-----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, KrYB6Vt7XSoCvrO7WlyT2l1RIyrxRPiEjJg9tdGbkQttjFVGK9X85YlJSG/dr+aF 8ADnsMajkV6HDEEsysNgRw== 0000883369-99-000006.txt : 19990630 0000883369-99-000006.hdr.sgml : 19990630 ACCESSION NUMBER: 0000883369-99-000006 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 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-K/A SEC ACT: SEC FILE NUMBER: 000-19847 FILM NUMBER: 99655022 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/A 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, 1999, or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from to Commission File Number 0-19847 FIRST MORTGAGE CORPORATION (Exact name of registrant as specified in its charter) California 95-2960716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3230 Fallow Field Drive 91765 Diamond Bar, California (Zip Code) (Address of principal executive offices) (909) 595-1996 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which None registered: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant on June 15, 1999, based on the average bid and asked prices on that date reported by the OTC Bulletin Board, was $2,081,000. Solely for purposes of this calculation, all executive officers and directors of the registrant were considered affiliates as were all beneficial owners of more than 10% of the registrant's Common Stock. As of June 15, 1999, 5,315,697 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 22, 1999 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, 1999. 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 25, 1999 By S/Clement Ziroli Clement Ziroli, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on June 25, 1999. By S/Clement Ziroli Clement Ziroli, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By S/Pac W. Dong Pac W. Dong, Director, Chief Financial Officer, Controller and Executive Vice President (Principal Financial and Accounting Officer) By S/Bruce G. Norman Bruce G. Norman, Director, President and Chief Operating Officer. By S/Harold Harrigian Harold Harrigian, Director By S/Robert E. Weiss Robert E. Weiss, Director First Mortgage Corporation Index to Financial Statements Report of Independent Auditors F-2 Financial Statements Balance Sheet as of March 31, 1999 and 1998 F-3 Statement of Income for the years ended March 31, 1999, 1998 and 1997 F-4 Statement of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997 F-5 Statement of Cash Flows for the years ended March 31, 1999, 1998 and 1997 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, 1999 and 1998, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1999 in conformity with generally accepted accounting principles. Orange County, California June 4, 1999 First Mortgage Corporation Balance Sheet
March 31 1999 1998 Assets Cash $14,839,000 $ 8,182,000 Mortgage loans held for sale 45,463,000 53,052,000 Other receivables and servicing advances, net 7,378,000 10,566,000 Capitalized servicing rights, net 12,475,000 7,490,000 Property and equipment, net 761,000 664,000 Prepaid expenses and other assets 765,000 361,000 Note receivable, Fin-West - 130,000 Total assets $81,681,000 $80,445,000 Liabilities and stockholders' equity Liabilities: Notes payable, banks $35,469,000 $40,427,000 Sight drafts payable 9,450,000 9,372,000 Accounts payable and accrued liabilities 2,967,000 1,392,000 Deferred income taxes 4,065,000 2,259,000 Total liabilities 51,951,000 53,450,000 Commitments and contingencies (Note 12) 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 - 5,347,197 in 1999 and 5,808,697 in 1998 2,924,000 4,963,000 Retained earnings 26,806,000 22,032,000 Total stockholders' equity 29,730,000 26,995,000 Total liabilities and stockholders' equity $81,681,000 $80,445,000
See accompanying notes. First Mortgage Corporation Statement of Income
Year ended March 31 1999 1998 1997 Revenues: Loan origination income $ 3,857,000 $ 3.303,000 $ 3,426,000 Loan servicing income 7,761,000 7,628,000 7,137,000 Gain on sale of mortgage loans 18,191,000 7,611,000 5,374,000 Interest income 3,862,000 2,527,000 2,165,000 Other income 3,000 5,000 2,000 Total revenues 33,674,000 21,074,000 18,104,000 Expenses: Compensation and benefits 11,407,000 8,282,000 8,217,000 General and administrative expenses 8,782,000 6,285,000 5,708,000 Amortization of capitalized servicing rights 4,061,000 3,174,000 1,563,000 Interest expense 1,275,000 701,000 690,000 Total expenses 25,525,000 18,442,000 16,178,000 Income before income taxes 8,149,000 2,632,000 1,926,000 Income tax expense 3,375,000 1,101,000 811,000 Net income $ 4,774,000 $ 1,531,000 $ 1,115,000 Basic and diluted earnings per share $ .87 $ .26 $ .19
