-----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, TARsHhX1/elPRrigUvo047L3BFh+wgop3oAt6gPDeJycErpst3k5r8Nemq1E/yLN iliqdmYxuPaevdyOmhXhhw== 0000883369-98-000018.txt : 19981116 0000883369-98-000018.hdr.sgml : 19981116 ACCESSION NUMBER: 0000883369-98-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MORTGAGE CORP /CA/ CENTRAL INDEX KEY: 0000883369 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 952960716 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19847 FILM NUMBER: 98746349 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 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 (I.R.S. Employer of incorporation or Identification No.) organization) 3230 Fallow Field Drive Diamond Bar, California 91765 (Address, including zip code, of principal executive offices) (909) 595-1996 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO____ As of September 30, 1998, 5,569,697 shares of the registrant's common stock were outstanding. FIRST MORTGAGE CORPORATION FORM 10-Q INDEX
Part I - Financial Information Page Item 1. Financial Statements: Balance Sheet 3 September 30, 1998 (Unaudited) and March 31, 1998 Unaudited Statement of Income Three Months and Six Months Ended September 30, 1998 and 1997 4 Unaudited Statement of Cash Flows Six Months Ended September 30, 1998 and 1997 5 Notes to Unaudited Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET
September 30,1998 March 31, 1998 (Unaudited) ASSETS Cash $3,732,000 $8,182,000 Mortgage loans held for sale 57,352,000 53,052,000 Other receivables and servicing 8,788,000 10,566,000 advances Capitalized servicing rights 9,997,000 7,490,000 Property and equipment, net 697,000 664,000 Prepaid expenses and other assets 138,000 361,000 Note receivable 130,000 130,000 TOTAL ASSETS $80,834,000 $80,445,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $37,854,000 $40,427,000 Sight drafts payable 9,552,000 9,372,000 Accounts payable and accrued 1,963,000 1,392,000 liabilities Deferred income taxes 2,828,000 2,259,000 Income taxes payable 57,000 - Total Liabilities 52,254,000 53,450,000 STOCKHOLDERS' EQUITY Preferred stock, no par value; Authorized shares - 1,000,000 Issued and outstanding shares - - - None Common stock, no par value: Authorized shares - 10,000,000 Issued and outstanding shares - 5,569,697 at 3,888,000 4,963,000 September 30, 1998 and 5,808,697 at March 31, 1998 Retained earnings 24,692,000 22,032,000 Total Stockholders' Equity 28,580,000 26,995,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,834,000 $80,445,000
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME
Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 REVENUES: Loan origination income $989,000 $808,000 $2,100,000 $1,512,000 Loan servicing income 1,957,000 1,873,000 3,881,000 3,729,000 Gain on sale of mortgage loans 4,807,000 1,858,000 8,460,000 3,198,000 Interest income 935,000 626,000 1,966,000 1,163,000 Total revenues 8,688,000 5,165,000 16,407,000 9,602,000 EXPENSES: Compensation and benefits 2,585,000 2,065,000 5,003,000 4,053,000 General and administrative expenses 2,444,000 1,483,000 4,634,000 2,756,000 Amortization of capitalized servicing rights 829,000 595,000 1,700,000 1,141,000 Interest expense 266,000 183,000 525,000 355,000 Total expenses 6,124,000 4,326,000 11,862,000 8,305,000 INCOME BEFORE INCOME TAXES 2,564,000 839,000 4,545,000 1,297,000 INCOME TAX EXPENSE 1,060,000 352,000 1,885,000 546,000 NET INCOME $1,504,000 $ 487,000 $2,660,000 $ 751,000 BASIC EARNINGS PER SHARE $ 0.27 $ 0.08 $ 0.47 $ 0.13 DILUTED EARNINGS PER SHARE $ 0.27 $ 0.08 $ 0.47 $ 0.13
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS
Six Months Ended September 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,660,000 $ 751,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for deferred income taxes 569,000 124,000 Provision for losses on foreclosure (54,000) (183,000) Amortization of capitalized servicing rights 1,700,000 1,141,000 Depreciation and amortization of property and equipment 130,000 100,000 Change in excess service fee 36,000 48,000 Originations and purchases of mortgage loans held for sale (433,509,000) (200,344,000) Sales and principal repayments of mortgage loans held for sale 429,209,000 192,765,000 Changes in other receivables and servicing advances 1,832,000 422,000 Change in prepaid expenses and other assets 223,000 193,000 Change in accounts payable and accrued liabilities 571,000 112,000 Change in income taxes payable 57,000 - Net cash provided by (used in) operating activities 3,424,000 (4,871,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights (23,000) (401,000) Origination mortgage servicing rights (4,220,000) (1,347,000) Purchase of furniture, equipment and leasehold improvements (163,000) (101,000) Change in due from affiliates - 134,000 Net cash used in investing activities (4,406,000) (1,715,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks (2,573,000) 2,855,000 Change in sight drafts payable 180,000 1,542,000 Change in notes payable, officer - (1,500,000) Repurchase of common stock (1,075,000) - Net cash provided by (used in) financing activities (3,468,000) 2,897,000 DECREASE IN CASH (4,450,000) (3,689,000) CASH, BEGINNING OF PERIOD 8,182,000 5,903,000 CASH, END OF PERIOD $3,732,000 $2,214,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 416,000 $ 264,000 Income taxes 1,000,000 225,000
FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS September 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In addition, this document should be read in conjunction with the financial statements and footnotes included in the Company's annual report on Form 10-K for fiscal year ended March 31, 1998. The preparation of the financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. 2. CAPITALIZED SERVICING RIGHTS Activities in Capitalized Servicing Rights are summarized as follows:
Capitalized Servicing Rights Balance at March 31, 1998 $7,490,000 Additions 4,243,000 Amortizations and write offs (1,736,000) Balance at September 30, 1998 $9,997,000
3. NOTES PAYABLE At September 30, 1998, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $70,000,000 and $30,000,000 with annual interest payable monthly at 1.25% to 1.40% or the bank's reference rate, depending on the level of borrowings and the compensating balances maintained. At September 30, 1998, borrowings under these lines of $37,854,000 were collateralized by mortgage loans held for sale. The line of credit agreements are subject to renewal on September 1, 1999 and August 31, 2000, respectively. Both agreements contain certain requirements, including but not limited to, the maintenance of minimum net worth, debt to net worth ratio, current ratio, net income and servicing portfolio, and restrict the Company's ability to pay dividends. The Company believes its two lines of credit agreements will be renewed prior to their expiration. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Six Months ended September 30 1998 1997 Numerator: Net income $2,660,000 $751,000 Denominator: Shares used in computing basic earnings per share 5,658,069 5,859,117 share Effect of stock options treated as equivalents under the treasury stock method 9,494 - Denominator for diluted earnings per share 5,667,563 5,859,117 Basic earnings per share $.47 $.13 Diluted earnings per share $.47 $.13
5. CONTINGENCIES The Company is currently a defendant in certain litigation arising in the ordinary course of business. It is management's opinion that the outcome of these actions will not have a material effect on the financial position or results of operations of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements in this Form 10-Q are forward-looking statements, including those that discuss strategies, goals, outlook, projected revenues, income, return and other financial measures. These forward- looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following facters: (i) the direction of interest rates; (ii) the demand for mortgage credits; (iii) the ability to obtain sufficient financial sources for liquidity and working capital; (iv) changes in laws or regulations governing mortgage banking operations; and (v) level of competition within the mortgage banking industry. In addition, the words "believe," "expect," "anticipate," "intend," "will" and similar words identify forward- looking statements in this Form 10-Q. RESULTS OF OPERATIONS: Three months ended September 30, 1998 compared to three months ended September 30, 1997. GENERAL First Mortgage reported net income of $1.504 million or $0.27 per share for the quarter ended September 30, 1998, compared to net income of $487,000 or $0.08 per share for the comparable 1997 quarter. The increase of 208.8% in net income was primarily attributable to substantial larger gains on mortgage sales; stronger loan origination revenues and increase in interest income. The improvement in earnings was, however, offset partially by higher compensation; general and administrative expenses and amortization of capitalized servicing rights. REVENUES For the quarter ended September 30, 1998, the volume of new mortgage loans closed increased by 85.3% to $210.44 million from $113.55 million in the prior year quarter. The increase is a reflection of lower long-term interest rates, which significantly increased the volume of refinancing loans in the market place, and the robust recovery of the California real estate market. For the three months ended September 30, 1998, loan origination revenue increased by approximately 22.4% to $989,000 from the September 1997 quarter, due primarily to a higher volume of retail loans, which carry higher front-end origination fees. As of September 30, 1998, the Company serviced $1.662 billion in loans compared to $1.712 billion at September 30, 1997, a decrease of 2.9% compared to the year-ago quarter. The run-offs in the servicing portfolio were due to heavy refinances induced by the current low interest rate environment. However, total loan servicing income, including late charges and other miscellaneous fees, rose by 4.5% to $1.96 million in the September 1998 quarter, from $1.87 million of the prior year quarter. The rise in servicing income is primarily due to the larger number of FHA and VA loans currently serviced by the Company, which typically carry a net service fee of 44 basis points. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated.
