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: September 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: (951) 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[ ] No[X]
As of November 10, 2004, there were 8,708,467 shares of the Registrant's common
stock outstanding.
This Form 10-Q contains 25 pages.
Exhibit Index: Page 21
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
September 30, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
-----------------------------------
ASSETS
Cash and Due from Banks $10,362,018 $9,348,013
Federal Funds Sold 26,900,000 21,400,000
-----------------------------------
Total Cash and Cash Equivilents 37,262,018 30,748,013
Loans Held for Sale 23,018,728 17,005,198
Loans:
Commercial 28,236,554 33,008,385
Real Estate - Construction 179,394,158 113,846,726
Real Estate - Other 275,582,264 195,991,515
Consumer and Other 2,579,587 3,194,582
-----------------------------------
TOTAL LOANS 485,792,563 346,041,208
Net Deferred Loan Fees (3,442,305) (2,297,015)
Allowance for Loan Losses (5,351,737) (3,607,833)
-------------------------------------
NET LOANS 476,998,521 340,136,360
Federal Reserve & Home Loan Bank
Stock, at Cost 2,125,500 1,145,000
Other Real Estate Owned 302,698 485,036
Premises and Equipment 3,979,370 2,185,543
Cash Surrender Value of Life
Insurance 9,494,528 5,740,729
Deferred Tax Assets 2,428,615 2,393,000
SBA Servicing Assets 7,709,287 6,116,679
SBA Interest-Only Strips Receivable 23,644,223 20,495,511
Accrued Interest and Other Assets 8,282,710 4,761,049
--------------------------------------
$595,246,198 $431,212,118
=====================================
1
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
September 30, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
-------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $138,303,661 $112,367,018
Money Market and NOW 73,760,874 61,340,428
Savings 44,766,390 35,180,027
Time Deposits Under $100,000 133,095,630 88,771,099
Time Deposits $100,000 and Over 138,764,865 85,828,794
-------------------------------------
TOTAL DEPOSITS 528,691,420 383,487,366
Junior Subordinated Debt Securities 20,620,000 12,372,000
Accrued Interest and Other Liabilities 6,144,102 5,669,687
-------------------------------------
TOTAL LIABILITIES 555,455,522 401,529,053
Shareholders' Equity:
Common Stock - No Par Value Authorized
40,000,000 Shares; Issued and
Outstanding 8,690,503 Shares at
09/30/2004 and 8,151,914 Shares at
12/31/2003 0 0
Surplus 16,596,751 14,082,278
Retained Earnings 23,193,925 15,600,787
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 39,790,676 29,683,065
-------------------------------------
$595,246,198 $431,212,118
=====================================
2
TEMECULA VALLEY BANCORP INC.
STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $8,746,232 $6,335,067 $23,324,087 $17,335,478
Interest on HTM Securities - U.S. Treasuries 539 220 1,032 220
Interest on Federal Funds Sold 36,615 17,182 65,541 106,334
--------------------------------------------------------------------
TOTAL INTEREST INCOME 8,783,386 6,352,469 23,390,660 17,442,032
INTEREST EXPENSE
Interest on Money Market and NOW 132,537 116,965 361,123 436,303
Interest on Savings Deposits 50,528 45,437 136,096 149,322
Interest on Time Deposits 1,380,918 953,189 3,328,896 2,771,682
Interest on Federal Funds Purchased 0 0 0 878
Interest on FHLB Advances 10,625 4,036 59,992 32,295
Interest on Junior Subordinated Debt Securities 176,237 99,492 482,942 288,955
--------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,750,845 1,219,119 4,369,049 3,679,435
--------------------------------------------------------------------
NET INTEREST INCOME 7,032,541 5,133,350 19,021,611 13,762,597
Provision for Loan Losses 1,635,000 150,000 2,385,000 650,000
--------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,397,541 4,983,350 16,636,611 13,112,597
NON-INTEREST INCOME
Service Charges and Fees 169,902 193,218 516,225 604,253
Gain on Sale of Loans/Assets 4,870,793 4,160,363 13,304,011 10,978,491
Fees, and Other Income 2,247,553 2,085,196 6,922,701 6,391,960
--------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 7,288,248 6,438,777 20,742,937 17,974,704
--------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 5,457,390 5,076,043 16,555,198 15,037,254
Occupancy Expenses 502,233 312,429 1,177,661 875,932
Furniture and Equipment 292,755 220,571 808,790 636,714
