<PAGE>
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 September 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 September 30, 1996, 5,883,117 shares of the registrant's common
stock were outstanding.
<PAGE>
FIRST MORTGAGE CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
Item 1. Financial Statements:
Balance Sheet
September 30, 1996 (Unaudited) and March 31, 1996 3
Unaudited Statements of Income
Three Months and Six Months Ended September 30, 1996 and 1995 4
Unaudited Statements of Cash Flows
Six Months Ended September 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 8-12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
September 30, 1996 March 31, 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash $4,179,000 $5,948,000
Mortgage loans held for sale 17,336,000 19,879,000
Investment in commercial paper - 9,955,000
Other receivables and servicing advances 10,928,000 9,545,000
Originated mortgage servicing rights net 4,510,000 3,133,000
Excess service fee, net 358,000 414,000
Purchased servicing rights, net 491,000 430,000
Property and equipment, net 620,000 612,000
Prepaid expenses and other assets 799,000 891,000
Due from affiliates 134,000 194,000
Notes receivable 630,000 130,000
TOTAL ASSETS $39,985,000 $51,131,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $10,560,000 $20,653,000
Note payable, officer 1,500,000 1,500,000
Sight drafts payable 916,000 2,699,000
Accounts payable and accrued liabilities 717,000 765,000
Deferred income taxes 1,131,000 867,000
Total Liabilities 14,824,000 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 19,900,000 19,386,000
Total Stockholders' Equity 25,161,000 24,647,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,985,000 $51,131,000
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $944,000 $1,230,000 $1,675,000 $2,180,000
Loan servicing income 1,778,000 1,678,000 3,492,000 3,365,000
Gain on sale of mortgage loans 1,631,000 1,907,000 2,545,000 4,335,000
Interest income 559,000 619,000 1,186,000 1,054,000
Other income 1,000 - 2,000 10,000
Total revenues 4,913,000 5,434,000 8,900,000 10,944,000
EXPENSES:
Employees' salaries and
commissions 2,127,000 1,989,000 3,965,000 3,952,000
General and
administrative expenses 1,886,000 1,634,000 3,635,000 3,149,000
Interest expense 216,000 191,000 410,000 404,000
Total expenses 4,229,000 3,814,000 8,010,000 7,505,000
INCOME BEFORE INCOME TAXES 684,000 1,620,000 890,000 3,439,000
INCOME TAX EXPENSE 287,000 698,000 376,000 1,453,000
NET INCOME $397,000 $922,000 $514,000 $1,986,000
NET INCOME PER SHARE $0.07 $0.16 $0.09 $0.34
WEIGHTED AVERAGE OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,892,000 5,883,000 5,892,000 5,883,000
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months
Ended
September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 514,000 $1,986,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 264,000 538,000
Provision for losses on foreclosure 277,000 235,000
Amortization of originated mortgage servicing rights,
excess service fee and purchased servicing rights 720,000 501,000
Depreciation and amortization of property and equipment 97,000 100,000
Originations and purchases of mortgage loans
held for sale (171,997,000) (170,528,000)
Sales and principal repayments of mortgage loans
held for sale 174,540,000 175,108,000
Changes in other receivables and servicing advances (1,660,000) (1,419,000)
Additions to excess service fee - (2,000)
Change in prepaid expenses and other assets 92,000 (781,000)
Change in accounts payable and accrued liabilities (48,000) 491,000
Change in income taxes payable - 912,000
Net cash provided by operating activities 2,799,000 7,141,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (189,000) (2,000)
Origination of mortgage servicing rights (1,913,000) (2,202,000)
Change in Notes receivable (500,000) 120,000
Sale of commercial paper 9,955,000 -
Purchase furniture, equipment and leasehold improvements (105,000) (30,000)
Proceeds from sale of assets - 1,000
Change in due from affiliates 60,000 -
Net cash provided by (used in) investing activities 7,308,000 (2,113,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks (10,093,000) 3,519,000
Change in sight drafts payable (1,783,000) 1,339,000
Change in notes payable, other - (9,493,000)
Net cash used in financing activities (11,876,000) (4,635,000)
INCREASE (DECREASE) IN CASH (1,769,000) 393,000
CASH, BEGINNING OF PERIOD 5,948,000 4,748,000
CASH, END OF PERIOD $4,179,000 $5,141,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 147,000 $ 326,000
Income taxes 30,000 800,000
See accomanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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
Mortgage servicing assets consist of excess service fees, purchased
servicing rights and originated mortgage servicing rights.
