With the secondary market for Small Business Administration loans frozen, Temecula Valley Bancorp Inc., one of the nation's most active SBA lenders, stopped taking applications for those loans Monday.
Frank Basirico, the $1.5 billion-asset California company's new chief executive officer, said in an interview Tuesday that it left the business because it could no longer sell the loans profitably.
"We will wait for the secondary market to come back before we open that spigot back up," Mr. Basirico said. "Basically, we are in a holding pattern."
That is a dramatic change in strategy for Temecula Valley. Only seven months ago it had been ramping up its SBA lending and adding staff, but it said Tuesday that it would cut 36 jobs, 25 of them related to SBA lending.
Other banking companies also have cut their SBA lending, citing the disruption in the secondary market.
The $864 million-asset Unity Bancorp in Clinton, N.J., announced in the fall that it would shut down eight SBA loan offices in seven states and cut 10 of its 12 SBA lending positions. "There's virtually no market left for SBA loans," James A. Hughes, Unity's president and CEO, said at the time.
Investor demand dried up in September as the profit margin on SBA loans shrunk in comparison with other investment options. That caused a backlog of inventory for the companies that buy the government-guaranteed portion of the loans and then create pools of securities to be sold to investors.
Lenders such as Temecula Valley say that they are receiving few bids on their loans, and that the prices offered are so low that the business is no longer profitable.
Though the government has taken steps to get the secondary market moving again, lenders say there has been no improvement so far.
Mr. Basirico said Temecula Valley, which has been struggling with a spike in bad construction loans since the housing market collapsed, needs to conserve capital.
"We have deemphasized SBA and reduced our footprint to just the state of California and curtailed construction lending," he said. "We are getting back to middle-market lending and a community bank strategy."
Temecula Valley ranked eighth among SBA lenders in dollar volume on Sept. 30, up from 24th a year earlier. In the year that ended Sept. 30 its SBA loan portfolio grew 44%, to $384 million.
It has SBA loan offices in California, Arizona, Oregon, Texas, and Washington, and on Monday it told all its lenders outside California that they would be let go.
Temecula Valley lost $3.6 million in the third quarter, compared with a $2.6 million profit a year earlier.
It ousted Stephen H. Wacknitz as its chairman, president, and CEO last month and appointed Mr. Basirico as its CEO, Martin E. Plourd as its president, and Neil M. Cleveland as its chairman.
In a press release announcing Mr. Cleveland's appointment, Luther J. Mohr, the vice chairman, said the company would return "to our roots in community banking, reducing the leverage on our balance sheet, and improving the efficiency of the entire operation."
Tim O'Brien, an analyst at Sandler O'Neill & Partners LP, said Temecula Valley previously had a three-pronged business model of construction lending, SBA lending, and community bank-based deposits.
It always seemed to pay more than others for deposits, but "that didn't matter, because it could offset that with gains" from selling the SBA loans, he said. "The velocity of turnover on capital was so high they generated a ton of profit on the SBA business and booking high-yield construction loans. When the economy was strong in their footprint, and credit losses were at historic lows, it worked well."
Mr. Basirico said a new focus on comercial and industrial lending should help increase core deposits. "We really need to beef up the middle-market piece, because that brings the deposit part. It's especially hard to attract deposits with out-of-state SBA borrowers." The company estimated that about 60% of its SBA loans had come from outside its home state.
Mr. O'Brien said he thinks Temecula stands a good chance of making it past the current crisis with its credit quality. "They face big challenges, like other banks with similar exposure," he said. "Management is doing everything they can — shrink the balance sheet, reduce expenses, improve the funding structure, and conserve capital. We'll see if they get it done. Hopefully, they do."