Temecula Valley Bncr : Temecula Valley Bancorp Announces Second Quarter 2007 Earnings

Temecula Valley Bancorp, Inc. (NASDAQ:TMCV) today announced second quarter 2007 net income of $5.25 million, a 15.9 percent increase from the $4.53 million reported for the second quarter of 2006. Diluted earnings per share for the second quarter were $0.47, unchanged from the 2006 second quarter, and $0.09 above the first quarter of 2007. For the six months year-to-date, net income was $9.4 million, up 10.6 percent from the $8.5 million reported for the 2006 six-month period; diluted earnings per share were $0.85 compared with $0.89 for the prior six months, a decline of 5.6 percent. Compared with the year-earlier quarter, second quarter 2007 results reflect strong loan growth and a narrower net interest margin. Compared with the first quarter of this year, results reflect improved profitability from loan sales, a stabilizing margin, and lower net loan charge-offs. Per share earnings were negatively impacted in 2007 by the private placement of 1.4 million common shares in November 2006, which increased average shares outstanding by 15.3 percent compared to second quarter of 2006, and by 15.9 percent for the six-month period.

Highlights of the quarter include:

• The sale of $102.5 million of loans including $70 million in long-term lower-yielding commercial real estate loans, resulting in a gain of $4.5 million.
• Improved profitability, as reflected in the net interest margin stabilizing at 5.51 percent, and a 25 basis point increase to 1.59 percent, in the annualized return on average assets, compared to the previous quarter.
• A return to more normalized asset quality, as reflected in the $291,000 decline in net loan charge-offs, to 0.06 percent of average loans, compared to first quarter of 2007.
• The Company declared a first-time quarterly cash dividend of $0.04 per share.
• Temecula's board of directors authorized a stock buyback program to purchase up to $5.5 million of shares of TMCV common stock; this quarter, 106,900 shares were repurchased at a cost of $2.1 million.

Chairman of the Board, CEO and President Stephen H. Wacknitz stated, ?This quarter's performance provides a good example of the strength of our organization, as well as our flexibility in challenging times. Our balance sheet provides us with multiple options, enabling us to respond quickly to changes in the industry environment and local market conditions.

?We concluded that this interest-rate environment, with its inverted yield curve and increased competition for core deposits, will be with us for a while,? commented Mr. Wacknitz. ?So this quarter, we opted to shift from our traditional growth posture to a more conservative stance, with a focus on profitability. Loan originations remain solid and we are seeing good quality loans in every category of our portfolio. So asset quality remains strong. However, funding costs have become the major factor impacting our earnings. The sale of $70 million of lower-yielding loans this quarter allowed us to decrease our reliance on high-cost deposits and therefore, stabilize our net interest margin.?

Returns on average assets and average equity were 1.59 percent and 19.07 percent, respectively, for the quarter ending June 30, 2007, compared to 1.90 percent and 27.71 percent, respectively, for the year-ago second quarter; six-month returns on average assets and equity were 1.47 percent and 17.56 percent, respectively, for the 2007 period compared with 1.86 percent and 27.19 percent for the prior year.

Income Statement

Total interest income for the second quarter of 2007 was $30.0 million, compared with $22.0 million for the second quarter of 2006, an increase of 36.4 percent. Net interest income was $17.1 million, up 17.3 percent over the $14.5 million reported for the year-ago quarter. Growth in net interest income reflects a 44.5 percent increase in average earnings assets, partially offset by a 128 basis point, or 18.8 percent, decline in net interest margin, from 6.79 percent for the 2006 quarter, to 5.51 percent for the current quarter. Compared to first quarter 2007, the margin declined a mere three basis points as loan growth slowed and funding costs dropped significantly. Mr. Wacknitz commented, ?Our book is well-matched between tenor of loans and deposits, which gives us great flexibility to manage our net interest margin.?

Non-interest income for the second quarter of 2007 was $6.1 million, a decline of $358,000, or 5.9 percent, from the year-ago quarter, and a $2.2 million improvement from the first quarter of this year. Over the past twelve months, SBA servicing assets decreased by $9.0 million, to $16.9 million, due to adjustments to fair value according to FAS 156. The sale of $102.5 million of loans served the dual purpose of generating a $4.5 million gain on sale that more than offset the $1.1 million swing in SBA servicing income caused by accelerated prepayments, and it enabled Temecula to lower the level of high-cost borrowings. While Temecula is consistently a net seller of loans, second quarter sales were distinguished by their magnitude. By comparison with the current quarter, Temecula sold $51.6 million of loans the second quarter of 2006, resulting in a $3.8 million gain, and $40.1 million in the first quarter 2007 for a $2.3 million gain on sales.

The provision for loan losses was zero for the current quarter, compared with $1.1 million reported for the year-ago quarter, and $415,000 for the first quarter of this year. During the second quarter of 2007, we made a contribution of $485,000 to our reserve for undisbursed loans. Net charge-offs have been relatively modest since virtually all of Temecula's non-performing loans are collateralized by real estate, and over half is guaranteed under various SBA programs.

Second quarter non-interest expense was $14.3 million, an increase of $2.2 million, or 18.1 percent, over the $12.1 million reported for the year-ago quarter, and $1.7 million above first quarter 2007. Salary and benefits expenses accounted for $1.5 million of the linked quarter increase. They increased due to staffing increases, an accrual for the ESOP contribution, and increased benefit expenses. For the quarter ending June 30, 2007, the efficiency ratio increased to 61.8 percent from 57.4 percent in the second quarter of 2006.

