FORM 10-Q 03-31-2007

0001172678-07-000011.txt : 20070510 0001172678-07-000011.hdr.sgml : 20070510 20070510115803 ACCESSION NUMBER: 0001172678-07-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070510 DATE AS OF CHANGE: 20070510 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: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-49844 FILM NUMBER: 07835852 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-Q 1 form10q-033107.htm FORM 10-Q 03-31-2007 FORM 10-Q 03-31-2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2007

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No: 000-49844

TEMECULA VALLEY BANCORP INC.

(Exact name of registrant as specified in its charter)

California 46-0476193

(State or other jurisdiction of incorporate or organization) (I.R.S. Employer Identification No.)

27710 Jefferson Avenue, Suite A100

Temecula, California 92590

(Address of principal executive offices)(Zip Code)

(Registrant's telephone number, including area code)

(951) 694-9940

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of May 8, 2007, there were 10,630,825 shares of the registrant's common stock, no par value per share, outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			3
	ITEM 1	FINANCIAL STATEMENTS	3
		NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5
	ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	7
		OVERVIEW	7
		FINANCIAL CONDITION	9
		RESULTS OF OPERATIONS	14
		LIQUIDITY	18
		CAPITAL PLANNING	19
		CRITICAL ACCOUNTING POLICIES AND ESTIMATES	19
		LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS	20
	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
	ITEM 4	CONTROLS AND PROCEDURES	21
PART II - OTHER INFORMATION			22
	ITEM 1.	LEGAL PROCEEDINGS	22
	ITEM 1A.	RISK FACTORS	22
	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	22
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22
	ITEM 5.	OTHER INFORMATION	22
	ITEM 6.	EXHIBITS	22
	SIGNATURES		23

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Financial Condition

(Unaudited)

	March 31, 2007		December 31, 2006
ASSETS	(in thousands, except share data)
Cash and Due from Banks	$	14,912	$	15,190
Interest-bearing deposits in financial institutions		99		99
Federal Funds Sold		55,320		18,180
TOTAL CASH AND CASH EQUIVALENTS		70,331		33,469

FNMA Mortgage-backed Security HTM (fair value of $1,026 at March 31, 2007 and $1,029 at December 31, 2006)		1,016		1,019

Loans Held for Sale		201,495		173,120
Loans:
Commercial		51,289		59,663
Real Estate - Construction		474,650		462,562
Real Estate - Other		250,168		246,095
SBA		202,726		201,105
Consumer and other		3,566		3,684
TOTAL LOANS HELD IN PORTFOLIO		982,399		973,109
Net Deferred Loan Fees		(4,105)		(3,536)
Allowance for Loan Losses		(12,458)		(12,522)
TOTAL NET LOANS HELD IN PORTFOLIO		965,836		957,051

Federal Home Loan Bank Stock, at Cost		2,026		1,996
Premises and Equipment		5,600		5,492
Other Real Estate Owned		722		1,255
Cash Surrender Value of Life Insurance		24,265		24,036
Deferred Tax Assets		8,780		8,480
SBA Servicing Assets		7,621		8,288
SBA Interest-Only Strips Receivable		11,399		13,215
Accrued Interest Receivable		6,473		6,155
Other Assets		6,884		4,613
TOTAL ASSETS	$	1,312,448	$	1,238,189

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non Interest-Bearing Demand	$	151,293	$	144,525
Money Market and NOW		141,028		130,357
Savings		32,012		29,781
Time Deposits, Under $100,000		420,301		367,029
Time Deposits, $100,000 and Over		407,219		409,809
TOTAL DEPOSITS		1,151,853		1,081,501

Accrued Interest Payable		2,141		2,094
Junior Subordinated Debt		41,240		41,240
Other Liabilities		9,470		10,091
TOTAL LIABILITIES		1,204,704		1,134,926
SHAREHOLDERS’ EQUITY:
Common Stock No Par Value; 40,000,000 Shares
Authorized; 10,613,659 and 10,586,659 Shares Issued and Outstanding at March 31, 2007 and December 31, 2006		46,685		46,383
Accumulated other comprehensive income (loss)		-		(172)
Retained Earnings		61,059		57,052
TOTAL SHAREHOLDERS' EQUITY		107,744		103,263
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,312,448	$	1,238,189

See accompanying notes to the consolidated financial statements

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Income

(Unaudited)

	For the Three Months Ended March 31,
	2007		2006
INTEREST INCOME	(in thousands, except per share data)
Loans, including fees	$	28,078	$	19,298
Investment Securities		18		3
Interest-bearing deposits in financial institutions		1		-
Federal Funds Sold		263		120
TOTAL INTEREST INCOME		28,360		19,421
INTEREST EXPENSE
Money Market and NOW		968		485
Savings Deposits		24		27
Time Deposits		10,284		4,949
Junior Subordinated Debt and Other Borrowings		834		592
TOTAL INTEREST EXPENSE		12,110		6,053
NET INTEREST INCOME		16,250		13,368
Provision for Loan Losses		415		314
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		15,835		13,054
NON INTEREST INCOME
Service Charges and Fees		149		153
Gain on Sale of Loans		2,297		2,945
Gain(Loss) on Other Assets and Other Real Estate Owned		(14)		25
Servicing Income (Loss)		(855)		415
Loan Broker Income		1,386		620
Loan Related Income		458		521
Other Income		517		262
TOTAL NON INTEREST INCOME		3,938		4,941
NON INTEREST EXPENSE
Salaries and Employee Benefits		8,638		7,740
Occupancy Expenses		792		738
Furniture and Equipment		472		380
Data Processing		352		302
Marketing and Business Promotion		344		225
Legal and Professional		309		302
Regulatory Assessments		55		42
Travel & Entertainment		306		245
Loan Related Expense		621		462
Office Expenses		658		608
Other Expenses		117		33
TOTAL NON INTEREST EXPENSE		12,664		11,077
INCOME BEFORE INCOME TAX EXPENSE		7,109		6,918
Income Tax expense		2,930		2,937
NET INCOME	$	4,179	$	3,981
Per Share Data :
Earnings Per Share - Basic		$0.39		$0.44
Earnings Per Share - Diluted		$0.38		$0.42

Average number of shares outstanding		10,602		8,955
Average number of shares and equivalents		11,125		9,568

See accompanying notes to the consolidated financial statements

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Shareholders’ Equity

(Unaudited)

									Accumulated
					Common				Other
		Comprehensive			Stock		Retained		Comprehensive
		Income	Shares		& Surplus		Earnings		Income		Total
	(in thousands)
Balance at January 1, 2006			8,898	$	17,640	$	40,132	$	409	$	58,181
Exercise of Stock Options,
Including the Realization of Tax Benefits of $243 thousand			80		559						559
Stock-based compensation					420						420
Net Income		3,981					3,981				3,981
Other comprehensive income (loss), net		(318)							(318)		(318)
Total comprehensive income	$	3,663
Balance at March 31, 2006			8,978	$	18,619	$	44,113	$	91	$	62,823
Exercise of Stock Options,
Including the Realization of Tax Benefits of $941 thousand			163		1,443						1,443
Stock-based compensation					198						198
Net Income		4,529					4,529				4,529
Other comprehensive income (loss), net		(1,061)							(1,061)		(1,061)
Total comprehensive income	$	3,468
Balance at June 30, 2006			9,141	$	20,260	$	48,642	$	(970)	$	67,932
Exercise of Stock Options,
Including the Realization of Tax Benefits of $189 thousand			28		369						369
Stock-based compensation					314						314
Net Income		4,018					4,018				4,018
Other comprehensive income (loss), net		328							328		328
Total comprehensive income	$	4,346
Balance at September 30, 2006			9,169	$	20,943	$	52,660	$	(642)	$	72,961
Exercise of Stock Options,
Including the Realization of Tax Benefits of $189 thousand			17		122						122
Private Placement Stock Offering			1,401		25,137						25,137
Stock-based compensation					181						181
Net Income		4,392					4,392				4,392
Other comprehensive income(loss), net		470							470		470
Total comprehensive income	$	4,862
Balance at December 31, 2006			10,587	$	46,383	$	57,052	$	(172)	$	103,263
Exercise of Stock Options,
Including the Realization of Tax Benefits of $10 thousand			27		112						112
Stock-based compensation					190						190
Adjustment for adoption of FAS 155							(172)		172		-
Net Income							4,179				4,179
Balance at March 31, 2007			10,614	$	46,685	$	61,059	$	-	$	107,744

