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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 March 31, 2003
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.
------------------------------------------------------
(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 April 30, 2003. 3,280,934 shares of Common Stock, $1.00 par
value per share
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THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
MARCH 31, 2003
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Review Report of Independent Certified Public Accountants 2
Consolidated Balance Sheets - March 31, 2003 and 2002
and December 31, 2002 3
Consolidated Statements of Income
For the Three Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002 6
Condensed Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10-20
Item 4. Conclusion About the Effectiveness of Disclosure Controls
and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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
March 31, 2003 and 2002 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the three-month periods ended
March 31, 2003 and 2002 included in the accompanying Securities and Exchange
Commission Form 10-Q for the period ended March 31, 2003. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public Accountants. 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 auditing
standards generally accepted in the United States of America, the consolidated
balance sheet as of December 31, 2002, 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 24, 2003, 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, 2002 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
May 6, 2003
2
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31, March 31,
- --------------------------------------------------------------------------------
($ in thousands, except share data) 2003 2002 2002
- --------------------------------------------------------------------------------
ASSETS (Unaudited) (Unaudited)
Cash and due from banks $ 17,239 $ 34,932 $ 14,595
Interest-bearing deposits in bank 2,662 6,061 652
Federal funds sold 10,528 733 4,815
Securities available for sale, at fair
value (amortized cost of $45,898 on
3/31/03, $53,112 on 12/31/02 and
$56,302 on 3/31/02) 47,460 54,898 57,478
Loans 345,847 336,775 297,651
Less allowance for loan losses (4,600) (4,373) (3,923)
- --------------------------------------------------------------------------------
Net loans 341,247 332,402 293,728
Premises and equipment, net 4,712 4,804 4,775
Other real estate owned 117 117 -
Other assets 3,445 3,651 3,729
- --------------------------------------------------------------------------------
TOTAL ASSETS $427,410 $437,598 $379,772
================================================================================
LIABILITIES
Deposits:
Non interest-bearing demand $ 63,029 $ 63,450 $ 53,584
Interest-bearing demand 68,106 81,376 56,245
Savings 15,273 14,196 13,252
Money market accounts 68,119 62,537 49,728
Time, $100,000 and over 60,059 59,989 60,726
Other time deposits 80,328 81,496 80,438
- --------------------------------------------------------------------------------
Total deposits 354,914 363,044 313,973
Federal Home Loan Bank advances 20,581 20,625 20,793
Securities sold under repurchase
agreements 14,198 14,088 9,974
Federal funds purchased 462 2,906 593
Other liabilities 2,075 2,179 2,008
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 392,230 402,842 347,341
- --------------------------------------------------------------------------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share:
authorized 20,000,000 shares; issued
3,290,223 on 3/31/03 and 2,991,378 on
12/31/02 and 3/31/02, respectively 3,290 2,991 2,991
Preferred stock, par value $1 per share:
Authorized 10,000,000 shares, none issued - - -
Contributed capital 25,108 18,557 18,554
Retained earnings 5,974 12,261 10,303
Treasury stock, 9,289, 8,450 and
8,180 shares at 3/31/03, 12/31/02
and 3/31/02, respectively (161) (161) (147)
Accumulated other comprehensive income 969 1,108 730
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 35,180 34,756 32,431
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $427,410 $437,598 $379,772
================================================================================
See the condensed notes to the consolidated financial statements.
