<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, 1999
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, 1999, 5,302,697 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, 1999 (Unaudited) and March 31, 1999 3
Unaudited Statement of Income
Three Months Ended June 30, 1999 and 1998 4
Unaudited Statement of Cash Flows
Three Months Ended June 30, 1999 and 1998 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
<TABLE>
Item 1. Financial Statements
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
June 30, 1999 March 31, 1999
(Unaudited)
<S> <C> <C>
ASSETS
Cash $10,593,000 $14,839,000
Mortgage loans held for sale 67,985,000 45,463,000
Other receivables and servicing advances 7,221,000 7,378,000
Capitalized servicing rights, net 13,364,000 12,475,000
Property and equipment, net 738,000 761,000
Prepaid expenses and other assets 1,533,000 765,000
TOTAL ASSETS $101,434,000 $81,681,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $39,322,000 $35,469,000
Note payable, other 25,043,000 -
Sight drafts payable 1,318,000 9,450,000
Accounts payable and accrued liabilities 884,000 2,967,000
Deferred income taxes 5,094,000 4,065,000
Total Liabilities 71,661,000 51,951,000
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-5,302,697
at June 30, 1999 and 5,347,197 at
March 31, 1999 2,741,000 2,924,000
Retained earnings 27,032,000 26,806,000
Total Stockholders' Equity 29,773,000 29,730,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $101,434,000 $81,681,000
</TABLE>
See accompanying notes
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF INCOME
<CAPTION>
Three Months Ended
June 30
1999 1998
<S> <C> <C>
REVENUES:
Loan origination income $ 775,000 $1,111,000
Loan servicing income 1,925,000 1,924,000
Gain on sale of mortgage loans 2,464,000 3,653,000
Interest income 846,000 1,031,000
Total revenues 6,010,000 7,719,000
EXPENSES:
Compensation and benefits 2,307,000 2,418,000
General and administrative expenses 1,822,000 2,190,000
Amortization of capitalized 1,157,000 871,000
servicing rights
Interest expense 337,000 259,000
Total expenses 5,623,000 5,738,000
INCOME BEFORE INCOME TAXES 387,000 1,981,000
INCOME TAX EXPENSE 161,000 825,000
NET INCOME $ 226,000 $1,156,000
BASIC AND DILUTED EARNINGS PER SHARE $ 0.04 $ 0.20
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended
June 30
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $226,000 $1,156,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 1,029,000 91,000
Provision for losses on foreclosure (81,000) 67,000
Amortization of capitalized servicing rights 1,157,000 871,000
Depreciation and amortization of property
and equipment 70,000 64,000
Change in excess service fee 9,000 6,000
Originations and purchases of mortgage
loans held for sale (116,374,000) (223,069,000)
Sales and principal repayments of mortgage 93,852,000 206,377,000
loans held for sale
Change in other receivables and servicing
advances 238,000 (480,000)
Change in prepaid expenses and other assets (768,000) 236,000
Change in accounts payable and accrued
liabilities (2,083,000) 350,000
Change in income taxes payable - 477,000
Net cash used in operating activities (22,725,000) (13,844,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (27,000) -
Originated mortgage servicing rights (2,028,000) (1,995,000)
Purchase of furniture, equipment and
leasehold improvements (47,000) (80,000)
Net cash used in investing activities (2,102,000) (2,075,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 3,853,000 5,468,000
Change in sight drafts payable (8,132,000) 5,496,000
Change in note payable, other 25,043,000 -
Repurchase of common stock (183,000) (1,075,000)
Net cash provided by financing activities 20,581,000 9,889,000
DECREASE IN CASH (4,246,000) (6,030,000)
CASH, BEGINNING OF PERIOD 14,839,000 8,182,000
CASH, END OF PERIOD $10,593,000 $2,152,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $314,000 $211,000
Income taxes - -
</TABLE>
See accompanying notes
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
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, 1999.
