Temecula Valley Bancorp Reports Full Year and Fourth Quarter 2008
Results
 

• Full Year Net Loss of $16 Million Driven by Continued Aggressive Actions to Build Reserves
• Significant Progress Against Strategic Initiatives to Increase Capital, Diversify Loan Portfolios and Reduce Operating Expenses by $10 Million Annually
• Total Risk-Based Capital Ratio of 10.69% Exceeds Regulatory “Well-Capitalized” Minimum
• Total Assets Up 18% Over 2007
• SBA and Commercial Loans Increase; Percentage of Real Estate Construction Loans in Total Portfolio Continues to Decline

Temecula Valley Bancorp Inc. (NASDAQ: TMCV - News) today reported a net loss of $11.9 million, or $1.18 per share, for the fourth quarter of 2008, driven primarily by a $23.7 million provision for loan losses, compared to a net loss of $3.6 million, or $0.36 per share, in the immediate prior quarter and a net income of $3.1 million, or $0.30 per diluted share, for the fourth quarter of 2007. For the full year in 2008, following a $38.8 million provision for loan losses, the Company’s net loss totaled $16.0 million, or $1.60 per share, compared to earnings of $15.1 million, or $1.41 per diluted share for the full year in 2007.

“This quarter we have made strong progress on our new strategic initiatives to improve the operations of the bank and to strengthen the capital position of the Company,” said Frank Basirico, Chief Executive Officer. “Over the past few months, we completed staff reductions, implemented organizational changes and realigned our operating footprint to focus on our core markets in Southern California. This reduction in workforce, which included all levels of staff, is expected to generate more than $10 million in operating expense savings annually. While the current economic climate remains challenging, we have a clear strategy in place to continue reducing costs, further strengthen Temecula’s earnings capacity, provide excellent service to our customers and deliver long-term value for our shareholders.

“We have also engaged Stifel Nicolaus to assist us in exploring capital alternatives. We are working closely with them to determine the feasibility, structuring and potential terms for investment inquiries that we have received to date, should these opportunities progress,” Basirico continued. “Our primary goal in this effort is to put the bank in the best possible position to participate in any recapitalization programs that may be available while further strengthening our capital base so that we are well-prepared to weather any additional challenges in 2009.”

Temecula Valley Bancorp also provided additional details on progress the Company has made against its three-year strategic plan. To date, the Company has:

• Developed and implemented a capital plan to enhance capital ratios for the Bank and the Holding Company;
• Expanded and enhanced Board supervision of management, policies and objectives;
• Developed and implemented an asset disposition plan for classified assets to reduce nonperforming loans through collection and negotiations with delinquent borrowers, and to document the improved methodology of the loan loss reserve policy;
• Developed a plan to systematically diversify its loan portfolio and reduce concentrations in land and construction loans;
• Developed a plan to systematically diversify the deposit base and reduce reliance on brokered deposits;
• Ensured that the senior management team has the talent and expertise needed to implement this strategic realignment and determined a means to retain and recruit seasoned professionals, as necessary; and
• Developed and implemented a plan to return the bank to profitable operations.

Regional Economy

A weak housing market and decreased consumer spending raised California’s jobless rate to its highest level in 14 years, with the construction sector accounting for the highest number of job cuts in 2008. December unemployment for San Diego increased to 7.4% from a revised November rate of 6.9%, according to a January 23 report from the state’s Employment Development Department. However, according to Dean Calbreath of the San Diego Union-Tribune, “Despite the spike in unemployment in December, San Diego continues to perform better than many other regions of California.”

“Although the consensus for San Diego County's long-term economy is that it will outperform the state, we are prepared for a difficult 2009,” said Basirico. “While we hope the housing sector will stabilize soon, both the November and December sales report shows inventories are starting to move, it is too early to predict the direction the market will take this year.” According to DataQuick, there were 37,836 homes sold in California in December 2008, up 18% from November and 48% from December 2007. November 2008 home sales were up 118% over November 2007.

