<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, 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 December 31, 1997, 5,836,517 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, 1997 (Unaudited) and March 31, 1997 3
Unaudited Statements of Income
Three Months and Nine Months Ended December 31, 1997 and 1996 4
Unaudited Statements of Cash Flows
Nine Months Ended December 31, 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 8-12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST MORTGAGE CORPORATION
BALANCE SHEETS
<CAPTION>
December 31, 1997 March 31, 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash $6,208,000 $5,903,000
Mortgage loans held for sale 36,880,000 27,286,000
Other receivables and servicing advances 9,787,000 9,623,000
Capitalized servicing rights 7,737,000 6,709,000
Property and equipment, net 657,000 592,000
Prepaid expenses and other assets 379,000 546,000
Due from affiliates - 134,000
Notes receivable 130,000 130,000
TOTAL ASSETS $61,778,000 $50,923,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $31,633,000 $20,172,000
Note payable, officer - 1,500,000
Sight drafts payable 341,000 954,000
Accounts payable and accrued liabilities 814,000 816,000
Deferred income taxes 2,144,000 1,833,000
Total Liabilities 34,932,000 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
- 5,836,517 at
December 31, 1997 and
5,859,117 at March 31, 1997 5,067,000 5,147,000
Retained earnings 21,779,000 20,501,000
Total Stockholders' Equity 26,846,000 25,648,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $61,778,000 $50,923,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENTS OF INCOME
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $716,000 $991,000 $2,228,000 $2,666,000
Loan servicing income 1,959,000 1,799,000 5,688,000 5,291,000
Gain on sale of mortgage loans 2,186,000 1,675,000 5,384,000 4,220,000
Interest income 661,000 485,000 1,824,000 1,671,000
Other income - - - 2,000
Total revenues 5,522,000 4,950,000 15,124,000 13,850,000
EXPENSES:
Compensation and benefits 2,022,000 2,165,000 6,075,000 6,130,000
General and administrative expenses 1,637,000 1,456,000 4,393,000 4,427,000
Amortization of capitalized servicing rights 776,000 502,000 1,917,000 1,166,000
Interest expense 180,000 129,000 535,000 539,000
Total expenses 4,615,000 4,252,000 12,920,000 12,262,000
INCOME BEFORE INCOME TAXES 907,000 698,000 2,204,000 1,588,000
INCOME TAX EXPENSE 380,000 296,000 926,000 672,000
NET INCOME $527,000 $402,000 $1,278,000 $916,000
Basic and Diluted Earnings Per Share $ 0.09 $ 0.07 $ 0.22 $ 0.16
Weighted Average Of Common Shares Outstanding 5,856,000 5,877,000 5,856,000 5,877,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
December 31,
1997 1996
<C> <S> <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,278,000 $916,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 311,000 122,000
Provision for losses on foreclosure (490,000) 102,000
Amortization of capitalized servicing rights 1,989,000 1,254,000
Depreciation and amortization of property and equipment 159,000 149,000
Originations and purchases of mortgage loans held for sale (315,330,000) (274,638,000)
Sales and principal repayments of mortgage loans
held for sale 305,736,000 262,561,000
Changes in other receivables and servicing advances 326,000 (203,000)
Change in prepaid expenses and other assets 167,000 529,000
Change in accounts payable and accrued liabilities (2,000) 160,000
Net cash used in operating activities (5,856,000) (9,048,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (605,000) (354,000)
Origination of mortgage servicing rights (2,412,000) (3,000,000)
Note receivable - (500,000)
Sale of commercial paper - 9,955,000
Purchase of furniture and equipment and leasehold improvements (224,000) (191,000)
Change in due to affiliates 134,000 60,000
Net cash provided by (used in) investing activities (3,107,000) 5,970,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 11,461,000 4,235,000
Change in sight drafts payable (613,000) (2,345,000)
Change in notes payable, other (1,500,000) -
Repurchase of Common Stock (80,000) (114,000)
Net cash provided by financing activities 9,268,000 1,776,000
INCREASE (DECREASE) IN CASH 305,000 (1,302,000)
CASH, BEGINNING OF PERIOD 5,903,000 5,948,000
CASH, END OF PERIOD $6,208,000 $4,646,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 406,000 $ 432,000
Income taxes 455,000 30,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 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
Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (FAS
125) requires 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 3,017,000
Amortizations and write offs (1,980,000)
Impairment (9,000)
Balance at December 31, 1997 $7,737,000
</TABLE>
3. NOTES PAYABLE
At December 31, 1997, the Company had line of credit agreements with
two nonaffiliated banks, which provided for borrowings up to
$40,000,000 and $20,000,000 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 December 31,
1997, borrowings under these lines of $31,633,000 were collateralized
by mortgage loans held for sale.
