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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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18560
THE SAVANNAH BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1861820
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Bull Street, Savannah, GA 31401
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(Address of principal executive offices) (Zip Code)
912-651-8200
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 2004. 3,281,997 shares of Common Stock, $1.00 par
value per share
================================================================================
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
MARCH 31, 2004
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Review Report of Independent Certified Public Accountants 2
Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 3
Consolidated Statements of Income
For the Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2004 and 2003 5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003 6
Condensed Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9-16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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, 2004 and 2003 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the three-month periods ended March 31,
2004 and 2003 included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended March 31, 2004. 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 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, 2003, 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 22, 2004, 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, 2003 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 7, 2004
2
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
($ in thousands, except share data) MARCH 31, December 31, March 31,
2004 2003 2003
- --------------------------------------------------------------------------------
ASSETS (UNAUDITED) (Unaudited)
Cash and due from banks $ 14,935 $ 16,695 $ 17,239
Federal funds sold 12,883 2,291 10,528
Interest-bearing deposits in banks 5,538 11,987 2,662
- --------------------------------------------------------------------------------
Cash and cash equivalents 33,356 30,973 30,429
Securities available for sale, at fair
value (amortized cost of $39,047 and
$45,898 at March 31 2004 and 2003 and
$38,197 at December 31, 2003) 39,959 39,090 47,460
Loans, held for sale 24,544 10,393 -
Loans, net of allowance for credit
losses of $5,417 and $4,600 at
March 31, 2004 and 2003 and $5067 at
December 31, 2003 410,787 381,664 341,247
Premises and equipment, net 4,771 4,817 4,712
Other real estate owned 220 927 117
Bank-owned life insurance 5,184 5,123 -
Other assets 4,629 3,878 3,445
- --------------------------------------------------------------------------------
TOTAL ASSETS $523,450 $476,865 $427,410
================================================================================
LIABILITIES
Deposits:
Non interest-bearing $ 70,565 $ 77,173 $ 63,029
Interest-bearing 354,532 311,973 291,885
- --------------------------------------------------------------------------------
Total deposits 425,097 389,146 354,914
Securities sold under repurchase
agreements, federal funds purchased
and short-term borrowings 31,263 22,249 14,660
Federal Home Loan Bank Advances 21,365 20,409 20,581
Subordinated debt to nonconsolidated
subsidiary 6,186 6,186 -
Other liabilities 2,141 2,104 2,075
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 486,052 440,094 392,230
- --------------------------------------------------------------------------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share:
authorized 79,860,000 shares; issued
3,290,223 shares in 2004 and 2003,
respectively 3,290 3,290 3,290
Preferred stock, par value $1 per share:
authorized 10,000,000 shares, none issued - - -
Additional paid-in capital 25,109 25,109 25,108
Retained earnings 8,580 7,965 5,974
Treasury stock, 8,226 and 9,289 shares
at March 31, 2003 and 2004 and
8,246 at December 31, 2003 (147) (147) (161)
Accumulated other comprehensive income 566 554 969
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 37,398 36,771 35,180
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $523,450 $476,865 $427,410
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE
THREE MONTHS ENDED
MARCH 31,
- ------------------------------------------------------------------------
($ in thousands, except share data) 2004 2003
- ------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $5,761 $5,042
Debt securities:
Taxable 332 485
Tax-exempt 75 93
Dividends 18 19
Deposits with banks 22 10
Federal funds sold 16 28
- ------------------------------------------------------------------------
Total interest and dividend income 6,224 5,677
- ------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,317 1,411
Securities sold under repurchase
agreements, federal funds purchased
and short-term borrowings 96 67
Federal Home Loan Bank advances 255 255
Trust preferred securities 65 -
- ------------------------------------------------------------------------
Total interest expense 1,733 1,733
- ------------------------------------------------------------------------
NET INTEREST INCOME 4,491 3,944
Provision for credit losses 460 270
- ------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,031 3,674
- ------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 108 92
Customer service fees 392 406
Gains on sales of mortgage loans, net 142 172
Other income 205 121
Gains on sales of OREO 91 -
