===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act. Yes ___ NO __X__
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 30, 2004.
3,290,017 shares of Common Stock, $1.00 par value per share
===============================================================================
The Savannah Bancorp, Inc. and Subsidiaries
Form 10-Q Index
June 30, 2004
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm 2
Consolidated Balance Sheets - June 30, 2004 and 2003
and December 31, 2003 3
Consolidated Statements of Income
For the Six Months Ended June 30, 2004 and 2003
and for the Three Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 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 9-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16-19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
1
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of The Savannah Bancorp, Inc.:
We have reviewed the accompanying consolidated balance sheets of The
Savannah Bancorp, Inc. (a Georgia Corporation) and its subsidiaries as of June
30, 2004 and 2003 and the related consolidated statements of income for the
three-month and six-month periods ended June 30, 2004 and 2003 and the changes
in shareholder's equity and cash flows for the six-month periods ended June 30,
2004 and 2003 included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended June 30, 2004. These interim financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with the standards of the Public Company Accounting Oversight
Board, 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 the standards of
the Public Company Oversight Board, the consolidated balance sheet of The
Savannah Bancorp, Inc. 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
Atlanta, Georgia
August 10, 2004
2
The Savannah Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
($ in thousands, except share data) June 30, December 31, June 30,
2004 2003 2003
- -------------------------------------------------------------------------------
ASSETS (Unaudited) (Unaudited)
Cash and due from banks $ 14,813 $ 16,695 $ 16,359
Federal funds sold 6,275 2,291 12,959
Interest-bearing deposits in banks 18,896 11,987 15,817
- -------------------------------------------------------------------------------
Cash and cash equivalents 39,984 30,973 45,135
Securities available for sale, at fair
value (amortized cost of $45,753 and
$42,358 at June 30 2004 and 2003 and
$38,197 at December 31, 2003) 45,868 39,090 43,958
Loans, held for sale 26,277 10,393 -
Loans, net of allowance for credit
losses of $5,843 and $4,797 at
June 30, 2004 and 2003 and $5,067 at
December 31, 2003 438,529 381,664 350,111
Premises and equipment, net 4,713 4,817 4,667
Other real estate owned 500 927 117
Bank-owned life insurance 5,246 5,123 5,000
Other assets 7,108 3,878 3,370
- -------------------------------------------------------------------------------
TOTAL ASSETS $568,225 $476,865 $452,358
===============================================================================
LIABILITIES
Deposits:
Non interest-bearing $ 77,270 $ 77,173 $ 70,294
Interest-bearing 372,098 311,973 304,738
- -------------------------------------------------------------------------------
Total deposits 449,368 389,146 375,032
Securities sold under repurchase
agreements, federal funds purchased
and short-term borrowings 50,570 22,249 19,304
Federal Home Loan Bank Advances -
long term 21,016 20,409 20,517
Subordinated debt to nonconsolidated
subsidiary 6,186 6,186 -
Other liabilities 3,359 2,104 1,649
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 530,499 440,094 416,502
- -------------------------------------------------------------------------------
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 25,054 25,109 25,109
Retained earnings 9,315 7,965 6,612
Treasury stock, 226 and 8,321 shares
at June 30, 2003 and 2004 and 8,246
at December 31, 2003 (4) (147) (147)
Accumulated other comprehensive income 71 554 992
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS EQUITY 37,726 36,771 35,856
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY $568,225 $476,865 $452,358
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
The Savannah Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------
($ in thousands, except share data) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 6,213 $ 5,153 $11,974 $10,195
Debt securities:
Taxable 319 400 651 885
Tax-exempt 77 94 152 187
Dividends 22 19 40 38
Deposits with banks 32 22 54 32
Federal funds sold 24 47 40 75
- -------------------------------------------------------------------------------
Total interest and
dividend income 6,687 5,735 12,911 11,412
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,486 1,377 2,803 2,788
Securities sold under repurchase
agreements, federal funds
purchased and short-term
borrowings 137 59 233 126
Federal Home Loan Bank advances -
term 255 255 510 510
Trust preferred securities 65 - 130 -
- -------------------------------------------------------------------------------
Total interest expense 1,943 1,691 3,676 3,424
- -------------------------------------------------------------------------------
NET INTEREST INCOME 4,744 4,044 9,235 7,988
Provision for credit losses 415 265 875 535
- -------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,329 3,779 8,360 7,453
- -------------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 106 100 214 192
Customer service fees 399 394 791 800
Gains on sales of mortgage
loans, net 333 246 475 418
Other income 204 129 409 250
Gains on sales of OREO - - 91 -
- -------------------------------------------------------------------------------
