<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended March 31, 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
incorporation or organization) Identification No.)
3230 Fallow Field Drive 91765
Diamond Bar, California (Zip Code)
(Address of principal executive
offices)
(909) 595-1996
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on June 15, 1999, based on the average bid and asked prices on that
date reported by the OTC Bulletin Board, was $2,081,000. Solely for purposes of
this calculation, all executive officers and directors of the registrant were
considered affiliates as were all beneficial owners of more than 10% of the
registrant's Common Stock. As of June 15, 1999, 5,315,697 shares of the
registrant's Common Stock were issued and outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual meeting
of shareholders of the registrant to be held on September 22, 1999 are
incorporated by reference into Part III hereof. The definitive proxy statement
will be filed with the Securities and Exchange Commission within 120 days after
March 31, 1999.
<PAGE>
FIRST MORTGAGE CORPORATION
A California Corporation
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1999
TABLE OF CONTENTS
Item No. Description Page
PART I
1. Business 1
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
7A.Quantitative and Qualitative Disclosures About Market Risk 25
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 25
PART III
10.Directors and Executive Officers of the Registrant 25
11.Executive Compensation 25
12.Security Ownership of Certain Beneficial Owners and Management 25
13.Certain Relationships and Related Transactions 25
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
Signatures 29
<PAGE>
PART I
ITEM 1. BUSINESS
General
First Mortgage Corporation ("First Mortgage" or the "Company") is a mortgage
banking firm engaged in the mortgage banking business since its incorporation in
California in 1975. The Company originates, purchases, warehouses, sells and
services primarily first mortgage loans for the purchase or refinance of owner-
occupied one-to-four family residences located principally in California. The
Company originates mortgage loans in geographic areas with moderately priced
housing through a network of offices located in California, Arizona and Nevada.
Mortgage loans are originated by the Company through the following channels:
Retail production loans are generated by referrals from real estate agents,
builders and other sources. Refinance loans are originated by the Direct
Marketing division through targeted mail solicitations and direct telemarketing,
and wholesale production generally represents loans originated through approved
mortgage loan brokers. The Company's long-term production objective is to
increase loan origination through strategically located new offices and to
promote new products that can be marketed at an acceptable rate of return to the
Company.
Generally, First Mortgage sells all mortgage loans that it originates or
purchases to institutional investors in the secondary mortgage market, retaining
the servicing rights on a portion of such loans. The Company emphasizes the
origination of mortgage loans insured by the Federal Housing Authority ("FHA")
or partially guaranteed by the Veterans Administration ("VA") (collectively,
"FHA/VA loans"). The Company's FHA/VA loans are pooled to form securities of
the Government National Mortgage Association ("GNMA") which are sold in the
secondary mortgage market to investment banking firms, substantially all of
which are primary dealers in government securities. Management believes that
the origination of FHA/VA loans benefits the Company by (i) increased loan
servicing income due to the higher servicing fees and generally longer average
loan lives associated with FHA/VA loans, and (ii) reduced interest rates paid on
warehousing lines of credit due to the Company's ability to utilize tax and
insurance impound accounts associated with FHA/VA loans as compensating balances
with its creditor banks.
First Mortgage also originates conventional mortgage loans which comply with
the requirements for sale to, or conversion into securities issued by, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company sells a portion of the conventional mortgage
loans that it originates under purchase and guarantee programs sponsored by FNMA
and FHLMC. These programs provide for either direct sale of mortgage loans to
FNMA or FHLMC, or for pooling of mortgage loans in exchange for securities
issued by FNMA or FHLMC. Conventional loans originated by the Company,
including those which do not conform to government agency requirements, are also
sold to banks and other private institutional investors under the Company's
correspondent relationships with several such investors. The Company believes
that the ability to originate a substantial volume
<PAGE>
of conventional loans is important to the success of its business. The
origination of conventional loans enables the Company to offer mortgage loans to
a wider variety of markets and referral sources, thereby enhancing the Company's
overall mortgage loan origination capability.
First Mortgage funds mortgage loan originations and purchases with working
capital and short-term borrowings under warehousing lines of credit. The
Company generally holds or "warehouses" mortgage loans for a short period of
time (on average 25 days) pending their nonrecourse sale to institutional
investors in the secondary market as individual loans or as mortgage-backed
securities.
First Mortgage's loan servicing activities include the collection, remittance
and general administration of mortgage loans. Over the years, the company has
been successful in retaining servicing rights on a substantial portion of loan
originations. The current interest environment, however, has induced much more
refinance activities, which has accelerated the prepayment rate of the servicing
portfolio. The Company has managed to negate much of the impact of this runoff
by retaining most of the loans eligible for refinance through its own in-house
refinance programs. The Company's mortgage servicing portfolio decreased by 1%
from $1.684 billion at March 31, 1997 to $1.667 billion at March 31, 1998, and
dropped by 3.5% to $1.608 billion at March 31, 1999 compared to the previous
fiscal year.
The various phases of First Mortgage's business are discussed in greater
detail below.
Loan Origination
The Company originates mortgage loans through three primary sources: retail,
which represents loans generated through real estate agents and builders; direct
marketing, which represents loans initiated through direct mail and telephone;
and wholesale, which represents loans solicited from loan brokers.
Substantially all mortgage loans originated through such sources by the Company
are underwritten, funded and closed by the Company.
First Mortgage's loan origination activities include (i) offering a variety
of residential mortgage loans, (ii) attracting suitable loan applicants, (iii)
reviewing borrower credit and mortgaged property title, appraised value and
insurance ("underwriting"), (iv) issuing conditional loan commitments, and (v)
funding qualified loans at closing.
Types of Loans Originated. The Company originates three types of residential
mortgage loans: (i) FHA/VA loans which qualify for sale in the form of
securities guaranteed by GNMA; (ii) conventional mortgage loans which comply
with the requirements for sale to, or conversion into securities issued by, FNMA
or FHLMC ("conventional conforming loans"); and (iii) conventional mortgage
loans which comply with other institutional investor loan requirements
("conventional nonconforming loans"). The Company does not originate any
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans") with loan-to-value ratios above
<PAGE>
80% unless the borrowers obtain private mortgage insurance for the Company's
benefit from companies rated by Standard & Poor's Corporation or by Moody's
Investor Service, Inc.
All loan applications, regardless of source, must be approved by the Company
in accordance with its underwriting criteria, including loan-to-value ratios,
borrower income and credit qualifications, investor requirements, necessary
insurance and property appraisal requirements. The Company's underwriting
standards also comply with the relevant guidelines set forth by the FHA, VA,
FMHA, FNMA, FHLMC, private institutional investors and/or conduits and private
mortgage insurers, as applicable.
Management believes that the origination of FHA/VA loans benefits the Company
from (i) increased loan servicing income due to the higher servicing fees and
generally longer average loan lives customarily associated with FHA/VA loans,
and (ii) reduced interest rates on warehousing lines of credit due to the
Company's ability to utilize tax and insurance impound accounts associated with
FHA/VA loans as compensating balances with its creditor banks. However, the
Company also originates conventional loans and maintains a flexible loan
origination network that is capable of increasing the volume of conventional
loan production as market conditions warrant.
The Company receives fees from borrowers for the origination of retail loans,
generally in the range of one to two percent of the principal amount of the
loan. The Company also receives fees in connection with the origination of
wholesale loans which average approximately 0.5% per loan. The Company may
charge additional fees depending upon market conditions or the Company's
objectives concerning loan origination volume and pricing. The Company incurs
certain costs in originating loans, including overhead, out-of-pocket costs,
interest on money borrowed to finance loans and, when the loans are subject to a
purchase commitment from private investors, related commitment fees. The volume
of and type of loans and commitments made by the Company vary with competitive
and economic conditions, resulting in fluctuations in revenues from loan
originations. In periods of rising interest rates, the Company's volume of loan
originations, particularly refinancings, declines, and the Company's revenues
from loan originations decrease.
<PAGE>
The following table sets forth for the periods indicated, the number, dollar
volume, percentage of total volume and average loan balance of the FHA/VA loans,
conventional conforming loans and conventional nonconforming loans originated
and purchased by the Company:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
(Dollars in thousands, except average loan balance data)
<S> <C> <C> <C>
FHA/VA Loans:
Number of loans 3,728 2,115 1,575
Volume of loans $336,647 $ 208,927 $ 158,502
Percent of total volume 38.8% 43.8% 44.9%
Average loan balance $ 90,302 $ 98,783 $ 100,636
Conventional Conforming
Loans (1):
Number of loans 1,153 587 607
Volume of loans $153,971 $ 71,708 $ 77,097
Percent of total volume 17.8% 15.0% 21.8%
Average loan balance $133,539 $122,160 $ 127,013
Conventional Nonconforming
Loans:
Number of loans 1,087 577 379
Volume of loans $376,023 $196,351 $ 117,812
Percent of total volume 43.4% 41.2% 33.3%
Average loan balance $345,927 $340,296 $ 310,850
Total Loans (1):
Number of loans 5,968 3,279 2,561
Volume of loans $866,641 $476,986 $ 353,411
Average loan balance $145,215 $145,467 $ 137,997
<FN>
<F1>
(1)Includes sub-prime and second priority conventional conforming loans which
aggregate less than 1% of the total dollar volume of loans originated and
purchased in each of fiscal 1999, 1998, and 1997.
</FN>
</TABLE>
Mortgage loans originated by the Company are loans which primarily fund the
purchase of owner-occupied residential real property, or refinance loans which
repay and replace existing mortgage loans on owner-occupied residential real
property. The volume of refinance loans as a percentage of the Company's total
mortgage loan origination volume for fiscal years 1999, 1998 and 1997 was
approximately 81%, 50% and 38%, respectively. For fiscal years 1999, 1998 and
1997, approximately 44%, 33% and 16%, respectively, of the Company's refinance
loans were originated under the FHA's "streamline" refinance program. Pursuant
to this program, the FHA insures refinance loans intended solely to reduce the
payments on existing FHA-insured mortgage loans. The Company believes that in
some form, refinance loans will continue to represent a portion of its total
mortgage loan origination volume, the amount dependent upon the level of
interest rates at any given time.
Solicitation of Loan Applicants. First Mortgage follows a marketing strategy
designed to maximize the efficiency of the Company's loan solicitation and
origination activities. This strategy includes (i) operating a flexible branch
office network, (ii) utilizing an incentive compensation structure for the
majority of its work force, (iii) employing cost-efficient consumer marketing
techniques, and (iv) emphasizing prompt and professional customer services.
<PAGE>
In accordance with this strategy, the Company operates a network of retail
branch offices in service areas which are located near potential borrowers, real
estate brokers, builders, developers and other referral sources. This enhances
the ability of the Company's sales force to solicit potential customers and
referral sources and to develop referral networks which provide recurring
business. To maintain this strategy, the Company's senior management actively
seeks new service areas and continually reviews existing service areas to assess
whether to open or close branch offices. The Company attempts to open new
retail branch offices in areas where the population is growing and where housing
prices are affordable for moderate income homebuyers.
While the operation of a productive network of retail branch offices is
essential to mortgage loan originations, the Company believes that it is equally
important to maintain the flexibility to open or close branch offices in a
timely, cost-efficient manner as local market conditions dictate. Accordingly,
the Company typically enters into month-to-month or one to two year short-term
leases for 1,000 to 2,000 square foot offices, and does not enter into long-term
employment agreements with branch office employees. Over the last five fiscal
years, the Company has operated between 7 and 18 branch offices in varying
locations in California, Nevada, Oregon and Washington. The Company currently
operates a retail network of seven offices located in Covina, Pasadena,
Bakersfield, Fairfield and Modesto, California, as well as Tempe, Arizona and
Las Vegas, Nevada. Management plans to add additional branch offices in order
to increase new loan production, some of which may be located outside existing
service areas. Given the Company's present high concentration of loan
originations in California, there can be no assurance that its results of
operations will not be adversely affected to the extent California experiences
decreased residential real estate lending activity.
First Mortgage operates retail branch offices as individual profit centers.
Scheduled fees for loans originated and other services provided by the Company's
corporate headquarters are allocated to each branch office in determining the
office's profitability. Branch offices are staffed entirely by Company
employees. A typical retail branch office staff consists of a branch manager,
one to four salespersons, one to three loan processors and one or two clerical
office assistants. Salespersons are full-time employees who work exclusively
for the Company and are contractually obligated to comply with the Company's
business practice guidelines.
First Mortgage's retail marketing strategy also includes an incentive
compensation system designed to encourage quality mortgage loan production and
to retain productive managers and salespersons. A branch manager's compensation
includes (in addition to a base salary) a bonus based upon loan production and a
percentage of the branch office's annual profits. Salespersons are compensated
solely on commissions based upon revenue generated from their respective loan
closings. In addition, loan processors at the branch office level receive, in
addition to a salary, a bonus based on the number of mortgage loans which are
closed and; therefore, have met the Company's underwriting criteria. The
Company believes that an incentive compensation system based on the number and
quality of loans produced improves
<PAGE>
overall profitability, customer and employee relations and the Company's
reputation for providing timely and quality mortgage banking services.
The utilization of personal solicitation techniques is another aspect of the
Company's marketing strategy. The Company believes that on-going personal
relationships between retail branch salespersons and real estate brokers,
builders, developers and prior customers through regular direct contact
represent the most productive solicitation technique since historically the
majority of the Company's loan originations have been generated through these
referral sources. The Company engages in only limited mass media advertising
because it believes that the costs associated with such advertising usually
outweigh the benefits. The Company also directly solicits borrowers for
refinance loans, primarily through targeted mailings and telemarketing.
First Mortgage's reputation for prompt and professional service is an
integral component of the Company's marketing strategy. The Company believes
that its ability to process retail loan applications quickly has become
increasingly important in the market place. Despite the speed with which loan
applications are processed, the Company does not compromise its comprehensive
underwriting and quality control criteria. The utilization of new technology
and computerization of all critical phases of operations have had a significant
impact on the Company's cost control efforts, especially during the recent
upturn in refinance loan production.
The Company's wholesale loan origination business utilizes independent loan
brokers to originate mortgage loan applications. The Company's wholesale
operations sales staff solicits loans meeting the Company's underwriting
criteria from loan brokers who have been approved by the Company. These broker-
referred loan applications are subject to the same underwriting, verification
and approval process applied to loan applications obtained through its retail
branch offices. Upon approval, these loans are funded and closed by the
Company. The Company currently operates its wholesale regional office in San
Jose, California. Mortgage loan production through wholesale originations as a
percentage of total loan origination volume for fiscal 1999, 1998 and 1997 was
41%, 55% and 57%, respectively.
Loan Processing and Underwriting. Upon receipt of mortgage loan
applications, branch office loan personnel verify the completeness and accuracy
of application information. Verification procedures include, among other
things, obtaining (i) third-party written confirmations of the applicant's
income and bank deposits, (ii) a formal credit report on the applicant from a
credit reporting agency, and (iii) a preliminary title report and a real estate
appraisal. The Company's underwriting department is responsible for the
selection of the credit reporting agency, and such agency must issue reports
which meet or exceed the requirements of FHA, VA, FNMA and FHLMC. The Company's
in-house appraisers, or appraisers approved and chosen at random by the FHA or
VA, prepare property appraisals for FHA/VA loans. Appraisals for retail
conventional loans are prepared by the Company's in-house appraisers, or one of
a number of pre-approved independent appraisers who have contractually agreed to
comply with the Company's written appraisal specification requirements and who
meet
<PAGE>
its experience, education and reputation standards. Wholesale loan appraisals
are independently audited through the Company's quality assurance department.
Once an application has been verified and reviewed at the branch office
level, a formal loan application is assembled and submitted to the Company's
underwriting department. The underwriting department scrutinizes all loan
applications, other than loans purchased on a wholesale basis, in accordance
with the specific agency or investors' underwriting guidelines, including loan-
to-value ratios, borrower income qualifications, investor requirements,
necessary insurance and property appraisal requirements. The Company's
underwriting guidelines comply with the underwriting criteria of FHA, VA, FNMA
and FHLMC as applicable, and in some cases are more comprehensive. The
Company's underwriting guidelines for conventional nonconforming loans are based
on the underwriting standards required by the institutional investors to whom
such loans will be sold. The Company's underwriting personnel function
independently of the Company's mortgage loan origination personnel. The Company
believes that the implementation and enforcement of comprehensive underwriting
guidelines has mitigated the foreclosure loss expense which, as a percentage of
the Company's mortgage servicing portfolio, was 0.061% in fiscal 1999, 0.074% in
fiscal 1998 and 0.091% in fiscal 1997.
First Mortgage's quality assurance department audits a minimum of 10% of all
formal retail loan applications submitted to the underwriting department in
order to enhance the ongoing evaluation of the loan processing function,
including employees, credit reporting agencies and independent appraisers.
Applications from retail branch offices are chosen for audit in a manner that
assures impartiality. Higher risk loans, such as those on three and four-unit
properties are audited more frequently than other loans, and nearly all
wholesale loans are audited. The quality assurance department re-verifies all
employment and bank verifications, and obtains a separate credit report from a
second credit reporting agency as well as a written appraisal critique from a
second appraiser or audit agency familiar with the area of the mortgage
property. The quality assurance department submits all audit results directly
to the president of the Company. Management believes that by performing
comprehensive quality assurance audits, mortgage loans of investment quality
will be originated and negligent underwriting, foreclosure loss expense and
overall Company risk will be minimized.
