<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, 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 September 30, 1999, 5,270,897 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
September 30, 1999 (Unaudited) and March 31, 1999 3
Unaudited Statement of Operations
Three Months and Six Months Ended September 30, 1999
and 1998 4
Unaudited Statement of Cash Flows
Six Months Ended September 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 8-13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<CAPTION>
September 30, 1999 March 31, 1999
(Unaudited)
<S> <C> <C>
ASSETS
Cash $9,742,000 $14,839,000
Mortgage loans and mortgage-backed
securities held for sale 73,169,000 45,463,000
Other receivables and servicing advances 5,965,000 7,378,000
Capitalized servicing rights, net 13,165,000 12,475,000
Property and equipment, net 697,000 761,000
Prepaid expenses and other assets 1,738,000 765,000
TOTAL ASSETS $104,476,000 $81,681,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $43,828,000 $35,469,000
Note payable, other 24,886,000 -
Sight drafts payable 330,000 9,450,000
Accounts payable and accrued liabilities 795,000 2,967,000
Deferred income taxes 5,171,000 4,065,000
Total Liabilities 75,010,000 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 - 5,270,897
at September 30, 1999 and 5,347,197 at
March 31, 1999 2,613,000 2,924,000
Retained earnings 26,853,000 26,806,000
Total Stockholders' Equity 29,466,000 29,730,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $104,476,000 $81,681,000
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES:
Loan origination income $629,000 $989,000 $1,404,00 $2,100,000
Loan servicing income 1,948,000 1,957,000 3,873,000 3,881,000
Gain on sale of mortgage loans 187,000 4,807,000 2,651,000 8,460,000
Interest income 1,462,000 935,000 2,308,000 1,966,000
Other Income 4,000 - 4,000 -
Total revenues 4,230,000 8,688,000 10,240,000 16,407,000
EXPENSES:
Compensation and benefits 1,666,000 2,585,000 3,973,000 5,003,000
General and administrative expenses 1,071,000 2,444,000 2,893,000 4,634,000
Amortization of capitalized servicing rights 1,236,000 829,000 2,393,000 1,700,000
Interest expense 558,000 266,000 895,000 525,000
Total expenses 4,531,000 6,124,000 10,154,00 11,862,000
INCOME (LOSS) BEFORE INCOME TAXES (301,000) 2,564,000 86,000 4,545,000
INCOME TAX (BENEFITS) (122,000) 1,060,000 39,000 1,885,000
NET INCOME (LOSS) $(179,000) $1,504,000 $ 47,000 $ 2,660,000
BASIC AND DILUTED
EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.27 $ 0.01 $ 0.47
See accompanying notes
<PAGE>
</TABLE>
<TABLE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
<CAPTION>
Six Months Ended
September 30
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47,000 $2,660,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for deferred income taxes 1,106,000 569,000
Provision for losses on foreclosure (250,000) (54,000)
Amortization of capitalized servicing rights 2,393,000 1,700,000
Depreciation and amortization of property and equipment 138,000 130,000
Change in excess service fee 18,000 36,000
Loss on sale of assets (2,000) -
Originations and purchases of mortgage loans
held for sale (173,658,000) (433,509,000)
Sales and principal repayments of mortgage
loans held for sale 145,952,000 429,209,000
Change in other receivables and servicing advances 1,663,000 1,832,000
Change in prepaid expenses and other assets (973,000) 223,000
Change in accounts payable and accrued liabilities (2,172,000) 571,000
Change in income taxes payable - 57,000
Net cash provided by (used in) operating activities (25,738,000) 3,424,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (518,000) (23,000)
Originated mortgage servicing rights (2,583,000) (4,220,000)
Purchase of furniture, equipment and leasehold improvements (76,000) (163,000)
Proceeds from sale of assets 4,000 -
Net cash used in investing activities (3,173,000) (4,406,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 8,359,000 (2,573,000)
Change in sight drafts payable (9,120,000) 180,000
Change in note payable, other 24,886,000 -
Repurchase of common stock (311,000) (1,075,000)
Net cash provided by (used in) financing activities 23,814,000 (3,468,000)
DECREASE IN CASH (5,097,000) (4,450,000)
CASH, BEGINNING OF PERIOD 14,839,000 8,182,000
CASH, END OF PERIOD $9,742,000 $3,732,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $859,000 $416,000
Income taxes - 1,000,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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>
Six Months ended
September 30
1999 1998
<S> <C> <C>
Beginning balance $12,475,000 $7,490,000
Additions 3,101,000 4,243,000
Amortizations and write offs (2,411,000) (1,736,000)
Ending balance $13,165,000 $9,997,000
</TABLE>
3. NOTES PAYABLE
At September 30, 1999, the Company had mortgage loan warehousing agreements
with two nonaffiliated banks, which provided for borrowings up to
$50,000,000 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 September 30, 1999, borrowings under
these lines of $43,828,000 were collateralized by mortgage loans and
mortgage-backed securities held for sale.
The mortgage loan warehousing agreements are subject to renewal on August
31, 2000, and both 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 warehousing agreements
will be renewed prior to their expiration.
In addition to the warehousing agreements, 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 $24.89 million at September 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 Six Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income $(179,000) $1,504,000 $47,000 $2,660,000
Denominator:
Shares used in computing basic earnings per share 5,298,983 5,569,697 5,308,816 5,658,069
Effect of stock options treated as equivalents under the
treasury stock method 2,636 4,768 6,358 9,494
Denominator for diluted earnings per share 5,301,619 5,574,465 5,315,174 5,667,563
Basic earnings per share $(.03) $.27 $.01 $.47
Diluted earnings per share $(.03) $.27 $.01 $.47
</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 September 30, 1999 compared to three months ended September
30, 1998.
GENERAL
First Mortgage reported a net loss of $179,000 or $0.03 per share for the
quarter ended September 30, 1999, compared to net income of $1.504 million
or $0.27 per share for the comparable 1998 quarter. The decrease was
primarily attributable to the increase in mortgage interest rates during
the course of the period, which resulted in a sharp fall-off in new loan
production. In turn, reductions in income from origination and gain on
sale of mortgages outran a substantial reduction in most expense
categories.
REVENUES
For the quarter ended September 30, 1999, the volume of new mortgage loans
closed decreased by 72.8% to $57.28 million from $210.44 million in the
prior year quarter and loan origination revenue decreased by approximately
36.4% to $629,000 from the September 1998 quarter. The decrease is a
reflection of higher long-term interest rates, which significantly
impacted refinancing loans in the market place, and to a lesser degree,
loans for the purchase of housing.
As of September 30, 1999, the Company serviced $1.638 billion in loans
compared to $1.662 billion at September 30, 1998, a decrease of 1.44%.
Total loan servicing income, including late charges and other
miscellaneous fees also fell slightly to $1.95 million in the September
1999 quarter, from $1.96 million in the prior year quarter. The small
decrease was primarily due to lower loan production volume as explained in
the preceding paragraphs.
<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
September 30,
1999 1998
(Dollars in thousands except average loan balance)
<S> <C> <C>
Beginning loan service portfolio $1,523,082 $1,570,671
Add: Loans originated 57,284 210,440
Purchased Loans 70,505 -
Less: Prepayment and amortization 91,706 207,161
Ending loan servicing portfolio 1,559,165 1,573,950
Sub-Servicing 78,540 88,450
Total servicing portfolio $1,637,705 $1,662,400
Average loan balance (end of period) $ 91,380 $ 94,214
Number of Loans 17,922 17,645
</TABLE>
Due to an increase in long-term mortgage interest rates during the
quarter, coupled with the resulting sharp reduction in new loan
originations, the gain on sale of mortgage loans was $187,000 for the
three months ended September 30, 1999, a decrease of 96.1% over the
comparable 1998 period.
Interest income, which reflects the interest received on mortgage loans
and mortgage-backed securities held for sale, increased to $1.46 million
for the three months ended September 30, 1999 from $935,000 for the
comparable prior year quarter. This increase was due primarily to the
larger mortgage-backed securities inventory carried in the warehouse line
by the Company during the September 1999 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, 1999 decreased by 26% to
$4.53 million from the three months ended September 30, 1998.
Compensations and benefits were $1.67 million for the September 1999
quarter, a decrease of 35.6% over the year-ago quarter. General and
administrative expense decreased by $1.37 million, or 56.2% over the prior
year. These lower expenses were a direct result of contracting production
operations in the quarter, along with other cost reduction measures taken
by the Company over the course of this 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 109.8% to $558,000 for quarter ended September
1999 from $266,000 for the same period in 1998. The increase was due to a
larger volume of loans and mortgage-backed securities carried in the
warehouse line during the quarter, as compared to the same period a year
ago.
<PAGE>
RESULTS OF OPERATIONS:
Six months ended September 30, 1999 compared to six months ended September 30,
1998
GENERAL
In the six months ended September 30, 1999, the Company reported net
income of $47,000 or $0.01 per share, compared to net income of $2.66
million or $0.47 per share for the same period of 1998. Total revenue
decreased by 37.6% to $10.24 million from $16.41 million in the
comparable prior period. The decrease in net income was largely due to
the increase in mortgage interest rates during this period, which
resulted in a nearly 60% falloff in new loan production.
REVENUES
For the six months ended September 30, 1999 the volume of new mortgage
loan originations decreased 59.9% to $173.66 million from $433.51 million
in the comparable period last year, and the loan origination revenue
decreased 33.1% to $1.40 million from $2.10 million for the six months
ended September 30, 1998. The lower loan origination revenue was largely
due to the reduction of new loans originated by the Company.
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, fell slightly to $3.87 million for the six months
ended September 30, 1999 from $3.88 million for the same period in 1998.
