FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended March 31, 1998, 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
incorporation or organization) Identification No.)
3230 Fallow Field Drive 91765
Diamond Bar, California (Zip Code)
(Address of principal
executive offices)
(909) 595-1996
(Registrant's telephone number,including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on June 19, 1998, based on the average bid and asked prices on that
date reported by the OTC Bulletin Board, was $3,365,000. Solely for purposes of
this calculation, all executive officers and directors of the registrant were
considered affiliates as were all beneficial owners of more than 10% of the
registrant's Common Stock. As of June 19, 1998, 5,569,697 shares of the
registrant's Common Stock were issued and outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the annual meeting
of shareholders of the registrant to be held on September 23, 1998 are
incorporated by reference into Part III hereof. The definitive proxy statement
will be filed with the Securities and Exchange Commission within 120 days after
March 31, 1998.
FIRST MORTGAGE CORPORATION
A California Corporation
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
Item No. Description Page
PART I
1. Business 1
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A.Quantitative and Qualitative Disclosures About Market Risk 24
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 24
PART III
10.Directors and Executive Officers of the Registrant 25
11.Executive Compensation 25
12.Security Ownership of Certain Beneficial Owners and Management 25
13.Certain Relationships and Related Transactions 25
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
Signatures 29
PART I
ITEM 1. BUSINESS
General
First Mortgage Corporation ("First Mortgage" or the "Company") is a
mortgage banking firm engaged in the mortgage banking business since its
incorporation in California in 1975. The Company originates, purchases,
warehouses, sells and services primarily first mortgage loans for the
purchase or refinance of owneroccupied one-to-four family residences located
principally in California. The Company originates mortgage loans in
geographic areas with moderately priced housing through a network of
11 offices located in California and Arizona. Mortgage loans are originated
by the Company through the following channels: Retail production loans are
generated by referrals from real estate agents, builders and other sources.
Refinance loans are originated by the Direct Marketing division through targeted
mail solicitations and direct telemarketing, and wholesale production generally
represents loans originated through approved mortgage loan brokers. The
Company's long-term production objective is to increase loan origination through
strategically located new offices and to promote new products that can be
marketed at an acceptable rate of return to the Company.
Generally, First Mortgage sells all mortgage loans that it originates or
purchases to institutional investors in the secondary mortgage market, retaining
the servicing rights on a portion of such loans. The Company emphasizes the
origination of mortgage loans insured by the Federal Housing Authority ("FHA")
or partially guaranteed by the Veterans Administration ("VA") (collectively,
"FHA/VA loans"). The Company's FHA/VA loans are pooled to form securities of
the Government National Mortgage Association ("GNMA") which
are sold in the secondary mortgage market to investment banking firms,
substantially all of which are primary dealers in government securities.
Management believes that the origination of FHA/VA loans benefits the Company by
(i) increased loan servicing income due to the higher servicing fees and
generally longer average loan lives associated with FHA/VA loans, and (ii)
reduced interest rates paid on warehousing lines of credit due to the Company's
ability to utilize tax and insurance impound accounts associated with FHA/VA
loans as compensating balances with its creditor banks.
First Mortgage also originates conventional mortgage loans which comply
with the requirements for sale to, or conversion into securities issued by, the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company sells a portion of the conventional mortgage
loans that it originates under purchase and guarantee programs sponsored by FNMA
and FHLMC. These programs provide for either direct sale of mortgage loans to
FNMA or FHLMC, or for pooling of mortgage loans in exchange for securities
issued by FNMA or FHLMC. Conventional loans originated by the Company,
including those which do not conform to government agency requirements, are also
sold to banks and other private institutional investors under the Company's
correspondent relationships with several such investors. The Company believes
that the ability to originate a substantial volume
of conventional loans is important to the success of its business. The
origination of conventional loans enables the Company to offer mortgage loans to
a wider variety of markets and referral sources, thereby enhancing the Company's
overall mortgage loan origination capability.
First Mortgage funds mortgage loan originations and purchases with working
capital and short-term borrowings under warehousing lines of credit. The Company
generally holds or "warehouses" mortgage loans for a short period of time (on
average 25 days) pending their nonrecourse sale to institutional investors in
the secondary market as individual loans or as mortgage-backed securities.
First Mortgage's loan servicing activities include the collection, remittance
and general administration of mortgage loans. Over the years, the company has
been successful in retaining servicing rights on a substantial portion of loan
originations. The current interest environment, however, has induced much more
refinance activities, which has accelerated the prepayment rate of the servicing
portfolio. The Company has managed to neutralize the negative impact of this
"runoff" by retaining most of the loans eligible for refinance through its own
in-house refinance programs. The Company's mortgage servicing portfolio
increased by 7.3% to $1.684 billion at March 31, 1997 from $1.570 billion at
March 31, 1996, but decreased by 1% to $1.667 billion at March 31, 1998 compared
to $1.684 billion from the prior fiscal year.
The various phases of First Mortgage's business are discussed in greater
detail below.
Loan Origination
The Company originates mortgage loans through three primary sources: retail,
which represents loans generated through real estate agents and builders; direct
marketing, which represents loans initiated through direct mail and telephone;
and wholesale, which represents loans solicited from loan brokers. Substantially
all mortgage loans originated through such sources by the Company are
underwritten, funded and closed by the Company.
First Mortgage's loan origination activities include (i) offering
a variety of residential mortgage loans, (ii) attracting suitable
loan applicants, (iii) reviewing borrower credit and mortgaged property title,
appraised value and insurance ("underwriting"), (iv) issuing conditional loan
commitments, and (v) funding qualified loans at closing.
Types of Loans Originated. The Company originates three types of residential
mortgage loans: (i) FHA/VA loans which qualify for sale in the form of
securities guaranteed by GNMA; (ii) conventional mortgage loans which comply
with the requirements for sale to, or conversion into securities issued by, FNMA
or FHLMC ("conventional conforming loans"); and (iii) conventional mortgage
loans which comply with other institutional investor loan requirements
("conventional nonconforming loans"). The Company does not originate any
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans") with loan-to-value ratios above
80% unless the borrowers obtain private mortgage insurance for the Company's
benefit from companies rated by Standard & Poor's Corporation or by Moody's
Investor Service, Inc.
All loan applications, regardless of source, must be approved by the Company
in accordance with its underwriting criteria, including loan-tovalue ratios,
borrower income and credit qualifications, investor requirements, necessary
insurance and property appraisal requirements. The Company's underwriting
standards also comply with the relevant guidelines set forth by the FHA, VA,
FMHA, FNMA, FHLMC, private institutional investors and/or conduits and private
mortgage insurers, as applicable.
Management believes that the origination of FHA/VA loans benefits the Company
from (i) increased loan servicing income due to the higher servicing fees and
generally longer average loan lives customarily associated with FHA/VA loans,
and (ii) reduced interest rates on warehousing lines of credit due to the
Company's ability to utilize tax and insurance impound accounts associated with
FHA/VA loans as compensating balances with its creditor banks. However, the
Company also originates conventional loans and maintains a flexible loan
origination network that is capable of increasing the volume of conventional
loan production as market conditions warrant.
The Company receives fees from borrowers for the origination of retail loans,
generally in the range of one to two percent of the principal amount
of the loan. The Company also receives fees in connection with the origination
of wholesale loans which average approximately 0.5% per loan. The Company may
charge additional fees depending upon market conditions or the Company's
objectives concerning loan origination volume and pricing. The Company incurs
certain costs in originating loans, including overhead, out-of-pocket costs,
interest on money borrowed to finance loans and, when the loans are subject to a
purchase commitment from private investors, related commitment fees. The volume
of and type of loans and commitments made by the Company vary with competitive
and economic conditions, resulting in fluctuations in revenues from loan
originations. In periods of rising interest rates, the Company's volume of loan
originations, particularly refinancings, declines, and the Company's revenues
from loan originations decrease.
The following table sets forth for the periods indicated, the number, dollar
volume, percentage of total volume and average loan balance of the FHA/VA
loans, conventional conforming loans and conventional nonconforming loans
originated and purchased by the Company:
Year Ended March 31,
1998 1997 1996
(Dollars in thousands, except average loan balance data)
FHA/VA Loans:
Number of loans 2,115 1,575 1,421
Volume of loans $208,927 $158,502 $133,891
Percent of total volume 43.8% 44.9% 40.5%
Average loan balance $98,783 $100,636 $ 94,223
Conventional Conforming
Loans (1):
Number of loans 587 607 618
Volume of loans $71,708 $ 77,097 $ 80,798
Percent of total volume 15.0% 21.8% 24.4%
Average loan balance $122,160 $127,013 $130,741
Conventional Nonconforming
Loans:
Number of loans 577 379 366
Volume of loans $196,351 $117,812 $116,207
Percent of total volume 41.2% 33.3% 35.1 %
Average loan balance $340,296 $310,850 $317,505
Total Loans (1):
Number of loans 3,279 2,561 2,405
Volume of loans $476,986 $353,411 $330,896
Average loan balance $145,467 $137,997 $137,586
<FN>
<F1>
(1)Includes sub-prime and second priority conventional conforming loans which
aggregate less than 1% of the total dollar volume of loans originated and
purchased in each of fiscal 1998, 1997, and 1996.
</FN>
Mortgage loans originated by the Company are loans which primarily fund the
purchase of owner-occupied residential real property, or refinance loans which
repay and replace existing mortgage loans on owneroccupied residential real
property. The volume of refinance loans as a percentage of the Company's total
mortgage loan origination volume for fiscal years 1998, 1997 and 1996 was
approximately 50%, 38% and 46%, respectively. For fiscal years 1998, 1997 and
1996, approximately 33%, 16% and 41%, respectively, of the Company's refinance
loans were originated under the FHA's "streamline" refinance program. Pursuant
to this program, the FHA insures refinance loans intended solely to reduce the
payments on existing FHA-insured mortgage loans. The Company believes that in
some form, refinance loans will continue to represent a portion of its total
mortgage loan origination volume, the amount dependent upon the level of
interest rates at any given time.
Solicitation of Loan Applicants. First Mortgage follows a marketing strategy
designed to maximize the efficiency of the Company's loan solicitation and
origination activities. This strategy includes (i) operating a flexible branch
office network, (ii) utilizing an incentive compensation structure for the
majority of its work force, (iii) employing costefficient consumer marketing
techniques, and (iv) emphasizing prompt and professional customer services.
In accordance with this strategy, the Company operates a network
of retail branch offices in service areas which are located near potential
borrowers, real estate brokers, builders, developers and other referral sources.
This enhances the ability of the Company's sales force to solicit potential
customers and referral sources and to develop referral networks which provide
recurring business. To maintain this strategy, the Company's senior management
actively seeks new service areas and continually reviews existing service areas
to assess whether to open or close branch offices. The Company attempts to open
new retail branch offices in areas where the population is growing and where
housing prices are affordable for moderate income homebuyers.
While the operation of a productive network of retail branch offices is
essential to mortgage loan originations, the Company believes that it is equally
important to maintain the flexibility to open or close branch offices in a
timely, cost-efficient manner as local market conditions dictate. Accordingly,
the Company typically enters into month-to-month or one to two year
short-term leases for 1,000 to 2,000 square foot offices, and does not enter
into longterm employment agreements with branch office employees.
Over the last five fiscal years, the Company has operated between 10 and 18
branch offices in varying locations in California, Nevada, Oregon and
Washington. The Company currently operates a retail network of eight California
offices located in Covina, West Hollywood, Bakersfield, Rancho Cucamonga,
Woodland Hills, San Diego, Fairfield and Modesto, as well as Tempe, Arizona.
