<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19391
NAB ASSET CORPORATION
(Exact name of registrant as specified in its charter)
Texas 76-0332056
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
23361 Madero, Suite 200 92679
Mission Viejo, CA (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (949) 465-0244
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 1999 was $5,410,000 based upon the closing price as
of such date.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Title of Class Outstanding at March 22, 1999
-------------- -----------------------------
<S> <C>
Common Stock................... 5,091,300
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 10, 11, 12 and 13, will be
included in a definitive proxy statement to be filed on or before April 30, 1999
pursuant to Regulation 14A and is incorporated herein by reference.
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PART 1
ITEM 1. BUSINESS
THE COMPANY
NAB Asset Corporation, (the "Company" or "NAB") is a financial services
company primarily engaged in the residential lending business. The Company
commenced operations in July 1991 following its acquisition and assumption of
substantially all the assets and liabilities of National Asset Bank (a bank in
liquidation) (the "Bank"). The Bank was formed in 1988 in connection with the
merger of Allied Bancshares, Inc. ("Allied") with a subsidiary of First
Interstate Bancorp ("First Interstate") for the purpose of liquidating various
non-performing loan and real estate assets held by Allied and its subsidiaries
for the benefit of the prior Allied stockholders. Until 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 accounts of
others. The Company's business activities were limited to the ownership,
collection and sale of the assets acquired by the Company from the Bank, the
investment in and management of four privately held limited partnerships formed
for the purpose of acquiring non-performing and other troubled loans.
On June 5, 1996, pursuant to a 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.
Simultaneously with the merger, the Company amended its Articles of
Incorporation and By-laws to remove the previous operating restrictions on NAB
and, in order to preserve the Company's large net operating loss ("NOL") for tax
purposes, to restrict the acquisition of 5% or more of the outstanding shares of
New Common Stock of the Company so as to prevent the occurrence of an ownership
change under Section 382 of the federal income tax laws. Section 382 of the
Internal Revenue Code of 1986 (Section 382), as amended, provides in general
that if a corporation undergoes an ownership change, the amount of taxable
income that the corporation may offset after the date of such ownership change
with NOLs and certain built-in losses existing at the date of such ownership
change will be subject to an annual limitation. The Company's NOL's could become
subject to certain limitations on utilization in the event the Company undergoes
an ownership change within the meaning of Section 382.
On July 8, 1996 the Company acquired 80% of CARS USA, Inc. ("CARS"),
engaged in retail automobile sales, for a purchase price of $100,000.
Additionally, the Company invested $400,000 in preferred stock of CARS and made
a $1,000,000 subordinated loan to CARS. At the time of acquisition, Charles E.
Bradley, Jr., a director of the Company owned 50% of the outstanding shares of
CARS.
In June 1997, NAB sold its interest in CARS. The acquirer was a newly
formed company owned by Charles E. Bradley, Sr., the chief executive officer and
chairman of the board of NAB and Charles E. Bradley, Jr., a director of NAB. The
purchase price consisted of a $200,000 cash payment and a note for $1,300,000.
On July 10, 1996 the Company acquired from CPS 84% of the outstanding
common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase price
of $300,000. The Company also acquired
<PAGE> 3
all of the outstanding shares of MPS preferred stock for $2.25 million, through
conversion of debt to equity, and contributed $249,000 to the additional paid-in
capital of MPS.
MPS, which was organized in October 1995 and began business operations
in April 1996, is a Dallas, Texas based mortgage lender whose customers are
typically home purchasers and owners who cannot access traditional lending
institutions for financing because of job stability, credit problems or type of
property (sub-prime).
In January 1997, the Company, through a newly formed 84% owned
subsidiary NAFCO, Inc., ("NAFCO") acquired a portfolio of loans of which the
debtors are the rent-to-own and rental purchase businesses. The principal
balance of the loans totaled $1,966,000 and was purchased for $1,292,000. The
discount of $674,000 is being amortized in proportion to and over the life of
the portfolio.
On August 31, 1997, MPS acquired the fixed assets and employed the
personnel of the single-family mortgage lending division of Pacific Southwest
Bank ("PSB"); a Dallas based savings and loan. A premium of $200,000 was paid
for the operation. Additionally, amounts of up to $800,000 may be payable over
the two year period to August 31, 1999 depending on mortgage loan origination
volumes. In 1998, the Company incurred additional purchase premiums of $195,000
based on production levels. The division, Pacific American Mortgage Company
("PAMCO") is primarily engaged in mortgage lending through eleven retail
branches in seven states. Substantially all PAMCO mortgage loan originations are
conventional conforming, non-conforming and government insured mortgages
(prime).
On December 30, 1997 the Company, through a newly formed 86% owned
subsidiary, Construction Portfolio Funding, Inc. ("CPFI") acquired approximately
$53,000,000 in single family construction loans from a Dallas based savings and
loan. A premium of $541,000 was recorded in connection with the acquisition
acquired. Additionally on December 30, 1997, CPFI acquired $2,000,000 in
residential lot loans from NAFCO that were acquired from the savings and loan in
November 1997.
THE BUSINESS
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.
MORTGAGE BANKING
Through MPS, the Company originates, acquires, warehouses and sells
residential mortgage loans. MPS originates both conventional and government
insured mortgages (prime originations) and originates non-conforming residential
mortgage loans that are not salable to the government-sponsored entities or the
government agencies. These loans are commonly referred to as sub-prime loans.
MPS also has a division that services construction loans that are made
to consumers. These loans are originated through the PAMCO retail branches. The
construction loans are originated in conjunction with the customer's permanent
mortgage (one-time closings). Originations of these loans in 1998 totaled $24
million. This amount represents the total commitment of funds not necessarily
the ultimate amount disbursed. Amounts outstanding at December 31, 1998 and 1997
totaled $9,465,000 and $13,091,000, respectively. These amounts are included in
construction loans in the consolidated balance sheets.
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Origination Strategies
Retail Originations
PAMCO originates loans through eleven branches in seven states
using account executives that solicit loans through real estate agents,
homebuilders and referrals from previous customers. This branch operation
(PAMCO) was acquired August 31, 1997. PAMCO has 64 account executives soliciting
loans in this manner. PAMCO retail originations totaled $549 million in 1998 and
$157 million for the four months in 1997 that PAMCO operated as a division of
MPS. Retail prime originations totaled $534 million in 1998 and $151 million for
the four months ended December 31, 1997. Retail sub-prime originations totaled
$15 million in 1998 and $6 million for the four months ended December 31, 1997.
In late 1998, MPS began a direct to consumer solicitation program
through the internet. Preliminary applications are completed on-line by
prospective customers. The applications are then processed underwritten and
closed by MPS personnel. Total loan closings for 1998 were $2.4 million and
include both prime and sub-prime loans.
Wholesale Originations
MPS originates approximately 70% of its sub-prime mortgage loans using
a network of approved independent mortgage brokers. PAMCO also originates
approximately 10% of its mortgages in the same manner through a branch in
northern California. All loans are underwritten and closed centrally. A fee is
normally paid to the mortgage broker of up to 2% of the loan amount for
sub-prime loans and 3% of the loan amount for prime loans. Wholesale sub-prime
originations totaled $235 million in 1998 and $145 million in 1997. Wholesale
prime originations totaled $63 million in 1998 and $11 million for the four
months ended December 31, 1997.
Correspondent Originations
MPS originates approximately 30% of its sub-prime loans by purchasing
closed loans from other mortgage bankers. These loans are underwritten by MPS
prior to purchase. Correspondent sub-prime production was $83 million in 1998
and $60 million in 1997.
Underwriting
Underwriting guidelines with respect to prime mortgage loans are based
upon the guidelines set forth by the Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") for conventional
loans. The guidelines of the Federal Housing Administration ("FHA") and Veterans
Administration ("VA") are utilized for government insured or guaranteed
mortgages. Prime mortgage loans that would be conforming if not for the size of
the loan are underwritten to specific mortgage investor guidelines and are
generally consistent with FNMA or FHLMC guidelines. In most cases PAMCO has been
approved to underwrite the mortgage loan on behalf of the investor. MPS is also
an approved FHLMC seller/servicer.
Underwriting guidelines for sub-prime mortgages are developed to
generally conform to the guidelines as set forth by mortgage loan investors that
have approved MPS as a seller of mortgage loans. MPS utilizes a grid that, based
upon a borrower's credit history and current financial situation (including debt
to income ratios, employment and cash on hand), assigns a grade, A through D, to
that borrower. The grading of the loan determines the rate charged to the
borrower and the maximum loan based on the appraised value of the collateral.
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Loan Sales
Best Efforts Sales
The Company's originations of conventional and government insured or
guaranteed loans are sold to investors on a loan by loan basis. When the
customer wishes to lock in an interest rate, PAMCO will grant the rate to the
borrower and in turn lock in a price on or about the same date with an investor.
PAMCO represents to the investor that if the loan is closed within the time
allotted by the investor PAMCO will deliver that loan to that investor. If the
loan does not close within the allotted time period PAMCO is under no further
obligation to the investor. If the loan closes and upon receipt of the
appropriate executed legal documentation PAMCO will deliver the legal documents
and credit file to the investor. Upon satisfactory completion of the investor's
review of the documents the investor purchases the loan at the agreed upon
price. All of PAMCO's loans are sold on a servicing released basis, meaning a
portion of the price paid to PAMCO represents the value of the servicing rights
that PAMCO has released to the investor.
Bulk Sales
MPS has historically sold its sub-prime mortgage production on a
servicing released basis to investors in pools based on a bidding process.
Monthly, loans would be aggregated and summarized information regarding the
loans would be distributed to potential bidders. A winning bidder would be
selected who would then review the files and purchase the acceptable loans. In
late 1998, a severe liquidity strain in the sub-prime mortgage industry caused
many investors to exit the market for sub-prime mortgage pools. As a result MPS
is not currently selling a significant amount of loans on a bid basis.
Forward Commitments
MPS entered into a commitment with an investor in the fourth quarter of
1998 to sell up to $50 million in sub-prime mortgage loans at an agreed to price
assuming certain criteria were met. The commitment also contained formulas that
would allow the investor to pay less than the maximum price if those criteria
were not met. The commitment expired in December 1998 after MPS had delivered
approximately $49.6 million in mortgage loans. MPS has entered into a new
commitment with another investor totaling $100 million effective January 1,
1999. This commitment expires June 30, 1999. It is anticipated that in June upon
expiration of the commitment depending on current market conditions MPS will
either enter in to a new commitment or resume its bulk sales strategy.
Securitization
In June 1998 MPS completed its first securitization of approximately
$51,000,000 of sub-prime loans. In a securitization, the owner of loans sells
loans to a trust which in turn issues mortgage loan asset backed securities to
investors. The cash received is then distributed to the owner. The owner also
receives an interest in the excess cash flow generated from the sold loans which
is called a residual interest. The holder of the security then receives the
stated interest on the security and the principal repayments on the underlying
loans. The security that MPS issued was insured by a monoline insurance company
and the underlying mortgages were insured, as to credit losses, up to 5% of the
original principal balance of the loans sold to the trust under a pool policy
issued by a mortgage insurance company. Additionally a portion of the excess
cash flows accruing to MPS monthly are held in trust until certain minimum
levels of cash reserves are achieved.
MPS recorded a gain on sale of loans equal to the present value of the
cash flows to be received over the life of the securities. This gain was
calculated using prepayment and loss assumptions that effect the future cash
flows to be received. MPS is also the servicer of the loans and as a result
receives a portion of the monthly interest paid by the borrowers as a fee.
Hedging Activities
All of the Company's prime mortgage production is sold on a best
efforts basis as described above. The Company incurs no interest rate risk in
its sales strategy and therefore has no hedging activities.
4
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MPS's sub-prime mortgage loans are generally sold within thirty days of
origination and based upon its history, short term fluctuations in interest
rates have had little impact on the prices that have been received for its
mortgage loan production. Additionally, the Company has determined that the cost
of hedging its sub-prime production outweighs any benefit that would be derived
as a result.
Competition and Other Risks
MPS faces competition from numerous other mortgage bankers, banks,
savings and loans and finance companies. Many of these competitors are larger
and have greater access to capital and other financial resources than MPS.
MPS's originations have grown substantially since inception and the
company plans to continue its growth strategy. There can be no assurance that
MPS will be able to successfully expand and operate profitably.
As MPS continues to increase its origination capabilities it will be
required to expand its existing borrowing arrangements with financial
institutions or obtain new lines of credit. There can be no assurance that
additional financing can be obtained or that it can be obtained at favorable
terms.
In connection with financing MPS's mortgage loans receivable, most
financial institutions will not finance 100% of the loan amount. MPS will
generally be required to contribute, in addition to the normal costs of
operating the origination function, two percent of the principal amount of the
loan. MPS must generate sufficient cash flow from sales of mortgage loans to
fund the negative cash flow associated with the origination of its loans.
The contractual arrangements associated with the sale of sub-prime
loans require, for a specified period of time, generally one to two years,
indemnification for loans that prepay or default. Additionally MPS represents
and warrants to the investor that at the date of sale no material changes in the
borrowers condition since the origination date has occurred. A significant
increase in prepayments or defaults related to the loans sold would have a
significant negative impact on the liquidity and financial condition of MPS.
The business of MPS could be negatively affected if there is a
downturn in the economy in the geographic areas served by MPS, which results in
a decline for consumer credit or in real estate values. If originations decline,
sales of mortgage loans, the main source of MPS's revenue will also decline.
Declining real estate values inhibit the borrower's ability to refinance and
obtain cash based on the value of his/her property.
Fluctuations in interest rates may adversely affect MPS's loan
production. Substantial increases in long term interest rates generally result
in a decline in mortgage originations. A large decline in interest rates may
result in unusually large prepayments which, under the terms of the contracts
governing MPS's sales of mortgage loans, could require MPS to reimburse the
purchasers of such loans for a portion of the servicing release premium paid by
them for such loans. Approximately 66% of MPS's loan production is at a fixed
rate of interest. If short-term interest rates rise, MPS's borrowing cost would
increase, resulting in a decline in the spread (the difference between interest
received on loans and paid on borrowings) MPS earns. Additionally, prices paid
for the Company's loans may be negatively impacted. An increase in short-term
interest rates would also negatively impact the value of MPS's residual interest
in securitization as a portion of the payments made to bondholders adjust based
upon movements in the LIBOR.
Approximately 37% of the Company's consolidated revenues for 1998
result from the sub-prime mortgage operation. Over the past several months,
conditions affecting cash prices for these loans in the sub-prime mortgage
market have significantly deteriorated. The future profitability of the Company
is highly dependent on its sub-prime operation. It is possible that cost savings
and price increases to borrowers instituted by MPS in response to declines in
sales prices will not offset the revenue shortfall under these conditions. As a
result operating cash flows may be negatively impacted in the future as a
result.
5
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During 1998, approximately $5,619,000 or 13% of the Company's revenues
were as a result of loan sales to one customer.
MPS's business is subject to extensive regulation, supervision and
licensing by federal, state and local government authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. The Company's consumer
lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X, the Fair Housing Act, the
Home Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as
well as other federal and state statutes and regulations affecting the Company's
activities. The Company is also subject to the rules and regulations of and
examinations by the Department of Housing and Urban Development ("HUD") and
state regulatory authorities with respect to originating, processing,
underwriting and selling loans. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on loan applicants, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, demands for indemnification or mortgage
loan repurchases, certain rights of rescission for mortgage loans, claims by
mortgage borrowers and administrative enforcement actions.
CONSTRUCTION LENDING
CPFI is engaged in the business of providing financing and servicing to
residential homebuilders for the construction of single family residences and,
to a lesser extent, acquisition and development loans, lot loans and model home
loans to those homebuilders. As a part of the acquisition of loans in 1997 CPFI
acquired construction and lot loans to individuals. CPFI discontinued lending to
individuals in 1998. CPFI's construction loans held for investment totaled
$29,416,000 and $55,711,000 at December 31, 1998 and 1997, respectively. CPFI
originated $149,429,000 in new commitments in 1998.
Underwriting
CPFI underwrites each individual homebuilder and determines a guidance
limit under which each homebuilder is limited as to the total commitment from
CPFI for individual construction loans, acquisition and development loans, lot
loans and model home loans. The homebuilder is also generally restricted as to
the amount of speculative or unsold homes that may be financed by CPFI.
Depending on the size of the guidance limit a senior officer and/or a credit
committee consisting of senior officers and members of the board of directors of
CPFI must approve the guidance limits. The specific terms of the guidance
limits, such as interest rates and terms, are determined by the homebuilder's
historical and projected sales volume, historical financial performance,
financial strength, inventory turnover and other qualitative information. At
December 31, 1998 the guidance limits range from $500,000 to $10,000,000.
Substantially all guidance lines provide for a variable interest rate based upon
the prime rate.
Geographic Distribution
CPFI currently finances construction loans in eight states, Texas,
Arizona, California, Colorado, Nevada, New Mexico, Oklahoma and Georgia. There
are 27 homebuilder customers in those states.
Competition and Other Risks
The competition CPFI faces comes from a number of different financial
institutions, generally local banks and savings and loans and, to a lesser
extent, large publicly held banks, savings and loans, consumer finance companies
and real estate investment trusts. Many of these competitors have a lower cost
of funds, greater financial resources and access to capital and a more developed
and sophisticated operational infrastructure. CPFI intends to compete with these
financial institutions by emphasizing
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customer service and providing funds to smaller builders that may not attract
the larger financial institutions.
CPFI assumes credit risk as a result of its investment in construction
loans. The company seeks to mitigate its risk by instituting strict operating
controls and underwriting guidelines. CPFI also limits its funding of
speculative construction (spec housing), acquisition and development loans and
lot loans depending on the homebuilders financial strength. Also, CPFI evaluates
and monitors its homebuilding customers and establishes allowances for loan
losses based on trends in the portfolio and economic conditions within the
markets in which it lends.
The earnings of CPFI are dependent on the spread between the interest
it receives on the loan portfolio and what it pays for the financing of the
portfolio. CPFI intends to grow the portfolio and the ability to do so is
dependent upon the expansion of its credit facilities at a reasonable cost.
Additionally, CPFI is required to fund a portion of each loan with its own
available cash. CPFI must generate sufficient cash flow from its operations in
order to fund growth in the portfolio.
The business of CPFI could be negatively impacted by a downturn in the
local economies of its customers. Typically slowdowns in the economy result in
falling demand for housing which would inhibit the portfolio growth and subject
CPFI to additional credit risk. An increase in long-term interest rates also
reduces demand, as mortgages become more expensive for the homebuyer. A large
increase in short-term interest rates will increase the cost of building homes
which, the builder, may or may not be able to pass through to the homebuyers. If
interest costs cannot be passed through to the homebuyers, the homebuilder's
profit margins suffer and CPFI incurs additional credit risk.
Most of CPFI's customers are small homebuilders with less capital than
many of their competitors. As a result, the CPFI customer has less pricing
flexibility and financial capability to compete with the large homebuilders. If
larger more financially secure homebuilders enter the local market of a CPFI
customer, CPFI could be subjected to additional credit risk.
COMMERCIAL LENDING
NAFCO lends to companies in the rent-to-own and rental purchase
business. The loans NAFCO makes are for the purchase of inventory (such as
furniture and electronics) that is in turn rented on a short-term basis to
individuals and corporations.
The Company is currently reviewing alternatives for NAFCO that may
include a sale of the portfolio to CPFI or a third party. At December 31, 1998
the outstanding principal balance of the portfolio was $6,099,000 and
commitments to lend totaled $9,382,000.
EMPLOYEES
At December 31, 1998 the Company and its subsidiaries employed 322
persons. Of that total MPS employed 146 persons, PAMCO employed 165 persons,
CPFI employed 5 persons, NAFCO employed 3 persons and NAB employed 3 persons at
the corporate level.
ITEM 2. PROPERTIES
The Company's executive offices, totaling 2,000 square feet and located
in Mission Viejo, California, are leased at an annual base rent of $33,000. The
lease expires in April of 2001.
