UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q








x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE


ACT OF
1934





For the
quarterly period ended: June 30,
2009








 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE


ACT OF
1934





For the
transition period ended: ____________ to
____________





Commission
File Number: 000-31929





SONOMA
VALLEY BANCORP


(Exact
name of registrant as specified in its charter)





CALIFORNIA
              68-0454068(State
      of Incorporation)
              (I.R.S.
      Employer Identification No.)202
      West Napa Street Sonoma, California
              95476(Address
      of principal executive offices)
              (Zip
      Code)





(707)
935-3200


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes   x                                           No    ̈





Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
accelerated filer        ̈                                                                                           
Accelerated filer    ̈


Non-accelerated
filer         x (Do not check if a
smaller reporting company)     
    Smaller reporting company    ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.





Yes  ̈                                           No  x





The
number of shares outstanding of the registrant's Common Stock, no par value, as
of August 1, 2009 was 2,326,803.





INDEX





Part
      I  Financial Information
                          Page
      NumberItem
      1. Financial Statements (Unaudited):Consolidated Balance Sheets at June 30,
      2009, December 31, 2008 and June 30, 2008
                          3Consolidated Statements of Operations for
      the three and six months ended June 30, 2009 and
    2008
                          4Consolidated Statements of Changes in
      Shareholders’ Equity for the six months ended June 30, 2009, and the
      years ended December 31, 2008 and 2007
                          5Consolidated Statements of Cash Flows for
      the six months ended June 30, 2009 and 2008
                          7Notes to Consolidated Financial
      Statements
                          8Item
      2. Management's Discussion and Analysis of
      Financial Condition and Results of Operations
                          11Average Balances/Yields and Rates Paid for
      the six months ended June 30, 2009 and 2008
                          13Average Balances/Yields and Rates Paid for
      the three months ended June 30, 2009 and 2008
                          26Item
      3. Quantitative and Qualitative
      Disclosure About Market Risk
                          29Item
      4. Controls and
Procedures
                          29Part
      II  Other InformationItem
      1. Legal Proceedings
                          30Item
      1A. Risk Factors
                          30Item
      2. Unregistered Sales of Equity Securities
      and Use of Proceeds
                          32Item
      3. Defaults Upon Senior
      Securities
                          32Item
      4. Submission of Matters to a Vote of
      Security Holders
                          32Item
      5. Other Information
                          32Item
      6. Exhibits
                          32Signatures
                          34Certifications
                          35





2


Part
I




Item
1.     The information furnished in these interim
statements reflects all adjustments and accruals which are, in the opinion of
management, necessary for a fair statement of the results for such
periods.  The results of operations in the interim statements are not
necessarily indicative of the results that may be expected for the full
year.





FINANCIAL
STATEMENTS


SONOMA
VALLEY BANCORP AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


June 30,
2009 (Unaudited), December 31, 2008 (Audited)


and June
30, 2008 (Unaudited)




June
      30,
                          2009
                        
                        
                        December
      31,
                          2008
                        
                        
                        June
      30,
                          2008ASSETSCash
      and due from banks
                        
                        $
                        5,090,908
                        
                        
                        $
                        6,302,692
                        
                        
                        $
                        6,794,689Interest-bearing
      due from banks
                        
                        
                        17,356,713
                        
                        
                        
                        11,930,363
                        
                        
                        
                        8,850,264Total
      cash and cash equivalents
                        
                        
                        22,447,621
                        
                        
                        
                        18,233,055
                        
                        
                        
                        15,644,953Investment
      securities available-for-sale at fair value
                        
                        
                        6,503,448
                        
                        
                        
                        6,578,924
                        
                        
                        
                        2,040,691Investment
      securities held-to-maturity (fair value of $13,863,926,
      $14,028,111 and $14,065,909 respectively)
                        
                        
                        13,569,659
                        
                        
                        
                        13,862,911
                        
                        
                        
                        13,964,670Loans
      and lease financing receivables, net
                        
                        
                        279,974,850
                        
                        
                        
                        262,376,784
                        
                        
                        
                        252,291,863Premises
      and equipment, net
                        
                        
                        662,733
                        
                        
                        
                        734,091
                        
                        
                        
                        794,674Accrued
      interest receivable
                        
                        
                        1,678,394
                        
                        
                        
                        1,678,547
                        
                        
                        
                        1,674,077Other
      real estate owned
                        
                        
                        243,610
                        
                        
                        
                        285,665
                        
                        
                        
                        320,416Cash
      surrender value of life insurance
                        
                        
                        10,962,563
                        
                        
                        
                        10,777,482
                        
                        
                        
                        10,566,430Other
      assets
                        
                        
                        8,879,017
                        
                        
                        
                        7,420,622
                        
                        
                        
                        5,979,727Total
      assets
                        
                        $
                        342,521,895
                        
                        
                        $
                        321,948,081
                        
                        
                        $
                        303,277,501LIABILITIESNoninterest-bearing
      demand deposits
                        
                        $
                        48,107,294
                        
                        
                        $
                        48,279,759
                        
                        
                        $
                        52,634,753Interest-bearing
      transaction deposits
                        
                        
                        28,164,005
                        
                        
                        
                        31,062,597
                        
                        
                        
                        28,551,865Savings
      and money market deposits
                        
                        
                        92,803,924
                        
                        
                        
                        88,317,397
                        
                        
                        
                        78,377,774Time
      deposits, $100,000 and over
                        
                        
                        56,469,137
                        
                        
                        
                        50,694,468
                        
                        
                        
                        53,377,068Other
      time deposits
                        
                        
                        36,449,080
                        
                        
                        
                        35,591,280
                        
                        
                        
                        31,659,159Total
      deposits
                        
                        
                        261,993,440
                        
                        
                        
                        253,945,501
                        
                        
                        
                        244,600,619Other
      borrowings
                        
                        
                        35,000,000
                        
                        
                        
                        30,000,000
                        
                        
                        
                        22,100,000Accrued
      interest payable and other liabilities
                        
                        
                        7,400,750
                        
                        
                        
                        7,142,484
                        
                        
                        
                        6,501,169Total
      liabilities
                        
                        
                        304,394,190
                        
                        
                        
                        291,087,985
                        
                        
                        
                        273,201,788SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; $1,000 per share liquidation
                          preference;
      2,000,000 shares authorized; 8,653 Series A and 433 Series B at June 30,
      2009 and none at December 31, 2008 and June 30, 2008 issued and
      outstanding
                        
                        
                        8,680,271
                        
                        
                        
                        0
                        
                        
                        
                        0Common
      stock, no par value; 10,000,000 shares authorized; 2,326,803shares at June 30, 2009, 2,290,657 shares at December 31,
      2008 and 2,288,709 shares at June 30, 2008 issued and
      outstanding
                        
                        
                        16,690,015
                        
                        
                        
                        16,402,084
                        
                        
                        
                        16,222,864Additional
      paid-in-capital
                        
                        
                        2,731,467
                        
                        
                        
                        2,577,855
                        
                        
                        
                        2,640,657Retained
      earnings
                        
                        
                        10,052,017
                        
                        
                        
                        11,863,688
                        
                        
                        
                        11,222,268Accumulated
      other comprehensive (loss) income
                        
                        
                        (26,065
                        )
                        
                        
                        16,469
                        
                        
                        
                        (10,076
                        )Total
      shareholders' equity
                        
                        
                        38,127,705
                        
                        
                        
                        30,860,096
                        
                        
                        
                        30,075,713Total
      liabilities and shareholders' equity
                        
                        $
                        342,521,895
                        
                        
                        $
                        321,948,081
                        
                        
                        $
                        303,277,501





The
accompanying notes are an integral part of these financial
statements.




3


SONOMA
VALLEY BANCORP AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)




For
      the Three Months
                                                                          
                                                                          
                                                                          For
      the Six MonthsEnded
      June 30,
                                                                          
                                                                          
                                                                          Ended
      June 30,2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2008INTEREST
      INCOMELoans
      and leases
                                                                          
                                                                          $
                                                                          4,437,219
                                                                          
                                                                          
                                                                          $
                                                                          4,741,420
                                                                          
                                                                          
                                                                          $
                                                                          8,884,806
                                                                          
                                                                          
                                                                          $
                                                                          9,673,174Taxable
      securities
                                                                          
                                                                          
                                                                          28,615
                                                                          
                                                                          
                                                                          
                                                                          17,041
                                                                          
                                                                          
                                                                          
                                                                          81,478
                                                                          
                                                                          
                                                                          
                                                                          68,967Tax-exempt securities
                                                                          
                                                                          
                                                                          133,518
                                                                          
                                                                          
                                                                          
                                                                          133,511
                                                                          
                                                                          
                                                                          
                                                                          268,294
                                                                          
                                                                          
                                                                          
                                                                          269,343Federal funds sold and other
                                                                          
                                                                          
                                                                          6,298
                                                                          
                                                                          
                                                                          
                                                                          4,519
                                                                          
                                                                          
                                                                          
                                                                          13,164
                                                                          
                                                                          
                                                                          
                                                                          32,440Dividends
                                                                          
                                                                          
                                                                          45
                                                                          
                                                                          
                                                                          
                                                                          25,980
                                                                          
                                                                          
                                                                          
                                                                          97
                                                                          
                                                                          
                                                                          
                                                                          49,847Total
      interest income
                                                                          
                                                                          
                                                                          4,605,695
                                                                          
                                                                          
                                                                          
                                                                          4,922,471
                                                                          
                                                                          
                                                                          
                                                                          9,247,839
                                                                          
                                                                          
                                                                          
                                                                          10,093,771INTEREST
      EXPENSEInterest-bearing
      transaction deposits
                                                                          
                                                                          
                                                                          8,789
                                                                          
                                                                          
                                                                          
                                                                          11,987
                                                                          
                                                                          
                                                                          
                                                                          17,430
                                                                          
                                                                          
                                                                          
                                                                          25,135Savings
      and money market deposits
                                                                          
                                                                          
                                                                          221,050
                                                                          
                                                                          
                                                                          
                                                                          348,222
                                                                          
                                                                          
                                                                          
                                                                          449,584
                                                                          
                                                                          
                                                                          
                                                                          764,114Time
      deposits, $100,000 and over
                                                                          
                                                                          
                                                                          370,076
                                                                          
                                                                          
                                                                          
                                                                          556,557
                                                                          
                                                                          
                                                                          
                                                                          755,970
                                                                          
                                                                          
                                                                          
                                                                          1,104,710Other
      time deposits
                                                                          
                                                                          
                                                                          203,921
                                                                          
                                                                          
                                                                          
                                                                          305,066
                                                                          
                                                                          
                                                                          
                                                                          427,991
                                                                          
                                                                          
                                                                          
                                                                          633,359Other
      borrowings
                                                                          
                                                                          
                                                                          177,183
                                                                          
                                                                          
                                                                          
                                                                          149,067
                                                                          
                                                                          
                                                                          
                                                                          413,345
                                                                          
                                                                          
                                                                          
                                                                          443,794Total
      interest expense
                                                                          
                                                                          
                                                                          981,019
                                                                          
                                                                          
                                                                          
                                                                          1,370,899
                                                                          
                                                                          
                                                                          
                                                                          2,064,320
                                                                          
                                                                          
                                                                          
                                                                          2,971,112NET
      INTEREST INCOME
                                                                          
                                                                          
                                                                          3,624,676
                                                                          
                                                                          
                                                                          
                                                                          3,551,572
                                                                          
                                                                          
                                                                          
                                                                          7,183,519
                                                                          
                                                                          
                                                                          
                                                                          7,122,659Provision
      for loan and lease losses
                                                                          
                                                                          
                                                                          4,250,000
                                                                          
                                                                          
                                                                          
                                                                          310,000
                                                                          
                                                                          
                                                                          
                                                                          4,880,000
                                                                          
                                                                          
                                                                          
                                                                          530,000NET
      INTEREST INCOME AFTER
                                                                            PROVISION
      FOR LOAN AND
                                                                            LEASE
      LOSSES
                                                                          
                                                                          
                                                                          (625,324
                                                                          )
                                                                          
                                                                          
                                                                          3,241,572
                                                                          
                                                                          
                                                                          
                                                                          2,303,519
                                                                          
                                                                          
                                                                          
                                                                          6,592,659NON-INTEREST
      INCOME
                                                                          
                                                                          
                                                                          502,447
                                                                          
                                                                          
                                                                          
                                                                          531,454
                                                                          
                                                                          
                                                                          
                                                                          981,611
                                                                          
                                                                          
                                                                          
                                                                          1,088,388NON-INTEREST
      EXPENSESalaries
      and employee benefits
                                                                          
                                                                          
                                                                          1,231,013
                                                                          
                                                                          
                                                                          
                                                                          1,387,178
                                                                          
                                                                          
                                                                          
                                                                          2,588,229
                                                                          
                                                                          
                                                                          
                                                                          2,815,470Premises
      and equipment
                                                                          
                                                                          
                                                                          250,609
                                                                          
                                                                          
                                                                          
                                                                          236,095
                                                                          
                                                                          
                                                                          
                                                                          494,343
                                                                          
                                                                          
                                                                          
                                                                          464,800Other
                                                                          
                                                                          
                                                                          1,086,877
                                                                          
                                                                          
                                                                          
