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, 1996 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 June 30, 1996, 5,883,117 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, 1996 (Unaudited) and March 31, 1996 3 Unaudited Statement of Income Three Months Ended June 30, 1996 and 1995 4 Unaudited Statement of Cash Flows Three Months Ended June 30, 1996 and 1995 5 Notes to Unaudited Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET June 30, 1996 March 31, 1996 (Unaudited) ASSETS Cash $ 3,101,000 $ 5,948,000 Mortgage loans held for sale 39,525,000 19,879,000 Investment in commercial paper - 9,955,000 Other receivables and servicing advances 9,360,000 9,545,000 Originated mortgage servicing rights net 3,939,000 3,133,000 Excess service fee, net 387,000 414,000 Purchased servicing rights, net 434,000 430,000 Property and equipment, net 590,000 612,000 Prepaid expenses and other assets 941,000 891,000 Due from affiliates 194,000 194,000 Notes receivable 630,000 130,000 TOTAL ASSETS $59,101,000 $51,131,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $29,389,000 $20,653,000 Note payable, officer 1,500,000 1,500,000 Sight drafts payable 1,772,000 2,699,000 Accounts payable and accrued liabilities 665,000 765,000 Deferred income taxes 1,011,000 867,000 Total Liabilities 34,337,000 26,484,000 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 - 5,883,117 5,261,000 5,261,000 Retained earnings 19,503,000 19,386,000 Total Stockholders' Equity 24,764,000 24,647,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $59,101,000 $51,131,000 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME Three Months Ended June 30 1996 1995 REVENUES: Loan origination income $ 731,000 $ 950,000 Loan servicing income 1,714,000 1,687,000 Gain on sale of mortgage loans 914,000 2,428,000 Interest income 627,000 435,000 Other income 1,000 10,000 Total revenues 3,987,000 5,510,000 EXPENSES: Employees' salaries and commissions 1,838,000 1,963,000 General and administrative expenses 1,749,000 1,515,000 Interest expense 194,000 213,000 Total expenses 3,781,000 3,691,000 INCOME BEFORE INCOME TAXES 206,000 1,819,000 INCOME TAX EXPENSE 89,000 755,000 NET INCOME $ 117,000 $1,064,000 NET INCOME PER SHARE $ 0.02 $ 0.18 WEIGHTED AVERAGE OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,890,000 5,883,000 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS Three Months Ended June 30 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 117,000 $ 1,064,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 144,000 349,000 Provision for losses on foreclosure (40,000) 134,000 Amortization of originated mortgage servicing rights, excess service fee and purchased servicing rights 340,000 182,000 Depreciation and amortization of property and equipment 47,000 53,000 Originations and purchases of mortgage loans held for sale (92,095,000) (70,625,000) Sales and principal repayments of mortgage loans held for sale 72,449,000 75,084,000 Change in other receivables and servicing advances 225,000 96,000 Additions to excess service fee - (1,000) Change in prepaid expenses and other assets (50,000) 10,000 Change in accounts payable and accrued liabilities (100,000) 432,000 Change in income taxes payable - 404,000 Net cash (used in) provided by operating activities (18,963,000) 7,182,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights (69,000) - Originated mortgage servicing rights (1,054,000) (1,113,000) Notes receivable (500,000) 70,000 Sale of commercial paper 9,955,000 - Purchase of furniture, equipment and leasehold improvements (25,000) (5,000) Net cash provided by (used in) investing activities 8,307,000 (1,048,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 8,736,000 543,000 Change in sight drafts payable (927,000) 162,000 Change in notes payable, other - (9,493,000) Net cash provided by (used in) financing activities 7,809,000 (8,788,000) DECREASE IN CASH (2,847,000) (2,654,000) CASH, BEGINNING OF PERIOD 5,948,000 4,748,000 CASH, END OF PERIOD $ 3,101,000 $ 2,094,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 83,000 $ 178,000 Income taxes - - FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS June 30, 1996 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, 1996 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. MORTGAGE SERVICING ASSETS Mortgage servicing assets consist of excess service fees, purchased servicing rights and originated mortgage servicing rights. Activities in each category are summarized as follows: Excess Purchased Originated Service Servicing Mortgage Fee Rights Servicing Rights Balance at March 31, 1996 $ 414,000 $ 430,000 $ 3,133,000 Additions - 69,000 1,054,000 Amortizations