Back to GetFilings.com
===============================================================================
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 September 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.
------------------------------------------------------
(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
------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
------------------------------------------------------
(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 October 31, 2004. 3,289,997 shares of Common Stock, $1.00
par value per share
===============================================================================
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
SEPTEMBER 30, 2004
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm 2
Consolidated Balance Sheets - September 30, 2004 and
December 31, 2003 3
Consolidated Statements of Income
For the Nine Months Ended September 30, 2004
and 2003 and for the Three Months Ended
September 30, 2004 and 2003 4
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2004 and 2003 5
Consolidated Statements of Cash Flows
For the Nine Months Ended September 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 9-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16-20
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
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 sheet of The
Savannah Bancorp, Inc. (a Georgia Corporation) and its subsidiaries as of
September 30, 2004 and the related consolidated statements of income for the
three-month and nine-month periods ended September 30, 2004 and 2003 and the
changes in shareholders' equity and cash flows for the nine-month periods ended
September 30, 2004 and 2003 included in the accompanying Securities and Exchange
Commission Form 10-Q for the period ended September 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/ BDP Seidman, LLP
Atlanta, Georgia
November 3, 2004
2
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
($ in thousands, except share data) 2004 2003
- -------------------------------------------------------------------------------
ASSETS (UNAUDITED)
Cash and due from banks $ 11,274 $ 16,695
Federal funds sold 9,145 2,291
Interest-bearing deposits in banks 9,876 11,987
- -------------------------------------------------------------------------------
Cash and cash equivalents 30,295 30,973
Securities available for sale, at fair value
(amortized cost of $40,349 at September 30, 2004
and $38,197 at December 31, 2003) 40,932 39,090
Loans, held for sale 25,517 10,393
Loans, net of allowance for credit losses of
$6,180 at September 30, 2004 and $5,067 at
December 31, 2003 465,120 381,664
Premises and equipment, net 4,741 4,817
Other real estate owned 500 927
Bank-owned life insurance 5,302 5,123
Other assets 7,609 3,878
- -------------------------------------------------------------------------------
TOTAL ASSETS $580,016 $476,865
===============================================================================
LIABILITIES
Deposits:
Non interest-bearing $ 74,231 $ 77,173
Interest-bearing 391,356 311,973
- -------------------------------------------------------------------------------
Total deposits 465,587 389,146
Securities sold under repurchase agreements,
federal funds purchased and short-term
borrowings 39,858 22,249
Federal Home Loan Bank Advances - long term 20,937 20,409
Subordinated debt to nonconsolidated subsidiary 10,310 6,186
Other liabilities 4,308 2,104
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 541,000 440,094
- -------------------------------------------------------------------------------
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
Preferred stock, par value $1 per share:
authorized 10,000,000 shares, none issued - -
Additional paid-in capital 25,054 25,109
Retained earnings 10,315 7,965
Treasury stock, 226 shares at September 30, 2004
and 8,246 shares at December 31, 2003 (4) (147)
Accumulated other comprehensive income 361 554
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 39,016 36,771
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $580,016 $476,865
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------
($ in thousands, except share data) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 6,994 $ 5,106 $18,968 $15,301
Debt securities:
Taxable 344 353 995 1,238
Tax-exempt 64 91 216 278
Dividends 26 16 66 54
Deposits with banks 64 33 118 65
Federal funds sold 19 23 59 89
- -------------------------------------------------------------------------------
Total interest and dividend income 7,511 5,622 20,422 17,025
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,698 1,300 4,501 4,088
Securities sold under repurchase
agreements, federal funds purchased
and short-term borrowings 208 74 441 191
Federal Home Loan Bank advances -
long term 258 259 768 769
Trust preferred securities 66 - 196 -
- -------------------------------------------------------------------------------
Total interest expense 2,230 1,633 5,906 5,048
- -------------------------------------------------------------------------------
NET INTEREST INCOME 5,281 3,989 14,516 11,977
Provision for credit losses 320 255 1,195 790
- -------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,961 3,734 13,321 11,187
- -------------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 110 101 324 293
Customer service fees 423 396 1,214 1,196
Gains on sales of mortgage loans, net 255 252 730 670
Other income 241 194 650 444
Gains on sales of other real estate owned - - 91 -
- -------------------------------------------------------------------------------
Total noninterest income 1,029 943 3,009 2,603
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,139 1,632 6,100 4,929