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
<TABLE>
Activities in capitalized servicing rights are summarized as follows:
<CAPTION>
Three Months ended June 30
1999 1998
<S> <C> <C>
Beginning balance $12,475,000 $7,490,000
Additions 2,055,000 1,995,000
Amortizations and
write offs (1,166,000) (887,000)
Ending Balance $13,364,000 $8,598,000
</TABLE>
3. NOTES PAYABLE
At June 30, 1999, the Company had line of credit agreements with two
nonaffiliated banks, which provided for borrowings up to $70,000,000 and
$35,000,000 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, 1999, borrowings under these lines of
$39,322,000 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.
In addition to the warehouse lines of credit, the Company makes use of the
short-term reverse repurchase agreement provided by an investment banking
firm in connection with its inventory of mortgage-backed securities. This
facility tends to carry lower interest rates and also allows the Company to
better utilize its warehousing lines. Borrowings outstanding under this
facility totaled $25.04 million at June 30, 1999.
<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
1999 1998
<S> <C> <C>
Numerator:
Net income $226,000 $1,156,000
Denominator:
Shares used in computing basic earnings
per share 5,318,757 5,747,411
Effect of stock options treated as
equivalents under the treasury stock
method 3,722 451
Denominator for diluted earnings per
share 5,322,479 5,747,862
Basic earnings per share $.04 $.20
Diluted earnings per share $.04 $.20
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement provides guidance for
the way public enterprises report information about derivatives and hedging
in annual financial statements and in interim financial reports. The
derivatives and hedging disclosure is required for financial statements for
fiscal years beginning after June 15, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedged must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company is in the process of evaluating the
effect of Statement 133, if any, will have on the earnings and financial
position of the Company.
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
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
factors: (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 June 30, 1999 compared to three months ended June 30, 1998.
GENERAL
First Mortgage reported net income of $226,000 or $0.04 per share for the
quarter ended June 30, 1999, compared to net income of $1.16 million or
$0.20 per share for the comparable 1998 quarter. The decrease in net
income was attributable to the increase in mortgage interest rates during
the quarter, which resulted in a 47.8% reduction in new loan originations
as compared to the three months ended June 30, 1998. The higher interest
rates also negatively affected origination fees, gain on sale of mortgages
and interest income.
REVENUES
For the quarter ended June 30, 1999, the volume of new mortgage loans
closed decreased by 47.8% to $116.4 million from $223.1 million in the
prior year quarter. The decrease is a reflection of higher long-term
interest rates, which significantly decreased the volume of refinancing
loans in the market place.
For the three months ended June 30, 1999, loan origination revenue
decreased by 30.2% to $775,000 from the June 30, 1998 quarter, due
primarily to a substantial drop in loan production.
As of June 30, 1999, the Company serviced $1.604 billion in loans compared
to $1.663 billion at June 30, 1998, a decrease of 3.6% compared to the
year-ago quarter. The run-off in the servicing portfolio was due to heavy
refinances induced by the low interest rate environment through most of
last fiscal year. Nevertheless, the number of loans serviced increased to
17,647 from 17,450 a year ago, as the run-off of higher balance
conventional loans was replaced by lower balance FHA loans. Total loan
servicing income, including late charges and other miscellaneous fees,
increased marginally to $1.925 million in the June 1999 quarter, from
$1.924 million in the prior year quarter.
<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 June 30
1999 1998
(Dollars in thousands
except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,527,507 $1,570,143
Add:Loans originated 116,374 223,069
Less: Prepayment and Amortization 120,799 222,541
Ending loan servicing portfolio 1,523,082 1,570,671
Sub-Servicing 80,827 92,584
Total servicing portfolio $1,603,909 $1,663,255
Average loan balance (end of period) $90,888 $95,321
Number of loans 17,647 17,450
</TABLE>
Due to lower new loan production and increases in long-term mortgage
interest rates during the quarter, the gain on sale of mortgage loans was
$2.46 million for the three months ended June 30, 1999, a decrease of
32.5% over the 1998 period.
