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UNITED STATES
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: March 31, 2005
Commission File Number: 000-31929
SONOMA VALLEY BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0454068
(State of Incorporation) (I.R.S. Employer Identification No.)
202 West Napa Street Sonoma, California 95476
(Address of principal executive offices) (Zip Code)
(707)935-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
The number of shares outstanding of the registrant's Common Stock, no par value,
as of May 2, 2005 was 2,156,003.
INDEX
Part I Financial Information Page Number
-----------
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at March 31, 2005,
December 31, 2004 and March 31, 2004.....................................3
Consolidated Statements of Operations for the
three months ended March 31, 2005 and 2004...............................4
Consolidated Statements of Changes in Shareholders Equity
for the three months ended March 31, 2005,
and the years ended December 31, 2004 and 2003...........................5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004...............................7
Notes to Consolidated Financial Statements...............................8
Average Balances, Yields and Rates Paid
for the three months ended March 31, 2005 and 2004......................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...........23
Item 4. Controls and Procedures.............................................23
Part II Other Information
Item 1. Legal Proceedings...................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........24
Item 3. Defaults Upon Senior Securities.....................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits............................................................24
Signatures...................................................................25
Certifications...............................................................26
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
March 31, 2005 (Unaudited), December 31, 2004 (Audited)
and March 31, 2004 (Unaudited)
March 31, December 31, March 31,
2005 2004 2004
----------- ------------ ------------
ASSETS
Cash and due from banks $ 5,921,096 $ 5,471,669 $ 8,023,673
Federal funds sold 0 9,840,000 $ 13,135,000
Interest-bearing due from banks 28,491 35,551 330,923
------------ ------------ ------------
Total cash and cash equivalents 5,949,587 15,347,220 21,489,596
Investment securities available-for-sale at fair value 34,893,820 20,253,490 22,217,390
Investment securities held-to-maturity (fair value
of $17,283,000, $17,842,000 and $17,917,000,
respectively) 17,053,628 17,418,303 17,221,214
Loans and lease financing receivables, net 154,268,219 150,732,087 129,763,724
Premises and equipment, net 1,299,879 1,364,879 1,345,083
Accrued interest receivable 1,225,535 1,138,607 1,030,255
Cash surrender value of life insurance 8,989,359 8,913,136 7,816,322
Other assets 3,108,467 3,079,740 3,108,825
------------ ------------ -------------
Total Assets $226,788,494 $218,247,462 $203,992,409
============ ============ ============
LIABILITIES
Noninterest-bearing demand deposits $ 43,438,855 $ 44,557,377 $ 37,163,893
Interest-bearing transaction deposits 33,489,731 34,912,205 32,104,881
Savings and money market deposits 72,910,910 70,254,926 64,391,506
Time deposits, $100,000 and over 26,442,251 25,307,661 25,950,385
Other time deposits 18,621,134 18,630,846 18,646,061
------------ ------------ ------------
Total deposits 194,902,881 193,663,015 178,256,726
Other borrowings 7,150,000 0 0
Accrued interest payable and other liabilities 3,915,337 3,903,287 3,345,753
------------ ------------ ------------
Total liabilities 205,968,218 197,566,302 181,602,479
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,00
shares authorized; 2,151,370 shares at
March 31, 2005, 2,142,104 shares at
December 31, 2004 and 1,484,823 shares at
March 31, 2004 issued and outstanding 15,686,097 15,528,940 15,615,193
Retained earnings 5,488,476 5,295,732 6,649,314
Accumulated other comprehensive income (loss) (354,297) (143,512) 125,423
------------ ------------ ------------
Total shareholders' equity 20,820,276 20,681,160 22,389,930
------------ ------------ ------------
Total liabilities and shareholders' equity $226,788,494 $218,247,462 $203,992,409
============ ============ ============
Page 3
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended March 31, 2005 and 2004
2005 2004
---------- ----------
INTEREST INCOME
Loans and leases $2,738,037 $2,193,173
Taxable securities 227,682 202,946
Tax-exempt securities 159,337 161,466
Federal funds sold 45,460 47,241
---------- ----------
Total interest income 3,170,516 2,604,826
INTEREST EXPENSE
Interest-bearing transaction deposits 14,517 11,595
Savings and money market deposits 162,736 98,408
Time deposits, $100,000 and over 176,405 170,425
Other time deposits 106,740 101,845
Other borrowings 7,231 0
---------- ----------
Total interest expense 467,629 382,273
---------- ----------
NET INTEREST INCOME 2,702,887 2,222,553
Provision for loan and lease losses 90,000 0
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 2,612,887 2,222,553
