-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LerG1NW1fOopMQWPbPFYZEXAaGq2CziSrsLMjdDm+mgUpAPQVu+zJoQ3YPmgbteT EfG/jIFmvS4GPWeYmnyvTw== 0000883369-97-000007.txt : 19970714 0000883369-97-000007.hdr.sgml : 19970714 ACCESSION NUMBER: 0000883369-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970701 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MORTGAGE CORP /CA/ CENTRAL INDEX KEY: 0000883369 STANDARD INDUSTRIAL CLASSIFICATION: 6162 IRS NUMBER: 952960716 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19847 FILM NUMBER: 97633649 BUSINESS ADDRESS: STREET 1: 3230 FALLOWFIELD DR CITY: DIAMOND BAR STATE: CA ZIP: 91765 BUSINESS PHONE: 9095951996 MAIL ADDRESS: STREET 1: 3230 FALLOW FIELD DRIVE CITY: DIAMOND BAR STATE: CA ZIP: 91765 10-K 1 1 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, 1997, 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 21, 1997, based on the average bid and asked prices on that date reported by the OTC Bulletin Board, was $20,507,000. 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 21, 1997, 5,859,117 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 October 16, 1997 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, 1997. FIRST MORTGAGE CORPORATION A California Corporation ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997 TABLE OF CONTENTS Item No. Description Page PART I 1. Business 1 2. Properties 15 3. Legal Proceedings 16 4. Submission of Matters to a Vote of Security Holders 16 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 16 6. Selected Financial Data 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 7A. Quantitative and Qualitative Disclosures About Market Risk 25 8. Financial Statements and Supplementary Data 25 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III 10. Directors and Executive Officers of the Registrant 26 11. Executive Compensation 26 12. Security Ownership of Certain Beneficial Owners and Management 26 13. Certain Relationships and Related Transactions 26 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26 Signatures 31 PART I ITEM 1. BUSINESS General First Mortgage Corporation ("First Mortgage" or the "Company") is a mortgage banking firm primarily 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 13 offices located in California, Nevada and Washington. Mortgage loans are originated by the Company through the following sources: Retail production loans are generated by referrals from real estate brokers, builders and other sources. Refinance loans are originated by the Consumer Direct Marketing division through targeted mail solicitations and direct telemarketing, and wholesale production generally represents loans originated through approved mortgage loan brokers. 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 longer average loan lives generally 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. The Company sells FNMA and FHLMC securities in the secondary mortgage market primarily to investment banking firms, substantially all of which are primary dealers in government securities. 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 conventional loans prevents over-dependence upon FHA or VA programs (which are subject to change), and 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 loan payments. The Company plans to increase loan servicing income through continued expansion of its mortgage servicing portfolio. Growth of the mortgage servicing portfolio is generated primarily through the retention of servicing rights on a portion of the mortgage loans originated by the Company, and to a lesser degree through the direct acquisition of servicing rights on loans originated by others. The Company believes that it can experience (i) increased operating efficiencies as its mortgage servicing portfolio grows in size, and (ii) reduced earnings volatility as loan servicing income increases, thereby providing a consistent source of income in periods of rising interest rates during which the number of mortgage loan originations and mortgage loan prepayments tend to decrease. The mortgage servicing portfolio generally gains value as the interest rates increase, and provides the Company with a source of liquid assets should the need for additional capital arise. The Company's mortgage servicing portfolio has grown to $1.684 billion at March 31, 1997 from $1.570 billion at March 31, 1996, an increase of 7.3%. 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 brokers and builders; direct consumer marketing, which represents loans initiated through direct mail and telephone; and wholesale, which represents loans solicited from loan brokers. Substantially all mortgage loans originated through such sources by the Company are underwritten, funded and closed by the Company. First Mortgage's loan origination activities include (i) offering a variety of residential mortgage loans, (ii) attracting suitable loan applicants, (iii) reviewing borrower credit and mortgaged property title, appraised value and insurance ("underwriting"), (iv) issuing conditional loan commitments, and (v) funding qualified loans at closing. Types of Loans Originated. The Company originates three types of residential mortgage loans: (i) FHA/VA loans which qualify for sale in the form of securities guaranteed by GNMA; (ii) conventional mortgage loans which comply with the requirements for sale to, or conversion into securities issued by, FNMA or FHLMC ("conventional conforming loans"); and (iii) conventional mortgage loans which comply with other institutional investor loan requirements ("conventional nonconforming loans"). The Company does not originate any conventional conforming loans or conventional nonconforming loans (collectively, "conventional loans") with loan-to-value ratios above 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 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, where 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. 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:
Year Ended March 31, 1997 1996 1995 (Dollars in thousands, except average loan balance data) FHA/VA Loans: Number of loans 1,575 1,421 1,223 Volume of loans $158,502 $133,891 $118,119 Percent of total volume 44.9% 40.5% 67.7% Average loan balance $100,636 $94,223 $96,581 Conventional Conforming Loans (1): Number of loans 607 618 409 Volume of loans $77,097 $80,798 $48,990 Percent of total volume 21.8% 24.4% 28.1% Average loan balance $127,013 $130,741 $119,780 Conventional Nonconforming Loans: Number of loans 379 366 34 Volume of loans $117,812 $116,207 $7,435 Percent of total volume 33.3% 35.1% 4.2% Average loan balance $310,850 $317,505 $218,669 Total Loans (1): Number of loans 2,561 2,405 1,666 Volume of loans $353,411 $330,896 $174,544 Average loan balance $137,997 $137,586 $104,768 (1)Includes second priority conventional conforming loans which aggregate less than 1% of the total dollar volume of loans originated and purchased in each of fiscal 1997, 1996, and 1995.
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 1997, 1996 and 1995 was approximately 38%, 46% and 22%, respectively. For fiscal years 1997, 1996 and 1995, approximately 16%, 41% and 15%, 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. 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 to moderate income homebuyers. While the operation of a productive network of retail branch offices is essential to mortgage loan originations, the Company believes that it is equally important to maintain the flexibility to open or close branch offices in a timely, cost-efficient manner as local market conditions dictate. Accordingly, the Company typically enters into month-to-month or one to two year short-term leases for 1,000 to 2,000 square foot offices, and does not enter into long-term employment agreements with branch office employees. Over the last five fiscal years, the Company has operated between 10 and 18 branch offices in varying locations in California, Nevada, Oregon and Washington. The Company currently operates a retail network of six California offices located in Covina, Diamond Bar, San Diego, Fairfield, Stockton and Modesto, as well as Reno, Nevada. Management plans to add additional branch offices in order to increase new loan production, some of which may be located outside existing service areas. Given the Company's present high concentration of loan originations in California, there can be no assurance that its results of operations will not be adversely affected to the extent California experiences decreased residential real estate lending activity. First Mortgage operates retail branch offices as individual profit centers. Scheduled fees for loans originated and other services provided by the Company's corporate headquarters are allocated to each branch office in determining the office's profitability. Branch offices are staffed entirely by Company employees. A typical retail branch office staff consists of a branch manager, one to four salespersons, one to three loan processors and one or two clerical office assistants. Salespersons are full-time employees who work exclusively for the Company and are contractually obligated to comply with the Company's business practice guidelines. First Mortgage's retail marketing strategy also includes an incentive compensation system designed to encourage quality mortgage loan production and to retain productive managers and salespersons. A branch manager's compensation includes (in addition to a base salary) a bonus based upon loan production and a percentage of the branch office's annual profits. Salespersons are compensated solely on commissions based upon revenue generated from their respective loan closings. In addition, loan processors at the branch office level receive, in addition to a salary, a bonus based on the number of mortgage loans which are closed and; therefore, have met the Company's underwriting criteria. The Company believes that an incentive compensation system based on the number and quality of loans produced improves overall profitability, customer and employee relations and the Company's reputation for providing timely and quality mortgage banking services. The utilization of personal solicitation techniques is another aspect of the Company's marketing strategy. The Company believes that on-going personal relationships between retail branch salespersons and real estate brokers, builders, developers and prior customers through regular direct contact represent the most productive solicitation technique since historically the majority of the Company's loan originations have been generated through these referral sources. The Company engages in only limited mass media advertising because it believes that the costs associated with such advertising usually outweigh the benefits. The Company also directly solicits borrowers for refinance loans, primarily through targeted mailings and telemarketing. First Mortgage's reputation for prompt and professional service is an integral component of the Company's marketing strategy. The Company believes that its ability to process retail loan applications quickly has become increasingly important in the market place. The average period between a retail branch office's receipt of a loan application and the Company's final lending commitment now is typically less than 15 days. Despite the speed with which loan applications are processed, the Company does not compromise its comprehensive underwriting and quality control criteria. The utilization of new technology and computerization of all critical phases of operations have had a significant impact on the Company's cost control efforts especially during the recent downturn in loan production. The Company's wholesale loan origination business utilizes independent loan brokers to originate mortgage loan applications. The Company's wholesale operations sales staff solicits loans meeting the Company's underwriting criteria from loan brokers who have been approved by the Company. Upon receipt of referrals, and prior to loans being funded, the Company subjects broker- referred loan applications 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 operates wholesale branch offices in San Jose, California, Seattle, Washington and Diamond Bar, California. The wholesale purchase business involves the acquisition of FHA/VA loans that other mortgage lenders have underwritten and committed to fund. These loans are funded in the name of the selling mortgage lender; however, proceeds for funding are provided by the Company through its warehousing lines of credit. The first mortgage deeds of trust associated with these loans are recorded in the name of the selling mortgage lender together with a simultaneous assignment of the deeds of trust to the Company. Such loans are then sold in the secondary mortgage market with the Company usually retaining the underlying servicing rights. FHA/VA loans purchased in this manner do not subject the Company to potential liability for any errors, omissions or breaches of representations or warranties by the selling mortgage lender in connection with its underwriting of the loans. Mortgage loan production through wholesale originations and purchases as a percentage of total loan origination volume for fiscal 1997, 1996 and 1995 was 57%, 38% and 7%, 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 use all three credit reporting repositories, which exceeds the requirements of FHA, VA, FNMA and FHLMC. The Company's in-house appraisers, or appraisers approved and chosen at random by the FHA or VA, prepare property appraisals for FHA/VA loans. Appraisals for retail conventional loans are prepared by the Company's in-house appraisers, or one of a limited 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. Once an application has been verified and reviewed at the branch office level, a formal loan application is assembled and submitted to the Company's underwriting department. The underwriting department scrutinizes all loan applications, other than loans purchased on a wholesale basis, in accordance with the specific agency or investors' underwriting guidelines, including loan- to-value ratios, borrower income qualifications, investor requirements, necessary insurance and property appraisal requirements. The Company's underwriting guidelines comply with all underwriting criteria of FHA, VA, FNMA and FHLMC and in some cases are more comprehensive. The Company's underwriting guidelines for conventional nonconforming loans are based on the underwriting standards required by the institutional investors to whom such loans will be sold. The Company's underwriting personnel function independently of the Company's mortgage loan origination personnel. The Company believes that the implementation and enforcement of comprehensive underwriting guidelines has mitigated the increase in foreclosure loss expense which, as a percentage of the Company's mortgage servicing portfolio, was 0.091% in fiscal 1997, 0.094% in fiscal 1996 and 0.089% in fiscal 1995. 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 broker- referred loans are audited. The quality assurance department re-verifies all employment and bank verifications, and obtains a separate credit report from a second credit reporting agency as well as a written appraisal critique from a second appraiser or audit agency familiar with the area of the mortgage property. The quality assurance department submits all audit results directly to the president of the Company. Management believes that by performing comprehensive quality assurance audits, mortgage loans of investment quality will be originated and negligent underwriting, foreclosure loss expense and overall Company risk will be minimized. Loan Commitments. First Mortgage does not issue final loan commitments to fund or acquire mortgage loans unless it is confident that the loan will meet the acquisition criteria of institutional investors in the secondary mortgage market. Subsequent to underwriting approval and prior to loan funding, the Company issues conditional loan approvals to qualified applicants. Conditional approvals indicate loan amounts, prevailing interest rates, fees, funding conditions and approval expiration dates. The interest rate indicated is usually subject to change in accordance with market interest rate fluctuations until the final loan closing documents are prepared, at which time the Company commits to a stated interest rate ("interest rate lock-in") typically for a maximum of 15 days. The Company determines the effective interest rates for mortgage loans based upon its daily review of prevailing interest rates in the secondary mortgage market, and interest rate lock-ins beyond 15 days are not issued unless the 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 $46.5 million. The Company's current warehousing lines of credit include a $30 million secured line of credit for 90-day notes with Bank of America National Trust and Savings Association ("Bank of America") that is subject to renewal on September 1, 1997; a $15 million secured line of credit for 90-day notes from Sanwa Bank of California ("Sanwa Bank"), subject to renewal on August 31, 1997; and a $1.5 million unsecured line of credit with the Company's Chairman of the Board that is subject to renewal on December 31, 1997. Advances under the Company's secured lines of credit are collateralized with the mortgage loans which they fund. The Company repays outstanding balances under warehousing lines of credit and replenishes its working capital with the proceeds from the sale of mortgage loans. Accordingly, the Company depends on mortgage loan sales to originate new mortgage loans without exceeding the limits of its warehousing lines of credit and available working capital. First Mortgage pays interest on funds advanced under the warehousing lines of credit at pre-negotiated rates. The Company must maintain minimum compensating balances with its creditor banks, which balances 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 on favorable terms. Loan Warehousing First Mortgage normally warehouses funded mortgage loans for a short period of time (on average 25 days), depending upon the delivery dates negotiated with institutional investors, the volume of loan originations, the availability of working capital and the amount available under warehousing lines of credit prior to purchase of the loans by institutional investors. The Company receives, as net interest income, the difference between the interest received on mortgage loans held prior to sale which are financed under warehousing lines of credit, and the interest paid by the Company under such lines of credit. The Company also receives interest income from mortgage loans funded with working capital. The Company attempts to mitigate interest rate risk by warehousing mortgage loans for relatively short time periods. Although this strategy may limit the amount of net interest income realized, management believes that this strategy is prudent and protects the Company from unexpected interest rate fluctuations. Loan Sales Unlike financial institutions and other lenders which customarily originate or acquire mortgage loans for long-term investment, mortgage bankers, including the Company, originate and purchase mortgage loans with the intention of selling them shortly after they are funded. Mortgage loans originated or purchased by the Company are sold to institutional investors in the secondary mortgage market with the Company generally retaining the right to service such loans. The majority of the Company's FHA/VA loans are pooled to form GNMA securities and are sold to investment banking firms, substantially all of which are primary dealers in government securities. Conventional conforming loans are sold for cash as individual whole loans to FNMA, FHLMC or other institutional investors. The Company sells its conventional nonconforming loans to institutional investors in privately negotiated transactions. In fiscal 1997, approximately 35% of the principal amount of the Company's mortgage loans were converted into GNMA securities, 5% were sold directly to FNMA or FHLMC for cash and the remaining 60% of the Company's mortgage loans were sold to institutional investors. The Company expects to continue to use these methods of selling mortgage loans, but in varying degrees in accordance with prevailing market conditions and may also employ other sales methods if management determines that it is prudent to do so. Since the Company's inception, all originated or purchased mortgage loans have been sold in the secondary mortgage market without recourse to the Company in the event of borrower default, subject to certain limitations applicable to VA loans. With respect to mortgage loans securitized through GNMA programs, the Company is insured by the FHA against foreclosure losses on FHA loans, and the VA guarantees against foreclosure losses on VA loans, subject to a limitation of 25% of the loan or such higher percentage that does not exceed $50,750. Mortgage loans sold to, or securitized through, FNMA or FHLMC are contractually nonrecourse to the Company upon borrower default. In connection with loan exchanges and sales, the Company makes representations and warranties customary in the industry relating to, among other things, compliance with laws, regulations, program standards and information accuracy. In the event of a breach of these representations and warranties, the Company could be required to repurchase such loans. The sale of mortgage loans generates a gain or loss to the Company primarily as a result of the following factors. First, the Company may fund a loan at a price (i.e., interest rate and discount) that is higher or lower than the price the Company would receive if it immediately sold the loan in the secondary mortgage market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. In 1997 and 1996, 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 sum of (i) the cash gain or loss, which is the difference between the Company's carrying value and the selling price of the loans, net of commitment fees paid by the Company, and (ii) the excess service fee amounts equal to the present value of servicing fees to be received in future years in excess of normal rates based upon the estimated life of the loans. The amount of the excess service fee, if any, is recorded as revenue, capitalized and amortized over the estimated average remaining loan life. If the realized life of the loan proves to be shorter than the estimated loan life (generally due to loan prepayments resulting from refinancing in response to interest rate declines), the amortization of the excess service fee is accelerated through a charge against current income. In fiscal year 1997 and 1996, the gain or loss on mortgage loans was also impacted by the implementation of Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" (FAS 122). FAS 122 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 122 are discussed further in Notes to Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations. Loan Servicing First Mortgage services substantially all the mortgage loans that it originates or purchases. 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, 1997, approximately 53% 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 0.40% of the declining principal amount) and generally have longer average loan lives. Overall, the Company receives annual loan servicing fees that presently average 0.37% (net of amortization of excess service fee, purchased servicing rights and agency guarantee fees), and range from 0.25% to 1.50% per annum of the declining principal amount of serviced loans. The Company also retains late charges paid by borrowers and other customary fees associated with loan servicing. While the Company periodically has sold a portion of newly funded mortgage loans on a servicing-released basis, it has never sold any servicing rights from its mortgage servicing portfolio; however, the sale of such rights represents an available source of funds. The Company also has been acquiring servicing rights for loans originated by other lenders since October, 1991. The Company intends to acquire additional servicing rights whenever attractive opportunities exist. The following table sets forth certain information regarding the Company's mortgage servicing portfolio for the periods indicated:
Year Ended March 31, 1997 1996 1995 (Dollars in thousands, except for number of loans serviced and average loan balance) Beginning loan servicing portfolio $1,477,161 $1,401,832 $1,355,164 Add: Loans originated and purchased 353,411 330,896 174,544 Purchase of servicing 14,960 6,431 16,320 Less:Prepayment of loans (149,953) (161,146) (119,846) Amortization (23,779) (21,286) (20,444) Loans sold servicing released (87,963) (79,566) (3,906) Ending loan servicing portfolio 1,583,837 1,477,161 1,401,832 Sub-servicing 99,815 92,544 132,056 Total servicing portfolio $1,683,652 $ 1,569,705 $1,533,888 Number of loans serviced (end of year) 17,466 16,820 16,614 Average loan balance (end of year) $96,396 $93,324 $92,325
The interest rate stratification of the servicing portfolio at March 31, 1997 is as follows:
Interest Rate Principal Balance Percent of Total (Dollars in thousands) 7.00% and Under $214,531 12.7% 7.01% to 8.00% 830,707 49.4% 8.01% to 9.00% 517,156 30.7% 9.01% to 10.00% 92,643 5.5% 10.01% to 11.00% 21,343 1.3% Over 11.00% 7,272 0.4% Total Servicing Portfolio $1,683,652 100.0%
The weighted average interest rate of the Company's servicing portfolio was 7.97% at March 31, 1997 as compared with 8.01% at March 31, 1996. At March 31, 1997, approximately 47% of the Company's mortgage servicing portfolio was covered by servicing agreements pursuant to the mortgage-backed securities programs of GNMA. Under these agreements, the Company may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Company cannot charge any interest on such advanced funds, the Company typically recovers the advances within five to ten days upon receipt of the borrower's payment, or in the absence of such payment, most of the advances can be recovered through FHA insurance, VA guarantee, FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. The Company has a $2 million line of credit with Sanwa Bank for the purpose of funding servicing advances. This line of credit was not utilized in fiscal 1997 since all advances were covered by working capital. During fiscal 1997 the monthly average amount of funds advanced by the Company for mortgage payments, taxes, insurance, foreclosure expenses and non-mandatory early removal of foreclosed loans (being processed by the Company) from GNMA pools amounted to $12,594,000. The total amount of all such advances during fiscal 1997 that were not recovered by the Company was $1,406,000. 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, 1997.