See accompanying notes to the consolidated financial statements

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Cash Flows

(Unaudited)

		For the Three Months Ended March 31,
		2007		2006
OPERATING ACTIVITIES		(dollars in thousands)
Net Income		$	4,179	$	3,981
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
	Provision for Loan Losses		415		314
	Depreciation and Amortization		3,204		2,333
	Amortization of debt issuance cost		18		18
	Net change in deferred loan origination fees		569		382
	Provision for Deferred Taxes		(300)		(531)
	Gain on Sale of Loans		(2,297)		(2,945)
	Loans Originated for Sale		(68,500)		(37,273)
	Proceeds from Loan Sales		42,422		35,590
	Loss (Gain) on Sale of Other Real Estate Owned		14		(25)
	Share-based compensation expense		190		420
	Net Increase in Cash Surrender Value of Life Insurance		(229)		(157)
	Federal Home Loan Bank Stock Dividends		(29)		(22)
	Net Change in Accrued Interest, Other Assets and Other Liabilities		(3,513)		107
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES			(23,857)		2,192

INVESTING ACTIVITIES
	Purchases of Held-to-Maturity Investments		(297)		(297)
	Proceeds from Maturities of Held-to-Maturity Securities		300		300
	Net Increase in Loans		(608)		(43,915)
	Purchase of loans		(9,883)		-
	Purchases of Premises and Equipment		(581)		(792)
	Proceeds from Sale of Premises and Equipment		93		48
	Proceeds from Sale of Other Real Estate Owned		1,241		2,136
NET CASH USED IN INVESTING ACTIVITIES			(9,735)		(42,520)

FINANCING ACTIVITIES
	Net Increase in Demand Deposits and Savings Accounts		19,670		19,101
	Net Increase in Time Deposits		50,682		64,866
	Net Change in Federal Home Loan Bank Advances		-		(30,000)
	Proceeds from Exercise of Stock Options		102		317
NET CASH PROVIDED BY FINANCING ACTIVITIES			70,454		54,284

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			36,862		13,956
	Cash and Cash Equivalents at Beginning of Year		33,469		51,512
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	70,331	$	65,468
	Supplemental Disclosures of Cash Flow Information:
	Interest Paid	$	12,063	$	5,943
	Income Taxes Paid, net of refunds	$	1,640	$	373
	Transfer of Loans to Other Real Estate Owned	$	722	$	728

See accompanying notes to the consolidated financial statements

TEMECULA VALLEY BANCORP INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For the three months ended March 31, 2007 and 2006

The accompanying unaudited consolidated financial statements have been prepared by Temecula Valley Bancorp Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Temecula Valley Bancorp Inc. ("company" or “our company” or “our holding company”) and its wholly owned subsidiary, Temecula Valley Bank ("bank" or “our bank”). All significant intercompany transactions have been eliminated. Unless the context indicates otherwise, all references in this report to “we”, “us”, and “our” refer to the Company and the Bank on a consolidated basis.

Our holding company is also the common stockholder of Temecula Valley Statutory Trust I, Temecula Valley Statutory Trust II, Temecula Valley Statutory Trust III, Temecula Valley Statutory Trust IV, and Temecula Valley Statutory Trust V. In accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51”, these trusts are not included in our consolidated financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Estimates associated with the allowance for loan losses, SBA servicing asset, and SBA interest-only strips receivable are particularly susceptible to material change in the near term. Actual results could differ from those estimates.

The results of operations for the three month period ended March 31, 2007, are not necessarily indicative of the results to be expected for the full year. These financial statements do not include all disclosures associated with our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC and, accordingly, should be read in conjunction with such statements. In our opinion, the unaudited financial statements contain all adjustments (consisting only of normal, recurring accruals) necessary to fairly present our financial position on March 31, 2007.

At March 31, 2007, $47.5 million of SBA 504 loans, secured by first trust deeds on commercial properties, previously included in the Real Estate - Other category were reclassified to the SBA category. At December 31, 2006, $48.1 million of SBA 504 loans, secured by first trust deeds on commercial properties, previously included in the Real Estate - Other category were reclassified to the SBA category. The accompanying consolidated financial statements have been adjusted to reflect these changes. Certain prior year amounts have been reclassified to conform to the current period’s presentation.

Note 1 - Significant Accounting Policies

Significant accounting policies we follow are presented in Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Effective January 1, 2007, we have adopted Financial Accounting Standards Boards (“FASB”) No. 155 and No. 156 as described below.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB statement No.140”, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 156 clarifies when a servicer should separately recognize servicing assets and servicing liabilities and permits an entity to choose either the “Amortization Method” or “Fair Value Measurement Method" for subsequent measurement of each class of such assets and liabilities. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not issued financial statements.

Effective January 1, 2007, we implemented SFAS No. 156 and elected to use the “fair value measurement method” to account for our servicing assets. At January 1, 2007, the carry value equaled the fair market value of the servicing asset, as such; there has been no impairment upon adoption.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155, amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS 140, "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140 that identifies which interest-only strips are not subject to the requirements of SFAS No. 133. We implemented this standard as of the beginning of our fiscal year 2007. As a result, we have recorded effective January 1, 2007, a cumulative effect adjustment to retained earnings of $172 thousand, representing the difference between the fair value and the carrying value of the servicing assets and interest-only strips receivable at January 1, 2007. This statement will impact the way we account for I/O strips requiring us to record these assets at fair value with all adjustments running through the income statement for new I/O strips acquired after the implementation date.

During the quarter ended March 31, 2007, we recognized a $2.8 million decrease in the fair value of servicing assets and interest-only strips receivable and such amount is reported as a reduction of other non-interest income.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under FIN 48, an income tax position will be recognized if it is more likely than not that it will be sustained upon IRS examination, based upon its technical merits. Once that status is met, the amount recorded will be the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective as of the beginning of fiscal years that begin after December 15, 2006.

We have adopted FIN 48 effective January 1, 2007. There was no cumulative effect of applying the provisions of FIN 48 and there was no material effect on our provision for income taxes for the three months ended March 31, 2007. The adoption of FIN 48 had no effect on our financial condition or results of operations.

We are subject to federal income tax and income tax of the state of California as well as various other state income taxes where we have SBA operations. Our federal income tax returns for the years ended December 31, 2003, 2004, 2005, and 2006 and our California state tax returns for the years ended December 31, 2002, 2003, 2004, 2005, and 2006, are open to audit under the statute of limitations by the Internal Revenue Service. We record interest and penalties related to uncertain tax positions as part of income tax expense. There was no penalty or interest expense recorded for the first quarter of 2007 and 2006. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Management’s discussion, as well as other provisions within this report, are intended to provide additional information regarding the significant changes and trends in our Financial Condition, Statements of Income, Funds Management and Capital Planning. Statements made in this Report that state our intentions, beliefs, expectations or predictions of the future are forward-looking statements. Our actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our Form 10-K and our other filings made with the Securities and Exchange Commission (“SEC”). Copies of such filings may be obtained by contacting us or accessing our filings at www.sec.gov. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of invoking these safe harbor provisions.

