UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2002 Commission File Number: 000-31929
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SONOMA VALLEY BANCORP
(Name of small business issuer in its charter)
CALIFORNIA 68-0454068
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(State of incorporation) (I.R.S. Employer Identification No.)
202 West Napa Street
Sonoma, California 95476
(707) 935-3200
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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Securities to be registered under section 12(b) of the Exchange Act: None
Securities to be registered under section 12(g) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ] Yes [ X ] No
Aggregate market value of Common Stock held by non-affiliates of Sonoma Valley
Bancorp as of February 19, 2003 based on the current market price of the stock:
$ 28,712,040
The number of shares of registrant's common stock outstanding on the NASD OTC BB
as of March 10, 2003 was 1,392,138.
DOCUMENTS INCORPORATE BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting of shareholders to be held on May
14, 2003.
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With the exception of historical facts stated herein, the matters discussed in
this Form 10-K 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-K, 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-K 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.
PART I
Item 1. Business
General
Sonoma Valley Bancorp ("Company") was incorporated under California law on March
9, 2000 at the direction of Sonoma Valley Bank for the purpose of forming a
single-bank holding company structure pursuant to a plan of reorganization. The
reorganization became effective November 1, 2000, after obtaining all required
regulatory approvals and permits, shares of the Company's common stock were
issued to shareholders of Sonoma Valley Bank in exchange for their Sonoma Valley
Bank stock. Previously, Sonoma Valley Bank filed its periodic reports and
current reports under the Securities Exchange Act of 1934 with the Federal
Deposit Insurance Corporation. Following the reorganization, periodic and
current reports are now filed with the Securities and Exchange Commission.
The business operations of the Company continue to be conducted through its
wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial
lending operations on June 3, 1988. In addition to its main branch located in
Sonoma, California, the Bank also operates a branch office located in Glen
Ellen, California. The following discussion, therefore, although presented on a
consolidated basis, analyzes the financial condition and results of operations
of the Bank for the twelve month period ended December 31, 2002.
Primary Services
The Bank emphasizes the banking needs of small to medium-sized commercial
businesses, professionals and upper middle to high income individuals and
families in its primary service area of Sonoma, California and the immediate
surrounding area.
The Bank offers depository and lending services keyed to the needs of its
business and professional clientele. These services include a variety of demand
deposit, savings and time deposit account alternatives, all insured by the FDIC
up to its applicable limits. Special merchant and business services,
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such as coin, night depository, courier, on line cash management and merchant
teller are available. The Bank offers bank by mail service, drive-up ATM
service, extended hours including Saturday banking, drive-up windows and
telephone voice response. The bank is venturing into Internet Banking. The
initial customers using the product are our Cash Management Commercial
customers. The Bank's lending activities are directed primarily towards granting
short and medium-term commercial loans, augmented by customized lines of credit,
for such purposes as operating capital, business and professional start-ups,
inventory, equipment, accounts receivable, credit cards, and interim
construction financing.
The bank is exploring ways to serve the Hispanic community in our market place.
We are installing bilingual ATM machine, and have bilingual officers and
customer service employees.
The business of the Bank is not seasonal. The Bank intends to continue with the
same basic commercial banking activities it has operated with since beginning
operations June 3, 1988.
Competition
In general, the banking business in California and in the market areas which the
Bank serves, is highly competitive with respect to both loans and deposits, and
is dominated by a relatively small number of major banks which have many offices
operating over a wide geographic area. The Bank competes for loans and deposits
with these and other regional banks, including several which are much larger
than the Bank, as well as savings and loan associations, thrift and loan
associations, finance companies, credit unions, offerors of money market funds
and other financial institutions.
The Bank's primary service area is currently served by six other banks
(including two major banks: Bank of America and Wells Fargo Bank). In order to
compete with the major financial institutions in its primary service area, the
Bank uses its flexibility as an independent bank. This includes emphasis on
specialized services and personalized attention.
In the event there are customers whose loan demands exceed the Bank's lending
limit, the Bank seeks to arrange for such loans on a participation basis with
other financial institutions and intermediaries. The Bank also is able to assist
those customers requiring other services not offered by the Bank by obtaining
those services through its correspondent banks.
Concentration of Credit Risk
The majority of the Bank's loan activity is with customers located within the
county of Sonoma. While the Bank has a diversified loan portfolio, approximately
83% of these loans are secured by real estate in its service area. This
concentration for the year ending December 31, 2002 is presented below:
(in thousands of dollars)
Secured by real estate:
Construction/land development $ 24,889
Farmland 4,197
1-4 family residences 20,917
Commercial/multi-family 56,663
Employees
As of December 31, 2002, the Company employed 44 full-time equivalent employees.
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Supervision and Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act, regulated, supervised and examined by the Federal Reserve Bank. As such, it
must file with the Federal Reserve Bank an annual report and additional reports
as the Federal Reserve Board may require. The Company is also subject to
periodic examination by the Federal Reserve Board.
In addition, both the Company and the Bank are extensively regulated under both
federal and state laws and regulations. These laws and regulations are primarily
intended to protect depositors, not shareholders. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions at issue.
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California Department of Financial
Institutions. The Bank is also subject to regulation, supervision, and periodic
examination by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
is not a member of the Federal Reserve System, but is nevertheless subject to
certain regulations of the Board of Governors of the Federal Reserve System. As
a state bank, the Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in most cases. For
this protection, the Bank pays a semi-annual assessment.
The regulations of these state and federal bank regulatory agencies govern most
aspects of the Company's and the Bank's business and operations, including but
not limited to, requiring the maintenance of non-interest bearing reserves on
deposits, limiting the nature and amount of investments and loans which may be
made, regulating the issuance of securities, restricting the payment of
dividends, regulating bank expansion and bank activities, including real estate
development activities. The Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the California Department of Financial Institutions have broad
enforcement powers over depository institutions, including the power to prohibit
a bank from engaging in business practices which are considered to be unsafe or
unsound, to impose substantial fines and other civil and criminal penalties, to
terminate deposit insurance, and to appoint a conservator or receiver under a
variety of circumstances. The Federal Reserve Board also has broad enforcement
powers over bank holding companies, including the power to impose substantial
fines and other civil and criminal penalties.
Regulation of Bank Holding Companies
As a bank holding company, the Company's activities are subject to extensive
regulation by the Federal Reserve Board. The Bank Holding Company Act requires
us to obtain the prior approval of the Federal Reserve Board before (i) directly
or indirectly acquiring ownership or control of any voting shares of another
bank or bank holding company if, after such acquisition, we would own or control
more than 5% of the shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The Federal Reserve Board will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve Board also considers capital adequacy and other
financial and managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company that is not a
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bank or bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities that, by statute or by Federal
Reserve Board regulation or order, have been determined to be activities closely
related to the business of banking or of managing or controlling banks.
Federal Deposit Insurance
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or pursuant to written agreement with, the
FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital.
Impact of Economic Conditions and Monetary Policies
The earnings and growth of the Bank are and will be affected by general economic
conditions, both domestic and international, and by the monetary and fiscal
policies of the United States Government and its agencies, particularly the
Federal Reserve Bank (FRB). One function of the FRB is to regulate the money
supply and the national supply of bank credit in order to mitigate recessionary
and inflationary pressures. Among the instruments of monetary policy used to
implement these objects are open market transactions in United States Government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirement held by depository institutions. The monetary policies of
the FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. However,
the effect of such policies on the future business and earnings of the Bank
cannot be accurately predicted.
Recent and Proposed Legislation
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature, and by various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on the Bank. Certain changes of potential
significance to the Bank which have been enacted recently or others which are
currently under consideration by Congress or various regulatory or professional
agencies are discussed below.
The Financial Services Modernization Act of 1999 (also known as the
"Gramm-Leach-Bliley Act" after its Congressional sponsors) substantially
eliminates most of the separations between banks, brokerage firms, and insurers
enacted by the Glass-Steagall Act of 1933. The reform legislation permits
securities firms and insurers to buy banks, and banks to underwrite insurance
and securities. States retain regulatory authority over insurers. The Treasury
Department's Office of the Comptroller of the Currency has authority to regulate
bank subsidiaries that underwrite securities and the Federal Reserve has
authority over bank affiliates for activities such as insurance underwriting and
real-estate development.
In 1997, California adopted the Environmental Responsibility Acceptance Act (the
"Act") (Cal. Civil Code Sections 850-855) to facilitate the notification of
government agencies and potentially responsible parties (for example, for
cleanup) of the existence of contamination and the cleanup or other remediation
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of contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conservation and Recovery Act to provide lenders
and fiduciaries with greater protections from environmental liability. In June
1997, the U.S. Environmental Protection Agency ("EPA") issued its official
policy with regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996. Although numerous exceptions exist, California law
provides that a lender acting in the capacity of a lender will not be liable
under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
In January 2001, the Basel Committee on Banking Supervision issued a proposal
for a "New Capital Accord." The New Capital Accord incorporates a three-part
framework of minimum capital requirements, supervisory review of an
institution's capital adequacy and internal assessment process, and market
discipline through effective disclosure to encourage safe and sound banking
practices. The New Capital Accord is scheduled for implementation by the end of
2006.
The federal banking agencies are required to take "prompt corrective action" in
respect of depository institutions and their bank holding companies that do not
meet minimum capital requirements. FDIC established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier, or that of its bank holding company, depends upon where its
capital levels are in relation to various relevant capital measures, including a
risk-based capital measure and a leverage ratio capital measure, and certain
other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv)
is not subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" bank holding
company or bank is defined as one that has (i) a total risk-based capital ratio
of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and
(iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank
with a composite CAMELS rating of 1). A bank holding company or bank is
considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio
of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii)
a leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a
total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based
capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and
(C)"critically undercapitalized" if the bank has a ratio of tangible equity to
total assets equal to or less than 2%. The Federal Reserve Board may reclassify
a "well capitalized" bank holding company or bank as "adequately capitalized" or
subject an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if it
determines that the bank holding company or bank is in an unsafe or unsound
condition or deems the bank holding company or bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency. The Company and
Bank currently meet the definition of "well capitalized" institutions.
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"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan and provide appropriate assurances of performance. If a
depository institution fails to submit an acceptable plan, including if the
holding company refuses or is unable to make the guarantee described in the
previous sentence, it is treated as if it is "significantly undercapitalized".
Failure to submit or implement an acceptable capital plan also is grounds for
the appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. Moreover, the parent holding
company of a "significantly undercapitalized" depository institution may be
ordered to divest itself of the institution or of nonbank subsidiaries of the
holding company. "Critically undercapitalized" institutions, among other things,
are prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
Each federal banking agency prescribes standards for depository institutions and
depository institution holding companies relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, a maximum
ratio of classified assets to capital, minimum earnings sufficient to absorb
losses, a minimum ratio of market value to book value for publicly traded shares
and other standards as they deem appropriate. The Federal Reserve Board and OCC
have adopted such standards.
Depository institutions that are not "well capitalized" or "adequately
capitalized" and have not received a waiver from the FDIC are prohibited from
accepting or renewing brokered deposits. As of December 31, 2002, the Company
and Bank had no brokered deposits.
USA Patriot Act
The USA Patriot Act imposes additional obligations on U.S. financial
institutions, including banks and broker dealer subsidiaries, to implement
policies, procedures and controls which are reasonably designed to detect and
report instances of money laundering and the financing of terrorism. In
addition, provisions of the USA Patriot Act require the federal financial
institution regulatory agencies to consider the effectiveness of a financial
institution's anti-money laundering activities when reviewing bank mergers and
bank holding company acquisitions.
Future Legislation and Regulations
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature, and by various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact legislative changes might have on the Bank.
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Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
(SFAS) No. 145, which amends Statements No. 4 "Reporting Gains and Losses from
Extinguishment of Debt", No. 44 "Accounting for Intangible Assets of Motor
Carriers" and No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". The Statement is effective for fiscal years beginning after May
15, 2002, or for transactions occurring after May 15, 2002. This Statement will
not have a material impact on Sonoma Valley Bancorp.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". The provisions of this Statement are effective for
exit and disposal activities that are initiated after December 31, 2002. This
Statement is not expected to have a material effect on Sonoma Valley Bancorp.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions". This Statement removes acquisitions of financial institutions
from the scope of SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with Statement No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". The Statement
indicates that the purchase method of accounting applies to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises. This Statement is effective for acquisitions occurring on or after
October 1, 2002. This Statement is not expected to have a material effect on the
Company.
In December 2002, FASB issued SFAS No. 148, which provides three alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock- based employee compensation and the impact on reported financial results.
Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting,
to require disclosure about those effects in interim financial information. This
Statement is effective for fiscal and interim periods ending after December 15,
2002. The Company has elected to adopt the prospective transition method
effective January 1, 2003 and, accordingly, compensation expense will be
recognized for any stock options granted on or after that date. The unvested
portion of stock options granted prior to January 1, 2003 will continue to be
accounted for under the provisions of APB Opinion No. 28. Management does not
expect this Statement to have material impact on the Company's financial
condition or results of operations in 2003. Since the method of determining the
value of stock options prescribed under SFAS No. 123 is based on a valuation
model that relies upon factors that are beyond the Company's control, such as
stock price volatility and market interest rates, Management is not able to
accurately predict the cost of options that may be granted in the future and the
resulting impact on the Company's financial condition and results of operations.