Percentage Number of Percentage Principal of Principal State Loans of No. of Balance Balance Serviced Loans Serviced Serviced Serviced (Dollars in thousands) California 15,580 89.2% $1,530,031 90.9% Nevada 873 5.0% 67,230 4.0% Washington 587 3.4% 65,932 3.9% Colorado 145 0.8% 3,974 0.2% Oregon 111 0.6% 11,356 0.7% Texas 107 0.6% 3,285 0.2% Other States 63 0.4% 1,844 0.1% Total 17,466 100.0% $1,683,652 100.0%
The Company believes that its mortgage servicing portfolio (net of capitalized mortgage servicing fee assets) has significant market value, although most 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. Since the Company's mortgage servicing portfolio as of March 31, 1997 consists of mortgage loans with an average interest rate of 7.97% which compares favorably to the prevailing interest rate, the Company believes that the risk of prepayment and the potential runoff of the portfolio, and thus corresponding reduction of loan servicing income, is minimized. At March 31, 1997, ARM's represented approximately 18% of the aggregate dollar amount of loans in the Company's mortgage servicing portfolio. At March 31, 1997, 0.62% of the number of mortgage loans in the Company's mortgage servicing portfolio were more than 90 days past due, and 1.37% of the number of mortgage loans were in foreclosure. First Mortgage believes that its loan servicing and loan origination operations reduce the risk of fluctuating interest rates. As interest rates increase, loan origination income may decrease; however, this decline is mitigated by the stabilization of loan administration income generated by the Company's mortgage servicing portfolio as a result of diminished loan prepayments. Conversely, as interest rates decline, increased loan prepayments may reduce loan administration income, but this reduction tends to be offset by increased loan originations and servicing fees due to increased loan originations. The Company can reduce the risk to its loan servicing and origination revenue resulting from interest rate fluctuations by selling mortgage loans for a premium on a servicing-released basis when interest rates are high, and by increasing its solicitation of refinance loans when interest rates are low. 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 surge of 1992 and 1993 led to a rapid expansion of mortgage providers, resulting in industry over-capacity when interest rates rose in 1994 and the volume of mortgage loans declined accordingly. Estimated U.S. mortgage origination volume fell to $750 billion in 1996 from $1.0 trillion in 1993 and $894 billion in 1992. During fiscal 1997 and 1996 competition for mortgage loans remained intense due both to industry over-capacity 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 increased 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 far more aggressively pricing their loans than the traditional secondary market agencies such as FHLMC and FNMA. Recognizing this, the Company established a strategic mortgage servicing-retained arrangement with one west coast bank and is exploring other such opportunities. Additionally, the Company has correspondent relationships with several of the most aggressive major banks. The Company also competes by operating only in strategically selected geographic markets, motivating its sales force through incentive compensation based on loan origination volume, providing prompt and comprehensive service and otherwise maintaining strong professional relationships with realtors, developers and customers. Regulation First Mortgage is an FHA-approved Direct Endorsement Mortgagee, a VA Automatic Lender, an approved issuer and servicer under the GNMA mortgage-backed securities program, and an approved seller and servicer with the FNMA, FHLMC, the California Housing Financing Agency, the California Public Employees Retirement System and several private mortgage-backed securities conduit companies. As such, the Company's mortgage banking business is subject to the periodic reporting, examination and auditing requirements and other rules and regulations of such governmental agencies with respect to its net worth and its mortgage loan origination, processing, sales and servicing. These rules and regulations, among other things, prohibit race, age and sex discrimination, provide for inspections and appraisals of properties, require credit reports on prospective borrowers, fix (in some cases) maximum interest rates, fees and loan amounts, and mandate the annual submission of audited financial statements. First Mortgage's loan origination activities are also subject to such federal laws as the Equal Credit Opportunity Act, the Truth-In-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which prohibit discrimination and require the disclosure of certain information to borrowers concerning credit and settlement costs. Furthermore, the Company is licensed to do business in California, Nevada, Oregon, Washington and Texas, and its mortgage banking operations are subject to the laws of those states, including those prohibiting usury. The Company is licensed by the California Department of Corporations as a Residential Mortgage Lender. The Company employs a full-time compliance officer and Quality Assurance staff to monitor and audit compliance with all regulatory requirements. Employees As of March 31, 1997, First Mortgage employed 146 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 81.4% of the Company's outstanding common stock. The lease requires monthly rental payments of $20,000 and expires on December 31, 1997, subject to the Company's right to extend the term of the lease for one additional one-year term. The monthly rental payment for any lease extension is subject to increase (but not decrease) upon any such extension. Such payments may not exceed the fair market rent for comparable facilities at the time of the extension. The Company pays for all property taxes, repairs, insurance and utility services for the entire building. The Company believes the current facilities are adequate to meet foreseeable future needs. The Company's branch offices each are leased at varying rates and each office contains approximately 1,000 to 2,000 square feet. For the year ended March 31, 1997, the annual aggregate rental expense for all branch offices was approximately $211,000. Most of the Company's branch offices are on month-to- month or one year short-term leases. No branch office leases generally extend beyond two years. 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, 1997. 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.
Fiscal 1997: High Low First quarter $ 6.75 $ 4.63 Second quarter 5.63 4.63 Third quarter 5.63 4.13 Fourth quarter 5.13 4.13
Fiscal 1996: High Low First quarter $ 5.00 $ 4.00 Second quarter 6.00 4.50 Third quarter 6.50 5.00 Fourth quarter 7.50 5.75
As of March 31, 1997, there were 37 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. ITEM 6. SELECTED FINANCIAL DATA All share and per share data set forth below have been adjusted to reflect a 5-for-4 stock split of the Company's Common Stock on August 2, 1993.
Year Ended March 31, 1997 1996 1995 1994 1993 (In thousands, except per share data) Income Statement Data: Revenues: Loan origination income $ 3,426 $ 3,397 $ 2,523 $ 6,361 $ 6,323 Loan servicing income 7,137 6,787 6,695 6,332 5,249 Gain on sale of mortgage loans 5,374 7,116 819 13,268 11,855 Interest income 2,165 2,105 2,866 2,959 2,640 Other income 2 29 43 65 110 Total revenues 18,104 19,434 12,946 28,985 26,177 Expenses: Employees' salaries and commissions 8,217 7,752 6,899 11,795 10,285 General and administrative expenses 7,271 6,494 5,594 7,245 5,788 Interest expense 690 786 1,309 1,465 1,133 Total expenses 16,178 15,032 13,802 20,505 17,206 Income (loss) before income taxes 1,926 4,402 (856) 8,480 8,971 Income tax expense (benefit) 811 1,833 (308) 3,491 3,715 Net income (loss) $ 1,115 $ 2,569 $ (548) $ 4,989 $ 5,256 Net Income (loss) per share $ 0.19 $ 0.44 $ (0.09) $ 0.83 $ 0.89 Weighted average shares outstanding 5,874 5,883 5,947 5,996 5,914 Operating Data: Loans originated and purchased $ 353,411 $330,896 $174,544 $ 624,317 $ 497,153 Loans serviced (end of year) $ 1,683,65 $1,569,705 $1,533,888 $1,495,384 $ 1,319,307
At March 31, 1997 1996 1995 1994 1993 (In thousands) Balance Sheet Data: Mortgage loans held for sale $27,286 $ 19,879 $25,329 $42,737 $37,005 Originated mortgage servicing rights, net 5,701 3,133 - - - Total assets 50,923 51,131 42,296 57,086 46,989 Notes and sight drafts payable 22,626 24,852 19,698 32,821 27,453 Stockholders' equity 25,648 24,647 22,078 23,080 18,091
No cash dividends were paid on common shares for any period. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General At the beginning of fiscal year 1997, First Mortgage Corporation decided to adopt a growth strategy of simultaneously enhancing and expanding its loan production capacity (either through new wholesale operations or additional retail branch offices) and increasing its loan servicing portfolio. The Company was largely successful in implementing the strategy. Through its production expansion plan, new wholesale branches were established and the servicing portfolio has also grown. In fiscal year 1997, loan originations increased by 6.8% to $353.4 million from $330.9 million in the previous year, in spite of extremely aggressive competition from other originators. The loan servicing portfolio also rose to $1.684 billion in 1997 compared to $1.570 billion in 1996, an increase of 7.3%. Net income for fiscal year 1997, however, decreased 56.6% to $1.12 million from $2.57 million a year ago. Compared to 1996, total revenues dropped by 6.8% while total expenses increased by 7.6%. The earnings in fiscal 1997 were negatively impacted by several factors: intensive price competition among mortgage banking firms and commercial banks which resulted in a substantial reduction in the gain on sale of mortgages; higher expenditures invested into start-up costs for the loan production expansion, and larger foreclosure losses. For the coming year, the Company has streamlined the corporate structure and adopted additional cost reduction measures and management believes that future operating results should improve. Results of Operations Revenue The Company generates revenue primarily from (i) loan origination fees, (ii) fees received for servicing (i.e., administering) mortgage loans, (iii) net gain on the sale of mortgage loans in the secondary market and (iv) interest income received on mortgage loans during the period in which the Company warehouses loans pending their sale and purchase. Loan origination fees, interest income and net gain on the sale of mortgage loans are largely transaction oriented and volume driven. Loan servicing fees constitute a continuing stream of revenue produced by the portfolio of mortgage loans serviced. The sale of servicing rights represents a potential revenue source available to the Company at any time should such need arise. The following table sets forth, for the periods indicated, the percentage of the Company's total revenue represented by each source of income:
Year Ended March 31, 1997 1996 1995 Loan origination income 18.9% 17.5% 19.5% Loan servicing income 39.4% 34.9% 51.7% Gain on sale of mortgage loans 29.7% 36.6% 6.3% Interest income 12.0% 10.8% 22.2% Other income - % 0.2% 0.3% Total 100.0% 100.0% 100.0%
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. The dollar amount of loan origination fees generally increases with the increase in the volume of loans originated, and likewise decreases when loan origination volume falls. In conjunction with new mortgage loan originations during the last three fiscal years, loan origination income rose slightly by 0.9% to $3.43 million in fiscal 1997 from $3.40 million in fiscal 1996, and 34.6% to $3.40 million in fiscal 1996 from $2.52 million in fiscal 1995. Loan origination income generally does not precisely track loan origination volume because many borrowers elect to pay slightly higher mortgage rates to reduce some or all of the amount of their loan origination fees. The Company is then able to obtain a premium upon the sale of such mortgage loans in the secondary market because of their higher interest rates, and those premiums are reflected in the gain on sale of mortgage loans. Loan Servicing Income. Loan servicing income represents loan servicing fees, late charges and other fees earned by the Company for administering loans on behalf of permanent investors. The Company's annual loan servicing fee for mortgage loans ranges from 0.25% to 1.5% of the principal amount of the loan serviced depending on the type of mortgage loan, and on average is approximately 0.37% net of amortization of capitalized service fees and agency guarantee fees. The aggregate principal balance of loans serviced by the Company and the amount of loan servicing income (net of amortization of capitalized servicing fees) have increased largely as a result of the growth in servicing portfolio. Loan servicing income increased 5.2% to $7.14 million in fiscal 1997 from $6.79 million in fiscal 1996, and 1.4% to $6.79 million in fiscal 1996 from $6.70 million in fiscal 1995. The Company's mortgage servicing portfolio increased 7.3% to $1.684 billion in fiscal 1997 from $1.570 billion in fiscal 1996, and 2.3% to $1.570 billion in fiscal 1996 from $1.534 billion in fiscal 1995. Gains on Sale of Mortgage Loans. Gains and losses from the sale of mortgage loans result from: (a) competitive market forces affecting our pricing structure at the time of origination; and (b) interest rate increases or decreases between the time that the Company commits to originate or purchase loans and when the Company commits to sell the loans in the secondary markets. It is also impacted by two other factors: price subsidies and the recognition of gains relating to originated mortgage servicing rights ("OMSRs"). Since 1995, price competition has grown increasingly intense. Commercial banks in particular have been very aggressive with mortgage pricing in order to capture a higher percentage of the market, with the Company's wholesale operations particularly 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. In May 1995, the Financial Accounting Standard Board issued FAS 122. The Company adopted FAS 122 for its fiscal year 1996. Since FAS 122 prohibits retroactive application to prior periods, fiscal year 1995 was accounted for under the original FAS No. 65. The primary difference between FAS 122 and FAS No. 65 is the accounting treatment for the normal servicing fee associated with in-house OMSRs. Under FAS No. 65, OMSRs were not recognized as an asset and as a result of this accounting treatment, the financial statements of 1995 were impacted as there was no balance sheet or income statement recognition of the value of the OMSRs created by the Company. Under FAS 122, OMSRs are required to be classified as an asset and the total cost of creating a mortgage loan is allocated at origination between the loan and the servicing rights based on their respective fair values. Gains on the sales of mortgage loans attributable to the allocation of costs to the OMSRs are recognized when the related loans are sold (even though the OMSRs asset is recorded on the date the loan is originated). Gain on sale of mortgage loans decreased to $5.37 million in fiscal 1997 from $7.12 million in fiscal 1996. The decrease was primarily attributable to intense price competition prevailing in the mortgage lending industry. Gain on sale of mortgage loans increased to $7.12 million in fiscal 1996 from $819,000 in fiscal 1995. This increase was attributable to the higher loan originations generated by the Company and the generally declining interest rate environment which existed during most of fiscal year 1996. 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. 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 each of the last eight fiscal years. 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. The following table sets forth certain data regarding net interestincome:
Year Ended March 31, 1997 1996 1995 (Dollars in Thousands) Interest income $2,165 $2,105 $2,866 Interest expense 690 786 1,309 Net interest income $1,475 $1,319 $1,557
Interest income, which consisted mostly of the interest received on mortgage loans held for sale, increased slightly by 2.9% in fiscal 1997 from fiscal 1996. The increase was due largely to higher average mortgage inventory portfolio carried by the Company. Interest income dropped by 26.6% in fiscal 1996 from fiscal 1995 due to lower average interest rate earned on mortgage loans. Interest expense decreased 12.2% in fiscal 1997 from fiscal 1996, and 40.0% in fiscal 1996 from fiscal 1995. The drops in interest expense for these periods were largely the result of lower reverse repurchase line utilization and higher loan funding with corporate cash. Expenses The major components of the Company's total expenses are (i) employees' salaries and commissions, (ii) general and administrative expenses, and (iii) interest expense. Total expenses, excluding interest expense, increased 9.2% to $15.5 million in fiscal 1997 from $14.2 million in fiscal 1996, compared to an increase of 13.6% to $14.2 million in fiscal 1996 from $12.5 million in fiscal 1995. The increase in total expenses for fiscal 1997 is a direct result of investment in new branch openings and increased loan origination volume. As the amount of mortgage loans originated by the Company increases, an increase in total employee compensation results from additional commissions paid to loan originators, processors and underwriters and other staff necessitated to support higher loan origination volume. Accordingly, employees' salaries and commissions increased 6.0% to $8.2 million in fiscal 1997 from $7.8 million in fiscal 1996, compared to an increase of 12.4% to $7.8 million in fiscal 1996 from $6.9 million in fiscal 1995. General and administrative expenses increased 12.0% to $7.3 million in fiscal 1997 from $6.5 million in fiscal 1996, compared to an increase of 16.1% from fiscal 1996 to fiscal 1995. The increases in these expenses were a direct result of expansion in loan origination, and higher foreclosure losses during the respective fiscal years. Income Taxes The Company's combined effective federal and state income tax rate was 42.1% and 41.6% for fiscal year ended March 31, 1997 and 1996, respectively. The rates for fiscal year 1997 and 1996 differ from the federal statutory rate of 34% primarily due to state income taxes. The effective tax rate for fiscal year 1995 was 36.0% due primarily to the inability to fully utilize tax benefits of California net operating losses. Liquidity and Capital Resources The Company's principal liquidity requirement is the funding of its new mortgage loans, loan origination expenses and other operating activities. To meet these needs, the Company relies on warehouse lines of credit with banks, its own capital, cash flows from operations and short-term reverse repurchase agreements with other investment banking firms. At March 31, 1997, maximum permitted borrowings under the warehouse lines of credit with two nonaffiliated banks totaled $45 million and the amount outstanding was $20.2 million. Borrowings under these facilities are secured by mortgage loans. The agreements also contain various covenants, including minimum net worth, current ratio (as defined), net income, servicing portfolio balances, debt to net worth ratio, and restrict the Company's ability to pay dividends. Management believes that the warehouse agreements will be renewed when the current terms expire in August and September, 1997. In addition to the warehouse lines of credit, the Company may utilize the short-term reverse repurchase agreements provided by investment banking firms in connection with its inventory of mortgage loans and mortgage-backed securities. These facilities tend to carry lower interest rates and allow the Company to better utilize its warehouse lines by accelerating the turnover of loans in inventory. Since September 1994, the Company has repurchased in open market transactions 122,300 shares of its common stock at an aggregate cost of $568,000. The Company's mortgage servicing portfolio provides a liquidity resource since certain 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 an available source of funds should the need arise. Management believes that its current financing arrangements are adequate to meet its present operating needs; however, increases in the existing facilities or other supplementary sources may have to be explored should the market conditions improve and loan origination volume increase. Inflation Inflation may significantly affect the Company's ability to originate loans. Interest rates typically increase during periods of high inflation and decrease during periods of low inflation. Generally, the mortgage banking industry has experienced increased origination volume in response to low interest rates and loan originations have generally decreased during periods of high interest rates. As interest rates decline, prepayments on the loan servicing portfolio generally increase as borrowers refinance mortgage loans to take advantage of lower rates. A higher prepayment rate on loans serviced decreases the value of the Company's loan servicing portfolio, accelerating amortization of purchased servicing and decreases the amount of servicing income. As interest rates rise, new loan originations are likely to fall, but prepayments of existing loans generally decline and the value of the Company's servicing portfolio and of the escrow balances collected thereunder may be enhanced. Recently Issued Financial Accounting Standards In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). FAS 125 will result in the recording of Originated Mortgage Servicing Rights (OMSRs) on the date of sale of a mortgage loan as opposed to the current practice of recording OMSRs on the date loans are originated. Additionally, under FAS 125, excess servicing fees will be combined with OMSRs for balance sheet presentation. In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 (FAS 127), which delays the effective date of the provisions of FAS 125 applicable to the Company by one year. The Company believes that the adoption of FAS 125 in fiscal 1998 will not have a material impact on the financial statements. In February 1997, the FASB issued Statement No. 128, Earnings Per Share (FAS 128), which simplifies the standards for computing earnings per share (EPS) and replaces the presentation of primary EPS with a presentation of basic EPS. The Company believes that the adoption of FAS 128 in fiscal 1998 will not have a material impact on the financial statements. Prospective Trends Fiscal 1997 was very similar to fiscal 1996 and saw more of the same in terms of competitive forces, industry consolidation and overall volume of new mortgage originations. Although the Company does well relative to its mortgage banking peers, the industry as a whole is suffering from the confluence of two major developments, the remaining over capacity of mortgage providers relative to the current level of available mortgage volume; and the looming and growing presence of the major commercial banks in the mortgage arena. In the first instance, the mortgage providing industries, which includes mortgage bankers, savings and loan associations, credit unions, mortgage loan brokers and commercial banks, continue to have excess capacity for the present volume of new mortgage originations, even though there has been an unprecedented shrinking of companies through consolidations, acquisitions and some outright failures. This remaining excess capacity by itself has led to price cutting and reduced operating margins for all mortgage originators. Furthermore, the American consumer is now well-tuned to interest rates, and even relatively small movements in rates can have fairly dramatic effects on new mortgage volume and earnings. In the second instance, as discussed under Competition on page 14, several of the major banks have become fiercely competitive in pricing mortgage products. 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 loan brokers, is having a major impact on the mortgage banking industry and our ability to compete on the types of mortgage loans most sought-after by these commercial banks. The Company's strategy in the face of this is to compete in the channels and with the products which are not the most sought-after by the commercial bank giants. Although we will maintain our correspondent relationships with the major banks who presently have such a strong appetite for certain mortgage products, our primary emphasis will be on the origination of FHA and VA loans for which the major banks largely do not compete; to expand our low-cost and profitable consumer direct marketing operations into other states; and to add other new non-bank loan products which have more profit potential for the Company. Much of this strategy has been implemented already with the expansion of our Consumer Direct Marketing into Texas, and with the planned introduction of home equity loans early this summer. Consistent with this, for fiscal 1998 the Company has revised its incentive bonus plan for the majority of its non-sales personnel and management. Heretofore, the bonus incentives were based upon the volume of loans processed through the Company, predicated on the long-standing industry practice that volume equated to profit. But the new reality dictates a new paradigm, one based upon profit and profit potential rather than volume of loans. Volume is important, but only if it enhances profit, and the bonus incentives are now connected directly to the Company profits. This is already producing results, as many of our employees are coming forth with ideas for reducing expenses and increasing revenue, a positive trend indeed. Forward-Looking Statements From time to time, the Company or its representatives may make forward- looking statements in this report or elsewhere relating to such matters as anticipated financial performance, including projections of revenues, expenses, earnings, liquidity, capital resources or other financial items; business plans, objectives and prospects; and similar matters. Forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 frequently are identified by the use of terms such as "expect," "believe," "estimate," "may," "should," "will" or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the forward-looking statements made by the Company or its representatives. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following, among other factors: (a) the cyclical financial results traditionally experienced by the mortgage banking industry, which have been caused in large part by periodic fluctuations in mortgage interest rates and in consumer demand for new mortgage loans; (b) the possibility of adverse changes in the Company's ability to obtain suitable warehousing lines of credit with which to fund new loans; (c) the possibility of adverse changes in the Company's ability to sell new mortgage loans in the secondary mortgage market; (d) increasing competition faced by the Company, particularly from commercial banks; (e) the possibility of adverse regulatory changes, such as changes in the level or terms of programs administered by GNMA, FNMA or FHLMC or the FHA or VA; (f) dependence on existing management; (g) credit risks inherent in the lending business; and (h) periodic fluctuations in general economic conditions, with corresponding fluctuations in the Company's ability to originate new mortgage loans. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information with respect to this item is set forth in "Index to Financial Statements". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT* ITEM 11. EXECUTIVE COMPENSATION* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT* ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS* * For information called for by Items 10-13, reference is made to the Company's definitive proxy statement for its annual meeting of shareholders, to be held on October 16, 1997, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 1997, 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, 1997. (c) Exhibits The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated by reference herein: Exhibit Number Description 3.1 Restated and Amended Articles of Incorporation of the Company (previously filed with the Securities and Exchange Commission on March 6, 1992 as Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 3.2 Restated Bylaws of the Company (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.1 Credit and Security Agreement dated September 1, 1995, between Bank of America National Trust and Savings Association and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.1 to the Company's Annual Report or 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 or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.3 Second Amendment dated September 1, 1996 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.4 Third Amendment dated December 18, 1996 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.5 First Amendment dated March 20, 1996 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 27, 1996 as Exhibit 10.3 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.6 Amendments dated May 1, 1995 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 27, 1996 as Exhibit 10.4 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.7 Amendments dated August 31, 1995 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 27, 1996 as Exhibit 10.5 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.8 Amendments dated October 31, 1995 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 27, 1996 as Exhibit 10.6 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.9 Amendments dated December 29, 1995 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 27, 1996 as Exhibit 10.7 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.10 Amendments dated July 1, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.11 Amendments dated August 31, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.12 Amendments dated October 25, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.13 Amendments dated February 3, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.14 Credit Agreement dated February 10, 1988, between Clement Ziroli and the Company, and amendments thereto (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.15 Note Secured by Deed of Trust dated February 1, 1991, by Fin-West Group in favor of the Company in the amount of $500,000 (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 33- 45187, and incorporated herein by reference). 10.16 Lease dated January 1, 1992, between the Company and Fin-West (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). 10.17 Amendment to Standard Office Lease-Net dated January 1, 1992 (previously filed with the Securities and Exchange Commission on March 6, 1992 as Exhibit 10.7(b) to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.18 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). 10.19 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). 10.20 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). 10.21 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). 10.22 Defined Contribution Plan and Trust -- Basic Plan Document No. 3 (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.11 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.23 Employee Pre-Tax Premium Plan of Fin-West Group, Inc., 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). 10.24 Amendment to Credit Agreement dated December 31, 1995, between Clement Ziroli and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.18 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.25 Amendment to Credit Agreement dated December 31, 1996, between Clement Ziroli and the Company. 10.26 Employment Agreement dated September 30, 1996 between Clement Ziroli and the Company. 10.27 Employment Agreement dated September 30, 1996 between Bruce G. Norman and the Company. 10.28 Employment Agreement dated September 30, 1996 between Pac W. Dong and the Company. 11.1 Computation of Per Share Earnings. 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. 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 27, 1997 By 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 27, 1997. By CLEMENT ZIROLI Clement Ziroli, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By PAC W. DONG Pac W. Dong, Director, Chief Financial Officer, Controller and Executive Vice President (Principal Financial and Accounting Officer) By BRUCE G. NORMAN Bruce G. Norman, Director, President and Chief Operating Officer. By HAROLD HARRIGIAN Harold Harrigian, Director By ROBERT E. WEISS Robert E. Weiss, Director First Mortgage Corporation Index to Financial Statements Report of Independent Auditors F-2 Financial Statements Balance Sheet as of March 31, 1997 and 1996 F-3 Statement of Operations for the years ended March 31, 1997, 1996 and 1995 F-4 Statement of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995 F-5 Statement of Cash Flows for the years ended March 31, 1997, 1996 and 1995 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. Report of Independent Auditors Board of Directors First Mortgage Corporation We have audited the accompanying balance sheet of First Mortgage Corporation as of March 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Mortgage Corporation at March 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. As discussed in the notes to financial statements, in fiscal 1996 First Mortgage Corporation adopted Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. Orange County, California May 23, 1997 First Mortgage Corporation Balance Sheet
March 31 1997 1996 Assets Cash $ 5,903,000 $ 5,948,000 Mortgage loans held for sale 27,286,000 19,879,000 Investment in commercial paper - 9,955,000 Other receivables and servicing advances 9,623,000 9,545,000 Originated mortgage servicing rights, net 5,701,000 3,133,000 Excess service fee, net 294,000 414,000 Purchased servicing rights, net 714,000 430,000 Property and equipment, net 592,000 612,000 Prepaid expenses and other assets 546,000 891,000 Due from affiliates 134,000 194,000 Note receivable, Fin-West 130,000 130,000 Total assets $50,923,000 $51,131,000 Liabilities and stockholders' equity Liabilities: Notes payable, banks $20,172,000 $20,653,000 Notes payable, officer 1,500,000 1,500,000 Sight drafts payable 954,000 2,699,000 Accounts payable and accrued liabilities 816,000 765,000 Deferred income taxes 1,833,000 867,000 Total liabilities 25,275,000 26,484,000 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 - 5,859,117 in 1997 and 5,883,117 in 1996 5,147,000 5,261,000 Retained earnings 20,501,000 19,386,000 Total stockholders' equity 25,648,000 24,647,000 Total liabilities and stockholders' equity $50,923,000 $51,131,000
See accompanying notes. First Mortgage Corporation Statement of Operations
Year ended March 31 1997 1996 1995 Revenues: Loan origination income $3,426,000 $3,397,000 $2,523,000 Loan servicing income 7,137,000 6,787,000 6,695,000 Gain on sale of mortgage loans 5,374,000 7,116,000 819,000 Interest income 2,165,000 2,105,000 2,866,000 Other income 2,000 29,000 43,000 Total revenues 18,104,000 19,434,000 12,946,000 Expenses: Employees' salaries and commissions 8,217,000 7,752,000 6,899,000 General and administrative expenses 7,271,000 6,494,000 5,594,000 Interest expense 690,000 786,000 1,309,000 Total expenses 16,178,000 15,032,000 13,802,000 Income (loss) before income taxes 1,926,000 4,402,000 (856,000) Income tax expense (benefit) 811,000 1,833,000 (308,000) Net income (loss) $1,115,000 $2,569,000 (548,000) Net income (loss) per share $ .19 $ .44 $ (.09)
See accompanying notes. First Mortgage Corporation Statement of Stockholders' Equity
Common stock Retained Shares Amount earnings Total Balance at March 31, 1994 5,981,247 $5,715,000 $17,365,000 $23,080,000 Repurchase of shares (98,300) (454,000) - (454,000) Net loss - - (548,000) (548,000) Balance at March 31, 1995 5,882,947 5,261,000 16,817,000 22,078,000 Net income - - 2,569,000 2,569,000 Stock issuances under option plan 170 - - - Balance at March 31, 1996 5,883,117 5,261,000 19,386,000 24,647,000 Net income - - 1,115,000 1,115,000 Repurchase of shares (24,000) (114,000) - (114,000) Balance at March 31, 1997 5,859,117 $5,147,000 $20,501,000 $25,648,000
See accompanying notes. First Mortgage Corporation Statement of Cash Flows
Year ended March 31 1997 1996 1995 Operating activities Net income (loss) $ 1,115,000 $2,569,000 (548,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for deferred income taxes 966,000 1,058,000 217,000 Provision for losses on foreclosure 153,000 210,000 549,000 Amortization of originated mortgage servicing rights, excess service fee and purchased servicing rights 1,683,000 1,032,000 314,000 Depreciation and amortization 195,000 175,000 171,000 Originations and purchases of mortgage loans held for sale (353,411,000) (330,896,000) (174,544,000) Sales and principal repayments of mortgage loans held for sale 346,004,000 336,346,000 191,952,000 Change in excess service fee - (2,000) 5,000 Change in other receivables and servicing advances (231,000) (810,000) (759,000) Change in prepaid expenses and other assets 345,000 (190,000) 229,000 Change in accounts payable and accrued liabilities 51,000 245,000 (665,000) Loss on sale of assets 7,000 - - Net cash provided by (used in) operating activities (3,123,000) 9,737,000 16,921,000 Investing activities Sale (purchase) of commercial paper 9,955,000 (9,955,000) - Originated mortgage servicing rights (3,838,000) (3,740,000) - Purchase of mortgage servicing rights (577,000) (37,000) (163,000) Note receivable, Fin-West - 120,000 - Purchase of furniture and equipment (212,000) (108,000) (33,000) Proceeds from sale of assets 30,000 39,000 61,000 Change in due from affiliates 60,000 (10,000) - Net cash provided by (used in) investing activities 5,418,000 (13,691,000) (135,000) Financing activities Change in notes payable, banks (481,000) 12,292,000 (21,332,000) Change in sight drafts payable (1,745,000) 2,355,000 (1,284,000) Change in notes payable, other - (9,493,000) 9,493,000 Repurchase of common stock (114,000) - (454,000) Net cash provided by (used in) financing activities (2,340,000) 5,154,000 (13,577,000) 000) Increase (decrease) in cash (45,000) 1,200,000 3,209,000 Cash at beginning of year 5,948,000 4,748,000 1,539,000 Cash at end of year $ 5,903,000 $5,948,000 $4,748,000
First Mortgage Corporation Notes to Financial Statements March 31, 1997 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 13 branch offices located in the states of California, Nevada and Washington. Fin-West Group (Fin-West), an affiliated company, owns 81.4% of the Company's outstanding common stock. Mortgage Loans Held for Sale Mortgage loans held for sale are stated at the lower of cost or aggregate market value. Market value is determined by purchase commitments from investors and prevailing market prices. Originated Mortgage Servicing Rights, Excess Service Fee and Purchased Servicing Rights Originated Mortgage Servicing Rights Originated mortgage servicing rights (OMSR's) are recorded based on their fair value relative to the loan as a whole. The cost is being amortized in proportion to the estimated future net servicing income. Impairment of originated mortgage servicing rights is determined using the estimated fair value of the mortgage servicing rights on a disaggregated portfolio basis. Excess Service Fee Gains and losses on sales of mortgage loans are adjusted to reflect as income or loss servicing fees that vary from normal servicing rates set by federally approved secondary market makers. Accordingly, the Company has recorded as excess service fee amounts equal to the present value of servicing fees to be received in future years in excess of normal rates based upon the estimated life of the loans. These fees are amortized over the estimated life of the loan thus offsetting excess servicing revenues received during such period. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Originated Mortgage Servicing Rights, Excess Service Fee and Purchased Servicing Rights (continued) The excess service fee is calculated based on an aggregation by year of loan origination and loan type. The net realizable value of each year's pool is evaluated separately on a disaggregation basis based on loan type, loan origination year, and loan interest rate. 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, excess service fee 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. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) 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. Loan Servicing Income 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 in excess of the estimated current normal service fee. Conversely, the gain on sale is decreased or loss increased for servicing fees to be received which are less than the estimated current normal service fee. Starting in fiscal year 1996, the gain on sale of mortgage loans was also benefited by the implementation of Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, see Note 3. 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. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Income Taxes The Company files a separate federal income tax return and is included in the State of California combined return of Fin-West Group. Statement of Cash Flows The Company paid interest in 1997, 1996 and 1995 of $641,000, $747,000 and $1,358,000, respectively. The Company paid income taxes in 1997, 1996 and 1995 of $30,000, $1,545,000 and $0, respectively. Net Income per Share Net income per share is computed based on the weighted average number of common and dilutive common equivalent shares (stock options) outstanding during each year retroactively adjusted for stock splits. The weighted average number of common and common equivalent shares outstanding in 1997, 1996 and 1995 were 5,873,931, 5,890,097 and 5,946,681, respectively. 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. Recently Issued Financial Accounting Standards In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). FAS 125 will result in the recording of OMSRs on the date of sale of a mortgage loan as opposed to the current practice of recording OMSRs on the date loans are originated. Additionally, under FAS 125, excess servicing fees will be combined with OMSR's for balance sheet presentation. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Recently Issued Financial Accounting Standard (continued) In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127 Deferral of the Effective Date of Certain provisions of FASB Statement No. 125 (FAS 127), which delays the effective date of the provisions of FAS 125 that are applicable to the Company by one year. The Company believes that the adoption of FAS 125 in fiscal year 1998 will not have a material impact on the financial statements. In February 1997, the FASB issued Statement No. 128, Earnings Per Share (FAS 128), which simplifies the standards for computing earnings per share (EPS) and replaces the presentation of primary EPS with a presentation of basic EPS. The Company believes that the adoption of FAS 128 in fiscal year 1998 will not have a material impact on the financial statements. 2. Mortgage Loans Held for Sale Mortgage loans held for sale consist of the following at March 31, 1997 and 1996:
1997 1996 Principal balance outstanding $28,003,000 $20,507,000 Loss reserve (30,000) (40,000) Loan origination discounts (601,000) (540,000) Deferred loan fees (86,000) (48,000) $27,286,000 $19,879,000
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, 1997, the Company had short-term commitments amounting to approximately $4,014,000 to fund mortgage loans subject to credit approval. The Company generally does not engage in forward delivery contracts to hedge its portfolio. First Mortgage Corporation Notes to Financial Statements (continued) 3. Mortgage Servicing Assets In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, an amendment of FAS 65 (FAS 122). The Company adopted this standard for its 1996 fiscal year. FAS 122 prohibits retroactive application. Accordingly, the Company's financial statements for the fiscal year ended March 31, 1995 was accounted for under the original FAS 65. FAS 122 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. 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. Mortgage servicing assets consist of originated mortgage servicing rights, excess servicing fee and purchased servicing rights. Activities in each category are summarized as follows:
Originated Excess Purchased mortgage servicing servicing servicing fee rights rights Beginning balance at March 31, 1996 $3,133,000 $414,000 $430,000 Additions 3,838,000 - 577,000 Amortization and write-offs (1,337,000) (120,000) (325,000) Impairment 67,000 - 32,000 Balance at March 31, 1997 $5,701,000(1) $294,000 $714,000 (1)Includes $350,000 of originated servicing rights related to mortgage loans held for sale to investors. Since the underlying loans have not yet been sold, no revenues have been recognized on these originated servicing rights for the fiscal year ended March 31, 1997.
First Mortgage Corporation Notes to Financial Statements (continued) 4. Other Receivables and Servicing Advances Other receivables and servicing advances consists of the following at March 31, 1997 and 1996:
1997 1996 Foreclosures and advances on real estate owned $8,800,000 $8,923,000 Servicing advances 1,715,000 1,799,000 Other 580,000 142,000 Allowance for possible losses (1,472,000) (1,319,000) $9,623,000 $9,545,000
5. Note Receivable, Fin-West The note receivable from Fin-West is collateralized by real property located in Diamond Bar, California and bears interest at 6% per annum, payable annually. The note is due January 2001. 6. Property and Equipment Property and equipment consists of the following at March 31, 1997 and 1996:
1997 1996 Furniture and equipment $1,981,000 $1,806,000 Automobiles 64,000 64,000 Leasehold improvements 388,000 388,000 2,433,000 2,258,000 Less accumulated depreciation and amortization (1,841,000) (1,646,000) $592,000 $612,000
First Mortgage Corporation Notes to Financial Statements (continued) 7. Income Taxes Income tax expense (benefit)for the years ended March 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 Current: Federal $(112,000) $ 622,000 $(525,000) State (43,000) 153,000 - (155,000) 775,000 (525,000) Deferred: Federal 701,000 718,000 261,000 State 265,000 340,000 (44,000) 966,000 1,058,000 217,000 $ 811,000 $1,833,000 $(308,000)
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, 1997 and 1996 are as follows:
1997 1996 Deferred tax assets: State income taxes $ 174,000 $ 119,000 Accrued liabilities 74,000 50,000 Deferred loan fees 39,000 22,000 Provision for foreclosure 367,000 328,000 Purchased servicing rights 153,000 116,000 Mark-to-market adjustments 3,000 5,000 Total deferred tax assets 810,000 640,000 Deferred tax liabilities: Originated mortgage servicing rights (2,425,000) (1,298,000) Capitalized servicing fees (13,000) (21,000) Accelerated depreciation (96,000) (79,000) Other (109,000) (109,000) Total deferred tax liabilities (2,643,000) (1,507,000) Net deferred tax liabilities $(1,833,000) $ (867,000)
First Mortgage Corporation Notes to Financial Statements (continued) 7. Income Taxes (continued) Income tax expense (benefit) computed at the statutory federal income tax rate (34%) and income tax expense (benefit) provided in the financial statements differ as follows for the years ended March 31, 1997, 1996 and 1995:
1997 1996 1995 Tax computed at the statutory rate $665,000 $1,497,000 $(291,000) 00 0) State income tax, net of federal income tax benefit 146,000 330,000 (29,000) Other 10,000 6,000 12,000 Income tax expense (benefit) $811,000 $1,833,000 $(308,000)
8. Notes Payable, Banks At March 31, 1997, the Company had two line of credit agreements with banks which provide for borrowings up to $30,000,000 and $15,000,000 with interest payable monthly at 1.25% per annum or the bank's reference rate of 8.25% at March 31, 1997, 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, 1997, borrowings under these lines of $20,172,000 are collateralized by mortgage loans held for sale. The weighted average interest rate for the fiscal year ended March 31, 1997 was 1.28%. The lines of credit are subject to renewal on September 1, 1997 and August 31, 1997, respectively. Management believes the line of credit agreements will be renewed prior to their expiration. Under the credit agreements, the Company must comply with certain financial and other covenants, including the maintenance of a minimum net worth, other financial ratios, and a minimum servicing portfolio size. Further, absent the consent of the lenders, such covenants prohibit the Company from declaring or paying any dividends upon any shares of the Company's common stock. At March 31, 1997, the Company was in compliance with the aforementioned loan convenants. One line 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, 1997 there were no investment securities purchased under this line. First Mortgage Corporation Notes to Financial Statements (continued) 8. Notes Payable, Banks (continued) At March 31, 1997, the Company also had an unsecured line of credit of $2,000,000 with a bank which expires in August 1997. Advances on the line of credit are due within 21 days and bear interest at the bank's reference rate. There were no amounts outstanding under the agreement at March 31, 1997 and 1996. 9. Related Party Transactions At March 31, 1997, the Company had a line of credit agreement with an officer, under which the Company may borrow up to $1,500,000. The line of credit expires on December 31, 1997. Advances under the agreement bear interest at a nonaffiliated bank's reference rate (8.25% at March 31, 1997) plus 1% per annum. The weighted average interest rate for the fiscal year ended March 31, 1997 was 9.3%. Interest expense of approximately $139,000, $148,000 and $128,000 were charged to operations for the years ended March 31, 1997, 1996 and 1995, respectively, for borrowings under this agreement. The Company leases certain premises from Fin-West, at a monthly rental of $20,000. Total rent expense for these premises amounted to $240,000 for each of the years ended March 31, 1997, 1996 and 1995. The Company subleased part of these premises for a monthly rental income of $3,200 pursuant to one sublease that expired in May 1995. The Company also leased certain premises on a month-to-month basis from an affiliated company in fiscal year 1995. Total rent expense for these premises amounted to $4,000 and $37,950 for the years ended March 31, 1996 and 1995, respectively. The Company paid title insurance fees to an affiliated entity of $151,000, $185,000 and $112,000 for the years ended March 31, 1997, 1996 and 1995, respectively. 10. Loan Servicing The Company's loan servicing portfolio at March 31, 1997 and 1996 consisted of the following:
1997 1996 GNMA mortgage-backed securities $798,504,000 $780,390,000 FHLMC 283,434,000 300,009,000 FNMA 186,782,000 192,101,000 Other 414,932,000 297,205,000 $1,683,652,000 $1,569,705,000
First Mortgage Corporation Notes to Financial Statements (continued) 10. Loan Servicing (continued) At March 31, 1997 and 1996, the Company subserviced approximately $99,815,000 and $92,544,000, 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 $12,966,000 and $13,892,000 at March 31, 1997 and 1996, 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 and $2,100,000 at March 31, 1997 and 1996, respectively. 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, 1997, the estimated fair value of mortgage loans held for sale, excess service fee and notes payable approximated the net carrying value of such accounts. First Mortgage Corporation Notes to Financial Statements (continued) 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, $60,000 and $0 for the years ended March 31, 1997, 1996, and 1995, respectively. 13. Commitments and Contingencies Leases Minimum annual rental payments under operating leases for office space are as follows: 1998 $258,000 Net rental payments to nonaffiliated entities of approximately $212,000, $261,000 and $313,000 have been charged to occupancy expense in the accompanying statements of operations for the years ended March 31, 1997, 1996 and 1995, 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 First Mortgage Corporation Notes to Financial Statements (continued) 14. Stockholders' Equity (continued) 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 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 is to be granted to each nonemployee director in office on the last business day of each July beginning in 1993 and continuing through 1997. No option is to be granted after the last business day in July 1997 unless the Plan is otherwise amended. The following summarizes stock option activity under both of the Company's stock plans for the year ended March 31, 1997:
Weighed-Average Options Exercise Price Options March 31, 1997 March 31,1997 March 31, 1996 Exercise Options outstanding at beginning of fiscal year 292,555 $5.66 250,150 Option granted 95,100 $4.81 84,375 Options exercised - - (170) Options cancelled (15,100) $5.30 (41,800) Options outstanding at end of fiscal year 372,555 $5.46 292,555 Exercise price: Per share for options exercised during the fiscal year n/a $5.00
First Mortgage Corporation Notes to Financial Statements (continued) 14. Stockholders' Equity (continued)
Weighed-Average Options Exercise Price Options March 31, 1997 March 31,1997 March 31,1996 Per share for options outstanding at end of fiscal year $4.625-$6.80 $4.625-$6.80 $6.80 Weighted average fair value of options granted $1.35 $1.17 Weighted average contractual life of option outstanding in years) 3.8 3.9
All outstanding options as of March 31, 1997 were exercisable. Options available for future grants under the plans were 263,945 and 355,445 as of March 31, 1997 and 1996, 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:
1997 1996 Expected life (years) 3 2.5 Interest rate 5.70% 5.60% Volatility 0.32 0.32 Dividend yield 0.00% 0.00%