Total noninterest income 1,042 869 1,980 1,660
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,052 1,650 3,961 3,297
Occupancy and equipment expense 459 414 906 827
Information technology expenses 266 218 525 427
Other operating expenses 691 600 1,335 1,198
- -------------------------------------------------------------------------------
Total noninterest expense 3,468 2,882 6,727 5,749
- -------------------------------------------------------------------------------
Income before income taxes 1,903 1,766 3,613 3,364
Income tax expense 626 603 1,196 1,124
- -------------------------------------------------------------------------------
NET INCOME $ 1,277 $ 1,163 $ 2,417 $ 2,240
===============================================================================
Net income per share:
Basic $ .39 $ .35 $ .74 $ .68
===============================================================================
Diluted $ .38 $ .35 $ .72 $ .67
===============================================================================
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 Six Months Ended June 2004 and 2003
(Unaudited)
Accumulated
Additional Other
($ in thousands, Common Share Paid-in Retaine Treasury Comprehensive
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 2,240 2,240
Other comprehensive income:
Change in net unrealized gain
on securities available for
sale, net of tax effect (116) (116)
-----
Total comprehensive income 2,124
Cash dividends - $0.315 per share (1,039) (1,039)
Exercise of options 1 14 15
Ten percent stock dividend 298,845 299 6,551 (6,850) -
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 3,290,223 $3,290 $25,109 $6,612 $(147) $ 992 $35,856
===========================================================================================================
Balance, December 31, 2003 3,290,223 $3,290 $25,109 $7,965 $(147) $554 $36,771
- -----------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 2,417 2,417
Other comprehensive income:
Change in net unrealized gain
on securities available for
sale, net of tax effect (483) (483)
-----
Total comprehensive income 1,934
Cash dividends - $0.325 per share (1,067) (1,067)
Exercise of options (55) 143 88
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 3,290,223 $3,290 $25,054 $9,315 $ (4) $ 71 $37,726
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
The Savannah Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the
Six Months Ended
June 30,
- ----------------------------------------------------------------------
($ in thousands) 2004 2003
- ----------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,417 $ 2,240
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for credit losses 875 535
Net amortization of securities 104 153
Depreciation and amortization 348 332
Gain on sale of foreclosed assets (91) -
Increase in CSV of bank-owned life
insurance policies (123) -
Change in other assets and other
liabilities, net (1,070) (179)
- ----------------------------------------------------------------------
Net cash provided by operating
activities 2,500 3,081
- ----------------------------------------------------------------------
INVESTING ACTIVITIES
Activity in available for sale securities
Purchases (19,878) (9,724)
Maturities and calls 12,218 20,324
Increase in loans held for sale, net (15,884) -
Loan originations and principal
collections, net (57,740) (18,244)
Proceeds from sale of foreclosed assets 798 -
Investment in bank owned life insurance - (5,000)
Investment in low income housing tax credits (2,000) -
Additions to premises and equipment (244) (194)
- ----------------------------------------------------------------------
Net cash used in investing
activities (82,730) (12,838)
- ----------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 97 6,844
Net increase in interest-bearing deposits 60,125 5,144
Net increase in securities sold under
borrowings 28,321 2,310
Net increase (decrease) in FHLB
advances - term 607 (108)
Proceeds from note payable 1,070 -
Dividend payments (1,067) (1,039)
Exercise of options 88 15
- ----------------------------------------------------------------------
Net cash provided by (used in)
financing activities 89,241 13,166
- ----------------------------------------------------------------------
Increase in Cash and Cash Equivalents 9,011 3,409
Cash and cash equivalents, at beginning of
period 30,973 41,726
- ----------------------------------------------------------------------
Cash and cash equivalents, at end of period $39,984 $45,135
======================================================================
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 SIX-MONTH PERIOD ENDED JUNE 30, 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 six-month period
ended June 30, 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. Certain prior period amounts have been reclassified to
conform to the current period presentation.
Note 2 - Restrictions on Cash and Demand Balances Due from Banks and Interest
Bearing Bank Balances
The Company's Subsidiary Banks are required by the Federal Reserve Bank to
maintain minimum cash reserves based on reserve requirements calculated on
their deposit balances. Cash reserves of $1,270,000 and $1,213,000 were
required as of June 30, 2004 and December 31, 2003. Due to the decline in
investment securities balances, the Company pledged interest-bearing cash
balances at the Federal Home Loan Bank in lieu of investment securities to
secure public fund deposits and securities purchased under agreements to
resell. Pledged cash balances were $18,700,000 and $11,700,000 at June 30,
2004 and December 31, 2003.
