<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended September 30, 2000
[ ] 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)
4144 N. Central Expy, Suite 800 75204
--------------------------------------- -------------------------------------
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code: (888) 451-7830
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 2000, there were 5,091,300 shares of common stock, $.10 par
value per share, of the registrant outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAB ASSET CORPORATION and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets September 30, December 31,
------ 2000 1999
(unaudited)
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 720 $ 1,397
Restricted cash 5,359 1,457
Receivables:
Construction loans, net 2,832 3,330
Residential mortgage loans held for sale 40,725 46,029
Loans to officers 1,653 2,213
Other receivables 644 995
Residual interest in securitization of mortgage loans 3,104 3,678
Real estate owned 731 728
Property and equipment, net 327 612
Costs in excess of net assets acquired, net 283 442
Net assets of discontinued operations 40 2,855
Other assets 379 670
------------- -------------
Total assets $ 56,797 $ 64,406
============= =============
Liabilities and Shareholders' Equity (Deficit)
Liabilities:
Warehouse lines of credit (Note 3) $ 40,205 $ 40,218
Notes payable to affiliates (Note 3) 7,102 9,277
Drafts payable 6,872 8,279
Accounts payable and accrued expenses 4,589 4,539
------------- -------------
Total liabilities 58,768 62,313
------------- -------------
Minority interest - 47
Contingencies (Note 3)
Shareholders' equity (deficit):
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
September 30, 2000 and December 31, 1999 509 509
Additional paid-in capital 7,815 7,815
Accumulated deficit (10,295) (6,278)
------------- -------------
Total shareholders' equity (deficit) (1,971) 2,046
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 56,797 $ 64,406
============= =============
</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 September 30, Nine months ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Gains on sales of loans $ 2,302 $ 3,382 $ 6,378 $ 10,766
Interest income 1,080 1,410 3,237 4,270
Origination and other fee income 2,441 2,069 6,366 6,647
------------ ------------ ------------ ------------
Total revenues: 5,823 6,861 15,981 21,683
Costs and expenses:
Compensation and benefits 3,669 4,660 11,545 15,090
Interest expense 861 979 2,579 3,037
Interest expense - affiliates 254 491 822 1,420
General and administrative 1,730 1,960 5,111 5,654
Minority interest -- (125) (47) (326)
------------ ------------ ------------ ------------
Total costs and expenses 6,514 7,965 20,010 24,875
------------ ------------ ------------ ------------
Loss from continuing
operations before income taxes and
cumulative effect of change in
accounting principle (691) (1,104) (4,029) (3,192)
Income tax expense 5 198 12 263
------------ ------------ ------------ ------------
Loss from continuing
operations before cumulative effect
of change in accounting principle (696) (1,302) (4,041) (3,455)
Cumulative effect of change in
accounting principle, net of income taxes -- -- -- (155)
Earnings (loss) from discontinued
operations, net of income taxes (7) (185) 24 (905)
------------ ------------ ------------ ------------
Net loss $ (703) $ (1,487) $ (4,017) $ (4,515)
============ ============ ============ ============
Basic and diluted loss per share:
Continuing operations before
cumulative effect of change in
accounting principle $ (0.14) $ (0.26) $ (0.79) $ (0.68)
Cumulative effect of change in
accounting principle, net of income taxes -- -- -- (0.03)
Earnings (loss) per share from
discontinued operations, net
of income taxes -- (0.03) -- (0.18)
------------ ------------ ------------ ------------
Loss per share $ (0.14) $ (0.29) $ (0.79) $ (0.89)
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,017) $ (4,515)
Discontinued operations (24) 905
Adjustments to reconcile net loss to net cash
from (used by) operating activities:
Amortization of net interest receivable account 569 737
Deposits to overcollateralization account (615) (873)
Cash released from over-collateralization account 620 --
Deferred compensation charge 184 --
Depreciation and amortization 486 784
Change in accounting principle -- 155
Minority interest (47) (326)
Net changes in:
Residential mortgage loans originated, purchased and sold, net 5,304 30,991
Restricted cash (3,902) (6,020)
Other receivables 303 (290)
Drafts payable (1,407) 1,573
Other assets 288 (1,379)
Accounts payable and accrued expenses 474 (138)
------------ ------------
Net cash from (used by) operating activities (1,784) 21,604
Cash flows from investing activities:
Construction loan repayments, net 498 5,311
Purchases of property and equipment (42) (101)
------------ ------------
Net cash from investing activities 456 5,210
Cash flows from financing activities:
Net repayments of warehouse lines of credit (13) (27,568)
Principal payments on notes payable to affiliates (2,175) (3,600)
------------ ------------
Net cash used by financing activities (2,188) (31,168)
Cash provided by discontinued operations 2,839 4,648
------------ ------------
Net increase (decrease) in cash and cash equivalents (677) 294
Cash and cash equivalents at beginning of period 1,397 946
------------ ------------
Cash and cash equivalents at end of period $ 720 $ 1,240
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
NAB ASSET CORPORATION and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
NAB Asset Corporation, (the "Company" or "NAB") is a financial
services company engaged in two reportable segments, sub-prime and prime
residential mortgage banking. 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"). Previously, the Company had two additional segments, a residential
construction lending business, Construction Portfolio Funding, Inc. ("CPFI"),
which originates and holds for investment single family residential construction
loans to homebuilders and a commercial finance operation, NAFCO Inc. ("NAFCO"),
which provides financing to operators of rent-to-own or rental purchase
retailers. In the third quarter of 1999, the Company elected to dispose of CPFI
and NAFCO.