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 $43,000 and $46,000 in 1997 and 1996, respectively. The pro forma net income resulting from the increased compensation cost was $1,072,000 ($0.18 per share) and $2,523,000 ($0.43 per share) in 1997 and 1996, respectively. The effect of stock-based compensation on net income for 1997 and 1996 may not be representative of the effect on pro forma net income in future years because compensation expense related to grants made prior to 1996 is not considered. 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 or 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 or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.3 Second Amendment dated September 1, 1996 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.4 Third Amendment dated December 18, 1996 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.5 First Amendment dated March 20, 1996 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 27, 1996 as Exhibit 10.3 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.6 Amendments dated May 1, 1995 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 27, 1996 as Exhibit 10.4 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.7 Amendments dated August 31, 1995 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 27, 1996 as Exhibit 10.5 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.8 Amendments dated October 31, 1995 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 27, 1996 as Exhibit 10.6 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.9 Amendments dated December 29, 1995 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 27, 1996 as Exhibit 10.7 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.10 Amendments dated July 1, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.11 Amendments dated August 31, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.12 Amendments dated October 25, 1996 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.13 Amendments dated February 3, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.14 Credit Agreement dated February 10, 1988, between Clement Ziroli and the Company, and amendments thereto (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.15 Note Secured by Deed of Trust dated February 1, 1991, by Fin-West Group in favor of the Company in the amount of $500,000 (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 33- 45187, and incorporated herein by reference). 10.16 Lease dated January 1, 1992, between the Company and Fin-West (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). 10.17 Amendment to Standard Office Lease-Net dated January 1, 1992 (previously filed with the Securities and Exchange Commission on March 6, 1992 as Exhibit 10.7(b) to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.18 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). 10.19 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). 10.20 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). 10.21 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). 10.22 Defined Contribution Plan and Trust -- Basic Plan Document No. 3 (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 10.11 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.23 Employee Pre-Tax Premium Plan of Fin-West Group, Inc., 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). 10.24 Amendment to Credit Agreement dated December 31, 1995, between Clement Ziroli and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.18 to the Company's Annual Report or Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.25 Amendment to Credit Agreement dated December 31, 1996, between Clement Ziroli and the Company. 10.36 Employment Agreement dated September 30, 1996 between Clement Ziroli and the Company. 10.37 Employment Agreement dated September 30, 1996 between Bruce G. Norman and the Company. 10.38 Employment Agreement dated September 30, 1996 between Pac W. Dong and the Company. 11.1 Computation of Per Share Earnings. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule (included only in the electronic filing). EX-10.3 2 SECOND AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT This Second Amendment to Amended and Restated Mortgage Loan Warehousing Agreement (the "Amendment') is dated as of this 1st day of September, 1996, by and among, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association (BOA), and the other banks signatory hereto from time to time (each a "Lender" and, collectively, the "Lenders), BOA as agent for the Lenders (in such capacity, the "Agent) and FIRST MORTGAGE CORPORATION, a California corporation (the "Company"). RECITALS A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing Agreement dated as of September 1, 1995 by and among BOA, the Agent and the Company (as amended from time to time, the "Agreement"), BOA agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. B. The Company and the Lenders desire to amend the Agreement in certain respects, all as set forth more particularly herein. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. . Change in Definition of Maturity Date. To reflect the agreement of the parties to extend the Maturity Date, the definition of " Maturity Date" in Section 11 of the Agreement is amended by replacing "September 1, 1996" with "September 1, 1997". 2. Reaffirmation of-Security Agreement. Other than as amended pursuant to Paragraph 1 above, the Company hereby affirms and agrees that (a) the execution and delivery by the Company of and the performance of b obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement as amended hereby, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. 3. Effective Date. This Amendment shall be effective as of the date (the "Effective Date ) that: (a) ALL parties signatory hereto have executed and delivered this Amendment to BOA; and (b) BOA has received such board resolutions, incumbency certificates and other additional documentation as ft may request in connection herewith. 4. No Other Amendment. Except as expressly amended herein, the Agreement and the other Loan Documents shall remain in full force and effect as currently written. 5. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 6. Representations and Warranties. The Company hereby represents and warrants to the Agent and the Lenders as follows: (a) The Company has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and all documents, instruments and agreements executed and delivered by the Company in connection therewith (collectively, the "Amendment Documents) and has taken all necessary corporate action to authorize the execution, delivery and performance of the Amendment Documents. The Amendment Documents have been duty executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect to the Amendment Documents: (1) complete in all respects, and (2) there has not occurred an Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Title Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as Agent and as Lender By: Name: Thomas A. Pizurie Title: Vice President EX-10.4 3 THIRD AMENDMENT TO AND REAFFIRMATION OF AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT AND RELATED DOCUMENTS THIS THIRD AMENDMENT TO AND REAFFIRMATION OF AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT AND RELATED DOCUMENTS (the "Amendment") is made and dated as of the 18th day of December, 1996 by and among FIRST MORTGAGE CORPORATION, a California corporation (the "Company"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("BOA"), and the other lenders from time to time party thereto (BOA and such other lenders being referred to herein, individually, as a "Lender" and collectively the "Lenders"), and BOA, as agent for the Lenders (in such capacity, the "Agent"). RECITALS A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing Agreement dated as of September 1, 1995 among the Agent, the Lenders, and the Company (as amended from time to time, the "Agreement"), the Lenders agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. B. The parties hereto desire to amend the Agreement in certain respects in order to add a sub-facility for financing the gestation of Mortgage-Backed Securities after their initial certification, all as more particularly described below. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1 . Gestation Advances. To reflect the agreement of the parties hereto to add a sub-facility for financing the gestation of Mortgage-Backed Securities after their initial certification and to incorporate additional interest rate provisions applicable thereto, Paragraphs 1 (a) through 1(e) of the Agreement ares hereby amended to read in their entirety as follows: "1(a) Credit Limit. On the terms and subject to the conditions set forth herein, the Lenders severally agree that they shall, from time to time but not including the Maturity Date (as such term and capitalized terms not otherwise defined herein are defined in Paragraph 11 below), make loans (the "Loans" or a "Loan"), in the form of either Regular Advances or Gestation Advances, pro rata in accordance with their respective Percentage Shares, to the Company in amounts not to exceed, in the aggregate at any time outstanding: (1) In the case of Regular Advances, the lesser of-. (i) The Credit Limit; and (ii) The Collateral Value of the Borrowing Base minus the aggregate dollar amount of all Gestation Advances outstanding; and (2) In the case of Gestation Advances, the least of: (i) The Gestation Advance Sublimit; (ii) The Collateral Value of the Borrowing Base consisting of Eligible Gestation Mortgage Loans; and (iii) The Collateral Value of the Borrowing Base minus the aggregate dollar amount of all Regular Advances outstanding. 1(b) Interest Rates Applicable to Loans. All Regular Advances shall initially bear interest at the Reference Rate and, thereafter, shall be maintained, at the election of the Company made from time to time as permitted herein, as Reference Rate Loans, Eurodollar Rate Loans and/or Established Rate Loans or any combination thereof. All Gestation Advances shall be maintained, at the election of the Company made from time to time as permitted herein, as Federal Funds Rate Loans and/or Established Rate Loans. l(c) Calculation of Interest. 'The Company shall pay interest on Loans outstanding hereunder from the date disbursed to but not including the date of payment calculated on such Lender's Percentage Share of the principal amount of such Loans outstanding during the interest calculation period, at a rate per annum equal to, at the option of and as selected by the Company from time to time (subject to the provisions of Paragraphs I (e), I (f), I (g) and I (h) below): (1) with respect to each Loan which is a Reference Rate Loan, at a fluctuating rate per annum equal to the Reference Rate during the applicable computation period, (2) with respect to each Loan which is an Established Rate Loan, at the Applicable Established Rate for the applicable computation period, (3) with respect to each Loan which is a Eurodollar Loan,, at the Applicable Eurodollar Rate for the applicable Interest Period, and (4) with respect to each Loan which is a Federal Funds Rate Loan, the Applicable Federal Funds Rate. 1(d) Payment of Interest. Interest accruing on Loans outstanding hereunder shall be payable directly to each Lender immediately following receipt by the Company from such Lender of an interest billing therefor. Interest accruing on Reference Rate Loans, Federal Funds Rate Loans and Established Rate Loans shall be payable monthly, in arrears, as provided in Paragraph 2(d) below; interest accruing on Eurodollar shall be payable at the end of the applicable Interest Period. 1(e) Established Rate Loans. (1) With respect to BOA's Percentage Share of Loans outstanding under the Agreement, the Company hereby agrees to maintain during any given calendar month (or applicable portion thereof) Available Deposits in noninterest bearing accounts with BOA, in such amounts as the Company and BOA may establish in a notice from BOA and acknowledged in writing by the Company at least five (5) Business Days prior to the first day of such month (the "Required Loan Balances" for such monthly period). If the Company maintains the Required Loan Balances as specified by BOA pursuant hereto, BOA hereby agrees to adjust the interest otherwise payable under Paragraph I (c) of the Agreement, against an equal dollar amount of BOA's Percentage Share of the daily average amount of Regular Advances and/or Gestation Advances outstanding under the Agreement during such monthly period (or applicable portion thereof), to the Applicable Established Rate. (2) In the event the Company shall fail to maintain the Required Loan Balances with BOA (with the Required Loan Balances first being allocated to Regular Advances outstanding and then to Gestation Advances outstanding during the applicable computation period), the Company shall pay to BOA a fee (a "Deficiency Fee") computed against the average daily deficit of such Required Loan Balances during such month at a per annum balance deficiency rate equal to one hundred and fifteen percent (I 15.00%) of the Reference Rate (the "Balance Valuation Rate"). In the event that during any monthly period Available Deposits are maintained with BOA in excess of the Required Loan Balances for such month, such excess shall be given a value (a "Balance Credit") computed as follows: (1) the dollar amount of such excess, multiplied by (2) the Balance Valuation Rate for such month. Balance Credits may be credited by BOA against Deficiency Fees owing BOA hereunder at any time during the six months (or such longer period as is mutually agreeable to BOA and the Company) immediately following the month in which such Balance Credit first accrued. (3) The Company hereby acknowledges and agrees that there is no requirement that Available Deposits be maintained in excess of Required Loan Balances and, consequently, under no circumstances shall the Company be entitled to any Balance Credit for such excess Available Deposits other than as expressly set forth herein, or to any Balance Credit following the Maturity Date, including, without limitation, following the occurrence of an Event of Default and acceleration of the Obligations. (4) BOA will notify the Company in writing from time to time of the amount of any Deficiency Fees payable to BOA by the Company hereunder, and the Company shall pay such Deficiency Fees directly to BOA within five (5) Business Days of receipt of such notice. BOA may elect not to make demand for the payment of Deficiency Fees accruing from time to time and it is expressly agreed and understood that no such Deficiency Fees shall, by reason of such failure of BOA to make demand therefor or otherwise, be deemed to have been waived by BOA (except as expressly waived in writing by BOA from time to time) and that all Deficiency Fees accrued and unpaid hereunder and not so expressly waived, whether or not previously declared due and owing by BOA, shall automatically be due and payable in full on the Maturity Date." 2. Use of Proceeds. To reflect the agreement of the parties hereto to restrict the use of proceeds from Gestation Advances, Paragraph 2(a) of the Agreement is hereby amended to read in its entirety as follows: "2(a) Use of Proceeds. The proceeds of all Regular Advances (including any Loans funded as a Swing Line Advance) shall be utilized by the Company solely for the purposes of (1) originating and/or acquiring Mortgage Loans (or repaying Swing Line Advances used for such purpose) and/or general working capital purposes. The proceeds of all Gestation Advances shall be utilized by the Company solely for the purpose of financing the gestation of Mortgage-Backed Securities after their initial certification." 3. Swing Line Advance-,. To reflect the agreement of the parties hereto that Swing Line Advances shall not be applicable to "Gestation Advances," Paragraph 2(m) of the Agreement is hereby amended to insert the following sentence at the end of said Paragraph: "In no event shall Gestation Advances be funded through Swing Line Advances". 4. Definitions. (a) The following new defined terms are hereby added to Paragraph 11 of the Agreement in appropriate alphabetical position: ... "Agency Custodial Agreements' shall mean the F14LMC Custodial Agreement, the FNMA Custodial Agreement and the GNMA Custodial Agreement, as applicable. " "Agency Guide' shall mean the FHLMC Guide, the FNMA Guide or the GNMA Guide, as applicable." "Applicable Established Rate' shall mean: (a) with respect to Regular Advances which are being maintained as Established Rate Loans, one and one quarter percent (1.25%), and (b) with respect to Gestation Advances which are being maintained as Established Rate Loans, three quarters of one percent (0.75%). "Applicable Federal Funds Rate' shall mean the Federal Funds Rate plus three quarters of one percent (0.75%)." "Certificating Custodian' shall mean any Person acting as the Company's "document custodian," "custodian" or "certificating custodian," as such terms are used in the applicable Agency Guide, for purposes of (a) certifying that the documentation relating to Mortgage Loans received by such Person from the Company (or the Collateral Agent) is complete and acceptable under the applicable Agency Guide for purposes of including such Mortgage Loan in a pool of Mortgage Loans in which Mortgage- Backed Securities will represent interests and (b) holding such documentation following formation of such pools and issuance of such Mortgage-Backed Securities. The Certificating Custodian shall at all times be party to the Agency Custodial Agreements." "Eligible Gestation Mortgage Loan' shall mean a Mortgage Loan with respect to which each of the following statements shall be accurate and complete (and the Company by including such Mortgage Loan in any computation of the Collateral Value of the Borrowing Base shall be deemed to so represent and warrant to the Agent, the Collateral Agent and the Lenders at and as of the date of such computation): (a) Said Mortgage Loan meets all of the requirements in the definition of Eligible Committed Conforming Mortgage Loan (except the requirement set forth in subparagraph (f) of such definition) and was included in the Borrowing Base as an Eligible Committed Conforming Mortgage Loan prior to its inclusion as an Eligible Gestation Mortgage Loan; and (b) The documentation relating to said Mortgage Loan has been certified by a Certificating Custodian as complete and acceptable under the applicable Agency Guide for purposes of including said Mortgage Loan in a pool of Mortgage Loans in which a Mortgage-Backed Security %ill represent an interest." "Federal Funds Rate' shall mean the rate per annum on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as made available to and quoted by the Agent on the Business Day and at the time the Gestation Advance to be borrowed at a rate based on the Federal Funds Rate is requested." "FHLMC Custodial Agreement' shall mean the agreement, as amended, modified or supplemented from time to time, among FHLMC, the Company and any Person meeting the eligibility requirements set forth in the FHLMC Guide to serve as a "custodian," as such term is used in the FNMA Guide, pursuant to which such Person is authorized to act as a Certificating Custodian." "FHLMC Guide' shall mean the "Sellers & Servicers' Guide" published by FHLMC, as amended, modified or supplemented from time to time." "FNMA Custodial Agreement' shall mean the agreement, as amended, modified or supplemented from time to time, among FNMA, the Company and any Person meeting the eligibility requirements set forth in the FNMA Guide to serve as a "document custodian," as such term is used in the FNMA Guide, pursuant to which such Person is authorized to act as a Certificating Custodian." "FNMA, Guide' shall mean, collectively, the "Selling Guide" and the "Servicing Guide" published by FNMA, as amended, modified or supplemented from time to time." "Gestation Advance' shall mean a Loan advanced pursuant to Paragraph I (a)(2) above, the proceeds of which are utilized by the Company for financing the gestation of Mortgage-Backed Securities after the initial certification and the Company by borrowing said Loan as a Gestation Advance shall be deemed to represent and warrant to the Agent and the Lenders that the proceeds of said Loan are and Ml] be so utilized by the Company. "Gestation Advance Sublimit' shall mean $7,500,000.00." "GNMA Custodial Agreement' shall mean the agreement, as amended, modified or supplemented from time to time, among GNMA, the Company and any Person meeting the eligibility requirements set forth in the GNMA Guide to serve as a "certificating custodian," as such term is used in the GNMA Guide, pursuant to which such Person is authorized to act as a Certificating Custodian." "GNMA Guide' shall mean, collectively, the "GNMA I Mortgage Backed Securities Guide" and the "GNMA II Mortgage-Backed Securities Guide" published by HUD, as amended, modified or supplemented from time to time." "HUD' shall mean the Department of Housing and Urban Development and any successor thereto." "Regular Advance' shall mean a Loan advanced pursuant to Paragraph 1 (a)(1) above, the proceeds of which are utilized by the Company solely for the purposes of (a) originating and/or acquiring Mortgage Loans (or repaying Swing Line Advances used for such purpose) and/or (b) general working capital purposes, and the Company by borrowing said Loan as a Regular Advance shall be deemed to represent and warrant to the Agent and the Lenders that the proceeds of said Loan are and will be so utilized by the Company." (b) The following definitions are hereby amended to read in their respective entireties as follows: "Established Rate Loans' shall mean Regular Advances and/or Gestation Advances during such time as they are being made and/or maintained at the Applicable Established Rate." " Federal Funds Rate Loans' shall mean Gestation Advances during such time as they are being made and/or maintained at the Applicable Federal Funds Rate. "'Reference Rate Loans' shall mean Regular Advances during such time as they are being made and/or maintained at the Reference Rate." (c) The definition of the term "Established Rate" is hereby deleted from Paragraph 11 of the Agreement. (d) Subparagraph (a) of the definition of the term "Collateral Value" is hereby amended to add the phrase "or an Eligible Gestation Mortgage Loan" Following the phrase "or an Eligible Committed Non-Conforming Mortgage Loan" in the second line thereof (e) The definition of the term "Eligible Committed Conforming Mortgage Loan" is hereby amended by deleting the word "and" at the end of subparagraph (d) thereof, by deleting the period and inserting the phrase "; and" at the end of subparagraph (e) thereof, and by adding a new subparagraph (f) thereto to read in its entirety as follows: "(f,) Said Mortgage Loan is not an Eligible Gestation Mortgage Loan." (f) The definition of the term "Eligible Mortgage Loan" is hereby amended as follows: (1) The lead-in section to subparagraph (r) is hereby amended to read as follows: "(r) There has been delivered to the Collateral Agent for such Mortgage Loan: (i) those items described on Exhibit H attached hereto prior to the inclusion of such Mortgage Loan in the Borrowing Base, (ii) if the Collateral Agent or any Lender has so requested in writing, those additional items described in Exhibit I attached hereto, and (iii) if such Mortgage Loan is to be included in the Borrowing Base as an Eligible Gestation Mortgage Loan, a FHLMC Custodial Certification Schedule (Form 1034), a FNMA Schedule of Mortgages (Form 2005) or a GNMA Schedule of Pooled Mortgages (HUD Form II 706) (or any comparable or successor form thereto) listing such Mortgage Loan as a Mortgage Loan to be pooled in support of a Mortgage-Backed Security, in each case completed and duly executed by a Certificating Custodian on or prior to the inclusion of such Mortgage Loan in the Borrowing Base as an Eligible Gestation Mortgage Loan; and the Collateral Agent has confirmed what Type of Mortgage Loan such Mortgage Loan is; provided, however, that even if such items have not been so delivered to the Collateral Agent, such Mortgage Loan may still qualify as an "Eligible Mortgage Loan" if"" (2) Subparagraph (v) is hereby amended to read in its entirety as follows: "(v) Unless said Mortgage Loan is an Eligible Foreclosure Mortgage Loan or an Eligible Gestation Mortgage Loan, said Mortgage Loan has not previously been included in the Borrowing Base." (g) The definition of the term "Type" is hereby amended to read in its entirety as follows: "Type' for any Mortgage Loan shall mean an Eligible Committed Conforming Mortgage Loan, an Eligible Committed Non-Conforming Mortgage Loan, an Eligible Foreclosure Mortgage Loan, an Eligible Uncommitted Conforming Mortgage Loan or an Eligible Gestation Mortgage Loan." 5. Amendment of Security Agreement. To reflect the agreement of the parties hereto to amend the Security Agreement to provide for the inclusion of Eligible Gestation Mortgage Loans in the Borrowing Base: (a) Paragraph 2 of the Security Agreement is hereby amended by adding the following passage at the end thereof: "In addition to the requirements set forth above, delivery of any Mortgage Loan as Collateral to be included in the Borrowing Base as an Eligible Gestation Mortgage Loan shall be effected by delivery by the Debtor to the Collateral Agent of an election to such effect in the form of that attached hereto as Exhibit G. Thereafter, such Mortgage Loan shall be included in the Borrowing Base as an Eligible Gestation Mortgage Loan upon the Collateral Agent's receipt of (as applicable) a FHLMC Custodial Certification Schedule (Form 1034), a FNMA Schedule of Mortgages (Form 2005) or a GNMA Schedule of Pooled Mortgages (HUD Form II 706) (each of such schedules and any comparable or successor form thereto, a "Gestation Certification") listing such Mortgage Loan as a Mortgage Loan to be pooled in support of a Mortgage-Backed Security, in each case completed and duly executed by the Certificating Custodian on or prior to the date such Mortgage Loan is to be included in the Borrowing Base as an Eligible Gestation Mortgage Loan. Collateral Agent's responsibility to review such Collateral to be included in the Borrowing Base as an Eligible' Gestation Mortgage Loan is limited to ensuring that each Gestation Certification has been completed and executed by a Certificating Custodian. If a Certificating Custodian returns to the Collateral Agent documentation relating to any Mortgage Loan Following such Certificating Custodian's determination that such Mortgage Loan is not suitable for pooling, such Mortgage Loan shall be included in the Borrowing Base as another Type of Eligible Mortgage Loan if such Mortgage Loan satisfies all eligibility requirements therefor. If the Collateral Value of a group of Mortgage Loans to be delivered for inclusion in the Borrowing Base as Eligible Gestation Mortgage Loans, when added to the Collateral Value of all Mortgage Loans already included in the Borrowing Base as Eligible Gestation Mortgage Loans, shall exceed the Gestation Advance Sublimit at any time, the Collateral Agent shall include such excess in the Borrowing Base as another Type or Types of Eligible Mortgage Loan if such Mortgage Loans satisfy all eligibility requirements respectively therefor." (b) Paragraph 5 of the Security Agreement is hereby amended to read in its entirety as follows: 5. Collateral A gent's Review of Collateral 7 Certifications. (a) Each delivery of Mortgage Loans to the Collateral Agent shall be accompanied by a collateral transmittal form in the form of that attached hereto as Exhibit 3., as such form may be modified from time to time at the direction of the Agent. Upon any receipt of Required Documents for any Mortgage Loan, the Collateral Agent shall review the same and verify that (1) all Required Documents relating to such Mortgage Loan appear regular on their face and are in the Collateral Agent's possession; and (2) the statements set forth on Exhibit 2 hereto are accurate and complete in all respects. In the event that the Company had been requested to deliver the additional items described on Exhibit J to the Credit Agreement with respect to any item of Collateral, the Collateral Agent shall review and verify such additional documents consistent with the obligations of the Collateral Agent above. (b) Eligible Gestation Mortgage Loans to be included in the Borrowing Base shall be deemed delivered to the Collateral Agent upon the receipt by the Collateral Agent of any completed and executed Gestation Certification for such Mortgage Loans; provided that Debtor shall have elected to include such Mortgage Loans in the Borrowing Base as an Eligible Gestation Mortgage Loan pursuant to the shipping request and authorization in the form of Exhibit 6 hereto and the Collateral Agent is in possession of an applicable bailee letter in respect of such Mortgage Loans. Upon the receipt of any Gestation Certification for any item of Collateral to be included in the Borrowing Base as an Eligible Gestation Mortgage Loan, Collateral Agent shall review such Gestation Certification to determine if it appears regular on its face. (c) Verification for Collateral delivered during any period covered by a collateral report referred to in Paragraph 7 below shall be set forth in such report. If Collateral Agent notes any exception in the review described in subparagraphs (a) or (b) above or questions, in its reasonable discretion, the genuineness, regularity, propriety, or accuracy of any item of Collateral, Collateral Agent shall so note in its next collateral report delivered to Lenders and shall hold such item of Collateral pending further instructions from the Lenders. Unless so agreed in writing by Collateral Agent in its sole discretion, in no event shall such item be included in any calculation of the Borrowing Base. In the event that Debtor had been requested to deliver the items described on Exhibit I to the Credit Agreement with respect to any item of Collateral, Collateral Agent shall review and verify such additional documents consistent with the obligations of Collateral Agent above." (c) A new Exhibit G in the form of that attached hereto as Amendment Exhibit is hereby added to the Security Agreement. 6. Reaffirmation of Security Agreement. The Company hereby affirms and agrees that (a) the execution, delivery and performance by the Company of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement and this Amendment, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. 7. Effective Date. This Amendment shall be effective on the earliest date (the "Effective Date") upon which (a) all parties signatory hereto have executed this Amendment, and (b) the Agent has received such board resolutions, incumbency certificates and other additional documentation as it may request in connection herewith. 8. No Other Amendment. Except as expressly amended herein, the Agreement and other Loan Documents shall remain in full force and effect as currently written. 9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 10. Representations and Warranties. The Company hereby represents and warrants to the Agent, the Lenders and the Collateral Agent as follows: (a) The Company has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered on behalf of the Company and constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect hereto: (1) the representations and warranties of the Company contained in the Agreement are accurate and complete in all respects, and (2) there has not occurred an Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION., a California corporation By:. Name: Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as Agent By: Name: Thomas A. Pizurie Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, as a Lender By: Name: Thomas A. Pizurie Title: Vice President AMENDMENT EXHIBIT G ELECTION FOR INCLUSION IN THE BORROWING BASE AS ELIGIBLE GESTATION MORTGAGE LOAN Pursuant to that certain Security and Collateral Agency Agreement (Warehousing) dated as of September 1, 1995 (as amended and reaffirmed from time to time, the "Security Agreement") by and between Bank of America National Trust and Savings Association (the "Collateral Agent") and First Mortgage Corporation (the "Company"), by checking any of the items below, the Company hereby requests the Collateral Agent to include the Mortgage Loans described on Schedule 1 attached hereto to be included as Eligible Gestation Mortgage Loans in the computation of the Collateral Value of the Borrowing Base upon the Collateral Agent's receipt of the following Gestation Certification(s) listing such Mortgage Loans, completed and executed by the applicable Certificating Custodian: FHLMC Custodial Certification Schedule (Form 1034). FNMA Schedule of Mortgages (Form 2005). GNMA Schedule of Pooled Mortgages (HUD Form 11706).