Occupancy and equipment expense 473 438 1,379 1,265
Information technology expenses 267 221 792 674
Other operating expenses 813 577 2,148 1,749
- -------------------------------------------------------------------------------
Total noninterest expense 3,692 2,868 10,419 8,617
- -------------------------------------------------------------------------------
Income before income taxes 2,298 1,809 5,911 5,173
Income tax expense 754 597 1,950 1,721
- -------------------------------------------------------------------------------
NET INCOME $ 1,544 $ 1,212 $ 3,961 $ 3,452
===============================================================================
NET INCOME PER SHARE:
Basic $ .47 $ .37 $ 1.21 $ 1.05
===============================================================================
Diluted $ .46 $ .36 $ 1.18 $ 1.03
===============================================================================
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 NINE MONTHS ENDED SEPTEMBER 30, 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 3,452 3,452
Other comprehensive income:
Change in net unrealized gain
on securities available for
sale, net of tax effect (409) (409)
-----
Total comprehensive income 3,043
Cash dividends - $0.475 per share (1,565) (1,565)
Exercise of options 1 14 15
Ten percent stock dividend 298,845 299 6,551 (6,850) -
- -----------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 3,290,223 $3,290 $25,109 $7,298 $(147) $ 699 $36,249
===========================================================================================================
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 3,290,223 $3,290 $25,109 $7,965 $(147) $ 554 $36,771
- -----------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 3,961 3,961
Other comprehensive income:
Change in net unrealized gain
on securities available for
sale, net of tax effect (193) (193)
-----
Total comprehensive income 3,768
Cash dividends - $0.49 per share (1,611) (1,611)
Exercise of options (55) 143 88
- -----------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 3,290,223 $3,290 $25,054 $10,315 $ (4) $361 $39,016
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
5
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
- -------------------------------------------------------------------------------
($ in thousands) 2004 2003
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 3,961 $ 3,452
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Provision for credit losses 1,195 790
Loans originated for sale (80,845) -
Proceeds from the sale of loans originated
for sale 66,103 -
Net amortization of securities 141 232
Depreciation and amortization 520 503
Increase (decrease) in deferred income
taxes - net (359) 124
Gains on sales of loans, net (382) -
Gains on sales of other real estate owned (91) -
Increase in CSV of bank-owned life
insurance policies (179) (66)
Change in other assets and other
liabilities, net (326) 41
- -------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (10,262) 5,076
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Activity in available for sale securities
Purchases (24,669) (12,781)
Maturities and calls 22,376 24,149
Loan originations and principal collections, net (84,651) (30,872)
Proceeds from sale of foreclosed assets 798 -
Investment in bank owned life insurance - (5,000)
Investment in low income housing tax credits (1,975) -
Additions to premises and equipment (444) (365)
- -------------------------------------------------------------------------------
Net cash used in investing activities (88,565) (24,869)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing
deposits (2,942) 6,686
Net increase in interest-bearing deposits 79,383 355
Net increase in securities sold under
agreements to repurchase and short-term
borrowings 17,609 3,815
Net increase (decrease) in FHLB advances - term 528 (152)
Issuance of trust preferred debt 4,124 6,000
Proceeds from note payable 1,070 -
Payments on note payable (100) -
Dividend payments (1,611) (1,565)
Exercise of options 88 15
- -------------------------------------------------------------------------------
Net cash provided by financing activities 98,149 15,154
- -------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (678) (4,639)
Cash and cash equivalents, at beginning of period 30,973 41,726
- -------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 30,295 $37,087
===============================================================================
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 NINE-MONTH PERIOD ENDED SEPTEMBER 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 three and nine month periods ended September 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 $1,431,000 and $1,213,000 were required as of
September 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 $9,700,000 and $11,700,000 at September 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------------------------------------------------------------------------
Average number of common shares
outstanding 3,290,000 3,282,000 3,286,000 3,282,000
Effect of dilutive options 73,000 69,000 78,000 64,000
------------------------------------------------------------------------------
Average number of common shares
outstanding used to calculate
diluted earnings per common
share 3,363,000 3,351,000 3,364,000 3,346,000
===============================================================================
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
income under the Company's application of APB 25. The Company did not issue any
options to non-employees for the three and nine month periods ended September
30, 2004 and 2003, respectively.