Activities in each category are summarized as follows:
<TABLE>
<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 - 189,000 1,913,000
Amortizations and (56,000) (128,000) (527,000)
write offs
Impairment - - (9,000)
(1)
Balance at September 30, 1996 $ 358,000 $ 491,000 $ 4,510,000
<FN>
<F1>
(1) Figure includes $199,000 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 September 30, 1996.
</FN>
</TABLE>
3. NOTES PAYABLE
At September 30, 1996, the Company had line of credit agreements
with two nonaffiliated banks, which provided for borrowings up to
$30,000,000 and $15,000,000 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 September
30, 1996, borrowings under these lines of $10,560,000 were
collateralized by mortgage loans held for sale.
At March 31, 1996, advances 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 September 30, 1996.
<PAGE>
The line of credit agreements are subject to renewal on September 1997.
Both agreements contain certain requirements, including, but not
limited to, the maintenance of minimum net 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
September 30, 1996.
At September 30, 1996, the Company also had an unsecured line of
credit of $2,000,000 with a nonaffiliated bank which expired on
October 31, 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended September 30, 1996 compared to three months ended
September 30, 1995.
GENERAL
The Company reported net income of $397,000 or $0.07 per share for
the quarter ended September 30, 1996, compared to net income of
$922,000 or $0.16 per share for the comparable 1995 quarter. The
decrease in net income was attributable to a 20% reduction in new
loan originations resulting from intensive price competition among
mortgage banking firms and commercial banks. As a result,
revenues fell nearly 9.6% while expenses increased by about 10.9%.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended September 30, 1996, the volume of new
mortgage loans closed decreased by 20% to $79.90 million from
$99.90 million in the prior year quarter. The decrease is a
reflection of higher long-term interest rates, which significantly
reduced the volume of refinancing loans in the market place, and a
higher proportion of wholesale loans, which carry lower front-end
origination fees.
For the three months ended September 30, 1996 loan origination
revenue decreased by approximately 23.3% to $944,000 from the
September 1995 quarter, due primarily to the lower volume of new
loan originations.
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 6.0% to $1.78 million for
the three months ended September 30, 1996 from $1.68 million for
the same period in 1995. The increase resulted from growth in the
Company's servicing portfolio.
As of September 30, 1996, the Company serviced $1.63 billion in
loans compared to $1.57 billion at September 30, 1995, a net gain
of 3.8% 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.
<PAGE>
<TABLE>
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated.
<CAPTION>
Three Months Ended September 30,
1996 1995
(Dollars in thousands except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,508,765 $1,421,673
Add: Loans originated 79,902 99,902
Less: Prepayment and amortization 55,066 43,624
Ending loan servicing portfolio 1,533,601 1,477,951
Sub-Servicing 97,964 90,721
Total servicing portfolio $1,631,565 $1,568,672
Average loan balance (end of period) $ 95,631 $ 94,175
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
Due to intense price competition and an increase in long-term
mortgage interest rates during the quarter, the gain on sale of
mortgage loans was $1.63 million for the three months ended
September 30, 1996, a decrease of 14.5% over the 1995 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage
loans held for sale, decreased to $559,000 for the three months
ended September 30, 1996 from $619,000 for the comparable prior
year quarter. This decrease is due primarily to the smaller
mortgage inventory carried by the Company during the September
1996 quarter.
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 September 30, 1996 increased
by 10.9% to $4.23 million from the three months ended September
30, 1995. Salaries and commissions were $2.13 million for the
September 1996 quarter, an increase of 6.9% over the year-ago
quarter. General and administrative expense increased by
$252,000, or 15.4% over prior year. These higher expenses were a
direct result of expanding production operations in the quarter
coupled with higher foreclosure expenses, partially offset by cost
reduction measures taken by the Company over the past year.
INTEREST EXPENSE
Interest expense increased 13.1% to $216,000 for quarter ended
September 1996 from $191,000 for the same period in 1995. The
increase was due to a decrease in the compensating balances used
to establish our borrowing costs, and a decrease in use of working
capital for loan fundings.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Six months ended September 30, 1996 compared to six months ended
September 30, 1995.
GENERAL
In the six months ended September 30, 1996, the Company reported
net income of $514,000 or $0.09 per share, compared to net income
of $1.99 million or $0.34 per share for the same period of 1995.