The Company through its subsidiaries also leases 36,000 square feet in
Dallas for administrative and sales functions relating to its mortgage banking,
construction lending and commercial lending operations. MPS leases office space
for its branches in Arizona, California, Colorado, Florida, Georgia, Illinois,
Nevada, Tennessee and Texas. The offices vary in size depending on the
origination volume in each location.
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The Company believes that its facilities are adequate for its immediate
needs and that additional space is available at a comparable cost if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to lawsuits which arise in the ordinary course of
its business. Management is of the opinion, based in part upon consultation with
its counsel, that the liability of the Company, if any, arising from existing
and threatened lawsuits would not have a material adverse effect on the
Company's financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fiscal quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "NABC". The following table sets forth the quarterly high and low sale
prices for the Common Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
PRICE
-------------------------
HIGH LOW
---------- ----------
<S> <C> <C>
Year ended December 31, 1997
First Quarter 3-9/16 2-7/8
Second Quarter 3-1/8 2
Third Quarter 3-3/16 2-1/2
Fourth Quarter 3-1/8 1-7/8
Year ended December 31, 1998
First Quarter 3-1/4 2-1/8
Second Quarter 4 2-3/8
Third Quarter 2-7/8 1-3/8
Fourth Quarter 2-1/4 1-1/4
</TABLE>
As of February 28, 1999, there were approximately 7,500 shareholders of
record.
Prior to June 5, 1996, as the Company had liquidated its loan and real
estate portfolios for cash, periodic distributions to shareholders were made. It
is anticipated that for the foreseeable future, all earnings will be retained to
provide for the future growth of the Company.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the year ended December 31,
(all amounts in thousands, except share data)
------------------------------------------------------------------------
1998 1997 1996 1995(1) 1994(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues from continuing operations $ 42,045 $ 16,855 $ 1,414 $ -- $ --
Earnings (loss) from continuing operations 162 1,121 (796)
Earnings (loss) from discontinued
Operations, net of income taxes -- 1,113 2,344 (456) 780
Net earnings (loss) 162 2,234 1,548 (456) 780
Basic earnings (loss) per share from
continuing Operations .03 0.22 (0.16) -- --
Basic earnings (loss) per share .03 0.44 0.30 (0.11) 0.19
Weighted average number common shares
Outstanding 5,091 5,091 5,091 4,209 4,209
BALANCE SHEET:
Residential mortgage loans 78,911 45,472 12,648 -- --
Construction loans 38,652 69,052 -- -- --
Total assets 140,799 129,119 17,904 22,720 28,886
Total debt 113,527 112,016 11,819 -- --
Total liabilities 131,581 120,964 12,298 744 7,107
Shareholders' equity (net assets) 8,599 7,839 5,605 21,976 21,779
Distributions -- -- 21,883 -- 6,313
Book value per share 1.57 1.54 1.10
Cash distributions per share (2) -- -- 3.64 -- 1.50
Transfer to liquidating trust per share (2) -- -- 1.56 -- --
</TABLE>
(1) Amounts relate to discontinued operations.
(2) Paid on 4,208,835 shares of common stock.
Reference is made to Item 1. Business, for discussion of the merger
between the Company and CPS Sub and the resulting distribution of cash and other
assets to the shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
NAB is a financial services company engaged in four reportable
segments, sub-prime and prime 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. As discussed in Item 1. Business, on
June 27, 1997 the Company sold its interest in its retail automobile sales
business. Prior to the Merger on June 5, 1996, the Company's primary operations
consisted of the acquisition, ownership, management and disposition of loans and
real estate for its own account and the account of others.
9
<PAGE> 11
FINANCIAL CONDITION
MORTGAGE BANKING
Beginning in September 1998, as a result of a number of factors, cash
prices in the sub-prime mortgage market significantly deteriorated. Prices paid
for the Company's sub-prime production declined in excess of 200 basis points.
The Company, in response, entered into a forward commitment in the fourth
quarter for $50,000,000 of its sub-prime production. The Company also lowered
the prices it paid for its wholesale and correspondent production. As a result
of lowering its prices, the Company's sub-prime loan production declined. The
decline in sales prices and the reduced levels of originations of sub-prime
mortgages resulted in a loss in the fourth quarter.
In response to market conditions the Company has reduced its workforce
in certain areas and continues to monitor the prices it pays for loans. In order
to protect itself from any continued deterioration in sales prices for its
sub-prime loans the Company has entered into an $100,000,000 forward commitment
with a subsidiary of a major bank beginning in 1999.
Loans Held For Sale
The Company's mortgage loan production and its originations of
construction loans to individuals (one-time closings) are financed under a
$120,000,000 line of credit with a federal savings bank. The interest rates
charged on the line of credit vary based on the type of loan, such as prime,
sub-prime and construction. Generally the Company must fund 2% of the mortgage
loan amount and 10% of the outstanding balance of the construction loan. The
interest rate charged the Company is based upon a spread over the Eurodollar
rate ranging from 1.25% to 2.25%.
At December 31,1998 residential mortgage loans held for sale totaled
$78,911,000. Of this amount $50,828,000 was conventional and government insured
or guaranteed loans (prime) and $28,083,000 was sub-prime loans.
The prime loans are sold individually to large mortgage bankers or
financial institutions. The Company represents and warrants to the investor that
the loans were underwritten to the appropriate guidelines. The sub-prime loans
held for sale at December 31,1998 are being sold through a forward commitment.
The Company generally represents and warrants to the investor that each
sub-prime loan was underwritten to the Company's guidelines and that the
borrowers financial position is the same at the date of delivery to the investor
as the origination date. The Company also agrees to reimburse the investor a
portion of the purchase premium if the loan pays in full over a period of up to
two years. The Company defers a portion of the purchase premium, which reduces
the gain recorded on each loan sale, to cover the potential liability resulting
from the warranties given to the investor.
At December 31, 1998, the prepayment liability as a result of the
warranties given to the purchasers of the Company's loans totaled $830,000.
Additions to the prepayment liability totaled $1,554,000 in 1998 and $651,000
in 1997. Such additions are netted against the gain at the time of the sale.
Securitization
In June 1998 the Company, through MPS, securitized approximately
$51,000,000 of sub-prime mortgage loans. MPS retained the servicing
responsibilities for the loans. MPS recorded a net gain of $1,908,000 or 3.74%
of the principal balance of the loans sold, which is the excess of the cash
received and fair value of the assets retained by the Company over the relative
fair value of the loans sold, less transaction costs.
10
<PAGE> 12
The performance of the loans underlying the security through December
31, 1998 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
------------- ---------------
<S> <C> <C>
Remaining Principal $ 26,441,000 $ 21,330,000
Annualized prepayment rates 6.8% 14.1%
Cumulative losses -- --
Delinquencies (over 30 days) 11.4% 11.0%
Cumulative principal amount of loans
Foreclosed or in foreclosure $ 628,000 $ 225,000
</TABLE>
The Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. The fee is .52% annually of the
unpaid principal of the loans. No claims have been made against the policy.
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 is required by
the servicing agreement to be maintained at 2.75% of the fixed rate balance and
4% of the adjustable rate balance of the securities.
The residual interests in the securitization of loans represents 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 prepayment, discount rate and loss
assumptions and 2) the overcollateralization account which is the excess monthly
cash flows, other than servicing revenues, that are required to be maintained
with the trustee until certain overcollateralization 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.
At December 31,1998 the residual interests in the securitization
consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
NIR $2,900,000
Overcollateralization account 634,000
----------
$3,534,000
</TABLE>
At December 31, 1998 the assumptions used in the valuation of the
residual interests were as follows:
<TABLE>
<S> <C>
Discount rate 12%
Weighted average life of fixed rate loans 4.27 years
Weighted average life of adjustable rate loans 3.47 years
Prepayment speeds- fixed rate loans Ramp up to 20% CPR
Prepayment speeds- adjustable rate loans Ramp up to 25% CPR
Cumulative losses, net of losses covered by the pool policy .2%
Delinquencies (over 30 days) 10%
</TABLE>
CONSTRUCTION LENDING
Loans receivable
CPFI's construction lending activities to builders and developers are
financed under a $40,000,000 line of credit with a savings and loan. The
interest rates charged on the line of credit vary based on the underlying
collateral, such as a single family residence, lot loan, acquisition and
development loan or model home. The interest rate is based upon a spread over
the one month LIBOR ranging from 2% to 3.75%. The Company is generally required
to fund 10% of the outstanding balance of the loan with its own operating funds.
11
<PAGE> 13
At December 31, 1998 the allowance for credit losses totaled $230,000
or .75% of the outstanding loan balances compared to $291,000 or .52% of the
balance at December 31, 1997. There have been no chargeoffs or losses associated
with the construction loan portfolio. At December 31,1998 loans on non-accrual
totaled $727,000 or 2.4% of the outstanding balances. This compares to no loans
on non-accrual at December 31, 1997. At December 31, 1998 and 1997 loans that
were deemed to be impaired was $727,000 and $0, respectively.
At December 31, 1998 and 1997 construction loans receivable consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Residential Construction Loans $21,619 $44,935
Acquisition and Development Loans 4,692 2,526
Construction and lot loans to individuals 1,627 2,415
Model Home Loans 742 3,221
Commercial Real Estate Loans 539 --
Lot Loans to Builders 197 2,614
------- -------
Total $29,416 $55,711
======= =======
</TABLE>
At December 31, 1998 CPFI's total commitments under these loans, if
fully funded, are $53,745,000. This amount does not necessarily represent the
total amounts that will ultimately be funded by the Company, as it is common
that the loan pays in full prior to the entire loan amount being drawn.
The outstanding principal balances by state as of December 31, 1998 are
as follows (in thousands)
:
<TABLE>
<S> <C>
Arizona $10,188
Texas 8,530
Nevada 6,277
Colorado 1,825
California 1,675
Georgia 752
New Mexico 119
Oklahoma 50
-------
Total: $29,416
=======
</TABLE>
In November 1998 the Company sold borrower relationships with total
outstanding balances of $28,000,000 to two financial institutions. The price
paid for the loans equaled the outstanding principal balance plus the accrued
interest receivable through the date of closing. The excess proceeds from the
sales after reducing the line of credit and available cash was used to pay down
$4,000,000 of the notes payable to CPS and SFSC. No gain or loss resulted from
the transactions.
The Company recorded a premium of $541,000 in 1997 in connection with
the acquisition of approximately $55,000,000 in construction loans. The amount
was fully amortized in 1998.
COMMERCIAL LENDING
Loans receivable
The Company's commercial loan portfolio is financed under a $6,500,000
line of credit with a bank. Outstanding borrowings bear interest at the prime
rate. The Company is generally required to fund 30% of the outstanding principal
balance of the loans with its operating funds.
The allowance for credit losses at December 31, 1998 is $107,000 or
1.7% of the outstanding balance as compared to $28,000 or 1.2% at December 31,
1997. There have been no chargeoffs or losses associated with the portfolio. At
December 31,1998 there were no loans past due with respect to interest more than
90 days.
12
<PAGE> 14
The net outstanding balances of the commercial loans at December 31,
1998 are $6,099,000. The Company's commitments to lend total $9,382,000. The
commitment amounts do not necessarily represent the total amounts that will be
funded by the Company as the borrowers may be limited by financial covenants
contained in the various debt agreements.
The Company is currently considering alternatives for the portfolio
that may include a sale of the portfolio or contributing the portfolio to CPFI.
The Company no longer intends to pursue this lending activity and has not
entered into any new borrower relationships since August 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
For the year ended December 31, 1998 the Company reported earnings of
$162,000 as compared to earnings from continuing operations of $1,121,000 for
the year ended December 31, 1997. In 1997 the Company disposed of its retail
automotive sales segment resulting in a gain of $1,384,000. Prior to the sale
the discontinued operation incurred a loss of $271,000 for the period from
January 1 to June 27, 1997 (the sale date).
Earnings in 1998 were negatively impacted by principally three factors:
1) Beginning in September 1998, as a result of a number of factors,
cash prices in the sub-prime mortgage market significantly deteriorated. Prices
received by the Company's for its sub-prime production declined in excess of 200
basis points. The Company, in response, entered into a forward commitment for
$50,000,000 of its production, lowered the prices it paid for its wholesale and
correspondent production and reduced operating expenses in the sub-prime
operation. As a result of lowering its prices, the Company's loan production
declined. The decline in sales prices and the reduced levels of originations of
sub-prime mortgages resulted in a loss in the fourth quarter.
2) In 1997, the Company entered into agreements with the executives of
MPS that granted options to the executives, exercisable only if certain
conditions are satisfied, to acquire up to 20% of the authorized common shares
of MPS. The number of shares to be issued pursuant to the agreements was
dependent upon several factors, including the future earnings and value of MPS.
On June 26, 1998 the Company, MPS and the executives entered into a
Restructure Agreement, which terminated the options. In exchange for the
termination of the options the Company entered into a deferred compensation
arrangement with the executives that requires the Company to pay annual
installments of approximately $1,100,000 to the executives over the three year
period beginning June 26, 1999, as long as the executive continues employment
with the Company. If the executive is terminated without cause all remaining
amounts due under the deferred compensation arrangement become immediately due
to the Company.
The Company also granted loans totaling $3,040,000 to the executives
repayable in three equal annual installments, plus interest at 5.7% per annum,
beginning June 30, 1999. The loans are secured by the stock that each executive
owns, which aggregates approximately 19% of the outstanding shares of MPS. If
the executive terminates for any reason prior to the end of the three year
period, all remaining amounts under the note become immediately payable.
Included in the Restructure Agreement is an additional provision that
requires the Company to pay to one of the executives $93,334 every six months,
beginning June 30, 1998, over the next three years, contingent upon continued
employment.
Compensation expense totaling $778,000 was recorded in the 1998
financial statements as a result of these agreements.
13
<PAGE> 15
3) 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. The Company recorded a charge to earnings of $636,000
in 1998 as a result.
The following discussion and analysis presents the significant changes
in financial condition and results of continuing operations of the Company's
operating segments for the years ended December 31, 1998, 1997 and 1996. The
results of operations include acquired operations and businesses since the
acquisition date. A summary of the operating profits and losses by the Company's
operating segments is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Residential mortgage banking-sub-prime $ 15,427 $ 10,856 $ 1,349
Residential mortgage banking-prime 19,634 5,245 --
Residential construction lending 6,094 29 --
Commercial lending 954 644 --
Corporate and intercompany eliminations (64) 81 65
-------- -------- --------
Total revenues: 42,045 16,855 1,414
Costs and expenses:
Residential mortgage banking-sub-prime 15,308 8,475 1,753
Residential mortgage banking-prime 16,997 4,690 --
Residential construction lending 5,489 24 --
Commercial lending 682 503 --
Corporate and intercompany eliminations 3,407 2,042 457
-------- -------- --------
Total costs and expenses 41,883 15,734 2,210
-------- -------- --------
Operating profit:
Residential mortgage banking-sub-prime 119 2,381 (404)
Residential mortgage banking-prime 2,637 555 --
Residential construction lending 605 5 --
Commercial lending 272 141 --
Corporate and intercompany eliminations (3,471) (1,961) (392)
-------- -------- --------
Earnings from continuing operations $ 162 $ 1,121 $ (796)
======== ======== ========
</TABLE>
Residential Mortgage Banking
The Company operates its mortgage banking activities through its 81%
owned subsidiary MPS. The mortgage banking operations has two primary divisions,
sub-prime and prime. The prime origination function operates as Pacific American
Mortgage Company or PAMCO, which was acquired in August of 1997. MPS and PAMCO
originate loans in 40 states.
14
<PAGE> 16
Residential mortgage loan production for 1998, 1997 and 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Prime(1) Sub-Prime
-------------------------- --------------------------------------------
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Retail:
Originations obtained
from the consumer $534,497 $150,621 $ 14,785 $ 6,362 $ --
Wholesale:
Loans received from
mortgage brokers and
closed in MPS's name 63,181 11,096 234,999 145,305 28,752
Correspondent:
Closed loans purchased
from other mortgage originators -- -- 83,144 59,567 6,747
-------- -------- -------- -------- --------
$597,678 $161,717 $332,928 $211,234 $ 35,499
======== ======== ======== ======== ========
</TABLE>
Total combined 1998 and 1997 originations by state are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- --------------------------------------
Total Originations Percent of Total Total Originations Percent of Total
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Texas $365,667 39% $136,222 37%
California 154,631 16 36,326 10
Tennessee 98,772 11 36,953 10
Colorado 71,072 8 24,056 6
All others 240,464 26 139,394 37
-------- -------- -------- --------
$930,606 100% $372,951 100%
======== ======== ======== ========
</TABLE>
Mortgage banking revenues consist of primarily gains from the sales of
loans, fees collected from the borrower or mortgage broker/banker and interest
earned on mortgage loans held for sale. Expenses consist primarily of
compensation and benefits and interest expense.
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 11,630 $ 8,847 $ 1,088
Interest income 3,797 2,009 261
Compensation and benefits 8,609 4,717 1,026
Interest expense 2,769 1,531 172
Other expenses 3,930 2,227 555
Loans originated $318,240 $204,872 $ 35,499
Loans sold $305,652 $197,855 $ 24,174
Gains on sales of loans and
Other fee income as a percent
of loans originated 3.66% 4.32% 2.99%
Compensation and benefits
as a percent of originations 2.71% 2.30% 2.89%
Other expenses as a percent
of originations 1.23% 1.09% 1.56%
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
Net interest income as a
Percent of originations .32% .23% .25%
PAMCO (principally prime)(1)
Gains on sales of loans
And other fee income $16,459 $4,516 -
Interest income 3,175 729 -
Compensation and benefits 10,520 2,971 -
Interest expense 3,383 863 -
Other expenses 3,094 856 -
Loans originated $612,366 $168,079 -
Loans sold(2) $595,209 $140,733 -
Gains on sales of loans and
Other fee income as a percent
Of loans originated 2.68% 2.67% -
Compensation and benefits
As a percent of originations 1.72% 1.77% -
Other expenses as a percent
Of originations .51% .51% -
Net interest expense as a
Percent of originations .03% .08% -
</TABLE>
(1) PAMCO operations are shown from date of acquisition, August 31,1997.
(2) Includes loans totaling $53,911,000 in 1998 and $18,167,000 in 1997
that were closed in the name of a third party (brokered-out).
MPS operations
For the year ended December 31, 1998 the MPS mortgage operation earned
$119,000 as compared to $2,381,000 in 1997. Revenues increased $4,571,000 or 42%
over 1997 and expenses increased $6,833,000 or 81% over 1997.
The decline in earnings resulted from the decline in sales prices in
the fourth quarter of 1998. In that quarter severe turmoil in the credit markets
resulted in a credit crunch for the larger sub-prime lenders. Many of the larger
lenders cut back production or eliminated entirely their loan production
facilities. Additionally, spreads on sub-prime backed securities widened
considerably, reducing the profitability of MPS's larger competitors and many of
the firms that MPS sold loans to. In reaction to the turmoil the firms that
continued to purchase loans reduced the price paid for such loans. The effect of
the price declines negatively impacted MPS's spreads between the prices received
upon the sale of the loans and the price or brokerage premiums paid to acquire
the loans. As a result the net gain on loan sales decline from 4.32% as a
percent of loans sold to 3.66%.
Compensation expenses as a percent of production increased to 2.71% in
1998 from 2.30% in 1997. The increase is mainly attributable to deferred
compensation expense of $778,000 or .23% of production and increased processing
and underwriting costs as the Company continued to emphasize customer service.
The sub-prime operation was also negatively impacted by a decline in its
production in the fourth quarter.
Other expenses increased in 1998 to 1.23% from 1.09% of production in
1997. The increase was attributable to an increase in losses on foreclosures
from $12,000 in 1997 to $230,000 in 1998 and the increased processing and
underwriting costs discussed above.
Net interest spread as a percentage of production increased from .23%
in 1997 to .32% in 1998 as a result of lowered borrowing costs.