- ------------------------------------------------------------------------
Total noninterest income 938 791
- ------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,909 1,647
Occupancy and equipment expense 447 413
Data processing expenses 259 235
Other operating expenses 644 572
- ------------------------------------------------------------------------
Total noninterest expense 3,259 2,867
- ------------------------------------------------------------------------
Income before income taxes 1,710 1,598
Income tax expense 570 521
- ------------------------------------------------------------------------
NET INCOME $1,140 $1,077
========================================================================
NET INCOME PER SHARE:
Basic $ .35 $ .33
========================================================================
Diluted $ .34 $ .32
========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
Accumulated
Additional Other
Common Share Paid-in Retained Treasury Comprehensive
($ in thousands, except share data) Shares Amount Capital Earning Stock Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------
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
Other comprehensive income:
Change in net unrealized
gain on securities available
for sale, net of tax effect (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
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 3,290,223 $3,290 $25,109 $ 7,965 $(147) $ 554 $36,771
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 1,140 1,140
Other comprehensive income:
Change in net unrealized
gain on securities available
for sale, net of tax effect 12 12
-----
Total comprehensive income 1,152
Cash dividends - $.16 per share (525) (525)
- -----------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 3,290,223 $3,290 $25,109 $ 8,580 $(147) $566 $37,398
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE
THREE MONTHS ENDED
MARCH 31,
- -------------------------------------------------------------------------
$ in thousands) 2004 2003
- -------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,140 $ 1,077
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for credit losses 460 270
Net amortization of securities 46 177
Depreciation and amortization 172 73
Gain on sale of foreclosed assets (91) -
Increase in CSV of bank-owned life
insurance policies (61) -
Change in other assets and other
liabilities, net (720) 187
- -------------------------------------------------------------------------
Net cash provided by operating activities 946 1,784
- -------------------------------------------------------------------------
INVESTING ACTIVITIES
Activity in available for sale securities
Purchases (5,059) (7,190)
Maturities and calls 4,162 14,331
Increase in loans held for sale (14,151) -
Loan originations and principal collections, net (29,583) (9,115)
Proceeds from sale of foreclosed assets 798 -
Additions to premises and equipment (126) (85)
- -------------------------------------------------------------------------
Net cash used in investing activities (43,959) (2,059)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits (6,608) (421)
Net increase (decrease) in interest-bearing
deposits 42,559 (7,709)
Net increase (decrease) in securities sold
under agreements to repurchase and
short-term borrowings 9,014 (2,334)
Net increase (decrease) in FHLB advances 956 (44)
Dividend payments (525) (514)
- -------------------------------------------------------------------------
Net cash provided by (used in)financing
activities 45,396 (11,022)
- -------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 2,383 (11,297)
Cash and cash equivalents, at beginning of period 30,973 41,726
- -------------------------------------------------------------------------
Cash and cash equivalents, at end of period $33,356 $30,429
=========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
6
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 2004 AND 2003
(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 2004, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. 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, 2003.
Note 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Various proposals have been issued by the Securities and Exchange Commission
("SEC") related to changes in filing requirements, accountability of Executive
management and Directors regarding accounting policies, internal controls and
audit issues. 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
Earnings Per Share - Basic earnings per share represents income available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflect additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Company relate solely to outstanding stock options, and are determined using the
treasury stock method. Earnings per common share have been computed based on the
following:
Three Months Ended March 31,
2004 2003
----------------------------
Average number of common shares outstanding 3,282,000 3,281,000
Effect of dilutive options 80,000 56,000
----------------------------
Average number of common shares outstanding
used to calculate diluted earnings per
common share 3,362,000 3,337,000
============================
No option shares were excluded from the diluted earnings per share calculation
due to their anti-dilutive effect. in 2003 or 2004.
Note 4 - ACCOUNTING FOR STOCK-BASED COMPENSATION
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
7
income under the Company's application of APB 25. The Company did not issue any
options to non-employees for the three months ended March 31, 2004 and 2003,
respectively.
