SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2003
Commission File Number: 000-31929
SONOMA VALLEY BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0454068
(State of Incorporation) (I.R.S. Employer Identification No.)
202 West Napa Street Sonoma, California 95476
(Address of principal executive offices) (Zip Code)
(707) 935-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes o No |_|
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No o
The number of shares outstanding of the registrant's Common Stock, no par value,
as of November, 10, 2003 was 1,451,486.
Page 1
INDEX
Part 1 Financial Information Page Number
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2003,
December 31, 2002 and September 30, 2002............................3
Consolidated Statements of Operations for the
three months and nine months ended September 30, 2003 and 2002........4
Consolidated Statements of Changes in Shareholders Equity
for the nine months ended September 30, 2003,
and the years ended December 31, 2002 and 2001........................5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002.........................7
Notes to Consolidated Financial Statements............................8
Average Balances, Yields and Rates Paid
for the nine months ended September 30, 2003 and 2002.................10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................11
Item 3. Quantitative and Qualitative Disclosure about Market Risk............24
Item 4. Controls and Procedures..............................................24
Part II Other Information
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities and Use of Proceeds............................24
Item 3. Default Upon Senior Securities.......................................24
Item 4. Submission of Matters to a Vote of Security Holders..................24
Item 5. Other Information....................................................24
Item 6. Exhibits and Reports on Form 8-K.....................................25
Signatures....................................................................26
Certifications................................................................27
The information furnished in these interim statements reflects all adjustments
and accruals which are, in the opinion of management, necessary for a fair
statement of the results for such periods. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year.
Page 2
Part I
Item 1. The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management, necessary for
a fair statement of the results for such periods. The results of operations in
the interim statements are not necessarily indicative of the results that may be
expected for the full year.
FINANCIAL STATEMENTS
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2003 (Unaudited) and December 31, 2002 (Audited) and
September 30, 2002 (Unaudited)
September 30 December 31 September 30
ASSETS 2003 2002 2002
------------ ------------ ------------
Cash and due from banks $ 8,812,428 $ 8,422,599 $ 7,618,219
Federal funds sold 31,190,000 23,095,000 22,235,000
------------ ------------ ------------
Total cash and cash equivalents 40,002,428 31,517,599 29,853,219
Investment securities available-for-sale at fair value 13,834,148 3,823,259 4,109,952
Investment securities held-to-maturity (fair
value of $14,011,000, $10,440,000 and
$11,597,000, respectively) 13,620,606 9,923,737 10,912,269
Loans and lease financing receivables, net 119,040,732 125,269,181 117,436,218
Premises and equipment, net 1,296,242 875,697 799,961
Accrued interest receivable 931,593 799,282 895,545
Cash surrender value of life insurance 7,644,878 7,387,712 7,229,242
Other assets 3,303,338 3,006,260 2,903,422
------------ ------------ ------------
Total assets $199,673,965 $182,602,727 $174,139,828
============ ============ ============
LIABILITIES
Non interest-bearing demand deposits $ 36,491,921 $ 38,760,806 $ 33,904,346
Interest-bearing transaction deposits 28,124,429 24,627,589 24,199,502
Savings and money market deposits 65,414,882 51,802,714 50,626,679
Time deposits, $100,000 and over 26,000,588 25,018,603 23,967,400
Other time deposits 19,539,327 19,778,540 19,824,973
------------ ------------ ------------
Total deposits 175,571,147 159,988,252 152,522,900
Accrued interest payable and other liabilities 3,489,366 3,374,165 3,075,469
------------ ------------ ------------
Total liabilities 179,060,513 163,362,417 155,598,369
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares
authorized; 1,451,486 shares at September 30, 2003,
1,401,146 shares at December 31, 2002 and 1,394,433
shares at September 30, 2002 issued & outstanding. 14,950,486 12,936,225 12,839,336
Retained earnings 5,619,396 6,215,790 5,594,567
Accumulated other comprehensive income 43,570 88,295 107,556
------------ ------------ ------------
Total shareholders' equity 20,613,452 19,240,310 18,541,459
------------ ------------ ------------
Total liabilities and shareholders' equity $199,673,965 $182,602,727 $174,139,828
============ ============ ============
Page 3
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
------------- ------------- ------------ -------------
INTEREST INCOME
Loans and leases $ 2,479,394 $ 2,391,314 $ 7,198,098 $ 7,026,433
Taxable securities 106,046 67,203 247,874 320,526
Tax-exempt securities 122,076 125,914 340,169 388,610
Federal funds sold 74,023 70,407 243,578 130,959
Dividends 3,111 3,800 10,206 11,573
------------- ------------- ----------- -------------
Total interest income 2,784,650 2,658,638 8,039,925 7,878,101
INTEREST EXPENSE
Interest-bearing transaction deposits 10,908 22,082 38,889 66,322
Savings and money market deposits 113,500 167,254 359,771 497,012
Time deposits, $100,000 and over 174,004 175,805 554,444 471,704
Other time deposits 115,390 136,667 368,272 403,613
Other borrowings 29 0 29 0
------------- ------------- ----------- -------------
Total interest expense 413,831 501,808 1,321,405 1,438,651
------------- ------------- ----------- -----------
NET INTEREST INCOME 2,370,819 2,156,830 6,718,520 6,439,450
Provision for loan and lease losses 0 70,000 20,000 205,000
------------- ------------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE
LOSSES 2,370,819 2,086,830 6,698,520 6,234,450
NON-INTEREST INCOME 455,301 383,088 1,296,322 1,164,054
NON-INTEREST EXPENSE
Salaries and employee benefits 914,569 878,696 2,574,209 2,563,429
Premises and equipment 203,696 156,747 568,717 455,961
Other 593,362 400,550 1,638,893 1,195,443
------------- ------------- ----------- ------------
Total non-interest expense 1,711,627 1,435,993 4,781,819 4,214,833
------------- ------------- ----------- ------------
Income before provision
for income taxes 1,114,493 1,033,925 3,213,023 3,183,671
Provision for income taxes 372,151 346,821 1,070,074 1,070,762
------------- ------------- ----------- ------------
NET INCOME $ 742,342 $ 687,104 $ 2,142,949 $ 2,112,909
============= ============= =========== =============
NET INCOME PER SHARE $ .51 $ .47 $ 1.47 $ 1.44
============= ============= =========== =============
NET INCOME PER SHARE-
ASSUMING DILUTION $ .47 $ .43 $ 1.35 $ 1.33
============= ============= =========== =============
Page 4
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2003 (Unaudited), and the
years ended December 31, 2002 (Audited) and 2001 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------- ------------- -------------- -------------
BALANCE AT
JANUARY 1, 2001 1,281,680 $ 9,585,003 $ 4,641,551 $ 78,692 $ 14,305,246
5% stock dividend 63,104 1,381,976 (1,381,976)
Fractional shares (11,955) (11,955)
Redemption and retirement
of stock (27,717) (207,323) (364,085) (571,408)
Stock options exercised and
related tax benefits 16,437 266,229 266,229
Net income for the year $ 2,600,244 2,600,244 2,600,244
Other comprehensive loss,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $57,842 82,706
-------------
Other comprehensive loss,
net of taxes 82,706 82,706 82,706
------------- --------- ------------- ------------- ------------ ------------
Total comprehensive income $ 2,682,950
=============
BALANCE AT
DECEMBER 31, 2001 1,333,504 $ 11,025,885 $ 5,483,779 $ 161,398 $ 16,671,062
5% stock dividend 65,742 1,775,026 (1,775,026)
Fractional shares (13,951) (13,951)
Redemption and retirement
of stock (14,596) (121,257) (223,345) (344,602)
Stock options exercised and
related tax benefits 16,496 256,571 256,571
Net income for the year $ 2,744,333 2,744,333 2,744,333
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $51,125 (73,103)
-------------
Other comprehensive income,
net of taxes (73,103) (73,103) (73,103)
------------- --------- ------------- ------------- ------------ ------------
Total comprehensive income $ 2,671,230
=============
Page 5
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the nine months ended September 30, 2003 (Unaudited), and the years ended
December 31, 2002 (Audited) and 2001 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------- ------------- ------------- -------------
BALANCE AT
DECEMBER 31, 2002 1,401,146 $ 12,936,225 $ 6,215,790 $ 88,295 $ 19,240,310
Stock dividend 68,665 1,997,422 (1,997,422)
Fractional shares (14,193) (14,193)
Redemption and retirement
of stock (38,917) (360,645) (727,728) (1,088,373)
Stock options exercised and
related tax benefits 20,592 377,484 377,484
Net income for the period $ 2,142,949 2,142,949 2,142,949
Other comprehensive income,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $ 31,279 (44,725)
-------------
Other comprehensive income,
net of taxes (44,725) (44,725) (44,725)
------------- --------- ------------- ------------- ------------- -------------
Total comprehensive income $ 2,098,224
=============
BALANCE AT
SEPTEMBER 30, 2003 1,451,486 $ 14,950,486 $ 5,619,396 $ 43,570 $ 20,613,452
========= ============= ============= ============= =============
Page 6
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2003 and 2002
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,142,949 $ 2,112,909
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 20,000 205,000
Depreciation 166,568 108,717
Amortization and other 72,808 31,779
Net change in interest receivable (132,311) 56,516
Net change in other assets (265,799) (5,228)
Net change in cash surrender value of life insurance (257,166) (198,711)
Net change in interest payable and other liabilities 115,201 51,306
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,862,250 2,362,288
INVESTING ACTIVITIES
Purchases of securities held-to-maturity (6,812,829) 0
Purchases of securities available-for sale (10,877,142) (551,947)
Proceeds from maturing securities held-to-maturity 3,083,400 860,000
Proceeds from maturing securities available-for sale 750,000 7,000,000
Net change in loans 6,208,450 (12,609,009)
Purchases of life insurance 0 (2,000,000)
Purchases of premises and equipment (587,113) (288,026)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (8,235,234) (7,588,982)
FINANCING ACTIVITIES
Net change in demand, interest-bearing transaction and savings deposits 14,840,123 7,044,877
Net change in time deposits 742,772 7,823,044
Exercise of stock options 377,484 154,321
Stock repurchases (1,088,373) (329,040)
Fractional shares purchased (14,193) (13,951)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,857,813 14,679,251
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,484,829 9,452,557
Cash and cash equivalents at beginning of period 31,517,599 20,400,662
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $40,002,428 $29,853,219
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,330,180 $ 1,440,953
Income taxes 1,025,000 860,000
Stock dividend 1,997,422 1,788,977
Change in unrealized gains and losses
on securities available-for-sale (76,004) (91,497)
Change in deferred income taxes on
unrealized holding gains and losses on securities 31,279 37,655
Page 7
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Note 1 - Basis of Presentation
In the opinion of Management, the unaudited interim consolidated financial
statements contain all adjustments of a normal recurring nature, which are
necessary to present fairly the financial condition of Sonoma Valley Bancorp and
Subsidiary at September 30, 2003 and results of operations for the three and
nine months then ended.
Certain information and footnote disclosures presented in the Company's annual
financial statements are not included in these interim financial statements.
