-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFNBngpZm2bOnSeFPMXN+ZeXm5uxK2ElCDzZPGAoZ9cXxQgepteVyK1aSe68wNRU e3y5px3grbLCqIE5fQUtyQ== 0001157523-04-002972.txt : 20040402 0001157523-04-002972.hdr.sgml : 20040402 20040402164445 ACCESSION NUMBER: 0001157523-04-002972 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMECULA VALLEY BANCORP INC CENTRAL INDEX KEY: 0001172678 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 460476193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-49844 FILM NUMBER: 04714561 BUSINESS ADDRESS: STREET 1: 27710 JEFFERSON AVENUE STREET 2: SUITE A-100 CITY: TEMECULA STATE: CA ZIP: 92590 BUSINESS PHONE: 9096949940 MAIL ADDRESS: STREET 1: 27710 JEFFERSON AVENUE STREET 2: SUITE A-100 CITY: TEMECULA STATE: CA ZIP: 92590 10-K/A 1 a4606836new.txt TEMECULA VALLEY BANK 10-K/A DOCUMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 TEMECULA VALLEY BANCORP INC. (Name of Registrant in its Charter) California 46-047619 (State or other jurisdiction of (I.R.S. Employer incorporate or organization) Identification No.) 27710 Jefferson Avenue - Suite A100 92590 Temecula, California (Zip Code) (Address of principal executive offices) Registrant's telephone number (909) 694-9940 Securities registered under Section 12(b) of Exchange Act: None Securities registered under Section 12(g) of Exchange Act: Common Stock, No Par Value Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) YES [ ] NO [ X ] The issuer's net revenues for its most recent fiscal year were $48,371,852. The aggregate market value of the voting stock held by non-affiliates of the issuer as of June 30, 2003 was approximately $55,593,410. Number of registrant's shares of Common Stock outstanding at March 22, 2004 was 8,308,896. Documents incorporated by reference: The information required by Part III of this Annual Report is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission 1 of 38 pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report. Explanatory Note On March 31, 2004, Temecula Valley Bancorp Inc. (the "Company") filed with the Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 2003 (the "Initial Form 10-K"). The Initial Form 10-K contained the following omissions/errors: 1. On the cover page of the Form 10-K the box should have been checked as follows: Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] 2. The audited financial statements should have been attached and they were not. Such audited financial statements are attached hereto. 3. References to small business issuer and Regulation S-B on the cover page were corrected as Registrant is no longer a small business issuer. 4. Each director and executive officer designated as signing the Initial Form 10-K actually signed the Initial Form 10-K and the signatures are on file at the Company. No other changes are included in this Amendment. PART II ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in "Consolidated Financial Statements", "Notes to Consolidated Financial Statements", the "Independent Auditors Report", and the "Report of Management" in our 2003 Annual Report to shareholders and such information is attached hereto. PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report (1) The following financial statements are incorporated by reference from Item 8 hereto and are attached hereto: Independent Auditors Report Page F-1 Consolidated Statements of Financial Condition as of December 31, 2003 and 2002 Page F-2 2 of 38 Consolidated Statements of Income for Each of the Years Ended December 31, 2003, 2002 and 2001 Page F-4 Consolidated Statement of Changes in Shareholders' Equity for the Years ended December 31, 2003, 2002 and 2001 Page F-5 Notes to Consolidated Financial Statements 2003, 2002 and 2001 Page F-7 Financial Statement Schedules Not applicable. (b) 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. is an Exhibit to the Company's Definitive 14A filed November 20, 2003. 4.1 Common Stock Certificate of Temecula Valley Bancorp Inc. filed on June 3, 2002 as an Exhibit to Temecula Valley Bancorp's Form 8-A12G. 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. 10.3 Brian D. Carlson Employment Agreement dated December 1, 2003. 10.4 Luther J. Mohr Employment Agreement dated January 1, 2003. 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 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. 3 of 38 10.7 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. 10.8 Amended and Restated Salary Continuing Agreement entered into on behalf of Stephen H. Wacknitz, as amended by that certain First Amendment effective as of December 31, 2002 filed on March 11, 2003 as an Exhibit to Temecula Valley Bancorp's Form 10KSB. 10.9 Amended and Restated Salary Continuing Agreement entered into on behalf of Luther J. Mohr, as amended by that certain First Amendment effective as of December 31, 2002 filed on March 11, 2003 as an Exhibit to Temecula Valley Bancorp's Form 10KSB. 10.10 Salary Continuing Plan entered into on behalf of Thomas M. Shepherd filed on March 11, 2003 as an Exhibit to Temecula Valley Bancorp's Form 10KSB. 10.11Salary Continuing Plan entered into on behalf of Brian Carlson filed on March 11, 2003 as an Exhibit to Temecula Valley Bancorp's Form 10KSB. 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 of Registrant submitted to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification shall not be deemed to be "filed" with the Commission subject to the liability of Section 18 of the Exchange Act, except to the extent that the Registrant requests that such certifications incorporated by reference into a filing under the Securities Act or Exchange Act. This certification is being furnished to the Commission and accompanies this Report pursuant to SEC Release No. 33-8212. 32.2 Certification of the Chief Financial Officer of Registrant submitted to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification shall not be deemed to be "filed" with the Commission subject to the liability of Section 18 of the Exchange Act, except to the extent that the Registrant requests that such certifications incorporated by reference into a filing under the Securities Act or Exchange Act. This certification is being furnished to the Commission and accompanies this Report pursuant to SEC Release No. 33-8212. 4 of 38 (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 December 18, 2003 that reported the effectiveness of a change in the Company's state of incorporation from Delaware to California. (2) A current report on Form 8-K dated December 10, 2003 that reported a press release concerning the addition of a loan production office in the Rancho Bernardo area of San Diego, California and the employment of Carl R. Kruse as Senior Vice President. (3) A current report on Form 8-K dated December 8, 2003 that reported a press release concerning the employment of Ronald R. Bradley as Senior Vice President. (4) A current report on Form 8-K dated November 19, 2003 that reported a press release concerning the naming of Temecula Valley Bank as the nation's eighth largest SBA lender. (5) A current report on Form 8-K dated November 3, 2003 that reported a press release concerning the seeking of shareholder approval of a two-for-one stock split and a reincorporation into California. (6) A current report on Form 8-K dated October 20, 2003 that reported a press release concerning earnings for the third quarter of 2003. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMECULA VALLEY BANCORP INC. DATE: March 31, 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 5 of 38 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- Director March 31, 2004 /s/- Dr. Steven W. Aichle - ------------------------- Dr. Steven W. Aichle Director March 31, 2004 /s/- Dr. Robert P. Beck - ----------------------- Dr. Robert P. Beck Director March 31, 2004 /s/- Neil M. Cleveland - ---------------------- Neil M. Cleveland Director and March 31, 2004 /s/- Luther J. Mohr Chief Operating Officer - ------------------- Luther J. Mohr President/CEO/ March 31, 2004 /s/ Stephen H. Wacknitz Chairman of the Board - ----------------------- Stephen H. Wacknitz Director March 31, 2004 /s/- Richard W. Wright - ---------------------- Richard W. Wright 6 of 38 Vavrinek, Trine, Day & Co., LLP Certified Public Accountants & Consultants Board of Directors and Shareholders of Temecula Valley Bancorp Inc. and Subsidiary We have audited the accompanying consolidated statements of financial condition of Temecula Valley Bancorp Inc. and Subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the three years ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Temecula Valley Bancorp Inc. and Subsidiary as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the three years ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Vavrinek, Trime, Day + Co., LLP Laguna Hills, California January 28, 2004 25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com FRESNO o LAGUNA HILLS o PLEASANTON o RANCHO CUCAMONGA o SAN JOSE F-1 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
2003 2002 -------------- -------------- ASSETS Cash and Due from Banks $ 9,348,013 $ 12,180,415 Federal Funds Sold 21,400,000 - -------------- -------------- TOTAL CASH AND CASH EQUIVALENTS 30,748,013 12,180,415 Loans Held for Sale 17,005,198 22,916,776 Loans: Commercial 33,008,385 44,975,966 Real Estate - Construction 113,846,726 61,568,251 Real Estate - Other 195,991,515 138,849,220 Consumer 3,194,582 4,455,377 -------------- -------------- TOTAL LOANS 346,041,208 249,848,814 Net Deferred Loan Fees ( 2,297,015) ( 1,339,764) Allowance for Loan Losses ( 3,607,833) ( 3,017,395) -------------- -------------- NET LOANS 340,136,360 245,491,655 Federal Reserve and Federal Home Loan Bank Stock, at Cost 1,145,000 1,460,050 Premises and Equipment 2,185,543 2,335,139 Other Real Estate Owned 485,036 - Cash Surrender Value of Life Insurance 5,740,729 3,983,183 Deferred Tax Assets 2,393,000 1,728,000 Servicing Assets 6,116,679 3,763,779 Interest-Only Strips Receivable 20,495,511 13,120,093 Accrued Interest and Other Assets 4,761,049 3,527,007 -------------- -------------- $431,212,118 $310,506,097 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-2 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
2003 2002 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-Bearing Demand $112,367,018 $ 85,324,384 Money Market and NOW 61,340,428 62,160,520 Savings 35,180,027 29,958,463 Time Deposits, Under $100,000 88,771,099 40,489,348 Time Deposits, $100,000 and Over 85,828,794 51,388,505 ------------- ------------- TOTAL DEPOSITS 383,487,366 269,321,220 Federal Home Loan Bank Advances - 10,000,000 Junior Subordinated Debt Securities 12,372,000 7,217,000 Accrued Interest and Other Liabilities 5,669,687 4,351,674 ------------- ------------- TOTAL LIABILITIES 401,529,053 290,889,894 Commitments and Contingencies - Notes C and M - - Shareholders' Equity: Common Stock No Par Value; 40,000,000 Shares Authorized; 8,151,914 and 7,446,646 Shares Issued and Outstanding at December 31, 2003 and 2002 14,082,278 11,869,755 Retained Earnings 15,600,787 7,746,448 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 29,683,065 19,616,203 ------------- ------------- $431,212,118 $310,506,097 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-3 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
2003 2002 2001 ------------ ------------ ------------ INTEREST INCOME Interest and Fees on Loans $23,738,166 $16,369,293 $11,298,931 Interest on Investment Securities 336 3,651 10,247 Interest on Federal Funds 151,998 136,497 693,700 Other Interest Income 63,791 46,477 19,332 ------------ ------------ ------------ TOTAL INTEREST INCOME 23,954,291 16,555,918 12,022,210 INTEREST EXPENSE Interest on Money Market and NOW 555,883 645,911 593,591 Interest on Savings Deposits 192,313 228,373 621,491 Interest on Time Deposits 3,727,584 1,910,417 1,519,325 Interest on Junior Subordinated Debt Securities and Other Borrowings 470,773 339,981 - ------------ ------------ ------------ TOTAL INTEREST EXPENSE 4,946,553 3,124,682 2,734,407 ------------ ------------ ------------ NET INTEREST INCOME 19,007,738 13,431,236 9,287,803 Provision for Loan Losses 1,022,000 2,460,000 400,000 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,985,738 10,971,236 8,887,803 NONINTEREST INCOME Service Charges and Fees 792,292 965,067 786,142 Gain on Sale of Loans 15,798,959 11,389,023 4,739,335 Mortgage Fees 3,882,234 2,943,730 2,004,254 Servicing Income 1,693,836 1,129,328 339,060 Construction Fund Control Fees 840,003 395,581 213,396 Other Income 1,410,237 1,072,436 870,122 ------------ ------------ ------------ 24,417,561 17,895,165 8,952,309 ------------ ------------ ------------ 42,403,299 28,866,401 17,840,112 NONINTEREST EXPENSE Salaries and Employee Benefits 20,484,132 14,866,458 10,051,392 Occupancy Expenses 1,183,460 1,044,391 840,008 Furniture and Equipment 892,154 807,779 738,461 Data Processing 988,280 891,906 613,043 Marketing and Business Promotion 723,429 455,253 376,981 Legal and Professional 411,537 419,011 217,236 Regulatory Assessments 137,506 128,279 85,760 Loan Funding Expense 1,821,320 1,253,018 499,068 Office Expenses 1,589,448 1,404,963 1,026,397 Other Expenses 889,805 529,779 383,167 ------------ ------------ ------------ 29,121,071 21,800,837 14,831,513 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 13,282,228 7,065,564 3,008,599 Income Taxes 5,427,889 2,874,510 1,205,018 ------------ ------------ ------------ NET INCOME $ 7,854,339 $ 4,191,054 $ 1,803,581 ============ ============ ============ Per Share Data : Net Income - Basic $1.00 $0.57 $0.28 Net Income - Diluted $0.89 $0.50 $0.25
The accompanying notes are an integral part of these consolidated financial statements. F-4 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
Common Retained Shares Stock Earnings Total ------------- ------------- ------------- ------------- Balance at January 1, 2001 5,505,322 $ 7,185,369 $ 1,751,813 $ 8,937,182 Exercise of Stock Options, Including the Realization of Tax Benefits of $19,908 215,944 391,826 391,826 Exercise of Warrants 5,058 12,645 12,645 Stock Offering, net of Expenses of $41,290 1,600,000 3,958,710 3,958,710 Net Income 1,803,581 1,803,581 ------------- ------------- ------------- ------------- Balance at December 31, 2001 7,326,324 11,548,550 3,555,394 15,103,944 Exercise of Stock Options, Including the Realization of Tax Benefits of $32,123 53,694 154,635 154,635 Exercise of Warrants 66,628 166,570 166,570 Net Income 4,191,054 4,191,054 ------------- ------------- ------------- ------------- Balance at December 31, 2002 7,446,646 11,869,755 7,746,448 19,616,203 Exercise of Stock Options, Including the Realization of Tax Benefits of $424,910 380,670 1,401,026 1,401,026 Exercise of Warrants 324,598 811,497 811,497 Net Income 7,854,339 7,854,339 ------------- ------------- ------------- ------------- Balance at December 31, 2003 8,151,914 $14,082,278 $15,600,787 $29,683,065 ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