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,
---------------------
2004 2003
---------------------
Net Income - as reported $1,140 $1,077
Stock-based employee compensation expense, determined
under fair value basis, net of tax (16) (19)
-------- --------
Net Income - pro forma $1,124 $1,058
======== ========
Net Income per share - basic - as reported $ 0.35 $ 0.33
Net Income per share - basic - pro forma $ 0.34 $ 0.32
Net Income per share - diluted - as reported $ 0.34 $ 0.32
Net Income per share - diluted - pro forma $ 0.33 $ 0.32
No options were granted in the first three months of 2004 or 2003. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the assumptions shown in Note 1 to the
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
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.
8
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For a comprehensive presentation of The Savannah Bancorp, Inc.'s financial
condition at March 31, 2004 and 2003 and results of operations for the quarters
ended March 31, 2004 and 2003, the following analysis should be reviewed along
with other information including the Company's December 31, 2003 Annual Report
on Form 10-K.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FIRST QUARTER FINANCIAL STATEMENT
MARCH 31, 2004 AND 2003
(Unaudited)
Balance Sheet Data Percent
At March 31 2004 2003 Change
- --------------------------------------------------------------------------------
(thousands, except per share data)
Total assets $523,450 $427,410 22
Interest-earning assets 497,787 402,857 24
Loans 416,204 345,847 20
Allowance for loan losses 5,417 4,600 18
Nonperforming assets 684 2,271 (70)
Deposits 425,097 354,914 20
Interest-bearing liabilities 413,346 327,126 26
Shareholders' equity 37,398 35,180 6.3
Allowance for possible
loan losses to total loans 1.30% 1.33% (2.3)
Nonperforming assets to
total loans 0.16% 0.66% (76)
Loan to deposit ratio 97.91% 97.45% 0.5
Equity to assets 7.14% 8.23% (13)
Tier 1 capital to risk-
weighted assets 9.94% 9.92% 0.2
Book value per share $ 11.39 $ 10.72 6.3
Outstanding shares 3,282 3,281 0.0
Market value per share $ 27.23 $ 22.80 19
Key Performance Data Percent
For the First Quarter 2004 2003 Change
- --------------------------------------------------------------------------------
Net income $ 1,140 $ 1,077 5.8
Return on average assets 0.92% 1.04% (12)
Return on average equity 12.33% 12.49% (1.3)
Net interest margin 3.85% 4.06% (5.2)
Efficiency ratio 60.03% 62.23% (3.5)
Per share data:
Net income - basic $ 0.35 $ 0.33 6.1
Net income - diluted $ 0.34 $ 0.32 6.3
Dividends $ 0.16 $ 0.155 3.2
Average shares:
Basic 3,282 3,281 0.0
Diluted 3,362 3,337 0.7
9
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD & A") provides supplemental information, which sets forth the
major factors that have affected the Company's financial condition and results
of operations and should be read in conjunction with the Consolidated Financial
Statements and related notes. The MD & A is divided into subsections entitled:
Introduction
Critical Accounting Estimate
Results of Operations
Financial Condition and Capital Resources
Liquidity and Interest Sensitivity Management
Off-Balance Sheet Arrangements
These discussions should facilitate a better understanding of the major factors
and trends that affect the Company's earnings performance and financial
condition and how the Company's performance during the first three months of
2004 compared with the same period in 2003. Throughout this section, The
Savannah Bancorp, Inc., and its subsidiaries, collectively, are referred to as
"SAVB" or the "Company." The Savannah Bank, N.A. is referred to as "Savannah,"
Bryan Bank & Trust is referred to as "Bryan" and Harbourside Mortgage Company, a
loan production office and division of Savannah, is referred to as
"Harbourside". Collectively, Bryan and Savannah are referred to as the
"Subsidiary Banks."
The averages used in this report are based on daily balances for each respective
period. Certain amounts in noninterest income and noninterest expense have been
reclassified in prior periods to conform to the presentation in the current
period.
