<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended March 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
---------------- -------------
Commission file number 0-19391
NAB ASSET CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0332956
- ---------------------------------------- -----------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
23361 Madero, Suite 200, Mission Viejo, CA 92691
- ------------------------------------------ ---------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 465-0244
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of April 30, 1999, there were 5,091,300 shares of common stock, $.10 par
value per share, of the registrant outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 645 $ 2,139
Restricted cash 3,767 3,952
Receivables:
Construction loans, net 34,388 38,652
Residential mortgage loans held for sale 66,789 78,911
Commercial loans held for investment, net 6,314 6,099
Loans to officers 3,040 3,040
Other receivables 954 1,449
Residual interest in securitization of mortgage loans 3,559 3,534
Property and equipment, net 1,019 1,151
Costs in excess of net assets acquired, net 578 641
Other assets 1,748 1,231
--------- ---------
Total assets $ 122,801 $ 140,799
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Warehouse lines of credit 81,709 100,650
Notes payable to affiliates 11,477 12,877
Drafts payable 15,773 11,681
Accounts payable and accrued expenses 4,488 5,250
Other liabilities 1,145 1,123
--------- ---------
Total liabilities 114,592 131,581
--------- ---------
Minority interest 559 619
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
March 31, 1999 and December 31, 1998 509 509
Additional paid-in capital 7,815 7,815
Retained earnings (deficit) (674) 275
--------- ---------
Total shareholders' equity 7,650 8,599
--------- ---------
$ 122,801 $ 140,799
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
<PAGE> 3
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Gains on sales of loans $ 3,544 $ 4,331
Interest income 2,376 2,892
Origination and other fee income 2,409 2,290
----------- -----------
Total revenues: 8,329 9,513
----------- -----------
Costs and expenses:
Compensation and benefits 5,349 4,656
Interest expense 1,928 2,648
General and administrative 1,906 1,796
Minority interest in earnings (loss) (60) 157
----------- -----------
Total costs and expenses 9,123 9,257
----------- -----------
Earnings (loss) before cumulative effect of
change in accounting principle (794) 256
Cumulative effect of change in accounting
principle (155) --
----------- -----------
Earnings (loss) $ (949) $ 256
=========== ===========
Basic and diluted earnings (loss) per share:
Before cumulative effect of change in
accounting principle $ (0.16) $ 0.05
Cumulative effect of change in accounting
principal $ (0.03) $ --
----------- -----------
Earnings (loss) per share $ (0.19) $ 0.05
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 5,091,300 5,091,300
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
NAB ASSET CORPORATION
and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (949) $ 256
Adjustments to reconcile net earnings (loss) to
net cash from (used by) operating activities:
Amortization of net interest receivable account 310 --
Deposits to overcollateralization account (335) --
Depreciation and amortization 381 114
Minority interest (60) 223
Provision for credit losses 121 73
Net changes in:
Residential mortgage loans originated,
purchased and sold 12,122 (17,683)
Restricted cash 185 (1,296)
Other receivables 495 (93)
Drafts payable 4,092 5,756
Other liabilities 22 192
Other assets (660) (103)
Accounts payable and accrued expenses (769) 1,274
-------- --------
Net cash from (used by) operating activities 14,955 (11,287)
Cash flows from investing activities:
Construction loans originated (13,747) (42,328)
Principal collections on construction loans 17,901 46,213
Commercial loans purchased and originated (1,151) (458)
Principal collections on commercial loans 925 249
Purchases of property and equipment (36) (95)
-------- --------
Net cash from (used by) investing activities 3,892 3,581
Cash flows from financing activities:
Net borrowings under (repayments of) warehouse lines
of credit (18,941) 8,691
Principal payments on notes payable to affiliates (1,400) --
-------- --------
Net cash from (used by) financing activities (20,341) 8,691
-------- --------
Net increase (decrease) in cash and cash equivalents (1,494) 985
Cash and cash equivalents at beginning of period 2,139 3,620
-------- --------
Cash and cash equivalents at end of period $ 645 $ 4,605
======== ========
Supplement disclosure of cash flow information:
Cash paid during the period for interest $ 1,628 $ 1,826
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
Notes to the Unaudited Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
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.