OVERVIEW

We formed our holding company in 2002. Our bank was formed in 1996 as a locally owned and managed financial institution that assumes an active community role and commenced operations on December 16, 1996 as a national banking association. We converted from a national charter to a state charter on June 29, 2005. Our bank has no subsidiaries. On August 23, 2006, we withdrew from Federal Reserve membership and became a California state-chartered, non-member bank.

We are organized as a single operating segment with a focus upon three business lines. The first is community banking through our ten full-service banking offices located in Carlsbad, Corona, El Cajon, Escondido, Fallbrook, Murrieta, Ontario, Solana Beach, and in the Rancho Bernardo area of San Diego. The second is operations by our Real Estate Industries Group of our bank which focuses on construction lending and maintains loan production offices in Corona and San Rafael, both in California. The third focus area is our network of SBA loan production offices in Arizona, California, Colorado, Florida, Indiana, Nebraska, Nevada, Oregon, and Texas.

We closed loan production offices located in the northeast and southeast areas of the country. To date, this reorganization has resulted in cost savings greater than the income generated from the closed offices. As a result of reorganization we place greater emphasis and resources on generating SBA loans in the mid and western United States.

Since we opened in 1996, we have experienced substantial annual growth. We continue to have strong growth in loans and deposits. We plan to continue to expand through new full service and/or loan production office locations if they make good business sense and are located within our geographic service areas or contiguous markets and if the target offices can be staffed with seasoned bankers that fit our culture. The following table highlights selected financial data for the three month periods ended March 31, 2007 and 2006 and the year ended December 31, 2006:

	For the Three Months Ended March 31,
	2007		2006
Income Statement	(dollars and shares in thousands, except per share data)
Interest income	$	28,360	$	19,421
Interest expense		12,110		6,053
Net interest income		16,250		13,368
Provision for loan losses		415		314
Net interest income after provision for loan losses		15,835		13,054
Non interest income		3,938		4,941
Non interest expense		12,664		11,077
Income before income taxes		7,109		6,918
Provision for income taxes		2,930		2,937
Net income	$	4,179	$	3,981

Per Share Data:
Basic earnings per share	$	0.39	$	0.44
Diluted earnings per share	$	0.38	$	0.42

Average common shares outstanding		10,602		8,955
Average common shares (dilutive)		11,125		9,568
Book value per share	$	10.15	$	7.00

Selected Ratios:
Net Interest Margin		5.54%		6.83%
Efficiency Ratio		62.73%		60.50%

Return on average assets		1.34%		1.82%
Return on average equity		16.04%		26.47%


	March 31, 2007		December 31, 2006
Total assets	$	1,312,448	$	1,238,189
Loans Held-for-sale		201,495		173,120
Net loans (excluding held-for-sale and allowance for loan loss)		978,294		969,573
Total deposits		1,151,853		1,081,501
Junior Subordinated Debt		41,240		41,240
Shareholders’ Equity		107,744		103,263

Net Charge offs	$	479	$	167
Net Charge offs / average total loans		0.04%		0.02%

Gross non-performing loans	$	23,813	$	19,124
Other Real Estate Owned, gross		722		1,255
Gross non-performing assets / average total loans		2.11%		2.22%

Net non-performing loans	$	10,240	$	8,790
Other Real Estate Owned, net		180		617
Net non-performing assets / average total loans		0.90%		1.04%

Allowance for loan loss	$	12,458	$	12,522
Allowance for loan loss/net loans and loans held-for-sale		1.06%		1.10%
Allowance for loan loss/net loans excluding loans held-for-sale		1.27%		1.29%
Allowance for loan loss/gross nonperforming loans		52.31%		65.48%

Tier I leverage ratio		11.27%		11.42%
Tier I risk based ratio		10.42%		10.49%
Total risk based ratio		11.65%		11.90%

FINANCIAL CONDITION

Balance Sheet Summary

Total assets were $1.31 billion at March 31, 2007 compared to $1.24 billion at December 31, 2006, an increase of $74.3 million or 6.00%. Total loans and loans held-for-sale, excluding deferred loan fees and allowance for loan loss, were $1.18 billion at March 31, 2007, an increase of $37.7 million or 3.29%, from $1.15 billion at December 31, 2006. Total deposits were $1.15 billion at March 31, 2007, an increase of $70.4 million or 6.51%, from $1.08 billion at December 31, 2006. Total shareholders’ equity was $107.7 million at March 31, 2007, an increase of $4.5 million or 4.34%, from $103.3 million at December 31, 2006.

Cash and Due From Banks

Cash and due from banks were $70.3 million as of March 31, 2007. Cash and due from banks consist of federal funds sold of $55.3 million compared to $18.2 million at December 31, 2006, an increase of $37.1 million. The increase in the first three months of 2007 is largely attributable to a $70.4 million increase in total deposits offset by a $9.3 million increase in total loans, and a $28.4 million increase in loans held-for-sale.

Investment Securities

At March 31, 2007, our FNMA mortgage-backed security, with an amortized cost and fair value of $1.0 million, was classified as held-to-maturity. This security was purchased on November 8, 2006 and matures in 2036.

Loans

Total loans, excluding loans held-for-sale, were $982.4 million at March 31, 2007 compared to $973.1 million at December 31, 2006, an increase of $9.3 million or 0.95%. The loan portfolio composition is primarily construction, commercial, and real estate secured loans. SBA loans, of which we are an active originator, comprise approximately 24% of net loans outstanding as of March 31, 2007 and 23% of net loans outstanding as of December 31, 2006. Typical of community bank loan markets, a significant portion of our portfolio is real estate secured. Approximately 94% of the loan portfolio at March 31, 2007 and December 31, 2006 was real estate secured. Approximately 50% of our lending portfolio was classified as real estate construction loans as of March 31, 2007 and December 31, 2006.

In December 2006, the federal banking agencies issued final guidance to reinforce sound risk management practices for bank holding companies and banks in commercial real estate (“CRE”) loans. The guidance establishes CRE concentration thresholds as criteria for examiners to identify CRE concentration that may warrant further analysis. The implementation of these guidelines could result in increased reserves and capital costs for banks with “CRE concentration”. We believe that our CRE portfolio as of March 31, 2007 does not have the risks associated with high CRE concentration due to mitigating factors, including low loan-to-value ratios, adequate debt coverage ratios, and a wide variety of property types. Under the final guidance, our ratio of commercial real estate loans, excluding owner-occupied properties, to capital as of March 31, 2007, is approximately 380%. While this exceeds the 300% benchmark set by the guidance, we believe we have implemented enhanced risk management practices as recommended by the guidance. These practices include the review and analysis of detailed monthly construction loan status reports, detailed monthly geographic concentration reports by product type and county location, detailed monthly commercial real estate concentration reports, and centralized monitoring and servicing of our commercial real estate term loans.

The weighted-average loan-to-value for our real estate loan portfolio, excluding owner occupied properties, is approximately 62% at March 31, 2007. The following table summarizes our loan portfolio, (including loans held-for-sale), excluding deferred loan fees and allowance for loan loss, by type of loan and their percentage distribution:

	March 31, 2007			December 31, 2006
	Amount		Percent	Amount		Percent
Loan portfolio composition:	(dollars in thousands)
Commercial	$	51,289	4%	$	59,663	5%
Real estate - Construction		595,507	50%		570,204	50%
Real estate - Other		250,169	21%		246,096	20%
SBA		283,363	24%		266,581	23%
Consumer		3,566	1%		3,685	1%
Total Loans	$	1,183,894	100%	$	1,146,229	100%

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequently, any recoveries are credited to the allowance.

