UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
TEMECULA VALLEY BANCORP INC.
(Exact name of registrant as specified in its charter)
California 46-0476193
(State or other jurisdiction of (I.R.S. Employer
incorporate or organization) Identification No.)
27710 Jefferson Avenue, Suite A100
Temecula, California 92590
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 694-9940
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Check whether or not the Company is an accelerated filer as defined in Exchange
Act Rule 12b-2.
Yes [ X ] No [ ]
As of August 11, 2004, there were 8,662,467 shares of the Registrant's common
stock outstanding.
This Form 10-Q contains 24 pages.
Exhibit Index: Page 21
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
June 30, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
------------------------------
ASSETS
Cash and Due from Banks $15,935,851 $9,348,013
Federal Funds Sold 15,600,000 21,400,000
------------------------------
Total Cash and Cash Equivilents $31,535,851 $30,748,013
Securities Held to Maturity - U.S. Treasuries 0 0
Loans Held for Sale: 22,133,546 17,005,198
Loans:
Commercial 35,091,728 33,008,385
Real Estate - Construction 146,074,887 113,846,726
Real Estate - Other 245,354,686 195,991,515
Consumer and Other 2,724,563 3,194,582
------------------------------
TOTAL LOANS 429,245,864 346,041,208
Net Deferred Loan Fees (3,150,391) (2,297,015)
Allowance for Loan Losses (4,043,705) (3,607,833)
------------------------------
NET LOANS 422,051,768 340,136,360
Federal Reserve & Home Loan Bank Stock, at Cost 2,050,300 1,145,000
Other Real Estate Owned 1,410,000 485,036
Premises and Equipment 3,006,473 2,185,543
Cash Surrender Value of Life Insurance 7,661,929 5,740,729
Deferred Tax Assets 2,428,615 2,393,000
SBA Servicing Assets 6,944,100 6,116,679
SBA Interest-Only Strips Receivable 21,689,271 20,495,511
Accrued Interest and Other Assets 6,881,890 4,761,049
------------------------------
$527,793,743 $431,212,118
==============================
1
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
June 30, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $126,475,079 $112,367,018
Money Market and NOW 68,961,521 61,340,428
Savings 41,638,487 35,180,027
Time Deposits Under $100,000 110,583,463 88,771,099
Time Deposits $100,000 and Over 104,700,257 85,828,794
------------------------------
TOTAL DEPOSITS 452,358,807 383,487,366
Federal Funds Purchased 0 0
Federal Home Loan Bank Advances 20,000,000 0
Junior Subordinated Debt Securities 12,372,000 12,372,000
Accrued Interest and Other Liabilities 6,152,543 5,669,687
------------------------------
TOTAL LIABILITIES 490,883,350 401,529,053
Shareholders' Equity:
Common Stock - No Par Value Authorized
40,000,000 Shares; Issued and Outstanding
8,608,538 Shares at 06/30/2004 and 8,151,914
Shares at 12/31/2003 0 0
Surplus 16,090,830 14,082,278
Retained Earnings 20,819,563 15,600,787
------------------------------
TOTAL SHAREHOLDERS' EQUITY 36,910,393 29,683,065
------------------------------
$527,793,743 $431,212,118
==============================
2
TEMECULA VALLEY BANCORP INC.
STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $7,779,689 $5,788,138 $14,577,855 $11,000,411
Interest on HTM Securities -
U.S. Treasuries 425 0 493 0
Interest on Federal Funds Sold 10,533 36,578 28,926 89,152
----------------------------------------------
TOTAL INTEREST INCOME 7,790,647 5,824,716 14,607,274 11,089,563
INTEREST EXPENSE
Interest on Money Market and NOW 126,323 139,649 228,586 319,338
Interest on Savings Deposits 44,144 51,843 85,568 103,885
Interest on Time Deposits 1,026,770 976,911 1,947,978 1,818,493
Interest on Federal Funds
Purchased 0 0 0 878
Interest on FHLB Advances 27,666 0 49,367 28,259
Interest on Junior Subordinated
Debt Securities 150,738 94,164 306,705 189,463
----------------------------------------------
TOTAL INTEREST EXPENSE 1,375,641 1,262,567 2,618,204 2,460,316
----------------------------------------------
NET INTEREST INCOME 6,415,006 4,562,149 11,989,070 8,629,247
Provision for Loan Losses 250,000 350,000 750,000 500,000
----------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,165,006 4,212,149 11,239,070 8,129,247
NON-INTEREST INCOME
Service Charges and Fees 156,559 188,870 346,323 411,035
Gain on Sale of Loans/Assets 4,299,874 3,863,812 8,433,218 6,818,128
Fees, and Other Income 2,270,466 2,285,469 4,675,147 4,306,764
----------------------------------------------
TOTAL NON-INTEREST INCOME 6,726,899 6,338,151 13,454,688 11,535,927
----------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 5,933,326 5,436,208 11,097,808 9,961,211
Occupancy Expenses 367,529 285,784 675,428 563,503
Furniture and Equipment 283,851 203,135 516,035 416,143
Other Expenses 1,823,005 1,503,237 3,563,048 3,065,386
----------------------------------------------
TOTAL NON-INTEREST EXPENSE 8,407,711 7,428,364 15,852,319 14,006,243
----------------------------------------------
INCOME BEFORE INCOME TAXES 4,484,194 3,121,936 8,841,439 5,658,931
Income Taxes 1,837,568 1,273,256 3,622,664 2,314,972
----------------------------------------------
NET INCOME $2,646,626 $1,848,680 $5,218,775 $3,343,959
==============================================
Per Share Data:
Net Income - Basic $0.32 $0.24 $0.63 $0.44
==============================================
Net Income - Diluted $0.28 $0.21 $0.56 $0.39
==============================================
Average Number of Shares
Outstanding 8,393,061 7,658,310 8,315,418 7,588,390
==============================================
Average Number of Shares and
Equivilents 9,309,436 8,773,854 9,272,054 8,672,872
==============================================
3
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2004 2003
------------------------------
OPERATING ACTIVITIES
Net Income $5,218,775 $3,343,959
Adjustments to Reconcile Net Loss to Net
Cash used by Operating Activities:
Depreciation and Amortization 3,166,196 2,059,040
Provision for Loan Losses 750,000 500,000
Decrease (Increase) of Deferred Tax Asset (35,615) 0
Gain on Loan Sales (8,505,217) (6,814,578)
Loans Originated for Sale (118,273,988) (115,796,194)
Proceeds from Loan Sales 126,479,048 123,481,589
Increase in Cash Surrender Value of Life
Insurance (121,200) (93,300)
Net Change in Other Assets and Liabilities (6,515,019) (6,277,249)
------------------------------
