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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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
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(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)
912-629-6486
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b)
of the Exchange Act
Common, $1.00 Par Value Nasdaq National Market
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Securities registered under Section 12(g)
of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No_
Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
The aggregate market value of the voting and non-voting common equity at June
30, 2003 held by non-affiliates, based on the price of the last trade of $23.99
per share times 2,494,188 non-affiliated shares, was $59,836,000.
The Registrant's number of shares outstanding at February 27, 2004 was
3,281,977.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of February 27, 2004, the registrant had issued 3,290,223 and outstanding
3,281,977 shares of common stock.
Portions of the 2003 Annual Report to Shareholders of Registrant are
incorporated in Parts I, II and IV of this report. Portions of the Proxy
Statement of Registrant dated March 22, 2004 are incorporated in Part III of
this report.
REGISTRANT'S DOCUMENTS INCORPORATED BY REFERENCE
PART NUMBER AND ITEM
DOCUMENT INCORPORATED NUMBER OF FORM 10-K INTO
BY REFERENCE WHICH INCORPORATED
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Page F-24 Part II, Item 5, Market
of Registrant's 2003 Annual for Registrant's Common
Report to Shareholders Equity and Related Stockholder
Matters and Issuer Purchases
of Equity Securities
Page F-22 through F-34 of Part II, Item 6,
Registrant's 2003 Annual Selected
Report to Shareholders Financial Data
Pages F-22 through F-34 Part II, Item 7,
of Registrant's Management's Discussion
2003 Annual Report to and Analysis of Financial
Shareholders Condition and Results of
Operations
Page F-30 through F-32 of Part II, Item 7A, Quantitative
Registrant's 2003 Annual and Qualitative Disclosures
Report to Shareholders About Market Risk
Pages F-1 through F-21, Part II, Item 8,
of Registrant's 2003 Financial Statements and
Annual Report to Shareholders Supplementary Data
Pages 4 through 9, Part III, Item 10,
of Registrant's Proxy Directors and Executive
Statement in connection with Officers of the Registrant
its Annual Shareholders' Meeting
to be held April 29, 2004
("2004 Proxy Statement")
Pages 13 and 14, Part III, Item 11,
of Registrant's 2004 Proxy Statement Executive Compensation
Pages 4 through 8, and page 16 Part III, Item 12,
of Registrant's 2004 Proxy Statement Security Ownership of
Certain Beneficial Owners
and Management
Page 16 of Registrant's 2004 Proxy Part III, Item 13,
Statement Certain Relationships
and Related Transactions
Page 16 of Registrant's 2004 Proxy Part IV, Item 14. Principal
Statement Accountant Fees and Services
Pages F-4 through F-21 Part IV, Item 15,
of Registrant's 2003 Exhibits, Financial Statement
Annual Report to Shareholders Schedules and Reports on
Form 8-K
2
THE SAVANNAH BANCORP, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 5
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for the Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreement with Accountants
on Accounting and Financial Disclosure 21
Item 9A. Controls and Procedures 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Principal Accountant Fees and Services 22
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 23
Signature page 25
3
PART I
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
ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), 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
OUR BEHALF EXCEPT AS MAY BE REQUIRED BY OUR DISCLOSURE OBLIGATIONS IN FILINGS WE
MAKE WITH THE SEC UNDER FEDERAL SECURITIES LAWS.
4
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
General
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The Savannah Bancorp, Inc. (the "Company") was incorporated as a Georgia
business corporation on October 5, 1989, for the purpose of becoming a bank
holding company by acquiring all of the common stock of The Savannah Bank,
National Association, Savannah, Georgia (the "Savannah Bank"). The Company
became a bank holding company within the meaning of the Federal Bank Holding
Company Act (the "Act") and the Georgia Bank Holding Company Act (the "Georgia
Act") upon the acquisition of 100 percent of the common stock of Savannah Bank
on August 22, 1990.
In February 1998, the Company entered into a plan of merger to exchange shares
of its stock for shares of Bryan Bancorp of Georgia, Inc. ("Bryan"), the bank
holding company for Bryan Bank & Trust ("Bryan Bank"). The transaction was
valued at approximately $24 million. The merger, which was accounted for as a
pooling of interests, was a tax-free reorganization for federal income tax
purposes. The merger was consummated on December 15, 1998. Bryan was merged into
the Company and Bryan Bank became a wholly-owned subsidiary of the Company on
the merger date.
The Savannah Bank, N.A. and Bryan Bank & Trust (the "Subsidiary Banks")
currently are the sole operating subsidiaries of the Company. The Savannah Bank
received its charter from the Office of the Comptroller of the Currency (OCC) to
commence business and opened for business on August 22, 1990. Bryan Bank & Trust
received its charter from the Georgia Department of Banking and Finance (the
"GDBF") in December 1989. The deposits at the Subsidiary Banks are insured by
the Federal Deposit Insurance Corporation (the "FDIC").
In October 2003, The Savannah Bank opened a mortgage loan production office on
Hilton Head Island, South Carolina. This office is approximately 30 miles from
downtown Savannah. This mortgage banking expansion opportunity includes the
hiring of a key manager, lenders and support personnel from other financial
institutions in the market, some of who have been impacted by regional bank
acquisitions in the market. In the aggregate, the lenders who have been hired
have substantial relationships with key customers and mortgage banking referral
sources in the Hilton Head market. Longer term plans include a full-service
banking office in the market after the charter requirements of South Carolina
have been met.
As of December 31, 2003, The Savannah Bank had five full service offices, one
loan production office, total assets of $344 million, total loans of $279
million, total deposits of $280 million, total stockholders' equity of $25.3
million and $3.1 million in 2003 net income. As of December 31, 2003, Bryan Bank
had one full service office, total assets of $132 million, total loans of $108
million, total deposits of $115 million, total stockholders' equity of $11.0
million and net income of $1.7 million for the year then ended.
(B) INFORMATION ABOUT INDUSTRY SEGMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are reviewed by the
chief operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is available. The
Company presently operates as two commercial banks offering traditional banking
services. Certain departmental revenues and asset and liability volumes are used
by executive management for performance and resource allocation purposes;
however, sufficient discrete financial information is not available for
presentation of segmented line of business financial information to
shareholders.
5
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is authorized to engage in any activity permitted by law to a
corporation, subject to applicable Federal regulatory restrictions on the
activities of bank holding companies. The Company was formed for the purpose of
becoming a holding company to own 100 percent of the stock of the Subsidiary
Banks. The holding company structure provides the Company with greater
flexibility than a bank would otherwise have to expand and diversify its
business activities through newly formed subsidiaries or through acquisitions.
While the Company has no present plans to engage actively in any nonbanking
business activities, management anticipates studying the feasibility of
establishing or acquiring subsidiaries to engage in other business activities to
the extent permitted by law.
BANKING SERVICES
The Subsidiary Banks have approximately 135 full-time and 20 part-time employees
and offer a full range of deposit services, including checking accounts, savings
accounts and various time deposits ranging from daily money market accounts to
longer-term certificates of deposit. The transaction accounts and time
certificates are tailored to the principal market areas at rates competitive to
those offered in the area. In addition, retirement accounts such as IRA
(Individual Retirement Account) and SEP (Simplified Employee Pension) accounts
are offered. The FDIC insures all deposit accounts up to the maximum amount
(currently $100,000 per account). The Subsidiary Banks solicit these accounts
from individuals, businesses, foundations, organizations, and governmental
authorities.
The Subsidiary Banks offer a full range of short-term and medium-term
commercial, real estate, residential mortgage and personal loans. The Subsidiary
Banks' primary lending focus is business, real estate and consumer lending.
Commercial loans include both secured and a limited volume of unsecured loans.
