and $291
at December 31, 1997 70,503 69,052
Residential mortgage loans held for sale 65,610 45,472
Commercial loans, net of allowance for loan
losses of $97 at September 30, 1998 and $28
at December 31, 1997 4,865 3,677
Other receivables 4,392 1,024
Residual interest in securitization of mortgage loans 3,520 --
Property and equipment, net 1,243 1,151
Costs in excess of net assets acquired, net 518 584
Other assets 1,281 884
-------- --------
Total assets $174,008 $129,119
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse lines of credit $125,633 $ 95,716
Notes payable to affiliates 16,794 16,300
Drafts payable 15,359 5,425
Accounts payable and accrued expenses 4,604 2,914
Deferred income 994 609
-------- --------
Total liabilities 163,384 120,964
-------- --------
Minority interest 1,425 316
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
September 30, 1998 and December 31, 1997 509 509
Additional paid-in capital 7,217 7,217
Retained earnings 1,473 113
-------- --------
Total shareholders' equity 9,199 7,839
-------- --------
$174,008 $129,119
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
<PAGE> 3
NAB ASSET CORPORATION and
Subsidiaries Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of loans $ 5,651 $ 2,924 $ 14,760 $ 6,215
Interest income 4,019 839 10,665 1,961
Other operating revenues 2,993 958 7,984 1,277
----------- ----------- ----------- -----------
Total revenues: 12,663 4,721 33,409 9,453
Costs and expenses:
Compensation and benefits 5,643 2,398 15,460 5,011
Interest expense 3,352 740 9,328 1,298
Provision for credit losses 226 11 423 18
General and administrative 2,372 808 6,189 2,101
----------- ----------- ----------- -----------
Total costs and expenses 11,593 3,957 31,400 8,428
----------- ----------- ----------- -----------
Earnings from continuing
operations before minority
interest and income taxes: 1,070 764 2,009 1,025
Minority interest 212 133 483 191
Income taxes 166 85 166 85
----------- ----------- ----------- -----------
Earnings from continuing operations 692 546 1,360 749
Earnings (loss) from discontinued
operations, net of income taxes:
Retail automobile sales -- -- -- (271)
Gain on disposal of CARS USA -- -- -- 1,384
----------- ----------- ----------- -----------
Net earnings $ 692 $ 546 $ 1,360 $ 1,862
=========== =========== =========== ===========
Basic and diluted net earnings
per share from continuing
operations $ 0.14 $ 0.11 $ 0.27 $ 0.15
=========== =========== =========== ===========
Basic and diluted net
earnings per share $ 0.14 $ 0.11 $ 0.27 $ 0.37
=========== =========== =========== ===========
Weighted average number of
common and common equivalent
shares outstanding 5,091,300 5,091,300 5,091,300 5,091,300
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations $ 1,360 $ 749
Adjustments to reconcile net earnings from
continuing operations to net cash from
(used by) operating activities:
Cash used in discontinued operations -- (176)
Proceeds from sale of CARS USA -- 200
Non-cash gain on securitization of mortgage loans (3,248) --
Deposits to over-collateralization account (583) --
Amortization of net interest receivable account 310 --
Depreciation and amortization 455 251
Provision for credit losses 423 18
Net changes in:
Restricted cash (16,128) (8,034)
Residential mortgage loans originated,
purchased and sold (20,282) (37,783)
Drafts payable 9,934 --
Minority interest 1,109 191
Other assets and liabilities (1,690) (52)
--------- ---------
Net cash from (used by) operating activities (28,340) (44,636)
Cash flows from investing activities:
Construction loan fundings (100,107) --
Principal collections on construction loans 98,446 --
Commercial loans purchased and originated (3,894) (1,610)
Principal collections on commercial loans 1,037 19
Acquisition of business, net of cash acquired -- (524)
Purchases of property and equipment (480) (327)
--------- ---------
Net cash used by investing activities (4,998) (2,442)
Cash flows from financing activities:
Net borrowings under warehouse lines of credit 29,917 41,939
Net proceeds from note payable to affiliates 2,094 6,800
--------- ---------
Net cash from financing activities 32,011 48,739
--------- ---------
Net increase in cash and cash equivalents (1,327) 1,661
Cash and cash equivalents at beginning of period 3,620 3,315
--------- ---------
Cash and cash equivalents at end of period $ 2,293 $ 4,976
========= =========
Supplement disclosure of cash flow information:
Cash paid during the period - Interest $ 7,303 $ 300
========= =========
Non-cash - Note received from sale of CARS USA $ -- $ 1,300
Non-cash - Notes receivable exchanged for reduction
in payable to affiliates $ 1,600 $ --
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
NAB ASSET CORPORATION and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
NAB Asset Corporation, a Texas Corporation (the "Company" or "NAB") is
primarily engaged in the residential lending business. As discussed below the
Company disposed of its retail automotive sales business in June 1997. Prior to
June 5, 1996 the Company's business consisted of the acquisition, ownership,
management and disposition of loans and real estate for its own account and the
account of others.
The Company was organized on March 31, 1991, by National Asset Bank (a
bank in liquidation) (the "Bank") as a wholly-owned subsidiary of the Bank for
the purpose of acquiring substantially all of the assets of the Bank through a
series of transactions and agreements intended to effect the final liquidation
of the Bank. The Company acquired substantially all of the assets of the Bank in
consideration of the issuance by the Company of shares of its common stock, $.01
par value (the "Common Stock"), and the assumption of all the Bank's
liabilities. Immediately following such acquisition, the Bank distributed the
shares of Common Stock received to the holders of the Bank's common stock, (the
"Bank Common Stock"), on the basis of one share of Common Stock for each ten
shares of the Bank Common Stock held of record as of the close of business on
July 17, 1991. Because the Company was formed for the purpose of effecting the
acquisition of substantially all of the Bank's assets, the Company had only
limited operating activities prior to such acquisition.