The Company commenced operations in July 1991 following its
acquisition and assumption of substantially all of 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 NOL's and certain built-in losses existing at the date of such ownership
change will be subject to an annual limitation. The Company's
5
<PAGE> 6
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.
(2) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet of the Company as of September 30,
2000, the related consolidated statements of operations for the three and nine
months ended September 30, 2000 and 1999 and the related statements of cash
flows for the nine month periods ended September 30, 2000 and 1999 are
unaudited. These statements reflect, in the opinion of management, all
adjustments consisting only of normal recurring accruals necessary for a fair
presentation of the consolidated balance sheet of the Company as of September
30, 2000, and results of consolidated operations for the three and nine months
ended September 30, 2000 and 1999 and the consolidated cash flows for the nine
months ended September 30, 2000 and 1999. 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 2000.
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, 1999.
On January 1, 1999 the Company adopted 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".
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133)
"Accounting for Derivative Instruments and for Hedging Activities," requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 requires
that changes in fair value of a derivative be recognized currently in earnings
unless specific hedge accounting criteria are met. Upon implementation of SFAS
No. 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to held for sale or trading. In June 2000, SFAS No.
138 was issued amending certain provisions of SFAS No. 133. The Company will
adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001 and is evaluating the
impact, if any, these statements may have on the future consolidated financial
statements.
6
<PAGE> 7
For the purpose of computing basic and diluted earnings (loss) per
share, the weighted average number of common and common equivalent shares
outstanding was 5,091,300 for all periods presented.
Certain amounts for the prior periods have been reclassified to
conform to the current presentation.
Consolidated Statements of Cash Flows-Supplemental Disclosures (in thousands):
<TABLE>
<CAPTION>
Nine Months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash paid during the period for
Interest $ 2,874 $ 4,660
Taxes $ 18 $ 145
Exchange of Loan to Officer for MPS common stock and termination of deferred
compensation agreement:
Loan to Officer $ 560 $ --
Interest receivable 48 --
Accrued deferred compensation (424) --
------------ ------------
Charge to compensation expense $ 184 $ --
============ ============
</TABLE>
(3) WAREHOUSE LINES OF CREDIT, NOTES PAYABLE TO AFFILIATES AND LIQUIDITY
During 1999 and the first nine months of 2000, cash flow from
operations was insufficient to cover the operating expenses of NAB. In the third
quarter of 1999 NAB elected to dispose of its investments in CPFI and NAFCO in
order to reduce its debt to Stanwich Financial Services Corp. ("SFSC") and to
provide operating funds for NAB. At September 30, 2000 the disposition has been
substantially completed.
To the extent funds are available the Company intends to expand the
current operations of MPS and PAMCO and acquire additional operations
complimentary to its core business lines. The ability of the Company to acquire
additional compatible operations is dependent upon the availability of
financing. There can be no assurance that internally generated funds will be
sufficient or financing will be available. Current credit agreements in place
are sufficient to provide the Company funds to operate its business lines as
currently structured. Alternatively MPS may dispose of certain divisions to
provide liquidity to NAB or use the proceeds to expand its operation, or both.
MPS has begun receiving funds from its over-collateralization account relating
to the security issued by MPS in 1998, which provides MPS additional liquidity.
NAB's sole source of internally generated cash is from interest and
tax sharing payments from MPS. No tax sharing payments are expected until MPS
generates sufficient taxable income to offset its accumulated tax losses.
Interest payments currently approximate $72,000 each quarter, less than the cash
required by NAB to fund its operating expenses as currently exist. If NAB is
unable to secure outside financing or other sources of cash, NAB will be unable
to pay expenses or satisfy its liabilities on a timely basis.
7
<PAGE> 8
At September 30, 2000, the Company has borrowed under notes from
SFSC a total of $7,102,000. The notes bear interest at 14% per annum, payable
monthly. Charles E. Bradley, Sr., who is an officer and director of NAB, and
Charles E. Bradley, Jr., who is a director of NAB, together own a majority
interest in SFSC. Messrs. Bradley, Sr., and Bradley, Jr., are officers and
directors of CPS.
On March 15, 2000 NAB entered into a Second Debt Restructure
Agreement, effective March 7, 2000, with SFSC in which SFSC agreed to extend the
maturity dates on the indebtedness to December 31, 2002. Additionally, SFSC
agreed to defer monthly interest payments, at NAB's option, on the notes to
March 31, 2001; provided that any deferred interest payment will bear interest
at 14% per annum until paid. Accrued unpaid interest that NAB has elected to
defer totals $254,000 at September 30, 2000. Beginning in March 2001, monthly
principal payments of $100,000 are required in addition to monthly interest (and
any deferred interest). In order to pay the remaining indebtedness, including
interest due, NAB must obtain cash from operations (which consists primarily of
tax sharing payments from MPS), financing from third parties, sell existing
assets, obtain more favorable terms under its various debt agreements or achieve
a combination of the above. NAB is currently pursuing all of these alternatives.