OPERATING ACTIVITIES 2003 2002 2001 -------------- -------------- -------------- Net Income $ 7,854,339 $ 4,191,054 $ 1,803,581 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 4,946,316 2,132,475 1,047,884 Provision for Loan Losses 1,022,000 2,460,000 400,000 Deferred Taxes ( 665,000) ( 909,000) ( 299,000) Gain on Sale of Loans ( 15,798,959) ( 11,389,023) ( 4,739,335) Loans Originated for Sale ( 246,036,807) ( 202,264,842) ( 115,408,177) Proceeds from Loan Sales 257,672,323 196,781,986 106,595,716 Loss (Gain) on Sale of Other Real Estate Owned ( 19,880) - - Net Increase in Cash Surrender Value of Life Insurance ( 205,546) ( 150,929) ( 124,925) Net Change in Accrued Interest, Other Assets and Other Liabilities 399,990 50,241 ( 1,047,445) -------------- -------------- -------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 9,168,776 ( 9,098,038) ( 11,771,701) INVESTING ACTIVITIES Purchases of Held-to-Maturity Investments ( 299,664) ( 955,939) ( 251,758) Purchases of Federal Reserve and Federal Home Loan Bank Stock ( 224,950) ( 924,500) ( 302,550) Proceeds from Maturities of Held-to-Maturity Securities 300,000 950,000 450,000 Proceeds from Sale of Federal Home Loan Bank Stock 571,900 - - Net Increase in Loans ( 100,889,635) ( 116,172,110) ( 48,382,205) Purchase of Cash Surrender Value Life Insurance ( 1,552,000) ( 1,000,000) ( 548,000) Proceeds from Sale of Premises and Equipment 29,000 57,477 16,175 Proceeds from Sale of Other Real Estate Owned 870,880 - - Purchases of Premises and Equipment ( 515,468) ( 701,446) ( 1,110,919) -------------- -------------- -------------- NET CASH USED BY INVESTING ACTIVITIES ( 101,709,937) ( 118,746,518) ( 50,129,257) FINANCING ACTIVITIES Net Increase in Demand Deposits and Savings Accounts 31,444,106 41,796,778 45,927,480 Net Increase in Time Deposits 82,722,040 54,596,217 19,694,009 Net Change in Federal Home Loan Bank Advances ( 10,000,000) 10,000,000 - Proceeds from Issuance of Junior Subordinated Debt Securities 5,155,000 7,217,000 - Proceeds from Issuance of Common Stock - - 3,958,710 Proceeds from Exercise of Warrants 976,116 166,570 12,645 Proceeds from Exercise of Stock Options 811,497 122,512 371,918 -------------- -------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 111,108,759 113,899,077 69,964,762 -------------- -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,567,598 ( 13,945,479) 8,063,804 Cash and Cash Equivalents at Beginning of Year 12,180,415 26,125,894 18,062,090 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,748,013 $ 12,180,415 $ 26,125,894 ============== ============== ============== Supplemental Disclosures of Cash Flow Information: Interest Paid $ 4,895,119 $ 3,029,930 $ 2,729,574 Income Taxes Paid $ 7,117,636 $ 3,155,090 $ 1,877,948 Transfer of Loans to Other Real Estate Owned $ 1,336,036 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. F-6 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Temecula Valley Bancorp Inc. and its wholly-owned subsidiary, Temecula Valley Bank (the "Bank"), collectively referred to herein as the "Company". All significant intercompany transactions have been eliminated. Nature of Operations - -------------------- The Company has been organized as a single operating segment and operates five branches in Temecula, Murrieta, Fallbrook, El Cajon and Escondido, California. In addition, the Company operates business loan centers in California, North Carolina, Florida, Tennessee, Georgia, Illinois and Washington. The Bank's primary sources of revenue are providing loans to customers, who are predominately small and middle-market businesses and individuals and originating mortgage and government guaranteed loans for sale to institutional investors in the secondary market. The Company also generates fee income by servicing the government guaranteed loans. Use of Estimates in the Preparation of Financial 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 reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and federal funds sold. Generally, federal funds are sold for one day periods. Cash and Due From Banks - ----------------------- Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Bank complied with the reserve requirements as of December 31, 2003. The Company maintains amounts due from banks which exceed federally insured limits. The Company has not experienced any losses in such accounts. Investment Securities - --------------------- Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. F-7 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Investment Securities - Continued - --------------------------------- Investments not classified as trading securities nor as held to maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders' equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method. Loans - ----- Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. For impairment recognized in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, the entire change in the present value of expected cash flows is reported as either provision for loan losses in the same manner in which impairment initially was recognized, or as a reduction in the amount of provision for loan losses that otherwise would be reported. The Bank has adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under this Statement, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. To calculate the gain (loss) on sale of loans, the Bank's investment in the loan is allocated among the retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative fair market value of each portion. The gain (loss) on the sold portion of the loan is recognized at the time of sale based on the difference between the sale proceeds and the allocated investment. As a result of the relative fair value allocation, the carrying value of the retained portion is discounted, with the discount accreted to interest income over the life of the loan. F-8 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans - Continued - ----------------- Servicing assets are amortized over an estimated life using a method that is in proportion to the estimated future servicing income; in the event future prepayments exceed Management's estimates and future expected cash flows are inadequate to cover the unamortized servicing asset, additional amortization would be recognized. The portion of servicing fees in excess of the contractual servicing fees is reflected as interest-only (I/O) strips receivable, which are classified as available for sale and are carried at fair value. Loans Held for Sale - ------------------- Mortgage loans and SBA loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Allowance for Loan Losses - ------------------------- The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Quarterly detailed reviews are performed to identify the risks inherent in the loan portfolio, assess the overall quality of the loan portfolio and to determine the adequacy of the allowance for loan losses and the related provision for loan losses to be charged to expense. Loans identified as less than "acceptable" are reviewed individually to estimate the amount of probable losses that need to be included in the allowance. These reviews include analysis of financial information as well as evaluation of collateral securing the credit. Additionally, the Company considers the inherent risk present in the "acceptable" portion of the loan portfolio taking into consideration historical losses on pools of similar loans, adjusted for trends, conditions and other relevant factors that may affect repayment of the loans in these pools. Premises and Equipment - ---------------------- Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and ten to thirty years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred. Advertising - ----------- The Bank expenses the costs of advertising in the period incurred. F-9 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income Taxes - ------------ Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is "more likely than not" that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depend on having sufficient taxable income of an appropriate character within the carryforward periods. Comprehensive Income - -------------------- Beginning in 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which requires the disclosure of comprehensive income and its components. For the years ending December 31, 2003, 2002 and 2001, the Company had no accumulated other comprehensive income and there were no significant components of comprehensive income with the exceptions of net income for 2003, 2002 and 2001. Financial Instruments - --------------------- In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received, as described in Note M. Disclosure About Fair Value of Financial Instruments - ---------------------------------------------------- SFAS No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Company's estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying notes. F-10 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Earnings Per Share (EPS) - ------------------------ Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. 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 would have been reduced to the pro forma amounts indicated below: 2003 2002 2001 ----------- ----------- ----------- Net Income: As reported $7,854,339 $4,191,054 $1,803,581 Stock-Based Compensation Using the Intrinsic Value Method 10,677 10,677 10,677 Stock-Based Compensation That Would Have Been Reported Using the Fair Value Method of SFAS 123 ( 505,457) ( 314,714) ( 547,283) ------------ ------------------------ Pro Forma Net Income $7,359,559 $3,887,017 $ 708,401 =========== =========== =========== Per Share Data: Net Income - Basic As Reported $ 1.00 $ 0.57 $ 0.28 Pro Forma $ 0.94 $ 0.53 $ 0.20 Net Income - Diluted As Reported $ 0.89 $ 0.50 $ 0.25 Pro Forma $ 0.82 $ 0.46 $ 0.17 F-11 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Current Accounting Pronouncements - --------------------------------- In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003; however, management does not believe adoption will have a material impact on the Bank's financial statements. In December 2003, FASB issued FASB Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an interpretations of ARB No.51." This interpretation addresses the consolidation of variable interest entities as defined in the Interpretations. This Interpretation will require companies that have issued trust preferred securities to deconsolidate the related entities. The Company has deconsolidated its trust preferred securities as of December 31, 2003, which did not have a material impact on the Company's financial statements. Reclassifications - ----------------- Certain reclassifications were made to prior year's presentation to conform to the current year. These classifications are of a normal recurring nature. F-12 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE B - LOANS The Bank's loan portfolio consists primarily of loans to borrowers within Temecula, California, its surrounding communities, and the surrounding communities of the other business loan centers. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries. The Bank also originated mortgage and SBA loans for sale to institutional investors. A substantial portion of the Bank's revenues are from origination of loans guaranteed by the Small Business Administration under its Section 7a program and sale of the guaranteed portions of those loans. Funding for the Section 7a program depends on annual appropriations by the U.S. Congress. At December 31, 2003 and 2002, the Bank was servicing approximately $306,252,000 and $177,075,000, respectively, in loans previously sold. A summary of the changes in the related servicing assets and interest-only strips receivable are as follows: Servicing Assets --------------------------------------- 2003 2002 2001 ------------ ------------- ------------ Balance at Beginning of Year $ 3,763,779 $ 1,538,437 $ 708,401 Increase from Loan Sales 3,251,793 2,708,148 929,465 Amortization Charged to Income ( 898,893) ( 425,806) ( 91,429) Increase in Valuation Allowance - ( 57,000) ( 8,000) ------------ ------------- ------------ Balance at End of Year $ 6,116,679 $ 3,763,779 $1,538,437 ============ ============= ============ Interest-Only Strips Receivable --------------------------------------- 2003 2002 2001 ------------ ------------- ------------ Balance at Beginning of Year $13,120,093 $ 4,136,809 $1,381,098 Increase from Loan Sales 10,710,121 10,034,996 3,145,725 Amortization Charged to Income ( 3,334,703) ( 1,036,212) ( 311,014) Writedown of Interest-Only Strips Receivable - ( 15,500) ( 79,000) ------------ ------------- ------------ Balance at End of Year $20,495,511 $13,120,093 $4,136,809 ============ ============= ============ F-13 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE B - LOANS - Continued The estimated fair value of the servicing assets approximated the carrying amount at December 31, 2003, 2002 and 2001. Fair value is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. Management has estimated the expected life of these loans to be approximately 25% to 30% of the remaining life at the time of sale. For purposes of measuring impairment, the Bank has identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded where the fair value is below the carrying amount of the asset. At December 31, 2003 and 2002, the Bank had a valuation allowance of $390,000. The Bank may also receive a portion of subsequent interest collections on loans sold that exceed the contractual servicing fee. In that case the Bank records an interest-only strip based on the relative fair market value of it and the other components of the loan. At December 31, 2003, 2002 and 2001, the Bank had interest-only strips of $20,495,511, $13,120,093 and $4,136,809, respectively, which approximates fair value. Fair value is estimated by discounting estimated future cash flows from the interest-only strips using assumptions similar to those used in valuing servicing assets. At December 31, 2003, key economic assumptions used to fair value the servicing assets and interest-only strips on SBA loans sold, along with the potential decline in the fair value of these assets due to an immediate 10 percent and 20 percent adverse change in those assumptions are as follows: SBA Loans Sold ------------- Carrying Value of Servicing Assets and I/O Strips - Fair Value $26,612,000 Weighted-Average Life (in months) 60 Repayment Speed Assumption (annual rate) 15.67% Decline in Fair Value from a 10% Adverse Change 1,774,000 Decline in Fair Value from a 20% Adverse Change 3,359,000 Discount Rate (annual rate) 9.50% Decline in Fair Value from a 10% Adverse Change 903,000 Decline in Fair Value from a 20% Adverse Change 1,750,000 The declines in fair value due to changes in the assumptions are hypothetical and should be used with caution. For purposes of this table, the effect of an adverse change is calculated for each assumption without changing any other assumptions; however, in reality changes in one factor may result in positive or negative changes in another factor, which might magnify or counteract the sensitivities. F-14 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE B - LOANS - Continued A summary of the changes in the allowance for loan losses as of December 31 follows:
2003 2002 2001 ------------ ------------ ------------ Balance at Beginning of Year $3,017,395 $1,239,308 $927,509 Additions to the Allowance Charged to Expense 1,022,000 2,460,000 400,000 Recoveries on Loans Charged Off 74,024 25,542 - ------------ ------------ ------------ 4,113,419 3,724,850 1,327,509 Less Loans Charged Off ( 505,586) ( 707,455) ( 88,201) ------------ ------------ ------------ $3,607,833 $3,017,395 $1,239,308 ============ ============ ============
The following is a summary of the investment in impaired loans, the related allowance for loan losses, and income recognized thereon as of December 31:
