Item 1. Business
General
Sonoma Valley Bancorp ("Company") was incorporated under California law on March 9, 2000 at the direction of Sonoma Valley Bank for the purpose of forming a single-bank holding company structure pursuant to a plan of reorganization. The reorganization became effective November 1, 2000, after obtaining all required regulatory approvals and permits, shares of the Company's common stock were issued to shareholders of Sonoma Valley Bank in exchange for their Sonoma Valley Bank stock. Previously, Sonoma Valley Bank filed its periodic reports and current reports under the Securities Exchange Act of 1934 with the Federal Deposit Insurance Corporation. Following the reorganization, periodic and current reports are now filed with the Securities and Exchange Commission.
The business operations of the Company continue to be conducted through its wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial lending operations on June 3, 1988. In addition to its main branch located in Sonoma, California, the Bank also operates a branch office located in Glen Ellen, California. The following discussion, therefore, although presented on a consolidated basis, analyzes the financial condition and results of operations of the Bank for the twelve month period ended December 31, 2002.
Primary Services
The Bank emphasizes the banking needs of small to medium-sized commercial businesses, professionals and upper middle to high income individuals and families in its primary service area of Sonoma, California and the immediate surrounding area.
The Bank offers depository and lending services keyed to the needs of its business and professional clientele. These services include a variety of demand deposit, savings and time deposit account alternatives, all insured by the FDIC up to its applicable limits. Special merchant and business services, - --------------------------------------------------------------------------------
such as coin, night depository, courier, on line cash management and merchant teller are available. The Bank offers bank by mail service, drive-up ATM service, extended hours including Saturday banking, drive-up windows and telephone voice response. The bank is venturing into Internet Banking. The initial customers using the product are our Cash Management Commercial customers. The Bank's lending activities are directed primarily towards granting short and medium-term commercial loans, augmented by customized lines of credit, for such purposes as operating capital, business and professional start-ups, inventory, equipment, accounts receivable, credit cards, and interim construction financing.
The bank is exploring ways to serve the Hispanic community in our market place. We are installing bilingual ATM machine, and have bilingual officers and customer service employees.
The business of the Bank is not seasonal. The Bank intends to continue with the same basic commercial banking activities it has operated with since beginning operations June 3, 1988.
Competition
In general, the banking business in California and in the market areas which the Bank serves, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks which have many offices operating over a wide geographic area. The Bank competes for loans and deposits with these and other regional banks, including several which are much larger than the Bank, as well as savings and loan associations, thrift and loan associations, finance companies, credit unions, offerors of money market funds and other financial institutions.
The Bank's primary service area is currently served by six other banks (including two major banks: Bank of America and Wells Fargo Bank). In order to compete with the major financial institutions in its primary service area, the Bank uses its flexibility as an independent bank. This includes emphasis on specialized services and personalized attention.
In the event there are customers whose loan demands exceed the Bank's lending limit, the Bank seeks to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Bank also is able to assist those customers requiring other services not offered by the Bank by obtaining those services through its correspondent banks.
Concentration of Credit Risk
The majority of the Bank's loan activity is with customers located within the county of Sonoma. While the Bank has a diversified loan portfolio, approximately 83% of these loans are secured by real estate in its service area. This concentration for the year ending December 31, 2002 is presented below:
(in thousands of dollars)
Secured by real estate: Construction/land development $ 24,889 Farmland 4,197 1-4 family residences 20,917 Commercial/multi-family 56,663
Employees
As of December 31, 2002, the Company employed 44 full-time equivalent employees. - --------------------------------------------------------------------------------
Supervision and Regulation
The Company is a registered bank holding company under the Bank Holding Company Act, regulated, supervised and examined by the Federal Reserve Bank. As such, it must file with the Federal Reserve Bank an annual report and additional reports as the Federal Reserve Board may require. The Company is also subject to periodic examination by the Federal Reserve Board.
In addition, both the Company and the Bank are extensively regulated under both federal and state laws and regulations. These laws and regulations are primarily intended to protect depositors, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions at issue.
As a California state-licensed bank, the Bank is subject to regulation, supervision and periodic examination by the California Department of Financial Institutions. The Bank is also subject to regulation, supervision, and periodic examination by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is not a member of the Federal Reserve System, but is nevertheless subject to certain regulations of the Board of Governors of the Federal Reserve System. As a state bank, the Bank's deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases. For this protection, the Bank pays a semi-annual assessment.
The regulations of these state and federal bank regulatory agencies govern most aspects of the Company's and the Bank's business and operations, including but not limited to, requiring the maintenance of non-interest bearing reserves on deposits, limiting the nature and amount of investments and loans which may be made, regulating the issuance of securities, restricting the payment of dividends, regulating bank expansion and bank activities, including real estate development activities. The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the California Department of Financial Institutions have broad enforcement powers over depository institutions, including the power to prohibit a bank from engaging in business practices which are considered to be unsafe or unsound, to impose substantial fines and other civil and criminal penalties, to terminate deposit insurance, and to appoint a conservator or receiver under a variety of circumstances. The Federal Reserve Board also has broad enforcement powers over bank holding companies, including the power to impose substantial fines and other civil and criminal penalties.
Regulation of Bank Holding Companies
As a bank holding company, the Company's activities are subject to extensive regulation by the Federal Reserve Board. The Bank Holding Company Act requires us to obtain the prior approval of the Federal Reserve Board before (i) directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, we would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve Board will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board also considers capital adequacy and other financial and managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a - --------------------------------------------------------------------------------
bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve Board regulation or order, have been determined to be activities closely related to the business of banking or of managing or controlling banks.
Federal Deposit Insurance
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or pursuant to written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital.
Impact of Economic Conditions and Monetary Policies
The earnings and growth of the Bank are and will be affected by general economic conditions, both domestic and international, and by the monetary and fiscal policies of the United States Government and its agencies, particularly the Federal Reserve Bank (FRB). One function of the FRB is to regulate the money supply and the national supply of bank credit in order to mitigate recessionary and inflationary pressures. Among the instruments of monetary policy used to implement these objects are open market transactions in United States Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirement held by depository institutions. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the effect of such policies on the future business and earnings of the Bank cannot be accurately predicted.
Recent and Proposed Legislation
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the California legislature, and by various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank. Certain changes of potential significance to the Bank which have been enacted recently or others which are currently under consideration by Congress or various regulatory or professional agencies are discussed below.
The Financial Services Modernization Act of 1999 (also known as the "Gramm-Leach-Bliley Act" after its Congressional sponsors) substantially eliminates most of the separations between banks, brokerage firms, and insurers enacted by the Glass-Steagall Act of 1933. The reform legislation permits securities firms and insurers to buy banks, and banks to underwrite insurance and securities. States retain regulatory authority over insurers. The Treasury Department's Office of the Comptroller of the Currency has authority to regulate bank subsidiaries that underwrite securities and the Federal Reserve has authority over bank affiliates for activities such as insurance underwriting and real-estate development.
In 1997, California adopted the Environmental Responsibility Acceptance Act (the "Act") (Cal. Civil Code Sections 850-855) to facilitate the notification of government agencies and potentially responsible parties (for example, for cleanup) of the existence of contamination and the cleanup or other remediation - --------------------------------------------------------------------------------
of contamination by the potentially responsible parties. The Act requires, among other things, that owners of sites who have actual awareness of a release of a hazardous material that exceeds a specified notification threshold to take all reasonable steps to identify the potentially responsible parties and to send a notice of potential liability to the parties and the appropriate oversight agency.
During 1996, new federal legislation amended the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the underground storage tank provisions of the Resource Conservation and Recovery Act to provide lenders and fiduciaries with greater protections from environmental liability. In June 1997, the U.S. Environmental Protection Agency ("EPA") issued its official policy with regard to the liability of lenders under CERCLA as a result of the enactment of the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. Although numerous exceptions exist, California law provides that a lender acting in the capacity of a lender will not be liable under any state or local statute, regulation or ordinance, other than the California Hazardous Waste Control Law, to undertake a cleanup, pay damages, penalties or fines, or forfeit property as a result of the release of hazardous materials at or from the property.
In January 2001, the Basel Committee on Banking Supervision issued a proposal for a "New Capital Accord." The New Capital Accord incorporates a three-part framework of minimum capital requirements, supervisory review of an institution's capital adequacy and internal assessment process, and market discipline through effective disclosure to encourage safe and sound banking practices. The New Capital Accord is scheduled for implementation by the end of 2006.
The federal banking agencies are required to take "prompt corrective action" in respect of depository institutions and their bank holding companies that do not meet minimum capital requirements. FDIC established five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." A depository institution's capital tier, or that of its bank holding company, depends upon where its capital levels are in relation to various relevant capital measures, including a risk-based capital measure and a leverage ratio capital measure, and certain other factors.
Under the implementing regulations adopted by the federal banking agencies, a bank holding company or bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank holding company or bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank with a composite CAMELS rating of 1). A bank holding company or bank is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank with a composite CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)"critically undercapitalized" if the bank has a ratio of tangible equity to total assets equal to or less than 2%. The Federal Reserve Board may reclassify a "well capitalized" bank holding company or bank as "adequately capitalized" or subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower capital category if it determines that the bank holding company or bank is in an unsafe or unsound condition or deems the bank holding company or bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency. The Company and Bank currently meet the definition of "well capitalized" institutions.
