UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2002 Commission File Number: 000-31929
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SONOMA VALLEY BANCORP
(Name of small business issuer in its charter)
CALIFORNIA 68-0454068
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(State of incorporation) (I.R.S. Employer Identification No.)
202 West Napa Street
Sonoma, California 95476
(707) 935-3200
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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Securities to be registered under section 12(b) of the Exchange Act: None
Securities to be registered under section 12(g) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [ ] Yes [ X ] No
Aggregate market value of Common Stock held by non-affiliates of Sonoma Valley
Bancorp as of February 19, 2003 based on the current market price of the stock:
$ 28,712,040
The number of shares of registrant's common stock outstanding on the NASD OTC BB
as of March 10, 2003 was 1,392,138.
DOCUMENTS INCORPORATE BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting of shareholders to be held on May
14, 2003.
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With the exception of historical facts stated herein, the matters discussed in
this Form 10-K are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Sonoma Valley Bancorp's wholly owned
subsidiary, Sonoma Valley Bank, projected costs and expenses related to
operations of the bank's liquidity, capital resources, and the availability of
future equity capital on commercially reasonable terms. Factors that could cause
actual results to differ materially include, in addition to the other factors
identified in this Form 10-K, the following: (i) increased competition from
other banks, savings and loan associations, thrift and loan associations,
finance companies, credit unions, offerors of money market funds, and other
financial institutions; (ii) the risks and uncertainties relating to general
economic and political conditions, both domestically and internationally,
including, but not limited to, inflation, or natural disasters affecting the
primary service area of the Bank or its major industries; or (iii) changes in
the laws and regulations governing the Bank's activities at either the state or
federal level. Readers of this Form 10-K are cautioned not to put undue reliance
on "forward looking" statements which, by their nature, are uncertain as
reliable indicators of future performance. Sonoma Valley Bancorp disclaims any
obligation to publicly update these "forward looking" statements, whether as a
result of new information, future events, or otherwise.
PART I
Item 1. Business
General
Sonoma Valley Bancorp ("Company") was incorporated under California law on March
9, 2000 at the direction of Sonoma Valley Bank for the purpose of forming a
single-bank holding company structure pursuant to a plan of reorganization. The
reorganization became effective November 1, 2000, after obtaining all required
regulatory approvals and permits, shares of the Company's common stock were
issued to shareholders of Sonoma Valley Bank in exchange for their Sonoma Valley
Bank stock. Previously, Sonoma Valley Bank filed its periodic reports and
current reports under the Securities Exchange Act of 1934 with the Federal
Deposit Insurance Corporation. Following the reorganization, periodic and
current reports are now filed with the Securities and Exchange Commission.
The business operations of the Company continue to be conducted through its
wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial
lending operations on June 3, 1988. In addition to its main branch located in
Sonoma, California, the Bank also operates a branch office located in Glen
Ellen, California. The following discussion, therefore, although presented on a
consolidated basis, analyzes the financial condition and results of operations
of the Bank for the twelve month period ended December 31, 2002.
Primary Services
The Bank emphasizes the banking needs of small to medium-sized commercial
businesses, professionals and upper middle to high income individuals and
families in its primary service area of Sonoma, California and the immediate
surrounding area.
The Bank offers depository and lending services keyed to the needs of its
business and professional clientele. These services include a variety of demand
deposit, savings and time deposit account alternatives, all insured by the FDIC
up to its applicable limits. Special merchant and business services,
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such as coin, night depository, courier, on line cash management and merchant
teller are available. The Bank offers bank by mail service, drive-up ATM
service, extended hours including Saturday banking, drive-up windows and
telephone voice response. The bank is venturing into Internet Banking. The
initial customers using the product are our Cash Management Commercial
customers. The Bank's lending activities are directed primarily towards granting
short and medium-term commercial loans, augmented by customized lines of credit,
for such purposes as operating capital, business and professional start-ups,
inventory, equipment, accounts receivable, credit cards, and interim
construction financing.
The bank is exploring ways to serve the Hispanic community in our market place.
We are installing bilingual ATM machine, and have bilingual officers and
customer service employees.
The business of the Bank is not seasonal. The Bank intends to continue with the
same basic commercial banking activities it has operated with since beginning
operations June 3, 1988.
Competition
In general, the banking business in California and in the market areas which the
Bank serves, is highly competitive with respect to both loans and deposits, and
is dominated by a relatively small number of major banks which have many offices
operating over a wide geographic area. The Bank competes for loans and deposits
with these and other regional banks, including several which are much larger
than the Bank, as well as savings and loan associations, thrift and loan
associations, finance companies, credit unions, offerors of money market funds
and other financial institutions.
The Bank's primary service area is currently served by six other banks
(including two major banks: Bank of America and Wells Fargo Bank). In order to
compete with the major financial institutions in its primary service area, the
Bank uses its flexibility as an independent bank. This includes emphasis on
specialized services and personalized attention.
In the event there are customers whose loan demands exceed the Bank's lending
limit, the Bank seeks to arrange for such loans on a participation basis with
other financial institutions and intermediaries. The Bank also is able to assist
those customers requiring other services not offered by the Bank by obtaining
those services through its correspondent banks.
Concentration of Credit Risk
The majority of the Bank's loan activity is with customers located within the
county of Sonoma. While the Bank has a diversified loan portfolio, approximately
83% of these loans are secured by real estate in its service area. This
concentration for the year ending December 31, 2002 is presented below:
(in thousands of dollars)
Secured by real estate:
Construction/land development $ 24,889
Farmland 4,197
1-4 family residences 20,917
Commercial/multi-family 56,663
Employees
As of December 31, 2002, the Company employed 44 full-time equivalent employees.
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Supervision and Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act, regulated, supervised and examined by the Federal Reserve Bank. As such, it
must file with the Federal Reserve Bank an annual report and additional reports
as the Federal Reserve Board may require. The Company is also subject to
periodic examination by the Federal Reserve Board.
In addition, both the Company and the Bank are extensively regulated under both
federal and state laws and regulations. These laws and regulations are primarily
intended to protect depositors, not shareholders. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions at issue.
As a California state-licensed bank, the Bank is subject to regulation,
supervision and periodic examination by the California Department of Financial
Institutions. The Bank is also subject to regulation, supervision, and periodic
examination by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank
is not a member of the Federal Reserve System, but is nevertheless subject to
certain regulations of the Board of Governors of the Federal Reserve System. As
a state bank, the Bank's deposits are insured by the FDIC to the maximum amount
permitted by law, which is currently $100,000 per depositor in most cases. For
this protection, the Bank pays a semi-annual assessment.
The regulations of these state and federal bank regulatory agencies govern most
aspects of the Company's and the Bank's business and operations, including but
not limited to, requiring the maintenance of non-interest bearing reserves on
deposits, limiting the nature and amount of investments and loans which may be
made, regulating the issuance of securities, restricting the payment of
dividends, regulating bank expansion and bank activities, including real estate
development activities. The Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the California Department of Financial Institutions have broad
enforcement powers over depository institutions, including the power to prohibit
a bank from engaging in business practices which are considered to be unsafe or
unsound, to impose substantial fines and other civil and criminal penalties, to
terminate deposit insurance, and to appoint a conservator or receiver under a
variety of circumstances. The Federal Reserve Board also has broad enforcement
powers over bank holding companies, including the power to impose substantial
fines and other civil and criminal penalties.
Regulation of Bank Holding Companies
As a bank holding company, the Company's activities are subject to extensive
regulation by the Federal Reserve Board. The Bank Holding Company Act requires
us to obtain the prior approval of the Federal Reserve Board before (i) directly
or indirectly acquiring ownership or control of any voting shares of another
bank or bank holding company if, after such acquisition, we would own or control
more than 5% of the shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The Federal Reserve Board will not approve any acquisition, merger or
consolidation that would have a substantially anticompetitive result, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve Board also considers capital adequacy and other
financial and managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company that is not a
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bank or bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities that, by statute or by Federal
Reserve Board regulation or order, have been determined to be activities closely
related to the business of banking or of managing or controlling banks.
Federal Deposit Insurance
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or pursuant to written agreement with, the
FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital.