The line of credit agreements are subject to renewal on September 1,
1998 and August 31, 1998, 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,
1997.
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, 1997.
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all
periods have been restated where necessary to conform to the Statement
128 requirements.
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, 1997 compared to three months ended
December 31, 1996.
GENERAL
First Mortgage reported net income of $527,000 or $0.09 per share for
the quarter ended December 31, 1997, compared to net income of
$402,000 or $0.07 per share for the comparable 1996 quarter. The
increase of 31.1% 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 several new production offices and increase in amortization
expense of mortgage servicing rights.
REVENUES
For the quarter ended December 31, 1997, the volume of new mortgage
loans closed increased by 12% to $114.99 million from $102.64 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 December 31, 1997, loan origination revenue
decreased by approximately 27.7% to $716,000 from the December 1996
quarter, due primarily to the higher volume of wholesale and refinance
loans, which carry lower front-end origination fees.
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 8.9% to $1.96 million for the
three months ended December 31, 1997 from $1.80 million for the same
period in 1996. The increase is primarily due to a larger mortgage
servicing portfolio.
As of December 31, 1997, the Company serviced $1.70 billion in loans
compared to $1.67 billion at December 31, 1996, a net gain of 1.9%
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>
The following table sets forth certain information pertaining to the
servicing portfolio of the Company for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended December 31.
1997 1996
(Dollars in thousands except average loan balance)
<C> <S> <S>
Beginning loan service portfolio $1,613,942 $1,533,601
Add: Loans originated 114,987 102,641
Less: Prepayment and amortization 117,418 66,094
Ending loan servicing portfolio 1,611,511 1,570,148
Sub-Servicing 90,196 99,053
Total servicing portfolio $1,701,707 $1,669,201
Average loan balance (end of period) $ 95,963 $ 96,519
</TABLE>
Due to a favorable trend in long-term mortgage interest rates during
the quarter, the gain on sale of mortgage loans was $2.19 million for
the three months ended December 31, 1997, an increase of 30.5% over
the 1996 period.
Interest income, which reflects the interest received on mortgage
loans held for sale, increased to $661,000 for the three months ended
December 31, 1997 from $485,000 for the comparable prior year quarter.
This increase was due primarily to the larger mortgage inventory
carried by the Company during the December 1997 quarter, partially
offset by lower interest rates.
EXPENSES
The major components of the Company's total expenses are (i)
compensation and benefits, (ii) general and administrative expenses,
(iii) amortization of capitalized servicing rights, and (iv) interest
expense. Total expenses for the three months ended December 31, 1997
increased by 8.5% to $4.62 million from the three months ended
December 31, 1996. Compensation and benefits were $2.02 million for
the December 1997 quarter, a decrease of 6.6% over the year-ago
quarter. The main reason for the drop is the implementation of cost
reduction measures taken by the Company.
General and administrative expense increased by $181,000, or 12.4%
over prior year. These higher expenses were a direct result of
expenses associated with branch closing, and expanding the production
operations in the quarter. Amortization expense of capitalized
servicing rights increased by $274,000 over the 3rd quarter of last
fiscal year, due mainly to the Company's larger investment in mortgage
servicing rights and higher volume of loan prepayments over the
comparable period of prior year.
Interest expense increased 39.5% to $180,000 for quarter ended
December 31 1997 from $129,000 for the same period in 1996. The
higher expense was due to an increase in use of warehouse lines for
loan fundings.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Nine months ended December 31, 1997 compared to nine months ended December
31, 1996.
GENERAL
In the nine months ended December 31, 1997, the Company reported net
income of $1.28 million or $0.22 per share, compared to net income of
$916,000 or $0.16 per share for the same period of 1996. Total
revenue increased by 9.2% to $15.12 million from $13.85 million in
the year earlier nine 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 nine month period as compared to 1996.
REVENUES
For the nine months ended December 31, 1997, loan origination revenue
decreased 16.4% to $2.23 million from $2.67 million for the nine
months ended December 31, 1996. The lower loan origination revenue
was largely due to a higher proportion of wholesale and refinance
loans, which carry much lower front-end origination revenue than
retail loans.
The volume of new mortgage loan originations increased 14.8% to
$315.33 million from $274.64 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 7.5% to $5.69 million for the
nine months ended December 31, 1997 from $5.29 million for the same
period in 1996 after prepayments and scheduled amortization of
mortgage loans.