NET CASH USED BY OPERATING ACTIVITIES 2,162,980 403,267
------------------------------
INVESTING ACTIVITIES
Purchases of Investments (449,207) 0
Repayment (Purchases) of FRB/FHLB Stock (905,300) 504,050
Maturity of Investments 450,000 0
Net Increases in Loans (88,418,564) (53,456,172)
Purchase of Life Insurance (1,800,000) (600,000)
Purchases of Premises and Equipment (1,169,064) (188,292)
Proceeds from Sale of Premises and Equipment 37,000 16,450
------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (92,255,135) (53,723,964)
------------------------------
FINANCING ACTIVITIES
Net Increases in Demand, NOW,Money Market and
Savings Accounts 28,187,614 11,574,939
Net Increases in Time Deposits 40,683,827 71,461,292
Net Increases/(Decreases) in Borrowings 20,000,000 (10,000,000)
Proceeds from the Exercise of Stock Warrants 0 811,495
Proceeds from the Exercise of Stock Options 2,008,552 519,975
------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 90,879,993 74,367,701
------------------------------
NET INCREASE IN CASH AND CASH EQUIVILENTS 787,838 21,047,004
Cash and Cash Equivilents at Beginning of Period 30,748,013 12,180,415
------------------------------
CASH AND CASH EQUIVILENTS AT END OF PERIOD $31,535,851 $33,227,419
==============================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 2,625,796 $ 2,430,969
Income Taxes Paid $ 3,719,371 $ 3,318,224
Loans Transferred to Other Real Estate Owned $ 1,410,000 $ 1,336,036
Loans Transferred out of Other Real Estate Owned $ 485,036 $ -
4
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period beginning December 31, 2002 and ending June 30, 2004
(UNAUDITED)
Common Retained
Shares Stock Surplus Earnings Total
------ ------ ------- -------- -----
Balance at December 31, 2002 3,723,323 $3,723 $11,866,032 $7,746,448 $19,616,203
Exercise of Options 58,536 59 426,615 426,674
Including the Realization
of Tax Benefits of $101,721
Exercise of Warrants 19,252 19 96,241 96,260
Net Income 1,495,279 1,495,279
---------------------------------------------------------------------------
Balance at March 31, 2003 3,801,111 $3,801 $12,388,888 $9,241,727 $21,634,416
Exercise of Options 19,157 19 93,282 93,301
Exercise of Warrants 143,047 143 715,092 715,235
Net Income 1,848,680 1,848,680
---------------------------------------------------------------------------
Balance at June 30, 2003 3,963,315 $3,963 $13,197,262 $11,090,407 $24,291,632
Exercise of Options 80,492 81 555,497 555,578
Including the Realization
of Tax Benefits of $173,871
Net Income 2,379,493 2,379,493
---------------------------------------------------------------------------
Balance at September 30, 2003 4,043,807 $4,044 $13,752,759 $13,469,900 $27,226,703
Exercise of Options 32,150 34 325,441 325,475
Including the Realization
of Tax Benefits of $149,318
Adjustment for Reorganization (4,078) 4,078 0
2 for 1 Stock Split 4,075,957
Net Income 2,130,887 2,130,887
---------------------------------------------------------------------------
Balance at December 31, 2003 8,151,914 0 14,082,278 15,600,787 29,683,065
Exercise of Options 156,982 0 930,408 930,408
Including the Realization
of Tax Benefits of $588,840
Net Income 2,572,150 2,572,150
---------------------------------------------------------------------------
Balance at March 31, 2004 8,308,896 0 15,012,686 18,172,937 33,185,623
Exercise of Options 299,642 0 1,078,144 1,078,144
Including the Realization
of Tax Benefits of $221,141
Net Income 2,646,626 2,646,626
---------------------------------------------------------------------------
Balance at June 30, 2004 8,608,538 0 16,090,830 20,819,563 36,910,393
===========================================================================
5
TEMECULA VALLEY BANCORP INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2004
1) Basis of Presentation: Temecula Valley Bancorp Inc. (the "Company") is the
parent company of Temecula Valley Bank, N.A. (the "Bank"). The term
"Company" includes the Bank throughout this Report, unless the context
otherwise requires. The Company prepares its consolidated financial
statements pursuant to the rules and regulations of the Securities and
Exchange Commission. The accompanying financial statements are unaudited
except the balance sheet at December 31, 2003, which was derived from the
audited consolidated financial statements as of that date. The unaudited
information furnished herein reflects all adjustments (consisting only of
normal, recurring accruals) which are, in the opinion of manage- ment,
necessary to fairly present the financial position of the Company with
respect to the interim finan- cial statements and the results of operations
for the interim period ended June 30, 2004. The interim financial
statements include the accounts of Temecula Valley Bancorp Inc. and the
Bank. These financial statements do not include all disclosures associated
with the Company's annual financial statements and, accordingly, should be
read in conjunction with such statements. We also have two unconsolidated
subsi- diaries, Temecula Valley Statutory Trust I and Temecula Valley
Statutory Trust II.
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities as of the end of the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the valuation
of loan servicing rights, interest only strips and the allowance for
estimated loan losses.
The results of operations for the six month period ending June 30, 2004 are
not necessarily indicative of the results to be expected for the full year.
2) Accounting Policies: There were no significant accounting policy changes
since the last report.
3) Stock Based Compensation Plans: At June 30, 2004, the Company has three
stock based compensation plans. Two of these plans are described in Note J
in the Company's 2003 Annual Report on Form 10-K. A new plan entitled the
Temecula Valley Bancorp Inc. 2004 Incentive Compensation Plan was approved
by the Company's shareholders at the annual meeting on May 25, 2004. That
plan, as amended, is an exhibit to this Report. The Company continues to
account for grants under its stock option plans using the intrinsic value
method prescribed in Accounting Principals Board Opinion 25. Accordingly,
compensa- tion cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of grant over
the amount an individual must pay to acquire the stock.
