<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, 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)
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, 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>
March 31, December 31,
2000 1999
(unaudited)
---------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 47 $ 1,397
Restricted cash 1,173 1,457
Receivables:
Construction loans, net 3,878 3,330
Residential mortgage loans held for sale 39,213 46,029
Loans to officers 2,213 2,213
Other receivables 641 995
Residual interest in securitization of mortgage loans 3,689 3,678
Real estate owned 1,605 728
Property and equipment, net 535 612
Costs in excess of net assets acquired, net 389 442
Net assets of discontinued operations 832 2,855
Other assets 593 670
-------- --------
Total assets $ 54,808 $ 64,406
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Warehouse lines of credit (Note 3) 33,858 40,218
Notes payable to affiliates 7,553 9,277
Drafts payable 8,747 8,279
Accounts payable and accrued expenses 4,479 4,539
-------- --------
Total liabilities 54,637 62,313
-------- --------
Minority interest -- 47
Contingencies (Note 4)
Shareholders' equity:
Common stock: $.10 par value, 30,000,000
Authorized shares:
5,091,300 shares issued and outstanding at
March 31, 2000 and December 31, 1999 509 509
Additional paid-in capital 7,815 7,815
Accumulated deficit (8,153) (6,278)
-------- --------
Total shareholders' equity 171 2,046
-------- --------
Total liabilities and shareholders' equity $ 54,808 $ 64,406
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
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NAB ASSET CORPORATION and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------- -------
<S> <C> <C>
Revenues:
Gains on sales of loans $ 1,895 $ 3,544
Interest income 978 1,514
Origination and other fee income 1,702 2,207
------- -------
Total revenues: 4,575 7,265
Costs and expenses:
Compensation and benefits 3,863 5,190
Interest expense 725 1,046
Interest expense-affiliates 301 471
General and administrative 1,592 1,584
Minority interest (47) (70)
------- -------
Total costs and expenses 6,434 8,221
------- -------
Loss from continuing
operations before income taxes and
cumulative effect of change in
accounting principle (1,859) (956)
Income tax expense 2 29
------- -------
Loss from continuing
operations before cumulative effect
of change in accounting principle (1,861) (985)
Cumulative effect of change in accounting
principle, write off of organizational costs -- (155)
Earnings (loss) from discontinued
operations, net of income taxes (14) 191
------- -------
Net loss $(1,875) $ (949)
======= =======
Basic and diluted loss per share:
Continuing operations before
cumulative effect of change in
accounting principle $ (0.37) $ (0.19)
Cumulative effect of change in
accounting principle -- (0.03)
Earnings (loss) per share from
discontinued operations, net
of income taxes -- 0.03
------- -------
Loss per share $ (0.37) $ (0.19)
======= =======
</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,
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,875) $ (949)
Discontinued operations 14 (191)
Adjustments to reconcile net loss to net cash
from operating activities:
Amortization of net interest receivable account 149 310
Deposits to overcollateralization account (160) (335)
Depreciation and amortization 176 189
Change in accounting principle -- 155
Minority interest (47) (70)
Net changes in:
Residential mortgage loans originated,
purchased and sold, net 6,816 12,122
Restricted cash 284 185
Other receivables 354 849
Drafts payable 468 4,092
Other assets 77 (470)
Real estate owned (877) (477)
Accounts payable and accrued expenses (60) (567)
------- --------
Net cash from operating activities 5,319 14,843
Cash flows from investing activities:
Construction loan (fundings) repayments, net (548) 964
Purchases of property and equipment (46) (39)
------- --------
Net cash from (used by) investing activities (594) 925
Cash flows from financing activities:
Net repayments of warehouse lines of credit (6,360) (15,582)
Principal payments on notes payable to affiliates (1,724) (1,400)
------- --------
Net cash used by financing activities (8,084) (16,982)
Cash provided by discontinued operations 2,009 535
------- --------
Net decrease in cash and cash equivalents (1,350) (679)
Cash and cash equivalents at beginning of period 1,397 946
------- --------
Cash and cash equivalents at end of period $ 47 $ 267
======= ========
Supplement disclosure of cash flow information:
Cash paid during the period for
Interest $ 873 $ 1,161
Taxes $ 3 $ --
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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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.