NON-INTEREST INCOME 459,097 421,366
NON-INTEREST EXPENSE
Salaries and employee benefits 1,107,431 953,042
Premises and equipment 229,305 222,470
Other 636,622 540,438
---------- ----------
Total non-interest expense 1,973,358 1,715,950
income before provision ---------- ----------
for income taxes 1,098,626 927,969
Provision for income taxes 368,040 282,399
---------- ----------
NET INCOME $ 730,586 $ 645,570
========== ==========
NET INCOME PER SHARE $ .34 $ .29
========== ==========
NET INCOME PER SHARE
ASSUMING DILUTION $ .32 $ .27
========== ==========
Page 4
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2005 (Unaudited), and the years
ended December 31, 2004 (Audited) and 2003 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- ------ ------ -------- ------ -----
BALANCE AT
JANUARY 1, 2003 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 income, 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
===========
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)
Stock options exercised and
related tax benefits 97,494 1,786,065 1,786,065
Redemption of stock
under tender offer (126,208) (1,416,223) (3,071,903) (4,488,126)
Cash dividend (906,732) (906,732)
Stock options granted 103,680 103,680
3 for 2 stock split 713,825
Fractional shares (7,498) (7,498)
Net income for the year $ 2,907,621 2,907,621 2,907,621
Other comprehensive
income, net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $116,844 (167,072)
-----------
Other comprehensive
loss, net of taxes (167,072) (167,072) (167,072)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income $ 2,740,549
===========
Page 5
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the three months ended March 31, 2005 (Unaudited), and the years
ended December 31, 2004 (Audited) and 2003 (Audited)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- ------ ------ -------- ------ -----
BALANCE AT
DECEMBER 31, 2004 2,142,104 $15,528,940 $ 5,295,732 $ (143,512) $20,681,160
Cash dividend (537,842) (537,842)
Stock options granted 25,920 25,920
Stock options exercised and
related tax benefits 9,266 131,237 131,237
Net income for the period $ 730,586 730,586 730,586
Other comprehensive income, net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $ 147,415 (210,785)
-----------
Other comprehensive loss,
net of taxes (210,785) (210,785) (210,785)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income $ 519,801
===========
BALANCE AT
MARCH 31, 2005
2,151,370 $15,686,097 $ 5,488,476 $ (354,297) $20,820,276
=========== =========== =========== =========== ===========
Page 6
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2005 and 2004
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net income $ 730,586 $ 645,570
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 90,000 0
Depreciation 77,416 72,376
Amortization and other 41,005 34,715
Stock options granted 25,920 10,368
Net change in interest receivable (86,928) (123,297)
Net change in cash surrender value
of life insurance (76,223) (85,722)
Net change in other assets 118,688 108,399
Net change in interest payable and other liabilities 12,050 (174,489)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 932,514 487,920
INVESTING ACTIVITIES
Purchases of securities held-to-maturity 0 (990,047)
Purchases of securities available-for-sale (15,014,860) (4,982,240)
Proceeds from maturing securities held-to-maturity 340,000 300,000
Proceeds from maturing securities available-for-sale 0 3,050,000
Net change in loans and leases (3,626,132) (9,929,735)
Purchases of premises and equipment (12,416) (103,464)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (18,313,408) (12,655,486)
FINANCING ACTIVITIES
Net change in demand, interest-bearing
transaction and savings deposits $ 114,988 $ (435,672)
Net change in time deposits 1,124,878 (1,422,218)
Cash dividend paid (537,842) (371,206)
Net change in FHLB borrowings 7,150,000 (17,042)
Stock options exercised 131,237 549,098
----------- -----------
PROVIDED (USED) BY FINANCING ACTIVITIES 7,983,261 (1,697,040)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,397,633) (13,864,606)
Cash and cash equivalents at beginning of period 15,347,220 35,354,202
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,949,587 $21,489,596
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 462,501 $ 382,539
Income taxes $ 140,000
SUPPLEMENTAL DISCLOSURES OF
NONCASH ACTIVITIES:
Net change in unrealized gains and losses on securities $ (358,200) $ 173,102
Net change in deferred income taxes on unrealized
gains and losses on securities $ 147,415 $ (71,239)
Page 7
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 March 31, 2005 and results of operations for the
three 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 2004 Annual Report on
Form 10-K. The results of operations for the three months ended March 31, 2005
are not necessarily indicative of the operating results through December 31,
2005.
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 March 31, 2005
and March 31, 2004.
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 March 31, 2005 was 2,150,804
and for the period ending March 31, 2004 was 2,204,923.
