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: June 30, 2003
Commission File Number: 000-31929
SONOMA VALLEY BANCORP
(Exact name of Registrant as specified in its charter)
CALIFORNIA 68-0454068
(State of Incorporation) (I.R.S. Employer Identification No.)
202 West Napa Street Sonoma, California 95476
(Address of principal executive offices)(Zip Code)
(707)935-3200
(Registrant's telephone number, including area code)
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 a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No X
The number of shares outstanding of the registrant's Common Stock, no par value,
as of August, 11 2003 was 1,451,786.
Page 1
INDEX
Part 1 Financial Information Page Number
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2003,
December 31, 2002 and June 30, 2002...................................3
Consolidated Statements of Operations for the
three months and six months ended June 30, 2003 and 2002..............4
Consolidated Statements of Changes in Shareholders Equity
for the six months ended June 30, 2003,
and the years ended December 31, 2002 and 2001........................5
Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002...............................7
Notes to Consolidated Financial Statements............................8
Average Balances, Yields and Rates Paid
for the six months ended June 30, 2003 and 2002......................10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk............22
Item 4. Controls and Procedures..............................................22
Part II Other Information
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities and Use of Proceeds............................24
Item 3. Default Upon Senior Securities.......................................24
Item 4. Submission of Matters to a Vote of Security Holders..................24
Item 5. Other Information....................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................25
Signatures....................................................................26
Certifications................................................................27
The information furnished in these interim statements reflects all adjustments
and accruals which are, in the opinion of management, necessary for a fair
statement of the results for such periods. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year.
Page 2
Part I
Item 1. The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
FINANCIAL STATEMENTS
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2003 (Unaudited) and December 31, 2002
(Audited)and June 30, 2002 (Unaudited)
June 30 December 31 June 30
ASSETS 2003 2002 2002
-------------- -------------- --------------
Cash and due from banks $ 9,406,889 $ 8,422,599 $ 8,878,954
Federal funds sold 26,840,000 23,095,000 4,470,000
-------------- -------------- --------------
Total cash and cash equivalents 36,246,889 31,517,599 13,348,954
Investment securities available-for-sale at fair value 14,045,526 3,823,259 5,562,202
Investment securities held-to-maturity (fair
value of $11,803,000, $10,440,000 and
$11,563,000, respectively) 11,165,263 9,923,737 11,114,931
Loans and lease financing receivables, net 119,318,628 125,269,181 113,027,763
Premises and equipment, net 1,117,100 875,697 673,787
Accrued interest receivable 908,680 799,282 850,666
Cash surrender value of life insurance 7,559,156 7,387,712 7,163,005
Other assets 2,629,646 3,006,260 2,391,617
-------------- ------------- -------------
Total assets $ 192,990,888 $ 182,602,727 $ 154,132,925
============== ============= =============
LIABILITIES
Non interest-bearing demand deposits $ 39,193,991 $ 38,760,806 $ 31,091,090
Interest-bearing transaction deposits 29,619,477 24,627,589 21,262,165
Savings and money market deposits 56,662,440 51,802,714 45,743,459
Time deposits, $100,000 and over 24,466,069 25,018,603 17,686,611
Other time deposits 19,833,979 19,778,540 17,603,258
-------------- ------------- -------------
Total deposits 169,775,956 159,988,252 133,386,583
Accrued interest payable and other liabilities 3,208,416 3,374,165 2,918,528
-------------- ------------- -------------
Total liabilities 172,984,372 163,362,417 136,305,111
SHAREHOLDERS' EQUITY ============== ============= =============
Common stock, no par value; 10,000,000 shares
authorized; 1,452,277 shares at June 30, 2003, 1,401,146
shares at December 31, 2002 and 1,391,426 shares at
June 30, 2002 issued & outstanding. 14,967,466 12,936,225 12,750,744
Retained earnings 4,882,517 6,215,790 4,975,042
Accumulated other comprehensive income 156,533 88,295 102,028
-------------- ------------- -------------
Total shareholders' equity 20,006,516 19,240,310 17,827,814
Total liabilities and shareholders' equity $ 192,990,888 $ 182,602,727 $ 154,132,925
============== ============= =============
Page 3
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
INTEREST INCOME
Loans and leases $ 2,276,001 $ 2,358,919 $ 4,718,704 $ 4,635,119
Taxable securities 88,392 105,728 141,828 253,323
Tax-exempt securities 109,492 125,509 218,093 262,696
Federal funds sold 93,395 23,801 169,555 60,552
Dividends 7,095 3,749 7,095 7,773
------------- ------------- ------------- -------------
Total interest income 2,574,375 2,617,706 5,255,275 5,219,463
INTEREST EXPENSE
Interest-bearing transaction deposits 15,119 21,468 27,981 44,240
Savings and money market deposits 120,058 153,301 246,271 329,758
Time deposits, $100,000 and over 184,525 141,286 380,440 295,899
Other time deposits 122,480 126,993 252,882 266,946
------------- ------------- ------------- -------------
Total interest expense 442,182 443,048 907,574 936,843
------------- ------------- ------------- -------------
NET INTEREST INCOME 2,132,193 2,174,658 4,347,701 4,282,620
Provision for loan and lease losses 0 75,000 20,000 135,000
NET INTEREST INCOME ------------- ------------- ------------- -------------
AFTER PROVISION FOR
LOAN AND LEASE
LOSSES 2,132,193 2,099,658 4,327,701 4,147,620
NON-INTEREST INCOME 436,925 383,170 841,021 780,966
NON-INTEREST EXPENSE
Salaries and employee benefits 815,644 833,302 1,659,640 1,684,734
Premises and equipment 183,376 159,102 365,021 299,214
Other 509,675 407,135 1,045,531 794,892
------------- ------------- ------------- -------------
Total non-interest expense 1,508,695 1,399,539 3,070,192 2,778,840
Income before provision ------------- ------------- ------------- -------------