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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 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 March 31, 2000, the
related consolidated statements of operations for the three months ended March
31, 2000 and 1999 and the related consolidated statements of cash flows for the
three month periods ended March 31, 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 March 31, 2000, and results of
consolidated operations and consolidated cash flows for the three months ended
March 31, 2000 and 1999. The results of consolidated operations for the
unaudited period 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 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.
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
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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. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133", deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on the future consolidated financial statements.
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.
(3) WAREHOUSE LINES OF CREDIT
The Company does not meet the guarantors net worth requirement under the
MPS line of credit that totals $33,858,000 at March 31, 2000. The Company, as
part of the renewal of MPS's line of credit, which expires June 15, 2000, has
requested that the guarantors net worth requirement be eliminated. The Company's
request is pending. Failure to obtain approval of the request could have a
material adverse effect on the Company's ability to continue its regular
business operations. Management believes that the request will be approved.
(4) NOTES PAYABLE TO AFFILIATES AND LIQUIDITY
During 1999 and the first 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 March 31, 2000 the remaining net assets to be
disposed of total $832,000 which will be used to pay the operating expenses,
including interest, at NAB.
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. 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 expects to receive
funds from its over-collateralization account relating to the security issued by
MPS in 1998. See note (3).
At March 31, 2000, the Company has borrowed under notes from SFSC a
total of $7,553,000. 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,
7
<PAGE> 8
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. 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 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. In connection with the
Second Debt Restructure Agreement, SFSC agreed to subordinate $4,000,000 of NAB
indebtedness to the MPS lenders under the MPS line of credit.
On March 7, 2000, CPFI borrowed $500,000 from two officers of the
Company. The notes bear interest at 14% per annum and are due April 30, 2000.
Proceeds from the disposition of the remaining CPFI loans will be used to repay
this indebtedness. The proceeds from the borrowings were used to repay principal
and interest due SFSC. Subsequent to March 31, 2000 the notes were extended to
June 30, 2000.
(5) 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.
8
<PAGE> 9
The following is a summary of the results of continuing operations,
before change in accounting principle by business line for the three months
ended March 31, 2000 as compared to March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Business Line External Revenue Interest Expense Loss
- ------------- ------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage
banking-sub-prime $2,191 $2,494 $ 391 $ 429 $(1,259) $(1,032)
Residential mortgage
banking-prime 2,344 4,728 405 752 (254) 601
Corporate and intercompany
eliminations 40 43 230 336 (348) (554)
------ ------ ------ ------ ------- -------
Total $4,575 $7,265 $1,026 $1,517 $(1,861) $ (985)
====== ====== ====== ====== ======= =======
</TABLE>
The following is a summary of total assets by business line for March
31, 2000 as compared to December 31, 1999 (in thousands):
2000 1999
-------- --------
Residential mortgage banking-sub-prime(1) $ 53,043 $ 59,969
Residential mortgage banking-prime(1) N/A N/A
Net assets of discontinued operations 832 2,855
Other Assets 3,871 2,769
Elimination of corporate payables/receivables (2,938) (1,187)
-------- --------
Total $ 54,808 $ 64,406
======== ========
- -------------------
(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.
(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.