7
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 Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------
Net Income - as reported $1,544 $1,212 $3,961 $3,452
Stock-based employee compensation
expense, determined under fair value
basis, net of tax (31) (26) (61) (78)
- -------------------------------------------------------------------------------
Net Income - pro forma $1,511 $1,186 $3,900 $3,374
- -------------------------------------------------------------------------------
Net Income per share - basic -
as reported $ 0.47 $ 0.37 $ 1.21 $ 1.05
Net Income per share - basic -
pro forma $ 0.46 $ 0.36 $ 1.19 $ 1.03
Net Income per share - diluted - as
reported $ 0.46 $ 0.36 $ 1.18 $ 1.03
Net Income per share - diluted -
pro forma $ 0.45 $ 0.35 $ 1.16 $ 1.01
35,000 option shares were granted in the first nine months of 2004 and none in
the same period of 2003. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model and are consistent
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 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
8
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 September 30, 2004 and 2003 and results of operations for the three
and nine month periods ended September 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
THIRD QUARTER FINANCIAL HIGHLIGHTS
SEPTEMBER 30, 2004 AND 2003
(Unaudited)
BALANCE SHEET DATA Percent
AT SEPTEMBER 30 2004 2003 Change
- ---------------------------------------------------------------------------
(thousands, except per share data)
Total assets $580,016 $455,334 27
Interest-earning assets 556,075 429,424 29
Loans, held for sale 25,517 - -
Loans 471,300 367,085 28
Allowance for loan losses 6,180 5,032 (23)
Nonperforming assets 631 3,249 (81)
Deposits 465,587 370,516 26
Interest-bearing liabilities 462,461 347,231 33
Shareholders' equity 39,016 36,249 7.6
Allowance for credit loan
losses to loans 1.31% 1.37% (4.2)
Nonperforming assets to total
loans and other real estate owned 0.13% 0.88% (85)
Loan to deposit ratio 101% 99% 1.9
Equity to assets 6.73% 7.96% (16)
Tier 1 capital to
risk-weighted assets 10.56% 11.26% (6.3)
Total capital to
risk-weighted assets 11.81% 12.51% (5.6)
Book value per share $ 11.86 $ 11.04 7.4
Outstanding shares 3,290 3,282 0.2
Market value per share $ 27.70 $ 24.98 11
- ---------------------------------------------------------------------------
KEY PERFORMANCE DATA Percent
FOR THE THIRD QUARTER 2004 2003 Change
- ---------------------------------------------------------------------------
NET INCOME $ 1,544 $ 1,212 27
Return on average assets 1.06% 1.08% (2.1)
Return on average equity 15.96% 13.37% 19
Net interest margin 3.82% 3.80% 0.5
Efficiency ratio 58.51% 58.15% 0.6
PER SHARE DATA:
Net income - basic $ 0.47 $ 0.37 27
Net income - diluted $ 0.46 $ 0.36 28
Dividends $ 0.165 $ 0.160 3.1
AVERAGE SHARES:
Basic 3,290 3,282 0.2
Diluted 3,363 3,351 0.4
- ---------------------------------------------------------------------------
Percent
FOR THE FIRST NINE MONTHS 2004 2003 Change
- ---------------------------------------------------------------------------
NET INCOME $ 3,961 $ 3,452 15
Return on average assets 0.98% 1.06% (7.8)
Return on average equity 14.01% 13.00% 7.7
Net interest margin 3.79% 3.94% (3.8)
Efficiency ratio 59.45% 58.51% 1.6
PER SHARE DATA:
Net income - basic $ 1.21 $ 1.05 15
Net income - diluted $ 1.18 $ 1.03 15
Dividends $ 0.49 $ 0.47 4.3
AVERAGE SHARES:
Basic 3,286 3,282 0.1
Diluted 3,364 3,346 0.5
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 Rate 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 three- month and
nine-month periods ended September 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, Savannah and Bryan 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 September 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 solid 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.
Primary risks to 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 former
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.
Enhanced growth rates in loans and deposits, expanded product lines, superior
customer service and quality expansion into new markets are the primary
strategic objectives of the Company. The Board believes the management team and
11
the operational and internal control infrastructure are largely in place to
execute the Company'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 September 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 FDIC as of
June 30, 2004.