for income taxes 1,060,423 1,083,289 2,098,530 2,149,746
Provision for income taxes 353,545 365,806 697,923 723,941
------------- ------------- ------------- -------------
NET INCOME $ 706,878 $ 717,483 $ 1,400,607 $ 1,425,805
============= ============= ============= =============
NET INCOME PER SHARE $ .48 $ .49 $ .96 $ .97
NET INCOME PER SHARE- ============= ============= ============= =============
ASSUMING DILUTION $ .44 $ .45 $ .88 $ .90
============= ============= ============= =============
Page 4
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2003 (Unaudited), and the years ended
December 31, 2002 (Audited) and 2001 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------ ------------ --------------- -------------
BALANCE AT
JANUARY 1, 2001 1,281,680 $ 9,585,003 $ 4,641,551 $ 78,692 $ 14,305,246
5% stock dividend 63,104 1,381,976 (1,381,976)
Fractional shares (11,955) (11,955)
Redemption and retirement
of stock (27,717) (207,323) (364,085) (571,408)
Stock options exercised and
related tax benefits 16,437 266,229 266,229
Net income for the year $ 2,600,244 2,600,244 2,600,244
Other comprehensive loss,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $57,842 82,706
Other comprehensive loss, -------------
net of taxes 82,706 82,706 82,706
------------- --------- ------------ ------------ ------------- --------------
Total comprehensive income $ 2,682,950
=============
BALANCE AT
DECEMBER 31, 2001 1,333,504 $ 11,025,885 $ 5,483,779 $ 161,398 $ 16,671,062
5% stock dividend 65,742 1,775,026 (1,775,026)
Fractional shares (13,951) (13,951)
Redemption and retirement
of stock (14,596) (121,257) (223,345) (344,602)
Stock options exercised and
related tax benefits 16,496 256,571 256,571
Net income for the year $ 2,744,333 2,744,333 2,744,333
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $51,125 (73,103)
Other comprehensive income, -------------
net of taxes (73,103) (73,103) (73,103)
------------- --------- ------------ ----------- -------------- -------------
Total comprehensive income $ 2,671,230
=============
Page 5
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the six months ended June 30, 2003 (Unaudited),
and the years ended December 31, 2002 (Audited) and 2001 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- ---------- ----------- ------------ ------------- -----------
BALANCE AT
DECEMBER 31, 2002 1,401,146 $12,936,225 $ 6,215,790 $ 88,295 $19,240,310
Stock dividend 69,156 2,011,615 (2,011,615)
Redemption and retirement
of stock (38,617) (357,858) (722,265) (1,080,123)
Stock options exercised and
related tax benefits 20,592 377,484 377,484
Net income for the period $ 1,400,607 1,400,607 1,400,607
Other comprehensive income,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $ (47,723) 68,238
Other comprehensive income, ------------
net of taxes 68,238 68,238 68,238
------------ ---------- ----------- ------------ ------------- -----------
Total comprehensive income $ 1,468,845
============
BALANCE AT
JUNE 30, 2003 1,452,277 $14,967,466 $ 4,882,517 $ 156,533 $20,006,516
========= =========== ============ ============= ===========
Page 6
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2003 and 2002
2003 2002
OPERATING ACTIVITIES ------------ ------------
Net income $ 1,400,607 $ 1,425,805
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 20,000 135,000
Depreciation 108,995 73,120
Amortization and other 41,153 21,927
Net change in interest receivable (109,399) 101,395
Net change in other assets 335,892 506,743
Net change in cash surrender value of life insurance (171,444) (132,474)
Net change in interest payable and other liabilities (165,749) (105,635)
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,460,055 2,025,881
INVESTING ACTIVITIES
Purchases of securities held-to-maturity (2,766,843) 0
Purchases of securities available-for-sale (10,884,142) (7,700)
Proceeds from maturing securities held-to-maturity 1,505,000 665,000
Proceeds from maturing securities available-for-sale 750,000 5,000,000
Net change in loans 5,930,553 (8,130,555)
Purchases of life insurance 0 (2,000,000)
Purchases of premises and equipment (350,398) (126,255)
------------ -------------
NET CASH USED FOR INVESTING ACTIVITIES (5,815,830) (4,599,510)
FINANCING ACTIVITIES
Net change in demand, interest-bearing transaction and savings deposits 10,284,799 (3,588,936)
Net change in time deposits (497,095) (679,460)
Exercise of stock options 377,484 20,625
Stock repurchases (1,080,123) (230,308)
------------ -------------
NET CASH PROVIDED(USED) BY FINANCING ACTIVITIES 9,085,065 (4,478,079)
------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,729,290 (7,051,708)
Cash and cash equivalents at beginning of period 31,517,599 20,400,662
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,246,889 $ 13,348,954
SUPPLEMENTAL DISCLOSURES: ============ =============
Cash paid during the period for:
Interest $ 914,317 $ 953,015
Income taxes 280,000 285,000
Change in unrealized gains and losses
on securities available-for-sale 115,961 (100,890)
Change in deferred income taxes on
unrealized holding gains and losses on securities (47,723) 41,520
Page 7
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
Note 1 - Basis of Presentation
In the opinion of Management, the unaudited interim consolidated financial
statements contain all adjustments of a normal recurring nature, which are
necessary to present fairly the financial condition of Sonoma Valley Bancorp and
Subsidiary at June 30, 2003 and results of operations for the three and six
months then ended.
Certain information and footnote disclosures presented in the Company's annual
financial statements are not included in these interim financial statements.
Accordingly, the accompanying unaudited interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 2002 Annual Report on
Form 10- K. The results of operations for the three and six months ended June
30, 2003 are not necessarily indicative of the operating results through
December 31, 2003.
Note 2 - Consolidation
The consolidated financial statements include the accounts of Sonoma Valley
Bancorp and its wholly owned subsidiary Sonoma Valley Bank. All material
intercompany accounts and transactions have been eliminated in consolidation.
Note 3 - Commitments
The Company has no outstanding performance letters of credit at June 30, 2003
and June 30, 2002.
