<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, 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
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, 2000, based on the
average bid and asked prices on that date reported by the OTC
Bulletin Board, was $1,182,000. 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, 2000, 5,250,697 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 20, 2000 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, 2000.
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FIRST MORTGAGE CORPORATION
A California Corporation
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2000
TABLE OF CONTENTS
Item No. Description Page
PART I
1. Business 1
2. Properties 14
3. Legal Proceedings 15
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 24
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
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
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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 and Arizona. 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 of conventional loans is important to the success of its
business. The origination of
<PAGE>
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 3.5% from $1.667 billion at March 31, 1998 to $1.608
billion at March 31, 1999, and it experienced a drop of 6.6% to
$1.502 billion at March 31, 2000 compared to the previous fiscal
year due to one of the Company's sub-servicing clients selling
its entire portfolio, and the new purchaser did not require any
sub-servicing by the Company.
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-
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value ratios above 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.
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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,
2000 1999 1998
(Dollars in thousands, except average loan balance data)
<S> <C> <C> <C>
FHA/VA Loans:
Number of loans 1,144 3,728 2,115
Volume of loans $110,875 $336,647 $208,927
Percent of total volume 46.4% 38.8% 43.8%
Average loan balance $96,919 $90,302 $98,783
Conventional Conforming
Loans (1):
Number of loans 334 1,153 587
Volume of loans $48,910 $153,971 $71,708
Percent of total volume 20.5% 17.8% 15.0%
Average loan balance $146,437 $133,539 $122,160
Conventional Nonconforming
Loans:
Number of loans 320 1,087 577
Volume of loans $78,941 $376,023 $196,351
Percent of total volume 33.1% 43.4% 41.2%
Average loan balance $246,691 $345,927 $340,296
Total Loans (1):
Number of loans 1,798 5,968 3,279
Volume of loans $238,726 $866,641 $476,986
Average loan balance $132,773 $145,215 $145,467
<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 2000, 1999, and 1998.
</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 2000, 1999 and
1998 was approximately 45%, 81% and 50%, respectively. For
fiscal years 2000, 1999 and 1998, approximately 52%, 44% and 33%,
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.
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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 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.
The Company currently operates a retail network of nine offices
located in Covina, Long Beach, Sacramento, Redding, Garden Grove
and Upland, California, as well as Mesa, Phoenix and Scottsdale,
Arizona. 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
overall profitability, customer and employee relations and the
Company's reputation for providing timely and quality mortgage
banking services.
<PAGE>
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 upturns in
refinance loan production such as we experienced in fiscal year
1999.
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 2000, 1999
and 1998 was 34%, 41% and 55%, 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
and 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 its experience, education
and reputation standards. Wholesale loan appraisals are
independently audited through the Company's quality assurance
department.
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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. Over this
past year, an increasing number of loan applications have been
underwritten through automated underwriting systems, primarily
the Federal National Mortgage Association's (FNMA) Desktop
Underwriter, or the Federal Home Loan Mortgage Corporation's
(FHLMC) Loan Prospector. These systems are rapidly becoming the
industry standard for conventional loan automated underwriting
and have even been adopted for the underwriting of FHA and VA
loans, as well as by many private institutional investors for
loans which do not meet the requirements of FNMA or FHLMC. 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. 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 0.028% in fiscal
2000, 0.061% in fiscal 1999 and 0.074% in fiscal 1998.
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 information, 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
<PAGE>
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 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 $85 million. The Company's current warehousing lines
of credit include a $50 million secured line of credit for 90-day
notes with Bank of America National Trust and Savings Association
("Bank of America") and a $35 million secured line of credit for
90-day notes from Sanwa Bank of California ("Sanwa Bank"). Both
lines are subject to renewal on August 31, 2000. Advances under
the Company's secured lines of credit are collateralized with the
mortgage loans and/or mortgage-backed securities 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.
In addition to the warehouse lines of credit, the Company
utilizes 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 allow the Company to better utilize its
warehouse lines by accelerating the turnover of loans in
inventory.
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
<PAGE>
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 and mortgage-backed
securities held prior to sale which may be financed under
warehousing lines of credit or the reverse repurchase agreements,
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 may attempt to mitigate
interest rate risk by warehousing mortgage loans for relatively
short period of time.
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 2000, approximately 32% of the principal amount of the
Company's mortgage loans were converted into GNMA and FNMA
securities, 9% were sold directly to FNMA or FHLMC for cash and
the remaining 59% 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.