The following table sets forth certain information pertaining to the
servicing portfolio of the Company for the period indicated:
<TABLE>
<CAPTION>
Nine Months Ended December 31,
1997 1996
(Dollars in thousands except average loan balance)
<C> <S> <S>
Beginning loan service portfolio $1,583,837 $1,477,161
Add: Loans originated 315,330 274,638
Less: Prepayment and amortization 287,656 181,651
Ending loan servicing portfolio 1,611,511 1,570,148
Sub-Servicing 90,196 99,053
Total servicing portfolio $1,701,707 $1,669,201
Average loan balance (end of period) $95,693 $96,519
</TABLE>
The sale of mortgages for the nine months ended December 31, 1997
resulted in a gain of $5.38 million compared to a gain of $4.22
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 nine months ended December 31, 1997, increased
9.2% to $1.82 million from $1.67 million for the nine months ended
December 31, 1996.
<PAGE>
EXPENSES
The major components of the Company's total expenses are (i)
compensation and benefits, (ii) general and administrative expenses,
(iii) amortization of capitalized servicing rights, and (iv) interest
expenses. Total expenses for the nine months ended December 31, 1997
increased by $658,000 or 5.4% from the nine months ended December 31,
1996. Compensation and benefits fell 0.9% to $6.08 million compared
to $6.13 million in the first nine months of fiscal year 1996. The
decrease in compensation expense reflects the success in cost control
measures adopted by the Company.
General and administrative expenses decreased slightly by $34,000
from the comparable period in 1996 despite higher loan originations
in 1997. It represents the effective implementation of tight cost
controls by the Company. Amortization expense of capitalized
servicing rights increased by $751,000 over the nine months period of
last fiscal year due primarily to the Company's larger investment of
mortgage servicing rights and higher volume of loan prepayments over
the comparable prior year period.
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 December 31, 1997, maximum permitted borrowings under the warehouse
line of credit agreements with two nonaffiliated banks totaled $60
million and the amount outstanding was $31.63 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, 1997. The Company
believes that the warehouse agreements will be renewed when the
current terms expire.
The Company had stockholders' equity of $26.85 million at December 31,
1997. Management believes that its current financing arrangements are
adequate to meet its projected operational needs.
PROSPECTIVE TRENDS
Between April 1997 and December 1997, long-term mortgage interest
rates fell approximately 1/2%, contributing to a 14.8% increase in new
loan originations over the immediate preceding nine months ended
December 31, 1996. Loan production will continue to grow unless long-
term interest rates unexpectedly increase. The surge in activity
should help produce positive results for the Company going forward.
Pricing of most 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. During
this year we introduced, for example, a 125% second mortgage equity
loan which is being originated through direct consumer mailing,
telemarketing, and our traditional retail branch operations.
As a continuing part of the Company's long-term plan, we are opening
new retail production offices as the opportunity presents itself in
the appropriate markets for the loan products we wish to originate.
Net of offices which have been closed, we have opened three new retail
offices thus far this year. Although slower to ramp up, retail
production originations have better margins than wholesale.
<PAGE>
We have also greatly increased the size and scope of our Consumer
Direct Marketing operation, with the result thus far of nearly
doubling the production over the comparable period last year. Margins
in this division are far better than other channels of loan
origination and we will continue expansion of these operations.
Conversely, the poor to nearly non-existent margins available in
wholesale originations have dictated a withdrawal from much of this
market, and we have closed our Diamond Bar, California and Bellevue,
Washington wholesale offices in order to direct resources towards our
other more profitable channels.
With mortgage interest rates recently falling to new lows, we believe
we are appropriately positioned to take advantage of the resulting
surge of both purchase and refinance business.
<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, 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: February 13, 1998 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: February 13, 1998 By S/Pac W. Dong
Pac W. Dong
Chief Financial Officer,
Executive Vice President
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] MAR-31-1998
[PERIOD-END] DEC-31-1997
[CASH] 6,208
[SECURITIES] 0
[RECEIVABLES] 9,787
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2,657
[DEPRECIATION] 2,000
[TOTAL-ASSETS] 61,778
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 5,067
[OTHER-SE] 21,779
[TOTAL-LIABILITY-AND-EQUITY] 61,778
[SALES] 0
[TOTAL-REVENUES] 15,124
[CGS] 0
[TOTAL-COSTS] 12,920
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 2,204
[INCOME-TAX] 926
[INCOME-CONTINUING] 1,278
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,278
[EPS-PRIMARY] 0.22
[EPS-DILUTED] 0.22
</TABLE>