Accordingly, the accompanying unaudited interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 2002 Annual Report on
Form 10-K. The results of operations for the three and nine months ended
September 30, 2003 are not necessarily indicative of the operating results
through December 31, 2003.
Note 2 - Consolidation
The consolidated financial statements include the accounts of Sonoma Valley
Bancorp and its wholly owned subsidiary Sonoma Valley Bank. All material
intercompany accounts and transactions have been eliminated in consolidation.
Note 3 - Commitments
The Company has no outstanding performance letters of credit at September 30,
2003 and September 30, 2002.
Note 4 - Net Income Per Common Share
Net income per share is calculated by using the weighted average common shares
outstanding. The weighted average number of common shares used in computing the
net income per common share for the period ending September 30, 2003 was
1,459,162 and for the period ending September 30, 2002 was 1,463,612.
Net income per share (diluted) is calculated by using the weighted average
common shares (diluted) outstanding. The weighted average number of common
shares (diluted) used in computing the net income per common share (diluted) for
the period ending September 30, 2003 was 1,591,815 and for the period ending
September 30, 2002 was 1,590,507.
Prior year shares have been adjusted to reflect the 5% stock dividend paid on
July 16, 2003.
Page 8
Note 5 - Stock Option Accounting
The Company has two stock-based employee and director compensation plans. In
December 2002 the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock-Based Compensation, an Amendment of SFAS No. 123 ("SFAS No.
123") in an effort to encourage the recognition of compensation expense for the
issuance of stock options. The Company adopted SFAS No. 148 effective January 1,
2003 using the prospective application method. Under this method, the
compensation expense and related tax benefit associated with stock option grants
issued on or after January 1, 2003 will be recognized in the income statement.
Prior to January 1, 2003, the Company accounted for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income for stock options granted prior to
January 1, 2003, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation on stock options granted prior to January 1, 2003.
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net Income, as reported $ 742,342 $ 687,104 $ 2,142,949 $ 2,112,909
Deduct: Total stock-based
compensation expense determined
under fair value based method for all
awards, net of related tax effects (44,978) (46,480) (134,935) (139,439)
------------ ----------- ----------- -----------
Pro forma net income $ 697,364 $ 640,624 $ 2,008,014 $ 1,973,470
============ =========== =========== ===========
Net income per share:
Basic - As reported .51 .47 1.47 1.44
Basic - Pro forma .48 .44 1.38 1.35
Diluted - As reported .47 .43 1.35 1.33
Diluted - Pro forma .44 .40 1.26 1.34
Page 9
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the nine months ended September 30, 2003 and 2002
(dollars in thousands)
2003 2002
---- ----
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans(2):
Commercial 85,155 4,932 7.74% 73,959 4,406 7.96%
Consumer 11,809 666 7.54% 13,178 817 8.29%
Real estate construction 19,532 1,176 8.05% 18,296 1,265 9.24%
Real estate mortgage 4,154 270 8.69% 5,856 368 8.40%
Tax exempt loans (1) 3,171 199 8.39% 3,420 217 8.48%
Leases 73 17 31.14% 178 20 15.02%
Tax exempt leases (1) 52 8 20.57% 113 11 13.02%
Unearned loan fees (414) (426)
-------- ------ -------- ------
Total loans 123,532 7,268 7.87% 114,574 7,104 8.29%
Investment securities
Available for sale:
Taxable 9,658 237 3.28% 6,743 310 6.15%
Tax exempt(1) 0 0 0.00% 0 0 0.00%
Hold to maturity:
Taxable 388 10 3.45% 202 9 5.96%
Tax exempt (1) 10,147 517 6.80% 11,105 589 7.09%
------ ------ -------- ------
Total investment securities 20,193 764 5.05% 18,050 908 6.73%
Federal funds sold 29,803 244 1.09% 10,444 131 1.68%
Federal Home Loan Bank stock 287 10 4.66% 273 12 5.88%
Total due from banks/Interest bearing 158 0 0.00% 85 1 1.57%
-------- ------ -------- ------
Total interest earning assets 173,973 8,286 6.37% 143,426 8,156 7.60%
====== ===== ====== =====
Noninterest-bearing assets:
Reserve for loan losses (2,781) (2,509)
Cash and due from banks 8,859 7,307
Premises and equipment 1,057 652
Other assets 10,971 9,857
-------- --------
Total assets $192,079 $158,733
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction 29,096 39 0.18% 23,217 66 0.38%
Savings deposits 57,659 360 0.83% 46,748 497 1.42%
Time deposits over $100,000 24,886 554 2.98% 18,690 472 3.38%
Other time deposits 19,843 368 2.48% 17,907 404 3.02%
-------- ------- -------- ------
Total interest bearing Deposits 131,484 1,321 1.34% 106,562 1,439 1.81%
Federal Funds purchased 0 0 0.00% 0 0 0.00%
Other short term borrowings 4 0 0.00% 0 0 0.00%
-------- ------ -------- ------
Total interest bearing liabilities 131,488 $1,321 1.34% 106,562 $1,439 1.81%
====== ======
Non interest bearing liabilities:
Non interest bearing demand deposits 37,395 31,604
Other liabilities 3,236 2,935
Shareholders' equity 19,960 17,632
-------- --------
Total liabilities and shareholders' equity $192,079 $158,733
======== ========
Interest rate spread 5.03% 5.79%
===== =====
Interest income $8,286 6.37% $8,156 7.60%
Interest expense 1,321 1.02% 1,439 1.34%
------ ----- ------ -----
Net interest income/margin $6,965 5.35% $6,717 6.26%
====== ===== ====== =====
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2003 and 2002
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $319,370 and $267,023 for the nine
months ended September 30, 2003 and September 30, 2002, respectively, were
amortized to the appropriate interest income categories.
