<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to__________________
Commission File Number 0-19847
FIRST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-2960716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3230 Fallow Field Drive
Diamond Bar, California 91765
(Address, including zip code, of principal executive offices)
(909) 595-1996
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO____
As of June 30, 2000, 5,250,697 shares of the registrant's common stock were
outstanding.
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FIRST MORTGAGE CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Item 1. Financial Statements:
Balance Sheet
June 30, 2000 (Unaudited) and March 31, 2000 3
Unaudited Statement of Income
Three Months Ended June 30, 2000 and 1999 4
Unaudited Statement of Cash Flows
Three Months Ended June 30, 2000 and 1999 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST MORTGAGE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
(Unaudited)
<S> <C> <C>
ASSETS
Cash $11,669,000 $11,264,000
Mortgage loans held for sale 72,788,000 67,336,000
Other receivables and servicing
advances 4,452,000 5,558,000
Capitalized servicing rights, net 10,772,000 11,555,000
Property and equipment, net 659,000 581,000
Prepaid expenses and other assets 1,904,000 1,531,000
TOTAL ASSETS $102,244,000 $97,825,000
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Notes payable, banks $42,818,000 $19,291,000
Note payable, other 22,927,000 43,787,000
Sight drafts payable 1,897,000 393,000
Accounts payable and accrued
liabilities 750,000 564,000
Deferred income taxes 5,248,000 4,979,000
Total Liabilities 73,640,000 69,014,000
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares
- None - -
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares
- 5,250,697 at June 30,
2000 and 5,253,197 at
March 31, 2000 2,551,000 2,559,000
Retained earnings 26,053,000 26,252,000
Total Stockholders' Equity 28,604,000 28,811,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $102,244,000 $97,825,000
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30
2000 1999
<S> <C> <C>
REVENUES:
Loan origination income $ 483,000 $ 775,000
Loan servicing income 1,844,000 1,925,000
Gain on sale of mortgage loans 621,000 2,464,000
Interest income 1,263,000 846,000
Other income 3,000 -
Total revenues 4,214,000 6,010,000
EXPENSES:
Compensation and benefits 1,630,000 2,307,000
General and administrative expenses 942,000 1,822,000
Amortization of capitalized
servicing rights 1,256,000 1,157,000
Interest expense 699,000 337,000
Total expenses 4,527,000 5,623,000
INCOME (LOSS) BEFORE INCOME TAXES (313,000) 387,000
INCOME TAX EXPENSE (BENEFITS) (114,000) 161,000
NET INCOME (LOSS) $(199,000) $ 226,000
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE $ (0.04) $ 0.04
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(199,000) $226,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for deferred income taxes 269,000 1,029,000
Provision for losses on foreclosure (96,000) (81,000)
Amortization of capitalized servicing rights 1,256,000 1,157,000
Depreciation and amortization of property and equipment 55,000 70,000
Change in excess service fee 4,000 9,000
Loss on sale of assets 2,000 -
Originations and purchases of mortgage loans held for sale (50,510,000) (116,374,000)
Sales and principal repayments of mortgage loans held for sale 45,058,000 93,852,000
Change in other receivables and servicing advances 1,202,000 238,000
Change in prepaid expenses and other assets (373,000) (768,000)
Change in accounts payable and accrued liabilities 186,000 (2,083,000)
Net cash used in operating activities (3,146,000) (22,725,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights - (27,000)
Originated mortgage servicing rights (477,000) (2,028,000)
Purchase of furniture, equipment and leasehold improvements (136,000) (47,000)
Proceeds from sale of assets 1,000 -
Net cash used in investing activities (612,000) (2,102,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks 23,527,000 3,853,000
Change in sight drafts payable 1,504,000 (8,132,000)
Change in note payable, other (20,860,000) 25,043,000
Repurchase of common stock (8,000) (183,000)
Net cash provided by financing activities 4,163,000 20,581,000
INCREASE (DECREASE) IN CASH 405,000 (4,246,000)
CASH, BEGINNING OF PERIOD 11,264,000 14,839,000
CASH, END OF PERIOD $11,669,000 $10,593,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $593,000 $314,000
Income taxes - -
See accompanying notes
</TABLE>
<PAGE>
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form
10-Q and Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the interim periods have been included.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. In
addition, this document should be read in conjunction with the
financial statements and footnotes included in the Company's annual
report on Form 10-K for fiscal year ended March 31, 2000.
