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, 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
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of November 2, 2005, there were 8,894,365 shares of the registrant's common
stock, no par value per share, outstanding.
Item 1 - Financial Statements
- -----------------------------
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF FINANCIAL CONDITION
September 30, 2005 and December 31, 2004
(UNAUDITED)
2005 2004
-------------- -------------
ASSETS
Cash and Due from Banks $12,666,220 $6,317,261
Federal Funds Sold 32,240,000 16,800,000
-------------- -------------
Total Cash and Cash Equivalents 44,906,220 23,117,261
Loans Held for Sale 10,967,417 15,142,720
Loans:
Commercial 27,871,475 23,560,360
Real Estate - Construction 334,352,496 203,885,627
Real Estate - Other 315,040,939 288,514,699
Consumer and Other 3,042,465 2,796,327
-------------- -------------
TOTAL LOANS 680,307,375 518,757,013
Net Deferred Loan Fees (4,896,856) (3,703,481)
Allowance for Loan Losses (8,240,198) (6,362,534)
-------------- -------------
NET LOANS 667,170,321 508,690,998
Federal Reserve & Home Loan Bank Stock, at Cost 2,867,600 2,377,800
Other Real Estate Owned 2,111,250 302,698
Premises and Equipment 4,745,390 4,379,809
Cash Surrender Value of Life Insurance 17,392,824 9,593,824
Deferred Tax Assets 5,020,990 4,370,990
SBA Servicing Assets 8,059,947 7,585,712
SBA Interest-Only Strips Receivable 22,513,631 24,679,520
Accrued Interest and Other Assets 9,076,994 6,586,197
-------------- -------------
$794,832,584 $606,827,529
============== =============
See accompanying notes to financial statements
1
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF FINANCIAL CONDITION
September 30, 2005 and December 31, 2004
(UNAUDITED)
2005 2004
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $153,506,186 $138,041,385
Money Market and NOW 94,728,376 73,880,005
Savings 38,204,043 41,838,703
Time Deposits Under $100,000 196,024,381 135,915,448
Time Deposits $100,000 and Over 221,418,333 145,091,164
------------- -------------
TOTAL DEPOSITS 703,881,319 534,766,705
Junior Subordinated Debt Securities 28,868,000 20,620,000
Accrued Interest and Other Liabilities 8,128,992 8,538,286
------------- -------------
TOTAL LIABILITIES 740,878,311 563,924,991
Shareholders' Equity:
Common Stock - No Par Value Authorized 40,000,000
Shares; Issued and Outstanding 8,879,697 Shares at
September 30, 2005 and 8,752,603 Shares at
December 31, 2004 17,545,980 16,724,128
Retained Earnings 36,408,293 26,178,410
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 53,954,273 42,902,538
------------- -------------
$794,832,584 $606,827,529
============= =============
See accompanying notes to financial statements
2
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------- -------------- ------------ -------------
INTEREST INCOME
Interest and Fees on Loans $15,227,253 $8,746,232 $40,031,341 $23,324,087
Interest on HTM Securities - U.S. Treasuries 1,750 539 3,934 1,032
Interest on Federal Funds Sold 122,566 36,615 181,232 65,541
-------------- -------------- ------------ -------------
TOTAL INTEREST INCOME 15,351,569 8,783,386 40,216,507 23,390,660
INTEREST EXPENSE
Interest on Money Market and NOW 273,668 132,537 538,910 361,123
Interest on Savings Deposits 31,467 50,528 112,321 136,096
Interest on Time Deposits 3,391,793 1,380,918 7,845,009 3,328,896
Interest on FHLB Advances 0 10,625 134,492 59,992
Interest on Junior Subordinated Debt Securities 354,193 176,237 977,826 482,942
-------------- -------------- ------------ -------------
TOTAL INTEREST EXPENSE 4,051,121 1,750,845 9,608,558 4,369,049
-------------- -------------- ------------ -------------
NET INTEREST INCOME 11,300,448 7,032,541 30,607,949 19,021,611
Provision for Loan Losses 346,000 1,635,000 1,988,900 2,385,000
-------------- -------------- ------------ -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,954,448 5,397,541 28,619,049 16,636,611
NON-INTEREST INCOME
Service Charges and Fees 133,994 169,902 454,844 516,225
Gain on Sale of Loans/Assets 2,771,841 4,870,793 11,187,939 13,304,011
Fees and Other Income 2,693,330 2,247,553 7,204,692 6,922,701
-------------- -------------- ------------ -------------
TOTAL NON-INTEREST INCOME 5,599,165 7,288,248 18,847,475 20,742,937
-------------- -------------- ------------ -------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 7,074,211 5,457,390 19,648,233 16,555,198
Occupancy Expenses 629,140 502,233 1,797,206 1,177,661
Furniture and Equipment 380,827 292,755 1,087,483 808,790
Other Expenses 2,866,162 2,413,300 7,434,230 5,976,348
-------------- -------------- ------------ -------------
TOTAL NON-INTEREST EXPENSE 10,950,340 8,665,678 29,967,152 24,517,997
-------------- -------------- ------------ -------------
INCOME BEFORE INCOME TAXES 5,603,273 4,020,111 17,499,372 12,861,551
Income Taxes 2,318,111 1,645,749 7,269,489 5,268,413
-------------- -------------- ------------ -------------
NET INCOME $3,285,162 $2,374,362 $10,229,883 $7,593,138
============== ============== ============ =============
Per Share Data:
Net Income - Basic $0.37 $0.27 $1.16 $0.90
============== ============== ============ =============
Net Income - Diluted $0.34 $0.25 $1.07 $0.81
============== ============== ============ =============
Average Number of Shares Outstanding 8,870,793 8,662,855 8,829,197 8,432,075
============== ============== ============ =============
Average Number of Shares and Equivalents 9,659,261 9,481,185 9,562,584 9,335,237
============== ============== ============ =============
See accompanying notes to financial statements
3
TEMECULA VALLEY BANCORP INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2005 2004
---------------- ----------------
OPERATING ACTIVITIES
Net Income $10,229,883 $7,593,138
Adjustments to Reconcile Net Income to Net
Cash (used) from by Operating Activities:
Depreciation and Amortization 6,800,458 4,911,691
Provision for Loan Losses 1,988,900 2,385,000
Increase of Deferred Tax Asset (650,000) (35,615)
Gain on Loan Sales (11,208,075) (13,372,009)
Loans Originated for Sale (135,501,202) (209,602,408)
Proceeds from Loan Sales 149,722,458 216,006,591
Loss on Sale of Other Real Estate Owned 26,297 72,998
Increase in Cash Surrender Value of Life Insurance (309,000) (181,800)
Net Change in Other Assets and Liabilities (2,948,093) (3,094,106)
---------------- ----------------
NET CASH (USED) FROM BY OPERATING ACTIVITIES 18,151,626 4,683,480
---------------- ----------------
INVESTING ACTIVITIES
Purchases of Investments (896,066) (698,668)
Purchases of FRB/FHLB Stock (489,800) (980,500)
Maturity of Investments 900,000 700,000
Net Increase in Loans (165,951,076) (148,794,223)
Purchase of Life Insurance (7,490,000) (3,572,000)
Purchases of Premises and Equipment (1,330,292) (2,358,951)
Proceeds from Sale of Other Real Estate Owned 584,101 1,519,340
Proceeds from Sale of Premises and Equipment 126,000 49,000
---------------- ----------------
NET CASH FROM (USED) BY INVESTING ACTIVITIES (174,547,133) (154,136,002)
---------------- ----------------
FINANCING ACTIVITIES
Net Increases in Demand, NOW,Money Market and Savings Accounts 32,678,512 47,943,452
Net Increases in Time Deposits 136,436,102 97,260,602
Proceeds from Issuance of Junior Subordinated Debt Securities 8,248,000 8,248,000
Proceeds from the Exercise of Stock Options 821,852 2,514,473
---------------- ----------------
NET CASH FROM BY FINANCING ACTIVITIES 178,184,466 155,966,527
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVILENTS 21,788,959 6,514,005
Cash and Cash Equivalents at Beginning of Period 23,117,261 30,748,013
---------------- ----------------
CASH AND CASH EQUIVILENTS AT END OF PERIOD $44,906,220 $37,262,018
================ ================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $9,328,549 $4,316,437
Income Taxes Paid $4,277,189 $5,869,371
Loans Transferred to Other Real Estate Owned $2,481,950 $1,410,000
See accompanying notes to financial statements
4
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period beginning December 31, 2003 and ending September 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
Exercise of Options 14,250 185,328 185,328
Including the Realization
of Tax Benefits of $39,884
Net Income 3,285,162 3,285,162
--------------- ------------- ------------- ------------
Balance at September 30, 2005 8,879,697 $17,545,980 $36,408,293 $53,954,273
=============== ============= ============= ============
See accompanying notes to financial statements
5
TEMECULA VALLEY BANCORP INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
The accompanying consolidated financial statements include the accounts of
Temecula Valley Bancorp Inc. ("Company") and its wholly owned subsidiary,
Temecula Valley Bank ("Bank"). All significant intercompany transactions have
been eliminated.
In the opinion of management of the Company, the unaudited financial statements
contain all adjustments (consisting only of normal, recurring accruals)
necessary to fairly present the financial position of the Company on September
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.
The preparation of 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 assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Estimates associated with the allowance for loan
losses, SBA servicing assets, and SBA interest-only strips receivable are
particularly susceptible to material change in the near term. Actual results
could differ from those estimates.
The results of operations for the three and nine month periods ended September
30, 2005, are not necessarily indicative of the results to be expected for the
full year.
There were no significant accounting policy changes since the last report.
The Company, a one-bank holding company for the Bank was formed on June 3, 2002.
Upon formation, the stock symbol for the common shares of the Company was
TMCV.OB (the Bank's common stock symbol was TMUL.OB) and the par value of the
Company's common stock initially was $.001 (the Bank's was $1.25). The stock
exchange, in connection with the formation of the Company, was one share for one
share. In December 2003, the Company reincorporated from Delaware to California
and the par value changed from $.001 to zero. On July 29, 2005, the Company's
stock listed on The National NASDAQ Market. Prior to that, the Company's common
stock was quoted on the Over the Counter Bulletin Board.
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 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. Most of the
grants in 2005 will not vest until 2006 and beyond.
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 and been
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.
6
Three Months Ending Sept 30 Nine Months Ending Sept 30
2005 2004 2005 2004
-------------- ------------- ------------- -------------
Net Income as reported $3,285,162 $2,374,362 $10,229,883 $7,593,138
Stock based compensation using the Intrinsic
Value Method 7,698 6,951 23,092 20,139
Stock based compensation that would have been
reported (129,981) (42,030) (389,943) (126,090)
-------------- ------------- ------------- -------------
Pro Forma Net Income $3,162,879 $2,339,283 $9,863,032 $7,487,187
============== ============= ============= =============
Basic per share as reported $.37 $.27 $1.16 $.90
Basic per share pro forma $.36 $.27 $1.12 $.89
Diluted per share as reported $.34 $.25 $1.07 $.81
Diluted per share pro forma $.33 $.25 $1.03 $.80
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 Income, 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, and listed its common stock on The National Nasdaq Market on July 29,
2005. 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. On September 29, 2005, the
Company participated in a fourth Trust Preferred pool in the net amount of
$8,000,000. Borrowing proceeds of $7,000,000 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 278 employees (273 full-time equivalents), of which 260 are full-time.
The staffing was 238 full-time equivalents 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 the remainder of 2005 and into
2006 with the opening of the Carlsbad, California, office in October, and the
7
Solana Beach, California, office in early 2006. 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, Ohio, Oregon, 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. In January 2006, the Indian Wells,
California, branch will be closed and the customers at that branch will be
transferred to our Corona office. This event will not have a material impact on
the Bank.
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 if the branches
are located within the Bank's geographic service area.
FINANCIAL CONDITION
Assets
- ------
Total assets increased from $595,246,198 at September 30, 2004 to $606,827,529
at December 31, 2004 and to $794,832,584 at September 30, 2005. The primary
increases in the first nine months of 2005 consisted of a $7,799,000 increase in
cash surrender value of life insurance, an increase in cash and cash equivalents
of $21,788,959, and an increase in loans outstanding. Total loans, excluding
loans held for sale, increased from $518,757,013 at year-end 2004 to
$680,307,375 at September 30, 2005, a $161,550,362 or 31.1% increase due mainly
to increased construction and construction tract lending. The loan portfolio
composition is primarily construction, commercial and real estate secured loans,
with over 95% of the total loan portfolio consisting of real estate secured
loans. The rate of loan growth should continue to be strong for the remainder of
2005, due to the planned increase in SBA loan production offices, the opening of
the Carlsbad branch, 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 $32,240,000 at September 30, 2005. The
increase in the first nine months of 2005 is largely attributable to a
$136,436,102 increase in certificates of deposit, the $32,678,512 increase in
other deposits, and an increase of $8,248,000 in junior subordinated debt
securities offset by the $161,550,362 increase in total loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses increased from $6,362,534 at December 31, 2004 to
$8,240,198 at September 30, 2005. The allowance, as a percentage of loans
outstanding, was 1.20% at December 31, 2004 and 1.20% at September 30, 2005. The
large increase in the provision in 2004 and the first nine months of 2005 was
due to the increase in construction lending and the general overall growth of
the loan portfolio. The provision was $1,988,900 in the first nine months of
2005, with net chargeoffs of $111,236. Management considers, through quarterly
analysis, the allowance to represent the estimate of probable incurred loan
losses in the loan portfolio and expects it will continue to make provisions for
loan losses 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 other factors inherent to each loan pool.
8
Summary of Allowance for Loan Loss
2003 2004 9 Mo. 2005
---- ---- ----------
Beginning Balance $3,017,395 $3,607,833 $6,362,534
Charge-offs (505,586) (1,096,698) (430,534)
Recoveries 74,024 30,099 319,298
Provision 1,022,000 3,821,300 1,988,900
----------- ----------- -----------
Ending Balance $3,607,833 $6,362,534 $8,240,198
=========== =========== ===========
At September 30, 2005, there was $7,029,016 of non-accrual loans, of which
$5,247,485 is guaranteed by the SBA. The Bank had $9,868,931 of non-accrual
loans as of September 30, 2004, of which $7,327,611was guaranteed by the SBA.
The Bank had $2,111,250 of other real estate owned (REO) as of September 30,
2005, one property in Southern Florida, of which $604,004 was guaranteed by the
SBA.
9
NON-CURRENT LOANS, NON-ACCRUAL LOANS & OTHER REAL ESTATE OWNED
Government Net Balance
September 30, 2004 Gross Balance Guaranteed
- ------------------ -------------- ---------------- ----------------
30 - 89 Days Past Due $862,778 ($ 663,177) $199,601
============== ================ ================
90+ Days Past Due & Accruing 0 (0) 0
Non-Accrual 9,868,931 ( 7,327,611) 2,541,320
-------------- ---------------- ----------------
Sub- Total 9,868,931 ( 7,327,611) 2,541,320
Other Real Estate Owned (REO) 302,698 ( 227,023) 75,675
-------------- ---------------- ----------------
Total Non-Performing $10,171,629 ($7,554,634) $2,616,995
============== ================ ================
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
============== ================ ================
September 30, 2005
- ------------------
30 - 89 Days Past Due $1,383,506 ( $1,176,386) $207,120
============== ================ ================
90+ Days Past Due & Accruing 0 0 0
Non-Accrual 7,029,016 ( 5,247,485) 1,781,531
-------------- ---------------- ----------------
Sub- Total 7,029,016 ( 5,247,485) 1,781,531
Other Real Estate Owned (REO) 2,111,250 (604,004) 1,507,246
-------------- ---------------- ----------------
Total Non-Performing $9,140,266 ($5,851,489) $3,288,777
============== ================ ================
Other Assets
- ------------
The ratio of interest earning assets to total assets was 87.71% for the first
nine months of 2005 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 to
the SBA servicing asset, the related SBA interest only strips receivable, and
the cash surrender value of life insurance. The SBA servicing asset was
$8,059,947, the SBA I/O strip receivable was $22,513,631 and the cash surrender
value of life insurance was $17,392,824 at September 30, 2005. At September 30,
2004, the SBA servicing asset was $7,709,287, the SBA I/O strips receivable was
$23,644,233 and the cash surrender value of life insurance was $9,494,528. At
December 31, 2004, the SBA servicing asset was $7,585,712, the SBA I/O strip
receivables 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 $703,881,319 at
September 30, 2005. Money market and NOW accounts increased $20,848,371, savings
decreased $3,634,660, demand deposits increased $15,464,801, and certificate of
deposits (CD's) increased $136,436,102. Demand deposits comprised 26% of
deposits at September 30, 2004, compared to 26% at December 31, 2004 and 22% at
September 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 September 30, 2005, more than 58% 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 the branch in Carlsbad in October 2005. The Bank
will continue to solicit core deposits to diminish reliance on volatile funds.
At September 30, 2004, December 31, 2004, and September 30, 2005, 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, 2004 was $36,354,213 and at
September 30, 2005 was $31,664,030.
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 7.51% as of September 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 6.93% as of September 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 6.17% as of September 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.
On September 29, 2005, the Company issued $8,248,000 of junior subordinated debt
securities to Temecula Valley Statutory Trust IV, 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 29, 2035. Interest is payable quarterly on these debt securities at
3-Month LIBOR plus 1.40% for an effective rate of 5.50% as of September 30,
2005. The debt securities can be redeemed for 107.5% of the principal balance
through September 29, 2010 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, III, and IV. The balance of the equity of Temecula Valley
Statutory Trusts I, II,III, and IV 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, III, and IV into
the Company financial statements. Prior to the issuance of FIN No. 46, bank
holding companies typically consolidated these entities. The Federal Reserve
Board has ruled that these mandatorily redeemable preferred securities qualify
as Tier 1 and Tier 2 capital. At the Company, up to 25% of these junior
subordinated debt securities can be treated as Tier 1 capital, 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 $39,790,676 at September 30, 2004, $42,902,538 at December 31,
2004, and $53,954,273 at September 30, 2005. For the first nine months of 2005,
the $11,051,735 increase consisted of $10,229,883 of net income and $821,852 on
the exercise of stock options. 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.
At the Bancorp, 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 11.45%, tier one risk based
capital of 9.04%, and tier one leverage ratio of 9.34% at September 30, 2005. At
September 30, 2004, December 31, 2004, and September 30, 2005 the Bank and the
Company were in the regulatory "well capitalized" category.
RESULTS OF OPERATIONS
Net Income
- ----------
For the third quarter of 2005, the Company earned $3,285,162, compared to
$2,374,362 in 2004. Net income per diluted share for the first nine months of
the year was $1.07 in 2005 compared to $0.81 for the same period in 2004. Net
income per diluted share was $0.34 per share in the third quarter of 2005
compared to $0.25 in 2004. The return on average assets was 1.72% for the third
quarter of 2005, compared to 1.69% for the third quarter of 2004. The return on
average equity was 24.97% for the third quarter of 2005, compared to 24.61% for
the third 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 and purchase transactions. The net interest margin is
rising as the Federal Reserve Bank continues to raise the Fed Funds rate. Net
income in the first nine 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 $5,137,209 or $2,977,218 after taxes in the first nine months of 2005
compared to $4,055,353 and $2,350,239 respectively in the first nine months of
2004. These sales are expected to continue for the remainder of the year. The
opening of the Carlsbad branch, as well as the expansion of the SBA operations,
in 2005 will have negative effect on earnings during 2005.
Net Interest Earnings
- ---------------------
Net interest income was $30,607,949 in the first nine months of 2005, compared
to $19,021,611 in the same period in 2004. For the third quarter of 2005 the net
interest margin was 6.71%, compared to 5.77% in the same period in 2004. The net
interest margin in the first nine months of 2005 was 6.68%, compared to 5.90% 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 increased from 95.59% at September 30, 2004 to 97.81% at September 30,
2005. The net interest margin was also helped by a healthy ratio of 24.12% of
demand deposit accounts to total deposits for the first nine months of 2005 and
28.13% for the first nine months of 2004. The yield on loans increased from
7.37% for the first nine months of 2004 to 8.86% for the first nine months of
2005. Rate floors on $265 million of variable rate loans at September 30, 2004
and $248 million at September 30, 2005 helped to mitigate the effects of the low
Federal Reserve rate environment that has reversed over the last sixteen months
and should continue with additional Federal Reserve rate increases in the near
future. As of September 30, 2005 there are less than $1 million of loans that
are at their floor rate. The yield on investments, which are all in Federal
Funds Sold and U.S. Treasuries, for the first nine months of 2005 was 3.17%,
compared to 1.16% in the same period in 2004. The cost of interest bearing
deposits was 2.44% in the first nine months of 2005 and 1.61% in the first nine
months of 2004. The increase in 2005 is due to higher CD balances and higher CD
rates. The cost of other borrowings, which consisted of Federal Home Loan Bank
advances and junior subordinated debt securities borrowings were 5.45% for the
first nine months of 2005 and 3.71% in the same period in 2004. The increase in
the cost of other borrowings in 2005 is due to a higher interest rate
environment.
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, but not for 2005. 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. 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 the first nine months of 2004. For the same period in 2005,
$7,750,342 was collected for servicing, the asset amortization was $5,917,679
and the SBA related servicing assets decreased $1,691,654. There was $92,186,658
in 7A loan sales during the first nine months of 2005. The servicing assets
decreased in the first nine 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, obtains an independent third
party analysis of the servicing assets and I/O strip receivable performed.
The table below summarizes the repayment rates for national SBA pools based on
their maturities:
SBA Pools - Constant Prepayment Rates
Variable Rate Pools
< 8 Yr 8 - 11 Yr 11 - 16 16 - 21 Yr > 21 Yr
Issue Date Life CPR Life CPR Yr Life Life CPR Life CPR
---------- -------- -------- ----- -------- --------
CPR
2002 15.8 13.0 12.1 12.3 12.1
2001 16.4 14.6 12.0 14.3 14.4
2000 16.2 14.4 14.9 16.3 15.9
1999 15.8 14.9 15.6 15.1 16.4
1998 13.9 14.6 16.9 14.8 17.3
1997 13.4 13.8 15.5 16.8 17.9
The following schedule displays the WAL (weighted average life) for each SBA
pool after applying the CPRs identified above:
Original Maturity WAL (Yrs.)
----------------- ----------
< 8 Years 1.6
8 - 11 Years 2.3
11 - 16 Years 3.3
26 - 21 Years 4.3
> 21 Years 5.3
Based on assessing each component, our estimated discount rates for each
Bank SBA pool at September 30, 2005 is as follows:
Original Maturity Disc Rate Excess Disc Rate I/O
----------------- ---------------- -------------
< 8 Years 11.12% 11.12%
8 - 11 Years 11.18% 11.18%
11 - 16 Years 11.18% 11.18%
26 - 21 Years 11.18% 11.18%
> 21 Years 11.19% 11.19%
The servicing assets value would increase approximately $1.2 million if the
discount rate decreases 1% and would decrease approximately $1.1 million if the
discount rate increases 1%.
13
Provision for Loan Loss
- -----------------------
As discussed under "Allowance for Loan Losses", the allowance for loan losses
represents management's best estimate of probable incurred losses 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 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 $1,988,900 for the
nine 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. 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 nine months of 2005, as it did in 2004. Service charges decreased from
$516,225 in the first nine months of 2004 compared to $454,844 in the same
period in 2005 due to an increased number of accounts offset by a decrease in
non-sufficient funds service charges. Fees and other income increased from
$6,922,701 for the first nine months of 2004 to $7,204,692 in the same period in
2005, due mainly to lower mortgage broker income and lower net SBA servicing
income offset by higher SBA broker income. SBA loan servicing income decreased
from $1,895,993 in the first nine months of 2004 to $1,739,370 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 $13,304,011 in the first nine months of 2004 compared
to $11,187,939 in the same period in 2005. The 2005 decrease was due to lower
SBA loan sale gains and much 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 and
purchase transactions.
Gain on Sale of Loans/Assets
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------
SBA 7A Unguaranteed Sales $1,579,121 $889,974 $5,137,209 $4,055,353
SBA 7A Guaranteed Sales 783,255 2,691,096 4,573,412 6,460,308
SBA 504 Sales 0 422,957 230,208 732,421
Mortgage Sales 6,842 379,699 285,108 1,202,266
Other Loan Related 393,248 483,067 982,139 921,661
REO Gain (Loss) 1,215 0 (26,297) (72,998)
Fixed Assets 8,160 4,000 6,160 5,000
-----------------------------------------------------------------------------
Total $2,771,841 $4,870,793 $11,187,939 $13,304,011
=============================================================================
14
Fees and Other Income
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Customer Fees $ 72,707 $ 57,901 $ 200,857 $ 172,914
Loan Funding Related 547,818 573,623 1,851,716 1,800,347
SBA Broker Income 877,072 568,175 2,102,404 1,872,167
Mortgage Broker Income 208,803 222,690 618,316 724,768
Loan Late Charges 50,152 45,272 157,808 133,723
Other Loan Charges 34,462 1,200 39,951 4,609
SBA Servicing, Net 710,185 641,743 1,739,370 1,895,993
CSV Life Insurance 147,000 109,219 371,000 256,219
FRB/FHLB Dividend 34,246 27,214 94,779 61,347
Trust Preferred Dividend 9,984 0 27,590 0
Other 901 516 901 614
-----------------------------------------------------------------------------------------
Total $2,693,330 $2,247,553 $7,204,692 $6,922,701
=========================================================================================
Non-Interest Expense
- --------------------
Non-interest expense was $24,517,997 in the first nine months of 2004 compared
to $29,967,152 in the first nine months of 2005, a 22% increase. The increase is
attributable to the expansion of the SBA department, the start up costs
associated with the Carlsbad office that will open in October, and overhead
costs associated with increased risk monitoring. The increased capacity in risk
monitoring includes the addition of a Risk Department, expansion of the
Compliance Department, expansion of Human Resources, the addition of an
Appraisal Department, and expansion of Credit Administration. Salaries and
benefits increased from $16,555,198 in the first nine months of 2004 to
$19,648,233 for the same period in 2005, a 19% increase, due to salary increases
and the increase in the number of employees to support the growth of the
Company. Other expenses increased from $5,976,348 in the first nine months of
2004 to $7,434,230 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------------------
Processing $ 261,164 $ 249,091 $ 828,904 $ 758,077
Professional 346,608 145,644 783,944 457,750
Travel & Entertainment 312,238 139,952 709,560 448,209
Director Related 66,563 47,563 143,845 102,512
Shareholder Related 132,461 11,150 194,913 87,391
Loan Funding Related 766,229 395,714 1,646,957 1,017,771
Office Related 705,396 619,392 1,895,404 1,650,599
Marketing 334,802 299,128 885,037 726,138
OCC/FDIC Assessments 38,422 46,422 205,676 128,355
Other (97,721) 459,244 139,990 599,546
---------------------------------------------------------------------------------
Total $2,866,162 $2,413,300 $7,434,230 $5,976,348
=================================================================================
15
Income Taxes
- ------------
Income tax expense totaled $7,269,489 for the first nine months of 2005 and
$5,268,413 for the first nine months of 2004. For the full year of 2004 the
effective rate was 41.6%, for the first nine months of 2004 the effective rate
was 41.0% and for the first nine months of 2005 it was 41.5%. Deferred tax
assets totaled $2,428,615 at September 30, 2004, $4,370,990 at December 31, 2004
and $5,020,990 at September 30, 2005. Over half of the deferred tax asset is due
to the tax deductibility timing difference of the provision for loan loss.
LIQUIDITY
Funds management is essential to the ongoing profitability of a bank. A bank
must attract funds at a reasonable rate and deploy the funds at an appropriate
rate of return, while taking into account risk factors, interest rates, short
and long term liquidity positions and profitability needs.
The Bank's cash position is determined on a daily basis. 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 $31,664,030 at September 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.
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 AND ESTIMATES
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. For a
discussion of our critical accounting policies, see item 7 "Management
Discussion and Analysis" of the Company's report on Form 10K for the year-ended
December 31, 2004. There were no changes in our critical accounting policies and
estimates in the three months ended September 30, 2005.
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 September 30, 2005 and December 31, 2004, the Company had the following
outstanding financial commitments whose contractual amount represents credit
risk:
09/30/2005 12/31/2004
---------- ----------
Commitments to Extend Credit $352,152,000 $242,499,000
Letters of Credit 3,549,000 1,113,000
------------ ------------
$355,701,000 $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.
17
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.
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 September 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 16.33%
-100 basis points (7.83%)
In the model, a rising rate environment will increase net interest income (NII)
from a flat rate environment. A lower rate environment will decrease net
interest income. 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.
18
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-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.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As of September 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
-----------------------------------------
None
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.
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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 October 1, 2003.
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.
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.
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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
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, filed on
August 9, 2005, as an Exhibit to Temecula Valley Bancorp's
10Q.
10.33 Salary Continuation Agreement between Robert Flores and
Temecula Valley Bank dated June 1, 2005, filed on August
9, 2005, as an Exhibit to Temecula Valley Bancorp's 10Q.
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EXHIBIT INDEX
10.34 Indenture dated as of September 29, 2005.
10.35 Amended and Restated Declaration of Trust dated September
29, 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: November 8, 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
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