Page 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the Nine Month Periods
Ended September 30, 2003 and 2002
Forward Looking Statements
With the exception of historical facts stated herein, the matters discussed in
this Form 10-Q are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Sonoma Valley Bancorp's wholly owned
subsidiary, Sonoma Valley Bank (the "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 Sonoma Valley Bancorp's Form 10-K for the year ended
December 31, 2002, 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-Q are cautioned not to put undue reliance on "forward looking"
statements which, by their nature, are uncertain as reliable indicators of
future performance. Sonoma Valley Bancorp disclaims any obligation to publicly
update these "forward looking" statements, whether as a result of new
information, future events, or otherwise.
Overview
Sonoma Valley Bancorp (the "Company") reported net income of $2,142,949 for the
first nine months of 2003 compared with $2,112,909 for the first nine months of
2002. On a per share basis, net income equaled $1.47 compared with $1.44 per
share during the same period in 2002.
Return on average total assets on an annualized basis for the nine-month periods
was 1.49% in 2003 and 1.78% in 2002. Return on average shareholders' equity on
an annualized basis for the same periods was 14.35% and 16.02%, respectively.
RESULTS OF OPERATIONS
Net interest Income
Net interest income is the difference between total interest income and total
interest expense. Net interest income, adjusted to a fully taxable equivalent
basis, as shown on the table- Average Balance, Yields and Rates Paid, on page
10, is higher than net interest income on the statement of
Page 11
income because it reflects adjustments applicable to tax-exempt income from
certain securities and loans ($246,000 in 2003 and $278,000 in 2002, based on a
34% federal income tax rate).
The improvement in net interest income (stated on a fully taxable equivalent
basis) is a result of a $130,000 increase in interest income and a decrease in
interest expense of $117,000.
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin for 2003 decreased to 5.35% from 6.26% for the
same period in 2002. The continuing decline in the net interest margin is the
result of timing differences coming in to play from the 475 basis point drop in
the prime lending rate in 2001, the 50 basis point drop in 2002 and the 25 basis
point drop in 2003.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) increased by $130,000 to $8.3 million in the nine months of 2003, a 1.59%
increase over the $8.2 million realized during the same period in 2002. The
increase in volume of average balance was responsible for a $862,000 increase in
interest income offset by a $732,000 decrease in income related to lower
interest rates. The net effect was a decline in interest income of $130,000.
Interest Expense
Total interest expense decreased by $117,000 to $1.3 million. The average rate
paid on all interest-bearing liabilities decreased from 1.81% in 2002 to 1.34%
in 2003. Average balances increased from $106.6 million to $131.4 million, a
23.39% gain in deposits. The increase in volume of average balances was
responsible for a $333,000 increase in interest expense offset by a $451,000
decrease in expense related to lower interest rates resulting in lower interest
expense of $118,000.
Individual components of interest income and interest expense are provided in
the table-Average Balances, Yields and Rates Paid on page 10.
Provision for Loan Losses
The provision for loan losses charged to operations is based on the Company's
monthly evaluation of the loan portfolio and the adequacy of the allowance for
loan losses in relation to total loans outstanding. The provision to the
allowance for loan losses amounted to $20,000 during the nine months of 2003 and
$205,000 in the same period in 2002. The decrease in the provision is due to
management's evaluation and assessment of the loan portfolio.
Loans charged-off were $44,000 and recoveries were $13,000 for the nine months
of 2003 compared with $21,000 in charge-offs and $14,000 in recoveries for the
same period in 2002. See page 16 for an analysis in the changes in allowance for
loan losses including charge offs and recoveries.
Page 12
Non-interest Income
Non-interest income of $1.3 million increased 11.4% over the $1.2 million
recorded in the comparable period in 2002. Services Charges were up due to
customers carrying lower balances and deposit growth, loan referral income
increased due to loan refinancings and earnings on life insurance increased due
to the purchases of an additional life insurance policies during 2002.
Non-interest Expense
Total non-interest expense increased 13.5% to $4.8 million during the nine
months of 2003 from $4.2 million for the same period in 2002. Non-interest
expense on an annualized basis represented 3.33% of average total assets in 2003
compared with 3.55% in the comparable period in 2002.
Salaries and benefits increased .42% from $2.563 million in 2002 to $2.574
million in 2003. At September 30, 2003 total full time equivalent employees were
47 compared to 46 in 2002.
Expense related to premises and equipment increased 24.7% to $569,000 in 2003
from $456,000 in 2002. The increase in premises and equipment is a reflection of
the remodel of the Operations Center in 2002 and the remodel of the Sonoma
Branch in 2003, as well as the continued investment in technology to better
utilize employees' time and offer a higher level of customer service.
Other operating expenses increased by 37.10% to $1.6 million in 2003 from $1.2
million in 2002. The largest category of other non-interest expense,
professional fees, is primarily comprised of data processing, item processing
and ATM services, as well as accounting, legal and other professional fees.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 33.30% for
the nine months of 2003 compared with 33.63% for the nine months of 2002. Income
taxes reported in the financial statements include deferred taxes resulting from
timing differences in the recognition of items for tax and financial reporting
purposes.
BALANCE SHEET ANALYSIS
Investments
Investment securities were $27.5 million at September 30, 2003, an 99.71%
increase from the $13.7 million at December 31, 2002 and a 82.76% increase from
$15.0 million at September 30, 2002. The increase in investment is the result of
the strong growth in deposits and declining loan demand. The Company purchases
securities rated A or higher by Standard and Poor's and or Moody's Investors
Service. In the event a security is downgraded, the Company will monitor the
investment more closely or sell if appropriate. Local tax-exempt bonds are
occasionally purchased without an A rating.