Impact of Economic Conditions and Monetary Policies
The earnings and growth of the Bank are and will be affected by general economic
conditions, both domestic and international, and by the monetary and fiscal
policies of the United States Government and its agencies, particularly the
Federal Reserve Bank (FRB). One function of the FRB is to regulate the money
supply and the national supply of bank credit in order to mitigate recessionary
and inflationary pressures. Among the instruments of monetary policy used to
implement these objects are open market transactions in United States Government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirement held by depository institutions. The monetary policies of
the FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. However,
the effect of such policies on the future business and earnings of the Bank
cannot be accurately predicted.
Recent and Proposed Legislation
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature, and by various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on the Bank. Certain changes of potential
significance to the Bank which have been enacted recently or others which are
currently under consideration by Congress or various regulatory or professional
agencies are discussed below.
The Financial Services Modernization Act of 1999 (also known as the
"Gramm-Leach-Bliley Act" after its Congressional sponsors) substantially
eliminates most of the separations between banks, brokerage firms, and insurers
enacted by the Glass-Steagall Act of 1933. The reform legislation permits
securities firms and insurers to buy banks, and banks to underwrite insurance
and securities. States retain regulatory authority over insurers. The Treasury
Department's Office of the Comptroller of the Currency has authority to regulate
bank subsidiaries that underwrite securities and the Federal Reserve has
authority over bank affiliates for activities such as insurance underwriting and
real-estate development.
In 1997, California adopted the Environmental Responsibility Acceptance Act (the
"Act") (Cal. Civil Code Sections 850-855) to facilitate the notification of
government agencies and potentially responsible parties (for example, for
cleanup) of the existence of contamination and the cleanup or other remediation
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of contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conservation and Recovery Act to provide lenders
and fiduciaries with greater protections from environmental liability. In June
1997, the U.S. Environmental Protection Agency ("EPA") issued its official
policy with regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996. Although numerous exceptions exist, California law
provides that a lender acting in the capacity of a lender will not be liable
under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
In January 2001, the Basel Committee on Banking Supervision issued a proposal
for a "New Capital Accord." The New Capital Accord incorporates a three-part
framework of minimum capital requirements, supervisory review of an
institution's capital adequacy and internal assessment process, and market
discipline through effective disclosure to encourage safe and sound banking
practices. The New Capital Accord is scheduled for implementation by the end of
2006.
The federal banking agencies are required to take "prompt corrective action" in
respect of depository institutions and their bank holding companies that do not
meet minimum capital requirements. FDIC established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier, or that of its bank holding company, depends upon where its
capital levels are in relation to various relevant capital measures, including a
risk-based capital measure and a leverage ratio capital measure, and certain
other factors.
Under the implementing regulations adopted by the federal banking agencies, a
bank holding company or bank is considered "well capitalized" if it has (i) a
total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv)
is not subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" bank holding
company or bank is defined as one that has (i) a total risk-based capital ratio
of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater and
(iii) a leverage ratio of 4% or greater (or 3% or greater in the case of a bank
with a composite CAMELS rating of 1). A bank holding company or bank is
considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio
of less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii)
a leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMELS rating of 1); (B) "significantly undercapitalized" if the bank has (i) a
total risk-based capital ratio of less than 6%, or (ii) a Tier 1 risk-based
capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and
(C)"critically undercapitalized" if the bank has a ratio of tangible equity to
total assets equal to or less than 2%. The Federal Reserve Board may reclassify
a "well capitalized" bank holding company or bank as "adequately capitalized" or
subject an "adequately capitalized" or "undercapitalized" institution to the
supervisory actions applicable to the next lower capital category if it
determines that the bank holding company or bank is in an unsafe or unsound
condition or deems the bank holding company or bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency. The Company and
Bank currently meet the definition of "well capitalized" institutions.
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"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan and provide appropriate assurances of performance. If a
depository institution fails to submit an acceptable plan, including if the
holding company refuses or is unable to make the guarantee described in the
previous sentence, it is treated as if it is "significantly undercapitalized".
Failure to submit or implement an acceptable capital plan also is grounds for
the appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and restrictions, including orders to sell sufficient voting stock to become
"adequately capitalized," requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. Moreover, the parent holding
company of a "significantly undercapitalized" depository institution may be
ordered to divest itself of the institution or of nonbank subsidiaries of the
holding company. "Critically undercapitalized" institutions, among other things,
are prohibited from making any payments of principal and interest on
subordinated debt, and are subject to the appointment of a receiver or
conservator.
Each federal banking agency prescribes standards for depository institutions and
depository institution holding companies relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, a maximum
ratio of classified assets to capital, minimum earnings sufficient to absorb
losses, a minimum ratio of market value to book value for publicly traded shares
and other standards as they deem appropriate. The Federal Reserve Board and OCC
have adopted such standards.
Depository institutions that are not "well capitalized" or "adequately
capitalized" and have not received a waiver from the FDIC are prohibited from
accepting or renewing brokered deposits. As of December 31, 2002, the Company
and Bank had no brokered deposits.
USA Patriot Act
The USA Patriot Act imposes additional obligations on U.S. financial
institutions, including banks and broker dealer subsidiaries, to implement
policies, procedures and controls which are reasonably designed to detect and
report instances of money laundering and the financing of terrorism. In
addition, provisions of the USA Patriot Act require the federal financial
institution regulatory agencies to consider the effectiveness of a financial
institution's anti-money laundering activities when reviewing bank mergers and
bank holding company acquisitions.
Future Legislation and Regulations
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature, and by various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact legislative changes might have on the Bank.
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Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
(SFAS) No. 145, which amends Statements No. 4 "Reporting Gains and Losses from
Extinguishment of Debt", No. 44 "Accounting for Intangible Assets of Motor
Carriers" and No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". The Statement is effective for fiscal years beginning after May
15, 2002, or for transactions occurring after May 15, 2002. This Statement will
not have a material impact on Sonoma Valley Bancorp.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". The provisions of this Statement are effective for
exit and disposal activities that are initiated after December 31, 2002. This
Statement is not expected to have a material effect on Sonoma Valley Bancorp.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions". This Statement removes acquisitions of financial institutions
from the scope of SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with Statement No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". The Statement
indicates that the purchase method of accounting applies to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises. This Statement is effective for acquisitions occurring on or after
October 1, 2002. This Statement is not expected to have a material effect on the
Company.
In December 2002, FASB issued SFAS No. 148, which provides three alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock- based employee compensation and the impact on reported financial results.
Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting,
to require disclosure about those effects in interim financial information. This
Statement is effective for fiscal and interim periods ending after December 15,
2002. The Company has elected to adopt the prospective transition method
effective January 1, 2003 and, accordingly, compensation expense will be
recognized for any stock options granted on or after that date. The unvested
portion of stock options granted prior to January 1, 2003 will continue to be
accounted for under the provisions of APB Opinion No. 28. Management does not
expect this Statement to have material impact on the Company's financial
condition or results of operations in 2003. Since the method of determining the
value of stock options prescribed under SFAS No. 123 is based on a valuation
model that relies upon factors that are beyond the Company's control, such as
stock price volatility and market interest rates, Management is not able to
accurately predict the cost of options that may be granted in the future and the
resulting impact on the Company's financial condition and results of operations.
Additional information regarding stock options is contained in Notes A and M of
the Notes to the Consolidated Financial Statements.
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Statistical Data
The following information is required by the Industry Guide 3,"Statistical
Disclosure by Bank Holding Companies". The averages shown have been
calculated using the average daily balance.