MPS's line of credit with Bank United totals $55,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.75% to 2.75%) over
the LIBOR rate. The line of credit, as amended, matures April 30, 2001. The
mortgage loans receivable of MPS are pledged as collateral for the line of
credit. At September 30, 2000, $40,205,000 was borrowed under the line.
On September 30, 2000, CPFI has borrowed, under a promissory note,
$185,000 from an officer of the Company that is included in the net assets of
discontinued operations. The note bears interest at 14% per annum and is due
December 31, 2000. Proceeds from the disposition of the remaining CPFI asset
will be used to repay this indebtedness. The proceeds from the borrowing were
used to repay principal and interest due SFSC.
At June 30, 2000, two officers of the Company had advanced MPS
$310,000. At September 30, 2000 the amounts had been repaid.
(4) SEGMENT REPORTING
The Company has two reportable segments, sub-prime and prime
mortgage banking. 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. All of the business segments operate within the U.S.
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The following is a summary of the results of continuing operations,
before change in accounting principle by business line for the three months
ended September 30, 2000 as compared to September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Revenue
From Other
Business Line External Revenue Interest Expense Operating units Earnings (Loss)
------------- -------------------- -------------------- -------------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $ 2,654 $ 2,885 $ 321 $ 486 $ -- $ 25 $ (579) $ (1,112)
Residential mortgage
banking-prime 3,157 3,865 613 565 -- -- 223 180
Corporate and intercompany
eliminations 12 86 181 419 -- -- (340) (370)
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 5,823 $ 6,836 $ 1,115 $ 1,470 $ -- $ 25 $ (696) $ (1,302)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following is a summary of the results of continuing operations
before change in accounting principle by business line for the nine months ended
September 30, 2000 as compared to September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Revenue
From Other
Business Line External Revenue Interest Expense Operating units Earnings (Loss)
------------- --------------------- --------------------- --------------------- ----------------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $ 7,497 $ 8,376 $ 1,226 $ 1,305 $ -- $ 75 $ (3,025) $ (3,315)
Residential mortgage
banking-prime 8,409 13,060 1,570 2,040 -- -- 35 1,235
Corporate and intercompany
eliminations 75 172 605 1,112 -- -- (1,051) (1,375)
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 15,981 $ 21,608 $ 3,401 $ 4,457 $ -- $ 75 $ (4,041) $ (3,455)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following is a summary of total assets by business line for
September 30, 2000 as compared to December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Residential mortgage banking-sub-prime(1) $ 56,819 $ 59,969
Residential mortgage banking-prime(1) N/A N/A
Net assets of discontinued operations 40 2,855
Other Assets 1,844 2,769
Elimination of corporate payables/receivables (1,906) (1,187)
-------- --------
Total $ 56,797 $ 64,406
======== ========
</TABLE>
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(1) The Company has not disclosed separate total 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.
(5) SIGNIFICANT TRANSACTIONS
On April 15, 2000, the Company sold its Southern California wholesale
sub-prime operation. The Company continued to fund the operation until the
purchaser obtained the appropriate state licenses. The sales price was the net
book value of the fixed assets, assumption of the lease obligations and 1% of
the principal balance of each loan originated by the operation and funded by the
Company for which there was an outstanding borrower application at April 15,
2000. The Company did not recognize a gain or loss on the sale. Revenues earned
by the Company relating to the sale totaled $111,000 in the second quarter. The
sale is not expected to have a material adverse effect on the ongoing operations
of the Company.
The Company was party to a deferred compensation agreement with an
executive in its Southern California office and the executive was obligated
under a $560,000 note payable to the Company. Accrued interest on the note
payable totaled $48,000 at the date of sale. The Company had recorded a deferred
compensation liability to the executive totaling $424,000 as of April 15, 2000.
In connection with the sale, the Company charged off all the amounts related to
the executive and the executive surrendered 350 shares of MPS common stock to
the Company. This resulted in a charge to compensation expense of $184,000 for
the second quarter of 2000.
In the second quarter of 2000 the Company also eliminated its
correspondent lending division. No significant gain or loss was recorded as a
result of the closure of the division.
(6) DISCONTINUED OPERATIONS
In the third quarter of 1999, the Company elected to dispose of its
investment in CPFI and NAFCO. The disposition of these two operations is not
expected to have a material adverse effect on the ongoing financial results of
the Company.
Summarized financial information for the discontinued operations is
as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------- -------------
<S> <C> <C>
Total assets $ 311 $ 6,183
Line of credit -- (2,914)
Notes payable to officers (185) --
Other liabilities (86) (414)
------------- -------------
Net assets of discontinued operations $ 40 $ 2,855
============= =============
</TABLE>
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<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ -- $ 1,151 $ 127 $ 3,357
Expenses 7 1,336 103 4,262
------- ------- ------- -------
Earnings (loss) from discontinued operations,
net of income taxes $ (7) $ (185) $ 24 $ (905)
======= ======= ======= =======
</TABLE>
Expenses for the nine months ended September 30, 2000 include a
$40,000 reversal of allowances previously provided. Expenses for the three and
nine months ended September 30, 1999 include provisions for losses of $298,000
and $1,377,000, respectively. Included in total assets of the discontinued
operation at September 30, 2000 is a $75,000 advance to SFSC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
RESIDENTIAL 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 forward commitments to protect itself
from any continued deterioration in sales prices, lowered the prices it paid for
its wholesale and correspondent production and reduced its workforce in certain
areas. As a result of lowering its prices, the Company's sub-prime loan
production has declined. The decline in sales prices and the reduced levels of
originations of sub-prime mortgages has resulted in losses in the sub prime
segment.
