UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q








x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934








For the
quarterly period ended: March 31,
2009






o


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,”
“accelerated filer”  and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
  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 April 30, 2009 was 2,326,803.





INDEX





Part
      I  Financial Information
            Page
      NumberItem
      1. Financial Statements (Unaudited):Consolidated Balance Sheets at March 31, 2009,
      December 31, 2008 and March 31, 2008
            3Consolidated Statements of Operations for
      the three months ended March 31, 2009 and 2008
            4Consolidated Statements of Changes in
      Shareholders’ Equity for the three months ended March 31, 2009, and
      the years ended December 31, 2008 and 2007
            5Consolidated Statements of Cash Flows for the three
      months ended March 31, 2009 and 2008
            7Notes to Consolidated Financial
      Statements
            8Average Balances/Yields and Rates Paid for
      the three months ended March 31, 2009 and 2008
            11Item
      1A. Risk Factors
            12Item
      2. Management's Discussion and Analysis
      of Financial Condition and Results of Operations
            12Item
      3. Quantitative and Qualitative
      Disclosure About Market Risk
            25Item
      4. Controls and
    Procedures
            25Part
      II  Other InformationItem
      1. Legal Proceedings
            25Item
      2. Unregistered Sales of Equity Securities
      and Use of Proceeds
            26Item
      3. Defaults Upon Senior
      Securities
            26Item
      4. Submission of Matters to a Vote of Security
      Holders
            26Item
      5. Other Information
            26Item
      6. Exhibits
            26Signatures
            27Certifications
            28







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


March 31,
2009 (Unaudited), December 31, 2008 (Audited)


and March
31, 2008 (Unaudited)


March
      31,
                          2009
                        
                        
                        December
      31,
                          2008
                        
                        
                        March
      31,
                          2008ASSETSCash
      and due from banks
                        
                        $
                        6,266,975
                        
                        
                        $
                        17,959,020
                        
                        
                        $
                        6,375,749Interest-bearing
      due from banks
                        
                        
                        9,626,534
                        
                        
                        
                        274,035
                        
                        
                        
                        6,895,623Total
      cash and cash equivalents
                        
                        
                        15,893,509
                        
                        
                        
                        18,233,055
                        
                        
                        
                        13,271,372Investment
      securities available-for-sale at fair value
                        
                        
                        6,532,448
                        
                        
                        
                        6,578,924
                        
                        
                        
                        3,278,041Investment
      securities held-to-maturity (fair value of $14,150,697, $14,028,111 and
      $14,604,518 respectively)
                        
                        
                        13,848,226
                        
                        
                        
                        13,862,911
                        
                        
                        
                        14,228,473Loans
      and lease financing receivables, net
                        
                        
                        274,661,982
                        
                        
                        
                        262,376,784
                        
                        
                        
                        248,126,995Premises
      and equipment, net
                        
                        
                        698,879
                        
                        
                        
                        734,091
                        
                        
                        
                        817,415Accrued
      interest receivable
                        
                        
                        1,715,610
                        
                        
                        
                        1,678,547
                        
                        
                        
                        1,659,121Other
      real estate owned
                        
                        
                        243,610
                        
                        
                        
                        285,665
                        
                        
                        
                        320,416Cash
      surrender value of life insurance
                        
                        
                        10,874,230
                        
                        
                        
                        10,777,482
                        
                        
                        
                        10,460,165Other
      assets
                        
                        
                        7,328,016
                        
                        
                        
                        7,420,622
                        
                        
                        
                        5,863,485Total
      assets
                        
                        $
                        331,796,510
                        
                        
                        $
                        321,948,081
                        
                        
                        $
                        298,025,483LIABILITIESNoninterest-bearing
      demand deposits
                        
                        $
                        48,800,308
                        
                        
                        $
                        48,279,759
                        
                        
                        $
                        49,534,037Interest-bearing
      transaction deposits
                        
                        
                        29,109,747
                        
                        
                        
                        31,062,597
                        
                        
                        
                        32,523,931Savings
      and money market deposits
                        
                        
                        91,953,928
                        
                        
                        
                        88,317,397
                        
                        
                        
                        75,938,300Time
      deposits, $100,000 and over
                        
                        
                        58,919,208
                        
                        
                        
                        50,694,468
                        
                        
                        
                        50,915,989Other
      time deposits
                        
                        
                        35,253,932
                        
                        
                        
                        35,591,280
                        
                        
                        
                        31,570,905Total
      deposits
                        
                        
                        264,037,123
                        
                        
                        
                        253,945,501
                        
                        
                        
                        240,483,162Other
      borrowings
                        
                        
                        21,200,000
                        
                        
                        
                        30,000,000
                        
                        
                        
                        22,300,000Accrued
      interest payable and other liabilities
                        
                        
                        6,990,769
                        
                        
                        
                        7,142,484
                        
                        
                        
                        6,154,221Total
      liabilities
                        
                        
                        292,227,892
                        
                        
                        
                        291,087,985
                        
                        
                        
                        268,937,383SHAREHOLDERS'
      EQUITYPreferred
      stock, no par value; $1,000 per share liquidationpreference; 2,000,000 shares authorized; 8,653 Series A and 433 Series B
      at March 31, 2009 and none at December 31, 2008 and March 31, 2008 issued
      and outstanding
                        
                        
                        8,661,334
                        
                        
                        
                        0
                        
                        
                        
                        0Common
      stock, no par value; 10,000,000 shares authorized; 2,313,821 shares at
      March 31, 2009, 2,290,657 shares at December 31, 2008 and 2,288,709 shares
      at March 31, 2008 issued and outstanding
                        
                        
                        16,586,608
                        
                        
                        
                        16,402,084
                        
                        
                        
                        16,222,864Additional
      paid-in-capital
                        
                        
                        2,664,333
                        
                        
                        
                        2,577,855
                        
                        
                        
                        2,583,348Retained
      earnings
                        
                        
                        11,666,701
                        
                        
                        
                        11,863,688
                        
                        
                        
                        10,275,643Accumulated
      other comprehensive (loss)income
                        
                        
                        (10,358
                        )
                        
                        
                        16,469
                        
                        
                        
                        6,245Total
      shareholders' equity
                        
                        
                        39,568,618
                        
                        
                        
                        30,860,096
                        
                        
                        
                        29,088,100Total
      liabilities and shareholders' equity
                        
                        $
                        331,796,510
                        
                        
                        $
                        321,948,081
                        
                        
                        $
                        298,025,483





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 ended March 31, 2009 and 2008





2009
                                
                                
                                2008INTEREST
      INCOMELoans
      and leases
                                
                                $
                                4,447,587
                                
                                
                                $
                                4,931,754Taxable
      securities
                                
                                
                                52,863
                                
                                
                                
                                51,926Tax-exempt
      securities
                                
                                
                                134,776
                                
                                
                                