The preparation of the financial statements of the Company requires
management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of the
date of the financial statements. Therefore, actual results could
differ from those estimates.
2. CAPITALIZED SERVICING RIGHTS
Activities in capitalized servicing rights are summarized as follows:
<TABLE>
<CAPTION>
Three Months ended June 30
2000 1999
<S> <C> <C>
Beginning balance $11,555,000 $12,475,000
Additions 477,000 2,055,000
Amortizations and
write offs (1,260,000) (1,166,000)
Ending Balance $10,772,000 $13,364,000
</TABLE>
3. NOTES PAYABLE
At June 30, 2000, the Company had line of credit agreements with two
nonaffiliated banks, which provided for borrowings up to $50,000,000
and $35,000,000 with annual interest payable monthly at 1.25% or the
bank's reference rate, depending on the level of borrowings and the
compensating balances maintained. At June 30, 2000, borrowings under
these lines of $42,818,000 were collateralized by mortgage loans and
mortgage-backed securities held for sale.
The line of credit agreements are subject to renewal on August
31, 2000. Both agreements contain certain requirements, including but
not limited to, the maintenance of minimum net worth, debt to net worth
ratio, current ratio, net income and servicing portfolio, and restrict
the Company's ability to pay dividends. The Company believes its two
lines of credit agreements will be renewed prior to their expiration.
In addition to the warehouse lines of credit, the Company makes use of
the short-term reverse repurchase agreement provided by an investment
banking firm in connection with its inventory of mortgage-backed
securities. This facility tends to carry lower interest rates and also
allows the Company to better utilize its warehousing lines. Borrowings
outstanding under this facility totaled $22,927,000 at June 30, 2000.
<PAGE>
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months ended June 30
2000 1999
<S> <C> <C>
Numerator:
Net income (loss) $(199,000) $ 226,000
Denominator:
Shares used in computing basic earnings per share 5,251,137 5,318,757
Effect of stock options treated as
equivalents under the treasury stock method - 3,722
Denominator for diluted earnings per share 5,251,137 5,322,479
Basic earnings per share $(0.04) $ .04
Diluted earnings per share $(0.04) $ .04
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement provides guidance
for the way public enterprises report information about derivatives and
hedging in annual financial statements and in interim financial
reports. The derivatives and hedging disclosure is required for
financial statements for fiscal years beginning after June 15, 2000.
The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not 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.
6. CONTINGENCIES
The Company is currently a defendant in certain litigation arising in
the ordinary course of business. It is management's opinion that the
outcome of these actions will not have a material effect on the
financial position or results of operations of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q are forward-looking statements,
including those that discuss strategies, goals, outlook, projected
revenues, income, return and other financial measures. These forward-
looking statements are subject to risk and uncertainties that may cause
actual results to differ materially from those contained in the statements,
including the following factors: (i) the direction of interest rates; (ii)
the demand for mortgage credits; (iii) the ability to obtain sufficient
financial sources for liquidity and working capital; (iv) changes in laws
or regulations governing mortgage banking operations; and (v) level of
competition within the mortgage banking industry. In addition, the words
"believe," "expect," "anticipate," "intend," "will" and similar words
identify forward-looking statements in this Form 10-Q.
RESULTS OF OPERATIONS:
Three months ended June 30, 2000 compared to three months ended June 30,
1999.
GENERAL
First Mortgage reported net loss of $199,000 or $0.04 per share for
the quarter ended June 30, 2000, compared to net income of $226,000 or
$0.04 per share for the comparable 1999 quarter. The loss was
attributable to the increase in mortgage interest rates during the
quarter, which resulted in a 56.6% reduction in new loan originations
as compared to the three months ended June 30, 1999. The higher
interest rates also negatively affected origination fees and gain on
sale of mortgages.
