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, 2005
[ ] 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
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---
As of August 2, 2005, there were 8,871,612 shares of the Registrant's common
stock, no par value per share, outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and December 31, 2004
(UNAUDITED)
2005 2004
--------------------------
ASSETS
Cash and Due from Banks $11,013,343 $6,317,261
Federal Funds Sold 27,420,000 16,800,000
--------------------------
Total Cash and Cash Equivilents 38,433,343 23,117,261
Loans Held for Sale 12,578,585 15,142,720
Loans:
Commercial 28,113,867 23,560,360
Real Estate - Construction 275,463,651 203,885,627
Real Estate - Other 313,746,739 288,514,699
Consumer and Other 3,022,702 2,796,327
--------------------------
TOTAL LOANS 620,346,959 518,757,013
Net Deferred Loan Fees (4,713,231) (3,703,481)
Allowance for Loan Losses (7,839,179) (6,362,534)
--------------------------
NET LOANS 607,794,549 508,690,998
Federal Reserve & Home Loan Bank Stock, at Cost 2,849,000 2,377,800
Other Real Estate Owned 0 302,698
Premises and Equipment 4,763,102 4,379,809
Cash Surrender Value of Life Insurance 13,469,824 9,593,824
Deferred Tax Assets 5,020,990 4,370,990
SBA Servicing Assets 8,102,773 7,585,712
SBA Interest-Only Strips Receivable 23,479,641 24,679,520
Accrued Interest and Other Assets 7,724,650 6,586,197
--------------------------
$724,216,457 $606,827,529
==========================
2
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF FINANCIAL CONDITION
June 30, 2005 and December 31, 2004
(UNAUDITED)
2005 2004
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $147,656,572 $138,041,385
Money Market and NOW 77,089,341 73,880,005
Savings 40,532,840 41,838,703
Time Deposits Under $100,000 182,567,615 135,915,448
Time Deposits $100,000 and Over 195,927,622 145,091,164
--------------------------
TOTAL DEPOSITS 643,773,990 534,766,705
Junior Subordinated Debt Securities 20,620,000 20,620,000
Accrued Interest and Other Liabilities 9,338,684 8,538,286
--------------------------
TOTAL LIABILITIES 673,732,674 563,924,991
Shareholders' Equity:
Common Stock - No Par Value Authorized 40,000,000
Shares; Issued and Outstanding 8,865,447 Shares at
6/30/2005 and 8,752,603 Shares at 12/31/2004 17,360,652 16,724,128
Retained Earnings 33,123,131 26,178,410
--------------------------
TOTAL SHAREHOLDERS'
EQUITY 50,483,783 42,902,538
--------------------------
$724,216,457 $606,827,529
==========================
3
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-----------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $13,414,314 $7,779,689 $24,804,088 $14,577,855
Interest on HTM Securities - U.S. Treasuries 1,507 425 2,184 493
Interest on Federal Funds Sold 38,573 10,533 58,666 28,926
-----------------------------------------------
TOTAL INTEREST INCOME 13,454,394 7,790,647 24,864,938 14,607,274
INTEREST EXPENSE
Interest on Money Market and NOW 137,593 126,323 265,242 228,586
Interest on Savings Deposits 37,729 44,144 80,854 85,568
Interest on Time Deposits 2,615,784 1,026,770 4,453,216 1,947,978
Interest on Federal Funds Purchased 0 0 0 0
Interest on FHLB Advances 44,558 27,666 134,492 49,367
Interest on Junior Subordinated Debt Securities 343,465 150,738 623,633 306,705
-----------------------------------------------
TOTAL INTEREST EXPENSE 3,179,129 1,375,641 5,557,437 2,618,204
-----------------------------------------------
NET INTEREST INCOME 10,275,265 6,415,006 19,307,501 11,989,070
Provision for Loan Losses 804,100 250,000 1,642,900 750,000
-----------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,471,165 6,165,006 17,664,601 11,239,070
NON-INTEREST INCOME
Service Charges and Fees 162,625 156,559 320,850 346,323
Gain on Sale of Loans/Assets 4,665,032 4,299,874 8,416,098 8,433,218
Fees, and Other Income 2,637,157 2,270,466 4,511,362 4,675,147
-----------------------------------------------
TOTAL NON-INTEREST INCOME 7,464,814 6,726,899 13,248,310 13,454,688
-----------------------------------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 6,722,516 5,933,326 12,574,022 11,097,808
Occupancy Expenses 605,801 367,529 1,168,066 675,428
Furniture and Equipment 368,975 283,851 706,656 516,035
Other Expenses 2,482,828 1,823,005 4,568,068 3,563,048
-----------------------------------------------
TOTAL NON-INTEREST EXPENSE 10,180,120 8,407,711 19,016,812 15,852,319
-----------------------------------------------
INCOME BEFORE INCOME TAXES 6,755,859 4,484,194 11,896,099 8,841,439
Income Taxes 2,812,818 1,837,568 4,951,378 3,622,664
-----------------------------------------------
NET INCOME $3,943,041 $2,646,626 $6,944,721 $5,218,775
===============================================
Per Share Data:
Net Income - Basic $0.45 $0.32 $0.79 $0.63
===============================================
Net Income - Diluted $0.41 $0.28 $0.73 $0.56
===============================================
Average Number of Shares Outstanding 8,828,292 8,393,061 8,808,055 8,315,418
===============================================
Average Number of Shares and Equivalents 9,528,263 9,309,436 9,515,624 9,272,054
===============================================
4
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2005 2004
--------------------------
OPERATING ACTIVITIES
Net Income $6,944,721 $5,218,775
Adjustments to Reconcile Net Income to Net
Cash (used) provided by Operating Activities:
Depreciation and Amortization 4,613,497 3,166,196
Provision for Loan Losses 1,642,900 750,000
Increase of Deferred Tax Asset (650,000) (35,615)
Gain on Loan Sales (8,445,610) (8,505,217)
Loans Originated for Sale (120,590,413)(123,402,336)
Proceeds from Loan Sales 134,608,647 126,479,048
Loss on Sale of Other Real Estate Owned 27,512 72,998
Increase in Cash Surrender Value of Life Insurance (186,000) (121,200)
Net Change in Other Assets and Liabilities (371,417) (1,684,305)
--------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 17,593,837 1,938,344
--------------------------
INVESTING ACTIVITIES
Purchases of Investments (597,816) (449,207)
Purchases of FRB/FHLB Stock (471,200) (905,300)
Maturity of Investments 600,000 450,000
Repayment of FRB/FHLB Stock 0 0
Net Increases in Loans (107,109,717) (88,605,966)
Purchase of Life Insurance (3,690,000) (1,800,000)
Purchases of Premises and Equipment (982,017) (1,169,064)
Proceeds from Sale of Other Real Estate Owned 275,186 412,038
Proceeds from Sale of Premises and Equipment 54,000 37,000
--------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (111,921,564) (92,030,499)
--------------------------
FINANCING ACTIVITIES
Net Increases in Demand, NOW,Money Market and Savings Accounts 11,518,660 28,187,614
Net Increases in Time Deposits 97,488,625 40,683,827
Net Increases in Borrowings 0 20,000,000
Proceeds from Issuance of Junior Subordinated Debt Securities 0 0
Proceeds from the Exercise of Stock Warrants 0 0
Proceeds from the Exercise of Stock Options 636,524 2,008,552
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 109,643,809 90,879,993
--------------------------
NET INCREASE IN CASH AND CASH EQUIVILENTS 15,316,082 787,838
Cash and Cash Equivalents at Beginning of Period 23,117,261 30,748,013
--------------------------
CASH AND CASH EQUIVILENTS AT END OF PERIOD $38,433,343 $31,535,851
==========================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $5,327,791 $2,625,796
Income Taxes Paid $4,277,189 $3,719,371
Loans Transferred to Other Real Estate Owned $ - $1,410,000
Loans Transferred out of Other Real Estate Owned $ 302,698 $ 485,036
5
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period beginning December 31, 2003 and ending June 30, 2005
(UNAUDITED)
Common Retained
Shares Stock Earnings Total
------------- ------------------------------------
Balance at December 31, 2003 8,151,914 14,082,278 15,600,787 29,683,065
Exercise of Options 156,982 930,408 930,408
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 15,012,686 18,172,937 33,185,623
Exercise of Options 299,642 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 16,090,830 20,819,563 36,910,393
Exercise of Options 81,965 505,921 505,921
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 $16,596,751 $23,193,925 $39,790,676
Exercise of Options 62,100 127,377 127,377
Including the Realization
of Tax Benefits of ($51,192)
Net Income 2,984,485 2,984,485
--------------------------------------------------
Balance at December 31, 2004 8,752,603 $16,724,128 $26,178,410 $42,902,538
Exercise of Options 59,680 149,870 149,870
Net Income 3,001,680 3,001,680
--------------------------------------------------
Balance at March 31, 2005 8,812,283 $16,873,998 $29,180,090 $46,054,088
Exercise of Options 53,164 486,654 486,654
Net Income 3,943,041 3,943,041
--------------------------------------------------
Balance at June 30, 2005 8,865,447 $17,360,652 $33,123,131 $50,483,783
==================================================
6
TEMECULA VALLEY BANCORP INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2005
1) In the opinion of management of Temecula Valley Bancorp Inc. ("Bancorp"),
the enclosed unaudited financial statements contain all adjustments (
consisting only of normal, recurring accruals) necessary to fairly present
the financial position of the Bancorp on June 30, 2005. These financial
statements do not include all disclosures associated with the Bancorp's
annual financial statements and, accordingly, should be read in conjunction
with such statements.
2) The results of operations for the six month period ending June 30, 2005 are
not necessarily indicative of the results to be expected for the full year.
3) There were no significant accounting policy changes since the last report.
4) Temecula Valley Bancorp Inc., a one bank holding company for Temecula
Valley Bank 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.
7
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 "us") 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, ("Bank") was December 16,
1996. The Bank converted from a national charter to a state charter on June 29,
2005. The charter change will not significantly change the operations of the
Bank. The Company became a one-bank holding company for the Bank effective June
3, 2002. On June 26, 2002, the Company participated in a Trust Preferred
Securities pool in the net amount of $7,000,000. The $6,789,000 of borrowing
proceeds was transferred to the Bank as capital. On September 17, 2003, the
Company participated in a second Trust Preferred Securities pool in the net
amount of $5,000,000. Borrowing proceeds of $5,000,000 were transferred to the
Bank as capital. On September 20, 2004, the Company participated in a third
Trust Preferred Securities pool in the net amount of $8,000,000. Borrowing
proceeds of $8,000,000 were transferred to the Bank as capital. Since the Bank
opened, it has consistently, from year to year, experienced substantial growth.
All per share data has been adjusted for three two-for-one common stock splits
effective April 29, 1998, April 28, 1999 and December 23, 2003. On December 18,
2003, the Company reincorporated into California from Delaware. The Bank, and
now collectively with the Company, has grown to 256 employees (251 full time
equivalent), of which 239 are full time. The staffing was 238 full-time
equivalent at the end of 2004. Approximately 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 2005 with branches anticipated for Carlsbad and Indian
Wells. The SBA department has expanded considerably since 2001, with loan
production offices, some of which are home offices, located in California,
Colorado, Florida, Georgia, Illinois, Nebraska, New Jersey, North Carolina,
Ohio, Pennsylvania, Texas, and Washington. The Company also operates non-SBA
loan production offices in Fallbrook, CA and Encinitas, CA; single-family tract
lending offices in Corona, CA and San Rafael, CA; and mortgage lending offices
in Fallbrook, CA and Temecula, CA. Our growth has been augmented by the opening
of full service offices in Fallbrook, CA in 1998; Escondido, CA in 1999;
Murrieta, CA in 2000; El Cajon, CA in 2001; Corona, CA in 2004; and Rancho
Bernardo, CA in 2004.
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 plans to continue to expand through 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.
8
FINANCIAL CONDITION
Assets
- ------
Total assets increased from $527,793,743 at June 30, 2004 to $606,827,529 at
December 31, 2004 and to $724,216,457 at June 30, 2005. The increase in the
first six months of 2005 consisted of a $15,316,082 increase in cash and cash
equivalents and an increase in loans outstanding. Total loans, excluding loans
held for sale, increased from $518,757,013 at year-end 2004 to $620,346,959 at
June 30, 2005, a $101,589,946 or 19.6% increase due mainly to increased
construction and construction tract lending. The loan portfolio composition is
primarily construction, commercial and real estate secured loans, with nearly
95% of the total loan portfolio consisting of real estate secured loans. The
rate of loan growth should continue to be strong for 2005, due to the planned
increase in SBA loan production offices, the opening of the Carlsbad and Indian
Wells branches, and the general increase in lending at existing offices.
Investments
- -----------
Investments, which were comprised only of Federal Funds Sold, increased from
$16,800,000 at December 31, 2004 to $27,420,000 at June 30, 2005. The increase
in the first six months of 2005 is largely attributable to a $97,488,625
increase in certificates of deposit and the $11,518,660 increase in other
deposits offset by the $101,589,946 increase in total loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased from $6,362,534 at December 31,
2004 to $7,839,179 at June 30, 2005. The allowance was 1.20% at December 31,
2004 and 1.25% at June 30, 2005. The large increase in the provision in 2004 and
the first half of 2005 was due to the increase in construction lending and the
general overall growth of the loan portfolio. The provision was $1,642,900 in
the first six months of 2005, with net chargeoffs of $166,255. 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
2003 2004 2005
---- ---- ----
Beginning Balance $3,017,395 $3,607,833 $6,362,534
Chargeoffs 505,586 1,096,698 404,825
Recoveries 74,024 30,098 238,570
Provision 1,022,000 3,821,300 1,642,900
--------- --------- ---------
Ending Balance $3,607,833 $6,362,534 $7,839,179
========= ========= =========
At June 30, 2005, there was $9,474,790 of non-accrual loans, of which $6,244,901
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 had no
other real estate owned (REO) as of June 30, 2005.
9
NON-CURRENT LOANS, NON-ACCRUAL LOANS & OTHER REAL ESTATE OWNED
June 30, 2004 Government Net
- ------------- Gross Balance Guaranteed 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 6,290,495 (5,006,792) 1,283,703
Other Real Estate Owned (REO) 1,410,000 (1,057,500) 325,500
--------- ---------- ---------
Total Non-Performing $7,700,495 ($6,064,292)$1,636,203
========== =========== ==========
December 31, 2004
- -----------------
30 - 89 Days Past Due $11,203 ( $0) $11,203
========== =========== ==========
90+ Days Past Due & Accruing 0 (0) 0
Non-Accrual 11,799,346 ( 8,140,267) 3,659,079
--------- ---------- ---------
Sub- Total 11,799,346 (8,140,267) 3,659,079
Other Real Estate Owned (REO) 302,698 (227,023) 75,675
--------- ---------- ---------
Total Non-Performing $12,102,044 ($8,367,290)$3,734,754
========== =========== ==========
June 30, 2005
- -------------
30 - 89 Days Past Due $149,793 ($0) $149,793
========== =========== ==========
90+ Days Past Due & Accruing 263,218 (244,753) 18,465
Non-Accrual 9,474,790 (6,244,901) 3,229,889
--------- ---------- ---------
Sub- Total 9,738,008 (6,489,654) 3,248,354
Other Real Estate Owned (REO) 0 (0) 0
--------- ---------- ---------
Total Non-Performing $9,738,008 ($6,489,654)$3,248,354
========== =========== ==========
Other Assets
- ------------
The ratio of interest earning assets to total assets was 87.53% for the first
half of 2005 compared to 85.46% for the first half of 2004. The target is to
keep this ratio above 90%, but has remained below that level due to the SBA
servicing asset, the related SBA interest only strip receivable, and the cash
surrender value of life insurance. The SBA servicing asset was $8,102,773, the
SBA I/O strip receivable was $23,479,641 and the cash surrender value of life
insurance was $13,469,824 at June 30, 2005. 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, 2004, the SBA
servicing asset was $7,585,712, the SBA I/O strip receivable was $24,679,520 and
the cash surrender value of life insurance was $9,593,824. 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.
10
Liabilities
- -----------
Deposits increased from $534,766,705 at December 31, 2004 to $643,773,990 at
June 30, 2005. Money market and NOW accounts increased $3,209,336, savings
decreased $1,305,863, demand deposits increased $9,615,187, and certificate of
deposits (CD's) increased $97,488,625. Demand deposits comprised 28% of deposits
at June 30, 2004, compared to 26% at December 31, 2004 and 23% at June 30, 2005.
The increase in the ratio of certificates of deposits to total deposits is due
to CD promotions in 2004 and 2005 to fund the rapid loan growth. At June 30,
2005, more than 56% of deposits have balances of $100,000 or more. No one
customer has balances that exceed 5% of the deposits of the Bank. The Bank
prefers 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 Rancho Bernardo
and Corona branches in 2004, the continued deposit increases at the other five
branches, and will be helped in the second half of 2005 by the opening of
branches in Carlsbad and Indian Wells. The Bank will continue to solicit core
deposits to diminish reliance on volatile funds.
At June 30, 2004 there was $20,000,000 short term advances from the Federal Home
Loan Bank and none at December 31, 2004 and June 30, 2005. The borrowing
capacity at the Federal Home Loan Bank as of December 31, 2004 was $36,354,213
and at June 30, 2005 was $35,964,246.
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 7.02% as of June 30, 2005. 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 6.46% as of June 30, 2005. 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 5.71% as of June 30, 2005. The
debt securities can be redeemed for 107.5% of the principal balance through
September 20, 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 these mandatorily redeemable preferred securities qualifies 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.
11
Capital
- -------
Total capital was $36,910,393 at June 30, 2004, $42,902,538 at December 31,
2004, and $50,483,783 at June 30, 2005. For the first six months of 2005, the
$7,581,245 increase consisted of $6,944,721 of net income and $636,524 on the
exercise of stock options. For the first six months of 2004, the $7,227,328
increase was due to $5,218,775 in net income and $2,008,553 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 11.08%, tier one risk based capital of 9.40%, and tier one
leverage ratio of 9.54% at June 30, 2005. At June 30, 2004, December 31, 2004,
and June 30, 2005 the Bank and the Company were in the regulatory "well
capitalized" category.
RESULTS OF OPERATIONS
Net Income
- ----------
For the second quarter of 2005, the Company earned $3,943,041, compared to
$2,646,626 in 2004. Net income per basic share for the first half of the year
was $0.45 in 2005 compared to $0.32 for the same period in 2004. Net income per
diluted share was $0.41 per share in the second quarter of 2005 compared to
$0.28 in 2004. The return on average assets was 2.28% for the second quarter of
2005, compared to 2.16% for the second quarter of 2004. The return on average
equity was 32.87% for the second quarter of 2005, compared to 30.16% for the
second quarter of 2004. The 2005 and 2004 earnings were significantly enhanced
by the sale of loans in the secondary market, most of which are SBA loans. The
sales of the SBA loans are expected to continue at this level or higher for the
remainder of the year. Mortgage loan sales are significantly slower than the
2003 and 2004 pace due to higher interest rates reducing the number of
refinances. The net interest margin is rising as the Federal Reserve Bank
continues to raise the Fed Funds rate. Net income in the first six months of
2005 and 2004 was augmented by the sale of the unguaranteed portion of SBA
loans. These sales increased net income before taxes by $3,558,088 or $2,062,054
after taxes in the first half of 2005 compared to $3,165,379 and $1,834,464
respectively in the first half of 2004. These sales are expected to continue for
the remainder of the year. The opening of the Carlsbad and Indian Wells
branches, as well as the expansion of the SBA operations, in 2005 will have
negative effect on earnings during 2005.
Stock-Based Compensation
- ------------------------
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, we measure the compensation cost for stock options as the excess,
if any, of the quoted market price of the Bank's stock at the date of the grant
over the amount an employee must pay to acquire the stock. 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. FASB Statement No. 123R, Accounting for Stock-Based
Compensation , requires all public companies beginning with the next fiscal year
beginning after June 15, 2005 to measure the compensation expense for stock
options at the fair value of the options when granted, and the cost is then to
be expensed over the employee service period, which is the vesting period of the
options. This has since been updated in 2005 to require compensation cost to be
disclosed starting in 2006. This will apply to awards granted or modified after
the effectiveness of the new requirements. In addition, a compensation expense
will be recorded for prior option grants that vest after the effectiveness of
the requirements. The effect on results of operations will depend on the level
of future option grants and the calculation of the fair value of the options
granted at such future date, as well as the vesting periods provided, and so
cannot currently be predicted. Existing options that were granted in 2004 and
before and will vest after the adoption date are expected to result in
additional compensation expense of approximately $408,151 in 2006 and $299,978
in 2007.
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 Nos. 123 and 123R, the Company's net income and earnings
per share would have reduced as in the following pro forma schedule.
12
Three Months Ending Six Months Ending
June 30 June 30
2005 2004 2005 2004
--------------------------------------------
Net Income as reported $3,943,041 $2,646,626 $6,944,721 $5,218,775
Stock based compensation using the Intrinsic Value Method 5,585 2,669 15,394 5,338
Stock based compensation that would have been reported (129,981) (42,030) (259,962) (84,060)
--------------------------------------------
Pro Forma Net Income $3,818,645 $2,607,265 $6,700,153 $5,140,053
============================================
Basic per share as reported $ .45 $ .32 $ .79 $ .63
Basic per share pro forma $ .43 $ .31 $ .76 $ .62
Diluted per share as reported $ .41 $ .28 $ .73 $ .56
Diluted per share pro forma $ .40 $ .28 $ .70 $ .55
Net Interest Earnings
- ---------------------
Net interest income was $19,307,501 in the first half of 2005, compared to
$11,989,070 in the same period in 2004. For the second quarter of 2005 the net
interest margin was 6.78%, compared to 6.11% in the same period in 2004. The net
interest margin in the first half of 2005 was 6.67%, compared to 5.98% in the
same period in 2004.The net interest margin increased from 2004 to 2005 due to
the Federal Reserve Bank rate increases in 2004 and 2005. The loan to deposit
ratio decreased from 99.09% at June 30, 2004 to 97.58% at June 30, 2005. The net
interest margin was also helped by a healthy ratio of 24.86% of demand deposit
accounts to total deposits for the first half of 2005 and 29.07% for the first
half of 2004. The yield on loans increased from 7.39% for the first half of 2004
to 8.64% for the first half of 2005. Rate floors on $229 million of variable
rate loans at June 30, 2004 and $265 million at June 30, 2005 helped to mitigate
the effects of low Federal Reserve rate environment. As of June 30, 2005 there
is less than $2 million of loans that are at their floor rate. The yield on
investments, which are all in Federal Funds Sold and US Treasuries, for the
first half of 2005 was 2.75%, compared to 0.94% in the same period in 2004. The
cost of interest bearing deposits was 2.21% in the first half of 2005 and 1.56%
in the first half of 2004. The increase in 2005 is due to a higher CD balances
and rates. The cost of other borrowings, which consisted of Federal Home Loan
Bank advances and junior subordinated debt securities borrowings were 5.00% for
the first half of 2005 and 3.35% in the same period in 2004. The increase in the
cost of other borrowings in 2005 is due to a higher interest rate environment.
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 2004 was in
the cash surrender value of life insurance (BOLI), the SBA servicing asset, and
the SBA I/O strip receivable asset, but in 2005 is mainly due to the increase in
the cash surrender value of life insurance. 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. Our average life of loans sold has
been higher than the 25% or 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 the first six
months of 2004. For the same period in 2005, $5,127,375 was collected for
servicing, the asset amortization was $4,037,595 and the SBA related servicing
assets decreased $682,818. There was $86,004,797 in 7A loan sales during the
13
first six months of 2005. The servicing assets decreased in the first six months
in 2005 due to more loans sold with a premium bid than with a par bid and
additional amortization taken due to the rising rate environment, as well as the
weighted average servicing rate slightly decreasing. 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 8 Yr 8 - 11 Yr 11 - 16 16 - 21 Yr Greater than 21 Yr
Issue Date Life CPR Life CPR Yr Life Life CPR Life CPR
---------- -------- -------- CPR -------- --------
------
2002 14.8 12.1 11.7 9.6 9.8
2001 15.8 13.9 11.8 13.5 13.0
2000 16.3 13.9 14.4 16.4 15.3
1999 16.0 14.9 15.0 14.8 16.0
1998 14.1 14.9 17.0 14.0 16.6
1997 13.5 13.9 15.3 16.8 17.8
The following schedule displays the WAL (weighted average life) for each
SBA pool at year-end after applying the CPRs identified above:
Original Maturity WAL (Yrs.)
Less than 8 Years 1.7
8 - 11 Years 2.3
11 - 16 Years 3.4
26 - 21 Years 4.7
Greater than 21 Years 5.8
Based on assessing each component, our estimated discount rates for each
Bank SBA pool at March 31,2005 is as follows:
Original Maturity Disc Rate Excess Disc Rate I/O
----------------- ---------------- -------------
Less than 8 Years 10.67% 10.67%
8 - 11 Years 10.85% 10.85%
11 - 16 Years 11.01% 11.01%
26 - 21 Years 11.14% 11.14%
Greater than 21 Years 11.24% 11.24%
14
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 $1,022,000 in 2003, $3,821,300 in 2004, and $1,642,900 for the
six months of 2005. The large increase in the provision in 2004 and 2005 was due
to the large increase in loans outstanding, especially construction and SBA
loans. For 2005 and 2004 the provisions were at a level to keep the allowance
for loan loss well reserved. The Bank plans to continue to sell the unguaranteed
portion of SBA 7A loans to mitigate the credit risk associated with SBA 7A
loans.
Non-Interest Income
- -------------------
Non-interest income contributed significantly to the earnings of the Bank in the
first six months of 2005, as it did in 2004. Service charges decreased from
$346,323 in the first six months of 2004 compared to $320,850 in the same period
in 2005 due to an increased number of accounts offset by a decrease in
non-sufficient funds service charges. Other income decreased from $4,675,147 for
the first six months of 2004 to $4,511,362 in the same period in 2005, due
mainly to lower SBA and mortgage broker income and lower net SBA servicing
income. SBA loan servicing income decreased from $1,254,249 in the first six
months of 2004 to $1,029,185 in the same period in 2005 due to higher servicing
asset amortization and a slightly lower average weighted servicing rate offset
by a higher servicing volume. The gain on sale of loans/assets was $8,433,218 in
the first six months of 2004 compared to $8,416,098 in the same period in 2005.
The 2005 decrease was due to slightly higher SBA loan sale gains offset by lower
mortgage loan sale gains. The SBA loan sales are expected to increase during the
remainder of the year and the mortgage loan sales will continue at their very
subdued pace due to the expected Federal Reserve Bank rate increases in 2005
reducing the number of refinances.
Gain on Sale of Loans/Assets
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------
SBA 7A Unguaranteed Sales $2,438,887 $870,093 $3,558,088 $3,165,379
SBA 7A Guaranteed Sales 1,831,117 2,380,663 3,790,157 3,769,212
SBA 504 Sales 36,484 309,464 230,208 309,464
Mortgage Sales 84,809 429,819 278,266 822,567
Other Loan Related 294,323 302,797 588,891 438,594
REO Gain (Loss) (20,588) 7,038 (27,512) (72,998)
Fixed Assets 0 0 (2,000) 1,000
-----------------------------------------------------------------------------
Total $4,665,032 $4,299,874 $8,416,098 $8,433,218
=============================================================================
15
Other Income
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Customer Fees $ 65,968 $ 61,957 $ 128,150 $ 115,013
Loan Funding 777,878 654,192 1,303,898 1,226,724
SBA Broker Income 738,771 560,625 1,225,332 1,303,992
Mortgage Broker Income 292,325 251,575 409,513 502,078
Loan Late Charges 59,277 3,945 107,656 88,451
Other Loan Charges 1,600 1,836 5,489 3,409
SBA Servicing, Net 532,846 643,654 1,029,185 1,254,249
CSV Life Insurance 119,000 73,500 224,000 147,000
FRB/FHLB Dividend 31,886 19,182 60,533 34,133
Trust Preferred Dividend 17,606 0 17,606 0
Other 0 0 0 98
-----------------------------------------------------------------------------------------
Total $2,637,157 $2,270,466 $4,511,362 $4,675,147
=========================================================================================
Non-Interest Expense
- --------------------
Non-interest expense was $15,852,319 in the first half of 2004 compared to
$19,016,812 in the first half of 2005, a 20% increase. Salaries and benefits
increased from $11,097,808 in the first six months of 2004 to $12,574,022 for
the same period in 2005, a 13% increase, due to salary increases and the
increase in employees to support the general growth of the Company. Other
expenses increased from $3,563,048 in the first six months of 2004 to $4,568,068
in the same period in 2005 due to higher loan volume, processing expenses and
office expenses to support the growth and internal controls of the Company.
Other Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---------------------------------------------------------------------------------
Processing $ 294,851 $ 259,978 $ 567,740 $ 508,986
Professional 380,057 141,810 437,336 312,106
Travel & Entertainment 221,674 195,780 397,322 308,257
Director Related 36,000 36,949 77,282 54,949
Shareholder 50,784 46,536 62,452 76,241
Loan Funding 400,325 193,278 880,728 622,057
Office Related 597,678 578,108 1,190,008 1,031,207
Marketing 252,829 253,180 550,235 427,010
OCC/FDIC Assessments 113,009 40,990 167,254 81,933
Other 135,621 76,396 237,711 140,302
---------------------------------------------------------------------------------
Total $2,482,828 $1,823,005 $4,568,068 $3,563,048
=================================================================================
16
Income Taxes
- ------------
Income tax expense totaled $4,591,378 for the first six months of 2005 and
$3,622,664 for the first six months of 2004. For the full year of 2004 the
effective rate was 41.6%, for the first six months of 2004 the effective rate
was 41.0% and for the first six months of 2005 it was 41.6%. Deferred tax assets
totaled $2,428,615 at June 30, 2004, $4,370,990 at December 31, 2004 and
$5,020,990 at June 30, 2005. Over half of the deferred tax asset is due to the
tax deductibility timing difference of the provision for loan loss and the
reserve for undisbursed loans.
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. On a monthly basis, a
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 is a member of the Federal
Home Loan Bank ("FHLB"). The Bank has borrowing capacity at the FHLB that will
fluctuate with loan balances that are pledged as collateral. At December 31,
2004, the borrowing capacity was $36,354,213, and $35,964,246 at June 30, 2005.
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. Throughout 2004 and 2005, a
positive liquidity position was maintained, but not at a level where profits
would have been diminished.
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.
17
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 not 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, 2005 and December 31, 2004, the Company had the following
outstanding financial commitments whose contractual amount represents credit
risk:
2005 2004
---- ----
Commitments to Extend Credit $304,118,000 $242,499,000
Letters of Credit 3,576,000 1,113,000
------------ ------------
$307,694,000 $243,612,000
A major portion of the increase in commitments in 2005 was in construction
lending. 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 represents 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 does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
18
Interest rate risk as discussed above is the most significant market risk
affecting the Company. Other types of market risk, such as foreign currency
exchange risk, equity price risk and commodity price risk, are not significant
in the normal course of the Company's business activities.
The ongoing monitoring and management of both interest rate risk and liquidity,
in the short and log term time horizon, 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.
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 the net
interest income.
The following reflects the Company's one year net interest income sensitivity
based on:
- Asset and liability levels using June 30, 2005 as a starting point.
- There are assumed to be conservative levels of balance sheet growth -
less than 20% growth in loans, investments and deposits, augmented by
necessary changes in borrowing and retained earnings, with no major
growth in other components of the balance sheet.
- The prime rate and Federal Funds rates are assumed to move up 200
basis points and down 100 basis points over a twelve-month period.
- Cash flows are based on contractual maturity.
Net Interest Income Sensitivity
Calculated annualized Increase
(Decrease) in projected net
Change in Interest Rates Interest income for one year
------------------------ ----------------------------
+ 200 basis points 14.64%
-100 basis points (7.18%)
In the model, both the rising and falling rate environment 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 upon current economic
and market conditions, the Company cannot make ant 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.
19
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 principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-1-15(e)) with respect to the
information generated for this report. Based on that evaluation, the Company's
principal executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective in ensuring 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 principal 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As of June 30, 2005 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 on Senior Securities
-----------------------------
None
Item 4. Submission of Matters to Security Holders
-----------------------------------------
The following item was submitted to the security holders for approval at the
annual meeting held on May 24, 2005:
1. Election of directors. The following individuals were elected for a
one-year term, until their successors are duly elected and qualified,
and the results were as follows:
For Withheld
--- --------
Dr. Steven W. Aichle 7,885,628 1,050
Dr. Robert P. Beck 7,885,628 1,050
Neil M. Cleveland 7,885,628 1,050
George Cossolias 7,883,482 3,196
Luther J. Mohr 7,840,428 46,250
Stephen H. Wacknitz 7,840,428 46,250
Richard W. Wright 7,883,482 3,196
20
Item 5. Other Information
-----------------
(a) None
(b) None.
Item 6.: Exhibits
--------
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.(i) Temecula Valley Bank and Temecula Valley Bancorp Amended
and Restated Plan of Reorganization dated as of April 2,
2002, filed on June 3, 2002 as an Exhibit to Form 8-A12G.
2.(ii) Agreement and Plan of Merger of Temecula Merger
Corporation and Temecula Valley Bancorp is an Exhibit to
the Company's Definitive 14A filed November 20, 2003.
3.(i) Articles of Incorporation of Temecula Valley Bancorp
Inc., a California corporation, is an Exhibit to Temecula
Valley Bancorp's Definitive 14A, filed November 20, 2003.
3.(ii) Bylaws of the Company, as amended, filed on May 17, 2004
as an Exhibit to Temecula Valley Bancorp's Form 10-Q.
4.1 Common Stock Certificate of Temecula Valley Bancorp,
filed on May 17, 2004 as an Exhibit to Temecula Valley
Bancorp's Form 10-Q.
4.2 Warrant Certificate of Temecula Valley Bank, N.A. as
adopted by Temecula Valley Bancorp Inc., filed on June 3,
2002 as an Exhibit to Temecula Valley Bancorp's Form
8-A12G.
10.1 Temecula Valley Bank, N.A. Lease Agreement for Main
Office, filed on March 11, 2003 as an Exhibit to the
Temecula Valley Bancorp's Form 10KSB.
10.2 Stephen H. Wacknitz Employment Agreement effective
October 1, 2003, filed on March 31, 2004 as an Exhibit to
Temecula Valley Bancorp's Form 10K.
10.3 First Amendment to Stephen H. Wacknitz Employment
Agreement dated June 23, 2005.
10.4 Luther J. Mohr Employment Agreement effective October
1, 2003, filed on March 31, 2004 as an Exhibit to
Temecula Valley Bancorp's Form 10K.
10.6 401(k) filed April 16, 2004 as an Exhibit to Temecula
Valley Bancorp's 10-K/A.
10.8 Thomas P. Ivory Employment Agreement effective January
25, 2001, filed on March 11, 2003 as an Exhibit to
Temecula Valley Bancorp's Form 10KSB.
10.9 James W. Andrews Employment Agreement dated June 1, 2002
filed on April 11, 2003 as an Exhibit to the Temecula
Valley Bancorp's Form 10KSB.
10.10 First Amendment to James W. Andrews Employment Agreement
dated November 24, 2004 filed on March 31, 2005 as an
Exhibit to Temecula Valley Bancorp's Form 10-K.
21
10.11 1996 Incentive and Non Qualified Stock Option Plan
(Employees), as amended by that certain First Amendment
effective May 15, 2001 and that certain Second Amendment
effective May 15, 2002, filed on April 11, 2003 as an
Exhibit to Temecula Valley Bancorp's Form 10KSB
("Employee Plan")
10.11(a) Form of ISO Stock Option Agreement for Employee Plan
filed on March 31, 2005 as an Exhibit to Temecula Valley
Bancorp's Form 10-K.
10.12 1997 Non Qualified Stock Option Plan (Directors), as
amended by that certain First Amendment effective May
15, 2001 and that certain Second Amendment effective
May 15, 2002, filed on April 11, 2003 as an Exhibit to
the Company's Form 10KSB ("Director Plan").