                                135,832Federal
      funds sold and other
                                
                                
                                6,866
                                
                                
                                
                                27,921Dividends
                                
                                
                                52
                                
                                
                                
                                23,867Total
      interest income
                                
                                
                                4,642,144
                                
                                
                                
                                5,171,300INTEREST
      EXPENSEInterest-bearing
      transaction deposits
                                
                                
                                8,641
                                
                                
                                
                                13,148Savings
      and money market deposits
                                
                                
                                228,534
                                
                                
                                
                                415,892Time
      deposits, $100,000 and over
                                
                                
                                385,894
                                
                                
                                
                                548,153Other
      time deposits
                                
                                
                                224,070
                                
                                
                                
                                328,293Other
      borrowings
                                
                                
                                236,162
                                
                                
                                
                                294,727Total
      interest expense
                                
                                
                                1,083,301
                                
                                
                                
                                1,600,213NET
      INTEREST INCOME
                                
                                
                                3,558,843
                                
                                
                                
                                3,571,087Provision
      for loan and lease losses
                                
                                
                                630,000
                                
                                
                                
                                220,000NET
      INTEREST INCOME AFTER
                                  PROVISION
      FOR LOAN AND LEASE LOSSES
                                
                                
                                2,928,843
                                
                                
                                
                                3,351,087NON-INTEREST
      INCOME
                                
                                
                                479,164
                                
                                
                                
                                556,934NON-INTEREST
      EXPENSESalaries
      and employee benefits
                                
                                
                                1,357,216
                                
                                
                                
                                1,428,292Premises
      and equipment
                                
                                
                                243,734
                                
                                
                                
                                228,705Other
                                
                                
                                1,044,402
                                
                                
                                
                                724,777Total
      non-interest expense
                                
                                
                                2,645,352
                                
                                
                                
                                2,381,774Income
      before provision for income taxes
                                
                                
                                762,655
                                
                                
                                
                                1,526,247Provision
      for income taxes
                                
                                
                                204,769
                                
                                
                                
                                498,958NET
      INCOME
                                
                                $
                                557,886
                                
                                
                                $
                                1,027,289Preferred
      stock dividends and amortization of preferred stockdiscount
                                
                                
                                (60,726
                                )
                                
                                
                                0NET
      INCOME AVAILABLE TOCOMMON
      SHAREHOLDERS
                                
                                $
                                497,160
                                
                                
                                $
                                1,027,289EARNINGS
      PER SHARE AVAILABLE TO COMMON SHAREHOLDERSBasic
                                
                                $
                                .22
                                
                                
                                $
                                .46Diluted
                                
                                $
                                .22
                                
                                
                                $
                                .45Dividends
      declared per common share
                                
                                $
                                .30
                                
                                
                                $
                                .30WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDINGBasic
                                
                                
                                2,283,580
                                
                                
                                
                                2,243,775Diluted
                                
                                
                                2,295,447
                                
                                
                                
                                2,307,051





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
three months ended March 31, 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
                                        
                                        
                                        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
three months ended March 31, 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
                          
                          
                          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
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (52,392
                          )
                          
                          
                          
                          
                          
                          
                          (52,392
                          )Amortization/
      Accretion of preferred stock,net
                          
                          
                          
                          
                          
                          8,334
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,334
                          )
                          
                          
                          
                          
                          
                          
                          0Stock
      options exercised and related tax benefits
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          23,164
                          
                          
                          
                          184,524
                          
                          
                          
                          29,019
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          213,543Cash
      dividend of $.30 per share
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (694,147
                          )
                          
                          
                          
                          
                          
                          
                          (694,147
                          )Stock
      options vested
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,772
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,772Restricted
      stock vested
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          40,687
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          40,687Net
      income for the year
                          
                          $
                          557,886
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          557,886
                          
                          
                          
                          
                          
                          
                          
                          557,886Other
      comprehensive income, net of tax: Unrealized holding loss on securities
      available- for-sale arising during the year, net of taxes of
      $18,762
                          
                          
                          (26,827
                          )Other
      comprehensive loss, net of taxes
                          
                          
                          (26,827
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (26,827
                          )
                          
                          
                          (26,827
                          )Total
      comprehensive income
                          
                          $
                          531,059BALANCE
      AT MARCH 31, 2009
                          
                          
                          
                          
                          
                          $
                          8,661,334
                          
                          
                          
                          2,313,821
                          
                          
                          $
                          16,586,608
                          
                          
                          $
                          2,664,333
                          
                          
                          $
                          11,666,701
                          
                          
                          $
                          (10,358
                          )
                          
                          $
                          39,568,618




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
three months ended March 31, 2009 and 2008





2009
                          
                          
                          2008OPERATING
      ACTIVITIESNet
      income
                          
                          $
                          557,886
                          
                          
                          $
                          1,027,289Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan and lease losses
                          
                          
                          630,000
                          
                          
                          
                          220,000Depreciation
                          
                          
                          57,594
                          
                          
                          
                          56,472Amortization
      and other
                          
                          
                          15,572
                          
                          
                          
                          18,487Stock-based
      compensation expense
                          
                          
                          57,459
                          
                          
                          
                          55,626Provision
      for foreclosed real estate
                          
                          
                          42,055
                          
                          
                          
                          0Net
      change in interest receivable
                          
                          
                          (37,063
                          )
                          
                          
                          23,088Net
      change in cash surrender value of life insurance
                          
                          
                          (96,748
                          )
                          
                          
                          (106,012
                          )Net
      change in other assets
                          
                          
                          140,387
                          
                          
                          
                          467,580Net
      change in interest payable and other liabilities
                          
                          
                          (204,107
                          )
                          
                          
                          (223,078
                          )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                          
                          
                          1,164,035
                          
                          
                          
                          1,539,452INVESTING
      ACTIVITIESPurchases
      of securities available-for-sale
                          
                          
                          0
                          
                          
                          
                          (1,007,500
                          )Proceeds
      from maturing securities held-to-maturity
                          
                          
                          0
                          
                          
                          
                          310,000Proceeds
      from maturing securities available-for-sale
                          
                          
                          0
                          
                          
                          
                          6,000,000Net
      change in loans and leases
                          
                          
                          (12,915,198
                          )
                          
                          
                          (1,929,193
                          )Purchases
      of premises and equipment
                          
                          
                          ( 22,382
                          )
                          
                          
                          ( 81,432
                          )NET
      CASH (USED IN)PROVIDED BY INVESTING ACTIVITIES
                          
                          
                          (12,937,580
                          )
                          
                          
                          3,291,875FINANCING
      ACTIVITIESNet
      change in demand, interest-bearing transaction and savings
      deposits
                          
                          
                          2,204,230
                          
                          
                          
                          (4,256,064
                          )Net
      change in time deposits
                          
                          
                          7,887,392
                          
                          
                          