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 March 31, 2005 was 2,300,299 and for the period ending March
31, 2004 was 2,404,950.
Prior year shares have been adjusted to reflect the three for two stock split in
August 2004.
Note 5 - Stock Option Accounting
The Company has a stock-based employee and director compensation plan. Prior to
January 1, 2003, the Company accounted for this plan 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. Effective January 1,
2003, the Company adopted the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2003. No options were granted in
2003. Awards under the Company's plan vest over five years. The cost related to
stock-based
Page 7
employee compensation included in the determination of net income for 2004 is
less than that which would have been recognized if the fair value based method
had been applied to all awards since the original effective date of SFAS No.
123. The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied to all outstanding and
unvested awards in each period.
March 31, March 31,
2005 2004
----------- ----------
Net income, as reported $ 730,586 $ 645,570
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 15,253
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (46,253)
----------- ----------
Pro forma net income $ 730,586 $ 614,570
=========== ==========
Net income per share:
Basic - as reported .34 .29
============= ==========
Basic - pro forma .34 .28
============= ==========
Diluted - as reported .32 .27
============= ==========
Diluted - pro forma .32 .26
============= ==========
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
three months ended March 31, 2005 and 2004 are as follows:
Directors Officers
2005 2004 2005 2004
------- ------- ------- -------
Service cost $ 9,091 $15,802 $33,666 $46,004
Interest cost on projected benefit obligation 10,610 5,455 8,058 17,252
Amortization of unrecognized liability at (2,375) 10,094 (7,534)
------- ------- ------- -------
transition
Net periodic pension cost recognized $17,326 $21,257 $51,818 $55,722
======= ======= ======= =======
Page 9
SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
For the three months ended March 31, 2005 and 2004
(dollars in thousands)
2005 2004
---- ----
ASSETS Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- -------- ------- ------- ------
Interest-earning assets:
Loans(2):
Commercial $103,846 $ 1,873 7.31% $ 88,158 $ 1,549 7.07%
Consumer 17,207 291 6.86% 12,268 215 7.05%
Real estate construction 22,389 408 7.39% 17,141 334 7.84%
Real estate mortgage 7,292 125 6.95% 2,233 50 9.01%
Tax exempt loans (1) 2,965 61 8.34% 3,069 64 8.39%
Leases 46 1 8.82% 43 3 28.06%
Tax exempt leases (1) 0 0 0 00% 3 0 0.00%
Unearned loan fees (481) (414)
-------- -------- -------- --------
Total loans 153,264 2,759 7.30% 122,501 2,215 7.27%
Investment securities
Available for sale:
Taxable 29,358 225 3.11% 23,190 200 3.47%
Hold to maturity:
Taxable 378 3 3.22% 398 3 3.03%
Tax exempt (1) 16,852 241 5.80% 16,751 245 5.88%
-------- -------- -------- --------
Total investment securities 46,588 469 4.08% 40,339 448 4.47%
Federal funds sold 7,814 45 2.34% 20,520 47 0.92%
FHLB Stock 711 0 0.00% 295 0 0.00%
Total due from banks/interest-bearing 35 0 0.00% 331 0 0.00%
-------- -------- -------- --------
Total interest-earning assets 208,412 $ 3,273 6.37% 183,986 $ 2,710 5.92%
======== ========
Noninterest-bearing assets:
Reserve for loan losses (2,518) (2,574)
Cash and due from banks 6,124 9,214
Premises and equipment 1,341 1,331
Other assets 12,388 11,741
-------- --------
Total assets $225,747 $203,698
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
Interest-bearing transaction $ 34,687 $ 15 0.18% $ 32,127 $ 12 0.15%
Savings deposits 75,711 163 0.87% 63,355 98 0.62%
Time deposits over $100,000 25,878 176 2.76% 26,344 170 2.60%
Other time deposits 18,646 107 2.33% 19,094 102 2.15%
-------- -------- -------- --------
Total interest-bearing deposits 154,922 461 1.21% 140,920 382 1.09%
Other short term borrowings 1,106 7 2.57% 0 0 0.00%
-------- -------- -------- --------
Total interest-bearing
liabilities 156,028 $ 468 1.22% 140,920 $ 382 1.09%
======== ========
Non interest-bearing liabilities:
Non interest-bearing demand deposits 44,761 37,165
Other liabilities 3,829 3,373
Shareholders' equity 21,129 22,240
-------- --------
Total liabilities and
Shareholders' equity $225,747 $203,698
======== ========
Interest rate spread 5.15% 4.83%
==== ====
Interest income $ 3,273 6.37% $ 2,710 5.92%
Interest expense 468 0.91% 382 0.84%
-------- ---- -------- ----
Net interest income/margin $ 2,805 5.46% $ 2,328 5.08%
======== ========
(1) Fully tax equivalent adjustments are based on a federal income tax
rate of 34% in 2005 and 2004.
