<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, 1998
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, 1998, 5,569,697 shares of the registrant's common
stock were outstanding.
<PAGE>
FIRST MORTGAGE CORPORATION
FORM 10-Q
INDEX<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Item 1. Financial Statements:
Balance Sheet 3
September 30, 1998 (Unaudited) and March 31, 1998
Unaudited Statement of Income
Three Months and Six Months Ended September 30, 1998 and
1997 4
Unaudited Statement of Cash Flows
Six Months Ended September 30, 1998 and 1997 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
September 30,1998 March 31, 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash $3,732,000 $8,182,000
Mortgage loans held for sale 57,352,000 53,052,000
Other receivables and servicing 8,788,000 10,566,000
advances
Capitalized servicing rights 9,997,000 7,490,000
Property and equipment, net 697,000 664,000
Prepaid expenses and other assets 138,000 361,000
Note receivable 130,000 130,000
TOTAL ASSETS $80,834,000 $80,445,000
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Notes payable, banks $37,854,000 $40,427,000
Sight drafts payable 9,552,000 9,372,000
Accounts payable and accrued 1,963,000 1,392,000
liabilities
Deferred income taxes 2,828,000 2,259,000
Income taxes payable 57,000 -
Total Liabilities 52,254,000 53,450,000
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
- 5,569,697 at 3,888,000 4,963,000
September 30, 1998 and
5,808,697 at March 31, 1998
Retained earnings 24,692,000 22,032,000
Total Stockholders' Equity 28,580,000 26,995,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $80,834,000 $80,445,000
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF INCOME
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $989,000 $808,000 $2,100,000 $1,512,000
Loan servicing income 1,957,000 1,873,000 3,881,000 3,729,000
Gain on sale of mortgage
loans 4,807,000 1,858,000 8,460,000 3,198,000
Interest income 935,000 626,000 1,966,000 1,163,000
Total revenues 8,688,000 5,165,000 16,407,000 9,602,000
EXPENSES:
Compensation and benefits 2,585,000 2,065,000 5,003,000 4,053,000
General and
administrative expenses 2,444,000 1,483,000 4,634,000 2,756,000
Amortization of
capitalized servicing
rights 829,000 595,000 1,700,000 1,141,000
Interest expense 266,000 183,000 525,000 355,000
Total expenses 6,124,000 4,326,000 11,862,000 8,305,000
INCOME BEFORE INCOME TAXES 2,564,000 839,000 4,545,000 1,297,000
INCOME TAX EXPENSE 1,060,000 352,000 1,885,000 546,000
NET INCOME $1,504,000 $ 487,000 $2,660,000 $ 751,000
BASIC EARNINGS PER SHARE $ 0.27 $ 0.08 $ 0.47 $ 0.13
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.08 $ 0.47 $ 0.13
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
<TABLE>
UNAUDITED STATEMENT OF CASH FLOWS
<CAPTION>
Six Months Ended
September 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,660,000 $ 751,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for deferred income taxes 569,000 124,000
Provision for losses on foreclosure (54,000) (183,000)
Amortization of capitalized servicing rights 1,700,000 1,141,000
Depreciation and amortization of property and equipment 130,000 100,000
Change in excess service fee 36,000 48,000
Originations and purchases of mortgage loans held for sale (433,509,000) (200,344,000)
Sales and principal repayments of mortgage loans held for sale 429,209,000 192,765,000
Changes in other receivables and servicing advances 1,832,000 422,000
Change in prepaid expenses and other assets 223,000 193,000
Change in accounts payable and accrued liabilities 571,000 112,000
Change in income taxes payable 57,000 -
Net cash provided by (used in) operating activities 3,424,000 (4,871,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (23,000) (401,000)
Origination mortgage servicing rights (4,220,000) (1,347,000)
Purchase of furniture, equipment and leasehold improvements (163,000) (101,000)
Change in due from affiliates - 134,000
Net cash used in investing activities (4,406,000) (1,715,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks (2,573,000) 2,855,000
Change in sight drafts payable 180,000 1,542,000
Change in notes payable, officer - (1,500,000)
Repurchase of common stock (1,075,000) -
Net cash provided by (used in) financing activities (3,468,000) 2,897,000
DECREASE IN CASH (4,450,000) (3,689,000)
CASH, BEGINNING OF PERIOD 8,182,000 5,903,000
CASH, END OF PERIOD $3,732,000 $2,214,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 416,000 $ 264,000
Income taxes 1,000,000 225,000
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1998
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, 1998.