Note 4 - Net Income Per Common Share
Net income per share is calculated by using the weighted average common shares
outstanding. The weighted average number of common shares used in computing the
basic net income per common share for the period ending June 30, 2003 was
1,463,457 and for the period ending June 30, 2002 was 1,464,783.
Net income per share (diluted) is calculated by using the weighted average
common shares (diluted) outstanding. The weighted average number of common
shares (diluted) used in computing the net income per common share (diluted) for
the period ending June 30, 2003 was 1,596,772 and for the period ending June 30,
2002 was 1,582,033.
These outstanding shares have been retroactively adjusted to reflect a 5% stock
dividend declared June 18, 2003, to shareholders of record July 2, 2003 and
payable on July 16, 2003.
Page 8
Note 5 - Stock Option Accounting
The Company has two stock-based employee and director compensation plans. In
December 2002 the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock-Based Compensation, an Amendment of SFAS No. 123 ("SFAS No.
123") in an effort to encourage the recognition of compensation expense for the
issuance of stock options. The Company adopted SFAS No. 148 effective January 1,
2003 using the prospective application method. Under this method, the
compensation expense and related tax benefit associated with stock option grants
issued on or after January 1, 2003 will be recognized in the income statement.
Prior to January 1, 2003, the Company accounted for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income for stock options granted prior to
January 1, 2003, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation on stock options granted prior to January 1, 2003.
For the Three Months For the Six Months
Ended June 30 Ended June 30
2003 2002 2003 2002
------------- ----------- ------------ ------------
Net Income, as reported $ 706,878 $ 717,483 $ 1,400,607 $ 1,425,805
Deduct: Total stock-based
compensation expense determined
under fair value based method for all
awards, net of related tax effects (44,978) (46,480) (89,956) (92,960)
------------- ----------- ------------ -----------
Pro forma net income $ 661,900 $ 671,003 $ 1,310,651 $ 1,332,845
============= =========== ============ ============
Net income per share:
Basic - As reported .48 .49 .96 .97
Basic - Pro forma .45 .46 .90 .91
Diluted - As reported .44 .45 .88 .90
Diluted - Pro forma .41 .42 .82 .84
Page 9
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the six months ended June 30, 2003 and 2002
(dollars in thousands)
2003 2002
-------- -------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans(2):
Commercial 84,518 3,162 7.54% 72,291 2,867 8.00%
Consumer 12,175 464 7.69% 13,276 548 8.32%
Real estate construction 20,099 795 7.98% 17,599 845 9.68%
Real estate mortgage 4,508 193 8.63% 6,257 260 8.38%
Tax exempt loans (1) 3,182 132 8.37% 3,450 146 8.53%
Leases 85 13 30.84% 192 14 14.70%
Tax exempt leases (1) 63 7 22.41% 121 7 11.67%
Unearned loan fees (415) (430)
-------- ------ -------- -------
Total loans 124,215 4,766 7.74% 112,756 4,687 8.38%
Investment securities
Available for sale:
Taxable 7,313 134 3.70% 7,967 246 6.23%
Tax exempt(1) 0 0 0.00% 0 0 0.00%
Hold to maturity:
Taxable 378 8 4.27% 202 6 5.99%
Tax exempt (1) 9,544 330 6.97% 11,269 398 7.12%
-------- ------ ------- -------
Total investment securities 17,235 472 5.52% 19,438 650 6.74%
Federal funds sold 29,179 170 1.17% 7,316 61 1.68%
FHLB Stock 285 7 4.95% 271 8 5.95%
Total due from banks/Interest bearing 71 0 0.00% 112 1 1.80%
-------- ------ -------- -------
Total interest earning assets 170,985 5,415 6.39% 139,893 5,407 7.79%
Noninterest-bearing assets: ====== =======
Reserve for loan losses (2,785) (2,472)
Cash and due from banks 8,783 7,252
Premises and equipment 972 608
Other assets 10,919 9,668
-------- --------
Total assets $188,874 $154,949
LIABILITIES AND SHAREHOLDERS' EQUITY ======== ========
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction 29,000 28 0.19% 22,867 44 0.39%
Savings deposits 55,168 246 0.90% 46,186 330 1.44%
Time deposits over $100,000 24,930 381 3.08% 17,704 296 3.37%
Other time deposits 19,897 253 2.56% 17,528 267 3.07%
-------- ----- -------- -------
Total interest bearing Deposits 128,995 908 1.42% 104,285 937 1.81%
Long term debt & other borrowings 0 0 0.00% 0 0 0.00%
-------- ------ -------- -------
Total interest bearing liabilities 128,995 $ 908 1.42% 104,285 $ 937 1.81%
Non interest bearing liabilities: ====== =======
Non interest bearing demand deposits 36,949 30,475
Other liabilities 3,180 2,877
Shareholders' equity 19,750 17,312
-------- --------
Total liabilities and shareholders' equity $188,874 $154,949
======== ========
Interest rate spread 4.97% 5.98%
==== ====
Interest income $5,415 6.39% $ 5,407 7.79%
Interest expense 908 1.07% 937 1.35%
------ ---- ------- ----
Net interest income/margin $4,507 5.32% $ 4,470 6.44%
====== ==== =======
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2003 and 2002.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $188,870 and $190,160 for the six
months ended June 30, 2003 and June 30, 2002, respectively, were amortized
to the appropriate interest income categories.
