<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 June 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 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 June 30, 1997, 5,859,117 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, 1997 (Unaudited) and March 31, 1997 3
Unaudited Statement of Income
Three Months Ended June 30, 1997 and 1996 4
Unaudited Statement of Cash Flows
Three Months Ended June 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 8-10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
June 30, 1997 March 31, 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 5,201,000 $ 5,903,000
Mortgage loans held for sale 24,982,000 27,286,000
Other receivables and servicing advances 11,015,000 9,623,000
Capitalized servicing rights 6,768,000 6,709,000
Property and equipment, net 584,000 592,000
Prepaid expenses and other assets 299,000 546,000
Due from affiliates - 134,000
Notes receivable 130,000 130,000
TOTAL ASSETS $48,979,000 $50,923,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $20,396,000 $20,172,000
Note payable, officer - 1,500,000
Sight drafts payable 199,000 954,000
Accounts payable and accrued liabilities 703,000 816,000
Deferred income taxes 1,769,000 1,833,000
Total Liabilities 23,067,000 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 5,147,000 5,147,000
Issued and outstanding shares - 5,859,117
Retained earnings 20,765,000 20,501,000
Total Stockholders' Equity 25,912,000 25,648,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $48,979,000 $50,923,000
See accompanying notes
</TABLE>
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FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF INCOME
<CAPTION>
Three Months Ended
June 30
1997 1996
<S> <C> <C>
REVENUES:
Loan origination income $ 704,000 $ 731,000
Loan servicing income 1,856,000 1,714,000
Gain on sale of mortgage loans 1,340,000 914,000
Interest income 537,000 627,000
Other income - 1,000
Total revenues 4,437,000 3,987,000
EXPENSES:
Employees' salaries and commissions 1,988,000 1,838,000
General and administrative expenses 1,819,000 1,749,000
Interest expense 172,000 194,000
Total expenses 3,979,000 3,781,000
INCOME BEFORE INCOME TAXES 458,000 206,000
INCOME TAX EXPENSE 194,000 89,000
NET INCOME $ 264,000 $ 117,000
NET INCOME PER SHARE $ 0.05 $ 0.02
WEIGHTED AVERAGE OF COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 5,859,000 5,890,000
See accompanying notes
</TABLE>
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FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended
June 30
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 264,000 $117,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes (64,000) 144,000
Provision for losses on foreclosure (3,000) (40,000)
Amortization of capitalized servicing rights 571,000 340,000
Depreciation and amortization of property and equipment 49,000 47,000
Originations and purchases of mortgage loans
held for sale (86,798,000) (92,095,000)
Sales and principal repayments of mortgage loans
held for sale 89,102,000 72,449,000
Change in other receivables and servicing advances (1,389,000) 225,000
Change in prepaid expenses and other assets 247,000 (50,000)
Change in accounts payable and accrued liabilities (113,000) (100,000)
Net cash provided by (used in) operating activities 1,866,000 (18,963,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (214,000) (69,000)
Originated mortgage servicing rights (416,000) (1,054,000)
Notes receivable - (500,000)
Sale of commercial paper - 9,955,000
Purchase of furniture, equipment and leasehold improvements (41,000) (25,000)
Change in due from affiliates 134,000 -
Net cash provided by (used in) investing activities (537,000) 8,307,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 224,000 8,736,000
Change in sight drafts payable (755,000) (927,000)
Change in notes payable, officer (1,500,000) -
Net cash provided by (used in) financing activities (2,031,000) 7,809,000
DECREASE IN CASH (702,000) (2,847,000)
CASH, BEGINNING OF PERIOD 5,903,000 5,948,000
CASH, END OF PERIOD $5,201,000 $3,101,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 139,000 $141,000
Income taxes - -
See accompanying notes
</TABLE>
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FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 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 630,000
Amortizations and write offs (558,000)
Impairment (13,000)
Balance at June 30, 1997 $6,768,000
</TABLE>
3. NOTES PAYABLE
At June 30, 1997, 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 June 30, 1997, borrowings under these lines of
$20,396,000 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.