Management plans to add additional branch offices in order to increase new loan
production, some of which may be located outside existing service areas. Given
the Company's present high concentration of loan originations in California,
there can be no assurance that its results of operations will not be adversely
affected to the extent California experiences decreased residential real estate
lending activity.
First Mortgage operates retail branch offices as individual profit centers.
Scheduled fees for loans originated and other services provided by the Company's
corporate headquarters are allocated to each branch office in determining the
office's profitability. Branch offices are staffed entirely by Company
employees. A typical retail branch office staff consists of a branch manager,
one to four salespersons, one to three loan processors and one or two clerical
office assistants. Salespersons are full-time employees who work exclusively
for the Company and are contractually obligated to comply with the Company's
business practice guidelines.
First Mortgage's retail marketing strategy also includes an incentive
compensation system designed to encourage quality mortgage loan production and
to retain productive managers and salespersons. A branch manager's compensation
includes (in addition to a base salary) a bonus based upon loan production and a
percentage of the branch office's annual profits. Salespersons are compensated
solely on commissions based upon revenue generated from their respective loan
closings. In addition, loan processors at the branch office level receive, in
addition to a salary, a bonus based on the number of mortgage loans which are
closed and; therefore, have met the Company's underwriting criteria. The Company
believes that an incentive compensation system based on the number and quality
of loans produced improves
overall profitability, customer and employee relations and the Company's
reputation for providing timely and quality mortgage banking services.
The utilization of personal solicitation techniques is another aspect of the
Company's marketing strategy. The Company believes that on-going personal
relationships between retail branch salespersons and real estate brokers,
builders, developers and prior customers through regular direct contact
represent the most productive solicitation technique since historically the
majority of the Company's loan originations have been generated through these
referral sources. The Company engages in only limited mass media advertising
because it believes that the costs associated with such advertising usually
outweigh the benefits. The Company also directly solicits borrowers for
refinance loans, primarily through targeted mailings and telemarketing.
First Mortgage's reputation for prompt and professional service is an
integral component of the Company's marketing strategy. The Company believes
that its ability to process retail loan applications quickly has become
increasingly important in the market place. Despite the speed with which loan
applications are processed, the Company does not compromise its comprehensive
underwriting and quality control criteria. The utilization of new technology and
computerization of all critical phases of operations have had a significant
impact on the Company's cost control efforts, especially
during the recent upturn in refinance loan production.
The Company's wholesale loan origination business utilizes independent loan
brokers to originate mortgage loan applications. The Company's wholesale
operations sales staff solicits loans meeting the Company's underwriting
criteria from loan brokers who have been approved by the Company. These
broker-referred loan applications are subject to the same underwriting,
verification and approval process applied to loan applications obtained through
its retail branch offices. Upon approval, these loans are funded and closed by
the Company. The Company currently operates its wholesale regional office in
San Jose, California. Mortgage loan production through wholesale originations
as a percentage of total loan origination volume for fiscal 1998, 1997 and 1996
was 55%, 57% and 38%, respectively.
Loan Processing and Underwriting. Upon receipt of mortgage loan
applications, branch office loan personnel verify the completeness and accuracy
of application information. Verification procedures include, among other
things, obtaining (i) third-party written confirmations of the applicant's
income and bank deposits, (ii) a formal credit report on the applicant from a
credit reporting agency, and (iii) a preliminary title report and a real estate
appraisal. The Company's underwriting department is responsible for the
selection of the credit reporting agency, and such agency must issue reports
which meet or exceed the requirements of FHA, VA, FNMA and FHLMC. The Company's
in-house appraisers, or appraisers approved and chosen at random by the FHA or
VA, prepare property appraisals for FHA/VA loans. Appraisals for retail
conventional loans are prepared by the Company's in-house appraisers, or one of
a number of pre-approved independent appraisers who have contractually agreed to
comply with the Company's written appraisal specification requirements and who
meet
its experience, education and reputation standards. Wholesale loan appraisals
are independently audited through the Company's quality assurance department.
Once an application has been verified and reviewed at the branch office
level, a formal loan application is assembled and submitted to the Company's
underwriting department. The underwriting department scrutinizes all loan
applications, other than loans purchased on a wholesale basis, in accordance
with the specific agency or investors' underwriting guidelines, including loanto
value ratios, borrower income qualifications, investor requirements, necessary
insurance and property appraisal requirements. The Company's underwriting
guidelines comply with the underwriting criteria of FHA, VA, FNMA and FHLMC as
applicable, and in some cases are more comprehensive. The Company's
underwriting guidelines for conventional nonconforming loans are based on the
underwriting standards required by the institutional investors to whom such
loans will be sold. The Company's underwriting personnel function independently
of the Company's mortgage loan origination personnel. The Company believes that
the implementation and enforcement of comprehensive underwriting guidelines has
mitigated the foreclosure loss expense which, as a percentage of the Company's
mortgage servicing portfolio, was 0.074% in fiscal 1998, 0.091% in fiscal 1997
and 0.094% in fiscal 1996.
First Mortgage's quality assurance department audits a minimum of 10% of all
formal retail loan applications submitted to the underwriting department in
order to enhance the ongoing evaluation of the loan processing function,
including employees, credit reporting agencies and independent appraisers.
Applications from retail branch offices are chosen for audit in a manner that
assures impartiality. Higher risk loans, such as those on three and four-unit
properties are audited more frequently than other loans, and nearly all
wholesale loans are audited. The quality assurance department re-verifies all
employment and bank verifications, and obtains a separate credit report from a
second credit reporting agency as well as a written appraisal critique from a
second appraiser or audit agency familiar with the area of the mortgage
property. The quality assurance department submits all audit results directly to
the president of the Company. Management believes that by performing
comprehensive quality assurance audits, mortgage loans of investment quality
will be originated and negligent underwriting, foreclosure loss expense and
overall Company risk will be minimized.
Loan Commitments. First Mortgage does not issue final loan commitments to
fund or acquire mortgage loans unless it is confident that the loan will meet
the acquisition criteria of institutional investors in the secondary mortgage
market. Subsequent to underwriting approval and prior to loan funding, the
Company issues conditional loan approvals to qualified applicants. Conditional
approvals indicate loan amounts, prevailing interest rates, fees, funding
conditions and approval expiration dates. The interest rate indicated is
usually subject to change in accordance with market interest rate fluctuations
until the final loan closing documents are prepared, at which time the Company
commits to a stated interest rate ("interest rate lock-in") typically for a
maximum of 15 days. The Company determines the effective interest rates for
mortgage loans based upon its daily review of prevailing interest rates in the
secondary mortgage market, and interest rate lock-ins beyond 15 days are not
issued unless the Company receives an appropriate fee premium based upon an
assessment
of the risk associated with the longer lock-in period. For instance, the Company
may issue a conditional loan approval with an interest rate lock-in for up to 60
days. In such cases, the Company charges an extended fee premium average of
0.25% to 0.50% of the mortgage loan amount.
Loan Funding. At closing, First Mortgage funds mortgage loans first with
available working capital, which represents the Company's lowest cost of funds,
and second with short-term borrowings under warehousing lines of credit which
currently aggregate $90 million. The Company's current warehousing lines of
credit include a $70 million secured line of credit for 90-day notes with Bank
of America National Trust and Savings Association ("Bank of America") that is
subject to renewal on September 1, 1998; and a $20 million secured line of
credit for 90-day notes from Sanwa Bank of California ("Sanwa Bank"), subject to
renewal on August 31, 1998. Advances under the Company's secured lines of
credit are collateralized with the mortgage loans which they fund. The Company
repays outstanding balances under warehousing lines of credit and replenishes
its working capital with the proceeds from the sale of mortgage loans.
Accordingly, the Company depends on mortgage loan sales to originate new
mortgage loans without exceeding the limits of its warehousing lines of credit
and available working capital.
First Mortgage pays interest on funds advanced under the warehousing lines of
credit at pre-negotiated rates depending on the level of borrowing and the
compensating balance maintained, which can be satisfied in whole or in part with
tax and insurance impound funds held in custodial accounts for mortgage loans
serviced by the Company. By maintaining compensating balances in excess of the
minimum requirements, the Company can, and frequently does, borrow funds under
the warehousing lines of credit at reduced interest rates. This method of
reducing the Company's cost of borrowing can significantly improve the
profitability of warehousing mortgage loans. While the Company's warehousing
lines of credit are subject to periodic renewal, the Company has historically
renewed or replaced these lines of credit at satisfactory rates, and the Company
believes that it maintains an excellent relationship with its current lenders.
There can be no assurance, however, that such financing will continue to be
available to the Company or on favorable terms.
Loan Warehousing
First Mortgage normally warehouses funded mortgage loans for a
short period of time (on average 25 days), depending upon the delivery dates
negotiated with institutional investors, the volume of loan originations, the
availability of working capital and the amount available under warehousing lines
of credit prior to purchase of the loans by institutional investors. The
Company receives, as net interest income, the difference between the interest
received on mortgage loans held prior to sale which may be financed under
warehousing lines of credit, and the interest paid by the Company under such
lines of credit. The Company also receives interest income from mortgage loans
funded with working capital. The Company attempts to mitigate interest rate risk
by warehousing mortgage loans for relatively short time periods. Although this
strategy may limit the amount of net interest income realized, management
believes
that this strategy is prudent and protects the Company from
unexpected interest rate fluctuations.
Loan Sales
Unlike financial institutions and other lenders which customarily
originate or acquire mortgage loans for long-term investment, mortgage bankers,
including the Company, originate and purchase mortgage loans with the intention
of selling them shortly after they are funded. Mortgage loans originated or
purchased by the Company are sold to institutional investors in the secondary
mortgage market with the Company generally retaining the right to service such
loans.
The majority of the Company's FHA/VA loans are pooled to form
GNMA securities and are sold to investment banking firms, substantially all of
which are primary dealers in government securities. Conventional conforming
loans are sold for cash as individual whole loans to FNMA, FHLMC or other
institutional investors. The Company sells its conventional nonconforming loans
to institutional investors in privately negotiated transactions. In fiscal
1998, approximately 35% of the principal amount of the Company's mortgage loans
were converted into GNMA securities, 7% were sold directly to FNMA or FHLMC for
cash and the remaining 58% of the Company's mortgage loans were sold to
institutional investors. The Company expects to continue to use these methods
of selling mortgage loans, but in varying degrees in accordance with prevailing
market conditions and may also employ other sales methods if management
determines that it is prudent to do so.
Since the Company's inception, all originated or purchased
mortgage loans have been sold in the secondary mortgage market without recourse
to the Company in the event of borrower default, subject to certain limitations
applicable to VA loans. With respect to mortgage loans securitized through GNMA
programs, the Company is insured by the FHA against foreclosure losses on FHA
loans, and the VA guarantees against foreclosure losses on VA loans, subject to
a limitation of 25% of the loan or such higher percentage that does not exceed
$50,750. Mortgage loans sold to, or securitized through, FNMA or FHLMC are
contractually nonrecourse to the Company upon borrower default.
In connection with loan exchanges and sales, the Company makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations, program standards and
information accuracy. In the event of a breach of these representations and
warranties, the Company could be required to repurchase such loans.
The sale of mortgage loans generates a gain or loss to the Company primarily
as a result of the following factors. First, the Company may fund a loan at a
price (i.e., interest rate and discount) that is higher or
lower than the price the Company would receive if it immediately sold the loan
in the secondary mortgage market. These pricing differences occur principally
as a result of competitive pricing conditions in the primary loan origination
market. In calendar year 1997 and 1996, price competition was
intensive primarily due to aggressive marketing actions taken by major banks
seeking to increase their market share. If the pricing pressure continues,
future marketing results will be negatively impacted. Second, gains or losses
may result from changes in the market value of the loans, or in the value of the
commitments to purchase loans as a result of interest rate fluctuations, from
the time the Company commits to a stated interest rate charged to a borrower
(i.e., an interest rate lock-in) until the time the loan is sold or a fixedprice
purchase commitment is obtained in the secondary mortgage market. Consequently,
if the Company anticipates that interest rates will increase, it seeks
to purchase commitments from institutional investors to buy mortgage loans in
amounts in excess of the Company's current fundings. If the Company does not
deliver loans to fulfill these commitments, the commitment fees are expensed.
If interest rates subsequently increase, and if the Company has obtained such
commitments at fixed interest rates and subsequently funds loans at higher
interest rates, it will benefit from the increased interest rate spread.
However, if the Company anticipates that interest rates will decrease,
commitments are obtained from institutional investors only for those loans which
the Company expects to fund immediately. This practice minimizes the potential
commitment fee expense relating to unused commitments.
First Mortgage's net gain or loss on sale of mortgage loans generally equals
the difference between the Company's carrying value and the selling price of the
loans, net of commitment fees paid by the Company. The gain or loss on mortgage
loans was also impacted by the implementation of Statement of Financial
Accounting Standards No. 125 "Accounting for Mortgage Servicing Rights"
(FAS 125). FAS 125 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based
on its fair value relative to the loan as a whole. Gains attributed to the
adoption of FAS 125 are discussed further in Notes to Financial Statements and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Loan Servicing
Loan servicing is performed at the Company's corporate headquarters, and
includes (i) collecting and remitting loan payments, (ii) accounting for
principal and interest, (iii) holding and disbursing escrow or impound funds for
real estate taxes and insurance premiums, (iv) contacting delinquent borrowers,
(v) supervising foreclosures, and (vi) otherwise administering mortgage loans
for institutional investors. At March 31, 1998, approximately 55% of the
aggregate principal amount of the Company's mortgage servicing portfolio
consisted of FHA/VA loans. The Company believes that such loans are desirable
to service because they typically command higher servicing fees (currently
weighted average servicing fee is 0.47%) and generally have longer average loan
lives. Overall, the Company receives annual loan servicing fees that presently
average 0.39% (net of amortization of excess service fee and agency guarantee
fees), and range from 0.25% to 1.50% per annum of the declining principal amount
of serviced loans. The Company also retains late charges paid by borrowers and
other customary fees associated with loan servicing. While the Company
periodically has sold a portion of newly funded mortgage loans on a
servicing-released basis, it has never sold any servicing rights from its
mortgage servicing portfolio; however, the sale of such rights represents an
available source of funds. The
Company also has been acquiring servicing rights for loans originated by other
lenders since October, 1991. The Company intends to acquire additional servicing
rights whenever attractive opportunities exist.
The following table sets forth certain information regarding the Company's
mortgage servicing portfolio for the periods indicated:
Year Ended March 31,
1998 1997 1996
(Dollars in thousands,
except for number of
loans serviced and
average loan balance)
Beginning loan servicing portfolio $1,583,837 $1,477,161 $1,401,832
Add: Loans originated and purchased 476,986 353,411 330,896
Purchase of servicing 6,652 14,960 6,431
Less:Prepayment of loans (239,992) (149,953) (161,146)
Amortization (24,979) (23,779) (21,286)
Loans sold servicing released (232,361) (87,963) (79,566)
Ending loan servicing portfolio 1,570,143 1,583,837 1,477,161
Sub-servicing 96,708 99,815 92,544
Total servicing portfolio $1,666,851 $1,683,652 $1,569,705
Number of loans serviced (end of year) 17,542 17,466 16,820
Average loan balance (end of year) $ 95,021 $ 96,396 $ 93,324
The interest rate stratification of the servicing portfolio at March 31, 1998
is as follows:
Interest Rate Principal Balance Percent of Total
(Dollars in thousands)
7.00% and Under $ 207,596 12.5%
7.01% to 8.00% 894,376 53.7
8.01% to 9.00% 465,386 27.9
9.01% to 10.00% 75,435 4.5
10.01% to 11.00% 17,237 1.0
Over 11.00% 6,821 0.4
Total Servicing Portfolio $ 1,666,851 100.0%
The weighted average interest rate of the Company's servicing portfolio was
7.93% at March 31, 1998 as compared with 7.97% at March 31, 1997.
At March 31, 1998, approximately 49% of the Company's mortgage servicing
portfolio was covered by servicing agreements pursuant to the
mortgage-backed securities programs of GNMA. Under these agreements, the
Company may be required to advance funds temporarily to make scheduled payments
of principal, interest, taxes or insurance if the borrower fails to make such
payments. Although the Company cannot charge any interest on such advanced
funds, the Company typically recovers the advances within five to ten days upon
receipt of the borrower's payment, or in the absence of such payment, most of
the advances can be recovered through FHA insurance, VA guarantee, FNMA or FHLMC
reimbursement provisions in connection with loan foreclosures. The Company has
a $2 million line of credit with Sanwa Bank for the purpose of funding servicing
advances. This line of credit was not utilized in fiscal 1998 since all advances
were covered by working capital. During fiscal 1998 the monthly average amount
of funds advanced by the Company for mortgage
payments, taxes, insurance, VA buydown, foreclosure expenses and nonmandatory
early removal of foreclosed loans (being processed by the Company) from GNMA
pools amounted to $12,433,000. The total advance and foreclosure losses for
fiscal 1998 were $1,161,000. The balance of the Company's mortgage servicing
portfolio is covered by servicing agreements that require the Company to make
required loan payments only out of funds actually received from borrowers.
The following table sets forth the geographic distribution of the Company's
loan servicing portfolio at March 31, 1998.
Percentage of
Number of Loans Percentage of No. of Principal Balance Principal Balance
State Serviced Loans Serviced Serviced Serviced
(Dollars in thousands)
California 15,395 87.8% $1,489,797 89.4%
Nevada 820 4.7 61,388 3.7
Washington 726 4.1 80,318 4.8
Texas 216 1.2 10,226 0.6
Oregon 156 0.9 16,017 1.0
Colorado 123 0.7 3,146 0.2
Other States 106 0.6 5,959 0.3
Total 17,542 100.0% $1,666,851 100.0%
The Company believes that its mortgage servicing portfolio (net
of capitalized mortgage servicing assets) has significant market value, although
a significant portion of the mortgage servicing portfolio has not been treated
as an asset for financial statement reporting purposes. The two primary risks to
mortgage servicing portfolio revenue (and therefore mortgage servicing portfolio
market value) are loan prepayments and loan foreclosures which prematurely
eliminate or reduce future loan servicing fees. The prepayment risk to the
mortgage servicing portfolio increases as (i) mortgage interest rates decline,
and (ii) the percentage of adjustable rate mortgages ("ARM's") in a servicing
portfolio increases because ARM's historically are prepaid more frequently than
fixed-rate loans. The Company believes that the composition of its mortgage
servicing portfolio, as measured by interest rates, compares favorably to that
of the mortgage banking industry as a whole. At March 31, 1998, ARM's
represented approximately 17% of the aggregate dollar amount of loans in the
Company's mortgage servicing portfolio. At March 31, 1998, 0.38% of the number
of mortgage loans in the Company's mortgage servicing portfolio were more than
90 days past due, and 1.31% of the number of mortgage loans were in foreclosure.
First Mortgage believes that its loan servicing and loan origination
operations reduce the risk of fluctuating interest rates. As
interest rates increase, loan origination income may decrease; however, this
decline is mitigated by the stabilization of loan administration income
generated by the Company's mortgage servicing portfolio as a result of
diminished loan prepayments. Conversely, as interest rates decline, increased
loan prepayments may reduce loan administration income, but this reduction tends
to be offset by increased loan origination fees due to increased loan
production. The Company can also reduce the risk to its loan servicing and
origination revenue resulting from interest rate fluctuations by selling
mortgage loans for a premium on a servicingreleased basis when interest rates
are high, and by increasing its solicitation of refinance loans when interest
rates are low.
Seasonality
The mortgage banking industry is usually subject to seasonal trends. These
trends reflect the general pattern of nationwide home sales. Such sales
typically peak during the spring and summer seasons and decline to lower levels
from midNovember through January.
Competition
The mortgage banking business is highly competitive and fragmented. First
Mortgage Corporation competes with other mortgage bankers, state and national
banks, savings and loan associations, mortgage brokers, credit unions and others
for mortgage loans. The record refinance surge of 1993 led to a rapid expansion
of mortgage providers, resulting in industry over-capacity when interest rates
rose in 1994 and the volume of mortgage loans declined accordingly. Estimated
U.S. mortgage origination volume fell to $750 billion in 1996 from $1.0 trillion
in 1993. During fiscal 1998 and 1997 competition for mortgage loans remained
intense due both to industry over-capacity and the expanded aggressiveness of
major banks. Banks have an advantage over others in that they can price their
mortgages at their lower short term cost of funds. And, due to their
strengthened capital position which increases their capacity to hold portfolio
loans, banks have become extremely aggressive with mortgage price discounting in
order to expand their mortgage base as a platform from which to crosssell other
bank products. The result is a competitive market wherein major banks, through
their mortgage banking subsidiaries, are far more aggressively pricing their
loans than the traditional secondary market agencies such as FHLMC and FNMA.
Recognizing this, the Company established a strategic mortgage servicingretained
arrangement with one west coast bank and is exploring other such opportunities.
Additionally, the Company has correspondent relationships with several of the
most aggressive major banks. The Company also competes by operating only in
strategically selected geographic markets, motivating its sales force through
incentive compensation based on loan origination volume, providing prompt and
comprehensive service and otherwise maintaining strong professional
relationships with realtors, developers and customers.
Regulation
First Mortgage is an FHA-approved Direct Endorsement Mortgagee, a VA
Automatic Lender, an approved issuer and servicer under the GNMA mortgage-backed
securities program, and an approved seller and servicer with the FNMA, FHLMC,
the California Housing Financing Agency, the California Public Employees
Retirement System and several private mortgage-backed securities conduit
companies. As such, the Company's mortgage banking business is subject to the
periodic reporting, examination and auditing requirements and other rules and
regulations of such governmental agencies with respect to its net worth and its
mortgage loan origination, processing, sales and servicing. These rules and
regulations, among other things, prohibit race, age and sex discrimination,
provide for inspections and appraisals of properties, require credit reports on
prospective borrowers, fix (in some cases)
maximum interest rates, fees and loan amounts, and mandate the annual submission
of audited financial statements.
First Mortgage's loan origination activities are also subject to such federal
laws as the Equal Credit Opportunity Act, the Truth-InLending Act, the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. Furthermore, the Company
is licensed to do business in California, Nevada, Oregon, Washington and Texas,
and its mortgage banking operations are subject to the laws of those states,
including those prohibiting usury. The Company is licensed by the California
Department of Corporations as a Residential Mortgage Lender.
The Company employs a full-time compliance officer and Quality Assurance
staff to monitor and audit compliance with all regulatory requirements.