Increases in long-term interest rates over the past twelve months
have severely reduced the mortgage banking industry's level of prime
originations, particularly the refinancing of borrower existing indebtedness to
a lower rate. Although historically PAMCO has not relied on the refinance
business, the Company's origination of prime mortgages has declined.
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
has relied on borrowings to grow its operations. Historically the Company has
relied on Stanwich Financial Services Corp. ("SFSC") and CPS to provide funds to
support the additional growth of the Company. Charles E. Bradley, Sr., who is an
officer and director of NAB, and Charles E. Bradley, Jr., who is a director of
NAB, together own a majority interest in SFSC.
Operating income from the two reportable segments has been
insufficient to cover the corporate expenses and interest to date. The Company
continues to minimize, to the extent possible, expenses for the ongoing
operation and to expand its origination network without requiring any capital.
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<PAGE> 12
NAB's sole source of internally generated cash is from interest and
tax sharing payments from MPS. No tax sharing payments are expected until MPS
generates sufficient taxable income to offset its accumulated tax losses.
Interest payments currently approximate $72,000 each quarter, less than the cash
required by NAB to fund its operating expenses as currently exist. If NAB is
unable to secure outside financing or other sources of cash, NAB will be unable
to pay expenses or satisfy its liabilities on a timely basis.
In order to reduce the debt to SFSC and CPS, the Company elected to
dispose of its investment in CPFI and NAFCO. Proceeds from the disposal have
been used to reduce the outstanding indebtedness to SFSC. The notes payable to
CPS were paid in full during 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
$55,000,000 line of credit with a federal savings bank of which $40,205,000 was
outstanding at September 30, 2000. 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 one month London Inter Bank
Offering Rate ("LIBOR") ranging from 1.75% to 2.75%.
At September 30, 2000 residential mortgage loans held for sale
totaled $40,725,000. Of this amount $27,740,000 was conventional and government
insured or guaranteed loans (prime) and $12,985,000 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 September 30, 2000 are being sold through forward commitments
or a bulk 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 borrower's 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 one year. 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.
Included in accounts payable and accrued expenses at September 30,
2000 is the liability, as a result of the warranties given to the purchasers of
the Company's loans. The liability totaled $511,000 at September 30, 2000 as
compared to $956,000 at December 31, 1999. Additions to the liability totaled
$186,000 and $587,000 for the three and nine months ended September 30, 2000 as
compared to $275,000 and $720,000 for the same periods in 1999. Such additions
are charged to gains on sales of loans. The decrease in the liability from
December 31, 1999 was attributable to realized losses on sales of repurchased
loans and write-downs of foreclosed real estate.
12
<PAGE> 13
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.
The Company purchased a mortgage pool insurance policy that covers
all losses up to 5% of the initial pool balances. Claims for losses total
$720,000 that has been paid to date by the insurer. Total remaining loss
coverage under the pool insurance policy is $1,849,000. The fee for the
insurance coverage is .52% annually of the unpaid principal of the loans.
The performance of the loans underlying the security through
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
-------------- --------------
<S> <C> <C>
Remaining Principal $ 18,969,000 $ 9,302,000
Annualized prepayment rates 13.17% 26.37%
Cumulative losses incurred by the Company $ -- $ --
Delinquency percentages
30-59 days .93% 2.48%
60-89 days 0% .81%
Over 90 days 0% 3.32%
Delinquent bankruptcies 2.66% 4.98%
Loans in foreclosure 2.12% .54%
Foreclosed loans 3.64% 4.39%
Total delinquencies 9.35% 16.52%
</TABLE>
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 original fixed rate
balance and 4% of the original adjustable rate balance of the securities. The
Company has met the original minimum over-collateralization requirement as set
forth by the bond insurer and in the second quarter of 2000 began receiving cash
from the over-collateralization account.
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 over-collateralization account which is the excess
monthly cash flows, other than servicing revenues, that are required to be
maintained with the trustee until certain over-collateralization 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
13
<PAGE> 14
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 that the Company believes is commensurate with the
risks involved.
At September 30, 2000 and December 31, 1999 the residual interests in
the securitization consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
NIR $ 1,409,000 $ 1,978,000
Over-collateralization account 1,695,000 1,700,000
------------- -------------
$ 3,104,000 $ 3,678,000
============= =============
</TABLE>
Cash released to the Company from the over-collateralization account
for the three and nine months ended September 30, 2000 was $249,000 and
$620,000. No cash had been released prior to the second quarter of 2000.