(HUD Form 11706). Other form of Gestation Certification. We hereby certify that the Take-out Commitment applicable to the Mortgage Loans to be included in the Borrowing Base as Eligible Gestation Mortgage Loans pursuant hereto is as set forth on the applicable Gestation Certification. Capitalized terms not otherwise defined herein shall have the meanings given such terms in the Security Agreement. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Title: EX-10.12 4 VARIABLE TERMS LETTER October 25, 1996 First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Arm: Mr. Clement Ziroli Chief Executive officer Gentlemen: This Variable Terms Letter constitutes the Variable Terms Letter referred to in and a supplement to that certain Master Mortgage Loan Warehousing and Security Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain terms and conditions of the lending arrangements between First Mortgage Corporation (the "Borrower") and Sanwa Bank California, a California corporation with a state banking license ("Bank"), set forth therein. Capitalized terms are used herein (including any exhibits and schedules hereto), unless otherwise defined herein, with the same meanings as in the Agreement. Credit Limit: $15,000,000.00. Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming, conventional Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property,, (ii) is covered by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base. Allocation B: Up to $10,000,000.00 of the Credit Limit for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal balance not exceeding $700,000.00. Up to $3,000,000.00 of this $10,000,000.00 sub-limit shall be available for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, (iv) has an original principal balance over $700,000.00 but not exceeding $1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be on a case-by- case basis. Allocation C: Up to $5,000,000.00 of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except for having an original principal balance not exceeding $700,000.00, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment. Purchased Loan Sub-limit: Not applicable. Pledged Loan Sub-limit: $5,000,000.00. Permitted Pledge Period: Two business days. Maturity Date: August 31, 1997. Prevailing Interest Rate: Prevailing Interest Rate, During the term hereof, Loans outstanding hereunder shall bear interest at a per annum rate equal to the Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be referred to as "Reference Rate Advances"); however, for any monthly period, to the extent average daily Available Deposits are maintained with Bank by the Borrower (or by an Affiliate of the Borrower as designated by Bank) during such monthly period, such loans in an amount equal to such average daily Available Deposits shall bear interest at a rate of interest equal to one and one quarter percent (1.25%) per annum (such advances shall hereinafter be referred to as "Deposit Based Advances"); and, for any Loans funded through overdrafts, such Loans shall bear interest at a rate equal to the Reference Rate plus two percent (2.0%). In addition to Reference Rate Advances and Deposit Based Advances, the Bank hereby agrees to make Loans to the Borrower, at the Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time that the Bank may quote and offer, provided that any such period of time shall not exceed thirty (30) days (the "Interest Period"), and provided that any such period of time does not extend beyond the Maturity date for advances in the minimum amount of $250,000.00, (such advances shall hereinafter be referred to as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the Fixed Rate shall be a percentage approximately equivalent to one and one quarter percent (1.25%) per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount approximately equivalent to the amount of the relevant Fixed Rate Advance and for a period of time approximately equal to the relevant Interest Period; The Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate Advances, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the convey within 10 days after the Borrower's receipt of any such statement which it deems to be incorrect. Notice of Election to Adjust Interest Rate, Upon telephonic notice which shall be received by the Bank at or before 12:00 p.m. (California Time) on a business day, the Borrower may elect: 1. That the interest on a Reference Rate Advance or Deposit Based Advance shall be adjusted to accrued at the Fixed Rate; provided however, that such notice shall be received by the Bank no later than one business day prior to the day (which shall be a business day) on which Borrower requests that interest be adjusted to accrue at the Fixed Rate. 2. That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Reference Rate; provided, however that such notice shall be received by the Bank no later than one business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Reference Rate upon the expiration of the Interest Period pertaining to such Fixed Rate Advance. Prohibition Against Prepayment of Fixed Rate Advances, Notwithstanding anything to the contrary in the Agreement, no prepayment shall be made on any Fixed Rate Advance except on a day which is the last day of the Interest Period pertaining thereto. If the whole of any part of any Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) sustained by the Bank as a consequence of such prepayment. Indemnification of Fixed Rate Costs, During any period of time in which interest on any Fixed Rate Advance is accruing on the basis of the Fixed Rate, the Borrower shall, upon the Bank's request promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirements or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to funds used by the Bank in quoting and determining the Fixed Rate. Conversion from Fixed Rate to Reference Rate, In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Balance and for a period of time approximately equal to the relevant Interest Period; or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event any Fixed Rate Advance shall be deemed to be a Reference Rate Advance and interest shall thereupon immediately accrue at the Reference Rate. Contact Office: Sanwa Bank California insurance and Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, CA 90017 Attn: John C. Hyche Funding Account: Account No. 2068-01106 Statement Date: March 31, 1996. Interim Date: June 30, 1996. Required Monthly Reports: Bank will have received monthly by the thirtieth day of each calendar month, each dated as of the last day of the preceding calendar month, (i) an Adjusted Net Worth, Financial Statement and Loan Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory Aging Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing Delinquency and Closed Loan Production Report in the form of Exhibit J hereto. With the prior written consent of Bank, any of the above reports may be in a form otherwise acceptable to Bank. Required Fees: Collateral Handling: The Borrower agrees to pay Bank, from time to time promptly upon delivery of a billing statement, a collateral handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower for inclusion in the Borrowing Base. Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation A or Allocation C. 60 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation B which have an original principal balance not exceeding $700,000.00. 30 days for Eligible Mortgage Loans which meet the criteria set forth in Allocation B and have an original principal balance over $700,000.00 but not exceeding $1,000,000.00. Minimum Permitted Current Ratio: 1.08 to 1.0 Minimum GAAP Net Worth: $15,000,000.00. Adjusted Net Worth Portfolio Percentage: 1.00% Minimum Permitted Adjusted Net Worth: $25,000,000.00. Minimum Permitted Servicing Portfolio: $1,000,000,000.00 on and after the date of the Agreement. Maximum Permitted Leverage Ratio: Borrower will not at any time per7nit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt)to the sum of (x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt to exceed 8.0 to 1.0. Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to exceed 5.0 to 1.0. Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each representing a one to four family residential Mortgage Loan, which loan is insured by the FHA, guaranteed by the VA or conforms to all underwriting and other requirements of FHLMC, except as (i) permitted above in Allocation B as to original principal balance. Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is FHA-insured, VA- guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%) of the lesser of. (1) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (b) As to each Mortgage Loan which conforms to all underwriting and other requirements of FNMA and FI4LMC except (A) as to original principal balance where the original principal balance does not exceed $700,000.00, ninety-five percent (95%) or (B) as to original principal balance where the original principal balance exceeds $700,000.00 but does not exceed $1,000,000.00, ninety-five percent (95%) of the lesser of (1) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (c) As to each Mortgage Loan which is FHA-insured, VA- guaranteed or FNMA/FHLMC conforming except that it is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment ninety- five percent (95%) of the unpaid principal balance of such Mortgage Loan. Collateral, The Collateral shall consist of the personal property described more particularly on the Collateral Schedule attached hereto as Exhibit E. Addresses for Purpose of Notice: The Borrower: First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Mr. Clement Ziroli Bank: Sanwa Bank California Insurance & Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, California 90017 Attn: Mr John C. Hyche Exceptions: The following provisions of the Agreement are hereby modified as follows: (a) The second sentence of Paragraph I(F) shall be amended in its entirety to read as follows: "In addition to all other payment obligations of the Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be confirmed in writing) from time to time, the Borrower shall repay to Bank within three (3) days of Bank's verbal demand (i) the amount by which ninety-seven (97%) of the aggregate principal amount of Loans outstanding hereunder exceeds the Fair Market Value of the Borrowing Base." (b) The words "the failure to comply with which could have a material adverse affect on the Borrower's business, operations, property or financial or other condition" are hereby added to the last line of Paragraph V(C) immediately before the period. (c) The words "Within ninety (90) days in Paragraph VI(A)(1) are hereby deleted and replaced with the words "Within one hundred twenty (I 20) days". (d) Paragraph VI(B)(1) shall be amended in its entirety to read as follows: "Within thirty (30) days after the last day of each month, an Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last day of such month. (e) Paragraph VI(B)(2) shall be amended in its entirety to read as follows: "No later than the thirtieth day of each calendar month and at such other times as Bank may reasonably request, each as of the last day of the, immediately preceding calendar month: (i) a Pipeline Position Report and (ii) a Servicing Delinquency and Closed Loan Production Report." (f) Paragraph VI(B)(3) shall be amended in its entirety to read as follows: "Promptly, such additional financial and other information, including but not limited to (i) a Borrowing Base Certificate, and (11) Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the end of each of the Borrower's quarters. (g) Each of Paragraph VII(D), (F), and (G) are hereby deleted and replaced with the words "intentionally omitted." (h) Paragraph VII(E) is hereby amended to read: Borrowers' payment of dividends may not exceed an amount equal to fifty percent (50%) of Borrowers' net income (after taxes) on a quarterly basis. (i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted and replaced with the word "GAAP". (j) The words "Servicing Delinquency Report" are hereby deleted wherever they appear in the Loan Documents and replaced with the words "Servicing Delinquency and Closed Loan Production Report." (k) The definition of "Fair Market Value" in Paragraph X shall be amended in its entirety to read as follows: "shall mean at any date the fair market value of any Collateral at such date, as determined by Bank using the FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for conventional loans and the dealer market sixty (60) day forward rate plus 0.50% for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder Financial Information or Telerate Systems, Inc." (1) Subparagraph (n) of the definition of "Eligible Mortgage Loan" is hereby deleted and replaced with the following: "(n) The date of the promissory note is no earlier than thirty days prior to the date said Mortgage Loan is first included in the Borrowing Base. (m) Section (c)(3) of the definition of "Tangible Net Worth" in Paragraph X is hereby deleted and replaced with the following: "(3) loans to, or investments in, affiliates (with the exception of the Borrower's note receivable dated February 1, 1991, from Fin-West Group with an existing principal balance of $250,000 and any renewals or extensions thereof." (n) The words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans owned by the Company" are hereby deleted and replaced with the words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans included in the Borrowing Base less the aggregate amount of Eligible Mortgage Loans which meet the criteria set forth under Allocation C. Additional Requirements The Borrower warrants that is will at all times remain an approved seller/servicer for each of FNMA and FHLMC. Notwithstanding any provision herein or under the Agreement to the contrary, every agreement and warranty of the Borrower herein (including, without limitation, any of the above additional requirements) shall be deemed to be an agreement under and pursuant to the Agreement. Exhibits Attached: A: Form of Promissory Note. B: Delivery Procedures and exhibits thereto. C: Certification re Adjusted Net Worth, Etc. D: Borrowing Base and Inventory Aging Certificate. E: Collateral Schedule. F: Loan Request Form. G: Pipeline Position and Commitment Status Report. H: Form of Pledge Agreement. 1: Required Collateral Documents. J: Servicing Delinquency and Closed Loan Production Report. If the above meets your approval, please so indicate by executing and returning to Bank the enclosed copy of this Variable Terms Letter. Very truly yours, SANWA BANK CALIFORNIA a California corporation with a state banking license AGREED TO AND ACCEPTED as of this 25th day of October, 1996. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Title: EX-10.11 5 VARIABLE TERMS LETTER As of August 31, 1996 First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Mr. Clement Ziroli Chief Executive Officer Gentlemen: This Variable Terms Letter constitutes the Variable Terms Letter referred to in and a supplement to that certain Master Mortgage Loan Warehousing and Security Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain terms and conditions of the lending arrangements between First Mortgage Corporation (the "Borrower") and Sanwa Bank California, a California corporation with a state banking license ("Bank"), set forth therein. Capitalized terms are used herein (including any exhibits and schedules hereto), unless otherwise defined herein, with the same meanings as in the Agreement. Credit Limit: $10,000,000.00. Sub-Credit L Allocation A: Up to the full amount of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming, conventional Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base. Allocation B: Up to $7,500,000.00 of the Credit Limit for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre- approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal balance not exceeding $650,000.00. Up to $1,500,000.00 of this $7,500,000.00 sub-limit shall be available for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre- approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, (iv) has an original principal balance over $650,000.00 but not exceeding $ 1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be on a case- by-case basis. Allocation C: Up to $5,000,000.00 of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except for having an original principal balance not exceeding $650,000.00, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment. Purchased Loan Sub-limit: Not applicable. Pledged Loan Sub-limit: $3,000,000.00. Permitted Pledge Period: Two business days. Maturity Date: October 31, 1996. Prevailing Interest Rate: Prevailing Interest Rate. During the term hereof, Loans outstanding hereunder shall bear interest at a per annum rate equal to the Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be referred to as "Reference Rate Advances"); however, for any monthly period, to the extent average daily Available Deposits are maintained with Bank by the Borrower (or by an Affiliate of the Borrower as designated by Bank) during such monthly period, such loans in an amount equal to such average daily Available Deposits shall bear interest at a rate of interest equal to one and one quarter percent (1.25%) per annum (such advances shall hereinafter be referred to as "Deposit Based Advances"); and, for any Loans funded through overdrafts, such Loans shall bear interest at a rate equal to the Reference Rate plus two percent (2.0%). In addition to Reference Rate Advances and Deposit Based Advances, the Bank hereby agrees to make Loans to the Borrower, at the Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time that the Bank may quote and offer, provided that any such period of time shall not exceed thirty (30) days (the "Interest Period"), and provided that any such period of time does not extend beyond the Maturity date for advances in the minimum amount of $250,000.00, (such advances shall hereinafter be referred to as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the Fixed Rate shall be a percentage approximately equivalent to one and one quarter percent (1.25%) per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount approximately equivalent to the amount of the relevant Fixed Rate Advance and for a period of time approximately equal to the relevant Interest Period. The Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate Advances, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 10 days after the Borrower's receipt of any such statement which it deems to be incorrect. Notice of Election to Adjust Interest Rate, Upon telephonic notice which shall be received by the Bank at or before 12:00 p.m. (California Time) on a business day, the Borrower may elect: 1. That the interest on a Reference Rate Advance or Deposit Based Advance shall be adjusted to accrued at the Fixed Rate; provided however, that such notice shall be received by the Bank no later than one business day prior to the day (which shall be a business day) on which Borrower requests that interest be adjusted to accrue at the Fixed Rate. 2. That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Reference Rate; provided, however that such notice shall be received by the Bank no later than one business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Reference rate upon the expiration of the Interest Period pertaining to such Fixed Rate Advance. Prohibition Against Prepayment of Fixed Rate Advances, Notwithstanding anything to the contrary in the Agreement no prepayment shall be made on any Fixed Rate Advance except on a day which is the last day of the Interest Period pertaining thereto. If the whole of any part of any Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) sustained by the Bank as a consequence of such prepayment. Indemnification of Fixed Rate Costs, During any period of time in which interest on any Fixed Rate Advance is accruing on the basis of the Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment reserve, deposit or similar requirements or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to funds used by the Bank in quoting and determining the Fixed Rate. Conversion from Fixed Rate to Reference Rate in the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Balance and for a period of time approximately equal to the relevant Interest Period; or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event any Fixed Rate Advance shall be deemed to be a Reference Rate Advance and interest shall thereupon immediately accrue at the Reference Rate. Contact Office: Sanwa Bank California Insurance and Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, CA 90017 Attn: John C. Hyche Funding Account: Account No. 2069-01106 Statement Date: March 31, 1996. Interim Date: June 30, 1996. Required Monthly Reports: Bank will have received monthly by the thirtieth day of each calendar month, each dated as of the last day of the preceding calendar month, (i) an Adjusted Net Worth, Financial Statement and Loan Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory Aging- Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing Delinquency and Closed Loan Production Report in the form of Exhibit J hereto. With the prior written consent of Bank, any of the above reports may be in a form otherwise acceptable to Bank. Required Fees: Commitment Fee: The Borrower agrees to pay Bank, quarterly in arrears on the last day of each quarter commencing with the calendar quarter ending March 31, 1996, and on the Maturity Date for the applicable period of the preceding calendar quarter, a commitment fee equal to one-sixteenth of one percent (0.0625%) of the amount by which the Credit Limit exceeds the average daily dollar amount of outstanding Loans during such quarter or portion thereof Collateral Handling Fee: The Borrower agrees to pay Bank, from time to time promptly upon delivery of a billing statement, a collateral handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower for inclusion in the Borrowing Base. Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation A or Allocation C. 60 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation B which have an original principal balance not exceeding $650,000.00. 30 days for Eligible Mortgage Loans which meet the criteria set forth in Allocation B and have an original principal balance over $650,000.00 but not exceeding $1,000,000.00. 3 Minimum Permitted Current Ratio: 1.08 to 1.0. Minimum GAAP Net Worth: $15,000,000.00. Adjusted Net Worth Portfolio Percentage: 1.00% Minimum Permitted Adjusted Net Worth: $25,000,000.00. Minimum Permitted Servicing Portfolio: $ 1,000,000,000.00 on and after the date of the Agreement. Maximum Permitted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt to exceed 8.0 to 1.0. Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to exceed 5.0 to 1.0. Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each representing a one to four family residential Mortgage Loan, which loan is insured by the FHA, guaranteed by the VA or conforms to all underwriting and other requirements of FNMA/FHLMC, except as (i) permitted above in Allocation B as to original principal balance. Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is FHA-insured, VA-guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%) of the lesser of.- (1) the weighted average net unfilled purchase price of all Take- Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (b)) As to each Mortgage Loan which conforms to all underwriting and other requirements of FNMA and FHLMC except (A) as to original principal balance where the original principal balance does not exceed $650,000.00, ninety-five percent (95%) or (B) as to original principal balance where the original principal balance exceeds $650,000.00 but does not exceed $1,000,000.00, ninety-five percent (95%) of the lesser of (1) the weighted average net unfilled purchase price of all Take- Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed or FNMA/FHLMC conforming except that it is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance of such Mortgage Loan. Collateral: The Collateral shall consist of the personal property described more particularly on the Collateral Schedule attached hereto as Exhibit E. Addresses for Purpose of Notice: The Borrower: First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Mr. Clement Ziroli Bank: Sanwa Bank California Insurance & Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, California 90017 Attn: Mr John C. Hyche Exceptions: The following provisions of the Agreement are hereby modified as follows: (a) The second sentence of Paragraph I(F) shall be amended in its entirety to read as follows: "In addition to all other payment obligations of the Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be confirmed in writing) from time to time, the Borrower shall repay to Bank within three (3) days of Bank's verbal demand (i) the amount by which ninety-seven (97%) of the aggregate principal amount of Loans outstanding hereunder exceeds the Fair Market Value of the Borrowing Base." (b)) The words "the failure to comply with which could have a material adverse affect on the Borrower's business, operations, property or financial or other condition" are hereby added to the last line of Paragraph V(C) immediately before the period. ((e) The words "Within ninety (90) days in Paragraph VI(A)(1) are hereby deleted and replaced with the words "Within one hundred twenty (120) days". (d) Paragraph VI(B)(1) shall be amended in its entirety to read as follows: "Within thirty (30) days after the last day of each month, an Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last day of such month." (e) Paragraph VI(B)(2) shall be amended in its entirety to read as follows: "No later than the thirtieth day of each calendar month and at such other times as Bank may reasonably request each as of the last day of the immediately preceding calendar month: (i) a Pipeline Position Report and (ii) a Servicing Delinquency and Closed Loan Production Report." (f) Paragraph VI(B)(3) shall be amended in its entirety to read as follows: "Promptly, such additional financial and other information, including but not limited to (i) a Borrowing Base Certificate, and (ii) Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the end of each of the Borrower's quarters. (g) Each of Paragraph VII(D), (F), and (G) are hereby deleted and replaced with the words "intentionally omitted." (h) Paragraph VII(E) is hereby amended to read: Borrowers' payment of dividends may not exceed an amount equal to fifty percent (50%) of Borrower's net income (after taxes) on a quarterly basis. (i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted and replaced with the word "GAAP". (j) The words "Servicing Delinquency Report" are hereby deleted wherever they appear in the Loan Documents and replaced with the words "Servicing Delinquency and Closed Loan Production Report." (k) The definition of "Fair Market Value" in Paragraph X shall be amended in its entirety to read as follows: "shall mean at any date the fair market value of any Collateral at such date, as determined by Bank using the FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for conventional loans and the dealer market sixty (60) day forward rate plus 0.50% for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder Financial Information or Telerate Systems, Inc." (l) Subparagraph (n) of the definition of "Eligible Mortgage Loan" is hereby deleted and replaced with the following: "(n) The date of the Promissory note is no earlier than thirty days prior to the date said Mortgage Loan is first included in the Borrowing Base. (m) Section (c)(3) of the definition of "Tangible Net Worth" in Paragraph X is hereby deleted and replaced with the following: "(3) loans to, or investments in, affiliates (with the exception of the Borrower's note receivable dated February 1, 1991, from Fin-West Group with an existing principal balance of $250,000 and any renewals or extensions thereof " (n) The words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans owned by the Company" are hereby deleted and replaced with the words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans included in the Borrowing Base less the aggregate amount of Eligible Mortgage Loans which meet the criteria set forth under Allocation C. Additional Requirements The Borrower warrants that is will at all times remain an approved seller/servicer for each of FNMA and FHLMC. Notwithstanding any provision herein or under the Agreement to the contrary, every agreement and warranty of the Borrower herein (including, without limitation, any of the above additional requirements) shall be deemed to be an agreement under and pursuant to the Agreement. Exhibits Attached: A: Form of Promissory Note. B: Delivery Procedures and exhibits thereto. C: Certification re Adjusted Net Worth, Etc. D: Borrowing Base and Inventory Aging Certificate. E: Collateral Schedule. F: Loan Request Form. G: Pipeline Position and Commitment Status Report. H: Form of Pledge Agreement. 