10-Q 1 0001.txt QUARTERLY REPORT JUNE 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to__________________ Commission File Number 0-19847 FIRST MORTGAGE CORPORATION (Exact name of registrant as specified in its charter) California 95-2960716 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3230 Fallow Field Drive Diamond Bar, California 91765 (Address, including zip code, of principal executive offices) (909) 595-1996 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO____ As of June 30, 2000, 5,250,697 shares of the registrant's common stock were outstanding. FIRST MORTGAGE CORPORATION FORM 10-Q INDEX
Part I - Financial Information Page Item 1. Financial Statements: Balance Sheet June 30, 2000 (Unaudited) and March 31, 2000 3 Unaudited Statement of Income Three Months Ended June 30, 2000 and 1999 4 Unaudited Statement of Cash Flows Three Months Ended June 30, 2000 and 1999 5 Notes to Unaudited Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13
PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET
June 30, 2000 March 31, 2000 (Unaudited) ASSETS Cash $11,669,000 $11,264,000 Mortgage loans held for sale 72,788,000 67,336,000 Other receivables and servicing advances 4,452,000 5,558,000 Capitalized servicing rights, net 10,772,000 11,555,000 Property and equipment, net 659,000 581,000 Prepaid expenses and other assets 1,904,000 1,531,000 TOTAL ASSETS $102,244,000 $97,825,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $42,818,000 $19,291,000 Note payable, other 22,927,000 43,787,000 Sight drafts payable 1,897,000 393,000 Accounts payable and accrued liabilities 750,000 564,000 Deferred income taxes 5,248,000 4,979,000 Total Liabilities 73,640,000 69,014,000 STOCKHOLDERS' EQUITY Preferred stock, no par value: Authorized shares - 1,000,000 Issued and outstanding shares - None - - Common stock, no par value: Authorized shares - 10,000,000 Issued and outstanding shares - 5,250,697 at June 30, 2000 and 5,253,197 at March 31, 2000 2,551,000 2,559,000 Retained earnings 26,053,000 26,252,000 Total Stockholders' Equity 28,604,000 28,811,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,244,000 $97,825,000 See accompanying notes
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME
Three Months Ended June 30 2000 1999 REVENUES: Loan origination income $ 483,000 $ 775,000 Loan servicing income 1,844,000 1,925,000 Gain on sale of mortgage loans 621,000 2,464,000 Interest income 1,263,000 846,000 Other income 3,000 - Total revenues 4,214,000 6,010,000 EXPENSES: Compensation and benefits 1,630,000 2,307,000 General and administrative expenses 942,000 1,822,000 Amortization of capitalized servicing rights 1,256,000 1,157,000 Interest expense 699,000 337,000 Total expenses 4,527,000 5,623,000 INCOME (LOSS) BEFORE INCOME TAXES (313,000) 387,000 INCOME TAX EXPENSE (BENEFITS) (114,000) 161,000 NET INCOME (LOSS) $(199,000) $ 226,000 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.04) $ 0.04 See accompanying notes
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS
Three Months Ended June 30 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(199,000) $226,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for deferred income taxes 269,000 1,029,000 Provision for losses on foreclosure (96,000) (81,000) Amortization of capitalized servicing rights 1,256,000 1,157,000 Depreciation and amortization of property and equipment 55,000 70,000 Change in excess service fee 4,000 9,000 Loss on sale of assets 2,000 - Originations and purchases of mortgage loans held for sale (50,510,000) (116,374,000) Sales and principal repayments of mortgage loans held for sale 45,058,000 93,852,000 Change in other receivables and servicing advances 1,202,000 238,000 Change in prepaid expenses and other assets (373,000) (768,000) Change in accounts payable and accrued liabilities 186,000 (2,083,000) Net cash used in operating activities (3,146,000) (22,725,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights - (27,000) Originated mortgage servicing rights (477,000) (2,028,000) Purchase of furniture, equipment and leasehold improvements (136,000) (47,000) Proceeds from sale of assets 1,000 - Net cash used in investing activities (612,000) (2,102,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 23,527,000 3,853,000 Change in sight drafts payable 1,504,000 (8,132,000) Change in note payable, other (20,860,000) 25,043,000 Repurchase of common stock (8,000) (183,000) Net cash provided by financing activities 4,163,000 20,581,000 INCREASE (DECREASE) IN CASH 405,000 (4,246,000) CASH, BEGINNING OF PERIOD 11,264,000 14,839,000 CASH, END OF PERIOD $11,669,000 $10,593,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $593,000 $314,000 Income taxes - - See accompanying notes
FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS June 30, 2000 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In addition, this document should be read in conjunction with the financial statements and footnotes included in the Company's annual report on Form 10-K for fiscal year ended March 31, 2000. The preparation of the financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. 2. CAPITALIZED SERVICING RIGHTS Activities in capitalized servicing rights are summarized as follows:
Three Months ended June 30 2000 1999 Beginning balance $11,555,000 $12,475,000 Additions 477,000 2,055,000 Amortizations and write offs (1,260,000) (1,166,000) Ending Balance $10,772,000 $13,364,000
3. NOTES PAYABLE At June 30, 2000, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $50,000,000 and $35,000,000 with annual interest payable monthly at 1.25% or the bank's reference rate, depending on the level of borrowings and the compensating balances maintained. At June 30, 2000, borrowings under these lines of $42,818,000 were collateralized by mortgage loans and mortgage-backed securities held for sale. The line of credit agreements are subject to renewal on August 31, 2000. Both agreements contain certain requirements, including but not limited to, the maintenance of minimum net worth, debt to net worth ratio, current ratio, net income and servicing portfolio, and restrict the Company's ability to pay dividends. The Company believes its two lines of credit agreements will be renewed prior to their expiration. In addition to the warehouse lines of credit, the Company makes use of the short-term reverse repurchase agreement provided by an investment banking firm in connection with its inventory of mortgage-backed securities. This facility tends to carry lower interest rates and also allows the Company to better utilize its warehousing lines. Borrowings outstanding under this facility totaled $22,927,000 at June 30, 2000. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months ended June 30 2000 1999 Numerator: Net income (loss) $(199,000) $ 226,000 Denominator: Shares used in computing basic earnings per share 5,251,137 5,318,757 Effect of stock options treated as equivalents under the treasury stock method - 3,722 Denominator for diluted earnings per share 5,251,137 5,322,479 Basic earnings per share $(0.04) $ .04 Diluted earnings per share $(0.04) $ .04
5. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This Statement provides guidance for the way public enterprises report information about derivatives and hedging in annual financial statements and in interim financial reports. The derivatives and hedging disclosure is required for financial statements for fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company is in the process of evaluating the effect of Statement 133, if any, on the earnings and financial position of the Company. 6. CONTINGENCIES The Company is currently a defendant in certain litigation arising in the ordinary course of business. It is management's opinion that the outcome of these actions will not have a material effect on the financial position or results of operations of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements in this Form 10-Q are forward-looking statements, including those that discuss strategies, goals, outlook, projected revenues, income, return and other financial measures. These forward- looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following factors: (i) the direction of interest rates; (ii) the demand for mortgage credits; (iii) the ability to obtain sufficient financial sources for liquidity and working capital; (iv) changes in laws or regulations governing mortgage banking operations; and (v) level of competition within the mortgage banking industry. In addition, the words "believe," "expect," "anticipate," "intend," "will" and similar words identify forward-looking statements in this Form 10-Q. RESULTS OF OPERATIONS: Three months ended June 30, 2000 compared to three months ended June 30, 1999. GENERAL First Mortgage reported net loss of $199,000 or $0.04 per share for the quarter ended June 30, 2000, compared to net income of $226,000 or $0.04 per share for the comparable 1999 quarter. The loss was attributable to the increase in mortgage interest rates during the quarter, which resulted in a 56.6% reduction in new loan originations as compared to the three months ended June 30, 1999. The higher interest rates also negatively affected origination fees and gain on sale of mortgages. REVENUES For the quarter ended June 30, 2000, the volume of new mortgage loans closed decreased by 56.6% to $50.5 million from $116.4 million in the prior year quarter. The decrease is a reflection of higher long-term interest rates, which significantly decreased the volume of loans in the market place. For the three months ended June 30, 2000, loan origination revenue decreased by 37.7% to $483,000 from $775,000 in the June 30, 1999 quarter, due primarily to a substantial drop in loan production. As of June 30, 2000, the Company serviced $1.492 billion in loans compared to $1.604 billion at June 30, 1999, a decrease of 7.0% compared to the year-ago quarter. The run-off in the servicing portfolio was due primarily to a sub-servicing client's sale of their servicing portfolio. Total loan servicing income, including late charges and other miscellaneous fees, decreased marginally to $1.84 million in the June 2000 quarter, from $1.93 million in the prior year quarter. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated.