5
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(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet of the Company as of March 31, 1999, the
related consolidated statements of operations for the three month periods ended
March 31, 1999 and 1998 and the related statements of cash flows for the three
month periods ended March 31, 1999 and 1998 are unaudited. These statements
reflect, in the opinion of management, all material adjustments consisting only
of normal recurring accruals necessary for a fair presentation of the
consolidated balance sheet of the Company as of March 31, 1999, and results of
consolidated operations for the three month periods ended March 31, 1999 and
1998 and the consolidated cash flows for the three month periods ended March 31,
1999 and 1998. The results of consolidated operations for the unaudited periods
are not necessarily indicative of the results of consolidated operations to be
expected for the entire year of 1999.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and therefore do not include all information and
footnotes normally included in consolidated financial statements prepared in
conformity with generally accepted accounting principles. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on SEC form 10-K for the year ended December 31, 1998.
On January 1, 1999 the company adopted Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants 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 and currently expense net
amounts previously capitalized. The Company wrote off $155,000 in organizational
costs effective January 1, 1999 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.
6
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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. Management is in the process
of assessing the future impact of the implementation of SFAS No. 133.
(3) SEGMENT REPORTING
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 following is a summary of the results of operations by business line
for the three months ended March 31, 1999 as compared to March 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Revenue (Expense)
From Other
Business Line External Revenue Operating units Net Income Total Assets
- ------------- ---------------- --------------- --------------- -------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ---- ---- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
mortgage
banking-sub-prime(1) $2,469 $3,448 $ 25 $ 25 $(1,032) $ 692 $ 86,872 $ 83,327
Residential
mortgage
banking-prime (1) 4,728 4,260 -- -- 601 613 N/A N/A
Residential
construction lending 879 1,601 (25) (25) 143 180 27,041 55,524
Commercial lending 245 176 -- -- 80 1 8,688 5,938
Corporate and
intercompany
eliminations (17) 3 -- -- (586) (1,230) 200 722
------ ------ ---- ---- ------- ------- -------- --------
Total $8,304 $9,488 $ -- $ -- $ (794) $ 256 $122,801 $145,511
====== ====== ==== ==== ======= ======= ======== ========
</TABLE>
- ------------------
(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.
7
<PAGE> 8
PART II - OTHER INFORMATION
ITEM 2. 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 is
conducted through a majority owned subsidiary, Mortgage Portfolio Services, Inc.
(MPS). MPS originates, acquires and sells prime and sub-prime mortgage loans.
The prime segment of MPS is operated as a division, Pacific American Mortgage
(PAMCO). The residential construction lending business is conducted through a
majority owned subsidiary, Construction Portfolio Funding, Inc. (CPFI) which
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 operation
(NAFCO) provides financing to operators of rent-to-own or rental purchase
retailers.
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
received for the Company's sub-prime production declined in excess of 200 basis
points. The Company, in response, has entered into forward commitments for its
sub-prime production, lowered the prices it paid for its wholesale and
correspondent production and reduced its workforce in certain production related
departments. As a result of lowering its prices and reducing its workforce, the
Company's sub-prime loan production has declined. The reduced levels of gains
from loan sales and origination volume were insufficient to cover the operating
expenses of the sub-prime operation for the first quarter of 1999.
At March 31, 1999 and December 31, 1998 residential mortgage loans held
for sale totaled $66,789,000 and $78,911,000. Of these amounts $45,125,000 and
$50,828,000, respectively were conventional and government insured or guaranteed
loans (prime) and $21,664,000 and $28,083,000, respectively were 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 are being sold through a forward
8
<PAGE> 9
commitment totaling $100,000,000 and on a competitive bid basis. 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 sale
premium if the loan pays in full over a period of generally one year. The
Company defers a portion of the sale premium, which reduces the gain recorded on
each loan sale, to cover the potential liability resulting from the warranties
given to the investor.
At March 31, 1999 the liability as a result of the warranties given to
the purchasers of the Company's prime and sub-prime loans totaled $845,000 as
compared to $830,000 at December 31, 1998. Additions to the prepayment liability
totaled $218,000 for the three months ended March 31, 1999 and $303,000 for the
three months ended March 31, 1998. Such additions are netted against the gain at
the time of the loan sale.
Construction loans to individuals (one-time closings) totaled $8,501,000
and $9,466,000 at March 31, 1999 and December 31, 1998, respectively. These
loans are originated by the PAMCO operation and are included in construction
loans in the consolidated balance sheets.
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. The performance of the loans underlying the
security through March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
----------- ---------------
<S> <C> <C>
Remaining principal $25,058,000 $20,339,000
Annualized prepayment rates 12.5% 17.0%
Cumulative losses -- --
Delinquencies (over 30 days) 8.0% 8.6%
Cumulative principal amount of
loans foreclosed or in foreclosure $ 830,000 $ 254,000
</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
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<PAGE> 10
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.