Consumer loans include secured loans for financing automobiles, home
improvements, real estate and other personal investments. Unsecured consumer
loans are limited and generally made to our most creditworthy borrowers. The
Subsidiary Banks originate fixed and variable rate mortgage loans and offer real
estate construction and acquisition loans.
The Subsidiary Banks' lending policies generally conform to supervisory
loan-to-value guidelines on real estate lending. Additionally, the existence of
a reliable source of repayment/cash flow is usually required before making any
loan, regardless of the security. Appraisals are obtained as required. Lending
officers or contract inspectors make on-site inspections on construction loans.
Loan exposures over $500,000 and $250,000 at Savannah Bank and Bryan Bank,
respectively, are reported to the appropriate Credit committee of each bank.
These committees approve loan exposures over $1,000,000 and $500,000, prior to
the loan being made at Savannah Bank and Bryan Bank, respectively. Generally,
lending relationships over $500,000 are reported to the full Board of Directors
of each bank. Higher lending limits for first mortgage residential loans were
implemented in the fourth quarter of 2003. In general, residential mortgage
loans of $500,000 and $350,000 or more at Savannah Bank and Bryan Bank,
respectively, require two executive officer approvals. Residential mortgage
loans over $1.5 million and $750,000 at Savannah Bank and Bryan Bank,
respectively, require prior approval of the applicable Credit committee.
Both management and the directors are aware that environmental liabilities may
negatively impact the financial condition of borrowers, the value of real
property and the contingent environmental clean-up liabilities the Subsidiary
Banks could incur by having a lien on environmentally deficient property. The
Subsidiary Banks generally decline to make loans secured by property with
environmental deficiencies. Environmental surveys are required when there is
reason for concern about potential environmental liabilities.
Both Subsidiary Banks operate residential mortgage loan origination departments.
The departments take mortgage loan applications, obtain rate commitments and
complete various origination documentation and follow-up for an origination and
service release fee from third-party mortgage bankers. In addition to generating
fee income, the department also generates banking relationships from its
customers and real estate-related contacts. These loans are funded by other
mortgage investors and have not been warehoused on the Subsidiary Banks' books.
The recent expansion of activities in the mortgage banking area include the
expertise to process, underwrite, close, warehouse, sell and service mortgage
loans originated and sold into the secondary market or held in the Subsidiary
Banks' portfolios. Increased fee income at origination and servicing fee income
over the life of the loan, offset by additional costs associated with the
expanded services, provide an excellent long-term source of net earnings.
6
Variation in mortgage origination volume, valuation of mortgage servicing assets
(MSAs) and the ongoing valuation of MSAs for impairment introduce the potential
for both positive and negative earnings volatility.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES
The Subsidiary Banks have a multi-faceted program designed to control and
continually monitor the credit risks inherent in the loan portfolios. This
begins with a structured loan approval process in which the Board of Directors
delegates authority for various types and amounts of loans to loan officers on a
basis commensurate with seniority and lending experience. The Subsidiary Banks
use an asset classification system that is consistent with the regulatory
classification system, which applies to all assets of an insured institution and
requires each institution to periodically classify its assets.
There are four risk grades of "criticized" assets: Special Mention, Substandard,
Doubtful and Loss. Assets designated as substandard, doubtful or loss are
considered "classified". The classification of assets is subject to regulatory
review and reclassification. The Subsidiary Banks include aggregate totals of
criticized assets, and general and specific valuation reserves in quarterly
reports to the Board of Directors, which approves the overall loan loss reserve
evaluation. The Subsidiary Banks' loan classification systems utilize both the
account officer and an independent loan review function to monitor the
classification of loans.
Account officers are charged with the responsibility of monitoring changes in
loan quality within his or her loan portfolio and reporting changes directly to
loan review and senior management. Additionally, the Subsidiary Banks have
contracted with an external loan review service which performs a review of the
Subsidiary Banks' loans to determine that the appropriate risk grade has been
assigned to each borrowing relationship along with other credit quality,
documentation and compliance factors. Delinquencies are monitored on all loans
as a basis for potential inclusion in general valuation reserves or, ultimately,
for potential charge-off. Loans that are delinquent 90 days (four payments) or
longer generally are placed on nonaccrual status unless the collectibility of
principal and accrued interest is assured beyond a reasonable doubt. In certain
cases, loans less than 90 days (four payments) delinquent are placed on
nonaccrual status when uncertainty exists as to the loan's collectibility. Real
estate acquired through foreclosure is classified as substandard unless there is
sufficient evidence to indicate such classification is not warranted.
The allowance for credit losses is evaluated as described in the MD&A section of
the 2003 Annual Report on pages F-26 and 27.
OTHER BANKING SERVICES
Savannah Bank was granted trust powers from the OCC in 1996. The Trust
Department uses a state of the art accounting system which includes the
capability to provide clients and their advisors with Internet access to view
their accounts. Employee benefit administration and certain money management
functions are outsourced to third parties. Using these resources, the Trust
Department offers a full array of trust services, including investment
management, personal trusts, custodial accounts, estate administration and
retirement plan asset management. The Trust Department contracts with Marshall &
Ilsley Trust Company to outsource trust data processing, securities safekeeping
and certain other operational functions.
The Subsidiary Banks offer cash management services, Internet access to account
data, a non-cash deposit courier service, safe deposit boxes, travelers checks,
direct deposit of payroll, U.S. Savings bonds, official bank checks and money
orders and automatic drafts for various accounts. The Subsidiary Banks have
seven automated teller machines in the area and are members of the STAR networks
of automated teller machines. The Subsidiary Banks issue ATM and debit cards and
offer VISA and MasterCard credit cards, which have a pre-authorized credit limit
for personal purchases and expenses, as an agent for a correspondent bank.
LOCATION AND SERVICE AREA
The Subsidiary Bank's primary service area is the city of Savannah, Chatham
County, the city of Richmond Hill, which is 20 miles southwest of downtown
Savannah, and Bryan County, Georgia. Its secondary service area is Effingham and
7
Liberty Counties, Georgia and Jasper County, South Carolina. The primary lending
service area has expanded to Hilton Head Island, South Carolina and surrounding
areas. The Subsidiary Banks' target customers are individuals and small to
medium sized businesses, including wholesale, retail and professional service
businesses in the community. The Subsidiary Banks also target individuals who
meet certain net worth and income requirements as potential customers for
private banking services.
The Savannah Bank's main office, known as the Johnson Square Office, is located
in the primary financial district in downtown Savannah, where most of the
commercial banks in the primary service area have their main Savannah offices.
In recent years, regional banks with headquarters outside of the state of
Georgia have acquired several of the banks in the primary service area. The
Savannah Bank emphasizes that it is based in Savannah and that its directors and
officers are committed to the economic development of the Savannah area.
Bryan Bank's main office opened in December 1989 and is located in the primary
commercial area of the city of Richmond Hill. Two other community bank branch
offices and one grocery store branch office are located in Richmond Hill. Bryan
Bank has approximately 78 percent of the bank deposits in the Richmond Hill
market.
In October 1992, Savannah Bank opened its second office at 400 Mall Boulevard.
The Mall Boulevard Office is located in the primary commercial and retail
district in Savannah which includes a high concentration of professional and
service-related businesses.
In November 1995, Savannah Bank opened its third office, the West Chatham
Office, at 100 Chatham Parkway. West Chatham is a full service office located
six miles west of the main office location in a significant commercial and
industrial growth area of Chatham County.
In October 1997, the fourth office at 4741 Highway 80 East on Whitemarsh Island,
six miles east of the main office, opened for business. Deposits, mortgage loans
and consumer loans are the primary opportunities for this location that serves a
large concentration of higher net worth individuals as well as a young adult
population in apartments and first homes.
In October 1998, Savannah Bank opened its fifth Savannah location in the Medical
Arts Shopping Center. This office is strategically located near two major
hospitals and numerous medical, dental and professional practices. This location
is approximately four miles southeast of the main office.