(2) Non accrual loans have been included in loans for the purposes of the
above presentation. Loan fees of approximately $76,108 and $70,344 for
the three months ended March 31, 2005 and 2004, 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
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 (the
"Company") 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 discussed in Sonoma Valley Bancorp's
Form 10-K for the year ended December 31, 2004, and subsequent periodic reports,
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.
For the Three Month Periods
Ended March 31, 2005 and 2004
Overview
The Company reported net income of $730,586 for the first three months of 2005
compared with $645,570 for the first three months of 2004. On a per share basis,
net income equaled $.34 compared with $.29 per share during the same period in
2004. The March 2004 per share amount has been adjusted for the three for two
stock split in August 2004.
Return on average total assets on an annualized basis for the three-month period
was 1.31% in 2005 and 1.28% in 2004, respectively. Return on average
shareholders' equity on an annualized basis for the same periods was 14.03% and
11.68%, respectively. The increase in the return on average assets is the result
of an increase in average earning assets from $184.0 million for the first three
months of 2004 to $208.4 for the comparable period of 2005. Additionally, $13.1
million in fed funds was invested in higher yielding securities. The higher
return on equity is the result of a $1.1 million decline in average equity for
the three months of 2005 to $21.1 million from $22.2 million for the three
months of 2004. This decline is a result of the tender offer closed on May 21,
2004. See page 6 for detail of "Changes in Shareholder Equity."
Income during the first quarter of 2005 is higher than 2004 due to the increase
in the net interest income from $2.2 million in 2004 to $2.7 million in 2005, an
increase of $480,000 or 21.6%.
Page 11
Additionally, with the 175 basis point increase in the prime rate in 2004 from
4.00% at the beginning of the year to 5.75% as of March 22, 2005, many variable
rate loans have moved off floors and the loan yield is increasing as the
interest rate increases.
The Company continues to experience loan and deposit growth at the Banco de
Sonoma Office from $6.2 million in deposits and $653,000 in loans as of December
31, 2004 to $7.3 million in deposits and $969,000 in loans as of March 31, 2005.
For the first three or four years the costs associated with opening a new office
will have a negative effect on the Consolidated Income Statement creating about
$200,000 in additional expense for the Company in 2005. The office is offering
services to the Latino community in our market place. Management identified this
as a niche which was underserved 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 increased by $139,116 or .67% during the quarter. At
March 31, 2005, the Company reported net income of $730,586. In March the
Company paid out $538,000 for cash dividends declared in February, 2005. In 2004
stock options were granted to senior employees with a fifth of the options
vesting each year over a five year period. In 2005, 13,500 options vested which
increased equity by $25,920 year to date. The net income figure of $730,586
reflects an expense for the stock options of $25,920, therefore the net effect
of the stock option transaction relative to equity was zero. Directors exercised
9,266 options which added $73,810 to the capital accounts. The tax benefit of
these options was $57,427, which also increased equity. The net effect of this
activity was capital of $20,820,276 as of March 31, 2005, compared to capital of
$20,681,160 as of December 31, 2004. See page 6 for detail of "Changes in
Shareholder Equity."
Section 404 of the Sarbanes-Oxley Act of 2002 requires the SEC to prescribe
rules requiring the inclusion of an internal control report in each annual
report. Accordingly, in the annual report for December 31, 2006, management will
be required to include a report on the effectiveness of the Company's internal
controls. The Company's independent auditors are required to attest to and
report on management's assessment of internal control. The Company's management
and staff are working diligently toward evaluating and documenting the internal
control systems in order to allow management to report on, and the Company's
independent auditors to attest to, the Company's internal control over financial
reporting. The Company has retained the services of a consulting firm to assist
management and staff with this process. Even so, there can be no assurances that
the evaluation required by Sarbanes-Oxley will not result in the identification
of significant control deficiencies or the Company's auditors will be able to
attest to the effectiveness of our internal controls over financial reporting.
Page 12
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 Balances, 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 ($102,000 in 2005 and $105,000 in 2004, based on a 34% federal income tax
rate).
The improvement in net interest income for the three months ended March 31, 2005
(stated on a fully taxable equivalent basis) is a result of the net effect of a
$563,000 increase in interest income offset by a smaller increase in interest
expense of $86,000, showing an increase of $477,000. This increase is a result
of the 175 basis point increase in the fed funds and prime lending rates. The
Fed Funds rate increased from 1.00% as of January 1, 2004, to 2.75% as of March
31, 2005 and prime lending rate increased from 4.00% in January 2004 to 5.75% as
of March 31, 2005. Additionally, $13.1 million was invested in securities rather
than Fed Funds and many variable rate loans moved off floors, which allows their
yield to increases as interest rates increase.