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------------------------
Average number of common shares
outstanding 3,287,000 3,282,000 3,284,000 3,281,000
Effect of dilutive options 84,000 61,000 80,000 61,000
-------------------------------------------------------------------------------
Average number of common shares
outstanding used to calculate
diluted earnings per common share 3,371,000 3,343,000 3,364,000 3,342,000
================================================================================
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
7
stock-based compensation cost is reflected in net income under the Company's
application of APB 25. The Company did not issue any options to
non-employees for the six months ended June 30, 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 For the
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------
2004 2003 2004 2003
- ------------------------------------------------------------------=-------------
Net Income - as reported $1,277 $1,163 $2,417 $2,240
Stock-based employee compensation
expense, determined under fair value
basis, net of tax (31) (26) (61) (51)
- --------------------------------------------------------------------------------
Net Income - pro forma $1,246 $1,137 $2,356 $2,189
- --------------------------------------------------------------------------------
Net Income per share - basic - as
reported $ 0.39 $ 0.35 $ 0.74 $ 0.68
forma $ 0.38 $ 0.35 $ 0.72 $ 0.67
Net Income per share - diluted - as
reported $ 0.38 $ 0.35 $ 0.72 $ 0.67
Net Income per share - diluted - pro
forma $ 0.37 $ 0.34 $ 0.70 $ 0.65
No options were granted in the first six 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.
Note 5 - Recent Accounting Pronouncements
On March 9, 2004, the SEC staff issued Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments", which provides
guidance regarding mortgage loan interest rate lock commitments related to
loans held for sale as written options, effective for commitments entered
into after March 31, 2004. The Company enters into such commitments with
customers in connection with residential mortgage loan applications, however,
the amount of these commitments is not material to the Company's consolidated
financial statements. The impact of implementing this guidance did not have a
significant impact on the consolidated financial statements.
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.
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
8
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.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For a comprehensive presentation of The Savannah Bancorp, Inc.'s financial
condition at June 30, 2004 and 2003 and results of operations for the
quarters and six-months ended June 30, 2004 and 2003, the following analysis
should be reviewed with other information including the Company's December
31, 2003 Annual Report on Form 10-K.
(remainder of page intentionally left blank)
9
The Savannah Bancorp, Inc. and Subsidiaries
Second Quarter Financial Highlights
JUne 30, 2004 and 2003
(Unaudited)
Balance Sheet Data Percent
At June 30 2004 2003 Change
-------------------------------------------------------------------
( thousands, except per share data)
Total assets $568,225 $452,358 26
Interest-earning assets 541,420 423,716 28
Loans 444,372 354,908 25
Allowance for loan
losses 5,843 4,797 22
Nonperforming assets 510 2,537 (80)
Deposits 449,368 375,032 20
Interest-bearing liabilities 449,870 344,559 31
Shareholders' equity 37,726 35,856 5.2
Allowance for possible loan
losses to total loans 1.31% 1.35% (2.6)
Nonperforming assets to
total loans and other
real estate owned 0.18% 0.71% (84)
Loan to deposit ratio 98.89% 96.43% 2.5
Equity to assets 6.64% 7.93% (16)
Tier 1 capital to risk-
weighted assets 9.63% 9.66% (0.3)
Book value per share $ 11.47 $ 10.93 4.9
Outstanding shares 3,290 3,282 0.2
Market value per share $ 28.25 $23.99 18
Key Performance Data Percent
For the Second Quarter 2004 2003 Change
-------------------------------------------------------------------
Net income $ 1,277 $ 1,163 9.8
Return on average assets 0.94% 1.06% (11)
Return on average equity 13.65% 13.14% (3.9)
Net interest margin 3.73% 3.95% (5.6)
Efficiency ratio 59.94% 60.73% (1.3)
Per share data:
Net income - basic $ 0.39 $ 0.35 11
Net income - diluted $ 0.38 $ 0.35 8.6
Dividends $ 0.165 $ 0.160 3.1
Average shares:
Basic 3,287 3,282 0.2
Diluted 3,371 3,343 0.8
Percent
For the First Six Months 2004 2003 Change
-------------------------------------------------------------------
Net income $ 2,417 $ 2,240 7.9
Return on average assets 0.93% 1.05% (11)
Return on average equity 13.00% 12.81% 1.5
Net interest margin 3.78% 4.00% (5.5)
Efficiency ratio 59.98% 61.46% (2.4)
Per share data:
Net income - basic $ 0.74 $ 0.68 8.8
Net income - diluted $ 0.72 $ 0.67 7.5
Dividends $ 0.325 $ 0.320 1.6
Average shares:
Basic 3,284 3,281 0.1
Diluted 3,364 3,342 0.7
10
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
Tables 1 -3
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 three- month
and six-month periods ended June 30, 2004 compared with the same periods 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 June 30, 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.
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 functioned in similar roles
during 2003. The strategic benefit of the two officers working as an
executive team is apparent to the Board and the overall senior management
team.
