-----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, CMCR9Hx0Ds4VS2/BYEaQiJsQXauWN8eKuev2MpV6VmTUCnN9vCMwJ42QtGcejff0 GMRvaivpmwzkPCIHcEFjnw== 0000883369-98-000004.txt : 19980807 0000883369-98-000004.hdr.sgml : 19980807 ACCESSION NUMBER: 0000883369-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 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: SEC FILE NUMBER: 000-19847 FILM NUMBER: 98655589 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 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, 1998, 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 19, 1998, based on the average bid and asked prices on that date reported by the OTC Bulletin Board, was $3,365,000. 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 19, 1998, 5,569,697 shares of the registrant's Common Stock were issued and outstanding. Documents Incorporated by Reference Portions of the registrant's definitive proxy statement for the annual meeting of shareholders of the registrant to be held on September 23, 1998 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, 1998. FIRST MORTGAGE CORPORATION A California Corporation ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998 TABLE OF CONTENTS Item No. Description Page PART I 1. Business 1 2. Properties 14 3. Legal Proceedings 14 4. Submission of Matters to a Vote of Security Holders 15 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15 6. Selected Financial Data 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 7A.Quantitative and Qualitative Disclosures About Market Risk 24 8. Financial Statements and Supplementary Data 24 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 PART III 10.Directors and Executive Officers of the Registrant 25 11.Executive Compensation 25 12.Security Ownership of Certain Beneficial Owners and Management 25 13.Certain Relationships and Related Transactions 25 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25 Signatures 29 PART I ITEM 1. BUSINESS General First Mortgage Corporation ("First Mortgage" or the "Company") is a mortgage banking firm engaged in the mortgage banking business since its incorporation in California in 1975. The Company originates, purchases, warehouses, sells and services primarily first mortgage loans for the purchase or refinance of owneroccupied 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 11 offices located in California and Arizona. Mortgage loans are originated by the Company through the following channels: Retail production loans are generated by referrals from real estate agents, builders and other sources. Refinance loans are originated by the Direct Marketing division through targeted mail solicitations and direct telemarketing, and wholesale production generally represents loans originated through approved mortgage loan brokers. The Company's long-term production objective is to increase loan origination through strategically located new offices and to promote new products that can be marketed at an acceptable rate of return to the Company. Generally, First Mortgage sells all mortgage loans that it originates or purchases to institutional investors in the secondary mortgage market, retaining the servicing rights on a portion of such loans. The Company emphasizes the origination of mortgage loans insured by the Federal Housing Authority ("FHA") or partially guaranteed by the Veterans Administration ("VA") (collectively, "FHA/VA loans"). The Company's FHA/VA loans are pooled to form securities of the Government National Mortgage Association ("GNMA") which are sold in the secondary mortgage market to investment banking firms, substantially all of which are primary dealers in government securities. Management believes that the origination of FHA/VA loans benefits the Company by (i) increased loan servicing income due to the higher servicing fees and generally longer average loan lives associated with FHA/VA loans, and (ii) reduced interest rates paid on warehousing lines of credit due to the Company's ability to utilize tax and insurance impound accounts associated with FHA/VA loans as compensating balances with its creditor banks. First Mortgage also originates conventional mortgage loans which comply with the requirements for sale to, or conversion into securities issued by, the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The Company sells a portion of the conventional mortgage loans that it originates under purchase and guarantee programs sponsored by FNMA and FHLMC. These programs provide for either direct sale of mortgage loans to FNMA or FHLMC, or for pooling of mortgage loans in exchange for securities issued by FNMA or FHLMC. Conventional loans originated by the Company, including those which do not conform to government agency requirements, are also sold to banks and other private institutional investors under the Company's correspondent relationships with several such investors. The Company believes that the ability to originate a substantial volume of conventional loans is important to the success of its business. The origination of conventional loans enables the Company to offer mortgage loans to a wider variety of markets and referral sources, thereby enhancing the Company's overall mortgage loan origination capability. First Mortgage funds mortgage loan originations and purchases with working capital and short-term borrowings under warehousing lines of credit. The Company generally holds or "warehouses" mortgage loans for a short period of time (on average 25 days) pending their nonrecourse sale to institutional investors in the secondary market as individual loans or as mortgage-backed securities. First Mortgage's loan servicing activities include the collection, remittance and general administration of mortgage loans. Over the years, the company has been successful in retaining servicing rights on a substantial portion of loan originations. The current interest environment, however, has induced much more refinance activities, which has accelerated the prepayment rate of the servicing portfolio. The Company has managed to neutralize the negative impact of this "runoff" by retaining most of the loans eligible for refinance through its own in-house refinance programs. The Company's mortgage servicing portfolio increased by 7.3% to $1.684 billion at March 31, 1997 from $1.570 billion at March 31, 1996, but decreased by 1% to $1.667 billion at March 31, 1998 compared to $1.684 billion from the prior fiscal year. The various phases of First Mortgage's business are discussed in greater detail below. Loan Origination The Company originates mortgage loans through three primary sources: retail, which represents loans generated through real estate agents and builders; direct marketing, which represents loans initiated through direct mail and telephone; and wholesale, which represents loans solicited from loan brokers. Substantially all mortgage loans originated through such sources by the Company are underwritten, funded and closed by the Company. First Mortgage's loan origination activities include (i) offering a variety of residential mortgage loans, (ii) attracting suitable loan applicants, (iii) reviewing borrower credit and mortgaged property title, appraised value and insurance ("underwriting"), (iv) issuing conditional loan commitments, and (v) funding qualified loans at closing. Types of Loans Originated. The Company originates three types of residential mortgage loans: (i) FHA/VA loans which qualify for sale in the form of securities guaranteed by GNMA; (ii) conventional mortgage loans which comply with the requirements for sale to, or conversion into securities issued by, FNMA or FHLMC ("conventional conforming loans"); and (iii) conventional mortgage loans which comply with other institutional investor loan requirements ("conventional nonconforming loans"). The Company does not originate any conventional conforming loans or conventional nonconforming loans (collectively, "conventional loans") with loan-to-value ratios above 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-tovalue ratios, borrower income and credit qualifications, investor requirements, necessary insurance and property appraisal requirements. The Company's underwriting standards also comply with the relevant guidelines set forth by the FHA, VA, FMHA, FNMA, FHLMC, private institutional investors and/or conduits and private mortgage insurers, as applicable. Management believes that the origination of FHA/VA loans benefits the Company from (i) increased loan servicing income due to the higher servicing fees and generally longer average loan lives customarily associated with FHA/VA loans, and (ii) reduced interest rates on warehousing lines of credit due to the Company's ability to utilize tax and insurance impound accounts associated with FHA/VA loans as compensating balances with its creditor banks. However, the Company also originates conventional loans and maintains a flexible loan origination network that is capable of increasing the volume of conventional loan production as market conditions warrant. The Company receives fees from borrowers for the origination of retail loans, generally in the range of one to two percent of the principal amount of the loan. The Company also receives fees in connection with the origination of wholesale loans which average approximately 0.5% per loan. The Company may charge additional fees depending upon market conditions or the Company's objectives concerning loan origination volume and pricing. The Company incurs certain costs in originating loans, including overhead, out-of-pocket costs, interest on money borrowed to finance loans and, when the loans are subject to a purchase commitment from private investors, related commitment fees. The volume of and type of loans and commitments made by the Company vary with competitive and economic conditions, resulting in fluctuations in revenues from loan originations. In periods of rising interest rates, the Company's volume of loan originations, particularly refinancings, declines, and the Company's revenues from loan originations decrease. 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, 1998 1997 1996 (Dollars in thousands, except average loan balance data) FHA/VA Loans: Number of loans 2,115 1,575 1,421 Volume of loans $208,927 $158,502 $133,891 Percent of total volume 43.8% 44.9% 40.5% Average loan balance $98,783 $100,636 $ 94,223 Conventional Conforming Loans (1): Number of loans 587 607 618 Volume of loans $71,708 $ 77,097 $ 80,798 Percent of total volume 15.0% 21.8% 24.4% Average loan balance $122,160 $127,013 $130,741 Conventional Nonconforming Loans: Number of loans 577 379 366 Volume of loans $196,351 $117,812 $116,207 Percent of total volume 41.2% 33.3% 35.1 % Average loan balance $340,296 $310,850 $317,505 Total Loans (1): Number of loans 3,279 2,561 2,405 Volume of loans $476,986 $353,411 $330,896 Average loan balance $145,467 $137,997 $137,586 (1)Includes sub-prime and second priority conventional conforming loans which aggregate less than 1% of the total dollar volume of loans originated and purchased in each of fiscal 1998, 1997, and 1996.