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Summarized financial information for the discontinued operations is as
follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Total assets (principally loans receivable) $1,457 $ 6,183
Line of credit -- (2,914)
Notes payable to officers (500) --
Other liabilities (125) (414)
------ -------
Net assets of discontinued operations $ 832 $ 2,855
====== =======
</TABLE>
Three months ended March 31,
----------------------------
2000 1999
---- ------
Revenues $ 95 $1,124
Expenses 109 933
---- ------
Earnings (loss) from discontinued
operations, net of income taxes $(14) $ 191
==== ======
Management expects that the majority of the remaining assets, consisting
primarily of loans receivable, of the discontinued operations will be disposed
of by July 31, 2000, either through sale or maturity of the loans.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
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. Additionally the seasonal
nature of PAMCO's business results in lower origination volume in the first
calendar quarter.
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.
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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.
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 an
$80,000,000 line of credit with a federal savings bank of which $33,858,000 was
outstanding at March 31, 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 1.25% to 2.50%.
At March 31, 2000 residential mortgage loans held for sale totaled
$39,213,000. Of this amount $21,098,000 was conventional and government insured
or guaranteed loans (prime) and $18,115,000 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 March 31,2000 are generally being sold through forward
commitments. 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 March 31, 2000 is
the liability, as a result of the warranties given to the purchasers of the
Company's loans, which totals $716,000. Additions to the liability totaled
$240,000 in for the first quarter of 2000 as compared to $218,000 for the same
period in 1999. Such additions are charged to gains on sales of loans.
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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 performance of the loans underlying the security through March 31,
2000 is as follows:
Fixed Rate Adjustable Rate
----------- ---------------
Remaining Principal $21,278,000 $14,719,000
Annualized prepayment rates 12.3% 20.7%
Cumulative losses $ 28,000 $ --
Delinquency percentages
30-59 days 2.32% 2.01%
60-89 days 2.17% 0%
Over 90 days .33% .46%
Delinquent bankruptcies 2.92% 1.04%
Loans in foreclosure 3.01% 3.25%
Foreclosed loans .79% 6.59%
Total delinquencies 11.54% 13.35%
The Company purchased a mortgage pool insurance policy that covers all
losses up to 5% of the initial pool balances. Total remaining loss coverage
under the pool insurance policy is $2,429,000. The fee is .52% annually of the
unpaid principal of the loans. The pool insurance policy stipulates that the
loans covered must be current at the date of the policy. Three loans were
delinquent at that date and subsequently were foreclosed upon and sold. Two
loans were repurchased by the Company and the remaining loan incurred a loss of
approximately $28,000.
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 Company has met the
original minimum over-collateralization requirement as set forth by the bond
insurer. One of the requirements set forth by the bond insurer is that the
interest rate spread between the adjustable rate loans and the underlying bonds,
after expenses must be 2.5%. At March 31, 2000 this requirement was not met. A
formula is used to calculate the new required over-collateralization based upon
the extent of the spread deficiency. Based on the formula, assuming the deposits
to the over-collateralization account continue at present levels and there is
not a significant increase in the underlying bond rates, the Company expects to
begin receiving cash flow from the security in the second quarter of 2000.
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<PAGE> 13
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 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 March 31, 2000 and December 31, 1999 the residual interests in the
securitization consisted of the following:
March 31, December 31,
2000 1999
---------- -----------
NIR $1,829,000 $1,978,000
Over-collateralization account 1,860,000 1,700,000
---------- ----------
$3,689,000 $3,678,000
========== ==========
At March 31, 2000 the assumptions used in the valuation of the residual
interests were as follows:
The assumptions used in the valuation of the residual interests were as
follows:
<TABLE>
<CAPTION>
March 31, 2000 Original Assumptions
---------------------------- ---------------------------
Fixed Adjustable Fixed Adjustable
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount rate 12% 12% 12% 12%
Weighted average life 4.69 years 2.62 years 3.94 years 3.16 years
Prepayment speeds-ramp up to 17% CPR 35% CPR 24% CPR 25% CPR
Cumulative defaults 13.22% 14.20% 8.00% 10.00%
Cumulative losses, net of losses
covered by pool insurance .53% .57% .40% .50%
Delinquencies (over 30 days) 13.00% 13.00% 8.00% 8.00%
</TABLE>
Upon reaching the required over-collateralization levels, the Company is
entitled to receive the cash flows that represent collections on the mortgage
loans in excess of the amounts required to be paid to the bondholders. If the
actual performance of the mortgage loans differs significantly from the original
assumed performance, the cash the Company is entitled to receive will vary from
the NIR calculated using the assumptions above.