The residual interests in the securitization consists of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
NIR $2,589,000 $2,900,000
Overcollateralization account 970,000 634,000
---------- ----------
$3,559,000 $3,534,000
========== ==========
</TABLE>
At March 31, 1999 the assumptions used in the valuation of the residual
interests were as follows:
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%
CONSTRUCTION LENDING
Loans receivable
At March 31, 1999 CPFI's construction loans receivable totaled
$26,227,000 as compared to $29,416,000 at December 31, 1998. CPFI's total
commitments under these loans, if fully funded, are $49,237,000. 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.
At March 31, 1999 the allowance for credit losses totaled $340,000 or
1.30% of the outstanding loan balances compared to $230,000 or .78% of the
balance at December 31, 1998. At March 31, 1999 and December 31, 1998, loans on
non-accrual and deemed to be impaired totaled $1,182,000 and $727,000,
respectively or 4.5% and 2.5%, respectively of the outstanding balances.
Specific allowances for impaired loans totaled $258,000 at March 31, 1999. There
were no loan charge-offs for the three months ended March 31, 1999 and 1998.
There were no specific allowances for impaired loans at December 31, 1998.
10
<PAGE> 11
COMMERCIAL LENDING
Loans receivable
The net outstanding balances of the commercial loans at March 31, 1999
and December 31, 1998 were $6,314,000 and $6,099,000, respectively. At March 31,
1999 the Company's commitments to lend totaled $9,301,000. 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 allowance for credit losses at March 31, 1999 and December 31, 1998
were $108,000 and $107,000, respectively. At March 31, 1999 and December 31,
1998 there were no loans past due with respect to interest more than 90 days.
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
Three months ended March 31, 1999 compared to the three months ended
March 31, 1998
For the three months ended March 31, 1999 the Company reported a loss of
$949,000 as compared to net earnings of $256,000 for the three months ended
March 31, 1998. Operations for the three-month period in 1999 were impacted by
the following 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 forward commitments for 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 first quarter of 1999.
(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.
11
<PAGE> 12
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 $297,000 was recorded in the first quarter
1999 financial statements as a result of these agreements.
(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 $46,000 and $376,000 for
the three months ended March 31, 1999 and 1998, respectively as a result.
(4) On January 1, 1999 the Company adopted Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires costs of start-up activities and organizational costs
to be expensed as incurred. In accordance with SOP 98-5, the Company wrote off
approximately $155,000 in previously capitalized organizational costs.
12
<PAGE> 13
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 three months ended March 31, 1999 and 1998. A summary
of the operating profits and losses by the Company's operating segments is as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Revenues:
Residential mortgage banking-sub-prime $ 2,494 $ 3,473
Residential mortgage banking-prime 4,728 4,260
Residential construction lending 879 1,601
Commercial lending 245 176
Corporate & intercompany eliminations (17) 3
------- -------
Total revenues: 8,329 9,513
Costs and expenses:
Residential mortgage banking-sub-prime 3,526 2,781
Residential mortgage banking-prime 4,127 3,647
Residential construction lending 736 1,421
Commercial lending 165 175
Corporate & intercompany eliminations 569 1,233
------- -------
Total costs and expenses 9,123 9,257
------- -------
Operating profit (loss):
Residential mortgage banking-sub-prime (1,032) 692
Residential mortgage banking-prime 601 613
Residential construction lending 143 180
Commercial lending 80 1
Corporate & intercompany eliminations (586) (1,230)
------- -------
Earnings (loss) before cumulative effect of
change in accounting principle $ (794) $ 256
======= =======
</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.
13
<PAGE> 14
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 1,800 $ 2,677
Interest income 694 796
Compensation and benefits 2,262 1,534
Interest expense 429 454
Other expenses 835 793
Loans originated $ 51,696 $ 69,172
Loans sold $ 57,403 $ 67,933
Gains on sales of loans and
other fee income as a percent
of loans originated 3.48% 3.87%
Compensation and benefits
as a percent of originations 4.37% 2.22%
Other expenses as a percent
of originations 1.62% 1.15%
Net interest income as a
percent of originations .51% .50%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 3,951 $ 3,559
Interest income 777 701
Compensation and benefits 2,676 2,336
Interest expense 752 774
Other expenses 699 537
Loans originated $ 140,662 $ 129,983
Loans sold(1) $ 151,783 $ 117,956
Gains on sales of loans and
other fee income as a percent
of loans originated 2.81% 2.74%
Compensation and benefits
as a percent of originations 1.90% 1.80%
Other expenses as a percent
of originations .50% .41%
Net interest income (expense) as a
percent of originations .02% (.06)%
</TABLE>
- ------------------
(1) Includes loans totaling $6,512,000 in 1999 and $10,488,000 in 1998 that were
closed in the name of a third party (brokered-out).