Employees
As of March 31, 1998, First Mortgage employed 164 persons. None
of the Company's employees is represented by a labor union, and the Company
believes that it has an excellent relationship with its employees.
ITEM 2. PROPERTIES
First Mortgage's executive and administrative headquarters are located in a
22,000 square foot office building at 3230 Fallow Field Drive, Diamond Bar,
California 91765. The entire building is leased by the Company from Fin-West
Group ("Fin-West"), an affiliated corporation which owns 82.5% of the Company's
outstanding common stock. Before expiration of the lease on December 31, 1997,
the Company negotiated a lease extension to renew the lease three times, each
time for one additional year, starting January 1, 1998. The monthly rental
payment will be $22,000 effective April 1, 1998. The monthly rental payment for
any lease extension is subject to increase (but not decrease) upon any such
extension. Such payments may not exceed the fair market rent for comparable
facilities at the time of the extension. The Company pays for all property
taxes, repairs, insurance and utility services for the entire building. The
Company believes the current facilities are adequate to meet foreseeable future
needs.
The Company's branch offices each are leased at varying rates and
each office contains approximately 1,000 to 2,000 square feet. For the year
ended March 31, 1998, the annual aggregate rental expense for all branch offices
was approximately $242,000. Most of the Company's branch offices are on month-
tomonth or one year short-term leases. No branch office leases generally extend
beyond two years.
ITEM 3. LEGAL PROCEEDINGS
First Mortgage is currently a defendant in certain litigation arising in the
normal course of its business. In the opinion of the Company, any potential
liability with
respect to such legal actions will not, in the aggregate, be material to the
Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock was traded on the NASDAQ National Market System
(the "NASDAQ System") under the symbol FMOR from April 20, 1992 to
April 24, 1997, and is presently traded on the Over The Counter ("OTC") Bulletin
Board under the same trading symbol. The reason behind the change was that the
Company no longer retains two registered and active market makers as required
by NASDAQ.
The following table sets forth the high and low bid quotations per share of
the Company's Common Stock during each of the quarterly periods indicated below.
Fiscal 1998: High Low
First quarter $ 4.125 $ 3.250
Second quarter 4.250 2.250
Third quarter 3.875 3.375
Fourth quarter 3.813 3.563
Fiscal 1997: High Low
First quarter $ 6.750 $ 4.625
Second quarter 5.625 4.625
Third quarter 5.625 4.125
Fourth quarter 5.125 4.125
As of March 31, 1998, there were 31 shareholders of record of the
Company's Common Stock. No cash dividends have been paid on the Company's common
stock. The Company presently intends to retain all earnings for use in its
business and therefore does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company's warehousing lines of credit with
Bank of America and Sanwa Bank restrict the Company's ability to pay dividends
or to make other distributions with respect to the Common Stock. Any decision
to pay cash dividends on the Common Stock will depend on the Company's
circumstances at the time, including the profitability of operations,
availability of cash, lines of credit restrictions and other factors.
ITEM 6. SELECTED FINANCIAL DATA
All share and per share data set forth below have been adjusted
to reflect a 5-for-4 stock split of the Company's Common Stock on August 2,
1993.
Year Ended March 31,
1998 1997 1996 1995 1994
(In thousands, except per share data)
Income Statement Data:
Revenues:
Loan origination income $ 3,303 $ 3,426 $ 3,397 $ 2,523 $ 6,361
Loan servicing income 7,628 7,137 6,787 6,695 6,332
Gain on sale of mortgage
loans 7,611 5,374 7,116 819 13,268
Interest income 2,527 2,165 2,105 2,866 2,959
Other income 5 2 29 43 65
Total revenues 21,074 18,104 19,434 12,946 28,985
Expenses:
Compensation and benefits 8,282 8,217 7,752 6,899 11,795
General and administrative
expenses 6,285 5,708 5,616 5,280 6,849
Amortization of capitalized
servicing rights 3,174 1,563 878 314 396
Interest expense 701 690 786 1,309 1,465
Total expenses 18,442 16,178 15,032 13,802 20,505
Income (loss) before income taxes 2,632 1,926 4,402 (856) 8,480
Income tax expense (benefit) 1,101 811 1,833 (308) 3,491
Net income (loss) $ 1,531 $ 1,115 $ 2,569 $ (548) $ 4,989
Basic and diluted net income
(loss) per share $ 0.26 $ 0.19 $ 0.44 $ (0.09) $ 0.83
Weighted average shares outstanding 5,848 5,873 5,883 5,947 5,996
Operating Data:
Loans originated and purchased $ 476,986 $ 353,411 $ 330,896 $ 174,544 $ 624,317
Loans serviced (end of year) 1,666,851 1,683,652 1,569,705 1,533,888 1,495,384
At March 31,
1998 1997 1996 1995 1994
(In thousands)
Balance Sheet Data:
Mortgage loans held for sale $53,052 $27,286 $19,879 $25,329 $42,737
Capitalized mortgage servicing rights 7,490 6,709 3,547 1,230 1,386
Total assets 80,445 50,923 51,131 42,296 57,086
Notes and sight drafts payable 49,799 22,626 24,852 19,698 32,821
Stockholders' equity 26,995 25,648 24,647 22,078 23,080
No cash dividends were paid on common shares for any period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
At the beginning of fiscal year 1998, First Mortgage Corporation decided to
continue its growth strategy of simultaneously enhancing and expanding its loan
production capacity and increasing its loan servicing portfolio.
The Company was largely successful in implementing the strategy. Through its
production expansion plan, new branches were established and originations have
grown. In fiscal year 1998, loan originations increased by 35.0% to $477.0
million from $353.4 million in the previous year, in spite of extremely
aggressive competition from other originators. The loan servicing portfolio
only declined slightly to $1.667 billion in 1998 compared to $1.684 billion in
1997, in the face of a significant refinance wave in the last half of the year.
Net income for fiscal year 1998 increased 37.3% to $1.53 million
from $1.12 million a year ago. Compared to 1997, total revenues increased by
16.4% while total expenses increased by 13.9%. The earnings in fiscal 1998 were
positively impacted by falling longterm interest rates which boosted both new
loan production and the gain on sale of mortgages, and increased market
penetration resulting from the earlier opening of new production offices
Results of Operations
Revenue
The Company generates revenue primarily from (i) loan origination
fees, (ii) fees received for servicing (i.e., administering) mortgage loans,
(iii) net gain on the sale of mortgage loans in the secondary market and (iv)
interest income received on mortgage loans during the period in which the
Company warehouses loans pending their sale and purchase. Loan origination
fees, interest income and net gain on the sale of mortgage loans are largely
transaction oriented and volume driven. Loan servicing fees constitute a
continuing stream of revenue produced by the portfolio of mortgage loans
serviced. The sale of servicing rights represents a potential revenue source
available to the Company at any time should such need arise.
The following table sets forth, for the periods indicated, the percentage of
the Company's total revenue represented by each source of income:
Year Ended March 31,
1998 1997 1996
Loan origination income 15.7% 18.9% 17.5%
Loan servicing income 36.2 39.4 34.9
Gain on sale of mortgage loans 36.1 29.7 36.6
Interest income 12.0 12.0 10.8
Other income - - 0.2
Total 100.0% 100.0% 100.0%
Loan Origination Income. The Company defers immediate recognition of loan
origination fees paid by the borrower for an originated mortgage loan. Instead,
fees and direct loan origination costs are offset and the net amount deferred
until the related loans are sold by the Company. Generally speaking, the amount
of loan origination fee income correlates positively to the volume of loan
origination. Loan origination income showed a modest increase of 0.9% to $3.43
million in fiscal 1997 from $3.40 million in fiscal 1996, as loan production
rose by 6.8% from 1996 to 1997. For the fiscal year 1998, however, the loan
origination revenue decreased by 3.6% to $3.30 million from a year ago, due
primarily to the higher volume of wholesale and refinance loans, which carry
lower front-end origination fees.
Loan origination income may not precisely track loan origination
volume because a majority of borrowers now elect to pay slightly higher mortgage
rates to reduce some or all of the amount of their loan origination fees. The
Company is then able to obtain a premium upon the sale of such mortgage loans in
the secondary market because of their higher interest rates, and those premiums
are reflected in the gain on sale of mortgage loans.
Loan Servicing Income. Loan servicing income represents loan servicing fees,
late charges and other fees earned by the Company for administering loans on
behalf of permanent investors. The Company's annual loan servicing fee for
mortgage loans ranges from 0.25% to 1.5% of the principal amount of the loan
serviced depending on the type of mortgage loan, and on average is approximately
0.39% net of amortization of capitalized service fees and agency guarantee fees.
Loan servicing income increased by 6.9% to $7.63 million in fiscal 1998 from
$7.14 million in fiscal 1997, and 5.2% to $7.14 million in fiscal 1997 from
$6.79 million in 1996. Higher servicing income can generally be accounted for
by one or more of the following reasons: growth in the loan servicing portfolio;
higher weighted average servicing fees and larger miscellaneous servicing income
(such as late charges).
The Company's mortgage servicing portfolio increased 7.3% to
$1.684 billion in fiscal 1997 from $1.570 billion in 1996. In fiscal 1998, the
lower long-term interest rate environment has accelerated the run-off rate, and
consequently, the loan servicing portfolio experienced a marginal decrease of 1%
to $1.667 from a year ago.
Gains on Sale of Mortgage Loans. Gains and losses from the sale of mortgage
loans result from: (a) competitive market forces affecting our pricing
structure at the time of origination; and (b) interest rate increases or
decreases between the time that the Company commits to originate or purchase
loans and when the Company commits to sell the loans in the secondary markets.
It is also impacted by two other factors: price subsidies and the recognition of
gains relating to originated mortgage servicing rights ("OMSRs").
Since 1995, price competition has grown increasingly intense.
Commercial banks in particular have been very aggressive with mortgage pricing
in order to capture a higher percentage of the market, with the Company's
wholesale operations particularly impacted. The Company therefore is often
forced to set prices below the secondary markets for some of its loan programs.
To the extent that the pricing pressure
continues, it will have a negative impact on the Company's future gains on
selling of mortgages.
In May 1995, the Financial Accounting Standard Board issued FAS 125. The
Company adopted FAS 125 for its fiscal year 1996. Under FAS 125, OMSRs are
required to be classified as an asset and the total cost of creating a mortgage
loan is allocated at origination between the loan and the servicing rights based
on their respective fair values. Gains on the sales of mortgage loans
attributable to the allocation of costs to the OMSRs are recognized when the
related loans are sold.
Gain on mortgage sales increased by 41.6% to $7.61 million in fiscal 1998
from $5.37 million in fiscal 1997. This increase was attributable to the higher
loan originations generated by the Company and the generally declining interest
rate environment which existed during most of fiscal year 1998. Gain on sale of
mortgage loans decreased to $5.37 million in fiscal 1997 from $7.12 million in
fiscal 1996. The decrease was mostly attributable to intense price competition
prevailing in the mortgage lending industry.
Net Interest Income. Net interest income consists of the difference between
the interest income received on mortgage loans held for sale and the interest
paid by the Company on the shortterm bank borrowings used to finance mortgage
loans prior to settlement of purchase. The conditions that affect net interest
income from period to period include the relationship between prevailing
mortgage rates and short term bank borrowing rates, the mix of fixed-rate and
adjustable rate mortgage loans held for sale and the average holding period
before the loans are sold. The Company also uses cash generated from operations
in lieu of bank borrowings to fund a portion of its mortgage loans to reduce
interest expense and increase net interest income. Interest income earned by
the Company on mortgage loans held for sale has exceeded interest expense on the
Company's shortterm bank borrowings in every fiscal year.
The following table sets forth certain data regarding net interest
income:
Year Ended March 31,
1998 1997 1996
(Dollars in Thousands)
Interest income $2,527 $2,165 $2,105
Interest expense 701 690 786
Net interest income $1,826 $1,475 $1,319
Interest income, which consisted mostly of the interest received on
mortgage loans held for sale, increased by 16.7% in fiscal 1998 from fiscal 1997
and by 2.9% in fiscal 1997 from fiscal 1996. The increase was due largely to
higher average mortgage inventory portfolio carried by the Company most notably
in fiscal 1998.
Interest expense increased by 1.6% in fiscal 1998 from fiscal 1997, due to
slightly higher utilization of warehousing lines. It decreased by 12.2% in
fiscal 1997 from fiscal 1996 due largely to lower balance outstanding in the
reverse repurchase line and more loan funding with corporate cash.
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 expense. Total expenses
increased 13.9% to $18.4 million in fiscal 1998 from $16.2 million in fiscal
1997, compared to an increase of 7.6% to $16.2 million in fiscal 1997 from $15.0
million in fiscal 1996.
As the amount of mortgage loans originated by the Company increases, an
increase in total employee compensation results from additional commissions paid
to loan originators, processors and underwriters and other staff necessitated to
support higher loan origination volume. Nevertheless, compensation and benefits
expenses increased only 0.8% to $8.3 million in fiscal 1998 from $8.2 million in
fiscal 1997, compared to an increase of 6.0% to $8.2 million in fiscal 1997 from
$7.8 million in fiscal 1996. The smaller increase was largely due to payroll
cost control measures implemented by the Company.
Amortization of capitalized servicing rights in fiscal 1998 increased over
prior years due mainly to the Company's larger investment in mortgage servicing
rights and substantially higher volume of prepayments over the comparable prior
period.
General and administrative expenses increased 10.0% to $6.3 million in fiscal
1998 from $5.7 million in fiscal 1997, compared to an increase of 1.6% from
fiscal 1997 to fiscal 1996. The increases in these expenses were a direct
result of expansion in loan origination, and direct marketing efforts during
fiscal 1998.
Income Taxes
The Company's combined effective federal and state income tax rate was 41.8%
for the fiscal year ended March 31, 1998 and 1997, and 41.6% for the fiscal year
ended March 31, 1996. The rates differ from the federal statutory rate of 34%
primarily due to state income taxes.
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
March 31, 1998, the Company believes that a 100 basis point change in longterm
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 $1.5 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 used as forecast.
Liquidity and Capital Resources
The Company's principal liquidity requirement is the funding of
its new mortgage loans, loan origination expenses, advances of delinquent
payments and escrow balances, and other operating activities. To meet these
needs, the Company relies on warehouse lines of credit with banks, its own
capital and cash flows from operations.
At March 31, 1998, maximum permitted borrowings under the warehouse lines of
credit with two nonaffiliated banks totaled $90 million and the amount
outstanding was $40.4 million. Borrowings under these facilities are secured by
mortgage loans. The agreements also contain various covenants, including
minimum net worth, current ratio (as defined), net income, servicing portfolio
balances, debt to net worth ratio, and restrict the Company's ability to pay
dividends. Management believes that the warehouse agreements will be renewed
when the current terms expire in August and September, 1998.
In addition to the warehouse lines of credit, the Company may
utilize the short-term reverse repurchase agreements provided by investment
banking firms in connection with its inventory of mortgage loans and mortgage-
backed securities. These facilities tend to carry lower interest rates and allow
the Company to better utilize its warehouse lines by accelerating the turnover
of loans in inventory.
From September 1994 to March 31, 1998, the Company repurchased in open market
transactions 172,720 shares of its common stock at an aggregate cost of
$752,000.
The Company's mortgage servicing portfolio provides a liquidity
resource since a majority of the loan servicing rights are an unrecorded asset
which may be sold. Although the Company does not intend to sell mortgage
servicing rights solely to increase liquidity, the sale of such rights is an
available source of funds should the need arise.
Management believes that its current financing arrangements are adequate to
meet its present operating needs; however, increases in the existing facilities
or other supplementary sources may have to be explored should the market
conditions improve and loan origination volume increase.
Inflation
Inflation may significantly affect the Company's ability to originate loans.
Interest rates typically increase during periods of high inflation and decrease
during periods of low inflation. Generally, the mortgage banking industry has
experienced increased
origination volume in response to low interest rates and loan originations have
generally decreased during periods of high interest rates. As interest rates
decline, prepayments on the loan servicing portfolio generally increase as
borrowers refinance mortgage loans to take advantage of lower rates. A higher
prepayment rate on loans serviced decreases the value of the Company's loan
servicing portfolio, accelerating amortization of purchased servicing and
decreases the amount of servicing income. As interest rates rise, new loan
originations are likely to fall, but prepayments of existing loans generally
decline and the value of the Company's servicing portfolio and of the escrow
balances collected thereunder may be enhanced.
Recently Issued Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (`FASB') issued FAS
No. 130, Reporting Comprehensive Income. FAS 130 requires reporting of
comprehensive income by its components and in total in the financial statements.
This standard is effective beginning in 1998. In management's opinion, this
standard will not have a material impact on the corporation's financial results.
Prospective Trends
Fiscal 1998 was very similar to fiscal 1997 and 1996 and saw more
of the same in terms of competitive forces and industry consolidation. Overall
volume of new mortgage originations, however, increased substantially during
fiscal 1998, particularly in the last fiscal quarter, enabling the Company to
increase its new loan production.
Although the Company does well relative to its mortgage banking peers, the
industry as a whole is suffering from the confluence of two major developments,
the remaining over capacity of mortgage providers relative to the current level
of available mortgage volume; and the looming and growing presence of the major
commercial banks in the mortgage arena. In the first instance, the mortgage
providing industries, which includes mortgage bankers, savings and loan
associations, credit unions, mortgage loan brokers and commercial banks,
continue to have excess capacity for the present volume of new mortgage
originations, even though there has been an unprecedented shrinking of companies
through consolidations, acquisitions and some outright failures. This remaining
excess capacity by itself has led to price cutting and reduced operating margins
for all mortgage originators. Furthermore, the American consumer is now
welltuned to interest rates, and even relatively small movements in rates can
have fairly dramatic effects on new mortgage volume and earnings.
In the second instance, as discussed under Competition on page 13, several of
the major banks continue to be fiercely competitive in pricing mortgage
products. Their present hope that holding a consumer's mortgage is the gateway
to crossselling many other bank products has engaged the banks in a virtual
price war with one another for those mortgages. Their valuation models for loan
servicing rights and the resulting downstream impact on pricing at the
origination level, particularly through their wholesale channel with loan
brokers, is having a major impact on the mortgage banking industry and our
ability to compete on the types of mortgage loans most soughtafter by these
commercial banks.
The Company's strategy in the face of this is to compete in the channels and
with the products which are not the most sought-after by the commercial bank
giants. Although we will maintain our correspondent relationships with the
major banks who presently have such a strong appetite for certain mortgage
products, our primary emphasis will be on the origination of FHA and VA loans
for which the major banks largely do not compete; to expand our low-cost and
profitable direct marketing operations into other states; and to add other new
nonbank loan products which have more profit potential for the Company. Much of
this strategy has been implemented already with the expansion of our Direct
Marketing channel, and the introduction of home equity loans.
Consistent with this, for fiscal 1998 the Company has revised its incentive
bonus plan for the majority of its non-sales personnel and management.
Heretofore, the bonus incentives were based upon the volume of loans processed
through the Company, predicated on the long-standing industry practice that
volume equated to profit. But the new reality dictates a new paradigm based
upon profit, and profit potential, rather than volume of loans. Volume is
important, but only if it enhances profit, and the bonus incentives are now
connected directly to the Company's profits. This has been producing results,
as many of our employees come forth with ideas for reducing expenses and
increasing revenue, a positive result indeed.
Year 2000 Issues
Most companies will face serious information systems problems in the next
two years because many software applications and systems written in the past may
not properly recognize calendar dates beginning in the year 2000. The errors
could result in miscalculations or system failures. The Company has identified
the changes needed to correct the problems and has allocated the resources it
deems necessary to have it implemented. The Company has established a deadline
of having substantially all of its hardware and software in compliance for year
2000 by the end of 1998.
The Company's computing environment consists largely of personal computers
connected to Local Area Network based system. The software for loan funding,
loan administration and corporate accounting are maintained by outside service
bureaus. These service bureaus have already been contacted by the Company and
are either in compliance or are expected to be in compliance by the Company's
deadline.
Based on preliminary information, the Company does not anticipate
that the expenses related to achieving year 2000 compliance will have a material
impact on the Company's results of operations.
Forward-Looking Statements
From time to time, the Company or its representatives may make
forward-looking statements in this report or elsewhere relating to such
matters as anticipated financial performance, including projections of revenues,
expenses, earnings, liquidity, capital resources or other financial items;
business plans, objectives and prospects; and similar matters. Forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 frequently are identified by the use of terms such
as "expect," "believe," "estimate," "may," "should," "will" or similar
expressions.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements made by the Company or its representatives. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include the following, among other
factors: (a) the cyclical financial results traditionally experienced by the
mortgage banking industry, which have been caused in large part by periodic
fluctuations in mortgage interest rates and in consumer demand for new mortgage
loans; (b) the possibility of adverse changes in the Company's ability to obtain
suitable warehousing lines of credit with which to fund new loans; (c) the
possibility of adverse changes in the Company's ability to sell new mortgage
loans in the secondary mortgage market; (d) increasing competition faced by the
Company, particularly from commercial banks; (e) the possibility of adverse
regulatory changes, such as changes in the level or terms of programs
administered by GNMA, FNMA or FHLMC or the FHA or VA; (f) dependence on existing
management; (g) credit risks inherent in the lending business; and (h) periodic
fluctuations in general economic conditions, with corresponding fluctuations in
the Company's ability to originate new mortgage loans.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Disclosure About Market Risk", incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information with respect to this item is set forth in "Index to Financial
Statements".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
* For information called for by Items 10-13, reference is made to
the Company's definitive proxy statement for its annual meeting of shareholders,
to be held on September 23, 1998, which will be filed with the Securities and
Exchange Commission within 120 days after March 31, 1998, and which is
incorporated herein by reference, except that the information included under the
captions "Report of the Compensation Committee on Executive Compensation" and
"Stock Performance Graph" is not incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements
The financial statements that are filed as part of this Annual Report on Form
10-K are set forth in the Index to Financial Statements at page F-1 of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K
The Company filed no current report on Form 8-K during the quarter ended
March 31, 1998.
(c) Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated by reference herein:
Exhibit
Number Description
3.1 Restated and Amended Articles of Incorporation of the Company (previously
filed with the Securities and Exchange Commission on March 6, 1992 as
Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
3.2 Restated Bylaws of the Company (previously filed with the Securities and
Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File No. 33-45187, and incorporated
herein by reference).
10.1 Credit and Security Agreement dated September 1, 1995, between Bank of
America National Trust and Savings Association and the Company
(previously filed with the Securities and Exchange Commission on June 27,
1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference).