                          8,691,527Proceeds
      from issuance of Preferred stock
                          
                          
                          8,653,000
                          
                          
                          
                          0Cash
      dividend paid
                          
                          
                          (694,147
                          )
                          
                          
                          (686,613
                          )Net
      change in FHLB borrowings
                          
                          
                          (8,800,000
                          )
                          
                          
                          (5,200,000
                          )Stock
      options exercised
                          
                          
                          184,524
                          
                          
                          
                          557,561NET
      CASH PROVIDED BY( USED IN) FINANCING ACTIVITIES
                          
                          
                          9,434,999
                          
                          
                          
                          (893,589
                          )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                          
                          
                          (2,339,546
                          )
                          
                          
                          3,937,738Cash
      and cash equivalents at beginning of period
                          
                          
                          18,233,055
                          
                          
                          
                          9,333,634CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                          
                          $
                          15,893,509
                          
                          
                          $
                          13,271,372SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
      expense
                          
                          $
                          1,086,766
                          
                          
                          $
                          1,295,781Income
      taxes
                          
                          $
                          95,570
                          
                          
                          $
                          12,156SUPPLEMENTAL
      DISCLOSURES OF NONCASH ACTIVITIES:Loans
      transferred to other real estate owned
                          
                          $
                          0
                          
                          
                          $
                          320,416Net
      change in unrealized gains and losses on securities
                          
                          $
                          (45,589
                          )
                          
                          $
                          70,087Net
      change in deferred income taxes on unrealized gains on
      securities
                          
                          $
                          18,762
                          
                          
                          $
                          (28,843
                          )Accrued
      preferred stock dividends
                          
                          $
                          (52,392
                          )
                          
                          $
                          0Amortization/Accretion
      of preferred stock discount/premium, net
                          
                          $
                          (8,334
                          )
                          
                          $
                          0





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


7


SONOMA
VALLEY BANCORP AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 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 March 31, 2009 and results of operations for the three 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 three months
ended March 31, 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 March 31, 2009 and March 31,
2008.





Note 4 -
Net Income Per Common Share





Net
income per share available
for common shareholdersis calculated by using the weighted average
common shares outstanding.  The weighted average number of common
shares used in computing the net income per common share for the period ending
March 31, 2009 was 2,283,580 and for the period ending March 31, 2008 was
2,243,775.





Net
income per share (diluted) available for common shareholders is calculated by
using the weighted average common shares (diluted) outstanding.  The
weighted average number of common shares (diluted) used in computing the net
income per common share (diluted) for the period ending March 31, 2009 was
2,295,447 and for the period ending March 31, 2008 was 2,307,051.





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 March 31, 2009 and 2008.




8


Note 6 -
Employee Benefit Plans





We
provide retirement plans to its 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
three months ended March 31, 2009 and 2008 are as follows:





Directors
                
                
                Officers2009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                10,305
                
                
                $
                9,355
                
                
                $
                31,235
                
                
                $
                68,727Interest
      cost on projected benefit obligation
                
                
                7,945
                
                
                
                6,632
                
                
                
                6,855
                
                
                
                38,951Amortization
      of unrecognized liability at transition
                
                
                (2,259
                )
                
                
                (2,320
                )
                
                
                65,547
                
                
                
                63,948Net
      periodic pension cost recognized
                
                $
                15,991
                
                
                $
                13,667
                
                
                $
                103,637
                
                
                $
                171,626




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
principals, 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 March 31, 2009, and indicate
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value.





At
      March 31, 2009Total
              Level
      1
              Level
      2
              Level
      3Available-for-sale
      securities
              $6,532,448
              $12,715
              $6,519,733
              $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.




March
      31, 2009Total
              Level
      1
              Level
      2
              Level
      3Impaired
      Loans
              $11,154,905
              $0
              $11,154,905
              $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 March 31, 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 $60,726 for the first
quarter in 2009


10


SONOMA
VALLEY BANCORP


AVERAGE BALANCES/YIELDS AND RATES PAID


For the
three months ended March 31, 2009 and 2008




2009
                
                
                2008ASSETS
                
                Average
                  Balance
                
                
                Income/
                  Expense
                
                
                Yield/
                  Rate
                
                
                Average
                  Balance
                
                
                Income/
                  Expense
                
                
                Yield/
                  RateInterest-earning
      assets:Loans(2):Commercial
                
                $
                183,155,354
                
                
                $
                3,023,922
                
                
                
                6.70
                %
                
                $
                179,736,036
                
                
                $
                3,474,731
                
                
                
                7.78
                %Consumer
                
                
                38,056,848
                
                
                
                594,713
                
                
                
                6.34
                %
                
                
                29,541,266
                
                
                
                559,799
                
                
                
                7.62
                %Real
      estate construction
                
                
                29,057,761
                
                
                
                456,510
                
                
                
                6.37
                %
                
                
                24,299,229
                
                
                
                512,949
                
                
                
                8.49
                %Real
      estate mortgage
                
                
                20,197,225
                
                
                
                344,300
                
                
                
                6.91
                %
                
                
                18,554,987
                
                
                
                353,823
                
                
                
                7.67
                %Tax
      exempt loans (1)
                
                
                2,099,035
                
                
                
                42,636
                
                
                
                8.24
                %
                
                
                2,209,027
                
                
                
                45,323
                
                
                
                8.25
                %Leases
                
                
                17,634
                
                
                
                0
                
                
                
                0.00
                %
                
                
                20,980
                
                
                
                539
                
                
                
                10.33
                %Unearned
      loan fees
                
                
                (227,360
                )
                
                
                
                
                
                
                
                
                
                
                (393,933
                )Total
      loans
                
                
                272,356,497
                
                
                
                4,462,081
                
                
                
                6.64
                %
                
                
                253,967,592
                
                
                
                4,947,164
                
                
                
                7.83
                %Investment
      securitiesAvailable
      for sale:Taxable
                
                
                6,562,678
                
                
                
                52,915
                
                
                
                3.27
                %
                
                
                5,832,909
                
                
                
                52,115
                
                
                
                3.59
                %Hold
      to maturity:Taxable
                
                
                0
                
                
                
                0
                
                
                
                0.00
                %
                
                
                0
                
                
                
                0
                
                
                
                0.00
                %Tax
      exempt (1)
                
                
                13,857,462
                
                
                
                204,206
                
                
                
                5.98
                %
                
                
                14,391,616
                
                
                
                205,806
                
                
                
                5.75
                %Total
      investment securities
                
                
                20,420,140
                
                
                
                257,121
                
                
                
                5.11
                %
                
                
                20,224,525
                
                
                
                257,921
                
                
                
                5.13
                %Federal
      funds sold
                
                
                0
                
                
                
                0
                
                
                
                0.00
                %
                
                
                171,428
                
                
                
                1,208
                
                
                