2003 2002 2001 ----------- ----------- ----------- Recorded Investment in Impaired Loans $4,160,000 $1,908,000 $ 99,000 Related Allowance for Impaired Loans $ 368,000 $ 172,000 10,000 Average Recorded Investment in Impaired Loans $3,437,000 $1,443,000 $292,000 Interest Income Recognized for Cash Payments None None None Total Nonaccrual Loans $4,160,000 $1,908,000 $ 99,000 Total Loans Past-Due Nintey Days or More and Still Accruing $ - $ - $100,000 Guaranteed Portion of Nonaccrual Loans $3,378,000 $1,077,000 $100,000
F-15 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE C - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31 follows: 2003 2002 ------------ ------------ Land $ 500,000 $ 500,000 Buildings and Leasehold Improvements 542,567 532,967 Autos 1,032,446 849,800 Furniture, Fixtures, and Equipment 2,337,729 2,130,792 ------------ ------------ 4,412,742 4,013,559 Less Accumulated Depreciation ( 2,227,199) ( 1,678,420) ------------ ------------ $ 2,185,543 $ 2,335,139 ============ ============ Depreciation and amortization expense for premises and equipment was $643,615 in 2003, $597,957 in 2002 and $558,441 in 2001. The Bank has entered into several leases for its branches and loan production offices, which expire at various dates through 2009. These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. Rental expense relating to these leases was approximately $811,000 in 2003, $701,000 in 2002 and $502,000 in 2001. The approximate future minimum annual payments for these leases by year are as follows: Year Amount - -------------- ----------- 2004 $ 862,423 2005 591,055 2006 511,781 2007 493,203 2008 472,648 Thereafter 22,314 ----------- $2,953,424 =========== The minimum rental payment shown above are given for the existing lease obligations and are not a forecast of future rental expense. F-16 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE D - DEPOSITS At December 31, 2003 the schedule maturities of time deposits are as follows: Year Amount - -------------- ------------- 2004 $164,022,297 2005 9,827,061 Thereafter 750,535 ------------- $174,599,893 ============= The five largest depositors with the Bank had approximately $12,928,000 on deposit at December 31, 2003. NOTE E - FHLB ADVANCES AND OTHER BORROWINGS As of December 31, 2002, Federal Home Loan Bank Advances consist of a $10,000,000 advance with a maturity date of January 2, 2003 and a fixed rate of 1.05%. The Bank is required to pledge a certain amount of loans with the Federal Home Loan Bank for collateralization purposes. As of December 31, 2003, approximately $50,000,000 in loans was pledged for an aggregate borrowing line of $25,554,000. The Bank had no Federal Home Loan Bank Advances as of December 31, 2003. The Bank maintains unused federal lines of credit with three financial institutions in the aggregate amount of $13,000,000 as of December 31, 2003. As of December 31, 2003, no amounts were outstanding under these arrangements. NOTE F - JUNIOR SUBORDINATED DEBT SECURITIES 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 4.59% as of December 31, 2003. 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. F-17 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE F - JUNIOR SUBORDINATED DEBT SECURITIES - Continued 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 4.09% as of December 31, 2003. 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 mandatorily 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 mandatorily redeemable preferred securities of a consolidated entity qualified as Tier 1 Capital. The Federal Reserve Board is evaluating the capital impact from FIN No. 46 but has not issued any final ruling. As of December 31, 2003, the Company has included the net junior subordinated debt in its Tier1 Capital for regulatory capital purposes. NOTE G - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties are made on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The following is a summary of the activity of these loans: 2003 2002 ------------ ------------ Balance at the Beginning of Year $790,000 $880,000 Advances 149,000 173,000 Payments ( 97,000) (263,000) ------------ ------------ $842,000 $790,000 ============ ============ Deposits from related parties held by the Bank at December 31, 2003 amounted to approximately $860,000. F-18 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE H - INCOME TAXES The provision for income taxes included in the statements of income as of the years ended December 31 consist of the following: 2003 2002 2001 --------------- --------------- ---------------- Current: Federal $4,504,304 $2,852,583 $1,119,830 State 1,588,585 930,927 384,188 --------------- --------------- ---------------- 6,092,889 3,783,510 1,504,018 Deferred ( 665,000) ( 909,000) ( 299,000) --------------- --------------- ---------------- $5,427,889 $2,874,510 $1,205,018 =============== =============== ================ Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The Bank's principal timing differences are from loan loss provision accounting, deferred compensation plans, and depreciation differences. The provision for income taxes varies from the federal statutory rate as follows:
2003 2002 2001 ---------------------- ---------------------- ---------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ----------- ---------- ----------- ---------- ----------- ---------- Federal Tax Rate $4,516,000 34.0% $2,402,000 34.0% $1,023,000 34.0% State Income Taxes, Net of Federal Income Tax Benefit 944,000 7.1 500,000 7.1 209,000 6.9 Tax Free Income ( 70,000) ( 0.5) ( 51,000) ( 0.7) ( 42,000) ( 1.4) Other Items, Net 37,889 0.3 23,510 0.3 15,018 0.5 ----------- ---------- ----------- ---------- ----------- ---------- $5,427,889 40.9% $2,874,510 40.7% $1,205,018 40.0% =========== ========== =========== ========== =========== ==========
F-19 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE H - INCOME TAXES - Continued The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statements of financial condition: 2003 2002 ------------ ------------ Deferred Tax Assets: Allowance for Loan Losses $1,260,000 $1,071,000 Depreciation Differences 51,000 41,000 Deferred Compensation Plans 571,000 332,000 State Taxes 507,000 296,000 Other Assets/Liabilities 4,000 - ------------ ------------ 2,393,000 1,740,000 Deferred Tax Liabilities: Cash Basis of Tax Reporting - ( 12,000) ------------ ------------ - ( 12,000) ------------ ------------ Net Deferred Tax Assets $2,393,000 $1,728,000 ============ ============ NOTE I - EARNINGS PER SHARE (EPS) The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:
2003 2002 2001 ---------------------- ---------------------- ---------------------- Income Shares Income Shares Income Shares ----------- ---------- ----------- ---------- ----------- ---------- Net Income as Reported $7,854,339 $4,191,054 $1,803,581 Weighted Average Shares Outstanding During the Year 7,823,951 7,372,504 6,484,108 ----------- ---------- ----------- ---------- ----------- ---------- Used in Basic EPS 7,854,339 7,823,951 4,191,054 7,372,504 1,803,581 6,484,108 Dilutive Effect of Stock Options and Warrants 1,037,755 997,536 658,182 ----------- ---------- ----------- ---------- ----------- ---------- Used in Dilutive EPS $7,854,339 8,861,706 $4,191,054 8,370,040 $1,803,581 7,142,290 =========== ========== =========== ========== =========== ==========
F-20 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE J - STOCK OPTION PLAN At December 31, 2003, the Company has two fixed option plans under which 3,300,000 shares of the Company's common stock may be issued. The compensation expense that has been charged against income for these stock-based compensation plans totaled $18,097 in 2003, 2002 and 2001. During 1996, the Company established an incentive stock option plan for officers and employees. Under this plan the Company may grant options for 1,800,000 shares of common stock at not less than 100% of the fair market value at the date the options are granted. During 1997, the Company established a nonqualified stock option plan for directors of the Company. Under this plan, the Company may grant options for 1,500,000 shares of common stock at not less than 85% of the fair market value at the date the options are granted. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free rates of 3.00% in 2003, 3.75% in 2002 and 4.00% in 2001; expected lives of five years in 2003 and three years in 2002 and 2001; and volatility of 22.9% for 2003, 40.3% for 2002 and 51.6% for 2001. A summary of the status of the Bank's fixed stock option plan as of December 31, 2003 and 2002, and changes during the years ending on those dates is presented below:
2003 2002 2001 -------------------- ------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- -------- ---------- -------- ---------- --------- Outstanding at Beginning of Year 2,042,348 $ 2.79 2,028,042 $2.68 1,598,014 $ 2.48 Granted 273,000 9.26 78,000 5.35 645,972 2.86 Options Exercised ( 380,670) 2.56 ( 53,694) 2.28 ( 215,944) 1.72 Options Cancelled ( 22,004) 4.01 ( 10,000) 2.94 - - ---------- ---------- ---------- --------- Outstanding at End of Year 1,912,674 3.74 2,042,348 2.79 2,028,042 2.68 ========== ========== ========== Options Exercisible at End of Year 1,617,008 3.24 1,598,146 2.60 731,679 2.54 Weighted-Average Fair Fair Value of Options Granted During the Year 3.01 1.68 1.49
F-21 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE J - STOCK OPTION PLAN - Continued The following table summarizes information about fixed options outstanding at December 31, 2003:
Options Outstanding Options Exercisable -------------------------------------------- -------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Contractual Price Exercisable Price Life - --------------- ----------- --------------- ------------ ----------- ------------- $1.00 to $1.99 200,686 3.15 $ 1.39 200,686 $ 1.39 $2.00 to $2.99 878,652 5.84 $ 2.61 817,788 $ 2.60 $3.00 to $3.99 480,336 5.83 $ 3.44 440,534 $ 3.44 $4.00 to $4.99 40,000 8.08 $ 4.72 18,000 $ 4.62 $5.00 to $5.99 92,000 8.75 $ 5.71 20,000 $ 5.69 $8.00 to $9.99 126,000 9.87 $ 9.29 120,000 $ 9.35 $11.00 to 11.99 95,000 9.90 $ 11.12 - $ - ----------- ----------- 1,912,674 6.21 $ 3.74 1,617,008 $ 3.24 =========== ===========
NOTE K - EMPLOYEE RETIREMENT SAVINGS PLAN During 2000, the Bank adopted a retirement savings plan for the benefit of its employees. Contributions to the plan are determined annually by the Board of Directors. The expense for this plan was approximately $263,000 in 2003, $167,000 in 2002 and $68,000 in 2001. NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-22 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments: Financial Assets - ---------------- The carrying amounts of cash, short term investments, due from customers on acceptances, and Bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with Banks. The fair values of investment securities, including available-for-sale, are generally based on quoted market prices. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available. Financial Liabilities - --------------------- The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities. Off-Balance Sheet Financial Instruments - --------------------------------------- The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. F-23 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The estimated fair value of financial instruments at December 31, 2003 and 2002 is summarized as follows: (dollar amounts in thousands)
December 31, ----------------------------------------------- 2003 2002 --------------------- ------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ------------ Financial Assets: Cash and Due From Banks $ 9,348 $ 9,348 $ 12,180 $ 12,180 Federal Funds Sold 21,400 21,400 - - Loans Held for Sale and Loans, net 357,142 359,914 268,409 270,245 Federal Reserve and Federal Home Loan Bank Stock 1,145 1,145 1,460 1,460 I/O Strips Receivable and Servicing Assets 26,612 26,612 16,884 16,884 Cash Surrender Value - Life Insurance 5,741 5,741 3,983 3,983 Accrued Interest Receivable 1,396 1,396 1,153 1,153 Financial Liabilities: Deposits 383,487 383,574 269,321 269,345 Federal Home Loan Bank Advances - - 10,000 10,000 Junior Subordinated Debt Securities 12,372 12,372 7,217 7,217 Accrued Interest and Other Liabilities 5,670 5,670 4,352 4,352
NOTE M - COMMITMENTS AND CONTINGENCIES 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. F-24 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE M - COMMITMENTS AND CONTINGENCIES - Continued As of December 31, 2003 and 2002, the Company had the following outstanding financial commitments whose contractual amount represents credit risk: 2003 2002 ------------- ------------- Commitments to Extend Credit $171,159,000 $108,046,000 Letters of Credit 1,440,000 1,444,000 ------------- ------------- $172,599,000 $109,490,000 ============= ============= Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments to guarantee the performance of a Company customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer. The Company is involved in various litigation which has arisen in the ordinary course of its business. In the opinion of management, the disposition of such pending litigation will not have a material effect on the Company's financial statements. The Company has entered into retirement benefit agreements with certain officers providing for future benefits aggregating approximately $6,900,000 payable in equal annual installments ranging from ten years to a lifetime benefit from the retirement dates of each participating officer. The estimated future benefits to be paid are being accrued over the period from the effective date of the agreements until the expected retirement dates of the participants. As of December 31, 2003, approximately $1,262,000 has been accrued in conjunction with these agreements. The expense incurred and accrued was $531,000, $267,000 and $166,000, for the years ended December 31, 2003, 2002 and 2001, respectively. The Company is the beneficiary of life insurance policies that have been purchased as a method of financing the benefits under the agreements. NOTE N - REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. F-25 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE N - REGULATORY MATTERS - Continued Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notification from the Comptroller of the Currency categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
To Be Well- Capitalized For Capital Under Prompt Adequacy Corrective Actual Purposes Provisions ----------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- -------- --------- -------- As of December 31, 2003: Total Capital (to Risk-Weighted $ 43,584 11.3% $ 30,964 8.0% $ 38,705 10.0% Assets) Tier 1 Capital (to Risk-Weighted $ 39,977 10.3% $ 15,482 4.0% $ 23,223 6.0% Assets) Tier 1 Capital (to Average Assets) $ 39,977 9.4% $ 17,070 4.0% $ 21,338 5.0% As of December 31, 2002: $ 29,073 10.5% $ 22,078 8.0% $ 27,598 10.0% Total Capital (to Risk-Weighted Assets) Tier 1 Capital (to Risk-Weighted $ 26,056 9.4% $ 11,039 4.0% $ 16,559 6.0% Assets) Tier 1 Capital (to Average Assets) $ 26,056 8.7% $ 12,020 4.0% $ 15,025 5.0%