The allowance for loan losses totaled $6.180 million, or 1.31 percent of total
loans, at September 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 nine
months ended September 30, 2004, the Company reported net charge-offs of
$82,000, or 0.03 percent of average loans on an annualized basis. This is
compared to net charge-offs of $131,000, or 0.05 percent of average loans for
the first nine months of 2003, also on an annualized basis. During the first
nine months of 2004, a provision for loan losses of $1,195,000 was added to the
allowance for loan losses primarily due to significant growth in the Savannah
and Harbourside loan portfolios.
If the allowance for loan losses had changed by 5 percent, the effect on net
income would have been approximately $192,000. 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 status 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 September 30, 2004. Nonaccrual loans
and loans past due 90 days and greater totaled $131,000, or 0.03 percent of
gross loans, at September 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 $112,000 and $574,000 at September 30,
2004 and December 31, 2003, respectively.
12
RESULTS OF OPERATIONS
THIRD QUARTER, 2004 COMPARED TO THE THIRD QUARTER, 2003
Net income in the third quarter 2004 was $1,544,000, up 27 percent from
$1,212,000 in the third quarter 2003. This represents annualized returns of
15.96 percent on average equity and 1.06 percent on average assets in the third
quarter 2004. Third quarter diluted earnings per share were $0.46 in 2004
compared to $0.36 for 2003.
Third quarter net interest income was $5,281,000 in 2004 as compared to
$3,989,000 in 2003, an increase of $1,292,000, or 32 percent. The increase
included $523,000 of net interest income attributable to the Harbourside
division. Third quarter average loans were $454 million, 27 percent higher in
2004, as compared to $357 million in 2003. The prime rate remained level at 4.00
percent from the third quarter, 2003 through June 2004. The prime rate increased
to 4.75 percent as a result of three 25 basis point increases by the Federal
Reserve Board (Fed) in the third quarter, 2004. The third quarter net interest
margin increased to 3.82 percent in 2004 from 3.80 percent in 2003. Higher
interest rates are expected to favorably impact the net interest margin.
The third quarter provision for credit losses was $320,000 for 2004, compared to
$255,000 for the comparable period of 2003, including $145,000 in 2004 related
to Harbourside loan growth. Changes in the provision each year are impacted as
discussed in the "Allowance for Credit Losses" section above. Third quarter loan
growth was $26.9 million in 2004, primarily in real estate loans, compared to
$12.6 million in loan growth in the third quarter, 2003. Third quarter net
recoveries were $15,000 in 2004 compared to net charge-offs of $20,000 in 2003.
Significant loan growth in the Savannah and Harbourside loan portfolios is the
primary reason for the higher provision for loan losses in 2004.
Third quarter noninterest income was $1,029,000 in 2004 compared to $943,000 in
2003, an increase of $86,000 or 9.1 percent. Third quarter other income included
gains on sale of mortgage loans of $255,000 in 2004 compared to $252,000 in
2003. Harbourside net loan sale gains in 2004 were offset by lower third quarter
volumes in Savannah and Bryan. No market valuation adjustments were required for
loans held for sale during the third quarter, 2004.
Third quarter other expenses were $3,692,000 in 2004 compared to $2,868,000 in
2003, an increase of $824,000, or 29 percent. Third quarter salaries and
benefits expense increased $507,000, or 31 percent in 2004. Excluding
Harbourside personnel costs of $322,000, the personnel cost increase was 11
percent. Third quarter information technology expense increased approximately
$46,000, or 21 percent, primarily due to the Harbourside expansion, improved
systems capabilities and account / transaction volume increases. Excluding costs
of $448,000 related to Harbourside and $63,000 of non-recurring expense,
noninterest expenses increased 10.9 percent when compared to comparable
operations in the third quarter of 2003.
The third quarter provision for income taxes was $754,000 in 2004 and $597,000
in 2003. The combined effective federal and state tax rates were 32.8 percent
and 33.0 percent in 2004 and 2003, respectively. The decrease in the effective
rate was due primarily to higher tax credits partially offset by lower
tax-exempt interest income in 2004 as compared to 2003. The Company has never
recorded a valuation allowance against deferred tax assets. All deferred tax
assets are considered to be realizable due to expected future taxable income.