The Company is headquartered in Savannah, Georgia and, as of March 31, 2004 had
6 banking offices and 7 ATMs in Savannah, Chatham County and Richmond Hill,
Georgia. The Company also has mortgage lending offices in Savannah, Richmond
Hill and the new Harbourside Mortgage office on Hilton Head Island, SC, which
opened in the fourth quarter of 2003.
Savannah and Bryan are in the relatively diverse, stable and growing Savannah
Metropolitan Statistical Area ("MSA"). The diversity of major employers includes
manufacturing, port related transportation, construction, military, healthcare,
tourism, education, warehousing and the supporting services and products for
each of these major employers. The real estate market is experiencing moderate
government and commercial development growth and good residential growth driven
in part by coastal Georgia's and South Carolina's reputation as a desired
retiree residential destination.
Harbourside, a mortgage loan production office, specifically targets real estate
lending and related opportunities in the fast growing coastal South Carolina
market.
Mortgage loan servicing for loans originated and sold to investors is a new
service being offered through Harbourside. Over time, this service may provide
significant fee income to the Company and strengthen the banking relationships
between the customers and the Subsidiary Banks. Key personnel hired at
Harbourside were instrumental in accomplishing significant growth and earnings
in the Hilton Head market with another bank that was acquired in 2003 by a large
regional financial institution.
The primary risks of the Company include any trend or event that would cause or
result in a significant decline in local employment, real estate values or a
decline in loans and core deposits. The Company operates in very competitive
markets with the related challenges of competitive pricing on loans, deposits
and other banking services. Competition for the best talent is also a strategic
challenge faced in competitive markets.
In January 2004, the Company announced the promotion of two key leaders of the
Company, both in their early forties, to the positions of Chief Executive
Officer and President, effective in April 2004 with the retirement of the
current President and CEO. The Board of Directors believes these two executives
have strengths which complement each other and provide leadership stability and
strength to the Company and its subsidiaries for the long-term. Operationally,
the two executives have been functioning in similar roles during 2003. The
10
strategic benefit of the two officers working as an executive team is apparent
to the Board and the overall senior management team.
Enhanced growth in loans, deposits, product lines, service quality in existing
markets and quality expansion into new markets are the primary strategic
objectives of the Company. The Board believes the management team and the
operational and internal control infrastructure is largely in place to execute
the Board's objectives over the long term.
CRITICAL ACCOUNTING ESTIMATE - ALLOWANCE FOR CREDIT LOSSES
The Company considers its policies regarding the allowance for loan losses to be
its most critical accounting estimate due to the significant degree of
management judgment involved. The allowance for loan losses is established
through charges in the form of a provision for loan losses based on management's
continuous 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, 2004. 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.
No assurance can be given that the Company will not 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 by 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 Subsidiary Banks. Such examinations 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 Banks' most recent examinations performed by the Office
of the Comptroller of the Currency as of December 31, 2003 and the Georgia
Department of Banking and Finance as of December 31, 2002.
The allowance for loan losses totaled $5.417 million, or 1.30 percent of total
loans, at March 31, 2004. This is compared to an allowance of $4.600 million, or
1.33 percent of total loans, at March 31, 2003. For the three months ended March
31, 2004, the Company reported net charge-offs of $110,000, or 0.11 percent of
average loans on an annualized basis. This is compared to net charge-offs of
$43,000, or 0.05 percent of average loans for 2003, also on an annualized basis.
Provision for loan losses of $460,000 was added to the allowance for loan losses
due to uncertain economic conditions and growth in the loan portfolio as
compared to the prior year.
If the allowance for loan losses had changed by 5 percent, the effect on net
income would have been approximately $168,000. If the allowance had to be
increased by this amount, it would not have changed the Banks' status as
well-capitalized financial institutions.
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 $220,000
consisted of one foreclosed property at March 31, 2004. Nonaccrual loans and
loans past due 90 days and greater totaled $464,000, or 0.11 percent of gross
loans, at March 31, 2004 compared to $2,154,000, or 0.63 percent of gross loans,
at March 31, 2003. Generally, loans are placed on non-accrual status at the
earlier of when they are 90 days past due or when the collection of the loan
becomes doubtful.
