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: September 30, 2008

or

[ ] 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)

(951) 694-9940

 (Registrant's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 [ ]        Small Company Reporter [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]   No  [X]

As of November 7, 2008, there were 10,040,267 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 (UNAUDITED)	3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS	11
OVERVIEW	11
FINANCIAL CONDITION	13
RESULTS OF OPERATIONS	20
LIQUIDITY	27
CAPITAL PLANNING	28
CRITICAL ACCOUNTING POLICIES AND ESTIMATES	28
LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS	29
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4 – CONTROLS AND PROCEDURES	30
PART II - OTHER INFORMATION	31
ITEM 1.           LEGAL PROCEEDINGS	31
ITEM 1A.        RISK FACTORS	31
ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31
ITEM 3.           DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	31
ITEM 5.           OTHER INFORMATION	31
ITEM 6.           EXHIBITS	32
SIGNATURES	33

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS (Unaudited)

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Financial Condition

(Unaudited)

	September 30, 2008			December 31, 2007
ASSETS	(in thousands, except share data)
Cash and Due from Banks	$	12,578		$	13,210
Federal Funds Sold		- -			4,220
TOTAL CASH AND CASH EQUIVALENTS		12,578			17,430
Interest-bearing deposits in financial institutions		1,000			1,000
Investment securities available-for-sale		39,125			- -
Investment securities held-to-maturity (fair value of $2,942 at September 30, 2008 and $3,046 at December 31, 2007)		2,875			2,981
Loans Held for Sale		221,136			207,391
Loans:
Commercial		82,091			68,761
Real Estate – Construction		481,435			481,849
Real Estate – Other		264,157			229,123
SBA		301,682			242,514
Consumer and other		4,722			3,632
TOTAL LOANS HELD IN PORTFOLIO		1,134,087			1,025,879
Net Deferred Loan Fees		4,835			4,447
Allowance for Loan Losses		(20,069	)		(16,022	)
TOTAL NET LOANS HELD IN PORTFOLIO		1,118,853			1,014,304
Federal Home Loan Bank Stock, at Cost		4,842			2,905
Premises and Equipment		5,311			5,271
Other Real Estate Owned		26,870			- -
Cash Surrender Value of Life Insurance		30,715			28,034
Deferred Tax Assets		15,438			12,298
SBA Servicing Assets		4,927			5,350
SBA Interest-Only Strips Receivable		7,008			6,599
Accrued Interest Receivable		5,901			6,827
Other Assets		17,393			8,135
TOTAL ASSETS	$	1,513,972		$	1,318,525
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non Interest-Bearing Demand	$	139,577		$	133,867
Money Market and NOW		106,860			146,270
Savings		27,157			28,059
Time Deposits, Under $100,000		610,044			453,272
Time Deposits, $100,000 and Over		322,524			399,603
TOTAL DEPOSITS		1,206,162			1,161,071
Accrued Interest Payable		2,787			2,329
Federal Reserve Bank, Discount Window Advance		131,800			- -
Junior Subordinated Debt		56,924			34,023
Dividend Payable		401			405
Other Liabilities		14,443			12,738
TOTAL LIABILITIES		1,412,517			1,210,566
Shareholders’ Equity:
Common Stock No Par Value; 40,000,000 Shares
Authorized; 10,038,267 and 10,147,910 Shares Issued
and Outstanding at September 30, 2008 and December 31, 2007		36,097			37,178
Retained Earnings		65,415			70,781
Accumulated other comprehensive loss		(57	)		- -
TOTAL SHAREHOLDERS’ EQUITY		101,455			107,959
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,513,972		$	1,318,525

See accompanying notes to the consolidated financial statements

3

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Income

(Unaudited)

	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2008				2007			2008			2007
INTEREST INCOME	(in thousands, except share and per share data)
Loans, including fees		$	22,132		$	28,496		$	70,433		$	86,061
Investment Securities			293			43			506			75
Due from Banks-Time			12			14			38			18
Federal Funds Sold			3			505			241			1,167
TOTAL INTEREST INCOME			22,440			29,058			71,218			87,321
INTEREST EXPENSE
Money Market and NOW			382			1,267			1,477			3,305
Savings Deposits			29			39			87			89
Time Deposits			9,161			10,586			29,034			31,846
Junior Subordinated Debt and Other Borrowings			1,337			649			3,576			2,262
TOTAL INTEREST EXPENSE			10,909			12,541			34,174			37,502
NET INTEREST INCOME			11,531			16,517			37,044			49,819
Provision for Loan Losses			7,550			1,055			15,050			1,470
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			3,981			15,462			21,994			48,349
NON INTEREST INCOME
Service Charges and Fees			166			154			465			454
Gain on Sale of Loans			1,310			1,631			2,710			8,381
Gain(Loss) on Other Assets and Other Real Estate Owned			(375	)		1			(340	)		(12	)
Servicing Income (loss)			(161	)		(3,108	)		362			(4,818	)
Loan Broker Income			106			1,332			1,056			3,993
Loan Related Income			415			928			1,442			1,945
Other Income			769			582			2,078			1,632
TOTAL NON INTEREST INCOME			2,230			1,520			7,773			11,575
NON INTEREST EXPENSE
Salaries and Employee Benefits			6,232			7,791			22,058			26,074
Occupancy Expenses			923			815			2,642			2,424
Furniture and Equipment			521			516			1,451			1,444
Data Processing			373			324			1,070			1,029
Marketing and Business Promotion			188			292			605			893
Legal and Professional			254			308			920			1,019
Regulatory Assessments			276			418			831			529
Travel & Entertainment			126			210			555			801
Loan Related Expense			737			975			1,805			2,090
Office Expenses			654			648			1,828			2,011
Other Real Estate Owned Expenses			892			- -			1,049			- -
Other Expenses			801			344			1,971			1,307
TOTAL NON INTEREST EXPENSE			11,977			12,641			36,785			39,621
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)			(5,766	)		4,341			(7,018	)		20,303
Income Tax Expense (Benefit)			(2,158	)		1,746			(2,857	)		8,278
NET INCOME (LOSS)		$	(3,608	)	$	2,595		$	(4,161	)	$	12,025
Per Share Data :
Earnings (Loss) Per Share – Basic		$	(0.36	)	$	0.25		$	(0.42	)	$	1.15
Earnings (Loss) Per Share – Diluted		$	(0.36	)	$	0.25		$	(0.42	)	$	1.10
Cash Dividend Per Share		$	0.04		$	0.04		$	0.12		$	0.08
Average number of shares outstanding			10,038,267			10,247,356			10,058,973			10,502,129
Average number of shares and equivalents (1)			10,038,267			10,559,464			10,058,973			10,892,611
(1) The effect of stock options for the quarter and year ended September 30, 2008 was not included in the calculation of diluted loss per share because to do so would have been anti-dilutive for all shares.

See accompanying notes to the consolidated financial statements

4

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Shareholders’ Equity

(Unaudited)

										Accumulated
				Common						Other
				Stock			Retained			Comprehensive
	Shares			& Surplus			Earnings			Income (Loss)			Total
	(in thousands, except per share data)
Balance at January 1, 2007		10,587		$	46,383		$	57,052		$	(172	)	$	103,263
Net Income								12,025						12,025
Exercise of Stock Options,
Including the Realization of    Tax Benefits of $1,019		235			1,897									1,897
Repurchase and retirement of common stock		(684	)		(12,061	)								(12,061	)
Stock-based compensation					651									651
Adjustment for adoption of FASB 155								(172	)		172			- -
Cash dividends ($0.08 per share)								(831	)					(831	)
Balance at September 30, 2007		10,138		$	36,870		$	68,074		$	- -		$	104,944
Balance at January 1, 2008		10,148		$	37,178		$	70,781		$	- -		$	107,959
Comprehensive loss:
Net Loss								(4,161	)					(4,161	)
Change in net unrealized loss on    investment securities available for sale,    after tax effects											(57	)		(57	)
Total comprehensive loss														(4,218	)
Exercise of Stock Options,
Including the Realization of    Tax Benefits of $117		90			428									428
Repurchase and retirement of common stock		(200	)		(2,043	)								(2,043	)
Stock-based compensation					534									534
Cash dividends ($0.12 per share)								(1,205	)					(1,205	)
Balance at September 30, 2008		10,038		$	36,097		$	65,415		$	(57	)	$	101,455

See accompanying notes to the consolidated financial statements

5

TEMECULA VALLEY BANCORP INC.

Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended September 30,
	2008			2007
OPERATING ACTIVITIES	(in thousands)
Net Income (Loss)	$	(4,161	)	$	12,025
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for loan losses		15,050			1,470
Depreciation and amortization		1,444			1,373
Fair value adjustment on servicing assets and I/O strips receivable		3,983			10,092
Amortization of debt issuance cost		47			42
Net amortization of securities premiums (discounts)		(3	)		9
Net change in deferred loan origination fees		(388	)		19
Provision for deferred taxes		(3,139	)		(900	)
Gain on sale of loans		(2,710	)		(8,381	)
Loans originated for sale		(93,348	)		(203,969	)
Proceeds from loan sales		82,313			112,474
Loss on sale of other real estate owned and fixed assets		340			12
Share-based compensation expense		534			651
Earnings on cash surrender value of life Insurance		(831	)		(737	)
Federal Home Loan Bank stock dividends		(132	)		(88	)
Net change in accrued interest, other assets and other liabilities		(10,349	)		(5,836	)
NET CASH USED IN OPERATING ACTIVITIES		(11,350	)		(81,744	)
INVESTING ACTIVITIES
Purchases of available-for-sale investments		(39,967	)		- -
Purchases of held-to-maturity investments		(600	)		(2,636	)
Proceeds from maturities of held-to-maturity securities		600			600
Principal repayments of securities		855			- -
Purchases of Federal Home Loan Bank stock		(1,806	)		- -
Proceeds from Federal Home Loan Bank stock		- -			783
Net decrease (increase) in loans		(150,834	)		23,683
Purchase of loans		(715	)		(57,200	)
Proceeds from first trust deed loan sales		- -			70,184
Purchases of premises and equipment		(1,658	)		(1,047	)
Proceeds from sale of premises and equipment		341			92
Proceeds from sale of other real estate owned		5,160			1,810
Purchase of Cash Surrender Value Life Insurance		(1,850	)		(3,000	)
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES		(190,474	)		33,269
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, now, money market and savings accounts		(34,602	)		41,340
Net increase in time deposits		79,693			28,711
Proceeds from exercise of stock options		311			878
Proceeds from Federal Reserve Bank, Discount Window Advance		131,800			- -
Proceeds from issuance of junior subordinated debt		22,901			- -
Retirement of junior subordinated debt securities		- -			(7,217	)
Cash dividends on common stock		(1,205	)		(831	)
Repurchase and retirement of common stock		(2,043	)		(12,061	)
Excess tax benefits from exercise of stock options		117			1,019
NET CASH  PROVIDED BY FINANCING ACTIVITIES		196,972			51,839
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(4,852	)		3,364
Cash and cash equivalents at beginning of year		17,430			33,469
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,578		$	36,833
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	33,715		$	37,350
Income taxes paid, net of refunds	$	5,520		$	8,349
Transfer of loans to other real estate owned	$	32,338		$	722

See accompanying notes to the consolidated financial statements

6

TEMECULA VALLEY BANCORP INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

For the nine months ended September 30, 2008 and 2007

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 shareholder of Temecula Valley Statutory Trust II, Temecula Valley Statutory Trust III, Temecula Valley Statutory Trust IV, Temecula Valley Statutory Trust V, and Temecula Valley Statutory Trust VI. 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, other real estate owned, 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 nine month period ended September 30, 2008, 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, 2007 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 adjustments) necessary to fairly present our financial position on September 30, 2008.

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, 2007. Effective January 1, 2008, we have adopted Financial Accounting Standards Boards (“FASB”) No. 157 and No. 159 and EITF No. 06-4 as described below.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We have adopted FAS 157 effective January 1, 2008. The adoption had no effect on our financial condition or results of operations.

On October 10, 2008, the FASB Staff issued an FSP related to Statement of Financial Accounting Standards (“SFAS”) No. 157, FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is not active.” The provisions of FSP 157-3 are effective on issuance, or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The issuance of FSP 157-3 and our adoption of FSP 157-3 did not have an effect on our interim consolidated financial statements. Application issues addressed by the FSP include:

a)   How management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist.

b)   How observable market information in a market that is not active should be considered when measuring fair value.

c)   How the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value.

7

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.

In September 2006, the FASB Emerging Issues Task Force (“EITF”) finalized Issue No. 06-4, ”Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or the future death benefit depending on the contractual terms of the underlying agreement. We adopted EITF 06-4 on January 1, 2008. The adoption of this standard did not have a material impact on our financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP Hierarchy). The Board issued this Statement because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB as opposed to auditing literature established by the AICPA and PCAOB. This Statement describes the different sources of GAAP and categorizes them in descending order of authority as follows:

FASB Statements and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research Bulletins and APB Opinions that have not been superseded by actions of the FASB. For SEC registrants, the rules and interpretive releases issued by the SEC are sources of level (a) GAAP for SEC registrants. In addition, SEC staff issue Staff Accounting Bulletins that represent practices followed by the SEC in administering issuer disclosure requirements. FASB Technical Bulletins and, if cleared by FASB, AICPA Industry Audit and Accounting Guides and Statements of Position, AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by FASB, consensus positions of the FASB Emerging Issues Task Force (EITF), and Appendix D Topics of EITF Abstracts Implementation guides (Q&As) issued by FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Positions not cleared by FASB, and practices that are widely recognized and prevalent either generally or in an industry. This Statement is not expected to result in any change in current practice.

Note 2 – Dividends Declared

Our company is a legal entity separate and distinct from our bank. Our company’s shareholders are entitled to receive dividends when and as declared by our Board of Directors, out of funds legally available therefore, subject to the restrictions set forth in the California General Corporation Law as well as other restrictions discussed below.

The availability of operating funds for our company and the ability of our company to pay a cash dividend depends largely on our bank’s ability to pay a cash dividend to our company. The payment of cash dividends by our bank is subject to restrictions set forth in various federal and state laws and regulations.

The Federal Reserve has broad authority to prohibit the payment of dividends by our company depending upon the condition of each entity within the corporate structure. In addition, the future payment of cash dividends will generally depend, subject to regulatory restraints, upon our company’s earnings during any period, and the assessment by our Board of the capital requirements, our company and other factors, including the maintenance of an adequate allowance for loan losses at our bank.

No cash dividends were paid by our bank prior to the formation of our company in 2002. Since 2007, our Board of Directors authorized six cash dividends.  In September 2008 our Board of Directors voted to suspend regular quarterly cash dividends on its common stock. This will not affect the cash dividends to be paid October 15, 2008. While our subsidiary bank remains above regulatory requirements for being a “well capitalized” institution, our Board of Directors believe maintaining a strong capital position is a priority at this time and eliminating our cash dividends will improve our capital position by conserving approximately $1.6 million of capital per year.

8

The table below sets forth information concerning cash dividends paid since 2007:

Date authorized:	Amount:	Record Date:	Payable Date:
May 2007	$0.04 per share	July 2, 2007	July 16, 2007
August 2007	$0.04 per share	October 1, 2007	October 15, 2007
November 2007	$0.04 per share	January 1, 2008	January 15, 2008
March 2008	$0.04 per share	April 1, 2008	April 15, 2008
May 2008	$0.04 per share	July 1, 2008	July 15, 2008
August 2008	$0.04 per share	October 1, 2008	October 15, 2008

Note 3 – Fair Value

Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities available-for-sale.  The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities’ relationship to other benchmark quoted securities (Level 2 inputs).

SBA Servicing Assets/SBA Interest-Only Strips Receivable.  The fair value of SBA servicing and I/O strip receivable assets are based on a valuation model used by an independent appraiser. We are able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 3 inputs).

Assets measured at fair value on a recurring basis are summarized below:

				Fair Value Measurements Using
	September 30, 2008			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:			(dollars in thousands)
Investment Securities available-for-sale	$	39,125		$	- -	$	39,125	$	- -
SBA Servicing Asset	$	4,927		$	- -	$	- -	$	4,927
SBA Interest-Only Strips Receivable	$	7,008		$	- -	$	- -	$	7,008

The table below presents a reconciliation of SBA Servicing and SBA Interest-Only Strips Receivable, measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period indicated:

	Servicing Assets			Interest-Only Strips Receivable
	(dollars in thousands)
Balance at beginning of period, January 1, 2008	$	5,350		$	6,599
Increase from Loan Sales		1,000			2,969
Fair Market value adjustment		(1,423	)		(2,560	)
Balance at end of period, September 30, 2008	$	4,927		$	7,008

Impaired Loans.  A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans which are collateral based are measured at the fair value of the loans collateral value. A majority of our loans are collateral dependent and, accordingly, are measured based on the fair value of such collateral. Impaired loans which are not collateral dependent are based on the present value of the expected future cash flows. We will consider a loan to be impaired if it is placed on nonaccrual or it becomes collateral dependent without the appropriate level of support from the borrower or guarantor.  Impairment is also assessed on classified loans still accruing with balances greater than $500,000 that have a loss potential. For example, a loan where a loss is estimated and an estimated loss reserve is established will be deemed an impaired loan because we have determined it to be probable that full interest and principal, in accordance with the contractual terms of the loan agreement, will not be collected.

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Fair value of the loan’s collateral is determined by appraisals or recent transaction prices for similar collateral, adjusted for costs to liquidate collateral. As such, fair value inputs on impaired loans are considered (Level 3 inputs). At September 30, 2008, substantially all of our impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to Management or recent transaction prices for similar collateral. Impaired loans had a carrying amount of $65.4 million, with a valuation allowance of $5.9 million, resulting in an additional provision for loan losses of $4.2 million for the period.

Assets measured at fair value on a non-recurring basis are summarized below:

				Fair Value Measurements Using
	September 30, 2008			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:			(dollars in thousands)
Impaired loans	$	59,354		$	- -	$	- -	$	59,354

Loans held-for-sale.  Loans held for sale consist of SBA 504 loans, SBA 7a, USDA B & I loans and SBA 504 Construction loans that have relatively long turnover periods as they are not sold until the construction is complete. Additionally, loans held for sale include the second trust deed of SBA 504 for loans which can take up to 6 months to be purchased by an SBA approved Community Development Corp. The majority of these loans are at floating rates and, consequently, fair values generally are stable, which currently results in carrying the loans at historical cost.