Additional information regarding stock options is contained in Notes A and M of
the Notes to the Consolidated Financial Statements.
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Statistical Data
The following information is required by the Industry Guide 3,"Statistical
Disclosure by Bank Holding Companies". The averages shown have been
calculated using the average daily balance.
Sequential Page
Number
I. Distribution of Assets, Liabilities and Stock-
holders' Equity; Interest Rates and Differential
A. Average balance sheets 16
B. Analysis of net interest earnings 16
C. Rate/volume analysis 17
II. Investment Portfolio
A. Book value (Amortized Cost) of investments 41
B. Weighted average yield and maturity 16, 20, 25 and 42
C. Securities of issuer exceeding
ten percent of equity: None
III. Loan Portfolio
A. Types of loans 16 and 43
B. Maturities and sensitivities of loans
to change in interest rates 25 and 44
C. Risk elements
1. Non-accrual, past due,
and restructured loans 21 and 43
2. Potential problem loans: None
3. Foreign outstandings: None
4. Loan concentrations 20 and 56
D. Other Interest Bearing Assets: None
IV. Summary of Loan Loss Experience 21, 22 and 44
V. Deposits
A. Average balances and average rates paid 16
B. Other categories of deposits None
C. Foreign outstandings None
D. Maturity of time deposits greater than $100,000 25
E. Maturity of foreign time deposits greater than 100,000 None
VI. Return on Equity and Assets 14
VII. Short-term Borrowings: None
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Item 2. Properties
The Company is headquartered in Sonoma, California. At the present time the
Company's Bank has two branch offices. In 1995 the Bank leased additional office
space adjacent to the Sonoma Branch and in September 1997 the Bank purchased
property across the street from the Sonoma Branch. The Sonoma Branch is located
at 202 W. Napa Street, Sonoma. The building contains approximately 6800 square
feet and has been subleased on a long-term basis (the initial term expires in
2009, with option to extend for two additional five-year terms). The office is
considered by management to be well maintained and adequate for the purpose
intended. Lease payments made in 2002 totaled $216,326 compared to the $208,005
paid in 2001. The lease provides for future annual rents to be adjusted for
changes in the Consumer Price Index ("CPI"), with a minimum annual increase of
4%, effective each March 1st.
In July, 1995, the Bank leased a building at 463 Second Street West. The
building contains approximately 2400 square feet and has been leased on a long
term basis to coincide with the Sonoma Branch lease. The initial term expired in
2000, with the first option exercised to expire in 2005, with an option to
extend for three additional five year terms and one additional four year term.
At present the Bank utilizes all of the units. Lease payments made in 2002
totaled $36,376 compared with the $40,720 paid in 2001. The lease provides for
future annual rents to be adjusted for changes in the Consumer Price Index
("CPI") effective each July 1st.
In September, 1997 the Bank purchased a building at 472 Second St. West. The
building contains approximately 1013 square feet. The Bank paid $246,943 for the
property. At present the Bank is utilizing the parking area for additional
parking for Bank employees and the Bank is renting out the building premises.
Rental income in 2002 was $16,521 compared to $15,576 in 2001.
The Glen Ellen Branch is located at 13751 Arnold Drive, Glen Ellen. The facility
is approximately 600 square feet. The facility is leased for a five year term
expiring in 2003 with the option to extend for an additional five year term.
Lease payments made in 2002 totaled $12,172 compared to $11,054 in 2001. The
lease provides for future annual rents to be adjusted for changes in the CPI,
with a minimum annual increase of 4% effective April 1st of each year.
Item 3. Legal Proceedings
In the normal course of operations, the Company and /or its Bank may have
disagreements or disputes with vendors, borrowers, or employees, which may or
may not result in litigation. These disputes are seen by the Company's
management as a normal part of business. There are no pending actions reported
and no threatened actions that management believes would have a significant
material impact on the Company's financial position, results of operations or
cash flows.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended December 31, 2002.
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PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
Following the reorganization the Company's common stock began trading on the
Over the Counter Bulletin Board ("OTC BB") under the symbol "SBNK", and the
Bank's stock ceased to be traded. The Company is not listed on any exchange or
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ").
Several brokers act as facilitators in the trades of Sonoma Valley Bancorp
stock. They are:
A.G. Edwards Hoefer and Arnett
703 2nd Street, Suite 100 555 Market Street, 18th floor
Santa Rosa, CA 95409 San Francisco, CA 94105
Denise Gilseth Lisa Gallo
(800) 972-4800 (800) 346-5544
Paine Webber Raymond James Financial Services
6570 Oakmont Drive 777 Baywood Drive
Santa Rosa, CA 95409 Petaluma, CA 94954
John Rector Moe Jacobson
(707) 539-1500 (707) 763-0354
Edward Jones Smith Barney
515 First Street East 111 Santa Rosa Ave., Suite 303
Sonoma, CA 95476 Santa Rosa, CA 95404
Gary Scott Kirk Aguer
(707) 935-1856 (707) 571-5702
Edward Jones Monroe Securities
19485 Sonoma Hwy, Suite G 47 State Street
Sonoma, CA 95476 Rochester, NY 14614
James Wandzilak Helen Rubeins
(707) 935-0865 (888) 995-5560
Wedbush Morgan Securities Sutro & Co.
1300 S.W. Fifth Avenue, Suite 2000. P.O. Box 2859
Portland, OR 97201-5667 Big Bear Lake, CA 92315
Joey Warmenhoven Troy Norlander
(503) 224-0480 (800)288-2811
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The table below summarizes those trades of the common stock as reported by OTC
BB, setting forth the high and low prices for the periods shown. The stock
prices have been adjusted for stock dividends.
Quarter Ended: High Low
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March 31, 2001 $ 19.16 $ 16.89
June 30, 2001 19.04 18.28
September 30, 2001 21.90 18.77
December 31, 2001 21.19 20.14
March 31, 2002 $ 22.38 $ 20.24
June 30, 2002 29.00 21.54
September 30, 2002 29.00 26.25
December 31, 2002 30.94 26.75
As of February 20, 2003, there were 1,069 holders of record of the Company's
common stock.
Payment of Dividends
Under state law, the Board of Directors of a California state-licensed bank may
declare a cash dividend, subject to the restriction that the amount available
for the payment of cash dividends shall be the lesser of retained earnings of
the bank or the bank's net income for its last three fiscal years (less the
amount of any distributions to shareholders made during such period).
However, under the Financial Institutions Supervisory Act, the FDIC has broad
authority to prohibit a bank from engaging in banking practices which it
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC may assert
that the payment of dividends or other payments by a bank is considered an
unsafe and unsound banking practice and therefore, implement corrective action
to address such a practice.
The Bank has never paid a cash dividend and the future payment of cash dividends
by the Company will not only depend on the Bank's future earnings, but will also
depend on the Bank and the Company meeting certain capital requirements and
having an adequate allowance for loan losses.
Page 12
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Historically, the Bank has declared nine stock dividends of 5% each, two stock
dividends of 10% in May 1996 and June 1997 and one 2 for 1 stock split in March
1998 as detailed below:
Date Declared Record Date Date Paid
May 13, 1992 May 31, 1992 June 15, 1992
June 26, 1993 July 15, 1993 July 31, 1993
July 20, 1994 August 1, 1994 August 15, 1994
January 18, 1995 February 5, 1995 February 20, 1995
August 16, 1995 September 11, 1995 September 29, 1995
May 22, 1996 June 14, 1996 June 28, 1996
June 18, 1997 July 15, 1997 August 1, 1997
March 18, 1998 April 15, 1998 April 30, 1998
July 21, 1999 August 16, 1999 August 31, 1999
August 16, 2000 September 8, 2000 September 25, 2000
July 18, 2001 August 3, 2001 August 17, 2001
June 17, 2002 July 2, 2002 July 16, 2002
Page 13
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Item 6. Selected Financial Data
SONOMA VALLEY BANCORP
Selected Consolidated Financial Data
dollars in thousands, except share
and per share data
For the years ended:
2002 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net interest income $ 8,633 $ 8,236 $ 7,870 $ 6,699 $ 5,987 $ 5,282
Provision for loan losses 393 342 335 240 335 295
Non-interest income 1,646 1,309 893 941 878 735
Non-interest expense 5,862 5,224 5,061 4,614 4,100 3,519
Provision for income tax 1,275 1,379 1,160 976 843 789
Gain(Loss) securities sold (5)
Extraordinary item ---------- ---------- ---------- ---------- ---------- ----------
$ 2,744 $ 2,600 $ 2,207 $ 1,810 $ 1,587 $ 1,414
========== ========== ========== ========== ========== ==========
SELECTED AVERAGE
BALANCES:
Assets $ 164,200 $ 147,807 $ 135,924 $ 123,202 $ 107,202 $ 98,359
Loans, net of unearned 116,867 100,605 86,547 73,222 70,838 56,811
Deposits 143,228 129,534 120,135 109,801 95,819 89,050
Shareholders' equity 17,964 15,121 12,984 11,490 9,976 8,377
PER SHARE DATA:
Basic net income $ 1.97 $ 1.85 $ 1.57 $ 1.27 $ 1.11 $ .99
Fully diluted net income $ 1.80 $ 1.74 $ 1.52 $ 1.25 $ 1.10 $ .99
Period end book value $ 13.73 $ 11.91 $ 10.14 $ 8.49 $ 7.50 $ 6.37
Weighted average shares
outstanding 1,395,679 1,404,486 1,409,908 1,428,782 1,434,138 1,434,138
FINANCIAL RATIOS:
Return on average assets 1.67% 1.76% 1.62% 1.47% 1.48% 1.44%
Return on average
shareholders' equity 15.27% 17.19% 17.00% 15.75% 15.91% 16.88%
Net yield on earning
assets 6.06% 6.25% 6.49% 6.04% 6.22% 5.95%
Cost Control ratio 55.07% 52.72% 55.06% 58.52% 57.97% 57.01%
Average shareholders'
equity to average assets 10.94% 10.23% 9.55% 9.33% 9.31% 8.52%
CAPITAL RATIOS:
Risk-based capital:
Tier I 12.31% 11.81% 12.78% 12.36% 12.57% 12.32%
Total 13.57% 13.07% 14.04% 13.62% 13.83% 13.57%
Leverage ratio 10.62% 10.38% 10.11% 9.54% 9.55% 8.65%
CREDIT QUALITY:
Net charge-offs to
average loans 0.02% 0.05% -0.04% 0.04% 0.09% 0.25%
Allowance for possible
loan losses to period
end loans 2.17% 2.25% 2.29% 2.19% 2.12% 2.01%
Page 14
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Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
The Year Ended December 31, 2002 versus December 31, 2001
The business operations of the Company continue to be conducted through its
wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial
lending operations on June 3, 1988. Accordingly, the following discussion and
analysis of the financial condition and the results of operations should be read
in conjunction with the financial statements and notes included elsewhere in
this annual report. Per share amounts for prior years have been adjusted for the
Bank's prior 2 for 1 stock split declared March 18, 1998, 10% stock dividends
declared June 18, 1997 and May 22, 1996 and 5% stock dividends declared in June
2002, July 2001, August 2000, July 1999, January and August, 1995, July 1994,
June 1993 and May, 1992.
Overview
Net income was $2,744,333 ($1.97 per share) for 2002 compared with earnings of
$2,600,244 ($1.85 per share) in 2001. Return on average shareholders' equity
declined to 15.28% in 2002 compared to 17.19% in 2001. Return on average total
assets for 2002, 2001 and 2000 were 1.67%, 1.76% and 1.62%, respectively.
At December 31, 2002 total assets were $182.6 million, a 16.1% increase over the
$157.4 million at December 31, 2001. The Company showed loan growth to $128.1
million in 2002, compared with $107.4 million at year-end 2001, a growth rate of
19.2%. Deposits also increased, growing 16.2%, from $137.7 million at year-end
2001 to $160.0 million at year-end 2002. The loan-to-deposit ratio increased
from 78.1% in 2001 to 80.0% in 2002, a reflection of stronger loan growth
compared to the growth of deposits.
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, increased $399,000 to $9.0 million, up 4.6% from 2001 net interest income
of $8.6 million. Net interest income on a fully taxable equivalent basis, as
shown on the table - Average Balances, Yields and Rates Paid (page 16), is
higher than net interest income on the statements of operations because it
reflects adjustments applicable to tax-exempt income from certain securities and
loans ($366,000 in 2002 and $364,000 in 2001, based on a 34% federal income tax
rate).
The increase in net interest income (stated on a fully taxable equivalent basis)
was the net effect of a $523,000 decrease in interest income and a $922,000
decrease in interest expense which is a result of deposit rates declining faster
than loan rates.
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 declined 19 basis points to 6.06% in 2002 from
6.25% in 2001.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) decreased by $523,000 to $11.0 million in 2002, a 4.6% decline over the
$11.5 million realized in 2001.