Sequential Page
Number
I. Distribution of Assets, Liabilities and Stock-
holders' Equity; Interest Rates and Differential
A. Average balance sheets 16
B. Analysis of net interest earnings 16
C. Rate/volume analysis 17
II. Investment Portfolio
A. Book value (Amortized Cost) of investments 41
B. Weighted average yield and maturity 16, 20, 25 and 42
C. Securities of issuer exceeding
ten percent of equity: None
III. Loan Portfolio
A. Types of loans 16 and 43
B. Maturities and sensitivities of loans
to change in interest rates 25 and 44
C. Risk elements
1. Non-accrual, past due,
and restructured loans 21 and 43
2. Potential problem loans: None
3. Foreign outstandings: None
4. Loan concentrations 20 and 56
D. Other Interest Bearing Assets: None
IV. Summary of Loan Loss Experience 21, 22 and 44
V. Deposits
A. Average balances and average rates paid 16
B. Other categories of deposits None
C. Foreign outstandings None
D. Maturity of time deposits greater than $100,000 25
E. Maturity of foreign time deposits greater than 100,000 None
VI. Return on Equity and Assets 14
VII. Short-term Borrowings: None
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Item 2. Properties
The Company is headquartered in Sonoma, California. At the present time the
Company's Bank has two branch offices. In 1995 the Bank leased additional office
space adjacent to the Sonoma Branch and in September 1997 the Bank purchased
property across the street from the Sonoma Branch. The Sonoma Branch is located
at 202 W. Napa Street, Sonoma. The building contains approximately 6800 square
feet and has been subleased on a long-term basis (the initial term expires in
2009, with option to extend for two additional five-year terms). The office is
considered by management to be well maintained and adequate for the purpose
intended. Lease payments made in 2002 totaled $216,326 compared to the $208,005
paid in 2001. The lease provides for future annual rents to be adjusted for
changes in the Consumer Price Index ("CPI"), with a minimum annual increase of
4%, effective each March 1st.
In July, 1995, the Bank leased a building at 463 Second Street West. The
building contains approximately 2400 square feet and has been leased on a long
term basis to coincide with the Sonoma Branch lease. The initial term expired in
2000, with the first option exercised to expire in 2005, with an option to
extend for three additional five year terms and one additional four year term.
At present the Bank utilizes all of the units. Lease payments made in 2002
totaled $36,376 compared with the $40,720 paid in 2001. The lease provides for
future annual rents to be adjusted for changes in the Consumer Price Index
("CPI") effective each July 1st.
In September, 1997 the Bank purchased a building at 472 Second St. West. The
building contains approximately 1013 square feet. The Bank paid $246,943 for the
property. At present the Bank is utilizing the parking area for additional
parking for Bank employees and the Bank is renting out the building premises.
Rental income in 2002 was $16,521 compared to $15,576 in 2001.
The Glen Ellen Branch is located at 13751 Arnold Drive, Glen Ellen. The facility
is approximately 600 square feet. The facility is leased for a five year term
expiring in 2003 with the option to extend for an additional five year term.
Lease payments made in 2002 totaled $12,172 compared to $11,054 in 2001. The
lease provides for future annual rents to be adjusted for changes in the CPI,
with a minimum annual increase of 4% effective April 1st of each year.
Item 3. Legal Proceedings
In the normal course of operations, the Company and /or its Bank may have
disagreements or disputes with vendors, borrowers, or employees, which may or
may not result in litigation. These disputes are seen by the Company's
management as a normal part of business. There are no pending actions reported
and no threatened actions that management believes would have a significant
material impact on the Company's financial position, results of operations or
cash flows.
Item 4. Submission of Matters to a Vote of Securities Holders
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended December 31, 2002.
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PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
Following the reorganization the Company's common stock began trading on the
Over the Counter Bulletin Board ("OTC BB") under the symbol "SBNK", and the
Bank's stock ceased to be traded. The Company is not listed on any exchange or
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ").
Several brokers act as facilitators in the trades of Sonoma Valley Bancorp
stock. They are:
A.G. Edwards Hoefer and Arnett
703 2nd Street, Suite 100 555 Market Street, 18th floor
Santa Rosa, CA 95409 San Francisco, CA 94105
Denise Gilseth Lisa Gallo
(800) 972-4800 (800) 346-5544
Paine Webber Raymond James Financial Services
6570 Oakmont Drive 777 Baywood Drive
Santa Rosa, CA 95409 Petaluma, CA 94954
John Rector Moe Jacobson
(707) 539-1500 (707) 763-0354
Edward Jones Smith Barney
515 First Street East 111 Santa Rosa Ave., Suite 303
Sonoma, CA 95476 Santa Rosa, CA 95404
Gary Scott Kirk Aguer
(707) 935-1856 (707) 571-5702
Edward Jones Monroe Securities
19485 Sonoma Hwy, Suite G 47 State Street
Sonoma, CA 95476 Rochester, NY 14614
James Wandzilak Helen Rubeins
(707) 935-0865 (888) 995-5560
Wedbush Morgan Securities Sutro & Co.
1300 S.W. Fifth Avenue, Suite 2000. P.O. Box 2859
Portland, OR 97201-5667 Big Bear Lake, CA 92315
Joey Warmenhoven Troy Norlander
(503) 224-0480 (800)288-2811
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The table below summarizes those trades of the common stock as reported by OTC
BB, setting forth the high and low prices for the periods shown. The stock
prices have been adjusted for stock dividends.
Quarter Ended: High Low
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March 31, 2001 $ 19.16 $ 16.89
June 30, 2001 19.04 18.28
September 30, 2001 21.90 18.77
December 31, 2001 21.19 20.14
March 31, 2002 $ 22.38 $ 20.24
June 30, 2002 29.00 21.54
September 30, 2002 29.00 26.25
December 31, 2002 30.94 26.75
As of February 20, 2003, there were 1,069 holders of record of the Company's
common stock.
Payment of Dividends
Under state law, the Board of Directors of a California state-licensed bank may
declare a cash dividend, subject to the restriction that the amount available
for the payment of cash dividends shall be the lesser of retained earnings of
the bank or the bank's net income for its last three fiscal years (less the
amount of any distributions to shareholders made during such period).
However, under the Financial Institutions Supervisory Act, the FDIC has broad
authority to prohibit a bank from engaging in banking practices which it
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC may assert
that the payment of dividends or other payments by a bank is considered an
unsafe and unsound banking practice and therefore, implement corrective action
to address such a practice.
The Bank has never paid a cash dividend and the future payment of cash dividends
by the Company will not only depend on the Bank's future earnings, but will also
depend on the Bank and the Company meeting certain capital requirements and
having an adequate allowance for loan losses.