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 owneroccupied residential real property. The volume of refinance loans as a percentage of the Company's total mortgage loan origination volume for fiscal years 1998, 1997 and 1996 was approximately 50%, 38% and 46%, respectively. For fiscal years 1998, 1997 and 1996, approximately 33%, 16% and 41%, 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 costefficient 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 for moderate income homebuyers. While the operation of a productive network of retail branch offices is essential to mortgage loan originations, the Company believes that it is equally important to maintain the flexibility to open or close branch offices in a timely, cost-efficient manner as local market conditions dictate. Accordingly, the Company typically enters into month-to-month or one to two year short-term leases for 1,000 to 2,000 square foot offices, and does not enter into longterm 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 eight California offices located in Covina, West Hollywood, Bakersfield, Rancho Cucamonga, Woodland Hills, San Diego, Fairfield and Modesto, as well as Tempe, Arizona. Management plans to add additional branch offices in order to increase new loan production, some of which may be located outside existing service areas. Given the Company's present high concentration of loan originations in California, there can be no assurance that its results of operations will not be adversely affected to the extent California experiences decreased residential real estate lending activity. First Mortgage operates retail branch offices as individual profit centers. Scheduled fees for loans originated and other services provided by the Company's corporate headquarters are allocated to each branch office in determining the office's profitability. Branch offices are staffed entirely by Company employees. A typical retail branch office staff consists of a branch manager, one to four salespersons, one to three loan processors and one or two clerical office assistants. Salespersons are full-time employees who work exclusively for the Company and are contractually obligated to comply with the Company's business practice guidelines. First Mortgage's retail marketing strategy also includes an incentive compensation system designed to encourage quality mortgage loan production and to retain productive managers and salespersons. A branch manager's compensation includes (in addition to a base salary) a bonus based upon loan production and a percentage of the branch office's annual profits. Salespersons are compensated solely on commissions based upon revenue generated from their respective loan closings. In addition, loan processors at the branch office level receive, in addition to a salary, a bonus based on the number of mortgage loans which are closed and; therefore, have met the Company's underwriting criteria. The Company believes that an incentive compensation system based on the number and quality of loans produced improves overall profitability, customer and employee relations and the Company's reputation for providing timely and quality mortgage banking services. The utilization of personal solicitation techniques is another aspect of the Company's marketing strategy. The Company believes that on-going personal relationships between retail branch salespersons and real estate brokers, builders, developers and prior customers through regular direct contact represent the most productive solicitation technique since historically the majority of the Company's loan originations have been generated through these referral sources. The Company engages in only limited mass media advertising because it believes that the costs associated with such advertising usually outweigh the benefits. The Company also directly solicits borrowers for refinance loans, primarily through targeted mailings and telemarketing. First Mortgage's reputation for prompt and professional service is an integral component of the Company's marketing strategy. The Company believes that its ability to process retail loan applications quickly has become increasingly important in the market place. Despite the speed with which loan applications are processed, the Company does not compromise its comprehensive underwriting and quality control criteria. The utilization of new technology and computerization of all critical phases of operations have had a significant impact on the Company's cost control efforts, especially during the recent upturn in refinance loan production. The Company's wholesale loan origination business utilizes independent loan brokers to originate mortgage loan applications. The Company's wholesale operations sales staff solicits loans meeting the Company's underwriting criteria from loan brokers who have been approved by the Company. These broker-referred loan applications are subject to the same underwriting, verification and approval process applied to loan applications obtained through its retail branch offices. Upon approval, these loans are funded and closed by the Company. The Company currently operates its wholesale regional office in San Jose, California. Mortgage loan production through wholesale originations as a percentage of total loan origination volume for fiscal 1998, 1997 and 1996 was 55%, 57% and 38%, respectively. Loan Processing and Underwriting. Upon receipt of mortgage loan applications, branch office loan personnel verify the completeness and accuracy of application information. Verification procedures include, among other things, obtaining (i) third-party written confirmations of the applicant's income and bank deposits, (ii) a formal credit report on the applicant from a credit reporting agency, and (iii) a preliminary title report and a real estate appraisal. The Company's underwriting department is responsible for the selection of the credit reporting agency, and such agency must issue reports which meet or exceed the requirements of FHA, VA, FNMA and FHLMC. The Company's in-house appraisers, or appraisers approved and chosen at random by the FHA or VA, prepare property appraisals for FHA/VA loans. Appraisals for retail conventional loans are prepared by the Company's in-house appraisers, or one of a number of pre-approved independent appraisers who have contractually agreed to comply with the Company's written appraisal specification requirements and who meet 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 loanto value ratios, borrower income qualifications, investor requirements, necessary insurance and property appraisal requirements. The Company's underwriting guidelines comply with the underwriting criteria of FHA, VA, FNMA and FHLMC as applicable, and in some cases are more comprehensive. The Company's underwriting guidelines for conventional nonconforming loans are based on the underwriting standards required by the institutional investors to whom such loans will be sold. The Company's underwriting personnel function independently of the Company's mortgage loan origination personnel. The Company believes that the implementation and enforcement of comprehensive underwriting guidelines has mitigated the foreclosure loss expense which, as a percentage of the Company's mortgage servicing portfolio, was 0.074% in fiscal 1998, 0.091% in fiscal 1997 and 0.094% in fiscal 1996. First Mortgage's quality assurance department audits a minimum of 10% of all formal retail loan applications submitted to the underwriting department in order to enhance the ongoing evaluation of the loan processing function, including employees, credit reporting agencies and independent appraisers. Applications from retail branch offices are chosen for audit in a manner that assures impartiality. Higher risk loans, such as those on three and four-unit properties are audited more frequently than other loans, and nearly all wholesale loans are audited. The quality assurance department re-verifies all employment and bank verifications, and obtains a separate credit report from a second credit reporting agency as well as a written appraisal critique from a second appraiser or audit agency familiar with the area of the mortgage property. The quality assurance department submits all audit results directly to the president of the Company. Management believes that by performing comprehensive quality assurance audits, mortgage loans of investment quality will be originated and negligent underwriting, foreclosure loss expense and overall Company risk will be minimized. Loan Commitments. First Mortgage does not issue final loan commitments to fund or acquire mortgage loans unless it is confident that the loan will meet the acquisition criteria of institutional investors in the secondary mortgage market. Subsequent to underwriting approval and prior to loan funding, the Company issues conditional loan approvals to qualified applicants. Conditional approvals indicate loan amounts, prevailing interest rates, fees, funding conditions and approval expiration dates. The interest rate indicated is usually subject to change in accordance with market interest rate fluctuations until the final loan closing documents are prepared, at which time the Company commits to a stated interest rate ("interest rate lock-in") typically for a maximum of 15 days. The Company determines the effective interest rates for mortgage loans based upon its daily review of prevailing interest rates in the secondary mortgage market, and interest rate lock-ins beyond 15 days are not issued unless the 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 $90 million. The Company's current warehousing lines of credit include a $70 million secured line of credit for 90-day notes with Bank of America National Trust and Savings Association ("Bank of America") that is subject to renewal on September 1, 1998; and a $20 million secured line of credit for 90-day notes from Sanwa Bank of California ("Sanwa Bank"), subject to renewal on August 31, 1998. Advances under the Company's secured lines of credit are collateralized with the mortgage loans which they fund. The Company repays outstanding balances under warehousing lines of credit and replenishes its working capital with the proceeds from the sale of mortgage loans. Accordingly, the Company depends on mortgage loan sales to originate new mortgage loans without exceeding the limits of its warehousing lines of credit and available working capital. First Mortgage pays interest on funds advanced under the warehousing lines of credit at pre-negotiated rates depending on the level of borrowing and the compensating balance maintained, which can be satisfied in whole or in part with tax and insurance impound funds held in custodial accounts for mortgage loans serviced by the Company. By maintaining compensating balances in excess of the minimum requirements, the Company can, and frequently does, borrow funds under the warehousing lines of credit at reduced interest rates. This method of reducing the Company's cost of borrowing can significantly improve the profitability of warehousing mortgage loans. While the Company's warehousing lines of credit are subject to periodic renewal, the Company has historically renewed or replaced these lines of credit at satisfactory rates, and the Company believes that it maintains an excellent relationship with its current lenders. There can be no assurance, however, that such financing will continue to be available to the Company or on favorable terms. Loan Warehousing First Mortgage normally warehouses funded mortgage loans for a short period of time (on average 25 days), depending upon the delivery dates negotiated with institutional investors, the volume of loan originations, the availability of working capital and the amount available under warehousing lines of credit prior to purchase of the loans by institutional investors. The Company receives, as net interest income, the difference between the interest received on mortgage loans held prior to sale which may be financed under warehousing lines of credit, and the interest paid by the Company under such lines of credit. The Company also receives interest income from mortgage loans funded with working capital. The Company attempts to mitigate interest rate risk by warehousing mortgage loans for relatively short time periods. Although this 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 1998, approximately 35% of the principal amount of the Company's mortgage loans were converted into GNMA securities, 7% were sold directly to FNMA or FHLMC for cash and the remaining 58% 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 calendar year 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 fixedprice purchase commitment is obtained in the secondary mortgage market. Consequently, if the Company anticipates that interest rates will increase, it seeks to purchase commitments from institutional investors to buy mortgage loans in amounts in excess of the Company's current fundings. If the Company does not deliver loans to fulfill these commitments, the commitment fees are expensed. If interest rates subsequently increase, and if the Company has obtained such commitments at fixed interest rates and subsequently funds loans at higher interest rates, it will benefit from the increased interest rate spread. However, if the Company anticipates that interest rates will decrease, commitments are obtained from institutional investors only for those loans which the Company expects to fund immediately. This practice minimizes the potential commitment fee expense relating to unused commitments. First Mortgage's net gain or loss on sale of mortgage loans generally equals the difference between the Company's carrying value and the selling price of the loans, net of commitment fees paid by the Company. The gain or loss on mortgage loans was also impacted by the implementation of Statement of Financial Accounting Standards No. 125 "Accounting for Mortgage Servicing Rights" (FAS 125). FAS 125 requires that a portion of the cost of originating a mortgage loan be allocated to the mortgage servicing rights based on its fair value relative to the loan as a whole. Gains attributed to the adoption of FAS 125 are discussed further in Notes to Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations. Loan Servicing Loan servicing is performed at the Company's corporate headquarters, and includes (i) collecting and remitting loan payments, (ii) accounting for principal and interest, (iii) holding and disbursing escrow or impound funds for real estate taxes and insurance premiums, (iv) contacting delinquent borrowers, (v) supervising foreclosures, and (vi) otherwise administering mortgage loans for institutional investors. At March 31, 1998, approximately 55% of the aggregate principal amount of the Company's mortgage servicing portfolio consisted of FHA/VA loans. The Company believes that such loans are desirable to service because they typically command higher servicing fees (currently weighted average servicing fee is 0.47%) and generally have longer average loan lives. Overall, the Company receives annual loan servicing fees that presently average 0.39% (net of amortization of excess service fee 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, 1998 1997 1996 (Dollars in thousands, except for number of loans serviced and average loan balance) Beginning loan servicing portfolio $1,583,837 $1,477,161 $1,401,832 Add: Loans originated and purchased 476,986 353,411 330,896 Purchase of servicing 6,652 14,960 6,431 Less:Prepayment of loans (239,992) (149,953) (161,146) Amortization (24,979) (23,779) (21,286) Loans sold servicing released (232,361) (87,963) (79,566) Ending loan servicing portfolio 1,570,143 1,583,837 1,477,161 Sub-servicing 96,708 99,815 92,544 Total servicing portfolio $1,666,851 $1,683,652 $1,569,705 Number of loans serviced (end of year) 17,542 17,466 16,820 Average loan balance (end of year) $ 95,021 $ 96,396 $ 93,324
The interest rate stratification of the servicing portfolio at March 31, 1998 is as follows:
Interest Rate Principal Balance Percent of Total (Dollars in thousands) 7.00% and Under $ 207,596 12.5% 7.01% to 8.00% 894,376 53.7 8.01% to 9.00% 465,386 27.9 9.01% to 10.00% 75,435 4.5 10.01% to 11.00% 17,237 1.0 Over 11.00% 6,821 0.4 Total Servicing Portfolio $ 1,666,851 100.0%
The weighted average interest rate of the Company's servicing portfolio was 7.93% at March 31, 1998 as compared with 7.97% at March 31, 1997. At March 31, 1998, approximately 49% 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 1998 since all advances were covered by working capital. During fiscal 1998 the monthly average amount of funds advanced by the Company for mortgage payments, taxes, insurance, VA buydown, foreclosure expenses and nonmandatory early removal of foreclosed loans (being processed by the Company) from GNMA pools amounted to $12,433,000. The total advance and foreclosure losses for fiscal 1998 were $1,161,000. 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, 1998.
