<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 December 31, 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 of (I.R.S. Employer Identification
incorporation or organization) No.)
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 December 31, 1996, 5,859,117 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 Sheets
December 31, 1996 (Unaudited) and March 31, 1996 3
Unaudited Statements of Income
Three Months and Nine Months Ended December 31, 1996 and 1995 4
Unaudited Statements of Cash Flows
Nine Months Ended December 31, 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 SHEETS
<CAPTION>
December 31, 1996 March 31, 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash $4,646,000 $5,948,000
Mortgage loans held for sale 31,956,000 19,879,000
Investment in commercial paper - 9,955,000
Other receivables and servicing 9,646,000 9,545,000
advances
Originated mortgage servicing 5,193,000 3,133,000
rights, net
Excess service fee, net 326,000 414,000
Purchased servicing rights, net 558,000 430,000
Property and equipment, net 654,000 612,000
Prepaid expenses and other assets 362,000 891,000
Due from affiliates 134,000 194,000
Notes receivable 630,000 130,000
TOTAL ASSETS $54,105,000 $51,131,000
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Notes payable, banks $24,888,000 $20,653,000
Note payable, officer 1,500,000 1,500,000
Sight drafts payable 354,000 2,699,000
Accounts payable and accrued 925,000 765,000
liabilities
Deferred income taxes 989,000 867,000
Total Liabilities 28,656,000 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
- 5,859,117 at December 31, 1996
and 5,883,117 at March 31, 1996 5,147,000 5,261,000
December 31, 1996 and
Retained earnings 20,302,000 19,386,000
Total Stockholders' Equity 25,449,000 24,647,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $54,105,000 $51,131,000
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $991,000 $658,000 $2,666,000 $2,838,000
Loan servicing income 1,799,000 1,680,000 5,291,000 5,045,000
Gain on sale of mortgage
loans 1,675,000 1,718,000 4,220,000 6,053,000
Interest income 485,000 553,000 1,671,000 1,607,000
Other income - 10,000 2,000 20,000
Total revenues 4,950,000 4,619,000 13,850,000 15,563,000
EXPENSES:
Employees' salaries and
commissions 2,165,000 1,836,000 6,130,000 5,788,000
General and administrative
expenses 1,958,000 1,623,000 5,593,000 4,772,000
Interest expense 129,000 203,000 539,000 607,000
Total expenses 4,252,000 3,662,000 12,262,000 11,167,000
INCOME BEFORE INCOME TAXES 698,000 957,000 1,588,000 4,396,000
INCOME TAX EXPENSE 296,000 374,000 672,000 1,827,000
NET INCOME $402,000 $583,000 $916,000 $2,569,000
NET INCOME PER SHARE $ 0.07 $ 0.10 $ 0.16 $ 0.44
WEIGHTED AVERAGE OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,886,000 5,883,000 5,886,000 5,883,000
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
December 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 916,000 $2,569,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 122,000 723,000
Provision for losses on foreclosure 102,000 238,000
Amortization of originated mortgage servicing rights,
excess service fee and purchased servicing rights 1,254,000 760,000
Depreciation and amortization of property and equipment 149,000 156,000
Originations and purchases of mortgage loans held for sale (274,638,000) (241,374,000)
Sales and principal repayments of mortgage loans
held for sale 262,561,000 250,465,000
Loss on sale of assets - 2,000
Changes in other receivables and servicing advances (203,000) (894,000)
Change in excess service fee - (2,000)
Change in prepaid expenses and other assets 529,000 (1,326,000)
Change in accounts payable and accrued liabilities 160,000 509,000
Change in income taxes payable - 1,100,000
Net cash provided by (used in) operating activities (9,048,000) 12,926,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (354,000) (2,000)
Origination of mortgage servicing rights (3,000,000) (2,817,000)
Note receivable (500,000) 120,000
Sale of commercial paper 9,955,000 -
Purchase of furniture and equipment and leasehold
improvements (191,000) (59,000)
Proceeds from sale of assets - 4,000
Change in due to affiliates 60,000 -
Net cash provided by (used in) investing activities 5,970,000 (2,754,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 4,235,000 (231,000)
Change in sight drafts payable (2,345,000) (128,000)
Change in notes payable, other - (9,493,000)
Repurchase of Common Stock (114,000) -
Net cash provided by (used in) financing activities 1,776,000 (9,852,000)
INCREASE (DECREASE) IN CASH (1,302,000) 320,000
CASH, BEGINNING OF PERIOD 5,948,000 4,748,000
CASH, END OF PERIOD $4,646,000 $5,068,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 213,000 $ 535,000
Income taxes 30,000 1,360,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 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 servicing fees, purchased
servicing rights and originated servicing rights. Activities in each
category are summarized as follows:
<TABLE>
<CAPTION>
Excess Purchased Originated
Servicing Servicing Servicing
Fees, Net Rights, Net Rights, Net
<S> <C> <C> <C>
Balance at March 31, 1996 $ 414,000 $ 430,000 $ 3,133,000
Additions - 354,000 3,000,000
Amortizations and write offs (88,000) (226,000) (1,015,000)
Impairment - - 75,000
(1)
Balance at December 31, 1996 $ 326,000 $ 558,000 $ 5,193,000
<FN>
<F1>
(1) Figure includes $350,000 of originated 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
servicing rights for the nine months ended December 31, 1996.
