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 December 31, 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 December 31, 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
December 31, 2000 (Unaudited) and March 31, 2000 3
Unaudited Statement of Operations
Three Months and Nine Months Ended December 31,
2000 and 1999 4
Unaudited Statement of Cash Flows
Nine Months Ended December 31, 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
December 31, 2000 March 31, 2000
(Unaudited)
ASSETS
Cash $17,688,000 $11,264,000
Mortgage loans and mortgage-backed
securities held for sale 16,373,000 67,336,000
Other receivables and servicing advances 3,917,000 5,558,000
Capitalized servicing rights, net 9,840,000 11,555,000
Property and equipment, net 718,000 581,000
Prepaid expenses and other assets 1,000,000 1,531,000
TOTAL ASSETS $49,536,000 $97,825,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable, banks $14,163,000 $19,291,000
Note payable, other - 43,787,000
Sight drafts payable 994,000 393,000
Accounts payable and accrued liabilities 806,000 564,000
Deferred income taxes 4,107,000 4,979,000
Total Liabilities 20,070,000 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 2,436,000 2,559,000
December 31, 2000 and 5,253,197 at March 31, 2000
Retained earnings 27,030,000 26,252,000
Total Stockholders' Equity 29,466,000 28,811,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,536,000 $97,825,000
See accompanying notes
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
REVENUES:
Loan origination income $581,000 $395,000 $1,592,000 $1,799,000
Loan servicing income 1,804,000 1,950,000 5,462,000 5,823,000
Gain on sale of mortgage loans 1,711,000 13,000 4,233,000 2,664,000
Interest income 1,110,000 1,305,000 3,611,000 3,613,000
Other Income 1,000 7,000 9,000 11,000
Total revenues 5,207,000 3,670,000 14,907,000 13,910,000
EXPENSES:
Compensation and benefits 1,737,000 1,392,000 5,187,000 5,365,000
General and administrative expenses 956,000 937,000 2,848,000 3,830,000
Amortization of capitalized servicing
rights 1,135,000 1,041,000 3,524,000 3,434,000
Interest expense 883,000 697,000 2,009,000 1,592,000
Total expenses 4,711,000 4,067,000 13,568,000 14,221,000
INCOME (LOSS) BEFORE INCOME TAXES 496,000 (397,000) 1,339,000 (311,000)
INCOME TAX (BENEFITS) 209,000 (163,000) 561,000 (124,000)
NET INCOME (LOSS) $ 287,000 $ (234,000) $ 778,000 $ (187,000)
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.06 $ (0.04) $ 0.15 $ (0.04)
See accompanying notes
FIRST MORTGAGE CORPORATION
UNAUDITED STATEMENT OF CASH FLOWS
Nine Months Ended
December 31,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 778,000 $ (187,000)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for deferred income taxes (872,000) 1,411,000
Provision for losses on foreclosure (185,000) (325,000)
Amortization of capitalized servicing rights 3,524,000 3,434,000
Depreciation and amortization of property and equipment 174,000 196,000
Change in excess service fee 11,000 27,000
Loss on sale of assets 2,000 19,000
Originations and purchases of mortgage loans held for sale (162,940,000) (216,824,000)
Sales and principal repayments of mortgage loans held for sale 213,903,000 197,226,000
Change in other receivables and servicing advances 1,826,000 2,768,000
Change in prepaid expenses and other assets 531,000 (1,461,000)
Change in accounts payable and accrued liabilities 242,000 (2,024,000)
Net cash provided by (used in) operating activities 56,994,000 (15,740,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage servicing rights (23,000) (518,000)
Originated mortgage servicing rights (1,797,000) (3,087,000)
Purchase of furniture, equipment and leasehold improvements (316,000) (79,000)
Proceeds from sale of assets 3,000 14,000
Net cash used in investing activities (2,133,000) (3,670,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable, banks (5,128,000) (17,877,000)
Change in sight drafts payable 601,000 (9,392,000)
Change in note payable, other (43,787,000) 44,368,000
Repurchase of common stock (123,000) (311,000)
Net cash provided by (used in) financing activities (48,437,000) 16,788,000
INCREASE (DECREASE) IN CASH 6,424,000 (2,622,000)
CASH, BEGINNING OF PERIOD 11,264,000 14,839,000
CASH, END OF PERIOD $17,688,000 $12,217,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $2,071,000 $1,274,000
Income taxes 915,000 -
See accompanying notes
FIRST MORTGAGE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
December 31, 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:
Nine Months ended
December 31
2000 1999
Beginning balance $11,555,000 $12,475,000
Additions 1,820,000 3,605,000
Amortizations and write offs (3,535,000) (3,461,000)
Ending balance $9,840,000 $12,619,000
3. NOTES PAYABLE
At December 31, 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 December 31, 2000, borrowings under these lines of $14.16
million were collateralized by mortgage loans 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 made 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 when mortgage production increases. There were
no borrowings outstanding under these facilities at December 31,
2000.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 2000 1999
Numerator:
Net income $287,000 $(234,000) $778,000 $(187,000)
Denominator:
Shares used in computing basic earnings per share 5,210,502 5,270,897 5,226,396 5,296,130
Effect of stock options treated as
equivalents under the treasury stock method - - - 6,358
Denominator for diluted earnings per share 5,210,502 5,270,897 5,226,396 5,302,488
Basic earnings per share $.06 $(.04) $.15 $(.04)
Diluted earnings per share $.06 $(.04) $.15 $(.04)
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement provides
guidance for the way public enterprises report information about
derivatives and hedging in annual financial statements and in
interim financial reports. The derivatives and hedging disclosure
is required for financial statements for fiscal years beginning
after June 15, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value.
