<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, 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 June 30, 1998, 5,569,697 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
June 30, 1998 (Unaudited) and March 31, 1998 3
Unaudited Statement of Income
Three Months Ended June 30, 1998 and 1997 4
Unaudited Statement of Cash Flows
Three Months Ended June 30, 1998 and 1997 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition 8-10
and Results of Operations
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, 1998 March 31, 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 2,152,000 $ 8,182,000
Mortgage loans held for sale 69,744,000 53,052,000
Other receivables and servicing advances 10,979,000 10,566,000
Capitalized servicing rights, net 8,598,000 7,490,000
Property and equipment, net 680,000 664,000
Prepaid expenses and other assets 125,000 361,000
Notes receivable 130,000 130,000
TOTAL ASSETS $92,408,000 $80,445,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $45,895,000 $40,427,000
Sight drafts payable 14,868,000 9,372,000
Deferred income taxes 2,350,000 2,259,000
Accounts payable and accrued liabilities 1,742,000 1,392,000
Income Taxes Payable 477,000 -
Total Liabilities 65,332,000 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 3,888,000 4,963,000
Issued and outstanding shares-5,569,697 at June 30,
1998 and 5,808,697 at March 31, 1998
Retained earnings 23,188,000 22,032,000
Total Stockholders' Equity 27,076,000 26,995,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $92,408,000 $80,445,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30
1998 1997
<S> <C> <C>
REVENUES:
Loan origination income $1,111,000 $ 704,000
Loan servicing income 1,924,000 1,856,000
Gain on sale of mortgage loans 3,653,000 1,340,000
Interest income 1,031,000 537,000
Total revenues 7,719,000 4,437,000
EXPENSES:
Compensation and benefits 2,418,000 1,988,000
General and administrative expenses 2,190,000 1,273,000
Amortization of capitalized servicing rights 871,000 546,000
Interest expense 259,000 172,000
Total expenses 5,738,000 3,979,000
INCOME BEFORE INCOME TAXES 1,981,000 458,000
INCOME TAX EXPENSE 825,000 194,000
NET INCOME $1,156,000 $ 264,000
BASIC EARNINGS PER SHARE $ 0.20 $ 0.05
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.05
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,156,000 $ 264,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 91,000 (64,000)
Provision for losses on foreclosure 67,000 (3,000)
Amortization of capitalized servicing rights 871,000 546,000
Depreciation and amortization of property and equipment 64,000 49,000
Change in excess service fee 16,000 25,000
Originations and purchases of mortgage loans
held for sale (223,069,000) (86,798,000)
Sales and principal repayments of mortgage loans
held for sale 206,377,000 89,102,000
Change in other receivables and servicing advances (480,000) (1,389,000)
Change in prepaid expenses and other assets 236,000 247,000
Change in accounts payable and accrued liabilities 350,000 (113,000)
Change in income taxes payable 477,000 -
Net cash provided by (used in) operating activities (13,844,000) 1,866,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights - (214,000)
Originated mortgage servicing rights (1,995,000) (416,000)
Purchase of furniture, equipment and leasehold improvements (80,000) (41,000)
Change in due from affiliates - 134,000
Net cash used in investing activities (2,075,000) (537,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 5,468,000 224,000
Change in sight drafts payable 5,496,000 (755,000)
Change in notes payable, officer - (1,500,000)
Repurchase of common stock (1,075,000) -
Net cash provided by (used in) financing activities 9,889,000 (2,031,000)
DECREASE IN CASH (6,030,000) (702,000)
CASH, BEGINNING OF PERIOD 8,182,000 5,903,000
CASH, END OF PERIOD $2,152,000 $5,201,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 211,000 $139,000
Income taxes - -
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 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 1,995,000
Amortizations and write offs (887,000)
Impairment -
Balance at June 30, 1998 $8,598,000
</TABLE>
3. NOTES PAYABLE
At June 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% or the bank's reference rate, depending on the level of
borrowings and the compensating balances maintained. At June 30,
1998, borrowings under these lines of $45,895,000 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>
4. EARNINGS PER SHARE
<TABLE>
The following table sets forth the computation of basic and diluted
earnings per share:
<CAPTION>
Three Months ended June 30
1998 1997
<S> <C> <C>
Numerator:
Net income $1,156,000 $264,000
Denominator:
Shares used in computing basic earnings per share 5,747,411 5,859,117
Effect of stock options treated as equivalents
under the treasury stock method 451 -
Denominator for diluted earnings per share 5,747,862 5,859,117
Basic earnings per share $.20 $.05
Diluted earnings per share $.20 $.05
</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
RESULTS OF OPERATIONS:
Three months ended June 30, 1998 compared to three months ended June
30, 1997.
GENERAL
The Company reported net income of $1.16 million or $0.20 per
share for the quarter ended June 30, 1998, compared to net income
of $264,000 or $0.05 per share for the comparable 1997 quarter.
The increase in net income was attributable to two major reasons:
a favorable interest rates environment during the June 1998
quarter; combined with a substantial increase in new loan
originations over the year earlier period.
