<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, 1997
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, 1997, 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 Sheet 3
September 30, 1997(Unaudited) and March 31, 1997
Unaudited Statements of Income
Three Months and Six Months Ended September 30, 1997
and 1996 4
Unaudited Statements of Cash Flows
Six Months Ended September 30, 1997 and 1996 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
September 30, 1997 March 31, 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash $2,214,000 $5,903,000
Mortgage loans held for sale 34,865,000 27,286,000
Other receivables and servicing
advances 9,384,000 9,623,000
Capitalized servicing rights 7,268,000 6,709,000
Property and equipment, net 593,000 592,000
Prepaid expenses and other assets 353,000 546,000
Due from affiliates - 134,000
Note receivable 130,000 130,000
TOTAL ASSETS $54,807,000 $50,923,000
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Notes payable, banks $23,027,000 $20,172,000
Note payable, officer - 1,500,000
Sight drafts payable 2,496,000 954,000
Accounts payable and accrued
liabilities 928,000 816,000
Deferred income taxes 1,957,000 1,833,000
Total Liabilities 28,408,000 25,275,000
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 5,147,000 5,147,000
Retained earnings 21,252,000 20,501,000
Total Stockholders' Equity 26,399,000 25,648,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $54,807,000 $50,923,000
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $808,000 $944,000 $1,512,000 $1,675,000
Loan servicing income 1,873,000 1,778,000 3,729,000 3,492,000
Gain on sale of mortgage loans 1,858,000 1,631,000 3,198,000 2,545,000
Interest income 626,000 559,000 1,163,000 1,186,000
Other income - 1,000 - 2,000
Total revenues 5,165,000 4,913,000 9,602,000 8,900,000
EXPENSES:
Compensation and benefits 2,065,000 2,127,000 4,053,000 3,965,000
General and admnistrative expenses 2,078,000 1,886,000 3,897,000 3,635,000
Interest expense 183,000 216,000 355,000 410,000
Total expenses 4,326,000 4,229,000 8,305,000 8,010,000
INCOME BEFORE INCOME TAXES 839,000 684,000 1,297,000 890,000
INCOME TAX EXPENSE 352,000 287,000 546,000 376,000
NET INCOME $487,000 $397,000 $751,000 $514,000
NET INCOME PER SHARE $ 0.08 $ 0.07 $ 0.13 $ 0.09
WEIGHTED AVERAGE OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,859,000 5,892,000 5,859,000 5,892,000
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
September 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 751,000 $ 514,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for deferred income taxes 124,000 264,000
Provision for losses on foreclosure (183,000) 277,000
Amortization of capitalized servicing rights 1,189,000 720,000
Depreciation and amortization of property and equipment 100,000 97,000
Originations and purchases of mortgage loans
held for sale (200,344,000) (171,997,000)
Sales and principal repayments of mortgage loans
held for sale 192,765,000 174,540,000
Changes in other receivables and servicing advances 422,000 (1,660,000)
Change in prepaid expenses and other assets 193,000 92,000
Change in accounts payable and accrued liabilities 112,000 (48,000)
Net cash provided by (used in) operating activities (4,871,000) 2,799,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (401,000) (189,000)
Origination of mortgage servicing rights (1,347,000) (1,913,000)
Change in note receivable - (500,000)
Sale of commercial paper - 9,955,000
Purchase furniture, equipment and leasehold improvements (101,000) (105,000)
Change in due from affiliates 134,000 60,000
Net cash provided by (used in) investing activities (1,715,000) 7,308,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 2,855,000 (10,093,000)
Change in sight drafts payable 1,542,000 (1,783,000)
Change in notes payable, officer (1,500,000) -
Net cash provided by (used in) financing activities 2,897,000 (11,876,000)
DECREASE IN CASH (3,689,000) (1,769,000)
CASH, BEGINNING OF PERIOD 5,903,000 5,948,000
CASH, END OF PERIOD $2,214,000 $4,179,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 264,000 $ 205,000
Income taxes 225,000 30,000
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1997
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, 1997.