Asset Quality

Including government guarantees of $7.1 million, nonperforming assets were $120.6 million or 7.75% of total assets at December 31, 2008. After deducting the SBA guarantees, nonperforming assets were $113.5 million or 7.30% of total loans at year end. Loans 90+ days past due and still accruing consist of only one loan totaling $1.5 million for a condominium project in San Diego County that is now current.

At December 31, 2008, net other real estate owned (OREO) consisted of 30 properties totaling $32.0 million. The five properties in San Bernardino County totaling $6.9 million include a restaurant, a home, an eight acre commercial lot, a development project for 14 condos and 28 lots, and seven residential lots. The four properties in San Diego County totaling $6.4 million included four homes, a lot and an 11 unit condo project which is complete and on the market. The four properties in Riverside County totaled $2.9 million, consisted of two duplexes, a home and a land development project. There were ten properties in other California counties totaling $13.6 million, and seven properties outside of California totaling $2.2 million, all net of SBA guarantees. By type of properties, there are 12 SBA properties totaling $5.4 million and 15 construction related properties totaling $22.1 million with the remainder in other real estate loans.

Temecula Valley Bancorp’s provision for loan losses for the fourth quarter of 2008 was $23.7 million compared with $7.6 million in the third quarter of 2008 and $3.1 million in the fourth quarter a year ago. For the full year, the provision for loan losses totaled $38.8 million compared to $4.6 million in 2007. The allowance for loan loss increased to 1.75% of total loans, up from 1.48% of total loans in the immediate prior quarter and from 1.29% a year ago.

Net charge-offs were $19.3 million, or an annualized 5.49% of average loans for the fourth quarter of 2008, and $30.3 million, or 2.29%, for the full year.

Balance Sheet

Total assets increased 18% year-over-year to $1.56 billion at December 31, 2008, compared to $1.32 billion at December 31, 2007. Over the past year, total loans increased 13% to $1.40 billion at December 31, 2008 from $1.24 billion a year ago. Real estate construction and development loans fell 3% in the quarter and 5% for the year, now accounting for 40% of the portfolio, down from 48% a year ago. SBA loans grew 46% year-over-year and now account for 30% of the portfolio, and commercial loans increased 40%, now accounting for 7% of the portfolio. Year-over-year loan growth was funded by Federal Home Loan Bank and FRB Discount Window advances, a 12% growth in deposits, and a higher level of junior subordinated debt.

“Although our strategy to deleverage the balance sheet, which we began implementing at the end of the year, is not reflected in year end balances, in 2009 we expect to shrink both the loan portfolio and the reliance on brokered deposits in a systematic and orderly process,” said Marty Plourd, President and COO.

The loan portfolio is primarily secured by real estate, which 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, and 12% of the portfolio is located in the Bay Area.

Deposits at December 31, 2008, increased 12% to $1.30 billion compared to $1.16 billion a year ago. Core deposits (excluding CD’s of $100,000 or more and including brokered deposits) increased 29% to $982 million and account for 76% of total deposits. Time deposits under $100,000 increased 67% to $755.3 million from $399.6 million due to increased brokered deposits.

“We continue to build core deposits and meet the savings needs of our customers. We have increased communications and customer education initiatives focusing on the FDIC Deposit Insurance coverage of 100% for noninterest checking accounts, NOW accounts earning up to 0.50%, and up to $250,000 coverage per depositor for all interest bearing accounts. In addition, the brokered CD portfolio of insured deposits has been built with a laddered maturity scale to fund the year-end loan growth,” said Plourd.

Declining interest rates plus an improved mix of certificates of deposits contributed to the 111 basis point improvement in the cost of interest bearing deposits during the past year, with the average cost of interest bearing deposits at 3.50% for the fourth quarter compared to 4.61% for the fourth quarter of 2007. For the full year, the cost of deposits fell 98 basis points to 3.74% from 4.72% in 2007.