Other Expenses 2,413,300 1,790,171 5,976,348 4,855,557
--------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 8,665,678 7,399,214 24,517,997 21,405,457
--------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,020,111 4,022,913 12,861,551 9,681,844
Income Taxes 1,645,749 1,643,420 5,268,413 3,958,392
--------------------------------------------------------------------
NET INCOME $2,374,362 $2,379,493 $7,593,138 $5,723,452
====================================================================
Per Share Data:
Net Income - Basic $0.27 $0.30 $0.90 $0.74
====================================================================
Net Income - Diluted $0.25 $0.27 $0.81 $0.66
====================================================================
Average Number of Shares Outstanding 8,662,855 7,980,546 8,432,075 7,720,546
====================================================================
Average Number of Shares and Equivilents 9,481,185 8,925,436 9,335,237 8,656,638
====================================================================
3
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2004 2003
-----------------------------------------
OPERATING ACTIVITIES
Net Income $7,593,138 $5,723,452
Adjustments to Reconcile Net Income to Net
Cash (used) provided by Operating Activities:
Depreciation and Amortization 4,911,691 3,452,630
Provision for Loan Losses 2,385,000 650,000
Decrease (Increase) of Deferred Tax Asset (35,615) 0
Gain on Loan Sales (13,372,009) (10,974,941)
Loans Originated for Sale (203,588,878) (183,487,804)
Proceeds from Loan Sales 216,006,592 191,174,010
Increase in Cash Surrender Value of Life Insurance (181,800) (139,950)
Net Change in Other Assets and Liabilities (12,185,462) (9,348,731)
-----------------------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 1,532,657 (2,951,334)
-----------------------------------------
INVESTING ACTIVITIES
Purchases of Investments (698,668) (150,000)
Repayment (Purchases) of FRB/FHLB Stock (980,500) 497,850
Maturity of Investments 700,000 150,000
Net Increases in Loans (144,124,060) (83,745,314)
Purchase of Life Insurance (3,572,000) (600,000)
Purchases of Premises and Equipment (2,358,951) (258,633)
Proceeds from Sale of Premises and Equipment 49,000 16,450
-----------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (150,985,179) (84,089,647)
-----------------------------------------
FINANCING ACTIVITIES
Net Increases in Demand, NOW,Money Market and Savings Accounts 47,943,452 25,597,215
Net Increases in Time Deposits 97,260,602 70,389,260
Net Increases/(Decreases) in Borrowings 8,248,000 (5,000,000)
Proceeds from the Exercise of Stock Warrants 0 811,495
Proceeds from the Exercise of Stock Options 2,514,473 1,075,553
-----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 155,966,527 92,873,523
-----------------------------------------
NET INCREASE IN CASH AND CASH EQUIVILENTS 6,514,005 5,832,542
Cash and Cash Equivilents at Beginning of Period 30,748,013 12,180,415
-----------------------------------------
CASH AND CASH EQUIVILENTS AT END OF PERIOD $37,262,018 $18,012,957
=========================================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 4,316,437 $ 3,650,927
Income Taxes Paid $ 5,869,371 $ 4,982,328
Loans Transferred to Other Real Estate Owned $ 1,410,000 $ 1,336,036
Loans Transferred out of Other Real Estate Owned $ 1,592,338 $ -
4
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period beginning December 31, 2002 and ending September 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
Exercise of Options 81,965 0 505,921 505,921
Including the Realization
of Tax Benefits of $208,871
Net Income 2,374,362 2,374,362
-------------------------------------------------------------
Balance at September 30, 2004 8,690,503 $0 $16,596,751 $23,193,925 $39,790,676
=============================================================
5
TEMECULA VALLEY BANCORP INC.
NOTES TO FINANCIAL STATEMENTS
September 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 management, necessary to fairly present the financial position of
the Company with respect to the interim financial statements and the results of
operations for the interim period ended September 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 three unconsolidated
subsidiaries, Temecula Valley Statutory Trust I, Temecula Valley Statutory Trust
II, and Temecula Valley Statutory Trust III.
