-----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, VoltbVocLN7F8vLV+uNkPudvXfE6i7kZILfJyLwvRIjAcxrEmVADO3I5mVR8ifnU ZpxHuszf3+NKUq0NzrswxA== 0000883369-99-000012.txt : 19991115 0000883369-99-000012.hdr.sgml : 19991115 ACCESSION NUMBER: 0000883369-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748996 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, 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 September 30, 1999, 5,270,897 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 September 30, 1999 (Unaudited) and March 31, 1999 3 Unaudited Statement of Operations Three Months and Six Months Ended September 30, 1999 and 1998 4 Unaudited Statement of Cash Flows Six Months Ended September 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 8-13 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, 1999 March 31, 1999 (Unaudited) ASSETS Cash $9,742,000 $14,839,000 Mortgage loans and mortgage-backed securities held for sale 73,169,000 45,463,000 Other receivables and servicing advances 5,965,000 7,378,000 Capitalized servicing rights, net 13,165,000 12,475,000 Property and equipment, net 697,000 761,000 Prepaid expenses and other assets 1,738,000 765,000 TOTAL ASSETS $104,476,000 $81,681,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $43,828,000 $35,469,000 Note payable, other 24,886,000 - Sight drafts payable 330,000 9,450,000 Accounts payable and accrued liabilities 795,000 2,967,000 Deferred income taxes 5,171,000 4,065,000 Total Liabilities 75,010,000 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 - 5,270,897 at September 30, 1999 and 5,347,197 at March 31, 1999 2,613,000 2,924,000 Retained earnings 26,853,000 26,806,000 Total Stockholders' Equity 29,466,000 29,730,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,476,000 $81,681,000 See accompanying notes
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF OPERATIONS
Three Months Ended Six Months Ended September 30, September 30, 1999 1998 1999 1998 REVENUES: Loan origination income $629,000 $989,000 $1,404,00 $2,100,000 Loan servicing income 1,948,000 1,957,000 3,873,000 3,881,000 Gain on sale of mortgage loans 187,000 4,807,000 2,651,000 8,460,000 Interest income 1,462,000 935,000 2,308,000 1,966,000 Other Income 4,000 - 4,000 - Total revenues 4,230,000 8,688,000 10,240,000 16,407,000 EXPENSES: Compensation and benefits 1,666,000 2,585,000 3,973,000 5,003,000 General and administrative expenses 1,071,000 2,444,000 2,893,000 4,634,000 Amortization of capitalized servicing rights 1,236,000 829,000 2,393,000 1,700,000 Interest expense 558,000 266,000 895,000 525,000 Total expenses 4,531,000 6,124,000 10,154,00 11,862,000 INCOME (LOSS) BEFORE INCOME TAXES (301,000) 2,564,000 86,000 4,545,000 INCOME TAX (BENEFITS) (122,000) 1,060,000 39,000 1,885,000 NET INCOME (LOSS) $(179,000) $1,504,000 $ 47,000 $ 2,660,000 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.27 $ 0.01 $ 0.47 See accompanying notes
FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS
Six Months Ended September 30 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 47,000 $2,660,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for deferred income taxes 1,106,000 569,000 Provision for losses on foreclosure (250,000) (54,000) Amortization of capitalized servicing rights 2,393,000 1,700,000 Depreciation and amortization of property and equipment 138,000 130,000 Change in excess service fee 18,000 36,000 Loss on sale of assets (2,000) - Originations and purchases of mortgage loans held for sale (173,658,000) (433,509,000) Sales and principal repayments of mortgage loans held for sale 145,952,000 429,209,000 Change in other receivables and servicing advances 1,663,000 1,832,000 Change in prepaid expenses and other assets (973,000) 223,000 Change in accounts payable and accrued liabilities (2,172,000) 571,000 Change in income taxes payable - 57,000 Net cash provided by (used in) operating activities (25,738,000) 3,424,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights (518,000) (23,000) Originated mortgage servicing rights (2,583,000) (4,220,000) Purchase of furniture, equipment and leasehold improvements (76,000) (163,000) Proceeds from sale of assets 4,000 - Net cash used in investing activities (3,173,000) (4,406,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 8,359,000 (2,573,000) Change in sight drafts payable (9,120,000) 180,000 Change in note payable, other 24,886,000 - Repurchase of common stock (311,000) (1,075,000) Net cash provided by (used in) financing activities 23,814,000 (3,468,000) DECREASE IN CASH (5,097,000) (4,450,000) CASH, BEGINNING OF PERIOD 14,839,000 8,182,000 CASH, END OF PERIOD $9,742,000 $3,732,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $859,000 $416,000 Income taxes - 1,000,000 See accompanying notes
FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS September 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:
Six Months ended September 30 1999 1998 Beginning balance $12,475,000 $7,490,000 Additions 3,101,000 4,243,000 Amortizations and write offs (2,411,000) (1,736,000) Ending balance $13,165,000 $9,997,000
3. NOTES PAYABLE At September 30, 1999, the Company had mortgage loan warehousing 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 September 30, 1999, borrowings under these lines of $43,828,000 were collateralized by mortgage loans and mortgage-backed securities held for sale. The mortgage loan warehousing agreements are subject to renewal on August 31, 2000, and both 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 warehousing agreements will be renewed prior to their expiration. In addition to the warehousing agreements, 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 $24.89 million at September 30, 1999. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended September 30, September 30, 1999 1998 1999 1998 Numerator: Net income $(179,000) $1,504,000 $47,000 $2,660,000 Denominator: Shares used in computing basic earnings per share 5,298,983 5,569,697 5,308,816 5,658,069 Effect of stock options treated as equivalents under the treasury stock method 2,636 4,768 6,358 9,494 Denominator for diluted earnings per share 5,301,619 5,574,465 5,315,174 5,667,563 Basic earnings per share $(.03) $.27 $.01 $.47 Diluted earnings per share $(.03) $.27 $.01 $.47