                                                                          722,973
                                                                          
                                                                          
                                                                          
                                                                          2,131,279
                                                                          
                                                                          
                                                                          
                                                                          1,447,750Total
      non-interest expense
                                                                          
                                                                          
                                                                          2,568,499
                                                                          
                                                                          
                                                                          
                                                                          2,346,246
                                                                          
                                                                          
                                                                          
                                                                          5,213,851
                                                                          
                                                                          
                                                                          
                                                                          4,728,020Income
      before provision for income taxes
                                                                          
                                                                          
                                                                          (2,691,376
                                                                          )
                                                                          
                                                                          
                                                                          1,426,780
                                                                          
                                                                          
                                                                          
                                                                          (1,928,721
                                                                          )
                                                                          
                                                                          
                                                                          2,953,027Provision
      for income taxes
                                                                          
                                                                          
                                                                          (1,213,543
                                                                          )
                                                                          
                                                                          
                                                                          480,155
                                                                          
                                                                          
                                                                          
                                                                          (1,008,774
                                                                          )
                                                                          
                                                                          
                                                                          979,113NET
      (LOSS)INCOME
                                                                          
                                                                          $
                                                                          (1,477,833
                                                                          )
                                                                          
                                                                          $
                                                                          946,625
                                                                          
                                                                          
                                                                          $
                                                                          (919,947
                                                                          )
                                                                          
                                                                          $
                                                                          1,973,914Preferred stock dividends and amortization of preferred stock
      discount
                                                                          
                                                                          
                                                                          (136,852
                                                                          )
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          (197,578
                                                                          )
                                                                          
                                                                          
                                                                          0NET
      (LOSS)INCOME AVAILABLE TO COMMON SHAREHOLDERS
                                                                          
                                                                          
                                                                          (1,614,685
                                                                          )
                                                                          
                                                                          
                                                                          946,625
                                                                          
                                                                          
                                                                          
                                                                          (1,117,525
                                                                          )
                                                                          
                                                                          
                                                                          1,973,914(LOSS)EARNINGS
      PER SHARE AVAILABLE TO COMMON SHAREHOLDERSBasic
                                                                          
                                                                          $
                                                                          (.70
                                                                          )
                                                                          
                                                                          $
                                                                          .42
                                                                          
                                                                          
                                                                          $
                                                                          (.49
                                                                          )
                                                                          
                                                                          $
                                                                          .88Diluted
                                                                          
                                                                          $
                                                                          (.70
                                                                          )
                                                                          
                                                                          $
                                                                          .41
                                                                          
                                                                          
                                                                          $
                                                                          (.49
                                                                          )
                                                                          
                                                                          $
                                                                          .86Dividends
      declared per common share
                                                                          
                                                                          $
                                                                          .00
                                                                          
                                                                          
                                                                          $
                                                                          .00
                                                                          
                                                                          
                                                                          $
                                                                          .30
                                                                          
                                                                          
                                                                          $
                                                                          .30WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDINGBasic
                                                                          
                                                                          
                                                                          2,295,633
                                                                          
                                                                          
                                                                          
                                                                          2,254,842
                                                                          
                                                                          
                                                                          
                                                                          2,295,633
                                                                          
                                                                          
                                                                          
                                                                          2,254,842Diluted
                                                                          
                                                                          
                                                                          2,301,040
                                                                          
                                                                          
                                                                          
                                                                          2,306,696
                                                                          
                                                                          
                                                                          
                                                                          2,301,040
                                                                          
                                                                          
                                                                          
                                                                          2,306,696




The accompanying notes are an integral part of these
financial statements.
  4


SONOMA
VALLEY BANCORP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
 For
the six months ended June 30, 2009 (Unaudited), and the years
ended
 December
31, 2008 (Audited) and 2007 (Audited)
 Comprehensive
                                          
                                          Preferred
                                          
                                          Common
      Stock
                                          
                                          
                                          Additional
      Paid-in
                                          
                                          
                                          Retained
                                          
                                          
                                          Accumulated
      Other ComprehensiveIncome
                                          
                                          Stock
                                          
                                          Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Earnings
                                          
                                          
                                          Income(Loss)
                                          
                                          
                                          TotalBALANCE
      AT JANUARY 1, 2007
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,283,047
                                          
                                          
                                          $
                                          15,479,556
                                          
                                          
                                          $
                                          1,872,648
                                          
                                          
                                          $
                                          9,206,716
                                          
                                          
                                          $
                                          (154,849
                                          )
                                          
                                          $
                                          26,404,071Redemption
      and retirement  of stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          (100,415
                                          )
                                          
                                          
                                          (689,422
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (2,243,816
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (2,933,238
                                          )Stock
      options exercised and related tax benefits
                                          
                                          
                                          
                                          
                                          
                                          
                                          60,177
                                          
                                          
                                          
                                          626,019
                                          
                                          
                                          
                                          358,353
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          984,372Cash
      dividend of $.60 per share
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,371,471
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,371,471
                                          )Stock
      options vested
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          216,473
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          216,473Restricted
      stock vested and related tax benefits
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          162,750
                                          
                                          
                                          
                                          7,935
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          170,685Net
      income for the year
                                          
                                          $
                                          4,343,538
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4,343,538
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4,343,538Other
      comprehensive income, net of tax: Unrealized holding gains on securities
      available- for-sale arising during the year, net of taxes of
      $83,819
                                          
                                          
                                          119,850Other
      comprehensive loss, net of taxes
                                          
                                          
                                          119,850
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          119,850
                                          
                                          
                                          
                                          119,850Total
      comprehensive income
                                          
                                          $
                                          4,463,388BALANCE
      AT   DECEMBER 31, 2007
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,242,809
                                          
                                          
                                          
                                          15,578,903
                                          
                                          
                                          
                                          2,455,409
                                          
                                          
                                          
                                          9,934,967
                                          
                                          
                                          
                                          (34,999
                                          )
                                          
                                          
                                          27,934,280Redemption
      and retirement  of stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,190
                                          )
                                          
                                          
                                          (8,526
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (13,414
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (21,940
                                          )Stock
      options exercised and related tax benefits
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          49,038
                                          
                                          
                                          
                                          668,957
                                          
                                          
                                          
                                          72,318
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          741,275Cash
      dividend of $.60 per share
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,373,226
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,373,226
                                          )Stock
      options vested
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          64,805
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          64,805Restricted
      stock vested and related tax benefit
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          162,750
                                          
                                          
                                          
                                          (14,677
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          148,073Net
      income for the year
                                          
                                          $
                                          3,315,361
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,315,361
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,315,361Other
      comprehensive
                                            income, net of tax: Unrealized holding gains on securities available-
      for-sale arising during the year, net of taxes of $35,994
                                          
                                          
                                          51,468Other
      comprehensive
                                            loss, net of taxes
                                          
                                          
                                          51,468
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          51,468
                                          
                                          
                                          
                                          51,468Total
      comprehensive income
                                          
                                          $
                                          3,366,829
  5
   SONOMA
VALLEY BANCORP AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
 For
the six months ended June 30, 2009 (Unaudited), and the years
ended
 December
31, 2008 (Audited) and 2007 (Audited)
 Comprehensive
                                          
                                          
                                          Preferred
                                          
                                          
                                          Common
      Stock
                                          
                                          
                                          Additional
      Paid-in
                                          
                                          
                                          Retained
                                          
                                          
                                          Accumulated
      Other ComprehensiveIncome
                                          
                                          
                                          Stock
                                          
                                          
                                          Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Earnings
                                          
                                          
                                          Income(Loss)
                                          
                                          
                                          TotalBALANCE
      AT DECEMBER 31, 2008
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,290,657
                                          
                                          
                                          $
                                          16,402,084
                                          
                                          
                                          $
                                          2,577,855
                                          
                                          
                                          $
                                          11,863,688
                                          
                                          
                                          $
                                          16,469
                                          
                                          
                                          $
                                          30,860,096Issuance
      of preferred stock
                                          
                                          
                                          
                                          
                                          $
                                          8,653,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          8,653,000Dividends
      on preferred stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (170,307
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (170,307
                                          )Amortization/
      Accretion of preferred stock,net
                                          
                                          
                                          
                                          
                                          
                                          27,271
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (27,271
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          0Stock
      options exercised and related tax benefits
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          36,146
                                          
                                          
                                          
                                          287,931
                                          
                                          
                                          
                                          38,618
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          326,549Cash
      dividend of $.30 per share
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (694,146
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (694,146
                                          )Stock
      options vested
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          33,619
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          33,619Restricted
      stock vested
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          81,375
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          81,375Net loss
      for the year
                                          
                                          $
                                          (919,947
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (919,947
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (919,947
                                          )Other
      comprehensive loss, net of tax: Unrealized holding loss on securities
      available- for-sale arising during the year, net of taxes of
      $29,746
                                          
                                          
                                          (42,534
                                          )Other
      comprehensive loss, net of taxes
                                          
                                          
                                          (42,534
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (42,534
                                          )
                                          
                                          
                                          (42,534
                                          )Total
      comprehensive income
                                          
                                          $
                                          (962,481
                                          )BALANCE
      AT June 30, 2009
                                          
                                          
                                          
                                          
                                          
                                          $
                                          8,680,271
                                          
                                          
                                          
                                          2,326,803
                                          
                                          
                                          $
                                          16,690,015
                                          
                                          
                                          $
                                          2,731,467
                                          
                                          
                                          $
                                          10,052,017
                                          
                                          
                                          $
                                          (26,065
                                          )
                                          
                                          $
                                          38,127,705


The accompanying notes are an integral part of these
financial statements.


6


SONOMA
VALLEY BANCORP AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)





For the
six months ended June 30, 2009 and 2008





2009
                        
                        
                        2008OPERATING
      ACTIVITIESNet
      (loss)income
                        
                        $
                        (919,947
                        )
                        
                        $
                        1,973,914Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan and lease losses
                        
                        
                        4,880,000
                        
                        
                        
                        530,000Depreciation
                        
                        
                        115,788
                        
                        
                        
                        115,050Amortization
      and other
                        
                        
                        30,475
                        
                        
                        
                        36,905Stock-based
      compensation expense
                        
                        
                        114,994
                        
                        
                        
                        112,935Provision
      for foreclosed real estate
                        
                        
                        42,055
                        
                        
                        
                        0Net
      change in interest receivable
                        
                        
                        153
                        
                        
                        
                        8,132Net
      change in cash surrender value of life insurance
                        
                        
                        (185,081
                        )
                        
                        
                        (212,277
                        )Net
      change in other assets
                        
                        
                        (1,390,031
                        )
                        
                        
                        362,752Net
      change in interest payable and other liabilities
                        
                        
                        87,959
                        
                        
                        
                        123,870NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                        
                        
                        2,776,365
                        
                        
                        
                        3,051,281INVESTING
      ACTIVITIESPurchases
      of securities available-for-sale
                        
                        
                        (5,499,027
                        )
                        
                        
                        (1,007,500
                        )Proceeds
      from maturing securities held-to-maturity
                        
                        
                        265,000
                        
                        
                        
                        560,000Proceeds
      from maturing securities available-for-sale
                        
                        
                        5,500,000
                        
                        
                        
                        7,205,000Net
      change in loans and leases
                        
                        
                        (20,078,066
                        )
                        
                        
                        (6,404,061
                        )Purchases
      of premises and equipment
                        
                        
                        (44,430
                        )
                        
                        
                        (117,269
                        )NET
      CASH (USED)PROVIDED FOR INVESTING ACTIVITIES
                        
                        
                        (19,856,523
                        )
                        
                        
                        236,170FINANCING
      ACTIVITIESNet
      change in demand, interest-bearing transaction and savings
      deposits
                        
                        
                        1,415,470
                        
                        
                        
                        (2,687,940
                        )Net
      change in time deposits
                        
                        
                        6,632,469
                        
                        
                        
                        11,240,860Proceeds
      from issuance of Preferred stock
                        
                        
                        8,653,000
                        
                        
                        
                        0Cash
      dividend paid
                        
                        
                        (694,146
                        )
                        
                        
                        (686,613
                        )Proceeds
      from FHLB borrowings
                        
                        
                        5,000,000
                        
                        
                        
                        0Repayments of FHLB borrowings
                        
                        
                        0
                        
                        
                        
                        (5,400,000
                        )Stock
      options exercised
                        
                        
                        287,931
                        
                        
                        
                        557,561NET
      CASH  PROVIDED BY FINANCING ACTIVITIES
                        
                        
                        21,294,724
                        
                        
                        
                        3,023,868NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                        
                        
                        4,214,566
                        
                        
                        
                        6,311,319Cash
      and cash equivalents at beginning of period
                        
                        
                        18,233,055
                        
                        
                        
                        9,333,634CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                        
                        $
                        22,447,621
                        
                        
                        $
                        15,644,953SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
      expense
                        
                        $
                        2,088,781
                        
                        
                        $
                        2,996,199Income
      taxes
                        
                        $
                        465,570
                        
                        
                        $
                        682,156SUPPLEMENTAL
      DISCLOSURES OF NONCASH ACTIVITIES:Loans
      transferred to other real estate owned
                        
                        $
                        0
                        
                        
                        $
                        320,416Net
      change in unrealized gains and losses on securities
                        
                        $
                        (72,280
                        )
                        
                        $
                        42,352Net
      change in deferred income taxes on unrealized gains on
      securities
                        
                        $
                        29,746
                        
                        
                        $
                        (17,429
                        )Accrued
      preferred stock dividends
                        
                        $
                        (170,307
                        )
                        
                        $
                        0Amortization/Accretion
      of preferred stock discount/premium, net
                        
                        $
                        (27,271
                        )
                        
                        $
                        0





The
accompanying notes are an integral part of these financial
statements.