Percentage of Number of Loans Percentage of No. of Principal Balance Principal Balance State Serviced Loans Serviced Serviced Serviced (Dollars in thousands) California 15,395 87.8% $1,489,797 89.4% Nevada 820 4.7 61,388 3.7 Washington 726 4.1 80,318 4.8 Texas 216 1.2 10,226 0.6 Oregon 156 0.9 16,017 1.0 Colorado 123 0.7 3,146 0.2 Other States 106 0.6 5,959 0.3 Total 17,542 100.0% $1,666,851 100.0%
The Company believes that its mortgage servicing portfolio (net of capitalized mortgage servicing assets) has significant market value, although a significant portion of the mortgage servicing portfolio has not been treated as an asset for financial statement reporting purposes. The two primary risks to mortgage servicing portfolio revenue (and therefore mortgage servicing portfolio market value) are loan prepayments and loan foreclosures which prematurely eliminate or reduce future loan servicing fees. The prepayment risk to the mortgage servicing portfolio increases as (i) mortgage interest rates decline, and (ii) the percentage of adjustable rate mortgages ("ARM's") in a servicing portfolio increases because ARM's historically are prepaid more frequently than fixed-rate loans. The Company believes that the composition of its mortgage servicing portfolio, as measured by interest rates, compares favorably to that of the mortgage banking industry as a whole. At March 31, 1998, ARM's represented approximately 17% of the aggregate dollar amount of loans in the Company's mortgage servicing portfolio. At March 31, 1998, 0.38% of the number of mortgage loans in the Company's mortgage servicing portfolio were more than 90 days past due, and 1.31% of the number of mortgage loans were in foreclosure. First Mortgage believes that its loan servicing and loan origination operations reduce the risk of fluctuating interest rates. As interest rates increase, loan origination income may decrease; however, this decline is mitigated by the stabilization of loan administration income generated by the Company's mortgage servicing portfolio as a result of diminished loan prepayments. Conversely, as interest rates decline, increased loan prepayments may reduce loan administration income, but this reduction tends to be offset by increased loan origination fees due to increased loan production. The Company can also reduce the risk to its loan servicing and origination revenue resulting from interest rate fluctuations by selling mortgage loans for a premium on a servicingreleased 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 midNovember 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 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. During fiscal 1998 and 1997 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 increases their capacity to hold portfolio loans, banks have become extremely aggressive with mortgage price discounting in order to expand their mortgage base as a platform from which to crosssell 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 servicingretained 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-InLending 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, 1998, First Mortgage employed 164 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 82.5% of the Company's outstanding common stock. Before expiration of the lease on December 31, 1997, the Company negotiated a lease extension to renew the lease three times, each time for one additional year, starting January 1, 1998. The monthly rental payment will be $22,000 effective April 1, 1998. The monthly rental payment for any lease extension is subject to increase (but not decrease) upon any such extension. Such payments may not exceed the fair market rent for comparable facilities at the time of the extension. The Company pays for all property taxes, repairs, insurance and utility services for the entire building. The Company believes the current facilities are adequate to meet foreseeable future needs. The Company's branch offices each are leased at varying rates and each office contains approximately 1,000 to 2,000 square feet. For the year ended March 31, 1998, the annual aggregate rental expense for all branch offices was approximately $242,000. Most of the Company's branch offices are on month- tomonth 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, 1998. 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 1998: High Low First quarter $ 4.125 $ 3.250 Second quarter 4.250 2.250 Third quarter 3.875 3.375 Fourth quarter 3.813 3.563 Fiscal 1997: High Low First quarter $ 6.750 $ 4.625 Second quarter 5.625 4.625 Third quarter 5.625 4.125 Fourth quarter 5.125 4.125
As of March 31, 1998, there were 31 shareholders of record of the Company's Common Stock. No cash dividends have been paid on the Company's common stock. The Company presently intends to retain all earnings for use in its business and therefore does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company's warehousing lines of credit with Bank of America and Sanwa Bank restrict the Company's ability to pay dividends or to make other distributions with respect to the Common Stock. Any decision to pay cash dividends on the Common Stock will depend on the Company's circumstances at the time, including the profitability of operations, availability of cash, lines of credit restrictions and other factors. 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, 1998 1997 1996 1995 1994 (In thousands, except per share data) Income Statement Data: Revenues: Loan origination income $ 3,303 $ 3,426 $ 3,397 $ 2,523 $ 6,361 Loan servicing income 7,628 7,137 6,787 6,695 6,332 Gain on sale of mortgage loans 7,611 5,374 7,116 819 13,268 Interest income 2,527 2,165 2,105 2,866 2,959 Other income 5 2 29 43 65 Total revenues 21,074 18,104 19,434 12,946 28,985 Expenses: Compensation and benefits 8,282 8,217 7,752 6,899 11,795 General and administrative expenses 6,285 5,708 5,616 5,280 6,849 Amortization of capitalized servicing rights 3,174 1,563 878 314 396 Interest expense 701 690 786 1,309 1,465 Total expenses 18,442 16,178 15,032 13,802 20,505 Income (loss) before income taxes 2,632 1,926 4,402 (856) 8,480 Income tax expense (benefit) 1,101 811 1,833 (308) 3,491 Net income (loss) $ 1,531 $ 1,115 $ 2,569 $ (548) $ 4,989 Basic and diluted net income (loss) per share $ 0.26 $ 0.19 $ 0.44 $ (0.09) $ 0.83 Weighted average shares outstanding 5,848 5,873 5,883 5,947 5,996 Operating Data: Loans originated and purchased $ 476,986 $ 353,411 $ 330,896 $ 174,544 $ 624,317 Loans serviced (end of year) 1,666,851 1,683,652 1,569,705 1,533,888 1,495,384
At March 31, 1998 1997 1996 1995 1994 (In thousands) Balance Sheet Data: Mortgage loans held for sale $53,052 $27,286 $19,879 $25,329 $42,737 Capitalized mortgage servicing rights 7,490 6,709 3,547 1,230 1,386 Total assets 80,445 50,923 51,131 42,296 57,086 Notes and sight drafts payable 49,799 22,626 24,852 19,698 32,821 Stockholders' equity 26,995 25,648 24,647 22,078 23,080
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 1998, First Mortgage Corporation decided to continue its growth strategy of simultaneously enhancing and expanding its loan production capacity and increasing its loan servicing portfolio. The Company was largely successful in implementing the strategy. Through its production expansion plan, new branches were established and originations have grown. In fiscal year 1998, loan originations increased by 35.0% to $477.0 million from $353.4 million in the previous year, in spite of extremely aggressive competition from other originators. The loan servicing portfolio only declined slightly to $1.667 billion in 1998 compared to $1.684 billion in 1997, in the face of a significant refinance wave in the last half of the year. Net income for fiscal year 1998 increased 37.3% to $1.53 million from $1.12 million a year ago. Compared to 1997, total revenues increased by 16.4% while total expenses increased by 13.9%. The earnings in fiscal 1998 were positively impacted by falling longterm interest rates which boosted both new loan production and the gain on sale of mortgages, and increased market penetration resulting from the earlier opening of new production offices 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, 1998 1997 1996 Loan origination income 15.7% 18.9% 17.5% Loan servicing income 36.2 39.4 34.9 Gain on sale of mortgage loans 36.1 29.7 36.6 Interest income 12.0 12.0 10.8 Other income - - 0.2 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. Generally speaking, the amount of loan origination fee income correlates positively to the volume of loan origination. Loan origination income showed a modest increase of 0.9% to $3.43 million in fiscal 1997 from $3.40 million in fiscal 1996, as loan production rose by 6.8% from 1996 to 1997. For the fiscal year 1998, however, the loan origination revenue decreased by 3.6% to $3.30 million from a year ago, due primarily to the higher volume of wholesale and refinance loans, which carry lower front-end origination fees. Loan origination income may not precisely track loan origination volume because a majority of borrowers now elect to pay slightly higher mortgage rates to reduce some or all of the amount of their loan origination fees. The Company is then able to obtain a premium upon the sale of such mortgage loans in the secondary market because of their higher interest rates, and those premiums are reflected in the gain on sale of mortgage loans. Loan Servicing Income. Loan servicing income represents loan servicing fees, late charges and other fees earned by the Company for administering loans on behalf of permanent investors. The Company's annual loan servicing fee for mortgage loans ranges from 0.25% to 1.5% of the principal amount of the loan serviced depending on the type of mortgage loan, and on average is approximately 0.39% net of amortization of capitalized service fees and agency guarantee fees. Loan servicing income increased by 6.9% to $7.63 million in fiscal 1998 from $7.14 million in fiscal 1997, and 5.2% to $7.14 million in fiscal 1997 from $6.79 million in 1996. Higher servicing income can generally be accounted for by one or more of the following reasons: growth in the loan servicing portfolio; higher weighted average servicing fees and larger miscellaneous servicing income (such as late charges). The Company's mortgage servicing portfolio increased 7.3% to $1.684 billion in fiscal 1997 from $1.570 billion in 1996. In fiscal 1998, the lower long-term interest rate environment has accelerated the run-off rate, and consequently, the loan servicing portfolio experienced a marginal decrease of 1% to $1.667 from a year ago. 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 125. The Company adopted FAS 125 for its fiscal year 1996. Under FAS 125, 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. Gain on mortgage sales increased by 41.6% to $7.61 million in fiscal 1998 from $5.37 million in fiscal 1997. 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 1998. Gain on sale of mortgage loans decreased to $5.37 million in fiscal 1997 from $7.12 million in fiscal 1996. The decrease was mostly attributable to intense price competition prevailing in the mortgage lending industry. 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 shortterm bank borrowings used to finance mortgage loans prior to settlement of purchase. The conditions that affect net interest income from period to period include the relationship between prevailing mortgage rates and short term bank borrowing rates, the mix of fixed-rate and adjustable rate mortgage loans held for sale and the average holding period before the loans are sold. The Company also uses cash generated from operations in lieu of bank borrowings to fund a portion of its mortgage loans to reduce interest expense and increase net interest income. Interest income earned by the Company on mortgage loans held for sale has exceeded interest expense on the Company's shortterm bank borrowings in every fiscal year. The following table sets forth certain data regarding net interest income:
Year Ended March 31, 1998 1997 1996 (Dollars in Thousands) Interest income $2,527 $2,165 $2,105 Interest expense 701 690 786 Net interest income $1,826 $1,475 $1,319
Interest income, which consisted mostly of the interest received on mortgage loans held for sale, increased by 16.7% in fiscal 1998 from fiscal 1997 and by 2.9% in fiscal 1997 from fiscal 1996. The increase was due largely to higher average mortgage inventory portfolio carried by the Company most notably in fiscal 1998. Interest expense increased by 1.6% in fiscal 1998 from fiscal 1997, due to slightly higher utilization of warehousing lines. It decreased by 12.2% in fiscal 1997 from fiscal 1996 due largely to lower balance outstanding in the reverse repurchase line and more loan funding with corporate cash. Expenses The major components of the Company's total expenses are (i) compensation and benefits, (ii) general and administrative expenses, (iii) amortization of capitalized servicing rights, and (iv) interest expense. Total expenses increased 13.9% to $18.4 million in fiscal 1998 from $16.2 million in fiscal 1997, compared to an increase of 7.6% to $16.2 million in fiscal 1997 from $15.0 million in fiscal 1996. 