Page 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Six Month Periods
Ended June 30, 2003 and 2002
Forward Looking Statements
With the exception of historical facts stated herein, the matters discussed in
this Form 10-Q are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Sonoma Valley Bancorp's wholly owned
subsidiary, Sonoma Valley Bank, projected costs and expenses related to
operations of the bank's liquidity, capital resources, and the availability of
future equity capital on commercially reasonable terms. Factors that could cause
actual results to differ materially include, in addition to the other factors
identified in this Form 10-Q, the following; (i) increased competition from
other banks, savings and loan associations, thrift and loan associations,
finance companies, credit unions, offerors of money market funds, and other
financial institutions; (ii) the risks and uncertainties relating to general
economic and political conditions, both domestically and internationally,
including, but not limited to, inflation, or natural disasters affecting the
primary service area of the Bank or its major industries; or (iii) changes in
the laws and regulations governing the Bank's activities at either the state or
federal level. Readers of this Form 10-QSB are cautioned not to put undue
reliance on "forward looking" statements which, by their nature, are uncertain
as reliable indicators of future performance. Sonoma Valley Bancorp disclaims
any obligation to publicly update these "forward looking" statements, whether as
a result of new information, future events, or otherwise.
Overview
Sonoma Valley Bancorp (the "Company") reported net income of $1,400,607 for the
first six months of 2003 compared with $1,425,805 for the first six months of
2002. On a per share basis, net income equaled $.96 compared with $.97 per share
during the same period in 2002.
Return on average total assets on an annualized basis for the six-month periods
was 1.50% in 2003 and 1.86% in 2002. Return on average shareholders' equity on
an annualized basis for the same periods was 14.30% and 16.61%, respectively.
RESULTS OF OPERATIONS
Net interest Income
Net interest income is the difference between total interest income and total
interest expense. Net interest income, adjusted to a fully taxable equivalent
basis, as shown on the table- Average Balance, Yields and Rates Paid, on page
10, is higher than net interest income on the statement of income because it
reflects adjustments applicable to tax-exempt income from certain
Page 11
securities and loans ($160,000 in 2003 and $187,000 in 2002, based on a 34%
federal income tax rate).
The improvement in net interest income (stated on a fully taxable equivalent
basis) is a result of an $8,000 increase in interest income combined with a
decrease in interest expense of $29,000.
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin for 2003 declined to 5.32% from 6.44% for the same
period in 2002.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) increased by $8,000 to $5.4 million in the six months of 2003, a .15%
increase over the $5.4 million realized during the same period in 2002. Average
balances increased from $140.0 million to $171.0 million an increase of 22%. The
increase in volume of average balances was responsible for a $570,000 increase
in interest income offset by a $562,000 decline in interest income, a result of
the 250 basis point decline in the prime lending rate. The net result was an
increase in interest income of $8,000.
Interest Expense
Total interest expense decreased by $29,000 to $908,000. The average rate paid
on all interest- bearing liabilities decreased from 1.81% in 2002 to 1.42% in
2003. Average balances increased from $104.3 million to $129.0 million, a 23.7%
gain in deposits. The increase in volume of average balances was responsible for
a $233,000 increase in interest expense offset by a $262,000 decrease in expense
related to lower interest rates resulting in lower interest expense of $29,000.
Individual components of interest income and interest expense are provided in
the table-Average Balances, Yields and Rates Paid on page 10.
Provision for Loan Losses
The provision for loan losses charged to operations is based on the Company's
monthly evaluation of the loan portfolio and the adequacy of the allowance for
loan losses in relation to total loans outstanding. The provision to the
allowance for loan losses amounted to $20,000 during the six months of 2003 and
$135,000 in the same period in 2002. The decline in the provision is a result of
the $6.0 million decline in loans and due to management's evaluation and
assessment of the loan portfolio.
Loans charged-off were $38,000 and recoveries were $9,000 for the six months of
2003 compared with $16,000 in charge-offs and $6,000 in recoveries for the same
period in 2002.
Page 12
Non-interest Income
Non-interest income of $841,000 increased 7.7% over the $781,000 recorded in the
comparable period in 2002. The growth in non interest income is a result of a
54.6% increase in loan referral income, growth of 28.6% in income on life
insurance policies and income on deposit accounts grew by 2.2%.
Non-interest Expense
Total non-interest expense increased 10.5% to $3.1 million during the six months
of 2003 from $2.8 million for the same period in 2002. Non-interest expense on
an annualized basis represented 3.28% of average total assets in 2003 compared
with 3.62% in the comparable period in 2002.
Salaries and benefits decreased 1.49% in 2003. The 2003 decrease reflects
consolidation of jobs and normal attrition. The Company has experienced
increases in premiums for workers' compensation and employee benefits which
could effect future salary and benefit costs. At June 30, 2003 total full time
equivalent employees were 48 compared to 45 in 2002.
Expense related to premises and equipment increased 22.0% to $365,000 in 2003
from $299,000 in 2002. In 2002 the Company completed a remodel of the Operations
Center which added work space for seven additional people and the Company also
continues to emphasize investment in technology in order to better utilize
employees' time and offer additional services and a higher level of customer
service. The increase in premises and equipment expense represents the
implementation of check imaging and Internet bank in addition to the Operations
Center remodel.
Other operating expenses increased by 31.5% to $1.0 million in 2003 from
$795,000 in 2002. The increases represent professional fees associated with the
Bank's involvement in check imaging and archival and Internet banking.
Additionally, the Bank has been investing in employees through training and
education relating to the new endeavors.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 33.26% for
the six months of 2003 compared with 33.68% for the six months of 2002. Income
taxes reported in the financial statements include deferred taxes resulting from
timing differences in the recognition of items for tax and financial statement
reporting purposes.
BALANCE SHEET ANALYSIS
Investments
Investment securities were $25.2 million at June 30, 2003, an 83.4% increase
from the $13.7 million at December 31, 2002 and a 51.2% increase from $16.7
million at June 30, 2002. The Company maintains an investment portfolio of
securities rated A or higher by Standard and Poor's
Page 13
and or Moody's Investors Service. Local tax-exempt bonds are occasionally
purchased without an A rating. On occasion bonds are downgraded during the
holding period.
Securities are classified as held to maturity, if the Company has both the
intent and the ability to hold these securities to maturity. As of June 30,
2003, the Company had securities totaling $11.2 million with a market value of
$11.8 million categorized as held to maturity. Decisions to acquire municipal
securities, which are generally placed in this category, are based on generating
higher earnings, tax planning needs and pledge requirements.
Securities are classified as available for sale if the Company intends to hold
these debt securities for an indefinite period of time, but not necessarily to
maturity. Investment securities which are categorized as available for sale are
acquired as part of the overall asset and liability management function and
serve as a primary source of liquidity. Decisions to acquire or dispose of
different investments are based on an assessment of various economic and
financial factors, including, but not limited to, interest rate risk, liquidity
and capital adequacy. Securities held in the available for sale category are
recorded at market value, which is $14.0 million compared to an amortized cost
of $13.8 million as of June 30, 2003.
Although the quoted market values fluctuate, investment securities are generally
held to maturity, and accordingly, gains and losses to the income statement are
recognized upon sale, or at such time as management determines that a permanent
decline in value exists.
Loans
The Company's loan portfolio was $122.1 million at June 30, 2003, or 71.9% of
total deposits. This compares with $128.1 million, or 80.0% of total deposits,
at December 31, 2002 and $115.6 million, or 86.6% of total deposits, at June 30,
2002. A comparative schedule of average loan balances is presented in the table
on page 10; period end and year-end balances are presented in the following
table.
June 30, Percentage December 31, Percentage June 30, Percentage
2003 of Total 2002 of Total 2002 of Total
------------ ---------- ------------ ---------- ------------ ----------
Commercial $ 89,840,964 73.3% $ 89,507,230 69.7% $ 79,537,695 68.6%
Consumer 11,359,551 9.3% 13,374,774 10.4% 13,197,630 11.4%
Real estate construction 17,448,570 14.2% 19,507,906 15.2% 17,820,862 15.4%
Real estate mortgage 3,748,583 3.1% 5,911,082 4.6% 5,104,704 4.4%
Leases 93,277 0.1% 174,409 0.1% 288,005 0.2%
------------ ------------ ------------
122,490,945 100.0% 128,475,401 100.0% 115,948,896 100.0%
Deferred loan fees ===== ===== =====
and costs, net (399,186) (424,258) (379,937)
Allowance for loan
and lease losses (2,773,131) (2,781,962) (2,541,196)
------------ ------------ ------------
$119,318,628 $125,269,181 $113,027,763
============ ============ ============
Page 14
Risk Elements
The majority of the Company's loan activity is with customers located within
Sonoma County. Approximately 83% of the total loan portfolio is secured by real
estate located in the Company's service area.
Significant concentrations of credit risk may exist if a number of loan
customers are engaged in similar activities and have similar economic
characteristics. The Company believes it has policies in place to identify
problem loans and to monitor concentrations of credits.
Based on its risk management review and a review of its loan portfolio,
management believes that its allowance for losses for the quarter ending June
30, 2003, is sufficient to absorb losses inherent in the loan portfolio. This
assessment is based upon the best available information and does involve
uncertainty and matters of judgment. Accordingly, the adequacy of the loan loss
reserve cannot be determined with precision and could be susceptible to
significant change in future periods.
Non Performing Assets
Management classifies all loans as non accrual loans when they become more than
90 days past due as to principal or interest, or when the timely collection of
interest or principal becomes uncertain, if earlier, unless they are adequately
secured and in the process of collection.
A loan remains in a non accrual status until both principal and interest have
been current for 6 months and when other criteria are met or when the loan is
determined to be uncollectible and is charged off against the allowance for loan
losses, or, in the case of real estate loans, is transferred to other real
estate owned. A loan is classified as a restructured loan when the interest rate
is materially reduced, when the term is extended beyond the original maturity
date or other concessions are made by the bank because of the inability of the
borrower to repay the loan under the original terms.
There were $3.1 million of non accrual loans and no loans 90 days or more past
due and still accruing at June 30, 2003. There were $428,000 of non accrual
loans and no loans 90 days or more past due and still accruing at June 30, 2002.
Relative to the non accrual loans, 99% of the amount is centered in four (4)
credits secured by real estate and in the process of collection.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by charge-offs,
net of recoveries. The allowance is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed monthly and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
Page 15
The review process is intended to identify loan customers who may be
experiencing financial difficulties. In these circumstances, a specific reserve
allocation or charge-off may be recommended. Other factors considered by
management in evaluating the adequacy of the allowance include: loan volume,
historical net loan loss experience, the condition of industries and geographic
areas experiencing or expected to experience economic adversities, credit
evaluations and current economic conditions. The allowance for loan losses is
not a precise amount, but based on the factors above, represents management's
best estimate of losses that may be ultimately realized from the current loan
portfolio.
Worsening conditions in certain economic sectors and geographic areas could
adversely affect the loan portfolio, necessitating larger provisions for loan
losses than currently estimated. However, as of June 30, 2003 the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At June 30, 2003, the allowance for loan losses was $2.8 million, or 2.27% of
period-end loans, compared with $2.8 million, or 2.17% at December 31, 2002 and
$2.5 million, or 2.20% at June 30, 2002.
An analysis of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan categories, is presented below.
For the Six Months For the Year For the Six Months
Ended Ended Ended
6/30/03 12/31/02 6/30/02
Balance beginning of year $ 2,781,962 $ 2,415,555 $ 2,415,555
Charge-offs:
Commercial (4,955) (10,741) (10,741)
Consumer (33,294) (34,872) (5,072)
-------------- -------------- --------------
Total charge-offs (38,249) (45,613) (15,813)
Recoveries:
Commercial 4,480 9,474 3,074
Consumer 4,938 9,546 3,380
-------------- -------------- --------------
Total recoveries 9,418 19,020 6,454
Net (chargeoffs) recoveries (28,831) (26,593) (9,359)
Provision charged to operations 20,000 393,000 135,000
-------------- -------------- --------------
Balance end of period $ 2,773,131 $ 2,781,962 $ 2,541,196
Ratio of net charge-offs ============== ============== ==============
annualized to average loans 0.05% 0.02% 0.02%
Balance in allowance as a percentage 2.27% 2.17% 2.20%
of loans outstanding at period end
YTD AVG LOANS 124,215,135 116,867,238 112,756,312
PERIOD END LOANS $ 122,091,759 $ 128,051,143 $ 115,568,960
Page 16
Deposits
A comparative schedule of average deposit balances is presented in the table on
page 10; period end and year-end deposit balances are presented in the following
table.