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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
March 31, 2000 and December 31, 1999 are as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Loans receivable, net $1,416 $ 6,096
Other assets 41 87
Warehouse lines of credit - (2,914)
Notes payable to officers (500) --
Other liabilities (125) (414)
------ -------
Net assets of discontinued operations $ 832 $ 2,855
====== =======
RESULTS OF OPERATIONS
For the three months ended March 31, 2000 the Company reported a net
loss of $1,875,000 as compared to a net loss of $949,000 for the three months
ended March 31, 1999.
The March 31, 2000 losses are principally due to three factors: the
continued losses associated with the Company's sub prime mortgage lending
operation, MPS; a decline in PAMCO's originations resulting from an increase in
long-term interest rates; and a decline in earnings from the Company's
discontinued lending operations, CPFI and NAFCO. The decline in earnings from
the discontinued operations have been offset somewhat 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 44% over 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 the first quarter of 1999. Historically the first quarter
of a calendar year is the slowest for originations. The first quarter of 2000 is
more indicative of PAMCO's normal results for the first quarter of a calendar
year, however the Company expects for the remainder of 2000 PAMCO's operating
earnings will be substantially less than in prior periods due to the higher
interest rates.
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.
14
<PAGE> 15
Results of Continuing Operations
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, 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):
Three months ended
March 31,
2000 1999
------- -------
Revenues:
Residential mortgage banking
Sub-prime $ 2,191 $ 2,494
Residential mortgage banking
Prime 2,344 4,728
Corporate and intercompany
eliminations 40 43
------- -------
Total revenues: 4,575 7,265
Costs and expenses:
Residential mortgage banking
Sub-prime 3,450 3,526
Residential mortgage banking
Prime 2,598 4,127
Corporate and intercompany
eliminations 388 597
------- -------
Total costs, expenses and taxes 6,436 8,250
------- -------
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle:
Residential mortgage banking
sub-prime (1,259) (1,032)
Residential mortgage banking
Prime (254) 601
Corporate and intercompany
eliminations (348) (554)
------- -------
Loss from continuing operations before
cumulative effect of change in
accounting principle $(1,861) $ (985)
15
<PAGE> 16
Results of Continuing Operations for the Three Months Ended March 31, 2000 and
1999
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.
A summary of the major revenue and expense components of the mortgage
banking operation is as follows (in thousands):
Three months ended
March 31,
-------------------------
2000 1999
-------- ---------
MPS (principally sub-prime)
Gains on sales of loans
and other fee income $ 1,643 $ 1,800
Interest income 548 694
Compensation and benefits 2,226 2,262
Interest expense 391 429
Other expenses 833 835
Loans originated $ 54,509 $ 51,696
Loans sold $ 55,325 $ 57,403
Gains on sales of loans and other fee
income as a percent of loans sold 2.97% 3.14%
Compensation and benefits
as a percent of originations 4.08% 4.38%
Other expenses as a percent
of originations 1.53% 1.62%
Net interest income as a
percent of originations .29% .51%
PAMCO (principally prime)
Gains on sales of loans
and other fee income $ 1,954 $ 3,951
Interest income 390 777
Compensation and benefits 1,558 2,676
Interest expense 405 752
Other expenses 635 699
Loans originated $ 78,569 $140,662
Loans sold(1) $ 82,589 $151,783
16
<PAGE> 17
Gains on sales of loans and other fee
income as a percent of loans sold 2.37% 2.60%
Compensation and benefits
as a percent of originations 1.98% 1.90%
Other expenses as a percent
of originations .81% .50%
Net interest (expense) income as a
percent of originations (.02)% .02%
- --------------
(1) Includes loans totaling $9,296,000 for the quarter ended March 31, 2000 and
$10,641,000 for the quarter ended March 31, 1999 that were closed in the
name of a third party (brokered-out).