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. Nevertheless, compensation and benefits expenses increased only 0.8% to $8.3 million in fiscal 1998 from $8.2 million in fiscal 1997, compared to an increase of 6.0% to $8.2 million in fiscal 1997 from $7.8 million in fiscal 1996. The smaller increase was largely due to payroll cost control measures implemented by the Company. Amortization of capitalized servicing rights in fiscal 1998 increased over prior years due mainly to the Company's larger investment in mortgage servicing rights and substantially higher volume of prepayments over the comparable prior period. General and administrative expenses increased 10.0% to $6.3 million in fiscal 1998 from $5.7 million in fiscal 1997, compared to an increase of 1.6% from fiscal 1997 to fiscal 1996. The increases in these expenses were a direct result of expansion in loan origination, and direct marketing efforts during fiscal 1998. Income Taxes The Company's combined effective federal and state income tax rate was 41.8% for the fiscal year ended March 31, 1998 and 1997, and 41.6% for the fiscal year ended March 31, 1996. The rates differ from the federal statutory rate of 34% primarily due to state income taxes. Disclosure About Market Risk The Company's earnings can be impacted significantly by the movement of interest rates, which is the primary component of the market risk to the Company. The interest rate risk affects value of the capitalized mortgage servicing rights, volume of loan production and total net interest income earned on its mortgage inventory. The Company has been managing this risk by striving to balance its loan origination and loan servicing segments, which generally are counter cyclical in nature. The overall objective is to offset changes in the values of the following items, such as the committed pipeline, mortgage loan inventory, mortgage-backed securities held for sale and mortgage servicing rights. The Company does not speculate on the direction or movement of the interest rates. Based on the information available and the interest environment as of March 31, 1998, the Company believes that a 100 basis point change in longterm interest rates over a twelve month period, up or down and all else being constant, would increase or decrease the Company's gross income by approximately $1.5 million dollars. These estimates are limited by the fact that they are performed at a particular point in time and do not incorporate many other factors and consequently, should not be used as forecast. Liquidity and Capital Resources The Company's principal liquidity requirement is the funding of its new mortgage loans, loan origination expenses, advances of delinquent payments and escrow balances, and other operating activities. To meet these needs, the Company relies on warehouse lines of credit with banks, its own capital and cash flows from operations. At March 31, 1998, maximum permitted borrowings under the warehouse lines of credit with two nonaffiliated banks totaled $90 million and the amount outstanding was $40.4 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, 1998. In addition to the warehouse lines of credit, the Company may utilize the short-term reverse repurchase agreements provided by investment banking firms in connection with its inventory of mortgage loans and mortgage- backed securities. These facilities tend to carry lower interest rates and allow the Company to better utilize its warehouse lines by accelerating the turnover of loans in inventory. From September 1994 to March 31, 1998, the Company repurchased in open market transactions 172,720 shares of its common stock at an aggregate cost of $752,000. The Company's mortgage servicing portfolio provides a liquidity resource since a majority of the loan servicing rights are an unrecorded asset which may be sold. Although the Company does not intend to sell mortgage servicing rights solely to increase liquidity, the sale of such rights is 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 1997, the Financial Accounting Standards Board (`FASB') issued FAS No. 130, Reporting Comprehensive Income. FAS 130 requires reporting of comprehensive income by its components and in total in the financial statements. This standard is effective beginning in 1998. In management's opinion, this standard will not have a material impact on the corporation's financial results. Prospective Trends Fiscal 1998 was very similar to fiscal 1997 and 1996 and saw more of the same in terms of competitive forces and industry consolidation. Overall volume of new mortgage originations, however, increased substantially during fiscal 1998, particularly in the last fiscal quarter, enabling the Company to increase its new loan production. Although the Company does well relative to its mortgage banking peers, the industry as a whole is suffering from the confluence of two major developments, the 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 welltuned to interest rates, and even relatively small movements in rates can have fairly dramatic effects on new mortgage volume and earnings. In the second instance, as discussed under Competition on page 13, several of the major banks continue to be fiercely competitive in pricing mortgage products. Their present hope that holding a consumer's mortgage is the gateway to crossselling 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 soughtafter by these commercial banks. The Company's strategy in the face of this is to compete in the channels and with the products which are not the most sought-after by the commercial bank giants. Although we will maintain our correspondent relationships with the major banks who presently have such a strong appetite for certain mortgage products, our primary emphasis will be on the origination of FHA and VA loans for which the major banks largely do not compete; to expand our low-cost and profitable direct marketing operations into other states; and to add other new nonbank loan products which have more profit potential for the Company. Much of this strategy has been implemented already with the expansion of our Direct Marketing channel, and the introduction of home equity loans. Consistent with this, 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 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's profits. This has been producing results, as many of our employees come forth with ideas for reducing expenses and increasing revenue, a positive result indeed. Year 2000 Issues Most companies will face serious information systems problems in the next two years because many software applications and systems written in the past may not properly recognize calendar dates beginning in the year 2000. The errors could result in miscalculations or system failures. The Company has identified the changes needed to correct the problems and has allocated the resources it deems necessary to have it implemented. The Company has established a deadline of having substantially all of its hardware and software in compliance for year 2000 by the end of 1998. The Company's computing environment consists largely of personal computers connected to Local Area Network based system. The software for loan funding, loan administration and corporate accounting are maintained by outside service bureaus. These service bureaus have already been contacted by the Company and are either in compliance or are expected to be in compliance by the Company's deadline. Based on preliminary information, the Company does not anticipate that the expenses related to achieving year 2000 compliance will have a material impact on the Company's results of operations. 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 The information required by this Item is contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure About Market Risk", incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information with respect to this item is set forth in "Index to Financial Statements". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT* ITEM 11. EXECUTIVE COMPENSATION* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT* ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS* * For information called for by Items 10-13, reference is made to the Company's definitive proxy statement for its annual meeting of shareholders, to be held on September 23, 1998, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 1998, 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, 1998. (c) Exhibits The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated by reference herein: Exhibit Number Description 3.1 Restated and Amended Articles of Incorporation of the Company (previously filed with the Securities and Exchange Commission on March 6, 1992 as Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 3.2 Restated Bylaws of the Company (previously filed with the Securities and Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-45187, and incorporated herein by reference). 10.1 Credit and Security Agreement dated September 1, 1995, between Bank of America National Trust and Savings Association and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September 1, 1995, among Bank of America National Trust and Savings Association and Bank of America National Trust and Savings Association as agent for various other lenders and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.3 Fourth Amendment dated April 7, 1997 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 Fifth Amendment dated August 29, 1997 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 Sixth Amendment dated September 10, 1997 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. 10.6 Seventh Amendment dated March 1, 1998 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.7 Amendments dated August 29, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.8 Amendments dated November 30, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.9 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. 3345187, and incorporated herein by reference). 10.10 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. 3345187, and incorporated herein by reference). 10.11 Lease extension dated December 15, 1997 to Standard Office Lease-Net dated January 1, 1992 between the Company and FinWest Group. 10.12 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). 10.13 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. 3370760, and incorporated herein by reference). 10.14 Profit Sharing Plan for Employees of the FinWest 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). 10.15 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. 3345187, and incorporated herein by reference). 10.16 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). 10.17 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). 10.18 Renewal of Employment Agreement dated April 30, 1998 between Clement Ziroli and the Company. 10.19 Employment Agreement dated April 30, 1998 between Bruce G. Norman and the Company. 10.20 Renewal of Employment Agreement dated April 30, 1998 between Pac W. Dong and the Company. 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, 1998 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, 1998. 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, 1998 and 1997 F-3 Statement of Income for the years ended March 31, 1998, 1997 and 1996 F-4 Statement of Stockholders' Equity for the years ended March 31, 1998, 1997 and 1996 F-5 Statement of Cash Flows for the years ended March 31, 1998, 1997 and 1996 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, 1998 and 1997, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1998 in conformity with generally accepted accounting principles. Ernst & Young, LLP Orange County, California June 15, 1998 First Mortgage Corporation Balance Sheet
March 31 1998 1997 Assets Cash $ 8,182,000 $ 5,903,000 Mortgage loans held for sale 53,052,000 27,286,000 Other receivables and servicing advances 10,566,000 9,623,000 Capitalized servicing rights, net 7,490,000 6,709,000 Property and equipment, net 664,000 592,000 Prepaid expenses and other assets 361,000 546,000 Due from affiliates - 134,000 Note receivable, Fin-West 130,000 130,000 Total assets $80,445,000 $50,923,000 Liabilities and stockholders' equity Liabilities: Notes payable, banks $40,427,000 $20,172,000 Notes payable, officer - 1,500,000 Sight drafts payable 9,372,000 954,000 Accounts payable and accrued liabilities 1,392,000 816,000 Deferred income taxes 2,259,000 1,833,000 Total liabilities 53,450,000 25,275,000 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 - 5,808,697 in 1998 and 5,859,117 in 1997 4,963,000 5,147,000 Retained earnings 22,032,000 20,501,000 Total stockholders' equity 26,995,000 25,648,000 Total liabilities and stockholders' equity $80,445,000 $50,923,000
See accompanying notes. First Mortgage Corporation Statement of Income
Year ended March 31 1998 1997 1996 Revenues: Loan origination income $ 3,303,000 $ 3,426,000 $3,397,000 Loan servicing income 7,628,000 7,137,000 6,787,000 Gain on sale of mortgage loans 7,611,000 5,374,000 7,116,000 Interest income 2,527,000 2,165,000 2,105,000 Other income 5,000 2,000 29,000 Total revenues $21,074,000 18,104,000 19,434,000 Expenses: Compensation and benefits 8,282,000 8,217,000 7,752,000 General and administrative expenses 6,285,000 5,708,000 5,616,000 Amortization of capitalized serving rights 3,174,000 1,563,000 878,000 Interest expense 701,000 690,000 786,000 Total expenses 18,442,000 16,178,000 15,032,000 Income before income taxes 2,632,000 1,926,000 4,402,000 Income tax expense 1,101,000 811,000 1,833,000 Net income $ 1,531,000 $ 1,115,000 $ 2,569,000 Basic earning per share $ .26 $ .19 $ .44 Diluted earning per share $ .26 $ .19 $ .44
See accompanying notes. First Mortgage Corporation Statement of Stockholders' Equity
Common stock Retained Shares Amount earnings Total 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 Net income - - 1,531,000 1,531,000 Repurchase of shares (50,420) (184,000) - (184,000) Balance at March 31, 1996 5,808,697 $4,963,000 $22,032,000 $26,995,000
See accompanying notes. First Mortgage Corporation Statement of Cash Flows
Year ended March 31 1998 1997 1996 Operating activities Net income $ 1,531,000 $ 1,115,000 $ 2,569,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for deferred income taxes 426,000 966,000 1,058,000 Provision for losses on foreclosure (459,000) 153,000 210,000 Amortization of originated mortgage servicing rights, excess service fee and purchased servicing rights 3,174,000 1,563,000 878,000 Depreciation and amortization 220,000 195,000 175,000 Originations and purchases of mortgage loans held for sale (476,986,000) (353,411,000) (330,896,000) Sales and principal repayments of mortgage loans held for sale 451,220,000 346,004,000 336,346,000 Change in excess service fee 136,000 120,000 152,000 Change in other receivables and servicing advances (484,000) (231,000) (810,000) Change in prepaid expenses and other assets 185,000 345,000 (190,000) Change in accounts payable and accrued liabilities 576,000 51,000 245,000 Loss on sale of assets - 7,000 - Net cash provided by (used in) operating activities (20,461,000) (3,123,000) 9,737,000 Investing activities Sale (purchase) of commercial paper - 9,955,000 (9,955,000) Originated mortgage servicing rights (3,436,000) (3,838,000) (3,740,000) Purchase of mortgage servicing rights (655,000) (577,000) (37,000) Note receivable, Fin-West - - 120,000 Purchase of furniture and equipment (306,000) (212,000) (108,000) Proceeds from sale of assets 14,000 30,000 39,000 Change in due from affiliates 134,000 60,000 (10,000) Net cash provided by (used in) investing activities (4,249,000) 5,418,000 (13,691,000) Financing activities Change in notes payable, banks 20,255,000 (481,000) 12,292,000 Change in sight drafts payable 8,418,000 (1,745,000) 2,355,000 Change in notes payable, other - - (9,493,000) Change in note payable, officer (1,500,000) - - Repurchase of common stock (184,000) (114,000) - Net cash provided by (used in) financing activities 26,989,000 (2,340,000) 5,154,000 Increase (decrease) in cash 2,279,000 (45,000) 1,200,000 Cash at beginning of year 5,903,000 5,948,000 4,748,000 Cash at end of year $ 8,182,000 $ 5,903,000 $ 5,948,000