16
<PAGE> 18
PAMCO operations
For the year ended December 31, 1998, MPS's principally prime
production operation, PAMCO, earned $2,637,000. For the four months ended
December 31, 1997 PAMCO earned $555,000. Operating revenues totaled $19,634,000
as compared to $5,245,000 for 1997 and expenses totaled $16,997,000 as compared
to $4,690,000 for 1997.
Gains on sales of loans and other loan fees as a percent of production
was 2.68% in 1998 as compared to 2.67% in 1997. The Company continues to benefit
from a strong secondary market for PAMCO's products and a favorable interest
rate environment. Compensation expenses as a percent of production declined to
1.72% from 1.77% in 1997 as the PAMCO gained efficiencies from higher average
monthly mortgage production. Other expenses as a percent of originations
remained at .51%.
Net interest expense as a percent of production was a deficit of .03%
in 1998 as compared to a deficit of .08% in 1997. The deficit narrowed due to
reduced borrowing costs which was offset somewhat by lower interest rates on the
products PAMCO originates.
Construction Lending
For the year ending December 31,1998 the construction lending operation
(CPFI) earned $605,000. The operation began on December 30, 1997 with the
acquisition of $55,000,000 in construction loans from a Dallas based savings and
loan. There were no material results from operations in 1997.
Interest income as a percent of average outstanding construction loans
receivable was 8.92%, which included the amortization of the original
capitalized purchase premium of $541,000. Interest expense on the bank debt as a
percent of outstanding borrowings was 8.23%. Interest income totaled $4,978,000
and commitment fee income totaled $1,116,000 in 1998. Interest expense totaled
$4,205,000 including interest expense totaling $436,000 paid to NAB as part of
the capitalization of the CPFI. The note to NAB was paid during 1998. Operating
expenses totaled $1,284,000 consisting of compensation and benefits of $666,000
and other general and administrative expenses of $618,000. Other general and
administrative expenses included $100,000 in charges relating a shared service
agreement with MPS to provide accounting and data processing services and
$97,000 in provisions for loan losses.
CPFI originated $149,429,000 in new commitments in 1998 and entered
into new guidance lines totaling $18,423,000.
In November 1998, the Company sold approximately $28,000,000 in
construction loans to two Dallas financial institutions. No gain or loss
resulted from the transactions. The Company used the proceeds to pay down the
warehouse lines of credit and notes payable to affiliates.
Commercial Lending
The commercial lending operation (NAFCO) earned $272,000 in 1998 as
compared to $141,000 in 1997. Interest income totaled $940,000 in 1998 as
compared to interest income of $611,000 in 1997. Interest expense totaled
$164,000 in 1998 as compared to $-0- in 1997. Operating expenses for 1998 and
1997 totaled $518,000 and $503,000, respectively, consisting primarily of
compensation and benefits of $235,000 and $273,000. Other expenses included
$79,000 and $28,000 in provisions for loan losses for 1998 and 1997 and legal
and professional fees of $109,000 and $69,000, respectively.
New loan commitments in 1998 totaled $5,400,000 as compared to $750,000
in 1997. The new loan commitments in 1998 represented seven new borrowers.
Increases in existing borrowers lines of credit totaled $1,924,000.
17
<PAGE> 19
Corporate and Intercompany Eliminations
Corporate revenues and expenses represent interest income and
unallocated compensation, interest expense, minority interest and other general
and administrative expenses.
Compensation expense totaled $1,316,000 in 1998 as compared to $787,000
in 1997. The increase was attributable to option termination related charges
totaling $636,000. Interest expense totaled $2,289,000 in 1998, an increase of
$1,900,000 over 1997. The increase in interest expense was due to borrowings
attributable to financing CPFI's acquisition of construction loans in December
of 1997 and borrowings to finance other corporate transactions. The borrowings
were obtained from CPS and SFSC.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER
31,1996
For the year ended December 31, 1997 the Company reported earnings from
continuing operations of $1,121,000 as compared to a loss of ($796,000) for the
year ended December 31, 1996. In 1997 the Company disposed of its retail
automotive sales segment resulting in a gain of $1,384,000. Prior to the sale
the operation incurred a loss of $271,000 for the period from January 1 to June
27, 1997 (the sale date). The earnings from continuing operations benefited from
a full years operating results of the mortgage banking subsidiary, MPS, and the
earnings from the commercial loan portfolio at NAFCO. The construction lending
operations began December 30, 1997 and as a result did not contribute
significantly to the earnings of the Company.
Operating income for the period from January 1, 1996 to June 5, 1996
(the discontinued real estate operations) was $3,467,000 due to several
liquidating transactions, including a $1,066,000 net gain on the sale of the
Company's partnerships and a $1,791,000 recovery on the settlement of an
in-substance foreclosure. Additionally, the Company incurred a loss of
($1,123,000) from the discontinued retail automotive sales business.
Sub-prime operations
For the year ended December 31, 1997 the sub-prime mortgage operation
earned $2,381,000 as compared to a loss of $404,000 in 1997. Revenues increased
$9,507,000 over 1996 and expenses increased $6,722,000 over 1996. The Company
acquired MPS on July 10,1996. The operating results of MPS are included from
date of acquisition.
Revenues increased from $1,349,000 in 1996 to $10,856,000 in 1997. The
increase is primarily attributable to increased gains on loan sales from
$962,000 in 1996 to $8,379,000 in 1997 resulting from increased loan
originations, and increased interest income as a result of the increased
production. Gains and other fee income as a percentage of loans sold increased
from 2.99% in 1996 to 4.32% in 1997. The increased gains resulted from a larger
base of customers who bid for the Company's loans and a strong demand for MPS's
product.
Compensation expenses as a percent of originations decreased to 2.30%
in 1997 from 2.89% in 1996. The decrease was attributable to the increase in
originations over 1996 resulting from a full year of operations.
Additionally MPS incurred significant start up costs in 1996.
Other expenses declined in 1997 to 1.09% from 1.56% of production in
1996. The 1996 costs included start up costs. Net interest spread as a
percentage of production declined slightly from .25% in 1996 to .23% in 1997.
Prime
For the four months ended December 31, 1997 PAMCO earned $555,000.
Operating revenues totaled $5,245,000 and expenses totaled $4,690,000. The PAMCO
operation was acquired on August 31, 1997.
18
<PAGE> 20
Gains on sales of loans and other loan fees as a percent of production
was 2.67%. Compensation expenses as a percent of production was 1.77% and other
expenses as a percent of originations was .51%. Net interest margin as a percent
of mortgage loan production was a deficit of .08%.
Commercial Lending
In January 1997, NAFCO acquired a portfolio of loans with a remaining
principal balance of $1,966,000. The purchase price was $1,292,000. New
commitments made during 1997 were $750,000.
NAFCO earned $141,000 in 1997. Interest income totaled $611,000 and
operating expenses totaled $503,000 consisting primarily of compensation and
benefits of $273,000, provisions for loan losses of $28,000, and legal and
professional fees of $69,000. NAFCO had no borrowings in 1997.
Corporate and Intercompany Eliminations
Compensation expense totaled $787,000 in 1997 as compared to $331,000
in 1996. Revenues and expenses for the period prior to June 6, 1996 are included
in discontinued operations. Interest expense totaled $389,000 in 1997. There
were no borrowings in 1996. Other general and administrative expenses totaled
$768,000 in 1997 as compared to $195,000 in 1996. On an annualized basis,
general and administrative costs increased as a result of legal and accounting
fees.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had approximately $6,091,000 in
cash as compared to $7,275,000 at December 31, 1997. Of those amounts $3,952,000
and $3,655,000 as of December 31, 1998 and 1997, respectively, was restricted to
usage for mortgage loan fundings and repayments under the Company's residential
warehouse line of credit.
Total assets have increased to $140,799,000 at December 31, 1998 from
$129,119,000 at December 31, 1997. The increase is attributable to the growth in
the mortgage loan production at MPS offset by the decline in the construction
loan portfolio at CPFI.
On June 29, 1998, MPS increased its line of credit with Guaranty
Federal Bank, F.S.B. and other lenders to $120,000,000 from $75,000,000.
Outstanding borrowings bear interest at various spreads (ranging from 1.25% to
2.25%) over the Eurodollar rate. The line of credit matures June 30, 1999. The
mortgage loans receivable of MPS are pledged as collateral for the line of
credit. At December 31, 1998, $74,117,000 was borrowed under the line.
On December 30, 1998, CPFI reduced its line of credit with Bank United
to $40,000,000 from $75,000,000 due to the sale, as discussed earlier, of
construction loans in November. The line of credit is secured by CPFI's
construction loans receivable. As of December 31, 1998, $23,533,000 was
outstanding under the line bearing interest at various spreads (ranging from
2.00% to 3.75%) over the one month LIBOR depending on the collateral. The line
of credit matures June 30, 1999.
On October 30, 1998, NAFCO entered into a line of credit totaling
$6,500,000 with a bank. The line bears interest at the prime rate and matures on
October 30, 1999. As of December 31, 1998, $3,000,000 was borrowed.
Substantially all of the assets of NAFCO are pledged as collateral for the line.
In the fourth quarter of 1998, numerous sub-prime mortgage bankers were
subjected to margin calls on their lines of credit as a result of the
significant decline in the sales premiums paid for loans and the deteriorating
sub-prime mortgage and asset-backed securities markets. Management considers its
relationships with its lenders to be good and is currently in compliance with
all of the covenants contained in its various debt agreements. Additionally
management believes that the debt agreements will be renewed in the ordinary
course of business on substantially the same terms and conditions or alternative
credit facilities are available on acceptable terms.
19
<PAGE> 21
At December 31, 1998, the Company has borrowed under notes and a line
of credit from Stanwich Financial Services Corp. ("SFSC") and CPS, for a total
of $12,877,000 summarized as follows:
<TABLE>
<CAPTION>
Payee Type Original Date Maturity Balance Rate
- ----- ---- ------------------ ------------------ ---------- ----
<S> <C> <C> <C> <C> <C>
SFSC Note June 27, 1997 June 30, 1999 $ 377,000 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%
CPS Note December 30, 1997 April 30, 1999 2,100,000 13%
</TABLE>
Proceeds from the borrowings were used to invest in the Company's
subsidiaries. All loans require the payment of interest quarterly with principal
due at maturity. The proceeds from the line of credit executed on August 28,
1997 are limited to usage at MPS. The total commitment is $5,000,000 of which
$3,500,000 has been drawn. Each note may be prepaid, partially or in full,
without penalty at any time. Any partial repayment may not be re-borrowed.
Charles E. Bradley, Sr., who is an officer and director of NAB, and Charles E.
Bradley, Jr., who is a director of NAB together owned a majority interest in
SFSC at December 31, 1997 and 1998. Messrs. Bradley, Sr., Bradley, Jr., are
officers and directors of CPS.
On August 13, 1998, the Company entered into a Debt Restructure
Agreement with Stanwich Financial Services, Corp. ("SFSC") a corporation owned
42.5% by Charles Bradley, Sr. and 42.5% by Charles Bradley, Jr., in which, among
other things the note due from the sale of CARS was exchanged for a
corresponding reduction in the Company's indebtedness to SFSC and the maturities
of the company's indebtedness were extended.
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. In 1998, NAB relied on SFSC and
CPS to provide funds to support the additional growth of the Company.
In the next twelve months the Company intends to continue the expansion
of the current operations through its subsidiaries and acquire additional
operations complimentary to its core business lines. The Company anticipates no
additional funding from SFSC or CPS, therefore must rely on internally generated
funds or additional borrowings from third parties. The ability of the Company to
acquire additional compatible operations is dependent upon the availability of
financing. Current credit agreements in place are sufficient to provide the
Company funds to operate its business lines as currently structured.
On March 29, 1999 NAB entered into a Payment Deferral Agreement with
SFSC in which SFSC agreed to extend the maturity dates on NAB's $6,377,000 in
notes payable to SFSC that were due June 30, 1999 to January 3, 2000.
Additionally, SFSC agreed to defer interest payments on all notes due from NAB
until January 3, 2000. The Company intends to pursue the refinancing of those
notes with a third party. There can be no assurance that such refinancing can be
accomplished and, if no financing is obtainable, that SFSC would agree to a
further extension of the maturity dates.
As of December 31, 1998 NAB had remaining indebtedness to CPS totaling
$2,100,000. The note originally due December 31, 1998 has been extended to April
30, 1999. Since December 31, 1998 NAB has repaid $1,400,000 and has $700,000
remaining. In order to pay the remaining amount NAB must obtain cash from
operations (which consists primarily of tax sharing payments from subsidiaries),
financing from third parties, sell existing assets, obtain more favorable terms
under its various debt agreements or achieve a combination of the above. The
Company is currently pursuing all of these alternatives and believes that the
remaining amount due will be paid on a timely basis.
20
<PAGE> 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and interest rates. The Company's earnings are materially impacted by net gains
on sales of mortgage loans and net interest margins. The level of gains from
loan sales the Company achieves is dependent on demand for the products
originated. Net interest margins are dependent upon the ability of the Company
to maintain the spread or interest differential between the interest it charges
the customer for loans and the interest the Company is charged for the financing
of those loans.
Loans held for sale and securitization related assets
The sub-prime loans the Company sells generally are included in asset
backed securities the investor or purchaser issues. These securities are priced
at spreads over the LIBOR or an equivalent term treasury security. These spreads
are determined by demand for the security. Demand is affected by the perception
of credit quality and prepayment risk associated with the loans the Company
originates and sells. Interest rates offered to customers also affect prices
paid for loans. These rates are determined by review of competitors rate
offerings to the public and current prices being paid to the Company for its
products. The Company does not hedge these price risks.
Prices paid for prime loans are impacted by movements in interest
rates. The Company mitigates this risk by locking in prices with its investors
as the customer locks in the price with the Company, thus allowing the Company
to maintain it margin. Generally, if interest rates rise significantly, home
sales will decline adversely affecting the Company's prime mortgage loan
production.
The Company's residual interest in securitization represents the
present value of the excess cash flows the Company expects to receive over the
life of the underlying sub-prime mortgage loans. The value is adversely affect
by prepayments, losses and delinquencies. The value would also be negatively
impacted by an increase in short-term interest rates, as a portion of the cash
flows fluctuate monthly based upon the one-month LIBOR.
In summary, the Company would be negatively impacted by rising interest
rates and declining prices for its sub-prime loans. Rising interest rates would
negatively impact prime mortgage production and the value of the residual
interest in the securitization and declining prices for the Company's sub-prime
loans would adversely effect the levels of gains achieved upon the sale of those
loans. The estimated negative income statement effect for 1999 of a 1% rise in
interest rates and a 1% decline in prices received for its sub-prime loans would
be as follows:
Sub prime operations- $3,172,000
Prime operations- $1,681,000
Residual interest in securitization- $343,000
Certain shortcomings are inherent in the methodology used in the above
market risk measurement. Modeling changes requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yield and
costs respond to changes in market interest rate. Assumptions are the underlying
factors that drive the interest rate and market risk measurement system which
include asset and liability compositions, changes in pricing of loans, cost
structures and prepayment assumptions. The model also assumes that a particular
change in interest rates is reflected uniformly across the yield curve.
According the model is intended to provide an indication of the Company's market
risk at a particular point in time and is not a forecast of the effect of
changes in market conditions on the results of operations of the Company and
will differ from actual results.
Interest sensitive assets and liabilities
In order to reduce the Company's exposure to interest rate fluctuations
the Company attempts to originate loans that contain short-term maturities (less
than one year) and bear interest rates that fluctuate based upon the prime rate.
21
<PAGE> 23
A summary of the fair value of interest earning assets and interest
bearing liabilities, segregated between fixed rate and adjustable rate
instruments, with expected maturity dates (or sales dates in the case of loans
held for sale) are as follows (in thousands):
<TABLE>
<CAPTION>
Greater
0-3 3-6 6-12 12-24 than 24
Months Months Months Months Months
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans held for sale(1) $79,903 -- -- -- --
Average rate 8.22% -- -- -- --
Constructions loans
Adjustable(2) $11,322 $ 8,987 $ 5,273 -- --
Average rate 9.19% 9.27% 9.31% -- --
Fixed $ 6,573 $ 2,655 $ 3,702 $ 140 --
Average rate 9.00% 10.89% 11.58% 14.00% --
Commercial loans
Adjustable rate(2) $ 501 -- $ 998 $ 583 $ 3,862
Average rate 9.75% -- 11.22% 12.28% 10.99%
Fixed rate $ 74 -- -- -- $ 81
Average rate 12.00% -- -- -- 14.00%
Residual interest in securitization $ 38 $ 46 $ 82 $ 111 $ 3,257
INTEREST BEARING LIABILITIES
Lines of credit(3) -- -- -- -- --
Residential mortgage loans(4) -- $74,117 -- -- --
Eurodollar plus 1.25% to
2.25%
Construction loans $23,533 -- -- --
LIBOR plus 2.00% to 3.75%
Commercial loans -- -- $ 3,000 -- --
Prime Rate
Notes payable to
affiliates-fixed rate -- $ 8,477 -- $ 4,400 --
Average rate -- 13.05% -- 15.59% --
</TABLE>
(1) The loans held for sale are shown in the table based upon the expected
date of sale.
(2) The adjustable rate construction loans and commercial loans have
interest rates based upon the prime rate.
(3) The lines of credit mature in the periods indicated. This does not
necessarily indicate when the outstanding balances would be paid. The
lines of credit fund 70% to 98% of the corresponding asset class. If
the asset balance declines whether through a sale or a payment from the
borrower, the corresponding liability must be paid.
(4) Includes borrowings totaling $7,618,000 in which construction loans to
individuals are pledged as collateral. The outstanding balance of the
collateral included in Construction Loans above totals $9,465,000.
22
<PAGE> 24
OTHER MATTERS
YEAR 2000
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.
The Company has determined that the following actions are necessary 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.
Progress report
Identification
The Company has identified all of its hardware systems and software (IT
systems) critical to the business and whose failure to process transaction and
information in the Year 2000 would have a material impact on the Company. The
Company commenced its current business segments beginning in mid-1996. As a
result substantially all of its hardware and software were Year 2000 compliant
when purchased.
The Company also identified non-information technology systems (non-IT
systems) critical to the business operation such as telephone and paging
systems. All of these systems were purchased subsequent to mid- 1996 and were
Year 2000 compliant when purchased.
Testing
The Company continues to test its IT systems and confirm the Year 2000
compliance of its non-IT systems. The management information systems department
(MIS) expects all critical IT systems to be tested by mid-1999.
IT and Non-IT Vendor Inquiries
The Company continues to communicate with customers, vendors, and
others to determine if their applications are year 2000 compliant and assess the
potential impact on the Company. The responses from the Company's major vendors
indicate that they are all expected to be year 2000 compliant within the next
twelve months or are already compliant as it relates to the relevant system the
Company relies on.
Costs
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. The Company has incurred
approximately $100,000 in costs to date primarily related to software upgrades.
The Company expects continuing costs related to internal resources to test the
systems and monitor vendor progress towards being Year 2000 compliant. The cost
of these internal resources is estimated to be $75,000. Depending on the results
of the tests, the Company may hire outside third parties to assist in the
project. The amount above does not include those costs.
23
<PAGE> 25
Contingency Planning
Based upon the progress of testing the Company's systems and the
responses of its material vendors as to their progress in becoming Year 2000
compliant, the Company will assess the need for contingency plans in the first
half of 1999.
Risks
The primary risk to the Company of the Year 2000 issue is that one or
more of the Company's outside vendors is not Year 2000 compliant. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998 the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
provides guidance on the financial reporting of start-up costs and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred. The Company has $156,000 in
organizational costs as of December 31, 1998. SOP 98-5 will require the Company
to write off those costs effective January 1, 1999. The amount, net of taxes,
will be reported as a cumulative effect of a change in accounting principle as
described in Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes.
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.
SFAS 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
alter 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 sell or hold those investments. However, a mortgage
banking
24
<PAGE> 26
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. The
adoption of SFAS 134 is not expected to have a material effect on the Company's
financial condition or results of operations.