11
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 are 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 June 30, 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 Banks' internally 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 $5.843 million, or 1.31 percent of
total loans, at June 30, 2004. This is compared to an allowance of $5.067
million, or 1.31 percent of total loans, at December 31, 2003. For the six
months ended June 30, 2004, the Company reported net charge-offs of $99,000,
or 0.09 percent of average loans on an annualized basis. This is compared to
net charge-offs of $43,000, or 0.06 percent of average loans for the first
six months of 2003, also on an annualized basis. During the first six months
of 2004, provision for loan losses of $875,000 was added to the allowance for
loan losses due to continued uncertain economic conditions, the higher credit
risks associated with a rising interest rate environment and significant
growth in a new market.
If the allowance for loan losses had changed by 5 percent, the effect on net
income would have been approximately $179,000. 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
$500,000 consisted of two foreclosed properties at June 30, 2004. Nonaccrual
loans and loans past due 90 days and greater totaled $290,000, or 0.07
percent of gross loans, at June 30, 2004 compared to $598,000, or 0.15
percent of gross loans, at December 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 $153,000 and $598,000 at June 30, 2004
and December 31, 2003, respectively.
12
RESULTS OF OPERATIONS
SECOND QUARTER, 2004 COMPARED TO THE SECOND QUARTER, 2003
Net income in the second quarter 2004 was $1,277,000, up 9.8 percent from
$1,163,000 in the second quarter 2003. This represents annualized returns of
13.65 percent on average equity and 0.94 percent on average assets in the
second quarter 2004. Second quarter diluted earnings per share were $0.38
in 2004 compared to $0.35 for 2003.
Average second quarter total assets increased 24 percent to $544 million in
2004 from $439 million in 2003. Total assets were $568 million and $452
million at June 30, 2004 and 2003, respectively, an increase of 26 percent.
The new Harbourside division accounted for approximately $50 million of the
June 30, 2004 assets.
Second quarter net interest income was $4,744,000 in 2004 as compared to
$4,044,000 in 2003, an increase of $700,000, or 17 percent. The increase
included $204,000 of net interest income attributable to the Harbourside
division. Second quarter average loans were $428 million, 23 percent higher
in 2004, as compared to $349 million in 2003. The prime rate decreased to
4.00 percent from 4.25 percent in June, 2003 and remained at that level until
July 1, 2004, when the rate increased to 4.25 percent. The second quarter
net interest margin decreased to 3.71 percent in 2004 from 3.95 percent in
2003 primarily due to the significant volumes of interest-earning assets
added at lower net interest spreads and the downward repricing of the
investment portfolio, as shown in Table 2. Higher interest rates are
expected to favorably impact the net interest margin.
The second quarter provision for credit losses was $415,000 for 2004,
compared to $265,000 for the comparable period of 2003, including $160,000 in
2004 related to Harbourside loan growth. Changes in the provision each year
are impacted as discussed under the "Allowance for Credit Losses" section
above. Second quarter loan growth was $28.2 million in 2004, primarily in
real estate loans, compared to $9.1 in loan growth the second quarter, 2003.
Uncertain economic conditions, significant loan growth in a new market and
borrower sensitivity to rising rates are the primary reasons for the higher
provision for loan losses in 2004.
Second quarter noninterest income was $1,042,000 in 2004 compared to $869,000
in 2003, an increase of $173,000 or 20 percent. Second quarter other income
included gains on sale of mortgage loans of $333,000 in 2004 compared to
$246,000 in 2003, an increase of $87,000 or 35 percent. The increase
included $176,000 of Harbourside net loan sale gains in 2004, partially
offset by lower second quarter volumes in Savannah and Bryan. Other income
increased by $75,000, or 58 percent due primarily to a $61,000 increase in
cash surrender value of officers' life insurance acquired on June 29, 2003.
No lower of cost or market adjustments were required for loans held for sale
during the second quarter, 2004.
Second quarter other expenses were $3,468,000 in 2004 compared to $2,882,000
in 2003, an increase of $586,000, or 20 percent. Second quarter salaries and
benefits expenses increased $402,000, or 24 percent in 2004. Excluding
Harbourside personnel costs of $218,000, the personnel cost increase was 11
percent. Second quarter information technology expenses increased
approximately $48,000, or 22 percent, primarily due to the Harbourside
expansion, improved systems capabilities and account / transaction volume
increases. Excluding costs of $383,000 related to Harbourside, noninterest
expenses increased 7.0 percent when compared to comparable operations in the
second quarter of 2003.
The second quarter provision for income taxes was $626,000 in 2004 and
$603,000 in 2003. The combined effective federal and state tax rates were
32.9 percent and 34.1 percent in 2004 and 2003, respectively. The decrease
in the effective rate was due primarily to additional tax-exempt income on
life insurance contracts 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.