and write offs (27,000) (65,000) (243,000) Impairment - - (5,000) (1) Balance at June 30, 1996 $ 387,000 $ 434,000 $ 3,939,000 <FN> <F1> (1) Figure includes $364,000 of originated mortgage servicing rights relating to mortgage loans held for sale to investors. Since the underlying loans have not yet been sold, no revenues have been recognized on these originated mortgage servicing rights for the three months ended June 30, 1996. </FN> 3. NOTES PAYABLE At June 30, 1996, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $30,000,000 and $10,000,000 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, 1996, borrowings under these lines of $29,389,000 were collateralized by mortgage loans held for sale. At March 31, 1996, advance of $9,955,000 against one of the lines of credit was collateralized by commercial paper which matured in April 1996. The advance was repaid and there was no investment in commercial paper at June 30, 1996. The line of credit agreements are subject to renewal on September 1, 1996 and August 31, 1996, 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. The Company has a presale funding facility with a nonaffiliated investment banking firm for borrowings under reverse repurchase arrangements, collateralized by mortgage loans held for sale pooled to form GNMA securities. There was no amount outstanding on June 30, 1996. At June 30, 1996, the Company also had an unsecured line of credit of $2,000,000 with a nonaffiliated bank which expires August 31, 1996. Advances on the line of credit are due within 21 days and bear interest at the bank's reference rate. There was no amount outstanding on June 30, 1996. 4. NET INCOME PER SHARE Net income per share is computed on the basis of the weighted average number of common shares outstanding during each period plus the effect of common shares contingently issuable from stock options in periods in which they have a dilutive effect. 5. 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 RESULTS OF OPERATIONS: Three months ended June 30, 1996 compared to three months ended June 30, 1995. GENERAL The Company reported net income of $117,000 or $0.02 per share for the quarter ended June 30, 1996, compared to net income of $1.06 million or $0.18 per share for the comparable 1995 quarter. The decrease in net income was attributable to two major reasons: a sharp increase in interest rates during June 1996 quarter; and intensive price competition among mortgage banking firms and commercial banks. As a result, the gain on sale of mortgages was adversely impacted, decreasing by 62.4% to $914,000 from the year ago quarter. REVENUES LOAN ORIGINATION INCOME For the quarter ended June 30, 1996, the volume of new mortgage loans closed increased by 30.4% to $92.10 million from $70.63 million in the prior year quarter. The increase is a reflection of the successful market penetration by our expanded wholesale operations in the first phase of our production expansion plan, which is to be followed by the opening of more retail offices in the next two years. For the three months ended June 30, 1996, in spite of higher loan production, loan origination revenue decreased by approximately 23.0% to $731,000 from the June 1995 quarter, due primarily to the lower average front-end loan fees earned on wholesale and refinance loans. LOAN SERVICING INCOME 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, rose slightly to $1.71 million for the three months ended June 30, 1996 from $1.69 million for the same period in 1995. The increase resulted from growth in the Company's servicing portfolio. As of June 30, 1996, the Company serviced $1.60 billion in loans compared to $1.53 billion at June 30, 1995, a net gain of 4.6% after prepayments and scheduled amortization of mortgage loans. The growth in the servicing portfolio reflects the Company's long- term plan of retaining the servicing rights on most loan originations. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated. Three Months Ended June 30, 1996 1995 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,477,161 $1,401,832 Add: Loans originated 92,095 70,624 Less: Prepayment and Amortization 60,491 50,783 Ending loan servicing portfolio 1,508,765 1,421,673 Sub-Servicing 91,938 111,598 Total servicing portfolio $1,600,703 $1,533,271 Average loan balance (end of period) $ 94,587 $ 92,824 Weighted Average Interest Rate 8.17% 7.99% GAIN ON SALE OF MORTGAGE LOANS Due to intense price competition and an increase of more than .50% in long-term mortgage interest rates during the quarter, the gain on sale of mortgage loans was $914,000 for the three months ended June 30, 1996, a decrease of 62.4% over the 1995 period. INTEREST