TEMECULA VALLEY BANCORP INC
TEMECULA VALLEY EXHIBIT 10.31
<DOCUMENT>
<TYPE>EX-10.31
<SEQUENCE>12
<FILENAME>a4852835ex1031.txt
<DESCRIPTION>TEMECULA VALLEY EXHIBIT 10.31
<TEXT>
                                  EXHIBIT 10.31



                              EMPLOYMENT AGREEMENT



                  THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of January
4, 2005 and shall be deemed effective as of November 29, 2004 between TEMECULA
VALLEY BANK, N.A., a national banking association ("Bank") and WILLIAM H.
McGAUGHEY ("Executive").

                                  R E C I T A L

                  Bank desires that Executive be employed as Executive Vice
President/Chief Operating Officer of Bank and Executive desires to be so
employed subject to the terms and conditions herein stated.

                  NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
parties agree as follows:

     1. TERM OF EMPLOYMENT.

1.1. Term. Bank hereby agrees to employ Executive, and Executive hereby accepts
employment with Bank, for the period ("Term") commencing November 29, 2004
("Commencement Date"), and terminating on such date and upon such terms as
provided for in Section 4 hereof.

     2. DUTIES OF EXECUTIVE.

     2.1.  Duties.   Executive  shall  perform  the  duties  of  Executive  Vice
President/Chief Operating Officer of Bank, as assigned by Bank's Chief Executive
Officer,  subject to the powers by law vested in the Board of  Directors of Bank
and in Bank's Shareholder. During the Term, Executive shall perform the services
herein  contemplated  to be  performed by  Executive  with due care  faithfully,
diligently,  to the  best of  Executive's  ability  and in  compliance  with all
applicable laws and Bank's Articles of Association and Bylaws.

     2.2.  Exclusivity.  Executive shall devote substantially all of Executive's
productive time,  ability and attention to the business of Bank during the Term.
Executive  shall not directly or  indirectly  render any services of a business,
commercial or professional  nature to any other person,  firm or corporation for
compensation without prior consent evidenced by a resolution duly adopted by the
Board of Directors of Bank, or the Executive Committee thereof.  Notwithstanding
the  foregoing,  Executive may (i) make  investments  of a passive nature in any
business or venture;  and (ii) serve in any  capacity  in civic,  charitable  or
social organizations, provided, however, that such investments or services shall
not be in competition, directly or indirectly, in any manner with Bank.

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     3. COMPENSATION AND BENEFITS.

     3.1. Salary. For Executive's  services hereunder,  Bank shall pay, or cause
to be paid, as annual gross base salary,  to Executive  $200,000 during the Term
("Base  Salary"),  beginning  with  the  Commencement  Date,  payable  in  equal
installments  in accordance with Bank's normal payroll periods as in effect from
time to time. The Board of Directors shall also, from time to time, and at least
once each calendar year grant such additional "merit" increases, if any, in, the
Base Salary as are  determined  after review to be appropriate in the discretion
of the Board of Directors.

     3.2. Bonus.

     (a) For each year within the Term, Executive shall be entitled to an annual
Incentive  Bonus,  determined in accordance with this Section,  if the Threshold
Test is met. The Threshold  Test shall be deemed to have been met if: (i) Bank's
regular  outside  independent  loan  reviewer  gives a  favorable  review of the
overall SBA loan quality of the Bank;  and (ii) the latest report of supervisory
activity  relative to Bank issued by the Bank's  principal bank regulator  rates
Bank operations no less than  satisfactory.  The annual Incentive Bonus shall be
the greater of:  $100,000,  or one and  one-half  percent  (1.5%) of the pre-tax
profits of Bank.  The  Incentive  Bonus  shall be payable in January of the year
following completion of the year on which its is based, or as soon thereafter as
is practical  after Bank's  certified  public  accountants  have delivered their
report on Bank's condition and results of operations for the year.