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 2005 increased 38 basis points to 5.46%, from
5.08% for the same period in 2004.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) increased by $563,000 to $3.3 million in the three months of 2005, a
20.78% increase over the $2.7 million realized during the same period in 2004.
The $563,000 increase was the result of the 45 basis point increase in the yield
on earning assets to 6.37% for the three month ended March 31, 2005 from 5.92%
for the same time period of 2004. Contributing to this increase was the $24.4
million or 13.28% increase in average earning assets to $208.4 million for the
first quarter of 2005.
Interest Expense
Total interest expense increased by $86,000 to $468,000. The average rate paid
on all interest-bearing liabilities increased from 1.09% in 2004 to 1.22% in
2005. Average balances of interest-bearing liabilities increased from $140.9
million to $156.0 million, a 10.72% gain in interest-bearing liabilities. Of the
increase in interest-bearing liabilities $1.1 million was borrowings at the
Federal Home Loan Bank. The Company has experienced stronger loan than deposit
growth, and anticipated loan payoffs have occurred later, so the company is
temporarily meeting liquidity needs by borrowing at the Federal Home Loan Bank.
The gain in volume of average balances was responsible for a $14,000 increase in
interest expense and the higher interest rates paid were responsible for a
$72,000 increase in interest expense for a total increase of $86,000.
Page 13
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 as of March 31, 2005 was $90,000 and no
provision was made in the same time period in 2004. 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 Company experienced strong loan growth in the first
quarter of 2005 and management anticipates that loan growth will continue,
requiring additional provisions to be made for loan losses.
The economic climate continues to slowly improve and the non-accrual portfolio
dropped to .71% during the three months ended March 31, 2005, compared to .92%
of loans during the first three months of 2004. Loans charged off were $5,683
and recoveries were $47,909 as of March 31, 2005, compared with $270,412 in
charge offs and $9,846 in recoveries for the same period in 2004.
Non-interest Income
Non-interest income of $459,000 increased 9.03% over the $421,000 recorded in
the comparable period in 2004. Services charges were up $42,000, due to the
growth in customer activity. Credit card merchant activity showed an increase of
$19,000, while loan referral income showed a decline of $15,000 and life
insurance proceeds showed a decline of $9,500; a result of the lower rates paid.
Non-interest Expense
Total non-interest expense increased 15.0% to $1.97 million during the three
months of 2005 from $1.72 million for the same period in 2004. Non-interest
expense on an annualized basis represented 3.55% of average total assets in 2005
compared with 3.39% in the comparable period in 2004.
Salaries and benefits increased 16.2% from $953,000 in 2004 to $1.1 million in
2005. The 2005 increase is the result of an accrual of $100,000 for potential
incentive/ bonus expense and expensing $26,000 for stock options, neither was
included in the salaries and benefits expense for the first quarter of 2004.
Additionally staff salaries show an increase when compared to 2004 due to the
implementation of focal point reviews and the addition to staff. Medical
benefits showed a significant increase in 2005 and although the Company has a
cap for the amount they will pay, most employees were not at the cap.
Expense related to premises and equipment increased 2.69% to $229,000 in 2005
from $223,000 in 2004. The slight increase of $6,835 in expense in 2005 is the
result of the amortization of expenses for the remodel of the Glen Ellen Branch.
The Company continues to emphasize security in its computer operations.
Equipment and software are monitored and upgraded as appropriate to ensure
confidentiality of customer and company data.
Page 14
Other operating expenses increased 17.96% in 2005 to $637,000 from $540,000 in
2004 an increase of $97,000. The area of expense responsible for the increase is
professional fees, showing an increase over 2004 of $102,000. This is the result
of additional accruals for expenses associated with the implementation of
Sarbanes Oxley, Rule 404, regarding internal controls over financial reporting.
Provision for Income Taxes
The provision for income taxes increased to an effective tax rate of 33.5% for
the three months of 2005 compared with 30.43% for the three months of 2004. The
higher effective tax rate is a reflection of the lower ratio 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 $52.0 million at March 31, 2005, a 37.9% increase
from the $37.7 million at December 31, 2004 and a 31.7% increase from $39.4
million at March 31, 2004. 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.
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 March 31, 2005, the
Company had securities totaling $17.1 million with a market value of $17.3
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 $34.9 million compared to an amortized cost
of $35.5 million as of March 31, 2005.