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. CAPITALIZED SERVICING RIGHTS
In June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FAS 125). FAS 125 will result in
the recording of Capitalized Servicing Rights (CSRs) on the date of
sale of a mortgage loan as opposed to the previous practice of
recording CSRs on the date loans are originated. Additionally,
under FAS 125, excess servicing fees is included in CSRs for
balance sheet presentation. Activities in CSRs are summarized as
follows:
<TABLE>
<CAPTION>
Capitalized
Servicing
Rights
<S> <C>
Balance at March 31, 1997 $6,709,000
Additions 1,748,000
Amortizations and write offs (1,176,000)
Impairment (13,000)
Balance at September 30, 1997 $7,268,000
</TABLE>
3. NOTES PAYABLE
At September 30, 1997, the Company had line of credit agreements
with two nonaffiliated banks, which provided for borrowings up to
$40,000,000 and $15,000,000 with annual interest payable monthly at
1.25% to 1.40% or the bank's reference rate, depending on the level
of borrowings and the compensating balances maintained. At
September 30, 1997, borrowings under these lines of $23,027,000
were collateralized by mortgage loans held for sale.
The line of credit agreements are subject to renewal on September
1, 1998 and November 30, 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>
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 period in which they have a dilutive effect.
5. RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued Statement No. 128, Earnings Per
Share (FAS 128), which simplifies the standards for computing
earnings per share (EPS) and replaces the presentation of primary
EPS with a presentation of basic EPS. The Company believes that
the adoption of FAS 128 in fiscal year 1998 will not have a
material impact on the financial statements.
6. 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, 1997 compared to three months ended
September 30, 1996.
GENERAL
First Mortgage reported net income of $487,000 or $0.08 per share
for the quarter ended September 30, 1997, compared to net income
of $397,000 or $0.07 per share for the comparable 1996 quarter.
The increase of 22.7% in net income was primarily attributable to
larger gains on mortgage sales as interest rates became more
favorable; and to higher servicing income as the mortgage
servicing portfolio grows; and also to an increase in interest
income due to stronger loan production. The improvement in
earnings was, however, offset partially by greater general and
administrative expenses from start-up cost of production offices.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended September 30, 1997, the volume of new
mortgage loans closed increased by 42.1% to $113.55 million from
$79.90 million in the prior year quarter. The increase is a
reflection of lower long-term interest rates, which significantly
increased the volume of refinancing loans in the market place, and
the robust recovery of the California real estate market.
For the three months ended September 30, 1997, loan origination
revenue decreased by approximately 14.4% to $808,000 from the
September 1996 quarter, due primarily to the higher volume of
wholesale loan, which carry lower front-end origination fees.
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 5.3% to $1.87 million for
the three months ended September 30, 1997 from $1.78 million for
the same period in 1996. The increase resulted from growth in the
Company's servicing portfolio.
As of September 30, 1997, the Company serviced $1.71 billion in
loans compared to $1.63 billion at September 30, 1996, a net gain
of 4.9% 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 a
portion of new 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,
1997 1996
(Dollars in thousands
except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,606,069 $1,508,765
Add: Loans originated 113,546 79,902
Less: Prepayment and amortization 105,673 55,066
Ending loan servicing portfolio 1,613,942 1,533,601
Sub-Servicing 98,167 97,964
Total servicing portfolio $1,712,109 $1,631,565
Average loan balance (end of period) $ 96,631 $ 95,631
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
Due to a favorable trend in long-term mortgage interest rates
during the quarter, the gain on sale of mortgage loans was $1.86
million for the three months ended September 30, 1997, an increase
of 13.9% over the 1996 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage
loans held for sale, increased to $626,000 for the three months
ended September 30, 1997 from $559,000 for the comparable prior
year quarter. This increase was due primarily to the larger
mortgage inventory carried by the Company during the September
1997 quarter.
EXPENSES
The major components of the Company's total expenses are (i)
compensations and benefits, (ii) general and administrative
expenses and (iii) interest expense. Total expenses for the three
months ended September 30, 1997 increased by 2.3% to $4.33 million
from the three months ended September 30, 1996. Compensations and
benefits were $2.07 million for the September 1997 quarter, a
decrease of 2.9% over the year-ago quarter. General and
administrative expense increased by $192,000, or 10.2% 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 15.3% to $183,000 for quarter ended
September 1997 from $216,000 for the same period in 1996. The
decrease was due to an increase 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, 1997 compared to six months ended
September 30, 1996.