Page 12
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Historically, the Bank has declared nine stock dividends of 5% each, two stock
dividends of 10% in May 1996 and June 1997 and one 2 for 1 stock split in March
1998 as detailed below:
Date Declared Record Date Date Paid
May 13, 1992 May 31, 1992 June 15, 1992
June 26, 1993 July 15, 1993 July 31, 1993
July 20, 1994 August 1, 1994 August 15, 1994
January 18, 1995 February 5, 1995 February 20, 1995
August 16, 1995 September 11, 1995 September 29, 1995
May 22, 1996 June 14, 1996 June 28, 1996
June 18, 1997 July 15, 1997 August 1, 1997
March 18, 1998 April 15, 1998 April 30, 1998
July 21, 1999 August 16, 1999 August 31, 1999
August 16, 2000 September 8, 2000 September 25, 2000
July 18, 2001 August 3, 2001 August 17, 2001
June 17, 2002 July 2, 2002 July 16, 2002
Page 13
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Item 6. Selected Financial Data
SONOMA VALLEY BANCORP
Selected Consolidated Financial Data
dollars in thousands, except share
and per share data
For the years ended:
2002 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
RESULTS OF OPERATIONS:
Net interest income $ 8,633 $ 8,236 $ 7,870 $ 6,699 $ 5,987 $ 5,282
Provision for loan losses 393 342 335 240 335 295
Non-interest income 1,646 1,309 893 941 878 735
Non-interest expense 5,862 5,224 5,061 4,614 4,100 3,519
Provision for income tax 1,275 1,379 1,160 976 843 789
Gain(Loss) securities sold (5)
Extraordinary item ---------- ---------- ---------- ---------- ---------- ----------
$ 2,744 $ 2,600 $ 2,207 $ 1,810 $ 1,587 $ 1,414
========== ========== ========== ========== ========== ==========
SELECTED AVERAGE
BALANCES:
Assets $ 164,200 $ 147,807 $ 135,924 $ 123,202 $ 107,202 $ 98,359
Loans, net of unearned 116,867 100,605 86,547 73,222 70,838 56,811
Deposits 143,228 129,534 120,135 109,801 95,819 89,050
Shareholders' equity 17,964 15,121 12,984 11,490 9,976 8,377
PER SHARE DATA:
Basic net income $ 1.97 $ 1.85 $ 1.57 $ 1.27 $ 1.11 $ .99
Fully diluted net income $ 1.80 $ 1.74 $ 1.52 $ 1.25 $ 1.10 $ .99
Period end book value $ 13.73 $ 11.91 $ 10.14 $ 8.49 $ 7.50 $ 6.37
Weighted average shares
outstanding 1,395,679 1,404,486 1,409,908 1,428,782 1,434,138 1,434,138
FINANCIAL RATIOS:
Return on average assets 1.67% 1.76% 1.62% 1.47% 1.48% 1.44%
Return on average
shareholders' equity 15.27% 17.19% 17.00% 15.75% 15.91% 16.88%
Net yield on earning
assets 6.06% 6.25% 6.49% 6.04% 6.22% 5.95%
Cost Control ratio 55.07% 52.72% 55.06% 58.52% 57.97% 57.01%
Average shareholders'
equity to average assets 10.94% 10.23% 9.55% 9.33% 9.31% 8.52%
CAPITAL RATIOS:
Risk-based capital:
Tier I 12.31% 11.81% 12.78% 12.36% 12.57% 12.32%
Total 13.57% 13.07% 14.04% 13.62% 13.83% 13.57%
Leverage ratio 10.62% 10.38% 10.11% 9.54% 9.55% 8.65%
CREDIT QUALITY:
Net charge-offs to
average loans 0.02% 0.05% -0.04% 0.04% 0.09% 0.25%
Allowance for possible
loan losses to period
end loans 2.17% 2.25% 2.29% 2.19% 2.12% 2.01%
Page 14
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Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
The Year Ended December 31, 2002 versus December 31, 2001
The business operations of the Company continue to be conducted through its
wholly-owned subsidiary, Sonoma Valley Bank ("Bank"), which began commercial
lending operations on June 3, 1988. Accordingly, the following discussion and
analysis of the financial condition and the results of operations should be read
in conjunction with the financial statements and notes included elsewhere in
this annual report. Per share amounts for prior years have been adjusted for the
Bank's prior 2 for 1 stock split declared March 18, 1998, 10% stock dividends
declared June 18, 1997 and May 22, 1996 and 5% stock dividends declared in June
2002, July 2001, August 2000, July 1999, January and August, 1995, July 1994,
June 1993 and May, 1992.
Overview
Net income was $2,744,333 ($1.97 per share) for 2002 compared with earnings of
$2,600,244 ($1.85 per share) in 2001. Return on average shareholders' equity
declined to 15.28% in 2002 compared to 17.19% in 2001. Return on average total
assets for 2002, 2001 and 2000 were 1.67%, 1.76% and 1.62%, respectively.
At December 31, 2002 total assets were $182.6 million, a 16.1% increase over the
$157.4 million at December 31, 2001. The Company showed loan growth to $128.1
million in 2002, compared with $107.4 million at year-end 2001, a growth rate of
19.2%. Deposits also increased, growing 16.2%, from $137.7 million at year-end
2001 to $160.0 million at year-end 2002. The loan-to-deposit ratio increased
from 78.1% in 2001 to 80.0% in 2002, a reflection of stronger loan growth
compared to the growth of deposits.
Net Interest Income
Net interest income is the difference between total interest income and total
interest expense. Net interest income, adjusted to a fully taxable equivalent
basis, increased $399,000 to $9.0 million, up 4.6% from 2001 net interest income
of $8.6 million. Net interest income on a fully taxable equivalent basis, as
shown on the table - Average Balances, Yields and Rates Paid (page 16), is
higher than net interest income on the statements of operations because it
reflects adjustments applicable to tax-exempt income from certain securities and
loans ($366,000 in 2002 and $364,000 in 2001, based on a 34% federal income tax
rate).
The increase in net interest income (stated on a fully taxable equivalent basis)
was the net effect of a $523,000 decrease in interest income and a $922,000
decrease in interest expense which is a result of deposit rates declining faster
than loan rates.
Net interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest margin. The
Company's net interest margin declined 19 basis points to 6.06% in 2002 from
6.25% in 2001.
Interest Income
As previously stated, interest income (stated on a fully taxable equivalent
basis) decreased by $523,000 to $11.0 million in 2002, a 4.6% decline over the
$11.5 million realized in 2001.
The $523,000 decrease was the net effect of a 7.9% increase in average earning
assets to $148.4 million offset by a 96 basis point decline in average yield for
the year.
Page 15
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SONOMA VALLEY BANCORP
AVERAGE BALANCES/YIELDS AND RATES PAID
Rate/Volume
2002 2001 2000
---- ---- ----
ASSETS Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- ------- ------ ------- ------- -----
Interest-earning assets:
Loans(2):
Commercial $ 75,696 $ 5,978 7.90% $ 61,888 $ 5,582 9.02% $ 52,475 $ 5,195 9.90%
Consumer 13,186 1,098 8.33% 14,583 1,370 9.39% 11,889 1,179 9.92%
Real estate construction 19,040 1,689 8.87% 12,393 1,279 10.32% 11,316 1,224 10.82%
Real estate mortgage 5,732 481 8.39% 8,983 823 9.16% 8,763 830 9.47%
Tax exempt loans (1) 3,367 285 8.46% 2,566 220 8.57% 1,798 149 8.29%
Leases 164 27 16.46% 409 42 10.27% 537 55 10.24%
Tax exempt leases (1) 106 15 14.15% 165 15 9.09% 122 11 9.02%
Unearned loan fees (424) (382) (353)
-------- ------- -------- ------- --------
Total loans 116,867 9,573 8.19% 100,605 9,331 9.27% 86,547 8,643 9.99%
Investment securities
Available for sale:
Taxable 6,029 365 6.05% 16,420 1,001 6.10% 22,696 1,420 6.26%
Tax exempt(1) 0 0 0.00% 0 0 0.00% 199 15 7.54%
Hold to maturity:
Taxable 201 13 6.47% 203 13 6.40% 347 19 5.48%
Tax exempt (1) 10,904 777 7.13% 11,779 837 7.11% 11,509 803 6.98%
-------- -------- -------- ------- -------- ------
Total investment securities 17,134 1,155 6.74% 28,402 1,851 6.51% 34,751 2,257 6.50%
Federal funds sold 14,053 216 1.54% 8,219 286 3.48% 4,802 294 6.12%
FHLB Stock 275 15 5.45% 261 15 5.75% 285 22 7.72%
Total due from banks/Interest bearing 73 1 1.37% 11 0 2.73% 40 2 4.33%
--------- -------- -------- ------- -------- -------
Total interest earning assets 148,402 $ 10,960 7.39% 137,498 $11,483 8.35% 126,425 11,218 8.87%
======== ======= =======
Noninterest-bearing assets:
Reserve for loan losses (2,547) (2,263) (1,916)
Cash and due from banks 7,600 6,620 6,115
Premises and equipment 705 620 619
Other assets 10,040 5,332 4,681
-------- -------- --------
Total assets $164,200 $147,807 $135,924
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing deposits
Interest bearing transaction $ 23,794 $ 84 0.35% $ 21,940 $ 149 0.68% $ 20,875 $ 204 0.98%
Savings deposits 48,052 656 1.37% 42,074 997 2.37% 38,400 1,016 2.65%
Time deposits over $100,000 18,362 547 2.98% 16,739 845 5.05% 15,177 831 5.48%
Other time deposits 20,155 674 3.34% 18,913 885 4.68% 18,594 947 5.09%
-------- -------- -------- ------- -------- -------
Total interest bearing
Deposits 110,363 1,961 1.78% 99,666 2,876 2.89% 93,046 2,998 3.22%
Federal Funds purchased 0 0 0.00% 0 0 0.00 69 5 7.25%
Other short term borrowings 0 0 0.00% 174 7 4.02% 186 13 6.99%
-------- -------- -------- ------- -------- -------
Total interest bearing
liabilities 110,363 $ 1,961 1.78% 99,840 $ 2,883 2.89% 93,301 $ 3,016 3.23%
======== ======= =======
Non interest bearing liabilities:
Non interest bearing demand deposits 32,865 29,868 27,089
Other liabilities 3,008 2,978 2,550
Shareholders' equity 17,964 15,121 12,984
-------- -------- --------
Total liabilities and
shareholders' equity $164,200 $147,807 $135,924
======== ======== ========
Interest rate spread 5.61% 5.46% 5.64%
==== ==== ====
Interest income $ 10,960 7.39% $11,483 8.35% $11,218 8.87%
Interest expense 1,961 1.32% 2,883 2.10% 3,016 2.39%
-------- ---- ------- ---- ------- ----
Net interest income/margin $ 8,999 6.06% $ 8,600 6.25% $ 8,202 6.49%
======== ======= =======
(1) Fully tax equivalent adjustments are based on a federal income tax rate of
34% in 2002,2001 and 2000.