10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September
1, 1995, among Bank of America National Trust and Savings Association and
Bank of America National Trust and Savings Association as agent for
various other lenders and the Company (previously filed with the
Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference).
10.3 Fourth Amendment dated April 7, 1997 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.4 Fifth Amendment dated August 29, 1997 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.5 Sixth Amendment dated September 10, 1997 to Amended and Restated
Mortgage Loan Warehousing Agreement among Bank of America National Trust
and Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.6 Seventh Amendment dated March 1, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.7 Amendments dated August 29, 1997 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.8 Amendments dated November 30, 1997 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.9 Note Secured by Deed of Trust dated February 1, 1991, by Fin-West Group
in favor of the Company in the amount of $500,000 (previously filed with
the Securities and Exchange Commission on January 21, 1992 as Exhibit
10.5 to the Company's Registration Statement on Form S-1, File No.
3345187, and incorporated herein by reference).
10.10 Lease dated January 1, 1992, between the Company and Fin-West (previously
filed with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.7 to the Company's Registration Statement on Form S-1, File
No. 3345187, and incorporated herein by reference).
10.11 Lease extension dated December 15, 1997 to Standard Office Lease-Net
dated January 1, 1992 between the Company and FinWest Group.
10.12 1992 Stock Incentive Plan (previously filed with
the Securities and Exchange Commission on March 6, 1992 as Exhibit 10.8
to Amendment No. 1 to the Company's Registration Statement on Form S-1,
File No. 33-45187, and incorporated herein by reference).
10.13 1993 Stock Option Plan for Non-Employee Directors (previously filed with
the Securities and Exchange Commission on October 25, 1993 as Exhibit
4.6 to the Company's Registration Statement on Form S-8, File No.
3370760, and incorporated herein by reference).
10.14 Profit Sharing Plan for Employees of the FinWest Group, dated April 5,
1990 (previously filed with the Securities and Exchange
Commission on January 21, 1992 as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, File No. 33-45187, and incorporated
herein by reference).
10.15 Fin-West Group 401(k) Savings Plan, dated April 5, 1990 (previously filed
with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.10 to the Company's Registration Statement on Form S-1, File
No. 3345187, and incorporated herein by reference).
10.16 Defined Contribution Plan and Trust -- Basic Plan Document No. 3
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.11 to the Company's Registration Statement on Form
S-1, File No. 33 45187, and incorporated herein by reference).
10.17 Employee Pre-Tax Premium Plan of Fin-West Group, Inc., a California
corporation, dated January 1, 1990 (previously filed with the Securities
and Exchange Commission on January 21, 1992 as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, File No. 33-45187, and
incorporated herein by reference).
10.18 Renewal of Employment Agreement dated April 30, 1998 between Clement
Ziroli and the Company.
10.19 Employment Agreement dated April 30, 1998 between Bruce G. Norman and the
Company.
10.20 Renewal of Employment Agreement dated April 30, 1998 between
Pac W. Dong and the Company.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (included only in the electronic filing).
Exhibits filed herewith or incorporated by reference herein will be furnished
to shareholders of the Company upon written request and payment of a fee of $.20
per page, which fee covers only the Company's reasonable expense in furnishing
such exhibits. Written requests should be addressed to Robyn S. Fredericks,
Secretary, First Mortgage Corporation, 3230 Fallow Field Drive, Diamond Bar,
California 91765.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MORTGAGE CORPORATION
Dated June 27, 1998 By CLEMENT ZIROLI
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 27, 1998.
By CLEMENT ZIROLI
Clement Ziroli, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
By PAC W. DONG
Pac W. Dong, Director, Chief Financial
Officer, Controller and Executive Vice
President (Principal Financial and Accounting
Officer)
By BRUCE G. NORMAN
Bruce G. Norman, Director,
President and Chief Operating Officer.
By HAROLD HARRIGIAN
Harold Harrigian, Director
By ROBERT E. WEISS
Robert E. Weiss, Director
First Mortgage Corporation
Index to Financial Statements
Report of Independent Auditors F-2
Financial Statements
Balance Sheet as of March 31, 1998 and 1997 F-3
Statement of Income for the years ended March 31, 1998, 1997 and 1996 F-4
Statement of Stockholders' Equity for the years ended March 31, 1998,
1997 and 1996 F-5
Statement of Cash Flows for the years ended March 31, 1998,
1997 and 1996 F-6
Notes to Financial Statements F-7
All other schedules are omitted because they are not required, are not
applicable or because the information is included in the Company's financial
statements or the notes thereto.
Report of Independent Auditors
Board of Directors
First Mortgage Corporation
We have audited the accompanying balance sheet of First Mortgage Corporation as
of March 31, 1998 and 1997, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Mortgage Corporation at
March 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
Ernst & Young, LLP
Orange County, California
June 15, 1998
First Mortgage Corporation
Balance Sheet
March 31
1998 1997
Assets
Cash $ 8,182,000 $ 5,903,000
Mortgage loans held for sale 53,052,000 27,286,000
Other receivables and servicing advances 10,566,000 9,623,000
Capitalized servicing rights, net 7,490,000 6,709,000
Property and equipment, net 664,000 592,000
Prepaid expenses and other assets 361,000 546,000
Due from affiliates - 134,000
Note receivable, Fin-West 130,000 130,000
Total assets $80,445,000 $50,923,000
Liabilities and stockholders' equity
Liabilities:
Notes payable, banks $40,427,000 $20,172,000
Notes payable, officer - 1,500,000
Sight drafts payable 9,372,000 954,000
Accounts payable and accrued liabilities 1,392,000 816,000
Deferred income taxes 2,259,000 1,833,000
Total liabilities 53,450,000 25,275,000
Commitments and contingencies (Note 13)
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 - 5,808,697 in 1998
and 5,859,117 in 1997 4,963,000 5,147,000
Retained earnings 22,032,000 20,501,000
Total stockholders' equity 26,995,000 25,648,000
Total liabilities and stockholders' equity $80,445,000 $50,923,000
See accompanying notes.
First Mortgage Corporation
Statement of Income
Year ended March 31
1998 1997 1996
Revenues:
Loan origination income $ 3,303,000 $ 3,426,000 $3,397,000
Loan servicing income 7,628,000 7,137,000 6,787,000
Gain on sale of mortgage loans 7,611,000 5,374,000 7,116,000
Interest income 2,527,000 2,165,000 2,105,000
Other income 5,000 2,000 29,000
Total revenues $21,074,000 18,104,000 19,434,000
Expenses:
Compensation and benefits 8,282,000 8,217,000 7,752,000
General and administrative expenses 6,285,000 5,708,000 5,616,000
Amortization of capitalized serving rights 3,174,000 1,563,000 878,000
Interest expense 701,000 690,000 786,000
Total expenses 18,442,000 16,178,000 15,032,000
Income before income taxes 2,632,000 1,926,000 4,402,000
Income tax expense 1,101,000 811,000 1,833,000
Net income $ 1,531,000 $ 1,115,000 $ 2,569,000
Basic earning per share $ .26 $ .19 $ .44
Diluted earning per share $ .26 $ .19 $ .44
See accompanying notes.
First Mortgage Corporation
Statement of Stockholders' Equity
Common stock Retained
Shares Amount earnings Total
Balance at March 31, 1995 5,882,947 $5,261,000 $16,817,000 $22,078,000
Net income - - 2,569,000 2,569,000
Stock issuances under
option plan 170 - - -
Balance at March 31, 1996 5,883,117 5,261,000 19,386,000 24,647,000
Net income - - 1,115,000 1,115,000
Repurchase of shares (24,000) (114,000) - (114,000)
Balance at March 31, 1997 5,859,117 5,147,000 20,501,000 25,648,000
Net income - - 1,531,000 1,531,000
Repurchase of shares (50,420) (184,000) - (184,000)
Balance at March 31, 1996 5,808,697 $4,963,000 $22,032,000 $26,995,000
See accompanying notes.
First Mortgage Corporation
Statement of Cash Flows
Year ended March 31
1998 1997 1996
Operating activities
Net income $ 1,531,000 $ 1,115,000 $ 2,569,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for deferred income taxes 426,000 966,000 1,058,000
Provision for losses on foreclosure (459,000) 153,000 210,000
Amortization of originated mortgage servicing rights,
excess service fee and purchased servicing rights 3,174,000 1,563,000 878,000
Depreciation and amortization 220,000 195,000 175,000
Originations and purchases of mortgage loans held
for sale (476,986,000) (353,411,000) (330,896,000)
Sales and principal repayments of mortgage loans
held for sale 451,220,000 346,004,000 336,346,000
Change in excess service fee 136,000 120,000 152,000
Change in other receivables and servicing advances (484,000) (231,000) (810,000)
Change in prepaid expenses and other assets 185,000 345,000 (190,000)
Change in accounts payable and accrued liabilities 576,000 51,000 245,000
Loss on sale of assets - 7,000 -
Net cash provided by (used in) operating activities (20,461,000) (3,123,000) 9,737,000
Investing activities
Sale (purchase) of commercial paper - 9,955,000 (9,955,000)
Originated mortgage servicing rights (3,436,000) (3,838,000) (3,740,000)
Purchase of mortgage servicing rights (655,000) (577,000) (37,000)
Note receivable, Fin-West - - 120,000
Purchase of furniture and equipment (306,000) (212,000) (108,000)
Proceeds from sale of assets 14,000 30,000 39,000
Change in due from affiliates 134,000 60,000 (10,000)
Net cash provided by (used in) investing activities (4,249,000) 5,418,000 (13,691,000)
Financing activities
Change in notes payable, banks 20,255,000 (481,000) 12,292,000
Change in sight drafts payable 8,418,000 (1,745,000) 2,355,000
Change in notes payable, other - - (9,493,000)
Change in note payable, officer (1,500,000) - -
Repurchase of common stock (184,000) (114,000) -
Net cash provided by (used in) financing activities 26,989,000 (2,340,000) 5,154,000
Increase (decrease) in cash 2,279,000 (45,000) 1,200,000
Cash at beginning of year 5,903,000 5,948,000 4,748,000
Cash at end of year $ 8,182,000 $ 5,903,000 $ 5,948,000
See accompanying notes.
First Mortgage Corporation
Notes to Financial Statements
March 31, 1998
1. Summary of Significant Accounting Policies
Business and Basis of Presentation
First Mortgage Corporation (the Company) is a mortgage banking company that
originates, purchases, warehouses, sells and services primarily first deed of
trust loans (mortgage loans) for the purchase or refinance of owneroccupied
one-to-four family residences through a network of 11 branch offices located in
the states of California and Arizona.
Fin-West Group (Fin-West), an affiliated company, owns 82.5% of the Company's
outstanding common stock.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of cost or aggregate market
value. Market value is determined by purchase commitments from investors and
prevailing market prices.
Originated Mortgage Servicing Rights, Excess Service Fee and Purchased Servicing
Rights
Originated Mortgage Servicing Rights
Effective January 1, 1997, Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights, was superseded by Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The Company adopted Statement No. 125, Accounting for Transfers
and Servicing of Financial Assets and Estinguishments of Liabilities in fiscal
1998 and recognizes OMSRs as an asset separate from the underlying originated
mortgage loan by allocating the total cost of originating a mortgage loan
between the loan and the servicing right based on their respective
fair values. Mortgage servicing rights are carried at the lower of cost, less
accumulated amortization, or fair value.