The Company is subject to similar requirements administered by its primary regulator, the Federal Reserve Board. For capital adequacy purposes, the Company must maintain total capital to risk-weighted assets and Tier 1 capital to risk-weighted assets of 8.0% and 4.0%, respectively. Its total capital to risk-weighted assets and Tier 1 capital to risk-weighted assets was 11.5% and 10.0%, respectively at December 31, 2003. Its total capital to risk-weighted assets and Tier 1 capital to risk-weighted assets was 10.6% and 9.30%, respectively at December 31, 2002. The Bank is restricted as to the amount of dividends that can be paid to the holding company. Dividends declared by national banks that exceed the net income (as defined) for the current year plus retained net income for the preceding two years must be approved by the OCC. The Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. F-26 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE O - WARRANTS In connection with a stock offering that was completed in June 2001, the Bank issued 400,000 units, with each unit containing four shares of common stock and one warrant to purchase one share of common stock at an exercise price of $2.50 per share. The warrants expired June 23, 2003. NOTE P - FORMATION OF TEMECULA VALLEY BANCORP INC. On June 3, 2002, Temecula Valley Bancorp Inc. acquired all the outstanding shares of Temecula Valley Bank N.A. by issuing 3,673,203 shares of common stock in exchange for the surrender of all outstanding shares of Temecula Valley Bank N.A.'s common stock. There was no cash involved in this transaction. The acquisition was accounted for as a reverse merger. The consolidated financial statements contained herein have been restated to give full effect to this transaction. NOTE Q - STOCK SPLIT On December 22, 2003, the Bancorp's Board of Directors approved a 2-for-1 stock split of the Company's outstanding common stock. All per share data in the financial statements and related footnotes have been retroactively adjusted to reflect this split. NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY Temecula Valley Bancorp Inc. operates Temecula Valley Bank N.A.,. Temecula Valley Bancorp Inc. commenced operations during 2002. The earnings of the subsidiary are recognized on the equity method of accounting. Condensed financial statements of the parent company only are presented below: F-27 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - Continued CONDENSED BALANCE SHEETS December 31, December 31, 2003 2002 ------------- ------------- ASSETS: Cash $ 825,456 $ - Investment in Temecula Valley Statutory Trust I 217,000 217,000 Investment in Temecula Valley Statutory Trust II 155,000 - Investment in Temecula Valley Bank N.A. 40,588,549 26,431,883 Other Assets 283,033 189,900 ------------- ------------- $42,069,038 $26,838,783 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY: Other Liabilities $ 13,973 $ 5,580 Junior Subordinated Debt Securities 12,372,000 7,217,000 Shareholders' Equity 29,683,065 19,616,203 ------------- ------------- $42,069,038 $26,838,783 ============= ============= F-28 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF INCOME Year Ended Year Ended Year Ended December 31, December 31, December 31, 2003 2002 2001 ------------- ------------- ------------- INCOME: Cash Dividends from Statutory Trusts $ - $ 6,012 $ 6,012 ------------- ------------- ------------- TOTAL INCOME 6,012 6,012 EXPENSES: Interest on Junior Subordinated Debt Securities 437,601 220,960 220,960 Other 155,018 23,489 23,489 Allocated Tax Benefit ( 243,889) ( 98,128) ( 98,128) ------------- ------------- ------------- TOTAL EXPENSES 348,730 146,321 146,321 ------------- ------------- ------------- LOSS BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY ( 348,730) ( 140,309) ( 140,309) EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 8,203,069 4,331,363 4,331,363 ------------- ------------- ------------- NET INCOME $ 7,854,339 $ 4,191,054 $ 4,191,054 ============= ============= =============
F-29 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS Year Ended Year Ended Year Ended December 31, December 31, December 31, 2003 2002 2001 ------------- ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,854,339 $ 4,191,054 $ 4,191,054 Noncash items included in net income: Equity in income of Subsidiary ( 8,203,069) ( 4,331,363) ( 4,331,363) Other ( 84,740) ( 184,320) ( 184,320) ------------- ------------- -------------- NET CASH USED IN OPERATING ACTIVITIES ( 433,470) ( 324,629) ( 324,629) CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Subsidiaries ( 5,683,687) ( 7,187,465) ( 7,187,465) Dividends received from Subsidiaries - 6,012 6,012 ------------- ------------- -------------- NET CASH USED BY INVESTING ACTIVITIES ( 5,683,687) ( 7,181,453) ( 7,181,453) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Junior Subordinated Debt Securities 5,155,000 7,217,000 7,217,000 Proceeds from exercise of stock options 976,116 122,512 122,512 Proceeds from exercise of warrants 811,497 166,570 166,570 ------------- ------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,942,613 7,506,082 7,506,082 ------------- ------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 825,456 - - CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - - - ------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 825,456 $ - $ - ============= ============= ==============
F-30 TEMECULA VALLEY BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 NOTE S - QUARTERLY DATA (UNAUDITED) The following table sets forth the Company's unaudited results of operations for the four quarters ended in 2003 and 2002:
For the Quarter Ended in 2003 For the year -------------------------------------------------------- Ended March 31, June 30, September 30, December 31, December 31, 2003 ------------- -------------- ------------- ------------- ------------------ Interest Income $ 5,279,705 $ 5,844,313 $ 6,367,114 $ 6,463,159 $ 23,954,291 Interest Expense ( 1,197,749) ( 1,262,567) ( 1,219,119) ( 1,267,118) ( 4,946,553) ------------- -------------- ------------- ------------- ------------------ Net Interest Income 4,081,956 4,581,746 5,147,995 5,196,041 19,007,738 Provision for Loan Losses ( 150,000) ( 350,000) ( 150,000) ( 372,000) ( 1,022,000) Noninterest Income 5,182,918 6,318,554 6,424,132 6,491,957 24,417,561 Noninterest Expense ( 6,577,879) ( 7,428,364) ( 7,399,214) ( 7,715,614) ( 29,121,071) ------------- -------------- ------------- ------------- ------------------ Income before Income Taxes 2,536,995 3,121,936 4,022,913 3,600,384 13,282,228 Income Taxes ( 1,041,716) ( 1,273,256) ( 1,643,420) ( 1,469,497) ( 5,427,889) ------------- -------------- ------------- ------------- ------------------ Net Income $ 1,495,279 $ 1,848,680 $ 2,379,493 $ 2,130,887 $ 7,854,339 ============= ============== ============= ============= ================== Per Share Data: Net Income - Basic $ .20 $ .24 $ .30 $ .26 $ 1.00 Net Income - Diluted $ .18 $ .21 $ .27 $ .23 $ .89 For the Quarter Ended in 2002 For the year -------------------------------------------------------- Ended March 31, June 30, September 30, December 31, December 31, 2002 ------------- -------------- ------------- ------------- ------------------ Interest Income $ 3,318,861 $ 3,861,979 $ 4,407,173 $ 4,967,905 $ 16,555,918 Interest Expense ( 498,284) ( 646,735) ( 946,317) ( 1,033,346) ( 3,124,682) ------------- -------------- ------------- ------------- ------------------ Net Interest Income 2,820,577 3,215,244 3,460,856 3,934,559 13,431,236 Provision for Loan Losses ( 220,000) ( 340,000) ( 375,000) ( 1,525,000) ( 2,460,000) Noninterest Income 3,022,885 3,967,224 3,842,881 7,062,175 17,895,165 Noninterest Expense ( 4,570,228) ( 5,102,259) ( 5,657,088) ( 6,471,262) ( 21,800,837) ------------- -------------- ------------- ------------- ------------------ Income before Income Taxes 1,053,234 1,740,209 1,271,649 3,000,472 7,065,564 Income Taxes ( 423,685) ( 706,730) ( 514,152) ( 1,229,943) ( 2,874,510) ------------- -------------- ------------- ------------- ------------------ Net Income $ 629,549 $ 1,033,479 $ 757,497 $ 1,770,529 $ 4,191,054 ============= ============== ============= ============= ================== Per Share Data: Net Income - Basic $ .09 $ .14 $ .10 $ .24 $ $.57 Net Income - Diluted $ .08 $ .12 $ .09 $ .21 $ $.50
F-31 EX-10.2 3 a4606836ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is effective as of the 1st day of January, 2003 ("Effective Date"), is entered into as of October 1, 2003 and amends and restates that certain Employment Agreement made as of September 1, 2001 ("Old Agreement") between Temecula Valley Bank, N.A., a national banking association ("Bank"), and Stephen H. Wacknitz ("Executive"). W I T N E S S E T H WHEREAS, at the direction of Bank's Board of Directors ("Board of Directors"), the Old Agreement is hereby revised and restated as provided herein. WHEREAS, Bank desires that Executive continue to be employed as Bank's President, Chairman of the Board and Chief Executive Officer on the terms set forth herein. WHEREAS, Executive is willing to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, and other good and valuable consideration, it is hereby agreed as follows: A. TERM OF EMPLOYMENT 1. Term. Bank hereby agrees to employ Executive and Executive hereby accepts employment with Bank, for the period (the "Term") commencing January 1, 2003 and terminating on such date and upon such terms as provided in Section F hereof. B. DUTIES OF EXECUTIVE 1. Duties. Executive shall perform the duties of President, Chairman of the Board and Chief Executive Officer of Bank, subject to the powers by law vested in the Board of Directors of Bank and in Bank's shareholders, and shall serve as a Director of Bank. During the Term, Executive shall perform the services herein contemplated to be performed by Executive with due care faithfully, diligently, to the best of Executive's ability and in compliance with all applicable laws and Bank's Articles of Association and Bylaws. 2. Exclusivity. Executive shall devote substantially all of Executive's entire productive time, ability and attention to the business of Bank during the Term. Executive shall not directly or indirectly render any services of a business, commercial or professional nature to any other person, firm or corporation for compensation without prior consent evidenced by a resolution duly adopted by the Board of Directors, or Executive Committee thereof. Notwithstanding the foregoing, Executive may (i) make investments of a passive nature in any business or venture; or (ii) serve in any capacity in civic, charitable or social organizations. Page 1 of 10 3. Physical Examination. Executive may, in his discretion, take an annual physical examination during each year during the Term of this Agreement with said physical examination(s) conducted at the expense of Bank. C. COMPENSATION 1. Salary. For Executive's services hereunder, Bank shall pay, or cause to be paid, as annual gross base salary, to Executive the amount of not less than $210,000 during each of the years of the Term, beginning with the Effective Date. Executive's salary shall be payable in equal installments in conformity with Bank's normal payroll periods as in effect from time to time. The Board of Directors shall also, from time to time, and at least once each year grant such additional "merit" increases, if any, in, the base salary as are determined after review to be appropriate in the discretion of the Board of Directors. Bank and Executive both contemplate that his base salary shall be increased as Bank grows and profits. Executive shall also, so long as he serves on the Board of Directors, be entitled to directors and committee fees, and any other compensation or benefits provided to outside directors of Bank (including, but not limited to, committee fees, any director retirement benefits, any stock options granted to directors in such capacity, etc.) in addition to the compensation and benefits provided to him as an employee pursuant to this Agreement. D. EXECUTIVE BENEFITS 1. Vacation. Executive shall be entitled to a vacation leave accruing at the rate of two and one-half vacation days for each month in which he works (and a pro rata portion thereof for partial weeks, except that banking holidays shall be treated as days worked) during each year of the Term, of which two weeks must be taken consecutively in each year. Executive shall be entitled to vacation pay in lieu of vacation. Time spent by Executive at (or traveling to and from) seminars, conventions or conferences related to Bank business shall not be counted against his vacation leave. 2. Automobile. Bank shall provide for the use of Executive a suitable automobile (equivalent to, or better than, a Lexus LS 430), commensurate with his position, and shall pay all the expenses (including, but not limited to, maintenance, fuel, insurance, registration) related thereto during the Term. 3. Group Medical and Life Insurance Benefits. Bank shall provide for Executive, at Bank's expense during the Term, and after the Term until death in accordance with Bank's policy now in effect or as shall be amended as soon as practicable to provide for ongoing coverage upon the events described in such policy, participation in a comprehensive major medical and dental, with life insurance benefits, equivalent to the maximum available from time to time under the California Bankers Association Group Insurance Program for an employee of Executive's salary level. Any such insurance for which Executive votes in favor as a director, or endorses as an officer, shall be deemed to meet the requirements of this Section. Term life insurance benefits shall be provided to Executive, at Bank's expense during the Term, in an amount not less than $250,000, with Executive to be entitled to make an irrevocable designation Page 2 of 10 of the beneficiary and owner of the policy thereunder. Executive's Salary Continuation Agreement with Bank currently in effect shall be maintained by Bank during the Term. 4. Bonus. For each year end within the Term, Executive shall be entitled to an Incentive Bonus determined in accordance with this Section if the Threshold Test is met. The Threshold Test shall be deemed to have been met if one or more of the following exists: (i) Bank's regular outside independent loan reviewer gives a favorable review of the loan quality of Bank at, or within four months of, the end of the year; (ii) net loan losses for the year do not exceed one percent of gross outstanding loans at the beginning of the year; or (iii) the latest report of supervisory activity of Bank by the Office of the Comptroller of the Currency (or other bank regulatory agency) rates Bank no less than satisfactory. The Incentive Bonus shall equal 7.5% of Bank's "Profits." For purposes of this Section 4, "Profits" shall mean Bank's net income before income taxes and before the effect of this bonus or any other bonuses based on the profits of Bank. This bonus shall be payable in January of the year following completion of the year on which it is based, or as soon thereafter as is practical after Bank's certified public accountants have delivered their report on Bank's condition and results of operations for the year. 5. Sick Leave. Executive shall be entitled to sick leave in accordance with Bank's Personnel Policy, accruing at a rate of not less than one day per month or partial month of service. Accrued sick leave may be carried over from prior periods, but Executive shall not be entitled to be paid in lieu thereof. 