                2.83
                %FHLB
      stock
                
                
                1,565,200
                
                
                
                0
                
                
                
                0.00
                %
                
                
                1,808,896
                
                
                
                23,678
                
                
                
                5.26
                %Total
      due from banks/interest-bearing
                
                
                10,712,227
                
                
                
                6,868
                
                
                
                0.26
                %
                
                
                2,590,792
                
                
                
                26,713
                
                
                
                4.15
                %Total
      interest-earning assets
                
                $
                305,054,064
                
                
                $
                4,726,070
                
                
                
                6.28
                %
                
                $
                278,763,233
                
                
                $
                5,256,684
                
                
                
                7.58
                %Noninterest-bearing
      assets:Reserve
      for loan losses
                
                
                (5,046,979
                )
                
                
                
                
                
                
                
                
                
                
                (3,753,995
                )Cash
      and due from banks
                
                
                5,013,880
                
                
                
                
                
                
                
                
                
                
                
                5,691,343Premises
      and equipment
                
                
                719,315
                
                
                
                
                
                
                
                
                
                
                
                817,163Other
      real estate owned
                
                
                284,731
                
                
                
                
                
                
                
                
                
                
                
                38,732Other
      assets
                
                
                18,315,958
                
                
                
                
                
                
                
                
                
                
                
                16,441,433Total
      assets
                
                $
                324,340,969
                
                
                
                
                
                
                
                
                
                
                $
                297,997,909LIABILITIES
      AND SHAREHOLDERS' EQUITYInterest-bearing
      liabilities:Interest-
      bearing depositsInterest-bearing
      transaction
                
                $
                29,551,433
                
                
                $
                8,641
                
                
                
                0.12
                %
                
                $
                31,781,651
                
                
                $
                13,148
                
                
                
                0.17
                %Savings
      deposits
                
                
                87,759,695
                
                
                
                228,534
                
                
                
                1.06
                %
                
                
                75,213,289
                
                
                
                415,892
                
                
                
                2.22
                %Time
      deposits over $100,000
                
                
                55,168,874
                
                
                
                385,894
                
                
                
                2.84
                %
                
                
                47,356,638
                
                
                
                548,153
                
                
                
                4.66
                %Other
      time deposits
                
                
                34,629,877
                
                
                
                224,070
                
                
                
                2.62
                %
                
                
                30,186,551
                
                
                
                328,293
                
                
                
                4.37
                %Total
      interest-bearing deposits
                
                
                207,109,879
                
                
                
                847,139
                
                
                
                1.66
                %
                
                
                184,538,129
                
                
                
                1,305,486
                
                
                
                2.85
                %Other
      borrowings
                
                
                27,624,444
                
                
                
                236,162
                
                
                
                3.47
                %
                
                
                29,791,209
                
                
                
                294,727
                
                
                
                3.98
                %Total
      interest-bearing liabilities
                
                
                234,734,323
                
                
                $
                1,083,301
                
                
                
                1.87
                %
                
                
                214,329,338
                
                
                $
                1,600,213
                
                
                
                3.00
                %Non
      interest-bearing liabilities:Non
      interest-bearing demand deposits
                
                
                47,422,063
                
                
                
                
                
                
                
                
                
                
                
                48,391,059Other
      liabilities
                
                
                7,730,856
                
                
                
                
                
                
                
                
                
                
                
                6,292,439Shareholders'
      equity
                
                
                34,453,727
                
                
                
                
                
                
                
                
                
                
                
                28,985,073Total
      liabilities and shareholders' equity
                
                $
                324,340,969
                
                
                
                
                
                
                
                
                
                
                $
                297,997,909Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                4.41
                %
                
                
                
                
                
                
                
                
                
                
                4.58
                %Interest
      income
                
                
                
                
                
                $
                4,726,070
                
                
                
                6.28
                %
                
                
                
                
                
                $
                5,256,684
                
                
                
                7.58
                %Interest
      expense
                
                
                
                
                
                
                1,083,301
                
                
                
                1.44
                %
                
                
                
                
                
                
                1,600,213
                
                
                
                2.31
                %Net
      interest income/margin
                
                
                
                
                
                $
                3,642,769
                
                
                
                4.84
                %
                
                
                
                
                
                $
                3,656,471
                
                
                
                5.27
                %





(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 $60,873 and $120,322
      for the three months ended March 31, 2009 and 2008, respectively, were
      amortized to the appropriate interest income
  categories.


11


Item
1A.                      Risk Factors





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.





Item
      2.
            MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND  RESULTS OF
    OPERATIONS





Forward
Looking Statements





With the
exception of historical facts stated herein, the matters discussed in this Form
10-Q are “forward looking” statements that involve risks and uncertainties that
could cause actual results to differ materially from projected
results.  Such “forward looking” statements include, but are not
necessarily limited to statements regarding anticipated levels of future
revenues and earnings from the operation of Sonoma Valley Bancorp’s 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.


12


For
the Three Month Periods


Ended
March 31, 2009 and 2008





Overview





We
reported net income of $557,886 for the first three months of 2009 compared with
$1,027,289 for the first three months of 2008.   The $469,403
decrease in net income is largely attributable to a $410,000 increase in the
provision for loan losses and a $129,000 increase in the accrual for FDIC
assessment due to increases in the premium and in anticipation of a special
assessment.  On a per share basis, net income equaled $.22 compared
with $.46 per share during the same period in 2008.





Return on
average total assets on an annualized basis for the three-month period was 0.70%
in 2009 and 1.39% in 2008.  The decline in the return on assets is the
result of a 45.7% or $469,403 decline in net income combined with a 8.8%
increase in average assets from $298.0 million as of March 31, 2008 to $324.3
million as of March 31, 2009.  Return on average shareholders' equity
on an annualized basis at the end of the first quarter 2009 and 2008 was 6.57%
and 14.25%, respectively.  The lower return on equity is the result of
$469,403 decline in net income combined with the 18.9% or $5.5 million increase
in average equity from $29.0 million in 2008 to $34.5 million as of March 31,
2009.





At March
31, 2009, total assets were $331.8 million, a 3.06% increase over $321.9 million
as of December 31, 2008 and an 11.33% increase over $298.0 million as of March
31, 2008.  We showed loans of $279.7 million at March 31, 2009
compared with $267.4 million and $251.9 million as of December 31, 2008 and
March 31, 2008, increases of 4.60% and 11.02%, respectively.  Deposits
increased 4.0% or $10.1 million from $253.9 million as of December 31, 2008 and
increased 9.8% or $23.6 million from $240.5 as of March 31, 2008 to $264.0
million as of March 31, 2009. The increase in deposits is a result of $8.2
million growth in CD’s greater than $100,000 in response to various promotions
offered by the Bank and an increase of $3.6 million in savings
deposit.  The loan-to-deposit ratio increased slightly to 105.9% at
March 31, 2009 from 105.3% at December 31, 2008 and 104.8% at March 31,
2008.