Total revenue decreased by 18.7% to $8.90 million from $10.94
million in the year earlier six months. The lower operating
results were largely due to lower loan origination income and a
lower gain on sale of mortgage loans for the six month period as
compared to 1995.
REVENUES
For the six months ended September 30, 1996, loan origination
revenue decreased 23.2% to $1.68 million from $2.18 million for
the six months ended September 30, 1995. The lower loan
origination revenue was largely due to a higher proportion of
wholesale loans, which carry much lower front-end origination
revenue than retail loans.
The volume of new mortgage loan originations remained flat at
$171.99 million from $170.53 million in the comparable period
last year.
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 3.8% to $3.49 million
for the six months ended September 30, 1996 from $3.37 million
for the same period in 1995 after prepayments and schedule
amortization of mortgage loans.
<TABLE>
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated:
<CAPTION>
Six Months Ended September 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 171,997 170,528
Less: Prepayment and amortization 115,557 94,407
Ending loan servicing portfolio 1,533,601 1,477,951
Sub-Servicing 97,964 90,721
Total servicing portfolio $1,631,565 $1,568,672
Average loan balance (end of period) $95,631 $94,175
Weighted average interest rate 8.00% 8.18%
</TABLE>
The sale of mortgages for the six months ended September 30, 1996
resulted in a gain of $2.55 million compared to a gain of $4.34
million for the 1995 period. The gain is primarily impacted by
two factors: the escalating price competition and the
recognition of gains related to originated mortgage servicing
rights mandated by FAS 122.
<PAGE>
Interest income, which reflects the interest received on mortgage loans
held for sale, increased 12.5% to $1.19 million for the six
months ended September 30, 1996 from $1.05 million for the 1995
period. This increase was due largely to higher average interest
rate on mortgage loans and a larger inventory carried by the
Company during the June, 1996 quarter.
EXPENSES
The major components of the Company's total expenses are (i)
employees' salaries and commissions, (ii) general and
administrative expenses and (iii) interest expenses. Total
expenses for the six months ended September 30, 1996 increased by
$505,000 or 6.7% from the six months ended September 30, 1995.
Salaries and commission expenses remained flat at $3.97 million
compared to $3.95 million in the first six months of fiscal year
1995. General and administrative expenses increased by 15.4% to
$3.64 million from the comparable period in 1995. The increase
was partly attributable to ongoing implementation of our
production expansion plan, coupled with higher foreclosure
expenses.
There was no material increase in interest expense compared to
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirement is the funding of its
new mortgage loans and origination expenses. To meet these 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.
The Company's mortgage loans held for sale decreased from $19.88
million at March 31, 1996 to $17.34 million at September 30, 1996.
The majority of the cash provided from this decrease was used to
repay short-term borrowings. At September 30, 1996, maximum
permitted borrowings under the warehouse line of credit agreements
with two nonaffiliated banks totaled $45 million and the amount
outstanding was $10.56 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 September 30, 1996. The
Company believes that the warehouse agreements will be renewed
when the current terms expire in September 1997.
In addition to the warehouse lines of credit, the Company may use
the short-term reverse repurchase agreements provided by other
investment banking firms in connection with its inventory of
mortgage loans and mortgage-backed securities. There was no
amount outstanding under the agreements at September 30, 1996.
The Company had stockholders' equity of $25.16 million at
September 30, 1996. Management believes that its current
financing arrangements are adequate to meet its projected
operation needs.
PROSPECTIVE TRENDS
The increase in long-term interest rates during the first four
months of the fiscal year had a negative impact on new loan
originations, particularly those for refinance loans. Although
our new loan originations were virtually flat at $172 million for
the six months ended September 30, 1996 compared to $171 million
for the six months ended September 30, 1995, the mix of new
originations tilted more to wholesale rather than retail.
<PAGE>
We have completed the wholesale expansion phase of our production
growth plan, and have now moved to the retail branch expansion
phase, opening new branches in Spokane, Washington and Diamond
Bar, California. Both of the new operations are off to a fast
start, and we plan to continue to expand our retail operations as
opportunities arise.
Competition is more intense than at any time in the past, as the
industry continues consolidation and downsizing. Pricing
practices remain cut-throat in most 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. 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 unless the capacity of
the mortgage-providing industries finally shrink to the size of
current demand, or long-term interest rates decline enough to
stimulate more demand.
<PAGE>
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 September 30, 1996.
<PAGE>
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: November 8, 1996 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: November 8, 1996 By S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883369
<NAME> FIRST MORTGAGE CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
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