On June 5, 1996, pursuant to the Plan and Agreement of Merger, CPS
Investing Corp. ("CPS Sub"), a wholly owned subsidiary of Consumer Portfolio
Services, Inc. ("CPS"), was merged with and into NAB (the "Merger"). Under the
terms of the Plan and Agreement of Merger and in exchange for all of the
outstanding shares of NAB $.01 par value common stock, the shareholders of NAB
received on a pro rata basis (i) an aggregate cash distribution of $15.3 million
($3.64 per share), (ii) an undivided interest in a liquidating trust
("Liquidating Trust"), and (iii) 62% of the outstanding shares of common stock,
$.10 par value (the "New Common Stock") of the new combined company which had a
net asset value of $7.5 million as of the merger date. The Liquidating Trust was
established for the benefit of converting the trust assets to cash for the NAB
shareholders. On June 5, 1996 in connection with the Merger, NAB contributed
approximately $3.0 million in cash and all of the remaining non-cash assets of
NAB with a net book value of $3.7 million to the Liquidating Trust. No gain or
loss was recognized by NAB in connection with the merger. In exchange for a $4
million contribution to NAB, CPS received 38% or 1,934,706 shares of the New
Common Stock of NAB.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet of the Company as of September 30, 1998,
the related consolidated statements of operations for the three and nine month
periods ended September 30, 1998 and 1997, and the related statements of cash
flows for the nine month periods ended September 30, 1998 and 1997 are
unaudited. These statements reflect, in the opinion of management, all material
adjustments consisting only of normal recurring accruals necessary for a fair
presentation of the consolidated balance sheet of the Company as of September
30, 1998,
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and results of consolidated operations for the three and nine months ended
September 30, 1998 and 1997 and the consolidated cash flows for the nine month
period ended September 30, 1998 and 1997. The results of consolidated operations
for the unaudited periods are not necessarily indicative of the results of
consolidated operations to be expected for the entire year of 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and therefore do not include all information and
footnotes normally included in consolidated financial statements prepared in
conformity with generally accepted accounting principles. Accordingly, 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 SEC form 10-K for the year ended December 31, 1997.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designed as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk.
SFSA No. 133 supercedes FASB Statements No. 80 "Accounting for Futures
Contracts", No. 105 "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," and No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments". It amends FASB Statement No. 107 "Disclosures
about the Fair Value of Financial Instruments" to include in Statement 107 the
disclosure provisions about concentration of credit risk from Statement 105.
This Statement also nullifies or modifies the consensus reached in a number of
issues addressed by the Emerging Issues Task Force. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is in the process of assessing the future impact of the
implementation of SFAS No. 133.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134 (SFAS No. 134), "Accounting for Mortgage Backed Securities
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify in accordance with the provisions of SFAS No. 115
the resulting mortgage backed securities or other retained interests based on
its ability and intent to
6
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sell or hold those investments. However, a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it commits to
sell before or during the securitization process. This Statement is effective
for the first fiscal quarter beginning after December 15, 1998. Management is in
the process of determining the impact of the adoption of this statement on the
Company's financial condition or results of operations.
(3) ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for losses at an amount which it
believes is sufficient to provide adequate protection against future losses in
the loan portfolios. The allowance for losses is determined primarily on the
basis of management's judgment of net loss potential, including specific
allowances for known impaired loans and other factors such as changes in the
nature and volume of the portfolio, value of the collateral and current economic
conditions that may affect the borrowers' ability to pay. A loan is impaired
when it is "probable" that a creditor will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. The measurement of impairment may be based on (1) the present
value of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (2) the observable market price of the
impaired loan or (3) the fair value of the collateral of a collateral-dependent
loan. The amount by which the recorded investment of the loan exceeds the
measure of the impaired loan is recognized by recording a valuation allowance
with a corresponding charge to provision for loan losses.
Loans are continually evaluated for collectibility and, if appropriate,
the loan may be placed on non accrual status, generally if 90 days past due, and
previously accrued interest is reversed from income. As of September 30, 1998,
there were no loans on non accrual status.
(4) RESIDUAL INTEREST IN SECURITIZATION OF MORTGAGE LOANS
Net gains on securitization of loans represent the excess of the
estimated cash to be received on assets retained by the Company over the
relative fair value of the loans sold, less transaction costs. Various
assumptions are used in the calculation of the gain on the sale of the loans and
the valuation of the residual interest in the securitization of mortgage loans.
The residual interests in the securitization of loans represent the sum
of (1) the net interest receivable (NIR) which is the present value of the
difference between the contractual interest rates on the loans and the rate paid
to the buyer or bondholder using various assumptions and (2) the
overcollaterization account which is the excess monthly cash flows, other than
servicing revenues, that are required to be maintained with the trustee until
certain overcollateralzation levels are met. The residual interest is accounted
for as a trading security and as such is recorded at its estimated fair value.
The Company is not aware of an active market for the purchase or sale of the
residual interests. Accordingly, the Company determines the estimated fair value
of the residual interests by discounting the expected cash flows released from
the trust (the cash out method) using a discount rate which the Company believes
is commensurate with the risks involved.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NAB is a financial services company engaged in residential mortgage
banking, residential construction lending and commercial finance. The
residential mortgage banking business, acquired in July 1996, originates,
acquires and sells prime and sub-prime mortgage loans. The residential
construction lending business, begun in December, 1997, originates and holds for
investment single family residential construction loans to homebuilders and to a
lesser extent lots, model homes, and acquisition and development projects for
those homebuilders. The commercial finance operations, begun in January, 1997,
provides financing to operators of rent-to-own or rental purchase retailers. On
June 27, 1997 the Company sold its interest in its retail automobile sales
business.