7


SONOMA
VALLEY BANCORP AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 June
30, 2009
 (Unaudited)
  Note
1 - Basis of Presentation
  In
the opinion of Management, the unaudited interim consolidated financial
statements contain all adjustments of a normal recurring nature, which are
necessary to present fairly the financial condition of Sonoma Valley Bancorp and
Subsidiary (the "Company") at June 30, 2009 and results of operations for the
six months then ended.
  Certain
information and footnote disclosures presented in our annual financial
statements are not included in these interim financial
statements.  Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our 2008 Annual
Report on Form 10-K.  The results of operations for the six months
ended June 30, 2009 are not necessarily indicative of the operating results
through December 31, 2009.
  Note
2 - Consolidation
  The
consolidated financial statements include the accounts of Sonoma Valley Bancorp
and its wholly owned subsidiary, Sonoma Valley Bank.  All material
intercompany accounts and transactions have been eliminated in
consolidation.
  Note
3:  Commitments
  We
had no outstanding performance letters of credit at June 30, 2009 and June 30,
2008.
  Note
4:  Net Income Per Common Share
  Net
income per share is calculated by using the weighted average common shares
outstanding.  The weighted average number of common shares used in
computing the net income per common share for the period ending June 30, 2009
was 2,295,633 and for the period ending June 30, 2008 was
2,254,842.
  Net income per share (diluted) is calculated by
using the weighted average common shares (diluted) outstanding.  The
weighted average number of common shares (diluted) used in computing the net
income per common share (diluted) for the period ending June 30, 2009 was
2,301,040 and for the period ending June 30, 2008 was 2,306,696.
  Note
5:  Stock Option Accounting
  We
have a stock-based employee and director compensation plan.  We
adopted the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation,prospectively to all employee awards granted,
modified, or settled after January 1, 2003.Options
were granted in 2004, 2007 and 2008 under the fair value
method.  Awards under our plan generally vest over five
years.  Restricted stock was granted in July 2006 that vests over
three and five years beginning July 2007.  The cost related to
stock-based employee and director compensation is included in the determination
of net income for the periods ended June 30, 2009 and 2008.
  8
  Note
6:  Employee Benefit Plans
 
 We
provide retirement plans to our key officers and directors.  The plans
are unfunded and provide for payment to the officers and directors specified
amounts for specified periods after retirement.  The amount of pension
expense related to this plan, and the components of pension expense for the six
months ended June 30, 2009 and 2008 are as follows:
 
 Directors
                        
                        
                        Officers2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Service
      cost
                        
                        $
                        24,077
                        
                        
                        $
                        20,593
                        
                        
                        $
                        52,457
                        
                        
                        $
                        148,906Interest
      cost on projected benefit obligation
                        
                        
                        18,563
                        
                        
                        
                        14,597
                        
                        
                        
                        110,080
                        
                        
                        
                        138,551Amortization
      of unrecognized liability at transition
                        
                        
                        (5,277
                        )
                        
                        
                        (5,107
                        )
                        
                        
                        11,511
                        
                        
                        
                        84,391Net
      periodic pension cost recognized
                        
                        $
                        37,363
                        
                        
                        $
                        30,083
                        
                        
                        $
                        174,048
                        
                        
                        $
                        371,848
 
 
 Note
7:  Fair Value Measurement
 
 Statement
of Financial Accounting Standards (SFAS) No. 157 defines fair value, establishes
a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value
measurement.  Effective January 1, 2008 the Company adopted SFAS No.
157, which enhances the disclosures about financial instruments carried at fair
value.  The adoption of SFAS No. 157 did not have an impact on the
Company’s financial condition or results of operations.
 
 In
general, fair values determined by:
 
 Level
1 inputs utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access.
 
 Level
2 inputs include quoted prices for similar assets and liabilities in active
markets, and inputs other than quoted prices that are observable for the asset
or liability, such as interest rates and yield curves that are observable at
commonly quoted intervals.  Fair values determined by Level 2 inputs
utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly.
 
 Level
3 inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any market activity for the asset or
liability.
 
 The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of June 30, 2009, and indicate
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value.
 
 At
      June 30, 2009Total
                  Level
      1
                  Level
      2
                  Level
      3Available-for-sale
      securities
                  $6,503,448
                  $14,927
                  $6,488,521
                  $0
 
  9
 
 The
following methods were used to estimate the fair value of each class of
financial instrument above:
 
 Securities
available-for-sale –Securities classified as available-for-sale are
reported at fair value utilizing Level 1 inputs for equity securities and Level
2 inputs for all other investment securities.  For equity securities,
the Company obtains the fair value measurements from NASDAQ and for investment
securities, the Company obtains fair value measurements from an independent
pricing service.  The fair value measurements consider observable data
that may include dealer quotes, market spreads, cash flows, the U.S. Treasury
yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the bond’s terms and conditions among
other things.
 
 The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles.  These include assets that are measured at the
lower of cost or market that were recognized at fair value below cost at the end
of the period.  Assets measured at fair value on a nonrecurring basis
are included in the table below.
 
 June
      30, 2009Total
                  Level
      1
                  Level
      2
                  Level
      3Impaired
      Loans
                  $22,529,886
                  $0
                  $22,529,886
                  $0Other
      Real Estate Owned
                  $     243,610
                  $0
                  $     243,610
                  $0
 
 
 Impaired loans
–The fair value of impaired loans and other real estate owned is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash
flows.  Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans.  At June 30, 2009
substantially all of the total impaired loans were evaluated based on the fair
value of the collateral.  In accordance with SFAS 157, impaired loans
where an allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the impaired loan as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
as nonrecurring Level 3.
 
 Note
8 -  Stockholder’s Equity
 
 On
February 20, 2009, we completed the issuance of $8,653,000 of Series A preferred
stock and related warrant for Series B preferred stock under the U.S. Department
of Treasury’s Capital Purchase Program.  The preferred stock has a
cumulative dividend of 5% per annum for five years and, unless redeemed, 9%
thereafter. The liquidation amount is $1,000 per share.  The proceeds
were recorded in equity based on the relative fair value of the preferred stock
and warrant.
 
 Preferred
stock dividends, including accretion of the discount, were $197,578 for the six
months ended June 30, 2009.
 
 
 
 
  10
 Item 2.   MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking
Statements
 
 With
the exception of historical facts stated herein, the matters discussed in this
Form 10-Q are “forward-looking” statements that involve risks and uncertainties
that could cause actual results to differ materially from projected
results.  Such “forward-looking” statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Sonoma Valley Bancorp and its wholly
owned subsidiary, Sonoma Valley Bank (“Bank”), projected costs and expenses
related to operations of our liquidity, capital resources, and the availability
of future equity capital on commercially reasonable terms.  Factors
that could cause actual results to differ materially include, in addition to the
other factors discussed in our Form 10-K for the year ended December 31, 2008,
and subsequent periodic reports, the following; (i) increased competition from
other banks, savings and loan associations, thrift and loan associations,
finance companies, credit unions, offerors of money market funds, and other
financial institutions; (ii) the risks and uncertainties relating to general
economic and political conditions, both domestically and internationally,
including, but not limited to, inflation, or natural disasters affecting the
primary service area of our major industries; or (iii) changes in the laws and
regulations governing the Bank’s activities at either the state or federal
level.  Readers of this Form 10-Q are cautioned not to put undue
reliance on “forward-looking” statements which, by their nature, are uncertain
as reliable indicators of future performance.  We disclaim any
obligation to publicly update these “forward-looking” statements, whether as a
result of new information, future events, or otherwise.
 
 For
the Six Month Periods
 Ended
June 30, 2009 and 2008
  Overview
  The
Company recorded a net loss of $919,947 or $0.49 per diluted share for the six
months ended June 30, 2009. This represents a decline of $2.9 million from
earnings of $1.97 million or $.86 per diluted share during the period ended June
30, 2008. The decline in earnings relates to a $4.35 million increase in
provision for loan losses, a $106,777 decline in non-interest income and a
$485,831 increase in non-interest expense, offset by an increase in net interest
income of $60,860 and a $1.99 million decline in the provision for income taxes.
The increase in the loan loss provision is primarily in response to our
evaluation of the required level of the allowance for loan losses in the current
economic environment and is a reflection of the significant increase in
non-performing loans from $634,482 at June 30, 2008 to $11.73 million at June
30, 2009. Non-performing loans at December 31, 2008 totaled $6.53
million.
 
 Net
income (loss) allocable to common shareholders declined from net income of $1.97
million during the six months ended June 30, 2008 to a net loss of $1.12 million
for the six months ended June 30, 2009. Included in the current year loss was
the net loss described above of $919,947 and $197,578 which represents dividends
accrued and discount amortized on preferred stock.
 
 On
February 20, 2009 the Company entered into a Letter Agreement with the United
States Department of the Treasury, pursuant to which the Company issued and sold
(i) 8,653 shares of the Company’s Preferred Stock, Series and (ii) a warrant to
purchase 433 shares of the Company’s preferred stock, Series B for an aggregate
purchase price of $8,653,000 in cash. The proceeds from this sale have been
temporarily invested in excess reserves at the Federal Reserve Bank. These funds
also provide us with additional lending capacity and liquidity which we can
utilize to support our growth objectives and local economic
expansion.
 11
 Total
assets at June 30, 2009 were $342.5 million, an increase of $20.6 million from
the $321.9 million at December 31, 2008.  Cash and due from banks
increased by $4.2 million from $18.2 million at December 31, 2008 to $22.4
million at June 30, 2009 and investment securities decreased by $368,728 to
$20.1 million at June 30, 2009.  Net loans increased $15.2 million,
which includes a net increase in the allowance for loan losses of $3.6 million.
Deposits increased by $8.05 million from $253.95 million at December 31, 2008 to
$261.99 million at June 30, 2009.  A decrease of $2.9 million in
interest-bearing checking and $172,465 in non-interest-bearing checking was
offset by increases of $5.8 million in time deposits greater that $100K and $4.5
million in savings and money market and $857,800 in other time deposits. Total
shareholders’ equity increased by $7.3 million from $30.9 million at December
31, 2008 to $38.1 million at June 30, 2009. This increase is related to the
issuance of $8.7 million in preferred stock, partially offset by our 2009 loss
for the six months ending June 30, 2009.
 
 Return
(loss) on average total assets on an annualized basis for the six month
period was (0.56)% in 2009 and 1.34% in 2008.  The decline in the
return on assets is the result of the $2.9 million decline in net income
combined with growth of $34.1 million or 11.6% in average assets from $295.2
million as of June 30, 2008 to $329.4 million as of June 30,
2009.  Return (loss) on average shareholders' equity on an annualized
basis at the end of the second quarter 2009 and 2008 was (4.98)% and
13.52%, respectively.  The decline in return (loss) on equity is the
result of the decline in net income from $1.97 million in 2008 to a loss of
$919,947 in 2009. Additionally average equity grew $7.9 million or 26.8% from
$29.4 million as of June 30, 2008 to $37.2 million as of June 30,
2009.
 
 Section
404 of Sarbanes-Oxley Act of 2002 requires the Securities and Exchange
Commission (“SEC”) to prescribe rules requiring the establishment, maintenance
and evaluation of an issuer’s internal control of financial
reporting.  We certified compliance for the year ended December 31,
2008.  Our external independent auditors are required to attest to and
report on management's assessment of internal control over financial reporting
beginning December 31, 2009.  Our management and staff worked
diligently evaluating and documenting the internal control systems in order to
allow our management to report on our internal control over financial
reporting.
 
 RESULTS
OF OPERATIONS
 
 Net
Interest Income
 
 Net
interest income is the difference between total interest income and total
interest expense.  Net interest income, adjusted to a fully taxable
equivalent basis, as shown on the table- Average Balances/Yields and Rates Paid,
on page 13,is higher
than net interest income on the statement of income because it reflects
adjustments applicable to tax-exempt income from certain securities and loans
($167,367 in 2009 and $169,572 in 2008, based on a 34% federal income tax
rate).
 