Quarterly detailed reviews are performed to identify the risks inherent in the loan portfolio, assess the overall quality of the loan portfolio and the related provision for loan losses to be charged to expense. The analysis considers general factors such as evaluation of collateral securing the credit, changes in lending policies and procedures, economic trends, loan volume trends, changes in lending management and staff, trends in delinquencies, nonaccruals and charge-offs, changes in loan review and Board oversight, the effects of competition, legal and regulatory requirements, and factors inherent to each loan pool. Allocations of the allowance may be made for specific loans or pool of loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance for loan losses was $12.5 million at March 31, 2007 and December 31, 2006. The allowance for loan losses as a percentage of net loans outstanding and loans held-for-sale was 1.06% as of March 31, 2007 and 1.10% as of December 31, 2006. The allowance for loan losses as a percentage of net loans outstanding excluding loans held-for-sale was 1.27% as of March 31, 2007, and 1.29% as of December 31, 2006.

A summary of the allowance for loan losses for the three months ended March 31, 2007 and 2006 and the year ended December 31, 2006 follows:

	Allowance for Loan Losses
	March 31, 2007		December 31, 2006		March 31, 2006
	(dollars in thousands)
Loans outstanding and loans held-for-sale	$	1,179,789	$	1,142,693	$	799,100
Average amount of loans outstanding		1,167,399		922,264		782,333
Balance of allowance for loan losses, beginning of periods		12,522		9,039		9,039
Loans charged off:
Commercial		(38)		(208)		(63)
Real Estate - Construction		-		(10)		(10)
Real Estate - Other		(441)		(159)		(82)
Consumer		-		(4)		(1)
Total loans charged off	$	(479)	$	(381)	$	(156)

Recoveries of loans previously charged off:
Commercial		-		202		1
Real Estate - Construction		-		10		-
Real Estate - Other		-		1		-
Consumer		-		1		-
Total loan recoveries	$	-	$	214	$	1
Net loans charged off		(479)		(167)		(155)
Provision for loan loss expense		415		3,650		314
Balance, end of period	$	12,458	$	12,522	$	9,198

Ratio of net charge-offs to average loans		0.04%		0.02%		0.02%

Nonaccrual, Past Due, Restructured Loans and Other Real Estate Owned ("OREO")

At March 31, 2007, gross nonaccrual loans totaled $23.8 million, a $4.7 million or 24.52% increase from gross nonaccrual loans of $19.1 million at December 31, 2006. The OREO balance was $722 thousand at March 31, 2007 compared to $1.3 million at December 31, 2006. We had no restructured loans as of March 31, 2007 or December 31, 2006. The following table presents information concerning nonaccrual loans, OREO, accruing loans which are contractually past due 90 days or more, as to interest or principal payments and still accruing, and restructured loans:

	March 31, 2007						December 31, 2006
	Gross		Government		Net		Gross		Government		Net
	Balance		Guaranteed		Balance		Balance		Guaranteed		Balance
Nonaccrual loans (Gross):	(dollars in thousands)
Commercial	$	404	$	(115)	$	289	$	89	$	(44)	$	45
Real Estate - Construction		6,689		-		6,689		5,942		-		5,942
Real Estate - Other		16,720		(13,458)		3,262		13,093		(10,290)		2,803
Installment		-		-		-		-		-		-
Total		23,813		(13,573)		10,240		19,124		(10,334)		8,790
OREO		722		(542)		180		1,255		(638)		617
Total nonaccrual loans and OREO	$	24,535	$	(14,115)	$	10,420	$	20,379	$	(10,972)	$	9,407

Gross nonaccrual loans as a percentage of total loans						2.02%						1.67%
Gross nonaccrual loans and OREO as a percentage of total loans and OREO						2.08%						1.78%
Allowance for loan losses to total net loans (including held-for-sale)						1.06%						1.10%
Allowance for loan losses to total net loans (excluding held-for-sale)						1.27%						1.29%
Allowance for loan losses to gross nonaccrual loans						52.31%						65.48%

Loans past due 90 days or more on accrual status:
Commercial					$	-					$	26
Real Estate						-						114
Installment						-						-
Total					$	-					$	140

Cash Surrender Value of Life Insurance

The cash surrender value of life insurance is bank-owned life insurance (“BOLI”) which is the purchase of single premium life insurance on certain executives. We are the owner and beneficiary of these policies with split-dollar agreements on covered executives. The BOLI had a balance of $24.3 million at March 31, 2007, compared to $24.0 million at December 31, 2006, an increase of $229 thousand.

Servicing Asset and Interest-Only Strips Receivable

Our goal is to maintain at least 90% of our assets as interest-earning assets. One component of non interest-earning assets are the SBA servicing and SBA interest-only (I/O) strip receivable assets. At March 31, 2007, we were servicing approximately $383.1 million of the guaranteed portion of 7(a) loans previously sold with a weighted-average servicing and I/O rate of 1.95%. At December 31, 2006, we were servicing approximately $399.9 million of the guaranteed portion of 7(a) loans previously sold with a weighted-average servicing and I/O rate of 2.01%.

SBA 7(a) loans can be sold for a premium or for par. When an SBA 7(a) loan is sold for a premium, the originator is required to retain at least 1% interest on the sold portion of the loan. The 1% interest is considered the contractual servicing fee for the loan. When an SBA 7(a) loan is sold for par, the originator generally retains a much larger interest than the required contractual servicing. The premium represents what the buyer is willing to pay the originator for the difference between the rates passed through to the buyer in a premium sale versus a par sale. When we feel that the premium is not sufficient to compensate us for the future income resulting from the higher retained interest in a par sale, we will sell the loan at par versus a premium.

The servicing asset represents the value of the contractual servicing fee less adequate servicing compensation. Adequate servicing compensation in the SBA industry has been considered 40 basis points. Therefore, the servicing asset value is based upon the contractual servicing fee of generally 1%, less adequate servicing compensation of 40 basis points. When the interest rate retained exceeds the contractual servicing fee,

generally 1% for SBA 7(a) loans, the excess over 1% is considered the I/O. At March 31, 2007 and December 31, 2006, we had I/O strips of $11.4 million, and $13.2 million, respectively, which approximate fair value. Fair value is estimated by discounting estimated future cash flows from the I/O strips using assumptions similar to those used in valuing servicing assets.

For the first three months of 2007, we recognized a decrease in the fair value of servicing assets and interest-only strips receivable. The change in value was caused primarily by changes in the prepayment speed assumptions used in the valuation. A summary of the changes in the related servicing asset and I/O strips receivable are as follows:

	Servicing Asset
	Three Months Ended March 31, 2007		Year End December 31, 2006
	(dollars in thousands)
Balance at Beginning of Period	$	8,288	$	8,169
Increase from Loan Sales		220		2,378
Amortization Charged to Income		-		(2,259)
Fair Market Value Adjustment		(887)		-
Balance at End of Period	$	7,621	$	8,288

	Interest-Only Strips Receivable
	Three Months Ended March 31, 2007		Year End December 31, 2005
	(dollars in thousands)
Balance at Beginning Period	$	13,215	$	22,068
Increase from Loan Sales		68		1,377
Amortization Charged to Income		-		(9,228)
Fair Market Value Adjustment		(1,884)		(1,002)
Balance at End of Period	$	11,399	$	13,215

Servicing income is a component of non interest income in the consolidated statement of income. The $855 thousand loss in servicing income for the first quarter of 2007 was comprised of $2.0 million of servicing income and $2.8 million of expense due to the fair value adjustment. For the first quarter of 2006, servicing income was comprised of $2.4 million of servicing income and $2.0 million of amortization expense.