Page 13
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 September 30,
2003, the Company had securities totaling $13.6 million with a market value of
$14.0 million categorized as held to maturity. Decisions to acquire municipal
securities, which are generally placed in this category, are based on tax
planning needs, pledge requirements and earnings.
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 $13.8 million compared to an amortized cost
of $13.8 million as of September 30, 2003.
Although the quoted market values fluctuate, investment securities are generally
held to maturity, and accordingly, gains and losses to the income statement are
recognized upon sale, or at such time as management determines that a permanent
decline in value exists.
Loans
The Company's loan portfolio was $121.8 million at September 30, 2003, or 69.38%
of total deposits. This compares with $128.1 million, or 80.0% of total
deposits, at December 31, 2002 and $120.1 million, or 78.7% of total deposits,
at September 30, 2002. A comparative schedule of average loan balances is
presented in the table on page 10; period end and year-end balances are
presented in the following table.
September 30, Percentage December 31, Percentage September 30, Percentage
2003 of Total 2002 of Total 2002 of Total
------------ ---------- ------------ ---------- ------------ ----------
Commercial $ 89,465,014 73.2% $ 89,507,230 69.7% $ 81,484,879 67.6%
Consumer 11,096,839 9.1% 13,374,774 10.4% 13,269,622 11.0%
Real estate construction 18,606,701 15.2% 19,507,906 15.2% 20,550,668 17.1%
Real estate mortgage 2,987,397 2.4% 5,911,082 4.6% 4,959,109 4.1%
Leases 71,060 0.1% 174,409 0.1% 226,216 0.2%
------------ ------------ ------------
122,227,011 100.0% 128,475,401 100.0% 120,490,494 100.0%
===== ===== =====
Deferred loan fees
and costs, net (414,889) (424,258) (440,307)
Allowance for loan
and lease losses (2,771,390) (2,781,962) (2,613,969)
------------ ------------ ------------
$119,040,732 $125,269,181 $117,436,218
============ ============ ============
Risk Elements
The majority of the Company's loan activity is with customers located within
Sonoma County. Approximately 83.1% of the total loan portfolio is secured by
real estate located in the Company's service area.
Page 14
Significant concentrations of credit risk may exist if a number of loan
customers are engaged in similar activities and have similar economic
characteristics. The Company believes it has policies in place to identify
problem loans and to monitor concentrations of credits.
Based on its risk management review and a review of its loan portfolio,
management believes that its allowance for losses for the quarter ending
September 30, 2003, is sufficient to absorb losses inherent in the loan
portfolio. This assessment is based upon the best available information and does
involve uncertainty and matters of judgment. Accordingly, the adequacy of the
loan loss reserve cannot be determined with precision and could be susceptible
to significant change in future periods.
Non Performing Assets
Management classifies all loans as non accrual loans when they become more than
90 days past due as to principal or interest, or when the timely collection of
interest or principal becomes uncertain, if earlier, unless they are adequately
secured and in the process of collection.
A loan remains in a non accrual status until both principal and interest have
been current for 6 months and when other criteria are met or when the loan is
determined to be uncollectible and is charged off against the allowance for loan
losses, or, in the case of real estate loans, is transferred to other real
estate owned. A loan is classified as a restructured loan when the interest rate
is materially reduced, when the term is extended beyond the original maturity
date or other concessions are made by the bank because of the inability of the
borrower to repay the loan under the original terms.
There were $1,813,000 of non accrual loans and no loans 90 days or more past due
and still accruing at September 30, 2003. There were $402,000 of non accrual
loans and no loans 90 days or more past due and still accruing at September 30,
2002. Relative to the non accrual loans, 97% of the non accrual loans in 2003
are centered in six(6) real estate secured loans. One of the six, a $105,000
loan, has been subsequently repaid.
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,
Page 15
credit evaluations and current economic conditions. The allowance for loan
losses is not a precise amount, but based on the factors above, represents
management's best estimate of losses that may be ultimately realized from the
current loan portfolio.
Worsening conditions in certain economic sectors and geographic areas could
adversely affect the loan portfolio, necessitating larger provisions for loan
losses than currently estimated. However, as of September 30, 2003 the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At September 30, 2003, the allowance for loan losses was $2.8 million, or 2.28%
of period- end loans, compared with $2.8 million, or 2.17% at December 31, 2002
and $2.6 million, or 2.18% at September 30, 2002.
An analysis of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan categories, is presented below.
For the Nine For the Year For the Nine
Months Ended Ended Months Ended
9/30/03 12/31/02 9/30/02
Balance beginning of year $ 2,781,962 $ 2,415,555 $ 2,415,555
Charge-offs:
Commercial (4,955) (10,741) (10,741)
Consumer (38,675) (34,872) (10,070)
---------------- ---------------- ----------------
Total charge-offs (43,630) (45,613) (20,811)
Recoveries:
Commercial 6,400 9,474 6,914
Consumer 6,658 9,546 7,311
---------------- ---------------- ----------------
Total recoveries 13,058 19,020 14,225
Net (chargeoffs) recoveries (30,572) (26,593) (6,586)
Provision charged to operations 20,000 393,000 205,000
---------------- ---------------- ----------------
Balance end of period $ 2,771,390 $ 2,781,962 $ 2,613,969
================ ================ ================
Ratio of net charge-offs
annualized to average loans 0.03% 0.02% 0.01%
Balance in allowance as a percentage 2.28% 2.17% 2.18%
of loans outstanding at period end
YTD AVG LOANS 123,531,714 116,867,238 114,573,975
PERIOD END LOANS 121,812,123 128,051,143 120,050,186
Page 16
Deposits
A comparative schedule of average deposit balances is presented in the table on
page 10; period end and year-end deposit balances are presented in the following
table.
