-----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, RlLV1vFgxMNJn+dxqlrC18O4NuPVXpX5E6sNdjxk36waDyjsUoZ4Xdv5dO4cwou4 ur75r+O8rIFNVNtfPg0vHA== 0000883369-99-000010.txt : 19990812 0000883369-99-000010.hdr.sgml : 19990812 ACCESSION NUMBER: 0000883369-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 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: 99683293 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 June 30, 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 Identification incorporation or organization) No.) 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, 1999, 5,302,697 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, 1999 (Unaudited) and March 31, 1999 3 Unaudited Statement of Income Three Months Ended June 30, 1999 and 1998 4 Unaudited Statement of Cash Flows Three Months Ended June 30, 1999 and 1998 5 Notes to Unaudited Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET
June 30, 1999 March 31, 1999 (Unaudited) ASSETS Cash $10,593,000 $14,839,000 Mortgage loans held for sale 67,985,000 45,463,000 Other receivables and servicing advances 7,221,000 7,378,000 Capitalized servicing rights, net 13,364,000 12,475,000 Property and equipment, net 738,000 761,000 Prepaid expenses and other assets 1,533,000 765,000 TOTAL ASSETS $101,434,000 $81,681,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $39,322,000 $35,469,000 Note payable, other 25,043,000 - Sight drafts payable 1,318,000 9,450,000 Accounts payable and accrued liabilities 884,000 2,967,000 Deferred income taxes 5,094,000 4,065,000 Total Liabilities 71,661,000 51,951,000 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-5,302,697 at June 30, 1999 and 5,347,197 at March 31, 1999 2,741,000 2,924,000 Retained earnings 27,032,000 26,806,000 Total Stockholders' Equity 29,773,000 29,730,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,434,000 $81,681,000
See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME
Three Months Ended June 30 1999 1998 REVENUES: Loan origination income $ 775,000 $1,111,000 Loan servicing income 1,925,000 1,924,000 Gain on sale of mortgage loans 2,464,000 3,653,000 Interest income 846,000 1,031,000 Total revenues 6,010,000 7,719,000 EXPENSES: Compensation and benefits 2,307,000 2,418,000 General and administrative expenses 1,822,000 2,190,000 Amortization of capitalized 1,157,000 871,000 servicing rights Interest expense 337,000 259,000 Total expenses 5,623,000 5,738,000 INCOME BEFORE INCOME TAXES 387,000 1,981,000 INCOME TAX EXPENSE 161,000 825,000 NET INCOME $ 226,000 $1,156,000 BASIC AND DILUTED EARNINGS PER SHARE $ 0.04 $ 0.20
See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS
Three Months Ended June 30 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income $226,000 $1,156,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 1,029,000 91,000 Provision for losses on foreclosure (81,000) 67,000 Amortization of capitalized servicing rights 1,157,000 871,000 Depreciation and amortization of property and equipment 70,000 64,000 Change in excess service fee 9,000 6,000 Originations and purchases of mortgage loans held for sale (116,374,000) (223,069,000) Sales and principal repayments of mortgage 93,852,000 206,377,000 loans held for sale Change in other receivables and servicing advances 238,000 (480,000) Change in prepaid expenses and other assets (768,000) 236,000 Change in accounts payable and accrued liabilities (2,083,000) 350,000 Change in income taxes payable - 477,000 Net cash used in operating activities (22,725,000) (13,844,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights (27,000) - Originated mortgage servicing rights (2,028,000) (1,995,000) Purchase of furniture, equipment and leasehold improvements (47,000) (80,000) Net cash used in investing activities (2,102,000) (2,075,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 3,853,000 5,468,000 Change in sight drafts payable (8,132,000) 5,496,000 Change in note payable, other 25,043,000 - Repurchase of common stock (183,000) (1,075,000) Net cash provided by financing activities 20,581,000 9,889,000 DECREASE IN CASH (4,246,000) (6,030,000) CASH, BEGINNING OF PERIOD 14,839,000 8,182,000 CASH, END OF PERIOD $10,593,000 $2,152,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $314,000 $211,000 Income taxes - -
See accompanying notes FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS June 30, 1999 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, 1999. 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 1999 1998 Beginning balance $12,475,000 $7,490,000 Additions 2,055,000 1,995,000 Amortizations and write offs (1,166,000) (887,000) Ending Balance $13,364,000 $8,598,000
3. NOTES PAYABLE At June 30, 1999, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $70,000,000 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, 1999, borrowings under these lines of $39,322,000 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. 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 $25.04 million at June 30, 1999. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months ended June 30 1999 1998 Numerator: Net income $226,000 $1,156,000 Denominator: Shares used in computing basic earnings per share 5,318,757 5,747,411 Effect of stock options treated as equivalents under the treasury stock method 3,722 451 Denominator for diluted earnings per share 5,322,479 5,747,862 Basic earnings per share $.04 $.20 Diluted earnings per share $.04 $.20