Note 4 - Participation in the Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the U. S. secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (“CPP”), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. We are evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.

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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 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 eleven full-service banking offices located in Carlsbad, Corona, El Cajon, Escondido, Fallbrook, Murrieta, Ontario, San Marcos, Solana Beach, Temecula, and in the Rancho Bernardo area of San Diego. The second is operations by our Real Estate Industries Group of our bank that 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, Florida, Oregon, Texas, and Washington.

Since opening in 1996, and through 2006, we experienced substantial annual growth. Since the beginning of 2007, growth has progressively moderated due to a sale of $59.0 million in 1st trust deed loans in 2007 and the fairly abrupt slowdown in the real estate market continuing and deepening through 2008.  Loan growth in 2008 has been fueled by growth in SBA lending.

Recent Events

The FDIC has issued a proposed rule to raise current deposit insurance assessment rates uniformly for all financial institutions for the first quarter of 2009. The proposed rule also provides for a new means of calculating deposit insurance beginning during the second quarter of 2009, and includes an assessment of the financial institution’s risk profile as determined by the FDIC. Although final rules have not been published, we anticipate that its cost of insuring deposits will increase in 2009, when and if the final rules are adopted.

During the past year, the banking industry in general has been under significant stress due to declining real estate values resulting in asset impairment, eroding capital ratios and tightening liquidity. The impacts of these trends are discussed in the Management Discussion and Analysis portion of this filing.

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The following table highlights selected financial data for the three and nine month periods ended September 30, 2008 and 2007, and the year ended December 31, 2007:

	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2008				2007					2008			2007
Income Statement:	(dollars and shares in thousands, except per share data)
Interest income		$	22,440				$	29,058		$	71,218			$	87,321
Interest expense			10,909					12,541			34,174				37,502
Net interest income			11,531					16,517			37,044				49,819
Provision for loan losses			7,550					1,055			15,050				1,470
Net interest income after provision for loan losses			3,981					15,462			21,994				48,349
Non interest income			2,230					1,520			7,773				11,575
Non interest expense			11,977					12,641			36,785				39,621
Income (loss) before income taxes			(5,766	)				4,341			(7,018	)			20,303
Provision for income taxes			(2,158	)				1,746			(2,857	)			8,278
Net income (loss)		$	(3,608	)			$	2,595		$	(4,161	)		$	12,025
Per Share Data:
Basic earnings (loss) per share		$	(0.36	)			$	0.25		$	(0.42	)		$	1.15
Diluted earnings (loss) per share		$	(0.36	)			$	0.25		$	(0.42	)		$	1.10
Average common shares outstanding			10,038					10,247			10,059				10,502
Average common shares (dilutive) (1)			10,038					10,559			10,059				10,893
Book value per share		$	10.11				$	10.35		$	10.11			$	10.35
Selected Ratios:
Net Interest Margin			3.32	%				5.38	%		3.70	%			5.48	%
Efficiency Ratio			87.04	%				70.08	%		82.08	%			64.54	%
Return on average assets			(0.97	)%				0.79	%		(0.39	)%			1.24	%
Return on average equity			(13.88	)%				9.66	%		(5.33	)%			15.03	%
Balance Sheet Data:	September 30, 2008					December 31, 2007
Total assets		$	1,513,972				$	1,318,525
Loans Held-for-sale			221,136					207,391
Gross loans(excluding loans held-for-sale)			1,134,087					1,025,879
Total deposits			1,206,162					1,161,071
Junior Subordinated Debt			56,924					34,023
Federal Reserve Bank, Discount Window Advance			131,800					- -
Shareholders' Equity			101,455					107,959
Net Charge offs – year-to-date		$	11,283				$	1,100
Net Charge offs / year-to-date average total loans (annualized)			1.13	%				0.09	%
Gross non-performing loans		$	69,252				$	30,936
Other Real Estate Owned, gross			26,870					- -
Gross non-performing assets / ytd average total loans			7.40	%				2.58	%
Non-performing loans, net of guarantees		$	61,924				$	20,557
Other Real Estate Owned, net of guarantees			22,840					- -
Net non-performing assets / ytd average total loans			6.53	%				1.72	%
Allowance for loan loss		$	20,069				$	16,022
Allowance for loan loss/net loans and loans held-for-sale			1.48	%				1.29	%
Allowance for loan loss/net loans excluding loans held-for-sale			1.76	%				1.56	%
Allowance for loan loss/gross nonperforming loans			28.98	%				51.79	%
Allowance for loan loss/net nonperforming loans			32.41	%				77.94	%
Tier I leverage ratio			9.09	%				10.63	%
Tier I risk based ratio			8.81	%				9.65	%
Total risk based ratio			11.46	%				10.80	%
(1) The effect of stock options for the quarter and year ended September 30, 2008 was not included in the calculation of diluted loss per share because to do so would have been anti-dilutive for all shares.

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FINANCIAL CONDITION

Balance Sheet Summary

Total assets were $1.51 billion at September 30, 2008, compared to $1.32 billion at December 31, 2007, an increase of $195.4 million or 14.82%. Total loans, and loans held-for-sale, excluding deferred loan fees and allowance for loan loss, were $1.36 billion at September 30, 2008, an increase of $122.0 million or 9.89%, from $1.23 billion at December 31, 2007. Total deposits were $1.21 billion at September 30, 2008, an increase of $45.1 million or 3.88%, from $1.16 billion at December 31, 2007. Total shareholders’ equity was $101.5 million at September 30, 2008 a decrease of $6.5 million or 6.02%, from $108.0 million at December 31, 2007.

Cash and Cash Equivalents

Cash and cash equivalents were $12.6 million as of September 30, 2008, compared to $17.4 million at December 31, 2007, a decrease of $4.8 million or 27.84%. The decrease in the first nine months of 2008 is attributed to a decrease in federal funds sold of $4.2 million.

Investment Securities, available-for-sale

At September 30, 2008, the fair value of our investment securities available-for-sale totaled $39.1 million and had an average maturity of 2.4 years.  In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities held as “available-for-sale” are reported at current fair value for financial reporting purposes.  The related unrealized gains or losses are recorded, net of income taxes, as accumulated other comprehensive income (loss) in shareholders’ equity.

The following table is a comparison of amortized cost and fair value of investment securities available-for-sale as of the dates indicated:

	Investment Securities Available-for-Sale
	September 30, 2008									December 31, 2007
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(dollars in thousands)
U.S. government agency securities	$	39,221	$	1	$	(97	)	$	39,125	$	- -	$	- -	$	- -	$	- -
Total	$	39,221	$	1	$	(97	)	$	39,125	$	- -	$	- -	$	- -	$	- -

Investment Securities, held-to-maturity

At September 30, 2008, our FNMA mortgage-backed securities, with an amortized cost and fair value of $2.9 million, were classified as held-to-maturity. These securities were purchased in November 2006 and July 2007 and mature in 2036 and 2037, respectively.

Loans

Total loans, excluding loans held-for-sale, were $1.13 billion at September 30, 2008, compared to $1.03 billion at December 31, 2007, an increase of $108.2 million or 10.55%. The loan portfolio composition is primarily commercial, construction, real estate secured and SBA loans. SBA loans, of which we are an active originator, comprise, approximately 28% and 23% of net loans held in portfolio as of September 30, 2008 and December 31, 2007, respectively. Typical of community bank loan markets, a significant portion of our portfolio is real estate secured. Approximately 92% of the loan portfolio at September 30, 2008 and 93% at December 31, 2007 was real estate secured. Approximately 42% and 47% of our lending portfolio, including SBA construction loans was classified as real estate construction loans as of September 30, 2008 and December 31, 2007, respectively.

In 2006, we began purchasing participations in the unguaranteed portions of SBA 7(a) loans to be held in our loan portfolio (“purchase program”). No further purchases are anticipated due to the elimination of this department so we can concentrate on traditional SBA products. The participations were purchased based upon their payment history and other selected underwriting criteria. At September 30, 2008, we had $130.1 million in outstanding purchased participation balances, down from $156.0 million at December 31, 2007. Only $715 thousand of loans were purchased during the first nine months of 2008, with the purchase occurring in the first quarter. The participations were purchased from other financial institutions that are eligible to participate in the SBA 7(a) program. The participation agreements are tri-party agreements among the selling financial institution, the SBA and us.

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The federal banking agencies commercial real estate (“CRE”) loan guidance establishes CRE concentration thresholds as criteria for examiners to identify CRE concentration that may warrant further analysis. Under the guidance, our ratio of commercial real estate loans, excluding owner-occupied properties, to capital at September 30, 2008, is approximately 348%, down from 382% at December 31, 2007. 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.  As we focus more on building our SBA loan portfolio, we anticipate our ratio of commercial real estate loans, excluding owner-occupied properties, to capital, to decrease and for the downward trend to continue during 2008. The weighted-average loan-to-value for our commercial real estate loans, excluding owner occupied properties, is approximately 59% at September 30, 2008.

