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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 1996
or
[ ]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 0-19847
FIRST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-2960716
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3230 Fallow Field Drive
Diamond Bar, California 91765
(Address, including zip code, of principal executive offices)
(909) 595-1996
(Registrant's telephone number, including area code)
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 June 30, 1996, 5,883,117 shares of the registrant's common stock
were outstanding.
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FIRST MORTGAGE CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
Item 1. Financial Statements:
Balance Sheet
June 30, 1996 (Unaudited) and March 31, 1996 3
Unaudited Statement of Income
Three Months Ended June 30, 1996 and 1995 4
Unaudited Statement of Cash Flows
Three Months Ended June 30, 1996 and 1995 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
June 30, 1996 March 31, 1996
(Unaudited)
ASSETS
<S> <C> <C>
Cash $ 3,101,000 $ 5,948,000
Mortgage loans held for sale 39,525,000 19,879,000
Investment in commercial paper - 9,955,000
Other receivables and servicing advances 9,360,000 9,545,000
Originated mortgage servicing rights net 3,939,000 3,133,000
Excess service fee, net 387,000 414,000
Purchased servicing rights, net 434,000 430,000
Property and equipment, net 590,000 612,000
Prepaid expenses and other assets 941,000 891,000
Due from affiliates 194,000 194,000
Notes receivable 630,000 130,000
TOTAL ASSETS $59,101,000 $51,131,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $29,389,000 $20,653,000
Note payable, officer 1,500,000 1,500,000
Sight drafts payable 1,772,000 2,699,000
Accounts payable and accrued liabilities 665,000 765,000
Deferred income taxes 1,011,000 867,000
Total Liabilities 34,337,000 26,484,000
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - None - -
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 5,883,117 5,261,000 5,261,000
Retained earnings 19,503,000 19,386,000
Total Stockholders' Equity 24,764,000 24,647,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $59,101,000 $51,131,000
See accompanying notes
</TABLE>
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FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF INCOME
<CAPTION>
Three Months Ended
June 30
1996 1995
REVENUES:
<S> <C> <C>
Loan origination income $ 731,000 $ 950,000
Loan servicing income 1,714,000 1,687,000
Gain on sale of mortgage loans 914,000 2,428,000
Interest income 627,000 435,000
Other income 1,000 10,000
Total revenues 3,987,000 5,510,000
EXPENSES:
Employees' salaries and commissions 1,838,000 1,963,000
General and administrative expenses 1,749,000 1,515,000
Interest expense 194,000 213,000
Total expenses 3,781,000 3,691,000
INCOME BEFORE INCOME TAXES 206,000 1,819,000
INCOME TAX EXPENSE 89,000 755,000
NET INCOME $ 117,000 $1,064,000
NET INCOME PER SHARE $ 0.02 $ 0.18
WEIGHTED AVERAGE OF COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 5,890,000 5,883,000
See accompanying notes
</TABLE>
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FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended
June 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 117,000 $ 1,064,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 144,000 349,000
Provision for losses on foreclosure (40,000) 134,000
Amortization of originated mortgage servicing rights,
excess service fee and purchased servicing rights 340,000 182,000
Depreciation and amortization of property and equipment 47,000 53,000
Originations and purchases of mortgage loans
held for sale (92,095,000) (70,625,000)
Sales and principal repayments of mortgage loans
held for sale 72,449,000 75,084,000
Change in other receivables and servicing advances 225,000 96,000
Additions to excess service fee - (1,000)
Change in prepaid expenses and other assets (50,000) 10,000
Change in accounts payable and accrued liabilities (100,000) 432,000
Change in income taxes payable - 404,000
Net cash (used in) provided by operating activities (18,963,000) 7,182,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (69,000) -
Originated mortgage servicing rights (1,054,000) (1,113,000)
Notes receivable (500,000) 70,000
Sale of commercial paper 9,955,000 -
Purchase of furniture, equipment and leasehold improvements (25,000) (5,000)
Net cash provided by (used in) investing activities 8,307,000 (1,048,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 8,736,000 543,000
Change in sight drafts payable (927,000) 162,000
Change in notes payable, other - (9,493,000)
Net cash provided by (used in) financing activities 7,809,000 (8,788,000)
DECREASE IN CASH (2,847,000) (2,654,000)
CASH, BEGINNING OF PERIOD 5,948,000 4,748,000
CASH, END OF PERIOD $ 3,101,000 $ 2,094,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 83,000 $ 178,000
Income taxes - -
</TABLE>
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FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and in accordance with the
instructions to Form 10-Q and Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the
interim periods have been included. The results of operations for
the interim periods are not necessarily indicative of the results
to be expected for the full year. In addition, this document
should be read in conjunction with the financial statements and
footnotes included in the Company's annual report on Form 10-K for
fiscal year ended March 31, 1996
The preparation of the financial statements of the Company requires
management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of
the date of the financial statements. Therefore, actual results
could differ from those estimates.