13
FIRST SIX MONTHS, 2004 COMPARED WITH 2003
Net income in the first six months 2004 was $2,417,000, up 7.9 percent from
$2,240,000 in the first six months 2003. This represents annualized returns
of 13.00 percent on average equity and 0.93 percent on average assets in the
first six months 2004. First six months diluted earnings per share were
$0.72 in 2004 compared to $0.67 for 2003. Excluding $80,000 of net startup
losses for Harbourside Mortgage, the new loan production office on Hilton
Head Island, South Carolina, net income would have increased 11 percent in
2004 over 2003.
Average total assets for the first six months increased 21 percent to $521
million in 2004 from $430 million in 2003. Total assets were $568 million
and $452 million at June 30, 2004 and 2003, respectively, an increase of 26
percent. The new Harbourside division accounted for approximately $50
million of the June 30, 2004 assets.
The first six months net interest income was $9,235,000 in 2004 compared to
$7,988,000 in 2003, an increase of $1,247,000, or 16 percent. The increase
included $575,000 of net interest income attributable to the Harbourside
division. First six months average loans were $414 million, 20 percent
higher in 2004, as compared to $344 million in 2003. The first six months
average loan to deposit ratio increased to 98 percent in 2004 as compared to
97 percent in 2003. The prime rate remained at 4.00 percent until July 1,
2004, when the rate increased to 4.25 percent. Further interest rate
increases are anticipated by the financial markets. The first six months net
interest margin decreased to 3.78 percent in 2004 from 4.00 percent in 2003,
primarily due to the significant volumes of interest-earning assets added at
lower net interest spreads and the downward repricing of the investment
portfolio, as shown in Table 3. Higher interest rates are expected to
positively impact the net interest margin.
The first six months provision for credit losses was $875,000 for 2004,
compared to $535,000 for the comparable period of 2003, including $260,000 in
2004 related to Harbourside loan growth. Changes in the provision each year
are impacted as discussed under the "Allowance for Credit Losses" section
above. First six months loan growth was $57.7 million in 2004 and $18.1
million in 2003. First six months net charge-offs were $99,000 in 2004
compared with $111,000 in 2003. Uncertain economic conditions, significant
loan growth in a new market and borrower sensitivity to rising rates are the
primary reasons for higher provision for loan losses in 2004.
First six months noninterest income was $1,980,000 in 2004 compared to
$1,660,000 in 2003, an increase of $320,000 or 19 percent. First six months
other income included gains on sale of mortgage loans, net of $475,000 in
2004 compared to $418,000 in 2003, an increase of $57,000 or 14 percent,
primarily due to $220,000 in net loan sale gains in Harbourside partially
offset by lower mortgage refinancing volumes in Savannah and Bryan. Other
noninterest income increased by $159,000, due primarily to the $123,000
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 six months, 2004.
First six months noninterest expenses were $6,727,000 in 2004 compared to
$5,749,000 in 2003, an increase of $978,000, or 17 percent. First six months
salaries and benefits expenses increased $664,000, or 20 percent in 2004.
Excluding Harbourside personnel costs of $387,000, the personnel cost
increase was 8.4 percent. The first six months information technology
expenses increased approximately $98,000, or 23 percent, primarily due to the
Harbourside expansion, improved systems capabilities and account /
transaction volume increases. Excluding noninterest expenses of $665,000
related to Harbourside, noninterest expenses increased 5.4 percent when
compared to the comparable operations in first six months of 2003.
The first six months provision for income taxes was $1,196,000 in 2004 and
$1,124,000 in 2003. The combined effective federal and state tax rates were
33.1 percent and 33.4 percent in 2004 and 2003, respectively. The decrease
in the effective rate was due primarily to higher tax exempt income from life
insurance contracts offset by 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.
14
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 six months increase in loans of $58
million and the increase in loans held for sale of $16 million in 2004 was
funded primarily by $60 million in deposits and the remainder in other
borrowings. The deposit growth included $46 million in time deposits issued
through brokers.
The Company has classified all investment securities as available for sale.
Higher interest rates resulted in an overall decrease in unrealized gains on
investment securities. These amounts are included in shareholders' equity at
June 30, 2004 and 2003 as other accumulated comprehensive income.
The mortgage lending opportunities created by the Harbourside loan production
division impact the funding sources, capital requirements and liquidity of
Savannah. Historically, virtually all deposits at Savannah have been
obtained from local customers. In the first six months 2004, funding sources
were expanded to include non-local brokered time deposits of $46 million.
Short-term borrowings from the Federal Home Loan Bank of Atlanta were
utilized, primarily to fund loans held for sale. Brokered deposits, while
obtained at very competitive rates, are expected to cost more than core
deposits, and therefore, result in a lower overall net interest spread
between the loan yields and the deposit rates.