The following table summarizes our loan portfolio, (including loans held-for-sale, excluding deferred loan fees and allowance for loan loss), by category and percentage distribution as of the dates indicated:

		September 30, 2008			December 31, 2007
	Amount		Percent	Amount		Percent
Loan portfolio composition:	(dollars in thousands)
Commercial	$	82,091	6%	$	68,761	6%
Real estate - Construction		575,026	42%		587,992	47%
Real estate – Other		314,124	23%		292,869	23%
SBA		379,260	28%		280,016	23%
Consumer		4,722	1%		3,632	1%
Total Loans	$	1,355,223	100%	$	1,233,270	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 and 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 $20.1 million at September 30, 2008 and $16.0 million at December 31, 2007. The allowance for loan losses as a percentage of net loans outstanding and loans held-for-sale was 1.48% as of September 30, 2008 and 1.29% at December 31, 2007. The allowance for loan losses as a percentage of net loans outstanding excluding loans held-for-sale was 1.76% as of September 30, 2008, and 1.56% as of December 31, 2007.

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The following table summarizes the activity in our allowance for loan losses for the periods indicated:

	Allowance for Loan Losses
	September 30, 2008			December 31, 2007			September 30, 2007
	(dollars in thousands)
Loans outstanding and loans held-for-sale	$	1,360,058		$	1,237,717		$	1,204,474
Average amount of loans outstanding and loans held-for-sale		1,298,560			1,196,849			1,184,061
Balance of allowance for loan losses, beginning of periods		16,022			12,522			12,522
Loans charged off:
Commercial		(2,335	)		(449	)		(280	)
Real Estate - Construction		(6,485	)		(100	)		- -
Real Estate – Other		(2,461	)		(787	)		(547	)
SBA		- -			- -			- -
Consumer		(2	)		- -			- -
Total loans charged off	$	(11,283	)	$	(1,336	)	$	(827	)
Recoveries of loans previously charged off:
Commercial		32			148			96
Real Estate - Construction		- -			- -			- -
Real Estate – Other		248			88			38
SBA		- -			- -			- -
Consumer		- -			- -			- -
Total loan recoveries	$	280		$	236		$	134
Net loans charged off		(11,003	)		(1,100	)		(693	)
Provision for loan losses		15,050			4,600			1,470
Balance, end of period	$	20,069		$	16,022		$	13,299
Ratio of net charge-offs to average loans (annualized)		1.13	%		0.09	%		0.06	%

The determination for whether or not a loan is deemed to be impaired for Statement of Financial Accounting Standard  (“SFAS”) 114 purposes is based upon loan and/or borrower/guarantor performance, and not solely collateral coverage. Specifically, we will deem a loan to be impaired when, based on current information and events; it is probable that we will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement.

Classified loans, not on nonaccrual, that are not considered to be impaired are aggregated and provisions to the allowance are made on a general reserve basis. All classified loans, not on nonaccrual, of $500,000 or less (net of any SBA or government guaranty) will be treated under SFAS 5 and included in the general reserve.

The following table summarizes our allowance for loan losses between specific (SFAS 114) and general (SFAS 5) reserves for the periods indicated:

	Allowance for Loan Losses
	Total		Specific (SFAS 114)		General (SFAS 5)
	(dollars in thousands)
Balance at end of period, September 30, 2007	$	13,299	$	1,261	$	12,038
Balance at end of period, December 31, 2007	$	16,022	$	1,854	$	14,168
Balance at end of period, September 30, 2008	$	20,069	$	5,918	$	14,151

The total allowance for loan losses have increased to $20.1 million as of September 30, 2008 as compared to $16.0 million and $13.2 million as of December 31, 2008 and September 30, 2007. The increase in the allowance of approximately $4.0 million from December 31, 2007 to September 30, 2008 is due to an increase in the specific reserve of approximately $4.1 million offset by a slight decrease in the general reserve.  The allowance increased $6.8 million from September 30, 2007 to September 30, 2008. The increase is related to an increase of $4.7 million in the specific reserve and an increase of $2.1 million in the general reserve.  The increase in the specific reserve is directly related to the increase in non performing assets with the increase in the general reserve related to the change in the general economic environment and changes in our general reserve factors.  See further discussion in the Provision for Loan Losses section.

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

At September 30, 2008, gross nonaccrual loans totaled $66.2 million, a $35.3 million or 113.91% increase from gross nonaccrual loans of $30.9 million at December 31, 2007. Construction loans accounted for $27.6 million of the increase. The OREO balance was $26.9 million at September 30, 2008, compared to no OREO at December 31, 2007. The balance of loans 90 days or more past due and still accruing was $3.1 million at September 30, 2008, compared to no loans 90 days or more past due and still accruing at December 31, 2007. The balance of restructured loans was zero at September 30, 2008 and $539 thousand at December 31, 2007.

The following table presents information as of the dates indicated 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:

	September 30, 2008										December 31, 2007
	Gross			Government				Net			Gross		Government			Net
	Balance			Guaranteed				Balance			Balance		Guaranteed			Balance
Nonaccrual loans (Gross):	(dollars in thousands)
Commercial		$	702		$	(114	)	$	588		$	371	$	- -		$	371
Real Estate - Construction			38,823			(1,075	)		37,748			11,242		(288	)		10,954
Real Estate - Other			26,651			(6,139	)		20,512			19,323		(10,091	)		9,232
Total			66,176			(7,328	)		58,848			30,936		(10,379	)		20,557
OREO			26,870			(4,030	)		22,840			- -		- -			- -
Total nonaccrual loans and OREO		$	93,046		$	(11,358	)	$	81,688		$	30,936	$	(10,379	)	$	20,557
Gross nonaccrual loans as a percentage of total loans									4.87	%							2.50	%
Gross nonaccrual loans and OREO as a percentage of total loans and OREO									6.71	%							2.50	%
Allowance for loan losses to total net loans (including held-for-sale)									1.48	%							1.29	%
Allowance for loan losses to total net loans (excluding held-for-sale)									1.76	%							1.56	%
Allowance for loan losses to gross nonaccrual loans									30.33	%							51.79	%
Loans past due 90 days or more on accrual status:
Real Estate - Construction								$	2,431							$	- -
Real Estate - Other									645								- -
Total								$	3,076							$	- -
Restructured loans:
On accrual status								$	- -							$	- -
On nonaccrual status									- -								539
Total								$	- -							$	539

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 certain executives. The BOLI had a balance of $30.7 million at September 30, 2008, compared to $28.0 million at December 31, 2007, an increase of $2.7 million or 9.56%. The increase is the result of the addition of one policy totaling $1.9 million, coupled with year-to-date net earnings on the policies.

Servicing Asset and Interest-Only Strips Receivable

Two components of non interest-earning assets are the SBA servicing and SBA interest-only (I/O) strip receivable assets. At September 30, 2008, we were servicing approximately $370.6 million of the guaranteed portion of 7(a) and USDA Business and Industry (“B&I”) loans previously sold with a weighted-average servicing rate of 1.74%. At December 31, 2007, we were servicing approximately $374.4 million of the guaranteed portion of 7(a) loans previously sold with a weighted-average servicing and I/O rate of 1.69%.

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 a premium versus at par.

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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. At September 30, 2008 and December 31, 2007, we had servicing assets of $4.9 million, and $5.4 million, respectively, which approximate fair value. 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 September 30, 2008 and December 31, 2007, we had I/O strips of $7.0 million, and $6.6 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. Included in the SBA 7(a) totals are USDA B&I loans. These B&I loans usually carry an 80% government guarantee, and are sold in the secondary market much like SBA 7(a) loans. The serviced balance of B&I loans at September 30, 2008 was $44.9 million compared to $21.1 at December 31, 2007. For the first nine months of 2008, we recognized a decrease in the fair value of servicing assets and the interest-only strips receivable. The change in value was caused primarily by a shrinking in the size of the servicing portfolio.

A summary as of the dates indicated of the changes in the related servicing asset and I/O strips receivable are as follows:

	Servicing Assets
	September 30, 2008				December 31, 2007
	(dollars in thousands)
Balance at Beginning of Period		$	5,350			$	8,288
Increase from Loan Sales			1,000				1,557
Fair Market value adjustment			(1,423	)			(4,495	)
Balance at End of Period		$	4,927			$	5,350
	Interest-Only Strips Receivable
	September 30, 2008				December 31, 2007
	(dollars in thousands)
Balance at Beginning of Period		$	6,599			$	13,215
Increase from Loan Sales			2,969				69
Fair Market value adjustment			(2,560	)			(6,685	)
Balance at End of Period		$	7,008			$	6,599

Servicing income is a component of non-interest income in the consolidated statement of income. The $161 thousand loss for the third quarter of 2008 was comprised of $1.5 million of servicing income and $1.7 million of expense due to the fair value adjustment. For the third quarter of 2007, the $3.1 million loss was comprised of $1.7 million of servicing income and $4.8 million of expense due to the fair value adjustment.

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 increase significantly. Such exposure can result in a decrease in servicing income. With the assistance of a quarterly external appraisal, the servicing asset and I/O strip receivables are recorded at fair value. The contractual term of the underlying financial assets is predominately greater than 21 years.