Total shareholders equity
increased by $8,708,522 or 28.2% during the quarter.  At March 31,
2009, we  reported net income of $557,886.  In March, we
paid out $694,147 for cash dividends declared in February 2009.  In
July 2006, 26,000 restricted stock options were granted to senior employees with
a fifth of the shares vesting each year over a five-year period and 3,000 shares
of restricted stock were granted to a senior employee with a third of the shares
vesting over a three-year period. In 2009, equity was increased by $40,687 year
to date to reflect the expense for this restricted stock. In June 2007, 10,000
unqualified stock options were granted to a director with a fifth of the options
vesting each year over a five year period. Additionally, in December, 2007,
7,410 unqualified stock options were granted to two directors with one third
vesting immediately and two thirds vesting over a two year period. In 2009,
equity has been increased by $5,012 and $4,191, respectively, for these 2007
grants. In January 2008, 10,000 incentive stock options were awarded to a senior
employee with a fifth of the options vesting each year over a five year period.
In 2009, equity increased by $3,487 year to date. In April 2008, 10,000
unqualified stock options were granted to a director with a fifth of the options
vesting each year over a five year period. In 2009, equity increased $4,083 year
to date for these options. The net income figure of $557,866 reflects an expense
for the incentive stock options of $3,487, restricted stock options of $40,687,
and the unqualified stock options of $13,285; therefore, the net effect of the
stock option transactions relative to equity was zero.  Directors
exercised 23,164 options which added $184,524 to the capital
accounts.  The tax benefit of these options was $29,019, which also
increased equity. In February, 2009, we issued 8,653 shares of Series A
Senior Preferred and 433 shares of Series B Warrant Preferred to the U.S.
Treasury for an aggregate purchase price of $8,653,000.  The net effect of
this activity results in capital of $39,568,618 as of March 31, 2009, compared
to capital of $30,860,096 as of December 31,
2008.


13


Section
404 of Sarbanes-Oxley Act of 2002 (“Section 404”) 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  have
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 11,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
($83,926 in 2009 and $85,384 in 2008, based on a 34% federal income tax
rate).





The
slight decline in net interest income for the three months ended March 31, 2009
(stated on a fully taxable equivalent basis) is a result of the net effect of a
$530,614 decrease in interest income offset by a slightly smaller decrease in
interest expense of $516,912, showing a net increase of $13,702.  The
decline in both interest income and interest expense is a result of the 200 plus
basis point decline in the Fed Funds rate and prime rate since March 31, 2008.
The Fed Funds rate decreased from 2.25% at the end of March 2008 to .25% at the
end of March 2009  and the prime lending rate decreased from 5.25% to
3.25%.





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 decreased forty-three basis
points to 4.84%, from 5.27% for the same period in 2008.  This is a
result of the strong growth in time deposits greater than $100,000, which
receives the highest interest rates paid on deposits. The yield on interest
earning assets declined by 130 basis points while the yield on interest bearing
liabilities declined by only 113 basis points.





Interest
Income





As
previously stated, interest income (stated on a fully taxable equivalent basis)
decreased by $531,000 to $4.7 million in the first three months of 2009, a 10.1%
decrease from the $5.2 million realized during the same period in
2008.





The
$531,000 decrease in interest income is a result of the net effect of the $26.3
million (9.4%) growth in earning assets from $278.8 million for the first
quarter of 2008 to $305.1 million for the first quarter of 2009; offset by a 130
basis point decline in the yield on earning assets from 7.58% in 2008 to 6.28%
in 2009.





The gain
in volume of average earning assets was responsible for a $293,000 increase in
interest income, offset by a decrease in interest rates which was responsible
for a $824,000 decrease in interest income, for a net decrease in interest
income of $531,000.


14


Interest
Expense





Total
interest expense for the first three months of 2009 decreased by $517,000 to
$1.1 million from $1.6 million for the same period of 2008.  The
average rate paid on all interest-bearing liabilities decreased from 3.00% in
2008 to 1.87% in 2009, a decrease of 113 basis points.  Average
balances of interest-bearing liabilities increased from $214.3 million to $234.7
million, a 9.5% gain in interest-bearing liabilities.





The gain
in volume of average balances was responsible for a $74,000 increase in interest
expense offset by lower interest rates paid which was responsible for a $591,000
decrease in interest expense for a net decrease of $517,000.





Individual
components of interest income and interest expense are provided in the
table-Average Balances, Yields and Rates Paid on page 11.





Provision
for Loan Losses





The
provision for loan losses charged to operations as of March 31, 2009 was
$630,000 compared to $220,000 in 2008.  The provision for loan losses
is based on our monthly evaluation of the loan portfolio and the adequacy of the
allowance for loan losses in relation to total loans outstanding.  We
have experienced strong loan growth during the first quarter of 2009 and we
anticipate loan growth will continue, which will require additional provisions
for loan losses.  Additionally, there are regulatory concerns about
concentrations of commercial real estate loans and loans to developers, and
about the decline in collateral values across our lending area.  We
have a concentration of commercial real estate loans and we determined that it
is prudent to continue making a provision for loan losses. In addition to the
above, in recent months the economy has demonstrated growing weakness and real
estate values have declined further. We are monitoring our loan portfolio in
order to be aware of any concerns which may develop.





At the
quarter ending March 31, 2009 the non-performing assets to total loans ratio was
2.18% compared to 0.27% for the same period of 2008.  Non accrual
loans were $5.9 million as of March 31, 2009 compared to $339,000 as of
March  31, 2008, an increase of $5.5 million.  Loans
charged-off were $672,000 and recoveries were $51,000 as of March 31, 2009
compared with $144,000 in charge-offs and $8,000 in recoveries for the same
period in 2008.  The increase in charge offs in 2009 is a result of
multiple issues including an increase in total loans, 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 of $479,164 decreased 14.0% or $77,770 over the $556,934 recorded in the
comparable period in 2008. A decline in service charges on deposit accounts
represents 49.3% of the overall decline in non-interest income. Service charges
on deposit accounts declined $38,328 or 10.99% from $348,801 as of March 31,
2008 to $310,473 as of March 31, 2009. Most categories of service charges showed
small increases however,  the charges on checks written against
insufficient funds declined by $30,439.


15


Other fee
income represents 39.2% of the $77,770 decline in non-interest income. Other fee
income declined $30,512 or 31.8% as of March 31, 2009 from $95,962 as of March
31, 2008 to $65,450  in 2009.  The decrease in income is a
result of a $15,661 decrease in income the Bank earns from loan referrals, which
decreased from $17,761 as of March 31, 2008 to $2,100 for the same period of
2009.  Also contributing to the decrease in other fee income was a
decrease of $9,584 in merchant credit card income from $37,271 in 2008 to
$27,687 in 2009. Additionally, there  was a decline of $2,937 in money
transfer fees for funds sent to Mexico from $3,989 as of March 31, 2008 to
$1,052 as of March 31, 2009.





