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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18560
THE SAVANNAH BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1861820
------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Bull Street, Savannah, GA 31401
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(Address of principal executive offices) (Zip Code)
912-651-8200
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if
changed since last report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2002. 2,982,938 shares of Common Stock, $1.00 par
value per share
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THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
Form 10-Q Index
June 30, 2002
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Review Report of Independent Certified Public Accountants 2
Consolidated Balance Sheets - June 30, 2002 and 2001
and December 31, 2001 3
Consolidated Statements of Income for the second quarter and
for the Six Months Ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001 6
Condensed Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9-19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
1
Item 1. FINANCIAL STATEMENTS
REVIEW REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of The Savannah Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheets of The
Savannah Bancorp, Inc. (a Georgia Corporation) and its subsidiaries as of June
30, 2002 and 2001 and the related consolidated statements of income for the
three-month and six-month periods ended June 30, 2002 and 2001 and changes in
shareholders' equity and cash flows for the six-month periods ended June 30,
2002 and 2001 included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended June 30, 2002. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with generally accepted auditing
standards in the United States of America. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2001, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 31, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2001 is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Atlanta, Georgia
August 7, 2002
2
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31, June 30,
- --------------------------------------------------------------------------------
($ in thousands, except share data) 2002 2001 2001
- --------------------------------------------------------------------------------
Assets (Unaudited) (Unaudited)
Cash and due from banks $ 17,595 $ 17,261 $ 14,198
Interest-bearing deposits in bank 7,993 750 301
Federal funds sold 10,235 4,222 11,013
Securities available for sale, at fair
value(amortized cost of $51,805 on
6/30/02, $62,997 on 12/31/01 and
$66,997 on 6/30/01) 53,569 64,662 67,499
Loans 308,697 284,623 266,961
Less allowance for loan losses (4,041) (3,826) (3,658)
- --------------------------------------------------------------------------------
Net loans 304,656 280,797 263,303
Premises and equipment, net 4,774 4,864 4,475
Other assets 3,722 3,627 3,591
- --------------------------------------------------------------------------------
Total assets $402,544 $376,183 $364,380
================================================================================
Liabilities
Deposits:
Non interest-bearing demand $ 56,024 $ 50,294 $ 42,771
Interest-bearing demand 60,816 53,388 52,505
Savings 13,378 12,583 11,627
Money market accounts 56,091 48,601 40,077
Time, $100,000 and over 64,362 60,815 64,046
Other time deposits 83,492 83,942 93,109
- --------------------------------------------------------------------------------
Total deposits 334,163 309,623 304,135
Federal Home Loan Bank advances 20,730 20,836 20,940
Securities sold under repurchase agreements 12,141 8,583 6,008
Federal funds purchased 305 2,802 328
Other liabilities 1,796 2,268 2,438
- --------------------------------------------------------------------------------
Total liabilities 369,135 344,112 333,849
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1 per share:
authorized 20,000,000 shares; issued
2,991,378 on 6/30/02, 12/31/01 and
on 6/30/01, respectively 2,991 2,991 2,991
Preferred stock, par value $1 per share:
authorized 10,000,000 shares, none issued - - -
Contributed capital 18,555 18,754 18,806
Retained earnings 10,930 9,751 8,498
Treasury stock, 8,440, 25,542 and 33,667
shares at 6/30/02, 12/31/01 and 6/30/01,
respectively (160) (457) (594)
Accumulated other comprehensive income 1,093 1,032 830
- --------------------------------------------------------------------------------
Total shareholders' equity 33,409 32,071 30,531
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $402,544 $376,183 $364,380
================================================================================
See the condensed notes to the consolidated financial statements.
3
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(thousands, except per share data)
For the Six
For the Quarter Ended Months Ended
June 30, June 30,
----------------------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------
Interest income $ 5,894 $ 6,888 $11,732 $13,947
Interest expense 2,162 3,452 4,410 7,027
----------------------------------------------------------------------------
Net Interest Income 3,732 3,436 7,322 6,920
Provision for loan losses 156 155 312 305
----------------------------------------------------------------------------
Net interest income
after provision for
loan losses 3,576 3,281 7,010 6,615
----------------------------------------------------------------------------
Other Income
Trust fees 104 79 188 144
Service charges on
deposit accounts 413 329 738 667
Mortgage origination fees 249 223 489 391
Other income 113 124 217 236
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Total other operating
income 879 755 1,632 1,438
Gains on sales of assets 0 0 0 0
----------------------------------------------------------------------------
Total other income 879 755 1,632 1,438
----------------------------------------------------------------------------
Other Expense
Salaries and employee
benefits 1,570 1,370 3,107 2,734
Occupancy expense 222 176 405 345
Equipment expense 178 149 357 289
Other operating expenses 790 772 1,570 1,495
----------------------------------------------------------------------------
Total other expense 2,760 2,467 5,439 4,863
----------------------------------------------------------------------------
Income before provision
for income taxes 1,695 1,569 3,203 3,190
Provision for income taxes 561 490 1,040 1,030
----------------------------------------------------------------------------
Net Income $ 1,134 $ 1,079 $ 2,163 $ 2,160
============================================================================
Net Income Per Share:
Basic $ 0.38 $ 0.36 $ 0.73 $ 0.73
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Diluted $ 0.37 $ 0.36 $ 0.72 $ 0.72
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See the condensed notes to the consolidated financial statements.