GENERAL
In the six months ended September 30, 1997, the Company reported
net income of $751,000 or $0.13 per share, compared to net income
of $514,000 or $0.09 per share for the same period of 1996.
Total revenue increased by 7.9% to $9.6 million from $8.9 million
in the year earlier six months. The increase in net income was
largely due to higher loan servicing income and a greater gain on
sale of mortgage loans for the six month period as compared to
1996.
REVENUES
For the six months ended September 30, 1997, loan origination
revenue decreased 9.7% to $1.51 million from $1.68 million for
the six months ended September 30, 1996. 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 16.5% to
$200.34 million from $171.99 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 6.8% to $3.73 million
for the six months ended September 30, 1997 from $3.49 million
for the same period in 1996 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>
Six Months Ended September 30,
1997 1996
(Dollars in thousands
except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,583,837 $1,477,161
Add: Loans originated 200,344 171,997
Less: Prepayment and amortization 170,239 115,557
Ending loan servicing portfolio 1,613,942 1,533,601
Sub-Servicing 98,167 97,964
Total servicing portfolio $1,712,109 $1,631,565
Average loan balance (end of period) $96,631 $95,631
</TABLE>
The sale of mortgages for the six months ended September 30, 1997
resulted in a gain of $3.20 million compared to a gain of $2.55
million for the 1996 period. The gain is primarily attributable
to the favorable trend in long-term interest rates in 1997.
Interest income, which reflects the interest earned on mortgage
loans held for sale for the six months ended September 30, 1997
was comparable to the 1996 period.
<PAGE>
EXPENSES
The major components of the Company's total expenses are (i)
compensation and benefits, (ii) general and administrative
expenses and (iii) interest expenses. Total expenses for the six
months ended September 30, 1997 increased by $295,000 or 3.7%
from the six months ended September 30, 1996. Compensation and
benefits remained essentially flat at $4.05 million compared to
$3.97 million in the first six months of fiscal year 1996.
General and administrative expenses increased by 7.2% to $3.90
million from the comparable period in 1996. The increase was
partly attributable to ongoing implementation of our production
expansion plan with the opening of new retail branches.
Interest expense decreased to 13.4% to $355,000 as compared to
$410,000 in the year earlier 6 months, due primarily to increased
usage of working capital for funding mortgage loans.
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, and also cash flows from
operations.
At September 30, 1997, maximum permitted borrowings under the
warehouse line of credit agreements with two nonaffiliated banks
totaled $55 million and the amount outstanding was $23.03 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, 1997. The Company believes that the warehouse
agreements will be renewed when the current terms expire.
The Company had stockholders' equity of $26.40 million at
September 30, 1997. Management believes that its current
financing arrangements are adequate to meet its projected
operational needs.
PROSPECTIVE TRENDS
Between June 1997 and September 1997, long-term mortgage interest
rates fell approximately 1/4%, contributing to a 31% increase in new
loan originations over the immediate preceding quarter ended June
30, 1997; and 42% more than the year earlier period. Unless long-
term interest rates unexpectedly increase, the surge in activity
should help produce positive results for the Company going
forward.
Pricing of traditional mortgage products, however, remains
uneconomical and as previously discussed, the Company still faces
intense competition from many directions, particularly for the
standard conforming conventional mortgage loans so coveted by many
of the major commercial banks. Our strategy is to instead
emphasize the origination of FHA and VA loans, home equity loans
and other mortgage products with much greater profit potential for
the Company. We recently introduced, for example, a 125% second
mortgage equity loan which is being originated through direct
consumer mailing, telemarketing, and our traditional retail branch
operations. Initially to be sold servicing-released, we intend to
later securitize and retain servicing on this increasingly popular
new mortgage product.
As a continuing part of the Company's long-term plan, we are
opening additional retail offices wherever such opportunity
presents itself.
We believe we are appropriately positioned to take advantage of
the market niches within which we can competitively operate, but
we still face formidable competition and, as always, our business
is greatly influenced by the level of interest rates.
<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, 1997.
<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, 1997 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: November 8, 1997 By S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 2,214
<SECURITIES> 0
<RECEIVABLES> 9,384
<ALLOWANCES> 0
<INVENTORY> 0
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<PP&E> 2,534
<DEPRECIATION> 1,941
<TOTAL-ASSETS> 54,807
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0
0
<COMMON> 5,147
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</TABLE>