4) Other Matters: Temecula Valley Bancorp Inc., a one bank holding company for
Temecula Valley Bank, N.A., was formed on June 3, 2002. The stock symbol
for the common shares changed from TMUL.OB to TMCV.OB and the par value
changed from $1.25 to $.001. The stock exchange was one share for one
share. In December 2003, the Bancorp reincorporated from Delaware to
California and the par value changed from $.001 to zero. All financial
statements were adjusted to reflect the par value change.
Stock Split: On October 24, 2003, Temecula Valley Bancorp Inc. announced a
two for one stock split which was voted and approved by shareholders at a
special shareholders' meeting held December 18, 2003 in Temecula,
California. The split was effective December 19, 2003 and payable December
24, 2003. All share and per share data have been adjusted to reflect the
common stock two for one split.
6
Item 2 - Management's Discussion and Analyses of Financial Condition and Results
of Operations
Statements made in this Report that state the intentions, beliefs, expectations
or predictions by Temecula Valley Bancorp Inc. (the "Company") or its management
of the future are forward-looking statements. The Company's actual results could
differ materially from those projected in such forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in
the Company's Form 10K and other filings made by the Company with the Securities
and Exchange Commission ("SEC"). Copies of such filings may be obtained by
contacting the Company or accessing the Company's filings at www.sec.gov.
OVERVIEW
This management discussion is intended to provide additional information
regarding the significant changes and trends in the Company's Financial
Condition, Statement of Operations, Funds Management and Capital Planning.
Commencement of operations of Temecula Valley Bank, N.A. ("Bank") was December
16, 1996. The Company, which became a one-bank holding company for the Bank, was
formed on March 4, 2002, and the share exchange was on June 3, 2002. On that
date one share of common stock of the Bank (par value $1.25) was exchanged for
one common share of the Company (par value $.001). In December 2003, the Company
reincorporated from Delaware to California and the par value of the stock
changed from $.001 to zero. On June 26, 2002, the Company participated in a
Trust Preferred Securities pool in the amount of $7,000,000. The borrowing net
proceeds in the amount of $6,789,000 were transferred to the Bank as capital. On
September 17, 2003, the Company participated in a Trust Preferred Securities
pool in the amount of $5,000,000. The borrowing proceeds in the amount of
$5,000,000 were transferred to the Bank as capital. Since the Bank opened, it
has consistently, from year to year, had substantial growth. All per share data
has been adjusted for a two for one common stock split effective December 23,
2003. Since the date of opening, the Bank, and now collectively with the
Company, has grown to 235 employees (231 full time equivalent), of which 222 are
full time. One third of the employees are directly involved in the origination,
underwriting and processing of SBA loans. Additional support staff is required
to service the SBA loans after they are funded. All employees are employed at
the Bank. It is anticipated that growth will remain strong for 2004 with the
opening of the full service branch on June 1,2004 in Rancho Bernardo (San Diego
County) and the anticipated opening of the Corona branch (Riverside County) in
August 2004. The full service office in Murrieta was opened on January 11, 2001
and the loan production office in El Cajon converted to a full service branch on
June 18, 2001. The SBA department has expanded considerably since 2001, with
loan production offices now located in Chico, CA; Fresno, CA; Sherman Oaks, CA;
Anaheim Hills, CA; Irvine, CA; Sacramento, CA; St. Petersburg, FL; Coral
Springs, FL; Jacksonville, FL; Atlanta, GA; Westlake, OH; Gurnee, IL; Ocean
City, NJ and Bellevue, WA. In the third quarter of 2002, a real estate
department that concentrates on single family residence tract lending began
operating. The department is located in Corona, California. At the end of 2003,
a loan production office was opened in Encinitas, California. In late 1998,
staffing increased due to the addition of a full service office in Fallbrook,
California, and in the third quarter of 1999 staffing increased due to the
addition of a full service office in Escondido, California. In 2000, staffing
increased due to the addition of the mortgage department in Temecula and
anticipatory staffing of the Murrieta office. The mortgage department originates
FHA, VA, and conventional mortgages and sells them in the secondary market.
The Bank was formed as a locally owned and managed financial institution that
assumes an active community role. The Bank focuses primarily upon local banking
services and community needs, as well as nationwide SBA loan origination. The
Bank's marketing strategy stresses its local ownership and commitment to serve
the banking needs of the people and businesses in Temecula Valley, the
Interstate 15 corridor and surrounding areas, as well as originating loans
through the SBA network nationwide.
The Bank will continue to take advantage of new full service and/or loan
production office locations if they make good business sense and are located
within the Bank's geographic service area.
7
FINANCIAL CONDITION
Assets
- ------
Total assets increased from $387,839,345 at June 30, 2003 to $431,212,118 at
December 31, 2003 and to $527,793,743 at June 30, 2004. Most of the increase in
the first six months of 2004 was in loans outstanding. Total loans, excluding
loans held for sale, increased from $346,041,208 at year-end 2003 to
$429,245,864 at June 30, 2004, a $83,204,656 or 24.0% increase due to increased
SBA, construction, and tract lending. The loan portfolio composition is
primarily construction, commercial and real estate secured loans. The rate of
loan growth should continue to be strong for 2004, due to the SBA loan
production offices that have not yet reached their expected production levels,
the addition of the real estate tract-lending department, the addition of the
loan production office in Encinitas, California and the opening of the loan
production office in San Rafael, California in July 2004.
Investments
- -----------
Investments, which are comprised only of Federal Funds Sold, decreased from
$21,400,000 at December 31, 2003 to $15,600,000 at June 30, 2004. The timing of
loan sales during the month, as well as deposit generation and loan growth, are
the factors that most affect the Federal Funds Sold balance.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased from $3,607,833 at December 31, 2003 to
$4,043,705 at June 30, 2004. The allowance was 1.00% at December 31, 2003 and
0.90% at June 30, 2004. The large increase in the provision in 2002 was due to
the increase in SBA lending and the general overall growth of the loan
portfolio. The provision was $750,000 in the first three months of 2004, with
net chargeoffs of $314,128. Management considers, through quarterly analysis,
the allowance to be adequate and expects it will continue to add to this reserve
for the remainder of the year as the loan portfolio balance increases. The
analysis considers general factors such as changes in lending policies and
procedures, economic trends, loan volume trends, changes in lending management
and staff, trends in delinquencies, nonaccruals and charge-offs, changes in loan
review and Board oversight, the effects of competition, legal and regulatory
requirements and factors inherent to each loan pool.
