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, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to __________________ Commission File Number 0-19847 FIRST MORTGAGE CORPORATION (Exact name of registrant as specified in its charter) California 95-2960716 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 3230 Fallow Field Drive Diamond Bar, California 91765 (Address, including zip code, of principal executive offices) (909) 595-1996 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO____ As of June 30, 1997, 5,859,117 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, 1997 (Unaudited) and March 31, 1997 3 Unaudited Statement of Income Three Months Ended June 30, 1997 and 1996 4 Unaudited Statement of Cash Flows Three Months Ended June 30, 1997 and 1996 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 10 Signatures 11 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET June 30, 1997 March 31, 1997 (Unaudited) ASSETS Cash $ 5,201,000 $ 5,903,000 Mortgage loans held for sale 24,982,000 27,286,000 Other receivables and servicing advances 11,015,000 9,623,000 Capitalized servicing rights 6,768,000 6,709,000 Property and equipment, net 584,000 592,000 Prepaid expenses and other assets 299,000 546,000 Due from affiliates - 134,000 Notes receivable 130,000 130,000 TOTAL ASSETS $48,979,000 $50,923,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $20,396,000 $20,172,000 Note payable, officer - 1,500,000 Sight drafts payable 199,000 954,000 Accounts payable and accrued liabilities 703,000 816,000 Deferred income taxes 1,769,000 1,833,000 Total Liabilities 23,067,000 25,275,000 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 5,147,000 5,147,000 Issued and outstanding shares - 5,859,117 Retained earnings 20,765,000 20,501,000 Total Stockholders' Equity 25,912,000 25,648,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $48,979,000 $50,923,000 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME Three Months Ended June 30 1997 1996 REVENUES: Loan origination income $ 704,000 $ 731,000 Loan servicing income 1,856,000 1,714,000 Gain on sale of mortgage loans 1,340,000 914,000 Interest income 537,000 627,000 Other income - 1,000 Total revenues 4,437,000 3,987,000 EXPENSES: Employees' salaries and commissions 1,988,000 1,838,000 General and administrative expenses 1,819,000 1,749,000 Interest expense 172,000 194,000 Total expenses 3,979,000 3,781,000 INCOME BEFORE INCOME TAXES 458,000 206,000 INCOME TAX EXPENSE 194,000 89,000 NET INCOME $ 264,000 $ 117,000 NET INCOME PER SHARE $ 0.05 $ 0.02 WEIGHTED AVERAGE OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,859,000 5,890,000 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS Three Months Ended June 30 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 264,000 $117,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes (64,000) 144,000 Provision for losses on foreclosure (3,000) (40,000) Amortization of capitalized servicing rights 571,000 340,000 Depreciation and amortization of property and equipment 49,000 47,000 Originations and purchases of mortgage loans held for sale (86,798,000) (92,095,000) Sales and principal repayments of mortgage loans held for sale 89,102,000 72,449,000 Change in other receivables and servicing advances (1,389,000) 225,000 Change in prepaid expenses and other assets 247,000 (50,000) Change in accounts payable and accrued liabilities (113,000) (100,000) Net cash provided by (used in) operating activities 1,866,000 (18,963,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights (214,000) (69,000) Originated mortgage servicing rights (416,000) (1,054,000) Notes receivable - (500,000) Sale of commercial paper - 9,955,000 Purchase of furniture, equipment and leasehold improvements (41,000) (25,000) Change in due from affiliates 134,000 - Net cash provided by (used in) investing activities (537,000) 8,307,000 CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 224,000 8,736,000 Change in sight drafts payable (755,000) (927,000) Change in notes payable, officer (1,500,000) - Net cash provided by (used in) financing activities (2,031,000) 7,809,000 DECREASE IN CASH (702,000) (2,847,000) CASH, BEGINNING OF PERIOD 5,903,000 5,948,000 CASH, END OF PERIOD $5,201,000 $3,101,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 139,000 $141,000 Income taxes - - See accompanying notes FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS June 30, 1997 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, 1997. 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 In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125). FAS 125 will result in the recording of Capitalized Servicing Rights (CSRs) on the date of sale of a mortgage loan as opposed to the previous practice of recording CSRs on the date loans are originated. Additionally, under FAS 125, excess servicing fees is included in CSRs for balance sheet presentation. Activities in CSRs are summarized as follows: Capitalized Servicing Rights Balance at March 31, 1997 $6,709,000 Additions 630,000 Amortizations and write offs (558,000) Impairment (13,000) Balance at June 30, 1997 $6,768,000 3. NOTES PAYABLE At June 30, 1997, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $30,000,000 and $15,000,000 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, 1997, borrowings under these lines of $20,396,000 were collateralized by mortgage loans held for sale. The line of credit agreements are subject to renewal on September 1, 1997 and August 31, 1997, 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. 