<PAGE>
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 loan
origination market. In fiscal year 2000 and 1999, 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, 2000, approximately 68% 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 0.42% (net of
amortization of capitalized servicing rights and agency
<PAGE>
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; 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,
2000 1999 1998
(Dollars in thousands,
except for number of loans
serviced and average loan balance)
<S> <C> <C> <C>
Beginning loan servicing portfolio $1,527,151 $1,570,143 $1,583,837
Add: Loans originated and purchased 238,726 866,641 476,986
Purchase of servicing 73,563 3,046 6,652
Less: Prepayment of loans (210,817) (487,256) (239,992)
Amortization (23,959) (24,261) (24,979)
Loans sold servicing released (107,048) (401,162) (232,361)
Ending loan servicing portfolio 1,497,616 1,527,151 1,570,143
Sub-servicing 4,476 80,581 96,708
Total servicing portfolio $1,502,092 $1,607,732 $1,666,851
Number of loans serviced (end of year) 16,611 17,676 17,542
Average loan balance (end of year) $90,428 $90,956 $95,021
</TABLE>
The interest rate stratification of the servicing portfolio at
March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Interest Rate Principal Balance Percent of Total
(Dollars in thousands)
<S> <C> <C>
7.00% and Under $168,015 11.2%
7.01% to 8.00% 887,592 59.1
8.01% to 9.00% 371,751 24.7
9.01% to 10.00% 55,892 3.7
Over 10.00% 18,842 1.3
Total Servicing Portfolio $1,502,092 100.0%
</TABLE>
The weighted average interest rate of the Company's servicing
portfolio was 7.63% at March 31, 2000 as compared with 7.70% at
March 31, 1999.
At March 31, 2000, approximately 56% 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
<PAGE>
connection with loan foreclosures. In fiscal year 2000, 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 GNMA pools amounted to $5,496,000. The total
advance and foreclosure losses for fiscal 2000 were $375,000.
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, 2000.
<TABLE>
<CAPTION>
Number of Percentage Principal Percentage
Loans of No. of Balance of Principal
State Serviced Serviced Serviced Balance Serviced
(Dollars in thousands)
<S> <C> <C> <C> <C>
California 14,661 88.3% $1,347,025 89.7%
Nevada 695 4.2 52,072 3.5
Washington 483 2.9 49,103 3.3
Arizona 336 2.0 29,369 2.0
Texas 172 1.0 8,030 0.5
Oregon 105 0.6 10,192 0.7
Other States 159 1.0 6,301 0.3
Total 16,611 100.0% $1,502,092 100.0%
</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,
2000, ARM's represented approximately 10% of the aggregate dollar
amount of loans in the Company's mortgage servicing portfolio.
At March 31, 2000, 0.25% of the number of mortgage loans in the
Company's mortgage servicing portfolio were more than 90 days
past due, and 0.50% of the number of mortgage loans were in
foreclosure.
First Mortgage believes that its loan servicing and loan
origination operations provide a macro hedge and 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
<PAGE>
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.
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 fell 33% to approximately $1.0 trillion in
calendar year 1999 from the record $1.5 trillion in calendar year
1998, and indications are that the volume for calendar year 2000
will fall to perhaps as low as $800 billion, nearly 50% less than
just two years ago. During fiscal year 2000 competition for
mortgage loans intensified due to the shrinking market and 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,
<PAGE>
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.
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, Arizona, 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, 2000, First Mortgage employed 131 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 91.5% of the Company's
outstanding common stock at March 31, 2000. On April 1, 2000,
the Company successfully negotiated a second extension to the
lease originally signed on January 1, 1992. The second extension
allows the Company to have options to extend the lease for three
one-year terms, starting on January 1, 2001. The monthly rental
payment will be $23,000 effective January 1, 2001 and $24,000
effective January 1, 2002. 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 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, 2000, the annual aggregate
rental expense for the administrative headquarters and all branch
offices was approximately $538,000. Many of the Company's branch
offices are on one to two year short-term leases.
<PAGE>
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.
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, 2000.