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 insurance assessment rates
based on certain "well-capitalized" risk-based and equity capital ratios. As
of June 30, 2004, the Subsidiary Banks and the Company exceeded the minimum
requirements necessary to be classified as "well-capitalized."
Total equity capital for the Company is $37.7 million, or 6.64 percent of
total assets at June 30, 2004. The table below includes the regulatory
capital ratios for the Company and each subsidiary bank along with the
minimum capital ratio and the ratio required to maintain a well-capitalized
regulatory status. Tier 1 and Total capital at the Company level includes
$6.0 million of trust-preferred debt issued by the Company's unconsolidated
affiliate on September 29, 2003. Tier 1 capital also includes the allowance
for credit losses up to 1.25 percent of risk-weighted assets.
During the second quarter, the Federal Reserve finalized capital
regulations permitting trust-preferred debt to qualify as Tier 1 Capital up
to 25 percent of the sum of trust-preferred debt and tangible capital. The
Company's significantly higher growth rate during the last six months has
resulted in lower capital ratios. The capital ratios are significantly above
the well-capitalized threshold, except for the Total Capital to Risk-Weighted
Assets ratio which is at a level that requires short-term and long-term
planning as well as continuous monitoring. The Company plans to issue
additional trust-preferred debt in the third or fourth quarter to meet its
short-term capital growth needs. Long-term capital planning is a part of the
annual strategic planning process.
The following capital ratios, which have historically been presented in the
Company's Annual Report on Form 10-K, have been added to the disclosures in
the quarterly filings. The following table shows the capital ratios for the
Company and the Subsidiary Banks at June 30, 2004 compared to the regulatory
capital minimums:
- -------------------------------------------------------------------------------
Well-
($ in thousands) Company Savannah Bryan Minimum Capitalized
- -------------------------------------------------------------------------------
Qualifying Capital
- ------------------
Tier 1 capital $43,665 $31,229 $11,201 - -
Total capital 49,321 35,440 12,651 - -
Leverage Ratios
- ---------------
Tier 1 capital to
average assets 8.02% 7.72% 7.91% 4.00% 5.00%
Risk-based Ratios
- -----------------
Tier 1 capital to
risk-weighted assets 9.63% 9.27% 9.67% 4.00% 6.00%
Total capital to
risk-weighted assets 10.89% 10.52% 10.92% 8.00% 10.00%
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LIQUIDITY 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 to investors and borrowing from the Federal Reserve Bank of
Atlanta discount window.
Both Subsidiary Banks have entered into a Blanket Floating Lien Agreement
with the Federal Home Loan Bank of Atlanta (FHLB). Savannah and Bryan have
credit lines approved by the FHLB of up to 20 percent of assets, subject to
the FHLB collateral requirements. In aggregate, the Company had FHLB
borrowing capacity of approximately $114 million of which $42 million was
advanced at June 30, 2004. These credit arrangements serve as a core funding
source as well as liquidity backup for the banks. The Subsidiary Banks
also have conditional federal funds borrowing lines available from upstream
correspondent banks that can provide $15-20 million of temporary funding
needs for 30-60 days. The outstanding volume of loans held for sale is
targeted in the $20-30 million range but may at times vary between $15-40
million due to timing issues between new production and loan sales.
Management primarily uses overnight borrowings from the FHLB to fund the
loans held for sale portfolio.
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 June
30, 2004, was approximately $94 million at one year, or 17 percent of total
interest-earning assets. Fixed rate earning assets with maturities over five
years totaled $14 million, or 2.6 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 and the historically low
interest rate levels have negatively impacted net interest income and the net
interest margin as interest-bearing assets have repriced more than interest
bearing liabilities. The Company is well-positioned for a rising rate
environment. The Federal Reserve increased the federal funds target rate by
25 basis points on June 30, 2004, the first increase since the year 2000. It
has communicated a bias toward higher 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.
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 June 30, 2004, the Company had unfunded commitments to extend
16
credit of $117 million and outstanding stand-by letters of credit of $7.3
million. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments. Management does not anticipate that funding obligations arising
from these financial instruments will adversely impact its ability to fund
future loan growth or deposit withdrawals.