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 nine-month period ending September 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 September 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 the second quarter 2004 10-Q. 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, compensation
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 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. On September 20, 2004 the
Company participated in a Trust Preferred Securities pool in the amount of
$8,000,000. The borrowing net proceeds of $8,000,000 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 247 employees (244
full time equivalent), of which 234 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
in June 2004 in Rancho Bernardo (San Diego County) and the 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 $411,201,196 at September 30, 2003 to
$431,212,118 at December 31, 2003 and to $595,246,198 at September 30, 2004.
Most of the increase in the first nine months of 2004 was in loans outstanding
and Federal Funds Sold. Total loans, excluding loans held for sale, increased
from $346,041,208 at year-end 2003 to $485,792,563 at September 30, 2004, a
$139,751,355 or 40.4% 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 is comprised only of Federal Funds Sold, increased from
$21,400,000 at December 31, 2003 to $26,900,000 at September 30, 2004. The
timing of loan sales during the month, as well as deposit generation and loan
growth, are the factors that most effect the Federal Funds Sold balance.
Allowance for Loan Losses
The allowance for loan losses increased from $3,607,833 at December 31,
2003 to $5,351,737 at September 30, 2004. This allowance does not include the
$400,000 reserve for undisbursed loans, which is carried in other liabilities.
The allowance was, as a percentage of loans outstanding, 1.00% at December 31,
2003 and 1.06% at September 30, 2004. The large increase in the provision in
2004 was due to the increase in SBA lending, increase in tract and other
construction, and the general overall growth of the loan portfolio. The
provision was $2,385,000 in the first nine months of 2004, with net chargeoffs
of $641,096. The provision was $1,635,000 in the third quarter of 2004, which
increased the allowance from 0.90% of total loans at June 30, 2004 to 1.06% at
September 30, 2004. 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
9 Months
2002 2003 2004
---- ---- ----
Beginning Balance $1,239,308 $3,017,395 $3,607,833
Chargeoffs 707,455 505,586 649,737
Recoveries 25,542 74,024 8,641
Provision 2,460,000 1,022,000 2,385,000
--------- --------- ---------
Ending Balance $3,017,395 $3,607,833 $5,351,737
========= ========= =========
8
At September 30, 2003, there was $4,951,758 of non-accrual loans, of which
$4,157,030 was guaranteed by the SBA. The Bank had $9,868,931 of non-accrual
loans as of September 30, 2004, of which $7,327,611 was guaranteed by the SBA.
The Bank also had other real estate owned (REO) at September 30, 2004 of
$302,698, consisting of one parcel of land.
NON-CURRENT LOANS & OTHER REAL ESTATE OWNED
Government Guaranteed
---------------------
September 30, 2003 Gross Balance Net Balance
- ------------------ ------------- -----------
30 - 89 Days Past Due $ 1,195,112 ($ 946,172) $ 248,940
90+ Days Past Due & Accruing 0 (0) 0
Non-Accrual 4,951,758 (4,157,030) 794,728
--------- --------- -------
Subtotal 6,146,870 (5,103,202) 1,043,668
Other Real Estate Owned (REO) 1,336,036 (638,250) 697,786
--------- ------- -------
Total $7,482,906 ($5,741,452) $ 1,741,454
========= ========= =========
December 31, 2003
- -----------------
30 - 89 Days Past Due $3,243,706 ($ 582,205) $ ,661,501
90+ Days Past Due & Accruing 0 (0) 0
Non-Accrual 6,764,713 (5,269,317) 1,495,396
--------- --------- ---------
Subtotal 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
========== ========= =========
September 30, 2004
- ------------------
30 - 89 Days Past Due $862,778 $ 3,177) $ 199,601
90+ Days Past Due & Accruing 0 (0) 0
Non-Accrual 9,868,931 (7,327,611) 2,541,320
--------- --------- ---------
Subtotal 10,731,709 (7,990,788) 2,740,921
Other Real Estate Owned (REO) 302,698 (227,023) 75,675
--------- --------- ---------
Total $11,034,407 ($ 8,217,811) $ 2,816,596
========== ========= =========
Other Assets
The ratio of interest earning assets to total assets was 86.86% for the
first nine months of 2003 compared to 85.79% for the first nine months of 2004.