September 30, Percentage December 31, Percentage September 30, Percentage
2003 of Total 2002 of Total 2002 of Total
------------ ---------- ------------ ---------- ------------ ----------
Interest bearing
transaction deposits $ 28,124,429 16.0% $ 24,627,589 15.4% $ 24,199,502 15.9%
Savings deposits 65,414,882 37.3% 51,802,714 32.4% 50,626,679 33.2%
Time deposits,
$100,000
and over 26,000,588 14.8% 25,018,603 15.6% 23,967,400 15.7%
Other time deposits 19,539,327 11.1% 19,778,540 12.4% 19,824,973 13.0%
------------ ----- ------------ ----- ------------ -----
Total interest bearing
deposits 139,079,226 79.2% 121,227,446 75.8% 118,618,554 77.8%
Demand deposits 36,491,921 20.8% 38,760,806 24.2% 33,904,346 22.2%
------------ ----- ------------ ----- ------------ -----
Total deposits $175,571,147 100.0% $159,988,252 100.0% $152,522,900 100.0%
============ ===== ============ ===== ============ =====
Total deposits increased by $15.6 million, during the nine months of 2003, to
$175.6 million from $160.0 million at December 31, 2002. Savings deposits and
interest bearing transaction accounts showed the largest increase of $13.6
million and $3.5 million respectively, over year end balances. Other time
deposits also increased $982,000 to $26.0 million. Non interest bearing demand
deposits and time deposit greater than $100,000 declined by $2.3 million and
$239,000 respectively.
Risk-Based Capital
The Federal Deposit Insurance Corporation (FDIC) has adopted risk-based capital
guidelines which establish a risk-adjusted ratio relating capital to different
categories of assets and off- balance sheet exposures. Under current guidelines,
as of September 30, 2003, the Bank was required to have minimum Tier I and total
risk-based capital ratios of 4% and 8% respectively. To be well capitalized
under Prompt Corrective Action Provisions requires minimum Tier I and total
risk-based capital ratios should be 6% and 10% respectively.
The FDIC has also adopted new minimum leverage ratio guidelines for compliance
by banking organizations. The guidelines require a minimum leverage ratio of 4%
of Tier 1 capital to total average assets. Banks experiencing high growth rates
are expected to maintain capital positions well above the minimum levels. The
leverage ratio in conjunction with the risk-based capital ratio constitute the
basis for determining the capital adequacy of banking organizations.
Page 17
The table below presents Tier 1 capital, total capital and total risk-weighted
assets at September 30, 2003, along with the related risk-based capital ratio
and leverage ratio.
(dollars in thousands)
Total
Risked-based TIER 1 TOTAL Leverage
Assets Capital Ratio Capital Ratio Ratio
$163,964 $19,606 11.96% $21,664 13.21% 9.93%
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from interest rate
risk inherent in its loan and deposit functions. The goal for managing the
assets and liabilities of the Company is to maximize shareholder value and
earnings while maintaining a high quality balance sheet without exposing the
Company to undue interest rate risk. The Board of Directors has overall
responsibility for the interest rate risk management policies. Sonoma Valley
Bank has an Asset and Liability Management Committee (ALCO) that establishes and
monitors guidelines to control the sensitivity of earnings to changes in
interest rates.
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset/liability management. Sensitivity of earnings to
interest rate changes arises when yields on assets change in a different time
period or in a different amount from that of interest costs on liabilities. To
mitigate interest rate risk, the structure of the balance sheet is managed with
the goal that movements of interest rates on assets and liabilities are
correlated and contribute to earnings even in periods of volatile interest
rates. The asset/liability management policy sets limits on the acceptable
amount of variance in net interest margin and market value of equity under
changing interest environments. The Company uses simulation models to forecast
earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity
of earnings to interest rate changes. Using computer-modeling techniques, the
Company is able to estimate the potential impact of changing interest rates on
earnings. A balance sheet forecast is prepared quarterly using inputs of actual
loans, securities and interest bearing liabilities (i.e. deposits/borrowings)
positions as the beginning base. The forecast balance sheet is processed against
four interest rate scenarios. The scenarios include a 100 and 200 basis point
rising rate forecasts, a flat rate forecast and a 100 basis point falling rate
forecast which take place within a one year time frame. The net interest income
is measured during the year assuming a gradual change in rates over the
twelve-month horizon. The Company's 2003 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from year-end 2002
balances. The following table summarizes the effect on net interest income (NII)
of a +/-100 and +200 basis point change in interest rates as measured against a
constant rate (no change) scenario.
Page 18
Interest Rate Risk Simulation of Net Interest Income as of September 30, 2003
(In thousands)
Variation from a constant rate scenario $ Change in NII
+200bp $ 1,089
+100bp 504
-100bp (384)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
Interest Rate Sensitivity Analysis. Interest rate sensitivity is a function
of the repricing characteristics of the portfolio of assets and liabilities.