</FN>
</TABLE>
3. NOTES PAYABLE
At December 31, 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 interest payable monthly at 1.25% or the bank's reference
rate, depending on the level of borrowings and the compensating balances
maintained. At December 31, 1996, borrowings under these lines of
$24,888,000 were collateralized by mortgage loans held for sale.
The line of credit agreements are subject to renewal on September 1, 1997
and August 31, 1997, respectively. 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.
<PAGE>
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 December 31, 1996.
The Company also has an unsecured line of credit of $2,000,000 with a
nonaffiliated bank. The line was not utilized on December 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 December 31, 1996 compared to three months ended December 31,
1995.
GENERAL
The Company reported net income of $402,000 or $0.07 per share for the
quarter ended December 31, 1996, compared to net income of $583,000 or
$0.10 per share for the comparable 1995 quarter. The decrease in net
income was attributable to expenditures due to the expanding of our loan
production operations and higher foreclosure expenses during the quarter.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended December 31, 1996, the volume of new mortgage loans
closed increased by 44.9% to $102.64 million from $70.84 million in the
prior year quarter. The increase is a reflection of our expansion of loan
production capabilities over this fiscal year.
For the three months ended December 31, 1996 loan origination revenue
increased by 50.6% to $991,000 from the December 1995 quarter, due
primarily to the higher 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 7.1% to $1.80 million for the three months ended
December 31, 1996 from $1.68 million for the same period in 1995. The
increase resulted from growth in the Company's servicing portfolio.
As of December 31, 1996, the Company serviced $1.669 billion in loans
compared to $1.567 billion at December 31, 1995, an increase of 6.5% 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
December 31,
1996 1995
(Dollars in thousands except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,533,601 $1,477,951
Add: Loans originated 102,641 70,849
Less: Prepayment and amortization 66,094 62,121
Ending loan servicing portfolio 1,570,148 1,486,679
Sub-Servicing 99,053 80,202
Total servicing portfolio $1,669,201 $1,566,881
Average loan balance (end of period) $ 96,519 $ 94,402
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
Due to intense price competition during the quarter, the gain on sale of
mortgage loans was $1.67 million for the three months ended December 31,
1996, a decrease of 2.5% over the 1995 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage loans
held for sale and short-term investment in commercial paper, decreased to
$485,000 for the three months ended December 31, 1996 from $553,000 for the
comparable prior year quarter. This decrease was due primarily to less
funds available for investment as more working capital was utilized for
mortgage loan funding.
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 December
31, 1996 increased by 16.1% to $4.25 million from the three months ended
December 31, 1995. Salaries and commissions were $2.16 million for the
December 1996 quarter, an increase of 17.9% over the year-ago quarter.
General and administrative expense increased by $335,000, or 20.6% over
prior year. These higher expenses were a direct result of expanding
production operations in the quarter and higher foreclosure expenses,
partially offset by cost reduction measures taken by the Company.