Interest income, which reflects the interest received on mortgage loans
held for sale, decreased to $846,000 for the three months ended June 30,
1999 from $1.03 million for the comparable prior year quarter. This
decrease was due primarily to the smaller funding volume during the June
1999 quarter as compared to prior year 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 June 30, 1999 decreased by 2.0% to
$5.62 million from the three months ended June 30, 1998. Compensations
and benefits were $2.31 million for the June 1999 quarter, a decrease of
4.6% over the year-ago quarter. General and administrative expense
decreased by $368,000, or 16.8% over prior year. These lower expenses
were a result of shrinking production in the quarter.
Amortization of capitalized servicing rights increased by 32.8% over prior
year quarter 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 30.1% to $337,000 for quarter ended June 30,
1999 from $259,000 for the same period in 1998. The increase was due to
the utilization of reverse repo line to finance mortgage-backed securities
in the Company's inventory.
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, short-
term reverse repurchase agreement with an investment banking firm, its own
capital, and also cash flows from operations.
<PAGE>
At June 30, 1999, maximum permitted borrowings under the warehouse line of
credit agreements with two nonaffiliated banks totaled $105 million and
the amount outstanding was $39.3 million. Borrowings under these
facilities are secured by mortgage loans and GNMA securities. 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, 1999. The Company believes
that the warehouse agreements will be renewed when the current terms
expire.
In addition to the warehouse lines of credit, the Company makes use of the
short-term reverse repurchase agreement provided by an investment banking
firm in connection with its inventory of mortgage-backed securities. This
facility tends to carry lower interest rates and also allows the Company
to better utilize its warehousing lines. Borrowings outstanding under
this facility totaled $25.04 million at June 30, 1999.
In the first three months in fiscal year 2000, the Company repurchased in
open market transactions 44,500 shares of its common stock at an aggregate
cost of $183,000.
The Company had stockholders' equity of $29.77 million at June 30, 1999.
Management believes that its current financing arrangements are adequate
to meet its projected operational needs.
DISCLOSURE ABOUT MARKET RISK
The Company manages many risks in its normal course of business, however,
the management considers interest rate risk to be the most significant
market risk which could materially impact its financial position and
results of operations. The movements in interest rates affect the value of
capitalized mortgage servicing rights, the mortgage inventory held for
sale, volume of loan production and total net interest income earned.
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. In an environment of raising interest rates, loan
production will slow down, but the drop in origination income is mitigated
by decrease in the loan prepayment rate in its servicing portfolio and
hence write-offs, amortization and impairment charges against income will
fall. Conversely, the opposite scenario is true during a period of
declining interest rates. The overall objective is to offset changes in
the values of the following items arising from fluctuations in interest
rates, such as the production pipeline, mortgage loan inventory, mortgage-
backed securities held for sale and capitalized 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 June
30, 1999, the Company believes that a 50 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 $2 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 relied on
as a forecast of actual results.
YEAR 2000 ISSUES
Many companies will face serious information problems because their
software programs written in the past may not properly recognize calendar
dates beginning in the year 2000. Since the Company utilizes various
vendors and interfaces with numerous financial institutions in conducting
its business, the Company is exposed to the risk that its own systems and
systems of vendors and institutions may not be Year 2000 compliant.
Failure to adequately address these challenges could have an adverse
impact on the operations of the Company.
<PAGE>
The Company has adopted its Year 2000 Plan to prepare its entire computer
systems to properly calculate dates beyond December 31, 1999. Service
bureaus responsible for maintaining the Company's Loan Administration
System and Accounting System were contacted and upgrades for Year 2000
have been received and installed. The Company is also taking steps to
ensure that the vendors and institutions that it utilizes are also taking
necessary steps to be Year 2000 compliant.