All other
non-interest income showed a 7.96% decrease, or $8,930, from $112,171 in 2008 to
$103,241 in 2009.  This is a result of a decrease in the income
generated by bank owned life insurance policies.  Income on the
policies was $106,012 as of March 31, 2008 compared to $96,748 as of March 31,
2009.  The decline in earnings on these policies is a result of the
current low interest rates and a decline in the value of the investment
portfolios of the life insurance companies.





Non-interest
Expense





Total
non-interest expense increased $263,578 or 11.07% to $2.65 million for the first
three months of 2009 compared to $2.38 million in the comparable period of
2008.  Non-interest expense on an annualized basis represented 3.31%
of average total assets in 2009 compared with 3.21% in the comparable period in
2008. The expense/asset ratio is a standard industry measurement of a bank’s
ability to control its overhead or non-interest costs.





Salaries
and benefits decreased $71,076 in 2009 and was $1.36 million for the first three
months of 2009 compared  to $1.43 million for the first three months
of 2008.    Total full time equivalent employees as of March
31, 2009 were 53 compared to 51 full time equivalent in 2008.  As of
March 31, 2009, assets per employee were $6.3 million compared with $5.8 million
as of March 31, 2008.  Management tries to utilize efficiencies to
stabilize the growth in full time equivalent employees, although we have added
employees to better manage our loan operations and tighten
standards.





Expense
related to premises and equipment increased 6.6% to $243,734 in 2009 from
$228,705 for the same period of 2008, an increase of $15,029.  The
increase in expense in 2009 is the result of a $7,288 increase in software
expense due to upgrades in our on line banking product, $3,648 increase in lease
expense and smaller increases in other categories of premises and
equipment.





Other
operating expenses increased 44.1% in 2009 to $1,044,402 from $724,777 in 2008,
an increase of $319,625. The increase is a result of a $129,000 increase in the
accrual for the FDIC assessment due to increases in premiums, from $36,000 for
the three months ended March 31, 2008 to $165,000 as of March 31, 2009.
Additionally the FDIC will need to do a special assessment to maintain an
appropriate level in the fund which should cause additional increases throughout
the year. Loan expense has increased $114,135 during the first quarter of 2009.
This is due to a $42,055 write down on foreclosed property and an accrual of
$64,346 for a provision on unfunded loan commitments. There was also an $86,868
increase in professional fees from $254,755 as of March 31, 2008 to $341,623.
This is a result of increases in legal fees-corporate matters and legal
fees-loan collection expense of $58,537 and $22,387,
respectively.


16


Provision
for Income Taxes





The
provision for income taxes decreased to an effective tax rate of 26.85% for the
three months of 2009 compared with 32.69% for the three months of
2008.  The lower effective tax rate is a reflection of tax benefits
received for options exercised and tax credits resulting from the Bank’s
investment in California affordable housing. Income taxes reported in the
financial statements include deferred taxes resulting from timing differences in
the recognition of items for tax and financial reporting purposes.





BALANCE
SHEET ANALYSIS





Investments





Investment
securities were $20.4 million at March 31, 2009, a .30% decrease from the $20.4
million at December 31, 2008 and a 16.42% increase from $17.5 million at March
31, 2008.  The decline in the portfolio is a result of strong loan
demand and the need to utilize maturing and called investments to fund
loans.  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 March 31, 2009,
we had securities totaling $13.8 million with a market value of $14.2 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 $6.53 million
compared to an amortized cost of $6.52 million as of March 31,
2008.





There
were sixteen equity securities of $13,000 in the AFS portfolio and five
securities of $1.5 million in the HTM portfolio that are temporarily impaired as
of March 31, 2009. Unrealized losses totaled $35,000 on equity securities and
$80,000 on municipal securities. Of the above, 15 equity securities or $12,000
in the AFS portfolio and one municipal security of $51,000 in the HTM portfolio
that have been in a continuous loss position for 12 months or more as of March
31, 2009.    The primary cause of the impairment of these
securities 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 March 31, 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 effect the fair
value.


17


Loans





Our loan
portfolio was $279.7 million at March 31, 2009, or 105.9% of total deposits.
This compares with $267.4 million, or 105.3% of total deposits, at December 31,
2008 and $251.9 million, or 104.8% of total deposits, at March 31,
2008.  A comparative schedule of average loan balances is presented in
the table on page 11; period-end and year-end balances are presented in the
following table.





March
      31,
                    2009
                  
                  
                  Percentage
                    of Total
                  
                  
                  December
      31,
                    2008
                  
                  
                  Percentage
                    of Total
                  
                  
                  March
      31,
                    2008
                  
                  
                  Percentage
                    of TotalCommercial
                  
                  $
                  191,388,415
                  
                  
                  
                  68.4
                  %
                  
                  $
                  182,975,920
                  
                  
                  
                  68.4
                  %
                  
                  $
                  177,950,151
                  
                  
                  
                  70.5
                  %Consumer
                  
                  
                  38,154,607
                  
                  
                  
                  13.6
                  %
                  
                  
                  36,549,623
                  
                  
                  
                  13.7
                  %
                  
                  
                  29,784,989
                  
                  
                  
                  11.8
                  %Real
      estate construction
                  
                  
                  30,092,429
                  
                  
                  
                  10.7
                  %
                  
                  
                  27,918,414
                  
                  
                  
                  10.4
                  %
                  
                  
                  25,594,481
                  
                  
                  
                  10.2
                  %Real
      estate mortgage
                  
                  
                  20,302,172
                  
                  
                  
                  7.3
                  %
                  
                  
                  20,163,163
                  
                  
                  
                  7.5
                  %
                  
                  
                  18,930,063
                  
                  
                  
                  7.5
                  %Leases
                  
                  
                  17,634
                  
                  
                  
                  0.0
                  %
                  
                  
                  17,634
                  
                  
                  
                  0.0
                  %
                  
                  
                  19,884
                  
                  
                  
                  0.0
                  %279,955,257
                  
                  
                  
                  100.0
                  %
                  
                  
                  267,624,754
                  
                  
                  
                  100.0
                  %
                  
                  
                  252,279,568
                  
                  
                  
                  100.0
                  %Deferred
      loan fees and costs, net
                  
                  
                  (250,931
                  )
                  
                  
                  
                  
                  
                  
                  (215,470
                  )
                  
                  
                  
                  
                  
                  
                  (345,779
                  )Allowance
      for loan and lease losses
                  
                  
                  (5,042,344
                  )
                  
                  
                  
                  
                  
                  
                  (5,032,500
                  )
                  
                  
                  
                  
                  
                  
                  (3,806,794
                  )$
                  274,661,982
                  
                  
                  
                  
                  
                  
                  $
                  262,376,784
                  
                  
                  
                  
                  
                  
                  $
                  248,126,995








Risk
Elements





The
majority of our loan activity is with customers located within Sonoma
County.  Approximately 91.7% 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 for the quarter ending March 31,
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”).  Management
classifies all loans as non-accrual loans when they become more than 90 days
past due as to principal or interest, or when the timely collection of interest
or principal becomes uncertain, if earlier, unless they are adequately secured
and in the process of collection.