The $523,000 decrease was the net effect of a 7.9% increase in average earning
assets to $148.4 million offset by a 96 basis point decline in average yield for
the year.
Page 15
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SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
Rate/Volume
2002 2001 2000
---- ---- ----
ASSETS Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- ------- ------ ------- ------- -----
Interest-earning assets:
Loans(2):
Commercial $ 75,696 $ 5,978 7.90% $ 61,888 $ 5,582 9.02% $ 52,475 $ 5,195 9.90%
Consumer 13,186 1,098 8.33% 14,583 1,370 9.39% 11,889 1,179 9.92%
Real estate construction 19,040 1,689 8.87% 12,393 1,279 10.32% 11,316 1,224 10.82%
Real estate mortgage 5,732 481 8.39% 8,983 823 9.16% 8,763 830 9.47%
Tax exempt loans (1) 3,367 285 8.46% 2,566 220 8.57% 1,798 149 8.29%
Leases 164 27 16.46% 409 42 10.27% 537 55 10.24%
Tax exempt leases (1) 106 15 14.15% 165 15 9.09% 122 11 9.02%
Unearned loan fees (424) (382) (353)
-------- ------- -------- ------- --------
Total loans 116,867 9,573 8.19% 100,605 9,331 9.27% 86,547 8,643 9.99%
Investment securities
Available for sale:
Taxable 6,029 365 6.05% 16,420 1,001 6.10% 22,696 1,420 6.26%
Tax exempt(1) 0 0 0.00% 0 0 0.00% 199 15 7.54%
Hold to maturity:
Taxable 201 13 6.47% 203 13 6.40% 347 19 5.48%
Tax exempt (1) 10,904 777 7.13% 11,779 837 7.11% 11,509 803 6.98%
-------- -------- -------- ------- -------- ------
Total investment securities 17,134 1,155 6.74% 28,402 1,851 6.51% 34,751 2,257 6.50%
Federal funds sold 14,053 216 1.54% 8,219 286 3.48% 4,802 294 6.12%
FHLB Stock 275 15 5.45% 261 15 5.75% 285 22 7.72%
Total due from banks/Interest bearing 73 1 1.37% 11 0 2.73% 40 2 4.33%
--------- -------- -------- ------- -------- -------
Total interest earning assets 148,402 $ 10,960 7.39% 137,498 $11,483 8.35% 126,425 11,218 8.87%
======== ======= =======
Noninterest-bearing assets:
Reserve for loan losses (2,547) (2,263) (1,916)
Cash and due from banks 7,600 6,620 6,115
Premises and equipment 705 620 619
Other assets 10,040 5,332 4,681
-------- -------- --------
Total assets $164,200 $147,807 $135,924
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction $ 23,794 $ 84 0.35% $ 21,940 $ 149 0.68% $ 20,875 $ 204 0.98%
Savings deposits 48,052 656 1.37% 42,074 997 2.37% 38,400 1,016 2.65%
Time deposits over $100,000 18,362 547 2.98% 16,739 845 5.05% 15,177 831 5.48%
Other time deposits 20,155 674 3.34% 18,913 885 4.68% 18,594 947 5.09%
-------- -------- -------- ------- -------- -------
Total interest bearing
Deposits 110,363 1,961 1.78% 99,666 2,876 2.89% 93,046 2,998 3.22%
Federal Funds purchased 0 0 0.00% 0 0 0.00 69 5 7.25%
Other short term borrowings 0 0 0.00% 174 7 4.02% 186 13 6.99%
-------- -------- -------- ------- -------- -------
Total interest bearing
liabilities 110,363 $ 1,961 1.78% 99,840 $ 2,883 2.89% 93,301 $ 3,016 3.23%
======== ======= =======
Non interest bearing liabilities:
Non interest bearing demand deposits 32,865 29,868 27,089
Other liabilities 3,008 2,978 2,550
Shareholders' equity 17,964 15,121 12,984
-------- -------- --------
Total liabilities and
shareholders' equity $164,200 $147,807 $135,924
======== ======== ========
Interest rate spread 5.61% 5.46% 5.64%
==== ==== ====
Interest income $ 10,960 7.39% $11,483 8.35% $11,218 8.87%
Interest expense 1,961 1.32% 2,883 2.10% 3,016 2.39%
-------- ---- ------- ---- ------- ----
Net interest income/margin $ 8,999 6.06% $ 8,600 6.25% $ 8,202 6.49%
======== ======= =======
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2002,2001 and 2000.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $343,000, $334,000 and $312,000
for the twelve months ended December 31, 2002,2001 and 2000, respectively,
were amortized to the appropriate interest income categories.
Page 16
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SONOMA VALLEY BANCORP
Rate/Volume Analysis
2002 over 2001 2001 over 2000
-------------- --------------
Volume Rate Vol/Rate Total Volume Rate Vol/Rate Total
ASSETS
Interest-earning assets:
Loans:
Commercial 1,245 (694) (155) 396 932 (462) (83) 387
Consumer (131) (156) 15 (272) 267 (62) (14) 191
Real estate construction 686 (180) (96) 410 116 (56) (5) 55
Real estate mortgage (298) (69) 25 (342) 21 (27) (1) (7)
Tax exempt loans 69 (3) (1) 65 64 5 2 71
Leases (25) 25 (15) (15) (13) 0 0 (13)
Tax exempt leases (5) 8 (3) 0 4 0 0 4
Unearned fee income 0 0 0 0 0 0 0 0
------ ------ ----- ----- ----- ----- ----- -----
Total loans 1,541 (1,069) (230) 242 1,391 (602) (101) 688
Investment securities:
Available for sale:
Taxable (633) (7) 4 (636) (393) (36) 10 (419)
Tax-exempt 0 0 0 0 (15) (15) 15 (15)
Held to maturity:
Taxable 0 0 0 0 (8) 3 (1) (6)
Tax-exempt (62) 2 0 (60) 19 15 0 34
------ ----- ----- ----- ----- ----- ----- -----
Total investment
securities (695) (5) 4 (696) (397) (33) 24 (406)
Federal funds sold 203 (160) (113) (70) 209 (127) (90) (8)
FHLB Stock 1 (1) 0 0 (2) (6) 1 (7)
Due from banks-int bearing 2 0 (1) 1 (1) (1) 0 (2)
------ ----- ----- ----- ----- ----- ----- -----
Total interest-earning
assets 1,052 (1,235) (340) (523) 1,200 (769) (166) 265
====== ===== ===== ===== ===== ===== ===== =====
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits 13 (72) (6) (65) 10 (62) (3) (55)
Interest-bearing demand
deposits 142 (423) (60) (341) 97 (106) (10) (19)
Time less than $100,000 (26) (321) 9 (338) 16 (77) (1) (62)
Time $100,000 and over 172 (285) (58) (171) 86 (65) (7) 14
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
deposits 301 (1,101) (115) (915) 209 (310) (21) (122)
Federal funds purchased 0 0 0 0 (5) (5) 5 (5)
Other borrowings (7) (7) 7 (7) 0 (6) 0 (6)
------ ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities 294 (1,108) (108) 922 204 (321) (16) (133)
Interest differential 758 (127) (232) 399 996 (448) (150) 398
====== ===== ===== ===== ===== ===== ===== =====
Volume/Rate variances were allocated in the following manner:
a. Changes affected by volume (change in volume times old rate)
b. Changes affected by rates (change in rates times old volume)
c. Changes affected by rate/volume (change in volume times change in rates)
The total for each category was arrived at by totaling the individual items
in their respective categories
Page 17
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Interest Expense
Total interest expense declined by $922,000 to $2.0 million. The average rate
paid on all interest- bearing liabilities was 1.78%, compared to 2.89% in 2001.
Average balances increased from $99.8 million to $110.4 million, a 10.5% gain.
The gain in volume of average balances was responsible for a $186,000 increase
in interest expense offset by a $1.1 million decrease related to lower interest
rates paid for a net decrease of $922,000. The lower rates paid on
interest-bearing liabilities is a result of a declining interest rate
environment.
Individual components of interest income and interest expense are provided in
the table - Average Balances, Yields and Rates Paid on page 16.
Provision for Loan Losses
The provision for loan losses charged to operations is based on the Bank's
monthly evaluations of the loan portfolio and the adequacy of the allowance for
loan losses in relation to total loans outstanding. The provisions to the
allowance for loan losses amounted to $393,000 in 2002 and $342,000 in 2001. The
increase in the provision is the result management's evaluation and assessment
of the loan portfolio.
Loans charged-off, net of recoveries, resulted in losses totaling $27,000 in
2002 and $47,000 in 2001. The decrease in charge offs reflects management's
efforts to identify problems early.
Non-interest Income
Non-interest income of $1.6 million increased 25.4% in comparison with the $1.3
million recorded in 2001. The increase was primarily due to a $242,000 increase
in other non interest income which was generated by earnings on bank owned life
insurance policies.
Non-interest Expense
Total non-interest expense increased 12.2% to $5.8 million in 2002 from $5.2
million in 2001. Non- interest expense represented 3.6% of average total assets
in 2002 and 3.5% in 2001. The expense/asset ratio is a standard industry
measurement of a bank's ability to control its overhead or non-interest costs.
During 2002, the Company will continue to emphasize cost controls. Certain costs
are not controllable by management. Refer to Note I, page 47 and 48, for a
detailed description of Non-Interest Income and Non-Interest Expense.
Salaries and Benefits
Salaries and benefits increased 9.3% from $3.1 million in 2001 to $3.4 million
in 2002. The 2002 increase reflects normal merit increases and employee
incentives paid as a result of the Company's strong earnings in 2002.
Additionally, there continues to be significant increases in workers
compensation and employee medical benefits. At December 31, 2002 and 2001 total
full-time equivalent employees were 44 and 47 respectively. Year-end assets per
employee were $4.2 million in 2002 compared to $3.3 million in 2001 and 2000.
Page 18
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Premises and Equipment
Expenses related to premises and equipment increased by 5.5% to $618,000 in 2002
from $586,000 in 2001. Building lease expense on three locations and storage
units increased to $278,000 in 2002 from $268,000 in 2001. Lease income for 2002
totaled $17,000 compared to lease income of $16,000 in 2001. The increase in
premises and equipment expense is the result of the banks continued emphasis on
investment in technology.
Other Non-interest Expense
Other non-interest expense increased by 21.0% to $1.8 million in 2002 from $1.5
million in 2001. The increase was the result of a 24.7% increase in professional
fees and a 90.2% increase in advertising. Professional fees is the largest
category of other non-interest expense, primarily comprised of data processing,
item processing and ATM services, as well as accounting, legal and other
professional fees. These services increased by $187,000 to $944,000 in 2002 from
$757,000 in 2001. This increase is the result of the bank outsourcing many
functions to keep staffing costs down and outside assistance in implementing
check imaging and internet banking. Advertising/Marketing which includes in
addition to advertising, customer relations, shareholder relations, public
relation, donations and civic dues was $201,000 in 2002 which increased $95,000
from $106,000 in 2001. This is a result of the bank's greater community
involvement. Increases in other categories reflect the increased growth and
volume of business in general.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 31.72% in
2002 compared with 34.66% in 2001.
Balance Sheet Analysis
Investment Securities
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 December 31, 2002,
the Company had securities totaling $9.9 million with a market value of $10.4
million categorized as held to maturity. Decisions to acquire municipal
securities, which are generally placed in this category, are based on 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 $3.8 million compared to an amortized cost of
$3.7 million as of December 31, 2002.
Page 19
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At year end 2002 the overall portfolio had a market value of $14.3 million
compared with an amortized cost of $13.6 million. Investment securities
decreased 38.8% to $13.7 million from $22.5 million in 2001. The Company
maintains an investment portfolio of securities rated A or higher by Standard
and Poor's and/or Moody's Investors Service. Tax-exempt bonds are occasionally
purchased without an A rating. In the opinion of management, there was no
investment in securities at December 31, 2002 that would constitute a material
credit risk to the Company.
The table below shows the components of the investment portfolio and average
yields. For further information concerning the Company's total securities
portfolio, including market values and unrealized gains and losses, refer to
Note C of the Notes to Consolidated Financial Statements on pages 41 and 42.
Twelve months ended 12/31/02 Twelve months ended 12/31/01
Average Average Average Average
Balance Yield Balance Yield
U.S. Treasury securities $ 2,529 6.0% $ 12,280 6.1%
U.S. federal agency issues 1,596 6.1% 2,019 6.2%
State, county and municipal issues 11,105 7.1% 11,982 7.1%
Corporate securities 1,904 6.1% 2,121 6.2%
------- --------
Total investment securities $17,134 6.7% $ 28,402 6.5%
======= ========
Loans
A comparative schedule of average loan balances is presented in the table on
page 16; year-end balances are presented in Note D to the Consolidated Financial
Statements pages 43 and 44.
Loan balances, net of deferred loan fees at December 31, 2002, were $128.1
million, an increase of 19.2% over 2001. Commercial loans, comprising 69.7% of
the portfolio, increased $17.3 million, or 23.9% over 2001. This increase
represented the primary reason for the overall growth in the portfolio. Included
in commercial loans are loans made for commercial purposes and secured by real
estate.