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
Activities in Capitalized Servicing Rights are summarized as
follows:
<TABLE>
<CAPTION>
Capitalized
Servicing
Rights
<S> <C>
Balance at March 31, 1998 $7,490,000
Additions 4,243,000
Amortizations and write offs (1,736,000)
Balance at September 30, 1998 $9,997,000
</TABLE>
3. NOTES PAYABLE
At September 30, 1998, the Company had line of credit agreements
with two nonaffiliated banks, which provided for borrowings up to
$70,000,000 and $30,000,000 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, 1998, borrowings under these lines of $37,854,000
were collateralized by mortgage loans held for sale.
The line of credit agreements are subject to renewal on September
1, 1999 and August 31, 2000, 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. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Six Months ended
September 30
1998 1997
<S> <C> <C>
Numerator:
Net income $2,660,000 $751,000
Denominator:
Shares used in computing basic earnings per share 5,658,069 5,859,117
share
Effect of stock options treated as equivalents
under the treasury stock method 9,494 -
Denominator for diluted earnings per share 5,667,563 5,859,117
Basic earnings per share $.47 $.13
Diluted earnings per share $.47 $.13
</TABLE>
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
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q are forward-looking statements,
including those that discuss strategies, goals, outlook, projected
revenues, income, return and other financial measures. These forward-
looking statements are subject to risk and uncertainties that may cause
actual results to differ materially from those contained in the
statements, including the following facters: (i) the direction of
interest rates; (ii) the demand for mortgage credits; (iii) the
ability to obtain sufficient financial sources for liquidity and
working capital; (iv) changes in laws or regulations governing mortgage
banking operations; and (v) level of competition within the mortgage
banking industry. In addition, the words "believe," "expect,"
"anticipate," "intend," "will" and similar words identify forward-
looking statements in this Form 10-Q.
RESULTS OF OPERATIONS:
Three months ended September 30, 1998 compared to three months ended
September 30, 1997.
GENERAL
First Mortgage reported net income of $1.504 million or $0.27 per
share for the quarter ended September 30, 1998, compared to net
income of $487,000 or $0.08 per share for the comparable 1997
quarter. The increase of 208.8% in net income was primarily
attributable to substantial larger gains on mortgage sales;
stronger loan origination revenues and increase in interest
income. The improvement in earnings was, however, offset
partially by higher compensation; general and administrative
expenses and amortization of capitalized servicing rights.
REVENUES
For the quarter ended September 30, 1998, the volume of new
mortgage loans closed increased by 85.3% to $210.44 million from
$113.55 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, 1998, loan origination
revenue increased by approximately 22.4% to $989,000 from the
September 1997 quarter, due primarily to a higher volume of retail
loans, which carry higher front-end origination fees.
As of September 30, 1998, the Company serviced $1.662 billion in
loans compared to $1.712 billion at September 30, 1997, a decrease
of 2.9% compared to the year-ago quarter. The run-offs in the
servicing portfolio were due to heavy refinances induced by the
current low interest rate environment. However, total loan
servicing income, including late charges and other miscellaneous
fees, rose by 4.5% to $1.96 million in the September 1998 quarter,
from $1.87 million of the prior year quarter. The rise in
servicing income is primarily due to the larger number of FHA and
VA loans currently serviced by the Company, which typically carry
a net service fee of 44 basis points.
<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
September 30,
1998 1997
(Dollars in thousands
except average loan
balance)
<S> <C> <C>
Beginning loan service portfolio $1,570,671 $1,606,069
portfolio
Add: Loans originated 210,440 113,546
Less: Prepayment and amortization 207,161 105,673
Ending loan servicing portfolio 1,573,950 1,613,942
Sub-Servicing 88,450 98,167
Total servicing portfolio $1,662,400 $1,712,109
Average loan balance
(end of period) $ 94,214 $ 96,631
</TABLE>
Due to a very favorable reduction in long-term mortgage interest
rates during the quarter, the gain on sale of mortgage loans was
$4.81 million for the three months ended September 30, 1998, an
increase of 158.7% over the 1997 period.