The target is to keep this ratio above 90%, but has remained below that level
due 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 $5,571,993, the SBA I/O strip receivable was $18,883,704 and
the cash surrender value of life insurance was $4,723,133 at September 30, 2003.
At September 30, 2004, the SBA servicing asset was $7,709,287 the SBA I/O strip
receivable was $23,644,233 and the cash surrender value of life insurance was
$9,494,528. 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 $528,691,420
at September 30, 2004. Money market and NOW accounts increased $12,420,446,
savings increased $9,586,363, demand deposits increased $25,936,643, and
certificate of deposits (CD's) increased $97,260,602. Demand deposits comprised
26% of deposits at September 30, 2004, compared to 29% at December 31, 2003 and
30% at September 30, 2003. The increase in the ratio of certificates of deposits
to total deposits is due to CD promotions in 2003 and 2004 to help fund the
rapid loan growth. At September 30, 2004, more than 57% 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 in June, and Corona in August. The Bank will continue to solicit core
deposits to diminish reliance on volatile funds.
At December 31, 2003 and September 30, 2004 there were no short-term
advances from the Federal Home Loan Bank. The borrowing capacity at the Federal
Home Loan Bank as of December 31, 2003 was $25,553,805 and is $39,332,609 at
September 2004.
On June 26, 2002, the Company issued $7,217,000 of junior subordinated 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 5.40% as of September 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 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 4.84% as of September 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.
On September 20, 2004 the Company issued $8,248,000 of junior subordinated
debt securities to Temecula Valley Statutory Trust III, 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 20, 2034. Interest is payable quarterly on these debt
securities at 3-Month LIBOR plus 2.20% for an effective rate of 4.07% as of
September 30, 2004. The debt securities can be redeemed for 107.5% of the
principal balance through September 17, 2009 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, II and III. The balance of the equity of Temecula Valley
Statutory Trusts I, II and III 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, II and III 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 Company has included the net junior
subordinated debt securities in its Tier 1 and Tier 2 Capital for regulatory
capital purposes.
10
Capital
Total capital was $39,790,676 at September 30, 2004, $29,683,065 at
December 31, 2003, and $27,226,703 at September 30, 2003. For the first nine
months of 2003, the $7,610,500 increase consisted of $5,723,452 of net income,
$1,075,553 on the exercise of stock options and $811,495 on the exercise of
warrants. For the first nine months of 2004, the $10,107,611 increase was due to
$7,593,138 in net income and $2,514,473 on the exercise of stock options.
Total risk based capital was 11.70%, the tier one risk based ratio was
9.47%, and the tier one leverage ratio was 9.32% at September 30, 2004, compared
to a total risk based capital of 11.29%, tier one risk based capital of 9.55%,
and tier one leverage ratio of 8.86% at September 30, 2003. At September 30,
2003, December 31, 2003, and September 30, 2004 the Bank and the Company were in
the regulatory "well capitalized" category.
RESULTS OF OPERATIONS
Net Income
For the third quarter of 2003, the Company earned $2,379,493 compared to
$2,374,362 in 2004. Net income per basic share for the third quarter was $.30 in
2003 compared to $.27 in 2004. 2.35.69% for the third quarter of 2003, compared
to 2.35% for the third quarter of 2004. The return on average assets was 2.35%
for the third quarter of 2003, compared to 1.69% for the third quarter of 2004.
The return on average equity was 36.77% for the third quarter of 2003, compared
to 24.61% for the third quarter of 2004. For the first nine months of 2003, the
Company earned $5,723,452, compared to $7,593,138 in 2004. Net income per basic
share for the first nine months was $.74 in 2003 compared to $.90 in 2004. Net
income per diluted share was $.66 per share in the first nine months of 2003
compared to $.81 in 2004. The return on average assets was 2.06% for the first
nine months of 2003, compared to 2.03% for the first nine months of 2004. The
return on average equity was 32.88% for the first nine months of 2003, compared
to 29.21% for the first nine months 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. The
expected gradual increases in rates in the second half of 2004 which started
with the .25% increase in July and the .25% increase in August should have a
small positive effect on the net interest margin. Net income in the first nine
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 $1,965,150 in the
first nine months of 2003 compared to $4,055,353 in the first nine months 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 in
the third quarter and will continue to have a negative effect in the fourth
quarter 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 half would have been reduced the pro forma amounts
indicated on the following schedule.