 The
slight increase in net interest income for the six months ended June 30,
2009 (stated on a fully tax equivalent basis) is a result of the net effect of
an $848,137 decrease in interest income offset by a decrease in interest expense
of $906,792, showing a net increase of $58,655.  As of June 30, 2008
the federal funds rate and Wall Street Journal prime rate were 2% and 5%,
respectively. Over the course of the last year both rates have declined 175
basis points. At June 30, 2009 the federal funds rate was 0.00% - 0.25% and the
prime rate was 3.25%.
   12
 SONOMA VALLEY
BANCORP
 AVERAGE BALANCES/YIELDS AND RATES PAID
 For
the six months ended June 30, 2009 and 2008


2009
                          
                          
                          2008ASSETS
                          
                          Average
                            Balance
                          
                          
                          Income/
                            Expense
                          
                          
                          Yield/
                            Rate
                          
                          
                          Average
                            Balance
                          
                          
                          Income/
                            Expense
                          
                          
                          Yield/
                            RateInterest-earning
      assets:Loans(2):Commercial
                          
                          $
                          190,081,736
                          
                          
                          $
                          6,154,371
                          
                          
                          
                          6.53
                          %
                          
                          $
                          177,123,126
                          
                          
                          $
                          6,722,176
                          
                          
                          
                          7.65
                          %Consumer
                          
                          
                          38,288,114
                          
                          
                          
                          1,198,394
                          
                          
                          
                          6.31
                          %
                          
                          
                          30,327,759
                          
                          
                          
                          1,117,588
                          
                          
                          
                          7.43
                          %Real
      estate construction
                          
                          
                          27,646,991
                          
                          
                          
                          788,448
                          
                          
                          
                          5.75
                          %
                          
                          
                          25,382,056
                          
                          
                          
                          1,043,029
                          
                          
                          
                          8.29
                          %Real
      estate mortgage
                          
                          
                          20,448,342
                          
                          
                          
                          686,999
                          
                          
                          
                          6.78
                          %
                          
                          
                          19,246,242
                          
                          
                          
                          729,477
                          
                          
                          
                          7.64
                          %Tax
      exempt loans (1)
                          
                          
                          2,099,035
                          
                          
                          
                          85,747
                          
                          
                          
                          8.24
                          %
                          
                          
                          2,209,027
                          
                          
                          
                          90,646
                          
                          
                          
                          8.27
                          %Leases
                          
                          
                          17,435
                          
                          
                          
                          0
                          
                          
                          
                          0.00
                          %
                          
                          
                          20,285
                          
                          
                          
                          1,078
                          
                          
                          
                          10.72
                          %Unearned
      loan fees
                          
                          
                          (234,449
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (355,290
                          )Total
      loans
                          
                          
                          278,347,204
                          
                          
                          
                          8,913,959
                          
                          
                          
                          6.46
                          %
                          
                          
                          253,953,205
                          
                          
                          
                          9,703,994
                          
                          
                          
                          7.71
                          %Investment
      securitiesAvailable
      for sale:Taxable
                          
                          
                          6,024,074
                          
                          
                          
                          81,575
                          
                          
                          
                          2.73
                          %
                          
                          
                          4,091,751
                          
                          
                          
                          69,364
                          
                          
                          
                          3.42
                          %Hold
      to maturity:Tax
      exempt (1)
                          
                          
                          13,760,854
                          
                          
                          
                          406,508
                          
                          
                          
                          5.96
                          %
                          
                          
                          14,185,192
                          
                          
                          
                          408,095
                          
                          
                          
                          5.80
                          %Total
      investment securities
                          
                          
                          19,784,928
                          
                          
                          
                          488,083
                          
                          
                          
                          4.97
                          %
                          
                          
                          18,276,943
                          
                          
                          
                          477,459
                          
                          
                          
                          5.27
                          %Federal
      funds sold
                          
                          
                          0
                          
                          
                          
                          0
                          
                          
                          
                          0.00
                          %
                          
                          
                          85,714
                          
                          
                          
                          1,208
                          
                          
                          
                          2.84
                          %FHLB
      stock
                          
                          
                          1,565,640
                          
                          
                          
                          0
                          
                          
                          
                          0.00
                          %
                          
                          
                          1,750,802
                          
                          
                          
                          49,449
                          
                          
                          
                          5.70
                          %Total
      due from banks/interest-bearing
                          
                          
                          10,337,671
                          
                          
                          
                          13,164
                          
                          
                          
                          0.26
                          %
                          
                          
                          1,886,285
                          
                          
                          
                          31,233
                          
                          
                          
                          3.34
                          %Total
      interest-earning assets
                          
                          
                          310,035,443
                          
                          
                          $
                          9,415,206
                          
                          
                          
                          6.12
                          %
                          
                          
                          275,952,949
                          
                          
                          $
                          10,263,343
                          
                          
                          
                          7.50
                          %Noninterest-bearing
      assets:Reserve
      for loan losses
                          
                          
                          (5,173,482
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3,803,245
                          )Cash
      and due from banks
                          
                          
                          5,083,747
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          5,615,134Premises
      and equipment
                          
                          
                          702,937
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          811,432Other
      real estate owned
                          
                          
                          264,056
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          181,835Other
      assets
                          
                          
                          18,446,556
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,470,263Total
      assets
                          
                          $
                          329,359,257
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          295,228,368LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest-bearing
      liabilities:Interest-
      bearing depositsInterest-bearing
      transaction
                          
                          $
                          29,765,430
                          
                          
                          $
                          17,430
                          
                          
                          
                          0.12
                          %
                          
                          $
                          30,377,251
                          
                          
                          $
                          25,135
                          
                          
                          
                          0.17
                          %Savings
      deposits
                          
                          
                          89,672,842
                          
                          
                          
                          449,584
                          
                          
                          
                          1.01
                          %
                          
                          
                          76,444,146
                          
                          
                          
                          764,114
                          
                          
                          
                          2.02
                          %Time
      deposits over $100,000
                          
                          
                          55,780,541
                          
                          
                          
                          755,970
                          
                          
                          
                          2.73
                          %
                          
                          
                          50,854,046
                          
                          
                          
                          1,104,710
                          
                          
                          
                          4.38
                          %Other
      time deposits
                          
                          
                          35,457,461
                          
                          
                          
                          427,991
                          
                          
                          
                          2.43
                          %
                          
                          
                          30,969,274
                          
                          
                          
                          633,359
                          
                          
                          
                          4.12
                          %Total
      interest-bearing deposits
                          
                          
                          210,676,274
                          
                          
                          
                          1,650,975
                          
                          
                          
                          1.58
                          %
                          
                          
                          188,644,717
                          
                          
                          
                          2,527,318
                          
                          
                          
                          2.70
                          %Other
      borrowings
                          
                          
                          25,503,867
                          
                          
                          
                          413,345
                          
                          
                          
                          3.27
                          %
                          
                          
                          22,173,626
                          
                          
                          
                          443,794
                          
                          
                          
                          4.04
                          %Total
      interest-bearing liabilities
                          
                          
                          236,180,141
                          
                          
                          $
                          2,064,320
                          
                          
                          
                          1.76
                          %
                          
                          
                          210,818,343
                          
                          
                          $
                          2,971,112
                          
                          
                          
                          2.84
                          %Non-interest-bearing
      liabilities:Non-interest-bearing
      demand deposits
                          
                          
                          48,437,993
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          48,684,036Other
      liabilities
                          
                          
                          7,513,323
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6,358,558Shareholders'
      equity
                          
                          
                          37,227,800
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          29,367,431Total
      liabilities and shareholders' equity
                          
                          $
                          329,359,257
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          295,228,368Interest
      rate spread
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4.36
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4.66
                          %Interest
      income
                          
                          
                          
                          
                          
                          $
                          9,415,206
                          
                          
                          
                          6.12
                          %
                          
                          
                          
                          
                          
                          $
                          10,263,343
                          
                          
                          
                          7.50
                          %Interest
      expense
                          
                          
                          
                          
                          
                          
                          2,064,320
                          
                          
                          
                          1.34
                          %
                          
                          
                          
                          
                          
                          
                          2,971,112
                          
                          
                          
                          2.17
                          %Net
      interest income/margin
                          
                          
                          
                          
                          
                          $
                          7,350,886
                          
                          
                          
                          4.78
                          %
                          
                          
                          
                          
                          
                          $
                          7,292,231
                          
                          
                          
                          5.33
                          %




(1)  Fully
      tax equivalent adjustments are based on a federal income tax rate of 34%
      in 2009 and 2008.


(2)  Non
      accrual loans have been included in loans for the purposes of the above
      presentation.  Loan fees of approximately $135,966 and $218,087
      for the six months ended June 30, 2009 and 2008, respectively, were
      amortized to the appropriate interest income
  categories.







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.  In 2009, our net interest margin declined 55 basis points to
4.78%, from 5.33% for the same period in 2008.  The decline in the net
interest margin is a result of asset yields repricing downward faster than the
yields on earning liabilities. Additionally, with the increase in non- accrual
loans, we experience the loss of earning from those loans.
  Interest
Income
  As
previously stated, interest income (stated on a fully taxable equivalent basis)
declined by $848,137 to $9.42 million in the first six months of 2009,
an 8.26% decrease from the $10.26 million realized during the same period
in 2008.
  The
$848,137 decrease was the result of the 138 basis point decrease in the
yield on earning assets to 6.12% for the six months ended June 30, 2009
from 7.50% for the same period in 2008.  Average balances of
interest-bearing assets increased $34.1 million or 12.4% from $276.0 million as
of June 30, 2008 to $310.0 million as of June 30, 2009.
  The
gain in volume of average earning assets was responsible for a $793,601 increase
in interest income, and the decrease in interest rates contributed $1.642
million, for a net decrease in interest income of $848,137.
  Interest
Expense
  Total
interest expense for the first six months of 2009 decreased by
$906,792 to $2.064 million from $2.971 million for the same period in
2008.  The average rate paid on all interest-bearing liabilities
decreased from 2.84% in the first six months of 2008 to 1.76% in the same period
in 2009, a decrease of 108 basis points.  Average balances of
interest-bearing liabilities increased from $210.8 million to $236.2 million, a
$25.4 million or 12.03% increase in interest-bearing liabilities.
  The
gain in volume of average balances was responsible for a $240,880 increase in
interest expense and the lower interest rates paid were responsible for a $1.148
million decrease in interest expense for a net decrease of
$906,792.
  Individual components of interest income and
interest expense are provided in the table-Average Balances/Yields and Rates
Paid on page 13.
  Provision
for Loan Losses
  The
allowance for loan losses is maintained at a level that management believes will
be adequate to absorb inherent losses on existing loans based on an evaluation
of the collectability of the loans and prior loan loss
experience.  The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrower’s ability to repay their loan.  The allowance for
loan losses is based on estimates, and ultimate losses may vary from the current
estimates.  These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
  14
  The
provision for loan losses is established by charges to earnings based on
management’s overall evaluation of the collectability of the loan
portfolio.  Based on this evaluation the provision for loan losses
charged to operations for the six months ended June 30, 2009 increased to $4.88
million compared to $530,000 for the same time period in 2008. This increase was
primarily due to one large lending relationship secured by a commercial
construction project and a separate land development project in Sonoma County.
We have experienced a higher level of net loan charge-offs and nonperforming
loans related to the significant economic slow down affecting
California.
 
 As
of June 30, 2009, the non-performing assets to total loans ratio was 4.09%
compared to 0.25% for the same period of 2008. Non accrual loans were $11.5
million as of June 30, 2009 compared to $314,066 as of June 30, 2008, an
increase of $11.2 million. Loans charged-off were $1.3 million and recoveries
were $59,431 as of June 30, 2009 compared with $298,926 in charge-offs and
$15,196 in recoveries for the same period in 2008. The increase in charge-offs
in 2009 is a result of  a significant and growing recession continuing
in 2009 which caused more business failures and borrowers to become delinquent
and unable to payback their loans and a material drop in real estate values in
the Bank’s lending area. See pages 19 and 20 for a discussion of the allowance
for loan losses.
 
 Non-interest
Income
  Non-interest
income for the first six months of $981,611 decreased 9.8% or $106,777 over
the $1.088 million recorded in the comparable period in 2008.  Other fee
income has shown a decrease at June 30, 2009 of 25.8% or $48,297 from $187,378
as of June 30, 2008 to $139,081.
 
 Year-to-date
income from service charges on deposit accounts has declined 4.7%, or
$31,821, from $676,345 in 2008 to $644,524 in 2009.  There was a
decrease of $29,908 in income from overdrafts and checks drawn against
insufficient funds.
 
 All
other non-interest income showed an 11.9%, or $26,659, decrease from
$224,665 in 2008 to $198,006 in 2009.  This is a result of a
decrease in the income generated by bank owned life insurance
policies.  Income on the policies was $212,277 as of June 30, 2008
compared to $185,081 as of June 30, 2009, a decrease of $27,196.  The
earnings on the policies have declined due to the consistently low market
interest rates at this time.
 
 Non-Interest
Expense
 
 Total
non-interest expense grew $485,831, or 10.3%, to $5.2 million for the
first six months of 2009 from $4.7 million in the comparable period in
2008.  Non-interest expense on an annualized basis represented 3.19%
of average total assets in 2009 compared with 3.22% in the comparable period in
2008.
 
 Salaries
and benefits decreased $227,241, or 8.1%, from $2.8 million for the six months
ended June 30, 2008 to $2.6 million for the six months ended June 30,
2009.  Management tries to utilize efficiencies to stabilize the
growth in full-time equivalent employees. At June 30, 2009 total full time
equivalent employees were 53 compared to 54 as of June 30,
2008.  As of June 30, 2009, assets per employee were $6.5 million
compared with $5.6 million as of June 30, 2008.
  15
  Expenses
related to premises and equipment increased 6.4% to $494,343 in 2009 from
$464,800 for the same period in 2008.  The $29,543 increase in
expense in 2009 is the result of increases in software expense of $14,864 or
45.1% from $32,951 to $47,815 as of June 30, 2008 and 2009, respectively. Lease
expense increased for the first six months of 2009 to $203,310 from $194,359 for
the same period of 2008, an increase of 4.6% or $8,951.
 