Impaired loans under Statement of Financial Accounting Standards No. 114 were
all on non-accrual status and totaled $684,000 and $2,271,000 at March 31, 2004
and 2003, respectively.
11
RESULTS OF OPERATIONS
FIRST QUARTER, 2004 COMPARED WITH 2003
Net income in the first quarter 2004 was $1,140,000, up 5.8 percent from
$1,077,000 in the first quarter 2003. This represents annualized returns of
12.33 percent on average equity and 0.92 percent on average assets in the first
quarter 2004. First quarter diluted earnings per share were $0.34 in 2004
compared to $0.32 for 2003. Excluding $91,000 of net startup losses for
Harbourside Mortgage, the new loan production office on Hilton Head Island,
South Carolina, net income would have increased 14 percent in 2004 over 2003.
Average first quarter total assets increased 18 percent to $498 million in 2004
from $421 million in 2003. Total assets were $523 million and $427 million at
March 31, 2004 and 2003, respectively, an increase of 22 percent.
Harbourside originates various types of real estate loans, retains certain
loans, sells loans in the secondary market and services loans for investors.
Quarterly earnings in the first half of 2004 will continue to be negatively
impacted by Harbourside startup costs. It is expected to reach profitability on
a quarterly basis later in 2004.
First quarter net interest income was $4,491,000 in 2004 as compared to
$3,944,000 in 2003, an increase of $547,000, or 14 percent. First quarter
average loans were $401 million, 18 percent higher in 2004, as compared to $339
million in 2003. The first quarter average loan to deposit ratio increased to 99
percent in 2004 as compared to 98 percent in 2003. The prime rate remained at
4.25 percent until June 27, 2003, when the rate declined to 4.00 percent and has
remained at that level. The first quarter net interest margin decreased to 3.85
percent in 2004 from 4.06 percent in 2003, due to the greater repricing of
interest-earning assets as compared to interest-bearing liabilities, as shown in
Table 2. Continued downward pressure on the net interest margin is anticipated
until the loan rates begin to rise.
The first quarter provision for credit losses was $460,000 for 2004, compared to
$270,000 for the comparable period of 2003, including $100,000 in 2004 related
to the Harbourside loan growth. Changes in the provision each year are impacted
as discussed under the "Allowance for Credit Losses" section above. First
quarter loan growth was $29.5 million in 2004, primarily in real estate loans,
and $9.1 million in 2003. First quarter net charge-offs were $110,000 in 2004
compared with $43,000 in 2003. Uncertain economic conditions and borrower
sensitivity to rising rates are the primary reasons for maintaining a
consistently conservative level of allowance for credit losses.
First quarter other operating income was $938,000 in 2004 compared to $791,000
in 2003, an increase of $147,000 or 19 percent. First quarter service charges on
deposit accounts were $392,000 or 3.4 percent lower than 2003. First quarter
other income included gains on sale of mortgage loans, net of $142,000 in 2004
compared to $172,000 in 2003, a decrease of $30,000 or 17 percent, primarily due
to lower mortgage loan refinancing volume in 2004. First quarter trust income
increased to $108,000 in 2004, compared to $92,000 in 2003, an increase of 17
percent. Other income increased by approximately $84,000, due primarily to a
$61,000 increase in cash surrender value of officers' life insurance acquired on
June 29, 2003. The sale of a foreclosed property also resulted in a gain of
$91,000. No lower of cost or market adjustments were required for loans held for
sale during the first quarter, 2004.
First quarter other expenses were $3,259,000 in 2004 compared to $2,867,000 in
2003, an increase of $392,000, or 14 percent. First quarter salaries and
benefits expenses increased $262,000, or 16 percent in 2004. Excluding
Harbourside personnel costs of $169,000, the personnel cost increase was 5.6
percent. First quarter occupancy and equipment expenses increased approximately
$34,000, or 8.2 percent, primarily as a result of additional operations space
occupied by Harbourside in the fourth quarter of 2003. Excluding other expenses
of $282,000 related to Harbourside other expenses increased 3.8 percent when
compared to the first quarter of 2003.