The following table includes a breakdown of short-term and long-term payments
due under long-term contracts:
Payments due by period
------------------------------------------------
($ in thousands) Less More
than 1-3 3-5 than
Contractual Obligations Total 1 year years years 5 years
- -------------------------------------------------------------------------------
FHLB long-term debt $21,016 $421 $15,657 $1,508 $3,430
Subordinated debt 6,186 - - - 6,186
Operating leases - buildings 5,185 567 1,453 1,465 1,700
Information technology contracts 424 304 120 - -
- -------------------------------------------------------------------------------
Total $32,811 $1,292 $17,230 $2,973 $11,316
- -------------------------------------------------------------------------------
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING
The following is the long-term maturity and repricing data for the Company as
of June 30, 2004:
- ---------------------------------------------------------------------------------------------------------------
($ in 000s) 0-3 3 - 12 1 - 3 3 - 5 Over 5
Interest-bearing assets Immediate Months Months Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------
Investment securities $ - $ 2,750 $ 5,823 $ 18,998 $ 13,105 $ 5,077 $ 45,753
Interest-bearing deposits 18,895 - - - - - 18,896
Federal funds sold 6,275 - - - - - 6,275
Loans held for sale - 26,277 - - - - 26,277
Loans - fixed rates - 24,147 74,778 86,807 40,433 9,124 235,289
Loans - variable rates 208,830 - - - - - 208,930
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 234,101 53,174 80,601 105,805 53,538 14,201 541,420
- ---------------------------------------------------------------------------------------------------------------
Interest bearing deposits:
NOW and savings ** 20,857 10,427 31,283 41,712 - - 104,279
Money market accounts ** 22,861 7,675 23,027 23,024 - - 76,587
Time deposits - 31,515 69,525 57,658 32,495 39 191,232
Federal Home Loan Bank Advances - 115 307 15,657 1,507 3,430 21,016
Other borrowings 50,570 - - - - - 50,570
Trust Preferred Debt 6,186 - - - - 6,186
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 94,288 55,918 124,142 138,051 34,002 3,469 449,870
- ---------------------------------------------------------------------------------------------------------------
GAP-Excess Assets (Liabilities) 139,813 (2,744) (43,541) (32,246) 19,536 10,732 91,550
- ---------------------------------------------------------------------------------------------------------------
GAP-Cumulative 139,813 137,069 93,528 61,282 80,818 91,550 91,550
- ---------------------------------------------------------------------------------------------------------------
Cumulative Sensitivity Ratio * 2.48 1.91 1.34 1.15 1.18 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.
17
TABLE 2 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS -
SECOND QUARTER 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 liabilities during
the second quarter 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)
$ 14,365 $ 7,897 0.89 1.12 Interest-bearing deposits $ 32 $ 22 $ 10 $ (4) $ 14
35,795 37,556 3.83 4.47 Investments - taxable 341 419 (78) (61) (17)
5,831 7,527 9.36 9.01 Investments - non-taxable 136 169 (33) 7 (40)
10,823 16,307 0.89 1.16 Federal funds sold 24 47 (23) (11) (12)
25,355 0 5.44 5.92 Loans held for sale 344 0 344 0 344
427,629 349,207 5.50 5.92 Loans (c) 5,870 5,153 717 (359) 1,076
- -------- -------- ------ ------ ------
519,798 418,495 5.21 5.57 Total int.-earning assets 6,747 5,810 937 (378) 1,315
------ ------ ------ ------ ------
24,581 20,067 Non-earning assets
- -------- --------
$544,378 $438,562 Total assets
======== ========
LIABILITIES AND EQUITY
DEPOSITS
$ 87,349 $ 74,986 0.34 0.36 NOW accounts 72 68 5 (5) 10
18,999 15,348 0.51 0.76 Savings accounts 24 29 (5) (10) 5
73,667 68,107 0.97 1.26 Money market accounts 179 214 (35) (49) 14
70,664 60,852 2.72 3.12 CD's, $100M or more 480 473 7 (60) 67
34,898 0 2.79 0.00 CD's, $100M - non local 243 0 243 0 243
76,880 79,594 2.54 2.99 Other time deposits 487 593 (106) (89) (17)
- -------- -------- ------ ------ ------
Total interest-bearing
362,457 298,887 1.64 1.85 deposits 1,486 1,377 109 (152) 261
21,077 20,547 4.85 4.98 FHLB advances 255 255 0 (6) 6
39,219 17,101 1.40 1.38 Other borrowings 137 59 78 1 77
6,186 0 4.21 0.00 Trust preferred debt 65 0 65 0 65
- -------- -------- ------ ------ ------
Total interest-bearing
428,939 336,535 1.82 2.02 liabilities 1,943 1,691 252 (167) 419
------ ------ ------ ------ ------
75,709 64,537 Non-int bearing deposits
2,210 1,988 Other liabilities
37,520 35,502 Stockholders' equity
- -------- --------
$544,378 $438,562 Liabilities and equity
======== ========
3.39 3.55 Interest rate spread
==== ====
Net interest income $4,804 $4,119 $ 685 $ (211) $ 896
====== ====== ====== ====== ======
3.71 3.95 Net interest margin
$ 90,859 $ 81,960 Net earning assets
======== ========
Average deposits and
$438,166 $363,424 1.36 1.52 average cost of deposits
======== ======== ==== ====
98% 96% 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.