There were thirty Federal Farm Credit Bank, Federal Home Loan Bank, Federal Home
Loan Mortgage Corporation or Federal National Mortgage Association securities of
$29.5 million and six U.S. Treasury securities of $5.4 million in the AFS
portfolio and twenty seven municipal securities of $8.3 million in the HTM
portfolio that are temporarily impaired as of March 31, 2005. Of the above,
there were sixteen Federal Farm Credit Bank, Federal Home Loan Bank, Federal
Home Loan Mortgage Corporation or Federal National Mortgage Association
securities of $15.6 million in the AFS portfolio and six municipal securities of
$1.9 million in the HTM
Page 15
portfolio that have been in a continuous loss position for 12 months or more as
of March 31, 2005. The primary cause of the impairment of these securities is
interest rate volatility inherent in a rising rate environment which causes the
market value of the security to decline. Management understood the potential
market risks at the time of acquisition and determined the benefit to the
Company of the higher interest rates received more than offset the potential
deterioration in value. It is the Company's intent to carry the securities to
maturity date, at which time the Company will receive face value for the
securities at no loss.
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. In the opinion of management, there was no investment
in securities at March 31, 2005 that constituted a material credit risk to the
Company. The lower market value to amortized costs was a result of the increase
in market interest rates and not an indication of lower credit quality.
Loans
The Company's loan portfolio was $156.8 million at March 31, 2005, or 80.5% of
total deposits. This compares with $153.2 million, or 79.1% of total deposits,
at December 31, 2004 and $132.1 million, or 74.1% of total deposits, at March
31, 2004. 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.
March 31, Percentage December 31, Percentage March 31, Percentage
2005 of Total 2004 of Total 2004 of Total
---- -------- ---- -------- ---- --------
Commercial $108,068,054 68.7% $109,324,569 71.2% $ 98,282,959 74.1%
Consumer 18,253,222 11.6% 16,249,913 10.6% 13,289,577 10.0%
Real estate construction 23,081,948 14.7% 20,291,506 13.2% 18,280,825 13.8%
Real estate mortgage 7,872,218 5.0% 7,732,177 5.0% 2,703,348 2.0%
Leases 42,243 0.0% 47,717 0.0% 35,476 0.1%
------------ ----- ------------ ----- ------------ -----
157,317,685 100.0% 153,645,882 100.0% 132,592,185 100.0%
===== ===== =====
Deferred loan fees
and costs, net (488,668) (485,223) (454,402)
Allowance for loan
and lease losses (2,560,798) (2,428,572) (2,374,059)
------------ ------------ ------------
$154,268,219 $150,732,087 $129,763,724
============ ============ ============
Page 16
Risk Elements
The majority of the Company's loan activity is with customers located within
Sonoma County. Approximately 87.3% of the total loan portfolio is secured by
real estate located in the Company's service area. Significant concentrations of
credit risk may exist if a number of loan customers are engaged in similar
activities and have similar economic characteristics. The Company believes it
has policies in place to identify problem loans and to monitor concentrations of
credits.
Based on its risk management review and a review of its loan portfolio,
management believes that its allowance for loan losses for the quarter ending
March 31, 2005, 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, but is subject to periodic review,
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 six months and meets cash flow or collateral criteria, or when
the loan is determined to be uncollectible and is charged off against the
allowance for loan losses, or in the case of real estate loans, is transferred
to other real estate owned. A loan is classified as a restructured loan when the
interest rate is reduced, when the term is extended beyond the original maturity
date, or other concessions are made by the Company, because of the inability of
the borrower to repay the loan under the original terms.
There were $1.0 million nonaccrual loans and no loans 90 days or more past due
and still accruing at March 31, 2005 down from $1.2 million nonaccrual loans and
no loans 90 days or more past due and still accruing at March 31, 2004.
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
Page 17
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 March 31, 2005 the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At March 31, 2005, the allowance for loan losses was $2.6 million, or 1.63% of
period-end loans, compared with $2.4 million, or 1.59% at December 31, 2004 and
$2.4 million, or 1.80% at March 31, 2004.
An analysis of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan categories, is presented below.