The servicing calculations contain certain assumptions such as expected life of the loan and the discount rate used to compute the present value of future cash flows. The exposure of the loan life assumption is if loans prepay faster than expected. The exposure to the discount rate assumption is if rates adjust severely and permanently. Such exposure can cause a decrease in servicing income. With the assistance of quarterly external appraisals, the servicing asset and I/O strips are recorded at fair value.

The table below summarizes the repayment rates for national SBA pools based on their maturities:

Three Months Ended March 31, 2007
SBA Pools - Constant Prepayment Rates
Variable Rate Pools
Issue Date	< 8 Yr Life CPR	8-11 Yr Life CPR	11-16 Yr Life CPR	16-21 Yr Life CPR	> 21 Yr Life CPR
Year 1	8.44	6.01	5.83	4.29	4.55
Year 2	14.41	11.64	10.61	12.65	10.05
Year 3	18.32	16.34	16.44	16.81	17.62
Year 4	18.69	17.11	19.73	19.99	21.78
Year 5	16.93	16.61	21.16	20.00	21.27
Year 6	14.87	16.15	20.93	17.68	20.60
Year 7	11.88	14.64	19.52	18.96	19.02
Year 8	6.30	12.05	14.68	14.68	19.30
Year 9	3.73	9.53	14.73	19.47	19.30
Year 10	1.30	5.45	14.15	14.25	20.45
Year 11+	0.00	2.10	14.30	9.90	22.20

The value of the servicing asset would decrease $854 thousand if prepayment speeds increased 10% and the value of the servicing asset would decrease $1.9 million if prepayment speeds increased 20%.

The expected overall average life of the servicing portfolio is 3.75 years. The following schedule displays the weighted-average discount rates for each SBA pool after applying the CPRs identified above and our estimated discount rates for each SBA pool at March 31, 2007 based on assessing each component.

Original Maturity		Disc Rate
< 8	Years	8.87%
8-11	Years	8.66%
11-16	Years	8.55%
16-21	Years	8.54%
> 21	Years	8.54%

The servicing asset value would decrease $545 thousand if the discount rate increased 1% and the servicing asset value would decrease $1.1 million if the discount rate increased 2%. The amount of interest retained on the sold portion of the SBA 7(a) loans does not change even though most of the underlying loans are variable rate. Since the retained interest is fixed, changes in interest rates impact the value. Therefore, when rates rise, the value declines and when rates decline the value increases.

Other Assets

Premises and equipment, accrued interest, and deferred tax assets are major components of other assets. Following is a summary of these items as of March 31, 2007 and December 31, 2006.

·	Premises and equipment was $5.6 million at March 31, 2007 compared to $5.5 million at December 31, 2006, a 1.97% or $108 thousand increase. Contributing to the increase were the additions of the Solana Beach and Ontario branches as well as increases in premises and equipment from normal operations.

·	Accrued interest was $6.5 million at March 31, 2007 compared to $6.2 million at December 31, 2006, a 5.17% or $318 thousand increase. The increase in accrued interest is a direct result of the increase in loans from December 31, 2006 to March 31, 2007.

·	Deferred tax asset was $8.8 million at March 31, 2007 compared to $8.5 million at December 31, 2006, a 3.54% or $300 thousand increase.

Deposits

Deposits were $1.15 billion at March 31, 2007 compared to $1.08 billion at December 31, 2006, a 6.51% increase. Money market and NOW accounts increased $10.7 million, savings increased $2.2 million, demand deposits increased $6.8 million, and certificate of deposits (CD's) increased $50.7 million. Non interest-bearing demand deposits comprised approximately 13% of deposits at March 31, 2007 and December 31, 2006.

At March 31, 2007, more than 60% of deposits had balances of $100,000 or more. At March 31, 2007, none of our customers (excluding brokered deposits) had balances over 2% of the Bank’s deposits. We prefer core deposits as a source of funds for the loan portfolio. Consequently, we take steps to attract solid core accounts while at the same time maintaining a reasonable funding cost. We will continue to solicit core deposits to diminish reliance on volatile funds.

Borrowings and Junior Subordinated Debt

Borrowings - At March 31, 2007 and 2006, and December 31, 2006 there were no short-term advances from the Federal Home Loan Bank. The borrowing capacity at the Federal Home Loan Bank as of March 31, 2007 was $79.4 million and at December 31, 2006 was $73.8 million.

We use FHLB borrowings to fund loan demand and to manage liquidity in light of deposit flows. Our borrowing capacity can be used to borrow under various FHLB loan programs, including adjustable and fixed-rate financing, for periods ranging from one day to 30 years, with a variety of interest rate structures available. The borrowing capacity has no commitment fees or cost, requires minimum levels of investment in FHLB stock (we receive dividend income on our investment in FHLB stock), can be withdrawn by the FHLB if there is any significant change in our financial or operating condition and is conditional upon our compliance with certain agreements covering advances, collateral maintenance, eligibility and documentation.

Junior Subordinated Debt - Pursuant to rulings of the Federal Reserve Board, bank holding companies are permitted to issue long-term subordinated debt instruments called debentures that will, subject to certain conditions, qualify as and, therefore, augment capital for regulatory purposes. The debentures are subordinated to all of our existing and future borrowings. The table below summarizes the terms of each issuance of subordinated debentures:

Series	Amount (000’s)		Date Issued	Rate Adjustor	Effective Rate	Maturity Date
Temecula Valley Statutory Trust I	$	7,217	June 2002	3-month LIBOR +3.45%	8.80%	2032
Temecula Valley Statutory Trust II		5,155	September 2003	3-month LIBOR +2.95%	8.30%	2033
Temecula Valley Statutory Trust III		8,248	September 2004	3-month LIBOR +2.20%	7.55%	2034
Temecula Valley Statutory Trust IV		8,248	September 2005	3-month LIBOR +1.40%	6.75%	2035
Temecula Valley Statutory Trust V		12,372	September 2006	3-month LIBOR +1.60%	6.95%	2036
Total	$	41,240

The Federal Reserve Board has taken the position that these mandatorily redeemable preferred securities qualify as capital, subject to certain restrictions. As of March 31, 2007 we have included the net junior subordinated debt in our capital for regulatory capital purposes.

Capital

Total capital was $107.7 million at March 31, 2007 compared to $103.3 million at December 31, 2006. For the first three months of 2007, the $4.5 million increase consisted of $4.2 million of net income, $112 thousand on the exercise of stock options, and $190 thousand for stock-based compensation.

At March 31, 2007 and December 31, 2006 our bank and our holding company were in the regulatory "well capitalized" category. Refer to capital ratio tables included in the “Capital Planning” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Net Income

Our net income and basic and diluted earnings per share for the three months ended March 31, 2007 and 2006 are as follows:

·	For March 31, 2007, net income was $4.2 million or $0.39 per basic share and $0.38 per diluted share.

·	For March 31, 2006, net income was $4.0 million or $0.44 per basic share and $0.42 per diluted share.

For the first three months of 2007, we earned $4.2 million, compared to $4.0 million for the first three months of 2006. The increase was the result of an increase in net interest income of $2.9 million offset by an increase in non-interest expense of $1.6 million and a decrease in non-interest income of $1.0 million.