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
25
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NAB Asset Corporation:
We have audited the accompanying consolidated balance sheets of NAB Asset
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NAB Asset
Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Orange County, California
March 29, 1999
26
<PAGE> 28
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------------
Assets 1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 2,139 $ 3,620
Restricted cash 3,952 3,655
Receivables:
Construction loans, net 38,652 69,052
Residential mortgage loans held for sale 78,911 45,472
Commercial loans, net 6,099 3,677
Loans to officers 3,040 --
Other receivables 1,449 1,024
Residual interest in securitization of mortgage loans 3,534 --
Property and equipment, net 1,151 1,151
Costs in excess of net assets acquired, net 641 584
Other assets, net 1,231 884
----------- -----------
$ 140,799 $ 129,119
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Warehouse lines of credit $ 100,650 $ 95,716
Notes payable to affiliates 12,877 16,300
Drafts payable 11,681 5,425
Accounts payable and accrued expenses 5,250 2,914
Other liabilities 1,123 609
----------- -----------
Total Liabilities 131,581 120,964
Minority interest 619 316
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares; 5,091,300 issued and
outstanding at December 31, 1998 and 1997 509 509
Additional paid-in capital 7,815 7,217
Retained earnings 275 113
----------- -----------
Total shareholders' equity
8,599 7,839
Commitments and contingencies -- --
----------- -----------
$ 140,799 $ 129,119
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans $ 18,530 $ 10,153 $ 962
Interest income 12,926 3,491 323
Origination and other fee income 10,589 3,211 129
----------- ----------- -----------
Total revenues 42,045 16,855 1,414
----------- ----------- -----------
Costs and expenses:
Compensation and benefits 21,346 8,750 1,357
Interest expense 11,813 2,591 104
General and administrative 8,236 3,983 749
----------- ----------- -----------
Total costs and expenses 41,395 15,324 2,210
----------- ----------- -----------
Earnings (loss) from continuing operations before
minority interest and income taxes 650 1,531 (796)
Minority interest 303 315 --
Income taxes 185 95 --
----------- ----------- -----------
Earnings (loss) from continuing operations 162 1,121 (796)
Earnings (loss) from discontinued operations, net
Of income taxes:
Retail automobile sales -- (271) (1,123)
Real estate services -- -- 3,467
Gain on disposal of CARS USA -- 1,384 --
----------- ----------- -----------
Earnings (loss) $ 162 $ 2,234 $ 1,548
=========== =========== ===========
Basic earnings (loss) per share from continuing
Operations $ 0.03 $ 0.22 $ (0.16)
=========== =========== ===========
Basic earnings (loss) per share $ 0.03 $ 0.44 $ 0.30
=========== =========== ===========
Weighted average number of common shares
Outstanding 5,091,300 5,091,300 5,091,300
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
( IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAINS
ADDITIONAL RETAINED ON SECURITIES
COMMON PAID-IN EARNINGS AVAILABLE UNEARNED
STOCK CAPITAL (DEFICIT) FOR SALE COMPENSATION TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 42 $ 25,567 $ (3,669) $ 70 $ (34) $ 21,976
Amortization of unearned
Compensation -- -- -- -- 34 34
Securities valuation
Allowance, net -- -- -- (70) -- (70)
Refund of small
shareholder program -- 22 -- -- -- 22
Transfer to NAB
Liquidating Trust -- (6,585) -- -- -- (6,585)
Distributions (15,320) (15,320)
Surrender of old stock
in merger (42) 42 -- -- -- --
Issuance of new stock
in merger-62% to
shareholders of old NAB 316 (316) -- -- -- --
Contribution of capital by
CPS in Merger-38% of
Common Stock to CPS 193 3,807 -- -- -- 4,000
Net earnings -- -- 1,548 -- -- 1,548
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 509 7,217 (2,121) -- -- 5,605
Net earnings -- -- 2,234 -- -- 2,234
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 509 7,217 113 -- -- 7,839
Issuance of stock of -- 598 -- -- -- 598
subsidiaries
Net earnings -- -- 162 -- -- 162
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 $ 509 $ 7,815 $ 275 $ -- $ -- $ 8,599
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 31
NAB ASSET CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 162 $ 1,121 $ (796)
Adjustments to reconcile earnings (loss) from
Continuing operations to net cash used in operations Cash provided by
discontinued operations - real estate
Operations -- -- 1,657
Cash used in discontinued operations - retail
Automotive sales -- (176) (1,500)
Proceeds from sale of CARS USA -- 200 --
Non-cash gain on securitization of mortgage loans (3,248) -- --
Amortization of net interest receivable account 348 -- --
Deposits to overcollateralization account (634) -- --
Depreciation and amortization 1,283 434 117
Minority interest 303 315 --
Provision for credit losses 176 28 --
Net changes in:
Residential mortgage loans originated, purchased
And sold (33,143) (32,824) (11,287)
Restricted cash (297) (3,655) --
Loans to officers (3,040) -- --
Other receivables (425) (838) (709)
Other liabilities 514 489 120
Other assets (1,034) (117) 5
Drafts payable 6,256 5,425 --
Accounts payable and accrued expenses 2,229 2,554 205
--------- --------- ---------
Net cash used in operating activities (30,550) (27,044) (12,188)
--------- --------- ---------
Cash flows from investing activities:
Loan to Mortgage Portfolio Services, Inc. -- -- (2,499)
Construction loans funded and purchased (51,420) (69,052) --
Principal collections on and sales of construction loans 81,427 -- --
Commercial loans purchased and originated (4,421) (2,691) --
Principal collections on commercial loans 320 314 --
Acquisition of businesses, net of cash acquired -- (725) 684
Purchases of property and equipment (546) (518) (138)
--------- --------- ---------
Net cash provided by (used in) investing activities 25,360 (72,672) (1,953)
--------- --------- ---------
Cash flows from financing activities:
Contribution of capital by CPS in merger -- -- 4,000
Net borrowings under warehouse lines of credit 4,934 83,897 11,319
Borrowings under notes payable to affiliates 4,300 16,300 --
Payments on notes payable to affiliates (6,123) -- --
Issuance of stock of subsidiaries 598 -- --
--------- --------- ---------
Net cash provided by financing activities 3,709 100,197 15,319
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,481) 481 1,178
Cash and cash equivalents at beginning of year 3,620 3,139 1,961
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,139 $ 3,620 $ 3,139
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND DISCONTINUED OPERATIONS
Description of Business
NAB Asset Corporation, a Texas Corporation ("NAB") and subsidiaries
(the "Company") is primarily engaged in the residential lending business. As
discussed below NAB disposed of its retail automotive sales business in June,
1997. Prior to June 5, 1996 NAB's business consisted of the acquisition,
ownership, management and disposition of loans and real estate for its own
account and the account of others.
NAB 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. NAB acquired substantially all of the assets of the Bank in
consideration of the issuance by the NAB 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 NAB was formed for the purpose of effecting the acquisition of
substantially all of the Bank's assets, NAB 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.
Discontinued Real Estate Operations
Operating results of the discontinued real estate operation is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the period from
For the period from January 1, 1996 to
April 24, 1996 to April 23, 1996
June 5, 1996 (measurement date)
------------ ------------------
<S> <C> <C>
Revenues $3,013 $1,995
Expenses 564 977
------ ------
Net earnings (loss) $2,449 $1,018
====== ======
</TABLE>
Revenue for the discontinued real estate operations consisted of gain on sale of
assets and interest income. Expenses consisted primarily of compensation and
benefits.
31
<PAGE> 33
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Discontinued Retail Automotive Sales Operations
On July 8, 1996, NAB acquired 80% of CARS USA, Inc. ("CARS") for a
purchase price of $100,000. Additionally, NAB invested $400,000 in preferred
stock of CARS and made a $1,000,000 subordinated loan to CARS. At the time of
acquisition, Charles E. Bradley, Jr., a director of the Company owned 50% of the
outstanding shares of CARS. For the period from July 8, 1996 to December 31,
1996 CARS incurred a net loss of $1,123,000.
In March 1997, NAB entered into a definitive agreement to sell its
interest in CARS and on June 27, 1997 completed the transaction. The acquirer
was a newly formed company owned by Charles E. Bradley, Sr., the chief executive
officer and chairman of the board of NAB and Charles E. Bradley, Jr., a director
of NAB. The purchase price consisted of a $200,000 cash payment and a note for
$1,300,000. The note was paid in 1998. NAB recorded a $1,384,000 gain as a
result of the sale.
As a result of NAB's decision to divest its retail automotive sales
operations, all related operating activity has been reported as discontinued
operations for financial reporting purposes.
Operating results of the discontinued retail automotive sales operation
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Period from January 1,
Period from April 1, 1997 1997 to March 31, 1997 Period from July 8, 1996 to
to June 27, 1997 (measurement date) December 31, 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
Revenues $ 3,185 $ 2,199 $ 5,167
Expenses 3,249 2,406 6,290
------- ------- -------
Net loss $ (64) $ (207) $(1,123)
======= ======= =======
</TABLE>
Revenue and expenses for the discontinued automotive sales operation
consisted primarily of sales and cost of sales, respectively.
Acquisitions
On July 10, 1996 NAB acquired from CPS 84% percent of the outstanding
voting common stock of Mortgage Portfolio Services, Inc. ("MPS") for a purchase
price of $300,000. NAB also acquired $2.25 million of MPS preferred stock
through conversion of debt to equity and contributed approximately $249,000 to
the additional paid-in capital of MPS. The MPS preferred stock acquired by NAB
provides cumulative dividends at a rate of 10% per annum and has liquidation
preference over the MPS common stock equal to the purchase price of the MPS
preferred stock plus any accrued and unpaid dividends.
MPS is a mortgage banking company that specializes in the purchase,
origination, sale and servicing of residential mortgage loans that do not meet
traditional secondary market guidelines due to credit or employment history of
the borrower, debt-to-income ratios, or the nature of the collateral.
A summary of the assets and liabilities acquired at fair value are as
follows (in thousands):
<TABLE>
<S> <C>
Mortgage Loans $ 1,362
Other Assets 1,386
Warehouse Line of Credit (500)
Other Liabilities (2,547)
-------
Net Assets Acquired (299)
Purchase Price Paid (300)
-------
Costs in excess of Net Assets Acquired $ (599)
=======
</TABLE>
32
<PAGE> 34
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Selected unaudited pro forma combined results of operations for the
year ended December 31, 1996, assuming the acquisition of MPS had occurred on
January 1, 1996 are presented as follows (in thousands, except share data):
<TABLE>
<CAPTION>
<S> <C>
Net loss from continuing operations $ 916
=======
Basic loss per share from continuing operations $ 0.18
=======
</TABLE>
The increase in pro forma loss from continuing operations and pro forma
net loss per share from continuing operations gives effect to additional
amortization of cost in excess of net assets acquired totaling $77,000 which
would have been incurred assuming MPS was acquired on January 1, 1996.
On August 31, 1997, MPS acquired the fixed assets and employed the
personnel of the single family mortgage lending division of Pacific Southwest
Bank ("PSB"), a Dallas based savings and loan. A premium of $200,000 was paid
for the operation. Additionally amounts of up to $800,000 may be payable over
the two year period to August 31, 1999 depending on mortgage loan origination
volumes. During 1998 MPS paid $195,000 under this agreement, which increased the
cost in excess of net assets acquired. The division, Pacific American Mortgage
Company ("PAMCO") is primarily engaged in mortgage lending through ten retail
branches in six states. Substantially all PAMCO mortgage loan originations are
conventional conforming, non-conforming and government insured mortgages.
A summary of the PAMCO assets and liabilities acquired by MPS at fair
value are as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment $ 560
Other assets 125
Accounts payable and accrued expenses (160)
-----
Net assets acquired 525
Purchase price paid (725)
-----
Cost in excess of net assets acquired $(200)
=====
</TABLE>
Total accumulated amortization of the costs in excess of net assets
acquired related to MPS and PAMCO totaled $336,000 and $187,000 at December 31,
1998 and 1997, respectively.
In January 1997, NAB, through a newly formed 84% owned subsidiary,
NAFCO, Inc., acquired a $1,966,000 portfolio of loans made to rent-to-own and
rental purchase retail operations. The purchase price for these loans was
$1,292,000, representing a discount of $674,000. The discount is being amortized
over the contractual life of the loans using the interest method. NAFCO, Inc. is
a commercial finance company that specializes in providing financing and
consulting services to small independently owned rent-to-own retailers.
On December 30, 1997 NAB, through a newly formed 86% owned subsidiary,
Construction Portfolio Funding, Inc. ("CPFI") acquired approximately $53,000,000
in single family construction loans. A cash premium of $250,000 was paid in
addition to the principal balances acquired.
In connection with the acquisition, NAB recorded a $291,000 allowance
for loan losses based on the seller's loan loss history.
CPFI is engaged in the business of providing financing to residential
homebuilders for the construction of single family residences and to a lesser
extent acquisition and development loans, lot loans and model home loans to
those homebuilders.
33
<PAGE> 35
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company has four reportable segments, mortgage banking, sub-prime
and prime mortgage lending, construction lending and commercial lending. The sub
prime mortgage banking segment originates residential mortgage loans to
borrowers who are unable to obtain financing from conventional mortgage sources
due to credit problems or income qualification issues. The prime mortgage
banking segment originates conventional and government guaranteed or insured
mortgage loans. The construction lending operation lends to homebuilders for the
construction of single family residences and to a lesser extent for the purchase
of lots and acquisition and development of land for residential construction.
The commercial lending operation lends to operators of rent to own or rental
purchase businesses. All of the business segments operate within the U.S.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of significant accounting and financial
reporting policies:
Basis of Presentation
The consolidated financial statements include the accounts of NAB and
its majority-owned subsidiaries, with all significant inter-company transactions
being eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Construction Loans Receivable
Construction loans receivable are carried at the outstanding principal
balance, net of unamortized purchase discounts or premiums and net of allowance
for loan losses. Purchase discounts or premiums are amortized to income over the
contractual life of the loans based upon the interest method.
Residential Mortgage Loans Held for Sale
Residential mortgage loans are stated at the lower of cost or market in
the aggregate as determined by outstanding commitments from investors or current
investor yield requirements.
Commercial Loans Receivable
Commercial loans receivable are carried at the outstanding principal
balance, net of unamortized purchase discounts or premiums and net of allowance
for loan losses. Purchase discounts or premiums are amortized to income over the
contractual life of the loans based upon the interest method.
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
34
<PAGE> 36
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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
overcollateralization account which is the excess monthly cash flows, other than
servicing revenues, that are required to be maintained with the trustee until
certain overcollateralization 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.
Property and Equipment, Net
Property and Equipment are stated at cost, net of accumulated
depreciation. Major renewals and improvements are capitalized and depreciated.
Repairs and maintenance are expensed as incurred. Depreciation is provided on a
straight-line basis over the estimated useful lives of depreciable assets. Cost
and accumulated depreciation applicable to assets retired or sold are eliminated
from the accounts and any resulting gains or losses are recognized at such time.
Real Estate Owned
Real estate owned is transferred from the loan portfolio at fair market
value. The excess carrying value, if any, of the loan over the estimated fair
value less selling costs is charged to the allowance for loan losses. Any
subsequent impairments in value are recognized through a valuation allowance.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired which represents the excess of
purchase price over fair value of net assets acquired, is amortized on a
straight-line basis over five years. The Company reviews costs in excess of net
assets acquired for impairment when changes in events or circumstances may
effect the underlying basis of the asset.
Drafts Payable
The Company issues checks or initiates wire transfers in connection
with the origination of its residential mortgage loans. Drafts payable represent
checks or wire transfers on originated loans which have not been presented for
payment to the bank. Upon presentment, the Company either funds the loans with
operating cash or borrowings under its warehouse line of credit.
35
<PAGE> 37
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prepayment Liability
The Company sells all of its originated and purchased loans to third
party investors for cash. The purchase agreements require the Company to
reimburse the investor a portion of the purchase price paid if the loan pays in
full prior to a stated date, generally one year from origination. The Company
defers a portion of the gain on sold loans which represents management's
estimate of amounts due under the purchase agreements. This estimate is
calculated based on industry data as the Company has limited actual historical
data. The prepayment liability account is reduced based upon the prepayment of
loans, in accordance with the specific terms in the related sale agreement.
Revenue Recognition
Gains on sales of loans are recognized to the extent the selling price
exceeds the carrying value of the loans sold based on the estimated relative
fair values of the assets transferred, assets obtained and liabilities incurred.
A portion of the sales price on loans sold serviced released is recorded as
deferred income and represents management's estimate of amounts reimbursable to
the purchaser of the loans in the event of a loan prepayment prior to a period
specified in the loan sales agreement, generally one to two years.
Non-refundable fees and direct costs associated with the origination of loans
are deferred and included in the carrying value until the related loan is sold.
Interest is recognized as revenue when earned according to the terms of the
security instruments and when, in the opinion of management, it is collectable.
The Company's gain on accounting conforms to the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 125 (SFAS
125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." Under SFAS 125, a transfer of financial assets
in which control is surrendered is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in the exchange. Liabilities and derivatives incurred or obtained by
the transfer of financial assets are required to be measured at fair value, if
practical. Also, servicing assets and other retained interests in the
transferred assets must be measured by allocating the previous carrying value
between the asset sold and the interest retained, if any, based on their
relative fair values at the date of transfer.
SFAS 125 also requires an assessment of interest-only strips, loans,
other receivables and retained interests in securitization (residuals). If these
assets can be contractually prepaid or otherwise settled such that the holder
would not recover substantially all of its recorded investment, the asset will
be measured like trading securities.
Construction and commercial related lending revenues consist primarily
of interest income on loans and loan commitment fees. Interest is recognized as
revenue when earned according to the terms of the loan and when, in the opinion
of management, it is collectable. Non-refundable fees and direct costs are
deferred and income is recognized over the life of the loan commitment using the
interest method.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
base. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
36
<PAGE> 38
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed based on the weighted average number of common
shares and dilutive common share equivalents outstanding during the period. For
the years ended December 31, 1998, 1997 and 1996 there were no dilutive common
share equivalents.
Restricted Cash
Restricted cash primarily represents amounts required to be used to
fund loans and repay amounts outstanding under the residential mortgage
warehouse line of credit.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash in banks and interest bearing demand deposits.
Statement of Cash Flows-Supplemental Disclosure (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
-------- ------
<S> <C> <C>
Interest paid - continuing operations $ 11,235 $1,950
======== ======
Taxes paid $ 163 $ 116
======== ======
Non-cash activities:
Loans held for sale transferred to real
estate owned $ 566 $ 14
======== ======
Notes receivable exchanged for reduction in
payable to affiliates $ 1,600 $ --
======== ======
Reversal of allowance for credit losses against
purchase premium $ 158 $ --
======== ======
Note received from sale of CARS USA $ -- $1,300
======== ======
</TABLE>
Recent Accounting Pronouncements
In April 1998 the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
provides guidance on the financial reporting of start-up costs and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred. The Company has $111,991 in
organizational costs as of December 31, 1998. SOP 98-5 will require the Company
to write off those costs effective January 1, 1999. The amount, net of taxes,
will be reported as a cumulative effect of a change in accounting principle as
described in Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes.
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
37
<PAGE> 39
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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.
SFAS 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 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. The adoption of SFAS 134 is not expected to have a material
effect on the Company's financial condition or results of operations.
In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No.131, "Disclosures about Segments of Enterprise
and Related Information" (FASB 131). FASB 131 supercedes FASB 14, "Financial
Reporting for Segments of a Business Enterprise". FASB 131 replaces the
"industry segment" approach with the "management approach". The management
approach designates the segments identified by management within the
organization that are regularly reviewed as to allocation of capital and
operating performance. FASB 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of FASB 131 did not
affect the Company's financial position or results of operations (see note 14).
Reclassifications
Certain amounts for the prior periods have been reclassified to conform
to the current presentation.