6. Disability Coverage. (a) Bank shall continue to maintain for the benefit of Executive a long term disability insurance policy. Said policy shall provide benefits of not less than $120,000 per year and shall remain in effect to age 65. To the extent no disability payments are made by the insurer after disability but before payments are made under such policy, Bank shall provide monthly payments to Executive equal to $10,000 per month. Bank shall not be responsible for the premiums on such policy after termination of Executive's employment by Bank. (b) After age 65, in the event of Executive's disability as determined under applicable policies of Bank covering Executive, Bank shall pay to Executive the difference between the amount received by Executive under the then in effect Bank disability policies and $15,000 per month until September 16, 2006. E. BUSINESS EXPENSES AND REIMBURSEMENT 1. Business Expenses. Executive shall be entitled to reimbursement by Bank for any ordinary and necessary business expenses incurred by Executive in the performance of Executive's duties and in acting for Bank during the Term, provided that an independent officer of Bank approves such expenses in accordance with the standards set forth herein. Executive shall furnish to Bank adequate records and other documentary evidence Page 3 of 10 required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such payments as deductible business expenses of Bank and not as deductible compensation to Executive; provided, however, that reimbursement of such expenses shall not be dependent on proving deductibility of such expenses for tax purposes if such expenses are otherwise determined by the Board of Directors, in its sole discretion, to be appropriate. F. TERMINATION 1. Termination With Cause. Except as otherwise provided herein, this Agreement may be terminated by Bank, at Bank's option with notice to Executive, upon the occurrence of any of the following events: (a) Executive is convicted of illegal activity by a court of competent jurisdiction or pleads guilty or nolo contendere to, illegal activity, which activity materially adversely affects Bank's reputation in the community or which evidences the lack of Executive's fitness or ability to perform Executive's duties, as determined by the Board of Directors in good faith; (b) Executive has committed any illegal or dishonest act which would cause termination of coverage under Bank's Bankers Blanket Bond as to Employee, as distinguished from termination of coverage as to Bank as a whole; (c) Executive after written notice from the Board of Directors specifying the event and how it can be corrected again materially fails to perform or habitually neglects Executive's duties; (d) Executive becomes permanently disabled as such is defined in his or Bank's disability insurance policies (or if no such definition, as defined by federal law or regulation pursuant to the Social Security Act or a related statute), such disability makes Executive eligible for benefits thereunder, and any relevant waiting periods have passed. Any controversy concerning Executive's disability shall be settled by arbitration in accordance with the rules of the American Arbitration Association. Any termination pursuant to this subsection (d) shall not affect the continued operation of that portion of Section D.6. hereof which is intended to survive Executive's disability; (e) The Comptroller of the Currency, or any other regulatory agency having jurisdiction, finally removes, or suspends Executive from office; (f) The Comptroller of the Currency or other supervisory or regulatory authority having jurisdiction takes possession of the property and business of Bank; or (g) Any regulatory authority having supervisory authority over Bank exercises its cease and desist authority to remove Executive from office or advises Bank that Executive should be removed from office. Page 4 of 10 Notwithstanding the foregoing, Executive shall not be deemed to have been terminated pursuant to Section F.1. unless and until there has been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire authorized membership of the Board of Directors at a meeting of the Board of Directors called and held for the purpose (after reasonable notice and an opportunity for Executive, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors he engaged in conduct set forth above in clauses (a) through (g) of this Section F.1. and specifying the particulars thereof in detail. 2. Termination Without Cause or Resignation for Good Reason. (a) During the Term, this Agreement may be terminated by Bank without cause upon written notice to Executive or by Executive for Good Reason, as defined below. (b) During the Term, this Agreement may be terminated by Executive without cause upon written notice to Bank. 3. Compensation Upon Termination. (a) If Executive's employment with Bank is terminated by Bank pursuant to Section F.1., or by Executive pursuant to Section F.2.(b), Executive shall then only be entitled to receive the amount of his annual gross salary, as in effect immediately prior to termination, payable through the effective date of such termination plus proration of the Incentive Bonus described in Section D.4. above (calculated as provided in Section F.3(b)) and the amounts specified in Section D.6. as well as any incurred but not yet reimbursed business expenses (subject to the provisions of Section E.1. hereof). Other than the amounts payable over time under Section D.6, the amounts payable under this Section F.3(a) shall be paid in a lump sum upon termination. (b) If Executive's employment is terminated by Bank or any successor pursuant to Section F.2.(a), by Executive pursuant to Section F.2.(a) or by Bank or any successor within one year before or after any Change of Control, as defined below, and such termination is not based upon Section F.1., he shall be entitled to the same amount as if the termination had been pursuant to Section F.1., plus an immediate payment in an amount equal to the greater of: (i) one times the annual gross base salary of Executive (as in effect immediately prior to termination) plus the amount equal to the Incentive Bonus provided in Section D.4. above as though a full year had lapsed (calculated as follows: the dollar amount of the Incentive Bonus for the number of months lapsed in the year of termination, divided by the number of months lapsed in that year and the resulting number multiplied by 12, less the amount of the Incentive Bonus, if any, paid in the year of termination pursuant to Section G below; or (ii) two times Executive's annual gross base salary, as in effect immediately prior to termination, to be paid in a lump sum, less any applicable withholding deductions. Page 5 of 10 (c) Notwithstanding the foregoing, to the extent that 12 U.S.C. ss.1828 and regulations promulgated pursuant thereto prohibit, or limit, the payment of compensation pursuant to this Section F.3., Executive's right to compensation hereunder shall be similarly prohibited or limited. (d) Good Reason shall mean that without Executive's express written consent, the assignment to Executive of any duties inconsistent with his positions, duties, responsibilities and status with Bank; or a change in his reporting responsibilities, titles or offices; or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of his employment pursuant to Section F.1. or retirement or as a result of his death or by Executive other than for Good Reason; or a reduction by Bank in Executive's annual gross base salary as in effect on the date hereof or as the same may be increased from time to time. (e) Notwithstanding anything to the contrary set forth herein, if Executive's employment with Bank is terminated by the Bank pursuant to Section F.2(a), by Executive pursuant to Section F.2(a), by Executive after he reaches the age of 65 under Section F.2(b), or by Bank or any successor within one year before or after any Change of Control and such termination following a Change of Control is not based on Section F.1, Executive shall continue to receive the comprehensive major medical and dental, and life insurance benefits until death as set forth in Section D.3. G. Change of Control Benefit. Upon a Change of Control, as defined below, Executive shall be entitled to receive his Section D.4 Incentive Bonus as of the effective date of the Change of Control for the year in which the Change of Control occurs. Such Incentive Bonus shall be calculated as follows: the Incentive Bonus for the number of months lapsed in the year in which the Change of Control occurs divided by the number of months lapsed in the year in which the Change of Control occurs and the resulting number multiplied by 12. Such Incentive Bonus shall be paid effective at the Change of Control. 1. Change of Control. The term "Change of Control" pursuant to this Section G shall have the following meaning: (a) A reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the shareholders of Bank or its parent immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, directly or indirectly, own more than 75% of the combined voting power entitled to vote generally in the election of director of the reorganized, merged or consolidated entity's then outstanding voting securities; (b) A liquidation or dissolution of the Bank effected by the Bank; Page 6 of 10 (c) The sale of more than 50% of the assets of Bank to any person or entity not controlled by or under common control with Bank (unless such reorganization, merger, consolidation or other corporate transaction, liquidation, dissolution or sale is subsequently abandoned); or (d) The acquisition by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act, (excluding any employee benefit plan of Bank, its subsidiaries or its parent which acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act)) of: (i) more than 25% of the outstanding shares of any class of voting stock of the Bank or its parent; or (ii) more than 9.9% and up to and including 25% of the outstanding shares of any class of voting stock of the Bank or its parent, if after the acquisition, no other person, entity or "group" would beneficially own a greater percentage of such class of voting shares than the acquiror(s). H. GENERAL PROVISIONS 1. Ownership of Books and Records; Confidentiality. (a) All records or copies thereof of the accounts of customers, and any other records and books relating in any manner whatsoever to the customers of Bank, and all other files, books and records and other materials owned by Bank or used by it in connection with the conduct of its business, whether prepared by Executive or otherwise coming into his possession, shall be the exclusive property of Bank regardless of who actually prepared the original material, book or record. All such books and records and other materials, together with all copies thereof, shall be immediately returned to Bank by Executive on any termination of his employment. Executive shall be entitled to copies of any policies, procedures or forms prepared with his assistance. (b) During the Term, Executive will have access to and become acquainted with what Executive and Bank acknowledge are trade secrets, to wit, knowledge or data concerning Bank, including its operations and business, and the identity of customers of Bank, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Executive shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the Term or thereafter, except as required in the course of Executive's employment with Bank. Executive shall not solicit any employee or customer of Bank to become an employee or customer of another institution until six months following the termination; provided, however, that Executive shall not be prohibited from soliciting customers with which he had a banking relationship established at another employer prior to the commencement of the term hereof. 2. Assignment and Modification. This Agreement, and the rights and duties hereunder, may not be assigned by either party hereto without the prior written consent of the other, and the parties expressly agree that any attempt to assign the rights of any party hereunder without such consent will be null and void; provided, however, that Bank's rights and obligations hereunder shall be assignable without consent by operation of law in the event of a merger or similar transaction involving Bank. Page 7 of 10 3. Further Assurance. From time to time each party will execute and deliver such further instruments and will take such other action as the other party reasonably may request in order to discharge and perform the obligations and agreements hereunder. 4. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or a breach thereof (other than matters pertaining to injunctive relief, including, but not limited to, temporary restraining orders, preliminary injunctions and permanent injunctions,) shall be finally settled by arbitration in accordance with the rules then prevailing of the American Arbitration Association. Judgment upon the award rendered in such arbitration may be entered and enforced in any court of competent jurisdiction. The prevailing party shall be entitled to all costs of arbitration or litigation as determined by the arbitrators or the court, including, but not limited to, reasonable attorneys' fees. Any excluded matter shall be determined by the San Diego County Superior Court, subject to any rights of appeal which may exist. The arbitration, including the rendering of the award, shall take place in the County of San Diego, State of California, unless otherwise agreed to in writing by the parties. In reaching a decision, the arbitrator(s) shall be bound by the terms of this Agreement. The award and judgment thereon shall include interest, at the legal rate, from the date that the sum awarded to the prevailing party was originally due and payable. The parties hereto agree that the arbitrator(s) shall have jurisdiction to award punitive damages. Arbitration shall be the exclusive means of resolution of disputes, controversies or claims arising out of this Agreement and which are subject to arbitration. The parties agree that they shall be entitled to conduct discovery in accordance with Sections 1283.05 and 1283.1 of the California Code of Civil Procedure, or any successor provision thereof, in the same manner as though the dispute were within the jurisdiction of the Superior Court of the State of California. 5. Notices. All notices required or permitted hereunder shall be in writing and shall be delivered in person or sent by certified or registered mail, return receipt requested, postage prepaid as follows: To Bank: Temecula Valley Bank, N.A. 27710 Jefferson Drive, Suite A-100 Temecula, CA 92590 To Executive: Stephen H. Wacknitz 2148 Rockhoff Road Escondido, CA 92026 or to such other party or address as either of the parties may designate in a written notice served upon the other party in the manner provided herein. All notices required or permitted hereunder shall be deemed duly given and received on the date of delivery if delivered in person or on the third day next succeeding the date of mailing if sent by certified or registered mail, postage prepaid. 6. Successors. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the parties. Page 8 of 10 7. Entire Agreement. Except as provided herein and in any separate agreement for the provision of benefits to Executive, this Agreement constitutes the entire agreement between the parties, and all prior negotiations, representations or agreements between the parties, whether oral or written, are merged into this Agreement. This Agreement may only be modified by an agreement in writing executed by both of the parties hereto. 8. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. 9. Executed Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute a single agreement and each of which shall be an original for all purposes. 10. Section Headings. The various section headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or any section hereof. 11. Close of Business/Calendar Periods. Unless the context so requires, all periods terminating on a given day, period of days or date shall terminate on the close of business on that day or date, references to "days" shall refer to calendar days, references to "months" shall refer to calendar months and references to "years" shall refer to calendar years. Any singular term includes the plural and vice versa. 12. Severability. In the event that any of the provisions, or portions thereof, of this Agreement are held to be unenforceable or invalid by any court of competent jurisdiction, the validity and enforceability of the remaining provisions or portions thereof, shall not be affected thereby. 13. Attorneys' Fees. In the event that any party shall bring an action or arbitration in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expenses of litigation or arbitration, including reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such proceeding, in such amounts as may be determined in the discretion of the court or other body having jurisdiction. 14. Indemnification. Bank shall indemnify and hold Executive harmless from, claims (defined in the broadest sense, including claims for monetary or non-monetary relief, and any claims brought before an administrative agency or body) arising out of, or related to, his service as an officer, director or agent of Bank, to the fullest extent permitted by applicable law, including his costs of defense and attorneys fees and shall advance his costs of defense (including legal fees) related to the defense thereof to the extent permitted by applicable law. The provisions of this Section 14 shall survive termination of this Agreement and Executive's employment with the Bank. Page 9 of 10 15. Rules of Construction. The parties hereby agree that the normal rule of construction, which requires the court to resolve any ambiguities against the drafting party, shall not apply in interpreting this Agreement. This Agreement has been reviewed by each party and counsel for each party and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. Each provision of this Agreement shall be interpreted in a manner to be effective and valid under applicable law, but if any provision shall be prohibited or ruled invalid under applicable law, the validity, legality and enforceability of the remaining provisions shall not, except as otherwise required by law, be affected or impaired as a result of such prohibition or ruling. IN WITNESS WHEREOF, this Agreement is executed as of the day and year first above written. Bank: TEMECULA VALLEY BANK, N.A. By: /s/ Donald A. Pitcher --------------------- Donald A. Pitcher Executive Vice President / Chief Financial Officer Executive: /s/ Stephen H. Wacknitz ----------------------- Stephen H. Wacknitz Page 10 of 10 EX-10.3 4 a4606836ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is effective as of December 1, 2003 ("Effective Date") and amends and restates that certain Employment Agreement made as of January 1, 2003 ("Old Agreement") between Temecula Valley Bank, N.A., a national banking association ("Bank") and Brian Carlson ("Executive"). R E C I T A L WHEREAS, at the direction of the Bank's Board of Directors ("Board of Directors"), the Old Agreement is hereby revised and restated as provided herein. WHEREAS, Bank desires that Executive continue be employed as Executive Vice President/SBA Department Manager of Bank and Executive desires to be so employed, subject to the terms and conditions herein stated. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT 1.1. Term. Bank hereby agrees to employ Executive, and Executive hereby accepts employment with Bank, for the period (the "Term") commencing December 1, 2003 and terminating on such date and upon such terms as provided in Section 4 hereof. 2. DUTIES OF EXECUTIVE 2.1. Duties. Executive shall perform the duties of Executive Vice President/SBA Department Manager of Bank, as specified in Exhibit "A" hereto, and duties assigned by Bank's Chief Executive Officer and Board of Directors subject to the powers by law vested in the Board of Directors of Bank and in Bank's shareholders. During the Term, Executive shall perform the services herein contemplated to be performed by Executive with due care faithfully, diligently, to the best of Executive's ability and in compliance with all applicable laws and Bank's Articles of Association and Bylaws. 2.2. Exclusivity. Executive shall devote substantially all of Executive's productive time, ability and attention to the business of Bank during the Term. Executive shall not directly or indirectly render any services of a business, commercial or professional nature to any other person, firm or corporation for compensation without prior consent evidenced by a resolution duly adopted by the Board of Directors, or the Executive Committee thereof. otwithstanding the foregoing, Executive may (i) make investments of a passive nature in any business or venture; and (ii) serve in any capacity in civic, charitable or social organizations, provided, however, that such investments or services shall not be in competition, directly or indirectly, in any manner with Bank. 1 3. COMPENSATION AND BENEFITS 3.1. Salary and Bonus. For Executive's services hereunder, Bank shall pay, or cause to be paid, as annual gross base salary, to Executive in the amount of One Hundred Eighty Thousand Dollars ($180,000) during the Term ("Annual Salary"), beginning with the Effective Date, payable in substantially equal installments in accordance with Bank's normal payroll periods as in effect from time to time. In addition, Executive shall be paid a bonus (the "Bonus") equal to thirty (30) basis points of the total original principal amount of funded (to the extent disbursed) 7a and 504 SBA loans ("SBA Loans") as well as construction, conventional and business & industry loans related to and made in conjunction with SBA Loans, if such loans were generated by and processed through Bank's SBA Department, as reasonably determined by Bank. The Bonus shall be paid based upon monthly disbursements (or any partial calendar month hereunder) within thirty (30) days of the end of the applicable calendar month. 3.2. Vacation. Executive shall be entitled to four (4) weeks of vacation leave each year of the Term accruing in accordance with Bank policy, of which two (2) consecutive weeks must be taken in each calendar year ("Mandatory Vacation"). Any vacation not used in excess of the Mandatory Vacation shall not accumulate but at the end of each year of the Term, Executive shall be entitled to vacation pay in lieu of vacation. 3.3. Equipment. Bank shall provide for Executive's use an automobile, the selection of which shall be within the discretion of the Board of Directors. Bank shall pay all the expenses (including, but not limited to, maintenance, fuel, insurance, registration) related to such automobile during the Term. Bank shall also provide Executive with a cellular phone for Executive's reasonable use in the performance of his duties hereunder. Bank shall pay all reasonable expenses in connection with the business use of such cellular phone. 3.4. Group Medical and Other Benefits. Bank shall provide for Executive, at Bank's expense, participation in the medical and other benefit plans offered to other similarly titled employees of Bank. Executive shall be eligible to participate in Bank's 401(k) Plan. Executive will also be eligible to participate in Bank's Senior Management Retirement Program on terms agreeable to Bank and Executive. 3.5. Sick Leave. Executive shall be entitled to sick leave in accordance with Bank's personnel policy. Accrued sick leave may not be carried over from prior periods and Executive shall not be entitled to be paid in lieu thereof. 3.6. Stock Options. Executive shall be entitled to receive an option to purchase fifteen thousand (15,000) shares of common stock of Temecula Valley Bancorp Inc. ("Company") should a new stock option plan be approved by the shareholders of the Company. 2 3.7. Salary Deferment Program. Bank will use its best efforts to afford to Executive, as soon as practicable, a salary deferment plan the terms of which are acceptable to both parties. 4. TERMINATION 4.1. Termination With Cause. Except as otherwise provided herein, this Agreement may be terminated by Bank, at Bank's option with notice to Executive, upon the occurrence of any of the following events: (a) A material breach by Executive of any of the express terms or provisions of this Agreement; (b) Executive is charged with illegal activity or pleads guilty to or nolo contendere to, illegal activity; (c) Executive has committed any illegal or dishonest act which would cause termination of coverage under Bank's Bankers Blanket Bond as to Executive or termination of coverage as to Bank as a whole; (d) Executive fails to perform or neglects Executive's duties or commits an act of malfeasance or misfeasance in connection therewith; (e) Executive becomes permanently disabled, as determined in good faith by the Board of Directors; (f) The Comptroller of the Currency, or any other regulatory agency having jurisdiction, requests Executive's dismissal or removal, issues a notice of suspension or removal, finally removes, or suspends Executive from office; (g) The Comptroller of the Currency or other supervisory or regulatory authority having jurisdiction takes possession of the property and business of Bank; or (h) The death of the Executive. 4.2. Termination Without Cause. During the Term, subject to provisions specifically intended to survive termination, this Agreement may be terminated by either party without cause upon written notice to the other. 3 4.3. Compensation Upon Termination. If Executive's employment is terminated by Bank pursuant to Section 4.1 above, or by Executive pursuant to Section 4.2, Executive shall then only be entitled to receive his Annual Salary (as in effect immediately prior to termination) earned through the effective date of such termination. If Executive's employment is terminated by Bank pursuant to Section 4.2, subject to any limitations on payments under applicable federal or state law, Executive shall be entitled to the same amount as if the termination had been pursuant to Section 4.1, plus: (i) any earned but unpaid Bonus; and (ii) an immediate payment of severance equal to Executive's Annual Salary (as in effect immediately prior to termination) for one year, paid over one year in substantially equal installments, in accordance with the Bank's normal payroll periods as in effect from time to time. 4.4. Vesting of Options Upon Change of Control. Executive's option agreements covering stock options to be issued to him shall provide that in the event of a Change in Control (as defined below), all options shall vest immediately prior to any Change in Control. "Change of Control" means: (a) more than fifty percent (50%) of the Company's voting stock is transferred to a person or entity that is not an Affiliate of the Company prior to the transaction ("Affiliate," as that term is defined in 12 U.S.C. Section 371c); or (b) a merger or consolidation transaction pursuant to which the Company's shareholders prior to the merger or consolidation own less than fifty percent (50%) of the voting power with respect to the election of directors of the resulting entity after the merger or consolidation. 4.5. Other Employment. In the event of termination of Executive under Section 4.2 and payment by Bank of the severance compensation, Executive agrees not to seek or accept employment in the Banking industry for performance of services within a twenty five (25) mile radius of every location Bank maintains an office for a period of one (1) year from the effective date of termination. If Executive chooses to accept such employment, he shall not be entitled to the severance payments and to the extent paid, shall be repaid immediately to Bank. 5. GENERAL PROVISIONS. 5.1. Ownership of Books and Records; Confidentiality. (a) All records or copies thereof of the accounts of customers, and any other records and books relating in any manner whatsoever to Bank customers, and all other files, books and records and other materials owned by the Bank and the Company or used by it in connection with the conduct of its business, whether prepared by Executive or otherwise coming into his possession, shall be the exclusive property of the Company and the Bank regardless of who actually prepared the original material, book or record. All such books and records and other materials, together with all copies thereof, shall be immediately returned to the Bank by Executive on any termination of his employment; and 4 (b) During the Term, Executive will have access to and become acquainted with what Executive and Bank acknowledge are trade secrets, to wit, knowledge or data concerning the Bank and the Company, including their operations and business, and the identity of customers, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Executive shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the Term or thereafter, except as required in the course of Executive's employment with Bank. 5.2. Assignment and Modification. This Agreement, and the rights and duties hereunder, may not be assigned by Executive. 5.3. Notices. All notices required or permitted hereunder shall be in writing and shall be delivered in person, sent by courier, by facsimile or certified or registered mail, return receipt requested, postage prepaid as follows: To Bank: Temecula Valley Bank, N.A. 27710 Jefferson Drive, Suite A100 Temecula, California 92590 Attn: Stephen H. Wacknitz, President / Chief Executive Officer Facsimile: (909) 694-9194 To Executive: Brian Carlson ___________________________________________ Facsimile: ________________________________ With a copy to: Stephanie E. Allen, Esq. McAndrews, Allen & Matson 2040 Main Street, 14th Floor Irvine, CA 92614 Facsimile: (949) 955-3723 or to such other party or address as either of the parties may designate in a written notice served upon the other party in the manner provided herein. All notices required or permitted hereunder shall be deemed duly given and received on the date received if delivered in person, by courier or by facsimile, or on the third day next succeeding the date of mailing if sent by certified or registered mail, postage prepaid. 5.4. Successors. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the parties. 5.5. Entire Agreement. Except as provided herein, this Agreement constitutes the entire agreement between the parties, and all prior negotiations, representations, or agreements between the parties, whether oral or written, are merged into this Agreement. This Agreement may only be modified by an agreement in writing executed by both of the parties hereto. 5 5.6. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. 5.7. Executed Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute a single agreement and each of which shall be an original for all purposes. 