REVENUES
LOAN ORIGINATION INCOME
For the quarter ended June 30, 1998, the volume of new mortgage
loans closed increased 157% to $223.1 million from $86.8 million
in the prior year quarter.
For the three months ended June 30, 1998 loan origination revenue
increased by approximately 57.8% to $1.1 million from $704,000 in
the June 1997 quarter, due primarily to the increased 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 3.7% to $1.92 million for
the three months ended June 30, 1998 from $1.86 million for the
same period in 1997. The increase was primarily due to slightly
higher average servicing and miscellaneous fees.
As of June 30, 1998, the Company serviced $1.663 billion in loans
compared to $1.705 billion at June 30, 1997, a decrease of 2.5%
after prepayments and scheduled amortization of mortgage loans.
The drop in the servicing portfolio was attributable to the lower
interest rate environment in June 1998 quarter causing the
acceleration of the portfolio run-off rate.
<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,
1998 1997
(Dollars in thousands
except average loan balance
<S> <C> <C>
Beginning loan service portfolio $1,570,143 $1,583,837
Add: Loans originated 223,069 86,798
Purchase of Servicing - 6,652
Less: Prepayment and Amortization 222,541 71,218
Ending loan servicing portfolio 1,570,671 1,606,069
Sub-Servicing 92,584 98,577
Total servicing portfolio $1,663,255 $1,704,646
Average loan balance (end of period) $ 95,321 $ 96,482
Weighted Average Interest Rate 7.87% 7.98%
</TABLE>
GAIN ON SALE OF MORTGAGE LOANS
In spite of intense price competition, favorable long-term
mortgage interest rates during the quarter resulted in a gain on
sale of mortgage loans of $3.65 million for the three months ended
June 30, 1998, compared to $1.34 million over the 1997 period.
INTEREST INCOME
Interest income, which reflects the interest received on mortgage
loans held for sale, increased to $1.03 million for the three
months ended June 30, 1998 from $537,000 for the comparable prior
year quarter. This increase is due primarily to the larger
mortgage inventory carried by the Company during the June 1998
quarter.
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
June 30, 1998 increased by 44.2% to $5.74 million from the three
months ended June 30, 1997. Compensation and benefits were $2.42
million for the June 1998 quarter, an increase of 21.6% over the
year-ago quarter. The increase was due primarily to the increased
commissions and the hiring of new personnel resulting from the
large increase in new loan originations. General and
administrative expense increased by $917,000 over the prior year
period, primarily as a direct result of expanding production
operations in the quarter.
Amortization of capitalized servicing rights increased by $325,000
over the comparable prior year period due mainly to the Company's
larger investment in mortgage servicing rights and substantially
higher volume of prepayment over the year ago quarter.
INTEREST EXPENSE
Interest expense increased 50.6% to $259,000 for quarter ended
June 1998 from $172,000 for the same period in 1997. The increase
was due to larger warehouse borrowings during the quarter because
of the increased new loan production.
<PAGE>
PROSPECTIVE TRENDS
The reduction in long-term interest rates is having a positive
impact on new loan originations, especially refinance loans, for
the Company. The volume of new loan applications in June, for
example, were the highest in Company's history. Barring an
unexpected increase in interest rates, the surge in activity
should continue to produce improved results for the Company in the
second fiscal quarter.
As previously discussed in the Prospective Trends and the
Competition sections of the 10K for the fiscal year ended March
31, 1998, 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 streamline conventional refinance loan program to
complement our FHA streamline refinance program. We believe this
will result in a substantial increase in new loan originations
through our direct marketing channel.
As a continuing part of the Company's long-term plan, we will open
additional retail origination 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 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, 1998, maximum permitted borrowings under the warehouse
line of credit agreements with two nonaffiliated banks totaled
$100 million and the amount outstanding was $45.9 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, 1998. The Company believes that the warehouse
agreements will be renewed when the current terms expire in August
and September 1998.
During the quarter ended June 30, 1998, the Company repurchased in
open market transactions of 239,000 shares of its common stock at
an aggregate cost of $1,075,000.
The Company had stockholders' equity of $27.08 million at June 30,
1998. Management believes that its current financing arrangements
are adequate to meet its projected operational needs, however,
increases in the existing facilities or other supplementary
sources may have to be explored should the market conditions
improve and loan origination volume increases.
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 and the quarter ended June 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: August 5, 1998 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: August 5, 1998 By S/Pac W. Dong
Pac W. Dong
Chief Financial Officer,
Controller and Executive Vice
President
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAR-31-1999
[PERIOD-END] JUN-30-1998
[CASH] 2152
[SECURITIES] 0
[RECEIVABLES] 10979
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2796
[DEPRECIATION] 2116
[TOTAL-ASSETS] 92408
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 3888
[OTHER-SE] 23188
[TOTAL-LIABILITY-AND-EQUITY] 92408
[SALES] 0
[TOTAL-REVENUES] 7719
[CGS] 0
[TOTAL-COSTS] 5738
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 1981
[INCOME-TAX] 825
[INCOME-CONTINUING] 1156
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1156
[EPS-PRIMARY] 0.20
[EPS-DILUTED] 0.20
</TABLE>