In May, 2002, the Company opened an operations center occupying 5,000 square
feet of office space at 450 Mall Boulevard, adjacent to Savannah Bank's existing
branch office at 400 Mall Boulevard. The image item processing, statement
rendering, information technology, deposit operations and branch operations
support functions are located at this center. These functions work closely
together and their relocation from different offices to one location provides an
environment and opportunity for significant service enhancements, efficiencies
and synergies.
In October 2003, Savannah Bank opened a mortgage loan production office on
Hilton Head Island, SC which operates as Harbourside Mortgage Company, a
division of The Savannah Bank, N.A. This office is located at 23C Shelter Cove
Lane in a commercial and retail area of the island. Management anticipates that
Harbourside will move into larger permanent space near its present location in
the fourth quarter 2004.
The Subsidiary Banks' business plans rely principally upon local advertising and
promotional activity and upon personal contacts by its directors, officers and
stockholders to attract business and to acquaint potential customers with the
Subsidiary Banks' personalized services. Both Subsidiary Banks emphasize a high
degree of personalized customer service. Advertising and marketing emphasize the
advantages of dealing with an independent, locally-owned, relationship-oriented
bank to meet the particular needs of individuals, professionals and small to
medium-size businesses in the community. The profitability of all banking
products and services is evaluated periodically.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Assets of the Subsidiary Banks consist primarily of loans and an investment
portfolio. In an effort to maintain adequate levels of liquidity and minimize
declines in the net interest margin, the maturity and rate sensitivity of the
loan and investment portfolios is compared to the maturity and rate sensitivity
of the liabilities. Various short-term and long-term strategies and actions to
meet short-term and long-term objectives are considered by the company Executive
8
Management Asset-Liability Committee (ALCO Committee). Actions and strategies
are recommended by the ALCO Committee to the subsidiary bank board committees
responsible for oversight of the asset-liability management of each bank.
Quantitative disclosures regarding liquidity management are included on pages
F-30 to F-34 of the Company's 2003 Annual Report to Shareholders (2003 Annual
Report).
Both banks have been able to fund loan growth primarily with local deposits in
the past. However, higher anticipated loan volumes for 2004, generated by the
new Harbourside loan production office, create the need to issue time deposits
through brokers to fund much of the loan growth.
In the first quarter of 2004, Savannah Bank began purchasing time deposits
through brokers. The bank's asset size (over $300 million), well-capitalized
status and favorable industry rankings allow it to meet the minimum credit
quality standards for virtually all investors in brokered time deposits. This
position allows the bank to obtain brokered time deposit funding at the lower
end of the interest cost range for the various maturities.
Quarterly loan growth and funding projections for each bank are reviewed and
approved by the ALCO Committee and reported to the appropriate bank board
committees. Actual variances from quarterly plans are monitored between meetings
by executive management and reported quarterly or more frequently when necessary
to the bank board committees.
Although the objective of asset-liability management is to provide adequate
funding for asset growth at the lowest cost within the interest rate risk
parameters approved by the Board, unexpected changes in market rates,
competition, personnel and customer responses to these changes may cause
significant variances in volumes and rates.
The Company has no investment risk in off-balance sheet derivative investments.
INTEREST RATE RISK
Interest rate risk is a measure of exposure to changes in net interest income or
the theoretical market value of portfolio equity due to changes in market
interest rates. The differential between interest rate sensitive assets and
interest rate sensitive liabilities over a specified period of time (known as
"gap") represents a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of rate sensitive assets over
rate sensitive liabilities, while a negative gap indicates an excess of rate
sensitive liabilities over rate sensitive assets. Quantitative discussion of the
Company's interest rate risk is included on pages F-30 to F-34 in the 2003
Annual Report.
The Subsidiary Banks operate within parameters established by an interest rate
risk policy with oversight by the ALCO Committee, which makes quarterly reports
and recommendations to the Credit/ALCO Committee at Savannah Bank and the
Executive Committee at Bryan Bank. The policy outlines limits on interest rate
risk in terms of changes in net interest income and changes in the net market
values of assets and liabilities resulting from certain changes in the interest
rate environment. These measurements are made through cash flow and repricing
analyses which project the impact of changes in interest rates on the Subsidiary
Banks' assets and liabilities. Additionally, the committees may set other
interest rate risk objectives. The policy also outlines responsibility for
monitoring interest rate risk and the process for the approval, implementation
and monitoring of interest rate risk strategies to achieve the Company's
interest rate risk objectives.
FEDERAL AND STATE LAWS AND REGULATION OF BANKS AND BANK HOLDING COMPANIES
Bank holding companies and banks are extensively regulated under both federal
and state law. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable law or
regulation may have a material effect on the business of the Company and its
subsidiaries.
9
Savannah Bank is subject to extensive supervision and regulation by the OCC, and
Bryan Bank is subject to extensive supervision by the GBDF and the FDIC. The
regulators are responsible for overseeing the affairs of all banks and
periodically examining banks to determine their compliance with laws and
regulations. Banks must make quarterly call reports of their financial condition
and results of operations to the FDIC. The FDIC reviews the call report
information for accuracy, consistency and reasonableness. Quarterly Call Report
financial information is made available to regulators and the public
approximately 45 days after each quarter-end. Regulators use this data for
quarterly offsite monitoring of the financial condition of banks. Quarterly
holding company reports are filed with the Federal Reserve Bank of Atlanta (FRB)
within 45 days of each quarter-end. This financial information is reviewed by
the FRB for accuracy, consistency and reasonableness and is also made available
to holding company database providers within 75 days of the end of each quarter.
Bank analysts, regulators and consultants regularly use this information in
analyzing historical and expected performance of banks and bank holding
companies.
In addition, the regulators have authority to issue cease and desist orders
against banks and bank holding companies which are about to engage, are engaging
or have engaged in an unsafe or unsound practice in the conduct of their
business. The regulators can order affirmative action to correct any harm
resulting from a violation or practice, including, but not limited to, making
restitution and providing reimbursement or guarantees against loss in certain
cases. Regulators also administer several federal statutes such as the Community
Reinvestment Act and the Depository Institution Management Interlocks Act, which
apply to banks. The Subsidiary Banks are subject to special examination by the
FDIC and to certain FDIC regulations.
Regulators have adopted risk-based capital requirements that specify the minimum
level for which no prompt corrective action is required. In addition, the FDIC
adopts FDIC insurance assessment rates based on certain risk-based and equity
capital ratios. The table in Note 12 of the Notes to the Consolidated Financial
Statements in the 2003 Annual Report shows the capital ratios for the Company,
and the regulatory minimum capital ratios at December 31, 2003. The capital
ratios of the Company and each Subsidiary Bank exceeded the ratios required to
be considered "well-capitalized" by the FDIC.
A national banking association is insured by the FDIC and must be a member of
the Federal Reserve System. Therefore, the Subsidiary Banks are subject to
applicable provisions of the Federal Reserve Act which restrict the ability of
any national bank to extend credit to its parent holding company. Additionally,
a national banking association cannot extend credit to any affiliate (including
its parent and non-bank subsidiaries of its parent) to purchase the assets
thereof, to issue a guarantee, acceptance or letter of credit (including an
endorsement or standby letter of credit) to its affiliates, or to invest in the
stock or securities thereof or, under certain circumstances, take such stock or
securities as collateral for loans to any borrower.
