U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
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 August 6, 2004 was 2,142,103.
Page 1
INDEX
Part 1 Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2004,
December 31, 2003 and June 30, 2003..................................3
Consolidated Statements of Operations for the
three months and six months ended June 30, 2004 and 2003.............4
Consolidated Statements of Changes in Shareholders Equity
for the six months ended June 30, 2004,
and the years ended December 31, 2003 and 2002.......................5
Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003..............................7
Notes to Consolidated Financial Statements...........................8
Average Balances, Yields and Rates Paid
for the six months ended June 30, 2004 and 2003.....................10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation........................11
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........25
Item 4. Controls and Procedures.............................................25
Part II Other Information
Item 1. Legal Proceedings...................................................26
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of
Equity Securities...................................................26
Item 3. Default Upon Senior Securities......................................26
Item 4. Submission of Matters to a Vote of Security Holders.................27
Item 5. Other Information...................................................27
Item 6. Exhibits and Reports on Form 8-K....................................27
Signatures...................................................................29
Certifications...............................................................30
The information furnished in these interim statements reflects all adjustments
and accruals which are, in the opinion of management, necessary for a fair
statement of the results for such periods. The results of operations in the
interim statements are not necessarily indicative of the results that may be
expected for the full year.
Page 2
Part I
Item 1. The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management,
necessary for a fair statement of the results for such periods. The
results of operations in the interim statements are not necessarily
indicative of the results that may be expected for the full year.
FINANCIAL STATEMENTS
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2004 (Unaudited), December 31, 2003 (Audited)
and June 30, 2003 (Unaudited)
June 30, December 31, June 30,
2004 2003 2003
------------ ------------ ------------
ASSETS
Cash and due from banks $ 11,703,947 $ 9,803,272 $ 9,076,170
Federal funds sold 2,850,000 25,220,000 26,840,000
Interest-bearing due from banks 35,234 330,930 330,719
------------ ------------ ------------
Total cash and cash equivalents 14,589,181 35,354,202 36,246,889
Investment securities available-for-sale, at fair value 24,305,780 20,119,777 14,045,526
Investment securities held-to-maturity (fair value
of $17,754,000, $17,042,000 and $11,803,000,
respectively) 17,724,113 16,558,153 11,165,263
Loans and lease financing receivables, net 139,468,818 119,833,989 119,318,628
Premises and equipment, net 1,365,588 1,313,995 1,117,100
Accrued interest receivable 1,116,202 906,958 908,680
Cash surrender value of life insurance 7,891,610 7,730,600 7,559,156
Other assets 3,681,787 3,288,463 2,629,646
------------ ------------ ------------
Total assets $210,143,079 $205,106,137 $192,990,888
============ ============ ============
LIABILITIES
Noninterest-bearing demand deposits $ 43,813,055 $ 37,947,577 $ 39,193,991
Interest-bearing transaction deposits 32,377,851 32,467,678 29,619,477
Savings and money market deposits 68,092,556 63,680,697 56,662,440
Time deposits, $100,000 and over 24,840,625 26,565,347 24,466,069
Other time deposits 18,555,309 19,453,317 19,833,979
------------ ------------ ------------
Total deposits 187,679,396 180,114,616 169,775,956
Accrued interest payable and other liabilities 3,495,595 3,520,242 3,208,416
------------ ------------ ------------
Total liabilities 191,174,991 183,634,858 172,984,372
Commitments and contingencies (see accompanying notes)
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized; 2,100,719 shares
at June 30, 2004 1,457,594 shares at December 31, 2003 and 1,451,786
shares at June 30, 2003 issued and
outstanding 14,916,010 15,061,636 14,967,466
Retained earnings 4,268,298 6,386,083 4,882,517
Accumulated other comprehensive income (loss) (216,220) 23,560 156,533
------------ ------------ ------------
Total shareholders' equity 18,968,088 21,471,279 20,006,516
------------ ------------ ------------
Total liabilities and shareholders' equity $210,143,079 $205,106,137 $192,990,888
============ ============ ============
Page 3
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
INTEREST INCOME
Loans and leases $ 2,438,882 $ 2,276,001 $ 4,632,055 $ 4,718,704
Taxable securities 223,418 88,392 426,364 141,828
Tax-exempt securities 164,568 109,492 326,034 218,093
Federal funds sold 17,327 93,395 64,568 169,555
Dividends 5,756 7,095 5,756 7,095
------------- ------------- ------------- -------------
Total interest income 2,849,951 2,574,375 5,454,777 5,255,275
INTEREST EXPENSE
Interest-bearing transaction deposits 12,362 15,119 23,957 27,981
Savings and money market deposits 104,599 120,058 203,007 246,271
Time deposits, $100,000 and over 163,004 184,525 333,429 380,440
Other time deposits 97,170 122,480 199,015 252,882
------------- ------------- ------------- -------------
Total interest expense 377,135 442,182 759,408 907,574
------------- ------------- ------------- -------------
NET INTEREST INCOME 2,472,816 2,132,193 4,695,369 4,347,701
Provision for loan and lease losses 30,000 0 30,000 20,000
------------- ------------- ------------- -------------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE
LOSSES 2,442,816 2,132,193 4,665,369 4,327,701
NON-INTEREST INCOME 390,746 436,925 812,112 841,021
NON-INTEREST EXPENSE
Salaries and employee benefits 1,057,762 815,644 2,010,804 1,659,640
Premises and equipment 209,639 183,376 432,109 365,021
Other 555,947 509,675 1,096,385 1,045,531
------------- ------------- ------------- -------------
Total non-interest expense 1,823,348 1,508,695 3,539,298 3,070,192
------------- ------------- ------------- -------------
Income before provision
for income taxes 1,010,214 1,060,423 1,938,183 2,098,530
Provision for income taxes 318,621 353,545 601,020 697,923