REVENUES
For the quarter ended June 30, 2000, the volume of new mortgage loans
closed decreased by 56.6% to $50.5 million from $116.4 million in the
prior year quarter. The decrease is a reflection of higher long-term
interest rates, which significantly decreased the volume of loans in
the market place.
For the three months ended June 30, 2000, loan origination revenue
decreased by 37.7% to $483,000 from $775,000 in the June 30, 1999
quarter, due primarily to a substantial drop in loan production.
As of June 30, 2000, the Company serviced $1.492 billion in loans
compared to $1.604 billion at June 30, 1999, a decrease of 7.0%
compared to the year-ago quarter. The run-off in the servicing
portfolio was due primarily to a sub-servicing client's sale of their
servicing portfolio. Total loan servicing income, including late
charges and other miscellaneous fees, decreased marginally to $1.84
million in the June 2000 quarter, from $1.93 million in the prior year
quarter.
<PAGE>
The following table sets forth certain information pertaining to the
servicing portfolio of the Company for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(Dollars in thousands
except average loan
balance)
<S> <C> <C>
Beginning loan service $1,497,616 $1,527,507
portfolio
Add:Loans originated 50,510 116,374
Less: Prepayment and 56,605 120,799
Amortization
Ending loan servicing 1,491,521 1,523,082
portfolio
Sub-Servicing 487 80,827
Total servicing portfolio $1,492,008 $1,603,909
Average loan balance (end $ 90,849 $ 90,888
of period)
Number of loans 16,423 17,647
</TABLE>
Due to lower new loan production and increases in long-term mortgage
interest rates during the quarter, the gain on sale of mortgage loans
was $621,000 for the three months ended June 30, 2000, a decrease of
74.8% over the same 1999 period.
Interest income, which reflects the interest received on mortgage
loans held for sale, increased 49.3% to $1.26 million for the three
months ended June 30, 2000 from $846,000 for the comparable prior year
quarter. This increase was due primarily to the higher interest rates
and larger volume of loans and mortgage-backed securities held for
sale during the June 2000 quarter as compared to prior year quarter.
EXPENSES
The major components of the Company's total expenses are (i)
compensations and benefits, (ii) general and administrative expenses,
(iii) amortization of capitalized servicing rights, and (iv) interest
expense. Total expenses for the three months ended June 30, 2000
decreased by 19.5% to $4.53 million from the three months ended June
30, 1999. Compensations and benefits were $1.63 million for the June
2000 quarter, a decrease of 29.3% over the year-ago quarter. General
and administrative expense decreased by $880,000, or 48.3% over prior
year. These lower expenses were a result of shrinking production in
the quarter.
Amortization of capitalized servicing rights increased by 8.6% over
prior year quarter due mainly to larger investment and/or higher
prepayment over the prior period.
Interest expense increased to $699,000 for quarter ended June 30, 2000
from $337,000 for the same period in 1999. The increase was due to
the utilization of reverse repo line to finance mortgage-backed
securities in the Company's inventory.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirement is the funding of its
new mortgage loans, loan origination expenses, advances of delinquent
payments and other operating activities. To meet these funding needs,
the Company relies on warehouse lines of credit with banks, short-term
reverse repurchase agreement with investment banking firms, its own
capital, and also cash flows from operations.
<PAGE>
At June 30, 2000, maximum permitted borrowings under the warehouse
line of credit agreements with two nonaffiliated banks totaled $85
million and the amount outstanding was $42.82 million. Borrowings
under these facilities are secured by mortgage loans and GNMA
securities. The agreements contain various covenants, including
minimum net worth, current ratio, net income, servicing portfolio
balances, debt to net worth ratio, and restrict the Company's ability
to pay dividends. The Company was in compliance with all debt
covenants at June 30, 2000. The Company believes that the warehouse
agreements will be renewed when the current terms expire.