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 2000: High Low
<S> <C> <C>
First quarter $ 4.750 $ 4.000
Second quarter 4.250 3.875
Third quarter 4.000 2.750
Fourth quarter 3.100 3.040
</TABLE>
<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>
As of March 31, 2000, there were 30 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,
2000 1999 1998 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Loan origination income $2,073 $3,857 $3,303 $3,426 $3,397
Loan servicing income 7,763 7,761 7,628 7,137 6,787
Gain on sale of mortgage loans 3,189 18,191 7,611 5,374 7,116
Interest income 4,821 3,862 2,527 2,165 2,105
Other income 13 3 5 2 29
Total revenues 17,859 33,674 21,074 18,104 19,434
Expenses:
Compensation and benefits 6,806 11,407 8,282 8,217 7,752
General and administrative
expenses 4,861 8,782 6,285 5,708 5,616
Amortization of capitalized
servicing rights 4,661 4,061 3,174 1,563 878
Interest expense 2,306 1,275 701 690 786
Total expenses 18,634 25,525 18,442 16,178 15,032
Income (loss) before income taxes (775) 8,149 2,632 1,926 4,402
Income tax expense (benefit) (221) 3,375 1,101 811 1,833
Net income (loss) $(554) $4,774 $1,531 $1,115 $2,569
Basic and diluted earnings
(loss) per share $(0.10) $0.87 $0.26 $0.19 $0.44
Weighted average shares outstanding 5,288 5,507 5,848 5,873 5,883
Operating Data:
Loans originated and purchased $238,726 $866,641 $476,986 $353,411 $330,896
Loans serviced (end of year) 1,502,092 1,607,732 1,666,851 1,683,652 1,569,705
</TABLE>
<TABLE>
<CAPTION>
At March 31,
2000 1999 1998 1997 1996
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Mortgage loans and mortgage
backed securities held for sale $ 67,336 $ 45,463 $ 53,052 $ 27,286 $ 19,879
Capitalized mortgage servicing rights 11,555 12,475 7,490 6,709 3,547
Total assets 97,825 81,861 80,445 50,923 51,131
Notes and sight drafts payable 19,291 44,919 49,799 22,626 24,852
Stockholders' equity 28,811 29,730 26,995 25,648 24,647
</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 2000, First Mortgage
Corporation had just completed its most successful year ever,
with record new loan originations and all time or near all time
results in every other category. The economy was performing
well, interest rates were near the record lows, and all three of
our origination channels (retail, wholesale, direct marketing)
were contributing towards our record loan volume. The average
interest rate for a 30 year fixed-rate conventional loan was
7.00%.
In May 1999, however, mortgage interest rates began a slow
upward spiral, and the pool of remaining loans available for
refinancing at the higher rates began to shrink very rapidly. By
that summer, our new loan originations were off by more than 70%
from the year-earlier numbers (although the earlier numbers were
all time highs). The Federal Reserve Board had begun its long
march to slow the economy, and mortgage rates continued to
increase, with the average interest rate for fixed-rate loans
rising to 8.00% by December and to 8.375% by the close of the
fiscal year on March 31, 2000. New loan production fell and
continued to fall during the entire fiscal year, ending at the
lowest annual level in nearly ten years. Not surprisingly, our
operating results also began to suffer and turned negative.
For the entire fiscal year 2000, loan originations and
purchases decreased by 72.5% to $238.7 million from the record
$866.6 million in the previous year. The total loan servicing
portfolio, including sub-servicing, fell 6.6% to $1.502 billion,
due largely to a sub-servicing client's sale of its entire $76
million sub-serviced portfolio to an investor who did not require
our sub-servicing. Exclusive of sub-servicing, the servicing
portfolio shrunk only marginally by 1.93% to $1.498 billion from
a year ago.
The net loss for fiscal year 2000 was $554,000, compared to
the near record net income of $4.77 million in fiscal 1999.
Compared to fiscal 1999, total revenues fell by 47.0%, while
total expenses fell by 27.0%. As discussed above, the results
were negatively impacted primarily by increasing interest rates
during the course of the year.
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.
<PAGE>
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,
2000 1999 1998
<S> <C> <C> <C>
Loan origination income 11.6% 11.5% 15.7%
Loan servicing income 43.5 23.0 36.2
Gain on sale of mortgage loans 17.9 54.0 36.1
Interest income 27.0 11.5 12.0
Total 100.0% 100.0% 100.0%
</TABLE>
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 decrease of 46.3% to $2.07 million in fiscal 2000
from $3.86 million in fiscal 1999, while new loan production fell
by 72.5% from 1999 to 2000. This is due primarily to the greatly
reduced volume of wholesale and refinance loans, which often
carry no, or much lower, front-end origination fees as compared
to retail loan originations.
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 1.50% of the principal amount of the loan serviced
depending on the type of mortgage loan, and on average is
approximately 0.42% net of amortization of capitalized service
rights and agency guarantee fees. During fiscal year 2000, the
Company's mortgage servicing portfolio dropped 6.6% after one of
its sub-servicing clients sold its entire servicing portfolio.
The loan servicing income, however, remained steady at $7.76
million in fiscal 2000 compared to a growth of 1.7% to $7.76
million in fiscal 1999 from $7.63 million in fiscal 1998. The
stability can generally be attributable to higher weighted
average servicing fees as the composition of the servicing
portfolio has shifted to administrating more FHA loans. As of
March 31, 2000, approximately 68% of the aggregate principal
amount of the mortgage servicing portfolio consisted of FHA/VA
loans compared to 62% in fiscal 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:
<PAGE>
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
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 decreased by 82.5% to $3.19 million in
fiscal 2000 from $18.19 million in fiscal 1999. This decrease
was attributable to the lower loan originations generated by the
Company and the generally rising interest rate environment which
existed during most of fiscal year 2000.