Interest income, which reflects the interest received on mortgage
loans held for sale, increased to $935,000 for the three months
ended September 30, 1998 from $626,000 for the comparable prior
year quarter. This increase was due primarily to the larger
mortgage inventory carried by the Company during the September
1998 quarter.
EXPENSES
The major components of the Company's total expenses are (i)
compensations and benefits, (ii) general and administrative
expenses, (iii) amortization of capitalized servicing rights, and
(iv) interest expense. Total expenses for the three months ended
September 30, 1998 increased by 41.6% to $6.12 million from the
three months ended September 30, 1997. Compensations and benefits
were $2.59 million for the September 1998 quarter, an increase of
25.2% over the year-ago quarter. General and administrative
expense increased by $961,000, or 64.8% 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.
Amortization of capitalized servicing rights in fiscal 1999
increased over prior years due mainly to the larger investment in
mortgage servicing rights and higher volume of prepayments from
refinances over the comparable prior period.
Interest expense increased 45.4% to $266,000 for quarter ended
September 1998 from $183,000 for the same period in 1997. The
increase was due to the larger volume of loans originated during
the quarter.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Six months ended September 30, 1998 compared to six months ended
September 30, 1997
GENERAL
In the six months ended September 30, 1998, the Company reported
net income of $2.66 million or $0.47 per share, compared to net
income of $751,000 or $0.13 per share for the same period of
1997. Total revenue increased by 70.9% to $16.41 million from
$9.6 million in the comparable prior period. The increase in net
income was largely due to higher loan origination income and a
greater gain on sale of mortgage loans for the six month period
as compared to last year.
REVENUES
For the six months ended September 30, 1998, loan origination
revenue increased 38.9% to $2.10 million from $1.51 million for
the six months ended September 30, 1997. The higher loan
origination revenue was largely due to the larger volume of new
loans originated by the Company.
The volume of new mortgage loan originations increased 116.4% to
$433.51 million from $200.34 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 4.1% to $3.88 million
for the six months ended September 30, 1998 from $3.73 million
for the same period in 1997. The increase in servicing income is
primarily due to the larger number of FHA and VA loans currently
serviced by the Company, which typically carry a net service fee
of 44 basis points.
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated:
<TABLE>
<CAPTION>
Six Months Ended September 30,
1998 1997
(Dollars in thousands
except average loan
balance)
<S> <C> <C>
Beginning loan service portfolio $1,570,143 $1,583,837
portfolio
Add: Loans originated 433,509 200,344
Less: Prepayment and amortization 429,702 170,239
Ending loan servicing portfolio 1,573,950 1,613,942
Sub-Servicing 88,450 98,167
Total servicing portfolio $1,662,400 $1,712,109
Average loan balance
(end of period) $94,214 $96,631
</TABLE>
The sale of mortgages for the six months ended September 30, 1998
resulted in a gain of $8.46 million compared to a gain of $3.20
million for the 1997 period. The gain is primarily attributable
to the favorable trend in long-term interest rates in 1998.
<PAGE>
Interest income, which reflects the interest earned on mortgage loans
held for sale for the six months ended September 30, 1998 was
$1.97 million, an increase of 69% over the comparable 1997
period. The increase was as a result of the higher volume of
loans originated in the 1998 period.
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 six months ended
September 30, 1998 increased by $3.56 million or 42.8% from the
six months ended September 30, 1997. Compensation and benefits
increased 23.4% to $5 million compared to $4.05 million in the
first six months of fiscal year 1997. General and administrative
expenses increased by 68.1% to $4.63 million from the comparable
period in 1997. The increases in these expenses were a direct
result of expansion in loan originations and direct marketing
effort in the first half of fiscal year 1999.
Increase in amortization of capitalized servicing rights was
mainly due to larger investment in servicing rights and higher
volume of loan prepayments over prior period.
Interest expense increased to 47.9% to $525,000 as compared to
$355,000 in the year earlier 6 months, due primarily to the
larger volume of loans originated during the 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 September 30, 1998, maximum permitted borrowings under the
warehouse line of credit agreements with two nonaffiliated banks
totaled $70 million and the amount outstanding was $37.85 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, 1998. The Company believes that the warehouse
agreements will be renewed when the current terms expire.