Stockholders of banks (including bank holding companies which own stock in
banks, such as the Company) may be compelled by bank regulatory authorities to
invest additional capital in the event their bank's capital becomes impaired by
losses or otherwise. Failure to pay such an assessment could cause a forced sale
of the holder's bank stock. In addition, the Company may also be required to
provide additional capital to any additional banks that it acquires as a
condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
The earnings of the Subsidiary Banks and, consequently of the Company, are
affected significantly by the policies of the Federal Reserve Board, which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the rate
paid by banks on bank borrowings, changes in reserve requirements against bank
deposits and limitations on interest rates that banks may pay on time and
savings deposits. These techniques are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future.
In view of changing conditions in the national economy and money markets, as
well as the effect of actions by monetary and fiscal authorities, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand or the business and earnings of the Company and the Bank.
10
The Company, as a bank holding company, is required to register as such with the
Federal Reserve Board and the Georgia Department of Banking and Finance. It is
required to file with both of these agencies quarterly and annual reports and
other information regarding its business operation and those of its
subsidiaries. It is also subject to examination by these two agencies and will
be required to obtain their approval before acquiring directly or indirectly,
ownership or control of any voting shares of a bank or bank subsidiary of a bank
holding company if, after such acquisition, it would own or control directly or
indirectly, more than five percent of the voting stock of such bank or banking
subsidiary of a bank holding company. Furthermore, a bank holding company is
prohibited from acquiring direct or indirect ownership or control of any voting
stock of any company which is not a bank or bank holding company, with limited
exceptions. It must engage only in the business of banking or managing or
controlling banks or furnishing services to or performing services for its
subsidiary banks. During 1996, the Federal Reserve Board enacted regulations
that are slightly less restrictive of the types of businesses which bank holding
companies may own.
The Gramm-Leach-Bliley Act ("the Act"), formerly known as the Financial
Modernization Act was enacted on November 12, 1999. The statute is the most
sweeping financial services legislation enacted in decades. It repealed
depression-era laws and eliminated the barriers preventing affiliations among
banks, insurance companies, and securities firms. Key provisions to the Act are
summarized in the following paragraphs.
Repeal of the Glass-Stegall Act - At its core, the Act repealed the
anti-affiliation provisions in sections 20 and 32 of the Banking Act of 1933
(also known as the Glass-Steagall Act) and amended provisions in the Bank
Holding Company Act of 1956 to permit financial companies to offer a broad array
of banking, insurance, securities, and other financial products, either through
financial holding companies ("FHCs") or through operating subsidiaries
qualifying under the Act.
In general, Congress decided to preserve the Federal Reserve's role as the
umbrella supervisor for holding companies. The Board will work, however, within
a system of functional regulation designed to take advantage of the traditional
strengths of the federal and state financial supervisors. In addition, the
legislation establishes a mechanism for coordination between the Federal Reserve
and Treasury regarding the approval of new financial activities for both holding
companies and national bank financial subsidiaries.
Banking organizations are prohibited under the Act from participating in new
financial affiliations unless their depository institution subsidiaries are
well-capitalized and well-managed. Regulators are required to address any
failure to maintain safety and soundness standards in a prompt manner. In
addition, regulators must prohibit holding companies from participating in new
financial affiliations if, at the time of certification, any insured depository
affiliate had received a less than "satisfactory" Community Reinvestment Act
("CRA") rating at its most recent examination.
Affiliation Authority - The Act amended section 4 of the Bank Holding Company
Act ("BHCA") to provide a new framework for engaging in new financial
activities. Those bank holding companies ("BHCs") that qualify to engage in the
new financial activities are designated as FHCs. New provisions of the BHCA
permit BHCs that qualify as FHCs to engage in activities, and acquire companies
engaged in activities that are financial in nature or incidental to such
financial activities. FHCs are also permitted to engage in activities that are
"complementary" to financial activities if the Board of Governors of the Federal
Reserve Bank ("FRB Board") determines that the activity does not pose a
substantial risk to the safety or soundness of the institution or the financial
system in general.
The FRB Board may act by either regulation or order in determining what
activities are financial in nature, incidental to financial in nature, or
complementary. In doing so, the FRB Board must notify the Treasury of requests
to engage in new financial activities and may not determine that an activity is
financial or incidental to a financial activity if Treasury objects.
Furthermore, Treasury may propose that the Board find a particular activity
financial in nature or incidental to a financial activity. The Act establishes a
similar procedure with regard to the Treasury's (acting through the Office of
the Comptroller of the Currency ("OCC")) determination of financial activities
and activities that are incidental to financial activities for subsidiaries of
national banks. Congress intends for the Federal Reserve and Treasury to
establish a consultative process that will negate the need for either agency to
veto a proposal of the other agency.
Federal Home Loan Bank Reform - The Act reformed the Federal Home Loan Bank
System, including greatly expanding the collateral that a community bank can
pledge against FHLB System advances, thus giving smaller banks access to a
11
substantial new liquidity source. FHLB members can also pledge small business
and agricultural loans (or securities representing a whole interest in such
loans) as collateral for advances.
Privacy - The Act imposed a number of new restrictions on the ability of
financial institutions - read as any entity offering financial products,
including banks, insurance companies, securities houses, and credit unions - to
share nonpublic personal information with nonaffiliated third parties.
Specifically, the bill:
o requires financial institutions to establish privacy policies and disclose
them annually to all their customers, setting forth how the institutions
share nonpublic personal financial information with affiliates and third
parties
o directs regulators to establish regulatory standards that ensure the
security and confidentiality of customer information
o permits customers to prohibit ("opt out" of permitting) such institutions
from disclosing personal financial information to nonaffiliated third
parties
o prohibits transfer of credit card or other account numbers to third-party
marketers
o prohibits pretext calling (that is, makes it illegal for
information brokers to call banks to obtain customer information with the
intent to defraud the bank or customer)
o protects stronger state privacy laws, as well as those not "inconsistent"
with these Federal rules
o requires the Treasury and other Federal regulators to study the
appropriateness of sharing information with affiliates, including
considering both negative and positive aspects of such sharing for
consumers.
The bill also imposes an affirmative obligation on banks to respect their
customers' privacy interests. Language protects a community bank's ability to
share information with third parties selling financial products (for example,
insurance or securities) to bank customers. Community banks can thus continue
such sales practices without being subject to the opt-out provisions contained
elsewhere in the legislation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act) has introduced a process that enables nationwide interstate
banking through bank subsidiaries and interstate bank mergers. Separately, the
Riegle-Neal Act also permits bank subsidiaries to act as agents for each other
across state lines. Since September 29, 1995, adequately capitalized and managed
bank holding companies have been permitted to acquire control of a bank in any
state. Any acquisitions are subject to concentration limits. Beginning June 1,
1997, banks were permitted to merge with one another across state lines. The
Interstate Banking Act also permits de novo branching to the extent that a
particular state "opts into" the de novo branching provisions. The legislation
preserves the state laws which require that a bank must be in existence for a
minimum period of time before being acquired as long as the requirement is five
years or less. This legislation has relevance for the banking industry due to
increased competitive forces from institutions which may consolidate through
mergers and those which may move into new markets through enhanced opportunities
to branch across state lines. Georgia and South Carolina do not have reciprocal
provisions for de novo charters which means holding companies and banks may not
charter state banks across the state line. The available alternatives include
acquiring a financial institution or potentially moving the charter of a
national bank within 35 miles of its headquarters.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provision of any property or service. Thus, a bank may not extend credit, lease
or sell property or furnish any service or fix or vary the consideration for
such on the condition that (i) the customer should obtain or provide some
additional credit, property or service from or to such bank (other than a loan,
discount, deposit or trust service related to and usually provided in connection
with a loan, discount, deposit or trust service), its bank holding company or
any other subsidiary of its bank holding company or (ii) the customer may not
obtain some other credit, property or service from a competitor, except to the
extent reasonable conditions are imposed in a credit transaction to assure the
soundness of the credit extended.
