SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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 (I.R.S. Employer of incorporation or Identification No.) organization) 3230 Fallow Field Drive Diamond Bar, California 91765 (Address, including zip code, of principal executive offices) (909) 595-1996 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO____ As of June 30, 1998, 5,569,697 shares of the registrant's common stock were outstanding. FIRST MORTGAGE CORPORATION FORM 10-Q INDEX Part I - Financial Information Page Item 1. Financial Statements: Balance Sheet June 30, 1998 (Unaudited) and March 31, 1998 3 Unaudited Statement of Income Three Months Ended June 30, 1998 and 1997 4 Unaudited Statement of Cash Flows Three Months Ended June 30, 1998 and 1997 5 Notes to Unaudited Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition 8-10 and Results of Operations Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST MORTGAGE CORPORATION BALANCE SHEET June 30, 1998 March 31, 1998 (Unaudited) ASSETS Cash $ 2,152,000 $ 8,182,000 Mortgage loans held for sale 69,744,000 53,052,000 Other receivables and servicing advances 10,979,000 10,566,000 Capitalized servicing rights, net 8,598,000 7,490,000 Property and equipment, net 680,000 664,000 Prepaid expenses and other assets 125,000 361,000 Notes receivable 130,000 130,000 TOTAL ASSETS $92,408,000 $80,445,000 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Notes payable, banks $45,895,000 $40,427,000 Sight drafts payable 14,868,000 9,372,000 Deferred income taxes 2,350,000 2,259,000 Accounts payable and accrued liabilities 1,742,000 1,392,000 Income Taxes Payable 477,000 - Total Liabilities 65,332,000 53,450,000 STOCKHOLDERS' EQUITY Preferred stock, no par value: Authorized shares - 1,000,000 Issued and outstanding shares-None - - Common stock, no par value: Authorized shares - 10,000,000 3,888,000 4,963,000 Issued and outstanding shares-5,569,697 at June 30, 1998 and 5,808,697 at March 31, 1998 Retained earnings 23,188,000 22,032,000 Total Stockholders' Equity 27,076,000 26,995,000 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $92,408,000 $80,445,000 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF INCOME Three Months Ended June 30 1998 1997 REVENUES: Loan origination income $1,111,000 $ 704,000 Loan servicing income 1,924,000 1,856,000 Gain on sale of mortgage loans 3,653,000 1,340,000 Interest income 1,031,000 537,000 Total revenues 7,719,000 4,437,000 EXPENSES: Compensation and benefits 2,418,000 1,988,000 General and administrative expenses 2,190,000 1,273,000 Amortization of capitalized servicing rights 871,000 546,000 Interest expense 259,000 172,000 Total expenses 5,738,000 3,979,000 INCOME BEFORE INCOME TAXES 1,981,000 458,000 INCOME TAX EXPENSE 825,000 194,000 NET INCOME $1,156,000 $ 264,000 BASIC EARNINGS PER SHARE $ 0.20 $ 0.05 DILUTED EARNINGS PER SHARE $ 0.20 $ 0.05 See accompanying notes FIRST MORTGAGE CORPORATION UNAUDITED STATEMENT OF CASH FLOWS Three Months Ended June 30 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,156,000 $ 264,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 91,000 (64,000) Provision for losses on foreclosure 67,000 (3,000) Amortization of capitalized servicing rights 871,000 546,000 Depreciation and amortization of property and equipment 64,000 49,000 Change in excess service fee 16,000 25,000 Originations and purchases of mortgage loans held for sale (223,069,000) (86,798,000) Sales and principal repayments of mortgage loans held for sale 206,377,000 89,102,000 Change in other receivables and servicing advances (480,000) (1,389,000) Change in prepaid expenses and other assets 236,000 247,000 Change in accounts payable and accrued liabilities 350,000 (113,000) Change in income taxes payable 477,000 - Net cash provided by (used in) operating activities (13,844,000) 1,866,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage servicing rights - (214,000) Originated mortgage servicing rights (1,995,000) (416,000) Purchase of furniture, equipment and leasehold improvements (80,000) (41,000) Change in due from affiliates - 134,000 Net cash used in investing activities (2,075,000) (537,000) CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable, banks 5,468,000 224,000 Change in sight drafts payable 5,496,000 (755,000) Change in notes payable, officer - (1,500,000) Repurchase of common stock (1,075,000) - Net cash provided by (used in) financing activities 9,889,000 (2,031,000) DECREASE IN CASH (6,030,000) (702,000) CASH, BEGINNING OF PERIOD 8,182,000 5,903,000 CASH, END OF PERIOD $2,152,000 $5,201,000 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 211,000 $139,000 Income taxes - - See accompanying notes FIRST MORTGAGE CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS June 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In addition, this document should be read in conjunction with the financial statements and footnotes included in the Company's annual report on Form 10-K for fiscal year ended March 31, 1998. The preparation of the financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. 