These repricing characteristics are the time frames within which the
interest-bearing assets and liabilities are subject to change in interest rates
either at replacement, repricing or maturity. Interest rate sensitivity
management focuses on the maturity of assets and liabilities and their repricing
during periods of changes in market interest rates. Interest rate sensitivity is
measured as the difference between the volumes of assets and liabilities in the
current portfolio that are subject to repricing at various time horizons. The
differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive position. An
asset sensitive position in a rising interest rate environment will cause a
bank's interest rate margin to expand. This results as floating or variable rate
loans reprice more rapidly than fixed rate certificates of deposit that reprice
as they mature over time. Conversely, a declining interest rate environment will
cause the opposite effect. A negative cumulative gap may be equated to a
liability sensitive position. A liability sensitive position in a rising
interest rate environment will cause a bank's interest rate margin to contract,
while a declining interest rate environment will have the opposite effect.
The following table sets forth the dollar amounts of maturing and/or
repricing assets and liabilities for various periods. This does not include the
impact of prepayments or other forms of convexity caused by changing interest
rates. Historically, this has been immaterial and estimates for them are not
included.
The Company has more liabilities than assets repricing during the next
year. However, because the Company's asset rates change more than deposit rates,
the Company's interest income will change more than the cost of funds when rates
change. Its net interest margin should therefore increase somewhat when rates
increase and shrink somewhat when rates fall.
The Company controls its long term interest rate risk by keeping long term
fixed rate assets (longer than 5 years) less than its long term fixed rate
funding, primarily demand deposit accounts and capital. The following table sets
forth cumulative maturity distributions as of September 20, 2003 for the
Company's interest-bearing assets and interest-bearing liabilities, and the
Company's interest rate sensitivity gap as a percentage of total
interest-earning assets. The table shows $62.9 million in fixed rate loans over
5 years. Many variable rate credit lines reached
Page 19
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.
SEPTEMBER 30, 2003 3 months 12 months 3 years 5 years 15 years >15 years Totals
--------- --------- ------- --------- --------- --------- ---------
(in thousands)
ASSETS:
Fixed rate investments $ 946 $ 2,241 $ 10,834 $ 3,765 $ 8,693 $ 976 $ 27,455
Variable rate investments 0 0 0 0 0 292 292
Fixed rate loans 10,737 19,654 10,814 28,320 31,841 2,696 104,062
Variable rate loans 15,136 1,216 0 0 0 0 16,352
Interest-bearing balances due from banks 35 35
Fed funds sold 31,190 31,190
--------- --------- --------- --------- --------- --------- ---------
Interest bearing assets 58,044 23,111 21,648 32,085 40,534 3,964 179,386
--------- --------- --------- --------- -------- --------- ---------
LIABILITIES:
Interest bearing transaction deposits 28,125 28,125
Savings deposits 65,415 65,415
Time Deposits
Fixed rate >100m 5,982 11,569 6,250 2,062 25,863
Fixed rate <100m 5,148 9,293 4,265 926 19,632
Floating rate >100m 0
Floating rate <100m 44 44
Borrowings 0
--------- --------- --------- --------- --------- -------- ---------
Interest Bearing Liabilities $ 104,714 $ 20,862 $ 10,515 $ 2,988 $ 0 0 $ 139,079
--------- --------- --------- --------- --------- -------- ---------
Rate Sensitivity Gap (46,670) 2,249 11,133 29,097 40,534 3,964
--------- --------- --------- --------- --------- --------
Cumulative Rate Sensitivity Gap (46,670) (44,421) (33,288) (4,191) 36,343 40,307
--------- --------- --------- --------- --------- --------
Cumulative Position to Total Assets -23.40% -22.27% -16.69% -2.10% 18.22% 20.21%
======== ========= ========= ========= ========= ========
For the Three Month Periods
Ended September 30, 2003 and 2002
Overview
The Company reported net income of $742,000 for the third quarter of 2003
compared with $687,000 for the third quarter of 2002. On a per share basis, net
income for the three months ended September 30, 2003 equaled $.51 per share
compared with $.47 per share during the same period in 2002.
Return on average total assets on an annualized basis for the three months ended
September 30, 2003 and 2002 was 1.50% and 1.65%, respectively. Return on average
shareholders' equity on an annualized basis for the three months ended September
30, 2003 and 2002 was 14.6% and 15.0%, respectively.
Page 20
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, adjusted to a fully taxable equivalent basis, increased
$210,000 to $2.5 million for the three months ended September 30, 2003, from
$2.2 million during the comparable period of 2002. Net interest income on a
fully taxable equivalent basis, as shown on the table - Average Balances, Yields
and Rates Paid on page 23, is higher than net interest income on the statements
of income because it reflects adjustments applicable to tax-exempt income from
certain securities and loans ($86,000 in 2003 and $90,000 in 2002, based on a
34% federal income tax rate).
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin for the third quarter of 2003 declined to 5.42%
from 5.93% for the comparable period in 2002. The continuing decline in the net
interest margin is the result of timing differences coming into play from the
475 basis point drop in the prime lending rate in 2001, the 50 basis point drop
in 2002 and the 25 basis point drop in 2003.
Interest Income
Interest income for the three months ended September 30, 2003 increased by
$122,000 to $2.9 million, a 4.40% increase over the $2.7 million realized during
the same period in 2002. The gain in volume of average balances was responsible
for a $232,000 increase in interest income offset by a $111,000 decrease in
income related to lower interest rates. The net effect was a decline in interest
income of $121,000.
Interest Expense
Total interest expense for the three months ended September 30, 2003 declined by
$88,000 to $414,000 compared with $502,000 in the same period of 2002. The
average rate paid on all interest-bearing liabilities for the third quarter of
2003 declined to 1.20% from 1.79% in the third quarter of 2002, and average
balances for the third quarter of 2003 increased to $136.4 million from $111.1
million in the same period of 2002, a 22.8% gain.
The gain in volume of average balances accounted for a $99,000 increase in
interest expense offset by a $188,000 decline related to lower interest rates
paid resulting in a $89,000 decrease in interest expense for the third quarter
of 2003.