The Federal Reserve Board has cease and desist powers over parent bank holding
companies and non-banking subsidiaries should their actions constitute a serious
threat to the safety, soundness or stability of a subsidiary bank. The Company
is also subject to certain restrictions with respect to engaging in the business
of issuing, underwriting and distributing securities.
Although the Company is not presently subject to any direct regulatory
restrictions on dividends (other than those of Georgia corporate law), the
Company's long-term ability to pay cash dividends will depend on the amount of
dividends paid by the Subsidiary Banks and any other subsequently acquired
entities. OCC regulations restrict the amount of dividends which the Savannah
12
Bank may pay without obtaining prior approval. Based on such regulatory
restrictions, the Savannah Bank is limited from paying dividends in a calendar
year, which exceeds the current year's net income combined with the retained net
profits of the preceding two years. Bryan Bank is limited to paying 50 percent
of the prior year net income without getting approval from the GDBF. Banks also
have a financial advantage in the form of lower FDIC assessments if they are
classified as "well-capitalized" by the FDIC. Dividend payout plans of the
Subsidiary Banks will always consider maintaining their "well-capitalized"
classification an important objective. The Company's dividend payout ratio is at
the higher end of peer comparisons. Asset growth rate expectations are
significantly higher than historical growth rates. Continued increases in per
share dividend rates for the long-term are dependent upon the Company's ability
to increase earnings growth rates sufficiently to maintain capital ratios which
meet the well-capitalized minimums over the long-term.
Both Subsidiary Banks are members of the Federal Home Loan Bank ("FHLB") System,
which consists of 12 regional FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs maintain central credit
facilities primarily for member institutions. The Subsidiary Banks, as a member
of the FHLB of Atlanta, are required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to the greater of: (i) 1
percent of the aggregate outstanding principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations as of the
beginning of each year, (ii) 5 percent of its advances (borrowings) from the
FHLB of Atlanta, or (iii) $500,000. Additionally, the FHLB of Atlanta imposed a
maximum investment in its capital stock equal to $250,000 over the required
minimum. The Subsidiary Banks are in compliance with this requirement at
December 31, 2003.
Each FHLB serves as a reserve or central bank for its member institutions within
its assigned regions. It is funded primarily from proceeds derived from the sale
of obligations of the FHLB System. The FHLB makes advances (i.e., loans) to
members in accordance with policies and procedures established by its Board of
Directors. The Subsidiary Banks are authorized to borrow funds from the FHLB of
Atlanta to meet demands for withdrawals of deposits, to meet seasonal
requirements and for the expansion of its loan portfolio. Advances may be made
on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and the amount of previously
existing advances. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the regional FHLB and the purpose of the
borrowing.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires the federal bank
regulatory agencies to encourage financial institutions to meet the credit needs
of low- and moderate-income borrowers in their local communities. In May 1995,
the federal bank regulatory agencies published final amended regulations
promulgated pursuant to the CRA. The final regulations eliminate the 12
assessment factors under the former regulation and replace them with performance
tests. Institutions are no longer required to prepare CRA statements or
extensively document director participation, marketing efforts or the
ascertainment of community credit needs. Under the final rule, an institution's
size and business strategy determines the type of examination that it will
receive. Large, retail-oriented institutions will be examined using a
performance-based lending, investment and service test. Small institutions will
be examined using a streamlined approach. All institutions have the option of
being evaluated under a strategic plan formulated with community input and
pre-approved by the applicable bank regulatory agency.
CRA regulations provide for certain disclosure obligations. In accordance with
the CRA, each institution must post a CRA notice advising the public of the
right to comment to the institution and its regulator on the institution's CRA
performance and to review the CRA public file. Each lending institution must
maintain for public inspection a public file that includes a listing of branch
locations and services, a summary of lending activity, a map of its communities,
and any written comments from the public on its performance in meeting community
credit needs. Large institutions also are required to collect certain data,
including the amount and location of originated and purchased small business,
small farm, community development, and home mortgage loans, and to report this
data to their regulatory agencies.
Public disclosure of written CRA evaluations of financial institutions made by
regulatory agencies is required under the CRA. This promotes enforcement of CRA
requirements by providing the public with the status of a particular
institution's community reinvestment record. The Subsidiary Banks received a
"satisfactory" rating on the most recent performance evaluations of their CRA
efforts by their respective banking regulatory agencies.
13
Congress and various federal agencies responsible for implementing fair lending
laws have been increasingly concerned with discriminatory lending practices. In
1994, those federal agencies announced a Joint Policy Statement detailing
specific discriminatory practices prohibited under the Equal Opportunity Act and
the Fair Housing Act. In the Policy Statement, three methods of proving lending
discrimination were identified: (i) overt evidence of discrimination, where a
lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate
treatment, when a lender treats applicants differently based upon a prohibited
factor, even where there is no showing that the treatment was motivated by
intention to discriminate; and (iii) evidence of disparate impact, when a lender
applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral in appearance and
applied equally. Lenders are particularly uncertain about the application of the
"disparate impact" criteria by virtue of the vague nature of the Policy
Statement. The Policy Statement notes that "the precise contours of the law on
disparate impact as it applies to lending discrimination are under development."
RECENT BANKING LEGISLATION
Bills are presently pending before the United States Congress and certain state
legislatures, and additional bills may be introduced in the future in the
Congress and the state legislatures, which, if enacted, may alter the structure,
regulation and competitive relationships of the nation's financial institutions.
It cannot be predicted whether or in what form any of these proposals will be
adopted or the extent to which the business of the Company or the Subsidiary
Banks may be affected thereby.
Information-Sharing Between the Government and Financial Institutions and Among
Financial Institutions (U.S. PATRIOT ACT) - This federal legislation and the
resultant bank regulations require a financial institution to expeditiously
search its records to determine whether it maintains or has maintained accounts,
or engaged in transactions with individuals or entities, listed in a request
submitted by the Financial Crimes Enforcement Network (FinCEN). The records
search must cover current accounts, accounts opened in the prior twelve months,
and transactions conducted in the prior six months. Its purpose is to identify
funds or transactions with individuals associated with terrorist activities.
Substantial penalties and /or criminal prosecution may result from
non-compliance.
RECENT RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION
("SEC" OR "COMMISSION")
Certification of Disclosure in Companies' Quarterly and Annual Reports - As
directed by Section 302(a) of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules to require an issuer's principal executive and financial officers each to
certify the financial and other information contained in the issuer's quarterly
and annual reports. The rules also require these officers to certify that: they
are responsible for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls; they have made certain
disclosures to the issuer's auditors and the audit committee of the board of
directors about the issuer's internal controls; and they have included
information in the issuer's quarterly and annual reports about their evaluation
and whether there have been significant changes in the issuer's internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation. In addition, the SEC has adopted rules which
require issuers to maintain, and regularly evaluate the effectiveness of,
disclosure controls and procedures designed to ensure that the information
required in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported on a timely basis. The effective date of this
requirement was August 29, 2002. The Company has implemented procedures and
reporting tools to meet the requirements of the SEC certification rules.
Strengthening the SEC's Requirements Regarding Auditor Independence - The SEC
adopted amendments to its existing requirements regarding auditor independence
to enhance the independence of accountants that audit and review financial
statements and prepare attestation reports filed with the Commission. The final
rules recognize the critical role played by audit committees in the financial
reporting process and the unique position of audit committees in assuring
auditor independence. Consistent with the direction of Section 208(a) of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules to: revise the Commission's
regulations related to the non-audit services that, if provided to an audit
client, would impair an accounting firm's independence; require that an issuer's
audit committee pre-approve all audit and non-audit services provided to the
issuer by the auditor of an issuer's financial statements; prohibit certain
partners on the audit engagement team from providing audit services to the
issuer for more than five or seven consecutive years, depending on the partner's
involvement in the audit, except that certain small accounting firms may be
exempted from this requirement; prohibit an accounting firm from auditing an
14
issuer's financial statements if certain members of management of that issuer
had been members of the accounting firm's audit engagement team within the
one-year period preceding the commencement of audit procedures; require that the
auditor of an issuer's financial statements report certain matters to the
issuer's audit committee, including "critical" accounting policies used by the
issuer; and require disclosures to investors of information related to audit and
non-audit services provided by, and fees paid to, the auditor of the issuer's
financial statements. In addition, under the final rules, an accountant would
not be independent from an audit client if an audit partner received
compensation based on selling engagements to that client for services other than
audit, review and attest services. The rules are effective May 6, 2003.
Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 -
The SEC adopted rules and amendments requiring publicly traded companies to
include two new types of disclosures in their annual reports filed pursuant to
the Securities Exchange Act of 1934. First, the rules require a company to
disclose whether it has at least one "audit committee financial expert" serving
on its audit committee, and if so, the name of the expert and whether the expert
is independent of management. A company that does not have an audit committee
financial expert must disclose this fact and explain why it has no such expert.
Second, the rules require a company to disclose whether it has adopted a code of
ethics that applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. A company which has not adopted such a code must
disclose this fact and explain why it has not done so. A company also will be
required to promptly disclose amendments to, and waivers from, the code of
ethics relating to any of those officers. The Company posts its Corporate Code
of Business Ethics & Conduct, Audit Committee Charter and Nominating Committee
Charter on its Corporate Website located at www.savb.com.
Companies must comply with the code of ethics disclosure requirements
promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports
for fiscal years ending on or after July 15, 2003. They also must comply with
the requirements regarding disclosure of amendments to, and waivers from, their
ethics codes on or after the date on which they file their first annual report
in which the code of ethics disclosure is required. Companies similarly must
comply with the audit committee financial expert disclosure requirements
promulgated under Section 407 of the Sarbanes-Oxley Act in their annual reports
for fiscal years ending on or after July 15, 2003. The Nominating Committee of
the Board of Directors of the Company has nominated a new director who meets the
qualifications of a financial expert and who has agreed to serve as such if
elected at the 2004 Annual Shareholders Meeting to be held on April 29, 2004.
Various other legislative proposals are expected in Congress concerning the
banking industry. Given the uncertainty of the legislative process, management
cannot assess the effect any such legislation would have on the Company's
financial condition or results of operations.
COMPETITION
The banking business is highly competitive. Banks generally compete with other
financial institutions through the banking products and services offered, the
pricing of services, the level of service provided, the convenience and
availability of services, and the degree of expertise and the personal manner in
which services are offered. The Subsidiary Banks compete with other commercial
banks and savings and loan associations in their primary service areas.. In the
conduct of certain areas of its banking business, the Subsidiary Banks also
compete with credit unions, consumer finance companies, insurance companies,
money market mutual funds, brokerage firms and other financial institutions,
some of which are not subject to the same degree of regulation and restriction
imposed upon the Subsidiary Banks. Many of these competitors have substantially
greater resources and lending limits than the Subsidiary Banks and offer certain
services, such as international banking services, that the Subsidiary Banks do
not provide currently.
Many of these competitors have more branch offices in the Savannah Bank's
primary service area. However, the Company's plan is to expand into the markets
which will best serve its targeted customers. Management believes that
competitive pricing, local ownership, local decisions, local control and
personalized, relationship-oriented service provide the Subsidiary Banks with a
method to compete effectively for prospective customers.
The Subsidiary Banks generally benefit from regional bank mergers in the local
market and experience the most competition from new local community bank
entrants into the market area.
15
New entrants into the Savannah market include a de novo bank, which opened two
offices in Chatham County in 2002. Two branches of two non-local community banks
also opened in 2002. The presidents or city executives of these new competitors
were previously with banks who have merged into large regional banks. Other
banks have indicated interest in the coastal Georgia and South Carolina markets.
These new entrants have and will continue to increase the competition for
existing and new business.
Both Subsidiary Banks offer the full range of deposit services that is typically
available from financial institutions, including NOW, demand, savings, money
market and time deposit accounts. In addition, retirement accounts such as
Individual Retirement Accounts are available. All deposit accounts are insured
by the FDIC up to the maximum amount permitted by law.
Competition in the area of deposit growth is a substantial challenge facing the
banking industry and the Subsidiary Banks. It is likely that deposit growth in
competitive markets will require higher deposit interest rates. Higher costs of
funds without corresponding higher rates on earning assets will have a long-term
negative impact on net interest income. Higher market share growth on lower
costing core deposits, higher revenue growth on fee based services and lower
overhead growth rates are the key items required to accomplish the Company's
earnings growth objectives.
16
SELECTED STATISTICAL INFORMATION OF THE COMPANY
TABLE 1 - INVESTMENTS - WEIGHTED AVERAGE YIELDS BY MATURITY
The following table sets forth the amortized cost, fair value and tax-equivalent
yields by investment type and maturity category at December 31, 2003:
Taxable
Amortized Fair Equivalent
Cost Value Yield (a)
-------- -------- ----------
(Thousands) (%)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury, other U.S. Government
Agencies and mortgage-backed:
Within one year $11,293 $11,478 5.45
One year to five years 18,650 19,051 4.39
Five years to ten years 500 478 3.00
Over ten years 0 0 0.00
-------- -------- ----------
Total 30,443 31,007 4.76
-------- -------- ----------
Other interest-earning investments:
Within one year 250 256 8.00
One year to five years 4,369 4,619 6.54
Five years to ten years 888 930 6.99
Over ten years 2,247 2,278 4.95
-------- -------- ----------
Total 7,754 8,083 6.19
-------- -------- ----------
Total securities available-for-sale $38,197 $39,090 5.08
======== ======== ==========
(a) the yield is calculated on the amortized cost of the securities.
LOANS
The following tables set forth certain information regarding the Subsidiary
Banks' loan portfolio as of December 31, 2003 on a consolidated basis.
TABLE 2 - LOAN REPRICING OPPORTUNITIES
The following table sets forth certain loan maturity and repricing information
as of December 31, 2003. Loan renewals generally reprice relative to the prime
rate in effect at the time of the renewal. Management expects that certain real
estate mortgage loans that have maturities of one to three years with longer
amortization periods will renew at maturity.
After
($ in thousands) One One year Over
year Through Five
Loan Category or less Five years Years Total
------------- ---------- ---------- ---------- ----------
Real estate-construction and
development $63,340 $ 1,971 $ 3 $65,314
Commercial 21,536 5,598 476 27,610
---------- ---------- ---------- ----------
Total $84,876 $ 7,569 $ 479 $92,924
========== ========== ========== ==========
Loans with fixed rates $18,701 $ 7,569 $ 479 $26,749
Loans with floating and
adjustable rates 66,175 0 0 66,175
---------- ---------- ---------- ----------
Total $84,876 $ 7,569 $ 479 $92,924
========== ========== ========== ==========
17
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
At December 31, 2003 and 2002, nonperforming loans were $1,997,000 and $598,000,
respectively. Interest income of $7,000 and $0 was recognized from nonaccrual
loans in 2003 and 2002. At December 31, 2003, the Subsidiary Banks had $526,000
nonaccrual loans and had $72,000 in loans past due over 90 days.
Except for consumer loans, the Company's policy is to place a loan on nonaccrual
status when, in management's judgment, the collection of principal and interest
appears doubtful. Interest receivable accrued in prior years and subsequently
determined to have doubtful collectibility will be charged to the allowance for
possible loan losses. Interest on loans that are classified as nonaccrual is
recognized when received. In some cases, where borrowers are experiencing
financial difficulties, loans may be restructured to provide terms significantly
different from the original contractual terms.