Summary of Allowance for Loan Loss
6 Months
2002 2003 2004
---- ---- ----
Beginning Balance $1,239,308 $3,017,395 $3,607,833
Chargeoffs 707,455 505,586 321,081
Recoveries 25,542 74,024 6,953
Provision 2,460,000 1,022,000 750,000
---------- ---------- ----------
Ending Balance $3,017,395 $3,607,833 $4,043,705
========== ========== ==========
8
At June 30, 2003, there was $3,993,786 of non-accrual loans, of which $3,276,875
is guaranteed by the SBA. The Bank had $6,290,495 of non-accrual loans as of
June 30, 2004, of which $5,006,792 was guaranteed by the SBA. The Bank also had
other real estate owned (REO) at June 30, 2004 of $1,410,000, two parcels of
land and a commercial property.
NON-CURRENT LOANS & OTHER REAL ESTATE OWNED
Government Guaranteed
June 30, 2004 Gross Balance --------------------- Net Balance
------------- ------------- -----------
30 - 89 Days Past Due $247,122 ( $ 123,052) $124,070
90+ Days Past Due & Accruing 0 ( 0) 0
Non-Accrual 6,290,495 ( 5,006,792) 1,283,703
------------ ------------ ------------
Sub-Total 6,537,617 ( 5,129,844) 1,407,773
Other Real Estate Owned (REO) 1,410,000 ( 1,057,500) 352,500
------------ ------------ ------------
Total $7,947,617 ($6,187,344) $1,760,273
============ ============ ============
December 31, 2003
-----------------
30 - 89 Days Past Due $3,243,706 ($ 582,205) $2,661,501
90+ Days Past Due & Accruing 0 ( 0) 0
Non-Accrual 6,764,713 ( 5,269,317) 1,495,396
------------ ------------ ------------
Sub-Total 10,008,419 ( 5,851,522) 4,156,897
Other Real Estate Owned (REO) 485,036 ( 0) 485,036
------------ ------------ ------------
Total $10,493,455 ($5,851,522) $4,641,933
============ ============ ============
June 30, 2003
-------------
30 - 89 Days Past Due $110,314 ($ 0) $110,314
90+ Days Past Due & Accruing 0 ( 0) 0
Non-Accrual 3,993,786 ( 3,276,875) 716,911
------------ ------------ ------------
Sub-Total 4,104,100 ( 3,276,875) 827,225
Other Real Estate Owned (REO) 1,336,086 ( 638,250) 697,836
------------ ------------ ------------
Total $5,440,186 ($3,915,125) $1,525,061
============ ============ ============
Other Assets
- ------------
The ratio of interest earning assets to total assets was 87.33% for the first
half of 2003 compared to 85.26% for the first half of 2004. The target is to
keep this ratio above 90%, but has remained below that level due to SBA sales
that increased the SBA servicing asset, the related SBA interest only strip
receivable, and the cash surrender value of life insurance. The SBA servicing
asset was $4,874,235, the SBA I/O strip receivable was $16,923,447 and the cash
surrender value of life insurance was $4,676,483 at June 30, 2003. At June 30,
2004, the SBA servicing asset was $6,944,100, the SBA I/O strip receivable was
$21,689,271 and the cash surrender value of life insurance was $7,661,929. At
December 31, 2003, the SBA servicing asset was $6,116,679, the SBA I/O strip
receivable was $20,495,511 and the cash surrender value of life insurance was
$5,740,729. Even though these assets are not considered interest bearing for net
interest margin purposes, they do produce, or are related to, income that is
part of non-interest income.
9
Liabilities
- -----------
Deposits increased from $383,487,366 at December 31, 2003 to $452,358,807 at
June 30, 2004. Money market and NOW accounts increased $7,621,093 savings
increased $6,458,460, demand deposits increased $14,108,061, and certificate of
deposits (CD's) increased $40,683,827. Demand deposits comprised 28% of deposits
at June 30, 2004, compared to 29% at December 31, 2003 and 28% at June 30, 2003.
The increase in the ratio of certificates of deposits to total deposits is due
to CD promotions in 2003 and 2004 to fund the rapid loan growth. At June 30,
2004, more than 55% of deposits have balances of $100,000 or more. No one
customer has balances that exceed 10% of the deposits of the Bank. The Bank
depends on core deposits as a source of funds for the loan portfolio.
Consequently, the Bank tries to attract solid core accounts yet maintain a
reasonable funding cost. The core deposit base was helped by the addition of the
Murrieta and El Cajon branches in 2001, the continued deposit increases at all
five branches, and will be helped in the second half of 2004 by the opening of
the full service branches in Rancho Bernardo and Corona in the third quarter.
The Bank will continue to solicit core deposits to diminish reliance on volatile
funds.
At December 31, 2003 there were no short-term advances from the Federal Home
Loan Bank and at June 30, 2004 there was $20,000,000 advanced at a rate of 1.42%
and a maturity of July 1, 2004. The borrowing capacity at the Federal Home Loan
Bank as of December 31, 2003 was $25,553,805 and is $39,481,095 at the beginning
of the third quarter 2004.
On June 26, 2002, the Company issued $7,217,000 of junior subordinated debt
securities (the "debt securities") to Temecula Valley Statutory Trust I, a
statutory trust created under the laws of the State of Connecticut. These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable on June 26, 2032. Interest is payable quarterly on these debt
securities at 3-Month LIBOR plus 3.45% for an effective rate of 5.11% as of June
30, 2004. The debt securities can be redeemed for 107.5% of the principal
balance through June 26, 2007 and at par thereafter. The debt securities can
also be redeemed at par if certain events occur that impact the tax treatment or
the capital treatment of the issuance.
On September 17, 2003, the Company issued $5,155,000 of junior subordinated debt
securities (the "debt securities") to Temecula Valley Statutory Trust II, a
statutory trust created under the laws of the State of Delaware. These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable on September 17, 2033. Interest is payable quarterly on these
debt securities at 3-Month LIBOR plus 2.95% for an effective rate of 4.57% as of
June 30, 2004. The debt securities can be redeemed for 107.5% of the principal
balance through September 17, 2008 and at par thereafter. The debt securities
can also be redeemed at par if certain events occur that impact the tax
treatment or the capital treatment of the issuance.