Our return on average assets and return on average equity for the three months ended March 31, 2007 and 2006 are as follows:

·	For March 31, 2007, return on average assets was 1.34%; return on average equity was 16.04%.

·	For March 31, 2006, return on average assets was 1.82%; return on average equity was 26.47%.

Net Interest Earnings

Net interest income is the most significant component of our income from operations. Net interest income is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and other borrowings (interest-bearing liabilities). Net interest income depends on the volume of and interest rate earned on interest-earning assets and the volume of and interest rate paid on interest-bearing liabilities.

Net interest income was $16.3 million in the first three months of 2007, compared to $13.4 million in the same period in 2006. The net interest margin was 5.54% for the three months ending March 31, 2007 compared to 6.83% for the three months ending March 31, 2006. In the initial cycle of a flat rate environment following a rising rate environment, the net interest margin will slightly compress due to longer term, lower rate time deposits maturing and repricing at a higher rate. The yield on interest-earning assets decreased by 29 basis points for the first three months of 2007 and the yield on interest-bearing liabilities increased by 118 basis points for the same period. The following is a summation of various yields for interest-earning assets and interest-bearing liabilities for the three months ending March 31, 2007 and 2006:

·	Yield on loans decreased to 9.75% as of March 31, 2007 compared to 10.00% as of March 31, 2006 as a result of interest income being reversed on loans that were placed on nonaccrual status.

·	Yield on investments, Federal Funds Sold and U.S. Treasuries, increased to 5.23% as of March 31, 2007 compared to 4.50% as of March 31, 2006. The increase is a result of an increase in average Federal Funds Sold and an increase in interest rates.

·	Cost of interest-bearing deposits increased to 4.75% as of March 31, 2007 compared to 3.53% as of March 31, 2006 as a result of the growth in average interest-bearing deposits and the increasing interest rate environment.

Cost of other borrowings, Federal Home Loan Bank advances and junior subordinated debt borrowings, increased to 8.14% as of March 31, 2007 compared to 6.85% as of March 31, 2006. Contributing to the increase in the cost of borrowings was the increase in junior subordinated debt as well as the increasing interest rate environment.

The following table shows average balances with corresponding interest income and interest expense as well as average yield and cost information for the three months ending March 31, 2007 and 2006. Average balances are derived from daily balances, and nonaccrual loans are included as interest-bearing loans for purposes of these tables.

	Average Balances with Rates Earned and Paid
	Three-month period ended March 31,
	Average Balance			2007 Interest Income/ Expense	Average Interest Rate	Average Balance			2006 Interest Income/ Expense	Average Interest Rate
Assets	(dollars in thousands)
Interest-bearing deposits	$	99	$	1	4.19%	$	-	$	-	0.00%
Securities-HTM (1)		1,301		18	5.58%		277		3	4.00%
Federal Funds Sold		20,419		263	5.22%		10,740		120	4.52%
Total Investments		21,819		282	5.23%		11,017		123	4.50%

Total Loans (2)		1,167,399		28,078	9.75%		782,333		19,298	10.00%
Total Interest Earning Assets		1,189,218		28,360	9.67%		793,350		19,421	9.93%

Allowance for Loan Loss		(12,731)					(9,340)
Cash & Due From Banks		14,168					26,755
Premises & Equipment		5,609					5,016
Other Assets		70,393					69,855
Total Assets	$	1,266,657				$	885,636

Liabilities and Shareholders’ Equity
Interest Bearing Demand	$	32,029		12	0.15%	$	31,621		12	0.15%
Money Market		103,322		957	3.76%		72,066		473	2.66%
Savings		31,432		24	0.31%		31,926		27	0.34%
Time Deposits under $100,000		393,479		4,680	4.83%		243,332		2,470	4.12%
Time Deposits $100,000 or more		402,582		5,603	5.64%		248,349		2,479	4.05%
Other Borrowings		41,546		834	8.14%		35,012		592	6.85%
Total Interest Bearing Liabilities		1,004,390		12,110	4.89%		662,306		6,053	3.71%

Non-interest Demand Deposits		143,283					153,212
Other Liabilities		13,323					9,136
Shareholders' Equity		105,661					60,982
Total Liabilities and Shareholders' equity	$	1,266,657				$	885,636
Net Interest Income			$	16,250				$	13,368
Interest Spread (3)					4.78%					6.22%
Net Interest Margin (4)					5.54%					6.83%

(1) There are no tax exempt investments in any of the reported periods.
(2) Average balances are net of deferred fees/gains that are amortized to interest income over the term of the respective loan.
(3) Net interest spread is the yield earned on interest-earning assets less the rate paid on interest-bearing liabilities.
(4) Net interest margin is the net interest income divided by the interest-earning assets.

The following table shows a comparison of interest income and interest expense as the result of changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the three months ended March 31, 2007 and 2006.

		Rate/Volume Analysis
		Increase/Decrease in Net Interest Income
		Three month period ended
		March 31, 2007 and 2006
		Volume		Rate		Total
		(dollars in thousands)
Assets
Securities-HTM (1)		$	10	$	5	$	15
Due From Banks-Time			-		1		1
Federal Funds Sold			108		35		143
	Total Investments		118		41		159
	Total Loans (2)		9,499		(719)		8,780
Total Interest Earning Assets		$	9,617	$	(678)	$	8,939

Liabilities and Shareholders' Equity
Interest Bearing Demand			-		10		10
Money Market			210		264		474
Savings			-		(2)		(2)
Time Deposits under $100,000			1,524		686		2,210
Time Deposits $100,000 or more			1,539		1,584		3,123
Other Borrowings			110		132		242
Total Interest Bearing Liabilities			3,383		2,674		6,057
Net Interest Income		$	6,234	$	(3,352)	$	2,882

(1) There are no tax exempt investments in any of the reported periods.
(2) Average balances are net of deferred fees/gains that are amortized to interest income over the term of the respective loan.

Provision for Loan Losses

The allowance for loan losses represents management’s best estimate of probable incurred losses in the loan portfolio. We have a monitoring system to identify impaired and/or potential problem loans. This system assists in the periodic evaluation of impairment and in determining the amount of the allowance for loan losses required.

The monitoring system and allowance for loan losses methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the allowance for loan losses. The monitoring system and allowance methodology include an assessment of individual classified loans, as well as applying loss factors to all loans not individually classified. Classified loans are reviewed individually to estimate the amount of probable loss that needs to be included in the allowance. These reviews include analysis of financial information as well as evaluation of collateral securing the credit. The analysis considers general factors such as changes in lending policies and procedures, economic trends, loan volume trends, changes in lending management and staff, trends in delinquencies, nonaccruals and charge-offs, changes in loan review and Board oversight, the effects of competition, legal and regulatory requirements, and factors inherent to each loan pool. The provision was $415 thousand for the first three months of 2007 and $314 thousand for the same period in 2006.

Non-Interest Income

Non-interest income is an important revenue source. Non-interest income consists of service charges and fees, gain on sale of loans and other assets, and loan servicing, broker and other loan related income. Non-interest income was $3.9 million for the first three months of 2007 compared to $4.9 million for the same period in 2006, a $1.0 million decrease. The primary contributors to the decrease in non-interest income are the changes in the gain on sale of loans and servicing income.