At September 30, 2000 the assumptions used in the valuation of the
residual interests were as follows:
<TABLE>
<CAPTION>
September 30, 2000 Original Assumptions
----------------------------------- -----------------------------------
Fixed Adjustable Fixed Adjustable
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Weighted average life 4.63 years 2.33 years 3.94 years 3.16 years
Prepayment speeds-ramp up to 18% CPR 65% CPR 24% CPR 25% CPR
Cumulative defaults 13.74% 11.35% 8.00% 10.00%
Cumulative losses, net of losses
covered by pool insurance .41% .34% .40% .50%
Delinquencies (over 30 days) 13.00% 13.00% 8.00% 8.00%
</TABLE>
DISCONTINUED OPERATIONS
For financial statement purposes the operations of CPFI and NAFCO
have been classified as discontinued operations.
Summarized assets and liabilities of the discontinued operations as
of September 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Total assets $ 311 $ 6,183
Warehouse lines of credit -- (2,914)
Notes payable to officers (185) --
Other liabilities (86) (414)
------------- -------------
Net assets of discontinued operations $ 40 $ 2,855
============= =============
</TABLE>
14
<PAGE> 15
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2000 the Company
reported net losses of $703,000 and $4,017,000 as compared to net losses of
$1,487,000 and $4,515,000 for the three and nine months ended September 30,
1999.
The current year losses are principally due to the continued losses
associated with the Company's sub prime mortgage lending operation, MPS and a
decline in PAMCO's originations resulting from an increase in long-term interest
rates. The losses have been somewhat mitigated by the decline in interest
expense at NAB due to a reduction in outstanding borrowings using the proceeds
from the disposition of assets at CPFI and NAFCO.
PAMCO's mortgage production declined approximately 28% in 2000 as
compared to the same period of 1999. Rising long-term interest rates have
reduced originations in general in the prime mortgage banking industry as a
whole. Additionally rising long-term interest rates curb the home refinance
business that was a source of loan originations in 1999. It is expected that
higher long-term interest rates will continue for the foreseeable future and
will have a negative impact, as compared to 1999, on PAMCO's earnings and
operations.
On April 15, 2000, the Company sold its Southern California wholesale
sub-prime operation. The Company continued to fund the operation until the
purchaser obtained the appropriate state licenses. The sales price was the net
book value of the fixed assets, assumption of the lease obligations and 1% of
the principal balance of each loan originated by the operation and funded by the
Company for which there was an outstanding borrower application at April 15,
2000. The Company did not recognize a gain or loss on the sale. Revenues earned
by the Company relating to the sale totaled $111,000 in the second quarter of
2000. The sale is not expected to have a material adverse effect on the ongoing
operations of the Company.
The Company was party to a deferred compensation agreement with an
executive in its Southern California office and the executive was obligated
under a $560,000 note payable to the Company. Accrued interest on the note
payable totaled $48,000 at the date of sale. The Company had recorded a deferred
compensation liability to the executive totaling $424,000 as of April 15, 2000.
In connection with the sale, the Company charged off all the amounts related to
the executive and the executive surrendered 350 shares of MPS common stock to
the Company. This resulted in a charge to compensation expense of $184,000 for
the second quarter of 2000.
In the second quarter of 2000 the Company also eliminated its
correspondent lending division. No significant gain or loss was recorded as a
result of the closure of the division.
On January 1, 1999 the Company adopted 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.
Results of Continuing Operations
15
<PAGE> 16
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 and nine months ended September 30,
2000 and 1999. A summary of the operating profits and losses by the Company's
operating segments before cumulative effect of change in accounting principle is
as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Residential mortgage banking
Sub-prime $ 2,654 $ 2,910 $ 7,497 $ 8,451
Residential mortgage banking
Prime 3,157 3,865 8,409 13,060
Corporate and intercompany
eliminations 12 86 75 172
------------ ------------ ------------ ------------
Total revenues: 5,823 6,861 15,981 21,683
Costs and expenses:
Residential mortgage banking
Sub-prime 3,233 4,022 10,522 11,766
Residential mortgage banking
Prime 2,934 3,685 8,374 11,825
Corporate and intercompany
eliminations 352 456 1,126 1,547
------------ ------------ ------------ ------------
Total costs, expenses and taxes 6,519 8,163 20,022 25,138
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle:
Residential mortgage banking
Sub-prime (579) (1,112) (3,025) (3,315)
Residential mortgage banking
Prime 223 180 35 1,235
Corporate and intercompany
eliminations (340) (370) (1,051) (1,375)
------------ ------------ ------------ ------------
Loss from continuing
operations before cumulative
effect of change in
accounting principle $ (696) $ (1,302) $ (4,041) $ (3,455)
============ ============ ============ ============
</TABLE>
Results of Continuing Operations for the Three Months Ended June 30, 2000 and
1999
Residential Mortgage Banking
The Company operates its mortgage banking activities through its 84%
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.