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 period 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, 1997 compared to three months ended June 30, 1996. GENERAL The Company reported net income of $264,000 or $0.05 per share for the quarter ended June 30, 1997, compared to net income of $117,000 or $0.02 per share for the comparable 1996 quarter. The increase in net income was attributable to two major reasons: an easing in interest rates during the June 1997 quarter; and an increase in revenue from our loan servicing portfolio. REVENUES LOAN ORIGINATION INCOME For the quarter ended June 30, 1997, the volume of new mortgage loans closed decreased slightly to $86.8 million from $92.1 million in the prior year quarter. For the three months ended June 30, 1997 loan origination revenue decreased by approximately 3.7% to $704,000 from the June 1996 quarter, due primarily to the reduced new loan originations. 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 8.3% to $1.86 million for the three months ended June 30, 1997 from $1.71 million for the same period in 1996. The increase resulted from growth in the Company's servicing portfolio. As of June 30, 1997, the Company serviced $1.705 billion in loans compared to $1.601 billion at June 30, 1996, a net gain of 6.5% 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 as many loan originations as financially possible. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated. Three Months Ended June 30, 1997 1996 (Dollars in thousands except average loan balance) Beginning loan service portfolio $1,583,837 $1,477,161 Add: Loans originated 86,798 92,095 Purchase of Servicing 6,652 - Less: Prepayment and Amortization 71,218 60,491 Ending loan servicing portfolio 1,606,069 1,508,765 Sub-Servicing 98,577 91,938 Total servicing portfolio $1,704,646 $1,600,703 Average loan balance (end of period) $ 96,482 $ 94,587 Weighted Average Interest Rate 7.98% 8.17% GAIN ON SALE OF MORTGAGE LOANS In spite of intense price competition, a decrease of nearly 50 basis points in long-term mortgage interest rates during the quarter resulted in a gain on sale of mortgage loans of $1.34 million for the three months ended June 30, 1997, an increase of 46.6% over the 1996 period. INTEREST INCOME Interest income, which reflects the interest received on mortgage loans held for sale, decreased to $537,000 for the three months ended June 30, 1997 from $627,000 for the comparable prior year quarter. This decrease is due primarily to the lower average interest rate on mortgage loans and a smaller mortgage inventory carried by the Company during the June 1997 quarter. 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, 1997 increased by 5.2% to $3.98 million from the three months ended June 30, 1996. Salaries and commissions were $1.99 million for the June 1997 quarter, an increase of 8.2% over the year-ago quarter. The increase was due to the opening of new retail branches and the hiring of new personnel to staff them during the quarter. General and administrative expense increased by $70,000, an increase of 4.0% 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 11.3% to $172,000 for quarter ended June 1997 from $194,000 for the same period in 1996. 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 quarter, particularly at the very end of the quarter, is having a positive impact on new loan originations, especially refinance loans, for the Company. New loan applications in July, for example, were the highest of the year, double the number in June. Barring an unexpected increase in interest rates, the surge in activity should produce improved results for the Company in the second fiscal quarter. As previously discussed in the Prospective Trends and the Competition sections of the 10K for the fiscal year ended March 31, 1997, the Company still faces intense competition from many directions, particularly for the standard conforming conventional mortgage loans so coveted by many of the major commercial banks. Our strategy is to instead emphasize the origination of FHA and VA loans, home equity loans and other mortgage products with much greater profit potential for the Company. We recently introduced, for example, a 125% second mortgage equity loan which will be originated through direct consumer mailing, telemarketing, and our traditional retail branch operations. Initially to be sold servicing- released, we intend to later securitize and retain servicing on this increasingly popular new mortgage product. As a continuing part of the Company's long-term plan, we are opening additional retail origination offices wherever such opportunity presents itself. During this quarter we've opened new retail branches in Hollywood and Bakersfield, California, and are in the final stage of opening in Phoenix, Arizona. We believe we are appropriately positioned to take advantage of the market niches within which we can competitively operate, but we still face formidable competition and, as always, our business is greatly influenced by the level of long-term interest rates. 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 June 30, 1997, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $45 million and the amount outstanding was $20.40 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, 1997. The Company believes that the warehouse agreements will be renewed when the current terms expire in August and September 1997. The Company had stockholders' equity of $25.91 million at June 30, 1997. 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, 1997. 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, 1997 By S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: August 12, 1997 By S/Pac W. Dong Pac W. Dong Chief Financial Officer, Controller and Executive Vice President