The first quarter provision for income taxes was $570,000 in 2004 and $521,000
in 2003. The combined effective federal and state tax rates were 33.3 percent
and 32.6 percent in 2004 and 2003, respectively. The increase in the effective
rate was due primarily to lower tax-exempt income on investments in 2004. 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.
12
FINANCIAL CONDITION AND CAPITAL RESOURCES
BALANCE SHEET ACTIVITY
The major changes in the assets and liabilities of the Company for the current
period and the prior comparative period are shown in the consolidated statements
of cash flows. The first quarter increase in loans of $29.5 million and the
increase in loans held for sale of $14.2 million in 2004 was funded primarily by
$36 million in deposits and $9 million in other borrowings.
The Company has classified all investment securities as available for sale.
Shorter average maturities, the lower volume of investments and re-investments
at lower rates resulted in an overall decrease in unrealized gains on investment
securities. These amounts are included in shareholders' equity at March 31, 2004
and 2003 as other accumulated comprehensive income.
The Company's lending and investment policies continue to emphasize high quality
growth. However, the mortgage lending opportunities created by the opening of
Harbourside have impacted and will impact the funding sources and liquidity of
Savannah. Historically, virtually all deposits at Savannah have been obtained
from local customers. In the first quarter 2004, funding sources were expanded
to include non-local brokered time deposits of $30,204,000. Short-term
borrowings of $7,000,000 from the Federal Home Loan Bank of Atlanta were
obtained, primarily to fund the loans held for sale. The brokered deposits,
while obtained at very competitive rates, are expected to cost more than the
core deposit rates, and therefore, result in a lower overall net interest
margin.
CAPITAL RESOURCES
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, 2004, the Subsidiary Banks exceeded the minimum requirements
necessary to be classified as "well-capitalized."
Total equity capital for the Company is $37.4 million, or 7.14 percent of total
assets at March 31, 2004. Tier 1 Capital is 9.94 percent of Risk-Weighted Assets
at the same date. Tier 1 capital at the Company level includes $6.0 million of
trust preferred debt issued by the Company's unconsolidated affiliate on
September 29, 2003.
Under current Federal Reserve Bank regulations, the Company's trust preferred
debt qualifies for Tier 1 capital treatment. However, accounting authorities and
various regulators are considering modifications to the inclusion of trust
preferred debt in Tier 1 capital calculations. Although the outcome of these
discussions is uncertain, there is reasonable basis to believe that the capital
treatment of existing trust preferred debt will be retained and that the
qualifying capital rules may be changed for all future debt issuances.
The Company and the Subsidiary Banks qualify as well-capitalized without
inclusion of the trust preferred debt. Should the capital treatment of the trust
preferred debt be disallowed, the Company will consider other alternatives to
enable it to continue its growth plans and maintain its "well-capitalized"
status.
13
LIQUITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The objectives of funds management include maintaining adequate liquidity and
preserving reasonable harmony between the repricing of interest sensitive assets
and liabilities. The goal of liquidity management is to ensure the availability
of adequate funds to meet the loan demands 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.
In addition to local deposit growth, primary funding and liquidity sources
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 brokers and an Internet bulletin board service. Backup funding
and liquidity sources include the ability to sell 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 $61.8 million as of March 31, 2004. In aggregate, the
Company had secured borrowing capacity of approximately $63.0 million of which
$28.4 million was advanced at March 31, 2004. These credit arrangements serve as
a core-funding source as well as liquidity backup for the banks. Savannah and
Bryan 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 $22 million of temporary conditional federal funds
borrowing lines available from correspondent banks.
A continuing objective of asset/liability management is to maintain appropriate
levels of variable rate assets, including variable rate loans and
shorter-maturity investments, to balance increases in interest rate sensitive
liabilities. Interest rate sensitivity management requires analyses and actions
that take into consideration volumes repriced and the timing and magnitude of
their price changes to determine the effect upon net interest income.