For the Three For the Year For the Three
Months Ended Ended Months Ended
3/31/05 12/31/04 3/31/04
------------- ------------- -------------
Balance beginning of year $ 2,428,572 $ 2,634,625 $ 2,634,625
Charge-offs:
Commercial 0 (290,000) (270,000)
Consumer (5,683) (63,007) (412)
------------- ------------- -------------
Total charge-offs (5,683) (353,007) (270,412)
Recoveries:
Commercial 47,909 15,416 8,500
Consumer 0 1,538 1,346
------------- ------------- -------------
Total recoveries 47,909 16,954 9,846
Net recoveries (charge-offs) 42,226 (336,053) (260,566)
Provision charged to operations 90,000 130,000 0
------------- ------------- -----------
Balance end of period $ 2,560,798 $ 2,428,572 $ 2,374,059
============= ============= ===========
Ratio of net charge-offs
annualized to average loans -0.11% 0.24% 0.86%
Balance in allowance as a percentage
of loans outstanding at period end 1.63% 1.59% 1.80%
Page 18
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.
March 31, Percentage December 31, Percentage March 31, Percentage
2005 of Total 2004 of Total 2004 of Total
------------ ---------- ------------ ---------- ------------ ----------
Interest-bearing
transaction deposits $ 33,489,731 17.2% $ 34,912,205 18.0% $ 32,104,881 18.0%
Savings deposits 72,910,910 37.4% 70,254,926 36.3% 64,391,506 36.1%
Time deposits, $100,000
and over 26,442,251 13.6% 25,307,661 13.1% 25,950,385 14.6%
Other time deposits 18,621,134 9.5% 18,630,846 9.6% 18,646,061 10.5%
------------ ----- ------------ ----- ------------ -----
Total interest-bearing
deposits 151,464,026 77.7% 149,105,638 77.0% 141,092,833 79.2%
Demand deposits 43,438,855 22.3% 44,557,377 23.0% 37,163,893 20.8%
------------ ----- ------------ ----- ------------ -----
Total deposits $194,902,881 100.0% $193,663,015 100.0% $178,256,726 100.0%
============ ============ ===== ============ =====
Total deposits increased by $1.2 million, during the three months of 2005, to
$194.9 million from $193.7 million at December 31, 2004, and $178.3 million as
of March 31, 2004. As of March 31, 2005, non interest demand was $43.4 million
compared to $44.6 million as of December 31, 2004, interest bearing checking was
$33.5 million compared to $34.9 million and other time deposits were $18.5
million compared to $18.6 million, all showing decreases of $1.1 million, $1.4
million and $90,000, respectively. Savings showed the strongest growth from
$70.3 million as of December 31, 2004 to $72.9 million as of March 31, 2005,
growth of $2.7 million. Time deposits greater than $100,000 also showed growth
of $1.2 million, from $25.3 million as of December 31, 2004 to $26.5 million as
of March 31, 2005.
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 March 31, 2005, 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 of 6% and 10%, respectively.
The FDIC has also adopted minimum leverage ratio guidelines for compliance by
banking organizations. The guidelines require a minimum leverage ratio of 4% of
Tier 1 capital to total average assets. Banks experiencing high growth rates are
expected to maintain capital positions well above the minimum levels. The
leverage ratio in conjunction with the risk-based capital ratio constitute the
basis for determining the capital adequacy of banking organizations.
Page 19
The table below presents Tier 1 capital, total capital and total risk-weighted
assets at March 31, 2005, 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
------------ -------- ----- ------- ----- --------
$197,202 $ 19,865 10.07% $22,331 11.32% 8.79%
Off Balance Sheet Commitments
The Company's off balance sheet commitments consist of commitments to extend
credit and standby letters of credit. These commitments are extended to
customers in the normal course of business. Unfunded loan commitments were $35.2
million at March 31, 2005 and $32.1 million at March 31, 2004. Standby letters
of credit outstanding were $340,000 at March 31, 2005 and $475,000 at March 31,
2004. 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 March
31, 2005.
Payments due by period
Contractual Obligations
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------
Operating Lease Obligations 1,243,847 286,593 875,494 81,760 0
Executive Officer and Director
Supplemental Retirement 1,960,380 14,115 30,778 105,664 1,809,823
Deferred Compensation 1,170,681 14,048 29,501 40,506 1,086,626
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices
and rates. The Bank'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 Bank is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing the Bank 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
Page 20
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 Bank 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 Bank
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 100 and 200 basis point rising
rate forecasts, a flat rate forecast and 100 and 200 basis point falling rate
forecasts which take place within a one year time frame. The net interest income
is measured during the year assuming a gradual change in rates over the
twelve-month horizon. The Bank's 2005 net interest income, as forecast below,
was modeled utilizing a forecast balance sheet projected from March 31, 2005
balances. The following table summarizes the effect on net interest income (NII)
of +/-100 and +/-200 basis point changes in interest rates as measured
against a constant rate (no change) scenario.