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,
2000 1999 1998
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income $4,821 $3,862 $2,527
Interest expense 2,306 1,275 701
Net interest income $2,515 $2,587 $1,826
</TABLE>
Interest income, which consisted mostly of the interest
received on mortgage loans held for sale, increased by 24.8% in
fiscal 2000 from fiscal 1999 and by 52.8% in fiscal 1999 from
fiscal 1998. The increase was due largely to a higher mortgage
inventory and mortgage-backed securities portfolio carried by the
Company.
Interest expense increased by 80.9% in fiscal 2000 from fiscal
1999, and by 81.9% in fiscal 1999 from fiscal 1998. The chief
reason behind this increase in both years was higher mortgage
inventory portfolio and rising interest rates.
<PAGE>
Expenses
The major components of the Company's total expenses are (i)
compensation and benefits, (ii) general and administrative
expenses, (iii) amortization of capitalized servicing rights, and
(iv) interest expense. Total expenses decreased 27.0% to $18.63
million in fiscal 2000 from $25.53 million in fiscal 1999,
compared to an increase of 38.4% to $25.53 million in fiscal 1999
from $18.44 million in fiscal 1998.
As the amount of mortgage loans originated by the Company
decreases, a decrease in total employee compensation results from
lower commissions paid to loan originators, processors and
underwriters and other staff necessitated to support the loan
origination volume. Compensation and benefits expenses therefore
decreased 40.3% to $6.81 million in fiscal 2000 from $11.41
million in fiscal 1999.
Amortization of capitalized servicing rights increased by
14.8% to $4.66 million in fiscal year 2000 compared to fiscal
year 1999. It also rose by 27.9% in fiscal year 1999 from fiscal
year 1998. The higher amortization expense was due mainly to
larger investment in mortgage servicing rights and/or higher
volume of prepayments over the prior period.
General and administrative expenses decreased 44.6% to $4.86
million in fiscal 2000 from $8.78 million in fiscal 1999,
compared to an increase of 39.7% from fiscal 1998 to fiscal 1999.
The decreases in fiscal 2000 expenses were a direct result of
contraction in loan origination and direct marketing expenditures
during fiscal 2000.
Income Taxes
The Company's combined effective federal and state income tax
rate was 28.5%, for fiscal year ended March 31, 2000 due
primarily to the loss of tax benefits of California net operating
losses. Effective tax rates were 41.4% and 41.8% for the fiscal
years ended March 31, 1999 and March 31, 1998, 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, 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 a 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,
<PAGE>
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, 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 $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, 2000, maximum permitted borrowings under the
warehouse lines of credit with two nonaffiliated banks were $85
million and the amount outstanding was $19.29 million.
Borrowings under these facilities are secured by mortgage loans
and mortgage-backed securities. 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 August 31, 2000.
In addition to the warehouse lines of credit, the Company
utilizes 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, 1999 to March 31, 2000, the Company repurchased
in open market transactions 94,000 shares of its common stock at
an aggregate cost of $365,000.
The Company's mortgage servicing portfolio can provide a
source of liquidity 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 option 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 satisfy its anticipated
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.
<PAGE>
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 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 mortgage servicing rights 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 2000 was very nearly a complete reversal of fiscal 1999
and 1998, and was only similar in that we saw more of the same in
terms of competitive forces and industry consolidation. Overall
volume of new mortgage originations plunged dramatically from the
record levels of fiscal 1999, turning the industry on its head as
the interest rate cycle rapidly shifted towards higher interest
rates.
The industry as a whole continues to suffer 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, as can be seen by
the rapid choking off of new mortgage originations, particularly
refinance loans, over the course of this past year.
<PAGE>
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 valuation models for loan servicing
rights and the resulting downstream impact on pricing at the
origination level, particularly through their wholesale channel
with its thousands of 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 continue to
compete in the channels and with the loan 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 and with which we can retain the servicing rights;
to expand our retail branch network into smaller metropolitan
areas in the western states; and to add new non-bank loan
products which have more profit potential for the Company. Much
of this strategy has been implemented already with the ongoing
expansion of our retail channel, and the introduction of new
adjustable rate mortgage products which have greater customer
appeal in higher interest rate environments.
Nevertheless, fiscal 2001 is likely to be a very difficult
year for the Company and operating results are expected to be
marginal for the entire year. If there's a silver lining in this
"cycle cloud," it's that there should be a shake-out of the less
capitalized companies and many of the loan brokers, clearing away
some of the industry over-capacity and enabling the Company to be
better positioned to compete when the interest rate cycle turns
towards improvement once again.
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.
Total expense of the Year 2000 Plan was approximately
$250,000 of which $150,000 was recognized in fiscal year 2000.
The Company does not expect to incur significant additional
expenditures for Year 2000 project for future periods.
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
<PAGE>
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.
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.
<PAGE>
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 20, 2000, which
will be filed with the Securities and Exchange Commission within
120 days after March 31, 2000, 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.
(b) Reports on Form 8-K
The Company filed no current report on Form 8-K during the
quarter ended March 31, 2000.
(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 Compa
ny (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).
<PAGE>
3.2 Restated Bylaws of the Company (previously filed with the S
ecurities 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
(previously filed with the Securities and Exchange
Commission on June 25, 1999 as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 and incorporated herein by
reference).
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
(previously filed with the Securities and Exchange
Commission on June 25, 1999 as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 and incorporated herein by
reference).
10.5 Mortgage Loan Warehousing Agreement dated July 22, 1999
by and among the Company, other lenders from time to time
party hereto and Nations Bank, as administrative agent.
10.6 First Amendment dated August 30, 1999 to Mortgage Loan
Warehousing Agreement by and among the Company, Sanwa
Bank, as collateral agent and Bank of America, N.A.
(formerly Nations Bank, N.A.), as administrative agent.
10.7 Second Amendment dated October 15, 1999 to Mortgage Loan
Warehousing Agreement by and among the Company, Sanwa
Bank, as collateral agent and Bank of America, N.A., as
administrative agent.
<PAGE>
10.8 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.9 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.10 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.11 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).
10.12 Lease extension dated December 15, 1998 to Standard
Office Lease-Net dated January 1, 1992 between the
Company and Fin-West Group (previously filed with the
Securities and Exchange Commission on June 25, 1999 as
Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1999 and incorporated
herein by reference).
10.13 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).
10.14 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).
10.15 Extension of 1993 Stock Option Plan for Non-Employee
Directors adopted by the Board of Directors on July 1,
1999.
10.16 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).
<PAGE>
10.17 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).
10.18 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).
10.19 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 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.20 Renewal of 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 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.21 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 10-K 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 26, 2000 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
26, 2000.
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, 2000 and 1999 F-3
Statement of Income for the years ended March 31, 2000, 1999
and 1998 F-4
Statement of Stockholders' Equity for the years ended March
31, 2000, 1999 and 1998 F-5
Statement of Cash Flows for the years ended March 31, 2000,
1999 and 1998 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 sheets of First
Mortgage Corporation as of March 31, 2000 and 1999, and the
related statements of income, stockholders' equity and cash
flows for each of the three years in the period ended March
31, 2000. 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 auditing
standards generally accepted in the United States. 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, 2000 and
1999, and the results of its operations and its cash flows
for each of the three years in the period ended March 31,
2000 in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Orange County, California
May 30, 2000
<PAGE>
First Mortgage Corporation
Balance Sheet
<TABLE>
<CAPTION>
March 31
2000 1999
<S> <C> <C>
Assets
Cash $11,264,000 $14,839,000
Mortgage loans and mortgage-backed securities held for sale 67,336,000 45,463,000
Other receivables and servicing advances, net 5,558,000 7,378,000
Capitalized servicing rights, net 11,555,000 12,475,000
Property and equipment, net 581,000 761,000
Prepaid expenses and other assets 1,531,000 765,000
Total assets $97,825,000 $81,681,000
Liabilities and stockholders' equity
Liabilities:
Notes payable, banks $19,291,000 $35,469,000
Notes payable, other 43,787,000 -
Sight drafts payable 393,000 9,450,000
Accounts payable and accrued liabilities 564,000 2,967,000
Deferred income taxes 4,979,000 4,065,000
Total liabilities 69,014,000 51,951,000
Commitments and contingencies (Note 13)
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 - 5,253,197 in
2000 and 5,347,197 in 1999 2,559,000 2,924,000
Retained earnings 26,252,000 26,806,000
Total stockholders' equity 28,811,000 29,730,000
Total liabilities and stockholders' equity $97,825,000 $81,681,000
</TABLE>
See accompanying notes.
<PAGE>
First Mortgage Corporation
Statement of Income
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
<S> <C> <C> <C>
Revenues:
Loan origination income $2,073,000 $3,857,000 $3,303,000
Loan servicing income 7,763,000 7,761,000 7,628,000
Gain on sale of mortgage loans 3,189,000 18,191,000 7,611,000
Interest income 4,821,000 3,862,000 2,527,000
Other income 13,000 3,000 5,000
Total revenues 17,859,000 33,674,000 21,074,000
Expenses:
Compensation and benefits 6,806,000 11,407,000 8,282,000
General and administrative
expenses 4,861,000 8,782,000 6,285,000
Amortization of capitalized
servicing rights 4,661,000 4,061,000 3,174,000
Interest expense 2,306,000 1,275,000 701,000
Total expenses 18,634,000 25,525,000 18,442,000
Income (loss) before income taxes (775,000) 8,149,000 2,632,000
Income tax expense (benefit) (221,000) 3,375,000 1,101,000
Net income (loss) $(554,000) $4,774,000 $1,531,000
Basic and diluted
earnings (loss) per share $ (.10) $ .87 $ .26
</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, 1997 5,859,117 $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
Net loss - - (554,000) (554,000)
Repurchase of shares (94,000) (365,000) - (365,000)
Balance at March 31, 2000 5,253,197 $2,559,000 $26,252,000 $28,811,000
</TABLE>
See accompanying notes.
<PAGE>
First Mortgage Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
<S> <C> <C> <C>
Operating activities
Net income (loss) $(554,000) $4,774,000 $1,531,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for deferred income taxes 914,000 1,806,000 426,000
Provision for losses on foreclosure (324,000) (344,000) (459,000)
Amortization of originated mortgage servicing rights,
excess service fee and purchased servicing rights 4,712,000 4,157,000 3,310,000
Depreciation of property and equipment 256,000 269,000 220,000
Originations and purchases of mortgage loans held for sale (238,726,000) (866,641,000) (476,986,000)
Sales and principal repayments of mortgage loans held for
sale 216,853,000 874,230,000 451,220,000
Change in other receivables and servicing advances 2,144,000 3,532,000 (484,000)
Change in prepaid expenses and other assets (766,000) (404,000) 185,000
Change in accounts payable and accrued liabilities (2,403,000) 1,575,000 576,000
Loss (gain) on sale of assets 19,000 (1,000) -
Net cash provided by (used in) operating activities (17,875,000) 22,953,000 (20,461,000)
Investing activities
Originated mortgage servicing rights (3,274,000) (9,119,000) (3,436,000)
Purchase of mortgage servicing rights (518,000) (23,000) (655,000)
Note receivable, Fin-West - 130,000 -
Purchase of property and equipment (109,000) (369,000) (306,000)
Proceeds from sale of assets 14,000 4,000 14,000
Change in due from affiiates - - 134,000
Net cash used in investing activities (3,887,000) (9,377,000) (4,249,000)
Financing activities
Change in notes payable, banks (16,178,000) (4,958,000) 20,255,000
Change in sight drafts payable (9,057,000) 78,000 8,418,000
Change in note payable, other 43,787,000 - (1,500,000)
Repurchase of common stock (365,000) (2,039,000) (184,000)
Net cash provided by (used in) financing activities 18,187,000 (6,919,000) 26,989,000
Increase (decrease) in cash (3,575,000) 6,657,000 2,279,000
Cash at beginning of year 14,839,000 8,182,000 5,903,000
Cash at end of year $11,264,000 $14,839,000 $8,182,000
</TABLE>
See accompanying notes
<PAGE>
First Mortgage Corporation
Notes to Financial Statements
March 31, 2000
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 and
Arizona.
Fin-West Group (Fin-West), an affiliated company, owns 91.5%
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.
The Company's mortgage-backed securities ("MBS") held for
sale in the near term are classified as trading. Trading
securities are recorded at fair value, with the change in
fair value during the period included in earnings. The fair
value of MBS held for sale in the near term is based on
quoted market price.
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>
First Mortgage Corporation
Notes to Financial Statements (continued)
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>
First Mortgage Corporation
Notes to Financial Statements (continued)
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 2000, 1999 and 1998 of
$2,249,000, $1,282,000 and $540,000, respectively.
The Company paid income taxes in 2000, 1999 and 1998 of $0,
$1,855,000 and $615,000, respectively.
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Income (Loss) 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>
First Mortgage Corporation
Notes to Financial Statements (continued)
2. Mortgage Loans and Mortgage-Backed Securities Held for
Sale
Mortgage loans and mortgage-backed securities held for sale
consist of the following at March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Principal balance outstanding $69,406,000 $46,575,000
Loan origination discounts and market reserves (2,037,000) (1,072,000)
Deferred loan fees (33,000) (40,000)
$67,336,000 $45,463,000
</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, 2000, the Company had short-term commitments
amounting to approximately $4,759,000 to fund mortgage loans
subject to credit approval. The Company generally does not
engage in forward delivery contracts to hedge its portfolio.
At March 31, 2000, the Company held MBS with a cost of
approximately $57,856,000 which are used as collateral
against the Company's reverse repurchase agreements. The MBS
are mortgage loans held for sale which have been pooled to
form GNMA securities. The MBS carry an interest rate of 7%
and mature in 2029. In order to record MBS at fair value, a
reserve of $1,609,000 was recorded as of March 31, 2000.
3. Mortgage Servicing Assets
Capitalized mortgage servicing assets consist of originated
mortgage servicing rights and purchased servicing rights.
Activities are summarized as follows:
Capitalized
Servicing
Rights
Balance at March 31, 1999 $12,475,000
Additions 3,792,000
Amortization and write-offs (4,712,000)
Balance at March 31, 2000 $11,555,000
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
3. Mortgage Servicing Assets (continued)
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.
4. Other Receivables and Servicing Advances
Other receivables and servicing advances consists of the
following at March 31, 2000 and 1999:
2000 1999
Foreclosures and advances on real estate owned $3,322,000 $5,283,000
Servicing advances 2,143,000 2,485,000
Other 529,000 280,000
Allowance for possible losses (436,000) (670,000)
$5,558,000 $7,378,000
5. Property and Equipment
Property and equipment consists of the following at March
31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Furniture and equipment $2,582,000 $2,511,000
Automobiles 115,000 137,000
Leasehold improvements 400,000 403,000
3,097,000 3,051,000
Less accumulated depreciation and amortization (2,516,000) (2,290,000)
$ 581,000 $ 761,000
</TABLE>
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
6. Income Taxes
Income tax expense (benefit) for the years ended March 31,
2000, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current:
Federal $(1,136,000) $1,270,000 $ 583,000
State 1,000 299,000 92,000
(1,135,000) 1,569,000 675,000
Deferred:
Federal 860,000 1,206,000 224,000
State 54,000 600,000 202,000
914,000 1,806,000 426,000
$(221,000) $3,375,000 $1,101,000
</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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
State income taxes $ 463,000 $ 547,000
Accrued liabilities 46,000 216,000
Deferred loan fees 15,000 18,000
Provision for foreclosure 86,000 168,000
Purchased servicing rights 396,000 379,000
Mark-to-market adjustments 152,000 356,000
Net operating loss carryforward 137,000 -
Total deferred tax assets 1,295,000 1,684,000
Deferred tax liabilities:
Originated mortgage servicing rights (5,999,000) (5,517,000)
Capitalized servicing fees (5,000) (4,000)
Accelerated depreciation (122,000) (98,000)
Other (148,000) (130,000)
Total deferred tax liabilities (6,274,000) (5,749,000)
Net deferred tax liabilities $(4,979,000) $(4,065,000)
</TABLE>
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
6. Income Taxes (continued)
Income tax expense (benefit) 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, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Tax computed at the statutory rate $(263,000) $2,771,000 $899,000
State income tax, net of fedeeral income tax benefit 36,000 594,000 194,000
Other 6,000 10,000 8,000
Income tax expense (benefit) $(221,000) $3,375,000 $1,101,000
</TABLE>
7. Notes Payable, Banks
At March 31, 2000, the Company had two line of credit
agreements with banks which provide for borrowings up to
$50,000,000 and $35,000,000 with interest payable monthly at
1.25% per annum or the prime rate of 7.75% at March 31,
2000, 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, 2000, borrowings under these lines of
$17,602,000 are collateralized by mortgage loans held for
sale. The weighted average interest rate for the fiscal year
ended March 31, 2000 was 1.35%.
The lines of credit are subject to renewal on August 31,
2000. 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, 2000, 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, 2000 there were no investment securities purchased under
this line.
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
8. Notes Payable, Other
Under a presale funding facility with a nonaffiliated
investment banking firm, the Company borrowed $43,787,000 in
reverse repurchase agreements collateralized by $46,856,000
of MBS. The borrowings bear interest at 6.1% per annum. All
MBS underlying reverse repurchase agreements are held in
safekeeping by broker-dealers or banks.
9. 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 each of the years ended
March 31, 2000 and 1999, and $240,000 for the year ended
March 31, 1998.
The Company paid title insurance fees to an affiliated
entity of $103,000, $582,000 and $308,000 for the years
ended March 31, 2000, 1999 and 1998, respectively.
10. Loan Servicing
The Company's loan servicing portfolio at March 31, 2000 and
1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
GNMA mortgage-backed securities $ 846,755,000 $ 873,235,000
FHLMC 178,424,000 249,624,000
FNMA 133,650,000 165,403,000
Other 343,263,000 319,470,000
$1,502,092,000 $1,607,732,000
</TABLE>
At March 31, 2000 and 1999, the Company subserviced
approximately $4,476,000 and $80,581,000, 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 $17,651,000 and
$27,467,000 at March 31, 2000 and 1999, 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, 2000 and 1999.
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
11. 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,
2000, the estimated fair value of mortgage loans held for
sale, mortgage backed securities, mortgage servicing rights
and notes payable approximated the net carrying value of
such accounts.
12. 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 $0, $150,000 and $50,000 for the years ended March
31, 2000, 1999 and 1998, respectively.