 Other
operating expenses increased 47.2% to $2.1 million in 2009 from $1.4 million in
2008, an increase of $683,529. The increase is a result of a $353,000 increase
in the accrual for the FDIC assessment due to increases in premiums and a
special assessment, from $72,000 for the six months ended June 30, 2008 to
$425,000 as of June 30, 2009. There was a $241,817 increase in professional fees
from $498,678 as of June 30, 2008 to $740,495. This is a result of increases in
legal fees-corporate matters and legal fees-loan collection expense of $117,770
and $48,329, respectively. Loan expense increased $123,838 from $16,946 as of
June 30, 2008 to $140,784.  We established a provision for unfunded
loan commitments, which created an expense in 2009 of $60,450, where in the past
this amount was included in the provision for loan losses. Other loan expenses
that have increased are expenses on foreclosed property, which reflects costs
associated with that property, as well as a write down to reflect the market
value of the property, and higher appraisal expense due to the need to
re-evaluate non-accrual loans secured by real estate.
 
 Provision
(Benefit) for Income Taxes
 
 The
Company recorded an income tax benefit of $1.0 million, or 52.3% of pre-tax loss
for the six months ended June 30, 2009. This compares to income tax expense of
$979,113, or 33.16% of pre-tax income during the first six months of 2008. The
percentage for 2009 exceeds the statutory rate due to federal tax credits on
California Affordable Housing Investments and tax exempt income such as earnings
on Bank owned life insurance and municipal loan and investment income, which are
in addition to the tax benefit  generated as a result of the net
loss.
 
 BALANCE
SHEET ANALYSIS
  Investments
  Investment
securities were $20.1 million at June 30, 2009, a 1.8% decrease from the $20.4
million at December 31, 2008 and a 25.4% increase from $16.0 million at June 30,
2008.  The increase in the portfolio is a result of Treasury and
Agency purchases to pledge at the Federal Reserve Bank for discount window
borrowings, a contingent liquidity source for the Company.  We will
usually maintain an investment portfolio of securities rated “A” or higher by
Standard and Poor's and or Moody's Investors Service.  Local
tax-exempt bonds are occasionally purchased without an “A” rating.
 
 Securities
are classified as held to maturity (HTM) if we have both the intent and the
ability to hold these securities to maturity.  As of June 30, 2009, we
had securities totaling $13.6 million with a market value of $13.9 million
categorized as HTM.  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 (AFS) if we intend to hold these debt
securities for an indefinite period of time, but not necessarily to
maturity.  Investment securities which are categorized as AFS 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 AFS category
are recorded at market value, which was $6.50 million compared to an amortized
cost of $6.55 million as of June 30, 2009.
 16
 There
were sixteen equity securities of $14,925 and one Federal National Mortgage
Association (FNMA) security  in the AFS portfolio and six securities
of $6.5 million in the HTM portfolio that are temporarily impaired as of June
30, 2009. Unrealized losses totaled $32,512 on equity securities, $17,304 on the
FNMA bond and $63,128 on municipal securities. Of the above, 15 equity
securities or $14,705 in the AFS portfolio and one municipal security of $51,381
in the HTM portfolio that have been in a continuous loss position for 12 months
or more as of June 30, 2009.    The primary cause of the
impairment of this security is interest rate volatility due to market volatility
and downgrades of municipal insurers causing municipal securities to rely on the
underlying rating of the municipality which is typically lower than AAA
rated.  It is our intention to carry the securities to maturity date,
at which time we will receive face value for the securities at no loss. The
equity securities are minimal shares of local and peer group banks so that we
may better review their financial and compensation information.
 
 Although
the quoted market values fluctuate, investment securities are generally held to
maturity, and accordingly, gains and losses to the income statement are
recognized upon sale, or at such time as management determines that a permanent
decline in value exists.  In our opinion, there was no investment in
securities at June 30, 2009 that constituted a material credit risk to the
Company.  The lower market value to amortized costs was a result of
the increase in market interest rates and not an indication of lower credit
quality. At the present time there is some uncertainty in the market relative to
the companies insuring the municipal securities that we hold. We are monitoring
this situation very closely and believe that the municipalities will be able to
fulfill their obligations and there will be no need to rely on the insurance
companies for payment. If the insurance companies are down-graded it could lower
the rating on the securities and therefore affect the fair value.
 
 Loans
  Loan
balances, net of deferred loan fees at June 30, 2009, were $286.2 million, an
increase of 7.02% or $18.8 million over December 31, 2008 and an increase of
11.7% or $29.9 million over June 30, 2008. As of June 30, 2009, commercial loans
were 70.7% of the portfolio and increased $19.6 million, or 10.7%, from December
31, 2008 and increased 13.9% or $24.8 million over June 30,
2008.  Included in Commercial loans are loans made for commercial
purposes and secured by real estate.
 
 Real
Estate Construction loans were $24.7 million as of June 30, 2009 and showed a
decline of $3.2 million, or 11.5%, over December 31, 2008 and a decline of
8.9%, or $2.4 million, over June 30, 2008.
 
 Consumer
loans and Real Estate Mortgage loans both showed growth over December 31, 2008
of 4.7% and 3.4% or $1.7 million and $689,518, respectively.  Consumer
loans grew 18.4%, or $6.0 million and Real Estate mortgages grew 8.2%,
or $1.6 million, over June 30, 2008.
 
 Lease
Financing Receivables have all paid off at June 30, 2009.  Customer
interest in lease financing receivables has declined in our market and we do not
anticipate this to change in the foreseeable future. We have discontinued
offering this product.
  17
  
 June
      30,
                      2009
                    
                    
                    Percentage
                      of Total
                    
                    
                    December
      31,
                      2008
                    
                    
                    Percentage
                      of
      Total
                    
                    
                    June
      30,
                      2008
                    
                    
                    Percentage
                      of TotalCommercial
                    
                    $
                    202,605,207
                    
                    
                    
                    70.7
                    %
                    
                    $
                    182,975,920
                    
                    
                    
                    68.4
                    %
                    
                    $
                    177,821,482
                    
                    
                    
                    69.3
                    %Consumer
                    
                    
                    38,259,461
                    
                    
                    
                    13.4
                    %
                    
                    
                    36,549,623
                    
                    
                    
                    13.7
                    %
                    
                    
                    32,308,374
                    
                    
                    
                    12.6
                    %Real
      estate construction
                    
                    
                    24,720,180
                    
                    
                    
                    8.6
                    %
                    
                    
                    27,918,414
                    
                    
                    
                    10.4
                    %
                    
                    
                    27,146,824
                    
                    
                    
                    10.6
                    %Real
      estate mortgage
                    
                    
                    20,852,681
                    
                    
                    
                    7.3
                    %
                    
                    
                    20,163,163
                    
                    
                    
                    7.5
                    %
                    
                    
                    19,265,303
                    
                    
                    
                    7.5
                    %Leases
                    
                    
                    0
                    
                    
                    
                    0.0
                    %
                    
                    
                    17,634
                    
                    
                    
                    0.0
                    %
                    
                    
                    18,876
                    
                    
                    
                    0.0
                    %286,437,529
                    
                    
                    
                    100.0
                    %
                    
                    
                    267,624,754
                    
                    
                    
                    100.0
                    %
                    
                    
                    256,560,859
                    
                    
                    
                    100.0
                    %Deferred
      loan fees and costs, net
                    
                    
                    (232,293
                    )
                    
                    
                    
                    
                    
                    
                    (215,470
                    )
                    
                    
                    
                    
                    
                    
                    (299,509
                    )Allowance
      for loan and lease losses
                    
                    
                    (8,630,386
                    )
                    
                    
                    
                    
                    
                    
                    (5,032,500
                    )
                    
                    
                    
                    
                    
                    
                    (3,969,487
                    )$
                    277,574,850
                    
                    
                    
                    
                    
                    
                    $
                    262,376,784
                    
                    
                    
                    
                    
                    
                    $
                    252,291,863
 
 Risk
Elements
 
 The
majority of our loan activity is with customers located within
Sonoma County, California.  Approximately 91.1% of the total loan
portfolio is secured by real estate located in our service
area.  Significant concentrations of credit risk may exist if a number
of loan customers are engaged in similar activities and have similar economic
characteristics.  We believe we have policies in place to identify
problem loans and to monitor concentrations of credits.
 
 Based
on its risk management review and a review of its loan portfolio, management
believes that its allowance for loan losses as of June 30, 2009 is sufficient to
absorb losses inherent in the loan portfolio.  This assessment is
based upon the best available information and does involve uncertainty and
matters of judgment.  Accordingly, the adequacy of the loan loss
reserve cannot be determined with precision, but is subject to periodic review,
and could be susceptible to significant change in future periods.
 
 Non-Performing
Assets
 
 Non-performing
assets consist of loans on non-accrual status, delinquent loans past due greater
that 90 days and other real estate owned (OREO).  Non-performing
assets for June 2009 totaled $11.7 million up from $634,482 in June 2008. As of
June 30, 2009 the non-performing assets to total loans ratio was 4.09%, compared
to 0.25% for the same period of 2008.
 
 Management
classifies loans as non-accrual loans when they become more than 90 days past
due, or when the timely collection of interest or principal becomes
uncertain.  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.  OREO
represents assets held through loan foreclosure or recovery activities. As of
June 30, 2009, we had $243,610 classified as OREO compared to $285,665 as of
December 31, 2008 and $320,416 as of June 30, 2008.
  18
  There
were $11.5 million non-accrual loans and no loans 90 days or more past due and
still accruing at June 30, 2009, except for overdrafts of $337,961, which accrue
$5.00 a day per overdrawn account. As of June 30, 2008 there were $314,066
non-accrual loans and no loans 90 days or more past due and still accruing at
June 30, 2008, except for overdrafts of $41,331.  There was $11.1
million in non-accrual loans 90 days or more past due at June 30, 2009 compared
to $74,428 loans in non-accrual status and 90 days or more past due as of June
30, 2008. Occasionally, we will have more loans in non-accrual status than are
90 days past due following the guidelines in the above paragraph or if
management determines the collection of principal or interest is
unlikely.
 
 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.
 
 In
keeping with the Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan(“SFAS No. 114”) and No. 5, Accounting for
Contingencies (“SFAS No. 5”) a review process is performed to identify
loan customers who may be experiencing financial
difficulties.  Management reviews problem loans on a quarterly basis
and determines which loans are considered to be “Impaired
Loans”.  Those considered to be “Impaired” will be individually
evaluated and have a specific reserve set aside.  The impairment of
collateral dependent loans will be charged-off.  Loans not considered
impaired under SFAS No. 114 will be reserved for based on its operational loss
factor.  Loans that are not subject to SFAS No. 114 are reserved for
under SFAS No. 5.  Loans subject to SFAS No. 5 are grouped together
into pools based on similar risk characteristics.  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 risk categories assigned such as “watch”, “substandard”, or
“doubtful” and the factors above, represents management's best estimate of
losses that may be ultimately realized from the current loan
portfolio.
 
 Worsening
conditions in the general economy and real estate markets will likely continue
to adversely affect the loan portfolio, which could necessitate larger
provisions for loan losses than in prior periods. The drastic changes in the
availability of credit during 2008 and continuing into 2009 has negatively
impacted most asset values which serve as collateral to the majority of the
Bank’s loans. However, as of June 30, 2009, we believe the overall allowance for
loan losses is adequate based on our analysis of conditions at that
time.
 
 At
June 30, 2009, the allowance for loan losses was $8.6 million, or 3.02% of
period-end loans, compared with $5.0 million, or 1.88%, at December 31, 2008 and
$4.0 million, or 1.55%, at June 30, 2008. The increase in the allowance is a
result of the increase in the non-accrual loans and deterioration in collateral
values securing these loans. Real estate values continue to deteriorate and
economic conditions remain poor.
 
 Net
charge-offs to average loans increased when compared with the prior
year.  We recorded net charge-offs of $1.3 million or 0.93% of average
loans as of June 30, 2009 compared to June 30, 2008, which showed net
charge-offs of $283,730 or 0.22% of average loans.  The increase in
charge-offs is a direct result of the economic downturn, falling asset values
and increased risk associated with borrowers of all types.
 19
  An
analysis of the changes in the allowance for loan losses, including charge-offs
and recoveries by loan categories, is presented below.
 