4
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Accumulated
Other
Common Stock Contributed Retained Treasury Comprehensive
($ in thousands, except share data) Shares Amount Capital Earnings Stock Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 2,719,614 $2,720 $12,822 $13,476 $(485) $123 $28,656
Comprehensive income:
Net income: 2,160 2,160
Change in unrealized
gains on Securities available
for sale, net of tax 707 707
-------
Total comprehensive income 2,867
Cash dividends - $.296 per share (883) (883)
Ten percent stock dividend 271,764 271 5,984 (6,255) -
Purchase of treasury stock (109) (109)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 2,991,378 $2,991 $18,806 $8,498 $(594) $830 $30,531
==================================================================================================================
Balance, December 31, 2001 2,991,378 $2,991 $18,754 $9,751 $(457) 1,032 $32,071
Comprehensive income:
Net income 2,163 2,163
Change in unrealized
gains on securities available
for sale, net of tax 61 61
-------
Total comprehensive income 2,224
Cash dividends - $.33 per share (984) (984)
Exercise of options (199) 338 139
Purchase on treasury stock (41) (41)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 2,991,378 $2,991 $18,555 $10,930 $(160) $1,093 $33,409
==================================================================================================================
See the condensed notes to the consolidated financial statements.
5
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
- --------------------------------------------------------------------------------
($ in thousands) 2002 2001
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,163 $ 2,160
Adjustments to reconcile net income to cash
Provided by operating activities:
Provision for loan losses 312 305
Depreciation of premises and equipment 323 264
Amortization (accretion) of investment
securities discount-net 30 (12)
Increase in other assets (155) (62)
Decrease in other liabilities (424) (507)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 2,249 2,148
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investment securities (2,717) (21,288)
Proceeds from calls of investment
securities 9,875 14,000
Proceeds from maturities of investment
securities 4,004 713
Net increase in loans made to customers (24,171) (16,541)
Capital expenditures (233) (209)
- --------------------------------------------------------------------------------
Net cash used in investing activities (13,242) (23,325)
- --------------------------------------------------------------------------------
FINANCING ACITVITIES
Net increase in demand, savings and money
market deposits 21,443 5,105
Net increase in certificates of deposit 3,097 7,174
Net increase (decrease) in securities sold
under agreements to repurchase 3,558 (539)
Net(decrease) increase in FHLB advances (106) 6,896
Net (decrease) increase in federal funds
purchased (2,497) 140
Purchase of treasury stock (41) (109)
Dividend payments (984) (883)
Exercise of options 113 -
- --------------------------------------------------------------------------------
Net cash provided by financing activities 24,583 17,784
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 13,590 (3,393)
Cash and cash equivalents at beginning of period 22,233 28,905
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 35,823 $ 25,512
================================================================================
See the condensed notes to the consolidated financial statements.
6
THE SAVANNAH BANCORP, INC,. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND SIX MONTH PERIODS
ENDING JUNE 30, 2002 AND 2001
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June, 2002, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto, included in the Company's annual report on Form 10-K for
the year ended December 31, 2001.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and
Technical Corrections." SFAS No. 4 which was amended by SFAS No. 64, required
all gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in Opinion 30 will now be used to classify those gains
and losses. SFAS No. 13 was amended to eliminate modifications that have
economic effects that are similar to sale-leaseback transactions. The adoption
of SFAS No. 145 will not have a current impact on the Company's consolidated
financial statements.
In June 1998, FASB issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." Under
recently cleared Derivatives Implementation Group (DIG) Statement 133Implemen-
tation Issue C13, "Scope Exceptions: When a Loan Commitment is Included in the
Scope of Statement 133," the issuer (but not the holder) must apply Statement
133 to loan commitments related to the origination or acquisition of mortgage
loans that will be held for resale. The guidance takes effect the first day of a
reporting entity's first fiscal quarter beginning after April 10, 2002 (that is,
July 1, 2002, for the Company). The adoption of this guidance will not have a
current impact on the Company's financial statements.
Various proposals have been issued recently by the Securities and Exchange
Commission ("SEC") related to changes in filing requirements and accountability
of Executive management and Directors regarding accounting policies and audit
issues. These proposals result from the recent high profile accounting and audit
irregularities that have been widely covered in the media. Although the eventual
outcome of these proposals is expected to have no material impact on the
Company's consolidated financial statements, additional costs to comply with
certain rules can be expected.
7
NOTE 3 - SHARES USED IN COMPUTING NET INCOME PER SHARE
The Board of Directors declared a 10 percent stock dividend on April 16, 2001.