18
TABLE 3 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - FIRST SIX MONTHS,
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 liabilities during
the first six 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)
$ 11,992 $ 5,929 0.90 1.09 Interest-bearing deposits $ 32 $ 22 $ 10 $ (4) $ 14
33,915 39,354 4.09 4.73 Investments - taxable 692 923 (231) 125) (106)
5,983 7,519 9.08 9.04 Investments - non-taxable 271 337 (66) 2 (68)
8,879 12,919 0.90 1.17 Federal funds sold 40 75 (35) (17) (18)
21,659 0 5.13 0 Loans held for sale 554 0 554 0 554
414,471 344,091 5.53 5.97 Loans (c) 11,420 10,195 1,225 (771) 1,996
- -------- -------- ------ ------ ------
496,899 409,812 5.26 5.69 Total int.-earning assets 13,031 11,562 1,469 (879) 2,348
------ ------ ------ ------ ------
24,445 20,333 Non-earning assets
- -------- --------
$521,344 $430,145 Total assets
======== ========
LIABILITIES AND EQUITY
DEPOSITS
$ 86,257 $ 71,970 0.35 0.35 NOW accounts 151 126 25 (1) 26
18,320 14,953 0.50 0.76 Savings accounts 46 56 (10) (19) 9
72,420 66,305 0.95 1.24 Money market accounts 344 408 (64) (95) 31
70,958 60,517 2.74 3.22 CD's, $100M or more 969 965 4 (144) 148
22,661 0 2.73 0.00 CD's, $100M - non local 309 0 309 0 309
77,466 80,131 2.55 3.10 Other time deposits 984 1,233 (249) (222) (27)
- -------- -------- ------ ------ ------
Total interest-bearing
348,082 293,876 1.61 1.91 deposits 2,803 2,788 15 (437) 452
20,734 20,571 4.93 5.00 FHLB advances 510 510 0 (7) 7
33,545 17,082 1.39 1.48 Other borrowings 233 126 107 (7) 114
6,186 0 4.21 0.00 Trust preferred debt 130 0 130 0 130
- -------- -------- ------ ------ ------
Total interest-bearing
408,547 331,529 1.80 2.08 liabilities 3,676 3,424 252 (460) 712
------ ------ ------ ------ ------
73,393 61,239 Non-int bearing deposits
2,120 2,126 Other liabilities
37,284 35,2551 Stockholders' equity
- -------- --------
$521,344 $430,145 Liabilities and equity
======== ========
3.45 3.61 Interest rate spread
==== ====
Net interest income $9,355 $8,138 $1,217 $ (419) $1,636
====== ====== ====== ====== ======
3.45 3.61 Net interest margin
$ 88,352 $ 78,283 Net earning assets
======== ========
Average deposits and
$421,475 $355,155 1.33 1.58 average cost of deposits
======== ======== ==== ====
98% 97% 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.
19
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, use of proceeds. None
Item 3. Defaults upon senior securities. None
Item 4. Submission of matters to a vote of security holders.
Annual Meeting of Shareholders Held April 29, 2004
- --------------------------------------------------
2,836,499 shares were presented in person or by proxy, representing 86.43
percent of the 3,281,977 outstanding shares;
Re-election of Four Directors of Class II and Election of Three New Directors
- -----------------------------------------------------------------------------
2,835,526 shares representing 99.97 percent of the shares presented were
cast in favor of the election of directors; 973 shares were withheld on
selected directors.
Ratification of Independent Auditors
- ------------------------------------
2,829,701 shares, representing 99.76 percent of the shares present were cast
in favor of the ratification of the appointment of BDO Seidman, LLP as
independent auditors, 6,127 shares, representing 0.22 percent of the shares
present abstained and 671 shares or 0.02 percent voted against the
ratification of the independent auditors.
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
20
b. Reports on Form 8-K during the quarter ended June 30, 2004.
A Form 8-K for a Regulation FD disclosure was filed on April 29, 2004 which
included the Earnings Release for the first quarter, 2004.
A second Form 8-K was filed on April 30, 2004 announcing the completion of
the management succession plan announced in January, 2004 in which Archie H.
Davis communicated his plans to retire from Executive Management, effective
April 30, 2004.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Savannah Bancorp, Inc.
--------------------------
(Registrant)
Date 8/10/04 /s/G. Mike Odom, Jr .
------ -------------------------------------------
G. Mike Odom, Jr. - Chief Executive Officer
Date 8/10/04 /s/John C. Helmken II
------ -------------------------------------------
John C. Helmken II - President
Date 8/10/04 /s/Robert B. Briscoe
------ -------------------------------------------
Robert B. Briscoe - Chief Financial Officer
21