The Company's asset-sensitive cash flow maturity and repricing gap at March 31,
2004, was $102.7 million at one year, or 21 percent of total interest-earning
assets. Fixed rate earning assets with maturities over five years totaled $9.3
million, or 1.9 percent of total interest-earning assets. See Table 1 for cash
flow maturity and repricing gap.
The Company is asset-sensitive within one year. The decrease in the prime rate
from 4.25 percent to 4.00 percent in June 2003 negatively impacted net interest
income and the net interest margin. The Company is well-positioned for a rising
rate environment. Given the historically low level of current interest rates,
the probability of rising rates may be greater than the probability of falling
rates; however, the timing of a rise is uncertain. The Federal Reserve has most
recently communicated a bias for rising 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 on net interest income.
However, fixed rate assets with maturities over five years may include
significant rate risk in the event of significant market rate increases.
Management monitors interest rate risk on a quarterly basis using
rate-sensitivity gap analysis, rate shock simulation and performance forecasting
measures. If and when projected interest rate risk exposures are outside of
policy tolerances, specific actions to return interest rate risk exposures to
acceptable levels are reported to the Board by management. Management continues
to upgrade its interest rate risk reporting systems to provide better
information on a more frequent basis. These capabilities are especially valuable
during periods of volatile interest rates.
14
OFF-BALANCE SHEET ARRANGEMENTS
In order to meet the financing needs of its customers, the Company is a party to
financial instruments with off-balance sheet risks in the normal course of
business. At March 31, 2004, the Company had unfunded commitments to extend
credit of $99 million and outstanding stand-by letters of credit of $7 million.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments. Management does not anticipate that funding obligations arising
from these financial instruments will adversely impact its ability to fund
future loan growth or deposit withdrawals.
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING
The following is the long-term maturity and repricing data for the Company as of
March 31, 2004:
- ---------------------------------------------------------------------------------------------------------------
($ in 000s) 0-3 3 - 12 1 - 3 3 - 5 Over 5
Interest-bearing assets Immediate Months Months Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------
Investment securities $ - $ 6,282 $ 10,194 $ 12,272 $ 6,865 $ 3,435 $ 39,048
Interest-bearing deposits 5,538 - - - - - 5,538
Federal funds sold 12,883 - - - - - 12,883
Loans held for sale - 24,544 - - - - 24,544
Loans - fixed rates - 25,823 66,414 76,572 34,504 5,898 209,211
Loans - variable rates 206,563 - - - - - 206,563
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 224,984 56,649 76,608 88,844 41,369 9,333 497,787
- ---------------------------------------------------------------------------------------------------------------
Interest bearing deposits:
NOW and savings ** 20,536 10,268 30,804 41,071 - - 102,679
Money market accounts ** 21,727 7,243 21,729 21,731 - - 72,430
Time deposits - 33,227 72,157 43,471 30,530 38 179,423
Federal Home Loan Bank Advances - 115 305 15,834 1,662 3,449 21,365
Other borrowings 31,263 - - - - - 31,263
Trust Preferred Debt 6,186 - - - - 6,186
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 73,526 57,039 124,995 122,107 32,192 3,487 413,346
- ---------------------------------------------------------------------------------------------------------------
GAP-Excess Assets (Liabilities) 151,458 (390) (48,387) (33,263) 9,177 5,846 84,441
- ---------------------------------------------------------------------------------------------------------------
GAP-Cumulative 151,458 151,068 102,681 69,418 78,595 84,441 84,441
- ---------------------------------------------------------------------------------------------------------------
Cumulative Sensitivity Ratio * 3.06 2.16 1.40 1.18 1.19 1.20 1.20
- ---------------------------------------------------------------------------------------------------------------
* 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.
15
TABLE 2 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - 2004 AND 2003
The following table presents average balances of the Company and the Subsidiary
Banks on a consolidated basis, the average taxable-equivalent interest earned on
assets and the average interest paid on liabilites during the first three months
of 2004 and 2003.