18


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 March 31, 2009 we had $243,610
classified as OREO compared to $285,665 as of December 31, 2008 and $320,416 as
of March 31, 2008.





There
were $5.9 million non-accrual loans and no loans 90 days or more past due and
still accruing at March 31, 2009 up from $351,000 non-accrual loans and no loans
90 days or more past due and still accruing at March 31, 2008.  There
were $2.6 million in non-accrual loans 90 days or more past due at March 31,
2009 and $118,000 loans in non-accrual status and 90 days or more past due as of
March 31, 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.





The
review process is intended to identify loan customers who may be experiencing
financial difficulties.  In these circumstances, a specific reserve
allocation or charge-off may be recommended.  Other factors considered
by management in evaluating the adequacy of the allowance
include:  loan volume, historical net loan loss experience, the
condition of industries and geographic areas experiencing or expected to
experience economic adversities, credit evaluations and current economic
conditions.  The allowance for loan losses is not a precise amount,
but based on the factors above, represents management's best estimate of losses
that may be ultimately realized from the current loan portfolio.





Worsening
conditions in the general economy and real estate markets will likely continue
to adversely affect the loan portfolio, which could necessitate materially
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 March 31, 2009, we believe the overall allowance
for loan losses is adequate based on our analysis of conditions at that
time.





At March
31, 2009, the allowance for loan losses was $5.0 million, or 1.80% of period-end
loans, compared with $5.0 million, or 1.88% at December 31, 2008 and $3.8
million, or 1.51% at March 31, 2008.The increase
in the allowance is a result of the loan growth and our review and analysis of
the portfolio, which includes the  deterioration in real estate values
and extraordinarily poor economic conditions.





Net
charge-offs to average loans increased when compared with the prior
year.  We recorded net charge-offs of $620,000 or .92% of average
loans as of March 31, 2009 compared to March 31, 2008 which showed charge offs
of $136,000 or .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 Three
                  Months
      Ended
                  3/31/09
                
                
                For
      the Year
                  Ended
                  12/31/08
                
                
                For
      the Three
                  Months
      Ended
                  3/31/08Balance
      beginning of year
                
                $
                5,032,500
                
                
                $
                3,723,217
                
                
                $
                3,723,217Charge-offs:Commercial
                
                
                (438,253
                )
                
                
                (519,318
                )
                
                
                (91,308
                )Consumer
                
                
                (233,058
                )
                
                
                (508,758
                )
                
                
                (52,773
                )Total
      charge-offs
                
                
                (671,311
                )
                
                
                (1,028,076
                )
                
                
                (144,081
                )Recoveries:Commercial
                
                
                48,800
                
                
                
                218,812
                
                
                
                4,223Consumer
                
                
                2,355
                
                
                
                8,547
                
                
                
                3,435Total
      recoveries
                
                
                51,155
                
                
                
                227,359
                
                
                
                7,658Net
      recoveries (charge-offs)
                
                
                (620,156
                )
                
                
                (800,717
                )
                
                
                (136,423
                )Provision
      charged to operations
                
                
                630,000
                
                
                
                2,110,000
                
                
                
                220,000Balance
      end of period
                
                $
                5,042,344
                
                
                $
                5,032,500
                
                
                $
                3,806,794Ratio
      of net charge-offs annualized to average loans
                
                
                0.92
                %
                
                
                0.31
                %
                
                
                0.22
                %Balance
      in allowance as a percentage  of loans outstanding at period
      end
                
                
                1.80
                %
                
                
                1.88
                %
                
                
                1.51
                %





Deposits





A
comparative schedule of average deposit balances is presented in the table on
page 11;period-end and
year-end deposit balances are presented in the following table.





March
      31,
                      2009
                    
                    
                    Percentage
      of Total
                    
                    
                    December
      31,
                      2008
                    
                    
                    Percentage
                      of Total
                    
                    
                    March
      31,
                      2008
                    
                    
                    Percentage
      of TotalInterest-bearing
      transaction deposits
                    
                    $
                    29,109,747
                    
                    
                    
                    11.0
                    %
                    
                    $
                    31,062,597
                    
                    
                    
                    12.2
                    %
                    
                    $
                    32,523,931
                    
                    
                    
                    13.5
                    %Savings
      deposits
                    
                    
                    91,953,928
                    
                    
                    
                    34.8
                    %
                    
                    
                    88,317,397
                    
                    
                    
                    34.8
                    %
                    
                    
                    75,938,300
                    
                    
                    
                    31.6
                    %Time
      deposits, $100,000 and over
                    
                    
                    58,919,208
                    
                    
                    
                    22.3
                    %
                    
                    
                    50,694,468
                    
                    
                    
                    20.0
                    %
                    
                    
                    50,915,989
                    
                    
                    
                    21.2
                    %Other
      time deposits
                    
                    
                    35,253,932
                    
                    
                    
                    13.4
                    %
                    
                    
                    35,591,280
                    
                    
                    
                    14.0
                    %
                    
                    
                    31,570,905
                    
                    
                    
                    13.1
                    %Total
      interest-bearing  deposits
                    
                    
                    215,236,815
                    
                    
                    
                    81.5
                    %
                    
                    
                    205,665,742
                    
                    
                    
                    81.0
                    %
                    
                    
                    190,949,125
                    
                    
                    
                    79.4
                    %Demand
      deposits
                    
                    
                    48,800,308
                    
                    
                    
                    18.5
                    %
                    
                    
                    48,279,759
                    
                    
                    
                    19.0
                    %
                    
                    
                    49,534,037
                    
                    
                    
                    20.6
                    %Total
      deposits
                    
                    $
                    264,037,123
                    
                    
                    
                    100.0
                    %
                    
                    $
                    253,945,501
                    
                    
                    
                    100.0
                    %
                    
                    $
                    240,483,162
                    
                    
                    
                    100.0
                    %








Total
deposits increased by $10.1 million (3.97%) during the 3 months of 2009 to
$264.0 million from $253.9 million at December 31, 2008 and increased by 9.80%
from $240.5 million as of March 31, 2008.  Time deposits greater than
$100,000, savings deposits and non-interest bearing demand showed increases over
year end 2008.  Time deposits greater that $100,000 showed strong
growth of 16.2% or $8.2 million and were $58.9 million as of March 31, 2009
compared to $50.7 million at year end 2008.  Savings deposits of $92.0
million increased $3.6 million or 4.1% from $88.3 million at December 31, 2008.
Non-interest bearing demand grew $521,000 (1.1%) from $48.3 million as of
December 31, 2008 to $48.8 million at March 31, 2009.