Real Estate Construction loans increased $5.6 million, or 40.7% over 2001
balances. Consumer loans, including home equity loans, decreased $871,000 or
6.1% over 2001 balances while real estate mortgage loans declined $1.3 million.
In 1997 the Company offered leasing opportunities to small businesses. Lease
financing receivables for year end 2002 decreased $167,000 or 49.0%.
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 (see Note P, on page 56 of the
Consolidated Financial Statements, Concentration of Credit Risk).
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 that it has policies in place to identify
problem loans and to monitor concentration of credits of loan customers engaged
in similar activities.
Page 20
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Commitments and Letters of Credit
Loan commitments are written agreements to lend to customers at agreed upon
terms provided there are no violations of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses. Loan commitments may have variable interest rates and terms that
reflect current market conditions at the date of commitment. Because many of the
commitments are expected to expire without being drawn upon, the amount of total
commitments does not necessarily represent the Company's anticipated future
funding requirements. Unfunded loan commitments were $30.4 million at December
31, 2002 and $41.9 million at December 31, 2001.
Standby letters of credit commit the Company to make payments on behalf of
customers when certain specified events occur. Standby letters of credit are
primarily issued to support customers' financing requirements of twelve months
or less and must meet the Company's normal policies and collateral requirements.
Standby letters of credit outstanding were $589,000 at December 31, 2002 and
$953,000 at December 31, 2001.
Nonperforming 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 six months and meets cash flow or collateral criteria 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 Company because of
the inability of the borrower to repay the loan under the original terms.
The Company had $897,000 in non-accrual status at December 31, 2002 and $747,000
at December 31, 2001. There were $796,000 in loans 90 days or more past due at
December 31, 2002 and no loans 90 days or more past due at December 31, 2001.
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.
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
Page 21
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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 December 31, 2002, the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At December 31, 2002, the allowance for loan losses was $2.8 million, or 2.2% of
year end loans, compared with $2.4 million or 2.2% of year end loans at December
31, 2001. Net charge-offs to average loans decreased when compared with the
prior year. The Company recorded net losses of .02% in 2002 compared to .05% in
2001. The continued low level of charge-offs in 2002 reflects the Company's
attention and effort in managing and collecting past due loans by encouraging
the customer to bring them to a current status or to pay them off.
Deposits
A comparative schedule of average deposit balances is presented in the table on
page 16; year-end deposit balances are presented in the table below.
Total deposits increased $22.3 million (16.2%) in 2002, to $160.0 million.
Demand deposits increased $6.5 million, or 20.0% in 2002. Savings deposits
increased by $6.2 million, or 13.8% and interest bearing checking increased
$761,000 or 3.2% during 2002. Other time deposits of less than $100,000
increased $7.2 million, or 40.5% and time deposits over $100,000 increased $1.6
million, for an increase of 8.9% over 2001 balances.
The composition of deposits for the years ending December 31, 2002 and 2001 are
as follows:
December 31, Percentage December 31, Percentage
2002 of Total 2001 of Total
---- -------- ---- --------
Interest bearing transaction deposits $ 24,627,589 15.4% $ 23,865,954 17.3%
Savings deposits 51,802,714 32.4% 45,523,306 33.1%
Time deposits, $100,000 and over 25,018,603 15.6% 17,809,990 12.9%
Other time deposits 19,778,540 12.4% 18,159,339 13.2%
------------- ----- ------------- -----
Total interest bearing deposits 121,227,446 75.8% 105,358,589 76.5%
Demand deposits 38,760,806 24.2% 32,296,390 23.5%
------------- ----- ------------- -----
Total deposits $ 159,988,252 100.0% $ 137,654,979 100.0%
============= ===== ============= =====
Capital
The Bank is subject to FDIC regulations governing capital adequacy. The 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 the current guidelines, as of December 31, 2002, the Bank was
required to have minimum Tier I and total risk-based capital ratios of 4% and 8%
respectively. To be well
Page 22
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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
percent 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.
Based on the FDIC's guidelines, the Bank's total risk-based capital ratio at
December 31, 2002 was 13.41% and its Tier 1 risk-based capital ratio was 12.15%.
The Bank's leverage ratio was 10.49%. All the ratios exceed the minimum
guidelines of 8.00%, 4.00% and 4.00%, respectively. The ratios for the Bank at
December 31, 2001, were 13.07%, 11.81% and 10.38%, respectively. The capital
ratios for the Holding Company at December 31, 2002, were 13.57%, 12.31% and
10.62%, respectively.
In February 2001, the Company approved a program to repurchase Sonoma Valley
Bancorp stock up to $1 million and in August 2002 the Company approved the
repurchase of an additional $1 million Sonoma Valley Bancorp stock. As of
December 31, 2002, $344,600 was purchased and retired. The Company is continuing
to repurchase Sonoma Valley Bancorp stock up to the authorized amount.
Management believes that the Bank's current capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
business.
Liquidity Management
The Company's liquidity is determined by the level of assets (such as cash,
federal funds sold and available-for-sale securities) that are readily
convertible to cash to meet customer withdrawal and borrowing needs. Deposit
growth also contributes to the Company's liquidity needs. The Company's
liquidity position is reviewed by management on a regular basis to verify that
it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset and Liability Policy which it
uses to monitor and determine adequate levels of liquidity. At year end 2002,
the Company's liquidity ratio (adjusted liquid assets to deposits and short term
liabilities) was 20.39% compared to 21.08% and 24.27% at year end 2001 and 2000,
respectively. Management expects that liquidity will remain adequate throughout
2003, as loans are not expected to grow significantly more than deposits, and
excess funds will continue to be invested in quality liquid assets.
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.
Page 23
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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. depositis/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
forecasts 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.
Interest Rate Risk Simulation of Net Interest Income as of December 31, 2002
(In thousands)
Variation from a constant rate scenario $ Change in NII
+200bp $1,033
+100bp 472
-100bp (394)
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.
Page 24
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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 December 31, 2002 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 $65.0 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.
( dollars in thousands)
December 31, 2002 3 months 12 months 3 years 5 years 15 years >15 years Totals
-------- --------- ------- -------- -------- --------- ------
ASSETS:
Fixed rate investments $ 876 $ 2,391 $ 5,154 $ 317 $ 4,033 $ 976 $ 13,747
Variable rate investments 282 282
Fixed rate loans 11,069 16,759 7,524 18,194 44,021 2,782 100,349
Variable rate loans 26,370 27 11 822 0 0 27,230
Interest-bearing balances 35 35
Fed funds sold 23,095 23,095
-------- -------- -------- -------- -------- -------- --------
Interest bearing assets 61,445 19,177 12,689 19,333 48,054 4,040 164,738
======== ======== ======== ======== ======== ======== ========
LIABILITIES:
Interest bearing transaction
deposits 24,628 24,628
Savings deposits 51,803 51,803
Time deposits
Fixed rate >100m 7,154 8,566 7,891 1,222 24,833
Fixed rate <100m 5,552 7,728 5,687 945 19,912
Floating rate >100m 0
Floating rate <100m 51 51
Borrowings 0 0
-------- -------- -------- -------- -------- -------- --------
Interest Bearing Liabilities $ 89,188 $ 16,294 $ 13,578 $ 2,167 $ 0 $ 0 $121,227
======== ======== ======== ======== ======== ======== ========
Rate Sensitivity Gap (27,743) 2,883 (889) 17,166 48,054 4,040
Cumulative Rate Sensitivity Gap (27,743) (24,860) (25,749) (8,583) 39,471 43,511
Cumulative Position to Total Assets (15.20%) (13.62%) (14.10%) (4.70%) 21.62% 23.83%
Page 25
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Inflation
Assets and liabilities of a financial institution are principally monetary in
nature. Accordingly, interest rates, which generally move with the rate of
inflation, have potentially the most significant effect on the Company's net
interest income. The Company attempts to limit inflation's impact on rates and
net income margins by minimizing its effect on these margins through continuing
asset/liability management programs.
Management's Discussion and Analysis
The Year Ended December 31, 2001 versus December 31, 2000
Summary
Net earnings for 2001 were $2.6 million compared with $2.2 million in 2000.
Earnings per share for 2001 were $1.85 compared with $1.57 in 2000. Return on
average assets was 1.76% in 2001 compared with 1.62% the previous year, while
return on average equity was 17.19% in 2001 and 17.00% for the previous year.
Total assets reached $157.4 million in 2001, an 12.1% increase over the $140.4
million at December 31, 2000. Loans increased 16.1% to $107.5 million, compared
with $92.6 million at year-end 2000. Deposits also increased, growing 11.8% from
$123.1 million at year-end 2000 to $137.7 million at year-end 2001. The
loan-to-deposit ratio increased from 75.2% to 78.1%.
Net Interest Income
Net interest income on a fully tax equivalent basis increased by $398,000 to
$8.6 million in 2001, up 4.9% from 2000 net interest income of $8.2 million. The
net interest margin for 2001 decreased to 6.25% from 6.49% for the previous
year. Individual components of interest income and interest expense are provided
in the table - Average Balances, Yields and Rates Paid on page 16.
Interest Income
Interest income increased by $265,000 to $11.5 million for a 2.4% gain over the
$11.2 million realized in 2000. The volume of earning assets increased by 8.8%
to $137.5 million from $126.4 million in 2000, while the yield on average
earning assets declined 52 basis points.
Interest Expense
Interest expense decreased by $133,000 to $2.9 million in 2001 from $3.0 million
in 2000. The average rate paid on all interest-bearing liabilities decreased
from 3.23% in 2000 to 2.89% in 2001 while average balances increased from $93.3
million to $99.8 million, a 7.0% gain over 2000. The gain in volume of average
balances was responsible for a $188,000 increase in interest expense and higher
interest rates paid resulted in a decrease of $321,000 for a total decrease of
$133,000. The higher rates paid on interest bearing liabilities is the result of
a raising rate environment.
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Provision for Loan Losses
The provision for loan losses was $342,000 in 2001 and $335,000 in 2000. The
increase in the provision is primarily the result of loan growth and
management's evaluation and assessment of the loan portfolio. Loans charged off,
net of recoveries, resulted in losses totaling $47,000 in 2001 and recoveries of
$32,000 in 2000. The increase in charge-offs reflects current economic
conditions.
Non-interest Income
Non-interest income increased by 46.5% to $1.3 million from $893,000 the
previous year. The increase was due to increases in all categories of non
interest income with a 45.5% increase in other non interest income, a 34.2%
increase in service charge on deposit accounts and a 20.1% increase in other fee
income.
Non-interest Expense
Non-interest expenses increased 3.2% to $5.2 million in 2001 from $5.1 million
in 2000. Non-interest expense represented 3.5% of average total assets at
December 31, 2001 and 3.7% at December 31, 2000.
Salaries and benefits increased by 19.2% from $2.6 million in 2000 to $3.1
million in 2001. The 2001 increase reflects normal merit increases, incentives
and other increases in employee benefits. At December 31, 2001, total full-time
equivalent employees were 47 compared to 42 at December 31, 2000. Year end
assets per employee were $3.3 million in 2001 and 2000.
Expenses related to premises and equipment decreased by 3.3% to $586,000 in
2001, from $606,000 in 2000. Building lease expense on three locations and
storage units increased to $265,000 in 2001 from $260,000 in 2000.
Other non-interest expenses decreased by 17.8% to $1.5 million in 2001 from $1.8
million in 2000. The decrease was primarily the result of a 22.3% decrease in
professional fees. Professional fees is the largest category of other
non-interest expense, primarily comprised of data processing, item processing
and ATM services, as well as accounting, legal and other professional fees.
These services decreased by $217,000 to $757,000 in 2001 from $973,000 in 2000.
Increases in other categories reflect the increased growth and volume of
business in general.
Provision for Income Taxes
The provision for income taxes decreased to an effective tax rate of 34.66% in
2001 compared with 34.45% in 2000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on page 23 through 25 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.
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Item 8. Financial Statements and Supplementary Data
For consolidated financial statements of the Company and Subsidiary, see
consolidated balance sheets as of December 31, 2002 and 2001, consolidated
statements of operations, consolidated statements of changes in shareholders'
equity and consolidated statements of cash flows for the three years ended
December 31, 2002, 2001 and 2000 and notes to consolidated financial statements
at pages 29 through 62 of this annual report.