1: Required Collateral Documents. J: Servicing Delinquency and Closed Loan Production Report. If the above meets your approval, please so indicate by executing and returning to Bank the enclosed copy of this Variable Terms Letter. Very truly yours, SANWA BANK CALIFORNIA a California corporation with a state banking license Bv: Name: John C. Hyche Title: Vice President AGREED TO AND ACCEPTED as of this 31st day of August, 1996. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Title: EX-10.13 6 VARIABLE TERMS LETTER February 3, 1997 First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Mr. Clement Ziroli, Chief Executive Officer Gentlemen: This Variable Terms Letter constitutes the Variable Terms Letter referred to in and a supplement to that certain Master Mortgage Loan Warehousing and Security Agreement (the "Agreement") dated as of April 30, 1992, and will confirm certain terms and conditions of the lending arrangements between First Mortgage Corporation (the "Borrower") and Sanwa Bank California, a California corporation with a state banking license ("Bank"), set forth therein. Capitalized terms are used herein (including any exhibits and schedules hereto), unless otherwise defined herein, with the same meanings as in the Agreement. Credit Limit: $15,000,000.00. Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base. Allocation B: Up to $10,000,000.00 of the Credit Limit for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre- approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal balance not exceeding $700,000.00. Up to $3,000,000.00 of this $10,000,000.00 sub-limit shall be available for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre- approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, (iv) has an original principal balance over $700,000.00 but not exceeding $1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be on a case-by- case basis. Allocation C: Up to $5,000,000.00 of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except for having an original principal balance not exceeding $700,000.00, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment. Purchased Loan Sub-limit: Not applicable. Pled2ed Loan Sub-limit: $5,000,000.00. Permitted Pledge Period: Two business days. Maturity Date: August 31, 1997. Prevailing Interest Rate: Prevailing Interest Rate, During the term hereof, Loans outstanding hereunder shall bear interest at a per annum rate equal to the Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be referred to as "Reference Rate Advances"); however, for any monthly period, to the extent average daily Available Deposits are maintained with Bank by the Borrower (or by an Affiliate of the Borrower as designated by Bank) during such monthly period, such loans in an amount equal to such average daily Available Deposits shall bear interest at a rate of interest equal to one and one quarter percent (1.25%) per annum (such advances shall hereinafter be referred to as "Deposit Based Advances"). In addition to Reference Rate Advances and Deposit Based Advances, the Bank hereby agrees to make Loans to the Borrower, at the Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time that the Bank may quote and offer, provided that any such period of time shall not exceed thirty (30) days (the "Interest Period"), and provided that any such period of time does not extend beyond the Maturity date for advances in the minimum amount of $250,000.00, (such advances shall hereinafter be referred to as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the Fixed Rate shall be a percentage approximately equivalent to one and one quarter percent (1.25%) per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount approximately equivalent to the amount of the relevant Fixed Rate Advance and for a period of time approximately equal to the relevant Interest Period; The Bank shall provide the Borrower with a statement of the Borrowers' Fixed Rate Advances, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 10 days after the Borrower's receipt of any such statement which it deems to be incorrect. Notice of Election to Adjust Interest Rate, Upon telephonic notice which shall be received by the Bank at or before 12:00 p.m. (California Time) on a business day, the Borrower may elect: 1. That the interest on a Reference Rate Advance or Deposit Based Advance shall be adjusted to accrued at the Fixed Rate; provided however, that such notice shall be received by the Bank no later than one business day prior to the day (which shall be a business day) on which Borrower requests that interest be adjusted to accrue at the Fixed Rate. 2. That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Reference Rate; provided, however that such notice shall be received by the Bank no later than one business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Reference Rate upon the expiration of the Interest Period pertaining to such Fixed Rate Advance. Prohibition Against Prepayment of Fixed Rate Advances, Notwithstanding anything to the contrary in the Agreement, no prepayment shall be made on any Fixed Rate Advance except on a day which is the last day of the Interest Period pertaining thereto. If the whole of any part of any Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) sustained by the Bank as a consequence of such prepayment. Indemnification of Fixed Rate Costs. During any period of time in which interest on any Fixed Rate Advance is accruing on the basis of the Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment reserve, deposit or similar requirements or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to funds used by the Bank in quoting and determining the Fixed Rate. Conversion from Fixed Rate to Reference Rate. In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Balance and for a period of time approximately equal to the relevant Interest Period; or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event any Fixed Rate Advance shall be deemed to be a Reference Rate Advance and interest shall thereupon immediately accrue at the Reference Rate. Contact Office: Sanwa Bank California insurance and Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, CA 90017 Attn: John C. Hyche Funding Account: Account No. 2068-01106 Statement Date: March 31, 1996. Interim Date: December 31, 1996. Required Monthly Reports: Bank will have received monthly by the thirtieth day of each calendar month, each dated as of the last day of the preceding calendar month, (i) an Adjusted Net Worth, Financial Statement and Loan Covenant Compliance Report in the form of Exhibit C hereto (ii) an Inventory Aging Certificate in the form of Exhibit D hereto (iii) a Pipeline Position and Commitment Status Report in the form of Exhibit G hereto and (iv) a Servicing Delinquency and Closed Loan Production Report in the form of Exhibit J hereto. With the prior written consent of Bank, any of the above reports may be in a form otherwise acceptable to Bank. Required Fees: Collateral Handling: The Borrower agrees to pay Bank, from time to time promptly upon delivery of a billing statement a collateral handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower for inclusion in the Borrowing Base. Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation A or Allocation C. 60 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation B which have an original principal balance not exceeding $700,000.00. 30 days for Eligible Mortgage Loans which meet the criteria set forth in Allocation B and have an original principal balance over $700,000.00 but not exceeding $1,000,000.00. Minimum Permitted Current Ratio: 1.08 to 1.0. Minimum GAAP Net Worth: $15,000,000.00. Adjusted Net Worth Portfolio Percentage: 1.00% Minimum Permitted Adjusted Net Worth: $25,000,000.00. Minimum Permitted Servicing Portfolio: $ 1,000,000,000.00 on and after the date of the Agreement. Maximum Permitted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt, to exceed 8.0 to 1.0. Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to exceed 5.0 to 1.0. Types of Eligible Collateral Mortgage Loans: Eligible Mortgage Loans, each representing a one to four family residential Mortgage Loan, which loan is insured by the FHA-guaranteed by the VA or conforms to all underwriting and other requirements of FHLMC, except as (i) permitted above in Allocation B as to original principal balance. Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is FHA-insured, VA- guaranteed or FHLMC conforming, ninety-nine percent (99%) of the lesser of: (1) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (b)) As to each Mortgage Loan which conforms to all underwriting and other requirements of FNMA and FHLMC except (A) as to original principal balance where the original principal balance does not exceed $700,000.00, ninety-five percent (95%) or (B) as to original principal balance where the original principal balance exceeds $700,000.00 but does not exceed $ 1,000,000.00, ninety-five percent (95%) of the lesser of (1) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed or FNMA/FHLMC conforming except that it is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance of such Mortgage Loan. Collateral The Collateral shall consist of the personal property described more particularly on the Collateral Schedule attached hereto as Exhibit E. Addresses for Purpose of The Borrower: First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Mr. Clement Ziroli Bank: Sanwa Bank California Insurance & Financial Services, LA CBC 601 South Figueroa Street (W8-6) Los Angeles, California 90017 Attn: Mr. John C. Hyche Exceptions: The following provisions of the Agreement are hereby modified as follows: (a) The second sentence of Paragraph I(F) shall be amended in its entirety to read as follows: "In addition to all other payment obligations of the Borrower hereunder, upon verbal demand by the Bank (which verbal demand shall be confirmed in writing) from time to time, the Borrower shall repay to Bank within three (3) days of Bank's verbal demand (i) the amount by which ninety-seven (97%) of the aggregate principal amount of Loans outstanding hereunder exceeds the Fair Market Value of the Borrowing Base." (b) The words "the failure to comply with which could have a material adverse affect on the Borrower's business, operations, property or financial or other condition" are hereby added to the last line of Paragraph V(C) immediately before the period. (c) The words "Within ninety (90) days in Paragraph VI(A)(1) are hereby deleted and replaced with the words "Within one hundred twenty (120) days". (d) Paragraph VI(B)(1) shall be amended in its entirety to read as follows: "Within thirty (30) days after the last day of each month, an Adjusted Net Worth/Financial Statement/Covenant Compliance Report as of the last day of such month. (e) Paragraph VI(B)(2) shall be amended in its entirety to read as follows:: "No later than the thirtieth day of each calendar month and at such other times as Bank may reasonably request each as of the last day of the immediately preceding calendar month: (i) a Pipeline Position Report and (ii) a Servicing Delinquency and Closed Loan Production Report." (f) Paragraph VI(B)(3) shall be amended in its entirety to read as follows: "Promptly, such additional financial and other information, including but not limited to (i) a Borrowing Base Certificate, and (ii) Borrower's Form 10-Q and 10-K within 60 days and 120 days respectively after the end of each of the Borrower's quarters. (g) Each of Paragraph VII(D), (F), and (G) are hereby deleted and replaced with the words "intentionally omitted." (h) Paragraph VII(E) is hereby amended to read: Borrowers' payment of dividends may not exceed an amount equal to fifty percent (50%) of Borrowers' net income (after taxes) on a quarterly basis. (i) The word "Tangible" in Paragraph VII(J)(3) is hereby deleted and replaced with the word "GAAP". (j) The words "Servicing Delinquency Report" are hereby deleted wherever they appear in the Loan Documents and replaced with the words "Servicing Delinquency and Closed Loan Production Report." (k) The definition of "Fair Market Value" in Paragraph X shall be amended in its entirety to read as follows: "shall mean at any date the fair market value of any Collateral at such date, as determined by Bank using the FNMA sixty (60) day forward fixed and adjustable rates plus 0.25%for conventional loans and the dealer market sixty (60) day forward rate plus 0.50% for mortgage backed securities (i.e. FHA/VA Loans) as quoted by Knight Ridder Financial Information or Telerate Systems, Inc." (l) Subparagraph (n) of the definition of "Eligible Mortgage Loan" is hereby deleted and replaced with the following: "(n) The date of the promissory note is no earlier than thirty days prior to the date said Mortgage Loan is first included in the Borrowing Base. (m) Section (c)(3) of the definition of "Tangible Net Worth" in Paragraph X is hereby deleted and replaced with the following: "(3) loans to, or investments in, affiliates (with the exception of the Borrower's note receivable dated February 1, 1991, from Fin-West Group with an existing principal balance of $250,000 and any renewals or extensions thereof." (n) The words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans owned by the Company" are hereby deleted and replaced with the words "hold Take-Out Commitments in less than an aggregate amount necessary to provide for the sale of all closed Mortgage Loans included in the Borrowing Base less the aggregate amount of Eligible Mortgage Loans which meet the criteria set forth under Allocation C. Additional requirements The Borrower warrants that is will at all times remain an approved seller/servicer for each of FNMA and FHLMC. Notwithstanding any provision herein or under the Agreement to the contrary, every agreement and warranty of the Borrower herein (including., without limitation, any of the above additional requirements) shall be deemed to be an agreement under and pursuant to the Agreement. Exhibits Attached: A: Form of Promissory Note. B: Delivery Procedures and exhibits thereto. C: Certification re Adjusted Net Worth, Etc. D: borrowing Base and Inventory Aging Certificate. E: Collateral Schedule. F: Loan Request Form. G: Pipeline Position and Commitment Status Report. H: Form of Pledge Agreement. 1: Required Collateral Documents. Servicing Delinquency and Closed Loan Production Report. If the above meets your approval, please so indicate by executing and returning to Bank the enclosed copy of this Variable Terms Letter. Very truly yours, SANWA BANK CALIFORNIA a California corporation with a state banking license By: Name: John C. Hyche Title: Vice President AGREED TO AND ACCEPTED as of this 3rd day of February, 1997. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Title: EX-10.25 7 AMENDMENT TO CREDIT AGREEMENT This is an official amendment to the Credit Agreement dated February 10, 1 988 between Clement Ziroli and First Mortgage Corporation. The following revisions will be effective as of January 1, 1997. (1) This Credit Agreement is extended to December 31,1997. (2) Other existing terms and conditions of this credit facility remain unchanged Accepted and agreed to on this 31st day of December 1996. Pac Dong Clement Ziroli First Mortgage Corporation Executive Vice President Chief Financial Officer EX-10.36 8 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 30th day of September, 1996, by and between FIRST MORTGAGE CORPORATION, a California Corporation ("Employer") and CLEMENT ZIROLI ("Employee"). RECITAL Employee presently serves as Chief Executive Officer and a member and Chairman of Employer's Board of Directors (the "Board"). Employer and Employee desire to set forth herein their agreement regarding the terms and conditions upon which Employee shall henceforth serve as Chief Executive Officer and as a member and Chairman of the Board which such terms and conditions are consistent with the performance goals heretofore established by Compensation Committee of Employer (the "Committee"). NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which hereby is acknowledged, Employer and Employee hereby agree as follows: 1. Employment, Term of Employment. Employer hereby employs Employee, and Employee hereby accepts employment ("Employment") with Employer, in accordance with the terms and conditions of this Agreement. The term of Employee's Employment (the "Term of Employment") shall commence on the first day of October, 1996 and end on the 31st day of March, 1997, unless otherwise terminated, pursuant to the provisions of Agreement. In the event Employer and Employee have not entered into a new Agreement for the fiscal year beginning April 1, 1997, the terms of this Agreement will continue in full force and effect on a month to month term until a new Employment Agreement is executed by the parties or Employment is otherwise terminated. 2. Position, Duties, Authority and Exclusivity of Services. 2.1 Position. During the term of Employment, Employee shall serve as the Chief Executive Officer and as a member and Chairman of the Board. Upon the request of the Board, Employee shall also serve, without additional remuneration, as Chief Executive Officer and as a member of the Board of Directors of any direct or indirect subsidiaries of Employer specified by the Board. 2.2 Location of Employee's Performance. The principal location in which Employee shall be required to perform his duties hereunder shall be the principal business office of Employer in Diamond Bar, California, or in such other place as such principal business office may be relocated with Employee's prior written consent. Employer shall provide Employee with an office and working facilities that are customary for an officer in Employee's position and that are sufficient to enable Employee to perform his duties hereunder. 2.3 Duties and Authority. Employee's duties hereunder shall be the usual and customary duties of the offices in which he shall serve and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Employee shall have such executive power and authority as is customary for an officer in his position and is reasonably required to enable him to perform his duties hereunder. 2.4 Exclusivity of Services . Employee shall devote himself to the performance of his duties hereunder with a level of diligence commensurate with Employee's position. So long as Employee does not violate the noncompetition or confidentiality provisions as provided for within this Agreement or fail to perform his duties hereunder, Employee shall be entitled to (i) to serve in any capacity with any other business or professional organization, civic, educational or any governmental entity or professional or trade association and (ii) to make and manage personal business investments of his choice and of any kind. Employee shall not be required to obtain Board approval in order to engage in the activities described in the preceding sentence. 3. Compensation. 3.1 Base Salary. Payment for services rendered during the Term of Employment, paid to Employee, shall be computed upon a base annual salary (the "Base Salary") of not less than $370,000 per annum, payable in semi-monthly or monthly installments. If Employee is entitled to receive Base Salary for any period that is less than one calendar month, the Base Salary for such period shall be computed by prorating the annual Base Salary over such period based upon the actual number of days therein. The Board and the Compensation Committee shall review the Base Salary not later than sixty days prior to the expiration of this Agreement for the purpose of determining whether a merit increase is appropriate based upon Employer's performance and the performance of Employee. 3.2 Bonuses. (1) During the term of this Employment Agreement which is the 1997 fiscal year ending March 31, 1997, the Employee shall be entitled to receive an annual cash bonus (the "Bonus"), based upon the formula established by the Committee which is set forth in Exhibit "A" attached hereto and made a part hereof. The combined Bonus as hereinabove set forth is payable by Employer to Employee upon the issuance of the Audited Financial Statements at the close of the corporate fiscal year but in no event later than ninety days following the close of the corporate fiscal year. Provided, however, based upon financial information then available, Employee will be paid a sum equal to one-twelfth (1 / 12) of the estimated combined Bonus at the end of each calendar month during the term of this Agreement, or any extension thereto as an advance payment, provided further, that within the sole discretion of the Board a reserve amount may be deducted from any such advance payment or payments pending final Bonus accounting after the termination of this Agreement. 4. Employee Benefits, During the Term of Employment, Employee shall be entitled to receive all rights and benefits (collectively referred to herein as "Benefits") for which he is otherwise eligible under any profit-sharing plan, health and welfare plan, life, disability or medical insurance plan or policy or other employee benefit plan that Employer provides from time to time for senior officers, provided that, as minimum Benefits (1) Employer shall provide Employee with health insurance and with a right to participate in a stock option plan, a qualified profit-sharing plan, in each instance with terms at least as favorable as those currently received by Employee, and (ii) Employer shall maintain, and pay all premiums on, a Term Life Insurance Policy on Employee's life, such policy to be in an amount of at least $1,000,000 and the beneficiary thereof to be Employer (the "Term Life Insurance Policy"). Upon the termination of Employees' Employment for any reason other than death, the said Term Life Insurance Policy shall be cancelled. 5. Expense Reimbursement, Vacations and Perquisites. 5.1 Business Expense Reimbursement. Provided that Employee properly accounts therefor, Employee shall be entitled to receive full reimbursement for all reasonable out-of-pocket expenses (regardless of whether such expenses are deductible by Employer) incurred by him during the Term of Employment in accordance with the policies and procedures established by Employer. Employer shall remain obligated to reimburse Employee for such expenses upon the termination of Employee's Employment for any reason. 5.2 Vacations. Employee shall be entitled to receive whatever paid vacations are provided to Employer's other senior officers, provided that Employee shall be entitled to a minimum of four weeks paid vacation during each calendar year of Employment, prorated for any period that is less than one calendar year. Vacation time shall accrue on a daily basis during each calendar year and, upon the termination of Employee's Employment for any reason, Employee shall be entitled to be paid an amount based upon his Base Salary at the rate applicable immediately prior to such termination for any accrued by unused vacation time. 5.3 Perquisites. (a) During the Term of Employment, Employer shall provide Employee with full-time use of, and shall reimburse Employee for all reasonable expenses incurred by Employee in connection with, the company automobile currently being used by Employee. Employer shall also, at its expense, replace such automobile with an automobile of comparable quality as and when deemed appropriate by the Board and pay all such reasonable expenses thereon. (b) During the Term of Employment, Employee shall be entitled to receive all other perquisites that Employer provides from time to time for senior officers. At any time during the Term of Employment, Employer may increase any one or more of such additional perquisites but may not reduce any of such perquisites from then existing levels unless such reduction applies to all senior officers. (c) Employee's right to receive perquisite shall cease upon the termination of his Employment for any reason. 6. Termination of Employment. 6.1 General. This Section 6 describes the consequences of a termination of Employee's Employment, provided that all other provisions of this Agreement shall continue to govern Employer and Employee after such termination of Employment unless otherwise provided herein. 6.2 Employee's Voluntary Termination of Employment. Employee shall have the right at any time during the Term of Employment, upon not less than ninety days prior written notice to Employer, to terminate his Employment. Employee's right to receive Base Salary, Benefits, vacation time and perquisites shall cease as of the date of such Employment termination, subject to any earned but unpaid Base Salary and Bonuses pursuant to Section 3.2 which said Bonuses, if any, shall be payable at the time set forth in said Section 3.2 that may be due prorated to the date of termination. Employee's termination of his Employment by reason of his Disability (Section 6.3) shall not be regarded as a voluntary termination of Employment within the meaning of this Section 6.2. 6.3 Employee's Disability or Death. (a) If Employee suffers a "Disability", either Employer or Employee may terminate Employee's Employment by giving the other party at least thirty days' prior written notice of such termination, and such Employment shall automatically terminate as of the expiration of such notice period unless Employee resumes full-time performance of his duties hereunder prior to the expiration of such period. For purposes of this Agreement, the term "Disability" means a physical or mental disability of Employee, as certified in a written statement from a physician mutually approved by Employer and Employee, that results in Employee being unable to perform his duties hereunder on a full- time basis for (i) 120 consecutive days, or (ii) 180 days (regardless of whether such days are consecutive) during the term of this Agreement. (b) If Employee's Employment terminates by reason of his Disability or death, Employee (or, in the event of his death, Employee's estate and beneficiaries) shall be entitled to receive any earned but unpaid Base Salary, Bonus and vacation time accrued to date of death. 6.4 Employer's Termination of Employment for Cause. (a) Employer shall be entitled to terminate Employee's Employment at any time for "Cause", which shall mean a termination of Employment by reason of (i) Employee's conviction of a felony, (ii) Employee's willful and continued failure to perform his duties hereunder, or (iii) Employee's willful and gross misconduct that is materially and demonstrably injurious to Employer, provided that Employee's inability to perform his duties because of a Disability shall not constitute a basis for Employer's termination of Employee's Employment for Cause. Notwithstanding the foregoing, Employee's Employment shall not be subject to termination for Cause without (i) Employer's delivery to Employee a notice of intention to terminate, such notice to describe the reasons for the proposed Employment termination and actual termination date, (ii) an opportunity for Employee within the period prior to his proposed termination to cure any such breach (if curable) giving rise to the proposed termination, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) Employer's delivery to Employee of a notice of termination stating that a majority of the authorized number of Employer's directors has found that Employee was guilty of the conduct described above and specifying the particulars thereof. (b) Upon the effective date of the termination of Employee's Employment for Cause, Employee's right to receive Base Salary, Bonuses, Benefits, vacation time and perquisites shall cease. Subject, however, to such sums as may be due as provided for in Section 6.2. 7. Confidentiality; Competition. 7.1 Confidentially. Employee shall at no time, either during his Employment or following the termination of his Employment for any reason, use or disclose to any person, directly or indirectly, any business secret, customer list or other confidential information concerning the business or policies of Employer or of any direct or indirect subsidiary of Employer, except to the extent that such use or disclosure is (i) necessary to the performance of Employee's Employment hereunder, (ii) required by applicable law, (iii) authorized by Employer, or (iv) lawfully obtainable from other sources. Upon the termination of his Employment, Employee shall return to Employer all memoranda, notes and other documents in his possession that relate to the business secrets, customer lists and other confidential information of Employer and Employer's direct and indirect subsidiaries. 