The record date for distribution of the stock dividend was April 27 and the
payable date was May 11, 2001. Net income per share and average share amounts
have been restated to give the effect of the 10 percent additional shares
outstanding in the earliest period presented. Net income per diluted share is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the periods. The diluted weighted-average
shares outstanding after adjusting for a ten percent stock dividend were
approximately 3,027,000 and 3,015,000 for the second quarters of 2002 and 2001,
respectively. They included approximately 43,000 and 57,000 common equivalent
shares in 2002 and 2001, respectively.
FORWARD LOOKING STATEMENTS
The Savannah Bancorp, Inc. (the Company) may, from time to time, make written or
oral "forward-looking statements," including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
quarterly report on Form 10-Q and, in its reports to shareholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by customers, including the features, pricing and quality compared to
competitors' products and services; the willingness of customers to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For a comprehensive presentation of The Savannah Bancorp, Inc.'s financial
condition at June 30, 2002 and December 31, 2001 and results of operations for
the quarters and six-month periods ended June 30, 2002 and 2001, the following
analysis should be reviewed along with other information including the Company's
December 31, 2001 Annual Report on Form 10-K.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
SECOND QUARTER FINANCIAL HIGHLIGHTS
JUNE 30, 2002 and 2001
(Unaudited)
Percent
Balance Sheet Data Increase
at June 30 2002 2001 (Decrease)
-----------------------------------------------------------------------
(thousands, except per share data)
Total assets $402,544 $364,380 10
Interest-earning assets 378,297 343,689 10
Loans 308,697 266,961 16
Allowance for loan losses 4,041 3,658 10
Nonperforming assets 532 566 (6.0)
Deposits 334,163 304,135 10
Interest-bearing liabilities 311,315 288,640 7.9
Shareholders' equity 33,409 30,531 9.4
Allowance for possible
loan losses to total loans 1.31% 1.37% (4.5)
Loan to deposit ratio 92.38% 87.78% 5.2
Equity to assets 8.30% 8.38% (0.9)
Tier 1 capital to risk-
weighted assets 10.53% 10.91% (3.5)
Book value per share $ 11.20 $ 10.32 8.5
Outstanding shares 2,983 2,958 0.8
KEY PERFORMANCE DATA
FOR THE SECOND QUARTER
NET INCOME $ 1,134 $ 1,079 5.1
Return on average assets 1.15% 1.18% (2.3)
Return on average equity 13.82% 14.37% (3.9)
Net interest margin 4.09% 4.05% 1.0
Efficiency ratio ** 59.86% 58.86% 1.7
Net income per share:
Basic $ 0.38 $ 0.36 5.6
Diluted $ 0.37 $ 0.36 2.8
Dividends $ 0.17 $ 0.16 6.3
Average shares:
Basic 2,984 2,958 0.9
Diluted 3,027 3,015 0.4
9
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
SECOND QUARTER FINANCIAL HIGHLIGHTS
JUNE 30, 2002 and 2001
(Unaudited)
Percent
KEY PERFORMANCE DATA Increase
FOR THE FIRST SIX MONTHS 2002 2001 (Decrease)
-----------------------------------------------------------------------
(thousands, except per share data)
NET INCOME $ 2,163 $ 2,160 0.1
Return on average assets 1.13% 1.21% (6.8)
Return on average equity 13.35% 14.69% (9.2)
Net interest margin 4.12% 4.18% (1.4)
Efficiency ratio ** 60.74% 58.18% 4.4
Net income per share:
Basic $ 0.73 $ 0.73 0.0
Diluted $ 0.72 $ 0.72 0.0
Dividends $ 0.33 $ .296 11
Average shares:
Basic 2,982 2,959 0.8
Diluted 3,024 3,009 0.5
** - Efficiency ratio = other expense / (net interest income + other
income)
FINANCIAL CONDITION AND CAPITAL RESOURCES
BALANCE SHEET ACTIVITY
The major changes in the year-to-date assets and liabilities for the current
year and the prior year of the Company are shown in the consolidated statements
of cash flows. The increase in loans of $24.2 million in the first six months
2002 was funded primarily by the $24.5 million increase in deposits.
The Company has classified all investment securities as available for sale.
During the first six months, U.S. Treasury market rates have fallen slightly
causing a slight increase in net unrealized gains on available for sale
securities. These amounts are included in shareholders' equity at June 30, 2002
and December 31, 2001, respectively, in other accumulated comprehensive income.
The Company's lending and investment policies continue to emphasize high quality
growth. Management is not aware of any known trends, events or uncertainties
that will have or that are reasonably likely to have a material effect on the
liquidity, capital resources or operations of the Company. However, the events
of September 11 and the aftermath have caused fear, uncertainty and security
concerns. Additionally, recent high visibility accounting scandals involving
executive management, auditors and legal counsel have created some degree of
uncertainty among investors. Future events could cause disruptions in economic
growth.