June 30, Percentage December 31, Percentage June 30, Percentage
2003 of Total 2002 of Total 2002 of Total
------------ ---------- ------------- ---------- ------------ ----------
Interest bearing
transaction deposits $ 29,619,477 17.4% $ 24,627,589 15.4% $ 21,262,165 15.9%
Savings deposits 56,662,440 33.4% 51,802,714 32.4% 45,743,459 34.3%
Time deposits,
$100,000
and over 24,466,069 14.4% 25,018,603 15.6% 17,686,611 13.3%
Other time deposits 19,833,979 11.7% 19,778,540 12.4% 17,603,258 13.2%
------------ ----- ------------ ----- ------------ -----
Total interest bearing
deposits 130,581,965 76.9% 121,227,446 75.8% 102,295,493 76.7%
Demand deposits 39,193,991 23.1% 38,760,806 24.2% 31,091,090 23.3%
------------ ----- ------------ ----- ------------ -----
Total deposits $169,775,956 100.0% $159,988,252 100.0% $133,386,583 100.0%
============ ===== ============ ===== ============ =====
Total deposits increased by $9.8 million, during the six months of 2003, to
$169.8 million from $160.0 million at December 31, 2002. Interest bearing
checking and savings showed the largest increase of $5.0 million and $4.9
million respectively, over year end balances. Time deposits over $100,000
decreased $553,000. Non-interest bearing demand deposits increased $433,000 to
$39.2 million from $38.8 at December 31, 2002.
Risk-Based Capital
The Federal Deposit Insurance Corporation (FDIC) has adopted risk-based capital
guidelines which establish a risk-adjusted ratio relating capital to different
categories of assets and off- balance sheet exposures. Under current guidelines,
as of June 30, 2003, the Company was required to have minimum Tier I and total
risk-based capital ratios of 4% and 8% respectively. To be well capitalized
under Prompt Corrective Action Provisions requires minimum Tier I and total
risk-based capital ratios should be 6% and 10% respectively.
The FDIC has also adopted minimum leverage ratio guidelines for compliance by
banking organizations. The guidelines require a minimum leverage ratio of 4% of
Tier 1 capital to total average assets. Banks experiencing high growth rates are
expected to maintain capital positions well above the minimum levels. The
leverage ratio in conjunction with the risk-based capital ratio constitute the
basis for determining the capital adequacy of banking organizations.
Page 17
The table below presents Tier 1 capital, total capital and total risk-weighted
assets at June 30, 2003, along with the related risk-based capital ratio and
leverage ratio. (dollars in thousands)
Total
Risked-based TIER 1 TOTAL Leverage
Assets Capital Ratio Capital Ratio Ratio
------------ -------- ----- ------- ----- --------
$157,314 $18,842 11.98% $20,818 13.23% 9.81%
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its loan and deposit functions. The goal for managing the assets and
liabilities of the Company is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing the Company to undue
interest rate risk. The Board of Directors has overall responsibility for the
interest rate risk management policies. Sonoma Valley Bank has an Asset and
Liability Management Committee (ALCO) that establishes and monitors guidelines
to control the sensitivity of earnings to changes in interest rates.
Asset/Liability Management. Activities involved in asset/liability management
include but are not limited to lending, accepting and placing deposits and
investing in securities. Interest rate risk is the primary market risk
associated with asset/liability management. Sensitivity of earnings to interest
rate changes arises when yields on assets change in a different time period or
in a different amount from that of interest costs on liabilities. To mitigate
interest rate risk, the structure of the balance sheet is managed with the goal
that movements of interest rates on assets and liabilities are correlated and
contribute to earnings even in periods of volatile interest rates. The
asset/liability management policy sets limits on the acceptable amount of
variance in net interest margin and market value of equity under changing
interest environments. The Company uses simulation models to forecast earnings,
net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Using computer-modeling techniques, the
Company is able to estimate the potential impact of changing interest rates on
earnings. A balance sheet forecast is prepared quarterly using inputs of actual
loans, securities and interest bearing liabilities (i.e. deposits/borrowings)
positions as the beginning base. The forecast balance sheet is processed against
four interest rate scenarios. The scenarios include a 100 and 200 basis point
rising rate forecasts, a flat rate forecast and a 100 basis point falling rate
forecast which take place within a one year time frame. The net interest income
is measured during the year assuming a gradual change in rates over the
twelve-month horizon. The Company's 2003 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from year-end 2002
balances. The following table summarizes the effect on net interest income (NII)
of a +/-100 and +200 basis point change in interest rates as measured against a
constant rate (no change) scenario.
Page 18
Interest Rate Risk Simulation of Net Interest Income as of June 30, 2003
(In thousands)
Variation from a constant rate scenario $ Change in NII
+200bp $ 994
+100bp 456
-100bp (363)
The simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations. Therefore,
they do not reflect likely actual results, but serve as conservative estimates
of interest rate risk.
Interest Rate Sensitivity Analysis. Interest rate sensitivity is a function of
the repricing characteristics of the portfolio of assets and liabilities. These
repricing characteristics are the time frames within which the interest-bearing
assets and liabilities are subject to change in interest rates either at
replacement, repricing or maturity. Interest rate sensitivity management focuses
on the maturity of assets and liabilities and their repricing during periods of
changes in market interest rates. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the current
portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive position. An
asset sensitive position in a rising interest rate environment will cause a
bank's interest rate margin to expand. This results as floating or variable rate
loans reprice more rapidly than fixed rate certificates of deposit that reprice
as they mature over time. Conversely, a declining interest rate environment will
cause the opposite effect. A negative cumulative gap may be equated to a
liability sensitive position. A liability sensitive position in a rising
interest rate environment will cause a bank's interest rate margin to contract,
while a declining interest rate environment will have the opposite effect.