2. CAPITALIZED SERVICING RIGHTS Activities in Capitalized Servicing Rights are summarized as follows: Capitalized Servicing Rights Balance at March 31, 1998 $7,490,000 Additions 1,995,000 Amortizations and write offs (887,000) Impairment - Balance at June 30, 1998 $8,598,000 3. NOTES PAYABLE At June 30, 1998, the Company had line of credit agreements with two nonaffiliated banks, which provided for borrowings up to $70,000,000 and $30,000,000 with annual interest payable monthly at 1.25% or the bank's reference rate, depending on the level of borrowings and the compensating balances maintained. At June 30, 1998, borrowings under these lines of $45,895,000 were collateralized by mortgage loans held for sale. The line of credit agreements are subject to renewal on September 1, 1998 and August 31, 1998, respectively. Both agreements contain certain requirements, including, but not limited to, the maintenance of minimum net worth, debt to net worth ratio, current ratio, net income and servicing portfolio, and restrict the Company's ability to pay dividends. The Company believes its two lines of credit agreements will be renewed prior to their expiration. 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months ended June 30 1998 1997 Numerator: Net income $1,156,000 $264,000 Denominator: Shares used in computing basic earnings per share 5,747,411 5,859,117 Effect of stock options treated as equivalents under the treasury stock method 451 - Denominator for diluted earnings per share 5,747,862 5,859,117 Basic earnings per share $.20 $.05 Diluted earnings per share $.20 $.05 5. CONTINGENCIES The Company is currently a defendant in certain litigation arising in the ordinary course of business. It is management's opinion that the outcome of these actions will not have a material effect on the financial position or results of operations of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Three months ended June 30, 1998 compared to three months ended June 30, 1997. GENERAL The Company reported net income of $1.16 million or $0.20 per share for the quarter ended June 30, 1998, compared to net income of $264,000 or $0.05 per share for the comparable 1997 quarter. The increase in net income was attributable to two major reasons: a favorable interest rates environment during the June 1998 quarter; combined with a substantial increase in new loan originations over the year earlier period. REVENUES LOAN ORIGINATION INCOME For the quarter ended June 30, 1998, the volume of new mortgage loans closed increased 157% to $223.1 million from $86.8 million in the prior year quarter. For the three months ended June 30, 1998 loan origination revenue increased by approximately 57.8% to $1.1 million from $704,000 in the June 1997 quarter, due primarily to the increased new loan originations. LOAN SERVICING INCOME Loan servicing income, representing the loan servicing fees, late charges and other fees earned by the Company for administering the loans in its servicing portfolio, rose 3.7% to $1.92 million for the three months ended June 30, 1998 from $1.86 million for the same period in 1997. The increase was primarily due to slightly higher average servicing and miscellaneous fees. As of June 30, 1998, the Company serviced $1.663 billion in loans compared to $1.705 billion at June 30, 1997, a decrease of 2.5% after prepayments and scheduled amortization of mortgage loans. The drop in the servicing portfolio was attributable to the lower interest rate environment in June 1998 quarter causing the acceleration of the portfolio run-off rate. The following table sets forth certain information pertaining to the servicing portfolio of the Company for the period indicated. Three Months Ended June 30, 1998 1997 (Dollars in thousands except average loan balance Beginning loan service portfolio $1,570,143 $1,583,837 Add: Loans originated 223,069 86,798 Purchase of Servicing - 6,652 Less: Prepayment and Amortization 222,541 71,218 Ending loan servicing portfolio 1,570,671 1,606,069 Sub-Servicing 92,584 98,577 Total servicing portfolio $1,663,255 $1,704,646 Average loan balance (end of period) $ 95,321 $ 96,482 Weighted Average Interest Rate 7.87% 7.98% GAIN ON SALE OF MORTGAGE LOANS In spite of intense price competition, favorable long-term mortgage interest rates during the quarter resulted in a gain on sale of mortgage loans of $3.65 million for the three months ended June 30, 1998, compared to $1.34 million over the 1997 period. INTEREST INCOME Interest income, which reflects the interest received on mortgage loans held for sale, increased to $1.03 million for the three months ended June 30, 1998 from $537,000 for the comparable prior year quarter. This increase is due primarily to the larger mortgage inventory carried by the Company during the June 1998 quarter. 