13
FIRST NINE MONTHS, 2004 COMPARED WITH 2003
Net income in the first nine months 2004 was $3,961,000, up 15 percent from
$3,452,000 in the first nine months 2003. This represents annualized returns of
14.01 percent on average equity and 0.98 percent on average assets in the first
nine months 2004. First nine months diluted earnings per share were $1.18 in
2004 compared to $1.03 for 2003. The above earnings include $34,000 in 2004 and
$29,000 in 2003 of year-to-date net losses for Harbourside Mortgage, the loan
production office on Hilton Head Island, South Carolina.
The first nine months net interest income was $14,516,000 in 2004 compared to
$11,977,000 in 2003, an increase of $2,539,000, or 21 percent. The increase
included $1,098,000 of net interest income attributable to the Harbourside
division. First nine months average loans were $428 million, 23 percent higher
in 2004, as compared to $349 million in 2003. The first nine months average loan
to deposit ratio increased to 99 percent in 2004 as compared to 97 percent in
2003. The net interest margin for the first nine months decreased to 3.79
percent in 2004 from 3.94 percent in 2003 due to continued downward repricing of
assets until the third quarter, 2004.
Higher interest rates began to favorably impact the net interest margin on a
quarterly basis in the third quarter, 2004. Further interest rate increases are
anticipated by the financial markets.
The first nine months provision for credit losses was $1,195,000 for 2004,
compared to $790,000 for the comparable period of 2003, including $405,000 in
2004 related to Harbourside loan growth. Changes in the provision each year are
impacted as discussed in the "Allowance for Credit Losses" section above. First
nine months loan growth was $85 million in 2004 and $31 million in 2003. First
nine months net charge-offs were $82,000 in 2004 compared with $131,000 in 2003.
Significant loan growth in the Savannah and Harbourside loan portfolios is the
primary reason for the higher provision for loan losses in 2004.
First nine months noninterest income was $3,009,000 in 2004 compared to
$2,603,000 in 2003, an increase of $406,000 or 16 percent. First nine months
other income included net gains on sale of mortgage loans of $730,000 in 2004
compared to $670,000 in 2003, an increase of $60,000 or 9 percent, primarily due
to $382,000 in net loan sale gains in Harbourside partially offset by lower
mortgage refinancing volumes in Savannah and Bryan. Other noninterest income
increased by $206,000, due primarily to the $114,000 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 market valuation
adjustments were required for loans held for sale during the first nine months,
2004.
First nine months noninterest expenses were $10,419,000 in 2004 compared to
$8,617,000 in 2003, an increase of $1,802,000, or 21 percent. First nine months
salaries and benefits expense increased $1,171,000, or 24 percent in 2004.
Excluding Harbourside personnel costs of $709,000, the personnel cost increase
was 10 percent. The first nine months information technology expense increased
approximately $118,000, or 18 percent, primarily due to the Harbourside
expansion, improved systems and service capabilities. Excluding noninterest
expense increases of $1,113,000 related to Harbourside and $63,000 of
non-recurring expense, noninterest expenses increased 7.3 percent when compared
to the first nine months of 2003.
The first nine months provision for income taxes was $1,950,000 in 2004 and
$1,721,000 in 2003. The combined effective federal and state tax rates were 33.0
percent and 33.3 percent in 2004 and 2003, respectively. The decrease in the
effective rate was due primarily to higher tax exempt income from life insurance
contracts and higher tax credits 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 nine months increase in loans of $85 million and the
net increase in loans held for sale of $15 million in 2004 was funded primarily
by $76 million in deposits and the remainder in other borrowings. Deposit growth
included $63 million in time deposits issued through brokers. The other
borrowings included an additional $4 million in trust preferred debt issued in
the third quarter, 2004.
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
September 30, 2004 and 2003 as other accumulated comprehensive income.
Average third quarter total assets increased 27 percent to $580 million in 2004
from $447 million in 2003. Average total assets for the first nine months
increased 24 percent to $541 million in 2004 from $435 million in 2003. Total
assets were $580 million and $455 million at September 30, 2004 and 2003,
respectively, an increase of 27 percent. The new Harbourside division accounted
for approximately $68 million of the September 30, 2004 assets.