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
13. Commitments and Contingencies
Leases
Minimum annual rental payments under operating leases for
office space are as follows:
2001 $504,000
2002 421,000
2003 374,000
2004 225,000
2005 -
$1,524,000
Net rental payments to nonaffiliated entities of
approximately $274,000, $268,000 and $242,000 have been
charged to occupancy expense in the accompanying statements
of operations for the years ended March 31, 2000, 1999 and
1998, 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.
14. 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 compensation
committee. Options
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
14. Stockholders' Equity (continued)
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, 2000:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Options
March 31, 2000 March 31, 2000 March 31, 1999
<S> <C> <C> <C>
Options outstanding at beginning of fiscal year 422,150 $4.54 436,625
Option granted 97,675 $4.23 97,550
Options exercised - -
Options expired (156,075) $4.78 (112,025)
Options outstanding at end of fiscal year 363,750 $4.32 422,150
Exercise price:
Per share for options exercised during the fiscal year n/a n/a
</TABLE>
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
14. Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Options Options
March 31, March 31,
2000 1999 March 31, 2000 March 31, 1999
<S> <C> <C>
Per share for options outstanding at end of fiscal year $4.13-$4.63 $3.50-$5.00
Weighted average fair value of options granted $1.43 $1.51
Weighted average contractual life of option outstanding (in years) 2.54 2.2
</TABLE>
All outstanding options as of March 31, 2000 were
exercisable. Options available for future grants under the
plans were 361,250 and 302,850 as of March 31, 2000 and
1999, 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>
2000 1999
<S> <C> <C>
Expected life (years) 4.33 4.50
Interest rate 7.00% 6.00%
Volatility 0.31 0.31
Dividend yield 0.00% 0.00%
</TABLE>
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
14. 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 $65,000 and $83,000 in
2000 and 1999, respectively. The pro forma result from the
increased compensation cost was net loss of $619,000 ($0.12
per share) and net income of $4,691,000 ($0.85 per share) in
2000 and 1999, respectively. The effect of stock-based
compensation on net income for 2000 and 1999 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.
15. Earnings (Loss) Per Share
The following table sets forth the computation of basic and
diluted earnings (loss) per share:
<TABLE>
<CAPTION>
Year ended March 31
2000 1999 1998
<S> <C> <C> <C>
Numerator:
Net income (loss) $(554,000) $4,774,000 $1,531,000
Denominator:
Shares used in computing basic earnings (loss) per share 5,288,431 5,506,690 5,847,906
Effect of stock options treated as equivalents under the treasury stock method - 11,498 1,683
Denominator for diluted earnings (loss) per share 5,288,431 5,518,188 5,849,589
Basic and diluted earnings (loss) per share $(.10) $.87 $.26
</TABLE>
<PAGE>
First Mortgage Corporation
Notes to Financial Statements (continued)
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 May 30, 2000, with respect to the
financial statements of First Mortgage Corporation included in
its Annual Report (Form 10-K) for the year ended March 31, 2000.
Ernst & Young LLP
Orange County, California
June 26, 2000
<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
(previously filed with the Securities and Exchange
Commission on June 25, 1999 as Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 and incorporated herein by
reference).
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
(previously filed with the Securities and Exchange
Commission on June 25, 1999 as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999 and incorporated herein by
reference).
<PAGE>
10.5 Mortgage Loan Warehousing Agreement dated July 22, 1999
by and among the Company, other lenders from time to time
party hereto and Nations Bank, as administrative agent.
10.6 First Amendment dated August 30, 1999 to Mortgage Loan
Warehousing Agreement by and among the Company, Sanwa
Bank, as collateral agent and Bank of America, N.A.
(formerly Nations Bank, N.A.), as administrative agent.
10.7 Second Amendment dated October 15, 1999 to Mortgage Loan
Warehousing Agreement by and among the Company, Sanwa
Bank, as collateral agent and Bank of America, N.A., as
administrative agent.
10.8 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.9 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.10 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 (previously filed with the Securities and
Exchange Commission on June 25, 1999 as Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999 and incorporated herein by
reference).
10.11 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).
10.12 Lease extension dated December 15, 1998 to Standard
Office Lease-Net dated January 1, 1992 between the
Company and Fin-West Group (previously filed with the
Securities and Exchange Commission on June 25, 1999 as
Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1999 and incorporated
herein by reference).
10.13 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).
<PAGE>
10.14 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).
10.15 Extension of 1993 Stock Option Plan for Non-Employee
Directors adopted by the Board of Directors on July 1,
1999.
10.16 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).
10.17 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).
10.18 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).
10.19 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 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.20 Renewal of 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 10-K for the fiscal year ended March 31, 1998 and
incorporated herein by reference).
10.21 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 10-K 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).