3
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
($ in thousands, except share data) 2003 2002
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $5,042 $4,983
Investment securities:
Taxable 504 724
Non-taxable 93 109
Deposits with banks 10 6
Federal funds sold 28 16
- --------------------------------------------------------------------------------
Total interest income 5,677 5,838
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,411 1,922
Federal Home Loan Bank advances 255 257
Other borrowings 67 69
- --------------------------------------------------------------------------------
Total interest expense 1,733 2,248
- --------------------------------------------------------------------------------
NET INTEREST INCOME 3,944 3,590
Provision for loan losses 270 156
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,674 3,434
- --------------------------------------------------------------------------------
OTHER INCOME
Trust Fees 92 84
Service charges on deposit accounts 406 325
Mortgage origination fees 383 240
Other income 121 104
- --------------------------------------------------------------------------------
Total other income 1,002 753
- --------------------------------------------------------------------------------
OTHER EXPENSE
Salaries and employee benefits 1,858 1,537
Occupancy expense 204 183
Equipment expense 209 179
Other operating expenses 807 780
- --------------------------------------------------------------------------------
Total other expense 3,078 2,679
- --------------------------------------------------------------------------------
Income before provision for income taxes 1,598 1,508
Provision for income taxes 521 479
- --------------------------------------------------------------------------------
NET INCOME $1,077 $1,029
================================================================================
NET INCOME PER SHARE:
Basic $ 0.33 $ 0.31
================================================================================
Diluted $ 0.32 $ 0.31
================================================================================
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, 2001 2,991,378 $2,991 $18,754 $9,751 $(457) $ 1,032 $32,071
Comprehensive income:
Net income 1,029 1,029
Change in unrealized gains on
securities available for sale,
net of tax (302) (302)
-------
Total comprehensive income 727
Cash dividends - $.145 per share (477) (477)
Exercise of options (200) 310 110
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 2,991,378 $2,991 $18,554 $10,303 $(147) $ 730 $32,431
=======================================================================================================================
Balance, December 31, 2002 2,991,378 $2,991 $18,557 $12,261 $(161) $ 1,108 $34,756
Comprehensive income:
Net income 1,077 1,077
Change in unrealized gains on
securities available for sale,
net of tax (139) (139)
-------
Total comprehensive income 938
Cash dividends - $.155 per share (514) (514)
Ten percent stock dividend 298,845 299 6,551 (6,850) -
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 3,290,223 $3,290 $25,108 $5,974 $(161) $ 969 $35,180
=======================================================================================================================
See the condensed notes to the consolidated financial statements.
5
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE
THREE MONTHS ENDED
($ in thousands) MARCH 31,
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES 2003 2002
- --------------------------------------------------------------------------------
Net income $ 1,077 $ 1,029
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 270 156
Depreciation of premises and equipment 177 160
Amortization of investment securities discount-net 73 9
Decrease in other assets 269 19
Decrease in other liabilities (82) (173)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 1,784 1,200
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investment securities (7,190) -
Proceeds from maturities of investment securities 14,331 6,688
Net increase in loans made to customers (9,115) (13,087)
Capital expenditures (85) (71)
- --------------------------------------------------------------------------------
Net cash used in investing activities (2,059) (6,470)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand, savings
and money market deposits (7,032) 7,943
Net decrease in certificates of deposit (1,098) (3,593)
Net increase in securities sold under agreements
to repurchase 110 1,391
Net decrease in FHLB advances (44) (43)
Net decrease in federal funds purchased (2,444) (2,209)
Dividend payments (514) (477)
Exercise of options - 87
- --------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (11,022) 3,099
- --------------------------------------------------------------------------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (11,297) (2,171)
Cash and cash equivalents at beginning of period 41,726 22,233
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $30,429 $20,062
================================================================================
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 PERIOD
ENDING MARCH 31, 2003 AND 2002
(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 three-month period ended March, 2003, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003. 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, 2002.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", ("Interpretation No. 45"), which
addresses the accounting for and disclosures of guarantees. Interpretation No.
45 requires a guarantor to recognize a liability for the fair value of a
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee. The
disclosure requirements are effective for interim and annual financial
statements ending after December 15, 2002. (See Note 7, "Commitments and
Contingencies.") In accordance with Interpretation No. 45, the Company will
apply the initial recognition and measurement provisions on a prospective basis
for all guarantees within the scope of Interpretation No. 45 issued or modified
after December 31, 2002. This statement did not have a material impact on the
financial statements.
In January 2003, the FASB Issued Interpretation No. 46, "Consolidated
Financial Statements" ("Interpretation No. 46"), which addresses consolidation
by business enterprises of variable interest entities that have certain
characteristics. In general, Interpretation No. 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual return or both. An
entity that meets this definition is considered the "primary beneficiary".
Interpretation No. 46 requires disclosures about variable interest entities by
the primary beneficiary and an enterprise that holds significant variable
interests in a variable interest entity but is not the primary beneficiary.
Interpretation No. 46 provides for exceptions to the scope of this
interpretation including transfers to qualifying special purpose entities
subject to the reporting of Statement No. 140, which would not be consolidated.