38
<PAGE> 40
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) CONSTRUCTION AND COMMERCIAL LOANS RECEIVABLE
Construction and commercial loans consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
Construction loans:
Residential construction loans $ 21,619 $ 44,935
Acquisition and development loans 4,692 2,526
Lot loans to builders 197 2,614
Model home loans 742 3,221
Construction and lot loans to individuals 11,093 15,506
Commercial real estate 539 --
-------- --------
38,882 68,802
Purchase premium -- 541
Allowance for loan losses (230) (291)
-------- --------
$ 38,652 $ 69,052
======== ========
Commercial loans $ 6,244 3,998
Purchase discount (38) (293)
Allowance for loan losses (107) (28)
-------- --------
$ 6,099 $ 3,677
======== ========
</TABLE>
Activity in the allowance for credit losses was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- -------------------------
Construction Commercial Construction Commercial
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Beginning balance $ 291 $ 28 $ -- $ --
Provision for credit losses 97 79 -- 28
Initial reserves -- -- 291 --
Reduction of reserves as a -- -- -- --
result of loan sales (158) -- -- --
----- ----- ----- -----
Ending balance $ 230 $ 107 $ 291 $ 28
===== ===== ===== =====
</TABLE>
As of December 31, 1998 loans that were past due with respect to
interest more than 90 days totaled $726,897 and were on non-accrual and deemed
to be impaired. No specific allowance was on these impaired loans at December
31, 1998.
At December 31, 1998, the Company's total commitments under these
loans, if fully funded, are $81,646,000. Approximately 26%, 24%, 22% and 20%,
respectively of construction loans receivable are secured by properties located
in Arizona, Texas, California and Nevada.
(4) RESIDENTIAL MORTGAGE LOANS HELD FOR SALE
Residential mortgage loans originated by the Company are fixed-rate or
adjustable-rate, 15 to 30-year fully amortizing loans, secured by first liens on
single-family residential properties. Loans held for sale were comprised of the
following (in thousands):
39
<PAGE> 41
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
December 31, 1998 December 31, 1997
-------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Adjustable-rate $17,178 9.77% $ 4,577 9.15%
Fixed-rate 60,906 7.78% 40,123 8.47%
------- -------
78,084 44,700
Deferred loan fees
(net) 827 772
------- -------
$78,911 $45,472
======= =======
</TABLE>
(5) RESIDUAL INTEREST IN 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 net gain at the time of sale of $1,908,000 or 3.74% of the
principal balance of the loans sold, which represents the excess of the cash
received and assets retained by the Company over the relative fair value of the
loans sold, less transaction costs of $1,341,000. 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>
Cumulative default rates 8.15% 10.20%
Cumulative losses 5.17% 5.20%
Discount rate 12% 12%
Over-collateralization account Ramp up to 2.75% Ramp up to 4.00%
Weighted average life of loans 4.27 years 3.47 years
Prepayment speeds Ramp up to 20% CPR Ramp up to 25% CPR
</TABLE>
At December 31,1998 the residual interests in the securitization consisted of
the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
NIR $2,900
Overcollateralization account 634
-------
$3,534
=======
</TABLE>
The performance of the loans underlying the security through December 31,
1998 is as follows:
<TABLE>
<CAPTION>
FIXED RATE ADJUSTABLE RATE
---------- ---------------
<S> <C> <C>
Remaining principal $26,441 $21,330
Annualized prepayment rates 6.80% 14.07%
Cumulative losses -- --
Delinquencies (over 30 days) 11.40% 11.00%
Cumulative principal amount of loans
foreclosed or in foreclosure $ 628 $ 225
</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 .52% annually
of the unpaid principal of the loans. The net loss assumption used in the
valuation of the residual interest in the securitization of mortgage loans
taking the policy into effect was .17% for the fixed rate loans and .20% 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.
40
<PAGE> 42
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The residual interests in the securitization of loans represents 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
commensurable 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 amount 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.
Escrow balances on securitized loans serviced by the Company are not
included in the accompanying consolidated balance sheets and totaled $678,000 at
December 31, 1998.
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, stated at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Furniture and Equipment $ 1,142 $ 794
Computer Equipment and Software 829 631
Accumulated Depreciation (820) (274)
------- -------
$ 1,151 $ 1,151
======= =======
</TABLE>
(7) WAREHOUSE LINES OF CREDIT
Warehouse lines of credit were comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Warehouse line-of-credit, commitment of $120,000,000, secured by residential
mortgage loans and guaranteed by NAB, interest at a spread above the
Eurodollar, (7.5% and 7.5% at December 31, 1998 and
1997, respectively), expiring June 30, 1999 $ 74,117 $ 50,002
Warehouse line-of-credit, commitment of $40,000,000, secured by residential
construction loans and guaranteed by NAB, interest at a spread above libor,
(7.55% and 7.625% at December 31, 1998 and 1997),
expiring December 29, 1999 23,533 45,714
Warehouse line-of-credit, commitment of $6,500,000, secured by commercial loans
and guaranteed by NAB, interest at a spread above prime, (7.75% at December
31, 1998), expiring October 29, 1999
3,000 --
-------- --------
$100,650 $ 95,716
======== ========
</TABLE>
At December 31, 1997, NAFCO had a line of credit totaling $5,000,000 with a
savings bank. The line was terminated October 29, 1998.
41
<PAGE> 43
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The warehouse lines of credit provide for various financial covenants
including limitations on indebtedness, investments, transactions with
affiliates, minimum levels of net worth and restricts the payment of dividends
and material changes in ownership. At December 31, 1998 and 1997, the Company
complied with these covenants.
Management believes its warehouse lines of credit will be renewed in
the normal course of business.
(8) NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------- -------
<S> <C> <C>
Note payable to Stanwich Financial Services, Corp., unsecured, interest
at 13% payable quarterly, principal due June 30, 1999 $ 4,000 $ 4,000
Line of credit commitment of $5,000 payable to Stanwich Financial Services
Corp., unsecured, interest at 16% payable quarterly, payable
in full on September 30, 2000 3,500 3,500
Note payable to Stanwich Financial Services Corp., unsecured, interest
at 14% payable quarterly, due September 30, 2000 900 2,500
Note payable to Stanwich Financial Services Corp., unsecured, interest
at 13% payable quarterly, due June 30, 1999 377 800
Note payable to Stanwich Financial Services Corp., unsecured, interest
at 13% payable quarterly, due June 30, 1999 900 --
Note payable to Stanwich Financial Services Corp., unsecured, interest
at 13% payable quarterly, due June 30, 1999 1,100 --
Note payable to Consumer Portfolio Services, Inc., unsecured, interest
at 13% payable quarterly, principal due April 30, 1999 2,100 5,500
------- -------
$12,877 $16,300
======= =======
</TABLE>
(9) SHAREHOLDER AND OPTION AGREEMENTS
In June 1996 the Board of Directors adopted, subject to shareholder
approval, the 1996 Incentive Stock Option Plan (the "Incentive Plan") and the
1996 Non-Employee Director Stock Option Plan (the "Director Plan"). The
Incentive Plan provided for, among other things, the grant to key employees of
the Company options to purchase shares of NAB Common Stock. The Director Plan
provided for, among other things, the grant of options to purchase shares of NAB
Common Stock to directors of the Company who were not also employees of the
Company.
The Plans were not presented to the shareholders for approval. The
Company currently has no employee or director stock option plans, and there are
no currently outstanding stock options held by any employee or director.
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. The Company recorded a charge of $636,000 in 1998 as a result.
42
<PAGE> 44
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 1997, the Company entered into agreements with the executives of MPS
that granted options to the executives, exercisable only if certain conditions
are satisfied, to acquire up to 20% of the authorized common shares of MPS. The
number of shares to be issued pursuant to the agreements was dependent upon
several factors, including the future earnings and value of MPS.
On June 26, 1998 the Company, MPS and the executives entered into a
Restructure Agreement which terminated the options. In exchange for the
termination of the options the Company entered into a deferred compensation
arrangement with the executives that requires the Company to pay annual
installments of $1,121,000, $1,101,000 and $1,101,000 in the years 1999, 2000
and 2001, respectively, to the executives, as long as the executive continues
employment with the Company. If the executive is terminated without cause all
remaining amounts due under the deferred compensation arrangement become
immediately payable.
The Company also granted loans totaling $3,040,000 to the executives
repayable in three equal annual installments, plus interest at 5.7% per annum,
beginning June 30, 1999. The loans are secured by the stock that each executive
owns, which aggregates approximately 19% of the outstanding shares of MPS. If
the executive terminates for any reason prior to the end of the three year
period, all remaining amounts under the note become immediately payable.
Included in the Restructure Agreement is an additional provision that
requires the Company to pay to one of the executives $93,334 every six months,
beginning June 30, 1998, over the next three years, contingent upon continued
employment. In exchange, the executive agreed to purchase stock in MPS of
$560,000.
The financial statement impact of these new agreements for the year
ended December 31, 1998 was to record compensation expense totaling $778,036.
(10) INCOME TAXES
Income taxes are comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------
1998 1997
----- -----
<S> <C> <C>
Current
Federal $ 15 $ 9
State 271 86
Deferred
Federal 106 536
State (65) --
----- -----
327 631
Reduction in valuation allowance (142) (536)
----- -----
$ 185 $ 95
===== =====
</TABLE>
43
<PAGE> 45
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's tax expense differs from the amount determined by
applying the statutory Federal rate of 34% to earnings from continuing
operations as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1997
----- -----
<S> <C> <C>
Expense at Federal rate $ 121 $ 545
State taxes 206 86
Decrease in valuation allowance (142) (536)
----- -----
$ 185 $ 95
===== =====
</TABLE>
Net Federal deferred tax assets totaled $63.5 million and $63.6 million
at December 31, 1998 and 1997, respectively with corresponding valuation
allowances of $63.5 million and $63.6 million, respectively. Net deferred tax
assets consist primarily of net operating losses which totals $63 million. The
remaining deferred tax assets of $500,000 consist primarily of deferred income
and allowances for loan losses. No Federal deferred tax assets have been
recognized in the 1998 or 1997 consolidated financial statements due to the fact
that, based on the weight of available evidence, it is more likely than not that
the deferred tax assets will not be realized. A state tax benefit of $36,000 was
recognized in 1998 through a reduction of the state valuation allowance.
At December 31, 1998, for federal income tax purposes, the Company had
regular tax and alternative minimum tax net operating loss carryforwards of
approximately $185 million expiring as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
- ---------- --------
<S> <C>
2004 $ 52,388
2005 42,120
2006 28,004
2007 11,091
Thereafter 51,588
--------
$185,191
========
</TABLE>
Simultaneous with the Merger, the Company amended its Articles of
Incorporation and By-laws to restrict the acquisition of 5% or more of the
outstanding shares of New Common Stock of the Company so as to prevent the
occurrence of an ownership change under Section 382 of the federal income tax
laws. Section 382 of the Internal Revenue Code of 1986 (Section 382), as
amended, provides in general that if a corporation undergoes an ownership
change, the amount of taxable income that the corporation may offset after the
date of such ownership change will be subject to an annual limitation. The
Company's NOL's could become subject to certain limitations on utilization in
the event the Company undergoes an ownership change within the meaning of
Section 382.
(11) COMMITMENTS AND CONTINGENCIES
MPS is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate and sell loans and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated financial statements.
44
<PAGE> 46
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Commitments to originate mortgage loans are agreements to provide
financing at a fixed or variable interest rate subject to specific terms and a
customer's creditworthiness on a case-by-case basis. These commitments have
fixed expiration dates and other termination clauses and may require payment of
a fee. At December 31, 1998 and 1997 MPS had commitments to originate mortgage
loans of approximately $29,400,000 and $10,465,000, respectively. These
commitments do not necessarily represent future cash requirements, as some
portion of the commitments will expire without being drawn upon or will be
declined for credit or other reasons. At December 31, 1998 and 1997, MPS had no
outstanding firm commitments to purchase loans. At January 1, 1999 MPS entered
into a $100,000,000 commitment to sell sub-prime loans to an institutional
investor. The commitment expires June 30, 1999. MPS had no commitments to sell
loans at December 31, 1997.
MPS has entered into loan sale agreements with investors in the normal
course of business which includes standard representations and warranties
customary to the mortgage banking industry. Violations of these representations
and warranties may require MPS to repurchase loans previously sold. As of
December 31, 1998, MPS had no repurchase requests outstanding. In the opinion of
management, the potential exposure related to MPS's loan sale agreements will
not have a material adverse effect on the consolidated financial position and
operating results of the Company.
At December 31, 1998, the Company's total commitments under commercial
and construction loans, if fully funded, are $81,646,000.
The Company is subject to lawsuits that arise in the ordinary course of
its business. Management is of the opinion, based in part upon consultation with
its counsel, that the liability of the Company, if any, arising from existing
and threatened lawsuits would not have a material adverse effect on the
Company's financial position and results of operations.
The Company conducts its business from leased facilities. Rent expense
of approximately $1,136,000, $470,000 and $126,000 have been recorded for the
years ending December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, minimum rental commitments under all
noncancelable leases with terms exceeding one year were as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------
<S> <C>
1999 $1,179
2000 822
2001 404
2002 252
2003 --
------
$2,657
======
</TABLE>
(12) RELATED PARTY TRANSACTIONS
As discussed in Note (1), the Company sold its Retail Automotive Sales
Segment in June, 1997 to a company controlled by Charles E. Bradley, Sr., the
Chief Executive Officer and Chairman of NAB and Charles E. Bradley, Jr., a
director of NAB, for $1,500,000. The purchase price consisted of a $200,000 cash
payment and a note for $1,300,000. The note was satisfied in 1998.
In September 1998 the Company borrowed $500,000 from SFSC pursuant to
an unsecured promissory note. The loan was paid off in 1998.
In October 1998 the Company borrowed $800,000 from SFSC pursuant to an
unsecured promissory note. The loan was paid off in 1998.
45
<PAGE> 47
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 1997 the Company borrowed $5,500,000 from CPS pursuant to
an unsecured promissory note. The loan bears interest at 13% per year payable
quarterly. As of December 31, 1998, the principal balance of the note was
$2,100,000. The principal is due April 30, 1999. Messrs. Bradley, Sr. and
Bradley, Jr. are officers and directors of CPS.
Included in other assets is an unsecured note receivable for $55,000
from an officer of the Company. The note is due on July 1, 1999, bears no
interest and may be prepaid at any time.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made using estimated fair value amounts that have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market date
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The estimated fair value of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1998 1997
------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, restricted cash and cash equivalents $ 6,091 $ 6,091 $ 7,275 $ 7,275
Construction loans 38,652 38,652 69,052 69,052
Residential loans held for sale 78,911 79,903 45,472 46,707
Commercial loans 6,099 6,099 3,677 3,677
Residual interest in the securitization of
Mortgage loans 3,534 3,534 -- --
Financial liabilities:
Notes payable 113,527 113,527 112,016 112,016
Drafts payable 11,681 11,681 5,425 5,425
</TABLE>
The following methods and assumptions were used in estimating the
Company's fair value disclosures for financial instruments:
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Construction loans: The carrying value reported in the balance sheet
approximates fair value as the construction loans are short term and bear
interest at a rate that approximates current market interest rates for similar
types of credit.
Residential mortgage loans held for sale: The fair value of loans
receivable held for sale is determined in the aggregate based on current
investor yield requirements.
Commercial loans: The fair value of commercial loans approximates the
carrying value reported in the balance sheet based upon the present value of
estimated cash flows using current interest rates applicable for similar types
of credit.
Warehouse lines of credit: The carrying value reported in the balance
sheet approximates fair value as the warehouse lines of credit are due upon
demand and bear interest at a rate that approximates current market interest
rates for similar type lines of credit.
46
<PAGE> 48
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notes payable to affiliates: The carrying value reported in the balance
sheet approximates current value based upon current investor yield requirements
for similar instruments.
Commitments to originate loans: The fair value is based on fees paid by
the borrowers to obtain the loan and is not considered material.
(14) SEGMENT REPORTING
In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No.131, "Disclosures about Segments of Enterprise
and Related Information" (FASB 131). FASB 131 supercedes FASB 14, "Financial
Reporting for Segments of a Business Enterprise". FASB 131 replaces the
"industry segment" approach with the "management approach". The management
approach designates the segments identified by management within the
organization that are regularly reviewed as to allocation of capital and
operating performance. FASB 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of FASB 131 did not
affect the Company's financial position or results of operations.
The Company has four reportable segments, mortgage banking, sub-prime
and prime mortgage lending, construction lending and commercial lending. The sub
prime mortgage banking segment originates residential mortgage loans to
borrowers who are unable to obtain financing from conventional mortgage sources
due to credit problems or income qualification issues. The prime mortgage
banking segment originates conventional and government guaranteed or insured
mortgage loans. The construction lending operation lends to homebuilders for the
construction of single family residences and to a lesser extent for the purchase
of lots and acquisition and development of land for residential construction.
The commercial lending operation lends to operators of rent to own or rental
purchase businesses. All of the business segments operate within the U.S.
The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies. The segment data includes
charges for interest and taxes from the Parent, NAB Asset Corporation.
Allocation between segments represents charges from the sub prime mortgage
banking operation to the prime mortgage operation and the construction lending
operation for administrative services. The charges are based upon an estimate of
actual expenses incurred.
The sub prime segment was acquired July 10, 1996. The prime mortgage
lending segment was acquired August 31, 1997. The construction lending segment
commenced operations December 30, 1997. The commercial lending operation
commenced operations January 17, 1997.
47
<PAGE> 49
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information concerning the operations of the segments is as follows (in
thousands):
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage Construction Commercial
Lending Lending Lending Lending Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Revenues, other than interest $ 11,630 $ 16,459 $ 1,116 $ 14 $ 29,219
Interest income 3,797 3,175 4,978 940 12,890
Interest expense 2,769 3,383 4,205 164 10,521
Depreciation and amortization 403 264 76 57 800
Segment profit 119 2,637 605 272 3,633
Other non-cash items
Non-cash gain from
Securitization of loans 3,248 -- -- -- 3,248
Discount accretion -- -- -- 271 271
Premium amortization -- -- 383 -- 383
Segment assets(1) 100,680 -- 30,772 8,362 139,814
Expenditures for fixed assets(1) 413 -- 105 5 523
</TABLE>
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage Construction Commercial
Lending Lending Lending Lending Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Revenues, other than interest $ 8,847 $ 4,516 $ -- $ 33 $ 13,396
Interest income 2,009 729 29 611 3,378
Interest expense 1,531 863 20 -- 2,414
Depreciation and amortization 332 76 -- 4 412
Segment profit 2,381 555 5 141 3,082
Other non-cash items
Premium amortization -- 383 -- -- 383
Segment assets(1) 66,342 -- 56,853 5,140 128,335
Expenditures for fixed assets(1) 428 -- 59 20 507
</TABLE>
<TABLE>
<CAPTION>
Sub Prime Prime
Mortgage Mortgage Construction Commercial
Lending Lending Lending Lending Total
-------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Revenues, other than interest $ 1,088 $ -- $ -- $ -- $ 1,088
Interest income 261 -- -- -- 261
Interest expense 172 -- -- -- 172
Depreciation and amortization 91 -- -- -- 91
Segment profit (loss) (404) -- -- -- (404)
Segment assets 14,544 -- -- -- 14,544
Expenditures for fixed assets 138 -- -- -- 138
</TABLE>
48
<PAGE> 50
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) The Company has not disclosed separate asset information for the sub prime
and prime mortgage segments because that information is not produced internally.
The information provided for the sub prime segment includes the prime segment.