See accompanying notes. First Mortgage Corporation Notes to Financial Statements March 31, 1998 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 owneroccupied one-to-four family residences through a network of 11 branch offices located in the states of California and Arizona. Fin-West Group (Fin-West), an affiliated company, owns 82.5% of the Company's outstanding common stock. Mortgage Loans Held for Sale Mortgage loans held for sale are stated at the lower of cost or aggregate market value. Market value is determined by purchase commitments from investors and prevailing market prices. Originated Mortgage Servicing Rights, Excess Service Fee and Purchased Servicing Rights Originated Mortgage Servicing Rights Effective January 1, 1997, Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, was superseded by Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Company adopted Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Estinguishments of Liabilities in fiscal 1998 and recognizes OMSRs as an asset separate from the underlying originated mortgage loan by allocating the total cost of originating a mortgage loan between the loan and the servicing right based on their respective fair values. Mortgage servicing rights are carried at the lower of cost, less accumulated amortization, or fair value. 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) FAS 125 requires that a portion of the cost of originating a mortgage loan be allocated to the mortgage servicing right based on its fair value relative to the loan as a whole. To determine the fair value of the mortgage rights created during the year, the Company used quoted market prices of comparable servicing transactions. Excess Service Fee Prior to fiscal 1996, gains and losses on sales of mortgage loans were adjusted to reflect as income or loss servicing fees that varied from normal servicing rates set by federally approved secondary market makers. Accordingly, the Company 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 being amortized over the estimated life of the loan thus offsetting excess servicing revenues received during such period. No excess servicing fees have been recorded subsequent to fiscal 1996. 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. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Servicing Advances Servicing advances consist of advances and costs incurred by the Company in connection with the administration of the foreclosure process for loans being serviced. The majority of these amounts will be received from either the insuring agency or proceeds of the foreclosure sale. The Company provides a reserve for the estimated portion of the advances and costs that are not reimbursable by the insuring agencies. Loan Origination Fees Loan origination fees and certain direct loan origination costs for mortgage loans held for sale are deferred until the related loans are sold. Loan servicing income, which is generally a fee based on a percentage of the outstanding principal balances of the mortgage loans serviced by the Company (or by a subservicer where the Company is the master servicer), is recorded as income as the installment collections on the mortgages are received by the Company or the subservicer. Gain on Sale of Mortgage Loans Held for Sale Gains or losses on the sale of mortgage loans held for sale are recognized at the date of sale. Included in gain on sale is the estimated present value of any servicing fees to be received by the Company and included in mortgage servicing rights. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is provided using the straight-line method, except for automobiles, which are being depreciated using the double declining basis, over the estimated useful lives of the assets which range from three to eight years. Leasehold improvements are being amortized over the lesser of the estimated useful lives of the improvements or the lease terms, using the straight-line method. Income Taxes The Company files a separate federal income tax return and is included in the State of California combined return of Fin-West Group. First Mortgage Corporation Notes to Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Statement of Cash Flows The Company paid interest in 1998, 1997 and 1996 of $540,000, $641,000 and $747,000, respectively. The Company paid income taxes in 1998, 1997 and 1996 of $615,000, $30,000 and $1,545,000, respectively. Net Income per Share As of March 31, 1998, the Company adopted Statement No. 128, Earnings Per Share, and restated all prior period earnings per share (EPS) data, as required. Statement No. 128 replaced the presentation of primary and fully diluted EPS pursuant to APB Opinion No. 15, Earnings Per Share, with the presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period and the dilutive effect, if any, of stock options and warrants outstanding for the period. Use of Estimates in the Preparation of Financial Statements The preparation of the financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. 2. Mortgage Loans Held for Sale Mortgage loans held for sale consist of the following at March 31, 1998 and 1997:
1998 1997 Principal balance outstanding $51,723,000 $28,003,000 Loss reserve - (30,000) Loan origination discounts (1,238,000) (601,000) Deferred loan fees (91,000) (86,000) $53,052,000 $27,286,000
First Mortgage Corporation Notes to Financial Statements (continued) 2. Mortgage Loans Held for Sale (continued) 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, 1998, the Company had short-term commitments amounting to approximately $16,241,000 to fund mortgage loans subject to credit approval. The Company generally does not engage in forward delivery contracts to hedge its portfolio. 3. Mortgage Servicing Assets Capitalized mortgage servicing assets consist of originated mortgage servicing rights, excess servicing fee and purchased servicing rights. Activities are summarized as follows:
Capitalized Servicing Rights Balance at March 31, 1997 $6,709,000 Additions 4,091,000 Amortization and write-offs (3,247,000) Impairment (63,000) Balance at March 31, 1998 $7,490,000
To determine servicing value impairment at the end of the year, the post-implementation originated servicing portfolio was disaggregated into its predominant risk characteristics, namely loan type, interest rate and investor type. These segments of the portfolio were then valued, using quoted market prices of comparable servicing rights. The calculated value was then compared with the book value of each segment to determine if a reserve for impairment was required. 4. Other Receivables and Servicing Advances Other receivables and servicing advances consists of the following at March 31, 1998 and 1997:
1998 1997 Foreclosures and advances on real estate owned $8,798,000 $8,800,000 Servicing advances 2,518,000 1,715,000 Other 264,000 580,000 Allowance for possible losses (1,014,000) (1,472,000) $10,566,000 $9,623,000
First Mortgage Corporation Notes to Financial Statements (continued) 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, 1998 and 1997:
1998 1997 Furniture and equipment $2,190,000 $1,981,000 Automobiles 131,000 64,000 Leasehold improvements 395,000 388,000 2,716,000 2,433,000 Less accumulated depreciation and amortization (2,052,000) (1,841,000) $ 664,000 $ 592,000
7. Income Taxes Income tax expense for the years ended March 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996 Current: Federal $ 583,000 $(112,000) $ 622,000 State 92,000 (43,000) 153,000 675,000 (155,000) 775,000 Deferred: Federal 224,000 701,000 718,000 State 202,000 265,000 340,000 426,000 966,000 1,058,000 $1,101,000 $ 811,000 $1,833,000
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, 1998 and 1997 are as follows: First Mortgage Corporation Notes to Financial Statements (continued) 7. Income Taxes (continued)
1998 1997 Deferred tax assets: Stat income taxes $ 190,000 $ 174,000 Accrued liabilities 65,000 74,000 Deferred loan fees 41,000 39,000 Provision for foreclosure 253,000 367,000 Purchased servicing rights 313,000 153,000 Mark-to-market adjustments 128,000 3,000 Total deferred tax assets 990,000 810,000 Deferred tax liabilities: Originated mortgage servicing rights (3,030,000) (2,425,000) Capitalized servicing fees (7,000) (13,000) Accelerated depreciation (88,000) (96,000) Other (124,000) (109,000) Total deferred tax liabilities (3,249,000) (2,643,000) Net deferred tax liabilities $(2,259,000) $(1,833,000)
Income tax expense computed at the statutory federal income tax rate (34%) and income tax expense provided in the financial statements differ as follows for the years ended March 31, 1998, 1997 and 1996:
1998 1997 1996 Tax computed at the statutory rate $ 899,000 $ 655,000 $1,497,000 State income tax, net of federal income tax benefit 194,000 146,000 330,000 Other 8,000 10,000 6,000 Income tax expense $1,101,000 $ 811,000 $1,833,000
First Mortgage Corporation Notes to Financial Statements (continued) 8. Notes Payable, Banks At March 31, 1998, the Company had two line of credit agreements with banks which provide for borrowings up to $70,000,000 and $20,000,000 with interest payable monthly at 1.25% per annum or the bank's reference rate of 8.5% at March 31, 1998, 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, 1998, borrowings under these lines of $40,427,000 are collateralized by mortgage loans held for sale. The weighted average interest rate for the fiscal year ended March 31, 1998 was 1.27%. The lines of credit are subject to renewal on September 1, 1998 and August 31, 1998, respectively. Management believes the line of credit agreements will be renewed prior to their expiration. Under the credit agreements, the Company must comply with certain financial and other covenants, including the maintenance of a minimum net worth, other financial ratios, and a minimum servicing portfolio size. Further, absent the consent of the lenders, such covenants prohibit the Company from declaring or paying any dividends on any shares of the Company's common stock. At March 31, 1998, the Company was in compliance with the aforementioned loan convenants. One of the warehousing lines of credit allows the bank to act as an agent on behalf of the Company and invest in short term, highly liquid investment grade securities to the extent that the warehouse line is not utilized to fund mortgage loans. All investment securities are considered to be available for sale and carried at fair value. As of March 31, 1998 there were no investment securities purchased under this line. At March 31, 1998, the Company also had an unsecured line of credit of $2,000,000 with a bank which expires in August 1998. 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, 1998 and 1997. 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 expired on December 31, 1997 and was not renewed. 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 and $148,000 were charged to operations for the years ended March 31, 1997 and 1996, respectively, for borrowings under this agreement. First Mortgage Corporation Notes to Financial Statements (continued) 9. Related Party Transactions (continued) 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, 1998, 1997 and 1996. 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 paid title insurance fees to an affiliated entity of $308,000, $151,000 and $185,000 for the years ended March 31, 1998, 1997 and 1996, respectively. 10. Loan Servicing The Company's loan servicing portfolio at March 31, 1998 and 1997 consisted of the following:
1998 1997 GNMA mortgage-backed securities $ 810,304,000 $ 798,504,000 FHLMC 257,448,000 283,434,000 FNMA 185,459,000 186,782,000 Other 413,640,000 414,932,000 $1,666,851,000 $1,683,652,000
At March 31, 1998 and 1997, the Company subserviced approximately $96,708,000 and $99,815,000, 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 $31,474,000 and $12,966,000 at March 31, 1998 and 1997, respectively. These funds are not included in the accompanying balance sheets. The Company is required to pay interest equal to 2% per annum of the average daily balance of certain fiduciary funds to mortgagors. The Company had insurance coverage for errors and omissions and employee fidelity in the amount of $2,300,000 at March 31, 1998 and 1997. First Mortgage Corporation Notes to Financial Statements (continued) 11. Financial Instruments The Company is a party to financial instruments with off balance sheet risk in the normal course of business through the origination and sale of mortgage loans. These financial instruments include mandatory and optional forward commitments which involve, to varying degrees, elements of credit and interest rate risk. At any time the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value, which amount is a percentage of the outstanding commitments. Historically the Company has not incurred losses due to the failure or lack of performance of the counter parties to these commitments. Realized gains and losses on mandatory and optional delivery forward commitments are recognized in the period settlement occurs. Unrealized gains and losses on mandatory forward commitments are included in the lower of cost or market valuation adjustment to mortgage loans held for sale. Additionally, unrealized gains and losses on optional delivery forward commitments to which mortgages have been allocated are included in the lower of cost or market valuation adjustment to mortgage loans held for sale. Statement of Financial Accounting Standards No, 107, Disclosure About Fair Value of Financial Instruments (FAS 107), requires disclosure of fair value information about all financial instruments held or owned by a company except for certain excluded instruments and instruments for which it is not practicable to estimate fair value. At March 31, 1998, the estimated fair value of mortgage loans held for sale, mortgage servicing rights and notes payable approximated the net carrying value of such accounts. 12. Profit Sharing Plan The Company is a participant in a profit-sharing plan maintained by Fin-West, covering all full-time employees who have completed at least one year of service. Annual contributions by the Company to the plan are discretionary and were $50,000, $0 and $60,000 for the years ended March 31, 1998, 1997, and 1996, respectively. First Mortgage Corporation Notes to Financial Statements (continued) 13. Commitments and Contingencies Leases Minimum annual rental payments under operating leases for office space are as follows: 1999 $314,000 2000 36,000 2001 6,000 $356,000 Net rental payments to nonaffiliated entities of approximately $242,000, $212,000 and $261,000 have been charged to occupancy expense in the accompanying statements of operations for the years ended March 31, 1998, 1997 and 1996, respectively. Litigation The Company is currently a defendant in certain litigation arising in the ordinary course of business. It is management's opinion that the outcome of these actions will not have a material effect on the Company's financial position, results of operations or cash flows. 14. Stockholders' Equity Under the Company's 1992 Stock Incentive Plan, the compensation committee of the Board of Directors is authorized to grant awards to any officer or employee of the Company. Awards granted can take the form of incentive stock options, nonqualified stock options or restricted stock or any combination thereof. A maximum of 625,000 shares of common stock may be issued under the Plan. Incentive stock options are granted at a price not less than 100% of the fair market value at date of grant, except for employees who own shares possessing greater than 10% of total combined voting power whose grant price shall not be less than 110% of the fair market value at date of grant. The compensation committee also determines the exercise price of nonqualified stock options and the purchase price of restricted stock, provided that the purchase price of restricted stock may not be less than 25% of its fair market value at the date of grant. Incentive stock options and nonqualified stock options become exercisable not less than six months after the date of grant, as determined by the compensation committee. Options 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. First Mortgage Corporation Notes to Financial Statements (continued) 14. Stockholders' Equity (continued) The Company also has a 1993 Stock Option Plan for NonEmployee 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, 1998:
Weighed-Average Options Exercise Price Options March 31, 1998 March 31, 1998 March 31, 1997 Options outstanding at beginning of fiscal year 372,555 $5.46 292,555 Option granted 94,000 $3.54 95,100 Options exercised - - - Options canceled (29,930) $4.71 (15,100) Options outstanding at end of fiscal year 436,625 $5.09 372,555 Exercise price: Per share for options exercised during the fiscal year n/a n/a