------------- ------------- ------------- -------------
NET INCOME $ 691,593 $ 706,878 $ 1,337,163 $ 1,400,607
============= ============= ============= =============
NET INCOME PER SHARE $ .32 $ .32 $ .61 $ .64
============= ============= ============= =============
NET INCOME PER SHARE-
ASSUMING DILUTION $ .29 $ .29 $ .56 $ .58
============= ============= ============= =============
Page 4
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2004(Unaudited), and the years ended
December 31, 2003 (Audited) and 2002 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------- -------------- -------------- -------------
BALANCE AT
JANUARY 1, 2002 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 loss,
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 loss,
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
5% stock dividend 68,665 1,997,422 (1,997,422)
Fractional shares (14,193) (14,193)
Redemption and retirement
of stock (38,987) (361,296) (729,099) (1,090,395)
Stock options exercised and
related tax benefits 26,770 489,285 489,285
Net income for the year $ 2,911,007 2,911,007 2,911,007
Other comprehensive loss,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $45,274 (64,735)
-------------
Other comprehensive loss,
net of taxes (64,735) (64,735) (64,735)
------------- --------- ------------- -------------- -------------- -------------
Total comprehensive income $ 2,846,272
=============
Page 5
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the six months ended June 30, 2004(Unaudited), and the years ended
December 31, 2003 (Audited) and 2002 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
---------------- --------- ------------ ------------ ---------------- ------------
BALANCE AT
DECEMBER 31, 2003 1,457,594 $ 15,061,636 $ 6,386,083 $ 23,560 $ 21,471,279
Redemption and retirement
of stock (601) (6,218) (11,839) (18,057)
Cash dividend of $.25 per
share (371,206) (371,206)
Stock options granted 41,472 41,472
Stock options exercised and
related tax benefits 69,693 1,235,343 1,235,343
Redemption of stock
under tender offer (126,208) (1,416,223) (3,071,903) (4,488,126)
3 for 2 stock split (declared in
July 2004 - shown retroactive
for reporting purposes) 700,241
Net income for the period $ 1,337,163 1,337,163 1,337,163
Other comprehensive loss,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $ 167,693 (239,780)
--------------
Other comprehensive loss,
net of taxes (239,780) (239,780) (239,780)
------------- --------- ------------ ------------- -------------- ------------
Total comprehensive income $ 1,097,383
=============
BALANCE AT
June 30, 2004 2,100,719 $ 14,916,010 $ 4,268,298 $ (216,220) $ 18,968,088
========= ============ ============= ============== ============
Page 6
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2004 and 2003
2004 2003
-------------- -------------
OPERATING ACTIVITIES
Net income $ 1,337,163 $ 1,400,607
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 30,000 20,000
Depreciation 148,763 108,995
Gain on sale of premise and equipment (45) 0
Amortization and other 64,861 41,153
Stock options granted 41,472 0
Net change in interest receivable (209,244) (109,399)
Net change in cash surrender value
of life insurance (161,010) (171,444)
Net change in other assets (225,631) 335,892
Net change in interest payable and other liabilities (24,647) (165,749)
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,001,682 1,460,055
INVESTING ACTIVITIES
Purchases of securities held-to-maturity (1,984,960) (2,766,843)
Purchases of securities available-for-sale (8,154,337) (10,884,142)
Proceeds from maturing securities held-to-maturity 765,000 1,505,000
Proceeds from maturing securities available-for-sale 3,550,000 750,000
Net change in loans and leases (19,664,829) 5,930,553
Purchases of premises and equipment (200,311) (350,398)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (25,689,437) (5,815,830)
FINANCING ACTIVITIES
Net change in demand, interest-bearing
transaction and savings deposits $ 10,187,510 $ 10,284,799
Net change in time deposits (2,622,730) (497,095)
Cash dividend paid (371,206) 0
Stock repurchases (4,506,183) (1,080,123)
Stock options exercised 1,235,343 377,484
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,922,734 9,085,065
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (20,765,021) 4,729,290
Cash and cash equivalents at beginning of period 35,354,202 31,517,599
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,589,181 $ 36,246,889
============= =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 765,148 $ 914,317
Income taxes $ 115,000 $ 280,000
SUPPLEMENTAL DISCLOSURES OF
NONCASH ACTIVITIES:
Net change in unrealized gains and losses on securities available for sale $ (407,473) $ 115,961
Net change in deferred income taxes on unrealized
gains and losses on securities $ 167,693 $ (47,723)
Page 7
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(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 (the "Company") at June 30, 2004 and results of operations for the
three and six months then ended.
Certain information and footnote disclosures presented in the Company's annual
financial statements are not included in these interim financial statements.
Accordingly, the accompanying unaudited interim consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 2003 Annual Report on Form 10-K. The results
of operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the operating results through December 31, 2004.
Note 2 - Consolidation
The consolidated financial statements include the accounts of Sonoma Valley
Bancorp and its wholly owned subsidiary Sonoma Valley Bank. All material
intercompany accounts and transactions have been eliminated in consolidation.
Note 3 - Commitments
The Company has no outstanding performance letters of credit at June 30, 2004
and June 30, 2003.
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 June 30, 2004 was 2,191,136
and for the period ending June 30, 2003 was 2,194,449.
Net income per share (diluted) is calculated by using the weighted average
common shares (diluted) outstanding. The weighted average number of common
shares (diluted) used in computing the net income per common share (diluted) for
the period ending June 30, 2004 was 2,389,336 and for the period ending June 30,
2003 was 2,402,238.
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
Page 8
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation on stock options granted
prior to January 1, 2003.