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 September 30, 1999 compared to three months ended September 30, 1998. GENERAL First Mortgage reported a net loss of $179,000 or $0.03 per share for the quarter ended September 30, 1999, compared to net income of $1.504 million or $0.27 per share for the comparable 1998 quarter. The decrease was primarily attributable to the increase in mortgage interest rates during the course of the period, which resulted in a sharp fall-off in new loan production. In turn, reductions in income from origination and gain on sale of mortgages outran a substantial reduction in most expense categories. REVENUES For the quarter ended September 30, 1999, the volume of new mortgage loans closed decreased by 72.8% to $57.28 million from $210.44 million in the prior year quarter and loan origination revenue decreased by approximately 36.4% to $629,000 from the September 1998 quarter. The decrease is a reflection of higher long-term interest rates, which significantly impacted refinancing loans in the market place, and to a lesser degree, loans for the purchase of housing. As of September 30, 1999, the Company serviced $1.638 billion in loans compared to $1.662 billion at September 30, 1998, a decrease of 1.44%. Total loan servicing income, including late charges and other miscellaneous fees also fell slightly to $1.95 million in the September 1999 quarter, from $1.96 million in the prior year quarter. The small decrease was primarily due to lower loan production volume as explained in the preceding paragraphs. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated.
Three Months Ended September 30, 1999 1998 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,523,082 $1,570,671 Add: Loans originated 57,284 210,440 Purchased Loans 70,505 - Less: Prepayment and amortization 91,706 207,161 Ending loan servicing portfolio 1,559,165 1,573,950 Sub-Servicing 78,540 88,450 Total servicing portfolio $1,637,705 $1,662,400 Average loan balance (end of period) $ 91,380 $ 94,214 Number of Loans 17,922 17,645
Due to an increase in long-term mortgage interest rates during the quarter, coupled with the resulting sharp reduction in new loan originations, the gain on sale of mortgage loans was $187,000 for the three months ended September 30, 1999, a decrease of 96.1% over the comparable 1998 period. Interest income, which reflects the interest received on mortgage loans and mortgage-backed securities held for sale, increased to $1.46 million for the three months ended September 30, 1999 from $935,000 for the comparable prior year quarter. This increase was due primarily to the larger mortgage-backed securities inventory carried in the warehouse line by the Company during the September 1999 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, 1999 decreased by 26% to $4.53 million from the three months ended September 30, 1998. Compensations and benefits were $1.67 million for the September 1999 quarter, a decrease of 35.6% over the year-ago quarter. General and administrative expense decreased by $1.37 million, or 56.2% over the prior year. These lower expenses were a direct result of contracting production operations in the quarter, along with other cost reduction measures taken by the Company over the course of this 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 109.8% to $558,000 for quarter ended September 1999 from $266,000 for the same period in 1998. The increase was due to a larger volume of loans and mortgage-backed securities carried in the warehouse line during the quarter, as compared to the same period a year ago. RESULTS OF OPERATIONS: Six months ended September 30, 1999 compared to six months ended September 30, 1998 GENERAL In the six months ended September 30, 1999, the Company reported net income of $47,000 or $0.01 per share, compared to net income of $2.66 million or $0.47 per share for the same period of 1998. Total revenue decreased by 37.6% to $10.24 million from $16.41 million in the comparable prior period. The decrease in net income was largely due to the increase in mortgage interest rates during this period, which resulted in a nearly 60% falloff in new loan production. REVENUES For the six months ended September 30, 1999 the volume of new mortgage loan originations decreased 59.9% to $173.66 million from $433.51 million in the comparable period last year, and the loan origination revenue decreased 33.1% to $1.40 million from $2.10 million for the six months ended September 30, 1998. The lower loan origination revenue was largely due to the reduction of new loans originated by the Company. 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, fell slightly to $3.87 million for the six months ended September 30, 1999 from $3.88 million for the same period in 1998. The decrease in servicing income is primarily due to a small drop in the Company's servicing portfolio as compared to the same period last year. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated:
Six Months Ended September 30, 1999 1998 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,527,507 $1,570,143 Add: Loans originated 173,514 433,509 Purchased Loans 70,505 - Less: Prepayment and amortization 212,361 429,702 Ending loan servicing portfolio 1,559,165 1,573,950 Sub-Servicing 78,540 88,450 Total servicing portfolio $1,637,705 $1,662,400 Average loan balance (end of period) $91,380 $94,214 Number of Loans 17,922 17,645