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"Undercapitalized" depository institutions, among other things, are subject to growth limitations, are prohibited, with certain exceptions, from making capital distributions, are limited in their ability to obtain funding from a Federal Reserve Bank and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan and provide appropriate assurances of performance. If a depository institution fails to submit an acceptable plan, including if the holding company refuses or is unable to make the guarantee described in the previous sentence, it is treated as if it is "significantly undercapitalized". Failure to submit or implement an acceptable capital plan also is grounds for the appointment of a conservator or a receiver. "Significantly undercapitalized" depository institutions may be subject to a number of additional requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Moreover, the parent holding company of a "significantly undercapitalized" depository institution may be ordered to divest itself of the institution or of nonbank subsidiaries of the holding company. "Critically undercapitalized" institutions, among other things, are prohibited from making any payments of principal and interest on subordinated debt, and are subject to the appointment of a receiver or conservator.
Each federal banking agency prescribes standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares and other standards as they deem appropriate. The Federal Reserve Board and OCC have adopted such standards.
Depository institutions that are not "well capitalized" or "adequately capitalized" and have not received a waiver from the FDIC are prohibited from accepting or renewing brokered deposits. As of December 31, 2002, the Company and Bank had no brokered deposits.
USA Patriot Act
The USA Patriot Act imposes additional obligations on U.S. financial institutions, including banks and broker dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
Future Legislation and Regulations
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the California legislature, and by various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact legislative changes might have on the Bank.
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Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement (SFAS) No. 145, which amends Statements No. 4 "Reporting Gains and Losses from Extinguishment of Debt", No. 44 "Accounting for Intangible Assets of Motor Carriers" and No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". The Statement is effective for fiscal years beginning after May 15, 2002, or for transactions occurring after May 15, 2002. This Statement will not have a material impact on Sonoma Valley Bancorp.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". The provisions of this Statement are effective for exit and disposal activities that are initiated after December 31, 2002. This Statement is not expected to have a material effect on Sonoma Valley Bancorp.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions". This Statement removes acquisitions of financial institutions from the scope of SFAS No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with Statement No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". The Statement indicates that the purchase method of accounting applies to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This Statement is effective for acquisitions occurring on or after October 1, 2002. This Statement is not expected to have a material effect on the Company.
In December 2002, FASB issued SFAS No. 148, which provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock- based employee compensation and the impact on reported financial results. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. This Statement is effective for fiscal and interim periods ending after December 15, 2002. The Company has elected to adopt the prospective transition method effective January 1, 2003 and, accordingly, compensation expense will be recognized for any stock options granted on or after that date. The unvested portion of stock options granted prior to January 1, 2003 will continue to be accounted for under the provisions of APB Opinion No. 28. Management does not expect this Statement to have material impact on the Company's financial condition or results of operations in 2003. Since the method of determining the value of stock options prescribed under SFAS No. 123 is based on a valuation model that relies upon factors that are beyond the Company's control, such as stock price volatility and market interest rates, Management is not able to accurately predict the cost of options that may be granted in the future and the resulting impact on the Company's financial condition and results of operations. Additional information regarding stock options is contained in Notes A and M of the Notes to the Consolidated Financial Statements. - --------------------------------------------------------------------------------
Statistical Data
The following information is required by the Industry Guide 3,"Statistical Disclosure by Bank Holding Companies". The averages shown have been calculated using the average daily balance. Sequential Page Number I. Distribution of Assets, Liabilities and Stock- holders' Equity; Interest Rates and Differential
A. Average balance sheets 16 B. Analysis of net interest earnings 16 C. Rate/volume analysis 17
II. Investment Portfolio
A. Book value (Amortized Cost) of investments 41 B. Weighted average yield and maturity 16, 20, 25 and 42 C. Securities of issuer exceeding ten percent of equity: None
III. Loan Portfolio
A. Types of loans 16 and 43 B. Maturities and sensitivities of loans to change in interest rates 25 and 44 C. Risk elements
1. Non-accrual, past due, and restructured loans 21 and 43 2. Potential problem loans: None 3. Foreign outstandings: None 4. Loan concentrations 20 and 56
D. Other Interest Bearing Assets: None
IV. Summary of Loan Loss Experience 21, 22 and 44
V. Deposits
A. Average balances and average rates paid 16 B. Other categories of deposits None C. Foreign outstandings None D. Maturity of time deposits greater than $100,000 25 E. Maturity of foreign time deposits greater than 100,000 None
VI. Return on Equity and Assets 14
VII. Short-term Borrowings: None
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Item 2.
Item 2. Properties
The Company is headquartered in Sonoma, California. At the present time the Company's Bank has two branch offices. In 1995 the Bank leased additional office space adjacent to the Sonoma Branch and in September 1997 the Bank purchased property across the street from the Sonoma Branch. The Sonoma Branch is located at 202 W. Napa Street, Sonoma. The building contains approximately 6800 square feet and has been subleased on a long-term basis (the initial term expires in 2009, with option to extend for two additional five-year terms). The office is considered by management to be well maintained and adequate for the purpose intended. Lease payments made in 2002 totaled $216,326 compared to the $208,005 paid in 2001. The lease provides for future annual rents to be adjusted for changes in the Consumer Price Index ("CPI"), with a minimum annual increase of 4%, effective each March 1st.
In July, 1995, the Bank leased a building at 463 Second Street West. The building contains approximately 2400 square feet and has been leased on a long term basis to coincide with the Sonoma Branch lease. The initial term expired in 2000, with the first option exercised to expire in 2005, with an option to extend for three additional five year terms and one additional four year term. At present the Bank utilizes all of the units. Lease payments made in 2002 totaled $36,376 compared with the $40,720 paid in 2001. The lease provides for future annual rents to be adjusted for changes in the Consumer Price Index ("CPI") effective each July 1st.
In September, 1997 the Bank purchased a building at 472 Second St. West. The building contains approximately 1013 square feet. The Bank paid $246,943 for the property. At present the Bank is utilizing the parking area for additional parking for Bank employees and the Bank is renting out the building premises. Rental income in 2002 was $16,521 compared to $15,576 in 2001.
The Glen Ellen Branch is located at 13751 Arnold Drive, Glen Ellen. The facility is approximately 600 square feet. The facility is leased for a five year term expiring in 2003 with the option to extend for an additional five year term. Lease payments made in 2002 totaled $12,172 compared to $11,054 in 2001. The lease provides for future annual rents to be adjusted for changes in the CPI, with a minimum annual increase of 4% effective April 1st of each year.
Item 3.
Item 3. Legal Proceedings
In the normal course of operations, the Company and /or its Bank may have disagreements or disputes with vendors, borrowers, or employees, which may or may not result in litigation. These disputes are seen by the Company's management as a normal part of business. There are no pending actions reported and no threatened actions that management believes would have a significant material impact on the Company's financial position, results of operations or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company did not submit any matters to security holders during the fourth quarter of its last fiscal year ended December 31, 2002.
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PART II
Item 5.
Item 5. Market for the Company's Common Stock and Related Security Holder Matters
Following the reorganization the Company's common stock began trading on the Over the Counter Bulletin Board ("OTC BB") under the symbol "SBNK", and the Bank's stock ceased to be traded. The Company is not listed on any exchange or on the National Association of Securities Dealers Automated Quotation System ("NASDAQ").
Several brokers act as facilitators in the trades of Sonoma Valley Bancorp stock. They are:
A.G. Edwards Hoefer and Arnett 703 2nd Street, Suite 100 555 Market Street, 18th floor Santa Rosa, CA 95409 San Francisco, CA 94105 Denise Gilseth Lisa Gallo (800) 972-4800 (800) 346-5544
Paine Webber Raymond James Financial Services 6570 Oakmont Drive 777 Baywood Drive Santa Rosa, CA 95409 Petaluma, CA 94954 John Rector Moe Jacobson (707) 539-1500 (707) 763-0354
Edward Jones Smith Barney 515 First Street East 111 Santa Rosa Ave., Suite 303 Sonoma, CA 95476 Santa Rosa, CA 95404 Gary Scott Kirk Aguer (707) 935-1856 (707) 571-5702
Edward Jones Monroe Securities 19485 Sonoma Hwy, Suite G 47 State Street Sonoma, CA 95476 Rochester, NY 14614 James Wandzilak Helen Rubeins (707) 935-0865 (888) 995-5560
Wedbush Morgan Securities Sutro & Co. 1300 S.W. Fifth Avenue, Suite 2000. P.O. Box 2859 Portland, OR 97201-5667 Big Bear Lake, CA 92315 Joey Warmenhoven Troy Norlander (503) 224-0480 (800)288-2811
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The table below summarizes those trades of the common stock as reported by OTC BB, setting forth the high and low prices for the periods shown. The stock prices have been adjusted for stock dividends.
As of February 20, 2003, there were 1,069 holders of record of the Company's common stock.
Payment of Dividends
Under state law, the Board of Directors of a California state-licensed bank may declare a cash dividend, subject to the restriction that the amount available for the payment of cash dividends shall be the lesser of retained earnings of the bank or the bank's net income for its last three fiscal years (less the amount of any distributions to shareholders made during such period).
However, under the Financial Institutions Supervisory Act, the FDIC has broad authority to prohibit a bank from engaging in banking practices which it considers to be unsafe or unsound. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC may assert that the payment of dividends or other payments by a bank is considered an unsafe and unsound banking practice and therefore, implement corrective action to address such a practice.