The following table sets forth the dollar amounts of maturing and/or repricing
assets and liabilities for various periods. This does not include the impact of
prepayments or other forms of convexity caused by changing interest rates.
Historically, this has been immaterial and estimates for them are not included.
The Company has more liabilities than assets repricing during the next year.
However, because the Company's asset rates change more than deposit rates, the
Company's interest income will change more than the cost of funds when rates
change. Its net interest margin should therefore increase somewhat when rates
increase and shrink somewhat when rates fall.
The Company controls its long term interest rate risk by keeping long term fixed
rate assets (longer than 5 years) less than its long term fixed rate funding,
primarily demand deposit accounts and capital. The following table sets forth
cumulative maturity distributions as of June 30, 2003 for the Company's
interest-bearing assets and interest-bearing liabilities, and the Company's
interest rate sensitivity gap as a percentage of total interest-earning assets.
The table shows $60.5 million in fixed rate loans over 5 years. Many variable
rate credit lines reached floors in 2002, and were reclassified to the fixed
rate category. As soon as interest rates increase, the loans will no longer be
at floors and will reclass back to the floating rate category.
Page 19
June 30, 2003 3 months 12 months 3 years 5 years 15 years >15 years Totals
(in thousands)
ASSETS:
Fixed rate investments $ 1,404 $ 1,893 $ 10,990 $ 4,981 $ 4,605 $ 1,339 $ 25,212
Variable rate investments 0 0 0 0 0 289 289
Fixed rate loans 10,872 16,727 8,209 26,679 35,157 2,781 100,425
Variable rate loans 17,898 1,046 0 0 0 0 18,944
Interest-bearing balances due from banks 35 35
Fed funds sold 26,840 26,840
--------- --------- ---------- --------- -------- -------- ---------
Interest bearing assets 57,049 19,666 19,199 31,660 39,762 4,409 171,745
--------- --------- ---------- --------- -------- -------- ---------
LIABILITIES:
Interest bearing transaction deposits 29,619 29,619
Savings deposits 56,662 56,662
Time Deposits
Fixed rate >100m 7,231 7,220 8,189 1,767 24,407
Fixed rate <100m 5,573 7,952 5,343 980 19,848
Floating rate >100m 0
Floating rate <100m 46 46
Borrowings 0 0
--------- --------- ---------- --------- --------- --------- ---------
Interest Bearing Liabilities $ 99,131 $ 15,172 $ 13,532 $ 2,747 $ 0 $ 0 $ 130,582
--------- --------- ---------- --------- --------- --------- ---------
Rate Sensitivity Gap (42,082) 4,494 5,667 28,913 39,762 4,409
--------- --------- ---------- --------- --------- ---------
Cumulative Rate Sensitivity Gap (42,082) (37,588) (31,921) (3,008) 36,754 41,163
--------- --------- ---------- --------- --------- ---------
Cumulative Position to Total Assets -21.81% -19.48% -16.54% -1.56% 19.05% 21.33%
========= ========= ========== ========= ========= =========
For the Three Month Periods
Ended June 30, 2003 and 2002
Overview
The Company reported net income of $707,000 for the second quarter of 2003
compared with $718,000 for the second quarter of 2002. On a per share basis, net
income for the three months ended June 30, 2003 equaled $.48 per share compared
with $.49 per share during the same period in 2002.
Return on average total assets on an annualized basis for the three months ended
June 30, 2003 and 2002 was 1.46% and 1.86%, respectively. Return on average
shareholders' equity on an annualized basis for the three months ended June 30,
2003 and 2002 was 14.2% and 16.3%, respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, adjusted to a fully taxable equivalent basis, decreased
$55,000 to $2.2 million for the three months ended June 30, 2003, down 2.4% from
the $2.3 million in the comparable period of 2002. Net interest income on a
fully taxable equivalent basis, as shown on the table -Average Balances, Yields
and Rates Paid on page 23, is higher than net interest income
Page 20
on the statements of income because it reflects adjustments applicable to
tax-exempt income from certain securities and loans ($80,000 in 2003 and $92,000
in 2002, based on a 34% federal income tax rate).
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin for the second quarter of 2003 declined to 5.07%
from 6.53% for the comparable period in 2002. This variance is the result of a
higher loan to deposit ratio and management's efforts to hold existing loan
rates steady and the ability to lower interest rates paid on deposits.
Interest Income
Interest income for the three months ended June 30, 2003 decreased by $56,000 to
$2.7 million, 2.1% decline from the $2.7 million realized during the same period
in 2002.
Interest Expense
Total interest expense for the three months ended June 30, 2003 declined by
$1,000 to $442,000 compared with $443,000 in the same period of 2002. The
average rate paid on all interest- bearing liabilities for the second quarter of
2003 declined to 1.35% from 1.72% in the second quarter of 2002, and average
balances for the second quarter of 2003 increased to $131.7 million from $103.0
million in the same period of 2002, a 27.8% gain.
The gain in volume of average balances was responsible for a $121,000 increase
in interest expense offset by a $122,000 decline related to lower interest rates
paid.
Individual components of interest income and interest expense are provided in
the table - Average Balances, Yields and Rates Paid on page 23.
Provision for Loan Losses
There was no provision for loan losses during the second quarter of 2003 and the
provision was $75,000 for the second quarter of 2002. The decrease in the
provision is the result of managements' evaluation and assessment of the loan
portfolio.
Non-interest Income
Non-interest income of $437,000 for the second quarter of 2003 represented a
increase of $54,000, or 14.1%, from the $383,000 for the comparable period in
2002.
Non-interest Expense
For the second quarter of 2003, non-interest expense was $1.5 million compared
with $1.4 million for the same period in 2002, representing an increase of
$110,000, or 7.86%. The largest increase of non interest expense was other
operating expense, which increased $103,000, or 25.3%, compared with the three
months ended June 30, 2002.