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 for the three months ended June 30, 1998 increased by 44.2% to $5.74 million from the three months ended June 30, 1997. Compensation and benefits were $2.42 million for the June 1998 quarter, an increase of 21.6% over the year-ago quarter. The increase was due primarily to the increased commissions and the hiring of new personnel resulting from the large increase in new loan originations. General and administrative expense increased by $917,000 over the prior year period, primarily as a direct result of expanding production operations in the quarter. Amortization of capitalized servicing rights increased by $325,000 over the comparable prior year period due mainly to the Company's larger investment in mortgage servicing rights and substantially higher volume of prepayment over the year ago quarter. INTEREST EXPENSE Interest expense increased 50.6% to $259,000 for quarter ended June 1998 from $172,000 for the same period in 1997. The increase was due to larger warehouse borrowings during the quarter because of the increased new loan production. PROSPECTIVE TRENDS The reduction in long-term interest rates is having a positive impact on new loan originations, especially refinance loans, for the Company. The volume of new loan applications in June, for example, were the highest in Company's history. Barring an unexpected increase in interest rates, the surge in activity should continue to produce improved results for the Company in the second fiscal quarter. As previously discussed in the Prospective Trends and the Competition sections of the 10K for the fiscal year ended March 31, 1998, the Company still faces intense competition from many directions, particularly for the standard conforming conventional mortgage loans so coveted by many of the major commercial banks. Our strategy is to instead emphasize the origination of FHA and VA loans, home equity loans and other mortgage products with much greater profit potential for the Company. We recently introduced, for example, a streamline conventional refinance loan program to complement our FHA streamline refinance program. We believe this will result in a substantial increase in new loan originations through our direct marketing channel. As a continuing part of the Company's long-term plan, we will open additional retail origination offices wherever such opportunity presents itself. We believe we are appropriately positioned to take advantage of the market niches within which we can competitively operate, but we still face formidable competition and, as always, our business is greatly influenced by the level of long-term interest rates. LIQUIDITY AND CAPITAL RESOURCES The Company's principal liquidity requirement is the funding of its new mortgage loans and loan origination expenses. To meet these funding needs, the Company relies on warehouse lines of credit with banks, its own capital, and also cash flows from operations. At June 30, 1998, maximum permitted borrowings under the warehouse line of credit agreements with two nonaffiliated banks totaled $100 million and the amount outstanding was $45.9 million. Borrowings under these facilities are secured by mortgage loans. The agreements contain various covenants, including minimum net worth, current ratio, net income, servicing portfolio balances, debt to net worth ratio, and restrict the Company's ability to pay dividends. The Company was in compliance with all debt covenants at June 30, 1998. The Company believes that the warehouse agreements will be renewed when the current terms expire in August and September 1998. During the quarter ended June 30, 1998, the Company repurchased in open market transactions of 239,000 shares of its common stock at an aggregate cost of $1,075,000. The Company had stockholders' equity of $27.08 million at June 30, 1998. Management believes that its current financing arrangements are adequate to meet its projected operational 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 increases. PART II. OTHER INFORMATION. Item 6. Exhibits and Reports of Form 8-K. (a) No exhibits are filed with this report. (b) The Company did not file any reports on Form 8-K during the quarter ended June 30, 1997 and the quarter ended June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MORTGAGE CORPORATION Date: August 5, 1998 By S/Clement Ziroli Clement Ziroli Chairman of the Board of Directors, Chief Executive Officer Date: August 5, 1998 By S/Pac W. Dong Pac W. Dong Chief Financial Officer, Controller and Executive Vice President