FINANCIAL CONDITION
RESIDENTIAL MORTGAGE BANKING
For the three and nine months ended September 30, 1998, originations of
residential mortgage loans held for sale totaled $252.2 million and $687.2
million, respectively. This compares to $107.0 million and $189.7 million in
originations for the same periods in 1997.
Originations segregated between prime and sub prime for those periods
are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Prime $158,834 $ 46,271 $429,709 $ 46,271
Sub prime $ 93,366 $ 60,759 $257,495 $143,459
</TABLE>
The prime originations result from the activities of Pacific American
Mortgage Company (PAMCO) which was acquired in August 1997.
Sales of mortgage loans for the same periods segregated between prime
and sub prime are as follows (in thousands):
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Prime $148,010 $ 10,257 $387,429 $ 10,257
Sub prime $ 98,403 $ 55,980 $245,864 $134,952
</TABLE>
All sales of mortgage loans with the exception of the securitization
completed on June 29, 1998 have been for cash on a servicing released basis.
RESIDENTIAL CONSTRUCTION LENDING
Loan fundings for residential construction loans held for investment
totaled $37.8 million and $138.5 million for the three and nine months ended
September 30, 1998.
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Loans totaling $4,090,000 have matured as of September 30, 1998 as
compared to $4,345,000 at December 31, 1997. The Company generally grants
extensions of 60 to 180 days on loans that have matured. The unpaid principal
balance of loans that were past due with respect to interest totaled $2,069,000
and $5,859,000 at September 30, 1998 and December 31, 1997, respectively. The
past due interest related to the past due loans totaled $31,000 and $133,000,
respectively. At September 30, 1998 allowances for loan losses totaled $501,000
or 0.81% of the outstanding loan balances as compared to $291,000 or 0.54% of
the loan balances at December 31, 1997. There have been no losses or chargeoffs
during 1998. The Company has recorded no specific allowances against any of the
outstanding residential construction loans.
COMMERCIAL LENDING
Loan fundings for commercial loans held for investment totaled
$2,215,000 and $3,894,000 for the three and nine months ended September 30,
1998. There were no fundings in the same nine month period in 1997.
At September 30, 1998 reserves for loan losses totaled $97,000 or 2.00%
of the outstanding loan balances as compared to $18,000 or 1.12% of the loan
balances at December 31, 1997. There have been no losses or chargeoffs during
1998. The Company has recorded no specific reserves against any of the
outstanding commercial loans.
RESULTS OF OPERATIONS
The following discussion and analysis presents the significant changes
in financial condition and results of operations of the Company by primary
business line for the three and nine months ended September 30, 1998 and 1997.
The results of operations of acquired businesses are included in the
consolidated financial statements from the date of acquisition. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto (in thousands).
9
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Residential mortgage banking $ 10,574 $ 4,579 $ 27,499 $ 8,974
Residential construction lending 1,835 -- 5,183 --
Commercial lending 231 106 699 427
Corporate and intercompany
eliminations 23 36 28 52
-------- -------- -------- --------
Total revenues: 12,663 4,721 33,409 9,453
Costs and expenses:
Residential mortgage banking 9,557 3,822 24,940 7,491
Residential construction lending 1,748 -- 4,861 --
Commercial lending 187 78 575 374
Corporate and intercompany
eliminations 479 275 1,673 839
-------- -------- -------- --------
Total costs and expenses 11,971 4,175 32,049 8,704
-------- -------- -------- --------
Earnings from continuing operations:
Residential mortgage banking 1,017 757 2,559 1,483
Residential construction lending 87 -- 322 --
Commercial lending 44 28 124 53
Corporate and intercompany
eliminations (456) (239) (1,645) (787)
-------- -------- -------- --------
Earnings from continuing operations: $ 692 $ 546 $ 1,360 $ 749
======== ======== ======== ========
Earnings (loss) from discontinued
operations, net of income taxes:
Retail automobile sales -- -- -- (271)
Gain on disposal of CARS USA -- -- -- 1,384
-------- -------- -------- --------
Net earnings $ 692 $ 546 $ 1,360 $ 1,862
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
RESIDENTIAL MORTGAGE BANKING
Revenues for the three months ended September 30, 1998 primarily
consisted of $5,651,000 in gains on sale of loans, $2,756,000 in fee income and
$2,167,000 in interest income. The $5,995,000 increase in revenues from
$4,579,000 for the three months ended September 30, 1997 primarily related to
the additional revenues generated by the prime mortgage business of Pacific
American Mortgage Company (PAMCO) begun in August, 1997 and increased levels of
loan originations. The increase in revenues was primarily comprised of a
$2,726,000 increase in gains on sale of loans, a $1,797,000 increase in fee
income and a $1,472,000 increase in interest income.
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The increased gain on sale of loans was due primarily to the sale of
$246.4 million in loans for the three months ended September 30, 1998 compared
to $66.2 million for the three months ended September 30, 1997. Net gains as a
percentage of sub prime loans sold were 3.71 % and 4.96% for the three months
ended September 30, 1998 and September 30, 1997. Net gains as a percentage of
prime loans were 1.35% and 1.45% for the three months ended September 30, 1998
and September 30, 1997. The increase in fee income was primarily due to the
increase in loan production to $252.2 million for the three months ended
September 30, 1998, compared to $107.0 million for the three months ended
September 30, 1997. The acquisition of PAMCO accounted for $116.1 million of the
increase in loan production and $143.4 million of the increase in loan sales for
the quarter ended September 30, 1998.