Derivatives that are not 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 December 31, 2000 compared to three months ended
December 31, 1999.
GENERAL
First Mortgage reported a net profit of $287,000 or $0.06 per
share for the quarter ended December 31, 2000, compared to net
loss of $234,000 or $0.04 per share for the comparable 1999
quarter. The profit was attributable to decreases in interest
rates which substantially boosted new loan originations for the
Company and the industry. In turn, this led to increases in loan
origination and gain on sale of mortgages, two of the primary
sources of revenue for the Company. The increase in earnings was,
however, offset partially by higher compensation; general and
administrative expenses and amortization of capitalized servicing
rights.
REVENUES
For the quarter ended December 31, 2000, the volume of new
mortgage loans closed increased by 37.6% to $59.62 million from
$43.33 million in the prior year quarter. The increase is a
direct reflection of lower long-term interest rates, which
increased the volume of loans in the market place, coupled with
our retail branch expansion we began last year.
For the three months ended December 31, 2000, loan origination
revenue increased by approximately 47.1% to $581,000 from the
December 1999 quarter, due primarily to the increase in mortgage
production.
As of December 31, 2000, the Company serviced $1.475 billion in
loans compared to $1.543 billion at December 31, 1999, a decrease
of 4.4% compared to the year-ago quarter. The run-off in the
Company's own servicing portfolio was due to amortization and low
loan production during most of calendar 2000, prior to the
decrease in interest rates. Total loan servicing income,
including late charges and other miscellaneous fees, hence
declined to $1.80 million in the December 2000 quarter, from $1.95
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
December 31
2000 1999
(Dollars in thousands
except average loan balance)
Beginning loan service portfolio $1,487,214 $1,559,165
Add: Loans originated 59,622 43,331
Less: Prepayment and amortization 80,381 67,492
Ending loan servicing portfolio 1,466,455 1,535,004
Sub-Servicing 8,637 7,657
Total servicing portfolio $1,475,092 $1,542,661
Average loan balance (end of period) $ 91,479 $ 91,045
Due to the declining long-term mortgage interest rates during the
quarter and the increase in new loan production, the gain on sale
of mortgage loans increased dramatically to $1.71 million for the
three months ended December 31, 2000, as compared to only $13,000
for the 1999 period.
Interest income decreased to $1.11 million for the three months
ended December 31, 2000 from $1.31 million for the comparable
prior year quarter. This decrease was due primarily to the lower
interest rates in this quarter as compared to the December 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
December 31, 2000 increased by 15.8% to $4.71 million from the
$4.07 million for the three months ended December 31, 1999.
Compensations and benefits were $1.74 million for the December
2000 quarter, an increase of 24.8% over the year-ago quarter.
General and administrative expense increased by $19,000, or 2.0%
over the prior year. These higher expenses were a direct result
of expanded production operations in the quarter.
Amortization of capitalized servicing rights increased by 9.0%
over prior year quarter due mainly to larger investment in
servicing rights and higher volume of loan prepayments over prior
fiscal year.
Interest expense increased 26.7% to $883,000 for quarter ended
December 31, 2000 from $697,000 for the same period in 1999. The
increase was due to the larger mortgage inventory and mortgage-
backed securities carried during most of the quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Nine months ended December 31, 2000 compared to nine months ended
December 31, 1999.
GENERAL
In the nine months ended December 31, 2000, the Company reported
a net profit of $778,000 or $0.15 per share, compared to a net
loss of $187,000 or ($0.04) per share for the same period of
1999. Total revenue increased by 7.2% to $14.91 million from
$13.91 million in the comparable prior period. The increase in
net income was due to decreases in interest rates during the
later course of the year, which increased new loan originations
for the Company and the industry. In turn, this led to a steep
increase in gain on sale of mortgage revenues, one of the primary
sources of revenue for the Company.
REVENUES
For the nine months ended December 31, 2000, loan origination
revenue decreased 11.5% to $1.59 million from $1.80 million for
the nine months ended December 31, 1999. The lower loan
origination revenue was primarily due to the lower volume of new
loans originated by the Company during the first half of the
fiscal year.
The volume of new mortgage loan originations decreased 24.9% to
$162.94 million from $216.82 million in the comparable period
last year, with all of the decrease taking place in the first
half of the fiscal year.
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 6.2% to $5.46 million
for the nine months ended December 31, 2000 from $5.82 million
for the same period in 1999. The slight decrease in servicing
income is primarily due to lower delinquency rates which reduced
late charges, and the lower volume of loans currently serviced by
the Company.