Three Months Ended September 30, 1998 1997 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,570,671 $1,606,069 portfolio Add: Loans originated 210,440 113,546 Less: Prepayment and amortization 207,161 105,673 Ending loan servicing portfolio 1,573,950 1,613,942 Sub-Servicing 88,450 98,167 Total servicing portfolio $1,662,400 $1,712,109 Average loan balance (end of period) $ 94,214 $ 96,631
Due to a very favorable reduction in long-term mortgage interest rates during the quarter, the gain on sale of mortgage loans was $4.81 million for the three months ended September 30, 1998, an increase of 158.7% over the 1997 period. Interest income, which reflects the interest received on mortgage loans held for sale, increased to $935,000 for the three months ended September 30, 1998 from $626,000 for the comparable prior year quarter. This increase was due primarily to the larger mortgage inventory carried by the Company during the September 1998 quarter. EXPENSES The major components of the Company's total expenses are (i) compensations and benefits, (ii) general and administrative expenses, (iii) amortization of capitalized servicing rights, and (iv) interest expense. Total expenses for the three months ended September 30, 1998 increased by 41.6% to $6.12 million from the three months ended September 30, 1997. Compensations and benefits were $2.59 million for the September 1998 quarter, an increase of 25.2% over the year-ago quarter. General and administrative expense increased by $961,000, or 64.8% over prior year. These higher expenses were a direct result of expanding production operations in the quarter, partially offset by cost reduction measures taken by the Company over the past year. Amortization of capitalized servicing rights in fiscal 1999 increased over prior years due mainly to the larger investment in mortgage servicing rights and higher volume of prepayments from refinances over the comparable prior period. Interest expense increased 45.4% to $266,000 for quarter ended September 1998 from $183,000 for the same period in 1997. The increase was due to the larger volume of loans originated during the quarter. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Six months ended September 30, 1998 compared to six months ended September 30, 1997 GENERAL In the six months ended September 30, 1998, the Company reported net income of $2.66 million or $0.47 per share, compared to net income of $751,000 or $0.13 per share for the same period of 1997. Total revenue increased by 70.9% to $16.41 million from $9.6 million in the comparable prior period. The increase in net income was largely due to higher loan origination income and a greater gain on sale of mortgage loans for the six month period as compared to last year. REVENUES For the six months ended September 30, 1998, loan origination revenue increased 38.9% to $2.10 million from $1.51 million for the six months ended September 30, 1997. The higher loan origination revenue was largely due to the larger volume of new loans originated by the Company. The volume of new mortgage loan originations increased 116.4% to $433.51 million from $200.34 million in the comparable period last year. Loan servicing income, representing the loan servicing fees, late charges and other fees earned by the Company for administering the loans in its servicing portfolio, rose 4.1% to $3.88 million for the six months ended September 30, 1998 from $3.73 million for the same period in 1997. The increase in servicing income is primarily due to the larger number of FHA and VA loans currently serviced by the Company, which typically carry a net service fee of 44 basis points. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated:
Six Months Ended September 30, 1998 1997 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,570,143 $1,583,837 portfolio Add: Loans originated 433,509 200,344 Less: Prepayment and amortization 429,702 170,239 Ending loan servicing portfolio 1,573,950 1,613,942 Sub-Servicing 88,450 98,167 Total servicing portfolio $1,662,400 $1,712,109 Average loan balance (end of period) $94,214 $96,631
The sale of mortgages for the six months ended September 30, 1998 resulted in a gain of $8.46 million compared to a gain of $3.20 million for the 1997 period. The gain is primarily attributable to the favorable trend in long-term interest rates in 1998. Interest income, which reflects the interest earned on mortgage loans held for sale for the six months ended September 30, 1998 was $1.97 million, an increase of 69% over the comparable 1997 period. The increase was as a result of the higher volume of loans originated in the 1998 period. 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 expenses. Total expenses for the six months ended September 30, 1998 increased by $3.56 million or 42.8% from the six months ended September 30, 1997. Compensation and benefits increased 23.4% to $5 million compared to $4.05 million in the first six months of fiscal year 1997. General and administrative expenses increased by 68.1% to $4.63 million from the comparable period in 1997. The increases in these expenses were a direct result of expansion in loan originations and direct marketing effort in the first half of fiscal year 1999. Increase in amortization of capitalized servicing rights was mainly due to larger investment in servicing rights and higher volume of loan prepayments over prior period. Interest expense increased to 47.9% to $525,000 as compared to $355,000 in the year earlier 6 months, due primarily to the larger volume of loans originated during the period. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirement is the funding of its new mortgage loans and loan origination expenses. To meet these funding needs, the Company relies on warehouse lines of credit with banks, its own capital, and also cash flows from operations. At September 30, 1998, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $70 million and the amount outstanding was $37.85 million. Borrowings under these facilities are secured by mortgage loans. The agreements contain various covenants, including minimum net worth, current ratio, net income, servicing portfolio balances, debt to net worth ratio, and restrict the Company's ability to pay dividends. The Company was in compliance with all debt covenants at September 30, 1998. The Company believes that the warehouse agreements will be renewed when the current terms expire. In the first six months in fiscal year 1999, the Company repurchased in open market transactions 239,000 shares of its common stock at an aggregate cost of $1,075,000. The Company had stockholders' equity of $28.58 million at September 30, 1998. Management believes that its current financing arrangements are adequate to meet its projected operational needs. 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 September 30, 1998, the Company believes that a 100 basis point change in long-term interest rates over a twelve month period, up or down and all else being constant, would increase or decrease the Company's gross income by approximately $1.5 million dollars. These estimates are limited by the fact that they are performed at a particular point in time and do not incorporate many other factors and consequently, should not be used as forecast. YEAR 2000 ISSUES The Company's computing environment consists of one IBM AS/400 and other personal computers connected to Local Area Network. The IBM AS/400 is the primary platform for the Loan Servicing Department processing. Other departments, including loan processing, loan funding and corporate accounting, are serviced mainly by personal computers. Software for loan funding, loan administration and accounting are maintained by outside service bureaus. These service bureaus have already been contacted by the Company and are expected to be in compliance either by December 1998 or January 1999. Modifications have also been started on the in- house developed management reporting application that will be brought into Year 2000 compliant by March 1999. The Company has made and will continue to make investments to identify and modify any in-house systems that are not yet Year 2000 compliant. These costs are being expensed by the Company during the period in which they are incurred. A majority of the software and applications used by the Company are not custom programs, and the Company believes that it will receive Year 2000 upgrades from the software vendors from whom the programs were purchased in a timely manner. The Company, however, cannot be assured that these third party service providers will not have business interruptions or other problems which could have an adverse impact on the Company. Presently, the Company does not have a contingency plan to handle the worst case scenarios, but it intends to create one by January 1999. 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. PROSPECTIVE TRENDS During fiscal 1999 long-term mortgage interest rates have fallen to the lowest levels in the last 25 years, contributing to a 116% increase in new loan originations over the year earlier period ended September 30, 1997. Unless long-term interest rates unexpectedly increase, the surge in activity should help produce positive results for the Company going forward. Pricing of many traditional mortgage products, however, remains uneconomical and the Company still faces intense competition from many directions, particularly for the standard conforming conventional mortgage loans so coveted by many of the major commercial banks. Our strategy is to instead emphasize the origination of FHA and VA loans and other mortgage products with much greater profit potential for the Company. As a continuing part of the Company's long-term plan, we are opening additional retail offices wherever such opportunity presents itself. During this fiscal year we have already opened new offices in West Los Angeles, California and Las Vegas, Nevada. We believe we are appropriately positioned to take advantage of the market niches within which we can competitively operate, but we still face formidable competition and, as always, our business is greatly influenced by the level of interest rates. PART II. OTHER INFORMATION. Item 6. Exhibits and Reports of Form 8-K. (a) No exhibits are filed with this report. (b) The Company did not file any reports on Form 8-K during the quarter ended September 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MORTGAGE CORPORATION Date: November 8, 1998 By S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: November 8, 1998 By S/Pac W. Dong Pac W. Dong Executive Vice President, Chief Financial Officer EX-5 2 [ARTICLE] 5 [PERIOD-TYPE] 3-MOS [FISCAL-YEAR-END] MAR-31-1999 [PERIOD-END] SEP-30-1998 [CASH] 3732 [SECURITIES] 0 [RECEIVABLES] 8788 [ALLOWANCES] 0 [INVENTORY] 0 [CURRENT-ASSETS] 0 [PP&E] 2879 [DEPRECIATION] 2182 [TOTAL-ASSETS] 80834 [CURRENT-LIABILITIES] 0 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 3888 [OTHER-SE] 24692 [TOTAL-LIABILITY-AND-EQUITY] 80834 [SALES] 0 [TOTAL-REVENUES] 16407 [CGS] 0 [TOTAL-COSTS] 11862 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 0 [INCOME-PRETAX] 4545 [INCOME-TAX] 1885 [INCOME-CONTINUING] 2660 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 2660 [EPS-PRIMARY] 0.47 [EPS-DILUTED] 0.47
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