Operating expenses for the three months ended September 30, 1998
primarily consisted of $1,637,000 in interest expense, $5,114,000 in
compensation and benefit expense, $526,000 in intercompany tax expense, and
$2,280,000 in general and administrative expense. Operating expenses increased
by $5,735,000 from $3,822,000 for the prior period to $9,557,000 for the three
months ended September 30, 1998. This increase consisted of $1,009,000 in
interest expense, $2,987,000 in compensation and benefit expense, $135,000 in
intercompany tax expense and $1,604,000 in general and administrative expense.
In general, expenses increased due to the increase in loan originations as a
result of PAMCO, which accounted for the majority of the increase in interest
expense related to the additional warehouse line necessary to fund the
additional production. Compensation and benefits and general and administrative
expenses also increased mainly due to PAMCO.
RESIDENTIAL CONSTRUCTION LENDING
Revenues for the three months ended September 30, 1998 consisted of
interest income of $1,603,000 and fee income of $232,000.
Operating expenses for the three months ended September 30, 1998
consisted of $1,301,000 of interest expense, $186,000 of compensation and
benefit expense, $71,000 in provision for credit losses, $45,000 of intercompany
tax expense and $145,000 of general and administrative expense.
New loan commitments for residential construction for the three months
ended September 30, 1998 totaled $6,000,000.
COMMERCIAL LENDING
Revenues for the three months ended September 30, 1998 primarily
consisted of interest income of $226,000. The $125,000 increase in revenues from
the three months ended September 30, 1997 relates to the increase in loans
receivable.
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Operating expenses for the three months ended September 30, 1998
consisted of $58,000 in compensation and benefit expense, $11,000 in provision
for credit losses, $22,000 in interest expense, $22,000 in intercompany tax
expense and $74,000 in general and administrative expense. Operating expenses
from the three months ended September 30, 1998 increased $109,000 from the three
months ended September 30, 1997 due to the increased costs associated with
operating the lending activities.
New loan commitments approved for the three months ended September 30,
1998 totaled $2,500,000 compared to $0 for the three months ended September 30,
1997.
CORPORATE AND INTERCOMPANY ELIMINATIONS
Corporate expenses for the three months ended September 30, 1998
increased $205,000 from the three months ended September 30, 1997 primarily as a
result of increased compensation expense.
In April 1998, the Board of Directors authorized the Company to make
payments to officers and Directors in lieu of stock options that were originally
granted under stock option plans that were never presented to shareholders for
approval. As a result, the Company recorded a charge of $25,000 which is
recorded in compensation expense for the three months ended September 30, 1998,
and is obligated to pay certain officers of the Company an additional $207,000
over the period to January, 2000, contingent on continued employment. The
Company will record compensation expense as these amounts are earned.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
RESIDENTIAL MORTGAGE BANKING
Revenues for the nine months ended September 30, 1998 primarily
consisted of $14,760,000 in gains on sale of loans, $7,103,000 in fee income and
$5,636,000 in interest income. The $18,525,000 increase in revenues from
$8,974,000 for the nine months ended September 30, 1997 primarily related to the
additional revenues generated by PAMCO, which accounted for the increased levels
of loan originations. The increase in revenues was primarily comprised of a
$8,545,000 increase in gains on sale of loans, a $5,826,000 increase in fee
income and a $4,154,000 increase in interest income.
The increased gain on sale of loans was due primarily to the sale of
$634.3 million in loans for the nine months ended September 30, 1998 compared to
$145.2 million for the nine months ended September 30, 1997. Net gains as a
percentage of sub prime loans sold were 3.73% and 4.50% for the nine months
September 30, 1998 and September 30, 1997. Net gains as a percentage of prime
loans were 1.45% and 1.45% for the nine months ended September 30, 1998 and
September 30, 1997. The increase in fee income was primarily due to the increase
in loan production to $687.0 million for the nine months ended September 30,
1998, compared to $189.7 million for the nine months ended September 30, 1997.
PAMCO accounted for $498.3 million of the increase in loan production and $488.1
million of the increase in loan sales for the nine months ended September 30,
1998.
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<PAGE> 13
Operating expenses for the nine months ended September 30, 1998
consisted of $4,697,000 in interest expense, $13,587,000 in compensation and
benefit expense, $1,316,000 in intercompany tax expense and $5,340,000 in
general and administrative expense. Operating expenses increased by $17,449,000
from $7,491,000 for the prior period to $24,940,000 for the nine months ended
September 30, 1998. This increase consisted of $3,431,000 in interest expense,
$9,361,000 in compensation and benefit expense, $878,000 in intercompany tax
expense and $3,779,000 in general and administrative expense. In general,
expenses increased due to PAMCO, which accounted for the majority of the
increase in interest expense related to the additional warehouse line necessary
to fund the additional production. Compensation and benefits and general and
administrative expenses also increased mainly due to PAMCO.
RESIDENTIAL CONSTRUCTION LENDING
Revenues for the nine months ended September 30, 1998 consisted of
interest income of $4,311,000 and fee income of $872,000.
Operating expenses for the nine months ended September 30, 1998
consisted of $3,588,000 of interest expense, $494,000 of compensation and
benefit expense, $210,000 in bad debt expense, $166,000 in intercompany tax
expense and $403,000 of general and administrative expense.
New loan commitments for residential construction for the nine months
ended September 30, 1998 totaled $7,464,000.
COMMERCIAL LENDING
Revenues for the nine months ended September 30, 1998 primarily
consisted of interest income of $691,000. The $272,000 increase in revenues from
the nine months ended September 30, 1997 relates to the increase in loans
receivable.
Operating expenses for the nine months ended September 30, 1998
consisted of $172,000 in compensation and benefit expense, $68,000 in provision
for credit losses, $45,000 in interest expense, $64,000 in intercompany tax
expense and $226,000 in general and administrative expense. Operating expenses
from the nine months ended September 30, 1998 increased $201,000 from the nine
months ended September 30, 1997 primarily due to the increase in provision for
credit losses, debt, legal fees and interest expense due to the growth of the
loan portfolio.