Interest Rate Risk Simulation of Net Interest Income as of March 31, 2005 (In
thousands)
Variation from a constant rate scenario $ Change in NII
+200bp ($494)
+100bp (247)
-100bp (333)
-200bp (428)
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
change 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
Page 21
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
table above shows net interest income declining both when rates increase and
when rates decline. Although the Bank is usually asset sensitive which would
cause the Bank's net interest margin to expand, the negative change in net
interest income shows both in a rising and declining rate environment. The
decline in the rising rate environment is a result of management's conservative
evaluation of the pressure to increase rates on deposits, which temporarily
causes the decline in the net interest market.
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.
The Bank has more liabilities than assets repricing during the next year.
Usually because the Bank's asset rates change more than deposit rates, the
Bank's interest income will change more than the cost of funds when rates
change. For the current quarter, the Bank is making a more conservative
assumption. Historically, the Bank has been able to raise deposit rates with a
lag to loan rate increases, however loan rates have remained flat and market
demands are creating pressure to raise interest rates. Therefore for a period of
time the Bank has chosen to use the simulation to forecast deposits rates rising
quite rapidly. This causes the net interest margin to shrink and net interest
income to decline.
The Bank 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 March 31, 2005 for the Bank's
interest-bearing assets and interest-bearing liabilities, and the Bank's
interest rate sensitivity gap as a percentage of total interest-earning assets.
The table below shows $84.2 million in loans in the over twelve month category;
of that amount, only $30.7 million has a maturity or repricing of over 5 years.
MARCH 31, 2005 Immediate Up to 3 4 to 6 7 to 12 Over
Reprice Months Months Months 12 Months Total
--------- --------- --------- --------- --------- ---------
FFS + overnight IBB $ 28 $ 28
Securities + Other IBB 0 $ 999 $ 2,147 $ 4,293 $ 44,509 51,948
Loans 45,962 6,304 6,197 11,645 84,160 154,268
--------- --------- --------- --------- --------- ---------
Total RSA $ 45,990 $ 7,303 $ 8,344 $ 15,938 $ 128,669 $ 206,244
--------- --------- --------- --------- --------- ---------
MMDA/NOW/SAV $ 106,400 $ 106,400
CD's<$100k 0 $ 5,722 $ 4,006 $ 4,006 $ 4,887 18,621
CD's>$100k 0 7,371 9,387 2,347 7,337 24,442
Borrowings 0 7,150 0 0 0 7,150
--------- --------- --------- --------- --------- ---------
Total RSL $ 106,400 $ 20,243 $ 13,393 $ 6,353 $ 12,224 $ 158,613
--------- --------- --------- --------- --------- ---------
GAP $ (60,410) $ (12,940) $ (5,049) $ 9,585 $ 116,445 $ 47,631
Cumulative $ (60,410) $ (73,350) $ (78,399) $ (68,814) $ 47,631
% Assets -26.6% -32.3% -34.6% -30.3% 21.0%
Market risk in securities. Market risk in securities shows the amount of gain or
loss (before tax) in the securities portfolio. Portfolio volume, sector
distribution, duration, and quality all affect market valuation. The adjusted
equity ratio is tier 1 capital adjusted for the market gain or loss
Page 22
less any applicable tax effect divided by average total assets for leverage
capital purposes for the most recent quarter. The ratio is designed to show tier
1 capital if the securities portfolio had to be liquidated and all gains and
losses recognized. If the ratio remains strong after a +2% or +3% rate shock,
market risk is reasonable in relation to the level of capital. A bank has
flexibility and strength when the securities portfolio can be liquidated for
liquidity purposes without affecting capital adequacy.
The Bank has only moderate market risk in investments because the average
maturity in the portfolio is not very long, except for municipals, which are
held to maturity (see page 15 for discussion of investments). The portfolio
should decline in value only about 2.3% or $1.2 million for a 1% increase in
rates. The gain in value if rates fall would be somewhat less, because there are
some callable bonds. Marking-to-market available for sale securities when rates
change would add only modest volatility to a strong level of equity. This market
risk acts to offset the interest rate risk (i.e. if rates decline and NIM is
squeezed, there would be a concurrent gain in the value of securities).
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on page 20 through 23 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.
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.
Page 23
Item 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
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
Item 6. EXHIBITS
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 24
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
(Registrant)
Date: May 4, 2005 /s/ Mel Switzer, Jr.
-------------- ----------------------------------------
Mel Switzer, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 2005 /s/ Mary Dieter Smith
------------- ----------------------------------------
Mary Dieter Smith
Executive Vice President and
Chief Operating Officer and
Chief Financial Officer
(Principal and Financial Accounting Officer)
Page 25