Three Months Ended June 30, 2000 1999 (Dollars in thousands except average loan balance) Beginning loan service $1,497,616 $1,527,507 portfolio Add:Loans originated 50,510 116,374 Less: Prepayment and 56,605 120,799 Amortization Ending loan servicing 1,491,521 1,523,082 portfolio Sub-Servicing 487 80,827 Total servicing portfolio $1,492,008 $1,603,909 Average loan balance (end $ 90,849 $ 90,888 of period) Number of loans 16,423 17,647
Due to lower new loan production and increases in long-term mortgage interest rates during the quarter, the gain on sale of mortgage loans was $621,000 for the three months ended June 30, 2000, a decrease of 74.8% over the same 1999 period. Interest income, which reflects the interest received on mortgage loans held for sale, increased 49.3% to $1.26 million for the three months ended June 30, 2000 from $846,000 for the comparable prior year quarter. This increase was due primarily to the higher interest rates and larger volume of loans and mortgage-backed securities held for sale during the June 2000 quarter as compared to prior year quarter. EXPENSES The major components of the Company's total expenses are (i) compensations and benefits, (ii) general and administrative expenses, (iii) amortization of capitalized servicing rights, and (iv) interest expense. Total expenses for the three months ended June 30, 2000 decreased by 19.5% to $4.53 million from the three months ended June 30, 1999. Compensations and benefits were $1.63 million for the June 2000 quarter, a decrease of 29.3% over the year-ago quarter. General and administrative expense decreased by $880,000, or 48.3% over prior year. These lower expenses were a result of shrinking production in the quarter. Amortization of capitalized servicing rights increased by 8.6% over prior year quarter due mainly to larger investment and/or higher prepayment over the prior period. Interest expense increased to $699,000 for quarter ended June 30, 2000 from $337,000 for the same period in 1999. The increase was due to the utilization of reverse repo line to finance mortgage-backed securities in the Company's inventory. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirement is the funding of its new mortgage loans, loan origination expenses, advances of delinquent payments and other operating activities. To meet these funding needs, the Company relies on warehouse lines of credit with banks, short-term reverse repurchase agreement with investment banking firms, its own capital, and also cash flows from operations. At June 30, 2000, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $85 million and the amount outstanding was $42.82 million. Borrowings under these facilities are secured by mortgage loans and GNMA securities. The agreements contain various covenants, including minimum net worth, current ratio, net income, servicing portfolio balances, debt to net worth ratio, and restrict the Company's ability to pay dividends. The Company was in compliance with all debt covenants at June 30, 2000. The Company believes that the warehouse agreements will be renewed when the current terms expire. In addition to the warehouse lines of credit, the Company makes use of the short-term reverse repurchase agreements provided by investment banking firms in connection with its inventory of mortgage-backed securities. These facilities tend to carry lower interest rates and also allow the Company to better utilize its warehousing lines. Borrowings outstanding under these facilities totaled $22.93 million at June 30, 2000. In the first three months in fiscal year 2000, the Company repurchased in open market transactions 2,500 shares of its common stock at an aggregate cost of $7,500. The Company had stockholders' equity of $28.60 million at June 30, 2000. Management believes that its current financing arrangements are adequate to meet its projected operational needs. DISCLOSURE ABOUT MARKET RISK The Company manages many risks in its normal course of business, however, the management considers interest rate risk to be the most significant market risk which could materially impact its financial position and results of operations. The movements in interest rates affect the value of capitalized mortgage servicing rights, the mortgage inventory held for sale, volume