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The following table summarizes the constant prepayment rates (“CPR”) for national SBA pools for each year following the date of origination based on their maturities as of the dates indicated:

SBA Pools – Constant Prepayment Rates                           Variable Rate Pools
September 30, 2008							December 31, 2007
Issue Date	< 8 Yr Life CPR	8-10 Yr Life CPR	10-13 Yr Life CPR	13-16 Yr Life CPR	16-20 Yr Life CPR	> 20 Yr Life CPR	< 8 Yr Life CPR	8-10 Yr Life CPR	10-13 Yr Life CPR	13-16 Yr Life CPR	16-20 Yr Life CPR	> 20 Yr Life CPR
Year 1	9.48	7.54	6.98	7.22	7.78	7.46	8.69	7.79	7.24	5.20	7.94	6.76
Year 2	16.47	15.56	13.51	13.26	14.15	13.93	17.31	16.35	14.58	12.79	13.96	13.27
Year 3	20.25	19.60	17.52	17.07	18.71	19.00	21.53	20.55	18.99	17.55	18.25	18.38
Year 4	21.18	20.45	19.37	18.93	21.66	22.79	22.13	21.26	20.91	19.82	20.98	22.20
Year 5	19.64	18.92	19.42	19.15	23.16	25.41	19.88	19.44	20.77	20.02	22.33	24.83
Year 6	16.09	15.87	18.06	18.01	23.41	26.96	15.65	16.03	19.05	18.57	22.48	26.41
Year 7	11.39	12.18	15.65	15.85	22.58	27.56	10.69	12.04	16.20	15.92	21.61	27.03
Year 8	6.68	8.72	12.61	12.97	20.89	27.32	6.10	8.50	12.72	12.51	19.92	26.82
Year 9	0.00	6.43	9.33	9.70	18.51	26.37	0.00	6.33	9.09	8.80	17.57	25.88
Year 10	0.00	5.70	6.20	6.36	15.64	24.80	0.00	5.93	5.78	5.25	14.80	24.35
Year 11+	0.00	0.00	3.63	3.27	12.49	22.75	0.00	0.00	3.12	1.61	7.84	17.93

The value of the servicing assets would decrease $674 thousand if prepayment speeds increased 10% and the value of the servicing asset would decrease $1.3 million if prepayment speeds increased 20%.

The expected overall average life of the servicing portfolio is 3.47 years. The following table 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 as of the dates indicated based on assessing each component:

		Disc Rate
Original Maturity		September 30, 2008	December 31, 2007
< 8	Years	14.57%	13.24%
8-10	Years	14.23%	13.78%
10-13	Years	14.84%	14.07%
13-16	Years	14.99%	14.07%
16-20	Years	13.94%	13.25%
> 20	Years	13.91%	12.98%

The servicing assets value would decrease $266 thousand if the discount rate increased 1% and the servicing assets value would decrease $521 thousand 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, deferred tax assets, accrued interest receivable and other assets are other major components of assets. Following is a summary of these items as of September 30, 2008 and December 31, 2007.

·   Premises and equipment was $5.3 million at September 30, 2008 and at December 31, 2007.

·   Deferred tax asset was $15.4 million at September 30, 2008, compared to $12.3 million at December 31, 2007, a $3.1 million increase or 25.53%.

·   Accrued interest receivable was $5.9 million at September 30, 2008, compared to $6.8 million at December 31, 2007, a decrease of $926 thousand or 13.56%. The decrease in accrued interest is a result of a general decrease in interest rates and a higher level of loans on non-accrual status as of September 30, 2008, offset by an increase in loans.

·   Other assets were $17.4 million at September 30, 2008, compared to $8.1 million at December 31, 2007, an increase of $9.3 million or 113.80%.  The increase in other assets is primarily the result of the increases in income taxes receivable, coupled with the increase in debt issuance cost as a result of the issuance of trust preferred securities.

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Deposits

Deposits were $1.21 billion at September 30, 2008, compared to $1.16 billion at December 31, 2007, a 3.88% increase. Money market and NOW accounts decreased $39.4 million, savings decreased $902 thousand, certificate of deposits (CD's) increased $79.7 million and non interest-bearing deposits increased $5.7 million. Non interest-bearing demand deposits comprised approximately 11.6% of total deposits at September 30, 2008 and December 31, 2007.

At September 30, 2008, 41% of deposits at the Bank had balances of $100,000 or more. At September 30, 2008, 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 September 30, 2008, we maintained Federal Funds lines of credit of $18.0 million for short-term liquidity. In addition, we have created borrowing capacities at the Federal Reserve Bank Discount Window and Federal Home Loan Bank that fluctuates with loans and securities balances pledged as collateral. Payments of principal on loans and securities and sales of eligible loans reduce these funding sources. At September 30, 2008, remaining borrowing capacities with the Federal Reserve Bank Discount Window and with the Federal Home Loan Bank were $42.2 million and $123.4 million, respectively. At September 30, 2008 the Federal Reserve Bank Discount Window overnight advance of $131.8 million had a rate of 2.25%.

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 at September 30, 2008:

Series	Amount		Date Issued	Rate Adjustor	Effective Rate			Maturity Date
	(dollars in thousands)
Temecula Valley Statutory Trust II	$	5,155	September 2003	3-month LIBOR +2.95%		5.77	%	2033
Temecula Valley Statutory Trust III		8,248	September 2004	3-month LIBOR +2.20%		5.40	%	2034
Temecula Valley Statutory Trust IV		8,248	September 2005	3-month LIBOR +1.40%		4.22	%	2035
Temecula Valley Statutory Trust V		12,372	September 2006	3-month LIBOR +1.60%		5.36	%	2036
Temecula Valley Statutory Trust VI		22,901	January 2008	Fixed Rate		9.45	%	2038
Total	$	56,924

On January 17, 2008 we issued $22.9 million of junior subordinated debt at a fixed rate of 9.45%, with $12 million of the net proceeds transferred to the Bank as tier one capital.

The Federal Reserve Board has taken the position that these mandatorily redeemable preferred securities qualify as capital, subject to certain restrictions. As of September 30, 2008, we have included the net junior subordinated debt in our capital for regulatory capital purposes.

Capital

Total capital was $101.5 million at September 30, 2008, compared to $108.0 million at December 31, 2007. For the first nine months of 2008, the $6.5 million decrease consisted of the following: $4.2 million decrease from the net loss, $428 thousand increase on the exercise of stock options, $2.0 million decrease from the repurchase and retirement of common stock, $534 thousand increase for stock-based compensation and a $1.2 million decrease for cash dividends.

At September 30, 2008 and December 31, 2007, our bank and holding company were in the regulatory “well capitalized” category. Refer to the capital ratio tables included in the “Capital Planning” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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RESULTS OF OPERATIONS

Net Income (Loss)

Nine-month analysis. Our net income (loss) and basic and diluted earnings (loss) per share for the nine months ended September 30, 2008 and 2007 are as follows:

·   For September 30, 2008, net loss was $4.2 million or $(0.42) per basic share and $(0.42) per diluted share.

·   For September 30, 2007, net income was $12.0 million or $1.15 per basic share and $1.10 per diluted share.

The decrease was primarily the result of a decrease in net interest income of $12.8 million due to a lower net interest margin, a decrease of $5.7 million due to lower loan sales and lower premiums on the sales, and an increase in the loan loss provision of $13.6 million.

Our return on average assets and return on average equity for the nine months ended September 30, 2008 and 2007 are as follows:

·   For September 30, 2008, return on average assets was (0.39)%; return on average equity was (5.33)%.

·   For September 30, 2007, return on average assets was 1.24%; return on average equity was 15.03%.

Third quarter analysis. Our net income (loss) and basic and diluted earnings (loss) per share for the third quarter of 2008 and 2007 are as follows:

·   For 2008, net loss was $3.6 million or $(0.36) per basic share and $(0.36) per diluted share.

·   For 2007, net income was $2.6 million or $0.25 per basic share and $0.25 per diluted share.

The decrease was primarily the result of a decrease in net interest income of $5.0 million and an increase in the loan loss provision of $6.5 million.

Our return on average assets and return on average equity for the third quarter of 2008 and 2007 are as follows:

·   For 2008, return on average assets was (0.97)%; return on average equity was (13.88)%.

·   For 2007, return on average assets was 0.79%; return on average equity was 9.66%.

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.

Nine-month analysis. Net interest income was $37.0 million in the first nine months of 2008, compared to $49.8 million in the same period in 2007. The net interest margin was 3.70% for the nine months ending September 30, 2008, compared to 5.48% for the nine months ending September 30, 2007. In a decreasing rate environment, the net interest margin will compress due to longer term, higher rate time deposits maturing and repricing at a slower pace than the loan portfolio which is mostly tied to the prime rate. The yield on interest-earning assets decreased by 248 basis points for the first nine months of 2008 as compared to the same period in 2007 and the cost of interest-bearing liabilities decreased by 94 basis points for the same periods. The following is a summation of various yields for interest-earning assets and various costs for interest-bearing liabilities for the nine months ending September 30, 2008 and 2007:

·   Yield on loans decreased 249 basis points to 7.23% for the first nine months of 2008, compared to 9.72% for the first nine months of 2007 as a result of the rapid Federal Reserve Bank targeted fed funds rate decreases as well as interest income being reversed on loans that were placed on nonaccrual status.  The placement of loans on non-accrual status resulted in approximately $2.2 million of reduced interest income in the first nine months of 2008.