2. MORTGAGE SERVICING ASSETS
<TABLE>
Mortgage servicing assets consist of excess service fees, purchased
servicing rights and originated mortgage servicing rights.
Activities in each category are summarized as follows:
<CAPTION>
Excess Purchased Originated
Service Servicing Mortgage
Fee Rights Servicing
Rights
<S> <C> <C> <C>
Balance at March 31, 1996 $ 414,000 $ 430,000 $ 3,133,000
Additions - 69,000 1,054,000
Amortizations and write offs (27,000) (65,000) (243,000)
Impairment - - (5,000)
(1)
Balance at June 30, 1996 $ 387,000 $ 434,000 $ 3,939,000
<FN>
<F1>
(1) Figure includes $364,000 of originated mortgage servicing
rights relating to mortgage loans held for sale to investors.
Since the underlying loans have not yet been sold, no revenues have
been recognized on these originated mortgage servicing rights for
the three months ended June 30, 1996.
</FN>
</TABLE>
3. NOTES PAYABLE
At June 30, 1996, the Company had line of credit agreements with
two nonaffiliated banks, which provided for borrowings up to
$30,000,000 and $10,000,000 with annual interest payable monthly at
1.25% or the bank's reference rate, depending on the level of
borrowings and the compensating balances maintained. At June 30,
1996, borrowings under these lines of $29,389,000 were
collateralized by mortgage loans held for sale.
At March 31, 1996, advance of $9,955,000 against one of the lines
of credit was collateralized by commercial paper which matured in
April 1996. The advance was repaid and there was no investment in
commercial paper at June 30, 1996.
The line of credit agreements are subject to renewal on September
1, 1996 and August 31, 1996, respectively. Both agreements contain
certain requirements, including, but not limited to, the
maintenance of minimum net
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worth, debt to net worth ratio, current ratio, net income and servicing
portfolio, and restrict the Company's ability to pay dividends.
The Company believes its two lines of credit agreements will be
renewed prior to their expiration.
The Company has a presale funding facility with a nonaffiliated
investment banking firm for borrowings under reverse repurchase
arrangements, collateralized by mortgage loans held for sale pooled
to form GNMA securities. There was no amount outstanding on June
30, 1996.
At June 30, 1996, the Company also had an unsecured line of credit
of $2,000,000 with a nonaffiliated bank which expires August 31,
1996. Advances on the line of credit are due within 21 days and
bear interest at the bank's reference rate. There was no amount
outstanding on June 30, 1996.
4. NET INCOME PER SHARE
Net income per share is computed on the basis of the weighted
average number of common shares outstanding during each period plus
the effect of common shares contingently issuable from stock
options in periods in which they have a dilutive effect.
5. CONTINGENCIES
The Company is currently a defendant in certain litigation arising
in the ordinary course of business. It is management's opinion
that the outcome of these actions will not have a material effect
on the financial position or results of operations of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended June 30, 1996 compared to three months ended June
30, 1995.
GENERAL
The Company reported net income of $117,000 or $0.02 per share for
the quarter ended June 30, 1996, compared to net income of $1.06
million or $0.18 per share for the comparable 1995 quarter. The
decrease in net income was attributable to two major reasons: a
sharp increase in interest rates during June 1996 quarter; and
intensive price competition among mortgage banking firms and
commercial banks. As a result, the gain on sale of mortgages was
adversely impacted, decreasing by 62.4% to $914,000 from the year
ago quarter.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended June 30, 1996, the volume of new mortgage
loans closed increased by 30.4% to $92.10 million from $70.63
million in the prior year quarter. The increase is a reflection
of the successful market penetration by our expanded wholesale
operations in the first phase of our production expansion plan,
which is to be followed by the opening of more retail offices in
the next two years.
For the three months ended June 30, 1996, in spite of higher loan
production, loan origination revenue decreased by approximately
23.0% to $731,000 from the June 1995 quarter, due primarily to the
lower average front-end loan fees earned on wholesale and
refinance loans.
LOAN SERVICING INCOME
Loan servicing income, representing the loan servicing fees, late
charges and other fees earned by the Company for administering the
loans in its servicing portfolio, rose slightly to $1.71 million
for the three months ended June 30, 1996 from $1.69 million for
the same period in 1995. The increase resulted from growth in the
Company's servicing portfolio.
As of June 30, 1996, the Company serviced $1.60 billion in loans
compared to $1.53 billion at June 30, 1995, a net gain of 4.6%
after prepayments and scheduled amortization of mortgage loans.
The growth in the servicing portfolio reflects the Company's long-
term plan of retaining the servicing rights on most loan
originations.
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<TABLE>
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated.