The Company also purchased a 3% minority interest in Temecula Valley Statutory
Trusts I and II. The balance of the equity of Temecula Valley Statutory Trusts I
and II is comprised of mandatory redeemable preferred securities. Under FASB
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," the Company is not allowed to consolidate
Temecula Valley Statutory Trusts I and II into the Company financial statements.
Prior to the issuance of FIN No. 46, Bank Holding companies typically
consolidated these entities. The Federal Reserve Board had ruled that certain
mandatory redeemable preferred securities of a consolidated entity qualified as
Tier 1 and Tier 2 Capital. At the Company, up to 25% of the Tier 1 Capital can
be these debt securities with the remainder of the debt securities qualifying as
Tier 2 Capital. The Federal Reserve Board is evaluating the capital impact from
FIN No. 46 but has not issued any final ruling. The Company has included the net
junior subordinated debt securities in its Tier 1 and Tier 2 Capital for
regulatory capital purposes.
Capital
- -------
Total capital was $36,910,393 at June 30, 2004, $29,683,065 at December 31,
2003, and $24,291,632 at June 30, 2003. For the first six months of 2003, the
$4,675,429 increase consisted of $3,343,959 of net income, $519,975 on the
exercise of stock options and $811,495 on the exercise of warrants. For the
first six months of 2004, the $7,227,328 increase was due to $5,218,776 in net
income and $2,008,552 on the exercise of stock options.
Total risk based capital was 10.74%, the tier one risk based ratio was 9.91%,
and the tier one leverage ratio was 9.78% at June 30, 2004, compared to a total
risk based capital of 10.34%, tier one risk based capital of 9.37%, and tier one
leverage ratio of 8.33% at June 30, 2003. At June 30, 2003, December 31, 2003,
and June 30, 2004 the Bank and the Company were in the regulatory "well
capitalized" category.
10
RESULTS OF OPERATIONS
Net Income
- ----------
For the second quarter of 2003, the Company earned $1,848,680 compared to
$2,646,626 in 2004. Net income per basic share for the second quarter was $.24
in 2003 compared to $.28 in 2004. Net income per diluted share was $.21 per
share in the second quarter of 2003 compared to $.32 in 2004. The return on
average assets was 2.00% for the second quarter of 2003, compared to 2.16% for
the second quarter of 2004. The return on average equity was 32.67% for the
second quarter of 2003, compared to 30.60% for the second quarter of 2004. For
the first half of 2003, the Company earned $3,343,959, compared to $5,218,775 in
2004. Net income per basic share for the first half was $.44 in 2003 compared to
$.63 in 2004. Net income per diluted share was $.39 per share in the first half
of 2003 compared to $.56 in 2004. The return on average assets was 1.90% for the
first half of 2003, compared to 2.23% for the first half of 2004. The return on
average equity was 31.06% for the first half of 2003, compared to 31.79% for the
first half of 2004. The 2003 and 2004 earnings were significantly affected by
the sale of loans in the secondary market, most of which are SBA and mortgage
loans. The sales of the SBA loans are expected to continue at this level or
higher for the remainder of the year. Mortgage loans sales have slowed down from
the 2003 pace. The net interest margin has stabilized after the 4.75% Federal
Reserve Bank rate reductions in 2001 the .50% reduction in November 2002 and the
..25% reduction in June 2003 and the expected gradual increases in rates in the
second half of 2004 should have no significant effect on the net interest
margin. Net income in the first six months of 2003 and 2004 was increased by the
sale of the unguaranteed portion of SBA loans. These sales increased net income
before taxes by $1,108,013 in the first half of 2003 compared to $3,165,379 in
the first half of 2004. These sales are expected to continue for the remainder
of the year. The opening of the full service offices in Rancho Bernardo in June
2004 and the Corona full service office in August 2004 had a negative effect on
earnings second quarter and will continue to have a negative effect in the
second half of 2004.
Stock-Based Compensation
- ------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options will be measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, the Company's net income and earnings per share
for the first half and the second quarters of the years specified would have
reduced the pro forma amounts indicated on the following schedule.
Six Months Ending June 30
2004 2003 2002
---- ---- ----
Net Income as reported $ 5,218,775 $ 3,343,959 $ 1,663,028
Stock-based compensation using the Intrinsic Value Method
5,338 5,338 5,338
Stock-based compensation that would have been reported ( 84,060) ( 112,796) ( 157,358)
------------- ------------- -------------
Pro Forma Net Income $ 5,140,053 $ 3,236,501 $ 1,511,008
============= ============= =============
Basic per share as reported $ .63 $ .44 $ .23
Basic per share pro forma $ .62 $ .43 $ .21
Diluted per share as reported $ .56 $ .39 $ .20
Diluted per share pro forma $ .55 $ .37 $ .18
11
Three Months Ending June 30
2004 2003 2002
---- ---- ----
Net Income as reported $ 2,646,626 $ 1,848,680 $ 1,033,479
Stock-based compensation using the Intrinsic Value Method
2,669 2,669 2,669
Stock-based compensation that would have been reported ( 42,030) ( 56,398) ( 78,679)
------------- ------------- -------------
Pro Forma Net Income $ 2,607,265 $ 1,794,951 $ 957,469
============= ============= =============
Basic per share as reported $ .32 $ .24 $ .14
Basic per share pro forma $ .31 $ .23 $ .13
Diluted per share as reported $ .28 $ .21 $ .12
Diluted per share pro forma $ .28 $ .20 $ .11
Net Interest Earnings
- ---------------------
Net interest income was $4,562,149 in the second quarter of 2003, compared to
$6,415,006 in 2004. For the second quarter of 2003 the net interest margin was
5.68%, compared to 5.84% in 2004. The net interest margin decreased from 2001 to
2003 due to the Federal Reserve Bank rate reductions of 4.75% in 2001, 0.50% in
late 2002 and .25% in late June 2003. The loan to deposit ratio increased from
91.48% at June 30, 2003 to 99.09% at June 30, 2004. The net interest margin was
also helped by a healthy average of 27.67% DDA to total deposits ratio for the
first six months of 2003 and 29.07% for the first half of 2004. The yield on
loans decreased from 7.50% for the second quarter of 2003 to 7.49% for the
second quarter of 2004. Rate floors on nearly $229 million of variable rate
loans at June 30, 2004 helped to mitigate the effects of Federal Reserve rate
reductions. The yield on investments, which are all in federal funds sold and US
Treasuries, for the second quarter of 2003 was 1.66%, compared to 0.94% in 2004.