·   Yield on investments, which include interest-bearing deposits, securities and federal funds sold, decreased 210 basis points to 3.10% for the first nine months of 2008, compared to 5.20% for the first nine months of 2007. The decrease is a result of a decrease in interest rates.

·   Cost of interest-bearing deposits decreased 94 basis points to 3.82% for the first nine months of 2008, compared to 4.76% for the first nine months of 2007 as a result of the decreasing interest rate environment.

·   Cost of other borrowings, which include federal funds purchased, Federal Reserve Bank discount window advances, Federal Home Loan Bank advances and junior subordinated debt borrowings, decreased 265 basis points to 5.14% for the first nine months of 2008, compared to 7.79% for the first nine months of 2007. Contributing to the change in the cost of other borrowings were the increases in the average balances of the Federal Reserve Bank discount window advances and the Federal Home Loan Bank advances, coupled with the decreasing interest rate environment.  In addition, the fixed rate junior subordinated debt issued in January 2008 was at a higher rate.

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The following table shows average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods indicated.  Average balances are derived from daily balances, and nonaccrual loans are included as interest-bearing loans for purposes of this table.

	Average Balances with Rates Earned and Paid
	Nine-month period ended September 30,
	2008								2007
	Average Balance			Interest Income/ Expense		Average Interest Rate			Average Balance			Interest Income/ Expense		Average Interest Rate
Assets	(dollars in thousands)
Interest-bearing deposits	$	1,000		$	38		5.06	%	$	455		$	18		5.20	%
Securities (1)		21,879			506		3.08	%		1,796			75		5.57	%
Federal Funds Sold		10,807			241		2.97	%		30,137			1,167		5.18	%
Total Investments		33,686			785		3.10	%		32,388			1,260		5.20	%
Total Loans (2)		1,298,560			70,433		7.23	%		1,184,061			86,061		9.72	%
Total Interest Earning Assets		1,332,246			71,218		7.12	%		1,216,449			87,321		9.60	%
Allowance for Loan Loss		(17,362	)							(12,616	)
Cash & Due From Banks		11,572								12,912
Premises & Equipment		5,509								5,503
Other Assets		88,430								73,220
Total Assets	$	1,420,395							$	1,295,468
Liabilities and Shareholders’ Equity
Interest Bearing Demand	$	32,634		$	37		0.15	%	$	31,547		$	34		0.15	%
Money Market		103,050			1,440		1.86	%		114,312			3,271		3.82	%
Savings		27,482			87		0.42	%		29,933			89		0.40	%
Time Deposits under $100,000		517,345			16,738		4.31	%		402,830			15,314		5.08	%
Time Deposits $100,000 or more		385,477			12,296		4.25	%		412,241			16,532		5.36	%
Other Borrowings		92,752			3,576		5.14	%		38,827			2,262		7.79	%
Total Interest Bearing Liabilities		1,158,740			34,174		3.93	%		1,029,690			37,502		4.87	%
Non-interest Demand Deposits		138,571								144,201
Other Liabilities		18,851								14,581
Shareholders' Equity		104,233								106,996
Total Liabilities and Shareholders' equity	$	1,420,395							$	1,295,468
Net Interest Income				$	37,044							$	49,819
Interest Spread (3)							3.19	%							4.73	%
Net Interest Margin (4)							3.70	%							5.48	%
(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.

Third quarter analysis. Net interest income was $11.5 million in the third quarter of 2008, compared to $16.5 million in the same period in 2007. The following is a summation of various yields for interest-earning assets and various costs for interest-bearing liabilities for the third quarter 2008 and 2007:

·   Yield on loans decreased 304 basis points to 6.58% for the third quarter of 2008, compared to 9.62% for the third quarter of 2007.

·   Yield on investments, which include interest-bearing deposits, securities and federal funds sold, decreased 239 basis points to 2.77% for the third quarter of 2008, compared to 5.16% for the third quarter of 2007.

·   Cost of interest-bearing deposits decreased 129 basis points to 3.44% for the third quarter of 2008, compared to 4.73% for the third quarter of 2007.

·   Cost of other borrowings, which include federal funds purchased, Federal Reserve Bank discount window advances, Federal Home Loan Bank advances and junior subordinated debt borrowings, decreased 313 basis points to 4.38% for the third quarter of 2008, compared to 7.51% for the third quarter of 2007.

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The following table shows average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods indicated. Average balances are derived from daily balances, and nonaccrual loans are included as interest-bearing loans for purposes of this table.

	Average Balances with Rates Earned and Paid
	Three-month period ended September 30,
	2008								2007
	Average Balance			Interest Income/ Expense		Average Interest Rate			Average Balance			Interest Income/ Expense		Average Interest Rate
Assets	(dollars in thousands)
Interest-bearing deposits	$	1,000		$	12		4.76	%	$	1,000		$	14		5.25	%
Securities (1)		42,480			293		2.74	%		3,053			43		5.53	%
Federal Funds Sold		604			3		1.97	%		39,082			505		5.13	%
Total Investments		44,084			308		2.77	%		43,135			562		5.16	%
Total Loans (2)		1,334,421			22,132		6.58	%		1,175,764			28,496		9.62	%
Total Interest Earning Assets		1,378,505			22,440		6.46	%		1,218,899			29,058		9.46	%
Allowance for Loan Loss		(19,267	)							(12,519	)
Cash & Due From Banks		11,716								11,627
Premises & Equipment		5,470								5,350
Other Assets		105,431								72,977
Total Assets	$	1,481,855							$	1,296,334
Liabilities and Shareholders’ Equity
Interest Bearing Demand	$	32,256		$	13		0.16	%	$	30,009		$	11		0.15	%
Money Market		90,989			369		1.61	%		129,790			1,256		3.84	%
Savings		26,221			29		0.44	%		28,060			39		0.54	%
Time Deposits under $100,000		592,055			5,806		3.89	%		391,319			5,115		5.19	%
Time Deposits $100,000 or more		361,557			3,355		3.68	%		417,549			5,471		5.20	%
Other Borrowings		121,041			1,337		4.38	%		34,235			649		7.51	%
Total Interest Bearing Liabilities		1,224,119			10,909		3.54	%		1,030,962			12,541		4.83	%
Non-interest Demand Deposits		137,181								143,686
Other Liabilities		17,138								15,115
Shareholders' Equity		103,417								106,571
Total Liabilities and Shareholders' equity	$	1,481,855							$	1,296,334
Net Interest Income				$	11,531							$	16,517
Interest Spread (3)							2.92	%							4.63	%
Net Interest Margin (4)							3.32	%							5.38	%
(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.

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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 periods indicated.

		Rate/Volume Analysis
		Increase/Decrease in Net Interest Income
		Three month period ended									Nine month period ended
		September 30, 2008 and 2007									September 30, 2008 and 2007
		Volume			Rate			Total			Volume			Rate			Total
Assets		(dollars in thousands)
Interest-bearing deposits		$	(1	)	$	(1	)	$	(2	)	$	21		$	(1	)	$	20
Securities (1)			549			(299	)		250			840			(409	)		431
Federal Funds Sold			(497	)		(5	)		(502	)		(747	)		(179	)		(926	)
	Total Investments		51			(305	)		(254	)		114			(589	)		(475	)
	Total Loans (2)		3,845			(10,209	)		(6,364	)		8,668			(24,296	)		(15,628	)
Total Interest Earning Assets		$	3,896		$	(10,514	)	$	(6,618	)	$	8,782		$	(24,885	)	$	(16,103	)
Liabilities and
Shareholders' Equity
Interest Bearing Demand			1			1			2			4			(1	)		3
Money Market			(375	)		(512	)		(887	)		(319	)		(1,512	)		(1,831	)
Savings			(3	)		(7	)		(10	)		(7	)		5			(2	)
Time Deposits under $100,000			2,624			(1,933	)		691			4,425			(3,001	)		1,424
Time Deposits $100,000 or more			(734	)		(1,382	)		(2,116	)		(1,017	)		(3,219	)		(4,236	)
Other Borrowings			1,643			(955	)		688			3,161			(1,847	)		1,314
Total Interest Bearing Liabilities			3,156			(4,788	)		(1,632	)		6,247			(9,575	)		(3,328	)
Net Interest Income		$	740		$	(5,726	)	$	(4,986	)	$	2,535		$	(15,310	)	$	(12,775	)
(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 impaired loans, as well as applying loss factors to all loans not individually classified as impaired. Impaired 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 also 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.

During the second quarter of 2008, the SFAS 5 component of the allowance for loan losses was adjusted upwards as part of the Company’s quarterly review of the calculation.  The increases in the factors are primarily related to an increase in the net nonperforming loans and an increase in net charge-offs.  These factors were again reviewed in the third quarter of 2008.  Net Nonperforming loans increased to $61.9 million as of September 30, 2008 as compared to $20.6 million as of December 31, 2007, an increase of $41.3 million while net charge-offs to average total loans increased to an annualized rate of 1.13% as of September 30, 2008 as compared to 0.09% as of December 31, 2007.