     (b) As a signing bonus, Executive shall receive $15,000 per month, for five
months ($75,000 in the aggregate), payable for the first time on January 1, 2005
and on the first of each of the next four successive calendar months.

     3.3.  Vacation.  Executive  shall be entitled to 20 days of vacation  leave
each year of the Term  accruing in accordance  with Bank policy,  of which eight
consecutive  working  days  must be  taken  in each  calendar  year  ("Mandatory
Vacation").  Any vacation not used in excess of the Mandatory Vacation shall not
accumulate but at the end of each year of the Term,  Executive shall be entitled
to vacation pay in lieu of vacation.

     3.4. Equipment.  Bank shall provide for Executive's use an automobile,  the
selection  of which  shall be  within  the  discretion  of the  Chief  Executive
Officer.  Bank  shall  pay all the  expenses  (including,  but not  limited  to,
maintenance,  fuel,  insurance,  registration) related to such automobile during
the  Term.  Bank  shall  also  provide  Executive  with  a  cellular  phone  for
Executive's  reasonable  use in the  performance of his duties  hereunder.  Bank
shall pay all  reasonable  expenses in connection  with the business use of such
cellular phone.

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     3.5. Group Medical and Other Benefits. Bank shall provide for Executive, at
Bank's expense,  participation in the medical and other benefit plans offered to
other  similarly  titled  employees of Bank,  commencing on the first day of the
month following  Executive's  start date. Bank will reimburse  Executive for any
COBRA costs incurred in maintaining  insurance coverage between the Commencement
Date and the  effective  date of  coverage  under the Bank's  medical  and other
benefit plans.  Executive  will become  eligible to participate in Bank's 401(k)
Plan on the first day of the month following the 90th day after the Commencement
Date.  Executive will also be eligible to  participate in an Executive  deferred
compensation plan and a salary continuation  program, on terms agreeable to Bank
and Executive.

     3.6.  Sick Leave.  Executive  shall be entitled to sick leave in accordance
with Bank's  personnel  policy.  Accrued sick leave may not be carried over from
prior periods and Executive shall not be entitled to be paid in lieu thereof.

     3.7. Stock Options.  As soon as practicable  after the  Commencement  Date,
Executive  shall  receive an incentive  stock  option under the Temecula  Valley
Bancorp Inc. ("Company") 2004 Stock Incentive Plan which will entitle Executive,
upon  vesting,  to purchase up to an aggregate of 20,000 shares of the Company's
common stock.

     3.8. Relocation Expenses.  Bank shall pay for all of Executive's reasonable
relocation expenses from Truckee, California to the Temecula, California area.

     3.9.  Interim  Living  Expenses.  Bank  shall  pay for  all of  Executive's
temporary,  reasonable,  housing expenses in the Temecula, California area until
the first to occur of: (i) June 1, 2005, or (ii) the date Executive  permanently
moves his residence to the Temecula, California area.

     3.10. Salary  Continuation Plan. Subject to Executive's  successful passing
of a required physical  examination and insurability,  as determined by Bank and
Bank's insurance  provider,  Executive shall receive a salary  continuation plan
that  provides,  during the Term,  an annual  $100,000  benefit  when  Executive
reaches the age of 65 for up to 15 years.

     4. TERMINATION.

     4.1.  Termination With Cause.  Except as otherwise  provided  herein,  this
Agreement  may be terminated by Bank, at Bank's option with notice to Executive,
upon the occurrence of any of the following events:

     (a) A  material  breach  by  Executive  of  any  of the  express  terms  or
provisions of this Agreement;

     (b) Executive is charged with illegal  activity or pleads guilty to or nolo
contendere to, illegal activity;

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<PAGE>

     (c)  Executive has committed any illegal or dishonest act which would cause
termination  of coverage  under Bank's  Bankers  Blanket Bond as to Executive or
termination of coverage as to Bank as a whole;

     (d) Executive fails to perform or neglects Executive's duties or commits an
act of malfeasance or misfeasance in connection therewith;

     (e) Executive becomes permanently  disabled, as determined in good faith by
the Board of Directors;

     (f) The Comptroller of the Currency,  or any other regulatory agency having
jurisdiction,  requests  Executive's  dismissal  or removal,  issues a notice of
suspension or removal, finally removes, or suspends Executive from office;

     (g) The  Comptroller  of the Currency or other  supervisory  or  regulatory
authority having  jurisdiction  takes possession of the property and business of
Bank; or

     (h) The death of the Executive.