Loan Commitments. First Mortgage does not issue final loan commitments to
fund or acquire mortgage loans unless it is confident that the loan will meet
the acquisition criteria of institutional investors in the secondary mortgage
market. Subsequent to underwriting approval and prior to loan funding, the
Company issues conditional loan approvals to qualified applicants. Conditional
approvals indicate loan amounts, prevailing interest rates, fees, funding
conditions and approval expiration dates. The interest rate indicated is
usually subject to change in accordance with market interest rate fluctuations
until the final loan closing documents are prepared, at which time the Company
commits to a stated interest rate ("interest rate lock-in") typically for a
maximum of 15 days. The Company determines the effective interest rates for
mortgage loans based upon its daily review of prevailing interest rates in the
secondary mortgage market, and interest rate lock-ins beyond 15 days are not
issued unless the
<PAGE>
Company receives an appropriate fee premium based upon an assessment of the risk
associated with the longer lock-in period. For instance, the Company may issue
a conditional loan approval with an interest rate lock-in for up to 60 days. In
such cases, the Company charges an extended fee premium average of 0.25% to
0.50% of the mortgage loan amount.
Loan Funding. At closing, First Mortgage funds mortgage loans first with
available working capital, which represents the Company's lowest cost of funds,
and second with short-term borrowings under warehousing lines of credit which
currently aggregate $105 million. The Company's current warehousing lines of
credit include a $70 million secured line of credit for 90-day notes with Bank
of America National Trust and Savings Association ("Bank of America") that is
subject to renewal on September 1, 1999; and a $35 million secured line of
credit for 90-day notes from Sanwa Bank of California ("Sanwa Bank"), subject to
renewal on August 31, 2000. Advances under the Company's secured lines of
credit are collateralized with the mortgage loans which they fund. The Company
repays outstanding balances under warehousing lines of credit and replenishes
its working capital with the proceeds from the sale of mortgage loans.
Accordingly, the Company depends on mortgage loan sales to originate new
mortgage loans without exceeding the limits of its warehousing lines of credit
and available working capital.
First Mortgage pays interest on funds advanced under the warehousing lines of
credit at pre-negotiated rates depending on the level of borrowing and the
compensating balance maintained, which can be satisfied in whole or in part with
tax and insurance impound funds held in custodial accounts for mortgage loans
serviced by the Company. By maintaining compensating balances in excess of the
minimum requirements, the Company can, and frequently does, borrow funds under
the warehousing lines of credit at reduced interest rates. This method of
reducing the Company's cost of borrowing can significantly improve the
profitability of warehousing mortgage loans. While the Company's warehousing
lines of credit are subject to periodic renewal, the Company has historically
renewed or replaced these lines of credit at satisfactory rates, and the Company
believes that it maintains an excellent relationship with its current lenders.
There can be no assurance, however, that such financing will continue to be
available to the Company or on favorable terms.
Loan Warehousing
First Mortgage normally warehouses funded mortgage loans for a short period
of time (on average 25 days), depending upon the delivery dates negotiated with
institutional investors, the volume of loan originations, the availability of
working capital and the amount available under warehousing lines of credit prior
to purchase of the loans by institutional investors. The Company receives, as
net interest income, the difference between the interest received on mortgage
loans held prior to sale which may be financed under warehousing lines of
credit, and the interest paid by the Company under such lines of credit. The
Company also receives interest income from mortgage loans funded with working
capital. The Company attempts to mitigate interest rate risk by warehousing
mortgage loans for relatively short time periods. Although this <PAGE>
strategy may limit the amount of net interest income realized, management
believes that this strategy is prudent and protects the Company from unexpected
interest rate fluctuations.
Loan Sales
Unlike financial institutions and other lenders which customarily originate
or acquire mortgage loans for long-term investment, mortgage bankers, including
the Company, originate and purchase mortgage loans with the intention of selling
them shortly after they are funded. Mortgage loans originated or purchased by
the Company are sold to institutional investors in the secondary mortgage market
with the Company generally retaining the right to service such loans.
The majority of the Company's FHA/VA loans are pooled to form GNMA securities
and are sold to investment banking firms, substantially all of which are primary
dealers in government securities. Conventional conforming loans are sold for
cash as individual whole loans to FNMA, FHLMC or other institutional investors.
The Company sells its conventional nonconforming loans to institutional
investors in privately negotiated transactions. In fiscal 1999, approximately
36% of the principal amount of the Company's mortgage loans were converted into
GNMA securities, 14% were sold directly to FNMA or FHLMC for cash and the
remaining 50% of the Company's mortgage loans were sold to other institutional
investors. The Company expects to continue to use these methods of selling
mortgage loans, but in varying degrees in accordance with prevailing market
conditions and may also employ other sales methods if management determines that
it is prudent to do so.
Since the Company's inception, all originated or purchased mortgage loans
have been sold in the secondary mortgage market without recourse to the Company
in the event of borrower default, subject to certain limitations applicable to
VA loans. With respect to mortgage loans securitized through GNMA programs, the
Company is insured by the FHA against foreclosure losses on FHA loans, and the
VA guarantees against foreclosure losses on VA loans, subject to a limitation of
25% of the loan or such higher percentage that does not exceed $50,750.
Mortgage loans sold to, or securitized through, FNMA or FHLMC are contractually
nonrecourse to the Company upon borrower default.
In connection with loan exchanges and sales, the Company makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations, program standards and
information accuracy. In the event of a breach of these representations and
warranties, the Company could be required to repurchase such loans.
The sale of mortgage loans generates a gain or loss to the Company primarily
as a result of the following factors. First, the Company may fund a loan at a
price (i.e., interest rate and discount) that is higher or lower than the price
the Company would receive if it immediately sold the loan in the secondary
mortgage market. These pricing differences occur principally as a result of
competitive pricing conditions in the primary
<PAGE>
loan origination market. In calendar year 1998 and 1997, price competition was
intensive primarily due to aggressive marketing actions taken by major banks
seeking to increase their market share. If the pricing pressure continues,
future marketing results will be negatively impacted. Second, gains or losses
may result from changes in the market value of the loans, or in the value of the
commitments to purchase loans as a result of interest rate fluctuations, from
the time the Company commits to a stated interest rate charged to a borrower
(i.e., an interest rate lock-in) until the time the loan is sold or a fixed-
price purchase commitment is obtained in the secondary mortgage market.
Consequently, if the Company anticipates that interest rates will increase, it
seeks to purchase commitments from institutional investors to buy mortgage loans
in amounts in excess of the Company's current fundings. If the Company does not
deliver loans to fulfill these commitments, the commitment fees are expensed.
If interest rates subsequently increase, and if the Company has obtained such
commitments at fixed interest rates and subsequently funds loans at higher
interest rates, it will benefit from the increased interest rate spread.
However, if the Company anticipates that interest rates will decrease,
commitments are obtained from institutional investors only for those loans which
the Company expects to fund immediately. This practice minimizes the potential
commitment fee expense relating to unused commitments.
First Mortgage's net gain or loss on sale of mortgage loans generally equals
the difference between the Company's carrying value and the selling price of the
loans, net of commitment fees paid by the Company. The gain or loss on mortgage
loans was also impacted by the implementation of Statement of Financial
Accounting Standards No. 125 "Accounting for Mortgage Servicing Rights" (FAS
125). FAS 125 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its fair value
relative to the loan as a whole. Gains attributed to the adoption of FAS 125
are discussed further in Notes to Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Loan Servicing
Loan servicing is performed at the Company's corporate headquarters, and
includes (i) collecting and remitting loan payments, (ii) accounting for
principal and interest, (iii) holding and disbursing escrow or impound funds for
real estate taxes and insurance premiums, (iv) contacting delinquent borrowers,
(v) supervising foreclosures, and (vi) otherwise administering mortgage loans
for institutional investors. At March 31, 1999, approximately 62% of the
aggregate principal amount of the Company's mortgage servicing portfolio
consisted of FHA/VA loans. The Company believes that such loans are desirable
to service because they typically command higher servicing fees (currently
weighted average servicing fee is 0.47%) and generally have longer average loan
lives. Overall, the Company receives annual loan servicing fees that presently
average 0.40% (net of amortization of capitalized servicing rights and agency
guarantee fees), and range from 0.25% to 1.50% per annum of the declining
principal amount of serviced loans. The Company also retains late charges paid
by borrowers and other customary fees associated with loan servicing. While the
Company periodically has sold a portion of newly funded mortgage loans on a
servicing-released basis, it has never sold any servicing rights from its
mortgage servicing portfolio;
<PAGE>
however, the sale of such rights represents an available source of funds. The
Company may also acquire servicing rights for loans originated by other lenders
whenever attractive opportunities are encountered.
The following table sets forth certain information regarding the Company's
mortgage servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
(Dollars in thousands,
except for number of loans
serviced and average loan balance)
<S> <C> <C> <C>
Beginning loan servicing portfolio $1,570,143 $1,583,837 $1,477,161
Add: Loans originated and purchased 866,641 476,986 353,411
Purchase of servicing 3,046 6,652 14,960
Less: Prepayment of loans (487,256) (239,992) (149,953)
Amortization (24,261) (24,979) (23,779)
Loans sold servicing released (401,162) (232,361) (87,963)
Ending loan servicing portfolio 1,527,151 1,570,143 1,583,837
Sub-servicing 80,581 96,708 99,815
Total servicing portfolio $1,607,732 $1,666,851 $1,683,652
Number of loans serviced (end of year) 17,676 17,542 17,466
Average loan balance (end of year) $ 90,956 $ 95,021 $ 96,396
</TABLE>
The interest rate stratification of the servicing portfolio at March 31, 1999
is as follows:
<TABLE>
<CAPTION>
Interest Rate Principal Balance Percent
(Dollars in of Total
thousands)
<S> <C> <C>
7.00% and Under $145,184 9.0%
7.01% to 8.00% 939,774 58.5
8.01% to 9.00% 423,243 26.3
9.01% to 10.00% 74,804 4.7
Over 10.00% 24,727 1.5
Total Servicing Portfolio $1,607,732 100.0%
</TABLE>
The weighted average interest rate of the Company's servicing portfolio was
7.70% at March 31, 1999 as compared with 7.93% at March 31, 1998.
At March 31, 1999, approximately 54% of the Company's mortgage servicing
portfolio was covered by servicing agreements pursuant to the mortgage-backed
securities programs of GNMA. Under these agreements, the Company may be
required to advance funds temporarily to make scheduled payments of principal,
interest, taxes or insurance if the borrower fails to make such payments.
Although the Company cannot charge any interest on such advanced funds, the
Company typically recovers the advances within five to ten days upon receipt of
the borrower's payment, or in the absence of such payment, most of the advances
can be recovered through FHA insurance, VA guarantee, FNMA or FHLMC
reimbursement provisions in connection with loan foreclosures. In fiscal year
1999, all advances were covered by working capital and the monthly average
amount of funds advanced by the Company for mortgage payments, taxes, insurance,
VA buydown, foreclosure expenses and non-mandatory early removal of foreclosed
loans (being processed by the Company) from
<PAGE>
GNMA pools amounted to $8,299,000. The total advance and foreclosure losses for
fiscal 1999 were $974,000. The balance of the Company's mortgage servicing
portfolio is covered by servicing agreements that require the Company to make
required loan payments only out of funds actually received from borrowers.
The following table sets forth the geographic distribution of the Company's
loan servicing portfolio at March 31, 1999.
<TABLE>
<CAPTION>
Principal
Percentage Balance Serviced Percentage
Number of of No. of (Dollars in of Principal
State Loans Serviced Loans Serviced thousands) Balance Serviced
<S> <C> <C> <C> <C>
California 15,649 88.5% $1,454,466 90.5%
Nevada 751 4.2 56,600 3.5
Washington 570 3.2 59,716 3.7
Texas 192 1.1 9,384 0.6
Oregon 124 0.7 12,005 0.7
Colorado 110 0.6 3,403 0.2
Other States 280 1.7 12,158 0.8
Total 17,676 100.0% $1,607,732 100.0%
</TABLE>
The Company believes that its mortgage servicing portfolio (net of
capitalized mortgage servicing assets) has significant market value, although
approximately fifty percent of the mortgage servicing portfolio has not been
treated as an asset for financial statement reporting purposes. The two primary
risks to mortgage servicing portfolio revenue (and therefore mortgage servicing
portfolio market value) are loan prepayments and loan foreclosures which
prematurely eliminate or reduce future loan servicing fees. The prepayment risk
to the mortgage servicing portfolio increases as (i) mortgage interest rates
decline, and (ii) the percentage of adjustable rate mortgages ("ARM's") in a
servicing portfolio increases because ARM's historically are prepaid more
frequently than fixed-rate loans. The Company believes that the composition of
its mortgage servicing portfolio, as measured by interest rates, compares
favorably to that of the mortgage banking industry as a whole. At March 31,
1999, ARM's represented approximately 12% of the aggregate dollar amount of
loans in the Company's mortgage servicing portfolio. At March 31, 1999, 0.39%
of the number of mortgage loans in the Company's mortgage servicing portfolio
were more than 90 days past due, and 0.79% of the number of mortgage loans were
in foreclosure.
First Mortgage believes that its loan servicing and loan origination
operations reduce the risk of fluctuating interest rates. As interest rates
increase, loan origination income may decrease; however, this decline is
mitigated by the stabilization of loan administration income generated by the
Company's mortgage servicing portfolio as a result of diminished loan
prepayments. Conversely, as interest rates decline, increased loan prepayments
may reduce loan administration income, but this reduction tends to be offset by
increased loan origination fees due to increased loan production. The Company
can also reduce the risk to its loan servicing and origination revenue resulting
from interest rate fluctuations by selling mortgage loans for a premium on a
servicing-released basis when interest rates are high, and by increasing its
solicitation of refinance loans when interest rates are low.
<PAGE>
Seasonality
The mortgage banking industry is usually subject to seasonal trends. These
trends reflect the general pattern of nationwide home sales. Such sales
typically peak during the spring and summer seasons and decline to lower levels
from mid-November through January.
Competition
The mortgage banking business is highly competitive and fragmented. First
Mortgage Corporation competes with other mortgage bankers, state and national
banks, savings and loan associations, mortgage brokers, credit unions and others
for mortgage loans. The record refinance surges of 1993 and 1998 led to a rapid
expansion of mortgage providers, resulting in industry over-capacity whenever
interest rates increase and the volume of new mortgage loans declines
accordingly. Estimated U.S. mortgage origination volume rose to $1.5 trillion
in calendar 1998 from $1.1 trillion in calendar 1997. Even so, during fiscal
1999 competition for mortgage loans remained intense due to the expanded
aggressiveness of major banks. Banks have an advantage over others in that they
can price their mortgages at their lower short term cost of funds. And, due to
their strengthened capital position which increases their capacity to hold
portfolio loans, banks have become extremely aggressive with mortgage price
discounting in order to expand their mortgage base as a platform from which to
cross-sell other bank products. The result is a competitive market wherein
major banks, through their mortgage banking subsidiaries, are more aggressively
pricing their loans than the traditional secondary market agencies such as FHLMC
and FNMA. Recognizing this, the Company has correspondent relationships with
several of the most aggressive major banks. The Company also competes by
operating only in strategically selected geographic markets, motivating its
sales force through incentive compensation based on loan origination volume,
providing prompt and comprehensive service and otherwise maintaining strong
professional relationships with realtors, developers and customers.
Regulation
First Mortgage is an FHA-approved Direct Endorsement Mortgagee, a VA
Automatic Lender, an approved issuer and servicer under the GNMA mortgage-backed
securities program, and an approved seller and servicer with the FNMA, FHLMC,
the California Housing Financing Agency, the California Public Employees
Retirement System and several private mortgage-backed securities conduit
companies. As such, the Company's mortgage banking business is subject to the
periodic reporting, examination and auditing requirements and other rules and
regulations of such governmental agencies with respect to its net worth and its
mortgage loan origination, processing, sales and servicing. These rules and
regulations, among other things, prohibit race, age and sex discrimination,
provide for inspections and appraisals of properties, require credit reports on
prospective borrowers, fix (in some cases) maximum interest rates, fees and loan
amounts, and mandate the annual submission of audited financial statements.
<PAGE>
First Mortgage's loan origination activities are also subject to such federal
laws as the Equal Credit Opportunity Act, the Truth-In-Lending Act, the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. Furthermore, the Company
is licensed to do business in California, Nevada, Oregon, Washington and Texas,
and its mortgage banking operations are subject to the laws of those states,
including those prohibiting usury. The Company is licensed by the California
Department of Corporations as a Residential Mortgage Lender.
The Company employs a full-time compliance officer and Quality Assurance
staff to monitor and audit compliance with all regulatory requirements.
Employees
As of March 31, 1999, First Mortgage employed 206 persons. None of the
Company's employees is represented by a labor union, and the Company believes
that it has an excellent relationship with its employees.
ITEM 2. PROPERTIES
First Mortgage's executive and administrative headquarters are located in a
22,000 square foot office building at 3230 Fallow Field Drive, Diamond Bar,
California 91765. The entire building is leased by the Company from Fin-West
Group ("Fin-West"), an affiliated corporation which owns 89.8% of the Company's
outstanding common stock. Before expiration of the lease on December 31, 1997,
the Company negotiated an extension to the existing lease allowing the leasee to
renew the lease three times, one additional year each time, starting
January 1, 1998. The monthly rental payment will be $22,000 effective April 1,
1998. The monthly rental payment for any lease extension is subject to increase
(but not decrease) upon any such extension. Such payments may not exceed the
fair market rent for comparable facilities at the time of the extension. The
Company pays for all property taxes, repairs, insurance and utility services for
the entire building. The Company believes the current facilities are adequate
to meet foreseeable future needs.
The Company's branch offices each are leased at varying rates and each office
contains approximately 1,000 to 2,000 square feet. For the year ended March 31,
1999, the annual aggregate rental expense for the administrative headquarters
and all branch offices was approximately $532,000. Many of the Company's branch
offices are on month-to-month or one year short-term leases.
ITEM 3. LEGAL PROCEEDINGS
First Mortgage is currently a defendant in certain litigation arising in the
normal course of its business. In the opinion of the Company, any potential
liability with respect to such legal actions will not, in the aggregate, be
material to the Company's financial position, results of operations or cash
flows.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock was traded on the NASDAQ National Market System
(the "NASDAQ System") under the symbol FMOR from April 20, 1992 to April 24,
1997, and is presently traded on the Over The Counter ("OTC") Bulletin Board
under the same trading symbol. The reason behind the change was that the
Company no longer retains two registered and active market makers as required by
NASDAQ.