Interpretation No. 46 applies immediately to variable interest entities created
7
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after January 31, 2003. Interpretation No. 46 applies in the
first fiscal year, or interim period, beginning after June 15, 2003 to variable
interests entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. This statement did not have a material impact
on the 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.
NOTE 3 - SHARES USED IN COMPUTING NET INCOME PER SHARE
The Board of Directors declared a 10 percent stock dividend on January 28, 2003.
The record date for distribution of the stock dividend was February 10, 2003 and
the payable date was February 24, 2003. 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 3,337,000 and 3,321,000 for the first quarters of
2003 and 2002, respectively. They included approximately 56,000 and 43,000
common equivalent shares in 2003 and 2002, respectively.
NOTE 4 - ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company did not issue any options in the first quarter 2003 or 2002
and therefore no impact on reported results.
The Company has one stock-based employee compensation plan. As permitted by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123), the Company accounts for the plan under the
recognition and measurement principles of Accounting Principles Board Statement
No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and its
related interpretations. Because all options granted under the Company's plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant, no stock-based compensation cost is reflected in net
income under the Company's application of APB 25. Additionally, the Company did
not issue any options to non-employees for the three months ended March 31, 2003
or March 31, 2002, respectively.
8
The following table presents the effects on net income and net income per share
if the Company had recognized compensation expense under the fair value
recognition provisions of Statement No. 123:
For the Three Months Ended
March 31,
--------------------------
2003 2002
------ ------
Net Income - as reported $1,077 $1,029
Stock-based employee compensation expense,
determinedunder fair value basis, net of tax (26) (23)
------ ------
Net Income - pro forma $1,051 $1,006
====== ======
Net Income per share - basic - as reported $ 0.33 $ 0.31
Net Income per share - basic - pro forma $ 0.32 $ 0.31
Net Income per share - diluted - as reported $ 0.32 $ 0.31
Net Income per share - diluted - pro forma $ 0.31 $ 0.30
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; competitors' products and services; 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.
9
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 March 31, 2003 and December 31, 2002 and results of operations for
the quarters ended March 31, 2003 and 2002, the following analysis should be
reviewed along with other information including the Company's December 31, 2002
Annual Report on Form 10-K.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FIRST QUARTER FINANCIAL HIGHLIGHTS
MARCH 31, 2003 AND 2002
(Unaudited)
BALANCE SHEET DATA Percent
AT MARCH 31 2003 2002 Change
- --------------------------------------------------------------------------------
( thousands, except per share data)
Total assets $427,410 $379,772 13
Interest-earning assets 402,857 359,015 12
Loans 345,847 297,651 16
Allowance for loan losses 4,600 3,923 17
Nonperforming assets 2,271 490 363
Deposits 354,914 313,973 13
Interest-bearing liabilities 327,126 291,749 12
Shareholders' equity 35,180 32,431 8.5
Allowance for possible
loan losses to total loans 1.33% 1.32% 0.8
Loan to deposit ratio 97.45% 94.80% 2.8
Equity to assets 8.23% 8.54% (3.6)
Tier 1 capital to risk-
weighted assets 9.92% 10.71% (7.4)
Book value per share * $ 10.72 $ 9.88 8.5
Outstanding shares * 3,281 3,282 0.0
Market value per share * $ 22.80 $ 18.42 24
KEY PERFORMANCE DATA Percent
FOR THE FIRST QUARTER 2003 2002 Change
- --------------------------------------------------------------------------------
NET INCOME $ 1,077 $ 1,029 4.7
Return on average assets 1.04% 1.11% (0.6)
Return on average equity 12.49% 12.88% (3.1)
Net interest margin 4.06% 4.17% (2.6)
Efficiency ratio 62.23% 61.69% .9
PER SHARE DATA: *
Net income - basic $ 0.33 $ 0.31 6.5
Net income - diluted $ 0.32 $ 0.31 3.2
Dividends $ 0.155 $ 0.145 6.9
AVERAGE SHARES: *
Basic 3,281 3,278 0.1
Diluted 3,337 3,321 0.5
* - 2002 restated for a 10 percent stock dividend in February, 2003
10
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
HISTORICAL NET INCOME, SHARE AND PER SHARE DATA
RESTATEMENT FOR 5 YEARS AND 5 QUARTERS
(thousands, except per share data)
(UNAUDITED)
The following tables show per share information for the most recent 5 years and
5 quarters. Share and per share information have been restated to reflect the
effect of a 10 percent stock dividend with a record date of February 10, 2003,
an ex-dividend date of February 6 and a distribution date of February 24.