Individual components of interest income and interest expense are provided in
the table - Average Balances, Yields and Rates Paid on page 23.
Page 21
Provision for Loan Losses
There was no provision for loan losses during the third quarter of 2003 compared
to the $70,000 provision for the third quarter of 2002. The decrease in the
provision is the result of managements' evaluation and assessment of the loan
portfolio.
Non-interest Income
Non-interest income of $455,000 for the third quarter of 2003 represented an
increase of $72,000, or 18.8%, from the $383,000 for the comparable period in
2002.
Non-interest Expense
For the third quarter of 2003, non-interest expense was $1.7 million compared
with $1.4 million for the same period in 2002, representing an increase of
$276,000, or 19.22%. Salaries and benefits increased $36,000, or 4.10%, compared
with the three months ended September 30, 2002.
Premises and equipment expense increased $47,000, or 29.94%, to $204,000 for the
third quarter of 2003 from $157,000 for the third quarter of 2002.
Other operating expenses for the three months ended September 30, 2003 increased
48.25% to $593,000 from $400,000 in the same period in 2002.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 33.39% in
the third quarter of 2002 compared with 33.54% for the comparable period in
2002. Income taxes reported in the financial statements include deferred taxes
resulting from timing differences in the recognition of items for tax and
financial reporting purposes.
Page 22
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the three months ended September 30, 2003 and 2002
(dollars in thousands)
2003 2002
---- ----
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans(2):
Commercial 86,411 1,770 8.13% 77,252 1,539 7.90%
Consumer 11,088 202 7.23% 12,986 269 8.22%
Real estate construction 18,422 381 8.21% 19,667 420 8.47%
Real estate mortgage 3,450 77 8.85% 5,067 108 8.46%
Tax exempt loans (1) 3,148 67 8.44% 3,359 71 8.39%
Leases 50 4 31.74% 149 6 15.98%
Tax exempt leases (1) 31 1 12.80% 96 4 16.53%
Unearned loan fees (412) (418)
-------- ------ --------
Total loans 122,188 2,502 8.12% 118,158 2,417 8.12%
Investment securities
Available for sale:
Taxable 14,266 103 2.86% 4,333 64 5.86%
Tax exempt(1) 0 0 0.00% 0 0 0.00%
Hold to maturity:
Taxable 408 2 1.94% 201 3 5.92%
Tax exempt (1) 11,345 186 6.50% 10,781 191 7.03%
-------- ------ -------- ------
Total investment securities 26,019 291 4.44% 15,315 258 6.68%
Federal funds sold 31,039 74 0.95% 16,639 70 1.67%
Federal Home Loan Bank stock 291 3 4.09% 277 4 5.73%
Total due from banks/Interest bearing 331 0 0.00% 34 0 0.00%
-------- ------ -------- ------
Total interest earning assets 179,868 2,870 6.33% 150,423 2,749 7.25%
====== ======
Noninterest-bearing assets:
Reserve for loan losses (2,773) (2,583)
Cash and due from banks 9,005 7,417
Premises and equipment 1,226 739
Other assets 11,078 10,231
-------- --------
Total assets $198,404 $166,227
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction 29,282 $ 11 0.15% 23,914 22 0.36%
Savings deposits 62,577 114 0.72% 47,864 167 1.38%
Time deposits over $100,000 24,808 173 2.77% 20,651 176 3.38%
Other time deposits 19,735 115 2.31% 18,660 137 2.91%
-------- ------ -------- ------
Total interest bearing Deposits 136,402 413 1.20% 111,089 502 1.79%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other short term borrowings 11 0 0.00% 0 0 0.00%
-------- ------ -------- ------
Total interest bearing liabilities 136,413 $ 413 1.20% 111,089 $ 502 1.79%
====== ======
Non interest bearing liabilities:
Non interest bearing demand deposits 38,268 33,824
Other liabilities 3,349 3,050
Shareholders' equity 20,374 18,264
-------- --------
Total liabilities and shareholders' equity $198,404 $166,227
======== ========
Interest rate spread 5.13% 5.46%
===== =====
Interest income 2,870 6.33% $2,749 7.25%
Interest expense 413 0.91% 502 1.32%
------ ----- ------ -----
Net interest income/margin $2,457 5.42% $2,247 5.93%
====== ===== ====== =====
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2003and 2002
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $130,500 and $76,863 for the nine
months ended September 30, 2003 and September 30, 2002, respectively, were
amortized to the appropriate interest income categories.
Page 23
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on page 18 through 20 under the caption "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations - Market
Risk Management" and is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's Chief Executive Officer along with the Company's Chief Financial
Officer concluded that the Company's disclosure controls and procedures as of
the end of the period covered by this Form 10-Q are effective in timely alerting
them to material information relating to the Company required to be included in
this Form 10-Q.
Part II
Item 1. LEGAL PROCEEDINGS
From time to time the Company may be a party to legal proceedings arising in the
ordinary course of business. The Company is not currently a party to, nor is any
of its properties the subject of, any material pending legal proceedings.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
PAGE 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act
32 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes- Oxley Act
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
July 16, 2003 July 15, 2003 Press Release
announcing results
of second quarter
October 10, 2003 October 9, 2003 Press Release
announcing results
of third quarter
PAGE 25
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SONOMA VALLEY BANCORP
Registrant
Date: November 12, 2003 /s/ Mel Switzer, Jr.
------------------- -------------------------------------
Mel Switzer, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2003 /s/ Mary Quade Dieter
-------------------- --------------------------------------------
Mary Quade Dieter
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 26