The provision was $15.1 million and $1.5 million the first nine months of 2008 and 2007, respectively.  For the third quarter of 2008, the provision was $7.6 million, compared to $1.1 million for the third quarter of 2007. The provision for loan losses was increased from $5.3 million in the second quarter of 2008 to $7.6 million in the third quarter of 2008 to cover the increased amount of charge-offs, to cover the slight increase in loans outstanding, and to cover probable incurred losses associated with the general economic conditions in the markets we serve.

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Non-Interest Income

Non-interest income is an important revenue source for us. Non-interest income consists of service charges and fees, gain on sale of loans and other assets, loan servicing, broker and other loan related income.

Nine-month analysis. Non-interest income was $7.8 million for the first nine months of 2008, compared to $11.6 million for the same period in 2007, a $3.8 million decrease. The main contributors to the decrease were the decreases of gains on sale of loans and loan broker income, offset by an increase in servicing income.  The variances were as follows:

·   Gain on sale of loans were $2.7 million in the first nine months of 2008, compared to $8.4 million for the same period in 2007, a $5.7 million decrease.  The decrease in gain on sale of loans is the result of lower premiums on SBA 7(a) loan sales, coupled with lower volume of SBA 7(a) and SBA 504 loan sales.  In addition, we delayed the sale of some loans during the third quarter of 2008 as a result of the low premiums being offered by brokers resulting from the dislocations in the national credit market.  Historically in 2007 premiums have been approximately between the ranges of 4% to 10%, however were approximately at the 2% range at the end of September 2008.  We expect to increase loan sales volume when the offered premiums reach levels that are closer to historical levels.

·   Loan broker income was $1.1 million in the first nine months of 2008, compared to $4.0 million for the same period in 2007, a $2.9 million decrease. The decrease is a result of lower volume in the first nine months of 2008 compared to the same period in 2007.

·   Servicing income was $362 thousand in the first nine months of 2008, compared to a loss of $4.8 million for the same period in 2007, a $5.2 million increase. At September 30, 2008, we were servicing approximately $370.6 million of the guaranteed portion of 7(a) loans previously sold with a weighted-average servicing rate of 1.74%, compared to $373.9 million and 1.72%, respectively for the same period last year. The servicing income was negative for the nine month period ending September 30, 2007 as a result of adjusting the fair value of the servicing and I/O assets to account for higher discount rates due to the dislocation of the credit markets, coupled with higher prepayments in our SBA loan portfolio. For the first nine months of 2008, the discount rates and prepayments have stabilized and the servicing income has improved due to negative fair value adjustments improving. The fair value adjustment was a loss of $4.0 million and $10.1 million for the nine months ended September 30, 2008 and 2007.

Third quarter analysis. Non-interest income was $2.2 million in the third quarter of 2008, compared to $1.5 million in the same period in 2007, a $710 thousand increase. The main contributor to the increase was the increase in servicing income (loss), offset by the decrease in loan broker income.  The variances were as follows:

·   Servicing loss was $(161) thousand in the third quarter of 2008, compared to $(3.1) million for the same period in 2007, a $2.9 million increase.

·   Loan broker income was $106 thousand in the third quarter of 2008, compared to $1.3 million for the same period in 2007, a $1.2 million decrease.

The following table summarizes the components of non-interest income for the periods indicated.

	Fees and Other Income
	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(dollars in thousands)
Service Charges and Fees	$	166		$	154		$	465		$	454
Gain on Sale of Loans		1,310			1,631			2,710			8,381
Gain(Loss) on Other Assets           and Other Real Estate Owned		(375	)		1			(340	)		(12	)
Servicing Income (Loss)		(161	)		(3,108	)		362			(4,818	)
Loan Broker Income		106			1,332			1,056			3,993
Loan Related Income		415			928			1,442			1,945
Other Income		769			582			2,078			1,632
	$	2,230		$	1,520		$	7,773		$	11,575

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The gain on sale of loans was $2.7 million in the first nine months of 2008 compared to $8.4 million in the same period in 2007, a $5.7 million decrease. For the third quarter of 2008, the gain on sale of loans was $1.3 million compared to $1.6 million for the third quarter of 2007.

The following table summarizes the gain on sale of loans and other assets for the periods indicated.

	Gain on Sale of Loans / Assets
	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
	(dollars in thousands)
SBA 7A Unguaranteed Sales	$	- -		$	651		$	- -		$	1,299
SBA 7A Guaranteed Sales		1,266			811			2,319			3,658
1st TD Sales		- -			- -			- -			1,311
SBA 504 Sales		- -			12			404			845
Other Loan Related		44			157			(13	)		1,268
REO Gain (Loss)		(360	)		6			(308	)		(9	)
Fixed Assets Gain (Loss)		(15	)		(5	)		(32	)		(3	)
Total	$	935		$	1,632		$	2,370		$	8,369

Non-Interest Expense

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

Nine-month analysis. For the nine months ended September 30, 2008, non-interest expense was $36.8 million, compared to $39.6 million for the same period in 2007, a $2.8 million decrease. The main contributors to the decrease were the decreases in salaries and employee benefits, offset by the increases in other real estate owned expense and other expense. The variances were as follows:

·   Salaries and benefits were $22.1 million in the first nine months of 2008, compared to $26.1 million for the same period in 2007, a $4.0 million decrease. The decreases in salaries and benefits are primarily a result of lower commissions on SBA brokered loan sales, lower bonus accruals and lower full-time equivalent (1), offset by additional SBA production officers. The table below sets forth information concerning our total number of employees, our total number of full-time equivalent (1) and our total number of full time employees for the periods indicated:

	September 30, 2008	December 31, 2007	September 30, 2007
Number of employees	306	325	329
Number of full-time equivalent (1)	297	316	324
Number of full-time	279	296	308
(1)   Full-time equivalent (“FTE”) is defined as the number of total hours worked divided by the maximum number of compensable hours in a work year. For example, if the work year is defined as 2,080 hours, then one employee occupying a paid full time job all year would consume one FTE.  Two employees working for 1,040 hours each would consume one FTE between the two of them.

Also included in the salaries and benefits expense for the first nine months of 2008 is $534 thousand and for the first nine months of 2007 is $651 thousand for stock-based compensation for all share-based payments as a result of the adoption of SFAS No. 123R.

·   Other real estate owned expenses were $1.0 million for the first nine months of 2008, compared to no expense for the same period in 2007. The expenses are related to our OREO inventory of $26.9 million as of September 31, 2008. Given the increased level of our OREO inventory, management expects that expenses related to other real estate owned will continue to significantly impact our non-interest expense.

·    Other expenses were $2.0 million for the first nine months of 2008, compared to $1.3 million for the same period in 2007, a $664 thousand increase. A majority of this increase is due to increases in loan collection expenses associated with non-accrual loans.

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Third quarter analysis. For the third quarter of 2008, non-interest expense was $12.0 million compared, to $12.6 million for the same period in 2007, a $664 thousand decrease. The main contributors to the decrease were the decreases in salaries and employee benefits, offset by the increases in other real estate owned expense and other expense. The variances were as follows:

·   Salaries and benefits were $6.2 million in the third quarter of 2008, compared to $7.8 million for the same period in 2007, a $1.6 million decrease.

·   Other real estate owned expenses were $892 thousand in the third quarter of 2008, compared to no expense for the same period in 2007.

·   Other expenses were $801 thousand in the third quarter of 2008, compared to $344 thousand for the same period in 2007, a $457 thousand increase mainly due to increases in loan collection expense.

The following table summarizes the components of non-interest expense for the periods indicated.

	Other Expenses
	Three Months Ended September 30,					Nine Months Ended September 30,
		2008		2007		2008		2007
	(dollars in thousands)
Salaries and Employee Benefits		$	6,232	$	7,791	$	22,058	$	26,074
Occupancy Expenses			923		815		2,642		2,424
Furniture and Equipment			521		516		1,451		1,444
Data Processing			373		324		1,070		1,029
Marketing and Business Promotion			188		292		605		893
Legal and Professional			254		308		920		1,019
Regulatory Assessments			276		418		831		529
Travel & Entertainment			126		210		555		801
Loan Related Expense			737		975		1,805		2,090
Office Expenses			654		648		1,828		2,011
Other Real Estate Owned Expenses			892		- -		1,049		- -
Other Expenses			801		344		1,971		1,307
		$	11,977	$	12,641	$	36,785	$	39,621

Income Taxes

The provision for income taxes totaled $(2.9) million for the first nine months of 2008 and $8.3 million for the first nine months of 2007, representing 40.7% and 40.8%, respectively, of pre-tax income for those periods. As a result of the reduction in year-to-date pre-tax book income for the nine months ended September 30, 2008, when compared to the same period in 2007 and our expectation of earnings not to exceed $10 million for 2008, our federal statutory rate was reduced from 35% to 34% of pre-tax book income. During the third quarter of 2008 we recorded a $300,000 increase to the tax provision and decrease in deferred tax asset to account for the statutory tax rate change.

The amount of the tax provision is determined by applying our statutory income tax rates to pre-tax book income, adjusted for permanent differences between pre-tax book income and actual taxable income. Such permanent differences include but are not limited to increases in the cash surrender value of bank-owned life insurance, net interest income on California Enterprise Zone loans, compensation expense associated with incentive stock options and certain other expenses that are not allowed as tax deductions and tax credits.