The following table sets forth the high and low bid quotations per share of
the Company's Common Stock during each of the quarterly periods indicated below.
<TABLE>
<CAPTION>
Fiscal 1999: High Low
<S> <C> <C>
First quarter $ 4.500 $ 4.000
Second quarter 4.625 4.313
Third quarter 4.375 3.000
Fourth quarter 4.750 3.250
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998: High Low
<S> <C> <C>
First quarter $ 4.125 $ 3.250
Second quarter 4.250 2.250
Third quarter 3.875 3.375
Fourth quarter 3.813 3.563
</TABLE>
As of March 31, 1999, there were 31 shareholders of record of the Company's
Common Stock.
No cash dividends have been paid on the Company's common stock. The Company
presently intends to retain all earnings for use in its business and therefore
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The Company's warehousing lines of credit with Bank of America and
Sanwa Bank restrict the Company's ability to pay dividends or to make other
distributions with respect to the Common Stock. Any decision to pay cash
dividends on the Common Stock will depend on the Company's circumstances at the
time, including the profitability of operations, availability of cash, lines of
credit restrictions and other factors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Loan origination income $ 3,857 $ 3,303 $ 3,426 $ 3,397 $ 2,523
Loan servicing income 7,761 7,628 7,137 6,787 6,695
Gain on sale of mortgage
loans 18,191 7,611 5,374 7,116 819
Interest income 3,862 2,527 2,165 2,105 2,866
Other income 3 5 2 29 43
Total revenues 33,674 21,074 18,104 19,434 12,946
Expenses:
Compensation and benefits 11,407 8,282 8,217 7,752 6,899
General and administrative
expenses 8,782 6,285 5,708 5,616 5,280
Amortization of capitalized
servicing rights 4,061 3,174 1,563 878 314
Interest expense 1,275 701 690 786 1,309
Total expenses 25,525 18,442 16,178 15,032 13,802
Income (loss) before income taxes 8,149 2,632 1,926 4,402 (856)
Income tax expense (benefit) 3,375 1,101 811 1,833 (308)
Net income (loss) $ 4,774 $ 1,531 $ 1,115 $ 2,569 $ (548)
Basic and diluted earnings
(loss) per share $ 0.87 $ 0.26 $ 0.19 $ 0.44 $ (0.09)
Weighted average shares outstanding 5,507 5,848 5,873 5,883 5,947
Operating Data:
Loans originated and purchased $866,641 $476,986 $353,411 $330,896 $174,544
Loans serviced (end of year) 1,607,732 1,666,851 1,683,652 1,569,705 1,533,888
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Mortgage loans held for sale $45,463 $53,052 $27,286 $19,879 $25,329
Capitalized mortgage servicing rights 12,475 7,490 6,709 3,547 1,230
Total assets 81,861 80,445 50,923 51,131 42,296
Notes and sight drafts payable 44,919 49,799 22,626 24,852 19,698
Stockholders' equity 29,730 26,995 25,648 24,647 22,078
</TABLE>
No cash dividends were paid on common shares for any period.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
At the beginning of fiscal year 1999, First Mortgage Corporation decided to
continue its growth strategy of simultaneously enhancing and expanding its loan
production capacity and adding as much as was economically feasible to its loan
servicing portfolio.
The Company was largely successful in continuing the strategy. Through its
production expansion plan, new branches were established and originations have
grown. In fiscal year 1999, loan originations and purchases increased by 81.7%
to $866.6 million from $477.0 million in the previous year, in spite of
extremely aggressive competition from other originators. The loan servicing
portfolio declined slightly to $1.608 billion in 1999 compared to $1.667 billion
in 1998, in the face of a significant refinance wave during most of the year.
Net income for fiscal year 1999 increased 211.8% to $4.77 million from $1.53
million a year ago. Compared to fiscal 1998, total revenues rose by 59.8% while
total expenses increased by 38.4%. The earnings in fiscal 1999 were positively
impacted by falling long-term interest rates which boosted both new loan
production (particularly refinancings) and the gain on sale of mortgages in the
secondary markets.
Results of Operations
Revenue
The Company generates revenue primarily from (i) loan origination fees, (ii)
fees received for servicing (i.e., administering) mortgage loans, (iii) net gain
on the sale of mortgage loans in the secondary market and (iv) interest income
received on mortgage loans during the period in which the Company warehouses
loans pending their sale and purchase. Loan origination fees, interest income
and net gain on the sale of mortgage loans are largely transaction oriented and
volume driven. Loan servicing fees constitute a continuing stream of revenue
produced by the portfolio of mortgage loans serviced. The sale of servicing
rights represents a potential revenue source available to the Company at any
time should such need arise.
The following table sets forth, for the periods indicated, the percentage of
the Company's total revenue represented by each source of income:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
<S> <C> <C> <C>
Loan origination income 11.5% 15.7% 18.9%
Loan servicing income 23.0 36.2 39.4
Gain on sale of mortgage loans 54.0 36.1 29.7
Interest income 11.5 12.0 12.0
Total 100.0% 100.0% 100.0%
</TABLE>
<PAGE>
Loan Origination Income. The Company defers immediate recognition of loan
origination fees paid by the borrower for an originated mortgage loan. Instead,
fees and direct loan origination costs are offset and the net amount deferred
until the related loans are sold by the Company. Historically speaking, the
amount of loan origination fee income correlated positively to the volume of
loan origination. Loan origination income showed a modest increase of 16.8% to
$3.86 million in fiscal 1999 from $3.30 million in fiscal 1998, even though loan
production rose by 81.7% from 1998 to 1999. For fiscal year 1998, the loan
origination revenue decreased by 3.6% to $3.30 million from a year ago. This is
due primarily to the higher volume of wholesale and refinance loans, which carry
much lower front-end origination fees.
In recent years, loan origination income does not precisely track loan
origination volume as it used to because a majority of borrowers now elect to
pay slightly higher mortgage rates to reduce some or all of the amount of their
loan origination fees. The Company is then able to obtain a premium upon the
sale of such mortgage loans in the secondary market because of their higher
interest rates, and those premiums are reflected in the gain on sale of mortgage
loans.
Loan Servicing Income. Loan servicing income represents loan servicing fees,
late charges and other fees earned by the Company for administering loans on
behalf of permanent investors. The Company's annual loan servicing fee for
mortgage loans ranges from 0.25% to 1.5% of the principal amount of the loan
serviced depending on the type of mortgage loan, and on average is approximately
0.40% net of amortization of capitalized service rights and agency guarantee
fees. Loan servicing income increased by 1.7% to $7.76 million in fiscal 1999
from $7.63 million in fiscal 1998, and 6.9% to $7.63 million in fiscal 1998 from
$7.14 million in 1997. Higher servicing income can generally be accounted for
by one or more of the following reasons: growth in the loan servicing
portfolio; higher weighted average servicing fees as the composition of the
servicing portfolio has shifted to administering more FHA-insured loans, and
larger miscellaneous servicing income (such as late charges).
The Company's mortgage servicing portfolio decreased 3.6% to $1.608 billion
in fiscal 1999 from $1.667 billion in 1998. It also experienced a marginal
decrease of one percent to $1.667 billion in fiscal 1998 from the prior year.
The accelerated run-off rate was induced by the lower long-term interest rate
environment, especially during fiscal year 1999.
Gains on Sale of Mortgage Loans. Gains and losses from the sale of mortgage
loans result from: (a) competitive market forces affecting our pricing
structure at the time of origination; and (b) interest rate increases or
decreases between the time that the Company commits to originate or purchase
loans and when the Company commits to sell the loans in the secondary markets.
It is also impacted by two other factors: price subsidies and the recognition of
gains relating to originated mortgage servicing rights ("OMSRs").
Since 1995, price competition has grown increasingly intense. Commercial
banks in particular have been very aggressive with mortgage pricing in order to
capture a higher percentage of the market, with the Company's wholesale
operations particularly
<PAGE>
impacted. The Company therefore is often forced to set prices below the
secondary markets for some of its loan programs. To the extent that the pricing
pressure continues, it will have a negative impact on the Company's future gains
on selling of mortgages.
Gain on mortgage sales increased by 139.0% to $18.19 million in fiscal 1999
from $7.61 million in fiscal 1998. This increase was attributable to the higher
loan originations generated by the Company and the generally declining interest
rate environment which existed during most of fiscal year 1999. Gain on sale of
mortgage loans increased to $7.61 million in fiscal 1998 from $5.37 million in
fiscal 1997. The increase was mostly attributable to falling interest rates and
higher loan originations in the no cost refinance programs during these two
years.
Net Interest Income. Net interest income consists of the difference between
the interest income received on mortgage loans held for sale and the interest
paid by the Company on the short-term bank borrowings used to finance mortgage
loans prior to settlement of purchase. The conditions that affect net interest
income from period to period include the relationship between prevailing
mortgage rates and short-term bank borrowing rates, the mix of fixed-rate and
adjustable rate mortgage loans held for sale and the average holding period
before the loans are sold. The Company also uses cash generated from operations
in lieu of bank borrowings to fund a portion of its mortgage loans to reduce
interest expense and increase net interest income. Interest income earned by
the Company on mortgage loans held for sale has exceeded interest expense on the
Company's short-term bank borrowings in every fiscal year.
The following table sets forth certain data regarding net interest
income:
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income $3,862 $2,527 $2,165
Interest expense 1,275 701 690
Net interest income $2,587 $1,826 $1,475
</TABLE>
Interest income, which consisted mostly of the interest received on mortgage
loans held for sale, increased by 52.8% in fiscal 1999 from fiscal 1998 and by
16.7% in fiscal 1998 from fiscal 1997. The increase was due largely to higher
average mortgage inventory portfolio carried by the Company, most notably in
fiscal 1999, partially offset by lower interest rates.
Interest expense increased by 81.9% in fiscal 1999 from fiscal 1998, due to
higher utilization of warehousing lines.
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
increased 38.4% to $25.53
<PAGE>
million in fiscal 1999 from $18.44 million in fiscal 1998, compared to an
increase of 14.0% to $18.44 million in fiscal 1998 from $16.18 million in fiscal
1997.
As the amount of mortgage loans originated by the Company increases, an
increase in total employee compensation results from additional commissions paid
to loan originators, processors and underwriters and other staff necessitated to
support higher loan origination volume. Compensation and benefits expenses
therefore increased 37.7% to $11.41 million in fiscal 1999 from $8.28 million in
fiscal 1998.
Amortization of capitalized servicing rights in fiscal 1999 increased over
prior years due mainly to the Company's larger investment in mortgage servicing
rights and substantially higher volume of prepayments over the comparable prior
period.
General and administrative expenses increased 39.7% to $8.78 million in
fiscal 1999 from $6.29 million in fiscal 1998, compared to an increase of 10.1%
from fiscal 1997 to fiscal 1998. The increases in these expenses were a direct
result of expansion in loan origination and direct marketing efforts during
fiscal 1999.
Income Taxes
The Company's combined effective federal and state income tax rate was 41.4%,
41.8% and 42.1% for the fiscal years ended March 31, 1999, March 31, 1998 and
March 31, 1997, respectively. The rates differ from the federal statutory rate
of 34% due primarily to state income taxes.
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 March
31, 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
<PAGE>
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 relied on as a forecast of actual results.
Liquidity and Capital Resources
The Company's principal liquidity requirement is the funding of its new
mortgage loans, loan origination expenses, advances of delinquent payments and
escrow balances, and other operating activities. To meet these needs, the
Company relies on warehouse lines of credit with banks, its own capital and cash
flows from operations.
At March 31, 1999, maximum permitted borrowings under the warehouse lines of
credit with two nonaffiliated banks were increased to $105 million from $90
million a year ago, and the amount outstanding was $35.5 million. Borrowings
under these facilities are secured by mortgage loans. The agreements also
contain various covenants, including minimum net worth, current ratio (as
defined), net income, servicing portfolio balances, debt to net worth ratio, and
restrict the Company's ability to pay dividends. Management believes that the
warehouse agreements will be renewed when the current terms expire on September
1, 1999 and August 31, 2000, respectively.
In addition to the warehouse lines of credit, the Company may utilize the
short-term reverse repurchase agreements provided by investment banking firms in
connection with its inventory of mortgage loans and mortgage-backed securities.
These facilities tend to carry lower interest rates and allow the Company to
better utilize its warehouse lines by accelerating the turnover of loans in
inventory.
From April 1, 1998 to March 31, 1999, the Company repurchased in open market
transactions 461,500 shares of its common stock at an aggregate cost of
$2,039,000.
The Company's mortgage servicing portfolio can provide a liquidity resource
since approximately fifty percent of the loan servicing rights are an unrecorded
asset which may be sold. Although the Company does not intend to sell mortgage
servicing rights solely to increase liquidity, the sale of such rights is a
viable source of funds should the need arise.
It is the Company's policy to remain strongly capitalized and conservatively
leveraged. Management believes that its current financing arrangements are
adequate to meet its present operating 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 increase.
Inflation
Inflation may significantly affect the Company's ability to originate loans.
Interest rates typically increase during periods of high inflation and decrease
during periods of low inflation. Generally, the mortgage banking industry has
experienced increased
<PAGE>
origination volume in response to low interest rates and loan originations have
generally decreased during periods of high interest rates. As interest rates
decline, prepayments on the loan servicing portfolio generally increase as
borrowers refinance mortgage loans to take advantage of lower rates. A higher
prepayment rate on loans serviced decreases the value of the Company's loan
servicing portfolio, accelerating amortization of purchased servicing and
decreases the amount of servicing income. As interest rates rise, new loan
originations are likely to fall, but prepayments of existing loans generally
decline and the value of the Company's servicing portfolio and of the escrow
balances collected thereunder may be enhanced.
Recently Issued Financial Accounting Standards
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 hedges 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.
Prospective Trends
Fiscal 1999 was very similar to fiscal 1998 and 1997 and saw more of the same
in terms of competitive forces and industry consolidation. Overall volume of
new mortgage originations, however, increased to record levels during fiscal
1999, enabling the Company to increase its new loan production.
Although the Company does well relative to its mortgage banking peers, the
industry as a whole is suffering from the confluence of two major developments:
the consolidation of the industry and the growing presence of the major
commercial banks in the mortgage arena. The consolidation and now dominant
market share of banks has by itself led to price cutting and reduced operating
margins for all mortgage originators. Furthermore, the American consumer is now
well-tuned to interest rates, and even relatively small movements in rates can
have fairly dramatic effects on new mortgage volume and earnings.
In the second instance, as discussed under Competition on page 13, most of
the major banks continue to be fiercely competitive in pricing mortgage products
and growing their mortgage banking operations. Their present hope that holding
a consumer's mortgage is the gateway to cross-selling many other bank products
has engaged the banks in a virtual price war with one another for those
mortgages. Their <PAGE>
valuation models for loan servicing rights and the resulting downstream impact
on pricing at the origination level, particularly through their wholesale
channel with loan brokers, is having a major impact on the mortgage banking
industry and our ability to compete on the types of mortgage loans most sought-
after by these commercial banks.
The Company's strategy in the face of this is to compete in the channels and
with the products which are not the most sought-after by the commercial bank
giants. Although we will maintain our correspondent relationships with the
major banks who presently have such a strong appetite for certain mortgage
products, our primary emphasis will be on the origination of FHA and VA loans
for which the major banks largely do not compete; to expand our low-cost and
profitable direct marketing operations into other states; and to add other new
non-bank loan products which have more profit potential for the Company. Much
of this strategy has been implemented already with the expansion of our Direct
Marketing channel, and the introduction of home equity loans.
Consistent with this, starting in fiscal 1998 the Company revised its
incentive bonus plan for the majority of its non-sales personnel and management.
Heretofore, the bonus incentives were based upon the volume of loans processed
through the Company, predicated on the long-standing industry practice that
volume equated to profit. But the new reality dictates a strategy based upon
profit, and profit potential, rather than a sheer volume of loans. Volume is
still important, but only if it enhances profit, and the bonus incentives are
now connected directly to the Company's profits. This has been producing
results, as many of our employees and managers come forth with ideas for
reducing expenses and increasing revenue.
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 Year 2000 have been received
and tested. 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. This process will be essentially completed by June 30, 1999.
Additionally, the Company has enrolled 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
<PAGE>
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
$100,000 has been incurred through March 31, 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.
Forward-Looking Statements
From time to time, the Company or its representatives may make forward-
looking statements in this report or elsewhere relating to such matters as
anticipated financial performance, including projections of revenues, expenses,
earnings, liquidity, capital resources or other financial items; business plans,
objectives and prospects; and similar matters. Forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
frequently are identified by the use of terms such as "expect," "believe,"
"estimate," "may," "should," "will" or similar expressions.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the forward-looking statements made by the
Company or its representatives. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following, among other factors: (a) the cyclical financial results
traditionally experienced by the mortgage banking industry, which have been
caused in large part by periodic fluctuations in mortgage interest rates and in
consumer demand for new mortgage loans; (b) the possibility of adverse changes
in the Company's ability to obtain suitable warehousing lines of credit with
which to fund new loans; (c) the possibility of adverse changes in the Company's
ability to sell new mortgage loans in the secondary mortgage market; (d)
increasing competition faced by the Company, particularly from commercial banks;
(e) the possibility of adverse regulatory changes, such as changes in the level
or terms of programs administered by GNMA, FNMA or FHLMC or the FHA or VA; (f)
dependence on existing management; (g) credit risks inherent in the lending
business; and (h) periodic fluctuations in general economic conditions, with
corresponding fluctuations in the Company's ability to originate new mortgage
loans.
<PAGE>
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Disclosure About Market Risk", incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information with respect to this item is set forth in "Index to Financial
Statements".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
* For information called for by Items 10-13, reference is made to the
Company's definitive proxy statement for its annual meeting of shareholders, to
be held on September 22, 1999, which will be filed with the Securities and
Exchange Commission within 120 days after March 31, 1999, and which is
incorporated herein by reference, except that the information included under the
captions "Report of the Compensation Committee on Executive Compensation" and
"Stock Performance Graph" is not incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements
The financial statements that are filed as part of this Annual Report on Form
10-K are set forth in the Index to Financial Statements at page F-1 of this
Annual Report on Form 10-K.
<PAGE>
(b) Reports on Form 8-K
The Company filed no current report on Form 8-K during the quarter ended
March 31, 1999.
(c) Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated by reference herein:
Exhibit
Number Description
3.1 Restated and Amended Articles of Incorporation of the Company (previously
filed with the Securities and Exchange Commission on March 6, 1992 as
Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
3.2 Restated Bylaws of the Company (previously filed with the Securities and
Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File No. 33-45187, and incorporated
herein by reference).
10.1 Credit and Security Agreement dated September 1, 1995, between Bank of
America National Trust and Savings Association and the Company
(previously filed with the Securities and Exchange Commission on June
27, 1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996 and incorporated herein by
reference).
10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September
1, 1995, among Bank of America National Trust and Savings Association
and Bank of America National Trust and Savings Association as agent for
various other lenders and the Company (previously filed with the
Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference).
10.3 Eighth Amendment dated April 30, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.4 Ninth Amendment dated August 17, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
<PAGE>
10.5 Amendments dated April 22, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.6 Amendments dated August 26, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.7 Amendments dated November 5, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.8 Lease dated January 1, 1992, between the Company and Fin-West Group
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.7 to the Company's Registration Statement on Form
S-1, File No. 33-45187, and incorporated herein by reference).
10.9 Lease extension dated December 15, 1998 to Standard Office Lease-Net
dated January 1, 1992 between the Company and Fin-West Group.
10.10 1992 Stock Incentive Plan (previously filed with the Securities and
Exchange Commission on March 6, 1992 as Exhibit 10.8 to Amendment No. 1
to the Company's Registration Statement on Form S-1, File No. 33-45187,
and incorporated herein by reference).
10.11 1993 Stock Option Plan for Non-Employee Directors (previously filed with
the Securities and Exchange Commission on October 25, 1993 as Exhibit
4.6 to the Company's Registration Statement on Form S-8, File No. 33-
70760, and incorporated herein by reference).
10.12 Profit Sharing Plan for Employees of the Fin-West Group, dated April 5,
1990 (previously filed with the Securities and Exchange Commission on
January 21, 1992 as Exhibit 10.9 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
10.13 Fin-West Group 401(k) Savings Plan, dated April 5, 1990 (previously
filed with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.10 to the Company's Registration Statement on Form S-1, File
No. 33-45187, and incorporated herein by reference).
10.14 Defined Contribution Plan and Trust -- Basic Plan Document No. 3
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.11 to the Company's Registration Statement on
Form S-1, File No. 33-45187, and incorporated herein by reference).
<PAGE>
10.15 Employee Pre-Tax Premium Plan of Fin-West Group, a California
corporation, dated January 1, 1990 (previously filed with the Securities
and Exchange Commission on January 21, 1992 as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, File No. 33-45187, and
incorporated herein by reference).
10.16 Renewal of Employment Agreement dated April 30, 1998 between Clement
Ziroli and the Company (previously filed with the Securities and
Exchange Commission on June 29, 1998 as Exhibit 10.18 to the Company's
Annual Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.17 Employment Agreement dated April 30, 1998 between Bruce G. Norman and
the Company (previously filed with the Securities and Exchange
Commission on June 29, 1998 as Exhibit 10.19 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.18 Renewal of Employment Agreement dated April 30, 1998 between Pac W. Dong
and the Company (previously filed with the Securities and Exchange
Commission on June 29, 1998 as Exhibit 10.20 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (included only in the electronic filing).
Exhibits filed herewith or incorporated by reference herein will be furnished
to shareholders of the Company upon written request and payment of a fee of $.20
per page, which fee covers only the Company's reasonable expense in furnishing
such exhibits. Written requests should be addressed to Robyn S. Fredericks,
Secretary, First Mortgage Corporation, 3230 Fallow Field Drive, Diamond Bar,
California 91765.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MORTGAGE CORPORATION
Dated June 25, 1999 By S/Clement Ziroli
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 25, 1999.
By S/Clement Ziroli
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
By S/Pac W. Dong
Pac W. Dong, Director, Chief Financial
Officer, Controller and Executive Vice
President (Principal Financial and
Accounting Officer)
By S/Bruce G. Norman
Bruce G. Norman, Director, President and
Chief Operating Officer.
By S/Harold Harrigian
Harold Harrigian, Director
By S/Robert E. Weiss
Robert E. Weiss, Director
<PAGE>
First Mortgage Corporation
Index to Financial Statements
Report of Independent Auditors F-2
Financial Statements
Balance Sheet as of March 31, 1999 and 1998 F-3
Statement of Income for the years ended March 31, 1999, 1998 and 1997 F-4
Statement of Stockholders' Equity for the years ended March 31, 1999, 1998
and 1997 F-5
Statement of Cash Flows for the years ended March 31, 1999, 1998 and 1997 F-6
Notes to Financial Statements F-7
All other schedules are omitted because they are not required, are not
applicable or because the information is included in the Company's financial
statements or the notes thereto.
<PAGE>
Report of Independent Auditors
Board of Directors
First Mortgage Corporation
We have audited the accompanying balance sheet of First Mortgage Corporation as
of March 31, 1999 and 1998, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Mortgage Corporation at
March 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1999 in conformity
with generally accepted accounting principles.
Orange County, California
June 4, 1999
<PAGE>
First Mortgage Corporation
Balance Sheet
<TABLE>
<CAPTION>
March 31
1999 1998
<S> <C> <C>
Assets
Cash $14,839,000 $ 8,182,000
Mortgage loans held for sale 45,463,000 53,052,000
Other receivables and servicing advances, net 7,378,000 10,566,000
Capitalized servicing rights, net 12,475,000 7,490,000
Property and equipment, net 761,000 664,000
Prepaid expenses and other assets 765,000 361,000
Note receivable, Fin-West - 130,000
Total assets $81,861,000 $80,445,000
Liabilities and stockholders' equity
Liabilities:
Notes payable, banks $35,469,000 $40,427,000
Sight drafts payable 9,450,000 9,372,000
Accounts payable and accrued liabilities 2,967,000 1,392,000
Deferred income taxes 4,065,000 2,259,000
Total liabilities 51,951,000 53,450,000
Commitments and contingencies (Note 12)
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 - 5,347,197
in 1999 and 5,808,697 in 1998 2,924,000 4,963,000
Retained earnings 26,806,000 22,032,000
Total stockholders' equity 29,730,000 26,995,000
Total liabilities and stockholders' equity $81,861,000 $80,445,000
</TABLE>
See accompanying notes.
<PAGE>
First Mortgage Corporation
Statement of Income
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Loan origination income $3,857,000 $3,303,000 $3,426,000
Loan servicing income 7,761,000 7,628,000 7,137,000
Gain on sale of mortgage loans 18,191,000 7,611,000 5,374,000
Interest income 3,862,000 2,527,000 2,165,000
Other income 3,000 5,000 2,000
Total revenues 33,674,000 21,074,000 18,104,000
Expenses:
Compensation and benefits 11,407,000 8,282,000 8,217,000
General and administrative expenses 8,782,000 6,285,000 5,708,000
Amortization of capitalized serving rights 4,061,000 3,174,000 1,563,000
Interest expense 1,275,000 701,000 690,000
Total expenses 25,525,000 18,442,000 16,178,000
Income before income taxes 8,149,000 2,632,000 1,926,000
Income tax expense 3,375,000 1,101,000 811,000
Net income $4,774,000 $1,531,000 $1,115,000
Basic and diluted earnings per share $ .87 $ .26 $ .19
</TABLE>
See accompanying notes.
<PAGE>
First Mortgage Corporation
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common stock Retained
Shares Amount earnings Total
<S> <C> <C> <C> <C>
Balance at March 31, 1996 5,883,117 $5,261,000 $19,386,000 $24,647,000
Net income - - 1,115,000 1,115,000
Repurchase of shares (24,000) (114,000) - (114,000)
Balance at March 31, 1997 5,859,111 5,147,000 20,501,000 25,648,000
Net income - - 1,531,000 1,531,000
Repurchase of shares (50,420) (184,000) - (184,000)
Balance at March 31, 1998 5,808,697 4,963,000 $22,032,000 $26,995,000
Net income - - 4,774,000 4,774,000
Repurchase of shares (461,500) (2,039,000 - (2,039,000
Balance at March 31, 1999 5,347,197 $2,924,000 $26,806,000 $29,730,000
</TABLE>
See accompanying notes.
<PAGE>
First Mortgage Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Operating activities
Net income $4,774,000 $1,531,000 $1,115,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Provision for deferred income taxes 1,806,000 426,000 966,000
Provision for losses on foreclosure (344,000) (459,000) 153,000
Amortization of originated
mortgage servicing rights,
excess service fee and
purchased servicing rights 4,157,000 3,310,000 1,683,000
Depreciation of property and equipment 269,000 220,000 195,000
Originations and purchases of
mortgage loans held for sale (866,641,000) (476,986,000) (353,411,000)
Sales and principal repayments
of mortgage loans held for sale 874,230,000 451,220,000 346,004,000
Change in other receivables and
servicing advances 3,532,000 (484,000) (231,000)
Change in prepaid expenses and other assets (404,000) 185,000 345,000
Change in accounts payable and accrued liabilities 1,575,000 576,000 51,000
Loss (gain) on sale of assets (1,000) - 7,000
Net cash provided by (used in)
operating activities 22,953,000 (20,461,000) (3,123,000)
Investing activities
Sale of commercial paper - - 9,955,000
Originated mortgage servicing rights (9,119,000) (3,436,000) (3,838,000)
Purchase of mortgage servicing rights (23,000) (655,000) (577,000)
Note receivable, Fin-West 130,000 - -
Purchase of property and equipment (369,000) (306,000) (212,000)
Proceeds from sale of assets 4,000 14,000 30,000
Change in due from affiliates - 134,000 60,000
Net cash provided by (used in)
investing activities (9,377,000) (4,249,000) 5,418,000
Financing activities
Change in notes payable, banks (4,958,000) 20,255,000 (481,000)
Change in sight drafts payable 78,000 8,418,000 (1,745,000)
Change in note payable, officer - (1,500,000) -
Repurchase of common stock (2,039,000) (184,000) (114,000)
Net cash provided by (used in)
financing activities (6,919,000) 26,989,000 (2,340,000)
Increase (decrease) in cash 6,657,000 2,279,000 (45,000)
Cash at beginning of year 8,182,000 5,903,000 5,948,000
Cash at end of year $14,839,000 $8,182,000 $5,903,000
</TABLE>
<PAGE>
1. Summary of Significant Accounting Policies
Business and Basis of Presentation
First Mortgage Corporation (the Company) is a mortgage banking company that
originates, purchases, warehouses, sells and services primarily first deed of
trust loans (mortgage loans) for the purchase or refinance of owner-occupied one
- - -to-four family residences through a network of branch offices located in the
states of California, Arizona and Nevada.
Fin-West Group (Fin-West), an affiliated company, owns 89.8% of the Company's
outstanding common stock.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or aggregate market
value. Market value is determined by purchase commitments from investors and
prevailing market prices.
Originated Mortgage Servicing Rights and Purchased Servicing Rights
Originated Mortgage Servicing Rights (OMSR)
In accordance with Accounting for Transfers and Servicing of Financial
Assets and Estinguishments of Liabilities (FAS 125), the Company recognizes
OMSRs as an asset separate from the underlying originated mortgage loan by
allocating the total cost of originating a mortgage loan between the loan
and the servicing right based on their respective fair values. Mortgage
servicing rights are carried at the lower of cost, less accumulated
amortization, or fair value.
FAS 125 requires that a portion of the cost of originating a mortgage loan
be allocated to the mortgage servicing right based on its fair value
relative to the loan as a whole. To determine the fair value of the mortgage
rights created during the year, the Company used quoted market prices of
comparable servicing transactions.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Originated Mortgage Servicing Rights and Purchased Servicing Rights (continued)
Purchased Servicing Rights
The purchase price paid for contractual rights to service mortgage loans
(not exceeding the present value of estimated future net servicing income)
is capitalized and amortized in proportion to, and over, the period in which
estimated servicing revenue is in excess of estimated servicing costs.
The Company evaluates the net realizable value of purchased servicing rights
based on a disaggregation basis based on loan type, loan origination year
and loan interest rate.
Amortization of originated mortgage servicing rights and purchased servicing
rights is based upon estimates of future prepayment rates for the underlying
mortgage loans which, in turn, are affected by changes in general economic
conditions and prevailing interest rates for home mortgages. Prepayment rates
tend to increase (causing faster amortization) as mortgage interest rates
decline, and are inversely affected as mortgage interest rates increase. The
Company adjusts its amortization rates (which consider differences in mortgage
loans including interest rate, loan type and the loan's age or seasoning) as
estimated prepayment rates vary from those originally anticipated.
Servicing Advances
Servicing advances consist of advances and costs incurred by the Company in
connection with the administration of the foreclosure process for loans being
serviced. The majority of these amounts will be received from either the
insuring agency or proceeds of the foreclosure sale. The Company provides a
reserve for the estimated portion of the advances and costs that are not
reimbursable by the insuring agencies.
Loan Origination Fees
Loan origination fees and certain direct loan origination costs for mortgage
loans held for sale are deferred until the related loans are sold.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Loan Origination Fees (continued)
Loan servicing income, which is generally a fee based on a percentage of the
outstanding principal balances of the mortgage loans serviced by the Company (or
by a subservicer where the Company is the master servicer), is recorded as
income as the installment collections on the mortgages are received by the
Company or the subservicer.
Gain on Sale of Mortgage Loans Held for Sale
Gains or losses on the sale of mortgage loans held for sale are recognized at
the date of sale. Included in gain on sale is the estimated present value of any
servicing fees to be received by the Company and included in capitalized
servicing rights.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided using the straight-line method, except
for automobiles, which are being depreciated using the double declining basis,
over the estimated useful lives of the assets which range from three to eight
years. Leasehold improvements are being amortized over the lesser of the
estimated useful lives of the improvements or the lease terms, using the
straight-line method.
Income Taxes
The Company files a separate federal income tax return and is included in the
State of California combined return of Fin-West.
Statement of Cash Flows
The Company paid interest in 1999, 1998 and 1997 of $1,282,000, $540,000 and
$641,000, respectively.
The Company paid income taxes in 1999, 1998 and 1997 of $1,855,000, $615,000 and
$30,000, respectively.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Net Income per Share
As of March 31, 1998, the Company adopted Statement No. 128, Earnings Per
Share, and restated all prior period earnings per share (EPS) data, as required.
Statement No. 128 replaced the presentation of primary and fully diluted EPS
pursuant to APB Opinion No. 15, Earnings Per Share, with the presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period and the
dilutive effect, if any, of stock options and warrants outstanding for the
period.
Use of Estimates in the Preparation of Financial Statements
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.
Current 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 hedges
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, on the earnings and financial position of the Company.
<PAGE>
2. Mortgage Loans Held for Sale
Mortgage loans held for sale consist of the following at March 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Principal balance outstanding $46,575,000 $54,381,000
Loan origination discounts (1,072,000) (1,238,000)
Deferred loan fees (40,000) (91,000)
$45,463,000 $53,052,000
</TABLE>
All mortgage loans held for sale are collateralized by first trust deeds on
underlying real properties located primarily in California and may be used as
collateral for the Company's borrowings.
At March 31, 1999, the Company had short-term commitments amounting to
approximately $9,945,000 to fund mortgage loans subject to credit approval. The
Company generally does not engage in forward delivery contracts to hedge its
portfolio.
3. Mortgage Servicing Assets
Capitalized mortgage servicing assets consist of originated mortgage servicing
rights and purchased servicing rights. Activities are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Beginning balance $7,490,000 $6,709,000
Additions 9,142,000 4,091,000
Amortization and write-offs (4,071,000) (3,247,000)
Impairment (86,000) (63,000)
Ending balance $12,475,000 $7,490,000
</TABLE>
To determine servicing value impairment at the end of the year, the post-
implementation originated servicing portfolio was disaggregated into its
predominant risk characteristics, namely loan type, interest rate and investor
type. These segments of the portfolio were then valued, using quoted market
prices of comparable servicing rights. The calculated value was then compared
with the book value of each segment to determine if a reserve for impairment was
required.
<PAGE>
4. Other Receivables and Servicing Advances
Other receivables and servicing advances consists of the following at March 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Foreclosures and advances on real estate owned $ 5,283,000 $ 8,798,000
Servicing advances 2,485,000 2,518,000
Other 280,000 264,000
Allowance for possible losses (670,000) (1,014,000)
$ 7,378,000 $10,566,000
</TABLE>
5. Property and Equipment
Property and equipment consists of the following at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Furniture and equipment $2,511,000 $2,190,000
Automobiles 137,000 131,000
Leasehold improvements 403,000 395,000
3,051,000 2,716,000
Less accumulated depreciation and amortization (2,290,000) (2,052,000)
$ 761,000 $ 664,000
</TABLE>
<PAGE>
6. Income Taxes
Income tax expense for the years ended March 31, 1999, 1998 and 1997 consists of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $1,270,000 $ 583,000 $(112,000)
State 299,000 92,000 (43,000)
1,569,000 675,000 (155,000)
Deferred:
Federal 1,206,000 224,000 701,000
State 600,000 202,000 265,000
1,806,000 426,000 966,000
$3,375,000 $1,101,000 $ 811,000
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of March 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
State income taxes $ 547,000 $ 190,000
Accrued liabilities 216,000 65,000
Deferred loan fees 18,000 41,000
Provision for foreclosure 168,000 253,000
Purchased servicing rights 379,000 313,000
Mark-to-market adjustments 356,000 128,000
Total deferred tax assets 1,684,000 990,000
Deferred tax liabilities:
Originated mortgage servicing rights (5,517,000) (3,030,000)
Capitalized servicing fees (4,000) (7,000)
Accelerated depreciation (98,000) (88,000)
Other (130,000) (124,000)
Total deferred tax liabilities (5,749,000) (3,249,000)
Net deferred tax liabilities $(4,065,000) $(2,259,000)
</TABLE>
<PAGE>
6. Income Taxes (continued)
Income tax expense computed at the statutory federal income tax rate (34%) and
income tax expense provided in the financial statements differ as follows for
the years ended March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax computed at the statutory rate $2,771,000 $ 899,000 $655,000
State income tax, net of
federal income tax benefit 594,000 194,000 146,000
Other 10,000 8,000 10,000
Income tax expense $3,375,000 $1,101,000 $811,000
</TABLE>
7. Notes Payable, Banks
At March 31, 1999, the Company had two line of credit agreements with banks
which provide for borrowings up to $70,000,000 and $35,000,000 with interest
payable monthly at 1.25% per annum or the prime rate of 7.75% at March 31, 1999,
depending on the level of borrowings and the compensating balances maintained.
Fiduciary funds are used by the Company to satisfy compensating balance
requirements. At March 31, 1999, borrowings under these lines of $35,469,000 are
collateralized by mortgage loans held for sale. The weighted average interest
rate for the fiscal year ended March 31, 1999 was 2.02%.
The lines of credit are subject to renewal on September 1, 1999 and August 31,
2000, respectively. Management believes the line of credit agreements will be
renewed prior to their expiration. Under the credit agreements, the Company must
comply with certain financial and other covenants, including the maintenance of
a minimum net worth, other financial ratios, and a minimum servicing portfolio
size. Further, absent the consent of the lenders, such covenants prohibit the
Company from declaring or paying any dividends on any shares of the Company's
common stock. At March 31, 1999, the Company was in compliance with the
aforementioned loan covenants.
One of the warehousing lines of credit allows the bank to act as an agent on
behalf of the Company and invest in short term, highly liquid investment grade
securities to the extent that the warehouse line is not utilized to fund
mortgage loans. All investment securities are considered to be available for
sale and carried at fair value. As of March 31, 1999 there were no investment
securities purchased under this line.
<PAGE>
8. Related Party Transactions
The Company leases certain premises from Fin-West, at a monthly rental of
$22,000. Total rent expense for these premises amounted to $264,000 for the year
ended March 31, 1999 and $240,000 for each of the years ended March 31, 1998 and
1997.
The Company paid title insurance fees to an affiliated entity of $582,000,
$308,000 and $151,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
9. Loan Servicing
The Company's loan servicing portfolio at March 31, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
GNMA mortgage-backed securities $ 873,235,000 $ 810,304,000
FHLMC 249,624,000 257,448,000
FNMA 165,403,000 185,459,000
Other 319,470,000 413,640,000
$1,607,732,000 $1,666,851,000
</TABLE>
At March 31, 1999 and 1998, the Company subserviced approximately $80,581,000
and $96,708,000, respectively, of mortgage loans for a nonaffiliated company,
which is included above.
Related fiduciary funds held by the Company in noninterest-bearing accounts
totaled approximately $27,467,000 and $31,474,000 at March 31, 1999 and 1998,
respectively. These funds are not included in the accompanying balance sheets.
The Company is required to pay interest equal to 2% per annum of the average
daily balance of certain fiduciary funds to mortgagors.
The Company had insurance coverage for errors and omissions and employee
fidelity in the amount of $2,300,000 at March 31, 1999 and 1998.
<PAGE>
10. Financial Instruments
The Company is a party to financial instruments with off balance sheet risk in
the normal course of business through the origination and sale of mortgage
loans. These financial instruments include mandatory and optional forward
commitments which involve, to varying degrees, elements of credit and interest
rate risk. At any time the risk to the Company , in the event of default by the
purchaser, is the difference between the contract price and current market
value, which amount is a percentage of the outstanding commitments. Historically
the Company has not incurred losses due to the failure or lack of performance of
the counter parties to these commitments.
Realized gains and losses on mandatory and optional delivery forward commitments
are recognized in the period settlement occurs. Unrealized gains and losses on
mandatory forward commitments are included in the lower of cost or market
valuation adjustment to mortgage loans held for sale. Additionally, unrealized
gains and losses on optional delivery forward commitments to which mortgages
have been allocated are included in the lower of cost or market valuation
adjustment to mortgage loans held for sale.
Statement of Financial Accounting Standards No, 107, Disclosure About Fair Value
of Financial Instruments (FAS 107), requires disclosure of fair value
information about all financial instruments held or owned by a company except
for certain excluded instruments and instruments for which it is not practicable
to estimate fair value. At March 31, 1999, the estimated fair value of mortgage
loans held for sale, mortgage servicing rights and notes payable approximated
the net carrying value of such accounts.
11. Profit Sharing Plan
The Company is a participant in a profit-sharing plan maintained by Fin-West,
covering all full-time employees who have completed at least one year of
service. Annual contributions by the Company to the plan are discretionary and
were $150,000, $50,000 and $0 for the years ended March 31, 1999, 1998, and
1997, respectively.
<PAGE>
12. Commitments and Contingencies
Leases
Minimum annual rental payments under operating leases for office space are as
follows:
<TABLE>
<S> <C>
2000 $413,000
2001 108,000
2002 75,000
2003 43,000
2004 29,000
$668,000
</TABLE>
Net rental payments to nonaffiliated entities of approximately $268,000,
$242,000 and $212,000 have been charged to occupancy expense in the accompanying
statements of operations for the years ended March 31, 1999, 1998 and 1997,
respectively.
Litigation
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 Company's financial
position, results of operations or cash flows.
13. Stockholders' Equity
Under the Company's 1992 Stock Incentive Plan, the compensation committee of the
Board of Directors is authorized to grant awards to any officer or employee of
the Company. Awards granted can take the form of incentive stock options,
nonqualified stock options or restricted stock or any combination thereof. A
maximum of 625,000 shares of common stock may be issued under the Plan.
Incentive stock options are granted at a price not less than 100% of the fair
market value at date of grant, except for employees who own shares possessing
greater than 10% of total combined voting power whose grant price shall not be
less than 110% of the fair market value at date of grant. The compensation
committee also determines the exercise price of nonqualified stock options and
the purchase price of restricted stock, provided that the purchase price of
restricted stock may not be less than 25% of its fair market value at the date
of grant. Incentive stock options and nonqualified stock options become
exercisable not less than six months after the date of grant, as determined by
the
<PAGE>
13. Stockholders' Equity (continued)
compensation committee. Options remain exercisable until their specified
expiration date, but the expiration date cannot be more than ten years after the
date of grant for incentive stock options.
The Company also has a 1993 Stock Option Plan for Non-Employee Directors (the
Plan) which provides for an aggregate of 100,000 shares of the Company's common
stock to be available for eligible directors. All options granted under the Plan
are to be nonqualified options with an exercise price equal to 100% of fair
market value of the common stock on the date the option is granted. Each option
granted under the Plan may be exercised in full on the 185th day after the date
of grant and terminates five years from the date of grant. Under the Plan, an
option to purchase 5,750 shares of the Company's common stock has been granted
to each nonemployee director in office on the last business day of each July
beginning in 1993.
The following summarizes stock option activity under both of the Company's stock
plans for the year ended March 31, 1999:
<TABLE>
<CAPTION>
Weighed-
Average
Options Exercise Price Options
March 31,1999 March 31, 1999 March 31,1998
<S> <C> <C> <C>
Options outstanding at
beginning of fiscal year 436,625 $5.09 372,555
Option granted 97,550 $4.43 94,000
Options exercised - -
Options expired (112,025) $6.55 (29,930)
Options outstanding at
end of fiscal year 422,150 $4.54 436,625
Exercise price:
Per share for options
exercised during the
fiscal year n/a n/a
</TABLE>
<PAGE>
13. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Options Options
March 31, 1999 March 31, 1998
<S> <C> <C>
Per share for options outstanding
at end of fiscal year $3.50 - $5.00 $3.50 - $6.80
Weighted average fair value of
options granted $1.51 $1.13
Weighted average contractual life
of option outstanding (in years) 2.2 2.3
</TABLE>
All outstanding options as of March 31, 1999 were exercisable. Options available
for future grants under the plans were 302,850 and 288,375 as of March 31, 1999
and 1998, respectively.
The Company currently follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its stock options. Under APB 25, because the exercise price of
the Company's employee stock options are equal to the underlying stock on the
date of grant, no compensation expense is recognized. The Company intends to
follow the provisions of APB 25 for future years.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123), and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expected life (years) 4.50 4
Interest rate 6.00% 5.50%
Volatility 0.31 0.31
Dividend yield 0.00% 0.00%
</TABLE>
<PAGE>
13. Stockholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The estimated stock-based compensation cost calculated using the assumptions
indicated totaled $83,000 and $59,000 in 1999 and 1998, respectively. The pro
forma net income resulting from the increased compensation cost was $4,691,000
($0.85 per share) and $1,472,000 ($0.25 per share) in 1999 and 1998,
respectively. The effect of stock-based compensation on net income for 1999 and
1998 may not be representative of the effect on pro forma net income in future
years because compensation expense related to grants made prior to 1998 is not
considered.
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Net income $4,774,000 $1,531,000 $1,115,000
Denominator:
Shares used in computing basic
earnings per share 5,506,690 5,847,906 5,872,596
Effect of stock options treated as
equivalents under the treasury stock
method 11,498 1,683 2,065
Denominator for diluted earnings per share 5,518,188 5,849,589 5,874,661
Basic and diluted earnings per share $.87 $.26 $.19
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-70760) pertaining to the First Mortgage Corporation 1992 Stock
Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors and in the
related Prospectus of our report dated June 4, 1999, with respect to the
financial statements of First Mortgage Corporation included in its Annual Report
(Form 10-K) for the year ended March 31, 1999.
Orange County, California
June 25, 1999
<PAGE>
FIRST MORTGAGE CORPORATION
EXHIBIT INDEX
Sequential
Exhibit Page
Number Description of Exhibit Number
3.1 Restated and Amended Articles of Incorporation of the Company (previously
filed with the Securities and Exchange Commission on March 6, 1992 as
Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
3.2 Restated Bylaws of the Company (previously filed with the Securities and
Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File No. 33-45187, and incorporated
herein by reference).
10.1 Credit and Security Agreement dated September 1, 1995, between Bank of
America National Trust and Savings Association and the Company
(previously filed with the Securities and Exchange Commission on June
27, 1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996 and incorporated herein by
reference).
10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September
1, 1995, among Bank of America National Trust and Savings Association
and Bank of America National Trust and Savings Association as agent for
various other lenders and the Company (previously filed with the
Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference).
10.3 Eighth Amendment dated April 30, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.4 Ninth Amendment dated August 17, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.5 Amendments dated April 22, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
<PAGE>
10.6 Amendments dated August 26, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.7 Amendments dated November 5, 1998 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.8 Lease dated January 1, 1992, between the Company and Fin-West Group
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.7 to the Company's Registration Statement on Form
S-1, File No. 33-45187, and incorporated herein by reference).
10.9 Lease extension dated December 15, 1998 to Standard Office Lease-Net
dated January 1, 1992 between the Company and Fin-West Group.
10.10 1992 Stock Incentive Plan (previously filed with the Securities and
Exchange Commission on March 6, 1992 as Exhibit 10.8 to Amendment No. 1
to the Company's Registration Statement on Form S-1, File No. 33-45187,
and incorporated herein by reference).
10.11 1993 Stock Option Plan for Non-Employee Directors (previously filed with
the Securities and Exchange Commission on October 25, 1993 as Exhibit
4.6 to the Company's Registration Statement on Form S-8, File No. 33-
70760, and incorporated herein by reference).
10.12 Profit Sharing Plan for Employees of the Fin-West Group, dated April 5,
1990 (previously filed with the Securities and Exchange Commission on
January 21, 1992 as Exhibit 10.9 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
10.13 Fin-West Group 401(k) Savings Plan, dated April 5, 1990 (previously
filed with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.10 to the Company's Registration Statement on Form S-1, File
No. 33-45187, and incorporated herein by reference).
10.14 Defined Contribution Plan and Trust -- Basic Plan Document No. 3
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.11 to the Company's Registration Statement on
Form S-1, File No. 33-45187, and incorporated herein by reference).
<PAGE>
10.15 Employee Pre-Tax Premium Plan of Fin-West Group, a California
corporation, dated January 1, 1990 (previously filed with the Securities
and Exchange Commission on January 21, 1992 as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, File No. 33-45187, and
incorporated herein by reference).
10.16 Renewal of Employment Agreement dated April 30, 1998 between Clement
Ziroli and the Company (previously filed with the Securities and
Exchange Commission on June 29, 1998 as Exhibit 10.18 to the Company's
Annual Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.17 Employment Agreement dated April 30, 1998 between Bruce G. Norman and
the Company (previously filed with the Securities and Exchange
Commission on June 29, 1998 as Exhibit 10.19 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.18 Renewal of Employment Agreement dated April 30, 1998 between Pac W. Dong
and the Company (previously filed with the Securities and Exchange
Commission on June 29, 1998 as Exhibit 10.20 to the Company's Annual
Report on Form 10K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (included only in the electronic filing).
<PAGE>
Exhibit 10.3
EIGHTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT
This Eighth Amendment to Amended and Restated Mortgage Loan Warehousing
Agreement (the "Amendment") is dated as of April 30, 1998, by and among BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association
("BOA"), and the other banks signatory hereto from time to time (each a "Lender"
and, collectively, the "Lenders"), BOA as agent for the Lenders (in such
capacity, the "Agent") and FIRST MORTGAGE CORPORATION, a California corporation
(the "Company").
RECITALS
A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing
Agreement dated as of September 1, 1995 by and among BOA, the Agent and the
Company (as amended from time to time, the "Agreement"), BOA agreed to extend
credit to the Company on the terms and subject to the conditions set forth
therein. All capitalized terms not otherwise defined herein shall have the
meanings given to such terms in the Agreement.
B. The Company and the Lenders desire to amend the Agreement in certain
respects, all as set forth more particularly herein.
NOW, THEREFORE, in consideration of the foregoing Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Change in Definition of Gestation Advance Sublimit. To reflect the
agreement of the parties to increase the Gestation Advance Sublimit, the
definition of "Gestation Advance Sublimit" in Paragraph 4 of the Third Amendment
is hereby further amended by replacing "10,000,000" with "$25,000,000."
2. Change in Certain Definitions. To reflect the agreement of the
parties, the following definitions set forth in Paragraph 11 of the Agreement
are amended by restating such specified definitions in their respective
entireties as follows:
"Applicable Federal Funds Rate shall mean the Federal Funds Rate plus one and
four-tenths of one percent (1.40%) except that with respect to Gestation
Advances it shall mean (i) the Federal Funds Rate plus three-quarters of one
percent (0.75%) on outstanding Gestation Advance balances up to and including
the Gestation Advance Sublimit and (ii) the Federal Funds Rate plus one percent
(1%) on Gestation Advances in excess of the Gestation Advance Sublimit.
Eurodollar Spread shall mean, with respect to Loans which are made and/or
maintained as Eurodollar Loans, one and four-tenths of one percent (1.40%).
Federal Funds Rate shall mean the rate per annum on overnight Federal funds
transactions with members of the Federal Reserve arranged by Federal funds
brokers, as made available to and quoted by the Agent on the Business Day and at
the time the Regular Advance or the Gestation Advance to be borrowed at a rate
based on the Federal Funds Rate is requested.
<PAGE>
Federal Funds Rate Loans shall mean Regular Advances and/or Gestation Advances
during such time as they are being made and/or maintained at the Applicable
Federal Funds Rate."
3. Reaffirmation of Security Agreement. The Company hereby affirms and
agrees that (a) the execution, delivery and performance by the Company of its
obligations under this Amendment shall not in any way amend, impair, invalidate
or otherwise affect any of the obligations of the Company or the rights of the
Secured Parties under the Security Agreement or any other document or instrument
made or given by the Company in connection therewith, (b) the term "Obligations"
as used in the Security Agreement includes, without limitation, the Obligations
of the Company under the Agreement as amended hereby, and (c) the Security
Agreement remains in full force and effect in that such agreement constitutes a
continuing first priority security interest in and lien upon the Collateral.
4. Effective Date. This Amendment shall be effective as of the date (the
"Effective Date") upon which:
(a) All parties signatory hereto have executed and delivered this Amendment to
the Agent; and
(b) The Agent has received such board resolutions, incumbency certificates and
other additional documentation as it may request in connection herewith.
5. No Other Amendment. Except as expressly amended herein, the Agreement and
the other Loan Documents (as amended from time to time) shall remain in full
force and effect as currently written.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
7. Representations and Warranties. The Company hereby represents and warrants
to the Agent, the Lenders and the Collateral Agent as follows:
(a) The Company has the corporate power and authority and the legal right
to execute, deliver and perform this Amendment and all documents, instruments
and agreements executed and delivered by the Company in connection therewith
(collectively, the "Amendment Documents") and has taken all necessary corporate
action to authorize the execution, delivery and performance of the Amendment
Documents. The Amendment Documents have been duly executed and delivered on
behalf of the Company and constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms.
(b) At and as of the date of execution hereof and at and as of the
Effective Date of this Amendment and both prior to and after giving effect to
the Amendment Documents: (1) the representations and warranties of the Company
contained in the Agreement are accurate and complete in all respects, and (2)
there has not occurred an Event of Default or Potential Default under the
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
FIRST MORTGAGE CORPORATION
A California Corporation
By:
Name: Clement Ziroli
First Mortgage Corporation
3230 Fallowfield Road
Diamond Bar, CA 91765
Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
a national banking association as Agent and Lender
By:
Name: Thomas A. Pizurie
Title: Vice President
<PAGE>
Exhibit 10.4
NINTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT
This Ninth Amendment to Amended and Restated Mortgage Loan Warehousing Agreement
(the "Amendment") is dated as of August 17, 1998, by and among BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("BOA"),
and the other banks signatory hereto from time to time (each a "Lender" and,
collectively, the "Lenders"), BOA as agent for the Lenders (in such capacity,
the "Agent") and FIRST MORTGAGE CORPORATION, a California corporation (the
"Company").
RECITALS
A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing
Agreement dated as of September 1, 1995 by and among BOA, the Agent and the
Company (as amended from time to time, the "Agreement"), BOA agreed to extend
credit to the Company on the terms and subject to the conditions set forth
therein. All capitalized terms not otherwise defined herein shall have the
meanings given to such terms in the Agreement.
B. The Company and the Lenders desire to amend the Agreement in certain
respects, all as set forth more particularly herein.
NOW, THEREFORE, in consideration of the foregoing Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Change in Definition of Maturity Date. To reflect the agreement of the
parties to extend the Maturity Date, the definition of "Maturity Date" in
Paragraph 4 of the Agreement is hereby further amended by replacing "September
1, 1998" with "September 1, 1999."
2. Change in Definition of "Eligible Committed Non-Conforming Mortgage Loan."
Clause (g) of the definition of the term "Eligible Committed Non-Conforming
Mortgage Loan," set forth in Paragraph 11 of the Agreement, is hereby amended to
read in its entirety as follows:
"(g) The Collateral Value of said Mortgage Loan when added to the
Collateral Value of all Eligible Committed Non-Conforming Mortgage Loans
included in the Borrowing Base does not exceed fifty percent (50%) of the Credit
Limit and, if the original principal balance of said Mortgage Loan is greater
than $750,000, the Collateral Value of said Mortgage Loan, when added to the
Collateral Value of all Eligible Committed Non-Conforming Mortgage Loans whose
respective original principal balances are greater than $750,000 and are
included in the Borrowing Base, does not exceed ten percent (10%) of the Credit
Limit; and"
3. Reaffirmation of Security Agreement. The Company hereby affirms and agrees
that (a) the execution, delivery and performance by the Company of its
obligations under this Amendment shall not in any Way amend, impair, invalidate
or otherwise affect any of the obligations of the Company or the rights of the
Secured Parties under the Security Agreement or any other document or instrument
made or given by the Company in connection therewith, (b) the term "Obligations"
as used in the Security Agreement includes, without limitation, the Obligations
of the Company under the Agreement as amended hereby, and (c) the Security
Agreement remains in full force and effect in that such agreement constitutes a
continuing first priority security interest in and lien upon the Collateral.
<PAGE>
4. Effective Date. This Amendment shall be effective as of the date (the
"Effective Date") upon which:
(a) All parties signatory hereto have executed and delivered this Amendment to
the Agent; and
(b) The Agent has received such board resolutions, incumbency certificates and
other additional documentation as it may request in connection herewith.
5. No Other Amendment. Except as expressly amended herein, the Agreement
and the other Loan Documents (as amended from time to time) shall remain in full
force and effect as currently written.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
7. Representations and Warranties. The Company hereby represents and warrants
to the Agent, the Lenders and the Collateral Agent as follows:
(a) The Company has the corporate power and authority and the legal right
to execute, deliver and perform this Amendment and all documents, instruments
and agreements executed and delivered by the Company in connection therewith
(collectively, the "Amendment Documents") and has taken all necessary corporate
action to authorize the execution, delivery and performance of the Amendment
Documents. The Amendment Documents have been duly executed and delivered on
behalf of the Company and constitute legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms.
(b) At and as of the date of execution hereof and at and as of the
Effective Date of this Amendment and both prior to and after giving effect to
the Amendment Documents: (1) the representations and warranties of the Company
contained in the Agreement are accurate and complete in all respects, and (2)
there has not occurred an Event of Default or Potential Default under the
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
FIRST MORTGAGE CORPORATION
A California Corporation
By:
Name: Clement Ziroli
First Mortgage Corporation
3230 Fallowfield Road
Diamond Bar, CA 91765
Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
a national banking association as Agent and Lender
By:
Name: Thomas A. Pizurie
Title: Vice President
<PAGE>
Exhibit 10.5
VARIABLE TERMS LETTER
April 22, 1998
First Mortgage Corporation
3230 Fallow Field Drive
Diamond Bar, California 91765
Attn: Mr. Clement Ziroli
Chief Executive Officer
Gentlemen:
This Variable Terms Letter constitutes the Variable Terms Letter referred to in
and a supplement to that certain Master Mortgage Loan Warehousing and Security
Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain
terms and conditions of the lending arrangements between First Mortgage
Corporation (the "Borrower") and Sanwa Bank California, a California corporation
with a state banking license ("Bank"), set forth therein. Capitalized terms are
used herein (including any exhibits and schedules hereto), unless otherwise
defined herein, with the same meanings as in the Agreement.
Credit Limit: $30,000,000.00.
Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject
to a first priority deed of trust (or mortgage) on the Property, (ii) is covered
by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been
pre-approved by the investor issuing the applicable Take-Out Commitment prior to
the inclusion of such Eligible Mortgage Loan in the Borrowing Base.
Allocation B: Up to $10,000,000.00 of the Credit Limit for
funding conventional Eligible Mortgage Loans conforming to all underwriting and
other requirements of FNMA and FHLMC except as to original principal balance,
each of which Eligible Mortgage Loans: (i) is subject to a first priority deed
of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment
(iii) is of a type of Mortgage Loan which has been pre-approved by the investor
issuing the applicable Take-Out Commitment prior to the inclusion of such
Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal
balance not exceeding $750,000.00. Up to $5,000,000.00 of this $10,000,000.00
sub-limit shall be available for funding conventional Eligible Mortgage Loans
conforming to all underwriting and other requirements of FNMA and FHLMC except
as to original principal balance, each of which Eligible Mortgage Loans: (i) is
subject to a first priority deed of trust (or mortgage) on the Property, (ii) is
covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has
been pre-approved by the investor issuing the applicable Take-Out Commitment
prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base,
(iv) has an original principal balance over $750,000.00 but not exceeding
$1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be
on a case-by-case basis.
Allocation C: Up to $7,000,000.00 of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all
underwriting and other requirements of FNMA and FHLMC except for having an
original principal balance not exceeding $750,000.00, each of which Eligible
Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage)
on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is
submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment.
Allocation D: Up to $5,000,000 of the Credit Limit for funding
include 125% LTV Loans, Title 1 Loans, B&C Loans, and/or Home Equity Line of
Credits Loans PROVIDED that all loans funded under this sublimit must have a
purchase commitment attached at time of funding.
Purchased Loan Sub-limit: Not applicable.
<PAGE>
Pledged Loan Sub-limit: $10,000,000.00.
Permitted Pledge Period: Two business days.
Maturity Date: August 31, 1998.
Prevailing Interest Rate: Prevailing Interest Rate. During the term hereof,
Loans outstanding hereunder shall bear interest at a per annum rate equal to the
Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be
referred to as "Reference Rate Advances"); however, for any monthly period, to
the extent average daily Available Deposits are maintained with Bank by the
Borrower (or by an Affiliate of the Borrower as designated by Bank) during such
monthly period, such loans in an amount equal to such average daily Available
Deposits shall bear interest at a rate of interest equal to one and one quarter
percent (1.25%) per annum (such advances shall hereinafter be referred to as
"Deposit Based Advances").
In addition to Reference Rate Advances and Deposit Based
Advances, the Bank hereby agrees to make Loans to the Borrower, at the
Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time
that the Bank may quote and offer, provided that any such period of time shall
not exceed thirty (30) days (the "Interest Period"), and provided that any such
period of time does not extend beyond the Maturity date for advances in the
minimum amount of $250,000.00, (such advances shall hereinafter be referred to
as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the
Fixed Rate shall be a percentage approximately equivalent to one and one quarter
percent (1.25%) per annum in excess of the rate which the Bank determines in its
sole and absolute discretion to be equal to the Bank's cost of acquiring funds
(adjusted for any and all assessments, surcharges and reserve requirements
pertaining to the borrowing or purchase by the Bank of such funds) in an amount
approximately equivalent to the amount of the relevant Fixed Rate Advance and
for a period of time approximately equal to the relevant Interest Period; The
Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate
Advances, which statement shall be considered to be correct and conclusively
binding on the Borrower unless the Borrower notifies the Bank to the contrary
within 10 days after the Borrower's receipt of any such statement which it deems
to be incorrect.
Notice of Election to Adjust Interest Rate. Upon telephonic
notice which shall be received by the Bank at or before 12:00 p.m. (California
Time) on a business day, the Borrower may elect:
1. That the interest on a Reference Rate Advance or Deposit
Based Advance shall be adjusted to accrued at the Fixed Rate; provided however,
that such notice shall be received by the Bank no later than one business day
prior to the day (which shall be a business day) on which Borrower requests that
interest be adjusted to accrue at the Fixed Rate.
2. That interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Reference Rate; provided, however that such notice shall be received by
the Bank no later than one business day prior to the last day of the Interest
Period pertaining to such Fixed Rate Advance. If the Bank shall not have
received notice as prescribed herein of the Borrower's election that interest on
any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower
shall be deemed to have elected that interest thereon shall be adjusted to
accrue at the Reference Rate upon the expiration of the Interest Period
pertaining to such Fixed Rate Advance.
Prohibition Against Prepayment of Fixed Rate Advances.
Notwithstanding anything to the contrary in the Agreement, no prepayment shall
be made on any Fixed Rate Advance except on a day which is the last day of the
Interest Period pertaining thereto. If the whole of any part of any Fixed Rate
Advance is prepaid by reason of acceleration or otherwise, the Borrower shall,
upon the Bank's request, promptly pay to and indemnify the Bank for all costs
and ny loss (including interest) actually incurred by the Bank and any loss
(including loss of profit resulting from the re-employment of funds) sustained
by the Bank as a consequence of such prepayment.
<PAGE>
Indemnification of Fixed Rate Costs. During any period of time
in which interest on any Fixed Rate Advance is accruing on the basis of the
Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment, reserve, deposit or similar requirements or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any directive or requirement of any regulatory authority
pertaining or relating to funds used by the Bank in quoting and determining the
Fixed Rate.
Conversion from Fixed Rate to Reference Rate. In the event that
the Bank shall at any time determine that the accrual of interest on the basis
of the Fixed Rate (i) is infeasible because the Bank is unable to determine the
Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the amount of the
relevant Balance and for a period of time approximately equal to the relevant
Interest Period; or (ii) is or has become unlawful or infeasible by reason of
the Bank's compliance with any new law, rule, regulation, guideline or order, or
any new interpretation of any present law, rule, regulation, guideline or order,
then the Bank shall give telephonic notice thereof (confirmed in writing) to the
Borrower, in which event any Fixed Rate Advance shall be deemed to be a
Reference Rate Advance and interest shall thereupon immediately accrue at the
Reference Rate.
Contact Office:
Sanwa Bank California
Insurance and Financial Services, LA CBC
601 South Figueroa Street (W8-6)
Los Angeles, CA 90017
Attn: Robinson Kaspar
Funding Account: Account No. 2068-01106
Statement Date: March 31, 1997.
Interim Date: June 30, 1997.
Required Monthly Reports: Bank will have received quarterly by the thirtieth
day of each calendar quarter, each dated as of the last day of the preceding
calendar quarter, (i) an Adjusted Net Worth, Financial Statement and Loan
Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory
Aging Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and
Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing
Delinquency and Closed Loan Production Report in the form of Exhibit J hereto.
With the prior written consent of Bank, any of the above reports may be in a
form otherwise acceptable to Bank.
Required Fees: Collateral Handling Fee: The Borrower agrees to pay
Bank, from time to time promptly upon delivery of a billing statement, a
collateral handling fee in the amount of $10.00 per Mortgage Loan submitted by
the Borrower for inclusion in the Borrowing Base.
Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet
the criteria set forth under Allocation A or Allocation C. 60 days for Eligible
Mortgage Loans which meet the criteria set forth under Allocation B which have
an original principal balance not exceeding $750,000.00. 30 days for Eligible
Mortgage Loans which meet the criteria set forth in Allocation B and have an
original principal balance over $750,000.00 but not exceeding $1,000,000.00.
Minimum Permitted Current Ratio: 1.08 to 1.0.
Minimum GAAP Net Worth: $15,000,000.00.
<PAGE>
Adjusted Net Worth Portfolio Percentage: 1.00%
Minimum Permitted Adjusted Net Worth: $25,000,000.00.
Minimum Permitted Servicing Portfolio: $1,000,000,000.00 on and after the date
of the Agreement.
Maximum Permitted Leverage Ratio: Borrower will not at any time permit the
ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of
(x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt, to exceed
8.0 to 1.0.
Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit
the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the
sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to
exceed 5.0 to 1.0.
Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each
representing a one to four family residential Mortgage Loan, which loan is
insured by the FHA, guaranteed by the VA or conforms to all underwriting and
other requirements of FNMA/FHLMC, except as (i) permitted above in Allocation B
as to original principal balance.
Collateral Value of the Borrowing Base:
(a) As to each Mortgage Loan which is FHA-insured, VA-
guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%) of the lesser of:
(1) the weighted average net unfilled purchase price of all Take-Out Commitments
held by the Borrower under which such Mortgage Loan could be sold (assuming the
simultaneous shipment of all other Mortgage Loans owned by the Borrower) as
represented in the most recent Pipeline Position and Commitment Status Report
submitted to Bank, multiplied by the unpaid principal balance of such Mortgage
Loan, and (2) the unpaid principal balance of such Mortgage Loan.
(b) As to each Mortgage Loan which conforms to all underwriting
and other requirements of FNMA and FHLMC except (A) as to original principal
balance where the original principal balance does not exceed $750,000.00, ninety
- - -five percent (95%) or (B) as to original principal balance where the original
principal balance exceeds $750,000.00 but does not exceed $1,000,000.00, ninety-
five percent (95%) of the lesser of (1) the weighted average net unfilled
purchase price of all Take-Out Commitments held by the Borrower under which such
Mortgage Loan could be sold (assuming the simultaneous shipment of all other
Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline
Position and Commitment Status Report submitted to Bank, multiplied by the
unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal
balance of such Mortgage Loan.
(c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed
or FNMA/FHLMC conforming except that it is not, at the time such Eligible
Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a
Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance
of such Mortgage Loan. Also included are all Mortgage Loans funded under
sublimit "D".
Collateral: The Collateral shall consist of the personal property
described more particularly on the Collateral Schedule attached hereto as
Exhibit E.
Addresses for Purpose of Notice:
The Borrower: Bank:
First Mortgage Corporation Sanwa Bank California
3230 Fallow Field Drive Insurance & Financial Services, LA CBC
Diamond Bar, California 91765 601 South Figueroa Street (W8-6)
Attn: Mr. Clement Ziroli Los Angeles, California 90017
Attn: Mr. Robinson Kaspar
<PAGE>
Exceptions: The following provisions of the Agreement are hereby
modified as follows:
(a) The second sentence of Paragraph I(F) shall be amended in
its entirety to read as follows:
"In addition to all other payment obligations of the
Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be
confirmed in writing) from time to time, the Borrower shall repay to Bank within
three (3) days of Bank's verbal demand (i) the amount by which ninety-seven
(97%) of the aggregate principal amount of Loans outstanding hereunder exceeds
the Fair Market Value of the Borrowing Base."
(b) The words "the failure to comply with which could have a
material adverse affect on the Borrower's business, operations, property or
financial or other condition" are hereby added to the last line of Paragraph
V(C) immediately before the period.
(c) The words "Within ninety (90) days in Paragraph VI(A)(1) are
hereby deleted and replaced with the words "Within one hundred twenty (120)
days".
(d) Paragraph VI(B)(1) shall be amended in its entirety to read
as follows: "Within thirty (30) days after the last day of each quarter, an
Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last
day of such preceding quarter.
(e) Paragraph VI(B)(2) shall be amended in its entirety to read
as follows: "No later than the thirtieth day of each calendar quarter and at
such other times as Bank may reasonably request, each as of the last day of the
immediately preceding calendar quarter: (i) a Pipeline Position Report and (ii)
a Servicing Delinquency and Closed Loan Production Report."
(f) Paragraph VI(B)(3) shall be amended in its entirety to read
as follows: "Promptly, such additional financial and other information,
including but not limited to (i) a Borrowing Base Certificate, and (ii)
Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the
end of each of the Borrower's quarters.
(g) Each of Paragraph VII(D), (F), and (G) are hereby deleted
and replaced with the words "intentionally omitted."
(h) Paragraph VII(E) is hereby amended to read: Borrowers'
payment of dividends may not exceed an amount equal to fifty percent (50%) of
Borrowers' net income (after taxes) on a quarterly basis.
(i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted
and replaced with the word "GAAP".
(j) The words "Servicing Delinquency Report" are hereby deleted
wherever they appear in the Loan Documents and replaced with the words
"Servicing Delinquency and Closed Loan Production Report."
(k) The definition of "Fair Market Value" in Paragraph X shall
be amended in its entirety to read as follows: "shall mean at any date the fair
market value of any Collateral at such date, as determined by Bank using the
FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for
conventional loans and the dealer market sixty (60) day forward rate plus 0.50%
for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder
Financial Information or Telerate Systems, Inc."
(l) Subparagraph (n) of the definition of "Eligible Mortgage
Loan" is hereby deleted and replaced with the following: "(n) The date of the
promissory note is no earlier than thirty days prior to the date said Mortgage
Loan is first included in the Borrowing Base.