The following table sets forth certain information pertaining to
the servicing portfolio of the Company for the period indicated:
Nine Months Ended December 31,
2000 1999
(Dollars in thousands
except average loan balance)
Beginning loan service portfolio $1,497,616 $1,527,507
Add: Loans originated 162,940 216,824
Less: Prepayment and amortization 194,101 209,327
Ending loan servicing portfolio 1,466,455 1,535,004
Sub-Servicing 8,637 7,657
Total servicing portfolio $1,475,092 $1,542,661
Average loan balance (end of period) $91,479 $91,045
The sale of mortgages for the nine months ended December 31, 2000
resulted in a gain of $4.23 million compared to a gain of $2.66
million for the 1999 period. The increase is primarily
attributable to the reduction in interest rates over the last
fiscal quarter, enabling the Company to make a substantial gain
on mortgages held for sale.
Interest income at $3.61 million was virtually the same as the
year 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 nine months ended
December 31, 2000 decreased by $653,000 or 4.6% from the nine
months ended December 31, 1999. Compensation and benefits
decreased 3.3% to $5.19 million compared to $5.37 million in the
first nine months of fiscal year 1999. General and
administrative expenses decreased by 25.6% to $2.85 million from
$3.83 million in the comparable period in 1999. The decreases in
these expenses were a direct result of reduction in loan
originations and cost cutting measures taken by the Company
during the year.
The slight increase in amortization of capitalized servicing
rights was mainly due to higher volume of loan prepayments over
the preceding year.
Interest expense increased 26.2% to $2.01 million as compared to
$1.59 million in the year earlier nine months, due primarily to
the larger mortgage inventory and mortgage-backed securities
carried by the Company 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, reverse repurchase agreements, its own capital and also
cash flows from operations.
At December 31, 2000, maximum permitted borrowings under the
warehouse line of credit agreements with two nonaffiliated banks
totaled $85 million and the amount outstanding was $14.16 million.
Borrowings under these facilities are secured by mortgage loans.
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 December 31, 2000. The Company believes that the warehouse
agreements will be renewed when the current terms expire.
In addition to warehousing agreements, the Company regularly makes
use of the reverse repurchase agreements offered by two investment
firms in connection with its mortgage-backed securities. There
were no borrowings under these facilities at December 31, 2000.
In the first nine 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 $29.47 million at December
31, 2000. Management believes that its current financing
arrangements are adequate to meet its projected operational needs.
DISCLOSURE ABOUT MARKET RISK
The Company's earnings can be impacted significantly by the
movement of interest rates, which is the primary component of the
market risk to the Company. The interest rate risk affects value
of the capitalized mortgage servicing rights, volume of loan
production and total net interest income earned on its mortgage
inventory. 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. The overall objective
is to offset changes in the values of the following items, such as
the committed pipeline, mortgage loan inventory, mortgage-backed
securities held for sale and 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 December 31, 2000, the Company believes that a 100 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 net income by approximately $2.0 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 used as forecast.
PROSPECTIVE TRENDS
During the third quarter of fiscal 2001 interest rates retreated
from the higher levels of the past two years, new loan
applications increased briskly, and for the first time since
January of 1999 our monthly new loan fundings (closings) increased
over the year earlier results. The decrease in interest rates,
coupled with the continuing expansion of our retail division,
enabled us to increase our purchase loan business while refinance
loan activity was boosted in our Direct Marketing Division.
The Federal Reserve Board, having engaged in a continual service
of interest rate increases over the past two years, has now
reversed itself and is in the process of reducing interest rates
in order to soften any recessionary effects for the economy. For
out industry, which is counter-cyclical to others, this is usually
good news. We are already engaged in a mini-refinance surge,
which could turn into an all out refinance boom should long term
interest rates fall another 50 or more basis points.
The competitive pressures we've talked about so often are still
there, but their effect is greatly reduced when we are in this
part of the mortgage cycle.
We continue to pursue opportunities to expand our retail division,
which is now back up to ten offices, and we are aggressively
recruiting for more. We've added personnel to our Direct
Marketing Division so as to take advantage of the refinance loan
market which is opening up once again.
We have also just launched a new and expanded consumer website
(www.firstmortgage.com). Although we have no illusions about
becoming a big dot com lender, mortgage consumer websites can be a
good supplemental source for refinance loans when we are in a
declining interest rate environment, such as now. The Company has
a big advantage over many others in that we also have retail
offices, enabling us to offer both "clicks and bricks," to
potential borrowers.
We think we are positioned with the necessary channels and tools
to take advantage of the opportunities which are opening up as a
result of the recent reduction in interest rates. If rates stay
at this level, or fall even lower, and remain that way for
calendar year 2001, the Company has the potential to experience a
banner year in fiscal 2002.
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 December 31, 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: February 10, 2000 By: S/Clement Ziroli
Clement Ziroli
Chairman of the Board of Directors,
Chief Executive Officer
Date: February 10, 2000 By: S/Pac W. Dong
Pac W. Dong
Executive Vice President,
Chief Financial Officer