(2) Non accrual loans have been included in loans for the purposes of the above
presentation. Loan fees of approximately $343,000, $334,000 and $312,000
for the twelve months ended December 31, 2002,2001 and 2000, respectively,
were amortized to the appropriate interest income categories.
Page 16
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SONOMA VALLEY BANCORP
Rate/Volume Analysis
2002 over 2001 2001 over 2000
-------------- --------------
Volume Rate Vol/Rate Total Volume Rate Vol/Rate Total
ASSETS
Interest-earning assets:
Loans:
Commercial 1,245 (694) (155) 396 932 (462) (83) 387
Consumer (131) (156) 15 (272) 267 (62) (14) 191
Real estate construction 686 (180) (96) 410 116 (56) (5) 55
Real estate mortgage (298) (69) 25 (342) 21 (27) (1) (7)
Tax exempt loans 69 (3) (1) 65 64 5 2 71
Leases (25) 25 (15) (15) (13) 0 0 (13)
Tax exempt leases (5) 8 (3) 0 4 0 0 4
Unearned fee income 0 0 0 0 0 0 0 0
------ ------ ----- ----- ----- ----- ----- -----
Total loans 1,541 (1,069) (230) 242 1,391 (602) (101) 688
Investment securities:
Available for sale:
Taxable (633) (7) 4 (636) (393) (36) 10 (419)
Tax-exempt 0 0 0 0 (15) (15) 15 (15)
Held to maturity:
Taxable 0 0 0 0 (8) 3 (1) (6)
Tax-exempt (62) 2 0 (60) 19 15 0 34
------ ----- ----- ----- ----- ----- ----- -----
Total investment
securities (695) (5) 4 (696) (397) (33) 24 (406)
Federal funds sold 203 (160) (113) (70) 209 (127) (90) (8)
FHLB Stock 1 (1) 0 0 (2) (6) 1 (7)
Due from banks-int bearing 2 0 (1) 1 (1) (1) 0 (2)
------ ----- ----- ----- ----- ----- ----- -----
Total interest-earning
assets 1,052 (1,235) (340) (523) 1,200 (769) (166) 265
====== ===== ===== ===== ===== ===== ===== =====
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits:
Savings deposits 13 (72) (6) (65) 10 (62) (3) (55)
Interest-bearing demand
deposits 142 (423) (60) (341) 97 (106) (10) (19)
Time less than $100,000 (26) (321) 9 (338) 16 (77) (1) (62)
Time $100,000 and over 172 (285) (58) (171) 86 (65) (7) 14
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
deposits 301 (1,101) (115) (915) 209 (310) (21) (122)
Federal funds purchased 0 0 0 0 (5) (5) 5 (5)
Other borrowings (7) (7) 7 (7) 0 (6) 0 (6)
------ ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities 294 (1,108) (108) 922 204 (321) (16) (133)
Interest differential 758 (127) (232) 399 996 (448) (150) 398
====== ===== ===== ===== ===== ===== ===== =====
Volume/Rate variances were allocated in the following manner:
a. Changes affected by volume (change in volume times old rate)
b. Changes affected by rates (change in rates times old volume)
c. Changes affected by rate/volume (change in volume times change in rates)
The total for each category was arrived at by totaling the individual items
in their respective categories
Page 17
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Interest Expense
Total interest expense declined by $922,000 to $2.0 million. The average rate
paid on all interest- bearing liabilities was 1.78%, compared to 2.89% in 2001.
Average balances increased from $99.8 million to $110.4 million, a 10.5% gain.
The gain in volume of average balances was responsible for a $186,000 increase
in interest expense offset by a $1.1 million decrease related to lower interest
rates paid for a net decrease of $922,000. The lower rates paid on
interest-bearing liabilities is a result of a declining interest rate
environment.
Individual components of interest income and interest expense are provided in
the table - Average Balances, Yields and Rates Paid on page 16.
Provision for Loan Losses
The provision for loan losses charged to operations is based on the Bank's
monthly evaluations of the loan portfolio and the adequacy of the allowance for
loan losses in relation to total loans outstanding. The provisions to the
allowance for loan losses amounted to $393,000 in 2002 and $342,000 in 2001. The
increase in the provision is the result management's evaluation and assessment
of the loan portfolio.
Loans charged-off, net of recoveries, resulted in losses totaling $27,000 in
2002 and $47,000 in 2001. The decrease in charge offs reflects management's
efforts to identify problems early.
Non-interest Income
Non-interest income of $1.6 million increased 25.4% in comparison with the $1.3
million recorded in 2001. The increase was primarily due to a $242,000 increase
in other non interest income which was generated by earnings on bank owned life
insurance policies.
Non-interest Expense
Total non-interest expense increased 12.2% to $5.8 million in 2002 from $5.2
million in 2001. Non- interest expense represented 3.6% of average total assets
in 2002 and 3.5% in 2001. The expense/asset ratio is a standard industry
measurement of a bank's ability to control its overhead or non-interest costs.
During 2002, the Company will continue to emphasize cost controls. Certain costs
are not controllable by management. Refer to Note I, page 47 and 48, for a
detailed description of Non-Interest Income and Non-Interest Expense.
Salaries and Benefits
Salaries and benefits increased 9.3% from $3.1 million in 2001 to $3.4 million
in 2002. The 2002 increase reflects normal merit increases and employee
incentives paid as a result of the Company's strong earnings in 2002.
Additionally, there continues to be significant increases in workers
compensation and employee medical benefits. At December 31, 2002 and 2001 total
full-time equivalent employees were 44 and 47 respectively. Year-end assets per
employee were $4.2 million in 2002 compared to $3.3 million in 2001 and 2000.
Page 18
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Premises and Equipment
Expenses related to premises and equipment increased by 5.5% to $618,000 in 2002
from $586,000 in 2001. Building lease expense on three locations and storage
units increased to $278,000 in 2002 from $268,000 in 2001. Lease income for 2002
totaled $17,000 compared to lease income of $16,000 in 2001. The increase in
premises and equipment expense is the result of the banks continued emphasis on
investment in technology.
Other Non-interest Expense
Other non-interest expense increased by 21.0% to $1.8 million in 2002 from $1.5
million in 2001. The increase was the result of a 24.7% increase in professional
fees and a 90.2% increase in advertising. Professional fees is the largest
category of other non-interest expense, primarily comprised of data processing,
item processing and ATM services, as well as accounting, legal and other
professional fees. These services increased by $187,000 to $944,000 in 2002 from
$757,000 in 2001. This increase is the result of the bank outsourcing many
functions to keep staffing costs down and outside assistance in implementing
check imaging and internet banking. Advertising/Marketing which includes in
addition to advertising, customer relations, shareholder relations, public
relation, donations and civic dues was $201,000 in 2002 which increased $95,000
from $106,000 in 2001. This is a result of the bank's greater community
involvement. Increases in other categories reflect the increased growth and
volume of business in general.
Provision for Income Taxes
The provision for income taxes declined to an effective tax rate of 31.72% in
2002 compared with 34.66% in 2001.
Balance Sheet Analysis
Investment Securities
Securities are classified as held to maturity if the Company has both the intent
and the ability to hold these securities to maturity. As of December 31, 2002,
the Company had securities totaling $9.9 million with a market value of $10.4
million categorized as held to maturity. Decisions to acquire municipal
securities, which are generally placed in this category, are based on tax
planning needs and pledge requirements.