<CAPTION>
Three Months Ended June 30,
1996 1995
(Dollars in thousands except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,477,161 $1,401,832
Add: Loans originated 92,095 70,624
Less: Prepayment and Amortization 60,491 50,783
Ending loan servicing portfolio 1,508,765 1,421,673
Sub-Servicing 91,938 111,598
Total servicing portfolio $1,600,703 $1,533,271
Average loan balance (end of period) $ 94,587 $ 92,824
Weighted Average Interest Rate 8.17% 7.99%
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
Due to intense price competition and an increase of more than .50%
in long-term mortgage interest rates during the quarter, the gain
on sale of mortgage loans was $914,000 for the three months ended
June 30, 1996, a decrease of 62.4% over the 1995 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage
loans held for sale, increased to $627,000 for the three months
ended June 30, 1996 from $435,000 for the comparable prior year
quarter. This increase is due primarily to the higher average
interest rate on mortgage loans and a larger mortgage inventory
carried by the Company during the June 1996 quarter. It was also
benefited by the short-term investment in commercial paper.
EXPENSES
The major components of the Company's total expenses are (i)
employees' salaries and commissions, (ii) general and
administrative expenses and (iii) interest expense. Total
expenses for the three months ended June 30, 1996 increased
moderately by 2.4% to $3.78 million from the three months ended
June 30, 1995. Salaries and commissions were $1.838 million for
the June 1996 quarter, a decrease of 6.4% over the year-ago
quarter. The improvement was partly due to the success by the
Company in implementing tight controls over payroll expenditures
despite the push to increase loan originations, and also due to
lower profit incentive bonus paid out in the quarter. General and
administrative expense increased by $234,000, an increase of 15.5%
over prior year. These higher expenses were a direct result of
expanding production operations in the quarter, partially offset
by cost reduction measures taken by the Company over the past
year.
INTEREST EXPENSE
Interest expense decreased 8.9% to $194,000 for quarter ended June
1996 from $213,000 for the same period in 1995. The decrease was
due to lower warehouse borrowings during the quarter as more
corporate cash was used to finance a portion of Company's mortgage
warehousing needs.
PROSPECTIVE TRENDS
The reduction in long-term interest rates during the ten months
ended January 31, 1996 halted the downward trend in new loan
originations and, in fact, the Company had been experiencing
production increases as compared to the previous year.
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But long-term interest rates began increasing again in February
1996, rising nearly one full percent through the quarter ended
June 30, 1996. This increase in interest rates began to
negatively impact new loan originations in May, and the
origination trend is once again downward as the higher mortgage
rates have taken hold. Additionally, competition is intense as
the industry continues consolidating and downsizing. Pricing
practices have become cut-throat in many of our markets,
particularly at the wholesale level in which several of the major
banks appear to be engaged in a virtual price war for mortgages
originated through wholesale sources. The Company's retail
originations, however, were nearly half of the total loans
originated during the quarter ended June 30, 1996, providing us
with some insulation from the wholesale price wars. With our
multiple origination channels, the Company remains well-positioned
to take advantage of whichever channel emerges as the most
productive in the future. Nevertheless, competition at all levels
remains formidable and price intensive, and is likely to remain so
until the capacity of the mortgage-providing industries shrinks to
the size of current demand, or long-term interest rates decline
enough to stimulate more demand. In the meantime, new origination
volume and earnings are likely to remain adversely impacted.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirement is the funding of
its new mortgage loans and loan origination expenses. To meet
these funding needs, the Company relies on warehouse lines of
credit with banks, its own capital, cash flows from operations and
short-term reverse repurchase agreements with other investment
banking firms.
At June 30, 1996, maximum permitted borrowings under the warehouse
line of credit agreements with two nonaffiliated banks totaled $40
million and the amount outstanding was $29.39 million. Borrowings
under these facilities are secured by mortgage loans. The
agreements contain various covenants, including minimum net worth,
current ratio, net income, servicing portfolio balances, debt to
net worth ratio, and restrict the Company's ability to pay
dividends. The Company was in compliance with all debt covenants
at June 30, 1996. The Company believes that the warehouse
agreements will be renewed when the current terms expire in August
and September 1996.
In addition to the warehouse lines of credit, the Company makes
regular use of the short-term reverse repurchase agreements
provided by other investment banking firms in connection with its
inventory of mortgage loans and mortgage-backed securities. These
facilities generally allow the Company to better utilize its
warehouse lines. There was no amount outstanding under the
agreements at June 30, 1996.
The Company had stockholders' equity of $24.76 million at June 30,
1996. Management believes that its current financing arrangements
are adequate to meet its projected operational needs.
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PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports of Form 8-K.
(a) No exhibits are filed with this report.
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
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SIGNATURES
Pursuant to the requirements 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.
FIRST MORTGAGE CORPORATION
Date: August 12, 1996 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: August 12, 1996 By S/Pac W. Dong
Pac W. Dong
Chief Financial Officer,
Controller and Executive Vice
President