11
Nine Months Ending September 30
2004 2003
---- ----
Net Income as reported $7,593,138 $ 5,723,452
Stock based compensation using the Intrinsic Value Method 20,139
8,007
Stock based compensation that would have been reported (126,090) (379,093)
------- -------
Pro Forma Net Income $7,487,187 $ 5,352,366
========= =========
Basic per share as reported $ .90 69
Basic per share pro forma $ .81 $ .663
Diluted per share as reported 89 $ .39
Diluted per share pro forma $ .80 $ .62
Three Months Ending September 30
2004 2003
---- ----
Net Income as reported $2,374,362 $ 2,379,493
Stock based compensation using the Intrinsic Value Method 6,951
2,669
Stock based compensation that would have been reported (42,030) (126,364)
------ -------
Pro Forma Net Income $2,339,283 $ 2,255,798
========= =========
Basic per share as reported $ .27 $ .30
Basic per share pro forma $ .25 $ .27
Diluted per share as reported $ .27 $ .28
Diluted per share pro forma $ .25 $ .25
Net Interest Earnings
Net interest income was $ 5,133,350 in the third quarter of 2003, compared
to $7,032,541 in 2004. For the third quarter of 2003 the net interest margin was
5.91%, compared to 5.77% in 2004. The net interest margin decreased from 2001 to
2004 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 .25% Federal Reserve rate increase in
July 2004 and the .25% increase in August 2004 will increase the net interest
margin. The loan to deposit ratio decreased from 97.68% at September 30, 2003 to
95.59% at September 30, 2004. The net interest margin was also helped by a
healthy average of 28.34% DDA to total deposits ratio for the first nine months
of 2003 and 28.13% for the first nine months of 2004. The yield on loans
decreased from 7.46% for the third quarter of 2003 to 7.21% for the third
quarter of 2004. Rate floors on nearly $265 million of variable rate loans at
September 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 third quarter of 2003 was 1.56%, compared to 1.45% in 2004.
The cost of interest bearing deposits was 1.73% in the third quarter of 2003 and
1.69% in the third 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 4.52% for the third quarter of 2003
and 4.84% in 2004. The increase in the cost of other borrowings in 2004 is due
to a higher percentage of the borrowings in 2004 attributable to junior
Subordinated Debt Securities.
12
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 25% or 30% assumption, giving the
calculation a conservative bias. For the first nine months of 2004, $6,333,651
was collected for servicing, the asset amortization was $4,350,038 and the SBA
related servicing assets increased $4,741,320. The increase in the SBA loan
servicing assets was due to the sale of $132,541,887 in 7A loans during 2004.
For the same period in 2003, $4,222,760 was collected for servicing, the asset
amortization was $2,953,995 and the SBA related servicing assets increased
$7,571,825. There was $97,124,858 in 7A loan sales during the first nine months
of 2003. The servicing assets increased less in the first nine 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
Greater Less
Than Than
8 Yr 8 - 11 Yr 11 - 16 16 - 21 Yr 21 Yr
Issue Date Life CPR Life CPR Yr Life CPR Life CPR Life CPR
- ---------- -------- -------- ----------- -------- --------
2001 15.6 13.2 11.1 11.1 11.5
2000 16.3 13.7 14.0 15.9 14.4
1999 16.4 14.7 14.3 13.9 15.4
1998 14.4 15.1 16.9 14.2 16.4
1997 13.9 14.1 15.4 16.8 17.7
The following schedule displays the WAL for each SBA pool after applying
the CPRs identified above:
Original Maturity WAL (Yrs.)
< 8 Years 1.7
8 - 11 Years 2.3
11 - 16 Years 3.5
26 - 21 Years 4.5
> 21 Years 5.3
Based on assessing each component, our estimated discount rates for each
Bank SBA pool is as follows:
Original Maturity Discount Rate
< 8 Years 9.50%
8 - 11 Years 9.71%
11 - 16 Years 10.02%
26 - 21 Years 10.26%
> 21 Years 10.45%
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 $2,385,000
for the nine 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, the provisions were due to loan growth. For 2004, the
provisions were due to significant loan growth as well as additional provisions
for our new construction loan products. The Bank plans to continue to sell the
unguaranteed portion of SBA 7A loans to mitigate the risk associated with SBA 7A
loans.