Page 21
Premises and equipment expense increased $24,000, or 15.1%, to $183,000 for the
second quarter of 2003 from $159,000 for the second quarter of 2002.
Salary and benefit expense for the three months ended June 30, 2003 declined
2.0% to $816,000 from $833,000 in the same period in 2002.
Provision for Income Taxes
The provision for income taxes increased to an effective tax rate of 33.3% in
the second quarter of 2003 compared with 33.8% for the comparable period in
2002. Income taxes reported in the financial statements include deferred taxes
resulting from timing differences in the recognition of items for tax and
financial reporting purposes.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on page 18 through 20 under the caption "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations - Market
Risk Management" and is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's Chief Executive Officer along with the Company's Chief Financial
Officer concluded that the Company's disclosure controls and procedures as of
the end of the period covered by this Form 10-Q are effective in timely alerting
them to material information relating to the Company required to be included in
this Form 10-Q.
Page 22
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the three months ended June 30, 2003 and 2002
(dollars in thousands)
2003 2002
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans(2):
Commercial 83,074 1,530 7.39% 74,618 1,474 7.92%
Consumer 11,943 226 7.59% 12,883 267 8.31%
Real estate construction 19,797 384 7.78% 18,959 438 9.27%
Real estate mortgage 3,736 83 8.91% 5,867 121 8.27%
Tax exempt loans (1) 3,180 66 8.32% 3,497 75 8.60%
Leases 73 7 38.46% 178 7 15.77%
Tax exempt leases (1) 63 4 25.47% 122 3 9.86%
Unearned loan fees (406) (403)
-------- ------- -------- -------
Total loans 121,460 2,300 7.60% 115,721 2,385 8.27%
Investment securities
Available for sale:
Taxable 10,918 84 3.09% 6,341 99 6.26%
Tax exempt(1) 0 0 0.00% 0 0 0.00%
Hold to maturity:
Taxable 549 5 3.65% 201 3 5.99%
Tax exempt (1) 9,624 165 6.88% 11,039 195 7.09%
-------- ------- -------- -------
Total investment securities 21,091 254 4.83% 17,581 297 6.78%
Federal funds sold 31,945 93 1.18% 5,532 24 1.74%
FHLB Stock 288 7 9.75% 273 4 5.88%
Total due from banks/Interest bearing 107 0 0.37% 22 0 1.82%
-------- ------- -------- -------
Total interest earning assets 174,891 2,654 6.09% 139,129 2,710 7.81%
Non interest-bearing assets: ======= =======
Reserve for loan losses (2,772) (2,506)
Cash and due from banks 8,902 7,180
Premises and equipment 1,039 599
Other assets 11,007 10,190
-------- --------
Total assets $193,067 $154,592
LIABILITIES AND SHAREHOLDERS' EQUITY ======== ========
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction 31,119 $ 15 0.19% 23,544 21 0.36%
Savings deposits 56,231 120 0.86% 44,443 154 1.39%
Time deposits over $100,000 24,514 185 3.03% 17,680 141 3.20%
Other time deposits 19,823 122 2.49% 17,380 127 2.93%
-------- ------- -------- -------
Total interest bearing Deposits 131,687 442 1.35% 103,047 443 1.72%
Other short term borrowings 0 0 0.00% 0 0 0.00%
-------- ------- -------- -------
Total interest bearing liabilities 131,687 $ 442 1.35% 103,047 $ 443 1.72%
Non interest bearing liabilities: ======= =======
Non interest bearing demand deposits 38,258 31,071
Other liabilities 3,185 2,906
Shareholders' equity 19,937 17,568
-------- --------
Total liabilities and shareholders' equity $193,067 $154,592
======== ========
Interest rate spread 4.74% 6.09%
===== =====
Interest income $ 2,654 6.09% $ 2,710 7.81%
Interest expense 442 1.02% 443 1.28%
------- ----- ------- -----
Net interest income/margin $ 2,212 5.07% $ 2,267 6.53%
======= ===== ======= =====
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2003 and 2002.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $87,889 and $62,378 for the three
months ended June 30, 2003 and June 30, 2002, respectively, were amortized
to the appropriate interest income categories.
Page 23
Part II
Item 1. LEGAL PROCEEDINGS
From time to time the Company may be a party to legal proceedings arising in the
ordinary course of business. The Company is not currently a party to, nor is any
of its properties the subject of, any material pending legal proceedings.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the annual meeting of shareholders on May 14, 2003. The
following table sets forth the proposals and outcome from the voting.
Proposal Number 1 Election of Directors; and
Shares voted Shares Withholding Authority/ Abstentions and
Nominees For Voted Against Broker Non-Votes
------------ ----------------------------- ----------------
Suzanne Brangham 1,003,443 17,464
Dale T. Downing 1,008,313 12,594
Fred H. Harland 998,203 22,704
Robert B. Hitchcock 1,006,077 14,830
Gerald J. Marino 979,592 41,315
Gary D. Nelson 991,397 29,510
Robert J. Nicholas 1,009,114 11,793
Angelo C. Sangiacomo 1,005,783 15,124
J. Robert Stone 1,006,099 14,808
Mel Switzer, Jr. 960,148 60,758
Harry Weise 1,012,860 8,047
Proposal Number 2 Ratification of Richardson and Company
Total shares voted: For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
1,004,221 3,087 13,599
Page 24
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act
32 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
-------------- -------------- -------------
April 16, 2003 April 15, 2003 Press Release announcing
results of first quarter
July 16, 2003 July 15, 2003 Press Release announcing
results of second quarter
Page 25
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SONOMA VALLEY BANCORP
Date: August 13, 2003 /s/ Mel Switzer, Jr.
------------------ -------------------------------------
Mel Switzer, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2003 /s/ Mary Quade Dieter
------------------ -------------------------------------
Mary Quade Dieter
Executive Vice President and
Chief Operating Officer
(Principal Accounting Officer)
Page 26