The cost of interest bearing deposits was 1.93% in the second quarter of 2003
and 1.55% in the second quarter of 2004. The decrease in 2004 is due to higher
CD balances offset by a lower rate environment. The cost of other borrowings,
which consisted of Federal Funds purchased, Federal Home Loan Bank advances and
junior subordinated debt securities borrowing was 5.40% for the second quarter
of 2003 and 3.19% in 2004. The decrease in the cost of other borrowings in 2004
is due to a higher percentage of the borrowings in 2004 attributable to Federal
Home Loan Bank advances.
The Bank tries to maximize the percentage of assets it maintains as interest
earning assets, with the goal of maintaining at least 90% in that category.
Effectively, all of the increase in non-interest earning assets in 2003 and 2004
was in the cash surrender value of life insurance (BOLI), the SBA servicing and
SBA I/O strip receivable assets. The servicing assets are tested for impairment
by computing the net present value of the amount of servicing income over the
expected average life of the loan. Normal servicing (adequate compensation), in
accordance with industry standards, is 40 basis points of the principal balance
sold. The expected life assumes either 25 or 30 percent of the note life,
depending on the term of the note. The Company's average life of loans sold has
been higher than the 30% assumption, giving the calculation a conservative bias.
For the first six months of 2004, $4,120,064 was collected for servicing, the
asset amortization was $2,809,534 and the SBA related servicing assets increased
$2,021,180. The increase in the SBA loan servicing assets was due to the sale of
$70,843,859 in 7A loans during 2004. For the same period in 2003, $2,572,235 was
collected for servicing, the asset amortization was $1,730,998 and the SBA
related servicing assets increased $4,913,810.
12
There was $59,341,679 in 7A loan sales during the first six months of 2003. The
servicing assets increased less in the first six months in 2004 than 2003 due to
more loans sold with a premium bid than with a par bid. The servicing
calculations contain certain assumptions such as the expected life of the loan
and the discount rate used to compute the present value of future cash flows.
The exposure of the loan life assumption is if loans prepay faster than
expected. The exposure to the discount rate assumption is if prime rate adjusts
severely and permanently. Such exposure can cause adjustments to the income
statement. The Bank, on a quarterly basis, has outside analysis of the servicing
assets and I/O strip receivable performed to insure the fair value approximates
the book value. Asset quality is a continual primary focus of the Bank, and even
though risk is an integral part of the banking industry, it is the policy of the
Bank's management to actively manage the risk, without sacrificing long-term
stability with short-term profits.
The table below summarizes the repayment rates for national SBA pools based on
their maturities:
SBA Pools - Constant Prepayment Rates
Variable Rate Pools
Less Than Greater Than
8 Yr 8 - 11 Yr 11 - 16 Yr 16 - 21 Yr 21 Yr
Issue Date Life CPR Life CPR Life CPR Life CPR Life CPR
---------- --------- --------- --------- ---------- ------------
2001 15.2 13.0 10.4 11.3 10.8
2000 16.2 13.7 13.5 16.1 14.0
1999 16.5 14.7 13.9 13.9 15.0
1998 15.8 14.9 16.7 13.7 16.4
1997 15.6 14.4 15.9 16.8 17.7
The following schedule displays the WAL for each SBA pool after applying the
CPRs identified above:
Original Maturity WAL (Yrs.)
----------------- ---------
Less Than 8 Years 1.7
8 - 11 Years 2.3
11 - 16 Years 3.7
16 - 21 Years 4.4
Greater Than 21 Years 5.5
Based on assessing each component, our estimated discount rates for each Bank
SBA pool is as follows:
Original Maturity Disc Rt Excess Disc Rt I/O
----------------- -------------- -----------
Less Than 8 Years 9.53% 9.53%
8 - 11 Years 9.85% 9.85%
11 - 16 Years 10.37% 10.37%
16 - 21 Years 10.63% 10.63%
Greater Than 21 Years 10.91% 10.91%
13
Provision for Loan Loss
- -----------------------
As discussed under "Allowance for Loan Losses", the allowance for loan losses
represents management's best estimate of losses inherent in the existing loan
portfolio. The Bank has established a monitoring system for loans to identify
impaired loans and potential problem loans and to permit periodic evaluation of
impairment and adequacy of the allowance for loan losses in a timely manner. The
monitoring system and allowance for loan losses methodology has evolved over a
period of years, and loan classifications have been incorporated into the
determination of the allowance for loan losses. This monitoring system and
allowance methodology includes a loan-by-loan analysis for all classified loans
as well as loss factors for the balance of the unclassified portfolio.
Classified loans are reviewed individually to estimate the amount of probable
loan losses that needs to be included in the allowance. These reviews include
analysis of financial information as well as evaluation of collateral securing
the credit. Loss factors on the unclassified portion of the portfolio are based
on such factors as historical loss experience, current portfolio delinquency and
trends, and other inherent risk factors such as economic conditions,
concentrations in the portfolio, risk levels of particular loan categories,
internal loan review and management oversight.
The provision was $2,460,000 in 2002, $1,022,000 in 2003, and $750,000 for the
six months of 2004. The large increase in the provision in 2002 was due to the
large increase in loans outstanding as well as the substantial increase in SBA
loans. For 2003 and 2004 the provisions were to keep the allowance for loan loss
at a well reserved level. The Bank plans to continue to sell the unguaranteed
portion of SBA 7A loans to mitigate the risk associated with these loans.
Non-Interest Income
- -------------------
Non-interest income contributed significantly to the earnings of the Bank in the
second quarter of 2004, as it did in 2003 and 2002. Service charges decreased
from $188,870 in the second quarter of 2003 to $156,559 in 2004 due to an
increased number of accounts offset by a decrease in non-sufficient funds
service charges. Other income decreased from $2,285,469 for the second quarter
of 2003 to $2,270,466 in 2004, due mainly to higher SBA loan servicing income
offset by lower SBA broker income. SBA net loan servicing income increased from
$368,491 in the second quarter of 2003 to $643,654 in 2004 due to the increase
in the servicing portfolio. The gain on sale of loans was $4,299,874 in the
second quarter of 2004 compared to $3,863,812 in 2003. The 2004 increase was due
to higher SBA guaranteed and unguaranteed loan sales offset by lower mortgage
loan sales. The SBA loan sales are expected to continue at this pace or higher
for the remainder of the year and the mortgage loan sales are expected to be
lower than last year's volume due to the increase in mortgage rates.
