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, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to_____________
Commission File Number 0-19847
FIRST MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-2960716
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3230 Fallow Field Drive
Diamond Bar, California 91765
(Address, including zip code, of principal executive offices)
(909) 595-1996
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO____
As of September 30, 2000, 5,210,502 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, 2000 (Unaudited) and March 31, 2000 3
Unaudited Statement of Income
Three Months and Six Months Ended September 30,
2000 and 1999 4
Unaudited Statement of Cash Flows
Six Months Ended September 30, 2000 and 1999 5
Notes to Unaudited Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
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
September 30, 2000 March 31, 2000
(Unaudited)
ASSETS
Cash $16,107,000 $11,264,000
Mortgage loans and mortgage-backed
securities held for sale 60,224,000 67,336,000
Other receivables and servicing advances 3,698,000 5,558,000
Capitalized servicing rights, net 10,329,000 11,555,000
Property and equipment, net 653,000 581,000
Prepaid expenses and other assets 1,819,000 1,531,000
TOTAL ASSETS $92,830,000 $97,825,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $11,278,000 $19,291,000
Note payable, other 45,433,000 43,787,000
Sight drafts payable 576,000 393,000
Accounts payable and accrued liabilities 726,000 564,000
Deferred income taxes 5,638,000 4,979,000
Total Liabilities 63,651,000 69,014,000
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - None - -
Common stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 5,210,502 at
September 30, 2000 and 5,253,197 at March 31, 2000 2,436,000 2,559,000
Retained earnings 26,743,000 26,252,000
Total Stockholders' Equity 29,179,000 28,811,000
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $92,830,000 $97,825,000
See accompanying notes
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF INCOME
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
REVENUES:
Loan origination income $ 528,000 $ 629,000 $1,011,000 $1,404,000
Loan servicing income 1,814,000 1,948,000 3,658,000 3,873,000
Gain on sale of mortgage loans 1,901,000 187,000 2,522,000 2,651,000
Interest income 1,238,000 1,462,000 2,501,000 2,308,000
Other Income 5,000 4,000 8,000 4,000
Total revenues 5,486,000 4,230,000 9,700,000 10,240,000
EXPENSES:
Compensation and benefits 1,820,000 1,666,000 3,450,000 3,973,000
General and administrative expenses 950,000 1,071,000 1,892,000 2,893,000
Amortization of capitalized servicing
rights 1,133,000 1,236,000 2,389,000 2,393,000
Interest expense 427,000 558,000 1,126,000 895,000
Total expenses 4,330,000 4,531,000 8,857,000 10,154,000
INCOME (LOSS) BEFORE INCOME TAXES 1,156,000 (301,000) 843,000 86,000
INCOME TAX (BENEFITS) 466,000 (122,000) 352,000 39,000
NET INCOME (LOSS) $ 690,000 $ (179,000) $ 491,000 $ 47,000
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.13 $ (0.03) $ 0.09 $ 0.01
See accompanying notes
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
Six Months Ended
September 30
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $491,000 $ 47,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Provision for deferred income taxes 659,000 1,106,000
Provision for losses on foreclosure (124,000) (250,000)
Amortization of capitalized servicing rights 2,389,000 2,393,000
Depreciation and amortization of property and equipment 112,000 138,000
Change in excess service fee 9,000 18,000
Gain (loss) on sale of assets 2,000 (2,000)
Originations and purchases of mortgage loans held for sale (103,318,000) (173,658,000)
Sales and principal repayments of mortgage loans held for sale 110,430,000 145,952,000
Change in other receivables and servicing advances 1,984,000 1,663,000
Change in prepaid expenses and other assets (288,000) (973,000)
Change in accounts payable and accrued liabilities 162,000 (2,172,000)
Net cash provided by (used in) operating activities 12,508,000 (25,738,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (23,000) (518,000)
Originated mortgage servicing rights (1,149,000) (2,583,000)
Purchase of furniture, equipment and leasehold improvements (187,000) (76,000)
Proceeds from sale of assets 1,000 4,000
Net cash used in investing activities (1,358,000) (3,173,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks (8,013,000) 8,359,000
Change in sight drafts payable 183,000 (9,120,000)
Change in note payable, other 1,646,000 24,886,000
Repurchase of common stock (123,000) (311,000)
Net cash provided by (used in) financing activities (6,307,000) 23,814,000
INCREASE (DECREASE) IN CASH 4,843,000 (5,097,000)
CASH, BEGINNING OF PERIOD 11,264,000 14,839,000
CASH, END OF PERIOD $16,107,000 $ 9,742,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,071,000 $ 859,000
Income taxes - -
See accompanying notes
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and in accordance with the
instructions to Form 10-Q and Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the
interim periods have been included. The results of operations for
the interim periods are not necessarily indicative of the results
to be expected for the full year. In addition, this document
should be read in conjunction with the financial statements and
footnotes included in the Company's annual report on Form 10-K for
fiscal year ended March 31, 2000.