The reconciliation of the segment information above to that as reported
in the Company's Statement of Financial Condition and Statement of Operations is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues
Total revenues for reportable segments $ 42,109 $ 16,774 $ 1,349
Other revenues 178 113 65
Interest paid to segment from corporate (142) -- --
Elimination of intersegment revenues (100) (32) --
-------- -------- --------
Total consolidated revenues $ 42,045 $ 16,855 $ 1,414
======== ======== ========
1998 1997 1996
-------- -------- --------
Interest Income
Total interest income for reportable
segments $ 12,890 $ 3,378 $ 261
Unallocated interest income 178 113 62
Interest paid to segment from corporate (142) -- --
-------- -------- --------
Total consolidated interest income $ 12,926 $ 3,491 $ 323
======== ======== ========
1998 1997 1996
-------- -------- --------
Interest Expense
Total interest expense for
reportable segments $ 10,521 $ 2,414 $ 172
Unallocated interest expense 2,289 389 --
Net interest paid to corporate from segments (997) (212) (68)
-------- -------- --------
Total consolidated interest expense $ 11,813 $ 2,591 $ 104
======== ======== ========
1998 1997 1996
-------- -------- --------
Earnings (loss)
Total segment profit (loss) $ 3,633 $ 3,082 $ (404)
Unallocated amounts:
Interest expense (2,289) (389) --
Corporate income 178 113 65
Corporate expenses (2,357) (1,897) (525)
Net segment interest paid to corporate 997 212 68
-------- -------- --------
Earnings (loss) from continuing operations $ 162 $ 1,121 $ (796)
======== ======== ========
</TABLE>
49
<PAGE> 51
NAB ASSET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Assets
Total assets for reportable segments $ 139,814 $ 128,335 $ 14,544
Elimination of intersegment assets (8) -- --
Elimination of corporate payables / receivables (2,572) (1,500) --
Net assets of discontinued operation -- -- 377
Other assets 3,565 2,284 2,983
--------- --------- ---------
Total consolidated assets $ 140,799 $ 129,119 $ 17,904
========= ========= =========
</TABLE>
During 1998 approximately $5,619,000 or 13% of the Company's revenues
were the result of sub-prime loan sales to one customer. During 1997
approximately $6,236,000 or 37% of the Company's revenues were the result of
sub-prime loan sales to two customers.
(15) SUBSEQUENT EVENTS AND LIQUIDITY
On March 29, 1999 NAB entered into a Payment Deferral Agreement with
SFSC in which SFSC agreed to extend the maturity dates on NAB's $6,377,000 in
notes payable to SFSC that were due June 30, 1999 to January 3, 2000.
Additionally, SFSC agreed to defer interest payments on all notes due from NAB
until January 3, 2000. The Company intends to pursue the refinancing of those
notes with a third party. There can be no assurance that such refinancing can be
accomplished and, if no financing is obtainable, that SFSC would agree to a
further extension of the maturity dates.
As of December 31, 1998 NAB had remaining indebtedness to CPS totaling
$2,100,000. The note originally due December 31, 1998 has been extended to April
30, 1999. Since December 31, 1998 NAB has repaid $1,400,000 and has $700,000
remaining. In order to pay the remaining amount NAB must obtain cash from
operations (which consists primarily of tax sharing payments from its
subsidiaries), financing from third parties, sell existing assets, obtain more
favorable terms under its various debt agreements or achieve a combination of
the above. The Company is currently pursuing all of these alternatives and
believes that the remaining amount due will be paid on a timely basis.
50
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, information on
executive compensation is incorporated by reference from the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, information on
executive compensation is incorporated by reference from the Registrant's
definitive Proxy Statement to be filed pursuant to Regulation 14A promulgated by
the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, information on
security ownership of certain beneficial owners and management is incorporated
by reference from the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A promulgated by the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, information on
certain relationships and related transactions is incorporated be reference from
the Registrant's definitive Proxy Statement to filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) 1. INDEX TO FINANCIAL STATEMENTS PAGE
----
<S> <C>
Independent Auditors' Report 26
Consolidated Balance Sheets as of December 31, 1998 and 1997 27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 28
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 30
Notes to Consolidated Financial Statements 31
FINANCIAL STATEMENT SCHEDULES
None
</TABLE>
51
<PAGE> 53
3. EXHIBITS
<TABLE>
<S> <C>
2.1 Plan and Agreement of Merger dated February 7, 1996, by and among
Consumer Portfolio Services, Inc., CPS Investing Corp., and Registrant
(Incorporated by reference to Exhibit 2.1 to Form 8-K dated February
28, 1996).
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit A to Appendix A to the Registrant's Proxy Statement dated April
23, 1996).
3.2 Restated By-laws (Incorporated by reference to Exhibit B to Appendix A
to the Registrant's Proxy Statement dated April 23, 1996).
10.1 Employment Agreement dated December 1, 1996 between Registrant NAB
Asset and Michael W. Caton (Incorporated by reference to Exhibit 10.8
to Form 10K dated December 31, 1996).
10.2 Employment Agreement dated December 1, 1996 between James E. Hinton and
Mortgage Portfolio Services, Inc. (Incorporated by reference to Exhibit
10.9 to Form 10K dated December 31, 1996).
10.4 $800,000 Promissory Note dated June 27, 1997 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.11 to Form 10Q dated
September 30, 1997).
10.5 $5,000,000 Credit Line Note dated August 28, 1997 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.12 to Form 10Q dated
September 30, 1997).
10.6 $2,500,000 Promissory Note dated September 30, 1997 issued by
Registrant to SFSC. (Incorporated by reference to Exhibit 10.13 to Form
10Q dated September 30, 1997).
10.7 Asset Sale and Purchase Agreement dated as of December 23, 1997 between
Pacific Southwest Bank and Construction Portfolio Funding, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 8K filed January 14,
1998).
10.8 Rescission Agreement dated June 3, 1998 (but effective as of March 2,
1998) among the Registrant, Consumer Portfolio Services, Inc., Charles
E. Bradley, Sr., Charles E. Bradley, Jr., John Poole and Scott A.
Junkin (Incorporated by reference to Exhibit 10.23 to Form 8K filed
June 3, 1998
10.9 Third Restated Credit Agreement between Mortgage Portfolio Services,
Inc. and Guaranty Federal Bank, F.S.B. dated June 30, 1998
(Incorporated by reference to Exhibit 10.23 to Form 10Q dated June 30,
1998)
10.10 $900,000 Promissory Note dated March 12,1998 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.24 to Form 10Q dated
September 30, 1998)
10.11 $1,100,000 Promissory Note dated March 13,1998 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.25 to Form 10Q dated
September 30, 1998)
10.12 $3,000,000 Promissory Note dated June 25,1998 issued by Registrant to
CPS (Incorporated by reference to Exhibit 10.26 to Form 10Q dated
September 30, 1998)
10.13 Debt Restructure Agreement dated as of August 13, 1998 between the
Registrant and SFSC (filed herewith)
10.14 $500,000 Promissory Note dated September 25,1998 issued by Registrant
to SFSC (Incorporated by reference to Exhibit 10.27 to Form 10Q dated
September 30, 1998)
10.15 $800,000 Promissory Note dated October 23,1998 issued by Registrant to
SFSC (Filed herewith)
10.16 Third Amendment to Warehousing Credit and Security Agreement dated as
of December 15, 1998 between Construction Portfolio Funding, Inc. and
Bank United. (Filed herewith)
10.17 Payment Deferral Agreement dated March 26, 1999 between Registrant and
SFSC (filed herewith)
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule.
</TABLE>
(b). REPORTS ON FORM 8-K
A Form 8-K was filed on November 13, 1998 reporting the sale of
approximately $28,000,000 in residential construction loans.
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NAB ASSET CORPORATION
By: /s/ Charles E. Bradley, Sr.
------------------------------------------------
Charles E. Bradley, Sr.
Chairman of the Board/Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board March 29, 1999
/s/ Charles E. Bradley, Sr. Chief Executive Officer
------------------------------------ (Principal Executive Officer)
Charles E. Bradley, Sr.
President March 29, 1999
/s/ Michael W. Caton Chief Operating Officer and
------------------------------------ Director
Michael W. Caton
Senior Vice President March 29, 1999
/s/ Alan Ferree Chief Financial Officer
------------------------------------ (Principal Financial Officer)
Alan Ferree
/s/ Timothy G. Hanson Controller March 29, 1999
------------------------------------ (Principal Accounting Officer)
Timothy G. Hanson
/s/ Charles E. Bradley, Jr. Director March 29, 1999
------------------------------------
Charles E. Bradley, Jr.
/s/ James B. Gardner Director March 29, 1999
------------------------------------
James B. Gardner
/s/ Jeffrey W. Kramer Director March 29, 1999
------------------------------------
Jeffrey W. Kramer
</TABLE>
53
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Plan and Agreement of Merger dated February 7, 1996, by and among
Consumer Portfolio Services, Inc., CPS Investing Corp., and Registrant
(Incorporated by reference to Exhibit 2.1 to Form 8-K dated February
28, 1996).
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit A to Appendix A to the Registrant's Proxy Statement dated April
23, 1996).
3.2 Restated By-laws (Incorporated by reference to Exhibit B to Appendix A
to the Registrant's Proxy Statement dated April 23, 1996).
10.1 Employment Agreement dated December 1, 1996 between Registrant NAB
Asset and Michael W. Caton (Incorporated by reference to Exhibit 10.8
to Form 10K dated December 31, 1996).
10.2 Employment Agreement dated December 1, 1996 between James E. Hinton and
Mortgage Portfolio Services, Inc. (Incorporated by reference to Exhibit
10.9 to Form 10K dated December 31, 1996).
10.4 $800,000 Promissory Note dated June 27, 1997 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.11 to Form 10Q dated
September 30, 1997).
10.5 $5,000,000 Credit Line Note dated August 28, 1997 issued by Registrant
to SFSC. (Incorporated by reference to Exhibit 10.12 to Form 10Q dated
September 30, 1997).
10.6 $2,500,000 Promissory Note dated September 30, 1997 issued by
Registrant to SFSC. (Incorporated by reference to Exhibit 10.13 to Form
10Q dated September 30, 1997).
10.7 Asset Sale and Purchase Agreement dated as of December 23, 1997 between
Pacific Southwest Bank and Construction Portfolio Funding, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 8K filed January 14,
1998).
10.8 Rescission Agreement dated June 3, 1998 (but effective as of March 2,
1998) among the Registrant, Consumer Portfolio Services, Inc., Charles
E. Bradley, Sr., Charles E. Bradley, Jr., John Poole and Scott A.
Junkin (Incorporated by reference to Exhibit 10.23 to Form 8K filed
June 3, 1998
10.9 Third Restated Credit Agreement between Mortgage Portfolio Services,
Inc. and Guaranty Federal Bank, F.S.B. dated June 30, 1998
(Incorporated by reference to Exhibit 10.23 to Form 10Q dated June 30,
1998)
10.10 $900,000 Promissory Note dated March 12,1998 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.24 to Form 10Q dated
September 30, 1998)
10.11 $1,100,000 Promissory Note dated March 13,1998 issued by Registrant to
SFSC (Incorporated by reference to Exhibit 10.25 to Form 10Q dated
September 30, 1998)
10.12 $3,000,000 Promissory Note dated June 25,1998 issued by Registrant to
CPS (Incorporated by reference to Exhibit 10.26 to Form 10Q dated
September 30, 1998)
10.13 Debt Restructure Agreement dated as of August 13, 1998 between the
Registrant and SFSC (filed herewith)
10.14 $500,000 Promissory Note dated September 25,1998 issued by Registrant
to SFSC (Incorporated by reference to Exhibit 10.27 to Form 10Q dated
September 30, 1998)
10.15 $800,000 Promissory Note dated October 23,1998 issued by Registrant to
SFSC (Filed herewith)
10.16 Third Amendment to Warehousing Credit and Security Agreement dated as
of December 15, 1998 between Construction Portfolio Funding, Inc. and
Bank United. (Filed herewith)
10.17 Payment Deferral Agreement dated March 26, 1999 between Registrant and
SFSC (filed herewith)
21.1 Subsidiaries of the registrant.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 10.13
DEBT RESTRUCTURE AGREEMENT
This Agreement dated as of August 13, 1998 is between Stanwich
Financial Services Corp., a Rhode Island corporation ("SFSC"), and NAB Asset
Corporation, a Texas corporation ("NAB").
RECITALS
a. NAB is the holder of the following promissory notes issued to it
(collectively, "NAB'S NOTES RECEIVABLE"):
(i) Term Promissory Note dated June 2, 1997 in the
original principal amount of $300,000 issued by
Export Finance Network, Inc. (such issuer being
referred to herein as "EFN" and such note being
referred to herein as the "EFN NOTE"); and
(ii) Promissory Note dated June 27, 1997 in the original
principal amount of $1,300,000 issued by CARS
Holdings, Inc. (the "CARS NOTE").
b. Charles E. Bradley, Sr. and Charles E. Bradley, Jr. have guaranteed
the payment of the CARS Note pursuant to a certain Guaranty dated June 27, 1997
(the "BRADLEY CARS GUARANTEE").
c. Charles E. Bradley, Sr. has guaranteed the payment of the EFN Note
(the "BRADLEY EFN Guaranty").
d. The EFN Note was issued pursuant to a certain Loan and Option
Agreement dated June 2, 1997 between NAB and EFN (the "EFN AGREEMENT").
e. Pursuant to the EFN Agreement, EFN granted to NAB an option (the
"EFN OPTION") to purchase 17.65 shares of EFN's common stock (the "OPTION
SHARES") for an aggregate price of $17.65 (the "OPTION PRICE").
f. On November 5, 1997, NAB exercised the EFN Option and paid the
Option Price to EFN in connection therewith.
g. NAB is indebted to SFSC under a certain Promissory Note dated
September 30, 1997 in the original principal amount of $2,500,000 (the "9/97
NAB NOTE"), as well as under certain other promissory
notes.
h. NAB desires to pay a portion of its indebtedness under the 9/97 NAB
Note by transferring, assigning and endorsing NAB's Notes Receivable to SFSC,
and SFSC is willing to accept such payment on the terms hereinafter set forth.
<PAGE> 2
i. NAB has requested that SFSC extend the maturity of certain other
promissory notes issued by NAB to SFSC, and SFSC is willing to do so on the
terms hereinafter set forth.
NOW THEREFORE, the parties agree as follows:
1. For the consideration described in paragraphs 3 and 4, NAB hereby
sells, assigns and transfers to SFSC, without representation or recourse, except
as set forth in paragraph 2, all of NAB's rights, title and interest in, to and
under the following (collectively, the "TRANSFERRED ASSETS"):
(i) NAB's Notes Receivable;
(ii) the Bradley CARS Guaranty;
(iii) the Bradley EFN Guaranty;
(iv) The EFN Agreement; and
(v) the Option Shares.
2. NAB represents and warrants to SFSC as follows:
a. It is the sole outright owner of the Transferred
Assets, free and clear of all liens, claims, charges,
encumbrances and other restrictions, except for any
restrictions imposed by applicable securities laws.
b. As of the date hereof, the outstanding principal of,
and accrued and unpaid interest under, NAB's Notes
Receivable are as follows:
<TABLE>
<CAPTION>
Principal Interest Totals
------------- --------- -------------
<S> <C> <C> <C>
EFN Note $ 300,000.00 $18,493.15 $ 318,493.15
CARS Note $1,300,000.00 $43,273.97 $1,343,273.97
------------- --------- -------------
$1,600,000.00 $61,767.10 $1,661,767.12
</TABLE>
3. As purchase price and other consideration for the Transferred
Assets, (i) SFSC hereby reduces NAB's indebtedness under the 9/97 NAB Note by
$1,661,767.12, such amount being the aggregate of the amounts owed under NAB's
Notes Receivable as of the date hereof; (ii) SFSC is today paying NAB by check
$17.65 (such amount being allocated to the Option Shares and to the rights under
the EFN Agreement); and (iii) SFSC is extending the maturity of certain
promissory notes issued by NAB, as set forth in paragraph 4. The reduction in
indebtedness under the 9/97 NAB Note pursuant to item (i) of the preceding
sentence is applied as follows: $61,767.12 to accrued and unpaid interest, and
$1,600,000.00 to principal. After giving effect to such reduction, as of the
date hereof, the principal balance under the 9/97 NAB Note is $900,000, and the
accrued and unpaid interest thereunder is $153,986.32.
2
<PAGE> 3
4. Each of the following promissory notes is hereby amended to change
the Maturity Date specified therein to June 30, 1999: (i) Promissory Note dated
March 12, 1998 in the original principal amount of $900,000 issued by NAB to
SFSC; (ii) Promissory Note dated March 13, 1998 in the original principal amount
of $1,100,000 issued by NAB to SFSC; (iii) Promissory Note dated June 27, 1997
in the original principal amount of $800,000 issued by NAB to SFSC (the "6/97
NAB NOTE"); and (iv) Promissory Note dated December 30, 1997 in the original
principal amount of $4,000,000 issued by NAB to CPS and subsequently assigned
and endorsed by CPS to SFSC (the "12/97 NAB NOTE"). As used herein, the term
"Maturity Date" means, with respect to each promissory note referred to in the
preceding sentence, the date on or by which the principal of such note must be
paid in full (as set forth in numbered paragraph 1 of each such promissory
note), and the term "CPS" means Consumer Portfolio Services, Inc., a California
corporation.
5. Numbered paragraph 2 of each of the 6/97 NAB Note and the 12/97 NAB
Note is hereby amended to provide that interest shall also be payable thereunder
on September 30, 1998; December 31, 1998; March 31, 1999; and June 30, 1999 and
on any other date on which the principal thereof is paid.
6. NAB agrees to execute and deliver to SFSC, or as SFSC may direct,
all such other agreements, instruments, documents and notices, and to take all
such other actions, as SFSC may reasonably request in order to effectively
transfer the Transferred Assets to SFSC.
7. This Agreement (i) constitutes the entire understanding of the
parties with respect to the subject matter hereof, (ii) shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns, (iii) shall be governed and construed in accordance with
Connecticut law, and (iv) may be executed in multiple counterparts, each of
which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NAB ASSET CORPORATION
By /s/ Alan Ferree
--------------------------------
Name: Alan Ferree
Title: Senior Vice President
STANWICH FINANCIAL SERVICES CORP.
By /s/ Charles E. Bradley
--------------------------------
Name: Charles E. Bradley
Title: President
3
<PAGE> 1
Exhibit 10.15
PROMISSORY NOTE
$800,000 October 23, 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 Eight
Hundred Thousand Dollars ($800,000) 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
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 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.
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
2
<PAGE> 3
(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 $800,000 made by the Holder to the Maker on
the date hereof. At the Maker's direction, the Holder funded the loan by paying
said amount to Consumer Portfolio Services, Inc. ("CPS"). Such payment
constituted (1) a loan by the Holder to the Maker and (2) 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
<PAGE> 1
Exhibit 10.16
THIRD AMENDMENT TO
WAREHOUSING CREDIT AND SECURITY AGREEMENT
This Third Amendment to Warehousing Credit and Security Agreement (this
"Amendment"), is entered into as of the 15th day of December 1998, by and
between CONSTRUCTION PORTFOLIO FUNDING, INC., a Texas corporation (the
"Company"), and BANK UNITED, a federal savings bank ("Lender"). Capitalized
terms used but not defined herein have the meanings assigned to them in that
certain Warehousing Credit and Security Agreement (the "Credit Agreement") dated
effective as of December 30, 1997, by and between the Company and Lender, as the
same has been or may be amended or supplemented from time to time.
Section 1. Recitals. The Company and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:
Section 2. Amendments. The Credit Agreement is hereby amended and
supplemented as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by the
amendment or addition of the following definitions:
All references to the "Construction Policies and
Procedures Manual" shall hereafter be references to "Credit
and Underwriting Policies for Real Estate Lending," a copy of
which is attached hereto as Exhibit B.
"Aged Loans" means, collectively, (a) any Residential
Construction Loan for any Sold Home and Speculative Home
included in Collateral for a period of more than three hundred
sixty (360) days, (b) any Residential Construction Loan for
Model Homes included in Collateral for a period of more than
six hundred thirty (630) days, (c) any Residential A&D Loan
included in Collateral for a period of more than six hundred
thirty (630) days, and (d) any Commercial Mortgage Loan
included in the Collateral for a period of more than three
hundred sixty-five (365) days.