The Bank has never paid a cash dividend and the future payment of cash dividends by the Company will not only depend on the Bank's future earnings, but will also depend on the Bank and the Company meeting certain capital requirements and having an adequate allowance for loan losses.
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Historically, the Bank has declared nine stock dividends of 5% each, two stock dividends of 10% in May 1996 and June 1997 and one 2 for 1 stock split in March 1998 as detailed below:
Date Declared Record Date Date Paid
May 13, 1992 May 31, 1992 June 15, 1992 June 26, 1993 July 15, 1993 July 31, 1993 July 20, 1994 August 1, 1994 August 15, 1994 January 18, 1995 February 5, 1995 February 20, 1995 August 16, 1995 September 11, 1995 September 29, 1995 May 22, 1996 June 14, 1996 June 28, 1996 June 18, 1997 July 15, 1997 August 1, 1997 March 18, 1998 April 15, 1998 April 30, 1998 July 21, 1999 August 16, 1999 August 31, 1999 August 16, 2000 September 8, 2000 September 25, 2000 July 18, 2001 August 3, 2001 August 17, 2001 June 17, 2002 July 2, 2002 July 16, 2002
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Item 6.
Item 6. Selected Financial Data
SONOMA VALLEY BANCORP Selected Consolidated Financial Data dollars in thousands, except share and per share data
For the years ended:
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Item 7.
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations
The Year Ended December 31, 2002 versus December 31, 2001
The business operations of the Company continue to be conducted through its wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial lending operations on June 3, 1988. Accordingly, the following discussion and analysis of the financial condition and the results of operations should be read in conjunction with the financial statements and notes included elsewhere in this annual report. Per share amounts for prior years have been adjusted for the Bank's prior 2 for 1 stock split declared March 18, 1998, 10% stock dividends declared June 18, 1997 and May 22, 1996 and 5% stock dividends declared in June 2002, July 2001, August 2000, July 1999, January and August, 1995, July 1994, June 1993 and May, 1992.
Overview
Net income was $2,744,333 ($1.97 per share) for 2002 compared with earnings of $2,600,244 ($1.85 per share) in 2001. Return on average shareholders' equity declined to 15.28% in 2002 compared to 17.19% in 2001. Return on average total assets for 2002, 2001 and 2000 were 1.67%, 1.76% and 1.62%, respectively.
At December 31, 2002 total assets were $182.6 million, a 16.1% increase over the $157.4 million at December 31, 2001. The Company showed loan growth to $128.1 million in 2002, compared with $107.4 million at year-end 2001, a growth rate of 19.2%. Deposits also increased, growing 16.2%, from $137.7 million at year-end 2001 to $160.0 million at year-end 2002. The loan-to-deposit ratio increased from 78.1% in 2001 to 80.0% in 2002, a reflection of stronger loan growth compared to the growth of deposits.
Net Interest Income
Net interest income is the difference between total interest income and total interest expense. Net interest income, adjusted to a fully taxable equivalent basis, increased $399,000 to $9.0 million, up 4.6% from 2001 net interest income of $8.6 million. Net interest income on a fully taxable equivalent basis, as shown on the table - Average Balances, Yields and Rates Paid (page 16), is higher than net interest income on the statements of operations because it reflects adjustments applicable to tax-exempt income from certain securities and loans ($366,000 in 2002 and $364,000 in 2001, based on a 34% federal income tax rate).
The increase in net interest income (stated on a fully taxable equivalent basis) was the net effect of a $523,000 decrease in interest income and a $922,000 decrease in interest expense which is a result of deposit rates declining faster than loan rates.
Net interest income (stated on a fully taxable equivalent basis) expressed as a percentage of average earning assets, is referred to as net interest margin. The Company's net interest margin declined 19 basis points to 6.06% in 2002 from 6.25% in 2001.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent basis) decreased by $523,000 to $11.0 million in 2002, a 4.6% decline over the $11.5 million realized in 2001.
The $523,000 decrease was the net effect of a 7.9% increase in average earning assets to $148.4 million offset by a 96 basis point decline in average yield for the year. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AVERAGE BALANCES/YIELDS AND RATES PAID Rate/Volume
(1) Fully tax equivalent adjustments are based on a federal income tax rate of 34% in 2002,2001 and 2000. (2) Non accrual loans have been included in loans for the purposes of the above presentation. Loan fees of approximately $343,000, $334,000 and $312,000 for the twelve months ended December 31, 2002,2001 and 2000, respectively, were amortized to the appropriate interest income categories. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP
Rate/Volume Analysis
Volume/Rate variances were allocated in the following manner: a. Changes affected by volume (change in volume times old rate) b. Changes affected by rates (change in rates times old volume) c. Changes affected by rate/volume (change in volume times change in rates) The total for each category was arrived at by totaling the individual items in their respective categories
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Interest Expense
Total interest expense declined by $922,000 to $2.0 million. The average rate paid on all interest- bearing liabilities was 1.78%, compared to 2.89% in 2001. Average balances increased from $99.8 million to $110.4 million, a 10.5% gain.
The gain in volume of average balances was responsible for a $186,000 increase in interest expense offset by a $1.1 million decrease related to lower interest rates paid for a net decrease of $922,000. The lower rates paid on interest-bearing liabilities is a result of a declining interest rate environment.
Individual components of interest income and interest expense are provided in the table - Average Balances, Yields and Rates Paid on page 16.
Provision for Loan Losses
The provision for loan losses charged to operations is based on the Bank's monthly evaluations of the loan portfolio and the adequacy of the allowance for loan losses in relation to total loans outstanding. The provisions to the allowance for loan losses amounted to $393,000 in 2002 and $342,000 in 2001. The increase in the provision is the result management's evaluation and assessment of the loan portfolio.
Loans charged-off, net of recoveries, resulted in losses totaling $27,000 in 2002 and $47,000 in 2001. The decrease in charge offs reflects management's efforts to identify problems early.
Non-interest Income
Non-interest income of $1.6 million increased 25.4% in comparison with the $1.3 million recorded in 2001. The increase was primarily due to a $242,000 increase in other non interest income which was generated by earnings on bank owned life insurance policies.
Non-interest Expense
Total non-interest expense increased 12.2% to $5.8 million in 2002 from $5.2 million in 2001. Non- interest expense represented 3.6% of average total assets in 2002 and 3.5% in 2001. The expense/asset ratio is a standard industry measurement of a bank's ability to control its overhead or non-interest costs. During 2002, the Company will continue to emphasize cost controls. Certain costs are not controllable by management. Refer to Note I, page 47 and 48, for a detailed description of Non-Interest Income and Non-Interest Expense.
Salaries and Benefits
Salaries and benefits increased 9.3% from $3.1 million in 2001 to $3.4 million in 2002. The 2002 increase reflects normal merit increases and employee incentives paid as a result of the Company's strong earnings in 2002. Additionally, there continues to be significant increases in workers compensation and employee medical benefits. At December 31, 2002 and 2001 total full-time equivalent employees were 44 and 47 respectively. Year-end assets per employee were $4.2 million in 2002 compared to $3.3 million in 2001 and 2000. - --------------------------------------------------------------------------------
Premises and Equipment
Expenses related to premises and equipment increased by 5.5% to $618,000 in 2002 from $586,000 in 2001. Building lease expense on three locations and storage units increased to $278,000 in 2002 from $268,000 in 2001. Lease income for 2002 totaled $17,000 compared to lease income of $16,000 in 2001. The increase in premises and equipment expense is the result of the banks continued emphasis on investment in technology.
Other Non-interest Expense
Other non-interest expense increased by 21.0% to $1.8 million in 2002 from $1.5 million in 2001. The increase was the result of a 24.7% increase in professional fees and a 90.2% increase in advertising. Professional fees is the largest category of other non-interest expense, primarily comprised of data processing, item processing and ATM services, as well as accounting, legal and other professional fees. These services increased by $187,000 to $944,000 in 2002 from $757,000 in 2001. This increase is the result of the bank outsourcing many functions to keep staffing costs down and outside assistance in implementing check imaging and internet banking. Advertising/Marketing which includes in addition to advertising, customer relations, shareholder relations, public relation, donations and civic dues was $201,000 in 2002 which increased $95,000 from $106,000 in 2001. This is a result of the bank's greater community involvement. Increases in other categories reflect the increased growth and volume of business in general.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 31.72% in 2002 compared with 34.66% in 2001.
Balance Sheet Analysis
Investment Securities
Securities are classified as held to maturity if the Company has both the intent and the ability to hold these securities to maturity. As of December 31, 2002, the Company had securities totaling $9.9 million with a market value of $10.4 million categorized as held to maturity. Decisions to acquire municipal securities, which are generally placed in this category, are based on tax planning needs and pledge requirements.
Securities are classified as available for sale if the Company intends to hold these debt securities for an indefinite period of time, but not necessarily to maturity. Investment securities which are categorized as available for sale are acquired as part of the overall asset and liability management function and serve as a primary source of liquidity. Decisions to acquire or dispose of different investments are based on an assessment of various economic and financial factors, including, but not limited to, interest rate risk, liquidity and capital adequacy. Securities held in the available for sale category are recorded at market value, which is $3.8 million compared to an amortized cost of $3.7 million as of December 31, 2002.