For the Three Months For the Six Months
Ended June 30 Ended June 30
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Income, as reported $ 691,593 $ 706,878 $ 1,337,163 $ 1,400,607
Deduct: Total stock-based
compensation expense determined
under fair value based method for all
awards, net of related tax effects (31,000) (44,975) (62,000) (89,950)
----------- ----------- ----------- -----------
Pro forma net income $ 660,593 $ 661,903 $ 1,275,163 $ 1,310,657
=========== =========== =========== ===========
Net income per share:
Basic - As reported .32 .32 .61 .64
Basic - Pro forma .30 .30 .58 .60
Diluted - As reported .29 .29 .56 .58
Diluted - Pro forma .28 .28 .53 .55
Note 6 - Employee Benefit Plans
The Bancorp provides retirement plans to its key officers and directors. The
plans are unfunded and provide for the Bancorp to pay the officers and directors
specified amounts for specified periods after retirement. The amount of pension
expense related to this plan, and the components of pension expense for the six
months ended June 30, 2004 and 2003 are as follows:
Directors Officers
------------------------------- ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
Service cost $ 31,604 $ 35,694 $ 92,140 $ 100,811
Interest cost on projected benefit obligation 10,909 6,819 34,552 38,534
Amortization of unrecognized liability at
transition (15,089) (17,901)
------------- ------------- ------------- ------------
Net periodic pension cost recognized $ 42,513 $ 42,513 $ 111,603 $ 121,444
============= ============= ============= ============
Note 7 - Subsequent Event
On July 21, 2004, the Company's Board of Directors declared a 3 for 2 stock
split on outstanding common stock to be distributed on August 26, 2004, to
holders of record on August 6, 2004. As a result of the split, approximately
700,241 shares of common stock will be distributed. The balance sheet and
statement of changes in shareholders' equity have been retroactively adjusted
for financial reporting purposes to present the stock split as of June 30, 2004.
All data with respect to net income per common share and weighted average number
of shares outstanding has also been retroactively adjusted to reflect the stock
split. In addition, the Board of Directors declared a $.25 per share cash
dividend to be distributed on August 26, 2004, to holders of record on August 6,
2004, after reflecting the stock split.
Page 9
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the six months ended June 30, 2004 and 2003
(dollars in thousands)
2004 2003
---- ----
ASSETS Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ----------- ------ -------- ----------- -----
Interest-earning assets:
Loans(2):
Commercial $ 92,696 $ 3,267 7.09% $ 84,518 $ 3,162 7.54%
Consumer 13,307 458 6.92% 12,175 464 7.69%
Real estate construction 18,038 686 7.65% 20,099 795 7.98%
Real estate mortgage 3,353 132 7.92% 4,508 193 8.63%
Tax exempt loans (1) 3,067 128 8.39% 3,182 132 8.37%
Leases 37 5 27.18% 85 13 30.84%
Tax exempt leases (1) 2 0 0.00% 63 7 22.41%
Unearned loan fees (440) (415)
-------- ----------- ------- -----------
Total loans 130,060 4,676 7.23% 124,215 4,766 7.74%
Investment securities
Available for sale:
Taxable 23,574 417 3.56% 7,313 134 3.70%
Hold to maturity:
Taxable 396 5 2.54% 378 8 4.27%
Tax exempt (1) 16,943 494 5.86% 9,544 330 6.97%
-------- ----------- -------- -----------
Total investment securities 40,913 916 4.50% 17,235 472 5.52%
Federal funds sold 14,032 64 0.92% 29,179 170 1.17%
FHLB Stock 495 6 2.44% 285 7 4.95%
Total due from banks/Interest bearing 274 4 2.94% 71 0 0.00%
-------- ----------- -------- -----------
Total interest earning assets 185,774 $ 5,666 6.13% 170,985 $ 5,415 6.39%
=========== ===========
Noninterest-bearing assets:
Reserve for loan losses (2,475) (2,785)
Cash and due from banks 9,530 8,783
Premises and equipment 1,355 972
Other assets 11,863 10,919
-------- --------
Total assets $206,047 $188,874
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction $ 32,935 $ 24 0.15% $ 29,000 $ 28 0.19%
Savings deposits 65,316 203 0.63% 55,168 246 0.90%
Time deposits over $100,000 25,747 333 2.60% 24,930 381 3.08%
Other time deposits 18,904 199 2.12% 19,897 253 2.56%
-------- ----------- -------- -----------
Total interest bearing deposits 142,902 759 1.07% 128,995 908 1.42%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other short term borrowings 0 0 0.00% 0 0 0.00%
-------- ----------- -------- -----------
Total interest bearing
liabilities 142,902 $ 759 1.07% 128,995 $ 908 1.42%
=========== ===========
Non interest bearing liabilities:
Non interest bearing demand deposits 38,154 36,949
Other liabilities 3,397 3,180
Shareholders' equity 21,594 19,750
-------- --------
Total liabilities and
shareholders' equity $206,047 $188,874
======== ========
Interest rate spread 5.06% 4.97%
==== =====
Interest income $ 5,666 6.13% $ 5,415 6.39%
Interest expense 759 0.82% 908 1.07%
----------- ---- ----------- -----
Net interest income/margin $ 4,907 5.31% $ 4,507 5.32%
=========== ==== =========== =====
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2004 and 2003.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $139,809 and $188,870 for the six
months ended June 30, 2004 and 2003, 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
Forward Looking Statements
For the Six Month Periods
Ended June 30, 2004 and 2003
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, liquidity, capital resources, and the
availability of future equity capital on commercially reasonable terms. Factors
that could cause actual results to differ materially include, in addition to the
other factors identified in this Form 10-Q, the following; (i) increased
competition from other banks, savings and loan associations, thrift and loan
associations, finance companies, credit unions, offerors of money market funds,
and other financial institutions; (ii) the risks and uncertainties relating to
general economic and political conditions, both domestically and
internationally, including, but not limited to, inflation, or natural disasters
affecting the primary service area of the Bank or its major industries; or (iii)
changes in the laws and regulations governing the Bank's activities at either
the state or federal level. Readers of this Form 10-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
The Company continues to be profitable, however, net income decreased by $63,444
from $1,400,607 for the six months ended June 30, 2003 to $1,337,163 for the six
months ended June 30, 2004. The decrease in net income is a result expenses
associated with the opening of a new branch, Banco de Sonoma, during the first
quarter and the recognition of expense for stock options granted during January
2004. Additionally, the Company experienced a decline in income associated with
loan referral fees. The Company now originates most of the mortgage loans
previously outsourced to a vendor. The net effect of these items combined to
lower net income. On a per share basis, net income equaled $.61 compared with
$.64 per share during the same period in 2003.