20


Interest-bearing
checking showed a decline of $2.0 million or 6.3% from $31.1 at December 31,
2008 to $29.1 as of March 31, 2009. Other time deposits declined slightly from
$35.6 million at December 31, 2008 to $35.3 million as of March 31, 2009 a
decline of $337,348 or 0.9%.





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 March 31, 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.  We participated in the U.S. Treasury Troubled Asset
Relief Program-Capital Purchase Program in the first quarter and issued
$8,653,000 of Series A preferred stock and related warrants for Series B
preferred stock.  The new capital qualifies as Tier 1 capital and
increases our Tier 1 and total capital ratios as further described
below.





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 Sonoma Valley Bank's total risk-based capital ratio
at March 31, 2009 was 11.29% and its Tier 1 risk-based capital ratio was
10.03%.  The Bank's leverage ratio was 9.30%.  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 March 31, 2009, were 14.31%, 13.05% and
12.11%, 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 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 the 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.





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.


21


In
February 2001, we approved a program to repurchase Sonoma Valley Bancorp stock
up to $1.0 million and in August 2002 we approved the repurchase of an
additional $1.0 million of Sonoma Valley Bancorp stock.  As of
December 31, 2005, $1,580,162 had been repurchased and retired, net of options
which were exercised and then subsequently repurchased and
retired.  In February 2006 we approved the repurchase of 60,000 shares
of Sonoma Valley Bancorp stock, in October 2006 we approved an additional 60,000
shares of Sonoma Valley Bancorp stock and in July, 2007 we approved an
additional 60,000 shares of Sonoma Valley Bancorp stock.  During the
twelve months ended December 31, 2006, 55,028 shares were repurchased and
retired of which 15,035 shares or $364,729 were a part of the amount approved
August 2002.   As of December 31, 2007, 100,415 shares had been
repurchased and retired.  As of December 31, 2008, 1,190 shares had
been repurchased and retired. As of March 31, 2009, no shares have been
repurchased and retired. 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 $42.8
million at March 31, 2009 and $48.8 million at March 31, 2008.Standby
letters of credit outstanding were $118,000 at March 31, 2009 and $158,000 at
March 31, 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. We
believe our available liquidity is sufficient to accommodate existing contingent
obligations listed above.





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 March 31, 2009, our primary liquidity ratio
(adjusted liquid assets to deposits and short term liabilities) was 6.76%
compared to 5.56% as of March 31, 2008. Available liquidity which includes
the ability to borrow at the Federal Home Loan Bank was 28.48% as of March 31,
2009 and 31.65% as of March 31, 2008.  Management expects that
liquidity will remain adequate throughout 2009, as loan growth slows. Any excess
funds will be invested in quality liquid assets, such as 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 March 31, 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 March 31, 2009


(dollars
in thousands)


Variation
      from a constant rate scenario
                
                $
      Change in NII+300bp
                
                $
      1,633+200bp
                
                $    930+100bp
                
                $    385





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.





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.




23


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 $57.4 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 March 31, 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 $142.7 million in
fixed rate assets over 12 months, shown in the table below, $36.2 million are
long term assets over five years.  This $36.2 million compares
favorably to the $88.4 million in demand and core deposits and
equity.





MARCH
      31, 2009
                (dollars
      in thousands)
              
              Immediate
                Reprice
              
              
              Up
      to 3
                Months
              
              
              4
      to 6
                Months
              
              
              7
      to 12
                Months
              
              
              Over
      12
                Months
              
              
              TotalFFS
      + overnight IBB
              
              $
              9,626
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              9,626Securities
      + Other IBB
              
              
              0
              
              
              
              5,769
              
              
              
              692
              
              
              
              1,383
              
              
              
              12,537
              
              
              
              20,381Loans
              
              
              71,771
              
              
              
              11,543
              
              
              
              21,425
              
              
              
              39,788
              
              
              
              130,135
              
              
              
              274,662Total
      RSA
              
              $
              81,397
              
              
              $
              17,312
              
              
              $
              22,117
              
              
              $
              41,171
              
              
              $
              142,672
              
              
              $
              304,669MMDA/NOW/SAV
              
              $
              121,064
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              121,064CD’s
      <$100k
              
              
              0
              
              
              
              13,127
              
              
              
              8,729
              
              
              
              8,729
              
              
              
              4,470
              
              
              
              35,055CD’s
      >$100k
              
              
              0
              
              
              
              19,824
              
              
              
              25,388
              
              
              
              6,347
              
              
              
              7,560
              
              
              
              59,119Borrowings
              
              
              0
              
              
              
              1,199
              
              
              
              15,000
              
              
              
              0
              
              
              
              5,001
              
              
              
              21,200Total
      RSL
              
              $
              121,064
              
              
              $
              34,150
              
              
              $
              49,117
              
              
              $
              15,076
              
              
              $
              17,031
              
              
              $
              236,438GAP
              
              $
              (39,667
              )
              
              $
              (16,838
              )
              
              $
              (27,000
              )
              
              $
              26,095
              
              
              $
              125,641
              
              
              $
              68,231Cumulative
              
              $
              (39,667
              )
              
              $
              (56,505
              )
              
              $
              (83,505
              )
              
              $
              (57,410
              )
              
              $
              68,231%
      Assets
              
              
              -12.0
              %
              
              
              -17.0
              %
              
              
              -25.2
              %
              
              
              -17.3
              %
              
              
              20.6
              %





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 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.





24


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 17 for discussion of investments).  The portfolio should
decline in value only about 0.2% or $322,000 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).





Item
      3.
            QUANTITATIVE AND QUALITATIVE DISCLOSURE
      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
Consolidated Financial Condition and Results of Operations - 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 March 31, 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.





Part
II





Item
      1.
            LEGAL
PROCEEDINGS





From time
to time we may be a party to legal proceedings arising in the ordinary course of
business.  We are not currently a party to, nor is any of its
properties the subject of, any material pending legal proceedings.





25


Item
      2.
            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS





None





Item
      3.
            DEFAULTS UPON SENIOR
      SECURITIES




None





Item
      4.
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS





The
Company held a special meeting of shareholders on February 11,
2009.  The proposal and the outcome from the voting are set forth
below.





Proposal
      Number 1:
            To
      approve an amendment to the Company’s Articles of Incorporation to
      authorize 2,000,000 shares of preferred
stock.





Total
      shares Voted
            For
            Against
            Abstain/Broker
      Non-Votes1,366,723
            448,645
            7,836







Item
      5.
            OTHER
INFORMATION





None





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


26


SIGNATURES





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








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


27