Item 9. Changes On and Disagreement With Accountants on Accounting and Financial
Disclosure
None
Page 28
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REPORT OF RICHARDSON & COMPANY
INDEPENDENT AUDITORS
Board of Directors and Shareholders
Sonoma Valley Bancorp and Subsidiary
Sonoma, California
We have audited the accompanying consolidated balance sheets of Sonoma Valley
Bancorp and Subsidiary as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in the shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the Bancorp's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sonoma Valley
Bancorp and Subsidiary as of December 31, 2002 and 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Richardson & Company
January 29, 2003
Page 29
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
--------------- ---------------
ASSETS
Cash and due from banks $ 8,422,599 $ 7,150,662
Federal funds sold 23,095,000 13,250,000
--------------- ---------------
Total cash and cash equivalents 31,517,599 20,400,662
Investment securities available-for-sale, at fair value 3,823,259 10,668,970
Investment securities held-to-maturity ( fair value
of $10,440,453 and $12,142,652, respectively) 9,923,737 11,795,980
Loans and lease financing receivables, net 125,269,181 105,032,209
Premises and equipment, net 875,697 620,652
Accrued interest receivable 799,282 952,061
Cash surrender value of life insurance 7,387,712 5,030,531
Other assets 3,006,260 2,849,139
--------------- --------------
Total assets $ 182,602,727 $ 157,350,204
=============== ==============
LIABILITIES
Noninterest-bearing demand deposits $ 38,760,806 $ 32,296,390
Interest-bearing transaction deposits 24,627,589 23,865,954
Savings and money market deposits 51,802,714 45,523,306
Time deposits, $100,000 and over 25,018,603 17,809,990
Other time deposits 19,778,540 18,159,339
-------------- --------------
Total deposits 159,988,252 137,654,979
Accrued interest payable
and other liabilities 3,374,165 3,024,163
--------------- --------------
Total liabilities 163,362,417 140,679,142
Commitments and contingencies ( see accompanying notes )
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares
authorized; 1,401,146 shares in 2002 and 1,333,504 in
2001 issued and outstanding 12,936,225 11,025,885
Retained earnings 6,215,790 5,483,779
Accumulated other comprehensive income 88,295 161,398
--------------- --------------
Total shareholders' equity 19,240,310 16,671,062
--------------- --------------
Total liabilities and shareholders' equity $ 182,602,727 $ 157,350,204
=============== ==============
The accompanying notes are an integral part of these financial statements.
Page 30
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
INTEREST INCOME
Loans and leases $ 9,470,998 $ 9,251,314 $ 8,588,054
Taxable securities 378,511 1,013,330 1,441,452
Tax-exempt securities 512,708 552,110 539,863
Federal funds sold 216,362 286,083 294,165
Dividends 15,227 15,812 21,682
------------ ------------ ------------
Total interest income 10,593,806 11,118,649 10,885,216
INTEREST EXPENSE
Interest-bearing transaction deposits 84,241 149,078 203,767
Savings and money market deposits 655,841 996,864 1,016,445
Time deposits, $100,000 and over 674,089 844,351 830,920
Other time deposits 546,543 885,322 946,805
Other 7,221 17,579
------------ ----------- ------------
Total interest expense 1,960,714 2,882,836 3,015,516
------------ ----------- ------------
NET INTEREST INCOME 8,633,092 8,235,813 7,869,700
Provision for loan and lease losses 393,000 342,000 335,000
------------ ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 8,240,092 7,893,813 7,534,700
NON-INTEREST INCOME 1,641,191 1,309,315 892,701
NON-INTEREST EXPENSE
Salaries and employee benefits 3,437,390 3,143,911 2,636,374
Premises and equipment 618,029 585,748 606,044
Other 1,806,954 1,494,285 1,818,221
------------ ----------- ------------
Total non-interest expense 5,862,373 5,223,944 5,060,639
------------ ----------- ------------
Income before provision
for income taxes 4,018,910 3,979,184 3,366,762
Provision for income taxes 1,274,577 1,378,940 1,160,052
------------ ----------- ------------
NET INCOME $ 2,744,333 $ 2,600,244 $ 2,206,710
============ ============ ------------
NET INCOME PER SHARE $ 1.97 $ 1.85 $ 1.57
============ =========== ============
NET INCOME PER SHARE
ASSUMING DILUTION $ 1.80 $ 1.74 $ 1.52
============ =========== ============
The accompanying notes are an integral part of these financial statements.
Page 31
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- --------- ----------- ------------ ------------ -------------
BALANCE AT
JANUARY 1, 2000 1,230,161 $ 8,534,744 $ 3,671,578 $ (151,644) $ 12,054,678
5% stock dividend 60,605 1,068,160 (1,068,160)
Fractional shares (7,912) (7,912)
Redemption and retirement
of stock (14,168) (91,667) (160,665) (252,332)
Stock options exercised and
related tax benefits 5,082 73,766 73,766
Net income for the year $ 2,206,710 2,206,710 2,206,710
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $161,088 230,336
------------
Other comprehensive income,
net of taxes 230,336 230,336 230,336
------------ --------- ----------- ------------ ----------- ------------
Total comprehensive income $ 2,437,046
============
BALANCE AT
DECEMBER 31, 2000 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 income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $57,842 82,706
------------
Other comprehensive income,
net of taxes 82,706 82,706 82,706
------------ --------- ----------- ------------ ----------- ------------
Total comprehensive income $ 2,682,950
============
(Continued)
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------ ------------ ------------- ------------
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 losses
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
=============
BALANCE AT
DECEMBER 31, 2002 1,401,146 $ 12,936,225 $ 6,215,790 $ 88,295 $ 19,240,310
========= ============ ============ ============= ============
The accompanying notes are an integral part of these financial statements.
Page 33
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 2,744,333 $ 2,600,244 $ 2,206,710
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 393,000 342,000 335,000
Depreciation 144,659 142,683 150,492
Loss on sale of securities 5,098
Loss on sale of equipment 12,029
Amortization and other 43,971 71,782 93,539
Net change in interest receivable 152,779 199,863 (116,331)
Net change in cash surrender value
of life insurance (265,181) (113,227) (73,567)
Net change in other assets (63,800) (111,557) (832,950)
Net change in interest payable
and other liabilities 350,001 69,505 616,358
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,504,860 3,201,293 2,391,280
INVESTING ACTIVITIES
Purchases of securities held-to-maturity (1,129,886) (3,179,416)
Purchases of securities available-for-sale (540,547) (3,219,376)
Proceeds from maturing securities held-to-
maturity 1,841,141 1,472,700 1,832,000
Proceeds from maturing securities available-
for-sale 7,000,000 10,550,000 1,215,000
Proceeds from sales of securities available-
for-sale 244,063 2,915,968
Net increase in loans and leases (20,629,972) (14,910,204) (12,432,526)
Purchases of premises and equipment (399,704) (156,037) (226,378)
Purchases of life insurance (2,092,000) (3,000,000) (450,000)
Proceeds from disposal of equipment 19,700
----------- ----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES (14,577,019) (7,173,427) (13,525,028)
(Continued)
Page 34
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ -----------
FINANCING ACTIVITIES
Net change in demand, interest-bearing
transaction and savings deposits $ 13,505,460 $ 13,692,323 $ 6,043,892
Net change in time deposits 8,827,814 866,584 1,864,642
Stock repurchases (344,602) (571,408) (252,332)
Stock options exercised 214,375 214,858 61,602
Fractional shares purchased (13,951) (11,955) (7,912)
------------ -------------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 22,189,096 14,190,402 7,709,892
------------ -------------- -----------
NET CHANGE IN CASH AND
CASH EQUIVALENTS 11,116,937 10,218,268 (3,423,856)
Cash and cash equivalents
at beginning of year 20,400,662 10,182,394 13,606,250
------------ ----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 31,517,599 $ 20,400,662 $10,182,394
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 1,965,215 $ 2,920,348 $ 2,994,750
Income taxes $ 1,663,975 $ 1,556,000 $ 1,849,000
SUPPLEMENTAL DISCLOSURES OF
NONCASH ACTIVITIES:
Stock dividend $ 1,775,026 $ 1,381,976 $ 1,068,160
Net change in unrealized gains and losses
on securities $ (124,228) $ 140,548 $ 391,425
Net change in deferred income taxes on unrealized
gains and losses on securities $ 51,125 $ (57,842) $ (161,089)
The accompanying notes are an integral part of these financial statements.
Page 35
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: During 2000, the shareholders of Sonoma Valley Bank (the Bank)
approved a Plan of Reorganization and Merger Agreement, which provided for the
formation of Sonoma Valley Bancorp (the Bancorp) (a bank holding company) and
the conversion of each share of outstanding Bank common stock into one share of
no par value Bancorp common stock. Effective November 1, 2000, the Bancorp
issued 1,281,680 shares of its common stock for all of the outstanding common
stock of the Bank through a merger which has been accounted for similar to a
pooling of interests in that the historical cost basis of the Bank has been
carried forward. As a result of the merger, the Bank became the wholly owned
subsidiary of the Bancorp.
Sonoma Valley Bank was organized in 1987 and commenced operations on June 3,
1988 as a California state- chartered bank. The Bank is subject to regulation,
supervision and regular examination by the State Department of Financial
Institutions and Federal Deposit Insurance Corporation. The regulations of these
agencies govern most aspects of the Bank's business.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Bancorp and the Bank. All material intercompany accounts and
transactions have been eliminated.
Nature of Operations: The Bank provides a variety of banking services to
individuals and businesses in its primary service area of Sonoma, California and
the immediate surrounding area. The Bank offers depository and lending services
primarily to meet the needs of its business and professional clientele. These
services include a variety of demand deposit, savings and time deposit account
alternatives, and special merchant and business services. The Bank's lending
activities are directed primarily towards granting short and medium- term
commercial loans, customized lines of credit, for such purposes as operating
capital, business and professional start-ups, inventory, equipment and accounts
receivable, and interim construction financing.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: For the purposes of reporting cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
captions "Cash and due from banks" and "Federal funds sold." Generally, federal
funds are sold or purchased for one-day periods.
Investment Securities: Securities are classified as held-to-maturity if the
Bancorp has both the intent and ability to hold those debt securities to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Page 36
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities are classified as available-for-sale if the Bancorp intends to hold
those debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Bancorp's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized holding gains or losses
are reported as increases or decreases in shareholders' equity, net of the
related deferred tax effect. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in earnings.
Loans and Lease Financing Receivables: Loans are stated at the amount of unpaid
principal, less the allowance for loan losses and net deferred loan fees.
Interest on loans is accrued and credited to income based on the principal
amount outstanding. Loan origination fees and certain direct loan origination
costs are capitalized and recognized as an adjustment of the yield on the
related loan. However, loan origination costs in excess of fees collected are
not deferred but this treatment has an immaterial impact on the financial
statements. Amortization of net deferred loan fees is discontinued when the loan
is placed on nonaccrual status.
All of the Bancorp's leases are classified and accounted for as direct financing
leases. Under the direct financing method of accounting for leases, the total
net rentals receivable under the lease contracts, net of unearned income, are
recorded as a net investment in direct financing leases, and the unearned income
is recognized each month as it is earned so as to produce a constant periodic
rate of return on the unrecovered investment.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan and lease portfolio. Credit losses related to
off-balance-sheet instruments are included in the allowance for loan and lease
losses except if the loss meets the criteria for accrual under Statement of
Financial Accounting Standards No. 5, in which case the amount is accrued and
reported separately as a liability. Management determines the adequacy of the
allowance based upon reviews of individual loans and leases, recent loss
experience, current economic conditions, the risk characteristics of the various
categories of loans and leases and other pertinent factors. 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. Loans and
leases deemed uncollectible are charged to the allowance. Provisions for loan
and lease losses and recoveries on loans previously charged off are added to the
allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that the Bancorp will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Allowances on impaired loans are
established based on the
Page 37
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
present value of expected future cash flows discounted at the loan's historical
effective interest rate or, for collateral-dependent loans, on the fair value of
the collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and
leases, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or lease or a portion of a loan or lease is classified as
doubtful or is partially charged off, the loan or lease is classified as
nonaccrual. Loans and leases that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan or lease had
been partially charged off, recognition of interest on a cash basis is limited
to that which would have been recognized on the recorded balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed principally
by the straight-line method over the estimated useful lives of the related
assets.
Income Taxes: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized for
deductible temporary differences and tax credit carryforwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Page 38
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising: Advertising costs are charged to operations in the year incurred.
Net Income Per Share of Common Stock: Net income per share of common stock is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year, after giving retroactive effect to the
stock dividends and splits. Net income per share--assuming dilution is computed
similar to net income per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued. Included in the
denominator is the dilutive effect of stock options computed under the treasury
method.
Stock Option Accounting: At December 31, 2002 the Bancorp has two stock-based
employee and director compensation plans, which are described more fully in Note
M. The Bancorp accounts 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, 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 Bancorp had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.
2002 2001 2000
----------- ----------- -----------
Net Income, as reported $ 2,744,333 $ 2,600,244 $ 2,206,710
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (185,919) (179,899) (179,899)
----------- ----------- -----------
Pro forma net income $ 2,558,414 $ 2,420,345 $ 2,026,811
=========== =========== ===========
Net income per share:
Basic - As reported 1.97 1.85 1.57
Basic - Pro forma 1.83 1.72 1.44
Diluted - As reported 1.80 1.74 1.52
Diluted - Pro forma 1.68 1.62 1.39
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. Sonoma Valley Bancorp expects to adopt 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
Page 39
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
January 1, 2003 will be recognized in the income statement. The unvested portion
of stock option grants issued before January 1, 2003 will continue to be
accounted for under APB No. 25. SFAS No. 148 also requires new disclosures
regarding the cost of stock options not accounted for under SFAS No.148.