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 nine months 2004, funding sources were
expanded to include non-local brokered time deposits of $63 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
September 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 $39.0 million, or 6.73 percent of total
assets at September 30, 2004. The table below includes the regulatory capital
ratios for the Company and each subsidiary bank along with the minimum capital
ratio and the ratio required to maintain a well-capitalized regulatory status.
- -------------------------------------------------------------------------------
Well-
($ in thousands) Company Savannah Bryan Minimum Capitalized
- -------------------------------------------------------------------------------
Qualifying Capital
- -----------------
Tier 1 capital $48,779 $33,315 $11,505 - -
Total capital 54,557 37,551 13,034 - -
Leverage Ratios
- ---------------
Tier 1 capital to
average assets 8.40% 7.60% 8.01% 4.00% 5.00%
Risk-based Ratios
- -----------------
Tier 1 capital to
risk-weighted assets 10.56% 9.84% 9.42% 4.00% 6.00%
Total capital to
risk-weighted assets 11.81% 11.09% 10.67% 8.00% 10.00%
Tier 1 and total capital at the Company level includes $10.3 million of
subordinated debt issued to the Company's unconsolidated trust preferred
affiliates at September 30, 2004. Tier 1 and total capital also includes the
allowance for credit losses up to 1.25 percent of risk-weighted assets.
During the second quarter 2004, the Federal Reserve finalized capital
regulations permitting trust preferred debt to be included in Tier 1 Capital up
to a limit of 25 percent of the sum of trust-preferred debt and tangible
capital. The Company's higher asset growth rate during the last twelve months
15
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 ratios at the Subsidiary banks which are at levels which require
short-term and long-term planning as well as continuous monitoring.
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 has FHLB borrowing capacity
of approximately $115 million of which $36 million was advanced at September 30,
2004. Qualifying collateral reports have been filed providing immediately
accessible funding of approximately $75 million. 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 cash flow maturity and repricing gap at September 30, 2004 was
approximately $122 million at one year, or 22 percent of total interest-earning
assets. Fixed rate earning assets with maturities over five years totaled $14
million, or 2.5 percent of total interest-earning assets. See Table 1 for cash
flow maturity and repricing gap.
The Company is asset-sensitive within one year. The Company is well-positioned
for a rising rate environment, which began in the third quarter. The Federal
Reserve increased the federal funds target rate by 25 basis points three times
between June 30, 2004 and September 21, 2004. It has communicated a bias toward
higher interest rates implemented in a measured process.
The gap position between one and five years is of less concern because
management has time to respond to changing financial conditions with actions
that reduce the impact of the longer-term gap positions on net interest income.
However, fixed rate assets with maturities over five years may include
significant rate risk in the event of significant market rate increases.
Management monitors interest rate risk on a quarterly basis using
rate-sensitivity gap analysis, rate shock simulation and performance forecasting
measures. If and when projected interest rate risk exposures are outside of
policy tolerances, specific actions to return interest rate risk exposures to
acceptable levels are reported to the Board by management. Management continues
to upgrade its interest rate risk reporting systems to provide better
information on a more frequent basis. These capabilities are especially valuable
during periods of volatile interest rates.
16
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING
The following is the long-term maturity and repricing data for the Company as of
September 30, 2004:
- ---------------------------------------------------------------------------------------------------------------
($ in 000s) 0-3 3 - 12 1 - 3 3 - 5 Over 5
INTEREST BEARING ASSETS Immediate Months Months Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------
Investment securities $ - $ 68 $ 6,323 $ 20,332 $ 9,542 $ 4,084 $ 40,349
Interest-bearing deposits 9,876 - - - - - 9,876
Federal funds sold 9,145 - - - - - 9,145
Loans held for sale - 25,517 - - - - 25,517
Loans - fixed rates - 24,000 66,560 86,492 44,972 9,939 231,963
Loans - variable rates 239,225 - - - - - 239,225
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 258,246 49,585 72,883 106,824 54,514 14,023 556,075
- ---------------------------------------------------------------------------------------------------------------
INTEREST BEARING DEPOSITS:
NOW and savings ** 20,247 10,124 30,372 40,493 - - 101,236
Money market accounts** 17,381 7,991 23,973 30,073 - - 79,418
Time deposits - 35,628 72,477 79,589 22,969 39 210,702
Federal Home Loan Bank Advances - 101 260 15,693 1,471 3,412 20,937
Other borrowings 39,858 - - - - - 39,858
Trust Preferred Debt - - - - - 10,310 10,310
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 77,486 53,844 127,082 165,848 24,440 13,761 462,461
- ---------------------------------------------------------------------------------------------------------------
GAP-EXCESS ASSETS (LIABILITIES) 180,760 (4,259) (54,199) (59,024) 30,074 262 93,614
- ---------------------------------------------------------------------------------------------------------------
GAP-CUMULATIVE $180,760 $176,501 $122,302 $63,278 $93,352 $93,614 $93,614
===============================================================================================================
CUMULATIVE SENSITIVITY RATIO * 3.33 2.34 1.47 1.15 1.21 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 -
THIRD 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 third quarter of
2004 and 2003.