At December 31, 2008, the Tier 1 leverage ratio was 7.69%, the Tier 1 risk-based capital ratio at 7.77%, and the total risk-based capital ratio at 10.69%, all considered “well capitalized.” Shareholder equity was $89.6 million, or $8.93 per share, at the end of 2008, compared to $108.0 million, or $10.64 per share at the end of 2007. At year end 2007 and 2008, there was no goodwill on the books or any other significant intangible asset. Liquidity also remains solid with a variety of funding sources and borrowing capacity.

Income Statement

Total revenue, consisting of net interest income and noninterest income, was $11.0 million for the fourth quarter of 2008 compared with $13.8 million in the immediate prior quarter and $20.6 million for the fourth quarter of 2007. Net interest income was $10.5 million, down 34% from $15.8 million in the fourth quarter a year ago. The decline in net interest income includes $854,000 in reversal of interest for nonaccrual loans in the fourth quarter.

In 2008 revenue totaled $55.8 million compared to $82.0 million in 2007, reflecting lower net interest income, lower gain on sale of loans, losses on sale of OREO and lower loan related income.

Net interest margin was 2.90% in the fourth quarter, of which a 24 basis points drop resulted from the reversal of interest previously accrued. The net interest margin for 2008 was 3.49% with 23 basis points of the decline resulting from accrued interest being reversed.

Noninterest income was $474,000 for the fourth quarter compared to $2.2 million in the third quarter of 2008 and $4.8 million in the fourth quarter a year ago, primarily due to lower loan sales and losses and additional valuation adjustments to OREO. For the fourth quarter of 2008, the SBA net servicing income was $927,000, compared to a loss of $161,000 in the third quarter of 2008 and income of $513,000 in the fourth quarter a year ago. For the year, SBA servicing income was positive at $1.3 million, compared to a loss of $4.3 million in 2007. Servicing income is very volatile based on repayment schedules and other market forces. Gains on the sale of assets were negative at $1.8 million in the quarter and positive at $571,000 in the full year, due to disposition of and further valuation for OREO and lower premiums on sales of SBA loans. In 2007, fourth quarter gains on sale of loans were $1.7 million and $10.1 million for the full year.

Reflecting the reduction in staff and the $4.3 million reversal of accrued compensation and benefits for the former CEO, salary and benefits expenses were down 72% in the fourth quarter and 28% for the year compared to the same periods in 2007. Noninterest expense for the fourth quarter was reduced 39% to $7.4 million, compared to $12.3 million in the fourth quarter of 2007. In 2008, noninterest expense fell 15% to $44.2 million from $51.9 million in 2007. The Company expects total compensation costs of between $5.0 and $5.5 million per quarter for the coming year.

The expense ratio, which is the annualized noninterest expense divided by average assets, improved to 1.91% in the fourth quarter, compared to 3.69% in the same quarter a year ago. The efficiency ratio increased to 67.84% for the fourth quarter and 79.28% for the full year in 2008, reflecting lower revenues.

About Temecula Valley Bank

Temecula Valley Bank was established in 1996 and operates eleven full service banking offices in California, in the communities of Temecula, Murrieta, Corona, Carlsbad, El Cajon, Escondido, Fallbrook, Rancho Bernardo, San Marcos, Solana Beach and Ontario. Regional commercial and SBA loan offices are located throughout the state of California. The Bank is an SBA Preferred Lender. 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 Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.

Sources: http://www.signonsandiego.com/uniontrib/20080731/; http://www.sandiegometro.com/index.php; http://www.edd.ca.gov/; http://www.dqnews.com/

Note: Historical data and additional detail break out of the loan portfolio are available at the investor relations table on the company’s website at www.temvalbank.com.

Note: Transmitted on Business Wire on February 3, 2009.

Temecula Valley Bancorp Inc.
Frank Basirico, CEO, 951-694-9940