16
<PAGE> 17
A summary of the major revenue and expense components of the
mortgage banking operation is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 2,176 $ 2,163
Interest income 478 747
Compensation and benefits (1,940) (2,387)
Interest expense (321) (486)
Other expenses (972) (1,149)
------------ ------------
Loss from operations (579) (1,112)
Loans originated $ 52,601 $ 65,181
Loans sold $ 45,947 $ 70,563
Gains on sales of loans and other fee
income as a percent of loans sold 4.74% 3.07%
Compensation and benefits
as a percent of originations 3.69% 3.66%
Other expenses as a percent
of originations 1.85% 1.76%
Net interest income as a
percent of originations .30% .40%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 2,567 $ 3,288
Interest income 590 577
Compensation and benefits (1,674) (2,254)
Interest expense (613) (565)
Other expenses (647) (866)
------------ ------------
Earnings from operations 223 180
Loans originated $ 107,185 $ 126,086
Loans sold $ 107,988 $ 123,024
Gains on sales of loans and other fee
income as a percent of loans sold 2.38% 2.67%
Compensation and benefits
as a percent of originations 1.56% 1.79%
Other expenses as a percent
of originations .60% .69%
Net interest income (expense) as a
percent of originations (.02%) .01%
</TABLE>
17
<PAGE> 18
MPS operations
For the three months ended September 30, 2000 the loss from the MPS
mortgage operation totaled $579,000 as compared to a loss of $1,112,000 for the
same period in 1999. Revenues decreased $256,000 or 8.8% over 1999 and expenses
decreased $789,000 or 19.6% over 1999. Net gains on loan sales and other fees
increased from 3.07% as a percent of loans sold in the third quarter of 1999 to
4.74% as a percent of loans originated in the third quarter of 2000. Margins
have improved as a result of increased premiums received from investors on loan
sales and increased fees received on retail originations as the Company
continues to open new retail sub-prime branches. At September 30, 2000, MPS has
thirteen retail net branches, one commenced operations in the fourth quarter of
1999, three in the first quarter of 2000, six in the second quarter of 2000 and
three in the third quarter of 2000. The Company believes that retail branches
with company paid personnel will protect it against origination errors, such as
fraud, which will ultimately reduce the level of allowances required at the time
of loan sale. Loan fees also increase, which reduces the Company's reliance on
the loan sale process in the sub-prime market.
Compensation expenses as a percent of production increased to 3.69%
in the third quarter of 2000 from 3.66% in for the same period in 1999. Other
expenses increased to 1.85% of production for the quarter ended September 30,
2000 from 1.76% of production for the three months ended September 30, 1999.
Compensation and other expenses have declined as MPS has reduced costs in its
wholesale and correspondent (which has been eliminated) origination functions.
These costs reductions have been offset by the start up costs associated with
the new net branches.
Net interest spread as a percentage of production decreased from .40%
for the three months ended September 30, 1999 to .30% for the three months ended
September 30, 2000 as a result of a lower spread between the rates charged to
borrowers and the LIBOR based borrowings of MPS and higher commitment fees, as a
percentage of production, charged on the MPS's line of credit.
PAMCO operations
For the three months ended September 30, 2000, MPS's principally
prime production operation, PAMCO, recorded earnings of $223,000 as compared to
earnings of $180,000 for the three months ended September 30, 1999. Operating
revenues totaled $3,157,000 as compared to $3,865,000 for 1999 and expenses
totaled $2,934,000 as compared to $3,685,000 for 1999.
Gains on sales of loans and other loan fees as a percent of
production was 2.38% for the three months ended September 30, 2000 as compared
to 2.67% for the three months ended June 30, 1999. In periods of increasing
interest rates PAMCO's competitors generally reduce rates relative to the sales
prices that can be received. In order to maintain production levels, PAMCO will
reduce rates or fees charged to borrowers. Compensation expenses as a percent of
production
18
<PAGE> 19
decreased to 1.56% from 1.79% for the three months ended September
30, 1999 as a result of lower fees charged to borrowers that results in lower
commission expense and a reduction in benefits costs. Other expenses as a
percent of loan originations decreased from .69% for the three months ended
September 30, 1999 to .60% resulting from cost containment and reduction
measures implemented as a result of the increased interest rates and lower
origination levels.
Net interest expense was approximately $23,000 as compared to a net
interest income of $12,000 in the same period of 1999. Short-term interest rates
(upon which PAMCO borrowings are based) have increased substantially from the
third quarter of 1999 as compared to long-term rates (upon which most of PAMCO's
loans are originated).
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 $55,000 for the three months ended
September 30, 2000 as compared to $19,000 for the same period in 1999. The
increase relates to a salary termination by an officer of the Company in 1999
which has subsequently been reinstated.
Interest expense to affiliates was $254,000 for the three months
ended September 30, 2000, a decrease of $165,000 over 1999. The decrease is
attributable to the Company's partial repayment of debt to SFSC.
Other expenses totaled $116,000 for the third quarter of 2000 as
compared to $91,000 in the third quarter of 1999. The third quarter of 1999
included a $125,000 reduction in minority interest due to losses at MPS.
Minority interest was reduced to zero in the first quarter of 2000. Additionally
income tax expense declined from 1999. The tax expense arises from the 1998
securitization of loans and represents the tax effect of excess inclusion
interest income that cannot be offset by the net operating loss carryforwards of
the Company. Included in other expenses are credits for interest earned by NAB
from MPS. Interest earned from MPS totaled $73,000 for the third quarter of 2000
and 1999.