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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. 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, 1997 compared to three months ended June 30, 1996.
GENERAL
The Company reported net income of $264,000 or $0.05 per share for the
quarter ended June 30, 1997, compared to net income of $117,000 or $0.02
per share for the comparable 1996 quarter. The increase in net income was
attributable to two major reasons: an easing in interest rates during the
June 1997 quarter; and an increase in revenue from our loan servicing
portfolio.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended June 30, 1997, the volume of new mortgage loans
closed decreased slightly to $86.8 million from $92.1 million in the prior
year quarter.
For the three months ended June 30, 1997 loan origination revenue decreased
by approximately 3.7% to $704,000 from the June 1996 quarter, due primarily
to the reduced 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 8.3% to $1.86 million for the three months ended
June 30, 1997 from $1.71 million for the same period in 1996. The increase
resulted from growth in the Company's servicing portfolio.
As of June 30, 1997, the Company serviced $1.705 billion in loans compared
to $1.601 billion at June 30, 1996, a net gain 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 as many loan originations as financially possible.
<PAGE>
The following table sets forth certain information pertaining to the
servicing portfolio of the Company for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended June 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 86,798 92,095
Purchase of Servicing 6,652 -
Less: Prepayment and Amortization 71,218 60,491
Ending loan servicing portfolio 1,606,069 1,508,765
Sub-Servicing 98,577 91,938
Total servicing portfolio $1,704,646 $1,600,703
Average loan balance (end of period) $ 96,482 $ 94,587
Weighted Average Interest Rate 7.98% 8.17%
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
In spite of intense price competition, a decrease of nearly 50 basis points
in long-term mortgage interest rates during the quarter resulted in a gain
on sale of mortgage loans of $1.34 million for the three months ended June
30, 1997, an increase of 46.6% over the 1996 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage loans
held for sale, decreased to $537,000 for the three months ended June 30,
1997 from $627,000 for the comparable prior year quarter. This decrease is
due primarily to the lower average interest rate on mortgage loans and a
smaller mortgage inventory carried by the Company during the June 1997
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 June 30,
1997 increased by 5.2% to $3.98 million from the three months ended June
30, 1996. Salaries and commissions were $1.99 million for the June 1997
quarter, an increase of 8.2% over the year-ago quarter. The increase was
due to the opening of new retail branches and the hiring of new personnel
to staff them during the quarter. General and administrative expense
increased by $70,000, an increase of 4.0% 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 11.3% to $172,000 for quarter ended June 1997
from $194,000 for the same period in 1996. 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 quarter, particularly
at the very end of the quarter, is having a positive impact on new loan
originations, especially refinance loans, for the Company. New loan
applications in July, for example, were the highest of the year, double the
number in June. Barring an unexpected increase in interest rates, the
surge in activity should produce improved results for the Company in the
second fiscal quarter.
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As previously discussed in the Prospective Trends and the Competition
sections of the 10K for the fiscal year ended March 31, 1997, 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 will be
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 origination offices wherever such opportunity presents
itself. During this quarter we've opened new retail branches in Hollywood
and Bakersfield, California, and are in the final stage of opening in
Phoenix, Arizona.
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 long-term interest rates.
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 June 30, 1997, maximum permitted borrowings under the warehouse line of
credit agreements with two nonaffiliated banks totaled $45 million and the
amount outstanding was $20.40 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, 1997. The Company believes that the warehouse agreements will be
renewed when the current terms expire in August and September 1997.
The Company had stockholders' equity of $25.91 million at June 30, 1997.
Management believes that its current financing arrangements are adequate to
meet its projected operational needs.
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, 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: August 12, 1997 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: August 12, 1997 By S/Pac W. Dong
Pac W. Dong
Chief Financial Officer,
Controller and
Executive Vice President
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