Non-Interest Income
Non-interest income contributed significantly to the earnings of the Bank
in the third quarter of 2004, as it did in 2003 and 2002. Service charges
decreased from $193,218 in the third quarter of 2003 to $169,902 in 2004 due to
an increased number of accounts offset by a decrease in non-sufficient funds
service charges. Other income increased from $2,085,196 for the third quarter of
2003 to $2,247,553 in 2004, due mainly to higher SBA loan servicing income
offset by lower SBA broker income. SBA net loan servicing income increased from
$407,258 in the third quarter of 2003 to $641,743 in 2004 due to the increase in
the servicing portfolio. The gain on sale of loans was $4,870,793 in the third
quarter of 2004 compared to $4,160,363 in the third quarter of 2003. The 2004
increase was due to higher SBA guaranteed, unguaranteed loan sales, and SBA 504
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 will be likelylower than last year's volume due to the increase in
mortgage rates.
Gain on Sale of Loans/Assets
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-----------------------------------------------------------------------------
SBA 7A Unguaranteed Sales $ 889,974 $ 857,137 $4,055,353 $ 1,965,150
SBA 7A Guaranteed Sales 2,691,096 2,367,971 6,460,308 6,181,041
SBA 504 Sales 422,957 0 732,421 0
Mortgage Sales 379,699 712,010 1,202,266 2,404,284
Other Loan Related 483,067 223,245 921,661 424,466
REO Gain (Loss) 0 0 (72,998) 0
Fixed Assets 4,000 0 5,000 3,550
-----------------------------------------------------------------------------
Total $4,870,793 $4,160,363 $13,304,011 $10,978,491
=============================================================================
14
Other Income
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------------------------------------------------------------------------------
Customer Fees $ 57,901 $ 57,846 $ 172,914 $ 147,883
Loan Funding 573,623 597,507 1,800,347 1,625,692
SBA Broker Income 568,175 623,045 1,872,167 2,294,506
Mortgage Broker Income 222,690 277,976 724,768 774,424
Loan Late Charges 45,272 46,874 133,723 127,226
Other Loan Charges 1,200 3,339 4,609 7,239
SBA Servicing, Net 641,743 407,258 1,895,993 1,195,869
CSV Life Insurance 109,219 56,550 256,219 169,650
FRB/FHLB Dividend 27,214 14,645 61,347 49,100
Other 516 156 614 371
--------------------------------------------------------------------------------
Total $2,247,553 $2,085,196 $6,922,701 $ 6,391,960
================================================================================
Non-Interest Expense
Non-interest expense was $8,665,678 in the third quarter of 2004 compared
to $7,399,214 in the same quarter of 2003. Salaries and benefits increased from
$5,076,043 in the third quarter of 2003 to $5,457,390 for the same period in
2004 due to the increase in employees from the continued expansion of the SBA
department, hiring for the Corona and Rancho Bernardo office, and to support the
general growth of the Company. Other expenses rose from $1,790,171 in the third
quarter of 2003 to $2,413,300 in the third quarter 2004 due to higher loan
volume, processing expense, 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
September 30, September 30,
2004 2003 2004 2003
---------------------------------------------------------------------------------
Processing $ 249,091 $ 256,828 $ 758,077 $ 736,140
Professional 145,644 74,976 457,750 265,010
Travel & Entertainment 139,952 125,755 448,209 385,881
Director Related 47,563 29,048 102,512 126,097
Shareholder 11,150 13,931 87,391 65,396
Loan Funding 395,714 501,448 1,017,771 1,294,895
Office Related 619,392 427,708 1,650,599 1,170,487
Marketing 299,128 215,475 726,138 512,318
OCC/FDIC Assessments 46,422 37,369 128,355 99,861
Other 459,244 107,633 599,546 199,472
---------------------------------------------------------------------------------
Total $ 2,413,300 $ 1,790,171 $ 5,976,348 $ 4,855,557
=================================================================================
15
Income Taxes
Income tax expense totaled $1,643,420 for the third quarter of 2003 and
$1,645,749 for the third 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 nine months of 2004 it was 40.9%. Deferred tax assets totaled
$1,728,000 at September 30, 2003, $2,393,000 at December 31, 2003 and $2,428,615
at September 30, 2004. Over half of the deferred tax asset is due to the tax
deductibility-timing differences 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 $18,000,000 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 (FHLB). 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
$39,332,609 at September 30, 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 Bank 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 September 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 $211,569,000 $171,159,000
Letters of Credit 1,683,000 1,440,000
----------- -----------
$213,252,000 $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 September 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 September 30, 2004
-------------- ----------------------------
+ 200 basis points 15.56%
- 100 basis points 2.36%
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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
10.13 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Stephen H. Wacknitz dated September 30, 2004.