The adoption of SFAS No. 148 will reduce Sonoma Valley Bancorp's net income and
earnings per share. The future amount of this reduction is dependent upon a
number of factors, including the number of options granted and certain variables
used in determining the "fair value" of each option granted under the "Black-
Scholes" model. These variables include the volatility of Sonoma Valley
Bancorp's stock price, Sonoma Valley Bancorp's dividend yield, market interest
rates and the expected life of the options. The actual compensation ultimately
realized by option holders is determined at the time of exercised based on the
differential between the options exercise price and the current market value of
Sonoma Valley Bancorp stock.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business the
Bancorp has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
Operating Segments: Reportable segments are based on products and services,
geography, legal structure, management structure and any other manner in which
management desegregates a company for making operating decisions and assessing
performance. The Bancorp has determined that its business is comprised of a
single operating segment.
Reclassifications: Certain reclassifications have been made to the 2001 balances
to conform to the current presentation. Federal Home Loan Bank stock has been
reclassified from investment securities available-for- sale to other assets.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash and due from banks include amounts the Bank is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirement at December 31, 2002 and 2001 was $2,886,000 and
$2,337,000, respectively.
Page 40
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE C--INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities are
summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- -------------
December 31, 2002:
Securities Available-For-Sale
U.S. Treasury securities $ 533,848 $ 5,057 $ 538,905
U.S. Government agency
securities 1,497,398 115,417 1,612,815
Corporate securities 1,641,968 46,555 $ (16,984) 1,671,539
------------ ------------ ----------- ------------
$ 3,673,214 $ 167,029 $ (16,984) $ 3,823,259
============ ============ =========== ============
Securities Held-to-Maturity
Municipal securities $ 9,923,737 $ 517,873 $ (1,157) $ 10,440,453
------------ ------------ ----------- ------------
$ 9,923,737 $ 517,873 $ (1,157) $ 10,440,453
============ ============ =========== ============
December 31, 2001:
Securities Available-for-Sale
U.S. Treasury securities $ 7,005,118 $ 110,842 $ 7,115,960
U.S. Government agency
securities 1,495,960 96,070 1,592,030
Corporate securities 1,893,618 67,362 1,960,980
------------ ------------ ----------- ------------
$ 10,394,696 $ 274,274 $ $ 10,668,970
============ ============ =========== ============
Securities Held-to-Maturity
Municipal securities $ 11,795,980 $ 375,773 $ (29,101) $ 12,142,652
------------ ------------ ----------- ------------
$ 11,795,980 $ 375,773 $ (29,101) $ 12,142,652
============ ============ =========== ============
Page 41
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE C--INVESTMENT SECURITIES (Continued)
Contractual maturities of investment securities at December 31, 2002 were as
follows:
Securities Available-For-Sale Securities Held-To-Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------- ------------- ------------
Due in one year or less $ 750,562 $ 756,455 $ 2,511,232 $ 2,556,087
Due after one year through
five years 2,922,652 3,066,804 2,404,164 2,521,632
Due after five years through
ten years 1,700,768 1,834,720
Due after ten years 3,307,573 3,528,014
------------ ------------- ------------- ------------
$ 3,673,214 $ 3,823,259 $ 9,923,737 $ 10,440,453
============ ============= ============= ============
During 2002, the Bancorp sold securities available-for-sale for total proceeds
of approximately $244,062 resulting in gross realized losses of approximately
$5,098 and no gross realized gains. During 2001, the Bancorp did not sell any
securities available-for-sale. During 2000, the Bancorp sold securities
available-for- sale for total proceeds of approximately $2,687,482, resulting in
gross realized losses of approximately $97,186 and no gross realized gains.
As of December 31, 2002, investment securities with a carrying amount of
$5,332,794 and an approximate fair value of $5,677,085 were pledged, in
accordance with federal and state requirements, as collateral for public
deposits. Investment securities with a carrying amount and fair value of
$1,720,596 at December 31, 2002 were pledged to meet the requirements of the
Federal Reserve and the U.S. Department of Justice.
Page 42
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of the loan and lease portfolio was as follows at December 31:
2002 2001
------------------------ -----------------------
Commercial $ 89,507,230 69.7% $ 72,239,607 66.9%
Consumer 13,374,774 10.4% 14,246,442 13.2%
Real estate mortgage 5,911,082 4.6% 7,237,000 6.7%
Real estate construction 19,507,906 15.2% 13,864,265 12.9%
Lease financing receivables, net of
unearned income of $33,781
in 2002 and $70,764 in 2001 174,409 0.1% 340,714 0.3%
-------------- ------ -------------- -----
128,475,401 100.0% 107,928,028 100.0%
===== =====
Deferred loan fees and costs, net (424,258) (480,264)
Allowance for loan and lease losses (2,781,962) (2,415,555)
-------------- -------------
$ 125,269,181 $ 105,032,209
============== =============
At December 31, 2002, the recorded investment in loans for which impairment has
been recognized in accordance with Statement of Financial Accounting Standards
(Statement) No. 114 totaled $164,000, with a corresponding valuation allowance
of $17,000. At December 31, 2001, the recorded investment in loans for which
impairment has been recognized in accordance with Statement No. 114 totaled
$178,000, with a corresponding valuation allowance of $25,000. For the years
ended December 31, 2002, 2001 and 2000, the average recorded investment in
impaired loans was approximately $143,000, $192,000 and $220,000, respectively.
During 2002, $2,000 of interest was received and recognized on an impaired loan.
No interest was recognized on impaired loans during 2001 or 2000.
In addition, at December 31, 2002 and 2001, the Bancorp had other nonaccrual
loans of approximately $801,700 and $624,200, respectively, for which impairment
had not been recognized.
The Bancorp has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Page 43
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
The maturity and repricing distribution of the loan and lease portfolio at
December 31:
2002 2001
------------- ---------------
Fixed rate loan maturities
Three months or less $ 7,311,329 $ 4,331,247
Over three months to twelve months 10,216,291 12,442,102
Over one year to five years 25,726,170 16,285,410
Over five years 29,032,374 26,357,034
Floating rate loans repricing
Quarterly or more frequently 54,271,273 45,082,138
Quarterly to annual frequency 273,285 685,182
One to five years frequency 748,138 1,998,052
------------ ---------------
127,578,860 107,181,165
Nonaccrual loans 896,541 746,863
------------- ---------------
$ 128,475,401 $ 107,928,028
============= ===============
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31:
2002 2001 2000
------------- ------------- -------------
Beginning balance $ 2,415,555 $ 2,120,517 $ 1,753,894
Provision for loan and lease losses 393,000 342,000 335,000
Loans charged off:
Commercial (10,741) (44,345)
Consumer (34,872) (31,680) (19,440)
------------- ------------- -------------
(45,613) (76,025) (19,440)
Recoveries:
Commercial 9,474 10,363 38,181
Consumer 9,546 18,700 12,882
------------- ------------- -------------
19,020 29,063 51,063
------------- ------------- -------------
Ending balance $ 2,781,962 $ 2,415,555 $ 2,120,517
============== ============= =============
Page 44
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
2002 2001
----------- ------------
Land $ 175,000 $ 175,000
Building 71,943 71,943
Leasehold improvements 418,802 199,512
Furniture, fixtures and equipment 1,306,225 1,125,811
------------ ------------
1,971,970 1,572,266
Less: Accumulated depreciation (1,096,273) (951,614)
------------ ------------
$ 875,697 $ 620,652
============ ============
NOTE F--TIME DEPOSITS
The maturities of time deposits at December 31, 2002 are as follows:
Maturing within one year $ 29,050,000
Maturing in one year to two years 7,834,000
Maturing two years through five years 6,310,000
Maturing after five years 1,603,000
------------
$ 44,797,000
============
NOTE G--FEDERAL FUNDS CREDIT LINES
The Bancorp has uncommitted federal funds lines of credit agreements with other
banks. The maximum borrowings available under these lines totaled $15,500,000 at
December 31, 2002. The Bancorp pledged loans totaling $22,594,531 as collateral
to secure advances from the Federal Home Loan Bank of up to $12,767,110. There
were no borrowings outstanding under the agreements at December 31, 2002 or
2001.
Page 45
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE H--EMPLOYEE BENEFIT PLANS
The Bancorp has a 401(k) Employee Savings Plan (the Plan) in which the Bancorp
matches a portion of the employee's contribution each payday. All employees are
eligible for participation the first day of the month following six months of
employment. Bancorp contributions are 100% vested at all times. The Bancorp made
contributions totaling $77,913 in 2002, $60,845 in 2001 and $64,019 in 2000.
The Bancorp purchased single premium life insurance policies in connection with
the implementation of retirement plans for four key officers and for the Board
of Directors. The policies provide protection against the adverse financial
effects from the death of a key officer and provide income to offset expenses
associated with the plans. The officers are insured under the policies, but the
Bancorp is the owner and beneficiary. At December 31, 2002 and 2001, the cash
surrender value of these policies totaled $7,387,712 and $5,030,531,
respectively.
The retirement plans are unfunded and provide for the Bancorp to pay the
officers and directors specified amounts for specified periods after retirement
and allows them to defer a portion of current compensation in exchange for the
Bancorp's commitment to pay a deferred benefit at retirement. If death occurs
prior to or during retirement, the Bancorp will pay the officer's beneficiary or
estate the benefits set forth in the plans. Deferred compensation is vested as
to the amounts deferred. Liabilities are recorded for the estimated present
value of future salary continuation benefits and for the amounts deferred by the
officers and directors. At December 31, 2002 and 2001, the liability recorded
for the executive officer supplemental retirement plan totaled $1,223,570 and
$898,205 respectively. The amount of pension expense related to this plan for
2002 and 2001 was $325,365 and $233,124 respectively. The director retirement
plan was established during 2002 and a liability was recorded during the year
totaling $208,600. At December 31, 2002 and 2001, the liability recorded for the
deferred compensation plan totaled $849,600 and $696,000, respectively. The
amount of expense related to this plan for 2002 and 2001 was $74,400 and
$60,300, respectively. The following are the components of the accumulated
benefit obligation related to the executive officer supplemental retirement plan
as of December 31:
2002 2001
----------- ---------
Projected benefit obligation $ 1,032,706 $ 609,162
Unamortized net transition obligation 190,864 289,043
----------- ---------
Pension liability included in other liabilities $ 1,223,570 $ 898,205
=========== =========
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% for 2002 and 2001. The entire
accumulated benefit obligation was fully vested at December 31, 2002 and 2001.
Page 46
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE H--EMPLOYEE BENEFIT PLANS (Continued)
The following is a reconciliation of the beginning and ending balances of the
pension liability and the components of net pension expense for the years ended
December 31:
2002 2001
----------- ---------
Pension liability at beginning of year $ 898,205 $ 665,081
Net periodic pension expense:
Service cost 302,632 238,323
Interest cost on projected benefit obligation 66,189 42,517
Amortization of unrecognized liability at transition (43,456) (47,716)
----------- ---------
325,365 233,124
----------- ---------
Pension liability at end of year $ 1,223,570 $ 898,205
=========== =========
NOTE I--NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
Non-interest income is comprised of the following for the years ended December
31:
2002 2001 2000
----------- ----------- ----------
Service charges on deposit accounts $ 964,198 $ 930,171 $ 692,639
Other fee income 312,121 251,042 209,418
Investment securities gains (losses) (5,098) (97,186)
Life insurance earnings 357,181 113,227 73,567
Other ( none exceeding 1% of revenues ) 12,789 14,875 14,263
----------- ----------- -----------
$ 1,641,191 $ 1,309,315 $ 892,701
=========== =========== ===========
Page 47
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE I--NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE (Continued)
Other non-interest expense is comprised of the following for the years ended
December 31:
2002 2001 2000
---------- ----------- -----------
Professional and consulting fees $ 477,830 $ 287,471 $ 513,706
Data processing 465,946 469,750 459,559
Stationary and supplies 159,909 158,335 159,886
Staff related 158,707 104,092 148,724
Advertising and business development 200,848 105,614 139,926
Postage and telephone 122,408 116,879 110,093
Assessments and insurance 83,633 79,042 79,972
Other ( none exceeding 1% of revenues) 137,673 173,102 206,355
----------- ----------- -----------
$ 1,806,954 $ 1,494,285 $ 1,818,221
=========== =========== ===========
NOTE J--INCOME TAXES
The provision for income taxes is comprised of the following:
2002 2001 2000
----------- ----------- -----------
Current
Federal $ 1,100,218 $ 1,008,534 $ 1,112,326
State 437,893 409,376 449,287
----------- ----------- -----------
1,538,111 1,417,910 1,561,613
Deferred
Federal (222,552) (50,778) (311,409)
State (40,982) 11,808 (90,152)
----------- ----------- -----------
(263,534) (38,970) (401,561)
----------- ----------- ------------
$ 1,274,577 $ 1,378,940 $ 1,160,052
=========== =========== ===========
Page 48
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE J--INCOME TAXES (Continued)
The following is a reconciliation of income taxes computed at the Federal
statutory income tax rate of 34% to the effective income tax rate used for the
provision for income taxes:
2002 2001 2000
----------- ----------- -----------
Income tax at Federal statutory rate $ 1,366,429 $ 1,352,923 $ 1,144,699
State franchise tax, less Federal
income tax benefit 287,529 284,687 240,872
Interest on municipal obligations exempt
from Federal tax (230,100) (221,062) (198,144)
Life insurance earnings (146,996) (46,598) (30,276)
Meals and entertainment 7,412 7,283 5,191
Other differences (9,697) (1,707) (2,290)
----------- ----------- -----------
Provision for income taxes $ 1,274,577 $ 1,378,940 $ 1,160,052
=========== =========== ===========
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows:
2002 2001 2000
----------- ------------ ------------
Deferred tax assets:
Allowance for loan losses $ 1,012,030 $ 877,944 $ 753,634
Nonqualified benefit plans 917,768 719,760 526,215
Accrued liabilities 249,827 280,367 474,744
State franchise taxes 148,884 139,188 152,758
Other 45,118 27,186 28,984
---------- ------------ -----------
Total deferred tax assets 2,373,627 2,044,445 1,936,335
Deferred tax liabilities:
Unrealized securities holding gains 61,750 112,876 55,034
Depreciation 46,285 19,308 9,666
Other 35,565 29,392 24,820
----------- ------------ -----------
Total deferred tax liabilities 143,600 161,576 89,520
----------- ------------ -----------
Net deferred tax asset $ 2,230,027 $ 1,882,869 $ 1,846,815
=========== =========== ===========
Page 49
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE J--INCOME TAXES (Continued)
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
the Bancorp's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed.