Average Average Taxable-Equivalent (a) Variance
Balance Rate Interest Attributable to
- ------------------ ---------- -------------- Vari- --------------
2003 2002 2003 2002 2003 2002 Ance Rate Volume
- -------- -------- ---- ---- ------ ------ ------ ------ ------
(Thousands) (%) ASSETS (Thousands) (Thousands)
$ 9,620 $ 3,940 0.92 1.03 Interest-bearing deposits $ 22 $ 10 $ 12 $ (1) $ 13
32,035 41,111 4.37 4.97 Investments - taxable 349 504 (155) (62) (93)
6,136 7,571 9.09 9.00 Investments - non-taxable 139 168 (29) 2 (31)
6,934 9,494 0.93 1.20 Federal funds sold 16 28 (12) (6) (6)
17,964 0 4.69 0.00 Loans held for sale 210 0 210 0 210
401,312 339,217 5.55 6.03 Loans (c) 5,551 5,042 509 (406) 915
- -------- -------- ------ ------ ------ ------ ------
474,001 401,333 5.32 5.81 Total int.-earning assets 6,287 5,752 535 (473) 1,008
------ ------ ------ ------ ------
24,301 19,933 Non-earning assets
- -------- --------
$498,302 $421,266 Total assets
======== ========
LIABILITIES AND EQUITY
DEPOSITS
$ 85,103 $ 68,922 0.37 0.34 NOW accounts 78 58 20 5 15
17,642 14,553 0.50 0.75 Savings accounts 22 27 (5) (9) 4
65,262 64,462 1.01 1.22 Money market accounts 165 194 (29) (33) 4
76,905 60,179 2.55 3.32 CD's, $100M or more 489 492 (3) (115) 112
10,424 0 2.54 0.00 CD's, $100M - non local 66 0 66 0 66
78,053 80,673 2.55 3.22 Other time deposits 497 640 (143) (133) (10)
- -------- -------- ------ ------ ------ ------ ------
Total interest-bearing
333,389 288,789 1.58 1.98 deposits 1,317 1,411 (94) (285) 191
20,391 20,594 5.02 5.02 FHLB advances 255 255 0 0 0
27,872 17,063 1.38 1.59 Other borrowings 96 67 29 (9) 38
6,186 0 4.21 0.00 Trust preferred debt 65 0 65 0 65
- -------- -------- ------ ------ ------ ------ ------
Total interest-bearing
387,838 326,446 1.79 2.15 liabilities 1,733 1,733 0 (294) 294
------ ------ ------ ------ ------
71,078 57,919 Non-int bearing deposits
2,309 1,919 Other liabilities
37,077 34,982 Stockholders' equity
- -------- --------
$498,302 $421,266 Liabilities and equity
======== ========
3.53 3.66 Interest rate spread
==== ====
Net interest income $4,554 $4,019 $ 535 $ (178) $ 713
====== ====== ====== ====== ======
3.85 4.06 Net interest margin
$ 86,163 $ 74,887 Net earning assets
======== ========
Average deposits and
$404,467 $346,708 1.31 1.65 average cost of deposits
======== ======== ==== ====
99% 98% 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 are 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.
(C) Average nonaccruing loans have been excluded from total average loans as a
non interest-earning asset.
16
Item 4. - 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
quarterly 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,
president and chief financial officer.
Based on this evaluation, the chief executive officer, president 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 the Company's 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 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*
* 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.
Exhibit 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K during the quarter ended March 31, 2004.
A Form 8-K for a Regulation FD disclosure was filed on January 28, 2004 which
included the Earnings Release for the fourth quarter and year ended December 31,
2003.
17
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 5/7/04 /s/G. Mike Odom, Jr .
------ -------------------------------------------
G. Mike Odom, Jr. - Chief Executive Officer
Date 5/7/04 /s/John C. Helmken II
------ -------------------------------------------
John C. Helmken II - President
Date 5/7/04 /s/Robert B. Briscoe
------ -------------------------------------------
Robert B. Briscoe - Chief Financial Officer
18