10
ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
The allowance for loan losses is established through charges in the form of a
provision for loan losses based on management's continuing and quarterly
evaluation of the loan portfolio. Loan losses and recoveries are charged or
credited directly to the allowance. The amount of the allowance reflects
management's opinion of an adequate level to absorb probable losses inherent in
the loan portfolio at June 30, 2002. The amount charged to the provision and the
level of the allowance is based on management's judgment and is dependent upon
growth in the loan portfolio, the total amount of past due loans and nonper-
forming loans, known loan deteriorations, and concentrations of credit. Other
factors affecting the allowance are market interest rates, maturity and
composition, collateral values and general economic conditions. Finally,
management's assessment of probable losses based upon internal credit grading of
the loans and periodic reviews and assessments of credit risk associated with
particular loans is considered in establishing the allowance amount. The Company
considers its policies regarding the allowance for loan losses to be its most
critical accounting policy due to the significant degree of management judgment
involved.
Management maintains an allowance for loan losses which it believes adequate to
cover probable losses in the loan portfolio. It must be emphasized, however,
that the determination of the allowance for loan losses using the Company's
procedures and methods rests upon various judgments and assumptions about future
economic conditions, events, and other factors affecting loans which are
believed to be reasonable, but which may or may not prove valid. While it is the
Company's policy to provide for the loan losses in the current period in which a
loss is considered probable, there are additional risks of future losses which
cannot be quantified precisely or attributed to particular loans or classes of
loans. Because these risks include the state of the economy, industry trends,
and conditions affecting individual borrowers, management's judgment of the
allowance is necessarily approximate and imprecise. No assurance can be given
that the Company will not in any particular period sustain loan losses which
would be sizable in relationship to the amount reserved or that subsequent
evaluation of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings. The allowance for loan losses is also
subject to review by various regulatory agencies through their periodic
examinations of the Company's subsidiaries. Such examination could result in
required changes to the allowance for loan losses. No adjustment in the
allowance or significant adjustments to the Bank's internal classified loans
were made as a result of the subsidiary bank's most recent examination performed
by the Office of the Comptroller of the Currency as of December 31, 2001 and the
Federal Deposit Insurance Corporation as of September 30, 2001.
The allowance for loan losses totaled $4.0 million, or 1.31% of total loans, at
June 30, 2002. This is compared to an allowance of $3.8 million, or 1.34% of
total loans, at December 31, 2001. For the six months ended June 30, 2002, the
Company reported net charge-offs of $97,000, or 0.07 percent (annualized) of
average loans. This is compared to net charge-offs of $16,000, or 0.01 percent
(annualized) of average loans, for the comparable period of 2001.
11
The Company's nonperforming assets consist of loans on nonaccrual basis and
loans which are contractually past due 90 days or more on which interest is
still being accrued. There is no other real estate owned ("OREO") at June 30,
2002 or 2001. Nonaccrual loans and loans past due 90 days and greater totaled
$532,000, or 0.17 percent of gross loans, at June 30, 2002 compared to $566,000,
or 0.21 percent of gross loans, at June 30, 2001. Generally, loans are placed on
non-accrual status at the earlier of when they are 90 days past due or when the
collection of the loan becomes doubtful.
Impaired loans under Statement of Financial Accounting Standards 114, which were
all on non-accrual status, totaled $434,000 and $524,000 at June 30, 2002 and
2001, respectively.
CAPITAL ADEQUACY
The Office of the Comptroller of the Currency (OCC) has adopted capital
requirements that specify the minimum level for which no prompt corrective
action is required. In addition, the FDIC adopted FDIC insurance assessment
rates based on certain "well-capitalized" risk-based and equity capital ratios.
As of June 30, 2002, the subsidiary banks exceed the minimum requirements
necessary to be classified as "well-capitalized."
Total equity capital for the Company is $33.4 million, or 8.30 percent of total
assets at June 30, 2002. Tier 1 Capital is 10.53 percent of Risk-Weighted Assets
at the same date. The strong capital and earnings ratios allow the Company to
continue its aggressive growth objectives. Treasury stock activity during the
second quarter included 1,540 shares that were re-issued in conjunction with the
exercise of options and 1,800 shares that were purchased to be available for
future exercise of options. The treasury stock account was adjusted by the cost
of the treasury shares acquired using the first-in, first-out values.
12
RESULTS OF OPERATIONS
SECOND QUARTER 2002 COMPARED WITH SECOND QUARTER 2001
Net income for the second quarter 2002 was $1,134,000, up 5.1 percent from
$1,079,000 in the second quarter 2001. This represents annualized returns of
13.82 percent on average equity and 1.15 percent on average assets for the
second quarter, 2002. Diluted earnings per share were 37 cents in the second
quarter, 2002 compared to 36 cents for the same period in 2001, an increase of
2.8 percent.
Net interest income was $3,732,000 as compared to $3,436,000 in 2001, an
increase of $296,000, or 8.6 percent. Average loans were $301.4 million, or
15.5 percent higher in the second quarter 2002 as compared $261.0 million in the
second quarter 2001. The average loan to deposit ratio increased to 93 percent
in 2002 as compared to 86 percent in 2001. The prime rate remained at 4.75
percent during the second quarter 2002. The prime rate averaged 7.44 percent
during the second quarter 2001. Time deposit market rates decreased over 200
basis points in the second quarter 2002 as compared to the same period in 2001.
The net yield on interest earning assets increased slightly to 4.09 percent in
2002 from 4.05 percent in 2001 as a result of good loan growth and the repricing
of the higher rate time deposits as shown in Table 2 in the following content.
The provision for loan losses was $156,000 for the second quarter of 2002,
compared to $155,000 for the comparable period of 2001. Changes in the provision
each year are impacted as discussed under the "Allowance for Loan Losses"
section above. Net loan originations were $11.1 million for the quarter ended
June 30, 2002 and $10.1 million for the second quarter 2001.
Other operating income was $879,000 in 2002 compared to $755,000 in 2001, an
increase of $124,000 or 16.4 percent. Service charges on deposit accounts
increased $84,000 due to higher NSF charges and lower earnings credits on
commercial accounts. Other income included mortgage origination fees of $249,000
and $223,000 in 2002 and 2001, respectively. Lower loan interest rates caused
increases in mortgage origination volumes and fees throughout the industry.
Trust income was 104,000 in the second quarter of 2002, compared to $79,000 in
the same period of 2001. This increase resulted from increasing business
development efforts.
Other expenses were $2,760,000 in 2002 compared to $2,467,000 in 2001, an
increase of $293,000, or 11.9 percent. Personnel expense increased $200,000, or
14.6 percent in 2002. The Company operated in 2001 with a number of unfilled
positions. Many of the positions were filled in latter 2001 resulting in higher
personnel costs in 2002. In addition, 2002 includes a senior operations officer
salary, in-house item processing function salaries and higher incentive
compensation accruals. Higher costs related to systems security, audit and
marketing were present in the second quarter of 2002 as compared to the second
quarter of 2001. Increased occupancy and moving costs of approximately $48,000
were incurred during the second quarter and related to newly leased operations
space and the write-off of leasehold improvements in leased space for which the
lease option was not renewed.
The provision for income taxes was $561,000 in 2002 and $490,000 in 2001. The
effective federal and state tax rates were 33.1 percent and 31.2 percent in 2002
and 2001, respectively. The increase in the effective rate was due primarily to
13
lower tax exempt income in 2002. The Company has never recorded a valuation
allowance against deferred tax assets. All deferred tax assets are considered to
be realizable due to expected future taxable income.
FIRST SIX MONTHS 2002 COMPARED WITH FIRST SIX MONTHS 2001
Net income for the first six months of 2002 was $2,163,000, up 0.1 percent from
$2,160,000 in the first six months of 2001. This represented annualized returns
of 13.35 percent on average equity and 1.13 percent on average assets for the
first six months, 2002. Diluted earnings per share were 72 cents in the
first six months, 2002 and for the same period in 2001.
Net interest income was $7,322,000 as compared to $6,920,000 in 2001, an
increase of $402,000, or 5.8 percent. Average loans were $297.0 million, or
15.3 percent higher in the first six months of 2002 as compared to the same
period of 2001. The average loan to deposit ratio increased to 94 percent in
2002 as compared to 87 percent in 2001. The prime rate remained at 4.75 percent
during the first six months of 2002. The prime rate averaged 8.01 percent during
the first six months of 2001. The net yield on interest earning assets decreased
to 4.12 percent in 2002 from 4.18 percent in 2001 as shown in Table 3 of the
following content.
The provision for loan losses was $312,000 for the first six months of 2002,
compared to $305,000 for the same period of 2001. Changes in the provision each
year are impacted as discussed under the "Allowance for Loan Losses" section
above. Net loan originations were $24.1 million for the six months ended June
30, 2002 and $16.5 million for the same period in 2001.
Other operating income was $1,632,000 in 2002 compared to $1,438,000 in 2001, an
increase of $194,000, or 13.5 percent. Service charges on deposit accounts
increased $171,000 due to higher NSF charges and lower earnings credits on
commercial accounts. Other income included mortgage origination fees of $489,000
and $391,000 in 2002 and 2001, respectively. Lower loan interest rates caused
increases in mortgage origination volumes and fees throughout the industry.
Trust income was 188,000 in the first six months of 2002, compared to $144,000
in the first six months of 2001. This increase resulted from increasing business
development efforts.
Other expenses were $5,439,000 in 2002 compared to $4,863,000 in 2001, an
increase of $576,000, or 11.8 percent. Personnel expense increased $373,000, or
13.6 percent in 2002. The Company operated in 2001 with a number of unfilled
positions. Many of the positions were filled in latter 2001 resulting in higher
personnel costs in 2002. In addition, 2002 new salaries includes a senior
operations officer salary, in-house item processing function salaries and higher
incentive compensation accruals. Higher costs related to systems security, audit
and marketing were present in the first half of 2002 as compared to the first
half of 2001. Increased occupancy and moving costs of approximately $48,000 were
incurred during the second quarter related to newly leased operations space and
the write-off of leasehold improvement in leased space for which the lease
option was not renewed.
14
The provision for income taxes was $1,040,000 in 2002 and $1,030,000 in 2001.
The effective federal and state tax rates were 32.5 percent and 32.3 percent in
2002 and 2001, respectively. The slight increase in the effective rate was due
primarily to lower state tax- exempt income mostly offset by low-income housing
state tax credits in 2002. The Company has never recorded a valuation allowance
against deferred tax assets. All deferred tax assets are considered to be
realizable due to expected future taxable income.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The objectives of funds management include maintaining adequate liquidity and
reasonable harmony between the repricing of sources and uses of funds for
interest sensitive assets and liabilities. The goal of liquidity management is
to ensure the availability of adequate funds to meet the loan demand and the
deposit withdrawal needs of customers. This is achieved through maintaining a
combination of sufficient liquid assets, core deposit growth and unused capacity
to purchase and borrow funds in the money markets.
During the second quarter loans increased $11 million to $309 million, and
deposits increased $20 million to $334 million. The very low deposit market
interest rates have resulted in customers moving out of time deposits and into
other deposit types or alternative investments. The loan to deposit ratio
increased to 92.4% at June 30, 2002 from 91.9% at December 31, 2001. Loan growth
was strong in the second quarter as was growth in non-interest bearing deposits.
Primary funding and liquidity sources in addition to local deposit growth
include borrowing capacity with the Federal Home Loan Bank of Atlanta, temporary
federal funds purchased lines with correspondent banks, and non-local time
deposits through Internet bulletin board service. Backup funding and liquidity
sources include the ability to acquire brokered deposits, arrangements to sell
participations in certain loans and borrowing from the Federal Reserve Bank of
Atlanta discount window.
Both subsidiary banks have a Blanket Floating Lien Agreement with the Federal
Home Loan Bank of Atlanta ("FHLB"). Under these agreements, the banks have
credit lines up to 75 percent of the book value of their 1-4 family first
mortgage loans, or approximately $46.7 million as of March 31, 2002. In
addition, the banks had approximately $.7 million fair value of investment
securities pledged as collateral at the FHLB. In aggregate, the Company had
secured borrowing capacity of approximately $47.5 million of which $20.7 million
was advanced at June 30, 2002. These credit arrangements serve as a core-funding
source as well as liquidity backup for the banks. The Savannah Bank, N.A. and
Bryan Bank & Trust have credit lines approved by the FHLB of 20 percent and 16
percent of assets, respectively, subject to the FHLB collateral requirements.
The subsidiary banks also have $20 million of temporary conditional federal
funds borrowing lines available from correspondent banks.
A continuing objective of asset liability management is to maintain a high level
of variable rate assets, including variable rate loans and shorter-maturity
investments, to balance increases in interest rate sensitive liabilities.
Interest rate sensitivity management and its effects on the net interest margin
require analyses and actions that take into consideration volumes repriced and
the timing and magnitude of their change.
15
The Company's asset-sensitive cash flow maturity and repricing gap at June 30,
2002, was $31.0 million at one year, or 8.2 percent of total interest-earning
assets. Fixed rate earning assets with maturities over five years totaled $14.6
million, or 3.9 percent of total interest-earning assets. See Table 1 for cash
flow maturity and repricing gap.
The Company is more asset-sensitive within one year than desired in a falling
rate environment. The decrease in the prime rate from 9.50 percent to 4.75
percent between January 2001 and December 2001 negatively impacted net interest
income and the net interest margin. The Company is well-positioned for a rising
rate environment. Given the historically low level of current interest rates,
the opportunity for rising rates may be greater than falling rates, however, the
timing of a rise is uncertain. The Federal Reserve has most recently
communicated a neutral bias for interest rates.
The gap position between one and five years is of less concern because
management has time to respond to changing financial conditions with actions
that reduce the impact of the longer-term gap positions. However, fixed rate
assets with maturities over five years may include significant rate risk in the
event of significant market rate increases which subject the subsidiary banks to
repricing risk.
Management monitors interest rate risk on a quarterly basis using
rate-sensitivity gap analysis, rate shock simulation and performance forecasting
measures. If and when interest rate risk measures are outside of policy
tolerances, specific actions to return interest rate risk to acceptable levels
are reported to the Board by management. Management is in the midst of upgrading
its interest rate risk reporting systems to provide better information on a more
frequent basis. These capabilities are especially valuable during a period of
volatile interest rates.
The Company is a party to financial instruments with off-balance sheet risks in
the normal course of business to meet the financing needs of its customers. At
June 30, 2002, the Company had unfunded commitments to extend credit of $60.1
million and outstanding stand-by letters of credit of $2.0 million. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in establishing commitments and issuing
letters of credit as it does for on-balance sheet instruments. Management does
not anticipate that funding obligations arising from these financial instruments
will adversely impact its ability to fund future loan growth or deposit
withdrawals.