As a result of most SBA 7(a) loans now being sold at a premium instead of at par (par loan sales carry a higher servicing rate) the weighted-average rate on servicing asset has been decreasing. At March 31, 2007, we were servicing approximately $383.1 million of the guaranteed portion of 7(a) loans previously sold with a weighted-average servicing and I/O rate of 1.95%. The SBA 7(a) guaranteed servicing portfolio balance as of December 31, 2006 was $399.9 million with a weighted-average servicing and I/O rate of 2.01%. The servicing income was negative for the quarter as a result of adjusting the fair value of the servicing and I/O assets to account for an increase in the prepayments experienced in our SBA loan portfolio.

The following table summarizes the components of non-interest income for the three months ended March 31, 2007 and 2006.

	Fees and Other Income
	Three Months Ended March 31,
	2007		2006
	(dollars in thousands)
Service Charges and Fees	$	149	$	153
Gain on Sale of Loans		2,297		2,945
Gain(Loss) on Other Assets and Other Real Estate Owned		(14)		25
Servicing Income		(855)		415
Loan Broker Income		1,386		620
Loan Related Income		458		521
Other Income		517		262
	$	3,938	$	4,941

The gain on sale of loans was $2.3 million in the first three months of 2007 compared to $2.9 million in the same period in 2006, a $648 thousand decrease. The following table summarizes the gain on sale of loans and other assets for the three months ended March 31, 2007 and 2006.

	Gain on Sale of Loans / Assets
	Three months ended March 31,
	2007		2006
	(dollars in thousands)
SBA 7A Unguaranteed Sales	$	151	$	1,467
SBA 7A Guaranteed Sales		958		1,176
SBA 504 Sales		820		-
Other Loan Related		368		302
REO Gain (Loss)		(15)		25
Fixed Assets		1		-
Total	$	2,283	$	2,970

Non-Interest Expense

Non-interest expenses consist of salaries and benefits, occupancy, furniture and equipment, processing, office expense and professional costs such as legal and auditing, marketing and regulatory fees. These expenses are reviewed and controlled to maintain cost effective levels of operation.

For the three months ended March 31, 2007, non-interest expense was $12.7 million compared to $11.1 million for the same period in 2006, a $1.6 million increase. The main contributors to the increase were salaries and employee benefits, furniture and equipment expense, loan funding expense, and marketing and promotion expense. The variances were as follows:

Salaries and benefits were $8.6 million in the first three months of 2007 compared to $7.7 million for the same period in 2006, an $898 thousand increase. The increase in salaries and benefits is a result of the expansion of the Risk Management, Information Technology, and Appraisal Departments as well as the addition of the Solana Beach and Ontario branches, the Inland Empire loan production unit, the SBA unguaranteed purchase program, and growth of the SBA wholesale lending unit. At March 31, 2007, we had 318 employees (313 full-time equivalent), of which 299 were full time. At March 31, 2006, we had 286 employees (281 full-time equivalent), of which 268 were full time. Included in the salaries and benefits expense is $190 thousand for stock-based compensation for all share-based payments granted on or before March 31, 2007 and vested in the first three months of 2007 as a result of the adoption of SFAS No. 123R.

·	Furniture and equipment expense was $472 thousand for the first three months of 2007 compared to $380 thousand for the same period in 2006, a $92 thousand increase. Contributing to the increase are the costs related to the opening of the Solana Beach and Ontario branches.

·	Loan funding expenses were $621 thousand for the first three months of 2007 compared to $462 thousand for the same period in 2006, a $159 thousand increase. The increase is a result of continued growth in our loan portfolio.

Marketing and promotion expenses were $344 thousand for the first three months of 2007 compared to $225 thousand for the same period in 2006, a $119 thousand increase. Contributing to the increase are the costs related to the opening of the Solana Beach and Ontario branches, as well as the logo change for our bank and holding company.

The following table summarizes the components of non-interest expense for the three months ended March 31, 2007 and 2006.

	Other Expenses
	Three Months Ended March 31,
	2007		2006
	(dollars in thousands)
Salaries and Employee Benefits	$	8,638	$	7,740
Occupancy Expenses		792		738
Furniture and Equipment		472		380
Data Processing		352		302
Marketing and Business Promotion		344		225
Legal and Professional		309		302
Regulatory Assessments		55		42
Travel & Entertainment		306		245
Loan Related Expense		621		462
Office Expenses		658		608
Other Expenses		117		33
	$	12,664	$	11,077

Income Taxes

Income tax expense totaled $2.9 million for the first three months of 2007 and 2006. The effective rate was 41.21% and 42.46% for these periods in 2007 and 2006, respectively. Deferred tax assets totaled $8.8 million at March 31, 2007 compared to $8.5 million at December 31, 2006. Over half of the deferred tax asset balance is due to the tax deductibility timing difference of the provision for loan loss.

LIQUIDITY

Banks are in the business of managing money. Consequently, funds management is essential to the ongoing profitability of a bank. A bank must attract funds at a reasonable rate and deploy the funds at an appropriate rate of return, while taking into account risk factors, interest rates, short- and long-term liquidity positions and profitability needs. Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs and ongoing repayment of borrowings.

Our cash position is determined on a daily basis. On a monthly basis, our Board reviews our liquidity position. One analysis measures the liquidity gap. Another analysis measures an industry standard liquidity ratio. Our guidelines state a 10% ratio or more should be maintained. At March 31, 2007, the ratio was 23.28%.

Our primary sources of liquidity are derived from financing activities which includes Federal Funds lines of credit at correspondent banks, Federal Home Loan Bank Advances, Money Desk deposits, brokered deposits, and growth in customer deposits. We maintain Federal Funds lines of credit of $18.0 million for short-term liquidity. In addition, we have created a borrowing capacity at the Federal Home Loan Bank that fluctuates with loan balances pledged as collateral. At March 31, 2007, our borrowing capacity with the Federal Home Loan Bank was $79.4 million and at December 31, 2006 was $73.8 million. These funding sources are augmented by payments of principal and interest on loans and sales and participations of eligible loans. Primary uses of funds include withdrawal of deposits, interest paid on deposits and borrowings, originations of loans, and payment of operating expenses.

Net cash used by operating activities totaled $23.9 million for the first three months of 2007, compared to net cash provided by operating activities of $2.2 million for the same period last year. The decrease was primarily the result of an increase in loans originated for sale.

Net cash used by investing activities totaled $9.7 million for the first three months of 2007, compared to $42.5 million for the same period in 2006. The change was primarily the result of the purchase of the unguaranteed portion of 7(a) loans.

Net cash provided by financing activities totaled $70.5 million for the first three months of 2007, compared to $54.3 million for the same period last year. The increase was primarily the result of the repayment of FHLB advances in the prior year offset by a lower increase in time deposits.

At March 31, 2007, cash and cash equivalents totaled $70.3 million compared to $65.5 million at March 31, 2006 an increase of $4.9 million, or 7.43%. As of March 31, 2007, management is not aware of any current recommendations by

regulatory authorities, which, if they were implemented, would have or would be reasonably likely to have a materially adverse effect on our liquidity, capital resources, or operations.

CAPITAL PLANNING

It is our goal to maintain capital levels within the regulatory “well capitalized” category. We update our multiple-year capital plan annually in conjunction with the preparation of the annual budget. Capital levels are always a primary concern of the federal regulatory authorities, and we submit capital plans to them when requested. As a result of a regulatory examination just completed, the risk weighting of some assets changed, slightly reducing the risk-based ratios for December 31, 2006. It is our strategy to maintain an adequate level of capital, which by definition excludes excessive as well as inadequate capital. The following tables set forth our actual capital amounts and ratios (dollar amounts in thousands).