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At year end 2002 the overall portfolio had a market value of $14.3 million compared with an amortized cost of $13.6 million. Investment securities decreased 38.8% to $13.7 million from $22.5 million in 2001. The Company maintains an investment portfolio of securities rated A or higher by Standard and Poor's and/or Moody's Investors Service. Tax-exempt bonds are occasionally purchased without an A rating. In the opinion of management, there was no investment in securities at December 31, 2002 that would constitute a material credit risk to the Company.
The table below shows the components of the investment portfolio and average yields. For further information concerning the Company's total securities portfolio, including market values and unrealized gains and losses, refer to Note C of the Notes to Consolidated Financial Statements on pages 41 and 42.
Loans
A comparative schedule of average loan balances is presented in the table on page 16; year-end balances are presented in Note D to the Consolidated Financial Statements pages 43 and 44.
Loan balances, net of deferred loan fees at December 31, 2002, were $128.1 million, an increase of 19.2% over 2001. Commercial loans, comprising 69.7% of the portfolio, increased $17.3 million, or 23.9% over 2001. This increase represented the primary reason for the overall growth in the portfolio. Included in commercial loans are loans made for commercial purposes and secured by real estate.
Real Estate Construction loans increased $5.6 million, or 40.7% over 2001 balances. Consumer loans, including home equity loans, decreased $871,000 or 6.1% over 2001 balances while real estate mortgage loans declined $1.3 million. In 1997 the Company offered leasing opportunities to small businesses. Lease financing receivables for year end 2002 decreased $167,000 or 49.0%.
Risk Elements
The majority of the Company's loan activity is with customers located within Sonoma County. Approximately 83% of the total loan portfolio is secured by real estate located in the Company's service area (see Note P, on page 56 of the Consolidated Financial Statements, Concentration of Credit Risk).
Significant concentrations of credit risk may exist if a number of loan customers are engaged in similar activities and have similar economic characteristics. The Company believes that it has policies in place to identify problem loans and to monitor concentration of credits of loan customers engaged in similar activities.
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Commitments and Letters of Credit
Loan commitments are written agreements to lend to customers at agreed upon terms provided there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Loan commitments may have variable interest rates and terms that reflect current market conditions at the date of commitment. Because many of the commitments are expected to expire without being drawn upon, the amount of total commitments does not necessarily represent the Company's anticipated future funding requirements. Unfunded loan commitments were $30.4 million at December 31, 2002 and $41.9 million at December 31, 2001.
Standby letters of credit commit the Company to make payments on behalf of customers when certain specified events occur. Standby letters of credit are primarily issued to support customers' financing requirements of twelve months or less and must meet the Company's normal policies and collateral requirements. Standby letters of credit outstanding were $589,000 at December 31, 2002 and $953,000 at December 31, 2001.
Nonperforming Assets
Management classifies all loans as non-accrual loans when they become more than 90 days past due as to principal or interest, or when the timely collection of interest or principal becomes uncertain, if earlier, unless they are adequately secured and in the process of collection.
A loan remains in a non-accrual status until both principal and interest have been current for six months and meets cash flow or collateral criteria or when the loan is determined to be uncollectible and is charged off against the allowance for loan losses, or in the case of real estate loans, is transferred to other real estate owned. A loan is classified as a restructured loan when the interest rate is materially reduced, when the term is extended beyond the original maturity date or other concessions are made by the Company because of the inability of the borrower to repay the loan under the original terms.
The Company had $897,000 in non-accrual status at December 31, 2002 and $747,000 at December 31, 2001. There were $796,000 in loans 90 days or more past due at December 31, 2002 and no loans 90 days or more past due at December 31, 2001.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by charge-offs, net of recoveries. The allowance is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed monthly and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
The review process is intended to identify loan customers who may be experiencing financial difficulties. In these circumstances, a specific reserve allocation or charge-off may be recommended. Other factors considered by management in evaluating the adequacy of the allowance include: loan volume, historical net loan loss experience, the condition of industries and geographic areas experiencing or expected to experience economic adversities, credit evaluations, and current economic conditions. The - --------------------------------------------------------------------------------
allowance for loan losses is not a precise amount, but based on the factors above, represents management's best estimate of losses that may be ultimately realized from the current loan portfolio.
Worsening conditions in certain economic sectors and geographic areas could adversely affect the loan portfolio, necessitating larger provisions for loan losses than currently estimated. However, as of December 31, 2002, the Company believes its overall allowance for loan losses is adequate based on its analysis of conditions at that time.
At December 31, 2002, the allowance for loan losses was $2.8 million, or 2.2% of year end loans, compared with $2.4 million or 2.2% of year end loans at December 31, 2001. Net charge-offs to average loans decreased when compared with the prior year. The Company recorded net losses of .02% in 2002 compared to .05% in 2001. The continued low level of charge-offs in 2002 reflects the Company's attention and effort in managing and collecting past due loans by encouraging the customer to bring them to a current status or to pay them off.
Deposits
A comparative schedule of average deposit balances is presented in the table on page 16; year-end deposit balances are presented in the table below.
Total deposits increased $22.3 million (16.2%) in 2002, to $160.0 million. Demand deposits increased $6.5 million, or 20.0% in 2002. Savings deposits increased by $6.2 million, or 13.8% and interest bearing checking increased $761,000 or 3.2% during 2002. Other time deposits of less than $100,000 increased $7.2 million, or 40.5% and time deposits over $100,000 increased $1.6 million, for an increase of 8.9% over 2001 balances.
The composition of deposits for the years ending December 31, 2002 and 2001 are as follows:
Capital
The Bank is subject to FDIC regulations governing capital adequacy. The FDIC has adopted risk-based capital guidelines which establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. Under the current guidelines, as of December 31, 2002, the Bank was required to have minimum Tier I and total risk-based capital ratios of 4% and 8% respectively. To be well - --------------------------------------------------------------------------------
capitalized under Prompt Corrective Action Provisions requires minimum Tier I and total risk-based capital ratios should be 6% and 10% respectively.
The FDIC has also adopted minimum leverage ratio guidelines for compliance by banking organizations. The guidelines require a minimum leverage ratio of 4 percent of Tier 1 capital to total average assets. Banks experiencing high growth rates are expected to maintain capital positions well above the minimum levels. The leverage ratio in conjunction with the risk-based capital ratio constitute the basis for determining the capital adequacy of banking organizations.
Based on the FDIC's guidelines, the Bank's total risk-based capital ratio at December 31, 2002 was 13.41% and its Tier 1 risk-based capital ratio was 12.15%. The Bank's leverage ratio was 10.49%. All the ratios exceed the minimum guidelines of 8.00%, 4.00% and 4.00%, respectively. The ratios for the Bank at December 31, 2001, were 13.07%, 11.81% and 10.38%, respectively. The capital ratios for the Holding Company at December 31, 2002, were 13.57%, 12.31% and 10.62%, respectively.
In February 2001, the Company approved a program to repurchase Sonoma Valley Bancorp stock up to $1 million and in August 2002 the Company approved the repurchase of an additional $1 million Sonoma Valley Bancorp stock. As of December 31, 2002, $344,600 was purchased and retired. The Company is continuing to repurchase Sonoma Valley Bancorp stock up to the authorized amount.
Management believes that the Bank's current capital position, which exceeds guidelines established by industry regulators, is adequate to support its business.
Liquidity Management
The Company's liquidity is determined by the level of assets (such as cash, federal funds sold and available-for-sale securities) that are readily convertible to cash to meet customer withdrawal and borrowing needs. Deposit growth also contributes to the Company's liquidity needs. The Company's liquidity position is reviewed by management on a regular basis to verify that it is adequate to meet projected loan funding and potential withdrawal of deposits. The Company has a comprehensive Asset and Liability Policy which it uses to monitor and determine adequate levels of liquidity. At year end 2002, the Company's liquidity ratio (adjusted liquid assets to deposits and short term liabilities) was 20.39% compared to 21.08% and 24.27% at year end 2001 and 2000, respectively. Management expects that liquidity will remain adequate throughout 2003, as loans are not expected to grow significantly more than deposits, and excess funds will continue to be invested in quality liquid assets.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its loan and deposit functions. The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The Board of Directors has overall responsibility for the interest rate risk management policies. Sonoma Valley Bank has an Asset and Liability Management Committee (ALCO) that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.
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Asset/Liability Management. Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits and investing in securities. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments. The Company uses simulation models to forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on earnings. A balance sheet forecast is prepared quarterly using inputs of actual loans, securities and interest bearing liabilities (i.e. depositis/borrowings) positions as the beginning base. The forecast balance sheet is processed against four interest rate scenarios. The scenarios include a 100 and 200 basis point rising rate forecasts, a flat rate forecast and a 100 basis point falling rate forecasts which take place within a one year time frame. The net interest income is measured during the year assuming a gradual change in rates over the twelve-month horizon. The Company's 2003 net interest income, as forecast below, was modeled utilizing a forecast balance sheet projected from year-end 2002 balances. The following table summarizes the effect on net interest income (NII) of a +/-100 and +200 basis point change in interest rates as measured against a constant rate (no change) scenario.
Interest Rate Risk Simulation of Net Interest Income as of December 31, 2002 (In thousands)
Variation from a constant rate scenario $ Change in NII +200bp $1,033 +100bp 472 -100bp (394)
The simulations of earnings do not incorporate any management actions, which might moderate the negative consequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk.