New loan commitments approved for the nine months ended September 30,
1998 totaled $6,800,000 compared to $0 for the nine months ended September 30,
1997.
13
<PAGE> 14
CORPORATE AND INTERCOMPANY ELIMINATIONS
Corporate expenses for the nine months ended September 30, 1998
increased $834,000 from the nine months ended September 30, 1997 primarily as a
result of the accrual for payments to be made to officers and Directors in lieu
of stock options totaling $533,000, and increased interest expense incurred as a
result of additional debt incurred to facilitate the growth of the Company.
The Company's effective tax expense from continuing operations differs
from the amount determined by applying the statutory Federal rate of 34% to
earnings from continuing operations before income taxes. This difference results
primarily from the utilization of the Company's net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998 the Company has approximately $22,076,000 in
cash as compared to $7,275,000 at December 31, 1997. Of the $22,076,000 in cash
at September 30, 1998, $19,783,000 was restricted to usage for mortgage loan
fundings and repayments under the Company's residential warehouse line of
credit. Of the $7,275,000 in cash at December 31, 1997, $3,655,000 was
restricted.
Total assets have increased to $174,008,000 at September 30, 1998 from
$129,119,000 at December 31, 1997. The increase is principally attributable to
the growth in mortgage loan production. This growth was financed primarily by
borrowings from banks under lines of credit. The Company has a $120,000,000 line
of credit to finance residential mortgage loans held for sale that expires June
1999, and a $75,000,000 line of credit to finance construction loans that
expires December 1998.
On August 13, 1998, the Company entered into a Debt Restructure
Agreement with Stanwich Financial Services, Corp. (SFSC) in which the Company
exchanged two commercial loans (including the $1,300,000 note received from the
sale of CARS) totaling $1,600,000 for a corresponding reduction in the Company's
indebtedness to SFSC. Additionally the Company and SFSC agreed to extend the
maturity date on notes payable to SFSC totaling $6,800,000 to June 30,1999.
14
<PAGE> 15
As of September 30, 1998, notes payable to affiliates were comprised of
the following:
<TABLE>
<CAPTION>
Current
Principal
Payee Type Date Maturity Balance Rate
- ----- ---- ------------------ ------------------ ---------- ----
<S> <C> <C> <C> <C> <C>
SFSC Note June 27, 1997 June 30, 1999 $ 800,000 14%
SFSC Note September 30 ,1997 September 30, 2000 900,000 14%
SFSC Line of Credit August 28, 1997 September 30, 2000 3,500,000 16%
SFSC Note December 30, 1997 June 30, 1999 4,000,000 13%
SFSC Note March 12, 1998 June 30, 1999 900,000 13%
SFSC Note March 13, 1998 June 30, 1999 1,100,000 13%
SFSC Note September 25, 1998 December 31, 1998 500,000 13%
CPS Note December 30, 1997 December 31, 1998 3,500,000 13%
CPS Note June 26, 1998 December 31, 1998 1,594,000 14%
-----------
$16,794,000
===========
</TABLE>
In order to maintain its net operating loss carryforwards the Company is
limited under Section 382 of the Internal Revenue Code of 1986 as to issuance of
new common shares in order to raise additional capital. The Company must rely on
additional borrowings to grow its operations. NAB has relied on SFSC, a company
that is 85% owned by Charles E. Bradley, Sr. and Charles E. Bradley, Jr.,
directors of the Company, and CPS to provide funds to support the additional
growth of the Company. Management believes that the Company can obtain
extensions on its notes payable to affiliates as necessary to support its
ongoing operations.
Approximately 26% of the Company's revenues for the nine month period
ending on September 30, 1998 result from sales of sub-prime mortgage loans. Over
the past 60 days conditions affecting cash prices for these loans in the
sub-prime mortgage market have significantly deteriorated. The profitability of
the Company is highly dependent on its sub-prime operation. It is possible that
cost savings instituted by the Company in response to declines in sales prices
will not completely offset the revenue shortfall under these conditions. As a
result, the Company expects future operating cash flows to be less than
comparable prior periods.
Management considers its relationships with its lenders to be good and
currently is in compliance with all of the covenants contained in its various
debt agreements. There can be no assurance that the relationships with its
lenders will continue although there is currently no reason to believe that such
prices will not be received or its relationships with its lenders will change.
OTHER MATTERS
Securitization
The Company completed its first mortgage loan securitization on June 29,
1998. The company retained the servicing responsibilities for the loans. The
Company recorded a gain at the time of sale of $1,908,000, or 3.74% of the
principal balance of the loans sold, which is the
15
<PAGE> 16
excess of the cash received and assets retained by the Company over the relative
fair value of the loans sold, less transaction costs. The Company receives
corresponding cash flows represented by the over-collateralization account and
the NIR, which, when combined, are termed "residuals". The assumptions used in
the calculation of the gain on the sale of the loans and the valuation of the
residual interest in the securitization of mortgage loans were as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
----------- ---------------
<S> <C> <C>
Principal $27,667,000 $23,311,000
27,667,000
Cumulative losses 5.4% 5.5%
Discount rate 12% 12%
Overcollateralization account Ramp up to 2.75% Ramp up to 4.00%
Weighted average life of pool 3.94 years 3.16 years
</TABLE>
The Company purchased a mortgage pool insurance policy that will cover
all losses up to 5% of the initial pool balances. The fee is 0.52% annually of
the unpaid principal of the loans. The net loss assumption used in calculating
the gain on sale of loans taking the policy into effect was 0.40% for the fixed
rate loans and 0.50% for the adjustable rate loans.
