Temecula Valley Bancorp Strengthened Reserves with $7.6 Million Provision in 3Q08

TEMECULA, Calif.--(BUSINESS WIRE)--Temecula Valley Bancorp Inc. (NASDAQ: TMCV) today reported solid capital ratios, excellent growth in SBA lending, strong liquidity and lower operating expenses. Booking a $7.6 million provision for loan losses resulted in a net loss of $3.6 million, or $0.36 a share, for the third quarter of 2008, compared to a net loss of $2.0 million, or $0.20 per share, with a provision of $5.3 million in the prior linked quarter, and a net income of $2.6 million, or $0.25 per diluted share in the third quarter of 2007 when its provision was $1.1 million. For the first nine months of 2008, after booking a $15.1 million provision for loan losses, the net loss was $4.2 million, or $0.42 per share, compared to net income of $12.0 million, or $1.10 per diluted share, in the first nine months of 2007.

Due to the economic conditions, in early 2008 a strategic decision to shift more emphasis on SBA multi-purpose commercial owner-occupied real estate lending was made. “In less than one year, our SBA group has established itself as one of the most successful SBA lending teams in the country, and we are now the 8th largest SBA lender in the nation based on dollar volume in the 7(a) program,” said Stephen H. Wacknitz, Chairman, President and CEO. “By shifting our focus from construction and land development into SBA lending, with an emphasis on multi-purpose owner-occupied commercial real estate, we are able to better diversify our loan portfolio and build a strong source of fee income from loan servicing and originations.”

Third Quarter 2008 Highlights

• Temecula Valley Bancorp remains well-capitalized, according to regulatory requirements with a Tier 1 leverage ratio of 9.09% and a total capital to risk-adjusted assets of 11.46%.
• For 2008, loans grew 10% to $1.36 billion with SBA loans up 34% and now accounting for 28% of the total portfolio. In addition, SBA related construction loans account for $132.6 million of the total $575.1 million construction loan total at 09/30/08 compared to $120.5 million at 09/30/07 and $120.1 million at 12/31/07.
• The undisbursed portion of total construction loans has decreased dramatically since last year with $335.1 million at September 30, 2007; $321.2 million at December 31, 2007; and $240.5 million at September 30, 2008.
• Operating expenses declined 5% in the third quarter compared to last year and 7% year-to-date compared to last year reflecting a focus on efficiency and cost control.
• The $39.1 million investment securities available for sale are exclusively in SBA Pool Securities and a U.S. Government Agency bond with a short-term maturity. The $2.9 million held-to-maturity investment is a Fannie Mae mortgage-backed security. Temecula Valley does not own any Fannie Mae or Freddie Mac equity securities, nor does it own any sub-prime mortgage-backed bonds.

“Although our capital ratios are strong, we believe the new TARP Capital Purchase Program proposed by the Treasury Department has merit, and we are actively investigating the possibility of participating in this program. Whether funds will be available and what amount of funding will flow to community banks is not clear at this point,” Wacknitz commented. “At the same time, we have been substantially building our reserves and lowering operating expense in order to maintain adequate capital.” Temecula Valley recently announced that its Board of Directors voted to suspend regular quarterly cash dividends on its common stock in order to preserve capital of approximately $1.6 million per year. This action did not affect the recently declared cash dividend of $0.04 per share which was paid on October 15, 2008.

“We continue to remain optimistic about our ability to weather the current economic cycle and regain profitability. Although we cannot direct the wind, so to speak, we can adjust the sails. We are adjusting our goals and strategies to take advantage of opportunities in our regional as well as national market, particularly with the expansion of our SBA lending capabilities Unfortunately, it’s going to take a little longer than expected in this environment to bring down the balances of our construction and land development loans,” added Wacknitz.

“Although we are based in Southern California, about 25% of our loan portfolio is for SBA related financing outside of California. In addition, another 12% of our loan portfolio is in the San Francisco area, which is a relatively healthy real estate market,” said Wacknitz. “The good news is that more than 92% of our loan portfolio is secured by real estate that was underwritten at relatively low loan-to-value ratios. Even in the current difficult real estate environment, based on recent appraisals, the average loan-to-value ratio on our real estate secured loan portfolio is approximately 64%.

“As we continue to work through one of the worst residential real estate downturns ever, we still have confidence in the resiliency and desirability of our markets. We’ve experienced these cycles before–downturns followed by strong growth, leading sooner or later, at least in California, to a strong housing market,” Wacknitz added. “We are always trying to achieve the optimal mix of conservative underwriting and bottom-line profit generation. However, we know our markets, and we know how to manage them throughout various housing cycles. We have a strong capital base and one of the most experienced management teams in the state.”

Asset Quality

Before government guarantees of $11.4 million, nonperforming assets were $96.1 million or 6.35% of total assets at September 30, 2008. After deducting the SBA guarantees, nonperforming assets were $84.8 million or 5.60% of total loans at quarter end. Net charge-offs were an annualized 2.00% of average loans for the third quarter of 2008, compared with 0.01% a year ago. The provision for loan losses was $7.6 million for the third quarter of 2008 compared with $1.1 million reported for the third quarter of 2007. The allowance for loan loss increased to 1.48% of total loans from 1.10% for the year-ago quarter.