 
 For
      the Six
                      Months
      Ended
                      6/30/09
                    
                    
                    For
      the Year
                      Ended
                      12/31/08
                    
                    
                    For
      the Six
                      Months
      Ended
                      6/30/08Balance
      beginning of year
                    
                    $
                    5,032,500
                    
                    
                    $
                    3,723,217
                    
                    
                    $
                    3,723,217Charge-offs:Commercial
                    
                    
                    (769,937
                    )
                    
                    
                    (519,318
                    )
                    
                    
                    (116,144
                    )Consumer
                    
                    
                    (571,608
                    )
                    
                    
                    (508,758
                    )
                    
                    
                    (182,782
                    )Total
      charge-offs
                    
                    
                    (1,341,545
                    )
                    
                    
                    (1,028,076
                    )
                    
                    
                    (298,926
                    )Recoveries:Commercial
                    
                    
                    55,729
                    
                    
                    
                    218,812
                    
                    
                    
                    9,512Consumer
                    
                    
                    3,702
                    
                    
                    
                    8,547
                    
                    
                    
                    5,684Total
      recoveries
                    
                    
                    59,431
                    
                    
                    
                    227,359
                    
                    
                    
                    15,196Net
      recoveries (charge-offs)
                    
                    
                    (1,282,114
                    )
                    
                    
                    (800,717
                    )
                    
                    
                    (283,730
                    )Provision
      charged to operations
                    
                    
                    4,880,000
                    
                    
                    
                    2,110,000
                    
                    
                    
                    530,000Balance
      end of period
                    
                    $
                    8,630,386
                    
                    
                    $
                    5,032,500
                    
                    
                    $
                    3,969,487Ratio
      of net charge-offs annualized to average loans
                    
                    
                    0.93
                    %
                    
                    
                    0.31
                    %
                    
                    
                    0.22
                    %Balance
      in allowance as a percentage  of loans outstanding at period
      end
                    
                    
                    3.02
                    %
                    
                    
                    1.88
                    %
                    
                    
                    1.55
                    %
 
 Deposits
 
 A
comparative schedule of average deposit balances is presented in the table on
page 13;period-end
and year-end deposit balances are presented in the following table.
 
 
 June
      30,
                      2009
                    
                    
                    Percentage of
      Total
                    
                    
                    December
      31,
                      2008
                    
                    
                    Percentage of
      Total
                    
                    
                    June
      30,
                      2008
                    
                    
                    Percentage of
      TotalInterest-bearing
      transaction deposits
                    
                    $
                    28,164,005
                    
                    
                    
                    10.7
                    %
                    
                    $
                    31,062,597
                    
                    
                    
                    12.2
                    %
                    
                    $
                    28,551,865
                    
                    
                    
                    11.7
                    %Savings
      deposits
                    
                    
                    92,803,924
                    
                    
                    
                    35.4
                    %
                    
                    
                    88,317,397
                    
                    
                    
                    34.8
                    %
                    
                    
                    78,377,774
                    
                    
                    
                    32.1
                    %Time
      deposits, $100,000 and over
                    
                    
                    56,469,137
                    
                    
                    
                    21.6
                    %
                    
                    
                    50,694,468
                    
                    
                    
                    20.0
                    %
                    
                    
                    53,377,068
                    
                    
                    
                    21.8
                    %Other
      time deposits
                    
                    
                    36,449,080
                    
                    
                    
                    13.9
                    %
                    
                    
                    35,591,280
                    
                    
                    
                    14.0
                    %
                    
                    
                    31,659,159
                    
                    
                    
                    12.9
                    %Total
      interest-bearing  deposits
                    
                    
                    213,886,146
                    
                    
                    
                    81.6
                    %
                    
                    
                    205,665,742
                    
                    
                    
                    81.0
                    %
                    
                    
                    191,965,866
                    
                    
                    
                    78.5
                    %Demand
      deposits
                    
                    
                    48,107,294
                    
                    
                    
                    18.4
                    %
                    
                    
                    48,279,759
                    
                    
                    
                    19.0
                    %
                    
                    
                    52,634,753
                    
                    
                    
                    21,5
                    %Total
      deposits
                    
                    $
                    261,993,440
                    
                    
                    
                    100.0
                    %
                    
                    $
                    253,945,501
                    
                    
                    
                    100.0
                    %
                    
                    $
                    244,600,619
                    
                    
                    
                    100.0
                    %
  20
 Total
deposits increased by $8.0 million, or 3.2%, during the six months of 2009 to
$261.99 million from $253.95 million at December 31, 2008, and increased by 7.1%
from $244.6 million as of June 30, 2008.  Time deposits greater than
$100,000, savings deposits and other time deposits showed increases over
year-end 2008.  Time deposits greater than $100,000 showed strong
growth of 11.4%, or $5.8 million, and were $56.5 million as of June 30, 2009
compared to $50.7 million at year-end 2008.  Savings deposits of $92.8
million increased $4.5 million, or 5.1%, from $88.3 million at December 31,
2008.  Other time deposits showed growth of 2.4%, or $857,800, and
were $36.4 million as of June 30, 2009 compared to $35.6 million at December 31,
2008.
 
 Both
non-interest bearing demand deposits and interest bearing checking show
decreases. Non-interest bearing demand declined $172,465, or 0.36%, from $48.3
million as of December 2008 to $48.1 million as of June 30,
2009.  Interest-bearing checking declined to $28.2 million, a 9.3%, or
$2.9 million decline from $31.1 million as of December 31, 2008. This is an
indication that customers have been moving deposits to higher yielding
accounts.
 
 Capital
  Our
subsidiary, Sonoma Valley Bank (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 June 30, 2009, the Bank was required to have minimum
Tier 1 and total risk-based capital ratios of 4% and 8%, respectively. To be
well capitalized under Prompt Corrective Action Provisions requires minimum Tier
1 and total risk-based capital ratios to be 6% and 10%,
respectively.
 
 The
FDIC has also adopted minimum leverage ratio guidelines for compliance by
banking organizations.  The guidelines require a minimum leverage
ratio of 4% of Tier 1 capital to total average assets.  Banks
experiencing high growth rates are expected to maintain capital positions well
above the minimum levels.  The leverage ratio, in conjunction with the
risk-based capital ratio, constitutes 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 June 30,
2009 was 11.86% and its Tier 1 risk-based capital ratio was
10.59%.  The Bank's leverage ratio was 9.51%.  All the
ratios exceed the minimum guidelines of 8.00%, 4.00% and 4.00%,
respectively.  The Company’s total risk based capital, Tier 1 risk
based capital and leverage ratios at June 30, 2009, were 13.35%, 12.08% and
10.85%, respectively.
 
 On
February 20, 2009, we completed the issuance of $8,653,000 of Series A preferred
stock and related warrant for Series B preferred stock under the U.S. Department
of Treasury’s Capital Purchase Program.  We issued 8,653 shares of
Series A preferred stock and a warrant to acquire 433 shares of Series B
preferred stock for the aggregate purchase price (collectively the “Preferred
Stock”). The warrant was exercised immediately and the 433 shares issued. The
Series A preferred stock has a cumulative dividend of 5% per annum for five
years and, unless redeemed, 9% thereafter.  The liquidation amount is
$1,000 per share.  The Series B preferred stock pays a dividend of
9%.  The Preferred Stock has no maturity date and ranks senior to the
Company’s common stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up
of the Company. The Preferred Stock is generally non-voting, other than class
voting on certain matters that could adversely affect the Preferred
Stock.
 21
 The
Agreement contains limitations on certain actions of the Company, including, but
not limited to, payment of dividends, redemptions and acquisitions of Company
equity securities, and compensation of senior executive officers.
 
 In
February 2001, we approved a program to repurchase and retire Sonoma Valley
Bancorp stock. Effective February 20, 2009 the repurchase program has been
suspended pending the repayment of the Preferred Stock.
 
 We
believe that the Bank's current capital position, which exceeds guidelines
established by industry regulators, is adequate to support our
business.
 
 Off-Balance
Sheet Commitments
 
 Our
off-balance sheet commitments consist of commitments to extend credit and
standby letters of credit.  These commitments are extended to
customers in the normal course of business.  Unfunded loan commitments
were $40.3 million at June 30, 2009 and $49.0 million at June 30, 2008.Standby
letters of credit outstanding were $123,000 at June 30, 2009 and $118,000 at
June 30, 2008.  We also have contractual obligations consisting of
operating leases for various facilities and payments to participants under our
supplemental executive retirement plan and deferred compensation
plan.
 
 Liquidity
Management
  Our
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 our liquidity.  We review our liquidity position on a
regular basis to verify that it is adequate to meet projected loan funding and
potential withdrawal of deposits.  We have a comprehensive Asset and
Liability Policy which we use to monitor and determine adequate levels of
liquidity.  As of June 30, 2009, our primary liquidity ratio (adjusted
liquid assets to deposits and short term liabilities) was 8.46% of assets
compared to 5.84% as of June 30, 2008. Available liquidity, which includes
the ability to borrow at the Federal Home Loan Bank, was 26.3% of assets as of
June 30, 2009 and 42.5% as of June 30, 2008.  Management expects that
liquidity will remain adequate throughout 2009, as deposit growth keeps pace
with loan growth.  Any excess funds will be invested in quality liquid
assets, such as excess reserves with the Federal Reserve Bank or U.S. Treasury
and Agency securities.  Management believes that the Company has
adequate liquidity and capital resources to meet its short-term and long-term
commitments.
 
 Market
Risk Management
  Overview.  Market
risk is the risk of loss from adverse changes in market prices and
rates.  Our market risk arises primarily from interest rate risk
inherent in our loan and deposit functions.  The goal for managing the
assets and liabilities is to maximize shareholder value and earnings while
maintaining a high quality balance sheet without exposing us to undue interest
rate risk.  Our Board has overall responsibility for the interest rate
risk management policies.  The 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.
 22
 Asset/Liability
Management.  Activities involved in asset/liability management
include but are not limited to lending, accepting and placing deposits and
investing in securities.  Interest rate risk is the primary market
risk associated with asset/liability management.  Sensitivity of
earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities.  To mitigate interest rate risk, the structure of the
balance sheet is managed with the goal that movements of interest rates on
assets and liabilities are correlated and contribute to earnings even in periods
of volatile interest rates.When
interest rates increase, the market value of securities held in the investment
portfolio declines.  Generally, this decline is offset by an increase
in earnings.  When interest rates decline, the market value of
securities increases while earnings decrease due to the Bank's asset sensitivity
caused by the variable rate loans.  Usually we are able to mitigate
risks from changes in interest rates with this balance sheet
structure.  The asset/liability management policy sets limits on the
acceptable amount of variance in net interest margin and market value of equity
under changing interest environments.  The Bank uses simulation models
to forecast earnings, net interest margin and market value of
equity.
 
 Simulation
of earnings is the primary tool used to measure the sensitivity of earnings to
interest rate changes.  Using computer-modeling techniques, we are
able to estimate the potential impact of changing interest rates on
earnings.  A balance sheet forecast is prepared quarterly using inputs
of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base.  The forecast
balance sheet is processed against four interest rate scenarios.  The
scenarios include 100, 200 and 300 basis point rising rate forecasts and a flat
rate forecast which take place within a one year time frame.  Normally
we forecast a 100 and 200 basis point falling rate forecast, but since the
target Fed Funds is currently 0 – 25 basis points we feel we cannot forecast a
lower rate scenario. The net interest income is measured during the year
assuming a gradual change in rates over the twelve-month horizon.  Our
2009 net interest income, as forecast below, was modeled utilizing a forecast
balance sheet projected from June 30, 2009 balances.  The following
table summarizes the effect on net interest income (NII) of 100, 200 and 300
basis point changes in interest rates as measured against a constant rate (no
change) scenario.
 
 Interest
Rate Risk Simulation of Net Interest Income as of June 30, 2009
 (dollars
in thousands)
 
 Variation
      from a constant rate scenario
                      
                      $
      Change in NII+300bp
                      
                      $
      1,359+200bp
                      
                      $    757+100bp
                      
                      $    291
 
 The
simulations of earnings do not incorporate any management actions. Therefore,
they do not reflect likely actual results, but serve as conservative estimates
of interest rate risk.
 
 Since
the primary tool used by management to measure and manage interest rate exposure
is a simulation model, use of the model to perform simulations reflecting
changes in interest rates over a twelve month horizon enables management to
develop and initiate strategies for managing exposure to interest rate
risks.  Management believes that both individually and in the
aggregate its modeling assumptions are reasonable, but the complexity of the
simulation modeling process results in a sophisticated estimate, not an
absolutely precise calculation of exposure.
 23
 Interest Rate
Sensitivity Analysis.  Interest rate sensitivity is a function
of the repricing characteristics of the portfolio of assets and
liabilities.  These repricing characteristics are the time frames
within which the interest-bearing assets and liabilities are subject to change
in interest rates either at replacement, repricing or
maturity.  Interest rate sensitivity management focuses on the
maturity of assets and liabilities and their repricing during periods of change
in market interest rates.  Interest rate sensitivity is measured as
the difference between the volumes of assets and liabilities in the current
portfolio that are subject to repricing at various time horizons.  The
differences are known as interest sensitivity gaps.
 A
positive cumulative gap may be equated to an asset sensitive
position.  An asset sensitive position in a rising interest rate
environment will cause a bank’s interest rate margin to expand.  This
results as floating or variable rate loans reprice more rapidly than fixed rate
certificates of deposit that reprice as they mature over
time.  Conversely, a declining interest rate environment 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.
 
 We
have more liabilities than assets repricing during the next year. Usually
because our asset rates change more than deposit rates, our interest income will
change more than the cost of funds when rates change.  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 table below indicates that we are liability
sensitive for the first six months. During the seven to twelve month period, we
show more assets than liabilities repriceable in the seven to twelve month
category.  Still at the end of the twelve month cycle, the rate
sensitive gap shows $65.2 million more in liabilities than assets
repricing.
 