Results of Continuing Operations for the Nine Months Ended September 30, 2000
and 1999
Residential Mortgage Banking
A summary of the major revenue and expense components of the mortgage
banking operation for the nine months ended September 30, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 5,758 $ 6,416
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
Interest income 1,628 2,035
Other revenue 111 --
Compensation and benefits (6,484) (7,357)
Interest expense (1,226) (1,305)
Other expenses (2,812) (3,104)
------------ ------------
Loss from operations (3,025) (3,315)
Loans originated $ 156,371 $ 188,955
Loans sold $ 156,023 $ 198,366
Gains on sales of loans and other fee
income as a percent of loans sold 3.69% 3.23%
Compensation and benefits
as a percent of originations 4.16% 3.89%
Other expenses as a percent
of originations 1.80% 1.64%
Net interest income as a
percent of originations .26% .39%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 6,875 $ 10,997
Interest income 1,534 2,063
Compensation and benefits (4,856) (7,347)
Interest expense (1,570) (2,040)
Other expenses (1,948) (2,438)
------------ ------------
Earnings from operations 35 1,235
Loans originated $ 289,036 $ 402,883
Loans sold $ 287,959 $ 422,204
Gains on sales of loans and other fee
income as a percent of loans sold 2.39% 2.60%
Compensation and benefits
as a percent of originations 1.68% 1.82%
Other expenses as a percent
of originations .67% .61%
Net interest (expense) income as a
percent of originations (.01%) .01%
</TABLE>
MPS operations
For the nine months ended September 30, 2000 the loss from the MPS
mortgage operation totaled $3,025,000 as compared to a loss of $3,315,000 for
the same period in 1999. Revenues declined $954,000 or 11.3% over 1999 and
expenses decreased $1,244,000 or 10.6%
20
<PAGE> 21
over 1999. Net gains on loan sales and other fees increased from 3.23% as a
percent of loans sold in the first nine months of 1999 to 3.69% as a percent of
loans sold in 2000. Margins were negatively impacted by a larger portion of
loans sold in the first quarter that were of higher credit quality, which have
lower sales premiums, as MPS broadened its product lines. The lower margins were
offset by increased loan fees as MPS increased the amount of retail sub-prime
loan originations as compared to wholesale and correspondent production.
Beginning in the second quarter of 2000 loan sale margins improved
significantly.
Compensation expenses as a percent of production increased to 4.16%
for the nine months ended September 30, 2000 from 3.89% for the same period in
1999. Other expenses increased to 1.80% of production for the nine months ended
September 30, 2000 from 1.64% of production for the nine months ended September
30, 1999. Compensation and other expenses have declined as MPS has reduced costs
in its wholesale and correspondent (which has been eliminated) origination
functions. These costs reductions have been offset by the start up costs
associated with the new net branches. Of the increase in compensation expense
.13% is attributable to the charge to compensation expense of $184,000 relating
to the sale of the Southern California operation. Compensation and other
expenses will continue at higher levels in relation to production as a result of
continuing to open retail branches.
Net interest spread as a percentage of production decreased from .39%
for the nine months ended September 30, 1999 to .26% for the nine months ended
September 30, 2000 as a result of a lower spread between the rates charged to
borrowers and the LIBOR based borrowings of MPS and higher commitment fees, as a
percentage of production, charged on the MPS line of credit.
PAMCO operations
For the nine months ended September 30, 2000 MPS's principally prime
production operation, PAMCO, recorded earnings of $35,000 as compared to
earnings of $1,235,000 for the nine months ended September 30, 1999. Operating
revenues totaled $8,409,000 as compared to $13,060,000 for 1999 and expenses
totaled $8,374,000 as compared to $11,825,000 for 1999. Increasing long-term
interest rates have reduced the level of business activity in the mortgage
banking industry in general. Both origination levels and costs have decline
accordingly.
Gains on sales of loans and other loan fees as a percent of
production was 2.39% for the nine months ended June 30, 2000 as compared to
2.60% for the nine months ended September 30, 1999. In periods of increasing
interest rates PAMCO's competitors generally reduce rates relative to the sales
prices that can be received. In order to maintain production levels, PAMCO will
reduce rates or fees charged to borrowers. Compensation expenses as a percent of
production declined to 1.68% for the nine months ended September 30, 2000 as
compared to 1.82% for the same period of 1999. Commission levels have declined
as a result of lower revenues. Other expenses as a percent of loan originations
increased from .61% for the nine months ended September 30, 1999 to .67% for the
nine months ended September 30, 2000. Declines in origination levels have
negatively impacted fixed expenses, such as rent, as a percent of loan
originations.
21
<PAGE> 22
Net interest expense was $36,000 for the nine months ended September
30, 2000 as compared to net interest income of $23,000 for the same period in
1999. Short-term interest rates (upon which PAMCO borrowings are based) have
increased substantially from the third quarter of 1999 as compared to long-term
rates (upon which most of PAMCO's loans are originated).
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 $205,000 for the nine months ended
September 30, 2000 as compared to $397,000 for the same period in 1999. The
decrease was related to a reduction in incentive compensation expense and
personnel in 2000.
Interest expense to affiliates was $822,000 for the nine months ended
September 30, 2000, a decrease of $290,000 over 1999. The decrease is
attributable to the Company's partial repayment of debt to SFSC and the full
repayment of debt to Consumer Portfolio Services, Inc. ("CPS").
Other expenses totaled $316,000 for the nine months ended September
30, 2000 as compared to $346,000 for the same period in 1999. Reductions in
minority interest due to losses at MPS totaled $326,000 in 1999 as compared to
$47,000 this year. Minority interest was reduced to zero in the first quarter of
2000. Additionally income tax expense has declined from 1999. The tax expense
arises from the 1998 securitization of loans and represents the tax effect of
excess inclusion interest income that cannot be offset by the net operating loss
carryforwards of the Company. Included in other expenses are credits for
interest earned by NAB from MPS. Interest earned from MPS totaled $217,000 for
the nine months ended September 30, 2000 as compared to $308,000 for the nine
months ended September 30, 1999.