				Amount of Capital Required
Temecula Valley Bancorp				For Capital Adequacy Purposes
As of March 31, 2007:	Amount		Ratio	Amount		Ratio
Total Risk-Based Capital (to Risk-Weighted Assets)	$	159,460	11.65%	$	109,543	8.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	142,643	10.42%	$	54,771	4.00%
Tier 1 Leverage Ratio (to Average Assets)	$	142,643	11.27%	$	50,636	4.00%

As of December 31, 2006:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	154,976	11.90%	$	104,193	8.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	136,579	10.49%	$	52,097	4.00%
Tier 1 Leverage Ratio (to Average Assets)	$	136,579	11.42%	$	47,848	4.00%

				Amount of Capital Required
				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Provisions
Temecula Valley Bank
As of March 31, 2007:	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total Risk-Based Capital (to Risk-Weighted Assets)	$	150,739	11.02%	$	109,439	8.00%	$	136,799	10.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	138,261	10.11%	$	54,720	4.00%	$	82,080	6.00%
Tier 1 Leverage Ratio (to Average Assets)	$	138,261	10.93%	$	50,587	4.00%	$	63,234	5.00%

As of December 31, 2006:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	145,702	11.20%	$	104,089	8.00%	$	130,111	10.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	133,160	10.23%	$	52,044	4.00%	$	78,066	6.00%
Tier 1 Leverage Ratio (to Average Assets)	$	133,160	11.16%	$	47,740	4.00%	$	59,675	5.00%

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are integral to understanding the results reported. In preparing our consolidated financial statements, we are required to make judgments and estimates that may have a significant impact upon our financial results. Certain accounting policies require us to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and are considered critical accounting policies. The estimates and assumptions used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

Two critical accounting policies are noteworthy. They concern the allowance for loan loss and the SBA servicing asset. They are considered critical due to the assumptions that are contained in their calculation, as well as external factors that can affect their value. Through quarterly review and analysis, valuations and calculations are tested for reasonableness. For a discussion of our critical accounting policies, see Item 7 "Management Discussion and Analysis" of our report on Form 10-K for the year-ended December 31, 2006. There were no changes in our critical accounting policies and estimates in the three months ended March 31, 2007 except as discussed in Note 1 to the financial statements.

LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS

Loan Commitments and Off-Balance Sheet Financial Instruments

In the normal course of business, we enter into off-balance sheet financial commitments to meet the financing needs of our customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the statement of financial position. Our 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. We use the same credit policies in making commitments as we do for loans reflected in our financial statements.

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 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. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the customer.

Contractual Obligations

We conduct business at ten full-service banking offices in Southern California and multiple loan production offices in nine states, including California. The main office facilities are located at 27710 Jefferson Avenue, Suite A100, Temecula, California. As of March 31, 2007, we owned the property at one of our branch locations. The remaining banking offices and other offices are leased. Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance. Total future annual rental payments (exclusive of operating charges and real property taxes) are approximately $5.6 million, with lease expiration dates ranging from 2007 to 2014, exclusive of renewal options.

The following table summarizes our aggregate contractual obligations and their maturities as of March 31, 2007.

			Maturity by period
	Total		One year or less		More than 1 year to 3 years		More than 3 years to 5 years		More than 5 years
	(dollars in thousands)
Commitments to Extend Credit	$	433,945	$	255,208	$	144,372	$	1,138	$	33,227
Letters of Credit		7,283		581		6,702		-		-
Loan Commitments Outstanding		441,228		255,789		151,074		1,138		33,227

Junior Subordinated Debt		41,240		-		-		-		41,240
Operating Lease Obligations		5,610		1,873		2,124		418		1,195
Other Commitments Outstanding		46,850		1,873		2,124		418		42,435
Total Outstanding Commitments	$	488,078	$	257,662	$	153,198	$	1,556	$	75,662

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities.

We do not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of our Board. We are most affected by interest rate risk. Other types of market risk, such as foreign currency exchange risk, equity price risk and commodity price risk, are not significant to us in the normal course of our business activities.

The ongoing monitoring and management of both interest rate risk and liquidity, in the short- and long-term time horizon, is an important component of our asset/liability management process, which is governed by limits established in the policies reviewed and approved annually by our Board. We do not believe it is possible to reliably predict future interest rate movements, but instead maintain an appropriate process and set of measurement tools which enable us to identify and quantify sources of interest rate risk in varying rate environments. Our primary tool in managing interest rate risk is the effect of interest rate shocks on the net interest income.

The following reflects our one year net interest income sensitivity based on asset and liability levels using the March 31, 2007 net interest income as a starting point. For purposes of this table, there is assumed to be zero growth in loans, investments, deposits, or other components of the balance sheet.

March 31, 2007
Changes in			Projected Net		Change from	% Change from
Rates			Interest Income		Base Case	base Case
(dollars in thousands)
+300	bp	$	62,197	$	(12,675)	(16.93%)
+200	bp		66,237		(8,635)	(11.53%)
+100	bp		70,430		(4,442)	(5.93%)
0	bp		74,872		-	0.00%
-100	bp		80,020		5,148	6.88%
-200	bp		85,149		10,277	13.73%
-300	bp		90,258		15,386	20.55%

In the model, a rising rate environment will increase net interest income (NII) from a flat rate environment. A lower rate environment will decrease net interest income. The analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon various assumptions. While the assumptions are developed upon current economic and market conditions, we cannot make any assurances as to the predictive nature of these assumptions. Furthermore, the sensitivity analysis does not reflect actions our Board might take in responding to or anticipating changes in interest rates.

ITEM 4 - CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness (as defined in Rules 13a through15e) of our disclosure controls and procedures and have concluded that as of the period covered by this report our disclosure controls and procedures were effective.

In addition, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described in the above paragraph that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of March 31, 2007, we are not party to any litigation that is considered likely to have a material adverse effect on us.

ITEM 1A. RISK FACTORS

There have been no material changes in the discussion pertaining to risk factors described in Item 1A to Part I of our Annual Report on Form 10-K, for fiscal year ended December 31, 2006, which Item 1A is incorporated herein by reference. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

(a) None

(b) None.

ITEM 6. EXHIBITS

Exhibit No. Description of Exhibit

31.1 Rule 13a-14(a) Certification of Chief Executive Officer

31.2 Rule 13a-14(a) Certification of Chief Financial Officer

32.1 Section 1350 Certifications

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TEMECULA VALLEY BANCORP INC.

DATE: May 10, 2007

Stephen H. Wacknitz,

President/CEO, Chairman of the Board

Donald A. Pitcher,

Executive Vice President

Chief Financial Officer

EX-31 2 exhibit31-1.htm EXHIBIT 31.1 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 certify:

1. I have reviewed this quarterly report on Form 10-Q of Temecula Valley Bancorp Inc.;

2. Based on my knowledge, this report 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 period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant 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 Rules 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 principles;

(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 report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant'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 (or persons performing the equivalent functions):

(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 registrant'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: May 10, 2007

Stephen H. Wacknitz

President & Chief Executive Officer

EX-31.2 3 exhibit31-2.htm EXHIBIT 31.2 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 certify:

1. I have reviewed this quarterly report on Form 10-Q of Temecula Valley Bancorp Inc.;

(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: May 10, 2007

Donald A. Pitcher

EVP & Chief Financial Officer

EX-32 4 exhibit32-1.htm EXHIBIT 32.1 EXHIBIT 32.1

Exhibit 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Temecula Valley Bancorp Inc. (the "Company") hereby certificates that:

1. the Quarterly Report on Form 10-Q for the period ending March 31, 2007 ("Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; 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: May 10, 2007

Stephen H. Wacknitz

Chairman, President and

Chief Executive Officer

Certification of Chief Financial Officer

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007

Donald A. Pitcher

EVP/Chief Financial Officer

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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