FOR THE MOST RECENT FIVE YEARS
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Net income $ 4,508 $ 4,358 $ 4,292 $ 3,533 $ 2,626
AVERAGE SHARES
Basic 3,280 3,254 3,272 3,272 3,220
Diluted 3,328 3,312 3,325 3,352 3,340
NET INCOME PER SHARE
Basic $ 1.37 $ 1.34 $ 1.31 $ 1.08 $ 0.82
Diluted $ 1.35 $ 1.32 $ 1.29 $ 1.05 $ 0.79
Dividends per share $ 0.61 $ 0.56 $ 0.47 $ 0.38 $ 0.28
MARKET PRICE PER COMMON SHARE
High $ 22.10 $ 22.73 $ 17.98 $ 20.66 $ 25.62
Low 17.73 15.50 14.05 15.70 17.36
Close 19.06 18.55 15.91 16.28 21.49
AT DECEMBER 31
Shareholders' equity $34,756 $32,071 $28,656 $25,231 $24,475
Outstanding shares 3,281 3,263 3,261 3,278 3,246
Book value per share $ 10.59 $ 9.83 $ 9.66 $ 8.46 $ 7.54
(continued)
11
(continued)
FOR THE MOST RECENT FIVE QUARTERS
2003 2002
------- -------------------------------------
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
NET INCOME $ 1,077 $ 1,153 $ 1,192 $ 1,134 $ 1,029
AVERAGE SHARES
Basic 3,281 3,281 3,281 3,282 3,278
Diluted 3,336 3,329 3,329 3,330 3,322
NET INCOME PER SHARE
Basic $ 0.328 $ 0.351 $ 0.363 $ 0.345 $ 0.314
Diluted 0.323 0.346 0.358 0.341 0.310
Dividends per share 0.155 0.155 0.155 0.155 0.145
MARKET PRICE PER COMMON SHARE
High $ 24.00 $ 20.69 $ 22.10 $ 22.00 $ 18.64
Low 18.85 18.36 17.73 18.35 17.73
Close 22.80 19.06 19.86 22.00 18.42
AT QUARTER-END
Shareholders' equity $35,180 $34,756 $34,230 $33,409 $32,431
Outstanding shares 3,281 3,281 3,281 3,281 3,282
Book value per share $ 10.72 $ 10.59 $ 10.43 $ 10.18 $ 9.88
12
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 $9.1 million in the first three months
2003 was funded primarily by net proceeds of $7.1 million of investment
securities. Approximately $16 million of temporary public fund deposits in the
December 31, 2002 deposit balances were not in the March 31, 2003 balances.
The Company has classified all investment securities as available for sale.
During the first three months of 2003, U.S. Treasury market rates have fallen
15-20 basis points for two-year bonds. The two-year rates have fallen 125-150
basis points from the first quarter 2002 causing an increase in net unrealized
gains on available for sale securities. These amounts are included in
shareholders' equity at March 31, 2003 and 2002 and December 31, 2002,
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, 2001 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.
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 March 31, 2003. 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
nonperforming loans, known loan deteriorations, and concentrations of credit.
Other factors affecting the allowance are market interest rates, portfolio
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.
13
Management maintains an allowance for loan losses which it believes is 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 or credits 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, 2002 and the
Georgia Department of Banking and Finance as of March 31, 2003.
The allowance for loan losses totaled $4.600 million, or 1.33 percent of
total loans, at March 31, 2003. This is compared to an allowance of $4.373
million, or 1.30 percent of total loans, at December 31, 2002. For the three
months ended March 31, 2003, the Company reported net charge-offs of $43,000, or
0.05 percent (annualized) of average loans. This is compared to net charge-offs
of $59,000, or 0.08 percent (annualized) of average loans, for the comparable
period of 2002. Provision for loan losses of $270,000 was added to the allowance
for loan losses due to higher levels of non-performing assets and the 16 percent
growth in the loan portfolio as compared to the prior year.
The Company's nonperforming assets consist of other real estate owned, loans on
nonaccrual basis and loans which are contractually past due 90 days or more on
which interest is still being accrued. Other real estate owned of $117,000
consists of one foreclosed property at March 31, 2003 and $0 at March 31, 2002.
Nonaccrual loans and loans past due 90 days and greater totaled $2,154,000, or
0.62 percent of gross loans, at March 31, 2003 compared to $490,000, or 0.16
percent of gross loans, at March 31, 2002. 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. The increase in nonaccrual loans is
attributable to one SBA enhanced credit for $1,597,000 being placed in
nonaccrual status in the fourth quarter of 2002, for which the Company
anticipates no significant loss.
14
Impaired loans under Statement of Financial Accounting Standards 114, which
were on non-accrual status, totaled $2,078,000 and $405,000 at March 31, 2003
and 2002, 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 March 31, 2003, the subsidiary banks exceed the minimum requirements
necessary to be classified as "well-capitalized."
Total equity capital for the Company is $35.2 million, or 8.73 percent of total
assets at March 31, 2003. Tier 1 Capital is 9.92 percent of Risk-Weighted Assets
at the same date. The strong capital and earnings ratios allow the Company to
continue its aggressive growth objectives.
15
RESULTS OF OPERATIONS
FIRST QUARTER 2003 COMPARED WITH FIRST QUARTER 2002
Net income for the first quarter 2003 was $1,077,000, up 4.7 percent from
$1,029,000 in the first quarter 2002. This represents annualized returns of
12.49 percent on average equity and 1.04 percent on average assets for the first
quarter, 2003. Diluted earnings per share were 32 cents in the first quarter,
2003 compared to 31 cents for the same period in 2002, an increase of 3.2
percent. Earnings per share was restated in 2002 to reflect a 10 percent stock
dividend in February, 2003.
Net interest income was $3,944,000 as compared to $3,590,000 in 2002, an
increase of $354,000, or 9.9 percent. Average loans were $339.2 million, or 16
percent higher in the first quarter 2003 as compared $292.8 million in the first
quarter 2002. The average loan to deposit ratio increased to 97 percent in 2003
as compared to 95 percent in 2002. The prime rate remained at 4.75 percent
during the first quarter 2003. The net yield on interest earning assets
decreased to 4.06 percent in 2003 from 4.17 percent in 2002, as shown in Table
2, primarily as a result of the 50 basis point decline in the prime rate in
November 2002.
The provision for loan losses was $270,000 for the first quarter of 2003,
compared to $156,000 for the comparable period of 2002. Changes in the provision
each year are impacted as discussed under the "Allowance for Loan Losses"
section above. Loan growth was $9.1 million for the quarter ended March 31, 2003
and $13.0 million for the first quarter 2002.
Other operating income was $1,002,000 in 2003 compared to $753,000 in 2002, an
increase of $249,000 or 33 percent. Service charge on deposit accounts increased
$81,000 due to higher NSF charges and lower earnings credits on commercial
accounts. Other income included mortgage origination fees of $383,000 and
$240,000 in 2003 and 2002, respectively. Lower mortgage loan interest rates
caused increases in mortgage origination volumes and fees throughout the
industry. Trust income was $92,000 in the first quarter of 2003, compared to
$84,000 in the same period of 2002.
Other expenses were $3,078,000 in 2003 compared to $2,679,000 in 2002, an
increase of $399,000, or 15 percent. Personnel expense increased $321,000, or
20.9 percent in 2003. The Company operated in early 2002 with a number of
unfilled positions. Many of the positions were filled in the second quarter of
2002. Approximately $85,000 of salary and benefit increases are directly related
to commissions and benefits on additional mortgage loan origination fees of
$143,000. Increased occupancy and equipment expenses of approximately $51,000
include approximately $30,000 related to operations space leased in June 2002.
Depreciation expense on improvements and upgraded premises, hardware and
software comprise most the remaining increase. Although total other expenses are
significantly higher compared to the first quarter 2002 they are actually lower
than the fourth quarter 2002. This first quarter 2002 did not include the
additional space, two senior vice presidents or the higher levels of mortgage
commissions.
16
The provision for income taxes was $521,000 in 2003 and $479,000 in 2002. The
effective federal and state tax rates were 32.6 percent and 31.8 percent in 2003
and 2002, respectively. The increase in the effective rate was due primarily to
lower tax-exempt income on investments in 2003. 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.
ITEM 3. 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 first three months of 2003 loans increased $9.1 million to $345.8
million, and deposits decreased $8.1 million to $354.9 million. Approximately
$16 million of temporary public fund deposits in the December 31, 2002 deposit
balances were not in the March 31, 2003 balances. The very low deposit 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
97 percent at March 31, 2003 from 93 percent at December 31, 2002.
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 an 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 $57.1 million as of March 31, 2003. In
addition, the banks had approximately $5.7 million fair value of investment
securities pledged as collateral at the FHLB. In aggregate, the Company had
secured borrowing capacity of approximately $62.5 million of which $20.6 million
was advanced at March 31, 2003. 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 $24.5 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
17
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.
The Company's asset-sensitive cash flow maturity and repricing gap at March 31,
2003, was $47.5 million at one year, or 12 percent of total interest-earning
assets. Fixed rate earning assets with maturities over five years totaled $22.4
million, or 6 percent of total interest-earning assets. See Table 1 for cash
flow maturity and repricing gap.
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 enhancing
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
March 31, 2003, the Company had unfunded commitments to extend credit of $75.8
million and outstanding stand-by letters of credit of $5.3 million. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in establishing commitments and issuing
letters of credit as it does for on-balance sheet instruments. Management does
not anticipate that funding obligations arising from these financial instruments
will adversely impact its ability to fund future loan growth or deposit
withdrawals.
18
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING DATA
The following is the long-term maturity and repricing data for the Company as of
March 31, 2003:
($ 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 $ - $ 3,600 $ 6,403 $ 18,027 $ 3,578 $ 14,290 $ 45,898
Interest-bearing deposits 2,662 - - - - - 2,662
Federal funds sold 10,528 - - - - - 10,528
Loans - fixed rates - 19,096 43,396 74,059 24,738 8,138 169,427
Loans - variable rates 174,342 - - - - - 174,342
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets 187,532 22,696 49,799 92,086 28,316 22,428 402,857
--------- --------- --------- --------- --------- --------- ---------
INTEREST BEARING DEPOSITS:
NOW and savings ** 16,675 8,338 25,014 33,352 - - 83,379
Money market accounts ** 20,492 6,641 20,493 20,493 - - 68,119
Time, $100 and over - 14,531 30,968 8,219 6,341 - 60,059
Other time - 16,002 38,519 16,294 9,477 36 80,328
Federal Home Loan Bank Advances - 63 152 15,445 1,398 3,523 20,581
Other borrowings 14,660 - - - - - 14,660
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 51,827 45,575 115,146 93,803 17,216 3,559 327,126
--------- --------- --------- --------- --------- --------- ---------
GAP-EXCESS ASSETS (LIABILITIES) 135,705 (22,879) (65,347) (1,717) 11,100 18,869 75,731
--------- --------- --------- --------- --------- --------- ---------
GAP-CUMULATIVE - 3/31/03 $135,705 $112,826 $ 47,479 $ 45,762 $ 56,862 $ 75,731 $ 75,731
========= ========= ========= ========= ========= ========= =========
CUMULATIVE SENSITIVITY RATIO * 3.62 2.16 1.22 1.15 1.18 1.23 1.23
========= ========= ========= ========= ========= ========= =========
* 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.
19
SELECTED STATISTICAL INFORMATION OF THE COMPANY
The following statistical information is provided for the Company for the
quarter ended March 31, 2003 and 2002. 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 - FIRST QUARTER 2003
AND 2002
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 quarter of 2003 and 2002.
(a) Variance
Average Balance Average Rate Interest Attributable to
------------------- ---------------- ---------------- Vari- ---------------
2003 2002 2003 2002 2003 2002 ance Rate Volume
-------- -------- ------ ------ ------ ------ ------ ------ ------
( $ in Thousands) (%) TAXABLE-EQUIVALENT (Thousands) (Thousands)
INTEREST INCOME AND FEES (B)
3,940 1,413 1.03 1.72 Interest-bearing deposits $ 10 $ 6 $ 4 $ (2) $ 6
41,111 50,228 4.97 5.85 Investments - taxable 504 724 (220) (108) (112)
7,571 8,768 9.00 8.65 Investments - non-taxable 168 187 (19) 8 (27)
9,494 3,939 1.20 1.65 Federal funds sold 28 16 12 (4) 16
339,217 292,778 6.03 6.90 Loans (c) 5,042 4,983 59 (631) 690
-------- -------- ------ ------ ------
401,333 357,126 5.81 6.72 Total int.-earning assets 5,752 5,916 (164) (738) 574
------ ------ ------
19,933 19,824 Non-earning assets
-------- --------
$421,266 $376,950 Total assets
======== ========
INTEREST EXPENSE
Deposits
68,922 53,497 0.34 .60 NOW accounts 58 79 (21) (34) 13
14,553 12,691 0.75 .99 Savings accounts 27 31 (4) (7) 3
64,462 49,427 1.22 1.88 Money market accounts 194 229 (35) (80) 45
60,179 60,451 3.32 4.45 CD's, $100M or more 492 664 (172) (170) (2)
80,673 81,966 3.22 4.55 Other time deposits 640 919 (279) (269) (10)
-------- -------- ------ ------ ------
Total interest-bearing
288,789 258,032 1.98 3.02 deposits 1,411 1,922 (511) (559) 48
20,594 20,806 5.02 5.01 FHLB advances 255 257 (2) 1 (3)
17,063 13,468 1.59 2.08 Other borrowings 67 69 (2) (16) 14
-------- -------- ---- ---- ------ ------ ------
Total interest-bearing
326,446 292,306 2.15 3.12 liabilities 1,733 2,248 (515) (575) 60
-------- -------- ---- ---- ------ ------ ------ ------ ------
57,919 49,837 Non-int bearing deposits
1,919 2,414 Other liabilities
34,982 32,393 Stockholders' equity
-------- --------
421,266 376,950 Liabilities and equity
======== ========
3.66 3.60 Interest rate spread
==== ==== Net interest income $4,019 $3,668 $ 351 $ (163) $ 514
====== ====== ====== ====== ======
4.06 4.17 Net interest margin
==== ====
74,887 64,820 Net earning assets
======= ========
Total average deposits
and average cost of
346,708 307,869 1.65 2.53 deposits
======= ======= ==== ====
98 % 95 % Average loan to deposit ratio
(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.
20
Item 4. - Controls and Procedures
CONCLUSION ABOUT THE EFFECTIVENESS OF DISCLOSURE
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
Disclose the conclusions of the registrant's principal executive officers and
principal financial officer, or persons performing similar functions, about the
effectiveness of the registrant's disclosure controls and procedures (as defined
in ss.ss.240.13a-14(c) and 240.15d-14(c)) based on their evaluation of these
controls and procedures as of a date within 90 days of the filing date of the
quarterly or annual report that includes the disclosure required by this
paragraph.
We, the certifying officers have disclosed, based on our most recent evaluation,
to the Company's auditors and the audit committee of the board of directors the
following items:
No significant deficiencies in the design or operation of internal controls
which could adversely affect the company's ability to record, process,
summarize, and report financial data have been identified.
No fraud that involves management or other employees who have a significant role
in the company's internal controls has been discovered.
Changes in Internal Controls
- ----------------------------
Disclose whether or not there were significant changes in the registrant's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
We, the certifying officers, indicate in this report that there were no
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to our evaluation completed on
March 31, 2003. There were no significant deficiencies and material weaknesses
that require corrective actions.
21
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 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.4 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 March 31, 2003.
Fourth Quarter 2002 Earnings Release - Regulation FD Disclosures.
22
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 5/12/03 /s/ Archie H. Davis
------ -------------------
Archie H. Davis -
President & CEO
Date 5/12/03 /s/ G. Mike Odom, Jr.
------ ---------------------
G. Mike Odom, Jr. -
Executive Vice President & COO
Date 5/12/03 /s/ Robert B. Briscoe
------ ---------------------
Robert B. Briscoe -
Chief Financial Officer
23