INCOME Interest income, which reflects the interest received on mortgage loans held for sale, increased to $627,000 for the three months ended June 30, 1996 from $435,000 for the comparable prior year quarter. This increase is due primarily to the higher average interest rate on mortgage loans and a larger mortgage inventory carried by the Company during the June 1996 quarter. It was also benefited by the short-term investment in commercial paper. EXPENSES The major components of the Company's total expenses are (i) employees' salaries and commissions, (ii) general and administrative expenses and (iii) interest expense. Total expenses for the three months ended June 30, 1996 increased moderately by 2.4% to $3.78 million from the three months ended June 30, 1995. Salaries and commissions were $1.838 million for the June 1996 quarter, a decrease of 6.4% over the year-ago quarter. The improvement was partly due to the success by the Company in implementing tight controls over payroll expenditures despite the push to increase loan originations, and also due to lower profit incentive bonus paid out in the quarter. General and administrative expense increased by $234,000, an increase of 15.5% over prior year. These higher expenses were a direct result of expanding production operations in the quarter, partially offset by cost reduction measures taken by the Company over the past year. INTEREST EXPENSE Interest expense decreased 8.9% to $194,000 for quarter ended June 1996 from $213,000 for the same period in 1995. The decrease was due to lower warehouse borrowings during the quarter as more corporate cash was used to finance a portion of Company's mortgage warehousing needs. PROSPECTIVE TRENDS The reduction in long-term interest rates during the ten months ended January 31, 1996 halted the downward trend in new loan originations and, in fact, the Company had been experiencing production increases as compared to the previous year. But long-term interest rates began increasing again in February 1996, rising nearly one full percent through the quarter ended June 30, 1996. This increase in interest rates began to negatively impact new loan originations in May, and the origination trend is once again downward as the higher mortgage rates have taken hold. Additionally, competition is intense as the industry continues consolidating and downsizing. Pricing practices have become cut-throat in many of our markets, particularly at the wholesale level in which several of the major banks appear to be engaged in a virtual price war for mortgages originated through wholesale sources. The Company's retail originations, however, were nearly half of the total loans originated during the quarter ended June 30, 1996, providing us with some insulation from the wholesale price wars. With our multiple origination channels, the Company remains well-positioned to take advantage of whichever channel emerges as the most productive in the future. Nevertheless, competition at all levels remains formidable and price intensive, and is likely to remain so until the capacity of the mortgage-providing industries shrinks to the size of current demand, or long-term interest rates decline enough to stimulate more demand. In the meantime, new origination volume and earnings are likely to remain adversely impacted. 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, cash flows from operations and short-term reverse repurchase agreements with other investment banking firms. At June 30, 1996, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $40 million and the amount outstanding was $29.39 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 June 30, 1996. The Company believes that the warehouse agreements will be renewed when the current terms expire in August and September 1996. In addition to the warehouse lines of credit, the Company makes regular use of the short-term reverse repurchase agreements provided by other investment banking firms in connection with its inventory of mortgage loans and mortgage-backed securities. These facilities generally allow the Company to better utilize its warehouse lines. There was no amount outstanding under the agreements at June 30, 1996. The Company had stockholders' equity of $24.76 million at June 30, 1996. Management believes that its current financing arrangements are adequate to meet its projected operational needs. 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, 1996. 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, 1996 By S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: August 12, 1996 By S/Pac W. Dong Pac W. Dong Chief Financial Officer, Controller and Executive Vice President