LOAN CONCENTRATIONS
Most of the Subsidiary Banks' business activity is with customers located within
the Chatham, Bryan and Beaufort County area. As of December 31, 2003, the
Subsidiary Banks had a concentration of credit risk aggregating $227 million on
loans secured by real estate in these areas. The Subsidiary Banks have no
exposure to highly leveraged transactions and have no foreign credits in their
loan portfolios.
TABLE 3 - PROVISION FOR POSSIBLE LOAN LOSSES
Changes in the allowance for loan losses from 1999 through 2003 are summarized
as follows:
($ in thousands) 2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance at the beginning of the year $4,373 $3,826 $3,369 $2,794 $2,323
Charge-offs - Commercial (161) (67) (5) (33) (80)
Charge-offs - Consumer (112) (191) (167) (168) (78)
Charge-offs - Real estate (122) (35) (98) (63) (10)
------ ------ ------ ------ ------
Charge-offs - Total (395) (293) (270) (264) (168)
------ ------ ------ ------ ------
Recoveries - Commercial 7 11 29 21 30
Recoveries - Consumer 70 75 76 66 61
Recoveries - Real estate 12 4 17 7 3
------ ------ ------ ------ ------
Recoveries - Total 89 90 122 94 94
------ ------ ------ ------ ------
Net charge-offs (306) (203) (148) (170) (74)
------ ------ ------ ------ ------
Provision for loan losses 1,000 750 605 745 545
------ ------ ------ ------ ------
Balance at the end of the year $5,067 $4,373 $3,826 $3,369 $2,794
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans 0.13% 0.09% 0.06% 0.07% 0.04%
====== ====== ====== ====== ======
18
TABLE 4 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE The allowance for
loan losses is allocated by loan category based on management's assessment of
risk within the various categories of loans. The Company's allocation of the
allowance for loan losses based upon the amount deemed to be reasonably
necessary to absorb potential losses within each loan category is presented in
the following tables:
($ in thousands) % of % of % of % of % of
Total Total Total Total Total
Loan Categories 2003 Loans 2002 Loans 2001 Loans 2000 Loans 1999 Loans
- --------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Commercial $ 600 .16 $ 650 .19 $ 800 .28 $ 695 .28 $ 520 .25
Real estate - construction
and development 1,650 .43 1,450 .43 1,100 .39 825 .33 635 .31
Real estate - mortgage 1,300 .34 1,300 .39 1,100 .39 1,090 .44 993 .48
Installment and consumer 400 .10 500 .15 650 .22 550 .22 425 .21
Unallocated 1,117 .29 473 .14 176 .06 209 .08 221 .11
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses $5,067 1.31 $4,373 1.30 $3,826 1.34 $3,369 1.35 $2,794 1.36
====== ====== ====== ====== ======
The allowance for loan losses is based on estimates and is maintained at a level
considered adequate to provide for potential loan losses. The adequacy of the
allowance is based on management's continuing evaluation of the loan portfolio
considering current economic conditions, underlying collateral value securing
loans and other factors. Actual future losses may be different from estimates
due to unforeseen events. Loans, or portions thereof, which are deemed to be
uncollectible, will be charged against the allowance.
Loan loss reserves are determined based upon management's review of
nonperforming loans, delinquency trends, the level of rated assets and
historical loss trends. Additionally, management assesses national and local
economic trends and regulatory information to determine the impact of such
external factors on loan loss reserve levels. The Subsidiary Banks segregate
their loan portfolios by category (as shown in Table 4 above) and by credit risk
grade within each category. The allowance for loan losses is allocated to each
category by applying reserve percentages to each category. These percentages are
based upon management's assessment of risk inherent within each category and the
historical and anticipated loss rates within each category.
Although historically, there have been minimal losses in loans secured by real
estate, management has allocated additional reserves to these categories based
upon the large concentration of real estate loans, larger individual loan
amounts, a very competitive market for loan growth and rapidly rising property
valuations in recent years in certain segments of the market area which may not
be sustainable.
DEPOSITS
TABLE 5 - DEPOSIT AVERAGE BALANCES AND RATES PAID
The following table summarizes average balances of the Subsidiary Banks'
deposits on a consolidated basis and the average rates paid on such deposits
during 2003, 2002 and 2001.
2003 2002 2001
-------------------------------------------------
($ in thousands) Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
Non-interest-bearing demand $ 65,403 0.00% $ 55,250 0.00% $ 43,356 0.00%
Interest-bearing demand 75,952 0.37% 59,075 0.55% 52,542 1.47%
Savings deposits 15,626 0.61% 13,404 0.96% 11,741 2.03%
Money market deposits 66,472 1.16% 54,750 1.68% 40,478 3.15%
Time deposits 142,305 2.95% 144,334 3.97% 152,091 5.95%
-------- ----- -------- ----- -------- -----
Total $365,758 1.46% $326,813 2.17% $300,208 3.78%
======== ======== ========
19
ITEM 2. PROPERTIES
See Note 5 and Note 13 of Notes to Consolidated Financial Statements on page
F-13 and page F-18 of the Registrant's 2003 Annual Report to Shareholders, which
is specifically incorporated herein by reference.
The Savannah Bank's main office is located at 25 Bull Street, Savannah, Georgia
31401, on the ground floor and lower level of a seven story office building
located on Johnson Square in downtown Savannah. The Savannah Bank has leased
approximately 4,700 square feet on the main floor, and 2,000 square feet on the
lower level of the building under a five-year lease expiring in June 2009. In
November 1998, an additional 1,475 square feet of space was leased on the sixth
floor. This lease is also through June 2009. The rental costs increase by 3
percent of the gross rental amount each year during the initial five-year term
and thereafter in accordance with the Consumer Price Index. The Company is also
responsible for its pro rata share of utilities and janitorial services and
increases in the cost of ad volorem taxes and insurance.
In 1989, Bryan Bank constructed its 8,500 square foot two-story main office in
Richmond Hill, Georgia, on land owned by Bryan Bank. The building has a walk-up
ATM, a drive-up ATM and 4 drive-through lanes. All bank personnel are housed in
this location.
Savannah Bank leases approximately 6,500 square feet on the first floor of a
two-story building located at 400 Mall Boulevard, Savannah, Georgia. This space
is used for the Savannah Bank's branch location and the Mortgage and
Construction lending departments. The building is located near the corner of
Mall Boulevard and Hodgson Memorial Drive, a location that is convenient to a
significant concentration of commercial, service, and retail entities. The lease
rate increases with the Consumer Price Index. The initial lease term was for
five years and ended March 31, 1997. The Savannah Bank committed to exercise the
second five-year lease option in February 2002. There are three additional
five-year renewal options included in the terms. The Company is also responsible
for its prorata share of increases in the cost of ad volorem taxes, insurance
and maintenance of common areas. The bank renovated the space, constructed a
vault, and a five lane drive-through teller facility adjacent to the building.
During 1995, Savannah Bank entered into a five-year ground lease with nine
five-year renewal options on land located at 100 Chatham Parkway. The Savannah
Bank also has a right of first refusal to buy the property at appraised value
should the owner ever decide to sell the property. The location is at the
intersection of Chatham Parkway and U.S. Highway 80, a major commercial and
industrial intersection in west Chatham County. The Savannah Bank made land
improvements and constructed a 2,200 square-foot banking facility including four
drive-through lanes and an ATM drive-through lane. The West Chatham Office
opened for business on November 20, 1995.
In 1997, The Savannah Bank constructed a 2,300 square foot office on an out lot
owned in the Island Towne Centre Shopping Plaza, six miles east of downtown
Savannah. This office includes a four lane drive-through facility.
In November 1997, The Savannah Bank entered into a ten-year lease beginning June
1, 1998 with four five-year renewal options in the Medical Arts Shopping Center
at 4809 Waters Avenue. The property consists of 3,055 square feet of banking
office space and a separate drive-through facility behind the shopping center.