"Appraisal" means (a) with respect to each Home to be
constructed under any Residential Construction Loan, a current
fair market value appraisal, accepted by the Company in
accordance with the Construction Loan Agreement, that
appraises on a "completed value" basis the Home to be
constructed on a specified Lot; (b) with respect to any Lot
under any Residential Construction Loan or any Residential
Land under any residential A&D Loan, a current fair market
value appraisal of such Lot or Residential Land; (c) with
respect to any Consumer Lot Loan, a current fair market
appraisal of the lot to be acquired with proceeds of such
Consumer Lot Loan; (d) with respect to any Consumer
Construction Loan, a current fair market value appraisal that
appraises on a "completed value" basis the Home to be
constructed from the proceeds of such Consumer Construction
Loan and the lot on which such Home is located; and (e) with
respect to any Commercial Mortgage Loan, a current fair market
value appraisal of the real property (including all
improvements thereon)
<PAGE> 2
securing such Commercial Mortgage Loan; each of the foregoing
appraisals must satisfy the appraisal requirements of the
Office of Thrift Supervision ("OTS") pertaining to that
particular loan, as amended from time to time, provided,
however, that the Company shall not have any obligation to
conform to any changes in the OTS appraisal requirements
occurring after the effective date herewith unless Lender has
notified the Company in writing of such changes.
"Appraisal Value" means (a) with respect to each Lot
and Home to be constructed thereon under any Residential
Construction Loan, the fair market value of such Lot and Home,
upon one hundred percent (100%) completion of all construction
thereof in accordance with the Plans and Specifications for
such Home plus lot value for such Lot, all as determined by
the Appraisal; (b) with respect to a Lot on which a Home is to
be constructed thereon under any Residential Construction
Loan, the fair market value attributable to such Lot in the
Appraisal; (c) with respect to Residential Land under any
Residential A&D Loan, the fair market value attributable to
such Residential Land in the Appraisal; (d) with respect to
each Lot and Home to be constructed thereon under any Consumer
Construction Loan, the fair market value of such Lot and Home,
upon one hundred percent (100%) completion of all construction
of such Home plus lot value for such Lot, all as determined by
the Appraisal; (e) with respect to a Lot on which a Home is to
be constructed thereon under any Consumer Lot Loan, the fair
market value attributable to such Lot in the Appraisal; and
(f) with respect to the property securing a Commercial
Mortgage Loan, the fair market value of such property and all
improvements thereon, all as determined by the Appraisal.
"Assignment Documents" means originals of such
instruments, documents, agreements, assignments, certificates,
UCC Financing Statements, allonges or endorsements, in form
and substance satisfactory to Lender in Lender's sole
discretion, which Lender reasonably determines are necessary
or appropriate to evidence and/or effectuate the assignment to
Lender of all of the Company's right, title and interest in
and to any and all Residential Construction Loans, Residential
A&D Loans, Consumer Construction Loans, Consumer Lot Loans,
and Commercial Mortgage Loans in respect of which Advances
have been made by the Lender hereunder, including, without
limitation, all Consumer Loan Documents evidencing Consumer
Construction Loans and Consumer Lot Loans, all Construction
Loan Documents evidencing such Residential Construction Loans
and Residential A&D Loans, and all Commercial Loan Documents
evidencing Commercial Mortgage Loans, and the proceeds thereof
and Lender's perfection of a valid first priority lien thereon
or therein, including, without limitation, the UCC Financing
Statement.
"Commercial Loan Documents" shall mean, with respect
to any Commercial Mortgage Loan, any and all agreements or
instruments now or hereafter executed and delivered by any
Person in connection with, or as security for the payment or
- --------------------------------------------------------------------------------
Page 2
<PAGE> 3
performance of such Commercial Mortgage Loan, as such
Commercial Loan Documents may be supplemented, modified, or
amended.
"Commercial Loan Guidelines" means guidelines for
commercial loans set forth in the "Credit and Underwriting
Policies for Real Estate Lending," a copy of which is attached
hereto as Exhibit B.
"Commercial Mortgage Loan" shall mean any Mortgage
Loan that (a) is evidenced by a Mortgage Note secured by a
First Mortgage covering improved commercial real property, (b)
has closed not more than ninety (90) days prior to the date of
any determination, (c) is not in default in the payment of
principal and interest or in the performance of any obligation
under the note or mortgage evidencing or securing such loan
for a period greater than thirty (30) days, (d) is not in
foreclosure or subject to any claim for any credit, allowance,
or adjustment, and (e) complies with the Commercial Loan
Guidelines and the requirements of the Credit and Underwriting
Policies in all material respects.
"Commercial Note" means a promissory note executed by
any Person to the Company (or otherwise payable to the
Company) to evidence a Commercial Mortgage Loan, as such note
may be from time to time renewed, extended, rearranged,
modified, amended, restated, or replaced.
"Eligible Commercial Loan" means a Commercial
Mortgage Loan that, at all times during the term of this
Agreement, (a) is evidenced by Commercial Loan Documents that
are substantially in the forms previously approved, in
writing, by the Lender in its reasonable discretion; (b) is
validly pledged to the Lender, subject to no other Liens; (c)
is not in default in the payment of principal and interest for
a period of more than thirty (30) days; (d) is not in default
in the performance of any obligation under the Commercial Loan
Documents evidencing or securing such Eligible Commercial
Loan, that has not been cured by the borrower; (e) is not
subject to a bankruptcy or an act of fraud by the borrower
under such Eligible Commercial Loan, as the case may be; (f)
complies with all applicable Commercial Loan Guidelines in all
material respects, (g) is for a loan amount that does not
exceed its Loan Value; and (h) may not comply with all of the
foregoing terms but is otherwise on terms acceptable to the
Lender in its sole discretion as indicated by Lender's
specific written or oral waiver of non-compliance with such
foregoing terms.
"The definition of "Loan Value" is supplemented by
the addition of the following subsection (f):
"(f) with respect to each Commercial Mortgage Loan,
the least of (i) the Appraisal Value of the real
property (including all improvements thereon)
securing such Commercial Mortgage Loan; (ii) the
original principal amount of the Commercial Note
evidencing such Commercial Mortgage Loan; or (iii)
- --------------------------------------------------------------------------------
Page 3
<PAGE> 4
the outstanding principal balance of the Commercial
Note evidencing such Commercial Mortgage Loan."
"Pledged Mortgage" means any Residential Construction
Loan, Residential A&D Loan, Aged Loan, Consumer Construction
Loan, Consumer Lot Loan or Commercial Mortgage Loan, included
in the Collateral.
"Request for Advance" means, for Mortgage Loans that
are not Commercial Mortgage Loans, a disbursement request
summary accompanied by a Warehouse Loan Balance Summary,
substantially in the form of Exhibits "L", "M" and "R",
respectively, attached hereto, specifying the amount of the
requested Advance, the Residential Construction Loans,
Residential A&D Loans, Consumer Construction Loans, Consumer
Lot Loans, and Commercial Mortgage Loans, and (if not a
Commercial Mortgage Loan) the construction costs specified in
the applicable Construction Costs Schedule relating to such
loans that will be funded with the proceeds of such Advance
and a request that Lender make such Advance in accordance with
the terms of this Agreement. Notwithstanding the foregoing, if
the Advance is to be made against a Commercial Mortgage Loan,
"Request for Advance" shall mean the Form attached hereto as
Exhibit R, accompanied by documentation set forth in Exhibit
A-1 attached hereto.
"Termination Date" shall mean June 14, 1999, or such
earlier date upon which Lender's obligation to fund shall be
terminated pursuant to the terms of this Agreement.
"Year 2000 Issue" shall mean the failure of computer
software, hardware, and firmware systems and equipment
containing embedded computer chips to properly receive,
transmit, process, manipulate, store, retrieve, re-transmit,
or in any other way utilize data and information due to the
occurrence of the year 2000 or the inclusion of dates before,
on, or after January 1, 2000 (including, without limitation,
September 9, 1999, and February 29, 2000.
(b) Section 2.1 of the Credit Agreement is deleted in its entirety, and
the following is substituted therefor:
"2.1. The Commitment.
"(a) Subject to the terms and conditions of this Agreement and
provided no Default or Event of Default has occurred and is
continuing, the Lender agrees, from time to time during the
period from the date hereof to and including the Termination
Date, to make Advances to the Company, provided the total
aggregate principal amount outstanding at any one time of all
such Advances shall not exceed FORTY MILLION DOLLARS
($40,000,000.00) at any time after the date hereof. The
obligation of the Lender to make Advances hereunder up to such
limit is
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<PAGE> 5
hereinafter referred to as the "Commitment." Within the
Commitment, the Company may borrow, repay, and reborrow. All
Advances under this Agreement shall constitute a single
indebtedness, and all of the Collateral shall be security for
the Note and for the performance of all the Obligations of the
Company to the Lender.
"(b) Advances shall be used by the Company solely for the
purpose of funding or purchasing and/or funding Residential
Construction Loans, Residential A&D Loans, Consumer
Construction Loans, Consumer Lot Loans, and Commercial
Mortgage Loans, as specified in the Request for Advance, and
none other, and shall be made at the request of the Company in
the manner hereinafter provided in Section 2.2, against the
pledge of such Residential Construction Loans, Residential A&D
Loans, Consumer Construction Loans, Consumer Lot Loans, and
Commercial Mortgage Loans, as the case may be, and such other
collateral as is set forth in section 3.1 hereof as Collateral
therefor. Advances shall also be subject to the following
restrictions:
"(1) No Advance shall be made against a Residential
Construction Loan, a Residential A&D Loan, an Aged
Loan, a Consumer Construction Loan, or a Consumer Lot
Loan that is not an Eligible Construction Loan.
"(2) No Advance shall be made against a Commercial
Mortgage Loan that is not an Eligible Commercial
Loan.
"(3) The aggregate amount of all Advances against
Residential Construction Loans outstanding at any one
time shall not exceed FORTY MILLION AND NO/100
DOLLARS ($40,000,000/00). The aggregate face amount
of all Residential Construction Loans in respect of
which an Advance has been made by the Lender
hereunder shall not exceed in the aggregate Eighty
Million and No/100 Dollars ($80,000,000.00).
"(4) The aggregate amount of all Advances against
Model Homes under all Residential Construction Loans
outstanding at any one time shall not exceed Six
Million and No/100 Dollars ($6,000,000.00). The
aggregate face amount of all Residential Construction
Loans for Model Homes in respect of which an Advance
has been made by the Lender hereunder shall not
exceed in the aggregate Twelve Million and No/100
Dollars ($12,000,000.00).
"(5) The aggregate amount of all Advances against
Speculative Homes under all Residential Construction
Loans outstanding at any one time shall not exceed
Sixteen Million and No/100 Dollars ($16,000 000.00).
The aggregate face amount of all Residential
Construction Loans for Speculative Homes in respect
of which an Advance has been made by the Lender
hereunder shall not exceed in the aggregate
Thirty-two Million and No/100 Dollars
($32,000,000.00).
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<PAGE> 6
"(6) The aggregate amount of all Advances against
Residential A&D Loans and Commercial Mortgage Loans
outstanding at any one time shall not exceed Eight
Million and No/100 Dollars ($8,000,000.00); provided,
however, that in no event shall the aggregate amount
of Advances outstanding against Commercial Mortgage
Loans exceed Four Million Dollars ($4,000,000). The
aggregate face amount of all Residential A&D Loans
and Commercial Mortgage Loans in respect of which an
Advance has been made by the Lender hereunder shall
not exceed in the aggregate Sixteen Million and
No/100 Dollars ($16,000,000.00); provided, however,
that in no event shall the aggregate face amount of
all Commercial Mortgage Loans in respect of which an
Advance has been made by lender exceed in the
aggregate Eight Million Dollars ($8,000,000).
"(7) The aggregate amount of all Advances against
Residential A&D Loans, Model Homes, and Speculative
Homes outstanding at any one time shall not exceed
Twenty Million and No/100 Dollars ($20,000,000.00).
The aggregate face amount of all Residential A&D
Loans in respect of which an Advance has been made by
the Lender hereunder shall not exceed in the
aggregate Forty Million and No/100 Dollars
($40,000,000.00).
"(8) The aggregate amount of all Advances against
Aged Loans (that are not Commercial Mortgage Loans)
outstanding at any one time shall not exceed Six
Million and No/100 Dollars ($6,000,000.00). The
aggregate face amount of all Aged Loans (that are not
Commercial Mortgage Loans) in respect of which an
Advance has been made by the Lender hereunder shall
not exceed in the aggregate Twelve Million and No/100
Dollars ($12,000,000.00).
"(9) The aggregate amount of all Advances against
Aged Loans (that are Commercial Mortgage Loans)
outstanding at any one time shall not exceed One
Million and No/100 Dollars ($1,000,000.00). The
aggregate face amount of all Aged Loans (that are
Commercial Mortgage Loans) in respect of which an
Advance has been made by the Lender hereunder shall
not exceed in the aggregate Two Million and No/100
Dollars ($2,000,000.00).
"(10) The aggregate amount of all Advances against
Consumer Construction Loans and Consumer Lot Loans
outstanding at any one time shall not exceed Four
Million and No/100 Dollars ($4,000,000.00). The
aggregate face amount of all Consumer Construction
Loans and Consumer Lot Loans in respect of which an
Advance has been made by the Lender hereunder shall
not exceed in the aggregate Eight Million and No/100
Dollars ($8,000,000.00).
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<PAGE> 7
"(c) No Advance shall exceed the following amounts applicable
to the type of Collateral acquired with proceeds of the
Advance, determined as of the date the Collateral is pledged
to Lender:
"(1) with respect to Residential Construction Loans,
no Advance shall exceed an amount equal to ninety
percent (90%) of the amount of the Construction Loan
Advance under such residential Construction Loan to
be funded from the proceeds of the Advance.
"(2) with respect to any Residential A&D Loans that
has a loan-to-value ratio equal to or less than 70%
and a loan-to-cost ratio equal to or less than 90%,
no Advance shall exceed an amount equal to ninety
percent (90%) of the amount of the Construction Loan
Advance under such Residential A&D Loan to be funded
from the proceeds of the Advance.
"(3) with respect to Residential A&D Loans that
exceed the ratios set forth in Section 2.1(c)(2)
above, no Advance shall exceed an amount equal to
eighty percent (80%) of the amount of the
Construction Loan Advance under such Residential A&D
Loan to be funded from the proceeds of the Advance.
"(4) with respect to Commercial Mortgage Loans, no
Advance shall exceed an amount equal to 75% of the
Loan Value of such Commercial Mortgage Loan.
"(5) with respect to Aged Loans that are not
Commercial Mortgage Loans, no Advance shall exceed an
amount equal to sixty-five percent (65%) of the
principal amount outstanding of such Aged Loan prior
to any principal reductions required and received by
the Company from its borrower.
"(6) with respect to Aged Mortgage Loans that are
Commercial Mortgage Loans, no Advance shall exceed an
amount equal to sixty-five percent (65%) of the Loan
Value of such Commercial Mortgage Loan, prior to any
principal reductions required and received by the
Company from its borrower.
"(7) with respect to Consumer Lot Loans, no Advance
shall exceed an amount equal to eighty percent (80%)
of the amount of the Advance made by the Company
under such Consumer Lot Loan to be funded from the
proceeds of the Advance.
"(8) with respect to Consumer Construction Loans, no
Advance shall exceed an amount equal to ninety
percent (90%) of the amount of the Advance made by
the Company under such Consumer Construction Loan to
be funded from the proceeds of the Advance.
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<PAGE> 8
"(9) with respect to Aged Loans that are Acquired
Loans and that have been included in Collateral for
more than 450 days but less than 720 days, no Advance
shall exceed an amount equal to 50% of the principal
amount outstanding of such Aged Loan as of December
30, 1997.
(c) Section 2.4(a)(3) is amended to read as follows:
"(3) The unpaid amount of each advance outstanding against an
Aged Loan (that is not a Commercial Mortgage Loan) shall bear
interest from the later to occur of the date such Aged Loan
became an Aged Loan hereunder or the date of such Advance
until paid in full at a rate of interest equal to the lesser
of (a) the Maximum Rate, or (b) a floating rate of interest
(the "Floating Rate") which is equal to 275 basis points
(2.75%) per annum over the Monthly Average LIBOR Rate.
(d) Section 2.4(a) is amended by the addition of the following
subsections (5) and (6):
"(5) The unpaid amount of each Advance outstanding against a
Commercial Mortgage Loan that is not an Aged Loan shall bear
interest from the date of such Advance until paid in full, at
a rate of interest equal to the lesser of (i) the Maximum
Rate, or (ii) a floating rate of interest which is equal to
325 basis points (3.25%) per annum over the Monthly Average
LIBOR Rate.
"(6) The unpaid amount of each Advance outstanding against an
Aged Loan that is a Commercial Mortgage Loan shall bear
interest from the date of such Advance until paid in full, at
a rate of interest equal to the lesser of (i) the Maximum
Rate, or (ii) a floating rate of interest which is equal to
375 basis points (3.75%) per annum over the Monthly Average
LIBOR Rate."
(e) Section 2.5(a) is deleted in its entirety, and the following is
substituted therefor:
"(a) The outstanding unpaid principal amount of all Advances
shall be payable in full upon June 14, 1999."
(f) Section 2.5(c) of the Credit Agreement is hereby deleted in its
entirety, and the following is substituted therefor:
"2.5. Principal Payments.
(c) The Company shall be obligated to pay to the
Lender, without the necessity of prior demand or notice from
the Lender, and the Company authorizes the Lender to charge
the Funding Account or any accounts of the Company in Lender's
possession for the amount of any outstanding Advance against a
specific Residential Construction
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Page 8
<PAGE> 9
Loan, Residential A&D Loan, Aged Loan, Consumer Construction
Loan, Consumer Lot Loan, or Commercial Mortgage Loan, as the
case may be, upon the earliest occurrence of any of the
following events:
"(1) Any Residential Construction Loan that has been
included in Collateral for more than three hundred
sixty (360) days; except for any Residential
Construction Loan that continued to be an Eligible
Construction Loan at the end of such period and in
such event shall automatically be deemed an Aged
Loan;
"(2) Any Residential Construction Loan for Model
Homes has been included in Collateral for more than
six hundred thirty (630) days; except for any
Residential Construction Loan for any Model Home that
continues to be an Eligible Construction Loan at the
end of such period and in such event shall
automatically be deemed an Aged Loan;
(3) Any Residential A&D Loan has been included in
Collateral for more than six hundred thirty (630)
days; except for any such Residential A&D Loan that
continues to be an Eligible Construction Loan at the
end of such period and in such event shall
automatically be deemed an Aged Loan;
(4) Any Consumer Construction Loan or Consumer Lot
Loan has been included in Collateral for more than
five hundred forty (540) days;
"(5) Any Commercial Mortgage Loan has been included
in Collateral for more than the three hundred
sixty-five (365) days; except for any Commercial
Mortgage Loan that continues to be an Eligible
Commercial Loan at the end of such period and in such
event shall automatically be deemed an Aged Mortgage
Loan;
"(6) Any Aged Loan has been included in Collateral
(as an Aged Loan) for more than ninety (90) days,
unless such Aged Loan is a Residential A&D Loan or a
Residential Construction Loan for a Model Home, in
which case such Aged Loan has been included in the
Collateral (as an Aged Loan) for more than one
hundred eighty (180) days;
"(7) Such Residential Construction Loan, Residential
A&D Loan, Aged Loan, Consumer Construction Loan,
Consumer Lot Loan, or Commercial Mortgage Loan, is
not or ceases to be an Eligible Construction Loan or
Eligible Commercial Loan;
"(8) Upon receipt by Company of payment by the
Builder of such Residential Construction Loan,
Residential A&D Loan or Aged Loan in full;
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Page 9
<PAGE> 10
"(9) Upon receipt by Company of payment by the
Borrower of any such Consumer Construction Loan,
Consumer Lot Loan, Commercial Mortgage Loan, or Aged
Loan, in full;
"(10) Notwithstanding the foregoing, any Aged Loan
that is an Acquired Loan may remain in the Collateral
for a period greater than 450 days but no more than
720 days, subject to the provisions of Section
2.1(c)(7) hereof. All amounts advanced against such
Aged Loans that are Acquired Loans shall be due and
payable when such Aged Loans have been included in
the Collateral for more than 720 days.