16
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING DATA
The following is the long-term maturity and repricing data for the Company as of
June 30, 2002:
($ in 000's) 0-3 3-12 1-3 3-5 Over 5
Interest-bearing assets Immediate Months Months Years Years Years Total
- ------------------------- --------- -------- -------- -------- -------- -------- --------
Investment securities $ - $ 3,549 $ 17,778 $ 15,006 $ 7,103 $ 8,370 $ 51,806
Interest-bearing deposits 7,993 - - - - - 7,993
Federal funds sold 10,235 - - - - - 10,235
Loans - fixed rates - 20,374 36,320 76,166 19,700 6,236 158,796
Loans - variable rates 149,467 - - - - - 149,467
- ------------------------- --------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets 167,695 23,923 54,098 91,172 26,803 14,606 378,297
- ------------------------- --------- -------- -------- -------- -------- -------- --------
Interest bearing deposits:
NOW and savings ** 14,839 7,420 22,260 29,675 - - 74,194
Money market accounts ** 16,834 5,588 16,836 16,833 - - 56,091
Time, $100 and over - 16,661 37,625 7,249 2,827 - 64,362
Other time - 20,016 44,027 12,780 6,610 59 83,492
Federal Home Loan Bank
Advances - 43 170 15,438 1,416 3,663 20,730
Other borrowings 12,446 - - - - - 12,446
- ------------------------- --------- -------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 44,119 49,728 120,918 81,975 10,853 3,722 311,315
- ------------------------- --------- -------- -------- -------- -------- -------- --------
GAP-Excess Assets
(Liabilities) 123,576 (25,805) (66,820) 9,197 15,950 10,884 66,982
- ------------------------- --------- -------- -------- -------- -------- -------- --------
GAP-Cumulative - 6/30/02 $123,576 $ 97,771 $ 30,951 $ 40,148 $ 56,098 $ 66,982 $ 66,982
========= ======== ======== ======== ======== ======== ========
Cumulative Sensitivity Ratio* 3.80 2.04 1.14 1.14 1.18 1.22 1.22
========= ======== ======== ======== ======== ======== ========
* Cumulative interest-earning assets / cumulative interest-bearing
liabilities
** Repricing of NOW, Savings and Money market accounts based on
estimated percentages of the full market interest rate declines
over 1 to 36 months.
17
SELECTED STATISTICAL INFORMATION OF THE COMPANY
The following statistical information is provided for the Company for the
quarters and six months ended June 30, 2002 and 2001. The data is presented
using daily average balances. This data should be read in conjunction with the
financial statements appearing elsewhere in this report. The Company has no
foreign operations and, accordingly, there are no assets or liabilities
attributable to foreign operations.
TABLE 2 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - SECOND QUARTER
2002 AND 2001
The following table presents average balances of the Company and the Subsidiary
Banks on a consolidated basis, the taxable-equivalent interest earned and the
rate paid thereon during the second quarter of 2002 and 2001.
Average Average (a) Variance
Balance Rate Interest Attributable to
- ------------------ ------------- ---------------- Vari- ---------------
2002 2001 2002 2001 2002 2001 ance Rate Volume
- -------- -------- ------ ------ ------- ------- ------- ------- -------
(Thousands) (%) Taxable-Equivalent (Thousands) (Thousands)
Interest Income and fees(b)
$ 8,309 $ 5,749 1.64 4.40 Interest-bearing deposits $ 34 $ 63 (29) $ (39) $ 10
45,860 55,817 5.84 6.22 Investments - taxable 668 866 (198) (53) (145)
8,983 9,384 8.39 8.29 Investments - non-taxable 188 194 (6) 2 (8)
9,484 16,455 1.69 4.34 Federal funds sold 40 178 (138) (109) (29)
301,389 260,956 6.71 8.71 Loans (c) 5,042 5,665 (623) (1,299) 676
- -------- -------- ------ ------ ------- ------- -------
374,025 348,361 6.40 8.02 Total int.-earning assets 5,972 6,966 (994) (1,404) 410
- -------- -------- ------ ------ ------- ------- ------- ------- ------
Interest Expense
Deposits
60,640 55,299 0.59 1.62 NOW accounts 89 223 (134) (142) 8
13,197 11,762 1.00 2.28 Savings accounts 33 67 (34) (38) 4
51,957 36,775 1.90 3.54 Money market accounts 246 325 (79) (151) 72
62,274 64,437 4.08 6.36 CD's, $100M or more 634 1,022 (388) (366) (22)
81,944 94,277 4.08 6.25 Other time deposits 834 1,468 (634) (508) (126)
- -------- -------- ------ ------ ------- ------- -------
Total interest-
270,012 262,550 2.73 4.74 bearing deposits 1,836 3,105 (1,269) (1,320) (51)
Federal Home Loan
20,760 20,969 5.02 4.97 Bank advances 260 260 - 3 (3)
12,864 8,603 2.06 4.06 Other borrowings 66 87 (21) (43) 22
- -------- -------- ------ ------ ------- ------- -------
Total interest-
$303,636 $292,122 2.86 4.74 bearing liabilities 2,162 3,452 (1,290) (1,372) 82
- -------- -------- ------ ------ ------- ------- ------- -------- -------
3.55 3.28 Interest rate spread
====== ======
Net interest income $ 3,810 $ 3,514 $ 296 $ (32) $ 328
======= ======= ======= ======== =======
- -------- -------- Non-interest
55,655 41,591 bearing deposits
- -------- --------
Net yield on
4.09 4.05 interest-earning assets
====== ======
Total average deposits
and average cost
$325,667 $304,141 2.26 4.09 of deposits
======== ======== ====== ======
(a) This table shows the changes in interest income and interest expense for the
comparative periods based on either changes in average volume or changes in
average rates for interest-earning assets and interest-bearing liabilities.