Refundable income taxes were $147,486 and $389,855 at December 31, 2002 and
2001, respectively. The income tax benefit related to net investment losses were
$2,098 and $39,996 during 2002 and 2000. There were no net investment gains or
losses in 2001.
NOTE K--STOCK REPURCHASE
The Bancorp has in effect a program to repurchase Sonoma Valley Bancorp stock up
to $2 million. As of December 31, 2002, $916,010 was repurchased.
NOTE L--EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share for the
years ended December 31:
2002 2001 2000
----------- ----------- -----------
Basic:
Net income $ 2,744,333 $ 2,600,244 $ 2,206,710
=========== =========== ===========
Weighted-average common shares outstanding 1,395,679 1,404,486 1,409,908
=========== =========== ===========
Earnings per share $ 1.97 $ 1.85 $ 1.57
=========== =========== ===========
Page 50
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE L--EARNINGS PER SHARE (Continued)
2002 2001 2000
----------- ----------- -----------
Diluted:
Net income $ 2,744,333 $ 2,600,244 $ 2,206,710
=========== =========== ===========
Weighted-average common shares outstanding 1,395,679 1,404,486 1,409,908
Net effect of dilutive stock options - based on the
treasury stock method using average market
price 125,169 90,268 45,942
----------- ----------- -----------
Weighted-average common shares outstanding
and common stock equivalents 1,520,848 1,494,754 1,455,850
=========== =========== ===========
Earnings per share- assuming dilution $ 1.80 $ 1.74 $ 1.52
=========== =========== ============
NOTE M--STOCK OPTION PLAN
The Bancorp has a stock option plan (the Plan), effective March 31, 1996 and
terminating March 31, 2006, under which incentive and nonstatutory stock
options, as defined under the Internal Revenue Code, may be granted. The Plan is
administered by a Committee appointed by the Board. Options representing 432,404
shares of the Bancorp's authorized and unissued common stock may be granted
under the Plan by the committee to directors, full-time officers, and full-time
employees of the Bancorp at a price to be determined by the Committee, but in
the case of incentive stock options shall not be less than 100% of the fair
market value of the shares on the date the incentive stock option is granted. In
addition, the Bancorp shall grant options to purchase 2,942 shares of common
stock to each Board member on March 1st of each year, provided the person was a
member of the Board for the entire preceding year ending December 31st, at an
option price equal to the fair market value as of the grant date. The options
may have an exercise period of no more than 10 years and are vested upon
granting, except for 73,055 of incentive options and 141,193 of nonstatutory
options granted in April 1999, which are subject to a graded vesting schedule of
20% per year. In 2002, 1,050 options were granted and no options were granted in
2001 or 2000.
The Bancorp approved an equity incentive plan (the Plan), effective May, 2002
and terminating May, 2012, under which stock options, restricted stock, stock
appreciation rights and stock bonuses may be granted. The Plan is administered
by a Committee appointed by the Board. Options representing 78,448 shares of the
Bancorp's authorized and unissued common stock may be granted under the Plan by
the Committee to all employees of the Bancorp at a price to be determined by the
Committee but shall not be less than 100% of the fair market value of the shares
on the date the incentive stock option is granted. The options may have an
exercise period of no more than 10 years and vesting is at the discretion of the
committee.
Page 51
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE M--STOCK OPTION PLAN (Continued)
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2002; dividend yield of zero; expected volatility
of 33.36 percent; risk-free interest rate of 5.44 percent and expected life of
10 years.
A summary of stock option activity, adjusted to give effect to stock dividends
and stock splits follows for years ended December 31:
Incentive Stock Options
----------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------- -------------- -------- -------------- -------
Shares under option at
beginning of year $ 12.89 126,190 $ 12.90 128,748 $ 12.90 128,748
Options granted 22.86 1,050
Options exercised 12.92 (16,596) 13.47 (2,558)
Options cancelled 12.55 (2,431)
------- -------
Shares under option at
end of year 12.98 108,213 12.89 126,190 12.90 128,748
======= ======= =======
Options exercisable at
end of year 90,174 88,192 73,219
Weighted-average fair value
of options granted during
the year $ 10.23
Nonstatutory Stock Options
----------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------- -------------- ------- -------------- -------
Shares under option at
beginning of year $ 12.44 214,729 $ 12.43 229,435 $ 12.38 235,318
Options exercised 12.27 (14,706) 10.47 (5,883)
------- ------- -------
Shares under option at
end of year 12.44 214,729 12.44 214,729 12.43 229,435
======= ======= =======
Options exercisable at
end of year 155,901 126,465 111,776
Page 52
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE M--STOCK OPTION PLAN (Continued)
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
Options Outstanding
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
$ 8.60 to $10.28 37,170 4.26 years $ 9.08
$12.34 to $12.55 240,720 6.28 years 12.53
$15.32 to $16.97 44,002 5.18 years 15.87
$22.86 1,050 9.42 years 22.86
-----------
$8.60 to $22.86 322,942 5.95 years 12.62
===========
Options Exercisable
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
- --------------- ----------- --------------
$ 8.60 to $10.28 37,170 $ 9.08
$12.34 to $12.55 163,853 12.52
$15.32 to $16.97 44,002 15.87
$22.86 1,050 22.86
-----------
$ 8.60 to $22.86 246,075 12.64
============
NOTE N--RELATED PARTY TRANSACTIONS
The Bancorp has entered into transactions with its directors, executive officers
and their affiliates (related parties). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features. The following is a summary of the aggregate activity involving related
party borrowers at December 31, 2002 and 2001:
Page 53
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE N--RELATED PARTY TRANSACTIONS (Continued)
2002 2001
------------ -----------
Loans outstanding at beginning of year $ 2,236,000 $ 2,423,000
Loans disbursements 2,723,000 770,000
Loan repayments (352,000) (957,000)
------------ -----------
Loans outstanding at end of year $ 4,607,000 $ 2,236,000
============ ===========
At December 31, 2002, commitments to related parties of approximately $1,289,000
were undisbursed. Deposits received from directors and officers totaled
$5,360,000 and $4,277,000 at December 31, 2002 and 2001, respectively.
The Bancorp leases its Glen Ellen office from a director of the Bancorp under a
noncancellable operating lease. Lease expense for the years ended December 31,
2002 and 2001 was $12,172 and $11,054, respectively. The remaining lease
commitment is approximately $2,989 through March 2003 including a minimum
inflationary increase of 4% per year. The monthly lease payments will be
increased annually based upon the Consumer Price Index, but not less than 4%
annually. The term of the lease is 5 years with an option to extend the lease
term for an additional 5 years at the same Consumer Price Index limitations.
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments: The Bancorp leases its two Sonoma offices and Glen Ellen
office under noncancelable operating leases with remaining terms of
approximately seven years, three years and three months, respectively. Two of
the leases require adjustments to the base rent for changing price indices and
have a minimum annual increase of four percent. The Sonoma main office lease has
an option to renew for two consecutive five-year terms and the Sonoma annex
office has an option to renew for two five-year periods and one four-year
period. The Glen Ellen office lease has an option to renew for one additional
five-year term. The following table summarizes future minimum commitments under
the noncancelable operating leases.
Year ended December 31:
2003 $ 264,572
2004 270,582
2005 261,639
2006 253,071
2007 263,194
Thereafter 415,138
-----------
$ 1,728,196
===========
Page 54
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Rental expense was $278,000 in 2002, $268,000 in 2001 and $260,000 in 2000.
Financial Instruments with Off-Balance-Sheet Risk: The Bancorp's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit and standby letters of credit. A
summary of the Bancorp's commitments and contingent liabilities at December 31,
is as follows:
Contractual Amounts
2002 2001
-------------- --------------
Commitments to extend credit $ 30,359,000 $ 41,920,000
Standby letters of credit 589,000 952,500
Commitments to extend credit and standby letters of credit include exposure to
some credit loss in the event of nonperformance of the customer. The Bancorp's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extension of credit that are recorded on the balance
sheet. Because these instruments have fixed maturity dates, and because many of
them expire without being drawn upon, they do not generally present any
significant liquidity risk to the Bancorp.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bancorp evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bancorp upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, certificates of
deposits and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bancorp to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending facilities to customers.
The Bancorp has not incurred any losses on its commitments in 2002, 2001 or
2000.
Page 55
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
As a guarantor of its customer's credit card accounts, the Bancorp is
contingently liable for credit card receivable balances held by another
financial institution should the customers default. The total amount guaranteed
as of December 31, 2002 and 2001 was $181,000 and $34,000, respectively.
NOTE P--CONCENTRATIONS OF CREDIT RISK
Most of the Bancorp's business activity is with customers located within the
State of California, primarily in Sonoma County. The economy of the Bancorp's
primary service area is heavily dependent on the area's major industries which
are tourism and agriculture, especially wineries, dairies, cheese producers and
turkey breeders. General economic conditions or natural disasters affecting the
primary service area or its major industries could affect the ability of
customers to repay loans and the value of real property used as collateral.
While the Bancorp has a diversified loan portfolio, approximately 83% of these
loans are secured by real estate in its service area.
The concentrations of credit by type of loan are set forth in Note D. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. In addition, the Bancorp has loan commitments in the
wine/agricultural industry, tourism industry and construction loans,
representing 8%, 7% and 19%, of outstanding loans, respectively. Standby letters
of credit were granted primarily to commercial borrowers. The Bancorp, as a
matter of policy, does not extend credit to any single borrower or group of
related borrowers on a secured basis in excess of 25% of its unimpaired capital
(shareholders' equity plus the allowance for credit losses) and on an unsecured
basis in excess of 15% of its unimpaired capital.
The concentrations of investments are set forth in Note C. The Bancorp places
its investments primarily in financial instruments backed by the U.S. Government
and its agencies or by high quality financial institutions, municipalities or
corporations. The Bancorp has significant funds deposited with four
correspondent banks. At December 31, 2002 the Bancorp had on deposit $9,500,000,
$5,000,000 and $4,950,000 in federal funds sold to three of these institutions,
which represented 50%, 26% and 26% of the Bancorp's net worth, respectively. In
addition, deposits with one correspondent bank was in excess of the federally
insured limit by $1,390,645 at December 31, 2002. While management recognizes
the inherent risks involved in such concentrations, this concentration provides
the Bancorp with an effective and cost efficient means of managing its liquidity
position and item processing needs. Management closely monitors the financial
condition of their correspondent banks on a continuous basis. The Bancorp also
maintains additional deposit accounts with other correspondent banks should
management determine that a change in its correspondent banking relationship
would be appropriate.
At December 31, 2002, the Bancorp had life insurance policies with cash
surrender values of $2,155,278 and $1,772,564 with two insurance companies,
which represented 11% and 9%, respectively, of the Bancorp's net worth.
Management closely monitors the financial condition and rating of these
insurance companies on a regular basis.
Page 56
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE Q--REGULATORY MATTERS
Banking regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's regulatory agency. Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three years,
net of the amount of any other distributions made to shareholders during such
periods. As of December 31, 2002, $5,801,283 was available for cash dividend
distribution without prior approval.
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC).
Failure to meet minimum capital requirements can initiate certain
mandatory---and possibly additional discretionary---actions by regulators that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002, that the Bank
meets all capital adequacy requirements to which it is subject.