(m) Section (c)(3) of the definition of "Tangible Net Worth" in
Paragraph X is hereby deleted and replaced with the following: "(3) loans to,
or investments in, affiliates (with the exception of the Borrower's note
receivable dated February 1, 1991, from Fin-West Group with an existing
principal balance of $250,000 and any renewals or extensions thereof."
<PAGE>
(n) The words "hold Take-Out Commitments in less than an
aggregate amount necessary to provide for the sale of all closed Mortgage Loans
owned by the Company" are hereby deleted and replaced with the words "hold Take-
Out Commitments in less than an aggregate amount necessary to provide for the
sale of all closed Mortgage Loans included in the Borrowing Base less the
aggregate amount of Eligible Mortgage Loans which meet the criteria set forth
under Allocation C.
Additional Requirements The Borrower warrants that is will at all times remain
an approved seller/servicer for each of FNMA and FHLMC.
Notwithstanding any provision herein or under the Agreement to
the contrary, every agreement and warranty of the Borrower herein (including,
without limitation, any of the above additional requirements) shall be deemed to
be an agreement under and pursuant to the Agreement.
Exhibits Attached: A: Form of Promissory Note.
B: Delivery Procedures and exhibits thereto.
C: Certification re Adjusted Net Worth, Etc.
D: Borrowing Base and Inventory Aging Certificate.
E: Collateral Schedule.
F: Loan Request Form.
G: Pipeline Position and Commitment Status Report.
H: Form of Pledge Agreement.
I: Required Collateral Documents.
J: Servicing Delinquency and Closed Loan Production Report.
If the above meets your approval, please so indicate by executing and returning
to Bank the enclosed copy of this Variable Terms Letter.
Very truly yours,
SANWA BANK CALIFORNIA
a California corporation with
a state banking license
By:
Name: Robinson Kaspar
Title: Vice President
AGREED TO AND ACCEPTED as of the
22nd day of April, 1998.
FIRST MORTGAGE CORPORATION,
a California corporation
By:
Name:
Title:
<PAGE>
Exhibit 10.6
VARIABLE TERMS LETTER
August 26, 1998
First Mortgage Corporation
3230 Fallow Field Drive
Diamond Bar, California 91765
Attn: Mr. Clement Ziroli
Chief Executive Officer
Gentlemen:
This Variable Terms Letter constitutes the Variable Terms Letter referred to in
and a supplement to that certain Master Mortgage Loan Warehousing and Security
Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain
terms and conditions of the lending arrangements between First Mortgage
Corporation (the "Borrower") and Sanwa Bank California, a California corporation
with a state banking license ("Bank"), set forth therein. Capitalized terms are
used herein (including any exhibits and schedules hereto), unless otherwise
defined herein, with the same meanings as in the Agreement.
Credit Limit: $30,000,000.00.
Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject
to a first priority deed of trust (or mortgage) on the Property, (ii) is covered
by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been
pre-approved by the investor issuing the applicable Take-Out Commitment prior to
the inclusion of such Eligible Mortgage Loan in the Borrowing Base.
Allocation B: Up to $15,000,000.00 of the Credit Limit for
funding conventional Eligible Mortgage Loans conforming to all underwriting and
other requirements of FNMA and FHLMC except as to original principal balance,
each of which Eligible Mortgage Loans: (i) is subject to a first priority deed
of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment
(iii) is of a type of Mortgage Loan which has been pre-approved by the investor
issuing the applicable Take-Out Commitment prior to the inclusion of such
Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal
balance not exceeding $750,000.00. Up to $5,000,000.00 of this $10,000,000.00
sub-limit shall be available for funding conventional Eligible Mortgage Loans
conforming to all underwriting and other requirements of FNMA and FHLMC except
as to original principal balance, each of which Eligible Mortgage Loans: (i) is
subject to a first priority deed of trust (or mortgage) on the Property, (ii) is
covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has
been pre-approved by the investor issuing the applicable Take-Out Commitment
prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base,
(iv) has an original principal balance over $750,000.00 but not exceeding
$1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be
on a case-by-case basis.
Allocation C: Up to $7,000,000.00 of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all
underwriting and other requirements of FNMA and FHLMC except for having an
original principal balance not exceeding $750,000.00, each of which Eligible
Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage)
on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is
submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment.
Allocation D: Up to $5,000,000 of the Credit Limit for funding
include 125% LTV Loans, Title 1 Loans, B&C Loans, and/or Home Equity Line of
Credits Loans PROVIDED that all loans funded under this sublimit must have a
purchase commitment attached at time of funding.
Purchased Loan Sub-limit: Not applicable.
<PAGE>
Pledged Loan Sub-limit: $10,000,000.00.
Permitted Pledge Period: Two business days.
Maturity Date: August 31, 2000.
Prevailing Interest Rate: Prevailing Interest Rate. During the term hereof,
Loans outstanding hereunder shall bear interest at a per annum rate equal to the
Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be
referred to as "Reference Rate Advances"); however, for any monthly period, to
the extent average daily Available Deposits are maintained with Bank by the
Borrower (or by an Affiliate of the Borrower as designated by Bank) during such
monthly period, such loans in an amount equal to such average daily Available
Deposits shall bear interest at a rate of interest equal to one and one quarter
percent (1.25%) per annum (such advances shall hereinafter be referred to as
"Deposit Based Advances").
In addition to Reference Rate Advances and Deposit Based
Advances, the Bank hereby agrees to make Loans to the Borrower, at the
Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time
that the Bank may quote and offer, provided that any such period of time shall
not exceed thirty (30) days (the "Interest Period"), and provided that any such
period of time does not extend beyond the Maturity date for advances in the
minimum amount of $250,000.00, (such advances shall hereinafter be referred to
as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the
Fixed Rate shall be a percentage approximately equivalent to one and one quarter
percent (1.25%) per annum in excess of the rate which the Bank determines in its
sole and absolute discretion to be equal to the Bank's cost of acquiring funds
(adjusted for any and all assessments, surcharges and reserve requirements
pertaining to the borrowing or purchase by the Bank of such funds) in an amount
approximately equivalent to the amount of the relevant Fixed Rate Advance and
for a period of time approximately equal to the relevant Interest Period; The
Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate
Advances, which statement shall be considered to be correct and conclusively
binding on the Borrower unless the Borrower notifies the Bank to the contrary
within 10 days after the Borrower's receipt of any such statement which it deems
to be incorrect.
Notice of Election to Adjust Interest Rate. Upon telephonic
notice which shall be received by the Bank at or before 12:00 p.m. (California
Time) on a business day, the Borrower may elect:
1. That the interest on a Reference Rate Advance or Deposit
Based Advance shall be adjusted to accrued at the Fixed Rate; provided however,
that such notice shall be received by the Bank no later than one business day
prior to the day (which shall be a business day) on which Borrower requests that
interest be adjusted to accrue at the Fixed Rate.
2. That interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Reference Rate; provided, however that such notice shall be received by
the Bank no later than one business day prior to the last day of the Interest
Period pertaining to such Fixed Rate Advance. If the Bank shall not have
received notice as prescribed herein of the Borrower's election that interest on
any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower
shall be deemed to have elected that interest thereon shall be adjusted to
accrue at the Reference Rate upon the expiration of the Interest Period
pertaining to such Fixed Rate Advance.
Prohibition Against Prepayment of Fixed Rate Advances.
Notwithstanding anything to the contrary in the Agreement, no prepayment shall
be made on any Fixed Rate Advance except on a day which is the last day of the
Interest Period pertaining thereto. If the whole of any part of any Fixed Rate
Advance is prepaid by reason of acceleration or otherwise, the Borrower shall,
upon the Bank's request, promptly pay to and indemnify the Bank for all costs
and ny loss (including interest) actually incurred by the Bank and any loss
(including loss of profit resulting from the re-employment of funds) sustained
by the Bank as a consequence of such prepayment.
<PAGE>
Indemnification of Fixed Rate Costs. During any period of time
in which interest on any Fixed Rate Advance is accruing on the basis of the
Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment, reserve, deposit or similar requirements or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any directive or requirement of any regulatory authority
pertaining or relating to funds used by the Bank in quoting and determining the
Fixed Rate.
Conversion from Fixed Rate to Reference Rate. In the event that
the Bank shall at any time determine that the accrual of interest on the basis
of the Fixed Rate (i) is infeasible because the Bank is unable to determine the
Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the amount of the
relevant Balance and for a period of time approximately equal to the relevant
Interest Period; or (ii) is or has become unlawful or infeasible by reason of
the Bank's compliance with any new law, rule, regulation, guideline or order, or
any new interpretation of any present law, rule, regulation, guideline or order,
then the Bank shall give telephonic notice thereof (confirmed in writing) to the
Borrower, in which event any Fixed Rate Advance shall be deemed to be a
Reference Rate Advance and interest shall thereupon immediately accrue at the
Reference Rate.
Contact Office:
Sanwa Bank California
Insurance and Financial Services, LA CBC
601 South Figueroa Street (W8-6)
Los Angeles, CA 90017
Attn: Robinson Kaspar
Funding Account: Account No. 2068-01106
Statement Date: March 31, 1998.
Interim Date: July 31, 1998.
Required Monthly Reports: Bank will have received quarterly by the thirtieth
day of each calendar quarter, each dated as of the last day of the preceding
calendar quarter, (i) an Adjusted Net Worth, Financial Statement and Loan
Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory
Aging Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and
Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing
Delinquency and Closed Loan Production Report in the form of Exhibit J hereto.
With the prior written consent of Bank, any of the above reports may be in a
form otherwise acceptable to Bank.
Required Fees: Collateral Handling Fee: The Borrower agrees to pay Bank,
from time to time promptly upon delivery of a billing statement, a collateral
handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower
for inclusion in the Borrowing Base.
Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet
the criteria set forth under Allocation A or Allocation C. 60 days for Eligible
Mortgage Loans which meet the criteria set forth under Allocation B which have
an original principal balance not exceeding $750,000.00. 30 days for Eligible
Mortgage Loans which meet the criteria set forth in Allocation B and have an
original principal balance over $750,000.00 but not exceeding $1,000,000.00.
Minimum Permitted Current Ratio: 1.08 to 1.0.
Minimum GAAP Net Worth: $15,000,000.00.
<PAGE>
Adjusted Net Worth Portfolio Percentage: 1.00%
Minimum Permitted Adjusted Net Worth: $25,000,000.00.
Minimum Permitted Servicing Portfolio: $1,000,000,000.00 on and after the date
of the Agreement.
Maximum Permitted Leverage Ratio: Borrower will not at any time permit the
ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of
(x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt, to exceed
8.0 to 1.0.
Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit
the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the
sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to
exceed 5.0 to 1.0.
Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each
represeting a one to four family residential Mortgage Loan, which loan is
insured by the FHA, guaranteed by the VA or conforms to all underwriting and
other requirements of FNMA/FHLMC, except as (i) permitted above in Allocation B
as to original principal balance.
Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is
FHA-insured, VA-guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%)
of the lesser of: (1) the weighted average net unfilled purchase price of all
Take-Out Commitments held by the Borrower under which such Mortgage Loan could
be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by
the Borrower) as represented in the most recent Pipeline Position and Commitment
Status Report submitted to Bank, multiplied by the unpaid principal balance of
such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan.
(b) As to each Mortgage Loan which conforms to all underwriting
and other requirements of FNMA and FHLMC except (A) as to original principal
balance where the original principal balance does not exceed $750,000.00, ninety
- - -eight percent (98%) or (B) as to original principal balance where the original
principal balance exceeds $750,000.00 but does not exceed $1,000,000.00, ninety-
five percent (95%) of the lesser of (1) the weighted average net unfilled
purchase price of all Take-Out Commitments held by the Borrower under which such
Mortgage Loan could be sold (assuming the simultaneous shipment of all other
Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline
Position and Commitment Status Report submitted to Bank, multiplied by the
unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal
balance of such Mortgage Loan.
(c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed
or FNMA/FHLMC conforming except that it is not, at the time such Eligible
Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a
Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance
of such Mortgage Loan. Also included are all Mortgage Loans funded under
sublimit "D".
Collateral: The Collateral shall consist of the personal property
described more particularly on the Collateral Schedule attached hereto as
Exhibit E.
Addresses for Purpose of Notice:
The Borrower: Bank:
First Mortgage Corporation Sanwa Bank California
3230 Fallow Field Drive Insurance & Financial Services, LA CBC
Diamond Bar, California 91765 601 South Figueroa Street(W8-6)
Attn: Mr. Clement Ziroli Los Angeles, California 90017
Attn: Mr. Robinson Kaspar
<PAGE>
Exceptions: The following provisions of the Agreement are hereby
modified as follows:
(a) The second sentence of Paragraph I(F) shall be amended in
its entirety to read as follows:
"In addition to all other payment obligations of the
Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be
confirmed in writing) from time to time, the Borrower shall repay to Bank within
three (3) days of Bank's verbal demand (i) the amount by which ninety-seven
(97%) of the aggregate principal amount of Loans outstanding hereunder exceeds
the Fair Market Value of the Borrowing Base."
(b) The words "the failure to comply with which could have a
material adverse affect on the Borrower's business, operations, property or
financial or other condition" are hereby added to the last line of Paragraph
V(C) immediately before the period.
(c) The words "Within ninety (90) days in Paragraph VI(A)(1) are
hereby deleted and replaced with the words "Within one hundred twenty (120)
days".
(d) Paragraph VI(B)(1) shall be amended in its entirety to read
as follows: "Within thirty (30) days after the last day of each quarter, an
Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last
day of such preceding quarter.
(e) Paragraph VI(B)(2) shall be amended in its entirety to read
as follows: "No later than the thirtieth day of each calendar quarter and at
such other times as Bank may reasonably request, each as of the last day of the
immediately preceding calendar quarter: (i) a Pipeline Position Report and (ii)
a Servicing Delinquency and Closed Loan Production Report."
(f) Paragraph VI(B)(3) shall be amended in its entirety to read
as follows: "Promptly, such additional financial and other information,
including but not limited to (i) a Borrowing Base Certificate, and (ii)
Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the
end of each of the Borrower's quarters.
(g) Each of Paragraph VII(D), (F), and (G) are hereby deleted
and replaced with the words "intentionally omitted."
(h) Paragraph VII(E) is hereby amended to read: Borrowers'
payment of dividends may not exceed an amount equal to fifty percent (50%) of
Borrowers' net income (after taxes) on a quarterly basis.
(i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted
and replaced with the word "GAAP".
(j) The words "Servicing Delinquency Report" are hereby deleted
wherever they appear in the Loan Documents and replaced with the words
"Servicing Delinquency and Closed Loan Production Report."
(k) The definition of "Fair Market Value" in Paragraph X shall
be amended in its entirety to read as follows: "shall mean at any date the fair
market value of any Collateral at such date, as determined by Bank using the
FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for
conventional loans and the dealer market sixty (60) day forward rate plus 0.50%
for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder
Financial Information or Telerate Systems, Inc."
(l) Subparagraph (n) of the definition of "Eligible Mortgage
Loan" is hereby deleted and replaced with the following: "(n) The date of the
promissory note is no earlier than thirty days prior to the date said Mortgage
Loan is first included in the Borrowing Base.
(m) Section (c)(3) of the definition of "Tangible Net Worth" in
Paragraph X is hereby deleted and replaced with the following: "(3) loans to,
or investments in, affiliates (with the exception of the Borrower's note
receivable dated February 1, 1991, from Fin-West Group with an existing
principal balance of $250,000 and any renewals or extensions thereof."
<PAGE>
(n) The words "hold Take-Out Commitments in less than an
aggregate amount necessary to provide for the sale of all closed Mortgage Loans
owned by the Company" are hereby deleted and replaced with the words "hold Take-
Out Commitments in less than an aggregate amount necessary to provide for the
sale of all closed Mortgage Loans included in the Borrowing Base less the
aggregate amount of Eligible Mortgage Loans which meet the criteria set forth
under Allocation C.
Additional Requirements The Borrower warrants that is will at all times remain
an approved seller/servicer for each of FNMA and FHLMC.
Notwithstanding any provision herein or under the Agreement to
the contrary, every agreement and warranty of the Borrower herein (including,
without limitation, any of the above additional requirements) shall be deemed to
be an agreement under and pursuant to the Agreement.
Exhibits Attached: A: Form of Promissory Note.
B: Delivery Procedures and exhibits thereto.
C: Certification re Adjusted Net Worth, Etc.
D: Borrowing Base and Inventory Aging Certificate.
E: Collateral Schedule.
F: Loan Request Form.
G: Pipeline Position and Commitment Status Report.
H: Form of Pledge Agreement.
I: Required Collateral Documents.
J: Servicing Delinquency and Closed Loan Production Report.
If the above meets your approval, please so indicate by executing and returning
to Bank the enclosed copy of this Variable Terms Letter.
Very truly yours,
SANWA BANK CALIFORNIA
a California corporation with
a state banking license
By:
Name: Robinson Kaspar
Title: Vice President
AGREED TO AND ACCEPTED
FIRST MORTGAGE CORPORATION,
a California corporation
By:
Name:
Title:
<PAGE>
RIDER TO Variable Term Letter
This Rider shall be deemed to be subject to the terms of that certain Master
Mortgage Loan Warehousing and Security Agreement (the "Agreement") dated as of
April 30, 1992 by and between Bank and Borrower, as it may be amended from time
to time, and any and all addenda and riders thereto (collectively the
"Agreement). Unless otherwise defined herein, all terms used in this Rider
shall have the same meanings as in the Agreement To the extent that any of the
terms or provisions of this Rider conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
In addition to the covenants contained in Section 6 of the Agreement, Borrower
shall perform all acts reasonably necessary to ensure that Borrower (and any
business in which Borrower holds a substantial interest) and all customers,
suppliers and vendors that are material to Borrower's business become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all of Borrower's systems
and adopting a detailed plan, with itemized budget, for the remediation and
testing of such systems, as well as ascertaining that Borrower's material
customers, suppliers and vendors are taking all appropriate steps to become Year
2000 Compliant on a timely basis. For the purposes here-of, "Year 2000
Compliant" shall mean, in regard to any entity, that all software, hardware,
firmware, equipment, goods or systems, utilized by and material to the business
operations or financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000. Borrower shall
immediately, upon request, provide Bank with such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from time to
time require.