The preparation of the financial statements of the Company requires
management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of
the date of the financial statements. Therefore, actual results
could differ from those estimates.
2. CAPITALIZED SERVICING RIGHTS
Activities in capitalized servicing rights are summarized as
follows:
Six Months ended
September 30
2000 1999
Beginning balance $11,555,000 $12,475,000
Additions 1,172,000 3,101,000
Amortizations and write offs (2,398,000) (2,411,000)
Ending balance $10,329,000 $13,165,000
3. NOTES PAYABLE
At September 30, 2000, 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, 2000, borrowings under these lines of $11,278,000
were collateralized by mortgage loans and mortgage-backed
securities held for sale.
The mortgage loan warehousing agreements are subject to renewal on
August 31, 2001, 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 investment
banking firms in connection with its inventory of mortgage-backed
securities. These facilities tend to carry lower interest rates
and also allow the Company to better utilize its warehousing lines.
Borrowings outstanding under this facility totaled $45,433,000 at
September 30, 2000.
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,
2000 1999 2000 1999
Numerator:
Net income $690,000 $(179,000) $491,000 $47,000
Denominator:
Shares used in computing basic earnings per share 5,217,819 5,298,983 5,234,387 5,308,816
Effect of stock options treated as equivalents
under the treasury stock method - 2,636 - 6,358
Denominator for diluted earnings per share 5,217,819 5,301,619 5,234,387 5,315,174
Basic earnings per share $.13 $(.03) $.09 $.01
Diluted earnings per share $.13 $(.03) $.09 $.01
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, 2000 compared to three months ended
September 30, 1999.
GENERAL
First Mortgage reported net income of $690,000 or $0.13 per share
for the quarter ended September 30, 2000, compared to a net loss
of $179,000 or $0.03 per share for the comparable 1999 quarter.
The higher net income was primarily attributable to the easing of
mortgage interest rates during the course of the period, which
enabled us to reverse a significant portion of the loss reserve
against the mortgage-backed securities inventory.
REVENUES
For the quarter ended September 30, 2000, the volume of new
mortgage loans closed decreased by 7.8% to $52.81 million from
$57.28 million in the prior year quarter and loan origination
revenue decreased by approximately 16.1% to $528,000 from $629,000
of the September 1999 quarter. The decrease is a reflection of
higher long-term interest rates as compared to the prior year
quarter, which significantly impacted refinancing loans in the
market place, and to a lesser degree, loans for the purchase of
housing.
As of September 30, 2000, the Company serviced $1.487 billion in
loans compared to $1.638 billion at September 30, 1999, a decrease
of 9.2%. Total loan servicing income, including late charges and
other miscellaneous fees also fell slightly to $1.81 million in
the September 2000 quarter, from $1.95 million in the prior year
quarter. The drop in the servicing portfolio balance was due
primarily to a sub-servicing client selling their servicing
portfolio, and the acquirer doesn't require sub-servicing.