14
<PAGE> 15
MPS operations
For the three months ended March 31, 1999 the loss from the MPS mortgage
operation totaled $1,032,000 as compared to earnings of $692,000 for the same
period in 1998. Revenues declined $979,000 or 39% over 1998 and expenses
increased $745,000 or 27% over 1998. Net gains on loan sales declined from 3.87%
as a percent of loans originated in the first quarter of 1998 to 3.48% as a
percent of loans originated in the first quarter of 1999.
Compensation expenses as a percent of production increased to 4.37% in
1999 from 2.22% in 1997. The increase is attributable to deferred compensation
expense of $297,000 or .57% of production, increased processing and underwriting
costs as the Company continues to emphasize customer service and a decline in
its production from the fourth quarter of 1998. The Company has not undertaken
any additional cost savings actions since the fourth quarter of 1998.
Other expenses increased to 1.62% of production for the quarter ended
March 31, 1999 from 1.15% of production for the three months ended March 31,
1998. The increase was attributable to increased processing and underwriting
costs discussed above and the decline in loan originations from the fourth
quarter of 1998.
Net interest spread as a percentage of production increased from .50%
for the three months ended March 31, 1998 to .51% for the three months ended
March 31, 1999 as a result of lowered borrowing costs.
PAMCO operations
For the three months ended March 31, 1999, MPS's principally prime
production operation, PAMCO, earned $601,000 as compared to $613,000 for the
three months ended March 31, 1998. Operating revenues totaled $4,728,000 as
compared to $4,260,000 for 1998 and expenses totaled $4,127,000 as compared to
$3,647,000 for 1998.
Gains on sales of loans and other loan fees as a percent of production
was 2.81% for the three months ended March 31, 1999 as compared to 2.74% for the
three months ended March 31, 1998. The Company benefited from increased sales
prices for PAMCO's products. Compensation expenses as a percent of production
increased to 1.90% from 1.80% for the three months ended March 31, 1998
resulting from compensation increases for support personnel offset partially by
reduced benefit costs. Other expenses as a percent of originations increased
slightly from .41% for the three months ended March 31, 1998 to 50% for the
three months ended March 31, 1999.
15
<PAGE> 16
Net interest income as a percent of production was .02% for the three
months ended March 31, 1999 to as compared to a deficit of .06% for the same
period in 1998. The improvement in spread was due to reduced borrowing costs.
Construction Lending
For the three months ended March 31, 1999 the construction lending
operation (CPFI) earned $143,000 as compared to $180,000 for the first quarter
of 1998.
Interest income as a percent of average outstanding construction loans
receivable was 9.66% for the first quarter of 1999 as compared to 9.14% in the
first quarter of 1998. In 1998, the yield was reduced by approximately .50% as a
result of the amortization of the original purchase premium. Exclusive of the
amortization, the increase in yield is the result of better margins received on
CPFI's loans offset by the reduction in the prime rate, the rate upon which most
loans are based. Interest expense on the bank debt, for the first quarter of
1999, as a percent of average borrowings declined to 7.44% from 8.25% for the
quarter ended March 31, 1998. This decline is the result of declining short-term
rates. Total interest expense was $381,000 and $1,103,000 for the three months
ended March 31, 1999 and 1998, respectively. Included in interest expense in
1998 was $117,000 related to notes payable to NAB. The debt was paid off in the
fourth quarter of 1998.
Revenues totaled $879,000 for the first quarter of 1999 as compared to
$1,601,000 for the first quarter of 1998. Expenses totaled $736,000 for the
quarter ended March 31, 1999 as compared to $1,421,000 for the quarter ended
March 31, 1998. The decline in revenues and expense resulted from the fourth
quarter 1998 sale of approximately half of the CPFI loan portfolio. Operating
expenses increased from $319,000 in 1998 to $356,000 in 1999. Included in
operating expenses were provisions for loan losses that increased from $62,000
to $110,000, compensation and benefits decreased from $140,000 to $108,000 and
other general and administrative expenses increased from $117,000 to $138,000.
CPFI originated $12,935,000 in new commitments in the first quarter of
1999 as compared to $39,800,000 in 1998.