Interest Rate Sensitivity Analysis. Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during periods of changes in market interest rates. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the current portfolio that are subject to repricing at various time horizons. The differences are known as interest sensitivity gaps.
A positive cumulative gap may be equated to an asset sensitive position. An asset sensitive position in a rising interest rate environment will cause a bank's interest rate margin to expand. This results as floating or variable rate loans reprice more rapidly than fixed rate certificates of deposit that reprice as they mature over time. Conversely, a declining interest rate environment will cause the opposite effect. A negative cumulative gap may be equated to a liability sensitive position. A liability sensitive position in a rising interest rate environment will cause a bank's interest rate margin to contract, while a declining interest rate environment will have the opposite effect. - --------------------------------------------------------------------------------
The following table sets forth the dollar amounts of maturing and/or repricing assets and liabilities for various periods. This does not include the impact of prepayments or other forms of convexity caused by changing interest rates. Historically, this has been immaterial and estimates for them are not included.
The Company has more liabilities than assets repricing during the next year. However, because the Company's asset rates change more than deposit rates, the Company's interest income will change more than the cost of funds when rates change. Its net interest margin should therefore increase somewhat when rates increase and shrink somewhat when rates fall.
The Company controls its long term interest rate risk by keeping long term fixed rate assets (longer than 5 years) less than its long term fixed rate funding, primarily demand deposit accounts and capital. The following table sets forth cumulative maturity distributions as of December 31, 2002 for the Company's interest-bearing assets and interest-bearing liabilities, and the Company's interest rate sensitivity gap as a percentage of total interest-earning assets. The table shows $65.0 million in fixed rate loans over 5 years. Many variable rate credit lines reached floors in 2002, and were reclassified to the fixed rate category. As soon as interest rates increase, the loans will no longer be at floors and will reclass back to the floating rate category.
( dollars in thousands)
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Inflation
Assets and liabilities of a financial institution are principally monetary in nature. Accordingly, interest rates, which generally move with the rate of inflation, have potentially the most significant effect on the Company's net interest income. The Company attempts to limit inflation's impact on rates and net income margins by minimizing its effect on these margins through continuing asset/liability management programs.
Management's Discussion and Analysis The Year Ended December 31, 2001 versus December 31, 2000
Summary
Net earnings for 2001 were $2.6 million compared with $2.2 million in 2000. Earnings per share for 2001 were $1.85 compared with $1.57 in 2000. Return on average assets was 1.76% in 2001 compared with 1.62% the previous year, while return on average equity was 17.19% in 2001 and 17.00% for the previous year.
Total assets reached $157.4 million in 2001, an 12.1% increase over the $140.4 million at December 31, 2000. Loans increased 16.1% to $107.5 million, compared with $92.6 million at year-end 2000. Deposits also increased, growing 11.8% from $123.1 million at year-end 2000 to $137.7 million at year-end 2001. The loan-to-deposit ratio increased from 75.2% to 78.1%.
Net Interest Income
Net interest income on a fully tax equivalent basis increased by $398,000 to $8.6 million in 2001, up 4.9% from 2000 net interest income of $8.2 million. The net interest margin for 2001 decreased to 6.25% from 6.49% for the previous year. Individual components of interest income and interest expense are provided in the table - Average Balances, Yields and Rates Paid on page 16.
Interest Income
Interest income increased by $265,000 to $11.5 million for a 2.4% gain over the $11.2 million realized in 2000. The volume of earning assets increased by 8.8% to $137.5 million from $126.4 million in 2000, while the yield on average earning assets declined 52 basis points.
Interest Expense
Interest expense decreased by $133,000 to $2.9 million in 2001 from $3.0 million in 2000. The average rate paid on all interest-bearing liabilities decreased from 3.23% in 2000 to 2.89% in 2001 while average balances increased from $93.3 million to $99.8 million, a 7.0% gain over 2000. The gain in volume of average balances was responsible for a $188,000 increase in interest expense and higher interest rates paid resulted in a decrease of $321,000 for a total decrease of $133,000. The higher rates paid on interest bearing liabilities is the result of a raising rate environment.
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Provision for Loan Losses
The provision for loan losses was $342,000 in 2001 and $335,000 in 2000. The increase in the provision is primarily the result of loan growth and management's evaluation and assessment of the loan portfolio. Loans charged off, net of recoveries, resulted in losses totaling $47,000 in 2001 and recoveries of $32,000 in 2000. The increase in charge-offs reflects current economic conditions.
Non-interest Income
Non-interest income increased by 46.5% to $1.3 million from $893,000 the previous year. The increase was due to increases in all categories of non interest income with a 45.5% increase in other non interest income, a 34.2% increase in service charge on deposit accounts and a 20.1% increase in other fee income.
Non-interest Expense
Non-interest expenses increased 3.2% to $5.2 million in 2001 from $5.1 million in 2000. Non-interest expense represented 3.5% of average total assets at December 31, 2001 and 3.7% at December 31, 2000.
Salaries and benefits increased by 19.2% from $2.6 million in 2000 to $3.1 million in 2001. The 2001 increase reflects normal merit increases, incentives and other increases in employee benefits. At December 31, 2001, total full-time equivalent employees were 47 compared to 42 at December 31, 2000. Year end assets per employee were $3.3 million in 2001 and 2000.
Expenses related to premises and equipment decreased by 3.3% to $586,000 in 2001, from $606,000 in 2000. Building lease expense on three locations and storage units increased to $265,000 in 2001 from $260,000 in 2000.
Other non-interest expenses decreased by 17.8% to $1.5 million in 2001 from $1.8 million in 2000. The decrease was primarily the result of a 22.3% decrease in professional fees. Professional fees is the largest category of other non-interest expense, primarily comprised of data processing, item processing and ATM services, as well as accounting, legal and other professional fees. These services decreased by $217,000 to $757,000 in 2001 from $973,000 in 2000. Increases in other categories reflect the increased growth and volume of business in general.
Provision for Income Taxes
The provision for income taxes decreased to an effective tax rate of 34.66% in 2001 compared with 34.45% in 2000.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding Quantitative and Qualitative Disclosures about Market Risk appears on page 23 through 25 under the caption "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations - Market Risk Management" and is incorporated herein by reference.
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Item 8.
Item 8. Financial Statements and Supplementary Data
For consolidated financial statements of the Company and Subsidiary, see consolidated balance sheets as of December 31, 2002 and 2001, consolidated statements of operations, consolidated statements of changes in shareholders' equity and consolidated statements of cash flows for the three years ended December 31, 2002, 2001 and 2000 and notes to consolidated financial statements at pages 29 through 62 of this annual report.
Item 9.
Item 9. Changes On and Disagreement With Accountants on Accounting and Financial Disclosure
None
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REPORT OF RICHARDSON & COMPANY INDEPENDENT AUDITORS
Board of Directors and Shareholders Sonoma Valley Bancorp and Subsidiary Sonoma, California
We have audited the accompanying consolidated balance sheets of Sonoma Valley Bancorp and Subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in the shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sonoma Valley Bancorp and Subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
/s/ Richardson & Company
January 29, 2003 - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
The accompanying notes are an integral part of these financial statements.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000
The accompanying notes are an integral part of these financial statements.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
(Continued) - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the years ended December 31, 2002, 2001 and 2000
The accompanying notes are an integral part of these financial statements. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(Continued)
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 2002, 2001 and 2000
The accompanying notes are an integral part of these financial statements.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: During 2000, the shareholders of Sonoma Valley Bank (the Bank) approved a Plan of Reorganization and Merger Agreement, which provided for the formation of Sonoma Valley Bancorp (the Bancorp) (a bank holding company) and the conversion of each share of outstanding Bank common stock into one share of no par value Bancorp common stock. Effective November 1, 2000, the Bancorp issued 1,281,680 shares of its common stock for all of the outstanding common stock of the Bank through a merger which has been accounted for similar to a pooling of interests in that the historical cost basis of the Bank has been carried forward. As a result of the merger, the Bank became the wholly owned subsidiary of the Bancorp.
Sonoma Valley Bank was organized in 1987 and commenced operations on June 3, 1988 as a California state- chartered bank. The Bank is subject to regulation, supervision and regular examination by the State Department of Financial Institutions and Federal Deposit Insurance Corporation. The regulations of these agencies govern most aspects of the Bank's business.
Principles of Consolidation: The consolidated financial statements include the accounts of the Bancorp and the Bank. All material intercompany accounts and transactions have been eliminated.
Nature of Operations: The Bank provides a variety of banking services to individuals and businesses in its primary service area of Sonoma, California and the immediate surrounding area. The Bank offers depository and lending services primarily to meet the needs of its business and professional clientele. These services include a variety of demand deposit, savings and time deposit account alternatives, and special merchant and business services. The Bank's lending activities are directed primarily towards granting short and medium- term commercial loans, customized lines of credit, for such purposes as operating capital, business and professional start-ups, inventory, equipment and accounts receivable, and interim construction financing.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: For the purposes of reporting cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions "Cash and due from banks" and "Federal funds sold." Generally, federal funds are sold or purchased for one-day periods.
Investment Securities: Securities are classified as held-to-maturity if the Bancorp has both the intent and ability to hold those debt securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities are classified as available-for-sale if the Bancorp intends to hold those debt securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Bancorp's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. Unrealized holding gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
Loans and Lease Financing Receivables: Loans are stated at the amount of unpaid principal, less the allowance for loan losses and net deferred loan fees. Interest on loans is accrued and credited to income based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as an adjustment of the yield on the related loan. However, loan origination costs in excess of fees collected are not deferred but this treatment has an immaterial impact on the financial statements. Amortization of net deferred loan fees is discontinued when the loan is placed on nonaccrual status.