Additionally, the Company decided to enroll in the Mortgage Bankers
Association (`MBA') Year 2000 Readiness Test. Through this extensive inter-
industry testing over a ninety-day period, the Company has gained valuable
information of its systems and of the various communication hardware and
interface pieces. The Company has passed the MBA Year 2000 Readiness Test.
The estimated total pre-tax cost of the Year 2000 Plan, including new
hardware and software modifications, will be approximately $150,000, of
which $130,000 has been incurred through June 30, 1999.
The Company has developed contingency plans including identifying
alternative processing platforms and outsourcing certain critical
functions. The Company believes that all its systems will be Year 2000
compliant prior to December 31, 1999, however there can be no assurance
that its warehouse lenders, depository institutions, custodians, business
partners and vendors can resolve their own Year 2000 issues in a timely
manner. Neither can the Company be assured that any failure by these other
parties would not have an adverse impact on the Company's operations and
financial condition.
PROSPECTIVE TRENDS
Early in the fiscal quarter ended June 30, 1999, long term interest rates
began to move steadily upwards from the new levels which prevailed during
most of last fiscal year. Each move up eliminated more loans eligible for
refinancing and since the majority of our production was in refinance
loans, our new loan production began to fall accordingly. Compared to
last year, in April 1999 our originations fell 33.5%, in May 39.9% and in
June 67.4%, a cumulative total reduction of 47.8% for the entire quarter.
Mortgage interest rates have continued to increase, and we therefore
expect even larger reductions in new loan production compared to last
year. Operating results will be adversely affected over the near future.
Some perspective is in order though. The production numbers being
reported for this fiscal year are being compared against year-earlier
numbers, and those numbers were all-time records for the Company and the
industry. It appears that loan production is now returning to fiscal 1997
levels, a more typical type of year for the industry.
This can all turn around of course, should interest rates retreat from
levels many observers think are unsubstainably high for this economy. Be
that as it may, we have taken several steps to prepare for the higher
interest rates now prevailing in the market. Our employee staff has been
reduced by 25%, and our commission compensation is falling along with the
reduction in production.
We are refocusing emphasis to our retail branch production channel, which
is more heavily directed towards loans for the purchase of housing rather
than refinancing. We've also just opened an internet website structured
towards potential borrowers for purchase financing. Our direct marketing
channel has been re-tooled to home equity loans and traditional cash-out
refinancing, instead of the previous concentration on interest rate
reduction refinance loans.
The Company has entered into an exclusive loan sale partnership with a
west coast bank which will give us a very competitive menu of conventional
loan products to $750,000. We've also entered into correspondent
agreements with a thrift institution and two Real Estate Investment Trusts
which specialize in adjustable rate (ARM) loans. This is important
because in a higher interest rate environment ARM loans become attractive
to consumers, and we are now well equipped with the ARM products and the
investors to meet any such demand.
<PAGE>
We believe we are taking the right steps to operate effectively in the
current environment, but the volume of available mortgage production is
always dependent, almost exclusively, on the level of interest rates. The
higher rates will definitely hurt us going forward. Pricing, as we've
often reported, is also under pressure and is likely to become more
intense as the pool of available mortgages shrinks with the return of
higher interest rates. The combination of higher rates and pricing
pressures will continue to negatively impact our revenues and profits at
least through the next quarter, and perhaps longer.
<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 June 30, 1999.
<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, 1999 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of
Directors,
Chief Executive Officer
Date: August 12, 1999 By S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-3-1999
<CASH> 10593
<SECURITIES> 0
<RECEIVABLES> 7221
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3098
<DEPRECIATION> 2360
<TOTAL-ASSETS> 101434
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 2741
<OTHER-SE> 27032
<TOTAL-LIABILITY-AND-EQUITY> 101434
<SALES> 0
<TOTAL-REVENUES> 6010
<CGS> 5623
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 387
<INCOME-TAX> 161
<INCOME-CONTINUING> 226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 226
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