The provision for income taxes totaled $(2.2) million for the third quarter of 2008 and $1.7 million for the third quarter of 2007, representing 37.4% and 40.2%, respectively, of pre-tax income for those periods.

 Deferred tax assets totaled $15.4 million at September 30, 2008, compared to $12.3 million at December 31, 2007. Over half of the deferred tax asset balance is due to the tax deductibility timing difference of the provision for loan losses.

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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. Recent disruptions in the financial credit and liquidity markets have had the effect of decreasing the overall liquidity in the marketplace. As a result, during the third quarter of 2008 three federal funds lines totaling $65 million were closed by our correspondent banking relationships. To offset the decrease in federal funds lines available to us, we created a borrowing capacity at the Federal Reserve Bank Discount Window.

Our cash position is determined on a daily basis.  Our Board reviews our liquidity position on a monthly basis. One analysis measures the liquidity gap, which is a measurement of primary and secondary liquidity sources to total deposits, and other borrowings that mature within one year. Another analysis measures an industry standard peer group liquidity ratio to ours. Our guidelines state a 10% or more primary liquidity ratio should be maintained. At September 30, 2008, the ratio was 12.65%.

Our primary sources of liquidity are derived from financing activities that include:

·   Federal Funds lines of credit at correspondent banks;

·   Federal Reserve Bank, Discount Window advances;

·   Federal Home Loan Bank advances;

·   Money Desk deposits;

·   Brokered deposits; and

·   Customer deposits.

At September 30, 2008, we maintained Federal Funds lines of credit of $18.0 million for short-term liquidity. In addition, we have created borrowing capacities at the Federal Reserve Bank Discount Window and Federal Home Loan Bank that fluctuates with loans and securities balances pledged as collateral. Payments of principal on loans and securities and sales of eligible loans reduce these funding sources. At September 30, 2008, our borrowing capacities with the Federal Reserve Bank Discount Window and with the Federal Home Loan Bank were $42.2 million and $123.4 million, respectively.

Our primary uses of funds include withdrawal of deposits, interest paid on deposits and borrowings, originations of loans, and payment of operating expenses.

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. Competition from financial institutions seeking to maintain adequate liquidity has placed upward pressure on the rates paid on certain deposit accounts.

Cash Flow Activities

Net cash used in operating activities totaled $11.4 million for the first nine months of 2008, compared to $81.7 million for the same period last year. The change was primarily the result of the reduction in net income and the net change in loans originated for sale.

Net cash used in investing activities totaled $190.5 million for the first nine months of 2008, compared to net cash provided by of $33.3 million for the same period in 2007. The change was primarily the result of the purchase of $40.0 million in available-for-sale, U.S. government agency securities and the increase in loans in the current year compared to the prior year.

Net cash provided by financing activities totaled $197.0 million for the first nine months of 2008, compared to $51.8 million for the same period last year. The change was primarily the result of the discount window advance from the Federal Reserve Bank and the addition of junior subordinated debt in 2008.

At September 30, 2008, cash and cash equivalents totaled $12.6 million, compared to $36.8 million at September 30, 2007, a decrease of $24.2 million, or 65.9%.

The liquidity of our holding company is primarily dependent on the payment of cash dividends by our bank, subject to restrictions set forth by applicable California and Federal laws and regulations. As of September 30, 2008, approximately $14.9 million of undivided profits of our bank were available for dividends to our company, (an amount that would allow maintenance of the “well capitalized” level).

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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. It is our strategy to maintain an adequate level of capital, which by definition excludes excessive as well as inadequate capital.

Trust preferred securities are generally considered to be Tier 1 or Tier 2 capital for regulatory purposes, but long-term debt in accordance with generally accepted accounting principles. At September 30, 2008, $33.7 million of our Tier 1 capital consisted of trust preferred securities; however, no assurance can be given that trust preferred securities will continue to be treated as Tier 1 capital in the future.

The following tables set forth our actual capital amounts and ratios as of the dates indicated.

				Amount of Capital Required
				For Capital Adequacy Purposes
	Amount		Ratio	Amount		Ratio
Temecula Valley Bancorp	(dollars in thousands)
As of September 30, 2008:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	175,289	11.46%	$	122,366	8.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	134,673	8.81%	$	61,146	4.00%
Tier 1 Leverage Ratio (to Average Assets)	$	134,673	9.09%	$	59,262	4.00%
As of December 31, 2007:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	157,101	10.80%	$	116,380	8.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	140,424	9.65%	$	58,190	4.00%
Tier 1 Leverage Ratio (to Average Assets)	$	140,424	10.63%	$	52,844	4.00%

				Amount of Capital Required
				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio
Temecula Valley Bank	(dollars in thousands)
As of September 30, 2008:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	167,534	10.98%	$	122,065	8.00%	$	152,581	10.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	148,439	9.73%	$	61,023	4.00%	$	91,535	6.00%
Tier 1 Leverage Ratio (to Average Assets)	$	148,439	10.04%	$	59,139	4.00%	$	73,924	5.00%
As of December 31, 2007:
Total Risk-Based Capital (to Risk-Weighted Assets)	$	154,912	10.66%	$	116,290	8.00%	$	145,362	10.00%
Tier 1 Risk-Based Capital (to Risk-Weighted Assets)	$	138,235	9.51%	$	58,145	4.00%	$	87,217	6.00%
Tier 1 Leverage Ratio (to Average Assets)	$	138,235	10.48%	$	52,805	4.00%	$	66,006	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.

Three critical accounting policies are noteworthy. They concern the allowance for loan loss, other real estate owned, and the SBA servicing assets and I/O strips. 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, 2007.

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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 eleven full-service banking offices in Southern California and multiple loan production offices in six states, including California. The main office facilities are located at 27710 Jefferson Avenue, Suite A100, Temecula, California. As of September 30, 2008, 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 rental payments (exclusive of operating charges and real property taxes) are approximately $6.6 million, with lease expiration dates ranging from 2008 to 2018, exclusive of renewal options.

The following table summarizes our aggregate contractual obligations and their maturities as of September 30, 2008.

				Loan Commitments and Related Financial Instruments
				Maturity by period
				One year			More than 1			More than 3			More than
	Total			or less			year to 3 years			years to 5 years			5 years
	(dollars in thousands)
Commitments to Extend Credit		$	350,997		$	216,316		$	78,567		$	1,275		$	54,839
Letters of Credit			11,908			11,750			158			- -			- -
Loan Commitments Outstanding			362,905			228,066			78,725			1,275			54,839
Federal Reserve Bank, Discount Window Advance			131,800			131,800			- -			- -			- -
Junior Subordinated Debt			56,924			- -			- -			- -			56,924
Operating Lease Obligations			6,568			1,971			2,397			1,036			1,164
Other Commitments Outstanding			195,292			133,771			2,397			1,036			58,088
Total Outstanding Commitments		$	558,197		$	361,837		$	81,122		$	2,311		$	112,927

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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 and liquidity risks. 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 that 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 table reflects our one year net interest income sensitivity based on asset and liability levels using September 30, 2008 as a starting point. For purposes of this table, there is assumed to be zero growth in loans, investments, deposits, and other components of the balance sheet.

September 30, 2008
Changes in			Projected Net			Change from			% Change from
Rates			Interest Income			Base Case			Base Case
(dollars in thousands)
	+300	bp		$	48,743	$	10,985			29.09	%
	+200	bp			44,813		7,055			18.68	%
	+100	bp			41,099		3,341			8.85	%
	- -	bp			37,758		- -			0.00	%
	-100	bp			35,150		(2,608	)		(6.91	%)
	-200	bp			32,245		(5,513	)		(14.60	%)
	-300	bp			28,809		(8,949	)		(23.70	%)

In the model, a rising rate environment will increase net interest income (NII) from a flat rate environment and 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.

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PART II - OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

As of September 30, 2008, 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, 2007, 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

Stock Repurchases

On May 22, 2007, we announced a program to repurchase up to $5.5 million of our company’s common stock in the open market, for a period of six months ending November 22, 2007. On July 23, 2007, we announced a second program to repurchase up to $10.0 million of our company’s common stock in the open market, for a period of six months ending January 20, 2008. On January 20, 2008, we announced an extension of the second repurchase plan for an additional twelve months ending January 20, 2009 and an increase to allow a repurchase of up to an additional $8.6 million of our company’s common stock in the open market.

We have decided to temporarily suspend our stock repurchase program.  While there are presently no restrictions on our ability to repurchase shares of our common stock, our Board of Directors believes that the current economic conditions require prudent management and conservation of capital.  There were no shares of common stock purchased under the stock repurchase program during the quarter ended September 30, 2008.  During the nine months ended September 30, 2008, we repurchased 199,500 shares for a weighted average market price of $10.24 per share.  The maximum number of shares that may yet be purchased under the program as of September 30, 2008 is 9,994,753.

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.

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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

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SIGNATURES

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

TEMECULA VALLEY BANCORP INC.

Date: November 7, 2008	By: /s/ Stephen H. Wacknitz
	Stephen H. Wacknitz,
	Chairman of the Board, President and
	Chief Executive Officer
	By: /s/ Donald A. Pitcher
	Donald A. Pitcher,
	Executive Vice President,
	Chief Financial Officer

33