MPS operations
For the three months ended March 31, 2000 the loss from the MPS mortgage
operation totaled $1,259,000 as compared to a loss of $1,032,000 for the same
period in 1999. Revenues declined $303,000 or 12.1% over 1999 and expenses
decreased $76,000 or 2.2% over 1999. Net gains on loan sales and other fees
declined from 3.14% as a percent of loans sold in the first quarter of 1999 to
2.97% as a percent of loans originated in the first quarter of 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
broadens its product lines. The lower margins were offset somewhat by increased
loan fees as MPS increases the amount of retail sub- prime loan originations as
compared to wholesale and correspondent production. At March 31, 2000, MPS has
four retail net branches, all but one commenced operations in the first quarter
of 2000. Since the end of the quarter MPS has acquired four additional retail
net branches. 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 decreased to 4.08% in
2000 from 4.38% in 1999. Other expenses decreased to 1.53% of production for the
quarter ended March 31, 2000 from 1.62% of production for the three months ended
March 31, 1999. Compensation and other expenses have declined as MPS has reduced
costs in its wholesale and correspondent 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 .51%
for the three months ended March 31, 1999 to .29% for the three months ended
March 31, 2000 as a result of a lower spread between the rates charged to
borrowers and the LIBOR based borrowings of MPS.
17
<PAGE> 18
PAMCO operations
For the three months ended March 31, 2000 MPS's principally prime
production operation, PAMCO, recorded a loss of $254,000 as compared to earnings
of $601,000 for the three months ended March 31, 1999. Operating revenues
totaled $2,344,000 as compared to $4,728,000 for 1999 and expenses totaled
$2,598,000 as compared to $4,127,000 for 1998.
Gains on sales of loans and other loan fees as a percent of production
was 2.37% for the three months ended March 31, 2000 as compared to 2.60% for the
three months ended March 31, 1999. In periods of increasing interest rates the
Company'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
increased to 1.98% from 1.90% for the three months ended March 31, 1999. Other
expenses as a percent of loan originations increased from .50% for the three
months ended March 31, 1999 to .81% for the three months ended March 31, 2000.
Declines in compensation expense have not fully offset the decline in
origination levels and fixed expenses, such as rent, have increased as a percent
of loan originations.
Net interest expense as a percent of production was .02% for the three
months ended March 31, 2000 as compared to net interest income of .02% for the
same period in 1999. Increases in borrowing costs have not been fully offset by
increases in interest rates charged the borrowers.
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 $80,000 for the three months ended March
31, 2000 as compared to $253,000 for the same period in 1999. The decrease was
attributable to option termination related charges totaling $55,000 in 1999 as
compared to $0 in 2000 and a reduction in incentive compensation expense and
personnel in 2000.
Interest expense to affiliates was $301,000 for the three months ended
March 31, 2000, a decrease of $170,000 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 $127,000 for the first quarter of 2000 as
compared to $121,000 for the three months ended March 31, 1999.
18
<PAGE> 19
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:
Three months ended
March 31,
2000 1999
---- -----
Revenues, principally interest $ 95 $1,124
Expenses 109 933
---- ------
Earnings (loss) from discontinued
operations $(14) $ 191
==== ======
Management expects that the majority of the remaining assets consisting
primarily of loans receivable, of the discontinued operations will be disposed
of by July 31, 2000, either through sale or maturity of the loans.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had approximately $1,220,000 in cash
as compared to $2,854,000 at December 31, 1999. Of those amounts $1,173,000 and
$1,457,000 as of March 31, 2000 and December 31, 1999, respectively, was
restricted to usage for mortgage loan fundings and repayments under the
Company's residential warehouse line of credit. The decrease in unrestricted
cash is attributable to the losses incurred by the Company and the repurchase of
foreclosed loans in the first quarter.
