First Mortgage Corp. of Diamond Bar, Calif., earned 23% more in the latest quarter than a year earlier but faces tough competition from banks as it tries to expand its retail lending.

Net income totaled $487,000 in the quarter ended Sept. 30, the second of its fiscal year.

First Mortgage reported a $1.86 million gain on the sale of mortgage loans, 14% more than in the year-earlier quarter. It cited a decline in long-term mortgage interest rates.

Revenues were up 5%, to $5.17 million, and closings of mortgage loans jumped 42%, to $113.6 million.

Origination revenue declined 14.4%, to $808,000. Loan servicing income rose 5.3%, to $1.87 million.

With 13 offices in California, Washington, and Arizona, nine of them retail, First Mortgage Corp. is continuing its original mission as a retail-oriented mortgage banker, said Clement Ziroli, chairman and chief executive officer.

"Our thrust is to go back into the retail business in a bigger way than we have in the last few years," Mr. Ziroli said.

But he noted that consolidation has been a nearly irresistible force.

"It's been very difficult just for us to endure, let alone make a profit," he said. "The servicing end is where we're kind of losing out."

Servicing profits depend on economies of scale usually unavailable to small lenders.

Though First Mortgage opened an office in Tempe, Ariz., several months ago, its most significant wholesale and retail operations remain in California.

"We look for opportunity with people," said Mr. Ziroli. "It's really people-driven rather than market-driven."

The residential market in California, where First Mortgage does much of its business, has been recovering from an economic downturn in the early 1990s.

Today "California employment growth exceeds that of the nation as a whole," said Stuart Gabriel, deputy dean and professor of Finance and Business economics at the Marshall School of Business at the University of Southern California in Los Angeles.

"In some parts of the state, including San Francisco and Silicon Valley to the south as well as parts of West Los Angeles and Orange County, markets are rebounding very strongly.

"The strength of residential real estate market activity is also evident in many other parts of the state," he added.

First Mortgage hopes to boost retail operations next year despite increased competition from banks. "We're trying to position ourselves in a market where we can do more FHA and VA loans" Mr. Ziroli said, "and also in markets where there are opportunities for jumbo loans."

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