7.2 Competition During the Term of Employer's Employment. (a) During his Employment, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise), compete in any manner with the business then being conducted by Employer or any direct or indirect subsidiary of Employer. (b) The provisions of Section 7.2(a) hereof shall not in any manner be construed as prohibiting Employee from serving in any capacity with any civic, educational or charitable organization or any governmental entity or professional or trade association. 7.3 Unfair Competition After the Term of Employer's Employment. For the one-year period immediately following the termination of his Employment for any reason other than a termination without Cause (Section 6.5) or a constructive termination (Section 6.6), in order to prevent Employee from competing unfairly with Employer, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise) (i) solicit for the purpose of hiring any employee or consultant of Employer or of any direct or indirect subsidiary of Employer, or (ii) solicit for the purpose of providing any services to, or cause any other person to solicit for the purpose of providing any services to, any client or customer of Employer or of any direct or indirect subsidiary of Employer. 7.4 Remedies. Employee acknowledges that damages would be an inadequate remedy for his breach of any of the provisions of Sections 7.1, 72 or 7.3 hereof, and that his breach of any of such provisions will result in immeasurable and irreparable harm to Employer. Therefore, in addition to any other remedy to which Employer may be entitled by reason of Employee's breach of any such provision, Employer shall be entitled to seek and obtain temporary, preliminary and permanent injunctive relief from any court of competent jurisdiction restraining Employee from committing or continuing any breach of any provision of Section 7 1, 7.2 or Z 3. 8. General Provisions. 8.1 Indemnification. To the extent permitted by applicable law and the Articles of Incorporation and Bylaws of Employer (as from time to time in effect), Employer shall indemnify Employee and hold him harmless with respect to any and all acts or decisions made by him in good faith while performing services for Employer, regardless of whether such services were performed prior to the date of this Agreement or during the Term of Employment. To the same extent, Employer shall pay on a current basis all expenses, including, without limitation, reasonable attorneys' fees and the amounts of court approved settlements, actually incurred by Employee in connection with any appeal thereon, which has been and/or may be brought against Employee by reason of Employee's service for Employer. Employee shall be protected to the same extent as Employer's other officers under any officers' and directors' liability insurance policies that Employer may, in its sole discretion, purchase. The foregoing obligations of Employer shall survive the termination of Employee's Employment for any reason. 8.2 Notices. All notices and other communications required or permitted by this Agreement shall be delivered to Employer or Employee, as the case may be, in writing, either personally, by facsimile transmission or by registered, certified or express mail, return receipt requested, postage prepaid, to the address for such party specified below or to such other address as Employer or Employee may from time to time advise the other party, and shall be deemed given and received as of actual personal delivery or on the date of delivery shown on any such transmission or return receipt: If to Employer: First Mortgage Corporation 3530 Fallowfield Drive Diamond Bar, CA 91765 Attention: Board of Directors If to Employee: Clement Ziroli 23615 Falcons View Diamond Bar, CA 91765 8.3 Amendments and Termination; Entire Agreement. This Agreement may be amended or terminated only by a writing executed by Employer and Employee. This Agreement constitutes the entire agreement or Employer and Employee relating to the subject matter hereof and supersedes all prior oral and written understandings and agreements relating to such subject matter. 8.4 Successors and Assigns. This Agreement shall be binding upon, and shall benefit, Employer and Employee and their respective successors and assigns. Without the prior written consent of the other party, neither Employer nor Employee shall assign any of such party's obligations hereunder. 8.5 Calculation of Time. Wherever in this Agreement a period of time is stated in a number of days, it shall be deemed to mean calendar days. However, when any period of time so stated would end upon a Saturday, Sunday or legal holiday, such period shall be deemed to end upon the next day following that is not a Saturday, Sunday or legal holiday. 8.6 Further Assurances. Each party shall perform any further acts and execute and deliver any further documents that may be reasonably necessary or advisable to carry out the provisions of this Agreement. 8.7 Provisions Subject to Applicable Law. All provisions of this Agreement shall be applicable only to the extent that they do not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Agreement invalid, illegal or unenforceable under any applicable law. If any provision of this Agreement or any application thereof shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of other provisions of this Agreement or of any other application of such provision shall in no way be affected thereby. 8.8 Waiver of Rights. Neither party shall be deemed to have waived any right or remedy that it has under this Agreement unless this Agreement expressly provides a period of time within which such right or remedy must be exercised and such period has expired, or unless such party has expressly waived the same in writing. The waiver by either party of a right or remedy hereunder shall not be deemed to be a waiver of any other right or remedy or of any subsequent right or remedy of the same kind. 8.9 Headings: Gender and Number. The headings contained in this Agreement are for reference purposes only and shall not affect in any manner the meaning or interpretation of this Agreement. Where appropriate to the context of this Agreement, use of the singular shall be deemed also to refer to the plural, and uses of the plural to the singular, and pronouns of certain gender shall be deemed to comprehend either or both of the other genders. The terms "hereof", "herein", "hereby" and variations thereof shall, whenever used in this Agreement, refer to this Agreement as a whole and not to any particular section hereof. The term "person" refers to any natural person, corporation, partnership or other association or entity. 8.10 Counterparts. This Agreement may be executed in two counterparts, and by each party on a separate counterpart, each of which shall be deemed an original, but both of which taken together shall constitute but one and the same instrument. 8.11 Expenses Incurred in Implementing This Agreement. Employer shall bear all costs and expenses incurred in connection with the negotiation, preparation and interpretation of this Agreement, including, without limitation, the fees and expenses of Employee's attorneys. 8.12 Governing Laws, Arbitration and Expenses Resulting from Litigation. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. Except with respect to an action for injunctive relief brought by Employer in a court of competent jurisdiction pursuant to Section 74 hereof, all disputes arising between Employer and Employee concerning the enforcement of this Agreement shall be submitted to arbitration, before three arbitrators, in accordance with the Rules of the American Arbitration Association. All arbitration proceedings shall be held in Los Angeles, California. The award of the arbitrators in any arbitration proceeding shall be final and may be enforced in any court of competent jurisdiction. The unsuccessful party to such arbitration proceeding or to any court action that is permitted by this Agreement shall pay to the successful party all costs and expenses, including, without limitation, reasonably attorneys' fees, incurred therein by the successful party, all of which shall be included in and as a part of the award or judgment rendered in such proceeding or action. Notwithstanding anything to the contrary in this Agreement, if an arbitration proceeding involving Employer's obligation to make any payments hereunder to (or for the account of) Employee is commenced by either Employer or Employee, Employer shall be obligated to continue making all such disputed payments unless and until the award of the arbitrators specifies that Employee is not entitled to such payments, in which event Employee shall be obligated to refund to Employer all such previously received amounts to which he is not entitled. IN WITNESS WHEREOF, Employer and Employee have executed and delivered this Agreement as of the date first above written. EMPLOYER FIRST MORTGAGE CORPORATION By: Its: EMPLOYEE: CLEMENT ZIROLI EXHIBIT A CLEMENT ZIROLI (a) Loan Production Bonus The Loan Production Bonus shall be calculated based on the following formula: (1) 0.005% of wholesale mortgage loan production (funding) (2) 0.010% of retail mortgage loan production (funding) (b) Annual Profit Bonus The Annual Profit Bonus shall be calculated based on the following schedule: Annual corporate net income before income taxes Incremental bonus Percentage $0 $3,000,000 7.00% of this increment $3,000,001 $5,000,000 4.75% of this increment $5,000,001 $7,000,000 4.50% of this increment $7,000,001 $9,000,000 4.25% of this increment $9,000,001 $11,000,000 4.00% of this increment $11,000,001 $13,000,000 3.75% of this increment Over $13,000,000 3.50% of this increment (9/96) EX-10.37 9 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 30th day of September, 1996, by and between FIRST MORTGAGE CORPORATION, a California Corporation ("Employer") and BRUCE G. NORMAN ("Employee"). RECITAL Employee presently serves as President, Chief Operating Officer and as Director and a member of Employer's Board of Directors (the "Board"). Employer and Employee desire to set forth herein their agreement regarding the terms and conditions upon which Employee shall henceforth serve as President, Chief Operating Officer and as Director and a member of the Board which such terms and conditions are consistent with the performance goals heretofore established by Compensation Committee of Employer (the "Committee"). NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which hereby is acknowledged, Employer and Employee hereby agree as follows: 1. Employment; Term of Employment. Employer hereby employs Employee, and Employee hereby accepts employment ("Employment") with Employer, in accordance with the terms and conditions of this Agreement. The term of Employee's Employment (the "Term of Employment") shall commence on the first day of October, 1996 and end on the 31st day of March, 1997, unless otherwise terminated, pursuant to the provisions of Agreement. In the event Employer and Employee have not entered into a new Agreement for the fiscal year beginning April 1, 1997, the terms of this Agreement will continue in full force and effect on a month to month term until a new Employment Agreement is executed by the parties or Employment is otherwise terminated. 2. Position, Duties, Authority and Exclusivity of Services. 2.1 Position. During the term of Employment, Employee shall serve as the President, Chief Operating Officer and as Director and a member of the Board. Upon the request of the Board, Employee shall also serve, without additional remuneration, as President, Chief Operating Officer and as a member of the Board of Directors of any direct or indirect subsidiaries of Employer specified by the Board. 2.2 Location of "Employee's Performance. The principal location in which Employee shall be required to perform his duties hereunder shall be the principal business office of Employer in Diamond Bar, California, or in such other place as such principal business office may be relocated with Employee's prior written consent. Employer shall provide Employee with an office and working facilities that are customary for an officer in Employee's position and that are sufficient to enable Employee to perform his duties hereunder. 2.3 Duties and Authority. Employee's duties hereunder shall be the usual and customary duties of the offices in which he shall serve and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Employee shall have such executive power and authority as is customary for an officer in his position and is reasonably required to enable him to perform his duties hereunder. 2.4 Exclusivity of Services. Employee shall devote himself to the performance of his duties hereunder with a level of diligence commensurate with Employee's position. So long as Employee does not violate the noncompetition or confidentiality provisions as provided for within this Agreement or fail to perform his duties hereunder, Employee shall be entitled to (i) to serve in any capacity with any other business or professional organization, civic, educational or any governmental entity or professional or trade association and (ii) to make and manage personal business investments of his choice and of any kind. Employee shall not be required to obtain Board approval in order to engage in the activities described in the preceding sentence. 3. Compensation. 3.1 Base Salary. Payment for services rendered during the Term of Employment, paid to Employee, shall be computed upon a base annual salary (the "Base Salary") of not less than $235,000 per annum, payable in semi-monthly or monthly installments. If Employee is entitled to receive Base Salary for any period that is less than one calendar month, the Base Salary for such period shall be computed by prorating the annual Base Salary over such period based upon the actual number of days therein. The Board and the Compensation Committee shall review the Base Salary not later than sixty days prior to the expiration of this Agreement for the purpose of determining whether a merit increase is appropriate based upon Employer's performance and the performance of Employee. 3.2 Bonuses. (1) During the term of this Employment Agreement which is the 1997 fiscal year ending March 31, 1997, the Employee shall be entitled to receive an annual cash bonus (the "Bonus"), based upon the formula established by the Committee which is set forth in Exhibit "A" attached hereto and made a part hereof. The combined Bonus as hereinabove set forth is payable by Employer to Employee upon the issuance of the Audited Financial Statements at the close of the corporate fiscal year but in no event later than ninety days following the close of the corporate fiscal year. Provided, however, based upon financial information then available, Employee will be paid a sum equal to one-twelfth (1/12) of the estimated combined Bonus at the end of each calendar month during the term of this Agreement, or any extension thereto as an advance payment, provided further, that within the sole discretion of the Board a reserve amount may be deducted from any such advance payment or payments pending final Bonus accounting after the termination of this Agreement. 4. Employee Benefits. During the Term of Employment, Employee shall be entitled to receive all rights and benefits (collectively referred to herein as "Benefits") for which he is otherwise eligible under any profit-sharing plan, health and welfare plan, life, disability or medical insurance plan or policy or other employee benefit plan that Employer provides from time to time for senior officers, provided that, as minimum Benefits (1) Employer shall provide Employee with health insurance and with a right to participate in a stock option plan, a qualified profit-sharing plan, in each instance with terms at least as favorable as those currently received by Employee, and (ii) Employer shall maintain, and pay all premiums on, a Term Life Insurance Policy on Employee's life, such policy to be in an amount of at least $1,000,000 and the beneficiary thereof to be Employer (the "Term Life Insurance Policy"). Upon the termination of Employees' Employment for any reason other than death, the said Term Life Insurance Policy shall be cancelled. 5. Expense Reimbursement, Vacations and Perquisites. 5.1 Business Expense Reimbursement. Provided that Employee properly accounts therefor, Employee shall be entitled to receive full reimbursement for all reasonable out-of-pocket expenses (regardless of whether such expenses are deductible by Employer) incurred by him during the Term of Employment in accordance with the policies and procedures established by Employer. Employer shall remain obligated to reimburse Employee for such expenses upon the termination of Employee's Employment for any reason. 5.2 Vacations. Employee shall be entitled to receive whatever paid vacations are provided to Employer's other senior officers, provided that Employee shall be entitled to a minimum of four weeks paid vacation during each calendar year of Employment, prorated for any period that is less than one calendar year. Vacation time shall accrue on a daily basis during each calendar year and, upon the termination of Employee's Employment for any reason, Employee shall be entitled to be paid an amount based upon his Base Salary at the rate applicable immediately prior to such termination for any accrued by unused vacation time. 5.3 Perquisites. (a) During the Term of Employment, Employer shall provide Employee with full-time use of, and shall reimburse Employee for all reasonable expenses incurred by Employee in connection with, the company automobile currently being used by Employee. Employer shall also, at its expense, replace such automobile with an automobile of comparable quality as and when deemed appropriate by the Board and pay all such reasonable expenses thereon. (b) During the Term of Employment, Employee shall be entitled to receive all other perquisites that Employer provides from time to time for senior officers. At any time during the Term of Employment, Employer may increase any one or more of such additional perquisites but may not reduce any of such perquisites from then existing levels unless such reduction applies to all senior officers. (c) Employee's right to receive perquisite shall cease upon the termination of his Employment for any reason. 6. Termination of Employment. 6.1 General. This Section 6 describes the consequences of a termination of Employee's Employment, provided that all other provisions of this Agreement shall continue to govern Employer and Employee after such termination of Employment unless otherwise provided herein. 6.2 Employee's voluntary Termination of Employment. Employee shall have the right at any time during the Term of Employment, upon not less than ninety days prior written notice to Employer, to terminate his Employment. Employee's right to receive Base Salary, Benefits, vacation time and perquisites shall cease as of the date of such Employment termination, subject to any earned but unpaid Base Salary and Bonuses pursuant to Section 3.2 which said Bonuses, if any, shall be payable at the time set forth in said Section 3.2 that may be due prorated to the date of termination. Employee's termination of his Employment by reason of his Disability (Section 6.3) shall not be regarded as a voluntary termination of Employment within the meaning of this Section 6.2. 6.3 Employee's Disability or Death. (a) If Employee suffers a "Disability", either Employer or Employee may terminate Employee's Employment by giving the other party at least thirty days' prior written notice of such termination, and such Employment shall automatically terminate as of the expiration of such notice period unless Employee resumes full-time performance of his duties hereunder prior to the expiration of such period. For purposes of this Agreement, the term "Disability" means a physical or mental disability of Employee, as certified in a written statement from a physician mutually approved by Employer and Employee, that results in Employee being unable to perform his duties hereunder on a full- time basis for (i) 120 consecutive days, or (ii) 180 days (regardless of whether such days are consecutive) during the term of this Agreement. (b) If Employee's Employment terminates by reason of his Disability or death, Employee (or, in the event of his death, Employee's estate and beneficiaries) shall be entitled to receive any earned but unpaid Base Salary, Bonus and vacation time accrued to date of death. 6.4 Employer's Termination of Employment for Cause. (a) Employer shall be entitled to terminate Employee's Employment at any time for "Cause", which shall mean a termination of Employment by reason of (i) Employee's conviction of a felony, (ii) Employee's willful and continued failure to perform his duties hereunder, or (iii) Employee's willful and gross misconduct that is materially and demonstrably injurious to Employer, provided that Employee's inability to perform his duties because of a Disability shall not constitute a basis for Employer's termination of Employee's Employment for Cause. Notwithstanding the foregoing, Employee's Employment shall not be subject to termination for Cause without (i) Employer's delivery to Employee a notice of intention to terminate, such notice to describe the reasons for the proposed Employment termination and actual termination date, (ii) an opportunity for Employee within the period prior to his proposed termination to cure any such breach (if curable) giving rise to the proposed termination, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) Employer's delivery to Employee of a notice of termination stating that a majority of the authorized number of Employer's directors has found that Employee was guilty of the conduct described above and specifying the particulars thereof. (b) Upon the effective date of the termination of Employee's Employment for Cause, Employee's right to receive Base Salary, Bonuses, Benefits, vacation time and perquisites shall cease. Subject, however, to such sums as may be due as provided for in Section 6 2. 7. Confidentiality; Competition. 7.1 Confidentiality. Employee shall at no time, either during his Employment or following the termination of his Employment for any reason, use or disclose to any person, directly or indirectly, any business secret, customer list or other confidential information concerning the business or policies of Employer or of any direct or indirect subsidiary of Employer, except to the extent that such use or disclosure is (i) necessary to the performance of Employee's Employment hereunder, (ii) required by applicable law, (iii) authorized by Employer, or (iv) lawfully obtainable from other sources. Upon the termination of his Employment, Employee shall return to Employer all memoranda, notes and other documents in his possession that relate to the business secrets, customer lists and other confidential information of Employer and Employer's direct and indirect subsidiaries. 7.2 Competition During the Term of Employment. (a) During his Employment, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise), compete in any manner with the business then being conducted by Employer or any direct or indirect subsidiary of Employer. (b) The provisions of Section 7.2(a) hereof shall not in any manner be construed as prohibiting Employee from serving in any capacity with any civic, educational or charitable organization or any governmental entity or professional or trade association. 7.3 Unfair Competition After the Term of Employment. For the one-year period immediately following the termination of his Employment for any reason other than a termination without Cause (Section 6.5) or a constructive termination (Section 6.6), in order to prevent Employee from competing unfairly with Employer, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise) (i) solicit for the purpose of hiring any employee or consultant of Employer or of any direct or indirect subsidiary of Employer, or (ii) solicit for the purpose of providing any services to, or cause any other person to solicit for the purpose of providing any services to, any client or customer of Employer or of any direct or indirect subsidiary of Employer. 7.4 Remedies. Employee acknowledges that damages would be an inadequate remedy for his breach of any of the provisions of Sections 7.1, 7.2 or 7.3 hereof, and that his breach of any of such provisions will result in immeasurable and irreparable harm to Employer. Therefore, in addition to any other remedy to which Employer may be entitled by reason of Employee's breach of any such provision, Employer shall be entitled to seek and obtain temporary, preliminary and permanent injunctive relief from any court of competent jurisdiction restraining Employee from committing or continuing any breach of any provision of Section 7 1, 7.2 or 7.3. 8. General Provisions. 8.1 Indemnification. To the extent permitted by applicable law and the Articles of Incorporation and Bylaws of Employer (as from time to time in effect), Employer shall indemnify Employee and hold him harmless with respect to any and all acts or decisions made by him in good faith while performing services for Employer, regardless of whether such services were performed prior to the date of this Agreement or during the Term of Employment. To the same extent, Employer shall pay on a current basis all expenses, including, without limitation, reasonable attorneys' fees and the amounts of court approved settlements, actually incurred by Employee in connection with any appeal thereon, which has been and/or may be brought against Employee by reason of Employee's service for Employer. Employee shall be protected to the same extent as Employer's other officers under any officers' and directors' liability insurance policies that Employer may, in its sole discretion, purchase. The foregoing obligations of Employer shall survive the termination of Employee's Employment for any reason. 8.2 Notices. All notices and other communications required or permitted by this Agreement shall be delivered to Employer or Employee, as the case may be, in writing, either personally, by facsimile transmission or by registered, certified or express mail, return receipt requested, postage prepaid, to the address for such party specified below or to such other address as Employer or Employee may from time to time advise the other party, and shall be deemed given and received as of actual personal delivery or on the date of delivery shown on any such transmission or return receipt: If to Employer: First Mortgage Corporation 3530 Fallowfield Drive Diamond Bar, CA 91765 Attention: Board of Directors If to Employee: Bruce G. Norman 10241 Old Lamplighter Villa Park, CA 92861 8.3 Amendments and Termination: Entire Agreement. This Agreement may be amended or terminated only by a writing executed by Employer and Employee. This Agreement constitutes the entire agreement or Employer and Employee relating to the subject matter hereof and supersedes all prior oral and written understandings and agreements relating to such subject matter. 8.4 Successors and Assigns. This Agreement shall be binding upon, and shall benefit, Employer and Employee and their respective successors and assigns. Without the prior written consent of the other party, neither Employer nor Employee shall assign any of such party's obligations hereunder. 8.5 Calculation of Time. Wherever in this Agreement a period of time is stated in a number of days, it shall be deemed to mean calendar days. However, when any period of time so stated would end upon a Saturday, Sunday or legal holiday, such period shall be deemed to end upon the next day following that is not a Saturday, Sunday or legal holiday. 8.6 Further Assurances. Each party shall perform any further acts and execute and deliver any further documents that may be reasonably necessary or advisable to carry out the provisions of this Agreement. 