First Mortgage Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Originated Mortgage Servicing Rights, Excess Service Fee and Purchased Servicing
Rights (continued)
FAS 125 requires that a portion of the cost of originating a mortgage loan be
allocated to the mortgage servicing right based on its fair value relative to
the loan as a whole. To determine the fair value of the mortgage rights created
during the year, the Company used quoted market prices of comparable servicing
transactions.
Excess Service Fee
Prior to fiscal 1996, gains and losses on sales of mortgage loans were
adjusted to reflect as income or loss servicing fees that varied from normal
servicing rates set by federally approved
secondary market makers. Accordingly, the Company recorded as excess service
fee amounts equal to the present value of servicing fees to be received in
future years in excess of normal rates based upon the estimated life of the
loans. These fees are being amortized over the estimated life of the loan
thus offsetting excess servicing revenues received during such period. No
excess servicing fees have been recorded subsequent to fiscal 1996.
Purchased Servicing Rights
The purchase price paid for contractual rights to service mortgage loans (not
exceeding the present value of estimated future net servicing income) is
capitalized and amortized in proportion to, and over, the period in which
estimated servicing revenue is in excess of estimated servicing costs.
The Company evaluates the net realizable value of purchased servicing rights
based on a disaggregation basis based on loan type, loan origination year and
loan interest rate.
Amortization of originated mortgage servicing rights, excess service fee and
purchased servicing rights is based upon estimates of future prepayment rates
for the underlying mortgage loans which, in turn, are affected by changes in
general economic conditions and prevailing interest rates for home mortgages.
Prepayment rates tend to increase (causing faster amortization) as mortgage
interest rates decline, and are inversely affected as mortgage interest rates
increase. The Company adjusts its amortization rates (which consider differences
in mortgage loans including interest rate, loan type and the loan's age or
seasoning) as estimated prepayment rates vary from those originally anticipated.
First Mortgage Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Servicing Advances
Servicing advances consist of advances and costs incurred by the Company in
connection with the administration of the foreclosure process for loans being
serviced. The majority of these amounts will be received from either the
insuring agency or proceeds of the foreclosure sale. The Company provides a
reserve for the estimated portion of the advances and costs that are not
reimbursable by the insuring agencies.
Loan Origination Fees
Loan origination fees and certain direct loan origination costs for mortgage
loans held for sale are deferred until the related loans are sold.
Loan servicing income, which is generally a fee based on a
percentage of the outstanding principal balances of the mortgage loans serviced
by the Company (or by a subservicer where the Company is the master servicer),
is recorded as income as the installment collections on the mortgages are
received by the Company or the subservicer.
Gain on Sale of Mortgage Loans Held for Sale
Gains or losses on the sale of mortgage loans held for sale are recognized at
the date of sale. Included in gain on sale is the estimated present value of any
servicing fees to be received by the Company and included in mortgage servicing
rights.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and
amortization. Depreciation is provided using the straight-line method, except
for automobiles, which are being depreciated using the double declining basis,
over the estimated useful lives of the assets which range from three to eight
years. Leasehold improvements are being amortized over the lesser of the
estimated useful lives of the improvements or the lease terms, using the
straight-line method.
Income Taxes
The Company files a separate federal income tax return and is included in the
State of California combined return of Fin-West Group.
First Mortgage Corporation
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Statement of Cash Flows
The Company paid interest in 1998, 1997 and 1996 of $540,000, $641,000 and
$747,000, respectively.
The Company paid income taxes in 1998, 1997 and 1996 of $615,000, $30,000 and
$1,545,000, respectively.
Net Income per Share
As of March 31, 1998, the Company adopted Statement No. 128, Earnings Per
Share, and restated all prior period earnings per share (EPS) data, as required.
Statement No. 128 replaced the presentation of primary and fully diluted EPS
pursuant to APB Opinion No. 15, Earnings Per Share, with the presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period and the
dilutive effect, if any, of stock options and warrants outstanding for the
period.
Use of Estimates in the Preparation of Financial Statements
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 Loans Held for Sale
Mortgage loans held for sale consist of the following at March 31, 1998 and
1997:
1998 1997
Principal balance outstanding $51,723,000 $28,003,000
Loss reserve - (30,000)
Loan origination discounts (1,238,000) (601,000)
Deferred loan fees (91,000) (86,000)
$53,052,000 $27,286,000
First Mortgage Corporation
Notes to Financial Statements (continued)
2. Mortgage Loans Held for Sale (continued)
All mortgage loans held for sale are collateralized by first trust deeds on
underlying real properties located primarily in California and may be used as
collateral for the Company's borrowings.
At March 31, 1998, the Company had short-term commitments amounting to
approximately $16,241,000 to fund mortgage loans subject to credit approval. The
Company generally does not engage in forward delivery contracts to hedge its
portfolio.
3. Mortgage Servicing Assets
Capitalized mortgage servicing assets consist of originated mortgage servicing
rights, excess servicing fee and purchased servicing rights. Activities are
summarized as follows:
Capitalized Servicing Rights
Balance at March 31, 1997 $6,709,000
Additions 4,091,000
Amortization and write-offs (3,247,000)
Impairment (63,000)
Balance at March 31, 1998 $7,490,000
To determine servicing value impairment at the end of the year, the
post-implementation originated servicing portfolio was disaggregated into its
predominant risk characteristics, namely loan type, interest rate and investor
type. These segments of the portfolio were then valued, using quoted market
prices of comparable servicing rights. The calculated value was then compared
with the book value of each segment to determine if a reserve for impairment was
required.
4. Other Receivables and Servicing Advances
Other receivables and servicing advances consists of the following at March 31,
1998 and 1997:
1998 1997
Foreclosures and advances on real estate owned $8,798,000 $8,800,000
Servicing advances 2,518,000 1,715,000
Other 264,000 580,000
Allowance for possible losses (1,014,000) (1,472,000)
$10,566,000 $9,623,000
First Mortgage Corporation
Notes to Financial Statements (continued)
5. Note Receivable, Fin-West
The note receivable from Fin-West is collateralized by real property located
in Diamond Bar, California and bears interest at 6% per annum, payable
annually. The note is due January 2001.
6. Property and Equipment
Property and equipment consists of the following at March 31, 1998 and 1997:
1998 1997
Furniture and equipment $2,190,000 $1,981,000
Automobiles 131,000 64,000
Leasehold improvements 395,000 388,000
2,716,000 2,433,000
Less accumulated depreciation and amortization (2,052,000) (1,841,000)
$ 664,000 $ 592,000
7. Income Taxes
Income tax expense for the years ended March 31, 1998, 1997 and 1996 consists of
the following:
1998 1997 1996
Current:
Federal $ 583,000 $(112,000) $ 622,000
State 92,000 (43,000) 153,000
675,000 (155,000) 775,000
Deferred:
Federal 224,000 701,000 718,000
State 202,000 265,000 340,000
426,000 966,000 1,058,000
$1,101,000 $ 811,000 $1,833,000
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of March 31, 1998 and 1997
are as follows:
First Mortgage Corporation
Notes to Financial Statements (continued)
7. Income Taxes (continued)
1998 1997
Deferred tax assets:
Stat income taxes $ 190,000 $ 174,000
Accrued liabilities 65,000 74,000
Deferred loan fees 41,000 39,000
Provision for foreclosure 253,000 367,000
Purchased servicing rights 313,000 153,000
Mark-to-market adjustments 128,000 3,000
Total deferred tax assets 990,000 810,000
Deferred tax liabilities:
Originated mortgage servicing rights (3,030,000) (2,425,000)
Capitalized servicing fees (7,000) (13,000)
Accelerated depreciation (88,000) (96,000)
Other (124,000) (109,000)
Total deferred tax liabilities (3,249,000) (2,643,000)
Net deferred tax liabilities $(2,259,000) $(1,833,000)
Income tax expense computed at the statutory federal income tax rate (34%) and
income tax expense provided in the financial statements differ as follows for
the years ended March 31, 1998, 1997 and 1996:
1998 1997 1996
Tax computed at the statutory rate $ 899,000 $ 655,000 $1,497,000
State income tax, net of federal income
tax benefit 194,000 146,000 330,000
Other 8,000 10,000 6,000
Income tax expense $1,101,000 $ 811,000 $1,833,000
First Mortgage Corporation
Notes to Financial Statements (continued)
8. Notes Payable, Banks
At March 31, 1998, the Company had two line of credit agreements with banks
which provide for borrowings up to $70,000,000 and $20,000,000 with interest
payable monthly at 1.25% per annum or the bank's reference rate of 8.5% at March
31, 1998, depending on the level of borrowings and the compensating balances
maintained. Fiduciary funds are used by the Company to satisfy compensating
balance requirements. At March 31, 1998, borrowings under these lines of
$40,427,000 are collateralized by mortgage loans held for sale. The weighted
average interest rate for the fiscal year ended March 31, 1998 was 1.27%.
The lines of credit are subject to renewal on September 1, 1998 and August 31,
1998, respectively. Management believes the line of credit agreements will be
renewed prior to their expiration. Under the credit agreements, the Company must
comply with certain financial and other covenants, including the maintenance of
a minimum net worth, other financial ratios, and a minimum servicing portfolio
size. Further, absent the consent of the lenders, such covenants prohibit the
Company from declaring or paying any dividends on any shares of the Company's
common stock. At March 31, 1998, the Company was in compliance with the
aforementioned loan convenants.
One of the warehousing lines of credit allows the bank to act as an agent on
behalf of the Company and invest in short term, highly liquid investment grade
securities to the extent that the warehouse line is not utilized to fund
mortgage loans. All investment securities are considered to be available for
sale and carried at fair value. As of March 31, 1998 there were no
investment securities purchased under this line.
At March 31, 1998, the Company also had an unsecured line of credit of
$2,000,000 with a bank which expires in August 1998. Advances on the line of
credit are due within 21 days and bear interest at the bank's reference rate.
There were no amounts outstanding under the agreement at March 31, 1998 and
1997.
9. Related Party Transactions
At March 31, 1997, the Company had a line of credit agreement with an officer,
under which the Company may borrow up to $1,500,000. The line of credit expired
on December 31, 1997 and was not renewed. Advances under the agreement bear
interest at a nonaffiliated bank's reference rate (8.25% at March 31, 1997) plus
1% per annum. The weighted average interest rate for the fiscal year ended March
31, 1997 was 9.3%. Interest expense of approximately $139,000 and $148,000 were
charged to operations for the years ended March 31, 1997 and 1996, respectively,
for borrowings under this agreement.
First Mortgage Corporation
Notes to Financial Statements (continued)
9. Related Party Transactions (continued)
The Company leases certain premises from Fin-West, at a monthly rental of
$20,000. Total rent expense for these premises amounted to $240,000 for each of
the years ended March 31, 1998, 1997 and 1996. The Company subleased part of
these premises for a monthly rental income of $3,200 pursuant to one sublease
that expired in May 1995.
The Company paid title insurance fees to an affiliated entity of $308,000,
$151,000 and $185,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
10. Loan Servicing
The Company's loan servicing portfolio at March 31, 1998 and 1997 consisted of
the following:
1998 1997
GNMA mortgage-backed securities $ 810,304,000 $ 798,504,000
FHLMC 257,448,000 283,434,000
FNMA 185,459,000 186,782,000
Other 413,640,000 414,932,000
$1,666,851,000 $1,683,652,000
At March 31, 1998 and 1997, the Company subserviced approximately $96,708,000
and $99,815,000, respectively, of mortgage loans for a nonaffiliated company,
which is included above.