See accompanying notes. First Mortgage Corporation Statement of Stockholders' Equity
Common stock Retained Shares Amount earnings Total 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, 1998 5,808,697 4,963,000 22,032,000 26,995,000 Net income - - 4,774,000 4,774,000 Repurchase of shares (461,500) (2,039,000 - (2,039,000) Balance at March 31, 1999 5,347,197 $2,924,000 $26,806,000 $29,730,000
See accompanying notes. First Mortgage Corporation Statement of Cash Flows
Year ended March 31 1999 1998 1997 Operating activities Net income $ 4,774,000 $ 1,531,000 $ 1,115,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for deferred income tax4s 1,806,000 426,000 966,000 Provision for losses on foreclosoure (344,000) (459,000) 153,000 Amortization of originated mortgage servicing rights excess service fee and purchased servicing rights 4,157,000 3,310,000 1,683,000 Depreciation of property and equipment 269,000 220,000 195,000 Originations and purchases of mortgage loans held for sale (866,641,000)(476,986,000)(353,411,000) Sales and principal repayments of mortgage loans held for sale 874,230,000 451,220,000 346,004,000 Change in other receivables and servicing advances 3,532,000 (484,000) (231,000) Change in prepaid expenses and other assets (404,000) 185,000 345,000 Change in accounts payable and accured liabilities 1,575,000 576,000 51,000 Loss (gain) on sale of assets (1,000) - 7,000 Net cash provided by (used in) operating activities 22,953,000 (20,461,000) (3,123,000) Investing activities Sale of commercial paper - - 9,955,000 Originated mortgage servicing rights (9,119,000) (3,436,000) (3,838,000) Purchase of mortgage servicing rights (23,000) (655,000) (577,000) Note receivable, Fin-West 130,000 - - Purchase of property and equipment (369,000) (306,000) (212,000) Proceeds from sale of assets 4,000 14,000 30,000 Change in due from affiliates - 134,000 60,000 Net cash provided by (used in) investing activities (9,377,000) (4,249,000) 5,418,000 Financing activities Change in notes payable, banks (4,958,000) 20,255,000) (481,000) Change in sight drafts payable 78,000 8,418,000 (1,745,000) Change in note payable, officer - (1,500,000) - Repurchase of common stock (2,039,000) (184,000) (114,000) Net cash provided by (used in) financing activities (6,919,000) 26,989,000 (2,340,000) Increase (decrease) in cash 6,657,000 2,279,000 (45,000) Cash at beginning of year 8,182,000 5,903,000 5,948,000 Cash at end of year $14,839,000 $ 8,182,000 $ 5,903,000
1. Summary of Significant Accounting Policies Business and Basis of Presentation First Mortgage Corporation (the Company) is a mortgage banking company that originates, purchases, warehouses, sells and services primarily first deed of trust loans (mortgage loans) for the purchase or refinance of owner-occupied one-to-four family residences through a network of branch offices located in the states of California, Arizona and Nevada. Fin-West Group (Fin-West), an affiliated company, owns 89.8% 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 and Purchased Servicing Rights Originated Mortgage Servicing Rights (OMSR) In accordance with Accounting for Transfers and Servicing of Financial Assets and Estinguishments of Liabilities (FAS 125), the Company recognizes OMSRs as an asset separate from the underlying originated mortgage loan by allocating the total cost of originating a mortgage loan between the loan and the servicing right based on their respective fair values. Mortgage servicing rights are carried at the lower of cost, less accumulated amortization, or fair value. FAS 125 requires that a portion of the cost of originating a mortgage loan be allocated to the mortgage servicing right based on its fair value relative to the loan as a whole. To determine the fair value of the mortgage rights created during the year, the Company used quoted market prices of comparable servicing transactions. 