In the first six months in fiscal year 1999, the Company
repurchased in open market transactions 239,000 shares of its
common stock at an aggregate cost of $1,075,000.
The Company had stockholders' equity of $28.58 million at
September 30, 1998. Management believes that its current
financing arrangements are adequate to meet its projected
operational needs.
<PAGE>
DISCLOSURE ABOUT MARKET RISK
The Company's earnings can be impacted significantly by the
movement of interest rates, which is the primary component of the
market risk to the Company. The interest rate risk affects value
of the capitalized mortgage servicing rights, volume of loan
production and total net interest income earned on its mortgage
inventory. The Company has been managing this risk by striving to
balance its loan origination and loan servicing segments, which
generally are counter cyclical in nature. The overall objective
is to offset changes in the values of the following items, such as
the committed pipeline, mortgage loan inventory, mortgage-backed
securities held for sale and mortgage servicing rights. The
Company does not speculate on the direction or movement of the
interest rates.
Based on the information available and the interest environment as
of September 30, 1998, the Company believes that a 100 basis point
change in long-term interest rates over a twelve month period, up
or down and all else being constant, would increase or decrease
the Company's gross income by approximately $1.5 million dollars.
These estimates are limited by the fact that they are performed at
a particular point in time and do not incorporate many other
factors and consequently, should not be used as forecast.
YEAR 2000 ISSUES
The Company's computing environment consists of one IBM AS/400 and
other personal computers connected to Local Area Network. The IBM
AS/400 is the primary platform for the Loan Servicing Department
processing. Other departments, including loan processing, loan
funding and corporate accounting, are serviced mainly by personal
computers. Software for loan funding, loan administration and
accounting are maintained by outside service bureaus. These
service bureaus have already been contacted by the Company and
are expected to be in compliance either by December 1998 or
January 1999. Modifications have also been started on the in-
house developed management reporting application that will be
brought into Year 2000 compliant by March 1999.
The Company has made and will continue to make investments to
identify and modify any in-house systems that are not yet Year
2000 compliant. These costs are being expensed by the Company
during the period in which they are incurred.
A majority of the software and applications used by the Company
are not custom programs, and the Company believes that it will
receive Year 2000 upgrades from the software vendors from whom the
programs were purchased in a timely manner. The Company, however,
cannot be assured that these third party service providers will
not have business interruptions or other problems which could have
an adverse impact on the Company. Presently, the Company does not
have a contingency plan to handle the worst case scenarios, but it
intends to create one by January 1999. Based on preliminary
information, the Company does not anticipate that the expenses
related to achieving Year 2000 compliance will have a material
impact on the Company's results of operations.
PROSPECTIVE TRENDS
During fiscal 1999 long-term mortgage interest rates have fallen
to the lowest levels in the last 25 years, contributing to a 116%
increase in new loan originations over the year earlier period
ended September 30, 1997. Unless long-term interest rates
unexpectedly increase, the surge in activity should help produce
positive results for the Company going forward.
Pricing of many traditional mortgage products, however, remains
uneconomical and 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
<PAGE>
origination of FHA and VA loans and other mortgage products with much
greater profit potential for the Company.
As a continuing part of the Company's long-term plan, we are
opening additional retail offices wherever such opportunity
presents itself. During this fiscal year we have already opened
new offices in West Los Angeles, California and Las Vegas, Nevada.
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, 1998.
<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, 1998 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: November 8, 1998 By S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] SEP-30-1998
[CASH] 3732
[SECURITIES] 0
[RECEIVABLES] 8788
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2879
[DEPRECIATION] 2182
[TOTAL-ASSETS] 80834
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3888
[OTHER-SE] 24692
[TOTAL-LIABILITY-AND-EQUITY] 80834
[SALES] 0
[TOTAL-REVENUES] 16407
[CGS] 0
[TOTAL-COSTS] 11862
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 4545
[INCOME-TAX] 1885
[INCOME-CONTINUING] 2660
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2660
[EPS-PRIMARY] 0.47
[EPS-DILUTED] 0.47
</TABLE>