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated.
Three Months Ended
September 30,
2000 1999
(Dollars in thousands
except average loan
balance)
Beginning loan service portfolio $1,492,008 $1,523,082
Add: Loans originated 52,808 57,284
Purchased Loans 5,811 70,505
Less: Prepayment and amortization 67,849 91,706
Ending loan servicing portfolio 1,482,778 1,559,165
Sub-Servicing 4,436 78,540
Total servicing portfolio $1,487,214 $1,637,705
Average loan balance (end of period) $ 91,279 $ 91,380
Number of Loans 16,293 17,922
Due to a decrease in long-term mortgage interest rates towards the
end of the quarter, the gain on sale of mortgage loans was $1.901
million for the three months ended September 30, 2000, as we were
able to sell loans at a higher gain and reverse a significant
portion of the loss reserve against the mortgage-backed securities
inventory.
Interest income, which reflects the interest received on mortgage
loans and mortgage-backed securities held for sale, decreased to
$1.24 million for the three months ended September 30, 2000 from
$1.46 million for the comparable prior year quarter. This
decrease was due primarily to the smaller mortgage-backed
securities inventory carried in the warehouse line by the Company
during the September 2000 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, 2000 decreased by $201,000 to $4.33 million from
$4.53 million for the quarter ended September 30, 1999.
Compensations and benefits were $1.82 million for the September
2000 quarter, an increase of 9.2% over the year-ago quarter. The
increase in compensation and benefits were the result of the
expansion of our retail origination branches. General and
administrative expense decreased by $121,000, or 11.3% over the
prior period. These lower general and administrative 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 decreased compared to
the year earlier quarter due mainly to the lower volume of
prepayments from refinances over the comparable prior period.
Interest expense decreased 23.5% to $427,000 for quarter ended
September 2000 from $558,000 for the same period in 1999. The
decrease was due to a lower volume of loans and mortgage-backed
securities carried in the warehouse line towards the end of the
quarter, as compared to the same period a year ago.
RESULTS OF OPERATIONS:
Six months ended September 30, 2000 compared to six months ended
September 30, 1999.
GENERAL
In the six months ended September 30, 2000, the Company reported
net income of $491,000 or $0.09 per share, compared to net income
of $47,000 million or $0.01 per share for the same period of
1999. The increase in net income was largely due to reduction of
general and administrative expenses resulting from substantially
lower loan production and effective cost cutting measures taken
by the Company.
REVENUES
For the six months ended September 30, 2000 the volume of new
mortgage loan originations decreased 40.5% to $103.32 million
from $173.66 million in the comparable period last year, and the
loan origination revenue decreased 28.0% to $1.01 million from
$1.40 million for the six months ended September 30, 1999. 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 $3.66
million for the six months ended September 30, 2000 from $3.87
million for the same period in 1999. The decrease in servicing
income is primarily due to a small drop in the Company's
servicing portfolio as a sub-servicing client sold its entire
servicing portfolio and the acquirer does not require sub-
servicing.
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated:
Six Months Ended September 30,
2000 1999
(Dollars in thousands except average loan balance)
Beginning loan service portfolio $1,497,616 $1,527,507
Add: Loans originated 103,318 173,658
Purchased Loans 5,811 70,505
Less: Prepayment and amortization 123,967 212,505
Ending loan servicing portfolio 1,482,778 1,559,165
Sub-Servicing 4,436 78,540
Total servicing portfolio $1,487,214 $1,637,705
Average loan balance (end of period) $91,279 $91,380
Number of Loans 16,293 17,922
The sale of mortgages for the six months ended September 30, 2000
resulted in a gain of $2.52 million compared to a gain of $2.65
million for the 1999 period. The decrease is primarily
attributable to the reduction in new loans originated.