All of the Bancorp's leases are classified and accounted for as direct financing leases. Under the direct financing method of accounting for leases, the total net rentals receivable under the lease contracts, net of unearned income, are recorded as a net investment in direct financing leases, and the unearned income is recognized each month as it is earned so as to produce a constant periodic rate of return on the unrecovered investment.
Allowance for Loan and Lease Losses: The allowance is maintained at a level which, in the opinion of management, is adequate to absorb probable losses inherent in the loan and lease portfolio. Credit losses related to off-balance-sheet instruments are included in the allowance for loan and lease losses except if the loss meets the criteria for accrual under Statement of Financial Accounting Standards No. 5, in which case the amount is accrued and reported separately as a liability. Management determines the adequacy of the allowance based upon reviews of individual loans and leases, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and leases and other pertinent factors. The allowance is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed monthly and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Loans and leases deemed uncollectible are charged to the allowance. Provisions for loan and lease losses and recoveries on loans previously charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and events, if it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Allowances on impaired loans are established based on the - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
present value of expected future cash flows discounted at the loan's historical effective interest rate or, for collateral-dependent loans, on the fair value of the collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and leases, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or lease or a portion of a loan or lease is classified as doubtful or is partially charged off, the loan or lease is classified as nonaccrual. Loans and leases that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility of the recorded balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan or lease had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets.
Income Taxes: Provisions for income taxes are based on amounts reported in the statements of operations (after exclusion of non-taxable income such as interest on state and municipal securities) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred taxes are computed using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising: Advertising costs are charged to operations in the year incurred.
Net Income Per Share of Common Stock: Net income per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year, after giving retroactive effect to the stock dividends and splits. Net income per share--assuming dilution is computed similar to net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Included in the denominator is the dilutive effect of stock options computed under the treasury method.
Stock Option Accounting: At December 31, 2002 the Bancorp has two stock-based employee and director compensation plans, which are described more fully in Note M. The Bancorp accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Bancorp had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.
In December 2002 the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock- Based Compensation, an Amendment of SFAS No. 123 ("SFAS No. 123") in an effort to encourage the recognition of compensation expense for the issuance of stock options. Sonoma Valley Bancorp expects to adopt SFAS No. 148 effective January 1, 2003 using the prospective application method. Under this method, the compensation expense and related tax benefit associated with stock option grants issued on or after - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
January 1, 2003 will be recognized in the income statement. The unvested portion of stock option grants issued before January 1, 2003 will continue to be accounted for under APB No. 25. SFAS No. 148 also requires new disclosures regarding the cost of stock options not accounted for under SFAS No.148.
The adoption of SFAS No. 148 will reduce Sonoma Valley Bancorp's net income and earnings per share. The future amount of this reduction is dependent upon a number of factors, including the number of options granted and certain variables used in determining the "fair value" of each option granted under the "Black- Scholes" model. These variables include the volatility of Sonoma Valley Bancorp's stock price, Sonoma Valley Bancorp's dividend yield, market interest rates and the expected life of the options. The actual compensation ultimately realized by option holders is determined at the time of exercised based on the differential between the options exercise price and the current market value of Sonoma Valley Bancorp stock.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business the Bancorp has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
Operating Segments: Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management desegregates a company for making operating decisions and assessing performance. The Bancorp has determined that its business is comprised of a single operating segment.
Reclassifications: Certain reclassifications have been made to the 2001 balances to conform to the current presentation. Federal Home Loan Bank stock has been reclassified from investment securities available-for- sale to other assets.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash and due from banks include amounts the Bank is required to maintain to meet certain average reserve and compensating balance requirements of the Federal Reserve. The total requirement at December 31, 2002 and 2001 was $2,886,000 and $2,337,000, respectively.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE C--INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities are summarized as follows:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE C--INVESTMENT SECURITIES (Continued)
Contractual maturities of investment securities at December 31, 2002 were as follows:
During 2002, the Bancorp sold securities available-for-sale for total proceeds of approximately $244,062 resulting in gross realized losses of approximately $5,098 and no gross realized gains. During 2001, the Bancorp did not sell any securities available-for-sale. During 2000, the Bancorp sold securities available-for- sale for total proceeds of approximately $2,687,482, resulting in gross realized losses of approximately $97,186 and no gross realized gains.
As of December 31, 2002, investment securities with a carrying amount of $5,332,794 and an approximate fair value of $5,677,085 were pledged, in accordance with federal and state requirements, as collateral for public deposits. Investment securities with a carrying amount and fair value of $1,720,596 at December 31, 2002 were pledged to meet the requirements of the Federal Reserve and the U.S. Department of Justice. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of the loan and lease portfolio was as follows at December 31:
At December 31, 2002, the recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards (Statement) No. 114 totaled $164,000, with a corresponding valuation allowance of $17,000. At December 31, 2001, the recorded investment in loans for which impairment has been recognized in accordance with Statement No. 114 totaled $178,000, with a corresponding valuation allowance of $25,000. For the years ended December 31, 2002, 2001 and 2000, the average recorded investment in impaired loans was approximately $143,000, $192,000 and $220,000, respectively. During 2002, $2,000 of interest was received and recognized on an impaired loan. No interest was recognized on impaired loans during 2001 or 2000.
In addition, at December 31, 2002 and 2001, the Bancorp had other nonaccrual loans of approximately $801,700 and $624,200, respectively, for which impairment had not been recognized.
The Bancorp has no commitments to loan additional funds to the borrowers of impaired or nonaccrual loans.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE D--LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
The maturity and repricing distribution of the loan and lease portfolio at December 31:
An analysis of the changes in the allowance for loan and lease losses is as follows for the years ended December 31:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
NOTE F--TIME DEPOSITS
The maturities of time deposits at December 31, 2002 are as follows:
NOTE G--FEDERAL FUNDS CREDIT LINES
The Bancorp has uncommitted federal funds lines of credit agreements with other banks. The maximum borrowings available under these lines totaled $15,500,000 at December 31, 2002. The Bancorp pledged loans totaling $22,594,531 as collateral to secure advances from the Federal Home Loan Bank of up to $12,767,110. There were no borrowings outstanding under the agreements at December 31, 2002 or 2001.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE H--EMPLOYEE BENEFIT PLANS
The Bancorp has a 401(k) Employee Savings Plan (the Plan) in which the Bancorp matches a portion of the employee's contribution each payday. All employees are eligible for participation the first day of the month following six months of employment. Bancorp contributions are 100% vested at all times. The Bancorp made contributions totaling $77,913 in 2002, $60,845 in 2001 and $64,019 in 2000.
The Bancorp purchased single premium life insurance policies in connection with the implementation of retirement plans for four key officers and for the Board of Directors. The policies provide protection against the adverse financial effects from the death of a key officer and provide income to offset expenses associated with the plans. The officers are insured under the policies, but the Bancorp is the owner and beneficiary. At December 31, 2002 and 2001, the cash surrender value of these policies totaled $7,387,712 and $5,030,531, respectively.
The retirement plans are unfunded and provide for the Bancorp to pay the officers and directors specified amounts for specified periods after retirement and allows them to defer a portion of current compensation in exchange for the Bancorp's commitment to pay a deferred benefit at retirement. If death occurs prior to or during retirement, the Bancorp will pay the officer's beneficiary or estate the benefits set forth in the plans. Deferred compensation is vested as to the amounts deferred. Liabilities are recorded for the estimated present value of future salary continuation benefits and for the amounts deferred by the officers and directors. At December 31, 2002 and 2001, the liability recorded for the executive officer supplemental retirement plan totaled $1,223,570 and $898,205 respectively. The amount of pension expense related to this plan for 2002 and 2001 was $325,365 and $233,124 respectively. The director retirement plan was established during 2002 and a liability was recorded during the year totaling $208,600. At December 31, 2002 and 2001, the liability recorded for the deferred compensation plan totaled $849,600 and $696,000, respectively. The amount of expense related to this plan for 2002 and 2001 was $74,400 and $60,300, respectively. The following are the components of the accumulated benefit obligation related to the executive officer supplemental retirement plan as of December 31:
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% for 2002 and 2001. The entire accumulated benefit obligation was fully vested at December 31, 2002 and 2001.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE H--EMPLOYEE BENEFIT PLANS (Continued)
The following is a reconciliation of the beginning and ending balances of the pension liability and the components of net pension expense for the years ended December 31:
NOTE I--NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
Non-interest income is comprised of the following for the years ended December 31:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE I--NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE (Continued)
Other non-interest expense is comprised of the following for the years ended December 31:
NOTE J--INCOME TAXES
The provision for income taxes is comprised of the following:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE J--INCOME TAXES (Continued)
The following is a reconciliation of income taxes computed at the Federal statutory income tax rate of 34% to the effective income tax rate used for the provision for income taxes:
The tax effects of temporary differences that give rise to the components of the net deferred tax asset recorded as an other asset as of December 31 were as follows:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE J--INCOME TAXES (Continued)
Amounts presented for the tax effects of temporary differences are based upon estimates and assumptions and could vary from amounts ultimately reflected on the Bancorp's tax returns. Accordingly, the variances from amounts reported for prior years are primarily the result of adjustments to conform to the tax returns as filed.