Balance Sheet

Total assets were $1.31 billion at June 30, 2007, up $280.0 million or 27.2 percent from the $1.03 billion reported at June 30, 2006, and a $70.8 million increase since year-end 2006. Loans increased $227.0 million to $1.15 billion, or 24.5 percent year-over-year, but grew only $8.8 million over the past six months, with all of the growth in the first quarter of 2007; second quarter loans, in fact, decreased by $28.3 million compared with the previous quarter, primarily due to the sale of $102.5 million in loans.

Temecula remains solidly entrenched in real estate lending, with approximately 94.5 percent of loans collateralized by real property. Construction lending is the bank's major focus, accounting for approximately 50 percent of its loan portfolio. According to Mr. Wacknitz, ?We always have been selective in terms of our construction projects, and our borrowers are becoming more conservative as well, so we are seeing a slowdown in this sector.? Construction outstandings grew $175 million year-over-year; virtually all of this growth, however, occurred in 2006. The $70 million loan sale impacted the ?Real Estate Other' category (primarily commercial real estate and SBA 504 loans); this category currently accounts for $250.2 million, or 21.7 percent of total loans, a decline of $42.6 million from its December 31, 2006 high point. SBA 7a loans, by comparison, are flourishing; year-over-year, they have nearly doubled to $260.2 million from $93.3 million a year ago. The current quarter was $24.4 million higher than the first.

The loans held in portfolio are diversified geographically and by type of loan. Approximately 17.2 percent of loans were originated outside the state of California through various SBA programs; these are all commercial in nature, divided between non-construction CRE ($93.1 million) and commercial construction ($64.8 million). Of the California portfolio, residential construction loans account for 46.4 percent, commercial construction loans account for 15.4 percent and CRE loans account for 21.9 percent.

?Through our SBA programs,? Mr. Wacknitz explained, ?we have highly experienced lenders in eight states originating SBA and similar loans. We have 28 lenders throughout the state of California focused on construction lending as well as CRE. And most importantly, we have four people in our appraisal department who are responsible for ordering and reviewing the appraisals independent of the loan origination officers. We average a loan-to-value ratio of 68 percent for our entire real estate-secured portfolio. Because of these factors, our asset quality has been excellent. Yes, we are seeing some of our borrowers under pressure, and yes, non-performing assets have increased somewhat, but net charge-offs remain extremely low.?

Total non-performing assets were $27.4 million this quarter, supported by government guarantees of approximately $15.2 million, thereby reducing potential loss exposure to $12.2 million, or 0.93 percent of total assets. Both gross and net non-performing assets have been increasing quarterly over the past twelve months, from a gross level of $9.0 million (0.87 percent of assets) for the year-ago quarter, to $24.5 million (1.87 percent) for the linked quarter. After guarantees, exposures were reduced to $1.7 million (0.17 percent of assets) for the year-ago quarter, and $10.4 million (0.79 percent) for the linked quarter. Nonetheless, net loan charge-offs remained extremely low throughout these five quarters; except for a clean-up in the first quarter of this year, net charge-offs ranged form 0.00 percent to 0.06 percent for the current quarter. By comparison, the allowance for loan losses was 1.07 percent of total loans including loans held for sale at June 30, 2007. The allowance for loan losses was 1.28 percent of total loans excluding loans held for sale at June 30, 2007.

Deposits at June 30, 2007 were $1.15 billion, an increase of $227.9 million, or 24.7 percent, from $921.9 million at June 30, 2006. Again, the majority of this growth occurred in 2006; second quarter 2007 deposit balances declined by $2.1 million from the first quarter of this year. Core deposits, excluding time deposits greater than $100,000, were $729.9 million at June 30, 2007; they accounted for 63.5 percent of total deposits compared with $744.7 million, or 64.6 percent, for the linked quarter. The cost of interest-bearing deposits was relatively stable between the current and the previous quarters at approximately 4.78% to 4.75%. ?Slowing loan growth has assisted in stabilizing the cost of interest-bearing deposits,? commented Mr. Wacknitz.

Shareholder equity increased 65.2 percent from $67.9 million at June 30, 2006 to $112.2 million at June 30, 2007; over half the growth was attributable to the $25.1 million private placement completed in November 2006, and the remainder to the exercise of stock options and the contribution from net income. At June 30, 2007, the Company had 10,662,772 shares outstanding, net of the 106,900 shares repurchased this quarter under the newly-authorized stock buyback program. Capital ratios remain strong at June 30, 2007, with the Tier 1 leverage ratio at 10.93 percent, the Tier 1 risk-based capital ratio at 10.58 percent, and the total risk-based capital ratio at 11.51 percent, all above the minimum to qualify as "well capitalized."

?We have demonstrated the solidity of our business model and our ability to respond to market conditions. We turned on a dime this quarter, because we underwrite the majority of our commercial real estate loans to provide us with balance sheet flexibility. While we are not yet back to historical levels of performance, we have definitely made a lot of progress this past quarter. Our confidence in our future performance is reflected in the quarterly cash dividend we declared for the first time this past quarter, as well as the stock repurchases we continue to make,? concluded Mr. Wacknitz.

About the Company

Temecula Valley Bank, established in 1996, operates ten full-service offices in Temecula, Murrieta, Corona, Fallbrook, Escondido, Rancho Bernardo, El Cajon, Carlsbad, Solana Beach and Ontario. The Bank also operates a number of regional real estate loan production centers in California. As a nationally authorized SBA Preferred Lender, the Bank has multiple SBA loan production offices across the United States and has funded over $1.3 billion in SBA loans in 36 states in the last five years. The Bank's website is at www.temvalbank.com. Temecula Valley Bancorp was established in June 2002 and operates as a bank holding company for the Bank.

Temecula Valley Bancorp stock is traded on the NASDAQ Global Select Market under the symbol TMCV.

Forward-looking Statements

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 United States 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.