In addition, to facilitate the sale, the Company provided a credit
enhancement for the benefit of the investors in the form of additional
collateral held by the trust. The over-collateralization account was required by
the servicing agreement to be maintained at the levels shown above.
The residual interests in the securitization of loans represent the
present value of the difference between the contractual interest rates on the
loans and the rate paid to the buyer or bondholder using the assumptions
discussed above. The residual interest is accounted for as a trading security
and as such is recorded at its estimated fair value. The Company is not aware of
an active market for the purchase or sale of the residual interests.
Accordingly, the Company determined the estimated fair value of the residual
interests by discounting the expected cash flows released from the trust (the
cash out method) using a discount rate which the Company believes is
commensurate with the risks involved.
Upon reaching the required over-collateralization levels, the Company is
entitled to receive the cash flows that represent collections on the mortgage
loans in excess of the amounts required to be paid to the bondholders. If the
actual performance of the mortgage loans differs significantly from the original
assumed performance, the cash the Company is entitled to receive will vary from
the NIR calculated using the assumptions above. This may have a significant
impact on the Company's results of operations, financial condition and
liquidity.
YEAR 2000 COMPLIANCE
In order to be year 2000 compliant, the Company has addressed and will
continue to address the year 2000 issue as it relates to the Company's systems
and its business operations. To be year 2000 compliant means that (1)
significant computer systems in use by the Company demonstrate performance and
functionality that is not materially affected by processing dates on or after
January 1, 2000, (2) customers and collateral included in the Company's
portfolio of business are year 2000 compliant, and (3) vendors of services
critical to the Company's business processes are year 2000 compliant.
16
<PAGE> 17
The Company is currently taking the following actions to assess year
2000 compliance:
(1) Identification of each computer area that could be materially
affected and the proper action necessary to eliminate any material
adverse effects caused by the turn of the century.
(2) Testing the systems and switching to year 2000 compliance where
necessary.
(3) Making inquiries of key vendors and customers regarding year 2000
compliance.
The costs incurred to bring the Company's internal systems into year
2000 compliance and the costs of equipment acquisitions are not expected to have
a material impact on the Company's financial position. Based on progress to date
the Company expects all of its systems to be year 2000 compliant by the middle
of 1999.
The Company is communicating with customers, vendors, and others to
determine if their applications are year 2000 compliant and assess the potential
impact on the Company. The costs that may be incurred as a result of the failure
of any third parties to be year 2000 compliant cannot be determined at this
time. The Company cannot assure that all systems of other companies and
government agencies which reliance is placed upon will be year 2000 compliant on
a timely basis, regardless of the assurances that the company receives from
them. The failure of significant customers and vendors to be year 2000 compliant
could possibly have a material adverse effect on the Company's results of
operations and financial condition. The responses from the Company's major
vendors indicate that they are all expected to be year 2000 compliant within the
next twelve months
The Company has not currently established a year 2000 contingency plan,
but will consider doing so as part of the year 2000 compliance plan if
considered necessary by management.
SUBSEQUENT EVENTS
The Company is currently negotiating to sell approximately $28,000,000
of residential construction loans to two financial institutions. No gain or loss
is anticipated as a result of the transactions. The Company intends to reduce
its borrowings with the proceeds from the sales.
PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Litigation Securities Reform Act of 1995. The factors that could cause
actual results to differ materiality include competition, interest rates,
availability of additional or alternative financing and other risks described
elsewhere in the Company's filings with the Securities and Exchange Commission.
17
<PAGE> 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) EX-10.24 - $900,000 Promissory Note dated March 12,
1998 issued by the Registrant to SFSC.
(2) EX-10.25 - $1,100,000 Promissory Note dated March 13,
1998 issued by the Registrant to SFSC.
(3) EX-10.26 - $3,000,000 Promissory Note dated June 25,
1998 issued by the Registrant to CPS.
(4) EX-10.27 - $500,000 Promissory Note dated September
25, 1998 issued by the Registrant to SFSC.
(5) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 16, 1998
By: /s/ MICHAEL W. CATON
-------------------------------------
Michael W. Caton
President and Chief Operating Officer
By: /s/ ALAN FERREE
-------------------------------------
Alan Ferree
Senior Vice President and Chief
Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.24 $900,000 Promissory Note dated March 12, 1998 issued by the
Registrant to SFSC.
10.25 $1,100,000 Promissory Note dated March 13, 1998 issued by the
Registrant to SFSC.
10.26 $3,000,000 Promissory Note dated June 25, 1998 issued by the
Registrant to CPS.
10.27 $500,000 Promissory Note dated September 25, 1998 issued by the
Registrant to SFSC.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.24
PROMISSORY NOTE
$900,000 March 12, 1998
For value RECEIVED, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of STANWICH FINANCIAL SERVICES CORP.
(the "HOLDER"), a Rhode Island corporation, the principal amount of Nine Hundred
Thousand Dollars ($900,000) in accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable on
June 30, 1999.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
thirteen percent (13%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on September 30, 1998; December 31, 1998; March 31, 1999; and June 30,
1999. In addition, if the principal of this Note is paid on a date other than
those specified in the preceding sentence, interest shall also be payable on
such other date of payment of principal.
3. Prepayments. The Maker may prepay this Note in whole or, from time to
time, in part without penalty or premium. All such prepayments shall be applied
against the required installments of principal in order of maturity thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that:
(i) if any installment of principal or interest under this Note
shall not be paid when it is due and payable and such failure to pay is
not cured within fifteen (15) days after notice from Holder of such
failure to pay; or
(ii) if Maker shall suffer or permit the filing by or against the
Maker of any petition for adjudication, arrangement, reorganization or
the like under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property,
then, upon the happening of any such event (specified in items (i) and (ii),
above), the entire indebtedness and accrued interest thereon due under this Note
shall, at the option of the Holder, accelerate and become immediately due and
payable without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
<PAGE> 2
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Connecticut, from which the loan evidenced
by this Note was made and in which this Note has been accepted.