Securities are classified as available for sale if the Company intends to hold
these debt securities for an indefinite period of time, but not necessarily to
maturity. Investment securities which are categorized as available for sale are
acquired as part of the overall asset and liability management function and
serve as a primary source of liquidity. Decisions to acquire or dispose of
different investments are based on an assessment of various economic and
financial factors, including, but not limited to, interest rate risk, liquidity
and capital adequacy. Securities held in the available for sale category are
recorded at market value, which is $3.8 million compared to an amortized cost of
$3.7 million as of December 31, 2002.
Page 19
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At year end 2002 the overall portfolio had a market value of $14.3 million
compared with an amortized cost of $13.6 million. Investment securities
decreased 38.8% to $13.7 million from $22.5 million in 2001. The Company
maintains an investment portfolio of securities rated A or higher by Standard
and Poor's and/or Moody's Investors Service. Tax-exempt bonds are occasionally
purchased without an A rating. In the opinion of management, there was no
investment in securities at December 31, 2002 that would constitute a material
credit risk to the Company.
The table below shows the components of the investment portfolio and average
yields. For further information concerning the Company's total securities
portfolio, including market values and unrealized gains and losses, refer to
Note C of the Notes to Consolidated Financial Statements on pages 41 and 42.
Twelve months ended 12/31/02 Twelve months ended 12/31/01
Average Average Average Average
Balance Yield Balance Yield
U.S. Treasury securities $ 2,529 6.0% $ 12,280 6.1%
U.S. federal agency issues 1,596 6.1% 2,019 6.2%
State, county and municipal issues 11,105 7.1% 11,982 7.1%
Corporate securities 1,904 6.1% 2,121 6.2%
------- --------
Total investment securities $17,134 6.7% $ 28,402 6.5%
======= ========
Loans
A comparative schedule of average loan balances is presented in the table on
page 16; year-end balances are presented in Note D to the Consolidated Financial
Statements pages 43 and 44.
Loan balances, net of deferred loan fees at December 31, 2002, were $128.1
million, an increase of 19.2% over 2001. Commercial loans, comprising 69.7% of
the portfolio, increased $17.3 million, or 23.9% over 2001. This increase
represented the primary reason for the overall growth in the portfolio. Included
in commercial loans are loans made for commercial purposes and secured by real
estate.
Real Estate Construction loans increased $5.6 million, or 40.7% over 2001
balances. Consumer loans, including home equity loans, decreased $871,000 or
6.1% over 2001 balances while real estate mortgage loans declined $1.3 million.
In 1997 the Company offered leasing opportunities to small businesses. Lease
financing receivables for year end 2002 decreased $167,000 or 49.0%.
Risk Elements
The majority of the Company's loan activity is with customers located within
Sonoma County. Approximately 83% of the total loan portfolio is secured by real
estate located in the Company's service area (see Note P, on page 56 of the
Consolidated Financial Statements, Concentration of Credit Risk).
Significant concentrations of credit risk may exist if a number of loan
customers are engaged in similar activities and have similar economic
characteristics. The Company believes that it has policies in place to identify
problem loans and to monitor concentration of credits of loan customers engaged
in similar activities.
Page 20
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Commitments and Letters of Credit
Loan commitments are written agreements to lend to customers at agreed upon
terms provided there are no violations of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses. Loan commitments may have variable interest rates and terms that
reflect current market conditions at the date of commitment. Because many of the
commitments are expected to expire without being drawn upon, the amount of total
commitments does not necessarily represent the Company's anticipated future
funding requirements. Unfunded loan commitments were $30.4 million at December
31, 2002 and $41.9 million at December 31, 2001.
Standby letters of credit commit the Company to make payments on behalf of
customers when certain specified events occur. Standby letters of credit are
primarily issued to support customers' financing requirements of twelve months
or less and must meet the Company's normal policies and collateral requirements.
Standby letters of credit outstanding were $589,000 at December 31, 2002 and
$953,000 at December 31, 2001.
Nonperforming Assets
Management classifies all loans as non-accrual loans when they become more than
90 days past due as to principal or interest, or when the timely collection of
interest or principal becomes uncertain, if earlier, unless they are adequately
secured and in the process of collection.
A loan remains in a non-accrual status until both principal and interest have
been current for six months and meets cash flow or collateral criteria or when
the loan is determined to be uncollectible and is charged off against the
allowance for loan losses, or in the case of real estate loans, is transferred
to other real estate owned. A loan is classified as a restructured loan when the
interest rate is materially reduced, when the term is extended beyond the
original maturity date or other concessions are made by the Company because of
the inability of the borrower to repay the loan under the original terms.
The Company had $897,000 in non-accrual status at December 31, 2002 and $747,000
at December 31, 2001. There were $796,000 in loans 90 days or more past due at
December 31, 2002 and no loans 90 days or more past due at December 31, 2001.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by charge-offs,
net of recoveries. The allowance is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed monthly and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
The review process is intended to identify loan customers who may be
experiencing financial difficulties. In these circumstances, a specific reserve
allocation or charge-off may be recommended. Other factors considered by
management in evaluating the adequacy of the allowance include: loan volume,
historical net loan loss experience, the condition of industries and geographic
areas experiencing or expected to experience economic adversities, credit
evaluations, and current economic conditions. The
Page 21
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allowance for loan losses is not a precise amount, but based on the factors
above, represents management's best estimate of losses that may be ultimately
realized from the current loan portfolio.
Worsening conditions in certain economic sectors and geographic areas could
adversely affect the loan portfolio, necessitating larger provisions for loan
losses than currently estimated. However, as of December 31, 2002, the Company
believes its overall allowance for loan losses is adequate based on its analysis
of conditions at that time.
At December 31, 2002, the allowance for loan losses was $2.8 million, or 2.2% of
year end loans, compared with $2.4 million or 2.2% of year end loans at December
31, 2001. Net charge-offs to average loans decreased when compared with the
prior year. The Company recorded net losses of .02% in 2002 compared to .05% in
2001. The continued low level of charge-offs in 2002 reflects the Company's
attention and effort in managing and collecting past due loans by encouraging
the customer to bring them to a current status or to pay them off.
Deposits
A comparative schedule of average deposit balances is presented in the table on
page 16; year-end deposit balances are presented in the table below.
Total deposits increased $22.3 million (16.2%) in 2002, to $160.0 million.
Demand deposits increased $6.5 million, or 20.0% in 2002. Savings deposits
increased by $6.2 million, or 13.8% and interest bearing checking increased
$761,000 or 3.2% during 2002. Other time deposits of less than $100,000
increased $7.2 million, or 40.5% and time deposits over $100,000 increased $1.6
million, for an increase of 8.9% over 2001 balances.
The composition of deposits for the years ending December 31, 2002 and 2001 are
as follows:
December 31, Percentage December 31, Percentage
2002 of Total 2001 of Total
---- -------- ---- --------
Interest bearing transaction deposits $ 24,627,589 15.4% $ 23,865,954 17.3%
Savings deposits 51,802,714 32.4% 45,523,306 33.1%
Time deposits, $100,000 and over 25,018,603 15.6% 17,809,990 12.9%
Other time deposits 19,778,540 12.4% 18,159,339 13.2%
------------- ----- ------------- -----
Total interest bearing deposits 121,227,446 75.8% 105,358,589 76.5%
Demand deposits 38,760,806 24.2% 32,296,390 23.5%
------------- ----- ------------- -----
Total deposits $ 159,988,252 100.0% $ 137,654,979 100.0%
============= ===== ============= =====
Capital
The Bank is subject to FDIC regulations governing capital adequacy. The FDIC has
adopted risk-based capital guidelines which establish a risk-adjusted ratio
relating capital to different categories of assets and off-balance sheet
exposures. Under the current guidelines, as of December 31, 2002, the Bank was
required to have minimum Tier I and total risk-based capital ratios of 4% and 8%
respectively. To be well
Page 22
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capitalized under Prompt Corrective Action Provisions requires minimum Tier I
and total risk-based capital ratios should be 6% and 10% respectively.