     4.2.  Termination  Without  Cause.  During the Term,  subject to provisions
specifically  intended to survive termination,  this Agreement may be terminated
by either party without cause upon written notice to the other.

     4.3. Compensation Upon Termination. If Executive's employment is terminated
by Bank pursuant to Section 4.1 above, or by Executive  pursuant to Section 4.2,
Executive  shall then only be entitled  to receive  his Base Salary  through the
effective date of such termination.  If Executive's  employment is terminated by
Bank  pursuant to Section  4.2 or within six months  before or after a Change of
Control, as defined in Section 4.4, subject to any limitations on payments under
applicable  federal or state law, Executive shall be entitled to the same amount
as if the termination had been pursuant to Section 4.1, plus a Severance Payment
in an amount equal to Executive's Base Salary (as in effect immediately prior to
termination) for the severance period,  which shall, for this purpose, be twelve
months from the effective date of  termination,  payable over twelve months,  in
equal installments, in accordance with the Bank's normal payroll practices.

     4.4.  Vesting  of  Options  Upon  Change  of  Control.  Executive's  option
agreements  covering  Company  stock  options to be issued to him,  from time to
time, shall provide that in the event of a Change of Control (as defined below),
all options shall vest  immediately  prior to any Change of Control.  "Change of
Control" means:  (a) more than 50% of the Company's  voting stock is transferred
to a person or entity that is not, prior to the transaction, a Bank "Affiliate,"
as that term is defined in 12 U.S.C. Section 371c or (b) a merger, consolidation
or other  transaction  or series of  transactions  pursuant  to which  Company's
shareholders  prior to such  transaction or series of transactions own less than
50% of the voting control of the resulting entity after such transaction.

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<PAGE>

     4.5.  Other  Employment.  In the event of  termination  of Executive  under
Section 4.2 and payment by Bank of the  Severance  Payment  under  Section  4.3,
Executive  agrees not to seek or accept  employment in the banking  industry for
performance of services within a 25 mile radius of every location Bank maintains
an office for a period of six months from the effective date of termination.  If
Executive  chooses to accept  such  employment,  he shall not be entitled to the
Severance Payment and to the extent paid, shall be repaid immediately to Bank.

     5. GENERAL PROVISIONS.

     5.1. Ownership of Books and Records; Confidentiality.

     (a) All records or copies  thereof of the  accounts of  customers,  and any
other records and books relating in any manner whatsoever to Bank customers, and
all other files,  books and records and other materials owned by Bank or used by
it in connection with the conduct of its business, whether prepared by Executive
or otherwise coming into his possession, shall be the exclusive property of Bank
regardless of who actually prepared the original  material,  book or record. All
such books and records and other  materials,  together with all copies  thereof,
shall be  immediately  returned to Bank by Executive on any  termination  of his
employment; and

     (b) During the Term,  Executive  will have access to and become  acquainted
with what Executive and Bank acknowledge are trade secrets, to wit, knowledge or
data concerning Bank, including its operations and business, and the identity of
Bank  customers,   including  knowledge  of  their  financial  condition,  their
financial needs, as well as their methods of doing business. Executive shall not
disclose any of the aforesaid trade secrets, directly or indirectly, or use them
in any way,  either  during the Term or  thereafter,  except as  required in the
course of Executive's employment with Bank. Executive shall not solicit any Bank
employee  or Bank  customer  to  become  an  employee  or  customer  of  another
institution until six months following his termination of employment.