Page 57
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE Q--REGULATORY MATTERS (Continued)
As of December 31, 2002, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category. The Bank's
actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- ------
(in thousands)
As of December 31, 2002:
Total Capital
(to Risk Weighted Assets) $ 20,852 13.4% >$ 12,444 > 8.0% >$15,555 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 18,897 12.2% >$ 6,222 > 4.0% >$ 9,333 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 18,897 10.5% >$ 7,207 > 4.0% >$ 9,009 > 5.0%
- - - -
As of December 31, 2001:
Total Capital
(to Risk Weighted Assets) $ 17,781 13.1% >$ 10,884 >8.0% >$13,605 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 16,072 11.8% >$ 5,442 >4.0% >$ 8,163 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 16,072 10.4% >$ 6,195 >4.0% >$ 7,743 > 5.0%
- - - -
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
A condensed balance sheet as of December 31, 2002 and 2001 and the related
condensed statement of operations and cash flows for the years ended December
31, 2002 and 2001, and two months ended December 31, 2000 for Sonoma Valley
Bancorp (parent company only) are presented as follows:
Page 58
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Balance Sheets
December 31, 2002 and 2001
2002 2001
-------------- --------------
Assets
Cash $ 249,432 $ 349,706
Other assets 89,551 87,699
Investment in common stock of subsidiary 18,985,494 16,233,657
-------------- --------------
$ 19,324,477 $ 16,671,062
============== ==============
Liabilities
Accrued expenses $ 84,167
Shareholders' equity
Common stock 12,936,225 $ 11,025,885
Retained earnings 6,304,085 5,645,177
-------------- --------------
$ 19,324,477 $ 16,671,062
============== ==============
Condensed Statements of Operations
For the years ended December 31, 2002 and 2001 and the
two months ended December 31, 2000
2002 2001 2000
------------- ------------- -------------
Dividend from subsidiary $ 500,000 $ 300,000
Expenses $ 125,091 36,620 44,370
------------- ------------- -------------
(Loss) income before income taxes and equity in
undistributed income of subsidiary (125,091) 463,380 255,630
Income tax benefit 44,483 16,419 19,110
------------- ------------- ------------
(80,608) 479,799 274,740
Equity in undistributed net income of subsidiary 2,824,941 2,120,445 111,750
------------- ------------- ------------
Net income $ 2,744,333 $ 2,600,244 $ 386,490
============= ============= ============
Page 59
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
For the years ended December 31, 2002 and 2001 and the
two months ended December 31, 2000
2002 2001 2000
------------ ------------ ------------
Operating activities:
Net income $ 2,744,333 $ 2,600,244 $ 386,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (2,824,941) (2,120,445) (111,750)
Increase in other assets 40,345 (17,218) (19,110)
Net change in total liabilities 84,167
------------ ------------ ------------
Net cash provided by operating activities 43,904 462,581 255,630
------------ ------------ ------------
Financing activities:
Stock repurchases (344,602) (571,408)
Stock options exercised 214,375 214,858
Fractional shares purchased (13,951) (11,955)
------------ ------------
Net cash used by financing activities (144,178) (368,505)
Net change in cash and cash equivalents (100,274) 94,076 255,630
Cash and cash equivalents at beginning of year 349,706 255,630
------------ ------------ ------------
Cash and cash equivalents at end of year $ 249,432 $ 349,706 $ 255,630
============ ============ ============
Supplemental Disclosures of Noncash Activities:
Stock Dividend $ 1,775,026 $ 1,381,976
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bancorp as
a whole.
Page 60
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp and Subsidiary's financial instruments
are as follows at December 31:
2002 2001
----------------------------- ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets: ------------ ------------- ------------ ------------
Cash and due from banks $ 8,422,599 $ 8,422,599 $ 7,150,662 $ 7,150,662
Federal funds sold 23,095,000 23,095,000 13,250,000 13,250,000
Investment securities
available- for-sale 3,823,259 3,823,259 10,668,970 10,668,970
Investment securities held-
to-maturity 9,923,737 10,440,453 11,795,980 12,142,652
Loans and lease financing
receivables, net 125,269,101 125,970,797 105,032,209 105,660,396
Accrued interest receivable 799,282 799,282 952,061 952,061
Cash surrender value of life
insurance 7,387,712 7,387,712 5,030,531 5,030,531
Financial liabilities:
Deposits 160,079,253 161,011,407 137,654,979 137,977,557
Accrued interest payable 59,923 59,923 64,423 64,423
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating its
fair value disclosures for financial instruments:
Cash, due from banks and federal funds sold: The carrying amount is a
reasonable estimate of fair value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable approximates
its fair value.
Page 61
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans and lease financing receivables, net: For variable-rate loans and leases
that reprice frequently and fixed rate loans and leases that mature in the near
future, with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other fixed rate loans and leases are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans or leases with similar terms to borrowers of similar
credit quality. Loan and lease fair value estimates include judgments regarding
future expected loss experience and risk characteristics and are adjusted for
the allowance for loan and lease losses. The carrying amount of accrued interest
receivable approximates its fair value.
Cash surrender value of life insurance: The carrying amount approximates its
fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit and standby letters of credit. The contract or
notional amounts of the Bancorp's financial instruments with off- balance-sheet
risk are disclosed in Note O. Estimating the fair value of these financial
instruments is not considered practicable due to the immateriality of the
amounts of fees collected, which are used as a basis for calculating the fair
value, on such instruments.
Page 62
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PART III
Item 10. Directors and Executive Officers of the Company.
The information called for in Item 10 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
Item 11. Executive Compensation.
The information called for in Item 11 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for in Item 12 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
Item 13. Certain Relationships and Related Transactions.
The information called for in Item 13 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this Form 10-K, 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 are effective in timely
alerting them to material information relating to the Company required to be
included in this Form 10-K.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
Page 63
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Financial Statements
The following financial statements of the Company are filed as part of this
Annual Report:
Number Page
1. Independent Auditor's Report ....................................... 29
2. Consolidated Balance Sheets as of December 31, 2002 and 2001 ........30
3. Consolidated Statements of Operations for the three years ended
December 31, 2002, 2001 and 2000.....................................31
4. Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2002, 2001 and 2000....32 and 33
5. Consolidated Statements of Cash Flows for the three years ended
December 31, 2002, 2001 and 2000..............................34 and 35
6. Notes to Consolidated Financial Statements ..........................36
Financial Statement Schedules
All other schedules have been omitted since the required information is not
present or is not present in sufficient amounts to require submission of the
schedules or because the information is included in the financial statements or
the notes thereto.
Page 64
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Reports on Form 8-K
None
Exhibits
The following Exhibits are attached or incorporated herein by reference:
3.1 Sonoma Valley Bancorp Articles of Incorporation, filed as Exhibit 3.1 to
the Registrant's Registration Statement on Form S-8 filed on June 5, 2001.
3.3 Sonoma Valley Bancorp By-laws, filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-8 filed on June 5, 2001.
4.2 Agreement for the sale of Sonoma Valley Bank Stock dated September 23,
1992, filed as Exhibit 4.2 (formerly A-1) to the Form F-2 for the year
ended December 31, 1992.
10.1 Lease for Sonoma branch office, filed as Exhibit 10.1 (formerly 7.1) to the
Registrant's Registration Statement on Form F-1 filed on May 1, 1989.
10.2 Sonoma Valley Bank Chief Executive Officer Severance Agreement dated
January 4, 1995, filed as Exhibit 10.2 to the Form 10-KSB for the year
ended December 31, 1997.
10.3 Sonoma Valley Bank Supplemental Executive Retirement Plan, as amended on
March 20, 1996, filed as Exhibit 10.3 to the Form 10-KSB for the year ended
December 31, 1997.
10.4 Sonoma Valley Bank Deferred Compensation Plan, filed as Exhibit 10.4 to the
Form 10-KSB for the year ended December 31, 1997.
10.5 Sonoma Valley Bank Master Trust Agreement for Executive Deferral Plans,
filed as Exhibit 10.5 to the Form 10-KSB for the year ended December 31,
1997.
10.6 Sonoma Valley Bank 1996 Stock Option Plan, filed as Exhibit 10.6 to the
Form 10-KSB for the year ended December 31, 1997.
10.7 Sonoma Valley Bank Severance Agreement with Mel Switzer, Jr. dated October
21, 1998, filed as Exhibit 10.7 to the From 10-KSB for the year ended
December 31, 1998.
10.8 Sonoma Valley Bank Severance Agreement with Mary Dieter dated October 21,
1998, filed as Exhibit 10.8 to the From 10-KSB for the year ended December
31, 1998.
10.10Sonoma Valley Bancorp Assumption of Severance Agreement [Form of], filed
as Exhibit 10.1 to the Form 10-KSB for the year ended December 31, 2001.
10.11Sonoma Valley Bancorp 2002 Equity Incentive Plan, filed as Exhibit A to
the Company's Proxy Statement for the Annual Meeting held on May 14, 2002.
23.1 Consent of Richardson and Co., Independent Auditors.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 65
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In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SONOMA VALLEY BANCORP
Date: March 19, 2003 By:/s/ Mel Switzer, Jr.
-----------------------------------------
Mel Switzer, Jr.
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 19, 2003 By:/s/ Mary Quade Dieter
-----------------------------------------
Mary Quade Dieter
Executive Vice President and
Chief Operating Officer
(Principal Finance and Accounting Officer)
Page 66
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In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Suzanne Brangham Date: March 19, 2003
- ----------------------------------------
Suzanne Brangham, Secretary
of the Board and Director
/s/ Dale T. Downing Date: March 19, 2003
- -------------------------------------------
Dale T. Downing, Director
/s/ Frederick H. Harland Date: March 19, 2003
- -----------------------------------------
Frederick H. Harland, Director
/s/ Robert B. Hitchcock Date: March 19, 2003
- -----------------------------------------
Robert B. Hitchcock, Director
/s/ Gerald J. Marino Date: March 19, 2003
- --------------------------------------------
Gerald J. Marino, Director
/s/ Gary D. Nelson Date: March 19, 2003
- --------------------------------------------
Gary D. Nelson, Director
/s/ Robert J. Nicholas Date: March 19, 2003
- -------------------------------------------
Robert J. Nicholas, Chairman
of the Board and Director
/s/ Angelo C. Sangiacomo Date: March 19, 2003
- --------------------------------------
Angelo C. Sangiacomo, Director
/s/ Jesse R. Stone Date: March 19, 2003
- ----------------------------------------------
Jesse R. Stone, Director
/s/ Mel Switzer, Jr. Date: March 19, 2003
- ---------------------------------------------
Mel Switzer, Jr., Director, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Harry Weise Date: March 19, 2003
- ----------------------------------------------
Harry Weise, Director
/s/ Mary Quade Dieter Date: March 19, 2003
- -----------------------------------------
Mary Quade Dieter, Chief Financial Officer
Executive Vice President, Chief Operating Officer
(Principal Finance and Accounting Officer)
Page 67
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CERTIFICATION
I, Mel Switzer, Jr., Chief Executive Officer for Sonoma Valley Bancorp, certify
that:
1. I have reviewed this quarterly report on Form 10-K of Sonoma Valley Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 19, 2003 /s/ Mel Switzer, Jr.
------------------------ ----------------------------
Mel Switzer, Jr.
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
I, Mary Quade Dieter., Chief Financial Officer for Sonoma Valley Bancorp,
certify that:
1. I have reviewed this quarterly report on Form 10-K of Sonoma Valley Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 19, 2003 /s/ Mary Quade Dieter
------------------------ -----------------------------------------
Mary Quade Dieter
Chief Financial Officer
(Principal Finance and Accounting Officer)
EXHIBIT 23.1
Richardson & Company 550 Howe Avenue, Suite 210
Sacramento, California 95825
Telephone: (916) 564-8727
FAX: (916)564-8728
CONSENT OF RICHARDSON & COMPANY
We consent to the incorporation by reference in the Registration Statement
(Form S-8) (SEC File Number 333-62294) pertaining to the Sonoma Valley Bancorp's
1996 Stock Option Plan as amended in April 1999 and the Registration Statement
(Form S-8) (SEC File Number 333-88610) pertaining to the Sonoma Valley Bancorp's
2002 Equity Incentive plan of our report dated January 29, 2003 with respect to
the consolidated financial statements of Sonoma Valley Bancorp and Subsidiary
included in its Annual Report (Form 10-K) for the year ended December 31, 2002,
filed with the securities and Exchange Commission.
/s/ Richardson & Company
------------------------
Richardson & Company
Sacramento, California
March 19, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT 2002
In connection with the annual report of Sonoma Valley Bancorp (the "Company") on
Form 10-K for the period ending December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), We, Mel Switzer, Jr.,
Chief Executive Officer and Mary Quade Dieter, Chief Financial Officer, of the
Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 fo the Sarbanes-Oxley Act of 2002 , that to the best of our
knowledge and belief:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934: and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company.
Dated: March 19, 2003 /s/ Mel Switzer, Jr.
------------------------ ------------------------------------------
Mel Switzer, Jr.,
Chief Executive Officer
(Principal Executive Officer)
Dated: March 19, 2003 /s/ Mary Quade Dieter
------------------------ -------------------------------------------
Mary Quade Dieter,
Chief Financial Officer
(Principal Financial and Accounting Officer)