 We
control long term interest rate risk by keeping long term fixed rate assets
(longer than 5 years) less than long term fixed rate funding, primarily demand
deposit accounts and capital. The following table sets forth cumulative maturity
distributions as of June 30, 2009 for our interest-bearing assets and
interest-bearing liabilities, and our interest rate sensitivity gap as a
percentage of total interest-earning assets.  Of the $154.1 million in
fixed rate assets over 12 months, shown in the table below, $38.0 million are
long term assets over five years.  This $38.0 million compares
favorably to the $86.1 million in demand and core deposits and
equity.
 
 24
 
 JUNE
      30, 2009
                      (dollars
      in thousands)
                    
                    Immediate
                      Reprice
                    
                    
                    Up
      to 3
                      Months
                    
                    
                    4
      to 6
                      Months
                    
                    
                    7
      to 12
                      Months
                    
                    
                    Over
      12
                      Months
                    
                    
                    TotalFFS
      + overnight IBB
                    
                    $
                    17,357
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    17,357Securities
      + Other IBB
                    
                    
                    0
                    
                    
                    $
                    1,106
                    
                    
                    $
                    553
                    
                    
                    $
                    1,105
                    
                    
                    $
                    17,309
                    
                    
                    
                    20,073Loans
                    
                    
                    63,485
                    
                    
                    
                    9,830
                    
                    
                    
                    23,611
                    
                    
                    
                    43,849
                    
                    
                    
                    136,800
                    
                    
                    
                    277,575Total
      RSA
                    
                    $
                    80,842
                    
                    
                    $
                    10,936
                    
                    
                    $
                    24,164
                    
                    
                    $
                    44,954
                    
                    
                    $
                    154,109
                    
                    
                    $
                    315,005MMDA/NOW/SAV
                    
                    $
                    120,969
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    120,969CD’s
      <$100k
                    
                    
                    0
                    
                    
                    $
                    10,440
                    
                    
                    $
                    10,125
                    
                    
                    $
                    10,125
                    
                    
                    $
                    5,071
                    
                    
                    
                    35,761CD’s
      >$100k
                    
                    
                    0
                    
                    
                    
                    15,079
                    
                    
                    
                    27,499
                    
                    
                    
                    6,875
                    
                    
                    
                    7,704
                    
                    
                    
                    57,157Borrowings
                    
                    
                    10,000
                    
                    
                    
                    15,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    10,000
                    
                    
                    
                    35,000Total
      RSL
                    
                    $
                    130,969
                    
                    
                    $
                    40,519
                    
                    
                    $
                    37,624
                    
                    
                    $
                    17,000
                    
                    
                    $
                    22,775
                    
                    
                    $
                    248,887GAP
                    
                    $
                    (50,127
                    )
                    
                    $
                    (29,583
                    )
                    
                    $
                    (13,460
                    )
                    
                    $
                    27,954
                    
                    
                    $
                    131,334
                    
                    
                    $
                    66,118Cumulative
                    
                    $
                    (50,127
                    )
                    
                    $
                    (79,710
                    )
                    
                    $
                    (93,170
                    )
                    
                    $
                    (65,216
                    )
                    
                    $
                    66,118%
      Assets
                    
                    
                    -14.7
                    %
                    
                    
                    -23.3
                    %
                    
                    
                    -27.2
                    %
                    
                    
                    -19.1
                    %
                    
                    
                    19.3
                    %
 
 
 Market risk in
securities.  Market risk in securities shows the amount of gain
or loss (before tax) in the securities portfolio.  Portfolio volume,
sector distribution, duration, and quality all affect market
valuation.  The adjusted equity ratio is tier 1 capital adjustedfor
the market gain or loss less and any applicable tax effect divided by average
total assets for leverage capital purposes for the most recent
quarter.  The ratio is designed to show tier 1 capital if the
securities portfolio had to be liquidated and all gains and losses
recognized.  If the ratio remains strong after a +2% or +3% rate
shock, market risk is reasonable in relation to the level of
capital.  A bank has flexibility and strength when the securities
portfolio can be liquidated for liquidity purposes without affecting capital
adequacy.
 
 The
Bank has only moderate market risk in investments because the average maturity
in the portfolio is not very long, except for municipals, which are held to
maturity (see page 16 and 17 for discussion of investments).  The
portfolio should decline in value only about 1.1% or $468,000 for a 1% increase
in rates.  The gain in value if rates fall would be somewhat less,
because there are some callable bonds.  Marking-to-market available
for sale securities when rates change would add only modest volatility to a
strong level of equity. This market risk acts to offset the interest rate risk
(i.e. if rates decline and NIM is squeezed, there would be a concurrent gain in
the value of securities).
 
  25
 SONOMA
VALLEY BANCORP


AVERAGE
BALANCES/YIELDS AND RATES PAID


For the three months ended June 30, 2009 and
2008


2009
                                
                                
                                2008ASSETS
                                
                                Average
                                  Balance
                                
                                
                                Income/
                                  Expense
                                
                                
                                Yield/
                                  Rate
                                
                                
                                Average
                                  Balance
                                
                                
                                Income/
                                  Expense
                                
                                
                                Yield/
                                  RateInterest-earning
      assets:Loans(2):Commercial
                                
                                $
                                196,916,177
                                
                                
                                $
                                3,130,449
                                
                                
                                
                                6.38
                                %
                                
                                $
                                174,519,779
                                
                                
                                $
                                3,247,445
                                
                                
                                
                                7.46
                                %Consumer
                                
                                
                                38,517,309
                                
                                
                                
                                603,681
                                
                                
                                
                                6.29
                                %
                                
                                
                                31,115,190
                                
                                
                                
                                557,789
                                
                                
                                
                                7.19
                                %Real
      estate construction
                                
                                
                                26,255,488
                                
                                
                                
                                331,938
                                
                                
                                
                                5.07
                                %
                                
                                
                                26,464,118
                                
                                
                                
                                530,080
                                
                                
                                
                                8.03
                                %Real
      estate mortgage
                                
                                
                                20,696,128
                                
                                
                                
                                342,699
                                
                                
                                
                                6.64
                                %
                                
                                
                                19,932,255
                                
                                
                                
                                375,654
                                
                                
                                
                                7.56
                                %Tax
      exempt loans (1)
                                
                                
                                2,099,035
                                
                                
                                
                                43,111
                                
                                
                                
                                8.24
                                %
                                
                                
                                2,209,027
                                
                                
                                
                                45,323
                                
                                
                                
                                8.23
                                %Leases
                                
                                
                                17,233
                                
                                
                                
                                0
                                
                                
                                
                                0.00
                                %
                                
                                
                                19,592
                                
                                
                                
                                539
                                
                                
                                
                                11.03
                                %Unearned
      loan fees
                                
                                
                                (241,457
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (316,684
                                )Total
      loans
                                
                                
                                284,259,913
                                
                                
                                
                                4,451,878
                                
                                
                                
                                6.28
                                %
                                
                                
                                253,943,277
                                
                                
                                
                                4,756,830
                                
                                
                                
                                7.51
                                %Investment
      securitiesAvailable
      for sale:Taxable
                                
                                
                                5,479,879
                                
                                
                                
                                28,660
                                
                                
                                
                                2.10
                                %
                                
                                
                                2,353,859
                                
                                
                                
                                17,249
                                
                                
                                
                                2.94
                                %Hold
      to maturity:Tax
      exempt (1)
                                
                                
                                13,666,281
                                
                                
                                
                                202,302
                                
                                
                                
                                5.94
                                %
                                
                                
                                13,978,828
                                
                                
                                
                                202,289
                                
                                
                                
                                5.80
                                %Total
      investment securities
                                
                                
                                19,146,160
                                
                                
                                
                                230,962
                                
                                
                                
                                4.84
                                %
                                
                                
                                16,332,687
                                
                                
                                
                                219,538
                                
                                
                                
                                5.39
                                %FHLB
      stock
                                
                                
                                1,566,087
                                
                                
                                
                                0
                                
                                
                                
                                0.00
                                %
                                
                                
                                1,691,808
                                
                                
                                
                                25,771
                                
                                
                                
                                6.07
                                %Total
      due from banks/interest-bearing
                                
                                
                                9,972,716
                                
                                
                                
                                6,296
                                
                                
                                
                                0.25
                                %
                                
                                
                                1,181,983
                                
                                
                                
                                4,520
                                
                                
                                
                                1.53
                                %Total
      interest-earning assets
                                
                                
                                314,944,876
                                
                                
                                $
                                4,689,136
                                
                                
                                
                                5.97
                                %
                                
                                
                                273,149,755
                                
                                
                                $
                                5,006,659
                                
                                
                                
                                7.35
                                %Noninterest-bearing
      assets:Reserve
      for loan losses
                                
                                
                                (5,298,571
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (3,852,604
                                )Cash
      and due from banks
                                
                                
                                5,152,617
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                5,544,487Premises
      and equipment
                                
                                
                                686,732
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                805,735Other
      real estate owned
                                
                                
                                243,610
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                324,989Other
      assets
                                
                                
                                18,576,458
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                16,498,534Total
      assets
                                
                                $
                                334,305,722
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                292,470,896LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest-bearing
      liabilities:Interest-
      bearing depositsInterest-bearing
      transaction
                                
                                $
                                29,976,842
                                
                                
                                $
                                8,789
                                
                                
                                
                                0.12
                                %
                                
                                $
                                28,985,448
                                
                                
                                $
                                11,987
                                
                                
                                
                                0.17
                                %Savings
      deposits
                                
                                
                                91,565,310
                                
                                
                                
                                221,050
                                
                                
                                
                                0.97
                                %
                                
                                
                                77,675,134
                                
                                
                                
                                348,222
                                
                                
                                
                                1.80
                                %Time
      deposits over $100,000
                                
                                
                                56,386,663
                                
                                
                                
                                370,076
                                
                                
                                
                                2.63
                                %
                                
                                
                                54,340,915
                                
                                
                                
                                556,557
                                
                                
                                
                                4.11
                                %Other
      time deposits
                                
                                
                                36,274,216
                                
                                
                                
                                203,921
                                
                                
                                
                                2.25
                                %
                                
                                
                                31,751,693
                                
                                
                                
                                305,066
                                
                                
                                
                                3.85
                                %Total
      interest-bearing deposits
                                
                                
                                214,203,031
                                
                                
                                
                                803,836
                                
                                
                                
                                1.51
                                %
                                
                                
                                192,753,190
                                
                                
                                
                                1,221,832
                                
                                
                                
                                2.54
                                %Other
      borrowings
                                
                                
                                23,394,265
                                
                                
                                
                                177,183
                                
                                
                                
                                3.04
                                %
                                
                                
                                14,550,108
                                
                                
                                
                                149,067
                                
                                
                                
                                4.11
                                %Total
      interest-bearing liabilities
                                
                                
                                237,597,296
                                
                                
                                $
                                981,019
                                
                                
                                
                                1.66
                                %
                                
                                
                                207,303,298
                                
                                
                                $
                                1,370,899
                                
                                
                                
                                2.65
                                %Non-interest-bearing
      liabilities:Non-interest-bearing
      demand deposits
                                
                                
                                49,439,454
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                48,993,400Other
      liabilities
                                
                                
                                7,298,080
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                6,424,493Shareholders'
      equity
                                
                                
                                39,970,892
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                29,749,705Total
      liabilities and shareholders' equity
                                
                                $
                                334,305,722
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                292,470,896Interest
      rate spread
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                4.32
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                4.70
                                %Interest
      income
                                
                                
                                
                                
                                
                                $
                                4,689,136
                                
                                
                                
                                5.97
                                %
                                
                                
                                
                                
                                
                                $
                                5,006,659
                                
                                
                                
                                7.35
                                %Interest
      expense
                                
                                
                                
                                
                                
                                
                                981,019
                                
                                
                                
                                1.25
                                %
                                
                                
                                
                                
                                
                                
                                1,370,899
                                
                                
                                
                                2.01
                                %Net
      interest income/margin
                                
                                
                                
                                
                                
                                $
                                3,708,117
                                
                                
                                
                                4.72
                                %
                                
                                
                                
                                
                                
                                $
                                3,635,760
                                
                                
                                
                                5.34
                                %


(1)
            Fully
      tax equivalent adjustments are based on a federal income tax rate of 34%
      in 2009 and 2008.


(2)
            Non
      accrual loans have been included in loans for the purposes of the above
      presentation.  Loan fees of approximately $75,093 and $97,765
      for the three months ended June 30, 2009 and 2008, respectively, were
      amortized to the appropriate interest income
  categories.


26







For
the Three Month Periods


Ended
June 30, 2009 and 2008





Overview





We
reported a net loss of $1.48 million for the second quarter of 2009
compared with net income of $946,625 for the second quarter of
2008.  On a per share basis, net loss for the three months ended June
30, 2009 equaled ($0.70) per basic weighted average share compared with net
income of $0.42 per share during the same period in 2008. See page 4
for the comparative detail. The decline in earnings relates to a $3.94 million
increase in the provision for loan losses, a $317,000 decline in interest income
and an increase in non-interest expenses of $222,000, offset by a decrease in
interest expense of $390,000 and a $1.69 million decline in the provision for
income taxes.





Return
(loss) on average total assets on an annualized basis for the three months ended
June 30, 2009 and 2008 was (1.77%) and 1.29%, respectively.  Return
(loss) on average shareholders' equity on an annualized basis for the three
months ended June 30, 2009 and 2008 was (14.79%) and 12.7%,
respectively.  The decrease in the return on equity is a result of the
decline in earnings and the increase in average equity experienced in the second
quarter of 2009 when compared to 2008.  Net income (loss) allocable to
common shareholders declined from net income of $946,625 during the three months
ended June 30 2008 to a net loss of $1.61 million during the same period
2009.