Refundable income taxes were $147,486 and $389,855 at December 31, 2002 and 2001, respectively. The income tax benefit related to net investment losses were $2,098 and $39,996 during 2002 and 2000. There were no net investment gains or losses in 2001.
NOTE K--STOCK REPURCHASE
The Bancorp has in effect a program to repurchase Sonoma Valley Bancorp stock up to $2 million. As of December 31, 2002, $916,010 was repurchased.
NOTE L--EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share for the years ended December 31:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE L--EARNINGS PER SHARE (Continued)
NOTE M--STOCK OPTION PLAN
The Bancorp has a stock option plan (the Plan), effective March 31, 1996 and terminating March 31, 2006, under which incentive and nonstatutory stock options, as defined under the Internal Revenue Code, may be granted. The Plan is administered by a Committee appointed by the Board. Options representing 432,404 shares of the Bancorp's authorized and unissued common stock may be granted under the Plan by the committee to directors, full-time officers, and full-time employees of the Bancorp at a price to be determined by the Committee, but in the case of incentive stock options shall not be less than 100% of the fair market value of the shares on the date the incentive stock option is granted. In addition, the Bancorp shall grant options to purchase 2,942 shares of common stock to each Board member on March 1st of each year, provided the person was a member of the Board for the entire preceding year ending December 31st, at an option price equal to the fair market value as of the grant date. The options may have an exercise period of no more than 10 years and are vested upon granting, except for 73,055 of incentive options and 141,193 of nonstatutory options granted in April 1999, which are subject to a graded vesting schedule of 20% per year. In 2002, 1,050 options were granted and no options were granted in 2001 or 2000.
The Bancorp approved an equity incentive plan (the Plan), effective May, 2002 and terminating May, 2012, under which stock options, restricted stock, stock appreciation rights and stock bonuses may be granted. The Plan is administered by a Committee appointed by the Board. Options representing 78,448 shares of the Bancorp's authorized and unissued common stock may be granted under the Plan by the Committee to all employees of the Bancorp at a price to be determined by the Committee but shall not be less than 100% of the fair market value of the shares on the date the incentive stock option is granted. The options may have an exercise period of no more than 10 years and vesting is at the discretion of the committee.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE M--STOCK OPTION PLAN (Continued)
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2002; dividend yield of zero; expected volatility of 33.36 percent; risk-free interest rate of 5.44 percent and expected life of 10 years.
A summary of stock option activity, adjusted to give effect to stock dividends and stock splits follows for years ended December 31:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE M--STOCK OPTION PLAN (Continued)
The following table summarizes information about fixed stock options outstanding at December 31, 2002:
Options Outstanding
Weighted-Average Range of Number Remaining Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price - --------------- ----------- ---------------- -------------- $ 8.60 to $10.28 37,170 4.26 years $ 9.08 $12.34 to $12.55 240,720 6.28 years 12.53 $15.32 to $16.97 44,002 5.18 years 15.87 $22.86 1,050 9.42 years 22.86 -----------
$8.60 to $22.86 322,942 5.95 years 12.62 ===========
Options Exercisable
Range of Number Weighted-Average Exercise Prices Exercisable Exercise Price - --------------- ----------- -------------- $ 8.60 to $10.28 37,170 $ 9.08 $12.34 to $12.55 163,853 12.52 $15.32 to $16.97 44,002 15.87 $22.86 1,050 22.86 -----------
$ 8.60 to $22.86 246,075 12.64 ============
NOTE N--RELATED PARTY TRANSACTIONS
The Bancorp has entered into transactions with its directors, executive officers and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The following is a summary of the aggregate activity involving related party borrowers at December 31, 2002 and 2001:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE N--RELATED PARTY TRANSACTIONS (Continued)
At December 31, 2002, commitments to related parties of approximately $1,289,000 were undisbursed. Deposits received from directors and officers totaled $5,360,000 and $4,277,000 at December 31, 2002 and 2001, respectively.
The Bancorp leases its Glen Ellen office from a director of the Bancorp under a noncancellable operating lease. Lease expense for the years ended December 31, 2002 and 2001 was $12,172 and $11,054, respectively. The remaining lease commitment is approximately $2,989 through March 2003 including a minimum inflationary increase of 4% per year. The monthly lease payments will be increased annually based upon the Consumer Price Index, but not less than 4% annually. The term of the lease is 5 years with an option to extend the lease term for an additional 5 years at the same Consumer Price Index limitations.
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments: The Bancorp leases its two Sonoma offices and Glen Ellen office under noncancelable operating leases with remaining terms of approximately seven years, three years and three months, respectively. Two of the leases require adjustments to the base rent for changing price indices and have a minimum annual increase of four percent. The Sonoma main office lease has an option to renew for two consecutive five-year terms and the Sonoma annex office has an option to renew for two five-year periods and one four-year period. The Glen Ellen office lease has an option to renew for one additional five-year term. The following table summarizes future minimum commitments under the noncancelable operating leases.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Rental expense was $278,000 in 2002, $268,000 in 2001 and $260,000 in 2000.
Financial Instruments with Off-Balance-Sheet Risk: The Bancorp's financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the Bancorp's commitments and contingent liabilities at December 31, is as follows:
Commitments to extend credit and standby letters of credit include exposure to some credit loss in the event of nonperformance of the customer. The Bancorp's credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded on the balance sheet. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bancorp.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bancorp evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bancorp upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, certificates of deposits and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending facilities to customers.
The Bancorp has not incurred any losses on its commitments in 2002, 2001 or 2000.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE O--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
As a guarantor of its customer's credit card accounts, the Bancorp is contingently liable for credit card receivable balances held by another financial institution should the customers default. The total amount guaranteed as of December 31, 2002 and 2001 was $181,000 and $34,000, respectively.
NOTE P--CONCENTRATIONS OF CREDIT RISK
Most of the Bancorp's business activity is with customers located within the State of California, primarily in Sonoma County. The economy of the Bancorp's primary service area is heavily dependent on the area's major industries which are tourism and agriculture, especially wineries, dairies, cheese producers and turkey breeders. General economic conditions or natural disasters affecting the primary service area or its major industries could affect the ability of customers to repay loans and the value of real property used as collateral. While the Bancorp has a diversified loan portfolio, approximately 83% of these loans are secured by real estate in its service area.
The concentrations of credit by type of loan are set forth in Note D. The distribution of commitments to extend credit approximates the distribution of loans outstanding. In addition, the Bancorp has loan commitments in the wine/agricultural industry, tourism industry and construction loans, representing 8%, 7% and 19%, of outstanding loans, respectively. Standby letters of credit were granted primarily to commercial borrowers. The Bancorp, as a matter of policy, does not extend credit to any single borrower or group of related borrowers on a secured basis in excess of 25% of its unimpaired capital (shareholders' equity plus the allowance for credit losses) and on an unsecured basis in excess of 15% of its unimpaired capital.
The concentrations of investments are set forth in Note C. The Bancorp places its investments primarily in financial instruments backed by the U.S. Government and its agencies or by high quality financial institutions, municipalities or corporations. The Bancorp has significant funds deposited with four correspondent banks. At December 31, 2002 the Bancorp had on deposit $9,500,000, $5,000,000 and $4,950,000 in federal funds sold to three of these institutions, which represented 50%, 26% and 26% of the Bancorp's net worth, respectively. In addition, deposits with one correspondent bank was in excess of the federally insured limit by $1,390,645 at December 31, 2002. While management recognizes the inherent risks involved in such concentrations, this concentration provides the Bancorp with an effective and cost efficient means of managing its liquidity position and item processing needs. Management closely monitors the financial condition of their correspondent banks on a continuous basis. The Bancorp also maintains additional deposit accounts with other correspondent banks should management determine that a change in its correspondent banking relationship would be appropriate.
At December 31, 2002, the Bancorp had life insurance policies with cash surrender values of $2,155,278 and $1,772,564 with two insurance companies, which represented 11% and 9%, respectively, of the Bancorp's net worth. Management closely monitors the financial condition and rating of these insurance companies on a regular basis.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE Q--REGULATORY MATTERS
Banking regulations limit the amount of cash dividends that may be paid without prior approval of the Bank's regulatory agency. Cash dividends are limited to the lesser of retained earnings, if any, or net income for the last three years, net of the amount of any other distributions made to shareholders during such periods. As of December 31, 2002, $5,801,283 was available for cash dividend distribution without prior approval.
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital requirements can initiate certain mandatory---and possibly additional discretionary---actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that the Bank meets all capital adequacy requirements to which it is subject.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE Q--REGULATORY MATTERS (Continued)
As of December 31, 2002, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table.
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
A condensed balance sheet as of December 31, 2002 and 2001 and the related condensed statement of operations and cash flows for the years ended December 31, 2002 and 2001, and two months ended December 31, 2000 for Sonoma Valley Bancorp (parent company only) are presented as follows:
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Balance Sheets December 31, 2002 and 2001
Condensed Statements of Operations For the years ended December 31, 2002 and 2001 and the two months ended December 31, 2000
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE R--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows For the years ended December 31, 2002 and 2001 and the two months ended December 31, 2000
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bancorp as a whole. - --------------------------------------------------------------------------------
SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp and Subsidiary's financial instruments are as follows at December 31:
The carrying amounts in the preceding table are included in the balance sheet under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating its fair value disclosures for financial instruments:
Cash, due from banks and federal funds sold: The carrying amount is a reasonable estimate of fair value.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of accrued interest receivable approximates its fair value.