Changes which are not solely due to rate changes or solely due to volume
changes have been attributed to volume.
(b) The taxable equivalent adjustment results from tax exempt income less
non-deductible TEFRA interest expense.
(c) Average nonaccruing loans have been excluded from total average loans as a
non interest-earning asset.
18
The following statistical information is provided for the Company for the six
month periods ended June 30, 2002 and 2001. The data is presented using daily
average balances. This data should be read in conjunction with the financial
statements appearing elsewhere in this report. The Company has no foreign
operations and, accordingly, there are no assets or liabilities attributable to
foreign operations.
TABLE 3 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - FIRST SIX MONTHS
2002 AND 20012
The following table presents average balances of the Company and the Subsidiary
Banks on a consolidated basis, the taxable-equivalent interest earned and the
rate paid thereon during the first six months of 2002 and 2001.
Average Average (a) Variance
Balance Rate Interest Attributable to
- ------------------ ------------- ---------------- Vari- ---------------
2002 2001 2002 2001 2002 2001 ance Rate Volume
- -------- -------- ------ ------ ------- ------- ------- ------- -------
(Thousands) (%) Taxable-Equivalent (Thousands) (Thousands)
Interest Income and fees(b)
$ 4,880 $ 5,358 1.61 4.89 Interest-bearing deposits $ 39 $ 130 (91) $ (87) $ (4)
48,032 55,035 5.84 6.16 Investments - taxable 1,392 1,681 (289) (86) (203)
8,876 9,364 8.52 8.31 Investments - non-taxable 375 386 (11) 10 (21)
6,717 14,032 1.71 4.90 Federal funds sold 57 341 (284) (222) (62)
297,094 257,465 6.80 9.06 Loans (c) 10,025 11,565 (1,540) (2,877) 1,337
- -------- -------- ------ ------ ------- ------- -------
365,599 341,254 6.56 8.33 Total int.-earning assets 11,888 14,103 (2,215) (3,007) 792
- -------- -------- ------ ------ ------- ------- ------- ------- -------
Interest Expense Deposits
57,089 51,751 .59 1.92 NOW accounts 168 494 (326) (342) 16
12,945 11,595 1.00 2.43 Savings accounts 64 140 (76) (83) 7
50,704 36,108 1.89 3.86 Money market accounts 475 692 (217) (354) 137
61,367 63,680 4.27 6.50 CD's, $100M or more 1,298 2,053 (755) (706) (49)
81,955 93,057 4.31 6.35 Other time deposits 1,753 2,931 (1,178) (941) (237)
- -------- -------- ------ ------ ------- ------- -------
Total interest-
264,060 256,191 2.87 4.97 bearing deposits 3,758 6,310 (2,552) (2,664) 112
Federal Home Loan
20,783 20,722 5.02 5.02 Bank advances 517 516 1 (1) 2
13,164 8,705 2.07 4.66 Other borrowings 135 201 (66) (112) 46
- -------- -------- ------ ------ ------- ------- -------
Total interest-
$298,007 $285,618 2.98 4.96 bearing liabilities 4,410 7,027 (2,617) (2,800) 183
- -------- -------- ------ ------ ------- ------- ------- ------- -------
3.57 3.37 Interest rate spread
====== ======
Net interest income $ 7,478 $ 7,076 $ 402 $ (206) $ 608
======= ======= ======= ======= =======
- -------- -------- Non-interest
52,760 40,972 bearing deposits
- -------- --------
Net yield on
4.12 4.18 interest-earning assets
====== ======
Total average deposits
and average cost
$316,820 $297,163 2.39 4.28 of deposits
======== ======== ====== ======
(a) This table shows the changes in interest income and interest expense for the
comparative periods based on either changes in average volume or changes in
average rates for interest-earning assets and interest-bearing liabilities.
Changes which are not solely due to rate changes or solely due to volume
changes have been attributed to volume.
(b) The taxable equivalent adjustment results from tax exempt income less
non-deductible TEFRA interest expense.
(c) Average nonaccruing loans have been excluded from total average loans as a
non interest-earning asset.
19
PART II - OTHER INFORMATION
Item 1. Legal proceedings. None
Item 2. Changes in securities and use of proceeds. None
Item 3. Defaults upon senior securities. None
Item 4. Submission of matters to a vote of security holders. None
Item 5. Other information. None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11. Computation of Per Share Earnings*
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Data required by Statement of Financial Accounting Standards
No. 128, Earnings per Share, is provided in note 3 to the
condensed consolidated financial statements in this report.
b. Reports on Form 8-K during the quarter ended June 30, 2002. None
20
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.
The Savannah Bancorp, Inc.
-------------------------------
(Registrant)
Date 8/13/02 /s/ Archie H. Davis
------- ----------------
Archie H. Davis - President & CEO
Date 8/13/02 /s/ Robert B. Briscoe
------- -----------------
Robert B. Briscoe - Chief Financial Officer
21