Net Non-Accrual Loans by Type		Sept. 30, 2008					June 30, 2008
(dollars in 000s)		Amount			%		Amount			%
Construction – SFR		$	1,244		2%		$	1,161		2%
Construction – SFR – spec			10,181		17%			12,965		25%
Construction – multi-family			0		0%			6,946		14%
Construction – commercial			0		0%			0		0%
Construction – land dev			4,604		8%			0		0%
Construction – tract			14,991		26%			10,064		19%
Construction – SBA			6,728		11%			4,710		9%
Total Construction		$	37,748		64%		$	35,846		69%
Commercial real estate		$	10,597		18%		$	1,683		3%
SBA			10,451		18%			14,573		28%
Commercial			52		0%			0		0%
Consumer			0		0%			0		0%
Total		$	58,848		100%		$	52,102		100%
Net Non-Accrual Loans by Market		Sept. 30, 2008					June 30, 2008
(dollars in 000s)		Amount			%		Amount			%
San Diego County		$	8,886		15%		$	7,702		15%
Riverside County			13,877		24%			570		1%
San Bernardino County			6,475		11%			13,541		26%
Other California counties			20,804		35%			19,898		38%
Outside California			8,806		15%			10,391		20%
Total		$	58,848		100%		$	52,102		100%

Loans 90+ days past due and still accruing consist of two loans totaling $3.1 million, a mini-perm real estate loan on a commercial property in Riverside County and a 14 unit condo construction project in San Diego County.

Net other real estate owned at September 30, 2008 for 21 loans totaled $22.8 million and consisted of four properties in San Bernardino County totaling $6.0 million, five properties in San Diego County totaling $10.3 million, one property in Riverside County totaling $53,000, six properties in other California counties totaling $4.3 million, and five properties outside of California totaling $2.2 million. By type of properties, there are nine SBA properties totaling $3.1 million and 12 construction related properties totaling $19.7 million.

Balance Sheet

Total assets increased 15% year-over-year to $1.51 billion at September 30, 2008, compared to $1.30 billion at September 30, 2007. Over the past year, total loans increased 10% to $1.36 billion at September 30, 2008 from $1.20 billion a year ago. Real estate construction and development loans fell 6% in the quarter and 2% for the year, now accounting for 42% of the portfolio. SBA loans grew 34% this year and now account for 28% of the portfolio and commercial loans increased 19%, now accounting for 6% of the portfolio. Year-over-year loan growth was funded by Fed Funds advances, a 5% growth in deposits, and a higher level of junior subordinated debt.

The loan portfolio is diversified both geographically and by loan type. Over 25% of the Bank’s loans are located outside of California, underwritten through various SBA programs. These loans are all commercial in nature, divided between owner-occupied commercial real estate ($279.7 million), commercial construction ($63.7 million), and other commercial real estate secured ($0.7 million).

Deposits at September 30, 2008, increased 5% to $1.20 billion compared to $1.15 billion a year ago. Core deposits (excluding CD’s of $100,000 or more) increased 20% to $883.6 million and account for 73% of total deposits. Time deposits under $100,000 increased 56% from $391.4 million to $610.0 million. “We believe the increase in FDIC insurance limits will provide opportunities for us to build core deposits,” said Wacknitz. Declining interest rates plus an improved mix of deposits contributed to the 129 basis point improvement in the cost of deposits during the past year, with the average cost of deposits at 3.44% for the current quarter compared to 4.73% for the third quarter of 2007.

Capital ratios remain strong at September 30, 2008, with the Tier 1 leverage ratio at 9.09%, the Tier 1 risk-based capital ratio at 8.81%, and the total risk-based capital ratio at 11.46%, all above the minimum to qualify as well capitalized by Temecula’s regulatory authorities. Shareholder equity fell slightly to $101.5 million at the end of the third quarter of 2008, compared to $104.9 million at September 30, 2007.

Income Statement

Total revenue, consisting of net interest income and noninterest income, was $13.8 million for the third quarter of 2008 compared with $18.0 million for the third quarter of 2007. Net interest income was $11.5 million, down 30% from $16.5 million in the third quarter a year ago. The decline in net interest income includes $366,000 in reversal of interest for nonaccrual loans in the third quarter. Year-to-date, revenue totaled $44.8 million compared to $61.4 million in the first nine months of 2007. Net interest margin was 3.32% in the third quarter, of which 11 basis points drop resulted from interest reversals. The net interest margin for the first nine months of 2008 was 3.70% with 22 basis points of the decline resulting from accrued interest being reversed.