     5.2. Assignment and Modification. This Agreement, and the rights and duties
hereunder, may not be assigned by Executive.

     5.3.  Notices.  All notices  required or  permitted  hereunder  shall be in
writing and shall be  delivered  in person,  sent by courier,  by  facsimile  or
certified or registered  mail,  return  receipt  requested,  postage  prepaid as
follows:

        To Bank:         Temecula Valley Bank, N.A.
                         27710 Jefferson Drive, Suite A100
                         Temecula, California 92590
                         Attn: Stephen H. Wacknitz, President /
                            Chief Executive Officer
                         Facsimile:        (909) 694-9194

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<PAGE>

        With a copy to:  Stephanie E. Allen, Esq.
                         McAndrews, Allen & Matson
                         2040 Main Street, 14th Floor
                         Irvine, CA  92614
                         Facsimile:        (949) 955-3723

or to such other party or address as either of the parties may designate in a
written notice served upon the other party in the manner provided herein. All
notices required or permitted hereunder shall be deemed duly given and received
on the date received if delivered in person, by courier or by facsimile, or on
the third day next succeeding the date of mailing if sent by certified or
registered mail, postage prepaid.

     5.4.  Successors.  This Agreement shall be binding upon, and shall inure to
the benefit of, the successors and assigns of the parties.

     5.5.  Entire   Agreement.   Except  as  provided  herein,   this  Agreement
constitutes   the  entire   agreement   between  the  parties,   and  all  prior
negotiations,  representations,  or agreements between the parties, whether oral
or written, are merged into this Agreement.  This Agreement may only be modified
by an agreement in writing executed by both of the parties hereto.

     5.6.  Governing Law. This Agreement  shall be construed in accordance  with
the laws of the State of California.

     5.7. Executed  Counterparts.  This Agreement may be executed in one or more
counterparts, all of which together shall constitute a single agreement and each
of which shall be an original for all purposes.

     5.8.  Section  Headings.  The various  section  headings  are  inserted for
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement or any section hereof.

     5.9. Calendar Days/Close of Business.  Unless the context so requires,  all
periods  terminating on a given day,  period of days or date shall  terminate on
the close of business on that day or date and  references  to "days" shall refer
to calendar days.

     5.10.  Severability.  In the event that any of the provisions,  or portions
thereof,  of this Agreement are held to be unenforceable or invalid by any court
of competent  jurisdiction,  the validity and  enforceability  of the  remaining
provisions or portions hereof, shall not be affected thereby.

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     5.11. Attorneys' Fees. In the event that any party shall bring an action or
arbitration in connection with the performance, breach or interpretation hereof,
then the  prevailing  party in such action as  determined  by the court or other
body having  jurisdiction  shall be entitled to recover from the losing party in
such action, as determined by the court or other body having  jurisdiction,  all
reasonable costs and expenses of litigation or arbitration, including reasonable
attorneys' fees, court costs,  costs of investigation and other costs reasonably
related  to  such  proceeding,  in  such  amounts  as may be  determined  in the
discretion of the court or other body having jurisdiction.

     5.12. Rules of Construction.  The parties hereby agree that the normal rule
of construction, which requires the court to resolve any ambiguities against the
drafting party,  shall not apply in interpreting this Agreement.  This Agreement
has been  reviewed  by each  party  and  counsel  for each  party  and  shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of all parties hereto.  Each
provision of this Agreement shall be interpreted in a manner to be effective and
valid under  applicable  law, but if any provision  shall be prohibited or ruled
invalid under applicable law, the validity,  legality and  enforceability of the
remaining provisions shall not, except as otherwise required by law, be affected
or impaired as a result of such prohibition or ruling.

                  IN WITNESS WHEREOF, this Agreement is executed as of the date
first above written.

                  Bank:        TEMECULA VALLEY BANK, N.A.


                               By:      /s/
                                        Stephen H. Wacknitz
                                        President and Chief Executive Officer




                  Executive:   /s/
                               William H. McGaughey


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