In March 2002, The Savannah Bank entered into a lease agreement, effective May
1, 2002, for approximately 5,000 square feet of office space at 450 Mall
Boulevard, adjacent to our existing branch office at 400 Mall Boulevard. This
lease is an addition to an existing lease for space at 400 Mall Boulevard that
contains renewal options through 2017. The operations center is located in this
space.
In September 2003, The Savannah Bank entered into a lease agreement for
approximately 3,500 sq. ft. of office space at 23C Shelter Cove Lane, Hilton
Head Island, South Carolina. This lease is for one year with two one-year
renewal options. Harbourside Mortgage Company is located in this space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings incidental to the business of the Company or
the Subsidiary Banks.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Incorporated herein by reference to sections entitled "Table 4 - Market for
Registrant's Common Equity and Related Stockholder Matters" on page F-24 of the
Financial Statement Section of the 2003 Annual Report to Shareholders.
ITEM 6. - SELECTED FINANCIAL DATA
Incorporated herein by reference to sections entitled "Table 1- Selected
Financial Condition Highlights - Five-Year Comparison," "Table 2 - Selected
Operating Highlights" and "Table 3 - Selected Quarterly Data," "Table 6 -
Average Balance Sheet and Rate/Volume Analysis" and "Table 7 - Average Balance
Sheet and Rate/Volume Analysis" in the Registrant's Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages F-22 through
F-34 of the Financial Statement Section of the 2003 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference to the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages F-22 through F-34 of the Financial Statement Section of the 2003 Annual
Report to Shareholders.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference to the sections entitled "Liquidity and
Interest Rate Sensitivity Management" and "Table 5 - Long-term Maturity Gap and
Repricing Data" in the Registrant's Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages F-30 and F-32 of the
Financial Statement Section of the 2003 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)
1. Financial Statements - See listing in Item 15 2. Financial Statement
Schedules - See Item 15
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
21
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION ABOUT THE EFFECTIVENESS OF DISCLOSURE
CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
annual report as required by Rule 13a-15 of the Securities Exchange Act of 1934,
as amended. This evaluation was carried out under the supervision and with the
participation of our management, including our chief executive officer,
executive vice president and chief operating officer and chief financial
officer.
Based on this evaluation, the chief executive officer, executive vice president
and chief operating officer and chief financial officer have concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to The Savannah Bancorp, Inc. (including its
consolidated subsidiaries) required to be included in our periodic SEC filings.
No change in internal control over financial reporting occurred during the
period covered by this report that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the sections entitled "Election of
Directors" and "Executive Officers" in the Registrant's Proxy Statement dated
March 22, 2004 and filed on March 12, 2004. All transactions required pursuant
to the insider trading regulations were filed on either Form 4 or Form 5 of the
U.S. Securities and Exchange Commission except as disclosed in the Proxy
Statement on page 16. The required Code of Ethics disclosures are also
incorporated by reference to the section entitled "Code of Business Conduct and
Ethics" in the Registrant's Proxy Statement dated March 22, 2004.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the sections entitled "Executive
Compensation and Benefits" in the Registrant's Proxy Statement dated March 22,
2004 and filed on March 12, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Incorporated herein by reference to the sections
entitled "Election of Directors" and "Ownership of Equity Securities" in the
Registrant's Proxy Statement dated March 22, 2004 and filed on March 12, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in Note 4 to the Consolidated Financial Statements
incorporated by reference and under the caption "Certain Transactions" in the
Registrant's Proxy Statement dated March 22, 2004 and filed on March 12 2004.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the sections entitled "Principal Accountant
Fees and Services" in the Registrant's Proxy Statement dated March 22, 2004 and
filed on March 12, 2004.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements
Incorporated herein by reference to the financial statements, together with the
applicable report of independent accountants, are included on pages F-3 and F-21
of the Financial Statement Section of the 2003 Annual Report to Shareholders.
The index for the financial statements is as follows:
Page Number
-----------
(i) Consolidated Financial Highlights for 2003 and 2002 1
(ii) Management's Responsibility for Financial Reporting F-2
(iii) Report of Independent Certified Public Accountants F-3
(iv) Consolidated Balance Sheets December 31, 2003 and 2002 F-4
(v) Consolidated Statements of Income for the Years
Ended December 31, 2003, 2002 and 2001 F-5
(vi) Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 2003,
2002 and 2001 F-6
(vii) Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003, 2002 and 2001 F-7
(viii) Notes to Consolidated Financial Statements F-8
2. Required financial statement schedules
Exhibit 11 - Computation of Earnings Per Share
3. Exhibits for management contracts or compensatory plan or arrangement
required to be filed by Item 601 of Regulation S-K NONE
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on October 21, 2003 which included the Third Quarter 2003
Earnings Release. The filing was made to comply with Reg FD and the Sarbanes
Oxley reporting requirements.
23
(c) Exhibits
Exhibit
Number Description
------- ----------------------------------------------------------
3.1 * Articles of Incorporation
3.2 * By-laws as amended
10.1 * Lease for Bank Site at 25 Bull Street and Assumption of Lease
10.5 * Form of Organizers' Stock Option Agreement
10.6 * Lease for Mall Boulevard Office dated February 14, 1992
10.7 * The Savannah Bancorp, Inc. Incentive Stock Option Plan approved
by shareholders on April 18, 1995.
10.8 * Amendment to The Savannah Bancorp, Inc. Incentive Stock Option
Plan approved by shareholders on April 16, 1996.
11 Computation of Earnings Per Share *
* Data required by Statement of Financial Accounting Standards
No. 128, Earnings per Share, is provided in Note 1 to the
consolidated financial statements in this report.
14 Code of Corporate Ethics and Conduct
21 Subsidiaries of Registrant
22 Proxy for Annual Meeting
23.1 Consent of BDO Seidman, LLP
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Items 3.1, 3.2, 10.1, 10.5, 10.7, 10.8 and 21 were previously filed by the
Company as Exhibits (with the same respective Exhibit Numbers as indicated
herein) to the Company's Registration Statement (Registration No. 33-33405)
filed in February 1990 and such documents are incorporated herein by reference.
Item 10.6 was filed as an exhibit with the 1992 Annual Report on Form 10-K in
March, 1993.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on March
3-23, 2004 by the undersigned, thereunto duly authorized.
THE SAVANNAH BANCORP, INC.
By: /s/ ARCHIE H. DAVIS /s/ G. MIKE ODOM, JR.
Archie H. Davis G. Mike Odom, Jr.
President and Chief Executive Officer Executive Vice President and
(Principal Executive Officer) Chief Operating Officer
/s/ ROBERT B. BRISCOE
Robert B. Briscoe
Chief Financial Officer
(Principal Financial and Accounting Officer)
Directors:
/s/ J. WILEY ELLIS /s/ JACK M. JONES
J. Wiley Ellis Jack M. Jones
Chairman of the Board
/s/ AARON M. LEVY
/s/ E. JAMES BURNSED Aaron M. Levy
E. James Burnsed
Vice Chairman /s/ J. CURTIS LEWIS III
J. Curtis Lewis III
/s/ RUSSELL W. CARPENTER
Russell W. Carpenter /s/ M. LANE MORRISON
M. Lane Morrison
/s/ ARCHIE H. DAVIS
Archie H. Davis /s/ J. TOBY ROBERTS, SR.
J. Toby Roberts, Sr.
/s/ ROBERT H. DEMERE, JR.
Robert H. Demere, Jr. /s/ JAMES W. ROYAL, SR.
James W. Royal, Sr.
/s/ L. CARLTON GILL
L. Carlton Gill /s/ ROBERT T. THOMPSON, JR.
Robert T. Thompson, Jr.
25