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 hedged 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, will have 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, 1999 compared to three months ended June 30, 1998. GENERAL First Mortgage reported net income of $226,000 or $0.04 per share for the quarter ended June 30, 1999, compared to net income of $1.16 million or $0.20 per share for the comparable 1998 quarter. The decrease in net income was attributable to the increase in mortgage interest rates during the quarter, which resulted in a 47.8% reduction in new loan originations as compared to the three months ended June 30, 1998. The higher interest rates also negatively affected origination fees, gain on sale of mortgages and interest income. REVENUES For the quarter ended June 30, 1999, the volume of new mortgage loans closed decreased by 47.8% to $116.4 million from $223.1 million in the prior year quarter. The decrease is a reflection of higher long-term interest rates, which significantly decreased the volume of refinancing loans in the market place. For the three months ended June 30, 1999, loan origination revenue decreased by 30.2% to $775,000 from the June 30, 1998 quarter, due primarily to a substantial drop in loan production. As of June 30, 1999, the Company serviced $1.604 billion in loans compared to $1.663 billion at June 30, 1998, a decrease of 3.6% compared to the year-ago quarter. The run-off in the servicing portfolio was due to heavy refinances induced by the low interest rate environment through most of last fiscal year. Nevertheless, the number of loans serviced increased to 17,647 from 17,450 a year ago, as the run-off of higher balance conventional loans was replaced by lower balance FHA loans. Total loan servicing income, including late charges and other miscellaneous fees, increased marginally to $1.925 million in the June 1999 quarter, from $1.924 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 1999 1998 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,527,507 $1,570,143 Add:Loans originated 116,374 223,069 Less: Prepayment and Amortization 120,799 222,541 Ending loan servicing portfolio 1,523,082 1,570,671 Sub-Servicing 80,827 92,584 Total servicing portfolio $1,603,909 $1,663,255 Average loan balance (end of period) $90,888 $95,321 Number of loans 17,647 17,450
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 $2.46 million for the three months ended June 30, 1999, a decrease of 32.5% over the 1998 period. Interest income, which reflects the interest received on mortgage loans held for sale, decreased to $846,000 for the three months ended June 30, 1999 from $1.03 million for the comparable prior year quarter. This decrease was due primarily to the smaller funding volume during the June 1999 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, 1999 decreased by 2.0% to $5.62 million from the three months ended June 30, 1998. Compensations and benefits were $2.31 million for the June 1999 quarter, a decrease of 4.6% over the year-ago quarter. General and administrative expense decreased by $368,000, or 16.8% over prior year. These lower expenses were a result of shrinking production in the quarter. Amortization of capitalized servicing rights increased by 32.8% over prior year quarter 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 30.1% to $337,000 for quarter ended June 30, 1999 from $259,000 for the same period in 1998. 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 and loan origination expenses. To meet these funding needs, the Company relies on warehouse lines of credit with banks, short- term reverse repurchase agreement with an investment banking firm, its own capital, and also cash flows from operations. At June 30, 1999, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $105 million and the amount outstanding was $39.3 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, 1999. 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 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 $25.04 million at June 30, 1999. In the first three months in fiscal year 2000, the Company repurchased in open market transactions 44,500 shares of its common stock at an aggregate cost of $183,000. The Company had stockholders' equity of $29.77 million at June 30, 1999. 