1. Summary of Significant Accounting Policies (continued) Originated Mortgage Servicing Rights and Purchased Servicing Rights (continued) Purchased Servicing Rights The purchase price paid for contractual rights to service mortgage loans (not exceeding the present value of estimated future net servicing income) is capitalized and amortized in proportion to, and over, the period in which estimated servicing revenue is in excess of estimated servicing costs. The Company evaluates the net realizable value of purchased servicing rights based on a disaggregation basis based on loan type, loan origination year and loan interest rate. Amortization of originated mortgage servicing rights and purchased servicing rights is based upon estimates of future prepayment rates for the underlying mortgage loans which, in turn, are affected by changes in general economic conditions and prevailing interest rates for home mortgages. Prepayment rates tend to increase (causing faster amortization) as mortgage interest rates decline, and are inversely affected as mortgage interest rates increase. The Company adjusts its amortization rates (which consider differences in mortgage loans including interest rate, loan type and the loan's age or seasoning) as estimated prepayment rates vary from those originally anticipated. Servicing Advances Servicing advances consist of advances and costs incurred by the Company in connection with the administration of the foreclosure process for loans being serviced. The majority of these amounts will be received from either the insuring agency or proceeds of the foreclosure sale. The Company provides a reserve for the estimated portion of the advances and costs that are not reimbursable by the insuring agencies. Loan Origination Fees Loan origination fees and certain direct loan origination costs for mortgage loans held for sale are deferred until the related loans are sold. 1. Summary of Significant Accounting Policies (continued) Loan Origination Fees (continued) Loan servicing income, which is generally a fee based on a percentage of the outstanding principal balances of the mortgage loans serviced by the Company (or by a subservicer where the Company is the master servicer), is recorded as income as the installment collections on the mortgages are received by the Company or the subservicer. Gain on Sale of Mortgage Loans Held for Sale Gains or losses on the sale of mortgage loans held for sale are recognized at the date of sale. Included in gain on sale is the estimated present value of any servicing fees to be received by the Company and included in capitalized servicing rights. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is provided using the straight-line method, except for automobiles, which are being depreciated using the double declining basis, over the estimated useful lives of the assets which range from three to eight years. Leasehold improvements are being amortized over the lesser of the estimated useful lives of the improvements or the lease terms, using the straight-line method. Income Taxes The Company files a separate federal income tax return and is included in the State of California combined return of Fin-West. Statement of Cash Flows The Company paid interest in 1999, 1998 and 1997 of $1,282,000, $540,000 and $641,000, respectively. The Company paid income taxes in 1999, 1998 and 1997 of $1,855,000, $615,000 and $30,000, respectively. 1. Summary of Significant Accounting Policies (continued) 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. Current Accounting Pronouncements In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This statement provides guidance for the way public enterprises report information about derivatives and hedging in annual financial statements and in interim financial reports. The derivatives and hedging disclosure is required for financial statements for fiscal years beginning after June 15, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company is in the process of evaluating the effect of Statement 133, if any, on the earnings and financial position of the Company. 2. Mortgage Loans Held for Sale Mortgage loans held for sale consist of the following at March 31, 1999 and 1998:
1999 1998 Principal balance outstanding $46,575,000 $54,381,000 Loan origination discounts (1,072,000) (1,238,000) Deferred loan fees (40,000) (91,000) $45,463,000 $53,052,000
All mortgage loans held for sale are collateralized by first trust deeds on underlying real properties located primarily in California and may be used as collateral for the Company's borrowings. At March 31, 1999, the Company had short-term commitments amounting to approximately $9,945,000 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 and purchased servicing rights. Activities are summarized as follows:
1999 1998 Beginning balance $7,490,000 $6,709,000 Additions 9,142,000 4,091,000 Amortization and write-offs (4,071,000) (3,247,000) Impairment (86,000) (63,000) Ending balance $12,475,000 $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, 1999 and 1998:
1999 1998 Foreclosures and advances on real estate owned $ 5,283,000 $ 8,798,000 Servicing advances 2,485,000 2,518,000 Other 280,000 264,000 Allowance for possible losses (670,000) (1,014,000) $7,378,000 $10,566,000
5. Property and Equipment Property and equipment consists of the following at March 31, 1999 and 1998:
1999 1998 Furniture and equipment $2,511,000 $2,190,000 Automobiles 137,000 131,000 Leasehold improvements 403,000 395,000 3,051,000 2,716,000 Less accumulated depreciation and amortization (2,290,000) (2,052,000) $ 761,000 $ 664,000
6. Income Taxes Income tax expense for the years ended March 31, 1999, 1998 and 1997 consists of the following:
1999 1998 1997 Current: Federal $1,270,000 $ 583,000 $ (112,000) State 299,000 92,000 (43,000) 1,569,000 675,000 (155,000) Deferred: Federal 1,206,000 224,000 701,000 State 600,000 202,000 265,000 1,806,000 426,000 966,000 $3,375,000 $1,101,000 $ 811,000
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, 1999 and 1998 are as follows:
1999 1998 Deferred tax assets: State income taxes $ 547,000 $ 190,000 Accrued liabilities 216,000 65,000 Deferred loan fees 18,000 41,000 Provision for foreclosure 168,000 253,000 Purchased servicing rights 379,000 313,000 Mark-to-market adjustments 356,000 128,000 Total deferred tax assets 1,684,000 990,000 Deferred tax liabilities: Originated mortgage servicing rights (5,517,000) (3,030,000) Capitalized servicing fees (4,000) (7,000) Accelerated depreciation (98,000) (88,000) Other (130,000) (124,000) Total deferred tax liabilities (5,749,000) (3,249,000) Net deferred tax liabilities $(4,065,000) $(2,259,000)
6. Income Taxes (continued) 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, 1999, 1998 and 1997:
1999 1998 1997 Tax computed at the statutory rate $2,771,000 $ 899,000 $ 655,000 State income tax, net of federal income tax benefit 594,000 194,000 146,000 Other 10,000 8,000 10,000 Income tax expense $3,375,000 $1,101,000 $ 811,000
7. Notes Payable, Banks At March 31, 1999, the Company had two line of credit agreements with banks which provide for borrowings up to $70,000,000 and $35,000,000 with interest payable monthly at 1.25% per annum or the prime rate of 7.75% at March 31, 1999, 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, 1999, borrowings under these lines of $35,469,000 are collateralized by mortgage loans held for sale. The weighted average interest rate for the fiscal year ended March 31, 1999 was 2.02%. The lines of credit are subject to renewal on September 1, 1999 and August 31, 2000, 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, 1999, the Company was in compliance with the aforementioned loan covenants. One of the warehousing lines of credit allows the bank to act as an agent on behalf of the Company and invest in short term, highly liquid investment grade securities to the extent that the warehouse line is not utilized to fund mortgage loans. All investment securities are considered to be available for sale and carried at fair value. As of March 31, 1999 there were no investment securities purchased under this line. 8. Related Party Transactions The Company leases certain premises from Fin-West, at a monthly rental of $22,000. Total rent expense for these premises amounted to $264,000 for the year ended March 31, 1999 and $240,000 for each of the years ended March 31, 1998 and 1997. The Company paid title insurance fees to an affiliated entity of $582,000, $308,000 and $151,000 for the years ended March 31, 1999, 1998 and 1997, respectively. 9. Loan Servicing The Company's loan servicing portfolio at March 31, 1999 and 1998 consisted of the following:
1999 1998 GNMA mortgage-backed securities $ 873,235,000 $ 810,304,000 FHLMC 249,624,000 257,448,000 FNMA 165,403,000 185,459,000 Other 319,470,000 413,640,000 $1,607,732,000 $1,666,851,000
At March 31, 1999 and 1998, the Company subserviced approximately $80,581,000 and $96,708,000, 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 $27,467,000 and $31,474,000 at March 31, 1999 and 1998, 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, 1999 and 1998. 10. 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, 1999, the estimated fair value of mortgage loans held for sale, mortgage servicing rights and notes payable approximated the net carrying value of such accounts. 11. 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 $150,000, $50,000 and $0 for the years ended March 31, 1999, 1998, and 1997, respectively. 12. Commitments and Contingencies Leases Minimum annual rental payments under operating leases for office space are as follows: 2000 $413,000 2001 108,000 2002 75,000 2003 43,000 2004 29,000 $668,000 Net rental payments to nonaffiliated entities of approximately $268,000, $242,000 and $212,000 have been charged to occupancy expense in the accompanying statements of operations for the years ended March 31, 1999, 1998 and 1997, 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. 13. 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 13. Stockholders' Equity (continued) remain exercisable until their specified expiration date, but the expiration date cannot be more than ten years after the date of grant for incentive stock options. The Company also has a 1993 Stock Option Plan for Non-Employee Directors (the Plan) which provides for an aggregate of 100,000 shares of the Company's common stock to be available for eligible directors. All options granted under the Plan are to be nonqualified options with an exercise price equal to 100% of fair market value of the common stock on the date the option is granted. Each option granted under the Plan may be exercised in full on the 185th day after the date of grant and terminates five years from the date of grant. Under the Plan, an option to purchase 5,750 shares of the Company's common stock has been granted to each nonemployee director in office on the last business day of each July beginning in 1993. The following summarizes stock option activity under both of the Company's stock plans for the year ended March 31, 1999:
Weighed- Average Exercise Options Price Options March 31, March 31, March 31, 1999 1999 1998 Options outstanding at beginning of fiscal year 436,625 $5.09 372,555 Option granted 97,550 $4.43 94,000 Options exercised - - Options expired (112,025) $6.55 (29,930) Options outstanding at end of fiscal year 422,150 $4.54 436,625 Exercise price: Per share for options exercised during the fiscal year n/a n/a
13. Stockholders' Equity (continued)
Options Options March 31, March 31, 1999 1998 Per share for options outstanding at end of fiscal year $3.50 - $5.00 $3.50 - $6.80 Weighted average fair value of options granted $1.51 $1.13 Weighted average contractual life of option outstanding (in years) 2.2 2.3
All outstanding options as of March 31, 1999 were exercisable. Options available for future grants under the plans were 302,850 and 288,375 as of March 31, 1999 and 1998, 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:
1999 1998 Expected life (years) 4.50 4 Interest rate 6.00% 5.50% Volatility 0.31 0.31 Dividend yield 0.00% 0.00%
13. 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 $83,000 and $59,000 in 1999 and 1998, respectively. The pro forma net income resulting from the increased compensation cost was $4,691,000 ($0.85 per share) and $1,472,000 ($0.25 per share) in 1999 and 1998, respectively. The effect of stock-based compensation on net income for 1999 and 1998 may not be representative of the effect on pro forma net income in future years because compensation expense related to grants made prior to 1998 is not considered. 14. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Numerator: Net income $4,774,000 $1,531,000 $1,115,000 Denominator: Shares used in computing basic earnings per share 5,506,690 5,847,906 5,872,596 Effect of stock options treated as equivalents equivalents under the treasury stock method 11,498 1,683 2,065 Denominator for diluted earnings per share 5,518,188 5,849,589 5,874,661 Basic and diluted earnings per share $.87 $.26 $.19
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 4, 1999, with respect to the financial statements of First Mortgage Corporation included in its Annual Report (Form 10-K) for the year ended March 31, 1999. Orange County, California June 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----