Total assets have decreased to $54,808,000 at March 31, 2000 from
$64,406,000 at December 31, 1999. The decrease is principally attributable to a
decline in the mortgage loan production at PAMCO as a result of increasing
interest rates. Additionally the Company's investment in discontinued operations
has declined from $2,855,000 to $832,000 as a result of loan dispositions.
MPS's line of credit with Bank United totals $80,000,000. Outstanding
borrowings bear interest at various spreads (ranging from 1.25% to 2.50%) over
the LIBOR rate. The line of credit matures June 15, 2000. The mortgage loans
receivable of MPS are pledged as collateral for the line of credit. At March 31,
2000, $33,858,000 was borrowed under the line.
As discussed in Item 3 of Part II below the Company does not meet the
guarantors net worth requirement under the MPS line of credit. As part of the
renewal of MPS's line of credit, which expires June 15, 2000, the Company has
requested that the guarantors net worth requirement be eliminated. The Company's
request is pending. Failure to obtain approval of the request could have a
material adverse effect on the Company's ability to continue its regular
business operations. Management believes that the request will be approved.
19
<PAGE> 20
During 1999 and the first 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 March 31, 2000 the remaining net assets to be
disposed of total $832,000 which will be used to pay the operating expenses,
including interest, at NAB.
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. 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 expects to receive
funds from its over-collateralization account relating to the security issued by
MPS in 1998.
At March 31, 2000, the Company had borrowed under notes from SFSC a
total of $7,553,000. 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. Interest payments may be deferred by the Company. Deferred interest
payments bear interest at 14% until paid. In order to pay the remaining
indebtedness 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.
On March 7, 2000, CPFI borrowed $500,000 from two officers of the
Company. The notes bear interest at 14% per annum and are due April 30, 2000.
Proceeds from the disposition of the remaining CPFI loans will be used to repay
this indebtedness. The proceeds from the borrowings were used to repay principal
and interest due SFSC. Subsequent to March 31, 2000 the notes were extended to
June 30, 2000.
In order to maintain its net operating loss carryforwards the Company is
limited under Section 382 of the Internal Revenue Code of 1986 as to issuance of
new common shares in order to raise additional capital. The Company must rely on
additional borrowings to grow its operations. In 1998, NAB relied on SFSC and
CPS to provide funds to support the additional growth of the Company. During
1999 the Company required no additional funding.
20
<PAGE> 21
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 3: DEFAULTS UPON SENIOR SECURITIES
The Company does not meet the guarantors net worth requirement under the
MPS line of credit that totals $33,858,000 at March 31, 2000. The Company as
part of the renewal of MPS's line of credit, which expires June 15, 2000, has
requested that the guarantors net worth requirement be eliminated. The Company's
request is pending. Failure to obtain approval of the request could have a
material adverse effect on the Company's ability to continue its regular
business operations.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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 15, 2000
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
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 1,220 2,854
<SECURITIES> 0 0
<RECEIVABLES> 45,945 52,567
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,922 2,007
<DEPRECIATION> 1,387 988
<TOTAL-ASSETS> 54,808 64,406
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 509 6,859
<OTHER-SE> 680 1,537
<TOTAL-LIABILITY-AND-EQUITY> 171 64,406
<SALES> 1,895 3,544
<TOTAL-REVENUES> 4,575 7,265
<CGS> 0 0
<TOTAL-COSTS> 5,408 6,859
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,859) 1,517
<INCOME-PRETAX> (794) (1,111)
<INCOME-TAX> 2 29
<INCOME-CONTINUING> (1,861) (1,140)
<DISCONTINUED> (14) 191
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,875) (949)
<EPS-BASIC> (0.37) (0.19)
<EPS-DILUTED> (0.37) (0.19)
</TABLE>