9. Successors and Assigns. All the covenants, stipulations, promises and
agreements contained in this Note by or on behalf of the Maker or the Holder and
all rights of the Maker or the Holder contained in this Note shall bind or inure
to their respective successors, assigns, heirs and personal representatives,
whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
2
<PAGE> 3
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker:
NAB Asset Corporation
2 Ada
Irvine, CA 92618
(b) If to Holder:
Stanwich Financial Services Corp.
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note evidences the following indebtedness of the
Maker to the Holder: a loan of $900,000 made by the Holder to the Maker on the
date hereof, which loan was funded, at Maker's direction, by wire transfer of
funds to the account of Consumer Portfolio Services, Inc. ("CPS") to reduce the
Maker's indebtedness under a $5,500,000 Promissory Note dated December 30, 1997
issued by the Maker to CPS.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly
authorized officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By: /s/ MICHAEL W. CATON
---------------------------------------
Name: Michael W. Caton
Title: President
3
<PAGE> 1
EXHIBIT 10.25
PROMISSORY NOTE
$1,100,000 March 13, 1998
For value RECEIVED, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of STANWICH FINANCIAL SERVICES CORP.
(the "HOLDER"), a Rhode Island corporation, the principal amount of One Million
One Hundred Thousand Dollars ($1,100,000) in accordance with the terms of this
Note.
1. Payment of Principal. The principal of this Note shall be payable on
June 30, 1999.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
thirteen percent (13%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on September 30, 1998; December 31, 1998; March 31, 1999; and June 30,
1999. In addition, if the principal of this Note is paid on a date other than
those specified in the preceding sentence, interest shall also be payable on
such other date of payment of principal.
3. Prepayments. The Maker may prepay this Note in whole or, from time to
time, in part without penalty or premium. All such prepayments shall be applied
against the required installments of principal in order of maturity thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that:
(i) if any installment of principal or interest under this Note
shall not be paid when it is due and payable and such failure to pay is
not cured within fifteen (15) days after notice from Holder of such
failure to pay; or
(ii) if Maker shall suffer or permit the filing by or against the
Maker of any petition for adjudication, arrangement, reorganization or
the like under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property,
then, upon the happening of any such event (specified in items (i) and (ii),
above), the entire indebtedness and accrued interest thereon due under this Note
shall, at the option of the Holder, accelerate and become immediately due and
payable without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
<PAGE> 2
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Connecticut, from which the loan evidenced
by this Note was made and in which this Note has been accepted.
9. Successors and Assigns. All the covenants, stipulations, promises and
agreements contained in this Note by or on behalf of the Maker or the Holder and
all rights of the Maker or the Holder contained in this Note shall bind or inure
to their respective successors, assigns, heirs and personal representatives,
whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
2
<PAGE> 3
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker:
NAB Asset Corporation
2 Ada
Irvine, CA 92618
(b) If to Holder:
Stanwich Financial Services Corp.
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note evidences the following indebtedness of the
Maker to the Holder: a loan of $1,100,000 made by the Holder to the Maker on the
date hereof, which loan was funded, at Maker's direction, by wire transfer of
funds to the account of Consumer Portfolio Services, Inc. ("CPS") to reduce the
Maker's indebtedness under a $5,500,000 Promissory Note dated December 30, 1997
issued by the Maker to CPS.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By: /s/ MICHAEL W. CATON
--------------------------------
Name: Michael W. Caton
Title: President
3
<PAGE> 1
EXHIBIT 10.26
PROMISSORY NOTE
$3,000,000 June 25, 1998
For value received, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of CONSUMER PORTFOLIO SERVICES, INC.
(the "HOLDER"), a California corporation, the principal amount of Three Million
Dollars ($3,000,000) in accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
full on September 30, 1998.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on September 30, 1998.
3. Prepayments. The Maker may prepay this Note in whole or, from time to
time, in part without penalty or premium.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that, if Maker shall suffer or
permit the filing by or against the Maker of any petition for adjudication,
arrangement, reorganization or the like under any bankruptcy or insolvency law
(and, in the case of an involuntary proceeding the same is not dismissed within
30 days), make an assignment for the benefit of creditors or suffer or permit
the appointment of a receiver for any part of Maker's property, then, upon the
happening of any such event, the entire indebtedness and accrued interest
thereon due under this Note shall, at the option of the Holder, accelerate and
become immediately due and payable without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
<PAGE> 2
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Texas.
9. Successors and Assigns. All the covenants, stipulations, promises and
agreements contained in this Note by or on behalf of the Maker or the Holder and
all rights of the Maker or the Holder contained in this Note shall bind or inure
to their respective successors, assigns, heirs and personal representatives,
whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker:
NAB Asset Corporation
2 Ada
Irvine, CA 92618
(b) If to Holder:
Consumer Portfolio Services, Inc.
2 Ada
Irvine, CA 92618
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
2
<PAGE> 3
13. Consideration. This Note evidences the following indebtedness of the
Maker to the Holder: The obligation of the Maker to repay a $3,000,000 loan to
it made by the Holder on the date hereof.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By: /s/ ALAN FERREE
-----------------------------------
Name: Alan Ferree
Title: Senior Vice President
3
<PAGE> 1
EXHIBIT 10.27
PROMISSORY NOTE
$500,000 September 25, 1998
For value received, NAB ASSET CORPORATION (the "MAKER"), a Texas
corporation, promises to pay to the order of STANWICH FINANCIAL SERVICES CORP.