5.8. Section Headings. The various section headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or any section hereof. 5.9. Calendar Days/Close of Business. Unless the context so requires, all periods terminating on a given day, period of days or date shall terminate at the close of business on that day or date and references to "days" shall refer to calendar days. 5.10. Attorneys' Fees. In the event that any party shall bring an action or arbitration in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expenses of litigation or arbitration, including reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such proceeding, in such amounts as may be determined in the discretion of the court or other body having jurisdiction. 5.11. Rules of Construction. The parties hereby agree that the normal rule of construction, which requires the court to resolve any ambiguities against the drafting party, shall not apply in interpreting this Agreement. Each party to this Agreement has had sufficient opportunity to review it with counsel. This Agreement shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. Each provision of this Agreement shall be interpreted in a manner to be effective and valid under applicable law, but if any provision shall be prohibited or ruled invalid under applicable law, the validity, legality and enforceability of the remaining provisions shall not, except as otherwise required by law, be affected or impaired as a result of such prohibition or ruling. 6 IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. Bank: TEMECULA VALLEY BANK, N.A. By: /s/ Stephen H. Wacknitz ----------------------- Stephen H. Wacknitz President and Chief Executive Officer Executive: /s/ Brian Carlson ----------------- Brian Carlson 7 Exhibit "A" Duties of Executive Vice President ------------------------ POSITION TITLE: Executive Vice President/SBA Department REPORTS DIRECTLY TO: President/Chief Executive Officer FUNCTION: Senior Management of the SBA Department DUTIES: 1. Oversee overall growth of the Bank's SBA Department; Responsible for establishing, in consultation with the Bank's President and other key personnel, and achieving target growth of the Bank. 2. Supervise and effectively manage SBA personnel. 3. Aid in achieving CRA compliance. 4. Ensure the policies and procedures of the SBA Department are adhered to and maintained up to industry standards; take initiative to implement any policy or procedure changes required by law or good sound practices. A-1 EX-10.4 5 a4606836ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is effective as of the 1st day of January, 2003 ("Effective Date"), is entered into as of October 1, 2003 and amends and restates that certain Employment Agreement made as of September 1, 2001 ("Old Agreement") between Temecula Valley Bank, N.A., a national banking association ("Bank"), and Luther J. Mohr ("Executive"). W I T N E S S E T H WHEREAS, at the direction of Bank's Board of Directors ("Board of Directors"), the Old Agreement is hereby revised and restated as provided herein. WHEREAS, Bank desires that Executive continue to be employed as Bank's Chief Operating Officer on the terms set forth herein. WHEREAS, Executive is willing to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, and other good and valuable consideration, it is hereby agreed as follows: A. TERM OF EMPLOYMENT 1. Term. Bank hereby agrees to employ Executive and Executive hereby accepts employment with Bank, for the period (the "Term") commencing January 1, 2003 and terminating on such date and upon such terms as provided in Section F hereof. B. DUTIES OF EXECUTIVE 1. Duties. Executive shall perform the duties of Chief Operating Officer of Bank, subject to the powers by law vested in the Board of Directors of Bank and in Bank's shareholders, and shall serve as a Director of Bank. During the Term, Executive shall perform the services herein contemplated to be performed by Executive with due care faithfully, diligently, to the best of Executive's ability and in compliance with all applicable laws and Bank's Articles of Association and Bylaws. 2. Exclusivity. Executive shall devote substantially all of Executive's entire productive time, ability and attention to the business of Bank during the Term for six tenths of the time of a full time employee (approximately equivalent to three days of full time service for every five work days). Executive shall not directly or indirectly render any services of a business, commercial or professional nature to any other person, firm or corporation for compensation without prior consent evidenced by a resolution duly adopted by the Board of Directors, or Executive Committee thereof. Notwithstanding the foregoing, Executive may (i) make investments of a passive nature in any business or venture; or (ii) serve in any capacity in civic, charitable or social organizations. Page 1 of 10 3. Physical Examination. Executive may, in his discretion, take an annual physical examination during each year during the Term of this Agreement with said physical examination(s) conducted at the expense of Bank. C. COMPENSATION 1. Salary. For Executive's services hereunder, Bank shall pay, or cause to be paid, as annual gross base salary, to Executive the amount of not less than $94,500 during each of the years of the Term, beginning with the Effective Date. Executive's salary shall be payable in equal installments in conformity with Bank's normal payroll periods as in effect from time to time. The Board of Directors shall also, from time to time, and at least once each year grant such additional "merit" increases, if any, in, the base salary as are determined after review to be appropriate in the discretion of the Board of Directors. Bank and Executive both contemplate that his base salary shall be increased as Bank grows and profits. Executive shall also, so long as he serves on the Board of Directors, be entitled to directors and committee fees, and any other compensation or benefits provided to outside directors of Bank (including, but not limited to, committee fees, any director retirement benefits, any stock options granted to directors in such capacity, etc.) in addition to the compensation and benefits provided to him as an employee pursuant to this Agreement. D. EXECUTIVE BENEFITS 1. Vacation. Executive shall be entitled to a vacation leave accruing at the rate of one and one-half vacation days for each month in which he works (and a pro rata portion thereof for partial weeks, except that banking holidays shall be treated as days worked) during each year of the Term, of which two weeks must be taken consecutively in each year. Executive shall be entitled to vacation pay in lieu of vacation. Time spent by Executive at (or traveling to and from) seminars, conventions or conferences related to Bank business shall not be counted against his vacation leave. 2. Automobile. Bank shall provide for the use of Executive a suitable automobile (equivalent to, or better than, a Lexus LS 430), commensurate with his position, and shall pay all the expenses (including, but not limited to, maintenance, fuel, insurance, registration) related thereto during the Term. 3. Group Medical and Life Insurance Benefits. Bank shall provide for Executive, at Bank's expense during the Term, and after the Term until death in accordance with Bank's policy now in effect or as shall be amended as soon as practicable to provide for ongoing coverage upon the events described in such policy, participation in a comprehensive major medical and dental, with life insurance benefits, equivalent to the maximum available from time to time under the California Bankers Association Group Insurance Program for an employee of Executive's salary level. Any such insurance for which Executive votes in favor as a director, or endorses as an officer, shall be deemed to meet the requirements of this Section. Term life insurance benefits shall be provided to Executive, at Bank's expense during the Term, in an amount not less than $150,000, with Executive to be entitled to make an irrevocable designation Page 2 of 10 of the beneficiary and owner of the policy thereunder. Executive's Salary Continuation Agreement with Bank currently in effect shall be maintained by Bank during the Term. 4. Bonus. For each year end within the Term, Executive shall be entitled to an Incentive Bonus determined in accordance with this Section if the Threshold Test is met. The Threshold Test shall be deemed to have been met if one or more of the following exists: (i) Bank's regular outside independent loan reviewer gives a favorable review of the loan quality of Bank at, or within four months of, the end of the year; (ii) net loan losses for the year do not exceed one percent of gross outstanding loans at the beginning of the year; or (iii) the latest report of supervisory activity of Bank by the Office of the Comptroller of the Currency (or other bank regulatory agency) rates Bank no less than satisfactory. The Incentive Bonus shall equal 3.75% of Bank's "Profits." For purposes of this Section 4, "Profits" shall mean Bank's net income before income taxes and before the effect of this bonus or any other bonuses based on the profits of Bank. The Incentive Bonus shall be payable in January of the year following completion of the year on which it is based, or as soon thereafter as is practical after Bank's certified public accountants have delivered their report on Bank's condition and results of operations for the year. 5. Sick Leave. Executive shall be entitled to sick leave in accordance with Bank's Personnel Policy, accruing at a rate of not less than six tenths of one day per month or partial month of service. Accrued sick leave may be carried over from prior periods, but Executive shall not be entitled to be paid in lieu thereof. 6. Disability Coverage. After age 65, in the event of Executive's disability as determined under applicable policies of Bank covering Executive, Bank shall pay to Executive the difference between the amount received by Executive under the then in effect Bank disability policies and $10,000 per month until September 16, 2006. E. BUSINESS EXPENSES AND REIMBURSEMENT 1. Business Expenses. Executive shall be entitled to reimbursement by Bank for any ordinary and necessary business expenses incurred by Executive in the performance of Executive's duties and in acting for Bank during the Term, provided that an independent officer of Bank approves such expenses in accordance with the standards set forth herein. Executive shall furnish to Bank adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such payments as deductible business expenses of Bank and not as deductible compensation to Executive; provided, however, that reimbursement of such expenses shall not be dependent on proving deductibility of such expenses for tax purposes if such Page 3 of 10 expenses are otherwise determined by the Board of Directors, in its sole discretion, to be appropriate. F. TERMINATION 1. Termination With Cause. Except as otherwise provided herein, this Agreement may be terminated by Bank, at Bank's option with notice to Executive, upon the occurrence of any of the following events: (a) Executive is convicted of illegal activity by a court of competent jurisdiction or pleads guilty or nolo contendere to, illegal activity, which activity materially adversely affects Bank's reputation in the community or which evidences the lack of Executive's fitness or ability to perform Executive's duties, as determined by the Board of Directors in good faith; (b) Executive has committed any illegal or dishonest act which would cause termination of coverage under Bank's Bankers Blanket Bond as to Employee, as distinguished from termination of coverage as to Bank as a whole; (c) Executive after written notice from the Board of Directors specifying the event and how it can be corrected again materially fails to perform or habitually neglects Executive's duties; (d) Executive becomes permanently disabled as such is defined in his or Bank's disability insurance policies (or if no such definition, as defined by federal law or regulation pursuant to the Social Security Act or a related statute), such disability makes Executive eligible for benefits thereunder, and any relevant waiting periods have passed. Any controversy concerning Executive's disability shall be settled by arbitration in accordance with the rules of the American Arbitration Association. Any termination pursuant to this subsection (d) shall not affect the continued operation of that portion of Section D.6. hereof which is intended to survive Executive's disability; (e) The Comptroller of the Currency, or any other regulatory agency having jurisdiction, finally removes, or suspends Executive from office; (f) The Comptroller of the Currency or other supervisory or regulatory authority having jurisdiction takes possession of the property and business of Bank; or (g) Any regulatory authority having supervisory authority over Bank exercises its cease and desist authority to remove Executive from office or advises Bank that Executive should be removed from office. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated pursuant to Section F.1. unless and until there has been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire authorized membership of the Board of Directors at a meeting of the Board of Directors called and held for Page 4 of 10 the purpose (after reasonable notice and an opportunity for Executive, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors he engaged in conduct set forth above in clauses (a) through (g) of this Section F.1. and specifying the particulars thereof in detail. 2. Termination Without Cause or Resignation for Good Reason. (a) During the Term, this Agreement may be terminated by Bank without cause upon written notice to Executive or by Executive for Good Reason, as defined below. (b) During the Term, this Agreement may be terminated by Executive without cause upon written notice to Bank. 3. Compensation Upon Termination. (a) If Executive's employment with Bank is terminated by Bank pursuant to Section F.1., or by Executive pursuant to Section F.2.(b), Executive shall then only be entitled to receive the amount of his annual gross salary, as in effect immediately prior to termination, payable through the effective date of such termination plus proration of the Incentive Bonus described in Section D.4. above (calculated as provided in Section F.3(b)) and the amounts specified in Section D.6. as well as any incurred but not yet reimbursed business expenses (subject to the provisions of Section E.1. hereof). Other than the amounts payable over time under Section D.6, the amounts payable under this Section F.3(a) shall be paid in a lump sum upon termination. (b) If Executive's employment is terminated by Bank or any successor pursuant to Section F.2.(a), by Executive pursuant to Section F.2.