Gain on Sale of Loans/Assets
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-----------------------------------------------------------------------------
SBA 7A Unguaranteed Sales 870,093 595,818 3,165,379 1,108,013
SBA 7A Guaranteed Sales 2,380,663 2,094,965 3,769,212 3,813,070
SBA 504 Sales 309,464 0 309,464 0
Mortgage Sales 429,819 997,860 822,567 1,692,274
Other Loan Related 302,797 175,169 438,594 201,221
REO Gain (Loss) 7,038 0 (72,998) 0
Fixed Assets 0 0 1,000 3,550
-----------------------------------------------------------------------------
Total 4,299,874 3,863,812 8,433,218 6,818,128
=============================================================================
14
Other Income
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-----------------------------------------------------------------------------
Customer Fees 61,957 46,094 115,013 90,037
Loan Funding 654,192 641,507 1,226,724 1,028,185
SBA Broker Income 560,625 856,610 1,303,992 1,671,461
Mortgage Broker Income 251,575 257,579 502,078 496,448
Loan Late Charges 3,945 36,826 88,451 80,352
Other Loan Charges 1,836 2,000 3,409 3,900
SBA Servicing, Net 643,654 368,491 1,254,249 788,611
CSV Life Insurance 73,500 56,550 147,000 113,100
FRB/FHLB Dividend 19,182 19,597 34,133 34,455
Other 0 215 98 215
-----------------------------------------------------------------------------
Total 2,270,466 2,285,469 4,675,147 4,306,764
=============================================================================
Non-Interest Expense
- --------------------
Non-interest expense was $8,407,711 in the second quarter of 2004 compared to
$7,428,364 in 2003. Salaries and benefits increased from $5,436,208 in the
second quarter of 2003 to $5,933,326 for the same period in 2004 due to the
increase in employees from the continued expansion of the SBA department, the
addition of the loan production office in Encinitas, hiring for the Rancho
Bernardo office, and to support the general growth of the company. Other
expenses rose from $1,503,237 in the second quarter of 2003 to $1,823,005 in
2004 due to higher loan volume, processing expenses, the opening of loan
production offices, and the start up costs for the Rancho Bernardo and Corona
offices, offset by operating efficiencies.
Other Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-----------------------------------------------------------------------------
Processing 259,978 247,449 508,986 479,312
Professional 141,810 130,021 312,106 190,034
Travel & Entertainment 195,780 133,246 308,257 260,126
Director Related 36,949 25,049 54,949 97,049
Shareholder 46,536 39,876 76,241 51,465
Loan Funding 193,278 340,123 622,057 793,447
Office Related 578,108 358,903 1,031,207 742,779
Marketing 253,180 164,419 427,010 296,843
OCC/FDIC Assessments 40,990 28,271 81,933 62,492
Other 76,396 35,880 140,302 91,839
-----------------------------------------------------------------------------
Total 1,823,005 1,503,237 3,563,048 3,065,386
=============================================================================
15
Income Taxes
- ------------
Income tax expense totaled $1,273,256 for the second quarter of 2003 and
$1,837,568 for the second quarter of 2004. For the full year of 2002 the
effective rate was 40.7%, for the full year of 2003 the effective rate was 40.9%
and for the first six months of 2004 it was 41.0%. Deferred tax assets totaled
$1,728,000 at June 30, 2003, $2,393,000 at December 31, 2003 and $2,428,615 at
June 30, 2004. Over half of the deferred tax asset is due to the tax
deductibility timing difference of the provision for loan loss.
LIQUIDITY
Funds management is essential to the ongoing profitability of a bank. A bank
must attract funds at a reasonable rate and deploy the funds at an appropriate
rate of return, while taking into account risk factors, interest rates, short
and long term liquidity positions and profitability needs.
The Bank's cash position is determined on a daily basis and on a monthly basis
liquidity analysis and asset/liability management analysis are performed. The
Bank maintains Federal Funds lines of credit of $13,000,000 at correspondent
banks for short-term liquidity. In addition, the Bank was approved on July 31,
2001 for membership to the Federal Home Loan Bank. The Bank has borrowing
capacity at the FHLB that will fluctuate with the loan balances that are pledged
as collateral. At December 31, 2003, the borrowing capacity was $25,553,805 and
$39,481,095 at the beginning of the third quarter of 2004. Throughout 2003 and
2004, a positive liquidity position was maintained, but not at a level where
profits would have been diminished.
The Bank presents to the Board of Directors monthly a liquidity analysis. The
analysis measures the liquidity gap on a monthly basis and should always be in
at least a 2% positive liquidity gap position. Since the Bank opened, the Bank
has not gone into a negative liquidity gap position, even with the strong loan
growth the Bank has experienced.
CAPITAL PLANNING
It is the goal of the Company and the Bank to always be in the regulatory "well
capitalized" category.
The Company updates its multiple-year capital plan annually in conjunction with
the preparation of the annual budget. Capital levels are always a primary
concern of the federal regulatory authorities, and the Bank submits capital
plans to them when requested.
It is the Company's strategy always to have an adequate level of capital, which
by definition includes not having excessive or inadequate capital.
16
CRITICAL ACCOUNTING POLICIES
Our accounting policies are integral to understanding the results reported. In
preparing its consolidated financial statements, the Company is required to make
judgments and estimates that may have a significant impact upon its financial
results. Certain accounting policies require the Company to make significant
estimates and assumptions, which have a material impact on the carrying value of
certain assets and liabilities, and are considered critical accounting policies.
The estimates and assumptions used are based on the historical experiences and
other factors, which are believed to be reasonable under the circumstances.
Actual results could differ significantly from these estimates and assumptions,
which could have a material impact on the carrying value of assets and
liabilities at the balance sheet dates and results of operations for the
reporting periods.
The Company has identified two critical accounting policies. They concern the
allowance for loan loss and the SBA servicing assets. They are considered
critical due to the assumptions that are contained in their calculation, as well
as external factors that can affect their value. Through quarterly review and
analysis, valuations and calculations are tested for reasonableness.