Return on average total assets on an annualized basis for the six-month periods
was 1.31% in 2004 and 1.50% in 2003. Return on average shareholders' equity on
an annualized basis for the same periods was 12.45% and 14.30%, respectively.
The decline in the return on average assets in 2004 is the result of the
increase in average assets and lower income during the period and the lower
return on equity is the result of the decrease in income for the six month
period of 2004.
Page 11
Income for the six month period ending June 30, 2004 is lower than 2003 due to
the decline in interest rates on loans, the significant decline in loan referral
income, the increase in operating expense due to the new Banco de Sonoma Branch
and the expensing of stock options. The Company has experienced pressure to
refinance loans for customers and many of the loans are tied to the prime
lending rate and have repriced accordingly.
The most significant event affecting the Company's growth is the opening of the
Banco de Sonoma branch in Boyes Hot Springs. Initially, this will have a
negative effect on the Income Statement by creating in excess of $200,000 in
additional expense for the Company. The branch is offering services to the
Latino community in our market place. Management identified this as a niche
which was under served and an opportunity for future growth and profitability.
All employees at the branch are bilingual and able to offer full service
banking. An additional product which has been added is the ability for the
customer to effect an immediate transfer of funds to Mexico. Management
anticipates that the growth in the branch will be slow and steady and profitable
within three or four years.
Total shareholders' equity declined by $2.5 Million or 11.66% for the six months
ended June 30, 2004. On May 21, 2004, the Company closed the tender offer to
purchase 100,000 shares of stock at $35.00 per share. The Company exercised its
right to purchase an additional number of shares up to 2% of the outstanding
shares or approximately 29,696 shares. In total the Company purchased 126,208
shares of stock at the conclusion of the tender offer for $4,488,126 including
expenses associated with the offering, lowering equity. In addition to the
tender offer, the Company repurchased and retired 601 shares of stock for
$18,000. For the six months ending June 30, 2004 the Company reported net income
of $1,337,000 and paid out $371,000 in cash dividends in March, 2004. The
directors and officers exercised 69,693 options which added $841,000 to the
capital accounts. The tax benefit on these options exercised was $395,000, which
also increases equity. See page 6 for detail of "Changes in Shareholder Equity."
RESULTS OF OPERATIONS
Net interest Income
Net interest income is the difference between total interest income and total
interest expense. Net interest income, adjusted to a fully taxable equivalent
basis, as shown on the table- Average Balance, Yields and Rates Paid, on page
10, is higher than net interest income on the statement of income because it
reflects adjustments applicable to tax-exempt income from certain securities and
loans ($211,000 in 2004 and $160,000 in 2003, based on a 34% federal income tax
rate).
The improvement in net interest income for the six months ended June 30, 2004
(stated on a fully taxable equivalent basis) is a result of the net effect of a
$251,000 increase in interest income offset by a decline in interest expense of
$149,000, resulting in an increase of $400,000. The increase in interest income
is a result of the growth in the loan portfolio offset by the low rates paid on
deposit accounts which was a result of the decline in the fed funds rate and the
prime lending rate in June 2003.
Page 12
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 2004 declined to 5.31% from 5.32% for the same
period in 2003.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) increased by $251,000 to $5.7 million in the six months of 2004, a 4.6%
increase over the $5.4 million realized during the same period in 2003.
The $251,000 increase was the net effect of the growth in the loan portfolio
offset by the 25 basis point decline in the prime lending rate in June, 2003 and
higher yielding loans refinancing at lower interest rates. Average earning
assets grew 8.65% from $171.0 in 2003 to $185.8 in 2004.
Interest Expense
Total interest expense declined by $148,000 to $759,000. The average rate paid
on all interest- bearing liabilities declined from 1.42% in 2003 to 1.07% in
2004. Average balances of earning liabilities increased from $129.0 million to
$142.9 million, a 10.8% gain in deposits. The increase in volume of average
balances was responsible for a $49,000 increase in interest expense which was
more than offset by a $197,000 decrease in expense related to lower interest
rates.
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. Due to managements'
evaluation and assessment of the loan portfolio as a result of loan growth, a
provision of $30,000 was made in 2004 compared to $20,000 during the same period
of 2003. Management anticipates that loan growth will increase in the third
quarter which could necessitate an additional provision to the reserve for loan
losses. The provision for loan losses at year end 2003 was $20,000.
The economic climate continues to slowly improve and the non-accrual portfolio
dropped to below 1% of total loans during the first six months of 2004, down
over half from the level in the first six months of 2003. Loans charged-off were
$290,604 (one loan represented over 92.9% of this figure) and recoveries were
$12,041 for the six months of 2004 compared with $38,249 in charge-offs and
$9,418 in recoveries for the same period in 2003.
Non-interest Income
Non-interest income of $812,000 decreased 3.4% from the $841,000 recorded in the
comparable period in 2003. The Company has experienced a decline in loan
referral income which is a result of the decline in loan refinancings and new
purchase loans, offset by an increase in service charge income.
Page 13
Non-interest Expense
Total non-interest expense increased 15.3% to $3.5 million during the first six
months of 2004 from $3.1 million for the same period in 2003. Non-interest
expense on an annualized basis represented 3.45% of average total assets in 2004
compared with 3.28% in the comparable period in 2003. The increase in the 2004
expense ratio largely reflects expenses incurred with the opening of our new
branch, Banco de Sonoma and the expensing of stock options.
Salaries and benefits increased 21.2% from $1.7 million in 2003 to $2.0 million
in 2004. The 2004 increase is largely the result of the additional staffing and
benefits required for the Banco de Sonoma branch which opened during the first
quarter; and the effect of a 64.9% increase in the cost of Workers Compensation
insurance when comparing the six months ended June 30, 2004 with the same period
of 2003. Additionally, the Company began expensing stock options awarded in
2004. At June 30, 2004, total full time equivalent employees were 56 compared to
48 in 2003.