Interest income, which reflects the interest earned on mortgage
loans and mortgage-backed securities held for sale, was $2.50
million for the six months ended September 30, 2000 as compared
to $2.31 million over the comparable 1999 period. The increase
was as a result of the higher volume of 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, 2000 decreased by $1.30 million or 12.8% from the
six months ended September 30, 1999. Compensation and benefits
decreased 13.2% to $3.45 million compared to $3.97 million in the
first six months of fiscal year 1999. General and administrative
expenses decreased by 34.6% to $1.89 million from $2.89 million
in the comparable period in 1999. 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 2000.
The amortization of capitalized servicing rights was essentially
flat compared to the prior period.
Interest expense increased 25.8% to $1.126 million as compared to
$895,000 in the year-earlier six months, due primarily to the
larger volume of loans and mortgage-backed securities 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, 2000, maximum permitted borrowings under the
mortgage loan warehousing agreements with two nonaffiliated banks
totaled $85 million and the amount outstanding was $11.28 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, 2000. 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 agreements provided by
two investment banking firms in connection with its inventory of
mortgage-backed securities. These facilities tend to carry lower
interest rates and also allow the Company to better utilize its
warehousing lines. Borrowings outstanding under this facility
totaled $45.43 million at September 30, 2000.
In the first six months in fiscal year 2001, the Company
repurchased in open market transactions 42,695 shares of its
common stock at an aggregate cost of $123,000.
The Company had stockholders' equity of $29.18 million at
September 30, 2000. Management believes that its current
financing arrangements are adequate to meet its projected
operational needs.
DISCLOSURE ABOUT MARKET RISK
The Company manages many risks in its normal course of business,
however, the management considers interest rate risk to be the
most significant market risk which could materially impact its
financial position and results of operations. The movements in
interest rates affect the value of capitalized mortgage servicing
rights, the mortgage inventory held for sale, volume of loan
production and total net interest income earned.
The Company has been managing this risk by striving to balance its
loan origination and loan servicing segments, which generally are
counter cyclical in nature. In an environment of raising interest
rates, loan production will slow down, but the drop in origination
income is mitigated by decrease in the loan
prepayment rate in its servicing portfolio and hence write-offs,
amortization and impairment charges against income will fall.
Conversely, the opposite scenario is true during a period of
declining interest rates. The overall objective is to offset
changes in the values of the following items arising from
fluctuations in interest rates, such as the production pipeline,
mortgage loan inventory, mortgage-backed securities held for sale
and capitalized mortgage servicing rights. The Company does not
speculate on the direction or movement of the interest rates.
Based on the information available and on the estimates quantified
by various interest rate calculations, and also based on the
interest environment as of September 30, 2000, the Company
believes that a 50 basis point change in long-term interest rates
over a twelve month period, up or down and all else being
constant, would increase or decrease the Company's gross income by
approximately $2.5 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.
PROSPECTIVE TRENDS
During the fiscal quarter ended September 30, 2000, long-term
interest rates flattened and then began to slowly ease from the
earlier levels. This arrested the year long slide in new loan
originations and our new loan closings for August and September
were virtually the same as the year earlier levels. Because the
majority of new loan business is now for purchase loans rather
than refinance, traditional seasonality factors are coming back
into play, and new loan applications can be expected to remain at
modest levels throughout the winter. Should long-term interest
rates continue to ease however, new loan application volume could
jump very quickly.
We are continuing our strategy to grow our retail channel and are
aggressively looking for new locations and the appropriate
personnel for this growth. Our most recent new retail office is
in Nevada.
In order to be better prepared for the possibility of a new wave
of refinance loans, we are remodeling two of our existing websites
to make them more useful and user-friendly for consumers. The new
sites should be ready by the end of November, and will have
interactive features not available on our present sites. We have
also acquired the domain name firstmortgage.com, which will make
our consumer site easy to find, not only for existing customers,
but particularly for search engines looking for lenders who make
first mortgage loans.
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, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FIRST MORTGAGE CORPORATION
Date: November 10, 2000 By S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: November 10, 2000 By S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer