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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: March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
TEMECULA VALLEY BANCORP INC.
(Exact name of registrant as specified in its charter)
California 46-0476193
(State or other jurisdiction of (I.R.S. Employer
incorporate or organization) Identification No.)
27710 Jefferson Avenue, Suite A100
Temecula, California 92590
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 694-9940
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes___ No X
As of May 12, 2004, there were 8,363,742 shares of the Registrant's common
stock, at no par value per share, outstanding.
(Traditional Small Business Disclosure Format (check one): Yes__ No X )
This Form 10-Q contains 21 pages.
Exhibit Index: Page 17
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
March 31, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
--------------------------
ASSETS
Cash and Due from Banks $10,691,509 $9,348,013
Federal Funds Sold 20,810,000 21,400,000
--------------------------
Total Cash and Cash
Equivilents $31,501,509 $30,748,013
Securities Held to Maturity
- U.S. Treasuries 0 0
Loans Held for Sale: 12,151,841 17,005,198
Loans:
Commercial 33,160,053 33,008,385
Real Estate -
Construction 135,314,701 113,846,726
Real Estate - Other 211,868,941 195,991,515
Consumer and Other 2,987,769 3,194,582
--------------------------
TOTAL LOANS 383,331,464 346,041,208
Net Deferred Loan Fees (2,734,567) (2,297,015)
Allowance for Loan Losses (3,859,797) (3,607,833)
--------------------------
NET LOANS 376,737,100 340,136,360
Federal Reserve & Home Loan
Bank Stock, at Cost 1,938,900 1,145,000
Other Real Estate Owned 405,000 485,036
Premises and Equipment 2,133,324 2,185,543
Cash Surrender Value of Life
Insurance 7,601,329 5,740,729
Deferred Tax Assets 2,428,615 2,393,000
SBA Servicing Assets 6,241,789 6,116,679
SBA Interest-Only Strips
Receivable 20,866,935 20,495,511
Accrued Interest and Other
Assets 5,009,457 4,761,049
--------------------------
$467,015,799 $431,212,118
==========================
1
TEMECULA VALLEY BANCORP INC.
STATEMENT OF FINANCIAL CONDITION
March 31, 2004 and December 31, 2003
(UNAUDITED)
2004 2003
--------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing
Demand $119,640,183 $112,367,018
Money Market and NOW 60,625,444 61,340,428
Savings 40,715,835 35,180,027
Time Deposits Under
$100,000 100,158,775 88,771,099
Time Deposits
$100,000 and Over 95,687,990 85,828,794
--------------------------
TOTAL DEPOSITS 416,828,227 383,487,366
Federal Funds Purchased 0 0
Federal Home Loan Bank
Advances 0 0
Junior Subordinated Debt
Securities 12,372,000 12,372,000
Accrued Interest and
Other Liabilities 4,629,949 5,669,687
--------------------------
TOTAL LIABILITIES 433,830,176 401,529,053
Shareholders' Equity:
Common Stock - No Par Value Authorized
40,000,000 Shares; Issued and
Outstanding 8,308,896 Shares at
03/31/2004 and 8,151,914 Shares at
12/31/2003 0 0
Surplus 15,012,686 14,082,278
Retained Earnings 18,172,937 15,600,787
--------------------------
TOTAL
SHAREHOLDERS'
EQUITY 33,185,623 29,683,065
--------------------------
$467,015,799 $431,212,118
==========================
2
TEMECULA VALLEY BANCORP INC.
STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
March 31, March 31,
2004 2003
----------------------
INTEREST INCOME
Interest and Fees on Loans $6,798,167 $5,212,273
Interest on HTM Securities - U.S.
Treasuries 68 0
Interest on Federal Funds Sold 18,393 52,574
----------------------
TOTAL INTEREST INCOME 6,816,628 5,264,847
INTEREST EXPENSE
Interest on Money Market and NOW 102,263 179,689
Interest on Savings Deposits 41,424 52,042
Interest on Time Deposits 921,208 841,582
Interest on Federal Funds Purchased 0 878
Interest on FHLB Advances 21,701 28,259
Interest on Junior Subordinated Debt
Securities 155,967 95,299
----------------------
TOTAL INTEREST EXPENSE 1,242,563 1,197,749
----------------------
NET INTEREST INCOME 5,574,065 4,067,098
Provision for Loan Losses 500,000 150,000
----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,074,065 3,917,098
NON-INTEREST INCOME
Service Charges and Fees 189,764 222,165
Gain on Sale of Loans/Assets 4,133,344 2,954,316
Fees, and Other Income 2,404,681 2,021,295
----------------------
TOTAL NON-INTEREST INCOME 6,727,789 5,197,776
----------------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 5,164,482 4,525,003
Occupancy Expenses 307,899 277,719
Furniture and Equipment 232,184 213,008
Other Expenses 1,740,043 1,562,149
----------------------
TOTAL NON-INTEREST EXPENSE 7,444,608 6,577,879
----------------------
INCOME BEFORE INCOME TAXES 4,357,246 2,536,995
Income Taxes 1,785,096 1,041,716
----------------------
NET INCOME $2,572,150 $1,495,279
======================
Per Share Data:
Net Income - Basic $0.31 $0.20
======================
Net Income - Diluted $0.28 $0.18
======================
Average Number of Shares Outstanding 8,237,774 7,517,694
======================
Average Number of Shares and Equivilents 9,219,285 8,540,756
======================
3
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2004 2003
------------------------
OPERATING ACTIVITIES
Net Income $2,572,150 $1,495,279
Adjustments to Reconcile Net Loss to
Net Cash used by Operating Activities:
Depreciation and Amortization 1,564,369 908,611
Provision for Loan Losses 500,000 150,000
Decrease (Increase) of Deferred
Tax Asset (35,615) 0
Gain on Loan Sales (4,132,344) (2,950,766)
Loans Originated for Sale (49,151,709)(54,219,771)
Proceeds from Loan Sales 53,348,852 55,707,628
Increase in Cash Surrender Value
of Life Insurance (60,600) (46,650)
Net Change in Other Assets and
Liabilities (3,193,947) (3,081,939)
------------------------
NET CASH USED BY OPERATING ACTIVITIES 1,411,156 (2,037,608)
------------------------
INVESTING ACTIVITIES
Purchases of Investments (199,868) 0
Repayment (Purchases) of FRB/FHLB Stock (793,900) (56,750)
Maturity of Investments 200,000 0
Net Increases in Loans (32,232,148)(21,106,800)
Purchase of Life Insurance (1,800,000) (600,000)
Purchases of Premises and Equipment (140,013) (58,016)
Proceeds from Sale of Premises and
Equipment 37,000 16,450
------------------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (34,928,929)(21,805,116)
------------------------
FINANCING ACTIVITIES
Net Increases in Demand, NOW,Money
Market and Savings Accounts 12,093,989 5,199,817
Net Increases in Time Deposits 21,246,872 51,741,027
Net Increases/(Decreases) in Borrowings 0 (10,000,000)
Proceeds from the Exercise of Stock
Warrants 0 96,260
Proceeds from the Exercise of Stock
Options 930,408 426,674
------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 34,271,269 47,463,778
------------------------
NET INCREASE IN CASH AND CASH EQUIVILENTS 753,496 23,621,054
Cash and Cash Equivilents at Beginning
of Period 30,748,013 12,180,415
------------------------
CASH AND CASH EQUIVILENTS AT END OF PERIOD $31,501,509 $35,801,469
========================
Supplemental Disclosures of Cash Flow
Information:
Interest Paid $1,263,981 $3,029,930
Income Taxes Paid $50,178 $3,155,090
Loans Transferred to Other Real Estate
Owned $- $-
Loans Transferred out of Other Real
Estate Owned $80,036 $-
4
TEMECULA VALLEY BANCORP INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period beginning December 31, 2002 and ending March 31, 2004
(UNAUDITED)
Common Retained
Shares Stock Surplus Earnings Total
------------------------------------------------------
Balance at
December 31,
2002 3,723,323 $3,723 $11,866,032 $7,746,448 $19,616,203
Exercise of
Options 58,536 59 426,615 426,674
Including
the
Realization
of Tax
Benefits of
$101,721
Exercise of
Warrants 19,252 19 96,241 96,260
Net
Income 1,495,279 1,495,279
------------------------------------------------------
Balance at
March 31, 2003 3,801,111 $3,801 $12,388,888 $9,241,727 $21,634,416
Exercise of
Options 19,157 19 93,282 93,301
Exercise of
Warrants 143,047 143 715,092 715,235
Net
Income 1,848,680 1,848,680
-------------------------------------------------------
Balance at June
30, 2003 3,963,315 $3,963 $13,197,262 $11,090,407 $24,291,632
Exercise of
Options 80,492 81 555,497 555,578
Including
the
Realization
of Tax
Benefits of
$173,871
Net
Income 2,379,493 2,379,493
-------------------------------------------------------
Balance at
September 30,
2003 4,043,807 $4,044 $13,752,759 $13,469,900 $27,226,703
Exercise of
Options 32,150 34 325,441 325,475
Including
the
Realization
of Tax
Benefits of
$149,318
Adjustment for
Reorganization (4,078) 4,078 0
2 for 1 Stock
Split 4,075,957
Net
Income 2,130,887 2,130,887
-------------------------------------------------------
Balance at
December 31,
2003 8,151,914 0 14,082,278 15,600,787 29,683,065
Exercise of
Options 156,982 0 930,408 930,408
Including
the
Realization
of Tax
Benefits of
$588,840
Net
Income 2,572,150 2,572,150
------------------------------------------------------
Balance at
March 31, 2004 8,308,896 0 15,012,686 18,172,937 33,185,623
======================================================
TEMECULA VALLEY BANCORP INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
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 March 31, 2004. 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 three month period ending March 31,
2004 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, N.A., was formed on June 3, 2002. The stock symbol for the common
shares changed from TMUL.OB to TMCV.OB and the par value changed from $1.25 to
$.001. The stock exchange was one share for one share. In December 2003 the
Bancorp reincorporated from Delaware to California and the par value changed
from $.001 to zero. All financial statements were adjusted to reflect the par
value change.
5) On October 24, 2003 Temecula Valley Bancorp Inc. announced a two for one
stock split which was voted and approved by shareholders at a special
shareholders' meeting held December 18, 2003 in Temecula, California. The split
was effective December 19, 2003 and payable December 24, 2003. All share and per
share data have been adjusted to reflect the common stock two for one split.
6
Item 2- Management's Discussion and Analyses of Financial Condition and
Results of Operations
Statements made in this Report that state the intentions, beliefs,
expectations or predictions by Temecula Valley Bancorp Inc. (the "Company") or
its management of the future are forward-looking statements. The Company's
actual results could differ materially from those projected in such
forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those in the forward-looking
statements is contained in the Company's Form 10K and other filings made by the
Company with the SEC. Copies of such filings may be obtained by contacting the
Company or accessing the Company's filings at www.sec.gov.
OVERVIEW
This Management discussion is intended to provide additional information
regarding the significant changes and trends in the Company's Financial
Condition, Statement of Operations, Funds Management and Capital Planning.
Commencement of operations of Temecula Valley Bank, N.A. ("Bank") was December
16, 1996. The Company, which became a one-bank holding company for the Bank, was
formed on March 4, 2002, and the share exchange was on June 3, 2002. On that
date one share of common stock of the Bank (Par value $1.25) was exchanged for
one common share of the Company (par value $.001). In December 2003, the Company
reincorporated from Delaware to California and the par value of the stock
changed from $.001 to zero. On June 26, 2002, the Company participated in a
Trust Preferred Securities pool in the amount of $7,000,000. The borrowing net
proceeds in the amount of $6,789,000 were transferred to the Bank as capital. On
September 17, 2003, the Company participated in a Trust Preferred Securities
pool in the amount of $5,000,000. The borrowing proceeds in the amount of
$5,000,000 were transferred to the Bank as capital. Since the Bank opened, it
has consistently, from year to year, had substantial growth. All per share data
has been adjusted for a two for one common stock split effective December 23,
2003. Since the date of opening, the Bank, and now collectively with the
Company, has grown to 233 employees (228 full time equivalent), of which 218 are
full time. One third of the employees are directly involved in the origination,
underwriting and processing of SBA loans. Additional support staff is required
to service the SBA loans after they are funded. All employees are employed at
the Bank. It is anticipated that growth will remain strong for 2004 with the
anticipated opening of full service branches in Rancho Bernardo (San Diego
County) and Corona (Riverside County). The full service office in Murrieta was
opened on January 11, 2001 and the loan production office in El Cajon converted
to a full service branch on June 18, 2001. The SBA department has expanded
considerably since 2001, with loan production offices now located in Chico, CA;
Fresno, CA; Sherman Oaks, CA; Anaheim Hills, CA; Irvine, CA; St. Petersburg, FL;
Coral Springs, FL; Jacksonville, FL; Atlanta, GA; Westlake, OH; Gurnee, IL and
Bellevue, WA. In the third quarter of 2002, a real estate department that
concentrates on single family residence tract lending began operating. The
department is located in Corona, California. At the end of 2003, a loan
production office was opened in Encinitas, California. In late 1998, staffing
increased due to the addition of a full service office in Fallbrook, California,
and in the third quarter of 1999 staffing increased due to the addition of a
full service office in Escondido, California. In 2000, staffing increased due to
the addition of the Mortgage department in Temecula and anticipatory staffing of
the Murrieta office. The Mortgage department originates FHA, VA, and
conventional mortgages and sells them in the secondary market.
The Bank was formed as a locally owned and managed financial institution
that assumes an active community role. The Bank focuses primarily upon local
banking services and community needs, as well as nationwide SBA loan
origination. The Bank's marketing strategy stresses its local ownership and
commitment to serve the banking needs of the people and businesses in Temecula
Valley, those located along the Interstate 15 corridor and surrounding areas, as
well as originating loans through the SBA network nationwide.
The Bank will continue to take advantage of new full service and/or loan
production office locations if they make good business sense and are located
within the Bank's geographic service area.
7
FINANCIAL CONDITION
Assets
Total assets increased from $358,978,983 at March 31, 2003 to $431,212,118
at December 31, 2003 and to $467,015,799 at March 31, 2004. Most of the increase
in the first three months of 2004 was in loans outstanding. Total loans,
excluding loans held for sale, increased from $346,041,208 at year-end 2003 to
$383,331,464 at March 31, 2004, a $37,290,256 or 10.8% increase due to increased
SBA, construction, and tract lending. The loan portfolio composition is
primarily construction, commercial and real estate secured loans. The rate of
loan growth should continue to be strong for 2004, due to the SBA loan
production offices that have not yet reached their expected production levels,
the addition of the real estate tract-lending department, and the addition of
the loan production office in Encinitas, California.
Investments
Investments, which were comprised only of Federal Funds Sold, decreased
from $21,400,000 at December 31, 2003 to $20,810,000 at March 31, 2004. The
increase in the first nine months of 2003 is largely attributable to various CD
promotions that attracted more than $84 million in new money to fund the
$85,967,522 increase in loans and the net reduction of $5 million in borrowings.
Allowance for Loan Losses
The allowance for loan losses increased from $3,607,833 at December 31,
2003 to $3,859,797 at March 31, 2004. The allowance was 1.00% at December 31,
2003 and 0.98% at March 31, 2003. The large increase in the provision in 2002
was due to the increase in SBA lending and the general overall growth of the
loan portfolio. The provision was $500,000 in the first three months of 2004,
with net chargeoffs of $296,123. 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
3 Months
2002 2003 2004
Beginning Balance $1,239,308 $3,017,395 $3,607,833
Chargeoffs 707,455 505,586 250,389
Recoveries 25,542 74,024 2,353
Provision 2,460,000 1,022,000 500,000
Ending Balance $3,017,395 $3,607,833 $3,859,797
At March 31, 2003, there was $3,766,035 of non-accrual loans, of which
$3,221,919 is guaranteed by the SBA. The Bank had $7,918,753 of non-accrual
loans as of March 31, 2004, of which $6,404,927 was guaranteed by the SBA. The
Bank also had other real estate owned (REO) of $405,000, a commercial property
in Colorado.
8
NON-CURRENT LOANS & OTHER REAL ESTATE OWNED
March 31, 2004 Government Net
Gross Balance Guaranteed Balance
- ----------------------------------------------------------------------
30 - 89 Days Past Due $0 ($0) $0
90+ Days Past Due & Accruing 0 ( 0) 0
Non-Accrual 7,918,753 ( 6,404,927) 1,513,826
--------------------------------------
Sub- Total 7,918,753 ( 6,404,927) 1,513,826
Other Real Estate Owned (REO) 405,000 ( 0) 405,000
--------------------------------------
Total $8,323,753 ($6,404,927)$1,918,826
======================================
December 31, 2003
- --------------------------------
30 - 89 Days Past Due $3,243,706 ( $582,205)$2,661,501
90+ Days Past Due & Accruing 0 ( 0) 0
Non-Accrual 4,160,032 ( 3,378,401) 781,631
--------------------------------------
Sub- Total 7,403,738 ( 3,960,606) 3,443,132
Other Real Estate Owned (REO) 485,036 ( 0) 485,036
--------------------------------------
Total $7,888,774 ($3,960,606)$3,928,168
======================================
March 31, 2003
- --------------------------------
30 - 89 Days Past Due $750,806 ( $577,725) $173,081
90+ Days Past Due & Accruing 466,533 ( 0) 466,533
Non-Accrual 3,766,035 ( 3,221,919) 544,116
--------------------------------------
Sub- Total 4,983,374 ( 3,799,644) 1,183,730
Other Real Estate Owned (REO) 851,000 ( 0) 851,000
--------------------------------------
Total $5,834,374 ($3,799,644)$2,034,730
======================================
Other Assets
The ratio of interest earning assets to total assets was 87.36% for the
first quarter of 2003 compared to 85.70% for the first quarter of 2004. The
target is to keep this ratio above 90%, but has remained below that level due to
SBA sales that increased the SBA servicing asset, the related SBA interest only
strip receivable, and the cash surrender value of life insurance. The SBA
servicing asset was $4,237,641, the SBA I/O strip receivable was $15,223,090 and
the cash surrender value of life insurance was $4,629,833 at March 31, 2003. At
March 31, 2004, the SBA servicing asset was $6,241,789, the SBA I/O strip
receivable was $20,866,935 and the cash surrender value of life insurance was
$7,601,329. At December 31, 2003, the SBA servicing asset was $6,116,679, the
SBA I/O strip receivable was $20,495,511 and the cash surrender value of life
insurance was $5,740,729. Even though these assets are not considered interest
bearing for net interest margin purposes, they do produce, or are related to,
income that is part of non-interest income.
9
Liabilities
Deposits increased from $383,487,366 at December 31, 2003 to $416,828,227
at March 31, 2004. Money market and NOW accounts decreased $714,984, savings
increased $5,535,808, demand deposits increased $7,273,165, and certificate of
deposits (CD's) increased $21,246,872. Demand deposits comprised 29% of deposits
at March 31, 2004, compared to 29% at December 31, 2003 and 26% at March 31,
2003. The slight increase in the ratio of certificates of deposits to total
deposits is due to CD promotions in 2003 and 2004 to fund the rapid loan growth.
At March 31, 2004, more than 54% of deposits have balances of $100,000 or more.
No one customer has balances that exceed 10% of the deposits of the Bank. The
Bank depends on core deposits as a source of funds for the loan portfolio.
Consequently, the Bank tries to attract solid core accounts yet maintain a
reasonable funding cost. The core deposit base was helped by the addition of the
Murrieta and El Cajon branches in 2001, the continued deposit increases at all
five branches, and will be helped in the second half of 2004 by the opening of
the full service branches in Rancho Bernardo and Corona. The Bank will continue
to solicit core deposits to diminish reliance on volatile funds.
At December 31, 2003 and March 31, 2004, there were no short-term advances
from the Federal Home Loan Bank. The borrowing capacity at the Federal Home Loan
Bank as of December 31, 2003 was $25,553,805 and at March 31, 2004 was
$26,091,353.
On June 26, 2002, the Company issued $7,217,000 of junior subordinated debt
securities (the "debt securities") to Temecula Valley Statutory Trust I, a
statutory trust created under the laws of the State of Connecticut. These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable on June 26, 2032. Interest is payable quarterly on these debt
securities at 3-Month LIBOR plus 3.45% for an effective rate of 4.56% as of
March 31, 2004. The debt securities can be redeemed for 107.5% of the principal
balance through June 26, 2007 and at par thereafter. The debt securities can
also be redeemed at par if certain events occur that impact the tax treatment or
the capital treatment of the issuance.
On September 17, 2003, the Company issued $5,155,000 of junior subordinated
debt securities (the "debt securities") to Temecula Valley Statutory Trust II, a
statutory trust created under the laws of the State of Delaware. These debt
securities are subordinated to effectively all borrowings of the Company and are
due and payable on September 17, 2033. Interest is payable quarterly on these
debt securities at 3-Month LIBOR plus 2.95% for an effective rate of 4.06% as of
March 31, 2004. The debt securities can be redeemed for 107.5% of the principal
balance through September 17, 2008 and at par thereafter. The debt securities
can also be redeemed at par if certain events occur that impact the tax
treatment or the capital treatment of the issuance.
The Company also purchased a 3% minority interest in Temecula Valley
Statutory Trusts I and II. The balance of the equity of Temecula Valley
Statutory Trusts I and II is comprised of mandatory redeemable preferred
securities. Under FASB Interpretation (FIN) No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," the Company is not allowed
to consolidate Temecula Valley Statutory Trusts I and II into the Company
financial statements. Prior to the issuance of FIN No. 46, Bank Holding
companies typically consolidated these entities. The Federal Reserve Board had
ruled that certain mandatory redeemable preferred securities of a consolidated
entity qualified as Tier 1 and Tier 2 Capital. At the Company, up to 25% of the
Tier 1 Capital can be these debt securities with the remainder of the debt
securities qualifying as Tier 2 Capital. The Federal Reserve Board is evaluating
the capital impact from FIN No. 46 but has not issued any final ruling. The
Company has included the net junior subordinated debt securities in its Tier 1
and Tier 2 Capital for regulatory capital purposes.
Capital
Total capital was $33,185,623 at March 31, 2004, $29,683,065 at December
31, 2003, and $21,634,416 at March 31, 2003. For the first three months of 2003,
the $2,018,213 increase consisted of $4,195,279 of net income, $426,674 on the
exercise of stock options and $96,260 on the exercise of warrants. For the first
three months of 2004, the $3,502,558 increase was due to $2,572,150 in net
income and $930,408 on the exercise of stock options.
Total risk based capital was 11.14%, the tier one risk based ratio was
9.99%, and the tier one leverage ratio was 9.73% at March 31, 2004, compared to
a total risk based capital of 10.27%, tier one risk based capital of 9.28%, and
tier one leverage ratio of 8.30% at March 31, 2003. At March 31,2003, December
31, 2003, and March 31, 2004 the Bank and the Company were in the regulatory
"well capitalized" category.
10
RESULTS OF OPERATIONS
Net Income
For the first quarter of 2003, the Company earned $1,495,279, compared to
$2,572,150 in 2004. Net income per basic share for the first quarter was $.20 in
2003 compared to $.31 in 2004. Net income per diluted share was $.18 per share
in the first quarter of 2003 compared to $.28 in 2004. The return on average
assets was 1.78% for the first quarter of 2003, compared to 2.31% for the first
quarter of 2004. The return on average equity was 29.52% for the first quarter
of 2003, compared to 33.15% for the first quarter of 2004. The 2003 and 2004
earnings were significantly affected by the sale of loans in the secondary
market, most of which are SBA and mortgage loans. The sales of the SBA loans are
expected to continue at this level or higher for the remainder of the year.
Mortgage loans sales are expected to slow down from the 2003 pace. The net
interest margin has stabilized after the 4.75% Federal Reserve Bank rate
reductions in 2001 the .50% reduction in November 2002 and the .25% reduction in
June 2003. Net income in the first three months of 2003 and 2004 was increased
by the sale of the unguaranteed portion of SBA loans. These sales increased net
income before taxes by $512,196 or $301,405 after taxes in the first quarter of
2003 compared to $2,295,286 and $1,350,673 respectively in the first quarter of
2004. These sales are expected to continue for the remainder of the year. The
opening of the Rancho Bernardo and Corona full service offices in 2004 will have
negative effect on earnings in the second half of 2004.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Bank accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options will be
measured as the excess, if any, of the quoted market price of the Bank's stock
at the date of the grant over the amount an employee must pay to acquire the
stock.
Had compensation cost for the Bank's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Bank's net income and earnings
per share for the half would have been reduced the pro forma amounts indicated
on the following schedule.
Period Ending March 31
2004 2003 2002
Net Income as reported
$2,572,150 $1,495,279 $629,549
Stock based compensation
using the Intrinsic Value
Method 2,669 2,669 2,669
Stock based compensation
that would have been
reported ( 42,030) ( 56,398) ( 78,679)
Pro Forma Net Income $2,532,789 $ 1,441,550 $ 553,539
Basic per share as
reported $ .31 $ .20 $ .09
Basic per share pro
forma $ .31 $ .19 $ .08
Diluted per share as
reported $ .28 $ .18 $ .08
Diluted per share pro
forma $ .27 $ .17 $ .07
11
Net Interest Earnings
Net interest income was $4,067,098 in the first quarter of 2003, compared
to $5,574,065 in 2004. For the first quarter of 2003 the net interest margin was
5.91%, compared to 5.84% in 2004. The net interest margin decreased from 2001 to
2003 due to the Federal Reserve Bank rate reductions of 4.75% in 2001, 0.50% in
late 2002 and .25% in late June 2003. The loan to deposit ratio increased from
89.80% at March 31, 2003 to 94.22% at March 31, 2004. The net interest margin
was also helped by a healthy average of 26.92% DDA to total deposits ratio for
the first three months of 2003 and 29.97% for the first quarter of 2004. The
yield on loans decreased from 7.60% for the first quarter of 2003 to 7.27% for
the first quarter of 2004. Rate floors on $202 million of variable rate loans at
March 31, 2004 helped to mitigate the effects of Federal Reserve rate
reductions. The yield on investments, which are all in federal funds sold and US
Treasuries, for the first quarter of 2003 was 1.42%, compared to 0.93% in 2004.
The cost of interest bearing deposits was 1.99% in the first quarter of 2003 and
1.56% in the first quarter of 2004. The decrease in 2004 is due to a higher CD
and demand deposit balances offset by a lower rate environment. The cost of
other borrowings, which consisted of Federal Funds purchased, Federal Home Loan
Bank advances and junior subordinated debt securities borrowing was 3.25% for
the first quarter of 2003 and 3.53% in 2004. The increase in the cost of other
borrowings in 2004 is due to a higher percentage of the borrowings in 2004
attributable to the junior subordinated debt securities.
The Bank tries to maximize the percentage of assets it maintains as
interest earning assets, with the goal of maintaining at least 90% in that
category. Effectively, all of the increase in non-interest earning assets in
2003 and 2004 was in the cash surrender value of life insurance (BOLI), the SBA
servicing and SBA I/O strip receivable assets. The servicing assets are tested
for impairment by computing the net present value of the amount of servicing
income over the expected average life of the loan. Normal servicing (adequate
compensation), in accordance with industry standards, is 40 basis points of the
principal balance sold. The expected life assumes either 25 or 30 percent of the
note life, depending on the term of the note. The Company's average life of
loans sold has been higher than the 30% assumption, giving the calculation a
conservative bias. For the first three months of 2004, $2,025,801 was collected
for servicing, the asset amortization was $1,386,232 and the SBA related
servicing assets increased $496,534. The increase in the SBA loan servicing
assets was due to the sale of $23,750,241 in 7A loans during 2004. For the same
period in 2003, $1,184,902 was collected for servicing, the asset amortization
was $734,951 and the SBA related servicing assets increased $2,596,859. There
was $27,073,290 in 7A loan sales during the first three months of 2003. The
servicing assets increased less in the first three months in 2004 than 2003 due
to more loans sold with a premium bid than with a par bid. The servicing
calculations contain certain assumptions such as the expected life of the loan
and the discount rate used to compute the present value of future cash flows.
The exposure of the loan life assumption is if loans prepay faster than
expected. The exposure to the discount rate assumption is if prime rate adjusts
severely and permanently. Such exposure can cause adjustments to the income
statement. The Bank, on a quarterly basis, has outside analysis of the servicing
assets and I/O strip receivable performed to insure the fair value approximates
the book value. Asset quality is a continual primary focus of the Bank, and even
though risk is an integral part of the banking industry, it is the policy of the
Bank's management to actively manage the risk, without sacrificing long-term
stability with short-term profits.
The table below summarizes the repayment rates for national SBA pools based
on their maturities:
SBA Pools - Constant Prepayment Rates
Variable Rate Pools
Greater Less
Than Than
8 Yr 8 - 11 Yr 11 - 16 Yr 16 - 21 Yr 21 Yr
Issue Date Life CPR Life CPR Life CPR Life CPR Life CPR
2001 13.3 11.5 8.2 10.8 8.4
2000 15.7 12.9 11.5 14.4 13.1
1999 16.6 14.6 13.0 14.6 15.2
1998 16.5 14.8 16.3 13.2 16.5
1997 16.4 14.8 16.2 17.2 18.0
12
The following schedule displays the WAL for each SBA pool at year end after
applying the CPRs identified above:
Original Maturity WAL (Yrs.)
< 8 Years 1.6
8 - 11 Years 2.5
11 - 16 Years 3.8
26 - 21 Years 4.6
> 21 Years 6.0
Based on assessing each component, our estimated discount rates for each
Bank SBA pool at year end is as follows:
Original Maturity Disc Rt Excess Disc Rt I/O
< 8 Years 8.36% 8.36%
8 - 11 Years 8.74% 8.74%
11 - 16 Years 9.33% 9.33%
26 - 21 Years 9.67% 9.67%
> 21 Years 10.13% 10.13%
Provision for Loan Loss
As discussed under "Allowance for Loan Losses", the allowance for loan
losses represents management's best estimate of losses inherent in the existing
loan portfolio. The Bank has established a monitoring system for loans to
identify impaired loans and potential problem loans and to permit periodic
evaluation of impairment and adequacy of the allowance for loan losses in a
timely manner. The monitoring system and allowance for loan losses methodology
has evolved over a period of years, and loan classifications have been
incorporated into the determination of the allowance for loan losses. This
monitoring system and allowance methodology includes a loan-by-loan analysis for
all classified loans as well as loss factors for the balance of the unclassified
portfolio. Classified loans are reviewed individually to estimate the amount of
probable loan losses that needs to be included in the allowance. These reviews
include analysis of financial information as well as evaluation of collateral
securing the credit. Loss factors on the unclassified portion of the portfolio
are based on such factors as historical loss experience, current portfolio
delinquency and trends, and other inherent risk factors such as economic
conditions, concentrations in the portfolio, risk levels of particular loan
categories, internal loan review and management oversight.
The provision was $2,460,000 in 2002, $1,022,000 in 2003, and $500,000 for
the three months of 2004. The large increase in the provision in 2002 was due to
the large increase in loans outstanding as well as the substantial increase in
SBA loans. For 2003 and 2004 the provisions were 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 risk associated with these
loans.
Non-Interest Income
Non-interest income contributed significantly to the earnings of the Bank
in the first three months of 2004, as it did in 2003 and 2002. Service charges
decreased from $222,165 to $189,764 in 2004 due to an increased number of
accounts offset by a decrease in non-sufficient funds service charges. Other
income increased from $2,021,295 for the first three months of 2003 to
$2,404,681 in 2004, due mainly to higher loan volume, higher SBA loan servicing
income, and higher mortgage loan broker income, with unamortized loan fees also
contributing to the total. SBA net loan servicing income increased from $419,830
in the first three months of 2003 to $610,542 in 2004 due to the increase in the
servicing portfolio. The gain on sale of loans was $1,432,344 in the first three
months of 2004 compared to $2,954,316 in 2003. The 2004 increase was due to
higher SBA loan sales. The SBA loan sales are expected to continue at this pace
or higher for the remainder of the year and the mortgage loan sales will be
lower than last year's volume due to the increase in mortgage rates.
13
Non-Interest Expense
Non-interest expense was $7,444,608 in the first quarter of 2004 compared
to $6,577,879 in 2003. Salaries and benefits increased from $4,525,003 in the
first three months of 2003 to $5,164,482 for the same period in 2004 due to the
increase in employees from the continued expansion of the SBA department, the
addition of the loan production office in Encinitas, and to support the general
growth of the company. Other expenses went from $1,562,149 in the first three
months of 2003 to $1,740,043 in 2004 due to higher loan volume, processing
expenses and the opening of loan production offices offset by operating
efficiencies.
Income Taxes
Income tax expense totaled $1,041,716 for the first three months of 2003
and $1,785,096 for the first three months of 2004. For the full year of 2002 the
effective rate was 40.7%, for the full year of 2003 the effective rate was 40.9%
and for the first three months of 2004 it was 41.0%. Deferred tax assets totaled
$1,728,000 at March 31, 2003, $2,393,000 at December 31, 2003 and $2,428,615 at
March 31, 2004. Over half of the deferred tax asset is due to the tax
deductibility timing difference of the provision for loan loss.
LIQUIDITY
Funds management is essential to the ongoing profitability of a bank. A
bank must attract funds at a reasonable rate and deploy the funds at an
appropriate rate of return, while taking into account risk factors, interest
rates, short and long term liquidity positions and profitability needs.
The Bank's cash position is determined on a daily basis and on a monthly
basis liquidity analysis and asset/liability management analysis are performed.
The Bank maintains Federal Funds lines of credit of $13,000,000 at correspondent
banks for short-term liquidity. In addition, the Bank was approved on July 31,
2001 for membership to the Federal Home Loan Bank. The Bank has borrowing
capacity at the FHLB that will fluctuate with the loan balances that are pledged
as collateral. At December 31, 2003, the borrowing capacity was $25,553,805 and
$26,091,353 at March 31, 2004. Throughout 2003 and 2004, a positive liquidity
position was maintained, but not at a level where profits would have been
diminished.
The Bank presents to the Board of Directors monthly a liquidity analysis.
The analysis measures the liquidity gap on a monthly basis and should always be
in at least a 2% positive liquidity gap position. Since the Bank opened, the
Bank has been within these limits, even with the strong loan growth the Bank has
experienced.
CAPITAL PLANNING
It is the goal of the Company and the Bank to always be in the regulatory
"well capitalized" category.
The Company updates its multiple-year capital plan annually in conjunction
with the preparation of the annual budget. Capital levels are always a primary
concern of the federal regulatory authorities, and the Bank submits capital
plans to them when requested.
It is the Company's strategy always to have an adequate level of capital,
which by definition includes not having excessive or inadequate capital.
14
CRITICAL ACCOUNTING POLICIES
Our accounting policies are integral to understanding the results reported.
In preparing its consolidated financial statements, the Company is required to
make judgments and estimates that may have a significant impact upon its
financial results. Certain accounting policies require the Company to make
significant estimates and assumptions, which have a material impact on the
carrying value of certain assets and liabilities, and are considered critical
accounting policies. The estimates and assumptions used are based on the
historical experiences and other factors, which are believed to be reasonable
under the circumstances. Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods.
The Company has identified two critical accounting policies. They concern
the allowance for loan loss and the SBA servicing assets. They are considered
critical due to the assumptions that are contained in their calculation, as well
as external factors that can affect their value. Through quarterly review and
analysis, valuations and calculations are tested for reasonableness.
OFF BALANCE SHEET COMMITMENTS
In the normal course of business, the Company enters into financial
commitments to meet the financing needs of its customers. These financial
commitments include commitments to extend credit and standby letters of credit.
Those instruments involve to varying degrees, elements of credit and interest
rate risk note recognized in the statement of financial position.
The Company's exposure to loan loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for loans reflected in the financial
statements.
As of March 31, 2004 and December 31, 2003, the Company had the following
outstanding financial commitments whose contractual amount represents credit
risk:
2004 2003
Commitments to Extend Credit $186,179,000 $171,159,000
Letters of Credit 1,365,000 1,440,000
$187,544,000 $172,599,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Company customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily 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 considers interest rate risk to be its most significant market
risk, which could potentially have the greatest impact on operating earnings.
The structure of the Company's loan and deposit portfolios is such that a
significant decline in interest rates may adversely impact net market values and
net interest income.
15
The Company monitors whether material changes in market risk have occurred
since December 31, 2003. The Company does not believe that any material adverse
changes in market risk exposures have occurred since December 31, 2003.
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 Company's disclosure controls and
procedures. Based on this 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.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2004 the Company is not party to any litigation which 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
A Special Meeting of the Company's shareholders was held on December 18,
2003. At this meeting, 2,511,514 shares of the Compan's common stock were
represented in person or by proxy. Shareholders voted in favor of the
reorganization to allow the Company to reincorporate into California from
Delaware and in favor of the forward 2 for 1 stock split as follows: 2,511,514
shares For; 0 shares Against; and 0 shares abstaining. There were no broker
non-votes on the matter.
Item 5. Other Information
None
17
18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
2(i) Bank and Company 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 the Company's Definitive 14A filed November 20,
2003.
3(ii) Bylaws of Temecula Valley Bancorp Inc., as amended.
4.1 Common Stock Certificate of Temecula Valley Bancorp Inc.
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 Temecula Valley Bancorp's Form 10KSB.
10.2 Stephen H. Wacknitz Employment Agreement dated October 1, 2003 filed on
March 31, 2004 as an Exhibit to Temecula Valley Bancorp's Form 10K.
10.3 Brian D. Carlson Employment Agreement dated December 1, 2003 filed on March
31, 2004 as an Exhibit to Temecula Valley Bancorp's Form 10K.
10.4 Luther J. Mohr Employment Agreement dated October 1, 2003 filed on March
31, 2004 as an Exhibit to Temecula Valley Bancorp's Form 10K.
10.5 Thomas P. Ivory Employment Agreement dated January 25, 2001 filed on March
11, 2003 as an Exhibit to Temecula Valley Bancorp's Form 10KSB.
10.6 401(k) Plan filed on April 16, 2004 as an Exhibit to Temecula Valley
Bancorp's Form 10K, Amendment No. 2.
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 March 11, 2003 as an Exhibit to
Temecula Valley Bancorp's Form 10KSB.
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 March 11, 2003 as an Exhibit to Temecula Valley
Bancorp's Form 10KSB.
10.13 Amended and Restated Salary Continuing Agreement between Temecula Valley
Bank and Stephen H. Wacknitz dated January 1, 2004.
10.14 Amended and Restated Salary Continuing Agreement between Temecula Valley
Bank and Luther J. Mohr dated January 1, 2004.
10.15 Amended and Restated Salary Continuation Agreement between Temecula Valley
Bank and Scott Word dated January 1, 2004.
10.16 Amended and Restated Salary Continuing Agreement between Temecula Valley
Bank and Brian D. Carlson dated January 1, 2004.
31.1 Certification of the Chief Executive Officer of Registrant submitted to the
Securities and Exchange Commission pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of the Chief Financial Officer of Registrant submitted to the
Securities and Exchange Commission pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial Officer of
Registrant submitted to the Securities and Exchange Commission pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and
Exchange Commission by the Company during the last quarter of the period covered
by this Report.
(1) A current report on Form 8-K dated March 3, 2004 reported amendments to the
Registrant's Code of Ethics.
(2) A current report on Form 8-K dated February 6, 2004 that reported a press
release concerning the addition of a loan production office in Cleveland, Ohio
and the employment of Bryan P. Stevens as Senior Vice President, SBA East Coast
Sales Manager.
(3) A current report on Form 8-K dated February 2, 2004 that reported a press
release concerning earnings for the 12 month period ended December 31, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEMECULA VALLEY BANCORP INC.
DATE: May 17, 2004 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
2