OFF BALANCE SHEET COMMITMENTS
In the normal course of business, the Company enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve to varying degrees, elements of credit and interest rate
risk note recognized in the statement of financial position.
The Company's exposure to loan loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for loans reflected in the financial
statements.
As of June 30, 2004 and December 31, 2003, the Company had the following
outstanding financial commitments whose contractual amount represents credit
risk:
2004 2003
---- ----
Commitments to Extend Credit $195,305,000 $171,159,000
Letters of Credit 1,254,000 1,440,000
------------ ------------
$196,559,000 $172,599,000
============ ============
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Company customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Company is based on
management's credit evaluation of the customer.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possible chance of loss from unfavorable changes in market
prices and rates. These changes may result in a reduction of current and future
period net interest income, which is the favorable spread earned from the excess
of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.
The Company considers interest rate risk to be one of its most significant
market risks, which could potentially have a significant impact on operating
earnings. The structure of the Company's loan and deposit portfolios is such
that a significant decline in interest rates may adversely impact net market
values and net interest income.
The ongoing monitoring and management of both interest rate risk and liquidity,
in the short and long term time horizons, is an important component of the
Company's asset/liability management process, which is governed by limits
established in the policies reviewed and approved annually by the Board of
Directors.
17
As the Company does not believe it is possible to reliably predict future
interest rate movements, it has maintained an appropriate process and set of
measurement tools which enable it to identify and quantify sources of interest
rate risk in varying rate environments. The primary tool used by the Company in
managing interest rate risk is the effect of interest rate shocks on net
interest income.
The following reflects the Company's one-year net interest income sensitivity
based on:
o Asset and liability levels using June 30, 2004 as a starting point.
o There are assumed to be conservative levels of balance sheet growth -
low to mid single-digit growth in loans, investments and deposits,
augmented by necessary changes in borrowings and retained earnings,
with no growth in other major components of the balance sheet.
o The prime rate and federal funds rates are assumed to move up 200
basis points and down 100 basis points over a 12-month period.
o Cash flows are based on contractual maturity.
Net Interest Income Sensitivity
Calculated annualized
Increase (decrease) in
Change in projected net interest
Interest Rates income at June 30, 2004
-------------- -----------------------
+ 200 basis points 8.96%
- 100 basis points 1.33%
In the model, both the rising and falling rate environments reflect an increase
in net interest income (NII) from a flat rate environment. The analysis does not
represent a Company forecast and should not be relied upon as being indicative
of expected operating results. These hypothetical estimates are based upon
various assumptions. While the assumptions are developed based upon current
economic and market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions. Furthermore, the sensitivity analysis
does not reflect actions the Board might take in responding to or anticipating
changes in interest rates.
Item 4 - Controls and Procedures
As of the end of the period covered by this Report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures with respect to the information generated for use in this Report.
The evaluation was based in part upon reports provided by a number of
executives. Based on this evaluation, as of the date of such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective to provide
reasonable assurances that information required to be disclosed by the Company
in reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
It should be noted that the design of the Company's disclosure controls and
procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's Chief Executive and Financial Officers have concluded that the
Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
In addition, there have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation described in
the above paragraph that occurred during the Company's last fiscal quarter, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 2004 the Company is not party to any litigation
that is considered likely to have a material adverse effect on
the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Security Holders
The following items were submitted to the security holders for
approval at the annual meeting of shareholders held on May 25,
2004:
1. Election of the following six persons for a term of one year to
the Board of Directors of the Company. The results were as
follows:
NAME FOR AGAINST WITHHELD BROKER NON-VOTES
---- --- ------- -------- ----------------
Dr. Steven W. Aichle 7,614,842 0 6,570 0
Dr. Robert P. Beck 7,604,842 0 16,570 0
Neil M. Cleveland 7,615,842 0 5,570 0
Luther J. Mohr 7,598,852 0 22,570 0
Stephen H. Wacknitz 7,598,852 0 22,570 0
Richard W. Wright 7,603,706 0 17,716 0
2. Ratification and Approval of the 2004 Stock Incentive Plan
There were 4,233,127 votes FOR and 303,571 votes AGAINST, 69,928
votes WITHHELD and 0 BROKER NON-VOTES.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.17 Temecula Valley Bancorp Inc. 2004 Stock
Incentive Plan, as amended
31.1 Rule 13a-14(a) Certification
31.2 Rule 13a-14(a) Certification
32 Section 1350 Certifications
19
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities
and Exchange Commission by the Company during the last quarter of the period
covered by this Report:
(1) A current report on Form 8-K dated April 14, 2004 reported a
press release concerning first quarter 2004 earnings
(2) A current report on Form 8-K dated April 16, 2004 that
reported a press release concerning Temecula Valley Bancorp receiving
Carpenter's market cap champion award for 2003
(3) A current report on Form 8-K dated May 3, 2004 that reported
a press release announcing Temecula Valley Bancorp's intention to list on the
Nasdaq national market exchange
(4) A current report on Form 8-K dated June 15, 2004 that
reported a press release reporting the opening on June 1, 2004 a full service
office in Rancho Bernardo, California
(5) A current report on Form 8-K dated June 21, 2004 that
reported a press release reporting the opening of a SBA loan production office
in Ocean City, New Jersey
(6) A current report on Form 8-K dated June 24, 2004 that
reported a press release reporting that Temecula Valley Bank has appointed B.W.
Stone as a business development consultant for the East San Diego County area.
(7) A current report on Form 8-K dated June 28, 2004 that
reported a press release concerning Temecula Valley Bank receiving Finley's
rating of Super Premier Performer for 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEMECULA VALLEY BANCORP INC.
DATE: August 15, 2004 BY: /s/ Stephen H. Wacknitz
-------------------------------------------
Stephen H. Wacknitz, President/CEO,
Chairman of the Board
DATE: August 15, 2004 BY: /s/ Donald A. Pitcher
-------------------------------------------
Donald A. Pitcher, Executive Vice President
Chief Financial Officer
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EXHIBIT INDEX
10.17 Temecula Valley Bancorp Inc. 2004 Stock Incentive Plan, as amended
31.1 Rule 13a-14(a) Certification
31.2 Rule 13a-14(a) Certification
32 Section 1350 Certifications
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