INTEREST EXPENSE
Interest expense decreased 36.5% to $129,000 for quarter ended December
1996 from $203,000 for the same period in 1995. The decrease was due to an
increase in use of working capital for loan fundings, resulting in lower
warehouse line interest expense.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Nine months ended December 31, 1996 compared to nine months ended December 31,
1995.
GENERAL
In the nine months ended December 31, 1996, the Company reported net
income of $916,000 or $0.16 per share, compared to net income of $2.57
million or $0.44 per share for the same period of 1995. Total revenue
decreased by 11.0% to $13.85 million from $15.56 million in the year
earlier nine months. The lower operating results were largely due to a
lower gain on sale of mortgage loans and higher operating expenses.
REVENUES
For the nine months ended December 31, 1996, loan origination revenue
decreased 6.1% to $2.67 million from $2.84 million for the nine months
ended December 31, 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 increased to $274.64 million
from $241.37 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 4.9% to $5.29 million for the nine months ended
December 31, 1996 from $5.05 million for the same period in 1995 after
prepayments and scheduled 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>
Nine Months Ended December 31,
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 274,638 241,374
Less: Prepayment and amortization 181,651 156,527
Ending loan servicing portfolio 1,570,148 1,486,679
Sub-Servicing 99,053 80,202
Total servicing portfolio $1,669,201 $1,566,881
Average loan balance (end of period) $ 96,519 $ 94,402
Weighted average interest rate 7.98% 8.18%
</TABLE>
The sale of mortgages for the nine months ended December 31, 1996 resulted
in a gain of $4.22 million compared to a gain of $6.05 million for the
1995 period. The gain is adversely impacted by the escalating price
competition.
<PAGE>
Interest income, which reflects the interest received on mortgage loans
held for sale and short-term investment in commercial paper, increased
4.0% to $1.67 million for the nine months ended December 31, 1996 from
$1.61 million for the 1995 period. This increase was due primarily to a
larger mortgage inventory carried by the Company.
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 nine months ended
December 31, 1996 increased by $1.10 million or 9.8% from the nine months
ended December 31, 1995. Salaries and commission expenses increased to
$6.13 million compared to $5.79 million in the first nine months of fiscal
year 1995. General and administrative expenses increased by 17.2% to
$5.59 million from the comparable period in 1995. The increase was partly
attributable to expenditure resulted from ongoing implementation of our
production expansion plan, and higher foreclosure losses.
Interest expense decreased 11.2% to $539,000 compared to $607,000 in the
prior year. The drop was due to the increase in use of working capital in
loan funding, hence incurring lower warehouse interest expense.
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 increased from $19.88 million at
March 31, 1996 to $31.96 million at December 31, 1996. At December 31,
1996, maximum permitted borrowings under the warehouse line of credit
agreements with two nonaffiliated banks totaled $45 million and the amount
outstanding was $24.89 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
December 31, 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
December 31, 1996.
The Company had stockholders' equity of $25.45 million at December 31,
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
increased to $275 million for the nine months ended December 31, 1996
compared to $241 million for the nine months ended December 31, 1995, the
mix of new originations tilted more to wholesale rather than retail.
Wholesale originations are price driven and carry very slim margins for
origination revenue.
<PAGE>
We completed the wholesale expansion phase of our production growth plan,
and have now moved to the retail branch expansion phase. Retail
originations, although having better potential for origination revenue
margins, are much slower to develop momentum and volume of new
originations.
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. Despite the challenges,
however, we are confident that with our multiple origination channels, the
Company remains poised to take advantage of whichever channel emerges as
the most productive in the future. But competition at all levels is
formidable and very price intensive, and likely to continue so over the
coming year. Therefore, in the absence of a substantial reduction in long-
term interest rates, we expect to operate at marginal returns at least for
the near term. Nevertheless, we intend to remain focused on continuing the
incremental implementation of our long-range growth plan.
<PAGE>
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on 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 December 31, 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: February 13, 1997 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: February 13, 1997 By S/Pac W. Dong
Pac W. Dong
Chief Financial Officer,
Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000883369
<NAME> FIRST MORTGAGE CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,646
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<ALLOWANCES> 0
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