Related fiduciary funds held by the Company in noninterest-bearing accounts
totaled approximately $31,474,000 and $12,966,000 at March 31, 1998 and 1997,
respectively. These funds are not included in the accompanying balance
sheets. The Company is required to pay interest equal to 2% per
annum of the average daily balance of certain fiduciary funds to mortgagors.
The Company had insurance coverage for errors and omissions and employee
fidelity in the amount of $2,300,000 at March 31, 1998 and 1997.
First Mortgage Corporation
Notes to Financial Statements (continued)
11. Financial Instruments
The Company is a party to financial instruments with off balance
sheet risk in the normal course of business through the origination and sale of
mortgage loans. These financial instruments include mandatory and optional
forward commitments which involve, to varying degrees, elements of credit and
interest rate risk. At any time the risk to the Company, in the event of default
by the purchaser, is the difference between the contract price and current
market value, which amount is a percentage of the outstanding commitments.
Historically the Company has not incurred losses due to the failure or lack of
performance of the counter parties to these commitments.
Realized gains and losses on mandatory and optional delivery forward commitments
are recognized in the period settlement occurs. Unrealized gains and losses on
mandatory forward commitments are included in the lower of cost or market
valuation adjustment to mortgage loans held for sale. Additionally, unrealized
gains and losses on optional delivery forward commitments to which mortgages
have been allocated are included in the lower of cost or market valuation
adjustment to mortgage loans held for sale.
Statement of Financial Accounting Standards No, 107, Disclosure About Fair Value
of Financial Instruments (FAS 107), requires disclosure of fair value
information about all financial instruments held or owned by a company except
for certain excluded instruments and instruments for which it is not practicable
to estimate fair value. At March 31, 1998, the estimated fair value of mortgage
loans held for sale, mortgage servicing rights and notes payable approximated
the net carrying value of such accounts.
12. Profit Sharing Plan
The Company is a participant in a profit-sharing plan maintained by Fin-West,
covering all full-time employees who have completed at least one year of
service. Annual contributions by the Company to the plan are discretionary and
were $50,000, $0 and $60,000 for the years ended March 31, 1998, 1997, and 1996,
respectively.
First Mortgage Corporation
Notes to Financial Statements (continued)
13. Commitments and Contingencies
Leases
Minimum annual rental payments under operating leases for office space are as
follows:
1999 $314,000
2000 36,000
2001 6,000
$356,000
Net rental payments to nonaffiliated entities of approximately $242,000,
$212,000 and $261,000 have been charged to occupancy expense in the accompanying
statements of operations for the years ended March 31, 1998, 1997 and 1996,
respectively.
Litigation
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 Company's financial
position, results of operations or cash flows.
14. Stockholders' Equity
Under the Company's 1992 Stock Incentive Plan, the compensation
committee of the Board of Directors is authorized to grant awards to
any officer or employee of the Company. Awards granted can take the
form of incentive stock options, nonqualified stock options or restricted stock
or any combination thereof. A maximum of 625,000 shares of common stock may be
issued under the Plan. Incentive stock options are granted at a price not less
than 100% of the fair market value at date of grant, except for employees who
own shares possessing greater than 10% of total combined voting power whose
grant price shall not be less than 110% of the fair market value at date of
grant. The compensation committee also determines the exercise price of
nonqualified stock options and the purchase price of restricted stock, provided
that the purchase price of restricted stock may not be less than 25% of its fair
market value at the date of grant. Incentive stock options and nonqualified
stock options become exercisable not less than six months after the date of
grant, as determined by the compensation committee. Options remain exercisable
until their specified expiration date, but the expiration date cannot be more
than ten years after the date of grant for incentive stock options.
First Mortgage Corporation
Notes to Financial Statements (continued)
14. Stockholders' Equity (continued)
The Company also has a 1993 Stock Option Plan for NonEmployee Directors (the
Plan) which provides for an aggregate of 100,000 shares of the Company's common
stock to be available for eligible directors. All options granted under the Plan
are to be nonqualified options with an exercise price equal to 100% of fair
market value of the common stock on the date the option is granted. Each option
granted under the Plan may be exercised in full on the 185th day after the date
of grant and terminates five years from the date of grant. Under the Plan, an
option to purchase 5,750 shares of the Company's common stock is to be granted
to each nonemployee director in office on the last business day of each July
beginning in 1993 and continuing through 1997. No option is to be granted after
the last business day in July 1997 unless the Plan is otherwise amended.
The following summarizes stock option activity under both of the Company's stock
plans for the year ended March 31, 1998:
Weighed-Average
Options Exercise Price Options
March 31, 1998 March 31, 1998 March 31, 1997
Options outstanding at beginning
of fiscal year 372,555 $5.46 292,555
Option granted 94,000 $3.54 95,100
Options exercised - - -
Options canceled (29,930) $4.71 (15,100)
Options outstanding at end of
fiscal year 436,625 $5.09 372,555
Exercise price:
Per share for options
exercised during the fiscal
year n/a n/a
First Mortgage Corporation
Notes to Financial Statements (continued)
14. Stockholders' Equity (continued)
Options Options
March 31, 1998 March 31, 1997
Per share for options outstanding at end of
fiscal year $3.50-$6.80 $4.625-$6.80
Weighted average fair value of options
granted $1.13 $1.35
Weighted average contractual life of option
outstanding (in years) 2.3 3.8
All outstanding options as of March 31, 1998 were exercisable. Options
available for future grants under the plans were 245,875 and 263,945 as
of March 31, 1998 and 1997, respectively.
The Company currently follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its stock options. Under APB 25, because the exercise price of
the Company's employee stock options are equal to the underlying stock on the
date of grant, no compensation expense is recognized. The Company intends to
follow the provisions of APB 25 for future years.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123), and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
1998 1997
Expected life (years) 4 3
Interest rate 5.50% 5.70%
Volatility 0.31 0.32
Dividend yield 0.00% 0.00%
14. Stockholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The estimated stock-based compensation cost calculated using the assumptions
indicated totaled $59,000 and $43,000 in 1998 and 1997, respectively. The pro
forma net income resulting from the increased compensation cost was $1,472,000
($0.25 per share) and $1,072,000($0.18 per share) in 1998 and 1997,
respectively. The effect of stock-based compensation on net income for 1998 and
1997 may not be representative of the effect on pro forma net income in future
years because compensation expense related to grants made prior to 1997 is not
considered.
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended March 31
1998 1997 1996
Numerator:
Net income $1,531,000 $1,115,000 $2,569,000
Denominator:
Shares used in computing basic earnings per share 5,847,906 5,872,596 5,882,996
Effect of stock options treated as equivalents
under the treasury stock method 1,683 2,065 8,517
Denominator for diluted earnings per share 5,849,589 5,874,661 5,891,513
Basic earnings per share $.26 $.19 $.44
Diluted earnings per share $.26 $.19 $.44
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-70760) pertaining to the First Mortgage Corporation 1992 Stock
Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors and in the
related Prospectus of our report dated June 15, 1998, with respect to the
financial statements of First Mortgage Corporation included in its Annual Report
(Form 10-K) for the year ended March 31, 1998.
Ernst & Young, LLP
Orange County, California
June 27, 1998
FIRST MORTGAGE CORPORATION
EXHIBIT INDEX
Sequential
Exhibit Page
Number Description of Exhibit Number Number
3.1 Restated and Amended Articles of Incorporation of the Company (previously
filed with the Securities and Exchange Commission on March 6, 1992 as
Exhibit 3.1 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
3.2 Restated Bylaws of the Company (previously filed with the Securities and
Exchange Commission on January 21, 1992 as Exhibit 3.2 to the Company's
Registration Statement on Form S1, File No. 33-45187, and incorporated
herein by reference).
10.1 Credit and Security Agreement dated September 1, 1995, between Bank of
America National Trust and Savings Association and the Company
(previously filed with the Securities and Exchange Commission on June 27,
1996 as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by reference).
10.2 Amended and Restated Mortgage Loan Warehousing Agreement dated September
1, 1995, among Bank of America National Trust and Savings Association and
Bank of America National Trust and Savings Association as agent for
various other lenders and the Company (previously filed with the
Securities and Exchange Commission on June 27, 1996 as Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 and incorporated herein by reference).
10.3 Fourth Amendment dated April 7, 1997 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.4 Fifth Amendment dated August 29, 1997 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.5 Sixth Amendment dated September 10, 1997 to Amended and Restated
Mortgage Loan Warehousing Agreement among Bank of America National Trust
and Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.6 Seventh Amendment dated March 1, 1998 to Amended and Restated Mortgage
Loan Warehousing Agreement among Bank of America National Trust and
Savings Association, Bank of America National Trust and Savings
Association as agent for various other lenders and the Company.
10.7 Amendments dated August 29, 1997 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.8 Amendments dated November 30, 1997 to Variable Terms Letter of the Master
Mortgage Loan Warehousing and Security Agreement between Sanwa Bank of
California and the Company.
10.9 Note Secured by Deed of Trust dated February 1, 1991, by Fin-West Group
in favor of the Company in the amount of $500,000 (previously filed with
the Securities and Exchange Commission on January 21, 1992 as Exhibit
10.5 to the Company's Registration Statement on Form S-1, File No.
3345187, and incorporated herein by reference).
10.10 Lease dated January 1, 1992, between the Company and Fin-West (previously
filed with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.7 to the Company's Registration Statement on Form S-1, File
No. 3345187, and incorporated herein by reference).
10.11 Lease extension dated December 15, 1997 to Standard Office Lease-Net
dated January 1, 1992 between the Company and Fin-West Group.
10.12 1992 Stock Incentive Plan (previously filed with the Securities and
Exchange Commission on March 6, 1992 as Exhibit 10.8 to Amendment No. 1
to the Company's Registration Statement on Form S1, File No. 33-45187,
and incorporated herein by reference).
10.13 1993 Stock Option Plan for Non-Employee Directors (previously filed with
the Securities and Exchange Commission on October 25, 1993 as Exhibit 4.6
to the Company's Registration Statement on Form S-8, File No. 33 70760,
and incorporated herein by reference).
10.14 Profit Sharing Plan for Employees of the FinWest Group, dated April 5,
1990 (previously filed with the Securities and Exchange Commission on
January 21, 1992 as Exhibit 10.9 to the Company's Registration Statement
on Form S-1, File No. 33-45187, and incorporated herein by reference).
10.15 Fin-West Group 401(k) Savings Plan, dated April 5, 1990 (previously filed
with the Securities and Exchange Commission on January 21, 1992 as
Exhibit 10.10 to the Company's Registration Statement on Form S-1, File
No. 3345187, and incorporated herein by reference).
10.16 Defined Contribution Plan and Trust -- Basic Plan Document No. 3
(previously filed with the Securities and Exchange Commission on January
21, 1992 as Exhibit 10.11 to the Company's Registration Statement on Form
S-1, File No. 33 45187, and incorporated herein by reference).
10.17 Employee Pre-Tax Premium Plan of Fin-West Group, Inc., a California
corporation, dated January 1, 1990 (previously filed with the Securities
and Exchange Commission on January 21, 1992 as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, File No. 33-45187, and
incorporated herein by reference).
10.18 Renewal of Employment Agreement dated April 30, 1998 between Clement
Ziroli and the Company.
10.19 Employment Agreement dated April 30, 1998 between Bruce G. Norman and the
Company.
10.20 Renewal of Employment Agreement dated April 30, 1998 between Pac W. Dong
and the Company.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule (included only in the electronic filing).