RESULTS
OF OPERATIONS





Net
Interest Income





Net
interest income, adjusted to a fully taxable equivalent basis, increased by
$100,000 to $3.7 million for the three months ended June 30, 2009, from $3.6
million during the comparable period of 2008.  Net interest income on
a fully taxable equivalent basis, as shown on the table -Average Balances/Yields
and Rates Paid on page 26, is higher than net interest income on the statements
of income because it reflects adjustments applicable to tax-exempt income from
certain securities and loans ($83,000 in 2009 and $84,000 in 2008, based on a
34% federal income tax rate).





Net
interest income (stated on a fully taxable equivalent basis) expressed as a
percentage of average earning assets, is referred to as net interest
margin.  Our net interest margin for the second quarter of
2009 decreased 62 basis points to 4.72% from 5.34% for the quarter ended
June 30, 2008.  The decrease in net interest margin is the result of
yields on earning assets declining faster than the yields on earning
liabilities.  For the three months ended June 30, 2009, the yield on
average earning assets has decreased 138 basis points, while the yield on
interest-bearing liabilities decreased 99 basis points from 2.65% for the three
months of 2008 to 1.66% for the three months period ended June 30,
2009.  The Federal Reserve Bank has continued to lower
rates.  As of June 30, 2009 the federal funds rate was 0.00% - 0.25%
and the prime rate was 3.25%.





Interest
Income





Interest
income for the three months ended June 30, 2009 decreased by $318,000 to
$4.7 million, a 6.3% decrease over the $5.0 million realized during the same
period in 2008.  The gain in volume of average balances was
responsible for a $497,000 increase in interest income and a $815,000 decrease
in income was related to lower interest rates, resulting in a net decline in
interest income of $318,000.


27


Interest
Expense





Total
interest expense for the three months ended June 30, 2009 decreased by
$400,000 to $1.0 million compared with $1.4 million in the same period of
2008.  The average rate paid on all interest-bearing liabilities for
the second quarter of 2009 decreased 99 basis points to 1.66% from
2.65% in the second quarter of 2008. Average interest-earning deposit balances
for the second quarter of 2009 increased to $237.6 million from $207.3 million
in the same period of 2008, a 14.6% gain.





The gain
in volume of average balances accounted for a $140,000 increase in interest
expense while a decline of $530,000 was related to lower interest rates paid,
resulting in a $390,000 decrease in interest expense for the second quarter of
2009.





Individual
components of interest income and interest expense are provided in the table -
Average Balances/Yields and Rates Paid on page 26.





Provision
for Loan Losses





The
provision for loan losses was $4.25 million during the second quarter of 2009
compared to the $310,000 provision for the second quarter of
2008.  The increase in the provision is primarily the result of
managements' evaluation of one large lending relationship secured by a
commercial construction project and a separate land development project in
Sonoma County and the subsequent specific reserve based on the SFAS No. 114
analysis.  The Company continues to accrue based on the assessment of
the loan portfolio in light of current economic conditions.  In
addition, the Company has continued to experience growth in loan volume
necessitating an increase in the provision.





Non-interest
Income





Non-interest
income of $502,000 for the second quarter of 2009 represented a decrease of
$29,000, or 5.5%, from the $531,000 for the comparable period in
2008.  Contributing to this variance was a decline in income generated
by bank-owned life insurance policies. Income on the policies was $88,000 for
the quarter ending June 30, 2009 compared to $106,000 for the same period in
2008.





Non-interest
Expense





For the
second quarter of 2009, non-interest expense was $2.57 million compared with
$2.34 million for the same period in 2008, representing an increase of $222,000,
or 9.5%.  The largest increase in non-interest expense was in the
accrual for FDIC insurance and a special assessment from $36,000 for the three
months ended June 30, 2008 to $260,000 for the same period ended June 30, 2009,
an increase of $224,000.





Salaries
and benefits expense decreased $156,000, or 11.3% for the three months ended
June 30, 2009 from $1.39 million to $1.23 million. At June 30, 2009 and June
2008, total full-time equivalent employees were 53 and 54,
respectively.





Professional
fees expense increased $155,000, or 63.5% from $244,000 for the three months
ended June 30, 2008 to $399,000 for the same period in 2009. This is a result of
increases in legal fees for corporate matters and legal fees for loan
collections of $59,000 and $26,000, respectively.


28


The
expenses for premises and equipment increased 6.1% from $236,000 for the second
quarter of 2008 to $251,000 in 2009.  The $15,000 increase in expense
in 2009 is a result of increased building lease expense and additional software
costs.





Provision
(Benefit) for Income Taxes





The
Company recorded an income tax benefit of $1.2 million, or 45.1% of pre-tax loss
for the quarter ended June 30, 2009. This compares to income tax expense of
$480,155, or 33.7% of pre-tax income for the comparable quarter of 2008. The
percentage for 2009 exceeds the statutory rate due to federal tax credits on
California Affordable Housing Investments and tax exempt income such as earnings
on Bank owned life insurance and municipal loan and investment income which are
in addition to the tax benefit generated as a result of the net
loss.




Item 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT
MARKET RISK




Information
regarding Quantitative and Qualitative Disclosures about Market Risk appears on
page 22 through 25 under the caption “Management's Discussion and Analysis of
Financial Condition and Results of Operations -B Market Risk
Management” and is incorporated herein by reference.





Item
4.  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





Disclosure
controls and procedures are designed with the objective of ensuring that
information required to be disclosed in reports filed by the Company under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Disclosure controls and procedures are also
designed with the objective of ensuring that such information is accumulated and
communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.




Evaluation
of Disclosure Controls and Procedures




The
Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief
Financial Officer, about the effectiveness of disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the disclosure
controls and procedures, as of the end of the period covered by this Form 10-Q,
are effective in alerting them to material information required to be included
in this Form 10-Q.




Changes
in Internal Control over Financial Reporting





During
the quarter ended June 30, 2009, there have been no changes in our internal
control over financial reporting, or to our knowledge, in other factors, that
have materially affected or, are reasonably likely to materially affect our
internal controls over financial reporting.


29


Part
II





Item
1.  LEGAL PROCEEDINGS


From
time to time we are involved in litigation incidental to the conduct of our
business.  While the outcome of lawsuits and other proceedings
against  cannot be predicted with certainty, in the opinion of management,
individually, or in the aggregate, no such lawsuits are expected to have a
material effect on our financial position or results of
operations.




Item
1A. RISK FACTORS





The risks
identified in the Annual Report on Form 10-K for the year ended December 31,
2008, have not changed in any material respect, except that additional risk
factors are added at the end of the list of risk factors under Item 1A to read
in its entirety as follows:





If
Economic Conditions Deteriorate, Our Results of Operations and Financial
Condition could be Adversely Impacted.





Our
financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rates
which may cause a decrease in interest rate spreads, adverse employment
conditions, the monetary and fiscal policies of the federal government and other
significant external events, including credit availability from correspondent
banks. Adverse changes in the economy may also have a negative effect of the
ability of borrowers to make timely repayments of their loans, which could have
an adverse impact on earnings.





Our Securities Portfolio may be
Negatively Impacted by Fluctuations in Market Value.





Our
securities portfolio may be impacted by fluctuations in market value,
potentially reducing accumulated other comprehensive income and/or earnings.
Fluctuations in market value may be caused by decreases in interest rates, lower
market prices for securities and lower investor demand. Our securities portfolio
is evaluated for other-than-temporary impairment on at least a quarterly basis.
If this evaluation shows an impairment to cash flow connected with one or more
securities, a potential loss to earnings may occur.





Current
levels of market volatility are unprecedented.





The
market for certain investment securities has become highly volatile or inactive,
and may not stabilize or resume in the near term. This volatility can result in
significant fluctuations in the prices of those securities, which may affect the
Company’s results of operations.





Our
business has been and may continue to be adversely affected by current
conditions in the financial markets and economic conditions
generally.





The
global and U.S. economies are experiencing significantly reduced business
activity and consumer spending as a result of, among other factors, disruptions
in the capital and credit markets during the past year. Dramatic declines in the
housing market during the past year, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant write-downs of asset
values by financial institutions, including government-sponsored entities and
major commercial and investment banks.


30


A
sustained weakness or weakening in business and economic conditions generally or
specifically in the principal markets in which we do business could have one or
more of the following adverse effects on our business:





▪
                        a
      decrease in the demand for loans or other products and services offered by
      us;▪
                        a
      decrease in the value of our loans or other assets secured by consumer or
      commercial real estate;•
                        a
      decrease to deposit balances due to overall reductions in the accounts of
      customers;•
                        an
      impairment of certain intangible assets or investment
  securities;•
                        an
      increase in the number of borrowers who become delinquent, file for
      protection under bankruptcy laws or default on their loans or other
      obligations to us. An increase in the number of delinquencies,
      bankruptcies or defaults could result in a higher level of nonperforming
      assets, net charge-offs and provision for credit
  losses.





Additional requirements under our
regulatory framework, especially those imposed under the American Recovery and
Reinvestment Act of 2009 ("ARRA"), the Emergency Economic Stabilization Act of
2008 ("EESA") or other legislation intended to strengthen the U.S. financial
system, could adversely affect us.





Recent
government efforts to strengthen the U.S. financial system, including the
implementation of ARRA, EESA, the FDIC’s Temporary Liquidity Guaranty Program
(“TLGP”) and special assessments imposed by the FDIC, subject participants to
additional regulatory fees and requirements, including corporate governance
requirements, executive compensation restrictions, restrictions on declaring or
paying dividends, restrictions on share repurchases, limits on executive
compensation tax deductions and prohibitions against golden parachute payments.
These requirements, and any other requirements that may be subsequently imposed,
may have a material and adverse affect on our business, financial condition, and
results of operations.





If
we are unable to redeem the Series A Preferred Stock within five years, the cost
of this capital to us will increase substantially.





If we are
unable to redeem the Series A Preferred Stock prior to February 20, 2014, the
cost of the Series A Preferred Stock will increase substantially on that date,
from 5.0% per annum to 9.0% per annum. Depending on our financial condition at
the time, this increase in the annual dividend rate on the Series A Preferred
Stock could have a material negative effect on our liquidity.





Certain
restrictions will affect our ability to declare or pay dividends and repurchase
our shares as a result of our decision to participate in the Treasury’s Capital
Purchase program (the “CPP”).





As a
result of our participation in the CPP, our ability to declare or pay dividends
on any of our common stock has been limited. Specifically, we are not able to
declare dividend payments on our common, junior preferred or pari passu
preferred stock if we are in arrears on the dividends on our Preferred Stock.


31


Further,
we are not permitted to increase dividends on our common stock without the
Treasury’s approval until the third anniversary of the investment unless the
Preferred Stock has been redeemed or transferred. In addition, our ability to
repurchase our shares has been restricted. The Treasury’s consent generally will
be required for us to make any stock repurchases until the tenth anniversary of
the investment by the Treasury unless the Preferred Stock has been redeemed or
transferred.





Item
2.  UNREGISTERED SALESOF EQUITY
SECURITIES AND USE OF PROCEEDS





None





Item
3.  DEFAULTS UPON SENIOR
SECURITIES





None





Item
4.  SUBMISSION OF MATTERSTO A VOTE
OF SECURTIY HOLDERS





The Company held the annual meeting of
shareholders on May 20, 2009.  The proposals and the outcomes from the
voting are set forth below.






Proposal Number
1:                                           Election
of Directors:





Nominees
                Shares
      Voted For
                Shares
      Withholding Authority/Voted AgainstSuzanne
      Brangham
                1,670,842
                200,398Dale
      T. Downing
                1,674,233
                197,006Robert
      B. Hitchcock
                1,676,106
                195,133Robert
      J. Nicholas
                1,683,587
                187,652Valerie
      Pistole
                1,668,457
                202,782Mel
      Switzer, Jr.
                1,663,074
                208,165







Proposal
      Number 2:
                  Ratification
      of Richardson and Co. as the independent auditors for the Company for the
      fiscal year 2009.





Total
      shares Voted
              For
              Against
              Abstain/Broker
      Non-Votes1,742,074
              96,204
              32,960







Proposal
      Number 3:
                  To
      approve, in an advisory (non-binding) vote, the compensation of executives
      disclosed in the proxy
statement.





Total
      shares Voted
              For
              Against
              Abstain/Broker
      Non-Votes1,512,298
              207,733
              151,204











Item
5.  OTHER INFORMATION





None


32





Item
6.  EXHIBITS





Exhibits





31.1
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act


31.2
            Certification
      of Principal Financial Officer and Principal Accounting
      Officer  pursuant to Section 302 of the Sarbanes-Oxley
      Act


32       Certification
of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley
Act


33


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








SONOMA
      VALLEY BANCORP(Registrant)Date:
            August
      6, 2009
            
            /s/
      Sean C. CuttingSean
      C. CuttingPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:
            August
      6, 2009
            
            /s/
      Mary Dieter SmithMary
      Dieter SmithExecutive
      Vice President and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting Officer)


34