Except as specifically provided in this Rider, all other terms, conditions and
covenants contained in the Agreement shall remain unchanged and shall continue
in full force and effect.
IN S WHEREOF, this Rider has been executed by the parties hereto as of the date
first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA
By: By:
(Name/Title) (Title)
<PAGE>
Exhibit 10.7
VARIABLE TERMS LETTER
November 5, 1998
First Mortgage Corporation
3230 Fallow Field Drive
Diamond Bar, California 91765
Attn: Mr. Clement Ziroli
Chief Executive Officer
Gentlemen:
This Variable Terms Letter constitutes the Variable Terms Letter referred to in
and a supplement to that certain Master Mortgage Loan Warehousing and Security
Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain
terms and conditions of the lending arrangements between First Mortgage
Corporation (the "Borrower") and Sanwa Bank California, a California corporation
with a state banking license ("Bank"), set forth therein. Capitalized terms are
used herein (including any exhibits and schedules hereto), unless otherwise
defined herein, with the same meanings as in the Agreement.
Credit Limit: $35,000,000.00.
Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject
to a first priority deed of trust (or mortgage) on the Property, (ii) is covered
by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been
pre-approved by the investor issuing the applicable Take-Out Commitment prior to
the inclusion of such Eligible Mortgage Loan in the Borrowing Base.
Allocation B: Up to $15,000,000.00 of the Credit Limit for
funding conventional Eligible Mortgage Loans conforming to all underwriting and
other requirements of FNMA and FHLMC except as to original principal balance,
each of which Eligible Mortgage Loans: (i) is subject to a first priority deed
of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment
(iii) is of a type of Mortgage Loan which has been pre-approved by the investor
issuing the applicable Take-Out Commitment prior to the inclusion of such
Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal
balance not exceeding $750,000.00. Up to $5,000,000.00 of this $10,000,000.00
sub-limit shall be available for funding conventional Eligible Mortgage Loans
conforming to all underwriting and other requirements of FNMA and FHLMC except
as to original principal balance, each of which Eligible Mortgage Loans: (i) is
subject to a first priority deed of trust (or mortgage) on the Property, (ii) is
covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has
been pre-approved by the investor issuing the applicable Take-Out Commitment
prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base,
(iv) has an original principal balance over $750,000.00 but not exceeding
$1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be
on a case-by-case basis.
Allocation C: Up to $7,000,000.00 of the Credit Limit for
funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional
Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all
underwriting and other requirements of FNMA and FHLMC except for having an
original principal balance not exceeding $750,000.00, each of which Eligible
Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage)
on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is
submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment.
Allocation D: Up to $5,000,000 of the Credit Limit for funding
include 125% LTV Loans, Title 1 Loans, B&C Loans, and/or Home Equity Line of
Credits Loans PROVIDED that all loans funded under this sublimit must have a
purchase commitment attached at time of funding.
<PAGE>
Purchased Loan Sub-limit: Not applicable.
Pledged Loan Sub-limit: $10,000,000.00.
Permitted Pledge Period: Two business days.
Maturity Date: August 31, 2000.
Prevailing Interest Rate: Prevailing Interest Rate. During the term hereof,
Loans outstanding hereunder shall bear interest at a per annum rate equal to the
Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be
referred to as "Reference Rate Advances"); however, for any monthly period, to
the extent average daily Available Deposits are maintained with Bank by the
Borrower (or by an Affiliate of the Borrower as designated by Bank) during such
monthly period, such loans in an amount equal to such average daily Available
Deposits shall bear interest at a rate of interest equal to one and one quarter
percent (1.25%) per annum (such advances shall hereinafter be referred to as
"Deposit Based Advances").
In addition to Reference Rate Advances and Deposit Based
Advances, the Bank hereby agrees to make Loans to the Borrower, at the
Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time
that the Bank may quote and offer, provided that any such period of time shall
not exceed thirty (30) days (the "Interest Period"), and provided that any such
period of time does not extend beyond the Maturity date for advances in the
minimum amount of $250,000.00, (such advances shall hereinafter be referred to
as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the
Fixed Rate shall be a percentage approximately equivalent to one and one quarter
percent (1.25%) per annum in excess of the rate which the Bank determines in its
sole and absolute discretion to be equal to the Bank's cost of acquiring funds
(adjusted for any and all assessments, surcharges and reserve requirements
pertaining to the borrowing or purchase by the Bank of such funds) in an amount
approximately equivalent to the amount of the relevant Fixed Rate Advance and
for a period of time approximately equal to the relevant Interest Period; The
Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate
Advances, which statement shall be considered to be correct and conclusively
binding on the Borrower unless the Borrower notifies the Bank to the contrary
within 10 days after the Borrower's receipt of any such statement which it deems
to be incorrect.
Notice of Election to Adjust Interest Rate. Upon telephonic
notice which shall be received by the Bank at or before 12:00 p.m. (California
Time) on a business day, the Borrower may elect:
1. That the interest on a Reference Rate Advance or Deposit
Based Advance shall be adjusted to accrued at the Fixed Rate; provided however,
that such notice shall be received by the Bank no later than one business day
prior to the day (which shall be a business day) on which Borrower requests that
interest be adjusted to accrue at the Fixed Rate.
2. That interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Reference Rate; provided, however that such notice shall be received by
the Bank no later than one business day prior to the last day of the Interest
Period pertaining to such Fixed Rate Advance. If the Bank shall not have
received notice as prescribed herein of the Borrower's election that interest on
any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower
shall be deemed to have elected that interest thereon shall be adjusted to
accrue at the Reference Rate upon the expiration of the Interest Period
pertaining to such Fixed Rate Advance.
Prohibition Against Prepayment of Fixed Rate Advances.
Notwithstanding anything to the contrary in the Agreement, no prepayment shall
be made on any Fixed Rate Advance except on a day which is the last day of the
Interest Period pertaining thereto. If the whole of any part of any Fixed Rate
Advance is prepaid by reason of acceleration or otherwise, the Borrower shall,
upon the Bank's request, promptly pay to and indemnify the Bank for all costs
and ny loss (including interest) actually incurred by the Bank and any loss
(including loss of profit resulting from the re-employment of funds) sustained
by the Bank as a consequence of such prepayment.
<PAGE>
Indemnification of Fixed Rate Costs. During any period of time
in which interest on any Fixed Rate Advance is accruing on the basis of the
Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and
reimburse the Bank for all costs incurred and payments made by the Bank by
reason of any future assessment, reserve, deposit or similar requirements or any
surcharge, tax or fee imposed upon the Bank or as a result of the Bank's
compliance with any directive or requirement of any regulatory authority
pertaining or relating to funds used by the Bank in quoting and determining the
Fixed Rate.
Conversion from Fixed Rate to Reference Rate. In the event that
the Bank shall at any time determine that the accrual of interest on the basis
of the Fixed Rate (i) is infeasible because the Bank is unable to determine the
Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the amount of the
relevant Balance and for a period of time approximately equal to the relevant
Interest Period; or (ii) is or has become unlawful or infeasible by reason of
the Bank's compliance with any new law, rule, regulation, guideline or order, or
any new interpretation of any present law, rule, regulation, guideline or order,
then the Bank shall give telephonic notice thereof (confirmed in writing) to the
Borrower, in which event any Fixed Rate Advance shall be deemed to be a
Reference Rate Advance and interest shall thereupon immediately accrue at the
Reference Rate.
Contact Office:
Sanwa Bank California
Insurance and Financial Services, LA CBC
601 South Figueroa Street (W8-6)
Los Angeles, CA 90017
Attn: Robinson Kaspar
Funding Account: Account No. 2068-01106
Statement Date: March 31, 1998.
Interim Date: September 30, 1998.
Required Monthly Reports: Bank will have received quarterly by the thirtieth
day of each calendar quarter, each dated as of the last day of the preceding
calendar quarter, (i) an Adjusted Net Worth, Financial Statement and Loan
Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory
Aging Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and
Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing
Delinquency and Closed Loan Production Report in the form of Exhibit J hereto.
With the prior written consent of Bank, any of the above reports may be in a
form otherwise acceptable to Bank.
Required Fees: Collateral Handling Fee: The Borrower agrees to pay Bank,
from time to time promptly upon delivery of a billing statement, a collateral
handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower
for inclusion in the Borrowing Base.
Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet
the criteria set forth under Allocation A or Allocation C. 60 days for Eligible
Mortgage Loans which meet the criteria set forth under Allocation B which have
an original principal balance not exceeding $750,000.00. 30 days for Eligible
Mortgage Loans which meet the criteria set forth in Allocation B and have an
original principal balance over $750,000.00 but not exceeding $1,000,000.00.
Minimum Permitted Current Ratio: 1.08 to 1.0.
Minimum GAAP Net Worth: $15,000,000.00.
<PAGE>
Adjusted Net Worth Portfolio Percentage: 1.00%
Minimum Permitted Adjusted Net Worth: $25,000,000.00.
Minimum Permitted Servicing Portfolio: $1,000,000,000.00 on and after the date
of the Agreement.
Maximum Permitted Leverage Ratio: Borrower will not at any time permit the
ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of
(x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt, to exceed
8.0 to 1.0.
Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit
the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the
sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to
exceed 5.0 to 1.0.
Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each
representing a one to four family residential Mortgage Loan, which loan is
insured by the FHA, guaranteed by the VA or conforms to all underwriting and
other requirements of FNMA/FHLMC, except as (i) permitted above in Allocation B
as to original principal balance.
Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is
FHA-insured, VA-guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%)
of the lesser of: (1) the weighted average net unfilled purchase price of all
Take-Out Commitments held by the Borrower under which such Mortgage Loan could
be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by
the Borrower) as represented in the most recent Pipeline Position and Commitment
Status Report submitted to Bank, multiplied by the unpaid principal balance of
such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan.
(b) As to each Mortgage Loan which conforms to all underwriting
and other requirements of FNMA and FHLMC except (A) as to original principal
balance where the original principal balance does not exceed $750,000.00, ninety
- - -eight percent (98%) or (B) as to original principal balance where the original
principal balance exceeds $750,000.00 but does not exceed $1,000,000.00, ninety-
five percent (95%) of the lesser of (1) the weighted average net unfilled
purchase price of all Take-Out Commitments held by the Borrower under which such
Mortgage Loan could be sold (assuming the simultaneous shipment of all other
Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline
Position and Commitment Status Report submitted to Bank, multiplied by the
unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal
balance of such Mortgage Loan.
(c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed
or FNMA/FHLMC conforming except that it is not, at the time such Eligible
Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a
Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance
of such Mortgage Loan. Also included are all Mortgage Loans funded under
sublimit "D".
Collateral: The Collateral shall consist of the personal property
described more particularly on the Collateral Schedule attached hereto as
Exhibit E.
Addresses for Purpose of Notice:
The Borrower: Bank:
First Mortgage Corporation Sanwa Bank California
3230 Fallow Field Drive Insurance & Financial Services, LA CBC
Diamond Bar, California 91765 601 South Figueroa Street (W8-6)
Attn: Mr. Clement Ziroli Los Angeles, California 90017
Attn: Mr. Robinson Kaspar
<PAGE>
Exceptions: The following provisions of the Agreement are hereby
modified as follows:
(a) The second sentence of Paragraph I(F) shall be amended in
its entirety to read as follows:
"In addition to all other payment obligations of the
Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be
confirmed in writing) from time to time, the Borrower shall repay to Bank within
three (3) days of Bank's verbal demand (i) the amount by which ninety-seven
(97%) of the aggregate principal amount of Loans outstanding hereunder exceeds
the Fair Market Value of the Borrowing Base."
(b) The words "the failure to comply with which could have a
material adverse affect on the Borrower's business, operations, property or
financial or other condition" are hereby added to the last line of Paragraph
V(C) immediately before the period.
(c) The words "Within ninety (90) days in Paragraph VI(A)(1) are
hereby deleted and replaced with the words "Within one hundred twenty (120)
days".
(d) Paragraph VI(B)(1) shall be amended in its entirety to read
as follows: "Within thirty (30) days after the last day of each quarter, an
Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last
day of such preceding quarter.
(e) Paragraph VI(B)(2) shall be amended in its entirety to read
as follows: "No later than the thirtieth day of each calendar quarter and at
such other times as Bank may reasonably request, each as of the last day of the
immediately preceding calendar quarter: (i) a Pipeline Position Report and (ii)
a Servicing Delinquency and Closed Loan Production Report."
(f) Paragraph VI(B)(3) shall be amended in its entirety to read
as follows: "Promptly, such additional financial and other information,
including but not limited to (i) a Borrowing Base Certificate, and (ii)
Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the
end of each of the Borrower's quarters.
(g) Each of Paragraph VII(D), (F), and (G) are hereby deleted
and replaced with the words "intentionally omitted."
(h) Paragraph VII(E) is hereby amended to read: Borrowers'
payment of dividends may not exceed an amount equal to fifty percent (50%) of
Borrowers' net income (after taxes) on a quarterly basis.
(i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted
and replaced with the word "GAAP".
(j) The words "Servicing Delinquency Report" are hereby deleted
wherever they appear in the Loan Documents and replaced with the words
"Servicing Delinquency and Closed Loan Production Report."
(k) The definition of "Fair Market Value" in Paragraph X shall
be amended in its entirety to read as follows: "shall mean at any date the fair
market value of any Collateral at such date, as determined by Bank using the
FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for
conventional loans and the dealer market sixty (60) day forward rate plus 0.50%
for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder
Financial Information or Telerate Systems, Inc."
(l) Subparagraph (n) of the definition of "Eligible Mortgage
Loan" is hereby deleted and replaced with the following: "(n) The date of the
promissory note is no earlier than thirty days prior to the date said Mortgage
Loan is first included in the Borrowing Base.
(m) Section (c)(3) of the definition of "Tangible Net Worth" in
Paragraph X is hereby deleted and replaced with the following: "(3) loans to,
or investments in, affiliates (with the exception of the Borrower's note
receivable dated February 1, 1991, from Fin-West Group with an existing
principal balance of $250,000 and any renewals or extensions thereof."
<PAGE>
(n) The words "hold Take-Out Commitments in less than an
aggregate amount necessary to provide for the sale of all closed Mortgage Loans
owned by the Company" are hereby deleted and replaced with the words "hold Take-
Out Commitments in less than an aggregate amount necessary to provide for the
sale of all closed Mortgage Loans included in the Borrowing Base less the
aggregate amount of Eligible Mortgage Loans which meet the criteria set forth
under Allocation C.
Additional Requirements The Borrower warrants that is will at all times remain
an approved seller/servicer for each of FNMA and FHLMC.
Notwithstanding any provision herein or under the Agreement to
the contrary, every agreement and warranty of the Borrower herein (including,
without limitation, any of the above additional requirements) shall be deemed to
be an agreement under and pursuant to the Agreement.
Exhibits Attached: A: Form of Promissory Note.
B: Delivery Procedures and exhibits thereto.
C: Certification re Adjusted Net Worth, Etc.
D: Borrowing Base and Inventory Aging Certificate.
E: Collateral Schedule.
F: Loan Request Form.
G: Pipeline Position and Commitment Status Report.
H: Form of Pledge Agreement.
I: Required Collateral Documents.
J: Servicing Delinquency and Closed Loan Production Report.
If the above meets your approval, please so indicate by executing and returning
to Bank the enclosed copy of this Variable Terms Letter.
Very truly yours,
SANWA BANK CALIFORNIA
a California corporation with
a state banking license
By:
Name: Robinson Kaspar
Title: Vice President
AGREED TO AND ACCEPTED as of the
22nd day of April, 1998.
FIRST MORTGAGE CORPORATION,
a California corporation
By:
Name:
Title:
<PAGE>
RIDER TO Variable Term Letter
This Rider shall be deemed to be subject to the terms of that certain Master
Mortgage Loan Warehousing and Security Agreement (the "Agreement") dated as of
April 30, 1992 by and between Bank and Borrower, as it may be amended from time
to time, and any and all addenda and riders thereto (collectively the
"Agreement). Unless otherwise defined herein, all terms used in this Rider
shall have the same meanings as in the Agreement To the extent that any of the
terms or provisions of this Rider conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
In addition to the covenants contained in Section 6 of the Agreement, Borrower
shall perform all acts reasonably necessary to ensure that Borrower (and any
business in which Borrower holds a substantial interest) and all customers,
suppliers and vendors that are material to Borrower's business become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all of Borrower's systems
and adopting a detailed plan, with itemized budget, for the remediation and
testing of such systems, as well as ascertaining that Borrower's material
customers, suppliers and vendors are taking all appropriate steps to become Year
2000 Compliant on a timely basis. For the purposes here-of, "Year 2000
Compliant" shall mean, in regard to any entity, that all software, hardware,
firmware, equipment, goods or systems, utilized by and material to the business
operations or financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000. Borrower shall
immediately, upon request, provide Bank with such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from time to
time require.
Except as specifically provided in this Rider, all other terms, conditions and
covenants contained in the Agreement shall remain unchanged and shall continue
in full force and effect.
IN S WHEREOF, this Rider has been executed by the parties hereto as of the date
first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA
By: By:
(Name/Title) (Title)
<TABLE> <S> <C>
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<CIK> 0000883369
<NAME> FIRST MORTGAGE CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,839
<SECURITIES> 0
<RECEIVABLES> 7,378
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,051
<DEPRECIATION> 2,290
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0
0
<COMMON> 2,924
<OTHER-SE> 26,806
<TOTAL-LIABILITY-AND-EQUITY> 81,861
<SALES> 0
<TOTAL-REVENUES> 33,674
<CGS> 0
<TOTAL-COSTS> 25,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,149
<INCOME-TAX> 3,375
<INCOME-CONTINUING> 4,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,774
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