Faced with a shrinking net interest margin, Cenfed Financial Corp. is plunging into the Small Business Administration loan market.

Pasadena, Calif.-based Cenfed is one of the few community thrifts to punch through the region's recession in good health. Yet in the last nine months its spreads have been squeezed, and originations of its bread-and- butter home loans have fallen off.

"The addition of prime rate-based loans to our portfolio should have a favorable impact on our spread and will partially offset the effect of declining single-family loan originations," said D. Tad Lowrey, chief executive.

Cenfed, with $1.9 billion of assets and 20 branches in Southern California, saw its earnings drop 30% in the first quarter from the year before, due to its compressed margin.

But Cenfed last week bought the operating assets of Government Funding California Business and Industrial Development Corp., an independent SBA lender and servicer that's been in business in Los Angeles for 15 years.

Cenfed bought a $73 million portfolio of nonguaranteed portions of SBA loans along with the right to service $268 million of SBA-guaranteed loan balances sold to third parties. In addition, it has bought GFC's $50 million pipeline of applications in process.

Cenfed will retain about 24 salaried employees and eight commissioned business development officers.

William Nichol, executive vice president, said the deal was structured to give Cenfed protection from prepayment risk and losses on the retained portion of the loans.

Mr. Nichol added that the purchase was not a signal that SBA lending would be given greater emphasis at Cenfed. Currently, SBA loans amount to about 5% of its assets, and he said that share would not go above 10%. He described the move primarily as a defensive asset-liability strategy.

Cenfed said its outlook for the second quarter has been adversely affected by a 12-basis-point decline in its net interest margin since the end of the first quarter.

"Our margin has continued to decrease in the first two months of the current quarter," Mr. Lowrey said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.