Getting out of the cyclical home loan industry is easy. Hunkering down to do battle in the face of shrinking profit margins, intense competition, and relatively high interest rates is not.
But First Mortgage Corp., a small lender in this town outside Los Angeles, has decided to do things the hard way. It has restructured its management and plans to enter new markets and add branches during the next two years as droves of larger lenders exit the industry.
The company is staking its success on an improving California economy, waning competition, tight controls on overhead, and a balance sheet that includes little debt.
Despite the ambitious plan, the company's president maintains a cautious air.
"We plan to build slowly," said Bruce G. Norman, in an interview at the company's office. He was promoted from executive vice president and chief operating officer in December. His predecessor, Clement Ziroli, remains as chairman and chief executive.
The expansion plan calls for 10 offices to open in Washington, Colorado, Utah, Arizona, New Mexico, and Texas. Mr. Norman said he might also consider an office in Florida.
Those familiar with the company think it can grow successfully despite its recent financial woes.
Allen Strand, a stock analyst at Crowell, Weedon & Co., Los Angeles, said the company's low costs would help it stay competitive and allow it to expand successfully.
"I think they're coming out of this industry cycle a survivor," Mr. Strand said. "While there are bigger, more-visible competitors out there, there are some private mortgage banking companies that are now gone."
By paying loan officers commissions and negotiating flexible leases on its retail offices, the company is able to keep expenses down, Mr. Strand said. He says the company has been profitable in the present fiscal year, which ends March 31, and projects that First Mortgage's earnings will double next year, not taking the expansion into account. If the expansion goes ahead as planned, Mr. Strand said, "It could be a huge year for them."
The company's debt-to-equity multiple is 0.39 in an industry where the median is 4.5, said L. Todd Vencil, an analyst at SNL Securities, Charlottesville, Va. North American Mortgage Co., another publicly traded mortgage company has a ratio of 2.78, Mr. Vencil said.
First Mortgage's earnings for the nine months ended December 1995 were $2.6 million, or 44 cents a share. That is up from a loss of $932,000, or 16 cents per share, in the nine months ended December 1994.
The company could have put a better face on its profit picture by selling some servicing assets to lift earnings, as many mortgage lenders did, Mr. Norman said. But that would have been an unacceptable setback to the company's efforts to expand as a servicer, he said.
First Mortgage is mapping out a long-term mortgage strategy at a time when other California lenders have been inclined to call it quits.
Glendale Federal Bank recently announced it would concentrate on loans other than home mortgages. Wells Fargo has handed over its mortgage lending chores to Norwest Mortgage. And Medallion Mortgage Co. and Directors Mortgage have been sold in the last year or so.
But the worst may be over in the Golden State. "I don't know if now is the time to get out of the California market," said Abby Hedengran, executive vice president, of First Mortgage's fleeing competitors. If the California economy is getting stronger, as it appears to be, he said, "maybe now is the time to get in."
While some California lenders are leaving, out-of-state lenders have been moving into what is the largest U.S. housing market, according to a study of property deeds by TRW Redi Property Data. Both Nationsbanc Mortgage Corp. and Norwest's mortgage unit appeared in the top 20 lenders in California in 1995. Neither appeared in that ranking in 1994.
Mr. Norman said the company has difficulty competing against the aggressive pricing of the large lenders. But he added that First Mortgage would increase its wholesale lending to bring in business while its new retail branches warm up.
The growing frequency of delinquencies and defaults has been worrying all wholesale originators. However, Mr. Norman said, First Mortgage audits 100% of its wholesale-originated loans to guard against such problems.
"Yes, it's expensive," Mr. Norman said of First Mortgage's strict quality control for its wholesale operation, "but delinquencies are practically zero."
Mr. Norman said he expects a pickup in mortgage lending in 1996 and 1997. By that time, he said, he hopes the retail offices are doing a brisk business, when they will decrease wholesale origination volume.
The management restructuring will help the company grow, Mr. Norman said, by allowing him and Mr. Ziroli, to handle the expansion.
The company is now divided into a production unit, headed by Mr. Hedengran, who was hired in December from North American Mortgage, and a finance unit. Pac Dong, who will remain chief financial officer, will now head the finance division as executive vice president.
"The new structure will free us up to do other things," Mr. Norman said. Mr. Ziroli said he now uses his time to explore acquisition opportunities, and Mr. Norman said he is freed from the details of micromanagement that once bogged him down.