(g) Section 2.9 is deleted in its entirety, and the following is
substituted therefor:
"2.9 Commitment Fee. In consideration of Lender's agreement to
make Advances available to Company under the Commitment and to
extend the term of the Credit Agreement, subject to the terms
of this Agreement, Company shall pay to Lender a commitment
fee equal to $100,000 per annum, or $50,000 for six months
(the "Commitment Fee"). The Commitment Fee shall be due in two
(2) equal quarterly installments of $25,000 each. The first
installment of $25,000 shall be due and payable on the
execution date hereof and a like installment of $25,000.00
shall be due and payable on April 1, 1999. The Commitment Fee
shall be deemed fully earned and non-refundable upon the
execution and delivery of this Agreement by the parties,
notwithstanding the Commitment is never fully funded during
the term of this Agreement.
(h) Sections 3.1(a) is deleted in its entirety, and the following is
substituted therefor:
"(a) All Residential Construction Loans and all Commercial
Mortgage Loans and all Residential A&D Loans, including all
Commercial Notes, Construction Notes, Construction Loan
Agreements, Deeds of Trust, and all other Construction Loan
Documents or Commercial Loan Documents, as applicable,
evidencing and/or securing such Residential Construction
Loans, Residential A&D Loans or Commercial Mortgage Loans in
respect of which an Advance has been made by the Lender
hereunder."
(i) Section 3.2 is deleted in its entirety, and the following is
substituted therefor:
"3.2 Right of Redemption from Pledge. So long as no Event of
Default has occurred, the Company may redeem a Residential
Construction Loan, Residential A&D Loan, Aged Loan, Consumer
Construction Loan, Consumer Lot Loan or Commercial Mortgage
Loan by notifying the Lender of its intention to redeem such
Residential Construction Loan, Residential A&D Loan, Aged
Loan, Consumer Loan, Consumer Lot Loan, or Commercial Mortgage
Loan from pledge and by paying to Lender, for application to
prepayment of the principal balance of the Note, an amount
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<PAGE> 11
equal to the amount of all Advances outstanding with respect
to or relating to such Residential Construction Loan,
Residential A&D Loan, Aged Loan, Consumer Construction Loan,
Consumer Lot Loan, or Commercial Mortgage Loan."
(j) Sections 4.2(d), 5.13, 5.18, and 6.10 are deleted in their
entirety, and the following are substituted therefor:
"4.2(d) Lender shall not be obligated to fund all or any
portion of any Advance to be used to fund any Residential
Construction Loan, Residential A&D Loan, Consumer Construction
Loan, Consumer Lot Loan, or Commercial Mortgage Loan, unless
such Residential Construction Loan, Residential A&D Loan,
Consumer Construction Loan, or Consumer Lot Loan is an
Eligible Construction Loan or such Commercial Mortgage Loan is
an Eligible Commercial Loan."
"5.13 Direct Benefit From Loans. The Company has received, or,
upon the execution and funding thereof, will receive (a)
direct benefit from the making and execution of this Agreement
and the other Loan Documents to which it is a party, and (b)
fair and independent consideration for the entry into, and
performance of, this Agreement and the other Loan Documents to
which it is a party. Contemporaneously with the disbursements
of each Advance by the Lender to the Company, all such
proceeds will be used to fund or purchase and/or fund
Residential Construction Loans, Residential A&D Loans,
Consumer Construction Loans, Consumer Lot Loans, or Commercial
Mortgage Loans in accordance with the applicable Request for
Advance and none other."
"5.18 Use of Proceeds; Business Loans. The Company will use
the proceeds of the Advances made pursuant to the Commitment
solely as follows, and for no other purpose: finance the
funding of Residential Construction Loans, Residential A&D
Loans, Consumer Construction Loans, Consumer Lot Loans, and
Commercial Mortgage Loans. All loans evidenced by the Note are
and shall be "business loans" as such term is used in the
Depository Institutions Deregulation and Monetary Control Act
of 1980, as amended, and such loans are for business or
commercial purposes and not primarily for personal, family,
household or agricultural use, as such terms are used or
defined in chapter 1D, Texas Credit Title, Regulation Z
promulgated by the Board of Governors of the Federal Reserve
System, and Titles I and V of the Consumer Credit Protection
Act. The provisions of the Texas Credit Title which regulate
revolving loans and revolving triparty accounts) shall not
apply to this Agreement."
"6.10 Use of Proceeds of Advances. Use the proceeds of each
Advance solely for the purpose of financing the origination,
purchase, and/or funding of Residential Construction Loans,
Residential A&D Loans, Aged Loans, Consumer Construction
Loans, Consumer Lot Loans, and Commercial Mortgage Loans in
accordance with the applicable Request for Advance, and none
other.
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(k) The Credit Agreement is amended by the addition of the following
Sections 5.23 and 6.12:
"5.23 Year 2000 Review. Borrower represents and warrants to
the Lender that (a) it and its Subsidiaries have reviewed the
effect of the Year 2000 Issue on the computer software,
hardware, and firmware systems and equipment containing
embedded microchips owned or operated by or for Borrower and
its Subsidiaries or used or relied upon in the conduct of
their business (including systems and equipment supplied by
others or with which such computer systems of Borrower and its
Subsidiaries interface) and (b) the costs to Borrower and its
Subsidiaries of any reprogramming required as a result of the
Year 2000 Issue to permit the proper functioning of such
systems and equipment and the proper processing of data, and
the testing of such reprogramming, and of the reasonably
foreseeable consequences of the Year 2000 Issue to Borrower or
any of its subsidiaries (including reprogramming errors and
the failure of systems or equipment supplied by others), are
not reasonably expected to result in a Default or Event of
Default or to have a material adverse effect on the business,
assets, operations, prospects, or condition (financial or
otherwise) of Borrower or its Subsidiaries.
"6.12 Year 2000 Compliance. Borrower covenants and agrees with
Lender that it shall take all necessary action to complete in
all material respects by September 30, 1999, the reprogramming
of computer software, hardware, and firmware systems used or
relied upon in the conduct of its business (including systems
and equipment supplied by others or with which such systems of
Borrower interface) required as a result of the Year 2000
Issue to permit the proper functioning of such computer
systems and other equipment and testing of such systems and
equipment, as so reprogrammed. At the request of the Lender,
Borrower shall provide to the Lender reasonable assurance of
its compliance with the preceding sentence."
(l) Section 7.4 is deleted in its entirety, and the following is
substituted therefor:
"7.4 Minimum Tangible Net Worth. Permit Minimum
Tangible Net Worth of the Company (and its
Subsidiaries, on a consolidated basis) to be less
than SIX MILLION AND NO/100 DOLLARS ($6,000,000.00),
computed as of the end of each calendar month.
(m) The promissory note ("Credit Note") dated as of December 15, 1998,
in the original principal amount of $40,000,000, executed by Borrower
and payable to the order of Lender, is given to Lender in replacement
of that certain promissory note dated as of December 31, 1997, in the
original principal amount of $75,000,000, executed by Borrower and
payable to the order of Lender (the "Original Note"), and not in
novation or discharge thereof. The definition of the term "Note" in the
Credit Agreement is hereby amended to mean the Credit
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<PAGE> 13
Note and all renewals, extensions, modifications, increases,
rearrangements, and replacements thereof.
Section 3. Representations. The Company represents and warrants that
all of the representations and warranties contained in the Credit Agreement and
all instruments and documents executed pursuant thereto or contemplated thereby
are true and correct in all material respects on and as of this date.
Section 4. Continued Force and Effect. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the same meanings as set out
in the Credit Agreement, unless amended hereby or unless the context clearly
requires otherwise. References in the Credit Agreement to the "Agreement," the
"Loan Agreement," "hereof," "herein" and words of similar import shall be deemed
to be references to the Credit Agreement as amended hereby. Any reference in the
other Loan Documents to the "Agreement," the "Line of Credit Agreement,"
"Warehouse Agreement," or the "Loan Agreement" shall be deemed to be references
to the Credit Agreement as amended through the date hereof. Any references in
the Credit Agreement or any of the Loan Documents to the Note or the Credit Note
shall be deemed to be references to the Credit Note.
Section 5. Guarantor. NAB Asset Corporation joins in the execution of
this Amendment for, among other things, the purpose of ratifying its Guaranty
dated December 30, 1997 (the "Guaranty"), which guarantees the payment of the
indebtedness evidenced by the Credit Agreement and the Credit Note. GUARANTOR
(I) CONSENTS TO THE TERMS OF THIS AMENDMENT, (II) RATIFIES AND CONFIRMS THE
GUARANTY, WHICH IS IN FULL FORCE AND EFFECT IN ACCORDANCE WITH ITS TERMS, AND
(III) ACKNOWLEDGES THAT THE GUARANTY IS NOT SUBJECT TO ANY CLAIMS, OFFSETS,
DEFENSES, OR COUNTERCLAIMS OF ANY NATURE WHATSOEVER.
Section 6. Representations and Release of Claims. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Company, Guarantor,
or any third party to Lender, as evidenced by the Loan Documents. The Company
and Guarantor hereby acknowledge, agree, and represent that (i) the Company is
indebted to Lender pursuant to the terms of the Credit Note; (ii) the liens,
security interests and assignments created and evidenced by the Loan Documents
are, respectively, first, prior, valid and subsisting liens, security interests
and assignments against the Collateral and secure all indebtedness and
obligations of the Company to Lender under the Credit Note, the Credit
Agreement, and all other Loan Documents, as modified herein; (iii) there are no
claims or offsets against, or defenses or counterclaims to, the terms or
provisions of the Loan Documents, and the other obligations created or evidenced
by the Loan Documents; (iv) neither the Company nor the Guarantor has any
claims, offsets, defenses or counterclaims arising from any of the Lender's acts
or omissions with respect to the Loan Documents, or the Lender's performance
under the Loan Documents; (v) the representations and warranties contained in
the Loan Documents are true and correct representations and warranties of the
Company, as of the date hereof; (vi) the Company promises to pay to the order of
Lender the indebtedness evidenced by the Credit Note according to
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<PAGE> 14
the terms thereof; and (vii) the Company is not in default and no event has
occurred which, with the passage of time, giving of notice, or both, would
constitute a default by the Company of the Company's obligations under the terms
and provisions of the Loan Documents. In consideration of the modification of
certain provisions of the Loan Documents, all as herein provided, and the other
benefits received by the Company hereunder, the Company and Guarantor hereby
RELEASE, RELINQUISH and forever DISCHARGE Lender, its predecessors, successors,
assigns, shareholders, principals, parents, subsidiaries, agents, officers,
directors, employees, attorneys and representatives (collectively, the "Lender
Released Parties"), of and from any and all claims, demands, actions and causes
of action of any and every kind or character, whether known or unknown, present
or future, which the Company has, or may have against Lender Released Parties,
arising out of or with respect to any and all transactions relating to the
Credit Agreement, the Credit Note, the Original Note, the Guaranty, and the
other Loan Documents occurring prior to the date hereof, including any other
loss, expense and/or detriment, of any kind or character, growing out of or in
any way connected with or in any way resulting from the acts, actions or
omissions of the Lender Released Parties, and including any loss, cost or damage
in connection with any breach of fiduciary duty, breach of any duty of fair
dealing, breach of competence, breach of funding commitment, undue influence,
duress, economic coercion, conflict of interest, negligence, bad faith,
malpractice, violations of the Racketeer Influence and Corrupt Organizations
Act, intentional or negligent infliction of emotional or mental distress,
tortious interference with corporate governments or prospective business
advantage, tortious interference with contractual relations, breach of contract,
deceptive trade practices, libel, slander, conspiracy, the charging, contracting
for, taking, reserving, collecting or receiving of interest in excess of the
highest lawful rate applicable to the Loan Documents (i.e., usury), any
violations of federal or state law, any violations of federal or state banking
rules, laws or regulations, including, but not limited to, any violations of
Regulation B, Equal Credit Opportunity, bank tying act claims, any violation of
the Texas Free Enterprise Antitrust Act or any violation of federal antitrust
acts.
Section 7. Severability. In the event any one or more provisions
contained in the Credit Agreement, this Amendment, or any of the Loan Documents
should be held to be invalid, illegal or unenforceable in any respect, the
validity, enforceability and legality of the remaining provisions contained
herein and therein shall not be affected in any way or impaired thereby and
shall be enforceable in accordance with their respective terms.
Section 8. Expenses. The Company agrees to pay all out-of-pocket costs
and expenses (including reasonable fees and expenses of legal counsel) of Lender
in connection with the preparation, operation, administration and enforcement of
this Amendment.
Section 9. Acknowledgment. Except as amended hereby, the Company and
Guarantor ratify and confirm that the Loan Documents are and remain in full
force and effect in accordance with their respective terms and that all
Collateral is unimpaired by this Amendment and secures the payment and
performance of all indebtedness and obligations of the Company under the Credit
Note, the Credit Agreement, and all other Loan Documents, as modified hereby.
The undersigned
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<PAGE> 15
officer of the Company executing this Amendment represents and warrants that he
has full power and authority to execute and deliver this Amendment on behalf of
the Company. The undersigned officer of the Company represents and warrants that
his execution and delivery of this Amendment has been duly authorized, and that
the resolutions and affidavits previously delivered to Lender, in connection
with the execution and delivery of the Credit Agreement, are and remain in full
force and effect and have not been altered, amended or repealed in anywise.
Section 10. No Waiver. The Company and Guarantor agree that no Event of
Default and no Default has been waived or remedied by the execution of this
Amendment by Lender, and any such Default or Event of Default heretofore arising
and currently continuing shall continue after the execution and delivery hereof.
Section 11. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.
Section 12. Counterparts. This Amendment may be executed in any number
of counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.
SECTION 13. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, THE GUARANTY, AND THE OTHER LOAN DOCUMENTS, ALL AS
MODIFIED HEREBY, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED and effective as of the dates first written above.
COMPANY: GUARANTOR:
- -------- ----------
CONSTRUCTION PORTFOLIO
FUNDING, INC., NAB ASSET CORPORATION,
a Texas corporation a Texas corporation
By: /s/ Alan Ferree
By: /s/ James R. Reynolds Name: Alan Ferree
Name: James R. Reynolds Title: Senior Vice-President
Title: President
LENDER:
BANK UNITED,
a federal savings bank
By: /s/ Deborah A. Bourque
Name: Deborah A. Bourque
Title: Regional Director
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Page 15
<PAGE> 1
PAYMENT DEFERRAL AGREEMENT EXHIBIT 10.17
This Agreement dated March 26, 1999 is between Stanwich Financial
Services Corp. ("SFSC") and NAB Asset Corporation ("NAB").
RECITALS:
1. NAB is indebted to SFSC under the following instruments
(collectively, the "NOTES" and, individually, a "NOTE"):
(1) Promissory Note dated June 27, 1997 in the original
principal amount of $800,000;
(2) Line of Credit Note dated August 28, 1997 in a
principal amount not to exceed $5,000,000;
(3) Promissory Note dated September 30 , 1997 in the
original principal amount of $2,500,000;
(4) Promissory Note dated December 30, 1997 in the
original principal amount of $4,000,000 (acquired by
SFSC by assignment from Consumer Portfolio Services,
Inc.);
(5) Promissory Note dated March 12, 1998 in the original
principal amount of $900,000; and
(6) Promissory Note dated March 13, 1998 in the original
principal amount of $1,100,000.
2. NAB has requested that SFSC agree to amend the Notes to defer
principal and interest payments thereunder, and SFSC is
willing to do so on the terms and conditions hereinafter set
forth.
NOW THEREFORE, the parties agree as follows:
1. Subject to paragraphs 2, 3, 4 and 5, below, each of the Notes
is hereby amended to grant to NAB the option to defer making
any or all Scheduled Payments until January 3, 2000. As used
herein, the term "Scheduled Payments" means payments of
principal and interest under the Notes that are scheduled by
the terms thereof to be paid during the period beginning on
the date hereof and ending on December 31, 1999.
<PAGE> 2
2. Each of the Notes is hereby further amended to provide that,
if pursuant to paragraph 1, above, NAB defers any Scheduled
Payment that is an interest payment, the amount thereof shall
itself bear interest, at a rate equal to the rate at which
interest accrues on the principal of such Note, during the
period from the original due date of such deferred payment (as
scheduled in the applicable Note, before giving effect to this
Agreement) to the date such deferred payment is made. Each
item of additional interest provided for in this paragraph 2
shall be payable on the earlier to occur of (i) January 3,
2000 or (ii) the date of which the deferred interest to which
such additional interest relates is paid.
3. As used herein, the term "Corporate Transaction" means any
transaction in which (i) NAB borrows money from a lending
institution and/or (ii) all or substantially all of the
capital stock or assets of a subsidiary of NAB are sold (in
one or more transactions) other than in the ordinary course of
business. If, after the date hereof, NAB consummates one or
more Corporate Transactions prior to the payment of the Notes
in full and if the aggregate net proceeds received therefrom
by NAB and/or its subsidiaries at any time or from time to
time exceeds $400,000 or such lesser amount as NAB's Board of
Directors may determine, then, in such case, NAB shall use the
entire amount of such excess net proceeds (up to but not
exceeding the aggregate amount of NAB's indebtedness under the
Notes, as amended hereby) to pay or prepay its indebtedness
under the Notes, not later than the next business day after
each such receipt of excess net proceeds by NAB and/or its
subsidiaries; provided, however, that NAB shall be obligated
to so use such excess net process only to the extent it can do
so without causing a breach or default by itself or any such
subsidiary under any agreement existing on the date hereof to
which it or any such subsidiary is a party. NAB hereby agrees
to use its best efforts to effect one or more Corporate
Transactions as soon as possible with gross proceeds of at
least $5,000,000; provided that such transactions are
determined by NAB's Board of Directors to be fair to and in
the best interests of NAB and its shareholders. Any failure by
NAB to make any prepayment required by this paragraph 3 shall
constitute a default or event of default under all of the
Notes, with the result that, at SFSC's option, all of the
indebtedness under all of the
<PAGE> 3
Notes shall accelerate and become immediately due and payable,
without demand, notice presentment or any other legal
formalities. If the amount prepaid pursuant to this paragraph
is less than the aggregate amount then outstanding under the
Notes, then, in such case, such prepayment shall be applied,
first, towards the payment of interest (including additional
interest, if any, under paragraph 2, above) under the Notes
and, second, towards the payment of principal under the Notes,
in both cases in such order and such manner as may be
determined by SFSC in its discretion.
4. The foregoing amendments to the Notes shall not be construed
to amend, alter, modify, limit, impair or otherwise affect in
any manner SFSC's right under any Note to accelerate the
payment of the indebtedness thereunder upon the occurrence of
a default or event of default thereunder, in accordance with
the terms of such Note.
5. NAB's rights to prepay the Notes without penalty, as provided
for therein, is hereby confirmed.
IN WITNESS WHEREOF, the parties have signed this Agreement on the date
first above written.
STANWICH FINANCIAL SERVICES CORP. NAB ASSET CORPORATION
By: /s/ Charles E. Bradley, Jr. By: /s/ Alan Ferree
---------------------------------- --------------------------------
Name: Charles E. Bradley, Jr. Name: Alan Ferree
Title: Vice - President Title: Senior Vice President
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
Mortgage Portfolio Services, Inc. Delaware
NAFCO, Inc. Delaware
Construction Portfolio Funding, Inc. Texas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 6,091 7,275
<SECURITIES> 0 0
<RECEIVABLES> 128,650 119,253
<ALLOWANCES> 499 28
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,971 1,425
<DEPRECIATION> 820 274
<TOTAL-ASSETS> 140,799 129,119
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 8,090 7,330
<TOTAL-LIABILITY-AND-EQUITY> 140,799 129,119
<SALES> 18,530 10,153
<TOTAL-REVENUES> 42,045 16,855
<CGS> 0 0
<TOTAL-COSTS> 29,414 13,020
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 471 28
<INTEREST-EXPENSE> 11,813 2,591
<INCOME-PRETAX> 1,130 1,130
<INCOME-TAX> 185 95
<INCOME-CONTINUING> 162 1,121
<DISCONTINUED> 0 1,113
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 162 2,234
<EPS-PRIMARY> 0.03 0.44
<EPS-DILUTED> 0.03 0.44
</TABLE>