Commercial Lending
The commercial lending operation (NAFCO) earned $80,000 for the three
months ended March 31, 1999 as compared to $1,000 for the three months ended
March 31, 1998. Interest income totaled $245,000 in 1999 as compared to $174,000
in 1998. Interest expense totaled $65,000 in 1999 as compared to $13,000 in
1997. Operating expenses for the first quarter of 1999 and 1998 totaled $100,000
and $160,000, respectively, consisting primarily of compensation and benefits of
$51,000 and $64,000, respectively. Other expenses included $11,000 and $11,000
in provisions for loan losses for 1999 and 1998 and general and administrative
expenses of $89,000 and 86,000, respectively.
16
<PAGE> 17
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 $253,000 in 1999 as compared to $581,000 in
1998. The decrease was attributable to option termination related charges
totaling $376,000 in 1998 as compared to $46,000 in 1999. Interest expense
totaled $436,000 in 1999, a decrease of $120,000 over 1998. The decrease is
attributable to the Company's partial repayment of debt to SFSC and CPS.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had approximately $4,412,000 in cash
as compared to $6,091,000 at December 31, 1998. Of those amounts $3,767,000 and
$3,952,000 as of March 31, 1999 and December 31, 1998, respectively, was
restricted to usage for mortgage loan fundings and repayments under the
Company's residential warehouse line of credit.
Total assets have decreased to $122,801,000 at March 31, 1999 from
$140,799,000 at December 31, 1998. The decrease is principally attributable to
the decline mortgage loan production at MPS and a decline in the construction
loan portfolio at CPFI.
MPS's line of credit totals $120,000,000. 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 (including PAMCO) are pledged as collateral for the line of credit. At March
31, 1999, $58,535,000 was borrowed under the line.
CPFI's line of credit totals $40,000,000. The line of credit is secured
by CPFI's construction loans receivable. As of March 31, 1999, $19,895,000 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.
NAFCO's line of credit totals $6,500,000. The line bears interest at the
prime rate and matures on October 30, 1999. As of March 31, 1999, $3,279,000 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.
17
<PAGE> 18
At March 31, 1999, the Company has borrowed under notes and a line of
credit from Stanwich Financial Services Corp. ("SFSC") and CPS, for a total of
$11,477,000 summarized as follows:
<TABLE>
<CAPTION>
Payee Type Original Date Maturity Balance Rate
- ----- ---- ------------- -------- ---------- ----
<S> <C> <C> <C> <C> <C>
SFSC Note June 27, 1997 January 3, 2000 $ 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 January 3, 2000 4,000,000 13%
SFSC Note March 12, 1998 January 3, 2000 900,000 13%
SFSC Note March 13, 1998 January 3, 2000 1,100,000 13%
CPS Note December 30, 1997 June 30, 1999 700,000 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 owns a majority interest in
SFSC. Messrs. Bradley, Sr., Bradley, Jr., are officers and directors of CPS.
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 extend
the maturity dates.
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. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk profile has not significantly changed since
December 31, 1998. For a discussion of the Company's market risk, read Item 7A
of the Company's 10K for the year ended December 31, 1998.
18
<PAGE> 19
YEAR 2000 UPDATE
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 has completed testing of its IT systems and has made
modifications where necessary. The Company continues to communicate with its
outside vendors regarding the vendors testing of both IT and non-IT systems.
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 by year end 1999
or are already compliant as it relates to the relevant system the Company relies
on.
19
<PAGE> 20
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 $125,000 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 $50,000. 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.
Contingency Planning
Based upon the progress of the Company's material vendors in becoming
Year 2000 compliant, the Company will continually assess the need for
contingency plans.
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.
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.
20
<PAGE> 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 1999
By: /s/ Charles E. Bradley, Sr.
------------------------------------
Charles E. Bradley, Sr.
Chairman of the Board and Chief
Executive Officer
By: /s/ Alan Ferree
------------------------------------
Alan Ferree
Senior Vice President and Chief
Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 4,412 6,091
<SECURITIES> 0 0
<RECEIVABLES> 111,933 128,650
<ALLOWANCES> 448 499
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 2,007 1,971
<DEPRECIATION> 988 820
<TOTAL-ASSETS> 122,801 140,799
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 509
<OTHER-SE> 7,141 8,090
<TOTAL-LIABILITY-AND-EQUITY> 122,801 140,799
<SALES> 3,544 4,331
<TOTAL-REVENUES> 8,329 9,513
<CGS> 0 0
<TOTAL-COSTS> 7,053 6,536
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 142 73
<INTEREST-EXPENSE> 1,928 2,648
<INCOME-PRETAX> (794) 256
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (794) 256
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (155) 0
<NET-INCOME> (949) 256
<EPS-PRIMARY> (0.19) 0.05
<EPS-DILUTED> (0.19) 0.05
</TABLE>