In addition to the warehouse lines of credit, the Company makes use of
the short-term reverse repurchase agreements provided by investment
banking firms in connection with its inventory of mortgage-backed
securities. These facilities tend to carry lower interest rates and
also allow the Company to better utilize its warehousing lines.
Borrowings outstanding under these facilities totaled $22.93 million
at June 30, 2000.
In the first three months in fiscal year 2000, the Company repurchased
in open market transactions 2,500 shares of its common stock at an
aggregate cost of $7,500.
The Company had stockholders' equity of $28.60 million at June 30,
2000. Management believes that its current financing arrangements are
adequate to meet its projected operational needs.
DISCLOSURE ABOUT MARKET RISK
The Company manages many risks in its normal course of business,
however, the management considers interest rate risk to be the most
significant market risk which could materially impact its financial
position and results of operations. The movements in interest rates
affect the value of capitalized mortgage servicing rights, the
mortgage inventory held for sale, volume of loan production and total
net interest income earned.
The Company has been managing this risk by striving to balance its
loan origination and loan servicing segments, which generally are
counter cyclical in nature. In an environment of raising interest
rates, loan production will slow down, but the drop in origination
income is mitigated by decrease in the loan prepayment rate in its
servicing portfolio and hence write-offs, amortization and impairment
charges against income will fall. Conversely, the opposite scenario is
true during a period of declining interest rates. The overall
objective is to offset changes in the values of the following items
arising from fluctuations in interest rates, such as the production
pipeline, mortgage loan inventory, mortgage-backed securities held for
sale and capitalized mortgage servicing rights. The Company does not
speculate on the direction or movement of the interest rates.
Based on the information available and on the estimates quantified by
various interest rate calculations, and also based on the interest
environment as of June 30, 2000, the Company believes that a 50 basis
point change in long-term interest rates over a twelve month period,
up or down and all else being constant, would increase or decrease the
Company's gross income by approximately $2 million dollars. These
estimates are limited by the fact that they are performed at a
particular point in time and do not incorporate many other factors
and, consequently, should not be relied on as a forecast of actual
results.
YEAR 2000 ISSUES
The Company's Year 2000 Plan to prepare its entire computer systems to
properly identify and calculate dates beyond December 31, 1999 was
successfully implemented. The Company did not experience any major
Year 2000 related problems during the rollover. All internal systems
and communication interfaces with outside vendors have been
functioning normally without disruptions.
<PAGE>
PROSPECTIVE TRENDS
During the fiscal quarter ended June 30, 2000, long term interest
rates continued to move upwards from the new levels which prevailed
during the comparable period of last fiscal year. Each move up
eliminated more loans eligible for refinancing and since much of our
production was in refinance loans, our new loan production has fallen
accordingly. Compared to last year, our originations fell 56.6%.
On the positive side however, for the first time in many months our
new loan applications in June actually increased by 13.5% over the
year-earlier month, and were at the highest level thus far in the
fiscal year. Although a good sign, it's too soon to tell whether this
is a turning point or only a temporary spike.
Loan applications for the purchase of homes have increased to 77% of
our pipeline, while refinance loans are at a more normal 23%. A
significant part of the purchase loan increase is a result of our
earlier decision to expand our retail branch channel, which is more
heavily directed towards purchases rather than refinances. We now
have ten retail branch locations, compared to five a year ago. We are
seeking opportunities to open others as we continue to expand retail
operations. Other production channels, such as wholesale and direct
marketing, are at low production levels and are likely to remain there
under the current market conditions.
Our experiences over the past year are mirroring the entire industry,
which has been reporting similar results. Loan production is pretty
much at about 50% of the previous year, and there isn't much
likelihood for a change until and unless interest rates retreat from
the present levels. We believe the Company has all of the loan
programs and tools necessary to grow loan production when the interest
rate environment is again favorable. In the meantime our revenues and
operating results will remain adversely affected.
<PAGE>
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports of Form 8-K.
(a) No exhibits are filed with this report.
(b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST MORTGAGE CORPORATION
Date: August 12, 2000 By: S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: August 12, 2000 By: S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer