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 the interest environment as of June 30, 1999, 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 Many companies will face serious information problems because their software programs written in the past may not properly recognize calendar dates beginning in the year 2000. Since the Company utilizes various vendors and interfaces with numerous financial institutions in conducting its business, the Company is exposed to the risk that its own systems and systems of vendors and institutions may not be Year 2000 compliant. Failure to adequately address these challenges could have an adverse impact on the operations of the Company. The Company has adopted its Year 2000 Plan to prepare its entire computer systems to properly calculate dates beyond December 31, 1999. Service bureaus responsible for maintaining the Company's Loan Administration System and Accounting System were contacted and upgrades for Year 2000 have been received and installed. The Company is also taking steps to ensure that the vendors and institutions that it utilizes are also taking necessary steps to be Year 2000 compliant. Additionally, the Company decided to enroll in the Mortgage Bankers Association (`MBA') Year 2000 Readiness Test. Through this extensive inter- industry testing over a ninety-day period, the Company has gained valuable information of its systems and of the various communication hardware and interface pieces. The Company has passed the MBA Year 2000 Readiness Test. The estimated total pre-tax cost of the Year 2000 Plan, including new hardware and software modifications, will be approximately $150,000, of which $130,000 has been incurred through June 30, 1999. The Company has developed contingency plans including identifying alternative processing platforms and outsourcing certain critical functions. The Company believes that all its systems will be Year 2000 compliant prior to December 31, 1999, however there can be no assurance that its warehouse lenders, depository institutions, custodians, business partners and vendors can resolve their own Year 2000 issues in a timely manner. Neither can the Company be assured that any failure by these other parties would not have an adverse impact on the Company's operations and financial condition. PROSPECTIVE TRENDS Early in the fiscal quarter ended June 30, 1999, long term interest rates began to move steadily upwards from the new levels which prevailed during most of last fiscal year. Each move up eliminated more loans eligible for refinancing and since the majority of our production was in refinance loans, our new loan production began to fall accordingly. Compared to last year, in April 1999 our originations fell 33.5%, in May 39.9% and in June 67.4%, a cumulative total reduction of 47.8% for the entire quarter. Mortgage interest rates have continued to increase, and we therefore expect even larger reductions in new loan production compared to last year. Operating results will be adversely affected over the near future. Some perspective is in order though. The production numbers being reported for this fiscal year are being compared against year-earlier numbers, and those numbers were all-time records for the Company and the industry. It appears that loan production is now returning to fiscal 1997 levels, a more typical type of year for the industry. This can all turn around of course, should interest rates retreat from levels many observers think are unsubstainably high for this economy. Be that as it may, we have taken several steps to prepare for the higher interest rates now prevailing in the market. Our employee staff has been reduced by 25%, and our commission compensation is falling along with the reduction in production. We are refocusing emphasis to our retail branch production channel, which is more heavily directed towards loans for the purchase of housing rather than refinancing. We've also just opened an internet website structured towards potential borrowers for purchase financing. Our direct marketing channel has been re-tooled to home equity loans and traditional cash-out refinancing, instead of the previous concentration on interest rate reduction refinance loans. The Company has entered into an exclusive loan sale partnership with a west coast bank which will give us a very competitive menu of conventional loan products to $750,000. We've also entered into correspondent agreements with a thrift institution and two Real Estate Investment Trusts which specialize in adjustable rate (ARM) loans. This is important because in a higher interest rate environment ARM loans become attractive to consumers, and we are now well equipped with the ARM products and the investors to meet any such demand. We believe we are taking the right steps to operate effectively in the current environment, but the volume of available mortgage production is always dependent, almost exclusively, on the level of interest rates. The higher rates will definitely hurt us going forward. Pricing, as we've often reported, is also under pressure and is likely to become more intense as the pool of available mortgages shrinks with the return of higher interest rates. The combination of higher rates and pricing pressures will continue to negatively impact our revenues and profits at least through the next quarter, and perhaps longer. 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, 1999. 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, 1999 By S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: August 12, 1999 By S/Pac W. Dong Pac W. Dong Executive Vice President, Chief Financial Officer EX-27 2
5 3-MOS MAR-31-2000 JUN-3-1999 10593 0 7221 0 0 0 3098 2360 101434 0 0 0 0 2741 27032 101434 0 6010 5623 0 0 0 0 387 161 226 0 0 0 226 0.04 0.04
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