Noninterest income increased to $2.2 million for the third quarter of 2008 from $1.5 million in the third quarter a year ago, reflecting a higher SBA net servicing income. For the third quarter of 2008, the SBA net servicing loss was $161,000, compared to a loss of $3.1 million in the third quarter of 2007. Year-to-date, SBA servicing income was positive at $362,000 compared to a loss of $4.8 million in the first nine months of 2007. Servicing income is very volatile based on repayment schedules and other market forces. Gains on the sale of loans were down to $935,000 in the quarter and $2.4 million year-to-date, due to the bank’s decision to portfolio more of its SBA 7(a) loans. This compares to $1.6 million in the third quarter and $8.4 million in the first nine months of 2007. “We made the strategic decision to retain more of our SBA loan production this year to improve the diversification of our loan portfolio and build interest income from these loans. In addition, and because of the turmoil currently in the credit markets, we believe the low premiums do not provide enough value to sell these loans at this time,” said David Bartram, President SBA Division.

Primarily due to lower bonus and salary expense, Temecula Valley’s salary and benefits expenses were 20% lower in the third quarter and down 15% year-to-date compared to the same periods in 2007. Noninterest expense for the third quarter was reduced 5% to $12.0 million compared to $12.6 million in the third quarter of 2007. Year-to-date noninterest expense fell 7% to $36.8 million from $39.6 million in the first nine months of 2007. The expense ratio, which is the annualized noninterest expense divided by average assets, improved to 3.23% in the third quarter, compared to 3.90% in the same quarter a year ago. The efficiency ratio increased to 87.04% for the third quarter of 2008 from 70.08% for the third quarter a year ago. In the first nine months of 2008, the efficiency ratio was 82.08% compared to 64.53% in the like period of 2007. For the third quarter, the increase in the efficiency ratio is due to a lower net interest margin offset by higher noninterest income and lower noninterest expense. For the year-to-date periods, the increase was due to lower net interest margin and noninterest income offset by lower noninterest expense.

About Temecula Valley Bank

Temecula Valley Bank (the “Bank”) has grown to be one of the nation’s leading producers of Small Business Administration (SBA) loans funding over $1.6 billion in the past five years. As a leading SBA Preferred Lender, the Bank has a network of SBA loan production offices in primarily the western and southeastern United States. The Bank was established in 1996 and operates full service offices in California through eleven full-service banking offices in Temecula, Murrieta, Corona, Carlsbad, El Cajon, Escondido, Fallbrook, Rancho Bernardo, San Marcos, Solana Beach and Ontario. Regional loan production centers originate real estate and construction loans throughout the state of California. Temecula Valley Bancorp Inc. was established in June 2002 and operates as a bank holding company for the Bank. For more information about the Company, visit Temecula’s website at www.temvalbank.com.

Statements concerning future performance, developments, or events concerning expectations for growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements that are subject to a number of risks and uncertainties. Actual results may differ materially from stated expectations. Specific factors include, but are not limited to, the effect of interest rate changes, the ability to control costs and expenses, the impact of consolidation in the banking industry, financial policies of the U.S. government, and general economic conditions. Additional information on these and other factors that could affect financial results are included in the filings made with the Securities and Exchange Commission by Temecula Valley Bancorp Inc. The Corporation undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

TEMECULA VALLEY BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands, except share and per share data)
				3 Mos. Ended September 30,								9 Mos. Ended September 30,
				2008				2007				2008				2007
INTEREST INCOME
	Interest income and fees on loans		$	22,132			$	28,496			$	70,433			$	86,061
	Other Interest income			308				562				785				1,260
	Total Interest income			22,440				29,058				71,218				87,321
INTEREST EXPENSE
	Interest on deposits			9,572				11,892				30,598				35,240
	Interest on 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, fixed assets and OREO			935				1,632				2,370				8,369
	SBA Net Servicing income			(161	)			(3,108	)			362				(4,818	)
	Loan related income			521				2,260				2,498				5,938
	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 and equipment			1,444				1,331				4,093				3,868
	Marketing and business promotion			188				292				605				893
	Office expense			654				648				1,828				2,011
	Loan related expense			737				975				1,805				2,090
	Other expense			2,722				1,604				6,396				4,685
	Total Non Interest expense			11,977				12,641				36,785				39,621
	Earnings (Loss) before income taxes			(5,766	)			4,341				(7,018	)			20,303
	Income tax expense (benefit)			(2,158	)			1,746				(2,857	)			8,278
	Net earnings (loss)		$	(3,608	)		$	2,595			$	(4,161	)		$	12,025
OTHER SELECTED FINANCIAL DATA
	Actual common shares outstanding at end of period			10,038,267				10,137,910				10,038,267				10,137,910
	Average common shares outstanding			10,038,267				10,247,356				10,058,973				10,502,129
	Average common shares & equivalents outstanding			10,038,267				10,559,464				10,058,973				10,892,611
	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
	Return on average assets (annualized)			(0.97	)%			0.79	%			(0.39	)%			1.24	%
	Return on average equity (annualized)			(13.88	)%			9.66	%			(5.33	)%			15.03	%
	Investment Yield			2.77	%			5.16	%			3.10	%