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SONOMA VALLEY BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002, 2001 and 2000
NOTE S--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans and lease financing receivables, net: For variable-rate loans and leases that reprice frequently and fixed rate loans and leases that mature in the near future, with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other fixed rate loans and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans or leases with similar terms to borrowers of similar credit quality. Loan and lease fair value estimates include judgments regarding future expected loss experience and risk characteristics and are adjusted for the allowance for loan and lease losses. The carrying amount of accrued interest receivable approximates its fair value.
Cash surrender value of life insurance: The carrying amount approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and passbook accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value.
Off-balance sheet instruments: Off-balance sheet commitments consist of commitments to extend credit and standby letters of credit. The contract or notional amounts of the Bancorp's financial instruments with off- balance-sheet risk are disclosed in Note O. Estimating the fair value of these financial instruments is not considered practicable due to the immateriality of the amounts of fees collected, which are used as a basis for calculating the fair value, on such instruments.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Company.
The information called for in Item 10 of Part III is incorporated by reference from the definitive proxy statement of the Company to be filed with the Securities and Exchange Commission within 180 days from fiscal year end.
Item 11.
Item 11. Executive Compensation.
The information called for in Item 11 of Part III is incorporated by reference from the definitive proxy statement of the Company to be filed with the Securities and Exchange Commission within 180 days from fiscal year end.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for in Item 12 of Part III is incorporated by reference from the definitive proxy statement of the Company to be filed with the Securities and Exchange Commission within 180 days from fiscal year end.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information called for in Item 13 of Part III is incorporated by reference from the definitive proxy statement of the Company to be filed with the Securities and Exchange Commission within 180 days from fiscal year end.
Item 14.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in this Form 10-K.
There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
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PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Financial Statements
The following financial statements of the Company are filed as part of this Annual Report:
Number Page
1. Independent Auditor's Report ....................................... 29
2. Consolidated Balance Sheets as of December 31, 2002 and 2001 ........30
3. Consolidated Statements of Operations for the three years ended December 31, 2002, 2001 and 2000.....................................31
4. Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2002, 2001 and 2000....32 and 33
5. Consolidated Statements of Cash Flows for the three years ended December 31, 2002, 2001 and 2000..............................34 and 35
6. Notes to Consolidated Financial Statements ..........................36
Financial Statement Schedules
All other schedules have been omitted since the required information is not present or is not present in sufficient amounts to require submission of the schedules or because the information is included in the financial statements or the notes thereto.
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Reports on Form 8-K
None
Exhibits
The following Exhibits are attached or incorporated herein by reference:
3.1 Sonoma Valley Bancorp Articles of Incorporation, filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-8 filed on June 5, 2001.
3.3 Sonoma Valley Bancorp By-laws, filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-8 filed on June 5, 2001.
4.2 Agreement for the sale of Sonoma Valley Bank Stock dated September 23, 1992, filed as Exhibit 4.2 (formerly A-1) to the Form for the year ended December 31, 1992.
10.1 Lease for Sonoma branch office, filed as Exhibit 10.1 (formerly 7.1) to the Registrant's Registration Statement on Form filed on May 1, 1989.
10.2 Sonoma Valley Bank Chief Executive Officer Severance Agreement dated January 4, 1995, filed as Exhibit 10.2 to the Form 10-KSB for the year ended December 31, 1997.
10.3 Sonoma Valley Bank Supplemental Executive Retirement Plan, as amended on March 20, 1996, filed as Exhibit 10.3 to the Form 10-KSB for the year ended December 31, 1997.
10.4 Sonoma Valley Bank Deferred Compensation Plan, filed as Exhibit 10.4 to the Form 10-KSB for the year ended December 31, 1997.
10.5 Sonoma Valley Bank Master Trust Agreement for Executive Deferral Plans, filed as Exhibit 10.5 to the Form 10-KSB for the year ended December 31, 1997.
10.6 Sonoma Valley Bank 1996 Stock Option Plan, filed as Exhibit 10.6 to the Form 10-KSB for the year ended December 31, 1997.
10.7 Sonoma Valley Bank Severance Agreement with Mel Switzer, Jr. dated October 21, 1998, filed as Exhibit 10.7 to the From 10-KSB for the year ended December 31, 1998.
10.8 Sonoma Valley Bank Severance Agreement with Mary Dieter dated October 21, 1998, filed as Exhibit 10.8 to the From 10-KSB for the year ended December 31, 1998.
10.10Sonoma Valley Bancorp Assumption of Severance Agreement [Form of], filed as Exhibit 10.1 to the Form 10-KSB for the year ended December 31, 2001.
10.11Sonoma Valley Bancorp 2002 Equity Incentive Plan, filed as Exhibit A to the Company's Proxy Statement for the Annual Meeting held on May 14, 2002.
23.1 Consent of Richardson and Co., Independent Auditors.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - --------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SONOMA VALLEY BANCORP
Date: March 19, 2003 By:/s/ Mel Switzer, Jr. ----------------------------------------- Mel Switzer, Jr. President and Chief Executive Officer (Principal Executive Officer)
Date: March 19, 2003 By:/s/ Mary Quade Dieter ----------------------------------------- Mary Quade Dieter Executive Vice President and Chief Operating Officer (Principal Finance and Accounting Officer) - --------------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Suzanne Brangham Date: March 19, 2003 - ---------------------------------------- Suzanne Brangham, Secretary of the Board and Director
/s/ Dale T. Downing Date: March 19, 2003 - ------------------------------------------- Dale T. Downing, Director
/s/ Frederick H. Harland Date: March 19, 2003 - ----------------------------------------- Frederick H. Harland, Director
/s/ Robert B. Hitchcock Date: March 19, 2003 - ----------------------------------------- Robert B. Hitchcock, Director
/s/ Gerald J. Marino Date: March 19, 2003 - -------------------------------------------- Gerald J. Marino, Director
/s/ Gary D. Nelson Date: March 19, 2003 - -------------------------------------------- Gary D. Nelson, Director
/s/ Robert J. Nicholas Date: March 19, 2003 - ------------------------------------------- Robert J. Nicholas, Chairman of the Board and Director
/s/ Angelo C. Sangiacomo Date: March 19, 2003 - -------------------------------------- Angelo C. Sangiacomo, Director
/s/ Jesse R. Stone Date: March 19, 2003 - ---------------------------------------------- Jesse R. Stone, Director
/s/ Mel Switzer, Jr. Date: March 19, 2003 - --------------------------------------------- Mel Switzer, Jr., Director, President and Chief Executive Officer (Principal Executive Officer)
/s/ Harry Weise Date: March 19, 2003 - ---------------------------------------------- Harry Weise, Director
/s/ Mary Quade Dieter Date: March 19, 2003 - ----------------------------------------- Mary Quade Dieter, Chief Financial Officer Executive Vice President, Chief Operating Officer (Principal Finance and Accounting Officer)
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CERTIFICATION
I, Mel Switzer, Jr., Chief Executive Officer for Sonoma Valley Bancorp, certify that:
1. I have reviewed this quarterly report on Form 10-K of Sonoma Valley Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 19, 2003 /s/ Mel Switzer, Jr. ------------------------ ---------------------------- Mel Switzer, Jr. Chief Executive Officer (Principal Executive Officer)
CERTIFICATION
I, Mary Quade Dieter., Chief Financial Officer for Sonoma Valley Bancorp, certify that:
1. I have reviewed this quarterly report on Form 10-K of Sonoma Valley Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 19, 2003 /s/ Mary Quade Dieter ------------------------ ----------------------------------------- Mary Quade Dieter Chief Financial Officer (Principal Finance and Accounting Officer)
EXHIBIT 23.1
Richardson & Company 550 Howe Avenue, Suite 210 Sacramento, California 95825
Telephone: (916) 564-8727 FAX: (916)564-8728
CONSENT OF RICHARDSON & COMPANY
We consent to the incorporation by reference in the Registration Statement (Form S-8) (SEC File Number 333-62294) pertaining to the Sonoma Valley Bancorp's 1996 Stock Option Plan as amended in April 1999 and the Registration Statement (Form S-8) (SEC File Number 333-88610) pertaining to the Sonoma Valley Bancorp's 2002 Equity Incentive plan of our report dated January 29, 2003 with respect to the consolidated financial statements of Sonoma Valley Bancorp and Subsidiary included in its Annual Report (Form 10-K) for the year ended December 31, 2002, filed with the securities and Exchange Commission.
/s/ Richardson & Company ------------------------ Richardson & Company
Sacramento, California March 19, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT 2002
In connection with the annual report of Sonoma Valley Bancorp (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), We, Mel Switzer, Jr., Chief Executive Officer and Mary Quade Dieter, Chief Financial Officer, of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 fo the Sarbanes-Oxley Act of 2002 , that to the best of our knowledge and belief:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934: and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: March 19, 2003 /s/ Mel Switzer, Jr. ------------------------ ------------------------------------------ Mel Switzer, Jr., Chief Executive Officer (Principal Executive Officer)
Dated: March 19, 2003 /s/ Mary Quade Dieter ------------------------ ------------------------------------------- Mary Quade Dieter, Chief Financial Officer (Principal Financial and Accounting Officer)