Average Average Taxable-Equivalent (a) Variance
Balance Rate Interest Attributable to
- ------------------ ---------- -------------- Vari- ---------------
2004 2003 2004 2003 2004 2003 Ance Rate Volume
- -------- -------- ---- ---- ------ ------ ------ ------ ------
(Thousands) (%) (Thousands) (Thousands)
ASSETS
$ 18,387 $ 14,272 1.38 0.92 Interest-bearing deposits $ 64 $ 33 $ 31 $ 17 $ 14
37,943 35,699 3.86 4.10 Investments - taxable 369 369 - (22) 22
5,406 6,917 9.17 8.83 Investments - non-taxable 125 154 (29) 6 (35)
5,120 8,894 1.47 0.94 Federal funds sold 19 21 (2) 12 (14)
33,636 - 5.10 - Loans held for sale 432 - 432 - 432
453,688 357,432 5.74 5.67 Loans (c) 6,562 5,106 1,456 64 1,392
- -------- -------- ------ ------
554,180 423,214 5.42 5.33 Total int-earning assets 7,571 5,683 1,888 99 1,789
26,215 23,823 ---- ---- Non-earning assets ------ ------ ------ ------ ------
- -------- --------
$580,395 $447,037 Total assets
======== ========
LIABILITIES AND EQUITY
Deposits
$ 81,235 $ 76,323 0.36 0.40 NOW accounts 74 76 (2) (6) 4
19,506 16,018 0.49 0.47 Savings accounts 24 19 5 1 4
78,112 64,624 1.06 1.14 Money market accounts 209 186 23 (13) 36
68,974 64,923 2.74 2.88 CD's, $100M or more 476 472 4 (24) 28
54,075 - 2.96 - CD's, $100M - broker 403 - 403 - 403
77,123 78,462 2.63 2.77 Other time deposits 512 547 (35) (26) (9)
- -------- -------- ------ ------
Total interest-
379,025 300,350 1.78 1.72 bearing deposits 1,698 1,300 398 46 352
20,981 20,488 4.88 5.02 FHLB advances 258 259 (1) (7) 6
51,576 19,858 1.60 1.44 Other borrowings 208 72 136 8 128
7,217 - 3.63 - Trust preferred debt 66 - 66 - 66
- -------- -------- ------ ------
Total interest-
458,799 340,696 1.93 1.90 bearing liabilities 2,230 1,631 599 25 574
---- ---- ------ ------ ------ ------ ------
79,337 68,245 Non-int bearing deposits
3,887 2,122 Other liabilities
38,372 35,974 Stockholders' equity
- -------- --------
$580,395 $447,037 Liabilities and equity
======== ========
3.49 3.43 Interest rate spread
==== ====
Net interest income $5,341 $4,052 $1,289 $ 74 $1,215
====== ====== ====== ====== ======
3.82 3.80 Net interest margin
==== ====
$ 95,381 $ 82,518 Net earning assets
======== ========
Average deposits and
$458,362 $368,595 1.47 1.40 average cost of deposits
======== ======== ==== ====
99% 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.
18
TABLE 3 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS -
FIRST NINE 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 nine months
of 2004 and 2003.