The sale of mortgages for the six months ended September 30, 1999 resulted in a gain of $2.65 million compared to a gain of $8.46 million for the 1998 period. The decrease is primarily attributable to the unfavorable trend in long-term interest rates in 1999, coupled with the sharp reduction in new loans originated. Interest income, which reflects the interest earned on mortgage loans and mortgage-backed securities held for sale, was $2.31 million for the six months ended September 30, 1999 as compared to $1.97 million over the comparable 1998 period. The increase was as a result of the higher volume of loans and mortgage-backed securities carried in the warehouse line compared to the earlier 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, 1999 decreased by $1.71 million or 14.4% from the six months ended September 30, 1998. Compensation and benefits decreased 20.6% to $3.97 million compared to $5.00 million in the first six months of fiscal year 1998. General and administrative expenses decreased by 37.6% to $2.89 million from the comparable period in 1998. The decreases in these expenses were largely a result of the reduction in loan originations and associated compensation and general and administrative expenses in the first half of fiscal year 1999. The increase in amortization of capitalized servicing rights was mainly due to larger investment in servicing rights and higher volume of loan prepayments over the prior period. Interest expense increased 70.5% to $895,000 as compared to $525,000 in the year-earlier six months, due primarily to the larger volume of loans carried in the warehouse line 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, 1999, maximum permitted borrowings under the mortgage loan warehousing agreements with two nonaffiliated banks totaled $85 million and the amount outstanding was $43.83 million. Borrowings under these facilities are secured by mortgage loans and mortgage-backed 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 September 30, 1999. The Company believes that the warehouse agreements will be renewed when the current term expires. 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 $24.89 million at September 30, 1999. In the first six months in fiscal year 2000, the Company repurchased in open market transactions 76,300 shares of its common stock at an aggregate cost of $311,000. The Company had stockholders' equity of $29.47 million at September 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 September 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 $2.5 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 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 converting the system to become Year 2000 compliant have been installed and implemented successfully. 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 to $200,000, of which $150,000 has been incurred through September 30, 1999. The Company has developed contingency plans including identifying alternative processing platforms, outsourcing certain critical functions and the ability to process monthly government reportings manually. 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 Late in the last fiscal year ended March 31, 1999, long term interest rates began to move steadily upwards from the levels which prevailed during most of that fiscal year. For example, the prevailing interest rate for our standard 30 year fixed-rate loan progressed from 6.75% on September 30, 1998, to 7.25% on March 31, 1999, to 7.75% on June 30, 1999, and 8.125% as of October 25, 1999. 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 the first quarter our originations fell 47.8%, and in the second quarter 72.8%, a cumulative total reduction of 59.9% for the entire period. Should mortgage interest rates remain at, or increase from, today's level, we expect similar reductions in new loan production to continue, as compared to last year. Operating results would therefore continue to be adversely affected over the near future. Although 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, the loan production refinance wave is over for this cycle, and loans for the purchase of new housing are also being negatively impacted. We are also entering the traditional seasonal slowdown in housing sales, so the outlook for the rest of the fiscal year is poor. This can all turn around of course, should interest rates return to the lower levels of last year. Be that as it may, we have taken several steps to adjust our operations for the higher interest rates now prevailing in the market. The entire management staff have taken salary cuts; our employee staffing has been reduced by 42%, with many of the remaining employees on reduced workweeks; and our commission compensation expense is falling along with the reduction in production. We are refocusing emphasis to our retail branch production channel, which traditionally is more heavily directed towards loans for the purchase of housing rather than refinancing. This channel has withered over the past year, with several branches closing, and a new retail production manager has been brought into the Company to turn this channel around and re-build the retail branch system. He has extensive experience and an excellent track record in similar past endeavors, and we believe he will be successful in the retail re-building process. We've also 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 gives 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 more attractive to consumers, and we are now well equipped with the ARM products and the investors to compete for 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, low new loan production, 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 September 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. Date: November 10, 1999 FIRST MORTGAGE CORPORATION BY S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors Chief Executive Officer Date: November 10, 1999 FIRST MORTGAGE CORPORATION BY S/Pac W. Dong Pac W. Dong Executive Vice President, Chief Financial Officer EX-27 2
5 3-MOS MAR-31-2000 SEP-30-1999 9742 0 5965 0 0 0 3127 2430 104476 0 0 0 0 2613 26853 104476 0 4230 4531 0 0 0 0 (301) (122) (179) 0 0 0 (179) (0.03) (0.03)
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