10.12(a) Form of NSO Stock Option Agreement for Director Plan
filed on March 31, 2005 as an Exhibit to Temecula Valley
Bancorp's Form 10-K.
10.13 Amended and Restated Salary Continuation Agreement
between Temecula Valley Bank and Stephen H. Wacknitz
dated September 30, 2004, filed on November 18, 2004 as
an Exhibit to the Temecula Valley Bancorp's Form 10-Q/A
10.14 Amended and Restated Salary Continuation Agreement
between Temecula Valley Bank and Luther J. Mohr dated
January 28, 2004, filed on November 18, 2004 as an
Exhibit to Temecula Valley Bancorp's Form 10-Q/A.
10.17 Executive Deferred Compensation Agreement between
Temecula Valley Bank and Thomas P. Ivory dated April 1,
2001, filed on November 18, 2004 as an Exhibit to
Temecula Valley Bancorp's Form 10-Q/A.
10.17(a) Temecula Valley Bancorp Inc. 2004 Stock Incentive Plan,
as amended, filed on August 20, 2004 as an Exhibit to
Temecula Valley Bancorp's Form 10-Q ("Stock Incentive
Plan").
10.17(b) Form of NSO Stock Option Agreement for Stock Incentive
Plan filed on March 31, 2005 as an Exhibit to Temecula
Valley Bancorp's Form 10-K.
10.17(c) Form of ISO Stock Option Agreement for Stock Incentive
Plan filed on March 31, 2005 as an Exhibit to Temecula
Valley Bancorp's Form 10-K.
10.18 Executive Deferred Compensation Agreement between
Temecula Valley Bank and Stephen H. Wacknitz dated
September 30, 2004, filed on November 18, 2004 as an
Exhibit to Temecula Valley Bancorp's Form 10-Q/A.
10.19 Salary Continuation Agreement between Temecula Valley
Bank and Stephen H. Wacknitz dated January 28, 2004
filed on November 18, 2004 as an Exhibit to the
Temecula Valley Bancorp's Form 10-Q/A.
10.20 Amended and Restated Salary Continuation Agreement
between Temecula Valley Bank and Scott J. Word dated
September 30, 2004, filed on November 18, 2004 as an
Exhibit to Temecula Valley Bancorp's Form 10-Q/A
10.21 Split Dollar Agreement between Temecula Valley Bank and
Thomas P. Ivory dated September 30, 2004, filed on
November 18, 2004 as an Exhibit to Temecula Valley
Bancorp's Form 10-Q/A
10.22 Split Dollar Agreement between Temecula Valley Bank and
Luther J. Mohr dated September 30, 2004, filed on
November 18, 2004 as an Exhibit to Temecula Valley
Bancorp's Form 10-Q/A
10.23 Split Dollar Agreement between Temecula Valley Bank and
Stephen H. Wacknitz dated September 30, 2004, filed on
November 18, 2004 as an Exhibit to Temecula Valley
Bancorp's Form 10-Q/A
22
10.24 Split Dollar Agreement between Temecula Valley Bank and
Scott J. Word dated September 30, 2004, filed on November
18, 2004 as an Exhibit to Temecula Valley Bancorp's Form
10-Q/A
10.25 Robert Flores Employment Agreement dated January 27,
2005 filed March 31, 2005 as an Exhibit to Temecula
Valley Bancorp's Form 10-K.
10.27 Amended and Restated Salary Continuation Agreement
between Thomas M. Shepherd and Temecula Valley Bank dated
September 30, 2004 filed on March 31, 2005 as an Exhibit
to Temecula Valley Bancorp's Form 10-K.
10.28 Split Dollar Agreement between Thomas M. Shepherd
dated September 30, 2004 filed on March 31, 2005 as an
Exhibit to Temecula Valley Bancorp's Form 10-K.
10.29 Amended and Restated Salary Continuation Agreement
between Donald A. Pitcher and Temecula Valley Bank dated
September 30, 2004 filed on March 31, 2005 as an Exhibit
to Temecula Valley Bancorp's Form 10-K.
10.30 Split Dollar Agreement between Temecula Valley Bank
and Donald A. Pitcher dated September 30, 2004 filed on
March 31, 2005 as an Exhibit to Temecula Valley
Bancorp's Form 10-K.
10.31 William H. McGaughey Employment Agreement dated
January 4, 2005 filed on March 31, 2005 as an Exhibit
to Temecula Valley Bancorp's Form 10-K.
10.32 Salary Continuation Agreement between William
McGaughey and Temecula Valley bank dated June 1, 2005.
10.33 Salary Continuation Agreement between Robert Flores
and Temecula Valley Bank dated June 1, 2005.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
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 5, 2005 BY: /s/ Stephen H. Wacknitz
-----------------------------------
Stephen H. Wacknitz, President/CEO,
Chairman of the Board
BY: /s/ Donald A. Pitcher
-----------------------------------
Donald A. Pitcher, Executive Vice
President
Chief Financial Officer
23
EXHIBIT LIST
Exhibit No. Description
- ----------- -----------
10.3 First Amendment to Stephen H. Wacknitz Employment
Agreement dated June 23, 2005.
10.32 Salary Continuation Agreement between William McGaughey
and Temecula Valley bank dated June 1, 2005.
10.33 Salary Continuation Agreement between Robert Flores and
Temecula Valley Bank dated June 1, 2005.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications
24