The FDIC has also adopted minimum leverage ratio guidelines for compliance by
banking organizations. The guidelines require a minimum leverage ratio of 4
percent of Tier 1 capital to total average assets. Banks experiencing high
growth rates are expected to maintain capital positions well above the minimum
levels. The leverage ratio in conjunction with the risk-based capital ratio
constitute the basis for determining the capital adequacy of banking
organizations.
Based on the FDIC's guidelines, the Bank's total risk-based capital ratio at
December 31, 2002 was 13.41% and its Tier 1 risk-based capital ratio was 12.15%.
The Bank's leverage ratio was 10.49%. All the ratios exceed the minimum
guidelines of 8.00%, 4.00% and 4.00%, respectively. The ratios for the Bank at
December 31, 2001, were 13.07%, 11.81% and 10.38%, respectively. The capital
ratios for the Holding Company at December 31, 2002, were 13.57%, 12.31% and
10.62%, respectively.
In February 2001, the Company approved a program to repurchase Sonoma Valley
Bancorp stock up to $1 million and in August 2002 the Company approved the
repurchase of an additional $1 million Sonoma Valley Bancorp stock. As of
December 31, 2002, $344,600 was purchased and retired. The Company is continuing
to repurchase Sonoma Valley Bancorp stock up to the authorized amount.
Management believes that the Bank's current capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
business.
Liquidity Management
The Company's liquidity is determined by the level of assets (such as cash,
federal funds sold and available-for-sale securities) that are readily
convertible to cash to meet customer withdrawal and borrowing needs. Deposit
growth also contributes to the Company's liquidity needs. The Company's
liquidity position is reviewed by management on a regular basis to verify that
it is adequate to meet projected loan funding and potential withdrawal of
deposits. The Company has a comprehensive Asset and Liability Policy which it
uses to monitor and determine adequate levels of liquidity. At year end 2002,
the Company's liquidity ratio (adjusted liquid assets to deposits and short term
liabilities) was 20.39% compared to 21.08% and 24.27% at year end 2001 and 2000,
respectively. Management expects that liquidity will remain adequate throughout
2003, as loans are not expected to grow significantly more than deposits, and
excess funds will continue to be invested in quality liquid assets.
Market Risk Management
Overview. Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its loan and deposit functions. The goal for managing the assets and
liabilities of the Company is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing the Company to undue
interest rate risk. The Board of Directors has overall responsibility for the
interest rate risk management policies. Sonoma Valley Bank has an Asset and
Liability Management Committee (ALCO) that establishes and monitors guidelines
to control the sensitivity of earnings to changes in interest rates.
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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.
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The following table sets forth the dollar amounts of maturing and/or repricing
assets and liabilities for various periods. This does not include the impact of
prepayments or other forms of convexity caused by changing interest rates.
Historically, this has been immaterial and estimates for them are not included.
The Company has more liabilities than assets repricing during the next year.
However, because the Company's asset rates change more than deposit rates, the
Company's interest income will change more than the cost of funds when rates
change. Its net interest margin should therefore increase somewhat when rates
increase and shrink somewhat when rates fall.
The Company controls its long term interest rate risk by keeping long term fixed
rate assets (longer than 5 years) less than its long term fixed rate funding,
primarily demand deposit accounts and capital. The following table sets forth
cumulative maturity distributions as of December 31, 2002 for the Company's
interest-bearing assets and interest-bearing liabilities, and the Company's
interest rate sensitivity gap as a percentage of total interest-earning assets.
The table shows $65.0 million in fixed rate loans over 5 years. Many variable
rate credit lines reached floors in 2002, and were reclassified to the fixed
rate category. As soon as interest rates increase, the loans will no longer be
at floors and will reclass back to the floating rate category.
( dollars in thousands)
December 31, 2002 3 months 12 months 3 years 5 years 15 years >15 years Totals
-------- --------- ------- -------- -------- --------- ------
ASSETS:
Fixed rate investments $ 876 $ 2,391 $ 5,154 $ 317 $ 4,033 $ 976 $ 13,747
Variable rate investments 282 282
Fixed rate loans 11,069 16,759 7,524 18,194 44,021 2,782 100,349
Variable rate loans 26,370 27 11 822 0 0 27,230
Interest-bearing balances 35 35
Fed funds sold 23,095 23,095
-------- -------- -------- -------- -------- -------- --------
Interest bearing assets 61,445 19,177 12,689 19,333 48,054 4,040 164,738
======== ======== ======== ======== ======== ======== ========
LIABILITIES:
Interest bearing transaction
deposits 24,628 24,628
Savings deposits 51,803 51,803
Time deposits
Fixed rate >100m 7,154 8,566 7,891 1,222 24,833
Fixed rate <100m 5,552 7,728 5,687 945 19,912
Floating rate >100m 0
Floating rate <100m 51 51
Borrowings 0 0
-------- -------- -------- -------- -------- -------- --------
Interest Bearing Liabilities $ 89,188 $ 16,294 $ 13,578 $ 2,167 $ 0 $ 0 $121,227
======== ======== ======== ======== ======== ======== ========
Rate Sensitivity Gap (27,743) 2,883 (889) 17,166 48,054 4,040
Cumulative Rate Sensitivity Gap (27,743) (24,860) (25,749) (8,583) 39,471 43,511
Cumulative Position to Total Assets (15.20%) (13.62%) (14.10%) (4.70%) 21.62% 23.83%
Page 25
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Inflation
Assets and liabilities of a financial institution are principally monetary in
nature. Accordingly, interest rates, which generally move with the rate of
inflation, have potentially the most significant effect on the Company's net
interest income. The Company attempts to limit inflation's impact on rates and
net income margins by minimizing its effect on these margins through continuing
asset/liability management programs.
Management's Discussion and Analysis
The Year Ended December 31, 2001 versus December 31, 2000
Summary
Net earnings for 2001 were $2.6 million compared with $2.2 million in 2000.
Earnings per share for 2001 were $1.85 compared with $1.57 in 2000. Return on
average assets was 1.76% in 2001 compared with 1.62% the previous year, while
return on average equity was 17.19% in 2001 and 17.00% for the previous year.
Total assets reached $157.4 million in 2001, an 12.1% increase over the $140.4
million at December 31, 2000. Loans increased 16.1% to $107.5 million, compared
with $92.6 million at year-end 2000. Deposits also increased, growing 11.8% from
$123.1 million at year-end 2000 to $137.7 million at year-end 2001. The
loan-to-deposit ratio increased from 75.2% to 78.1%.
Net Interest Income
Net interest income on a fully tax equivalent basis increased by $398,000 to
$8.6 million in 2001, up 4.9% from 2000 net interest income of $8.2 million. The
net interest margin for 2001 decreased to 6.25% from 6.49% for the previous
year. Individual components of interest income and interest expense are provided
in the table - Average Balances, Yields and Rates Paid on page 16.
Interest Income
Interest income increased by $265,000 to $11.5 million for a 2.4% gain over the
$11.2 million realized in 2000. The volume of earning assets increased by 8.8%
to $137.5 million from $126.4 million in 2000, while the yield on average
earning assets declined 52 basis points.
Interest Expense
Interest expense decreased by $133,000 to $2.9 million in 2001 from $3.0 million
in 2000. The average rate paid on all interest-bearing liabilities decreased
from 3.23% in 2000 to 2.89% in 2001 while average balances increased from $93.3
million to $99.8 million, a 7.0% gain over 2000. The gain in volume of average
balances was responsible for a $188,000 increase in interest expense and higher
interest rates paid resulted in a decrease of $321,000 for a total decrease of
$133,000. The higher rates paid on interest bearing liabilities is the result of
a raising rate environment.
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Provision for Loan Losses
The provision for loan losses was $342,000 in 2001 and $335,000 in 2000. The
increase in the provision is primarily the result of loan growth and
management's evaluation and assessment of the loan portfolio. Loans charged off,
net of recoveries, resulted in losses totaling $47,000 in 2001 and recoveries of
$32,000 in 2000. The increase in charge-offs reflects current economic
conditions.
Non-interest Income
Non-interest income increased by 46.5% to $1.3 million from $893,000 the
previous year. The increase was due to increases in all categories of non
interest income with a 45.5% increase in other non interest income, a 34.2%
increase in service charge on deposit accounts and a 20.1% increase in other fee
income.
