Small business is big for California SBA specialist.

There's nothing "small" about small business lending at Temecula Valley Bancorp.

The bank, just over $1 billion in assets now, finished 2005 as the 16th-largest Small Business Administration lender in the nation and it has been the largest independent bank SBA 7(a) lender for four

Temecula, Calif., a small city north of San Diego, is a vibrant place, and its healthy economy drew the attention of Stephen H. Wacknitz, president, CEO, and chairman, about a decade ago.

"Temecula was the place to be," Wacknitz recalls, when he began talking to local investors and leaders about establishing a new bank in town in the mid-1990s.

But the bank's phenomenal SBA lending record draws on much more than a strong local economy. Over the last five years its SBA operation produced more than $1 billion in SBA loans to small businesses in 33 states--$300 million in 2005 alone. These loans came from a network of SBA loan production offices the bank has gradually established in 15 states. The bank expects to produce over $400 million in SBA loans this year.

This strong commitment to SBA loans helped produce stellar results for the bank in 2005. The company had a yearend ROAE of 27.6%, placing it ninth in the ABA Banking Journal "Top Performers" rankings for non-S corp. institutions between $100 million and $3 billion in assets(July 2006, p. 30).

Building a network

Of course, this aggressive operation didn't materialize overnight. Wacknitz came to town as a veteran of both California and Indiana banking, and had extensive SBA experience. He wanted to build his fast-growing bank with SBA lending, but this had to be done carefully.

"The key was having the right person to get our operation going," says Wacknitz. After the bank had been open for several years, Wacknitz recruited William H. McGaughey as chief operating officer. Over time, McGaughey, who had headed SBA lending at another California, concentrated on SBA operations, and is now senior executive vice president and director of finance and SBA lending for the bank. Today, more than a third of the bank's approximately 280 employees work in the SBA operation on origination, underwriting, processing, and servicing. The loan production offices are generally staffed by a producer and a sales assistant. Producers receive a base salary plus commission.

Much of the business comes down to people. Customer service quality is a big part of the equation, according to Wacknitz, and hiring and training people who can navigate the often complex SBA process makes that service better for borrowers. The bank is an SBA nationwide Preferred Lender, which further expedites its service.

Because of this "people factor," the producers in the bank's SBA sales office network are permitted to go out of their territory when pursuing business. In this way, they can continue to do business with a customer who is expanding beyond their original market.

McGaughey says this flexibility is helpful if a producer has managed to hook up with a hotel builder, for instance, who may wind up gaining a contract with multiple locations. Some producers, because of clients they've worked with over time, have wound up specializing in certain types of borrowers.

Handling SBA assets

In spite of the huge volume of SBA loans originated by Temecula Valley Bank, only 13% of its net loans outstanding consisted of SBA credit at year-end. The bank sells most of its SBA originations and services the loans it sells. As of December 2005, its total SBA servicing assets stood at $30.2 million and it had made $2.6 million in net SBA servicing fee income. The bank sold $108.9 million in SBA 7(a) loan guaranteed portions in 2005, and $37 million in unguaranteed portions.

A new wrinkle for 2006 is the bank's effort to generate still more SBA loans by buying the unguaranteed portion of SBA credits from other bank lenders. The bank likes to see at least $3 million in purchasable product right off the bat, and then buys the seller's future loan flow (the unguaranteed part). For the selling bank, this provides a ready alternative to direct sales to the secondary market. Temecula Valley generally pays from par to 105% of the unguaranteed piece offered, the price depend on the rates and terms in the package.

The selling lenders continue to service these loans, maintaining their connections with the borrowers. To assuage concerns about competition, McGaughey explains that the bank maintains a wall between this loan-purchase operation and its main SBA lending operation. And, unlike its own production, it keeps what it buys from the other banks in portfolio.

There are competitors for this kind of business, but McGaughey estimates that the bank will be able to add as much as $60 million to its SBA volume in this way in 2006.

"The team we have put in place to execute this program is highly experienced in evaluating and pricing SBA loans, both guaranteed and unguaranteed," says Wacknitz. "We see this program as an opportunity to add quality and high yielding loans to our portfolio."

You'll find more community banking articles at www.ababj.com. Among the new offerings this month:

Loan Portfolio Management Best Practices For De Novo Banks

By Steve H. Powell and Stephen J. Rountree, of Steve H. Powell & Co., a consultancy in Statesboro, Ga. The authors warn that while loan portfolio management is important for all banks, it deserves concentrated attention from de novo institutions. Based on extensive work with de novo banks, the authors make key recommendations. These include: diversifying the loan portfolio; avoiding asset-based lending; matching funding and lending very precisely; paying serious attention to lending regulations; building and maintaining an adequate loan loss reserve; and never confusing technological tools and banking know-how.