DISCONTINUED OPERATIONS
Discontinued operations consist of the CPFI and NAFCO lending
activities.
A summary of the operating results of the discontinued operations is
as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues, principally interest $ -- $ 1,151 $ 127 $ 3,357
Expenses 7 1,336 103 4,262
------- ------- ------- -------
Earnings (loss) from discontinued operations,
net of income taxes $ (7) $ (185) $ 24 $ (905)
======= ======= ======= =======
</TABLE>
22
<PAGE> 23
Expenses in the nine months ended September 30, 2000 include a
$40,000 reversal of allowances previously provided. The three and nine months
ended September 30, 1999 includes provisions for losses totaling $298,000 and
$1,377,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had approximately $720,000 in
unrestricted cash as compared to $1,397,000 at December 31, 1999. The decrease
in unrestricted cash is attributable to the losses incurred by the Company and
the repurchase of foreclosed loans in the first quarter of 2000.
Total assets have decreased to $56,797,000 at September 30, 2000 from
$64,406,000 at December 31, 1999. The decrease is attributable to the Company's
investment in discontinued operations that has declined from $2,855,000 to
$40,000 as a result of loan dispositions and by lower mortgage loan origination
levels.
MPS's line of credit with Bank United totals $55,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.75% to 2.75%) over
the LIBOR rate. The line of credit, as amended, matures April 30, 2001. The
mortgage loans receivable of MPS are pledged as collateral for the line of
credit. At September 30, 2000, $40,205,000 was borrowed under the line.
During 1999 and the second quarter of 2000, cash flow from operations
was insufficient to cover the operating expenses of NAB. In the third quarter of
1999 NAB elected to dispose of its investments in CPFI and NAFCO in order to
reduce its debt to Stanwich Financial Services Corp. ("SFSC") and to provide
operating funds for NAB. At June 30, 2000 the disposition has been substantially
completed.
For the remainder of 2000 the Company intends to expand the current
operations of MPS and PAMCO and acquire additional operations complimentary to
its core business lines. Any acquisitions or expansion would be dependent upon
available funds. The Company anticipates no additional funding from SFSC or CPS,
and 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. There can be no
assurance that internally generated funds will be sufficient or financing will
be available. Current credit agreements in place are sufficient to provide the
Company funds to operate its business lines as currently structured.
Additionally, in the second quarter of 2000, the Company began receiving funds
from its over-collateralization account relating to the security issued by MPS
in 1998.
NAB's sole source of internally generated cash is from interest and
tax sharing payments from MPS. No tax sharing payments are expected until MPS
generates sufficient taxable income to offset its accumulated tax losses.
Interest payments currently approximate $72,000 each quarter, less than the cash
required by NAB to fund its operating expenses as currently exist. If NAB is
unable to secure outside financing or other sources of cash, NAB will be unable
to pay expenses or satisfy its liabilities on a timely basis.
23
<PAGE> 24
At September 30, 2000, the Company had borrowed under notes from SFSC
a total of $7,102,000. The notes bear interest at 14% per annum payable monthly
and mature December 31, 2002. Monthly principal repayments of $100,000 begin in
March 2001. SFSC has agreed to defer monthly interest payments, at NAB's option,
on the notes to March 31, 2001; provided that any deferred interest payment will
bear interest at 14% per annum until paid. Accrued unpaid interest that the
Company has elected to defer totals $254,000 at September 30, 2000. In order to
pay the remaining indebtedness, including interest due, NAB must obtain cash
from operations (which consists primarily of tax sharing payments from MPS),
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.
At September 30, 2000, CPFI has borrowed under a promissory note,
$185,000 from an officer of the Company. The note bears interest at 14% per
annum and is due December 31, 2000. Proceeds from the disposition of the
remaining CPFI loan will be used to repay this indebtedness. The proceeds from
the borrowing was used to repay principal and interest due SFSC. At September
30, 2000 CPFI has an advance outstanding to SFSC totaling $75,000.
At June 30, 2000, two officers of the Company had advanced MPS
$310,000. At September 30, 2000 the amounts had been repaid.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk profile has not significantly changed since
December 31, 1999. For a discussion of the Company's market risk, read Item 7A
of the Company's 10K for the year ended December 31, 1999.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.28. Amended and Restated Warehousing Credit and Security
Agreement dated August 28, 2000 by and among MPS, the
Registrant and Bank United
10.29. First Amendment to the Amended and Restated Credit
Agreement dated October 15, 2000 by and among MPS, the
Registrant and Bank United
24
<PAGE> 25
10.30. Second Amendment to the Amended and Restated Credit
Agreement dated November 13, 2000 by and among MPS, the
Registrant and Bank United
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 13(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 14, 2000
By: /s/ Charles E. Bradley, Sr.
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Charles E. Bradley, Sr.
Chairman of the Board and Chief Executive Officer
By: /s/ Alan Ferree
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Alan Ferree
Senior Vice President and Chief Financial Officer
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