Average Average Taxable-Equivalent (a) Variance
Balance Rate Interest Attributable to
- ------------------ ---------- -------------- Vari- ---------------
2004 2003 2004 2003 2004 2003 Ance Rate Volume
- -------- -------- ---- ---- ------ ------ ------ ------ ------
(Thousands) (%) (Thousands) (Thousands)
ASSETS
$ 14,139 $ 8,741 1.11 0.99 Interest-bearing deposits $ 118 $ 65 $ 53 $ 8 $ 45
35,267 38,102 4.01 4.53 Investments - taxable 1,061 1,292 (231) (150) (81)
5,790 7,336 9.11 8.95 Investments - non-taxable 396 491 (95) 9 (104)
7,590 10,871 1.04 1.09 Federal funds sold 59 89 (30) (5) (25)
25,631 - 5.12 - Loans held for sale 986 - 986 - 986
427,687 348,587 5.60 5.87 Loans (c) 17,982 15,301 2,681 (701) 3,382
- -------- ------- ------ ------
516,104 413,637 5.32 5.57 Total int.-earning assets 20,602 17,238 3,364 (789) 4,153
25,065 21,529 ---- ---- Non-earning assets ------ ------ ------ ------ ------
- -------- --------
$541,169 $435,166 Total assets
======== ========
LIABILITIES AND EQUITY
Deposits
$ 84,571 $ 73,437 0.35 0.37 NOW accounts 225 202 23 (7) 30
18,718 15,312 0.50 0.65 Savings accounts 70 75 (5) (18) 13
74,328 65,735 0.99 1.21 Money market accounts 553 594 (41) (107) 66
70,113 62,013 2.75 3.10 CD's, $100M or more 1,445 1,437 8 (164) 172
33,209 - 2.86 - CD's, $100M - non local 712 - 712 - 712
77,351 79,569 2.58 2.99 Other time deposits 1,496 1,780 (284) (248) (36)
- -------- -------- ------ ------
Total interest-
358,290 296,066 1.67 1.85 bearing deposits 4,501 4,088 413 (384) 797
20,817 20,543 4.91 5.00 FHLB advances 768 769 (1) (14) 13
39,599 17,314 1.48 1.46 Other borrowings 441 191 250 2 248
6,598 - 3.96 - Trust preferred debt 196 - 196 - 196
- -------- -------- ------ ------
Total interest-
425,304 333,923 1.85 2.02 bearing liabilities 5,906 5,048 858 (429) 1,287
- -------- -------- ---- ---- ------ ------ ------ ------ ------
75,387 63,599 Non-int bearing deposits
2,803 2,141 Other liabilities
37,675 35,503 Stockholders' equity
- -------- --------
$541,169 $435,166 Liabilities and equity
======== ========
3.47 3.55 Interest rate spread
==== ====
Net interest income $14,696 $12,190 $ 2,506 $ (360) $ 2,866
======= ======= ======= ====== =======
3.79 3.94 Net interest margin
==== ====
$ 90,800 $ 79,714 Net earning assets
======== ========
Average deposits and
$433,677 $359,665 1.38 1.52 average cost of deposits
======== ======== ==== ====
99% 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
TABLE 4 - 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 September 30, 2004, the Company had unfunded commitments to extend
credit of $123 million and outstanding stand-by letters of credit of $7 million.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments. Management does not anticipate that funding obligations arising
from these financial instruments will adversely impact its ability to fund
future loan growth or deposit withdrawals.
The following table includes a breakdown of short-term and long-term payments
due under long-term contracts:
PAYMENTS DUE BY PERIOD
($ in thousands) ---------------------------------------------
TOTAL LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS 1 YEAR YEARS YEARS 5 YEARS
- -------------------------------------------------------------------------------
FHLB long-term debt $20,937 $ 361 $ 15,693 $ 1,471 $ 3,412
Subordinated debt 10,310 - - - 10,310
Operating leases - buildings 5,065 567 1,453 1,465 1,580
Information technology contracts 348 304 44 - -
- -------------------------------------------------------------------------------
Total $36,660 $ 1,232 $ 17,190 $ 2,936 $ 15,302
- -------------------------------------------------------------------------------
20
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. Unregistered sales of equity 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
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
21
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 11/9/04 /s/ G. Mike Odom, Jr.
--------- --------------------------------
G. Mike Odom, Jr.
Chief Executive Officer
Date 11/9/04 /s/_John C. Helmken II
--------- --------------------------------
John C. Helmken II
President
Date 11/9/04 /s/_Robert B. Briscoe
--------- --------------------------------
Robert B. Briscoe
Chief Financial Officer
22