8.7 Provisions Subject to Applicable Law. All provisions of this Agreement shall be applicable only to the extent that they do not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Agreement invalid, illegal or unenforceable under any applicable law. If any provision of this Agreement or any application thereof shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of other provisions of this Agreement or of any other application of such provision shall in no way be affected thereby, 8.8 Waiver of Rights. Neither party shall be deemed to have waived any right or remedy that it has under this Agreement unless this Agreement expressly provides a period of time within which such right or remedy must be exercised and such period has expired, or unless such party has expressly waived the same in writing. The waiver by either party of a right or remedy hereunder shall not be deemed to be a waiver of any other right or remedy or of any subsequent right or remedy of the same kind. 8.9 Headings: Gender and Number. The headings contained in this Agreement are for reference purposes only and shall not affect in any manner the meaning or interpretation of this Agreement. Where appropriate to the context of this Agreement, use of the singular shall be deemed also to refer to the plural, and uses of the plural to the singular, and pronouns of certain gender shall be deemed to comprehend either or both of the other genders. The terms "hereof", "herein", "hereby" and variations thereof shall, whenever used in this Agreement, refer to this Agreement as a whole and not to any particular section hereof. The term "person" refers to any natural person, corporation, partnership or other association or entity. 8. 10 Counterparts. This Agreement may be executed in two counterparts, and by each party on a separate counterpart, each of which shall be deemed an original, but both of which taken together shall constitute but one and the same instrument. 8. 11 Expenses Incurred in Implementin2 This A2reement. Employer shall bear all costs and expenses incurred in connection with the negotiation, preparation and interpretation of this Agreement, including, without limitation, the fees and expenses of Employee's attorneys. 8.12 Governing Laws, Arbitration and Expenses Resulting from Litigation. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. Except with respect to an action for injunctive relief brought by Employer in a court of competent jurisdiction pursuant to Section 7.4 hereof, all disputes arising between Employer and Employee concerning the enforcement of this Agreement shall be submitted to arbitration, before three arbitrators, in accordance with the Rules of the American Arbitration Association. All arbitration proceedings shall be held in Los Angeles, California. The award of the arbitrators in any arbitration proceeding shall be final and may be enforced in any court of competent jurisdiction. The unsuccessful party to such arbitration proceeding or to any court action that is permitted by this Agreement shall pay to the successful party all costs and expenses, including, without limitation, reasonably attorneys' fees, incurred therein by the successful party, all of which shall be included in and as a part of the award or judgment rendered in such proceeding or action. Notwithstanding anything to the contrary in this Agreement, if an arbitration proceeding involving Employer's obligation to make any payments hereunder to (or for the account of) Employee is commenced by either Employer or Employee, Employer shall be obligated to continue making all such disputed payments unless and until the award of the arbitrators specifies that Employee is not entitled to such payments, in which event Employee shall be obligated to refund to Employer all such previously received amounts to which he is not entitled. IN WITNESS WHEREOF, Employer and Employee have executed and delivered this Agreement as of the date first above written. EMPLOYER FIRST MORTGAGE CORPORATION By: Its: EMPLOYEE: BRUCE G. NORMAN EXHIBIT A BRUCE G NORMAN (a) Loan Production Bonus The Loan Production Bonus shall be calculated based on the following formula: (1) 0.0075% of wholesale mortgage loan production (funding) (2) 0.0125% of retail mortgage loan production (funding) (b) Annual Profit Bonus The Annual Profit Bonus shall be calculated based on the following schedule: incremental bonus percentage $0 $3,000,000 2.50% of this increment $3,000,001 $5,000,000 2.75% of this increment $5,000,001 $7,000,000 2.50% of this increment $7,000,001 $9,000,000 2.25% of this increment $9,000,001 $11,000,000 2.00% of this increment $11,000,001 $13,000,000 1.75% of this increment Over $13,000,000 1.50% of this increment (9/96) EX-10.38 10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 30th day of September, 1996, by and between FIRST MORTGAGE CORPORATION, a California Corporation ("Employer") and PAC W. DONG ("Employee"). RECITAL Employee presently serves as Executive Vice-President, Chief Financial Officer and as Director and a member of Employer's Board of Directors (the "Board"). Employer and Employee desire to set forth herein their agreement regarding the terms and conditions upon which Employee shall henceforth serve as Executive Vice-President, Chief Financial Officer and as Director and a member of the Board which such terms and conditions are consistent with the performance goals heretofore established by Compensation Committee of Employer (the "Committee"). NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which hereby is acknowledged, Employer and Employee hereby agree as follows: 1. Employment; Term of Employment. Employer hereby employs Employee, and Employee hereby accepts employment ("Employment") with Employer, in accordance with the terms and conditions of this Agreement. The term of Employee's Employment (the "Term of Employment") shall commence on the first day of October, 1996 and end on the 31st day of March, 1997, unless otherwise terminated, pursuant to the provisions of Agreement. In the event Employer and Employee have not entered into a new Agreement for the fiscal year beginning April 1, 1997, the terms of this Agreement will continue in full force and effect on a month to month term until a new Employment Agreement is executed by the parties or Employment is otherwise terminated. 2. Position, Duties, Authority and Exclusively of Services. 2.1 Position. During the term of Employment, Employee shall serve as the Executive Vice-President, Chief Financial Officer and as Director and a member of the Board. Upon the request of the Board, Employee shall also serve, without additional remuneration, as Executive Vice-President, Chief Financial Officer and as a member of the Board of Directors of any direct or indirect subsidiaries of Employer specified by the Board. 2.2 Location of Employee's Performance. The principal location in which Employee shall be required to perform his duties hereunder shall be the principal business office of Employer in Diamond Bar, California, or in such other place as such principal business office may be relocated with Employee's prior written consent. Employer shall provide Employee with an office and working facilities that are customary for an officer in Employee's position and that are sufficient to enable Employee to perform his duties hereunder. 2.3 Duties and Authority. Employee's duties hereunder shall be the usual and customary duties of the offices in which he shall serve and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Employee shall have such executive power and authority as is customary for an officer in his position and is reasonably required to enable him to perform his duties hereunder. 2.4 Exclusively of Services. Employee shall devote himself to the performance of his duties hereunder with a level of diligence commensurate with Employee's position. So long as Employee does not violate the noncompetition or confidentiality provisions as provided for within this Agreement or fail to perform his duties hereunder, Employee shall be entitled to (i) to serve in any capacity with any other business or professional organization, civic, educational or any governmental entity or professional or trade association and (ii) to make and manage personal business investments of his choice and of any kind. Employee shall not be required to obtain Board approval in order to engage in the activities described in the preceding sentence. 3. Compensation. 3.1 Base Salary. Payment for services rendered during the Term of Employment, paid to Employee, shall be computed upon a base annual salary (the "Base Salary') of not less than $130,000 per annum, payable in semi-monthly or monthly installments. If Employee is entitled to receive Base Salary for any period that is less than one calendar month, the Base Salary for such period shall be computed by prorating the annual Base Salary over such period based upon the actual number of days therein. The Board and the Compensation Committee shall review the Base Salary not later than sixty days prior to the expiration of this Agreement for the purpose of determining whether a merit increase is appropriate based upon Employer's performance and the performance of Employee. 3.2 Bonuses. (1) During the term of this Employment Agreement which is the 1997 fiscal year ending March 31, 1997, the Employee shall be entitled to receive an annual cash bonus (the "Bonus"), based upon the formula established by the Committee which is set forth in Exhibit "A" attached hereto and made a part hereof. The combined Bonus as hereinabove set forth is payable by Employer to Employee upon the issuance of the Audited Financial Statements at the close of the corporate fiscal year but in no event later than ninety days following the close of the corporate fiscal year. Provided, however, based upon financial information then available, Employee will be paid a sum equal to one-twelfth (1/12) of the estimated combined Bonus at the end of each calendar month during the term of this Agreement, or any extension thereto as an advance payment, provided further, that within the sole discretion of the Board a reserve amount may be deducted from any such advance payment or payments pending final Bonus accounting after the termination of this Agreement. 4. Employee Benefits. During the Term of Employment, Employee shall be entitled to receive all rights and benefits (collectively referred to herein as "Benefits") for which he is otherwise eligible under any profit-sharing plan, health and welfare plan, life, disability or medical insurance plan or policy or other employee benefit plan that Employer provides from time to time for senior officers, provided that, as minimum Benefits (1) Employer shall provide Employee with health insurance and with a right to participate in a stock option plan, a qualified profit-sharing plan, in each instance with terms at least as favorable as those currently received by Employee, and (ii) Employer shall maintain, and pay all premiums on, a Term Life Insurance Policy on Employee's life, such policy to be in an amount of at least $1,000,000 and the beneficiary thereof to be Employer (the "Term Life Insurance Policy"). Upon the termination of Employees' Employment for any reason other than death, the said Term Life Insurance Policy shall be cancelled. 5. Expense Reimbursement, Vacations and Perquisites. 5.1 Business Expense Reimbursement. Provided that Employee properly accounts therefor, Employee shall be entitled to receive full reimbursement for all reasonable out-of-pocket expenses (regardless of whether such expenses are deductible by Employer) incurred by him during the Term of Employment in accordance with the policies and procedures established by Employer. Employer shall remain obligated to reimburse Employee for such expenses upon the termination of Employee's Employment for any reason. 5.2 Vacations. Employee shall be entitled to receive whatever paid vacations are provided to Employer's other senior officers, provided that Employee shall be entitled to a minimum of four weeks paid vacation during each calendar year of Employment, prorated for any period that is less than one calendar year. Vacation time shall accrue on a daily basis during each calendar year and, upon the termination of Employee's Employment for any reason, Employee shall be entitled to be paid an amount based upon his Base Salary at the rate applicable immediately prior to such termination for any accrued by unused vacation time. 5.3 Perquisites. (a) During the Term of Employment, Employer shall provide Employee with full-time use of, and shall reimburse Employee for all reasonable expenses incurred by Employee in connection with, the company automobile currently being used by Employee. Employer shall also, at its expense, replace such automobile with an automobile of comparable quality as and when deemed appropriate by the Board and pay all such reasonable expenses thereon. (b) During the Term of Employment, Employee shall be entitled to receive all other perquisites that Employer provides from time to time for senior officers. At any time during the Term of Employment, Employer may increase any one or more of such additional perquisites but may not reduce any of such perquisites from then existing levels unless such reduction applies to all senior officers. (c) Employee's right to receive perquisite shall cease upon the termination of his Employment for any reason. 6. Termination of Employment. 6.1 General. This Section 6 describes the consequences of a termination of Employee's Employment, provided that all other provisions of this Agreement shall continue to govern Employer and Employee after such termination of Employment unless otherwise provided herein. 6.2 Employee's Voluntary Termination of Employment. Employee shall have the right at any time during the Term of Employment, upon not less than ninety days prior written notice to Employer, to terminate his Employment. Employee's right to receive Base Salary, Benefits, vacation time and perquisites shall cease as of the date of such Employment termination, subject to any earned but unpaid Base Salary and Bonuses pursuant to Section 3.2 which said Bonuses, if any, shall be payable at the time set forth in said Section 3.2 that may be due prorated to the date of termination. Employee's termination of his Employment by reason of his Disability (Section 6.3) shall not be regarded as a voluntary termination of Employment within the meaning of this Section 6.2. 6.3 Employee's Disability or Death. (a) If Employee suffers a "Disability", either Employer or Employee may terminate Employee's Employment by giving the other party at least thirty days' prior written notice of such termination, and such Employment shall automatically terminate as of the expiration of such notice period unless Employee resumes full-time performance of his duties hereunder prior to the expiration of such period. For purposes of this Agreement, the term "Disability" means a physical or mental disability of Employee, as certified in a written statement from a physician mutually approved by Employer and Employee, that results in Employee being unable to perform his duties hereunder on a full- time basis for (i) 120 consecutive days, or (ii) 180 days (regardless of whether such days are consecutive) during the term of this Agreement. (b) If Employee's Employment terminates by reason of his Disability or death, Employee (or, in the event of his death, Employee's estate and beneficiaries) shall be entitled to receive any earned but unpaid Base Salary, Bonus and vacation time accrued to date of death. 6.4 Employer's Termination of Employment for Cause. (a) Employer shall be entitled to terminate Employee's Employment at any time for "Cause", which shall mean a termination of Employment by reason of (i) Employee's conviction of a felony, (ii) Employee's willful and continued failure to perform his duties hereunder, or (iii) Employee's willful and gross misconduct that is materially and demonstrably injurious to Employer, provided that Employee's inability to perform his duties because of a Disability shall not constitute a basis for Employer's termination of Employee's Employment for Cause. Notwithstanding the foregoing, Employee's Employment shall not be subject to termination for Cause without (i) Employer's delivery to Employee a notice of intention to terminate, such notice to describe the reasons for the proposed Employment termination and actual termination date, (ii) an opportunity for Employee within the period prior to his proposed termination to cure any such breach (if curable) giving rise to the proposed termination, (iii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iv) Employer's delivery to Employee of a notice of termination stating that a majority of the authorized number of Employer's directors has found that Employee was guilty of the conduct described above and specifying the particulars thereof. (b) Upon the effective date of the termination of Employee's Employment for Cause, Employee's right to receive Base Salary, Bonuses, Benefits, vacation time and perquisites shall cease. Subject, however, to such sums as may be due as provided for in Section 6.2. 7. Confidentiality; Competition. 7.1 Confidentiality. Employee shall at no time, either during his Employment or following the termination of his Employment for any reason, use or disclose to any person, directly or indirectly, any business secret, customer list or other confidential information concerning the business or policies of Employer or of any direct or indirect subsidiary of Employer, except to the extent that such use or disclosure is (i) necessary to the performance of Employee's Employment hereunder, (ii) required by applicable law, (iii) authorized by Employer, or (iv) lawfully obtainable from other sources. Upon the termination of his Employment, Employee shall return to Employer all memoranda, notes and other documents in his possession that relate to the business secrets, customer lists and other confidential information of Employer and Employer's direct and indirect subsidiaries. 7.2 Competition During the Term of Employment. (a) During his Employment, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise), compete in any manner with the business then being conducted by Employer or any direct or indirect subsidiary of Employer. (b) The provisions of Section 7 2 (a) hereof shall not in any manner be construed as prohibiting Employee from serving in any capacity with any civic, educational or charitable organization or any governmental entity or professional or trade association. 7.3 Unfair Competition After the Term of Employment, For the one- year period immediately following the termination of his Employment for any reason other than a termination without Cause (Section 6.5) or a constructive termination (Section 6.6), in order to prevent Employee from competing unfairly with Employer, Employee shall not, directly or indirectly (as owner, principal, agent, partner, officer, employee, independent contractor, consultant, shareholder or otherwise) (i) solicit for the purpose of hiring any employee or consultant of Employer or of any direct or indirect subsidiary of Employer, or (ii) solicit for the purpose of providing any services to, or cause any other person to solicit for the purpose of providing any services to, any client or customer of Employer or of any direct or indirect subsidiary of Employer. 7.4 Remedies. Employee acknowledges that damages would be an inadequate remedy for his breach of any of the provisions of Sections 7.1, 7.2 or 7.3 hereof, and that his breach of any of such provisions will result in immeasurable and irreparable harm to Employer, therefore, in addition to any other remedy to which Employer may be entitled by reason of Employee's breach of any such provision, Employer shall be entitled to seek and obtain temporary, preliminary and permanent injunctive relief from any court of competent jurisdiction restraining Employee from committing or continuing any breach of any provision of Section 7. 1, 7.2 or 73. 8. General Provisions. 8.1 Indemnification. To the extent permitted by applicable law and the Articles of Incorporation and Bylaws of Employer (as from time to time in effect), Employer shall indemnify Employee and hold him harmless with respect to any and all acts or decisions made by him in good faith while performing services for Employer, regardless of whether such services were performed prior to the date of this Agreement or during the Term of Employment. To the same extent, Employer shall pay on a current basis all expenses, including, without limitation, reasonable attorneys' fees and the amounts of court approved settlements, actually incurred by Employee in connection with any appeal thereon, which has been and/or may be brought against Employee by reason of Employee's service for Employer. Employee shall be protected to the same extent as Employer's other officers under any officers' and directors' liability insurance policies that Employer may, in its sole discretion, purchase. The foregoing obligations of Employer shall survive the termination of Employee's Employment for any reason. 8.2 Notices. All notices and other communications required or permitted by this Agreement shall be delivered to Employer or Employee, as the case may be, in writing, either personally, by facsimile transmission or by registered, certified or express mail, return receipt requested, postage prepaid, to the address for such party specified below or to such other address as Employer or Employee may from time to time advise the other party, and shall be deemed given and received as of actual personal delivery or on the date of delivery shown on any such transmission or return receipt: If to Employer: First Mortgage Corporation 3530 Fallowfield Drive Diamond Bar, CA 91765 Attention: Board of Directors If to Employee: Pac W. Dong 827 N. Beaudry Ave. Los Angeles, CA 90012 8.3 Amendments and Termination; Entire Agreement. This Agreement may be amended or terminated only by a writing executed by Employer and Employee. This Agreement constitutes the entire agreement or Employer and Employee relating to the subject matter hereof and supersedes all prior oral and written understandings and agreements relating to such subject matter. 8.4 Successors and Assigns. This Agreement shall be binding upon, and shall benefit, Employer and Employee and their respective successors and assigns. Without the prior written consent of the other party, neither Employer nor Employee shall assign any of such party's obligations hereunder. 8.5 Calculation of Time. Wherever in this Agreement a period of time is stated in a number of days, it shall be deemed to mean calendar days. However, when any period of time so stated would end upon a Saturday, Sunday or legal holiday, such period shall be deemed to end upon the next day following that is not a Saturday, Sunday or legal holiday. 8.6 Further Assurances. Each party shall perform any further acts and execute and deliver any further documents that may be reasonably necessary or advisable to carry out the provisions of this Agreement. 8.7 Provisions Subject to Applicable Law. All provisions of this Agreement shall be applicable only to the extent that they do not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Agreement invalid, illegal or unenforceable under any applicable law. If any provision of this Agreement or any application thereof shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of other provisions of this Agreement or of any other application of such provision shall in no way be affected thereby. 8.8 Waiver of Rights. Neither party shall be deemed to have waived any right or remedy that it has under this Agreement unless this Agreement expressly provides a period of time within which such right or remedy must be exercised and such period has expired, or unless such party has expressly waived the same in writing. The waiver by either party of a right or remedy hereunder shall not be deemed to be a waiver of any other right or remedy or of any subsequent right or remedy of the same kind. 8.9 Headings; Gender and Number. The headings contained in this Agreement are for reference purposes only and shall not affect in any manner the meaning or interpretation of this Agreement. Where appropriate to the context of this Agreement, use of the singular shall be deemed also to refer to the plural, and uses of the plural to the singular, and pronouns of certain gender shall be deemed to comprehend either or both of the other genders. The terms "hereof", "herein", "hereby" and variations thereof shall, whenever used in this Agreement, refer to this Agreement as a whole and not to any particular section hereof. The term "person" refers to any natural person, corporation, partnership or other association or entity. 8.10 Counterparts. This Agreement may be executed in two counterparts, and by each party on a separate counterpart, each of which shall be deemed an original, but both of which taken together shall constitute but one and the same instrument. 8.11 Expenses Incurred in Implementing This Agreement. Employer shall bear all costs and expenses incurred in connection with the negotiation, preparation and interpretation of this Agreement, including, without limitation, the fees and expenses of Employee's attorneys. 8.12 Governing Laws, Arbitration and Expenses Resulting from Litigation. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California. Except with respect to an action for injunctive relief brought by Employer in a court of competent jurisdiction pursuant to Section 7 4 hereof, all disputes arising between Employer and Employee concerning the enforcement of this Agreement shall be submitted to arbitration, before three arbitrators, in accordance with the Rules of the American Arbitration Association. All arbitration proceedings shall be held in Los Angeles, California. The award of the arbitrators in any arbitration proceeding shall be final and may be enforced in any court of competent jurisdiction. The unsuccessful party to such arbitration proceeding or to any court action that is permitted by this Agreement shall pay to the successful party all costs and expenses, including, without limitation, reasonably attorneys' fees, incurred therein by the successful party, all of which shall be included in and as a part of the award or judgment rendered in such proceeding or action. Notwithstanding anything to the contrary in this Agreement, if an arbitration proceeding involving Employer's obligation to make any payments hereunder to (or for the account of) Employee is commenced by either Employer or Employee, Employer shall be obligated to continue making all such disputed payments unless and until the award of the arbitrators specifies that Employee is not entitled to such payments, in which event Employee shall be obligated to refund to Employer all such previously received amounts to which he is not entitled. IN WITNESS WHEREOF, Employer and Employee have executed and delivered this Agreement as of the date first above written. EMPLOYER FIRST MORTGAGE CORPORATION By: Clement Ziroli Its: EMPLOYEE PAC. DONG EXHIBIT A PAC W. DONG (a) Loan Production Bonus The Loan Production Bonus shall be calculated based on the following formula: (1) 0.0035% of wholesale mortgage loan production (funding) (2) 0.0070% of retail mortgage loan production (funding) (b) Annual Profit Bonus The Annual Profit Bonus shall be calculated based on the following schedule: Annual corporate net income before income taxes Incremental bonus percentage $0 $3,000,000 2.500% of this increment $3,000,001 $5,000,000 2.250% of this increment $5,000,001 $7,000,000 2.125% of this increment $7,000,001 $9,000,000 2.000% of this increment $9,000,001 $11,000,000 1.750% of this increment $11,000,001 $13,000,000 1.500% of this increment Over $13,000,000 1.250% of this increment (9/96) EX-27 11
5 0000883369 FIRST MORTGAGE CORPORATION YEAR MAR-31-1997 MAR-31-1997 5,903 0 9,623 0 0 0 2,433 1,841 50,923 0 0 0 0 5,147 20,501 50,923 0 18,104 0 16,178 0 0 0 1,926 811 1,115 0 0 0 1,115 0.19 0.19
EX-11.1 12 First Mortgage Corporation Notes to Financial Statements (continued) Exhibit 11.1 First Mortgage Corporation Computation of Per Share Earnings Three Years Ended March 31, 1997
Year ended March 31 1997 1996 1995 Primary earnings (loss) per share: Shares used in computing primary earnings per share: Weighted average shares outstanding 5,872,596 5,882,966 5,946,681 Effect of stock options treated as equivalents under the treasury stock method 1,335 7,131 - Total 5,873,931 5,890,097 5,946,681 Net income (loss) $1,115,000 $2,569,000 $(548,000) Earnings (loss) per share $.19 $.44 $(.09) Fully diluted earnings (loss) per share: Shares used in computing fully diluted earnings per share: Weighted average shares outstanding 5,872,596 5,882,966 5,946,681 Effect of stock options treated as equivalents under the treasury stock method 1,335 7,131 - Total 5,873,931 5,890,097 5,946,681 Net income (loss) $1,115,000 $2,569,000 $(548,000) Earnings (loss) per share $.19 $.44 $(.09)
EX-23.1 13 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-70760) pertaining to the First Mortgage Corporation 1992 Stock Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors and in the related Prospectus of our report dated May 23, 1997, with respect to the financial statements of First Mortgage Corporation included in its Annual Report (Form 10-K) for the year ended March 31, 1997. Orange County, California June 27, 1997 -----END PRIVACY-ENHANCED MESSAGE-----