10.14 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Luther J. Mohr dated January 28, 2004.
10.17 Executive Deferred Compensation Agreement between Temecula Valley
Bank and Thomas P. Ivory dated April 1, 2001.
10.18 Executive Deferred Compensation Agreement between Temecula Valley
Bank and Stephen H. Wacknitz dated September 30, 2004.
10.19 Salary Continuation Agreement between Temecula Valley Bank and
Stephen H. Wacknitz dated January 28, 2004.
10.20 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Scott J. Word dated September 30, 2004.
10.21 Split Dollar Agreement between Temecula Valley Bank and Thomas P.
Ivory dated September 30, 2004.
10.22 Split Dollar Agreement between Temecula Valley Bank and Luther J.
Mohr dated September 30, 2004.
19
10.23 Split Dollar Agreement between Temecula Valley Bank and Stephen H.
Wacknitz dated September 30, 2004.
10.24 Split Dollar Agreement between Temecula Valley Bank and Scott J. Word
dated September 30, 2004.
31.1 Rule 13a-14(a) Certification
31.2 Rule 13a-14(a) Certification
32.1 Section 1350 Certifications
32.2 Section 1350 Certification
(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 July 7, 2004 reported a press
release announcing the addition of George Cossolias to the Board of Directors of
the Bank.
(2) A current report on Form 8-K dated July 16, 2004 reported a press
release concerning second quarter 2004 earnings.
(3) A current report on Form 8-K dated July 25, 2004 that reported a press
release concerning the fact that the Company was named most profitable in the
United States.
(4) A current report on Form 8-K dated September 30, 2004 that reported a
press release and the resignation of the Banks Executive Vice President, SBA
Department.
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: November 10, 2004 BY: /s/ Stephen H. Wacknitz
----------------------------------------
Stephen H. Wacknitz, President/CEO,
Chairman of the Board
DATE: November 10, 2004 BY: /s/ Donald A. Pitcher
----------------------------------------
Donald A. Pitcher, Executive Vice President
Chief Financial Officer
20
EXHIBIT INDEX
10.13 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Stephen H. Wacknitz dated September 30, 2004.
10.14 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Luther J. Mohr dated January 28, 2004.
10.17 Executive Deferred Compensation Agreement between Temecula Valley
Bank and Thomas P. Ivory dated April 1, 2001.
10.18 Executive Deferred Compensation Agreement between Temecula Valley
Bank and Stephen H. Wacknitz dated September 30, 2004.
10.19 Salary Continuation Agreement between Temecula Valley Bank and
Stephen H. Wacknitz dated January 28, 2004.
10.20 Amended and Restated Salary Continuation Agreement between Temecula
Valley Bank and Scott J. Word dated September 30, 2004.
10.21 Split Dollar Agreement between Temecula Valley Bank and Thomas P.
Ivory dated September 30, 2004.
10.22 Split Dollar Agreement between Temecula Valley Bank and Luther J.
Mohr dated September 30, 2004.
10.23 Split Dollar Agreement between Temecula Valley Bank and Stephen H.
Wacknitz dated September 30, 2004.
10.24 Split Dollar Agreement between Temecula Valley Bank and Scott J. Word
dated September 30, 2004.
31.1 Rule 13a-14(a) Certification
31.2 Rule 13a-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
21