of loan production and total net interest income earned. The Company has been managing this risk by striving to balance its loan origination and loan servicing segments, which generally are counter cyclical in nature. In an environment of raising interest rates, loan production will slow down, but the drop in origination income is mitigated by decrease in the loan prepayment rate in its servicing portfolio and hence write-offs, amortization and impairment charges against income will fall. Conversely, the opposite scenario is true during a period of declining interest rates. The overall objective is to offset changes in the values of the following items arising from fluctuations in interest rates, such as the production pipeline, mortgage loan inventory, mortgage-backed securities held for sale and capitalized mortgage servicing rights. The Company does not speculate on the direction or movement of the interest rates. Based on the information available and on the estimates quantified by various interest rate calculations, and also based on the interest environment as of June 30, 2000, the Company believes that a 50 basis point change in long-term interest rates over a twelve month period, up or down and all else being constant, would increase or decrease the Company's gross income by approximately $2 million dollars. These estimates are limited by the fact that they are performed at a particular point in time and do not incorporate many other factors and, consequently, should not be relied on as a forecast of actual results. YEAR 2000 ISSUES The Company's Year 2000 Plan to prepare its entire computer systems to properly identify and calculate dates beyond December 31, 1999 was successfully implemented. The Company did not experience any major Year 2000 related problems during the rollover. All internal systems and communication interfaces with outside vendors have been functioning normally without disruptions. PROSPECTIVE TRENDS During the fiscal quarter ended June 30, 2000, long term interest rates continued to move upwards from the new levels which prevailed during the comparable period of last fiscal year. Each move up eliminated more loans eligible for refinancing and since much of our production was in refinance loans, our new loan production has fallen accordingly. Compared to last year, our originations fell 56.6%. On the positive side however, for the first time in many months our new loan applications in June actually increased by 13.5% over the year-earlier month, and were at the highest level thus far in the fiscal year. Although a good sign, it's too soon to tell whether this is a turning point or only a temporary spike. Loan applications for the purchase of homes have increased to 77% of our pipeline, while refinance loans are at a more normal 23%. A significant part of the purchase loan increase is a result of our earlier decision to expand our retail branch channel, which is more heavily directed towards purchases rather than refinances. We now have ten retail branch locations, compared to five a year ago. We are seeking opportunities to open others as we continue to expand retail operations. Other production channels, such as wholesale and direct marketing, are at low production levels and are likely to remain there under the current market conditions. Our experiences over the past year are mirroring the entire industry, which has been reporting similar results. Loan production is pretty much at about 50% of the previous year, and there isn't much likelihood for a change until and unless interest rates retreat from the present levels. We believe the Company has all of the loan programs and tools necessary to grow loan production when the interest rate environment is again favorable. In the meantime our revenues and operating results will remain adversely affected. PART II. OTHER INFORMATION. Item 6. Exhibits and Reports of Form 8-K. (a) No exhibits are filed with this report. (b) The Company did not file any reports on Form 8-K during the quarter ended June 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MORTGAGE CORPORATION Date: August 12, 2000 By: S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: August 12, 2000 By: S/Pac W. Dong Pac W. Dong Executive Vice President, Chief Financial Officer