First Mortgage Corporation Notes to Financial Statements (continued) 14. Stockholders' Equity (continued)
Options Options March 31, 1998 March 31, 1997 Per share for options outstanding at end of fiscal year $3.50-$6.80 $4.625-$6.80 Weighted average fair value of options granted $1.13 $1.35 Weighted average contractual life of option outstanding (in years) 2.3 3.8
All outstanding options as of March 31, 1998 were exercisable. Options available for future grants under the plans were 245,875 and 263,945 as of March 31, 1998 and 1997, 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:
1998 1997 Expected life (years) 4 3 Interest rate 5.50% 5.70% Volatility 0.31 0.32 Dividend yield 0.00% 0.00%
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 $59,000 and $43,000 in 1998 and 1997, respectively. The pro forma net income resulting from the increased compensation cost was $1,472,000 ($0.25 per share) and $1,072,000($0.18 per share) in 1998 and 1997, respectively. The effect of stock-based compensation on net income for 1998 and 1997 may not be representative of the effect on pro forma net income in future years because compensation expense related to grants made prior to 1997 is not considered. 15. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year ended March 31 1998 1997 1996 Numerator: Net income $1,531,000 $1,115,000 $2,569,000 Denominator: Shares used in computing basic earnings per share 5,847,906 5,872,596 5,882,996 Effect of stock options treated as equivalents under the treasury stock method 1,683 2,065 8,517 Denominator for diluted earnings per share 5,849,589 5,874,661 5,891,513 Basic earnings per share $.26 $.19 $.44 Diluted earnings per share $.26 $.19 $.44
EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-70760) pertaining to the First Mortgage Corporation 1992 Stock Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors and in the related Prospectus of our report dated June 15, 1998, with respect to the financial statements of First Mortgage Corporation included in its Annual Report (Form 10-K) for the year ended March 31, 1998. Ernst & Young, LLP Orange County, California June 27, 1998 FIRST MORTGAGE CORPORATION EXHIBIT INDEX Sequential Exhibit Page Number Description of Exhibit Number 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 S1, File No. 33-45187, and incorporated herein by reference). 10.1 Credit and Security Agreement dated September 1, 1995, between Bank of America National Trust and Savings Association and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September 1, 1995, among Bank of America National Trust and Savings Association and Bank of America National Trust and Savings Association as agent for various other lenders and the Company (previously filed with the Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 and incorporated herein by reference). 10.3 Fourth Amendment dated April 7, 1997 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 Fifth Amendment dated August 29, 1997 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 Sixth Amendment dated September 10, 1997 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. 10.6 Seventh Amendment dated March 1, 1998 to Amended and Restated Mortgage Loan Warehousing Agreement among Bank of America National Trust and Savings Association, Bank of America National Trust and Savings Association as agent for various other lenders and the Company. 10.7 Amendments dated August 29, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.8 Amendments dated November 30, 1997 to Variable Terms Letter of the Master Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of California and the Company. 10.9 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. 3345187, and incorporated herein by reference). 10.10 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. 3345187, and incorporated herein by reference). 10.11 Lease extension dated December 15, 1997 to Standard Office Lease-Net dated January 1, 1992 between the Company and Fin-West Group. 10.12 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 S1, File No. 33-45187, and incorporated herein by reference). 10.13 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). 10.14 Profit Sharing Plan for Employees of the FinWest 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). 10.15 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. 3345187, and incorporated herein by reference). 10.16 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). 10.17 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). 10.18 Renewal of Employment Agreement dated April 30, 1998 between Clement Ziroli and the Company. 10.19 Employment Agreement dated April 30, 1998 between Bruce G. Norman and the Company. 10.20 Renewal of Employment Agreement dated April 30, 1998 between Pac W. Dong and the Company. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule (included only in the electronic filing). EX-10 2 EXHIBIT 10-3 FOURTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT This Fourth Amendment to Amended and Restated Mortgage Loan Warehousing Agreement (the "Amendment") is dated as of this 7th day of April, 1997, by and among, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("BOA"), and the other banks signatory hereto from time to time (each a "Lender" and, collectively, the "Lenders"), BOA as agent for the Lenders (in such capacity, the "Agent") and FIRST MORTGAGE CORPORATION, a California corporation (the "Company"). RECITALS A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing Agreement dated as of September 1, 1995 by and among BOA, the Agent and the Company (as amended from time to time, the "Agreement"), BOA agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. B. The Company and the Lenders desire to amend the Agreement in certain respects, all as set forth more particularly herein. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Change in Definition of Gestation Advance Sublimit. TO reflect the agreement of the parties to increase the limit of the Gestation Advance Sublimit, the definition of "Gestation Advance Sublimit" in Section 4 of the Third Amendment is amended by replacing "$7,500,000.00" with "$10,000,000.00." 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 its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement as amended hereby, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. 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 it 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 duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect to the Amendment Documents: (1) complete in all respects, and (2) there has not occurred and Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION A California Corporation By: Name: Clement Ziroli Title: President Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, A national banking association as Agent and Lender By: Name: Thomas A. Pizurie Title: Vice President March 11, 1997 Pac Dong, Controller First Mortgage Corporation 3230 Fallowfield Road Diamond Bar, CA 91765 Re: Waiver of Breach of Covenant Dear Mr. Dong: By this letter the undersigned, as the Agent under (and as the term "Agent" and capitalized terms not otherwise defined herein are defined in) that certain Amended and Restated Mortgage Loan Warehousing Agreement dated as of the 1st day of September 1996, by and among Bank of America National Trust and Savings Association, First Mortgage Corporation, and certain Lenders, and on behalf of the Lenders participating therein (as amended to date, the "Credit Agreement"), hereby waives any Event of Default or Potential Default existing under the Credit Agreement resulting from the failure of the Company to be in compliance with the requirement of Paragraph 7 (g) of the Credit Agreement (the "Subject Default") for the fiscal year ending March 31, 1997. The Waiver of the undersigned set forth above is a one-time waiver only and is only made with respect to the Subject Default for the fiscal year ending March 31, 1997. Such waiver is not to be construed as a waiver of any other provision of the Credit Agreement and shall not constitute an agreement of the undersigned to waive any term, condition or requirement of the Credit Agreement in the future. Very truly yours Thomas A. Pizurie Vice President TAP;ps EX-4 3 EXHIBIT 10-4 FIFTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT The Fifth Amendment to Amended and Restated Mortgage Loan Warehousing Agreement (the "Amendment") is dated as of August 29, 1997, 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, 1997" with "September 1, 1998." 2. Elimination of Prohibition on Purchasing or Retiring Stock. To reflect the agreement of the parties to eliminate the Company's covenant not to acquire, purchase, redeem or retire any shares of its capital stock, Section 7(g) is deleted from the Agreement. 3. Inclusion of High Loan-to-Value Loans in Borrowing Base. To reflect the agreement of the parties to include in the Borrowing Base an allocation, not to exceed Two Million Dollars ($2,000,000.00) in Collateral Value for certain Eligible Committed Mortgage Loans having Loan-to-Value Ratios less than or equal to 125%, the Agreement is amended as set forth below. (a) Addition of Definition of Eligible Committed HLTV Loan. The following new defined term is hereby added to Section 11 of the Agreement in appropriate alphabetical position: "'Eligible Committed HLTV Loan' shall mean a Mortgage Loan with respect to which the following statement 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): Said Mortgage Loan meets all of the requirements in the definition of Eligible Committed Mortgage Loan except that said Mortgage Loan: (a) has an original principal balance not exceeding $300,000.00; (b) has a Loan-to-Value Ratio (including any related first mortgage) not greater than 125%; (c) is not required to be covered by a policy of private mortgage insurance; and (d) has not been included in the Borrowing Base for more than thirty (30) days or such longer period as may be approved by the Agent in writing (not to exceed an additional thirty (30) days)." (b) Change in Definition of "Type" The definition of the term "Type," set forth in Section 11 of the Agreement, is hereby amended to read in its entirety as follows: "'Type' for any Mortgage Loan shall mean an Eligible Committed Conforming Mortgage Loan including but not limited to an Eligible Committed HLTV 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," (c) Change in Definition of "Eligible Mortgage Loan." Clause (u) of the definition of the term "Eligible Mortgage Loan," set forth in Section 11 of the Agreement, is amended to read in its entirety as follows: "(u) Unless said Mortgage Loan is an Eligible Committed HLTV Loan, if said Mortgage Loan has a Loan-to-Value Ratio greater than eighty percent (80%), said Mortgage Loan is covered by a policy of private mortgage insurance acceptable to FNMA, FHLMC or has been pre-approved by the Agent." (d) Changes in Definition of "Eligible Committed Conforming Mortgage Loan." Clauses (b) and (e) of the definition of the term "Eligible Committed Conforming Mortgage Loan," set forth in Section 11 of the Agreement, are hereby amended to read in their entirety as follows: "(b) Said Mortgage Loan is secured by a first or second priority deed of trust (or mortgage) on the Property in favor of the Company; provided. however, that unless said Mortgage Loan is an Eligible Committed HLTV Loan, if said Mortgage Loan is secured by a second priority deed of trust (or mortgage), the Collateral Value of said Mortgage Loan when added to the Collateral Value of all other Mortgage Loans included in the Borrowing Base which are secured by second priority deeds of trust (or mortgages) and are not Eligible Committed HLTV Loans does not exceed $1,000,000.00 and provided further, that if said Mortgage Loan is an Eligible Committed HLTV Loan secured by a first or second priority deed of trust (or mortgage), the Collateral Value of said Mortgage Loan when added to the Collateral Value of all other Eligible Committed HLTV Loans included in the Borrowing Base does not exceed $2,000,000.00." "(e) Said Mortgage Loan has not been included in the Borrowing Base for more than ninety (90) days or such longer period as may be approved by the Agent in writing (not to exceed an additional sixty (60) days in the case of Mortgage Loans secured by first priority deeds of trust and thirty (30) days in the case of Mortgage Loans other than Eligible Committed HLTV Loans secured by second priority deeds of trust); provided, however, that notwithstanding the foregoing, if said Mortgage Loan is an Eligible Committed HLTV Loan, said Mortgage Loan has not been included in the Borrowing Base for more than thirty (30) days or such longer period as may be approved by the Agent in writing (not to exceed an additional thirty (30) days); and" (e) Change in Definition of "Collateral Value." Clause (a) of the definition of the term "Collateral Value," set forth in Section 11 of the Agreement, is hereby amended to read in its entirety as follows: "(a) If such Eligible Mortgage Loan is an Eligible Committed Conforming Mortgage Loan (other than an Eligible Committed HLTV Loan), an Eligible Committed Non-Conforming Mortgage Loan or an Eligible Gestation Mortgage Loan, ninety-eight percent (98%), and if such Eligible Mortgage Loan is an Eligible Committed HLTV Loan, ninety-five percent (95%) of the lesser of: (1) the unpaid principal balance thereof, (2) the Applicable Take-Out Price multiplied by the unpaid principal balance thereof, (3) the acquisition price thereof (net of discount and fees associated with yield), and (4) but only if said Mortgage Loan is an Eligible Committed HLTV Loan or is secured by a second priority deed of trust (or mortgage), the Fair Market Value of said Mortgage Loan;" 4. Reaffirmation of Security- Agreement The Company hereby affirms and agrees that (a) the execution, delivery and performance by the Company of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement as amended hereby, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. 5. Effective Date. This Amendment shall be effective as of the date (the "Effective Date") upon which: (a) All parties signatory hereto have executed and delivered this Amendment to the Agent; and (b) The Agent has received such board resolutions, incumbency certificates and other additional documentation as it may request in connection herewith. 6. No Other Amendment. Except as expressly amended herein, the Agreement and the other Loan Documents (as amended from time to time) shall remain in full force and effect as currently written. 7. 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. 