(a) or by Bank or any successor within one year before or after any Change of Control, as defined below, and such termination is not based upon Section F.1., he shall be entitled to the same amount as if the termination had been pursuant to Section F.1., plus an immediate payment in an amount equal to the greater of: (i) one times the annual gross base salary of Executive (as in effect immediately prior to termination) plus the amount equal to the Incentive Bonus provided in Section D.4. above as though a full year had lapsed (calculated as follows: the dollar amount of the Incentive Bonus for the number of months lapsed in the year of termination, divided by the number of months lapsed in that year and the resulting number multiplied by 12, less the amount of the Incentive Bonus, if any, paid in the year of termination pursuant to Section G below; or (ii) two times Executive's annual gross base salary, as in effect immediately prior to termination, to be paid in a lump sum, less any applicable withholding deductions. Page 5 of 10 (c) Notwithstanding the foregoing, to the extent that 12 U.S.C. ss.1828 and regulations promulgated pursuant thereto prohibit, or limit, the payment of compensation pursuant to this Section F.3., Executive's right to compensation hereunder shall be similarly prohibited or limited. (d) Good Reason shall mean that without Executive's express written consent, the assignment to Executive of any duties inconsistent with his positions, duties, responsibilities and status with Bank; or a change in his reporting responsibilities, titles or offices; or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of his employment pursuant to Section F.1. or retirement or as a result of his death or by Executive other than for Good Reason; or a reduction by Bank in Executive's annual gross base salary as in effect on the date hereof or as the same may be increased from time to time. (e) Notwithstanding anything to the contrary set forth herein, if Executive's employment with Bank is terminated by the Bank pursuant to Section F.2(a), by Executive pursuant to Section F.2(a), by Executive after he reaches the age of 65 under Section F.2(b), or by Bank or any successor within one year before or after any Change of Control and such termination following a Change of Control is not based on Section F.1, Executive shall continue to receive the comprehensive major medical and dental, and life insurance benefits until death as set forth in Section D.3. G. Change of Control Benefit. Upon a Change of Control, as defined below, Executive shall be entitled to receive his Section D.4 Incentive Bonus as of the effective date of the Change of Control for the year in which the Change of Control occurs. Such Incentive Bonus shall be calculated as follows: the Incentive Bonus for the number of months lapsed in the year in which the Change of Control occurs divided by the number of months lapsed in the year in which the Change of Control occurs and the resulting number multiplied by 12. Such Incentive Bonus shall be paid effective at the Change of Control. 1. Change of Control. The term "Change of Control" pursuant to this Section G shall have the following meaning: (a) A reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the shareholders of Bank or its parent immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, directly or indirectly, own more than 75% of the combined voting power entitled to vote generally in the election of director of the reorganized, merged or consolidated entity's then outstanding voting securities; (b) A liquidation or dissolution of the Bank effected by the Bank; Page 6 of 10 (c) The sale of more than 50% of the assets of Bank to any person or entity not controlled by or under common control with Bank (unless such reorganization, merger, consolidation or other corporate transaction, liquidation, dissolution or sale is subsequently abandoned); or (d) The acquisition by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act, (excluding any employee benefit plan of Bank, its subsidiaries or its parent which acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act)) of: (i) more than 25% of the outstanding shares of any class of voting stock of the Bank or its parent; or (ii) more than 9.9% and up to and including 25% of the outstanding shares of any class of voting stock of the Bank or its parent, if after the acquisition, no other person, entity or "group" would beneficially own a greater percentage of such class of voting shares than the acquiror(s). H. GENERAL PROVISIONS 1. Ownership of Books and Records; Confidentiality. (a) All records or copies thereof of the accounts of customers, and any other records and books relating in any manner whatsoever to the customers of Bank, and all other files, books and records and other materials owned by Bank or used by it in connection with the conduct of its business, whether prepared by Executive or otherwise coming into his possession, shall be the exclusive property of Bank regardless of who actually prepared the original material, book or record. All such books and records and other materials, together with all copies thereof, shall be immediately returned to Bank by Executive on any termination of his employment. Executive shall be entitled to copies of any policies, procedures or forms prepared with his assistance. (b) During the Term, Executive will have access to and become acquainted with what Executive and Bank acknowledge are trade secrets, to wit, knowledge or data concerning Bank, including its operations and business, and the identity of customers of Bank, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Executive shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the Term or thereafter, except as required in the course of Executive's employment with Bank. Executive shall not solicit any employee or customer of Bank to become an employee or customer of another institution until six months following the termination; provided, however, that Executive shall not be prohibited from soliciting customers with which he had a banking relationship established at another employer prior to the commencement of the term hereof. 2. Assignment and Modification. This Agreement, and the rights and duties hereunder, may not be assigned by either party hereto without the prior written consent of the other, and the parties expressly agree that any attempt to assign the rights of any party hereunder without such consent will be null and void; provided, however, that Bank's rights and obligations hereunder shall be assignable without consent by operation of law in the event of a merger or similar transaction involving Bank. Page 7 of 10 3. Further Assurance. From time to time each party will execute and deliver such further instruments and will take such other action as the other party reasonably may request in order to discharge and perform the obligations and agreements hereunder. 4. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or a breach thereof (other than matters pertaining to injunctive relief, including, but not limited to, temporary restraining orders, preliminary injunctions and permanent injunctions,) shall be finally settled by arbitration in accordance with the rules then prevailing of the American Arbitration Association. Judgment upon the award rendered in such arbitration may be entered and enforced in any court of competent jurisdiction. The prevailing party shall be entitled to all costs of arbitration or litigation as determined by the arbitrators or the court, including, but not limited to, reasonable attorneys' fees. Any excluded matter shall be determined by the San Diego County Superior Court, subject to any rights of appeal which may exist. The arbitration, including the rendering of the award, shall take place in the County of San Diego, State of California, unless otherwise agreed to in writing by the parties. In reaching a decision, the arbitrator(s) shall be bound by the terms of this Agreement. The award and judgment thereon shall include interest, at the legal rate, from the date that the sum awarded to the prevailing party was originally due and payable. The parties hereto agree that the arbitrator(s) shall have jurisdiction to award punitive damages. Arbitration shall be the exclusive means of resolution of disputes, controversies or claims arising out of this Agreement and which are subject to arbitration. The parties agree that they shall be entitled to conduct discovery in accordance with Sections 1283.05 and 1283.1 of the California Code of Civil Procedure, or any successor provision thereof, in the same manner as though the dispute were within the jurisdiction of the Superior Court of the State of California. 5. Notices. All notices required or permitted hereunder shall be in writing and shall be delivered in person or sent by certified or registered mail, return receipt requested, postage prepaid as follows: To Bank: Temecula Valley Bank, N.A. 27710 Jefferson Drive, Suite A-100 Temecula, CA 92590 To Executive: Luther J. Mohr 8975-438 Lawrence Welk Drive Escondido, CA 92026 or to such other party or address as either of the parties may designate in a written notice served upon the other party in the manner provided herein. All notices required or permitted hereunder shall be deemed duly given and received on the date of delivery if delivered in person or on the third day next succeeding the date of mailing if sent by certified or registered mail, postage prepaid. 6. Successors. This Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the parties. Page 8 of 10 7. Entire Agreement. Except as provided herein and in any separate agreement for the provision of benefits to Executive, this Agreement constitutes the entire agreement between the parties, and all prior negotiations, representations or agreements between the parties, whether oral or written, are merged into this Agreement. This Agreement may only be modified by an agreement in writing executed by both of the parties hereto. 8. Governing Law. This Agreement shall be construed in accordance with the laws of the State of California. 9. Executed Counterparts. This Agreement may be executed in one or more counterparts, all of which together shall constitute a single agreement and each of which shall be an original for all purposes. 10. Section Headings. The various section headings are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement or any section hereof. 11. Close of Business/Calendar Period. Unless the context so requires, all periods terminating on a given day, period of days or date shall terminate on the close of business on that day or date, references to "days" shall refer to calendar days, references to "months" shall refer to calendar months and references to "years" shall refer to calendar years. Any singular term includes the plural and vice versa. 12. Severability. In the event that any of the provisions, or portions thereof, of this Agreement are held to be unenforceable or invalid by any court of competent jurisdiction, the validity and enforceability of the remaining provisions or portions thereof, shall not be affected thereby. 13. Attorneys' Fees. In the event that any party shall bring an action or arbitration in connection with the performance, breach or interpretation hereof, then the prevailing party in such action as determined by the court or other body having jurisdiction shall be entitled to recover from the losing party in such action, as determined by the court or other body having jurisdiction, all reasonable costs and expenses of litigation or arbitration, including reasonable attorneys' fees, court costs, costs of investigation and other costs reasonably related to such proceeding, in such amounts as may be determined in the discretion of the court or other body having jurisdiction. 14. Indemnification. Bank shall indemnify and hold Executive harmless from, claims (defined in the broadest sense, including claims for monetary or non-monetary relief, and any claims brought before an administrative agency or body) arising out of, or related to, his service as an officer, director or agent of Bank, to the fullest extent permitted by applicable law, including his costs of defense and attorneys fees and shall advance his costs of defense (including legal fees) related to the defense thereof to the extent permitted by applicable law. The provisions of this Section 14 shall survive termination of this Agreement and Executive's employment with the Bank. Page 9 of 10 15. Rules of Construction. The parties hereby agree that the normal rule of construction, which requires the court to resolve any ambiguities against the drafting party, shall not apply in interpreting this Agreement. This Agreement has been reviewed by each party and counsel for each party and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. Each provision of this Agreement shall be interpreted in a manner to be effective and valid under applicable law, but if any provision shall be prohibited or ruled invalid under applicable law, the validity, legality and enforceability of the remaining provisions shall not, except as otherwise required by law, be affected or impaired as a result of such prohibition or ruling. IN WITNESS WHEREOF, this Agreement is executed as of the day and year first above written. Bank: TEMECULA VALLEY BANK, N.A. By: /s/ Donald A. Pitcher --------------------- Donald A. Pitcher ExecutiveVice President / Chief Financial Officer Executive: /s/ Luther J. Mohr ------------------ Luther J. Mohr Page 10 of 10 EX-31 6 a4606836ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen H. Wacknitz, that: 1. I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K of Temecula Valley Bancorp Inc.; 2. Based on my knowledge, this Amendment does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this Amendment, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this Amendment any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has material affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2004 /s/ Stephen H. Wacknitz ----------------------------------- Stephen H. Wacknitz President & Chief Executive Officer EX-31 7 a4606836ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Donald A. Pitcher, that: 1. I have reviewed this Amendment No. 1 to the Annual Report on Form 10-K of Temecula Valley Bancorp Inc.; 2. Based on my knowledge, this Amendment does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this Amendment, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this Amendment any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has material affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2004 /s/ Donald A. Pitcher ----------------------------------- Donald A. Pitcher EVP/Chief Financial Officer EX-32 8 a4606836ex321.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Amendment No. 1 to the Annual Report of the registrant on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Amendment"), the undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Amendment along with the underlying Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Amendment along with the underlying Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 31, 2004 By: /s/ Stephen H. Wacknitz ------------------------------------ Stephen H. Wacknitz President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Temecula Valley Bancorp Inc. and will be retained by Temecula Valley Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 9 a4606836ex322.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of the registrant on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Amendment"), the undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 31, 2004 By: /s/ Donald A. Pitcher ----------------------------------- Donald A. Pitcher EVP /Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Temecula Valley Bancorp Inc. and will be retained by Temecula Valley Bancorp Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----