Expense related to premises and equipment increased 18.4% to $432,000 in 2004
from $365,000 in 2003. The increase in expense in 2004 is a result of a remodel
of the Sonoma Branch and the opening of the Banco de Sonoma branch. The bank
continues to emphasize security in its computer operations and equipment and
software are monitored and upgraded as appropriate to ensure confidentiality of
customer and company data. The company continues to emphasize the utilization of
technology to generate efficiencies throughout the organization.
Other operating expenses increased by 4.9% in 2004 to $1.1 million from $1.0
million in 2003. The bank continues to utilize professional assistance where
appropriate and bank insurance expense showed a large increase in 2004 due to
increases in premiums and additional coverages purchased.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 31.01% for
the six months of 2004 compared with 33.26% for the six months of 2003. The
lower effective tax rate is a reflection of the increase of municipal securities
in the investment portfolio. 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 $42.0 million at June 30, 2004, a 14.6% increase from
the $36.7 million at December 31, 2003 and a 66.7% increase from $16.8 million
at June 30, 2003. The significant increase in the portfolio is management's
attempt to generate higher earnings by moving funds from Fed Funds Sold to
higher yielding investments. The Company will usually maintain an investment
portfolio of securities rated A or higher by Standard and Poor's and or Moody's
Investors Service. Local tax-exempt bonds are occasionally purchased without an
A rating.
Page 14
Securities are classified as held to maturity, if the Company has both the
intent and the ability to hold these securities to maturity. As of June 30,
2004, the Company had securities totaling $17.7 million with a market value of
$17.7 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 $24.3 million compared to an amortized cost
of $24.7 million as of June 30, 2004.
Although the quoted market values fluctuate, investment securities are generally
held to maturity, and accordingly, gains and losses are recognized in the
accounts upon sale, or at such time as management determines that a permanent
decline in value exists.
Loans
The Company's loan portfolio was $141.9 million at June 30, 2004, or 75.6% of
total deposits. This compares with $122.5 million, or 68.0% of total deposits,
at December 31, 2003 and $122.1 million, or 71.9% of total deposits, at June 30,
2003. A comparative schedule of average loan balances is presented in the table
on page 10; period-end and year-end balances are presented in the following
table.
June 30, Percentage December 31, Percentage June 30, Percentage
2004 of Total 2003 of Total 2003 of Total
------------ ---------- ------------ ---------- ------------ ----------
Commercial $101,715,639 71.4% $ 92,197,984 75.0% $ 89,840,964 73.3%
Consumer 14,327,942 10.1% 11,750,131 9.6% 11,359,551 9.3%
Real estate construction 20,742,197 14.6% 16,646,907 13.5% 17,448,570 14.2%
Real estate mortgage 5,526,690 3.9% 2,231,244 1.8% 3,748,583 3.1%
Leases 27,790 0.0% 79,884 0.1% 93,277 0.1%
------------ ---------- ------------ --------- ----------- ----------
142,340,258 100.0% 122,906,150 100.0% 122,490,945 100.0%
========== ========= ==========
Deferred loan fees
and costs, net (485,378) (437,536) (399,186)
Allowance for loan
and lease losses (2,386,062) (2,634,625) (2,773,131)
------------ ------------ ------------
$139,468,818 100.0% $119,833,989 100.0% $119,318,628 100.0%
============ ========== ============ ========= ============ ==========
Page 15
Risk Elements
The majority of the Company's loan activity is with customers located within
Sonoma County. Approximately 87% of the total loan portfolio is secured by real
estate located in the Company's service area.
Significant concentrations of credit risk may exist if a number of loan
customers are engaged in similar activities and have similar economic
characteristics. The Company believes it has policies in place to identify
problem loans and to monitor concentrations of credits.
Non Performing Assets
There were $1.1 million nonaccrual loans and no loans 90 days or more past due
and still accruing at June 30, 2004 down from $3.1 million nonaccrual loans and
no loans 90 days or more past due and still accruing at June 30, 2003.
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 allowance for loan losses is
not a precise amount, but based on the factors above, represents management's
best estimate of losses that may be ultimately realized from the current loan
portfolio.
Worsening conditions in certain economic sectors and geographic areas could
adversely affect the loan portfolio, necessitating larger provisions for loan
losses than currently estimated. However, as of June 30, 2004 the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At June 30, 2004, the allowance for loan losses was $2.4 million, or 1.68% of
period-end loans, compared with $2.6 million, or 2.15% at December 31, 2003 and
$2.8 million, or 2.27% at June 30, 2003.
Page 16
An analysis of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan categories, is presented below.
For the Six Months For the Year For the Six Months
Ended Ended Ended
6/30/04 12/31/03 6/30/03
Balance beginning of year $ 2,634,625 $ 2,781,962 $ 2,781,962
Charge-offs:
Commercial (290,000) (142,572) (4,955)
Consumer (604) (41,161) (33,294)
--------------- --------------- ---------------
Total charge-offs (290,604) (183,733) (38,249)
Recoveries:
Commercial 10,695 8,320 4,480
Consumer 1,346 8,076 4,938
--------------- --------------- ---------------
Total recoveries 12,041 16,396 9,418
Net charge-offs (278,563) (167,337) (28,831)
Provision charged to operations 30,000 20,000 20,000
--------------- --------------- ---------------
Balance end of period $ 2,386,062 $ 2,634,625 $ 2,773,131
=============== =============== ===============
Ratio of net charge-offs
annualized to average loans 0.43% 0.14% 0.05%
Balance in allowance as a percentage 1.68% 2.15% 2.27%
of loans outstanding at period end
Deposits
A comparative schedule of average deposit balances is presented in the table on
page 10; period end and year-end deposit balances are presented in the following
table.
June 30, Percentage December 31, Percentage June 30, Percentage
2004 of Total 2003 of Total 2003 of Total
------------ ---------- ------------ ---------- ------------ ----------
Interest bearing
transaction deposits $ 32,377,851 17.3% $ 32,467,678 18.0% $ 29,619,477 17.4%
Savings deposits 68,092,556 36.3% 63,680,697 35.4% 56,662,440 33.4%
Time deposits,
$100,000 and over 24,840,625 13.2% 26,565,347 14.7% 24,466,069 14.4%
Other time deposits 18,555,309 9.9% 19,453,317 10.8% 19,833,979 11.7%
------------ ---------- ------------ ---------- ------------ ----------
Total interest bearing
deposits 143,866,341 76.7% 142,167,039 78.9% 130,581,965 76.9%
Demand deposits 43,813,055 23.3% 37,947,577 21.1% 39,193,991 23.1%
------------ ---------- ------------ ---------- ------------ ----------
Total deposits $187,679,396 100.0% $180,114,616 100.0% $169,775,956 100.0%
============ ========== ============ ========== ============ ==========
PAGE 17
Total deposits increased by $7.6 million, during the six months of 2004, to
$187.7 million from $180.1 million at December 31, 2003. Non interest bearing
demand deposits showed the greatest increase of $5.9 million or 15.5% to $43.8
million at June 30, 2004 from $37.9 million as of December 31, 2003 and an
increase of $4.6 million or 11.8% increase from $39.2 million as of June 30,
2003. Savings deposits increased $4.4 million or 6.9% to $68.1 million from
$63.7 million as of December 31, 2003 or $11.4 million and 20.2% from $56.7
million as of June 30, 2003.
When comparing December 31, 2003, the Company showed declines in all other
categories of deposits. Time deposits greater than $100,000, other time deposits
and interest bearing checking declined by 6.5%, 4.6% and .28% to $24.8 million,
$18.6 million and $32.4 million, respectively. Of those three, interest bearing
checking and time deposits greater than $100,000 show increases over June 30,
2003 of 9.3% and 1.5% from $29.6 million and $24.5 million, respectively. Only
the category of other time deposits declined by 6.4% from $19.8 million at June
30, 2003 to $18.6 million as of June 30, 2004. Customers may be allowing funds
to accumulate in savings accounts rather than time deposits to more readily take
advantage of future interest rate increases.
With the future of interest rates uncertain the Company cannot predict how
quickly rates may change on deposit accounts which could cause the net interest
margin to decline, resulting in lower net income.
Risk-Based Capital
The Federal Deposit Insurance Corporation (FDIC) has adopted risk-based capital
guidelines which establish a risk-adjusted ratio relating capital to different
categories of assets and off- balance sheet exposures. Under current guidelines,
as of June 30, 2004, the Company was required to have minimum Tier I and total
risk-based capital ratios of 4% and 8% respectively. To be well capitalized
under Prompt Corrective Action Provisions requires minimum Tier I and total
risk-based capital ratios should be 6% and 10% respectively.
The FDIC has also adopted minimum leverage ratio guidelines for compliance by
banking organizations. The guidelines require a minimum leverage ratio of 4% of
Tier 1 capital to total average assets. Banks experiencing high growth rates are
expected to maintain capital positions well above the minimum levels. The
leverage ratio in conjunction with the risk-based capital ratio constitute the
basis for determining the capital adequacy of banking organizations.
The table below presents Tier 1 capital, total capital and total risk-weighted
assets at June 30, 2004, 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
------------ --------- ----- -------- ----- --------
$181,316 $ 17,384 9.59% $ 19,652 10.84% 8.37%
Page 18
Off Balance Sheet Commitments
The Company's off balance sheet commitments consist of commitments to extend
credit of $34.2 million and standby letters of credit of $410,000. These
commitments are extended to customers in the normal course of business. The
Company also has contractual obligations consisting of operating leases for
various facilities and payments to participants under the Company's supplemental
executive retirement plan and deferred compensation plan.
The following table summarizes the Company's contractual obligations as of June
30, 2004.
Payments due by period
Contractual Obligations
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Operating Lease Obligations 1,550,371 302,802 871,413 376,156 -
Executive Officer and
Director Supplemental
Retirement 1,879,336 5,450 31,949 202,216 1,639,721
Deferred Compensation 1,065,051 13,846 18,106 114,599 918,500
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, investment 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. When interest rates increase the market value of securities held in the
investment portfolio declines. This decline is offset by an increase in
earnings. When interest rates decline, the market value of securities increases
while earnings decrease due to the bank's asset sensitivity caused by the
variable rate loans. The Company is able to mitigate it's risk from changes in
interest rates with this balance sheet structure. The asset/liability management
policy sets limits on the acceptable amount of variance in net interest margin
and market value of equity under
Page 19
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 2004 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from year-end 2003
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 June 30, 2004
(In thousands)
Variation from a constant rate scenario $ Change in NII
+200bp $ 382
+100bp 178
-100bp (118)
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 20
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 subject to repricing during
the next year. However, because the Company's asset rates change more quickly
than deposit rates, the Company's interest income will change more than the cost
of funds when rates change. Its net interest margin should therefore increase
somewhat when rates increase and shrink somewhat when rates fall.
The Company controls its long term interest rate risk by keeping long term
fixed rate assets (longer than 5 years) less than its long term fixed rate
funding, primarily demand deposit accounts and capital. The following table sets
forth cumulative maturity distributions as of June 30, 2004 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 $81.5 million in fixed rate loans over 5 years. Many variable
rate credit lines reached floors in 2003, 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.
June 30, 2004 3 months 12 months 3 years 5 years 15 years >15 years Totals
---------- ---------- ---------- ---------- -------- --------- ---------
(in thousands)
ASSETS:
Fixed rate investments $ 1,250 $ 2,355 $ 15,682 $ 6,195 $ 15,571 $ 977 $ 42,030
Variable rate investments 0 0 0 0 0 697 697
Fixed rate loans 11,540 19,156 18,672 31,745 47,101 2,695 130,909
Variable rate loans 9,377 995 0 0 0 0 10,372
Interest-bearing balances due
from banks 35 35
Fed funds sold 2,850 2,850
---------- ---------- ---------- ---------- ---------- --------- ----------
Interest bearing assets 25,052 22,506 34,354 37,940 62,672 4,369 186,893
---------- ---------- ---------- ---------- ---------- --------- ----------
LIABILITIES:
Interest bearing transaction
deposits 32,378 32,378
Savings deposits 68,093 68,093
Time Deposits 0
Fixed rate >100m 9,368 7,284 6,532 1,757 24,941
Fixed rate <100m 5,661 7,660 4,070 1,040 18,431
Floating rate >100m 0
Floating rate <100m 23 23
Borrowings 0 0
---------- ---------- ---------- ---------- ---------- --------- ---------
Interest Bearing Liabilities $ 115,523 $ 14,944 $ 10,602 $ 2,797 $ 0 $ 0 $ 143,86
---------- ---------- ---------- ---------- ---------- --------- ---------
Rate Sensitivity Gap (90,471) 7,562 23,752 35,143 62,672 4,369
---------- ---------- ---------- ---------- ----------- ---------
Cumulative Rate Sensitivity Gap (90,471) (82,909) (59,157) (24,014) 38,658 43,027
---------- ---------- ---------- ---------- ----------- ---------
Cumulative Position to
Total Assets -43.14% -39.53% -28.21% -11.45% 18.43% 20.52%
========== ========== ========== ========== =========== =========
Page 21
For the Three Month Periods
Ended June 30, 2004 and 2003
Overview
The Company reported net income of $692,000 for the second quarter of 2004
compared with $707,000 for the second quarter of 2003. On a per share basis, net
income for the three months ended June 30, 2004 equaled $.32 per share compared
with $.32 per share during the same period in 2003.
Return on average total assets on an annualized basis for the three months ended
June 30, 2004 and 2003 was 1.33% and 1.46%, respectively. The decline in the
return on assets is because assets are growing faster than earnings. Return on
average shareholders' equity on an annualized basis for the three months ended
June 30, 2004 and 2003 was 13.2% and 14.2%, respectively. The decline in the
return on equity is a result of the growth in the equity accounts. The Company
began steps to mitigate the decline through the tender offer completed in May,
2004 and through the payment of cash dividends.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, adjusted to a fully taxable equivalent basis, increased
$367,000 to $3.0 million for the three months ended June 30, 2004, up 16.6% from
the $2.2 million in the comparable period of 2003. Net interest income on a
fully taxable equivalent basis, as shown on the table Average Balances, Yields
and Rates Paid on page 24, 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 ($107,000 in 2004 and $80,000 in 2003, based on a
34% federal income tax rate).
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin for the second quarter of 2004 increased to 5.47%
from 5.08% for the comparable period in 2003. This variance is the result of a
higher loan to deposit ratio and management's efforts to hold existing loan
rates steady and the ability to lower interest rates paid on deposits.
Interest Income
Interest income for the three months ended June 30, 2004 increased by $302,000
to $3.0 million, an 11.4% increase from the $2.7 million realized during the
same period in 2003.
Interest Expense
Total interest expense for the three months ended June 30, 2004 declined by
$65,000 to $377,000 compared with $442,000 in the same period of 2003. The
average rate paid on all interest-bearing liabilities for the second quarter of
2004 declined to 1.04% from 1.35% in the second quarter of 2003, and average
balances for the second quarter of 2004 increased to $144.9 million from $131.7
million in the same period of 2003, a 10.0% gain.
Page 22
The gain in volume of average balances was responsible for a $23,000 increase in
interest expense offset by a $93,000 decline related to lower interest rates
paid.
Individual components of interest income and interest expense are provided in
the table Average Balances, Yields and Rates Paid on page 24.
Provision for Loan Losses
The provision for loan losses was $30,000 during the second quarter of 2004 and
there was no provision for the second quarter of 2003. The increase in the
provision is the result of managements' evaluation and assessment of the loan
portfolio as a result of the growth in loans.
Non-interest Income
Non-interest income of $391,000 for the second quarter of 2004 represented a
decrease of $46,000, or 10.6%, from the $437,000 for the comparable period in
2003. Although service charge income is still growing, there was no income
received for loan referral fees during the second quarter of 2004. The Company
now originates most of the mortgage loans previously outsourced to a vendor.
Non-interest Expense
For the second quarter of 2004, non-interest expense was $1.8 million compared
with $1.5 million for the same period in 2003, representing an increase of
$315,000, or 20.9%. The largest increase of non interest expense was salaries
and benefits, which increased $242,000, or 29.7%, compared with the three months
ended June 30, 2003. The increase is largely a result of additional salary and
benefit costs associated with our new branch, Banco de Sonoma. The full time
equivalent employees at June 30, 2004 was 56 compared with 48 at June 30, 2003.
Premises and equipment expense increased $26,000, or 14.3%, to $210,000 for the
second quarter of 2004 from $183,000 for the second quarter of 2003. The
increase is tied to depreciation expense for the remodel of the Sonoma Branch
and the premises and equipment for the new branch, Banco de Sonoma.
Other non interest expense for the three months ended June 30, 2004 increased by
9.08% to $556,000 compared to $510,000 in the same period in 2003. The increase
is a result of higher insurance premiums and the overall increase in the cost of
doing business.
Provision for Income Taxes
The provision for income taxes decreased to an effective tax rate of 31.5% in
the second quarter of 2004 compared with 33.3% for the comparable period in
2003. 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 23
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the three months ended June 30, 2004 and 2003
(dollars in thousands)
2004 2003
---- ----
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans(2):
Commercial 97,231 1,718 7.03% 83,074 1,530 7.39%
Consumer 14,341 243 6.74% 11,943 226 7.59%
Real estate construction 18,944 352 7.39% 19,797 384 7.78%
Real estate mortgage 4,474 82 7.29% 3,736 83 8.91%
Tax exempt loans (1) 3,065 64 8.31% 3,180 66 8.32%
Leases 32 2 24.86% 73 7 38.46%
Tax exempt leases (1) 0.00 % 63 4 25.47%
Unearned loan fees (466) (406)
-------- ------- -------- -------
Total loans 137,621 2,461 7.11% 121,460 2,300 7.60%
Investment securities
Available for sale:
Taxable 23,951 217 3.60% 10,918 84 3.09%
Tax exempt(1) 0 0 0.00% 0 0 0.00%
Hold to maturity:
Taxable 393 2 2.02% 549 5 3.65%
Tax exempt (1) 17,133 249 5.78% 9,624 165 6.88%
------- ------- -------- -------
Total investment securities 41,477 468 4.49% 21,091 254 4.83%
Federal funds sold 7,566 17 0.89% 1,945 93 1.17%
FHLB Stock 695 6 3.43% 288 7 9.75%
Total due from banks/Interest bearing 216 4 7.37% 107 0 0.37%
-------- ------- -------- -------
Total interest earning assets 187,575 2,956 6.27% 174,891 2,654 6.09%
======= =======
Non interest-bearing assets:
Reserve for loan losses (2,375) (2,772)
Cash and due from banks 9,841 8,902
Premises and equipment 1,379 1,039
Other assets 11,984 11,007
-------- --------
Total assets $208,404 $193,067
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction 33,745 $ 12 0.14% 31,119 15 0.19%
Savings deposits 67,280 105 0.62% 56,231 120 0.86%
Time deposits over $100,000 25,153 163 2.58% 24,514 185 3.03%
Other time deposits 18,714 97 2.06% 19,823 122 2.47%
------- ------- -------- -------
Total interest bearing Deposits 144,892 377 1.04% 131,687 442 1.35%
Other short term borrowings 0 0 0.00% 0 0 0.00%
------- ------- -------- -------
Total interest bearing liabilities 144,892 $ 377 1.04% 131,687 $ 442 1.35%
======= =======
Non interest bearing liabilities:
Non interest bearing demand deposits 39,151 38,258
Other liabilities 3,420 3,185
Shareholders' equity 20,941 19,937
-------- --------
Total liabilities and shareholders' equity $208,404 $193,067
======== ========
Interest rate spread 5.23% 4.47%
==== ====
Interest income $ 2,956 6.27% $ 2,654 6.09%
Interest expense 377 0.80% 442 1.01%
------- ---- ------- ----
Net interest income/margin $ 2,579 5.47% $ 2,212 5.08%
======= ==== ======= =====
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2004 and 2003.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $69,465 and $87,889 for the three
months ended June 30, 2004 and June 30, 2003, respectively, were amortized
to the appropriate interest income categories.
Page 24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures about Market
Risk appears on page 14 under "Investments" and on pages 19 through 21 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 are
effective in timely alerting them to material information relating to the
Company required to be included in this Form 10-Q.
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 25
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 AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following chart summarizes the Company repurchases of the Company's common
shares as part of the Company's tender offer expiring May 21, 2004 and the
Company's publicly announced repurchase plan.
(a) (b) (c) (d)
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
Purchased as Part that May Yet be
Total Number of of Publicly Purchased Under
Shares (or Units) Average Price paid Announced Plans or the Plans or
Period Purchased per Share (or Unit) Programs Programs
Month #1: 189 $29.375 81,489 $540,067
1/1/04 - 1/31/04
Month #2: 383 $30.00 81,872 $534,515
2/1/04 - 2/29/04
Month #3: 0 0 81,872 $534,515
3/1/04 - 3/31/04
Month #4: 0 0 81,872 $534,515
4/1/04 - 4/30/04
Month #5: 126,208(1) $35.00 126,208 0
5/1/04 - 5/31/04
Month #6: 29 $35.00 81,901 $533,500
6/1/04 - 6/30/04
Total 126,809 $34.977 208,109 $533,500
(1) The Company purchased 126,208 shares of common stock at $35 per share
through a tender offer, which expired on May 21, 2004.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Page 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held the annual meeting of shareholders on June 24, 2004. The
following table sets forth the proposals and outcome from the voting.
Proposal Number 1 Election of Directors; and
Nominees Shares Voted For Shares Withholding Abstentions and Broker
Authority/Voted Against Non-Votes
Suzanne Brangham 1,051,441 48,221 277,487
Dale T. Downing 1,095,702 3,960 277,487
Fred H. Harland 1,080,240 19,422 277,487
Robert B. Hitchcock 1,096,978 2,684 277,487
Gerald J. Marino 1,049,459 50,202 277,487
Gary D. Nelson 1,075,623 24,039 277,487
Robert J. Nicholas 1,095,702 3,960 277,487
Angelo C. Sangiacomo 1,097,007 2,655 277,487
J. Robert Stone 1,095,652 4,010 277,487
Mel Switzer, Jr. 1,061,193 38,469 277,487
Harry Weise 1,097,007 2,655 277,487
Proposal Number 2 Ratification of Richardson and Company
Total shares voted: For Against Withheld Abstain/Broker Non-Votes
--------- -------- -------- ------------------------
1,089,185 1,407 9,070 277,487
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act
32 Certification of CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act
Page 27
(b) Reports on Form 8-K
Date of Report Date of Event Item Reported
July 23, 2004 July 21, 2004 Press Release
announcing 3 for 2 stock split
and a 25 cent cash dividend
July 16, 2004 July 15, 2004 Press Release
announcing results
Of second quarter
April 16, 2004 April 15, 2004 Press Release
announcing results
of first quarter
Page 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONOMA VALLEY BANCORP
Date: August 5, 2004 /s/ Mel Switzer, Jr.
------------------------ ----------------------------------------
Mel Switzer, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 2004 /s/ Mary Quade Dieter
----------------------- ----------------------------------------
Mary Quade Dieter
Executive Vice President
Chief Operating Officer and Chief
Financial Officer
(Principal Financial Accounting Officer)
Page 29