Non-interest Expense
Non-interest expenses increased 3.2% to $5.2 million in 2001 from $5.1 million
in 2000. Non-interest expense represented 3.5% of average total assets at
December 31, 2001 and 3.7% at December 31, 2000.
Salaries and benefits increased by 19.2% from $2.6 million in 2000 to $3.1
million in 2001. The 2001 increase reflects normal merit increases, incentives
and other increases in employee benefits. At December 31, 2001, total full-time
equivalent employees were 47 compared to 42 at December 31, 2000. Year end
assets per employee were $3.3 million in 2001 and 2000.
Expenses related to premises and equipment decreased by 3.3% to $586,000 in
2001, from $606,000 in 2000. Building lease expense on three locations and
storage units increased to $265,000 in 2001 from $260,000 in 2000.
Other non-interest expenses decreased by 17.8% to $1.5 million in 2001 from $1.8
million in 2000. The decrease was primarily the result of a 22.3% decrease in
professional fees. Professional fees is the largest category of other
non-interest expense, primarily comprised of data processing, item processing
and ATM services, as well as accounting, legal and other professional fees.
These services decreased by $217,000 to $757,000 in 2001 from $973,000 in 2000.
Increases in other categories reflect the increased growth and volume of
business in general.
Provision for Income Taxes
The provision for income taxes decreased to an effective tax rate of 34.66% in
2001 compared with 34.45% in 2000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding Quantitative and Qualitative Disclosures about Market Risk
appears on page 23 through 25 under the caption "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations - Market
Risk Management" and is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
For consolidated financial statements of the Company and Subsidiary, see
consolidated balance sheets as of December 31, 2002 and 2001, consolidated
statements of operations, consolidated statements of changes in shareholders'
equity and consolidated statements of cash flows for the three years ended
December 31, 2002, 2001 and 2000 and notes to consolidated financial statements
at pages 29 through 62 of this annual report.
Item 9. Changes On and Disagreement With Accountants on Accounting and Financial
Disclosure
None
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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
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
--------------- ---------------
ASSETS
Cash and due from banks $ 8,422,599 $ 7,150,662
Federal funds sold 23,095,000 13,250,000
--------------- ---------------
Total cash and cash equivalents 31,517,599 20,400,662
Investment securities available-for-sale, at fair value 3,823,259 10,668,970
Investment securities held-to-maturity ( fair value
of $10,440,453 and $12,142,652, respectively) 9,923,737 11,795,980
Loans and lease financing receivables, net 125,269,181 105,032,209
Premises and equipment, net 875,697 620,652
Accrued interest receivable 799,282 952,061
Cash surrender value of life insurance 7,387,712 5,030,531
Other assets 3,006,260 2,849,139
--------------- --------------
Total assets $ 182,602,727 $ 157,350,204
=============== ==============
LIABILITIES
Noninterest-bearing demand deposits $ 38,760,806 $ 32,296,390
Interest-bearing transaction deposits 24,627,589 23,865,954
Savings and money market deposits 51,802,714 45,523,306
Time deposits, $100,000 and over 25,018,603 17,809,990
Other time deposits 19,778,540 18,159,339
-------------- --------------
Total deposits 159,988,252 137,654,979
Accrued interest payable
and other liabilities 3,374,165 3,024,163
--------------- --------------
Total liabilities 163,362,417 140,679,142
Commitments and contingencies ( see accompanying notes )
SHAREHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares
authorized; 1,401,146 shares in 2002 and 1,333,504 in
2001 issued and outstanding 12,936,225 11,025,885
Retained earnings 6,215,790 5,483,779
Accumulated other comprehensive income 88,295 161,398
--------------- --------------
Total shareholders' equity 19,240,310 16,671,062
--------------- --------------
Total liabilities and shareholders' equity $ 182,602,727 $ 157,350,204
=============== ==============
The accompanying notes are an integral part of these financial statements.
Page 30
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
INTEREST INCOME
Loans and leases $ 9,470,998 $ 9,251,314 $ 8,588,054
Taxable securities 378,511 1,013,330 1,441,452
Tax-exempt securities 512,708 552,110 539,863
Federal funds sold 216,362 286,083 294,165
Dividends 15,227 15,812 21,682
------------ ------------ ------------
Total interest income 10,593,806 11,118,649 10,885,216
INTEREST EXPENSE
Interest-bearing transaction deposits 84,241 149,078 203,767
Savings and money market deposits 655,841 996,864 1,016,445
Time deposits, $100,000 and over 674,089 844,351 830,920
Other time deposits 546,543 885,322 946,805
Other 7,221 17,579
------------ ----------- ------------
Total interest expense 1,960,714 2,882,836 3,015,516
------------ ----------- ------------
NET INTEREST INCOME 8,633,092 8,235,813 7,869,700
Provision for loan and lease losses 393,000 342,000 335,000
------------ ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 8,240,092 7,893,813 7,534,700
NON-INTEREST INCOME 1,641,191 1,309,315 892,701
NON-INTEREST EXPENSE
Salaries and employee benefits 3,437,390 3,143,911 2,636,374
Premises and equipment 618,029 585,748 606,044
Other 1,806,954 1,494,285 1,818,221
------------ ----------- ------------
Total non-interest expense 5,862,373 5,223,944 5,060,639
------------ ----------- ------------
Income before provision
for income taxes 4,018,910 3,979,184 3,366,762
Provision for income taxes 1,274,577 1,378,940 1,160,052
------------ ----------- ------------
NET INCOME $ 2,744,333 $ 2,600,244 $ 2,206,710
============ ============ ------------
NET INCOME PER SHARE $ 1.97 $ 1.85 $ 1.57
============ =========== ============
NET INCOME PER SHARE
ASSUMING DILUTION $ 1.80 $ 1.74 $ 1.52
============ =========== ============
The accompanying notes are an integral part of these financial statements.
Page 31
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
----------- --------- ----------- ------------ ------------ -------------
BALANCE AT
JANUARY 1, 2000 1,230,161 $ 8,534,744 $ 3,671,578 $ (151,644) $ 12,054,678
5% stock dividend 60,605 1,068,160 (1,068,160)
Fractional shares (7,912) (7,912)
Redemption and retirement
of stock (14,168) (91,667) (160,665) (252,332)
Stock options exercised and
related tax benefits 5,082 73,766 73,766
Net income for the year $ 2,206,710 2,206,710 2,206,710
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $161,088 230,336
------------
Other comprehensive income,
net of taxes 230,336 230,336 230,336
------------ --------- ----------- ------------ ----------- ------------
Total comprehensive income $ 2,437,046
============
BALANCE AT
DECEMBER 31, 2000 1,281,680 9,585,003 4,641,551 78,692 14,305,246
5% stock dividend 63,104 1,381,976 (1,381,976)
Fractional shares (11,955) (11,955)
Redemption and retirement
of stock (27,717) (207,323) (364,085) (571,408)
Stock options exercised and
related tax benefits 16,437 266,229 266,229
Net income for the year $ 2,600,244 2,600,244 2,600,244
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $57,842 82,706
------------
Other comprehensive income,
net of taxes 82,706 82,706 82,706
------------ --------- ----------- ------------ ----------- ------------
Total comprehensive income $ 2,682,950
============
(Continued)
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SONOMA VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- ------------ ------------ ------------- ------------
BALANCE AT
DECEMBER 31, 2001 1,333,504 $ 11,025,885 $ 5,483,779 $ 161,398 $ 16,671,062
5% stock dividend 65,742 1,775,026 (1,775,026)
Fractional shares (13,951) (13,951)
Redemption and retirement
of stock (14,596) (121,257) (223,345) (344,602)
Stock options exercised and
related tax benefits 16,496 256,571 256,571
Net income for the year $ 2,744,333 2,744,333 2,744,333
Other comprehensive income,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $51,125 (73,103)
-------------
Other comprehensive income,
net of taxes (73,103) (73,103) (73,103)
------------- --------- ------------ ------------ ------------- ------------
Total comprehensive income $ 2,671,230
=============
BALANCE AT
DECEMBER 31, 2002 1,401,146 $ 12,936,225 $ 6,215,790 $ 88,295 $ 19,240,310
========= ============ ============ ============= ============
The accompanying notes are an integral part