(the "HOLDER"), a Rhode Island corporation, the principal amount of Five Hundred
Thousand Dollars ($500,000) in accordance with the terms of this Note.
1. Payment of Principal. The principal of this Note shall be payable in
full on December 31, 1998.
2. Interest. The unpaid principal of this Note outstanding from time to
time shall bear interest, beginning as of the date hereof, at an annual rate of
fourteen percent (14%), computed on the basis of a 365-day year and continuing
until the principal hereof is repaid in full. Interest shall be payable in
arrears on December 31, 1998.
3. Prepayments. The Maker may prepay this Note in whole or, from time to
time, in part without penalty or premium. All such prepayments shall be applied
against the required installments of principal in order of maturity thereof.
4. Place of Payments. All payments of principal and interest under this
Note shall be made to the order of Holder at the address specified in numbered
paragraph 12 hereof.
5. Default; Acceleration. Maker agrees that:
(i) if any installment of principal or interest under this Note
shall not be paid when it is due and payable and such failure to pay is
not cured within fifteen (15) days after notice from Holder of such
failure to pay; or
(ii) if Maker shall suffer or permit the filing by or against the
Maker of any petition for adjudication, arrangement, reorganization or
the like under any bankruptcy or insolvency law (and, in the case of an
involuntary proceeding the same is not dismissed within 30 days), make
an assignment for the benefit of creditors or suffer or permit the
appointment of a receiver for any part of Maker's property,
then, upon the happening of any such event (specified in items (i) and (ii),
above), the entire indebtedness and accrued interest thereon due under this Note
shall, at the option of the Holder, accelerate and become immediately due and
payable without notice.
6. Cost of Collection. The Maker shall reimburse the Holder for all
reasonable costs and expenses, including reasonable attorneys' fees, which may
be incurred by the Holder in collecting any amounts due hereunder.
<PAGE> 2
7. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
Maker of evidence reasonably satisfactory to the Maker of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Maker, and upon reimbursement to the Maker of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Maker will make and deliver a new note of like tenor in lieu
of this Note. Any note made and delivered in accordance with the provision of
this paragraph shall be dated as of the date to which interest has been paid on
this Note, or if no interest has theretofore been paid on this Note, then dated
the date hereof.
8. Governing Law. This Note shall be construed in accordance with and
governed by the laws of the State of Connecticut, without regard to principles
of conflicts of laws.
9. Successors and Assigns. All the covenants, stipulations, promises and
agreements contained in this Note by or on behalf of the Maker or the Holder and
all rights of the Maker or the Holder contained in this Note shall bind or inure
to their respective successors, assigns, heirs and personal representatives,
whether so expressed or not.
10. Cumulative Remedies. No course of dealing, or any delay or omission
of the Holder to exercise any right or power hereunder (including, without
limitation, any right or power arising from any default or failure of
performance of the Maker), shall exhaust, impair, waive or otherwise prejudice
any such right or power or prevent its exercise. Every right and remedy given to
the Holder hereunder, by any and all agreements executed and delivered in
connection herewith or by law may be exercised from time to time as often as the
Holder may deem expedient. No waiver by the Holder of any such default, whether
such waiver be full or partial, shall extend to or be taken to affect any
subsequent default, or to impair the rights resulting therefrom except as may be
otherwise expressly provided herein. No remedy hereunder is intended to be
exclusive of any other remedy but each and every remedy shall be cumulative and
in addition to any and every other remedy given hereunder or otherwise existing.
11. Headings. The headings of the paragraphs of this Note are inserted
for convenience only and shall not be deemed to constitute a part hereof.
2
<PAGE> 3
12. Notices. All notices, requests, demands and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by first class, registered or certified mail, return
receipt requested, postage and registry fees prepaid, and addressed as follows:
(a) If to Maker:
NAB Asset Corporation
23361 Madero
Mission Viejo, CA 92691
(b) If to Holder:
Stanwich Financial Services Corp.
c/o Stanwich Partners, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Any of the foregoing parties by notice in writing mailed to the other parties
may change the name and address to which notices, requests, demands and other
communications to it or him shall be mailed.
13. Consideration. This Note evidences the following indebtedness of the
Maker to the Holder: a loan of $500,000 made by the Holder to the Maker on the
date hereof. At the Maker's direction, the Holder funded the loan by causing TLC
Company ("TLC") to pay Consumer Portfolio Services, Inc., ("CPS") $500,000 on
the date hereof. Such payment constituted (1) a loan by TLC to the Holder, (2) a
loan by the Holder to the Maker and (3) a payment by the Maker of certain of its
obligations to CPS.
IN WITNESS WHEREOF, the Maker has signed this Note by a duly authorized
officer and dated it as of the day and year first above written.
NAB ASSET CORPORATION
By: /s/ MICHAEL W. CATON
----------------------------------
Name: Michael W. Caton
Title: President
3
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JUL-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 22,076 7,275
<SECURITIES> 0 0
<RECEIVABLES> 145,968 119,253
<ALLOWANCES> 598 28
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,908 1,425
<DEPRECIATION> 665 274
<TOTAL-ASSETS> 174,008 129,119
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 8,690 7,330
<TOTAL-LIABILITY-AND-EQUITY> 174,008 129,119
<SALES> 5,651 14,760
<TOTAL-REVENUES> 12,663 33,409
<CGS> 0 0
<TOTAL-COSTS> 8,227 22,132
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 226 423
<INTEREST-EXPENSE> 3,352 9,328
<INCOME-PRETAX> 858 1,526
<INCOME-TAX> 166 166
<INCOME-CONTINUING> 692 1,360
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 692 1,360
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<EPS-DILUTED> 0.14 0.27
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