The decrease in servicing income is primarily due to a small drop in the
Company's servicing portfolio as compared to the same period last year.
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,
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 173,514 433,509
Purchased Loans 70,505 -
Less: Prepayment and amortization 212,361 429,702
Ending loan servicing portfolio 1,559,165 1,573,950
Sub-Servicing 78,540 88,450
Total servicing portfolio $1,637,705 $1,662,400
Average loan balance (end of period) $91,380 $94,214
Number of Loans 17,922 17,645
</TABLE>
The sale of mortgages for the six months ended September 30, 1999
resulted in a gain of $2.65 million compared to a gain of $8.46 million
for the 1998 period. The decrease is primarily attributable to the
unfavorable trend in long-term interest rates in 1999, coupled with the
sharp reduction in new loans originated.
Interest income, which reflects the interest earned on mortgage loans and
mortgage-backed securities held for sale, was $2.31 million for the six
months ended September 30, 1999 as compared to $1.97 million over the
comparable 1998 period. The increase was as a result of the higher
volume of loans and mortgage-backed securities carried in the warehouse
line compared to the earlier period.
<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 six months ended September 30, 1999 decreased by
$1.71 million or 14.4% from the six months ended September 30, 1998.
Compensation and benefits decreased 20.6% to $3.97 million compared to
$5.00 million in the first six months of fiscal year 1998. General and
administrative expenses decreased by 37.6% to $2.89 million from the
comparable period in 1998. The decreases in these expenses were largely
a result of the reduction in loan originations and associated
compensation and general and administrative expenses in the first half of
fiscal year 1999.
The increase in amortization of capitalized servicing rights was mainly
due to larger investment in servicing rights and higher volume of loan
prepayments over the prior period.
Interest expense increased 70.5% to $895,000 as compared to $525,000 in
the year-earlier six months, due primarily to the larger volume of loans
carried in the warehouse line 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, 1999, maximum permitted borrowings under the mortgage
loan warehousing agreements with two nonaffiliated banks totaled $85
million and the amount outstanding was $43.83 million. Borrowings under
these facilities are secured by mortgage loans and mortgage-backed
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 September 30,
1999. The Company believes that the warehouse agreements will be renewed
when the current term expires.
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 $24.89 million at September 30, 1999.
In the first six months in fiscal year 2000, the Company repurchased in
open market transactions 76,300 shares of its common stock at an aggregate
cost of $311,000.
The Company had stockholders' equity of $29.47 million at September 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
<PAGE>
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
September 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 $2.5 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 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.
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 converting
the system to become Year 2000 compliant have been installed and
implemented successfully. 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 to
$200,000, of which $150,000 has been incurred through September 30, 1999.
The Company has developed contingency plans including identifying
alternative processing platforms, outsourcing certain critical functions
and the ability to process monthly government reportings manually. 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
Late in the last fiscal year ended March 31, 1999, long term interest
rates began to move steadily upwards from the levels which prevailed
during most of that fiscal year. For example, the prevailing interest
rate for our standard 30 year fixed-rate loan progressed from 6.75% on
September 30, 1998, to 7.25% on March 31, 1999, to 7.75% on June 30, 1999,
and 8.125% as of October 25, 1999. Each move up eliminated more
<PAGE>
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 the first quarter our originations fell 47.8%,
and in the second quarter 72.8%, a cumulative total reduction of 59.9% for
the entire period. Should mortgage interest rates remain at, or increase
from, today's level, we expect similar reductions in new loan production
to continue, as compared to last year. Operating results would therefore
continue to be adversely affected over the near future.
Although 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, the loan production
refinance wave is over for this cycle, and loans for the purchase of new
housing are also being negatively impacted. We are also entering the
traditional seasonal slowdown in housing sales, so the outlook for the
rest of the fiscal year is poor.
This can all turn around of course, should interest rates return to the
lower levels of last year. Be that as it may, we have taken several steps
to adjust our operations for the higher interest rates now prevailing in
the market. The entire management staff have taken salary cuts; our
employee staffing has been reduced by 42%, with many of the remaining
employees on reduced workweeks; and our commission compensation expense is
falling along with the reduction in production.
We are refocusing emphasis to our retail branch production channel, which
traditionally is more heavily directed towards loans for the purchase of
housing rather than refinancing. This channel has withered over the past
year, with several branches closing, and a new retail production manager
has been brought into the Company to turn this channel around and re-build
the retail branch system. He has extensive experience and an excellent
track record in similar past endeavors, and we believe he will be
successful in the retail re-building process. We've also 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 gives 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 more
attractive to consumers, and we are now well equipped with the ARM
products and the investors to compete for any such demand.
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, low new loan
production, 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 September 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.
Date: November 10, 1999 FIRST MORTGAGE CORPORATION
BY S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors
Chief Executive Officer
Date: November 10, 1999 FIRST MORTGAGE CORPORATION
BY S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
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