8. Representations and Warranties. The Company hereby represents and warrants to the Agent, the Lenders and the Collateral Agent as follows: (a) The Company has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and all documents, instruments and agreements executed and delivered by the Company in connection therewith (collectively, the "Amendment Documents") and has taken all necessary corporate action to authorize the execution, delivery and performance of the Amendment Documents. The Amendment Documents have been duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. (b) At and as of the date of execution hereof and at and as of the Effective Date of this Amendment and both prior to and after giving effect to the Amendment Documents: (1) the representations and warranties of the Company contained in the Agreement are accurate and complete in all respects, and (2) there has not occurred art Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION A California Corporation By: Name: Clement Ziroli Title: President Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, A national banking association as Agent and Lender By: Name: Thomas A. Pizurie Title: Vice President EX-5 4 EXHIBIT 10-5 SIXTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT This Sixth Amendment to Amended and Restated Mortgage Loan Warehousing Agreement (the "Amendment") is dated as of this 10th day of September, 1997, 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 Credit Limit. To reflect the agreement of the parties to increase the Credit Limit, the definition of "Credit Limit" in Section 11 of the Agreement is amended by replacing "$30,000,000" with "$40,000,000". 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 its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement as amended hereby, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. 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 it 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 duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. (b) At and as of the date of execution hereof and at and as of the effective date of this Amendment and both prior to and after giving effect to the Amendment Documents: (1) complete in all respects, and (2) there has not occurred an Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Clement Ziroli Title: Chairman 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-6 5 EXHIBIT 10-6 SEVENTH AMENDMENT TO AMENDED AND RESTATED MORTGAGE LOAN WAREHOUSING AGREEMENT This Seventh Amendment to Amended and Restated Mortgage Loan Warehousing Agreement (the "Amendment") is dated as of March 1, 1998, by and among BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("BOA"), and the other banks signatory hereto from time to time (each a "Lender" and, collectively, the "Lenders"), BOA as agent for the Lenders (in such capacity, the "Agent") and FIRST MORTGAGE CORPORATION, a California corporation (the "Company"). RECITALS A. Pursuant to that certain Amended and Restated Mortgage Loan Warehousing Agreement dated as of September 1, 1995 by and among BOA, the Agent and the Company (as amended from time to time, the "Agreement"), BOA agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Agreement. B. The Company and the Lenders desire to amend the Agreement in certain respects, all as set forth more particularly herein. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Change in Definition of Credit Limit. To reflect the agreement of the parties to increase the Credit Limit, the definition of "Credit Limit" in Paragraph 11 of the Agreement is amended by replacing "40,000,000" with "$70,000,000." 2. Elimination of Right to Elect Reference Rate Loans. To reflect the agreement of the parties hereto to eliminate the right of the Company to elect Reference Rate Loans, Paragraphs l (b), (1 (c) and 1(d) of the Agreement are hereby amended to read in their entirety as follows: "1(b) Interest Rates Applicable to Loans. All Regular Advances shall be maintained, at the election of the Company made from time to time as permitted herein, as Federal Funds 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. 1(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 1(e), 1(f), 1(g) and 1(h) below): (1) with respect to each Loan which is an Established Rate Loan, at the Applicable Established Rate for the applicable computation period, (2) with respect to each Loan which is a Eurodollar Loan, at the Applicable Eurodollar Rate for the applicable Interest Period, and (3) 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 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 Loans shall be payable at the end of the applicable Interest Period." 3. Change in Certain Definitions. To reflect the agreement of the parties, the following definitions set forth in Paragraph 11 of the Agreement are amended by restating such specified definitions in their respective entireties as follows: "Applicable Federal Funds Rate shall mean the Federal Funds Rate plus one and four-tenths of one percent (1.40%) except that with respect to Gestation Advances it shall mean the Federal Funds Rate plus three-quarters of one percent (0.75%). Eurodollar Spread shall mean, with respect to Loans which are made and/or maintained as Eurodollar Loans, one and four-tenths of one percent (1.40%). Federal Funds Rate shall mean the rate per annum on overnight Federal funds transactions with members of the Federal Reserve arranged by Federal funds brokers, as made available to and quoted by the Agent on the Business Day and at the time the Regular Advance or the Gestation Advance to be borrowed at a rate based on the Federal Funds Rate is requested. Federal Funds Rate Loans shall mean Regular Advances and/or Gestation Advances during such time as they are being made and/or maintained at the Applicable Federal Funds Rate." 4. Change in Definition of Eligible Committed Non-Conforming Mortgage Loan. To reflect the agreement of the parties to increase the original principal balance cap from $750,000 to $1,000,000 and to increase the Collateral Value of Eligible Committed Non-Conforming Mortgage Loans which may be included in the Borrowing Base, the definition "Eligible Committed Non-Conforming Mortgage Loan" is hereby amended to restate subparagraphs (e), (f) and (g) of such definition in their respective entireties as follows: "(e) The original principal balance of said Mortgage Loan did not exceed $1,000,000; (f) If the original principal balance of said Mortgage Loan was greater than $750,000, the inclusion of said Mortgage Loan in the Borrowing Base was preapproved in writing by the Agent; (g) The Collateral Value of said Mortgage Loan when added to the Collateral Value of all Eligible Committed Non-Conforming Mortgage Loans included in the Borrowing Base does not exceed one hundred percent (100%) of the Credit Limit and, if the original principal balance of said Mortgage Loan is greater than $750,000, the Collateral Value of said Mortgage Loan, when added to the Collateral Value of all Eligible Committed Non-Conforming Mortgage Loans whose respective original principal balances are greater than $750,000 and are included in the Borrowing Base, does not exceed ten percent (10%) of the Credit Limit; and" 5. Change in Definition of Collateral Value. To reflect the agreement of the parties to reduce the advance rate applicable to Eligible Committed Non- Conforming Mortgage Loans whose respective original principal balances are greater than $750,000 but not in excess of $1,000,000, the definition of "Collateral Value" is hereby amended to restate subparagraph (a) of such definition as follows: "(a) If such Eligible Mortgage Loan is an Eligible Committed Conforming Mortgage Loan (other than an Eligible Committed HLTV Loan), an Eligible Committed Non-Conforming Mortgage Loan or an Eligible Gestation Mortgage Loan, ninety-eight percent (98%), and if such Eligible Mortgage Loan is an Eligible Committed HLTV Loan, ninety-five percent (95%), and if such Eligible Mortgage Loan is an Eligible Committed Non-Conforming Mortgage Loan whose original balance is greater than $750,000 but not in excess of $1,000.000, ninety percent (90%) of the lesser of: (1) the unpaid principal balance thereof, (2) the Applicable Take-Out Price multiplied by the unpaid principal balance thereof, (3) the acquisition price thereof (net of discount and fees associated with yield), and (4) but only if said Mortgage Loan is an Eligible Committed HLTV Loan, an Eligible Committed Non-Conforming Mortgage Loan whose original principal balance is greater than $750,000 but not in excess of $1,000,000, or is secured by a second priority deed of trust (or mortgage), the Fair Market Value of said Mortgage Loan:" 6. Year 2000 Compliance. To reflect the agreement of the parties to add a representation and warranty regarding year 2000 compliance, a new Paragraph 5(m) is hereby added as follows: "5(m) Year 2000 Compliance. The Company, has conducted a comprehensive review and assessment of the Company's computer applications (and made inquiry, of the Company's key suppliers and vendors with respect to the 'year 2000 problem' (that is, the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) and, based on that review and inquiry, the Company does not believe the year 2000 problem will result in a material adverse change in the Company's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit." 7. Additional Event of Default. To reflect the agreement of the parties to add an additional Event of Default, a new Paragraph 8(1) is hereby added as follows: "8(1) A material adverse change occurs, or is reasonably likely to occur, in the Company's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit." 8. Reaffirmation of Security Agreement. The Company hereby affirms and agrees that (a) the execution, delivery, and performance by the Company of its obligations under this Amendment shall not in any way amend, impair, invalidate or otherwise affect any of the obligations of the Company or the rights of the Secured Parties under the Security Agreement or any other document or instrument made or given by the Company in connection therewith, (b) the term "Obligations" as used in the Security Agreement includes, without limitation, the Obligations of the Company under the Agreement as amended hereby, and (c) the Security Agreement remains in full force and effect in that such agreement constitutes a continuing first priority security interest in and lien upon the Collateral. Effective Date. This Amendment shall be effective as of the date (the "Effective Date") upon which: (a) All parties signatory hereto have executed and delivered this Amendment to the Agent; and (b) The Agent has received such board resolutions, incumbency certificates and other additional documentation as it may' request in connection herewith. 10. No Other Amendment Except as expressly amended herein, the Agreement and the other Loan Documents (as amended from time to time) shall remain in full force and effect as currently written. 11. 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. 12. Representations and Warranties. The Company hereby represents and warrants to the Agent, the Lenders and the Collateral Agent as follows: (a) The Company has the corporate power and authority and the legal right to execute, deliver and perform this Amendment and all documents, instruments and agreements executed and delivered by the Company in connection therewith (collectively, the "Amendment Documents") and has taken all necessary corporate action to authorize the execution, delivery and performance of the Amendment Documents. The Amendment Documents have been duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. (b) At and as of the date of execution hereof and at and as of the Effective Date of this Amendment and both prior to and after giving effect to the Amendment Documents: (1) the representations and warranties of the Company contained in the Agreement are accurate and complete in all respects, and (2) there has not occurred an Event of Default or Potential Default under the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. FIRST MORTGAGE CORPORATION A California Corporation By: Name: Clement Ziroli Title: President Percentage Shares: 100% BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, A national banking association as Agent and Lender By: Name: Thomas A. Pizurie Title: Vice President EX-7 6 EXHIBIT 10-7 VARIABLE TERMS LETTER August 29, 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. Pledged Loan Sub-limit: $5,000,000.00. Permitted Pledge Period: Two business days. Maturity Date: October 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 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 Borrowers 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 he 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 tile 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, 1997. Interim Date: June 30,1997. 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 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 $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 stun 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 $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 (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." (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. I: Required Collateral Documents. J: Servicing Delinquency and Closed Loan Production Report. If the above meets your approval, please so indicate by executing and returning to Bank the enclosed copy of this Variable Terms Letter. Very truly yours, SANWA BANK CALIFORNIA a California corporation with a state banking license By:John C. Hyche Title: Vice President AGREED TO AND ACCEPTED as of the 29th day of August, 1997. FIRST MORTGAGE CORPORATION, a California corporation By: Name: Clement Ziroli Title: Chairman of the Board EX-8 7 EXHIBIT 10-8 VARIABLE TERMS LETTER November 30, 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: $20,000,000.00. Sub-Credit Limits: Allocation A: Up to the full amount of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment and (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base. Allocation B: Up to $10,000,000.00 of the Credit Limit for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre-approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, and (iv) has an original principal balance not exceeding $750,000.00. Up to $5,000,000.00 of this $10,000,000.00 sub-limit shall be available for funding conventional Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except as to original principal balance, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, (ii) is covered by a Take-Out Commitment (iii) is of a type of Mortgage Loan which has been pre- approved by the investor issuing the applicable Take-Out Commitment prior to the inclusion of such Eligible Mortgage Loan in the Borrowing Base, (iv) has an original principal balance over $750,000.00 but not exceeding $1,000,000.00 and (v) has been pre-approved by the Bank which approval shall be on a case-by-case basis. Allocation C: Up to $7,000,000.00 of the Credit Limit for funding FHA-insured, VA-guaranteed and FNMA/FHLMC-conforming conventional Eligible Mortgage Loans, or Eligible Mortgage Loans conforming to all underwriting and other requirements of FNMA and FHLMC except for having an original principal balance not exceeding $750,000.00, each of which Eligible Mortgage Loans: (i) is subject to a first priority deed of trust (or mortgage) on the Property, and (ii) is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base; covered by a Take-Out Commitment. Allocation D; Up to $5,000,000 of the Credit Limit for funding include 125% LTV Loans, Title 1 Loans. B&C Loans, and/or Home Equity Line of Credits Loans PROVIDED that all loans funded under this sublimit must have a purchase commitment attached at time of funding. Purchased Loan Sub-limit: Not applicable. Pledged Loan Sub-limit: $10,000,000.00 Permitted Pledge Period: Two business days. Maturity Date: August 31, 1998 Prevailing Interest Rate Prevailing Interest Rate, During the term hereof, Loans outstanding hereunder shall bear interest at a per annum rate equal to the Reference Rate plus zero percent (0.0%) (such advances shall hereinafter be referred to as "Reference Rate Advances"); however, for any monthly period, to the extent average daily Available Deposits are maintained with Bank by the Borrower (or by an Affiliate of the Borrower as designated by Bank) during such monthly period, such loans in an amount equal to such average daily Available Deposits shall bear interest at a rate of interest equal to one and one quarter percent (1.25%) per annum (such advances shall hereinafter be referred to as "Deposit Based Advances"). In addition to Reference Rate Advances and Deposit Based Advances, the Bank hereby agrees to make Loans to the Borrower, at the Borrower's election, at a fixed rate (the "Fixed Rate") for such period of time that the Bank may quote and offer, provided that any such period of time shall not exceed thirty (30) days (the "Interest Period"), and provided that any such period of time does not extend beyond the Maturity date for advances in the minimum amount of $250,000.00, (such advances shall hereinafter be referred to as "Fixed Rate Advances"). For Fixed Rate Advances, the interest rate for the Fixed Rate shall be a percentage approximately equivalent to one and one quarter percent (1.25%) per annum in excess of the rate which the Bank determines in its sole and absolute discretion to be equal to the Bank's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by the Bank of such funds) in an amount approximately equivalent to the amount of the relevant Fixed Rate Advance and for a period of time approximately equal to the relevant Interest Period; The Bank shall provide the Borrower with a statement of the Borrower's Fixed Rate Advances, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 10 days after the Borrower's receipt of any such statement which it deems to be incorrect. Notice of Election to Adjust interest Rate. Upon telephonic notice which shall be received by the Bank at or before 12:00 p.m. (California Time) on a business day, the Borrower may elect: 1. That the interest on a Reference Rate Advance or Deposit Based Advance shall be adjusted to accrued at the Fixed Rate; provided however, that such notice shall be received by the Bank no later than one business day prior to the day (which shall be a business day) on which Borrower requests that interest be adjusted to accrue at the Fixed Rate. 2. That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Reference Rate; provided, however that such notice shall be received by the Bank no later than one business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the Fixed Rate, Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Reference Rate upon the expiration of the Interest Period pertaining to such Fixed Rate Advance. Prohibition Against Prepayment of Fixed Rate Advances. Notwithstanding anything to the contrary in the Agreement, no prepayment shall be made on any Fixed Rate Advance except on a day which is the last day of the Interest Period pertaining thereto. If the whole of any part of any Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and 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: Robinson Kaspar Funding Account: Acct. No. 2068-01106 Statement Date: March 31, 19979 Interim Date: June 30,1997 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 Fee: The Borrower agrees to pay Bank, from time to time promptly upon delivery of a billing statement, a collateral handling fee in the amount of $10.00 per Mortgage Loan submitted by the Borrower for inclusion in the Borrowing Base. Permissible Warehouse Period: 90 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation A or Allocation C. 60 days for Eligible Mortgage Loans which meet the criteria set forth under Allocation B which have an original principal balance not exceeding $750,000.00. 30 days for Eligible Mortgage Loans which meet the criteria set forth in Allocation B and have an original principal balance over $750,000.00 but not exceeding $1,000,000.00. Minimum Permitted Current Ratio: 1.08 to 1.0. Minimum GAAP Net Worth: $15,000,000.00. Adjusted Net Worth Portfolio Percentage: 1.00% Minimum Permitted Adjusted Net Worth: $25,000,000.00 Minimum Permitted Servicing Portfolio: $1,000,000,000.00 on and after the date of the Agreement. Maximum Permitted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of(x) the Borrower's Tangible Net Worth plus (y) its Subordinated Debt, to exceed 8.0 to 1.0. Maximum Permitted Adjusted Leverage Ratio: Borrower will not at any time permit the ratio of the Borrower's Indebtedness (excluding Subordinated Debt) to the sum of (x) the Borrower's Adjusted Net Worth plus (y) its Subordinated Debt to exceed 5.0 to 1.0. Types of Eligible Collateral Mortgage Loans:Eligible Mortgage Loans, each representing a one to four family residential Mortgage Loan, which loan is insured by the FHA, guaranteed by the VA or conforms to all underwriting and other requirements of FNMA/FHLMC, except as (i) permitted above in Allocation B as to original principal balance. Collateral Value of the Borrowing Base: (a) As to each Mortgage Loan which is FHA-insured, VA-guaranteed or FNMA/FHLMC conforming, ninety-nine percent (99%) of the lesser of (1) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (b) As to each Mortgage Loan which conforms to all underwriting and other requirements of FNMA and FHLMC except (A) as to original principal balance where the original principal balance does not exceed $750,000.00, ninety-five percent (95%) or (B) as to original principal balance where the original principal balance exceeds $750,000.00 but does not exceed $1,000,000.00, ninety-five percent (95%) of the lesser of(l) the weighted average net unfilled purchase price of all Take-Out Commitments held by the Borrower under which such Mortgage Loan could be sold (assuming the simultaneous shipment of all other Mortgage Loans owned by the Borrower) as represented in the most recent Pipeline Position and Commitment Status Report submitted to Bank, multiplied by the unpaid principal balance of such Mortgage Loan, and (2) the unpaid principal balance of such Mortgage Loan. (c) As to each Mortgage Loan which is FHA-insured, VA-guaranteed or FNMA/FHLMC conforming except that it is not, at the time such Eligible Mortgage Loan is submitted for inclusion in the Borrowing Base, covered by a Take-Out Commitment, ninety-five percent (95%) of the unpaid principal balance of such Mortgage Loan. Also included are all Mortgage Loans funded under sublimit "D". Collateral: The Collateral shall consist of the personal property described more particularly on the Collateral Schedule attached hereto as Exhibit E. Addresses for Purpose of Notice: The Borrower: 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 Arm: Mr. Robinson Kaspar 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. I: Required Collateral Documents. J: Servicing Delinquency and Closed Loan Production Report. If the above meets your approval, please so indicate by executing and returning to Bank the enclosed copy of this Variable Terms Letter. Very truly yours, SANWA BANK CALIFORNIA a California corporation with a state banking license By: Name: Robinson Kaspar Title: Vice President AGREED TO AND ACCEPTED as of the 30th day of November, 1997 FIRST MORTGAGE CORPORATION, a California corporation By Name: Pac Dong Title: Executive Vice President EX-11 8 EXHIBIT 10-11 LEASE EXTENSION December 15, 1997 To the Lease between Fin-West Group ("Lessor") and First Mortgage Corporation ("Lessee"), original Lease dated January 1st, 1992 for 3230 Fallow Field Drive, Diamond Bar, CA 91765, anything in the Lease or any Addendum to the contrary not withstanding, it is understood and agreed as follows: 1. Whereas the expiration of said Lease Extension for the fifth year expires on December 31, 1997, and whereas Lessee desires to remain in possession of the existing said premises, Lessee wishes to have the right to extend the Lease three (3) times, each time for one (1) additional year, starting January 1, 1998. This Lease Extension supersedes the Lease Extension in the original Lease, and Lessor will renew the Lease for an additional period under the original Lease terms, provisions, and conditions with the exception that the monthly rental thereof shall become $22,000.00 commencing April 1, 1998. 2. Lessee agrees to notify Lessor of its intention to re-lease or vacate said premises with at least thirty (30) days written notice prior to the expiration date of said extended lease term. By: CLEM ZIROLI LESSOR/FIN-WEST GROUP DATE: 12/15/97 BY: PAC DONG LESSEE/FIRST MORTGAGE CORPORATION DATE 12/15/97 EX-18 9 EXHIBIT 10-18 April 30, 1998 *** PERSONAL & CONFIDENTIAL *** HAND DELIVERED First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Clement Ziroli, Chairman Dear Clem: It is the recommendation of the Compensation Committee that the agreement by which you are currently employed by First Mortgage Corporation be renewed for the fiscal year April 1, 1998 through March 31, 1999 upon the same terms and conditions as presently exist. If this is acceptable to you, kindly sign the enclosed copy of this letter indicating that, if the recommendation is accepted by the Board of Directors of First Mortgage Corporation, you will continue in your employment under the contract as indicated. Best personal regards, Robert E. Weiss, Chairman, Compensation Committee REW:jk Encls. I agree to the renewal of my Employment Agreement by First Mortgage Corporation for the fiscal year April 1, 1998 through March 31, 1999 upon the same terms and conditions as presently exist. Dated: APRIL 30, 1998 CLEMENT ZIROLI, CHAIRMAN EX-19 10 EXHIBIT 10-19 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 1st day of April, 1998, 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 April, 1998 and end on the 31st day of March, 1999, unless otherwise terminated, pursuant to the provisions of Agreement. Provided, however, that within the sole discretion of the Board of Directors of Employer, upon recommendation by the Compensation Committee of the Board, this Agreement and all of the terms hereof may be extended for the period of one year for the fiscal year commencing April 1, 1999 through March 31, 2000. In the event Employer and Employee have not entered into a new Agreement for the fiscal year beginning April 1, 1999, 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 $265,000 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 comprised of the fiscal year ending March 31, 1999, the Employee shall be entitled to receive cash bonuses (the "Bonuses"), based upon the formula established by the Committee which is set forth in Exhibit "A" attached hereto and made a part hereof. In the event this Employment Agreement is extended by Board action as provided for in Paragraph 1 of this Agreement, the bonuses will be based upon said Exhibit "A." The Bonus as described as "Annual Profit Bonus" is payable 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, at the end of each quarter of the fiscal year during which this Employment Agreement is in existence or the year during which this Employment Agreement is renewed by Board action as provided in Paragraph 1 hereof, after preparation by Employer of the Form 10-Q'quarterly statement, employee may request and upon such request will be paid fifty percent (50%) of any bonus that may be shown to be due as a result of said statement. Such advance payments, if any, will be deducted from the final payment, if any, due at the end of the fiscal year. Provided further that in no event will any Annual Profit Bonus be paid pursuant to Paragraph A unless the "Corporate Net Income Before Income Taxes" for the fiscal period of the contract, as described in Exhibit "A", exceeds Two Million Dollars. In the event the total of the advance payments heretofore referred to exceed the total bonus due to Employee for the fiscal year, such excess will be repaid by Employee to the corporation during the next succeeding fiscal year. The Compensation Committee reserves the right to recommend to the Board of Directors a further discretionary bonus to be paid to Employee in the event the Compensation Committee deems such discretionary bonus appropriate. 3.3 Limitation of Compensation. In no event is Employee's combined compensation, that is a combination of base salary and bonuses, as provided under Paragraphs 3.1 and 3.2 hereof, to exceed ninety percent (90%) of the compensation paid to Clement Ziroli for the period of this contract or any extension or renewal thereof. Employee acknowledges that he has been presented with, read, and is fully acquainted with the terms of the Employee Agreement of Clement Ziroli and that he is familiar with the compensation provisions of Clement Ziroli's said Employment 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, (ii/) 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, 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 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 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: Clem Ziroli Its: Chairman EMPLOYEE BRUCE G. NORMAN EXHIBIT A (For Period: April 1, 1998 - March 31, 1999) BRUCE G. NORMAN (a) Loan Production Bonus Not Applicable (a) 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* (1) $0 - $2,000,000 2.65% of this increment (2) $2,000,001 - $3,000,000 3.00% of this increment (3) $3,000,001 - $4,000,000 3.50% of this increment (4) $4,000,001 - $5,000,000 4.50% of this increment (5) Over $5,000,001 5.50% of this increment *As each new percentage level is reached, that higher percentage will be applied retroactively to all prior levels, except level (1), which will not be increased. **Annual corporate net income shall exclude all extraordinary gains, and any gains from the selling of loan servicing portfolio.
EX-20 11 EXHIBIT 10-20 April 30, 1998 *** PERSONAL & CONFIDENTIAL *** HAND DELIVERED First Mortgage Corporation 3230 Fallow Field Drive Diamond Bar, California 91765 Attn: Pac W. Dong, Chief Financial Officer Dear Pac: It is the recommendation of the Compensation Committee that the agreement by which you are currently employed by First Mortgage Corporation be renewed for the fiscal year April 1, 1998 through March 31, 1999 upon the same terms and conditions as presently exist. If this is acceptable to you, kindly sign the enclosed copy of this letter indicating that, if the recommendation is accepted by the Board of Directors of First Mortgage Corporation, you will continue in your employment under the contract as indicated. Best personal regards, Robert E. Weiss, Chairman, Compensation Committee REW:jk Encls. I agree to the renewal of my Employment Agreement by First Mortgage Corporation for the fiscal year April 1, 1998 through March 31, 1999 upon the same terms and conditions as presently exist. Dated: April 30, 1998 PAC W. DONG, CHIEF FINANCIAL OFFICER EX-27 12
5 0000883369 FIRST MORTGAGE CORPORATION YEAR MAR-31-1998 MAR-31-1998 8,182 0 10,566 0 0 0 2,716 2,052 80,445 0 0 0 0 4,963 22,032 80,445 0 21,074 0 18,442 0 0 0 2,632 1,101 1,531 0 0 0 1,531 0.26 0.26
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