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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 0-18560
THE SAVANNAH BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-1861820
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
25 Bull Street, Savannah, GA 31401
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(Address of Principal Executive Offices) (Zip Code)
912-629-6486
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b)
of the Exchange Act
Common, $1.00 Par Value Nasdaq National Market
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Securities registered pursuant to Section 12(g)
of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No_
Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No _X_
The aggregate market value of the voting and non-voting common equity at June
30, 2004 held by non-affiliates, based on the price of the last trade of $22.60
per share times 3,117,735 non-affiliated shares, was $70,461,000.
The Registrant's number of shares outstanding at February 28, 2005 was
4,153,320.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of February 28, 2005, the registrant had outstanding 4,153,320 shares of
common stock.
1
Portions of the 2004 Annual Report to Shareholders of Registrant are
incorporated in Parts I, II and IV of this report. Portions of the Proxy
Statement of Registrant dated March 22, 2005 are incorporated in Part III of
this report.
REGISTRANT'S DOCUMENTS INCORPORATED BY REFERENCE
PART NUMBER AND ITEM
DOCUMENT INCORPORATED NUMBER OF FORM 10-K INTO
BY REFERENCE WHICH INCORPORATED
- --------------------------- ------------------------
Page F-24 Part II, Item 5, Market
of Registrant's 2004 Annual for Registrant's Common
Report to Shareholders Equity and Related Shareholder
Matters
Pages F-22 through F-35 of Part II, Item 6,
Registrant's 2004 Annual Selected
Report to Shareholders Financial Data
Pages F-22 through F-35 Part II, Item 7,
of Registrant's Management's Discussion
2004 Annual Report to and Analysis of Financial
Shareholders Condition and Results of
Operations
Pages F-30 and F-33 of Part II, Item 7A, Quantitative
Registrant's 2004 Annual and Qualitative Disclosures
Report to Shareholders About Market Risk
Pages F-1 through F-21 Part II, Item 8,
of Registrant's 2004 Financial Statements and
Annual Report to Shareholders Supplementary Data
Pages 4 through 8, and page 18 Part III, Item 10,
of Registrant's Proxy Directors and Executive
Statement in connection with Officers of the Registrant
its Annual Shareholders' Meeting
to be held April 21, 2005 ("2005 Proxy Statement")
Pages 18 and 19 Part III, Item 11,
of Registrant's 2005 Proxy Statement Executive Compensation
Pages 4 through 8, and page 21 Part III, Item 12,
of Registrant's 2005 Proxy Statement Security Ownership of
Certain Beneficial Owners,
Management and Related
Shareholder Matters
Page 21 of Registrant's 2005 Proxy Part III, Item 13,
Statement Certain Relationships
and Related Transactions
Page 21 of Registrant's 2005 Proxy Part III, Item 14, Principal
Statement Accountant Fees and Services
Pages F-3 through F-21 Part IV, Item 15,
of Registrant's 2004 Exhibits and Financial
Annual Report to Shareholders Statement Schedules
2
THE SAVANNAH BANCORP, INC.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 5
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 20
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
Item 9A. Controls and Procedures 21
Item 9B. Other Information 21
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Shareholder Matters 21
Item 13. Certain Relationships and Related Transactions 21
Item 14. Principal Accountant Fees and Services 21
PART IV
Item 15. Exhibits and Financial Statement Schedules 22
Signature page 24
3
PART I
THE SAVANNAH BANCORP, INC. (THE COMPANY) MAY, FROM TIME TO TIME, MAKE WRITTEN OR
ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS
ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO
SHAREHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM; INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND
SERVICES BY CUSTOMERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF CUSTOMERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE
SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND
SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
OUR BEHALF EXCEPT AS MAY BE REQUIRED BY OUR DISCLOSURE OBLIGATIONS IN FILINGS WE
MAKE WITH THE SEC UNDER FEDERAL SECURITIES LAWS.
4
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
General
The Savannah Bancorp, Inc. (the "Company") was incorporated as a Georgia
business corporation on October 5, 1989, for the purpose of becoming a bank
holding company. The Company became a bank holding company within the meaning of
the Federal Bank Holding Company Act (the "Act") and the Georgia Bank Holding
Company Act (the "Georgia Act") upon the acquisition of 100 percent of the
common stock of The Savannah Bank, National Association, Savannah, Georgia (the
"Savannah Bank") on August 22, 1990.
In February 1998, the Company entered into a plan of merger to exchange shares
of its stock for shares of Bryan Bancorp of Georgia, Inc. ("Bryan"), the bank
holding company for Bryan Bank & Trust ("Bryan Bank"). The transaction was
valued at approximately $24 million. The merger, which was accounted for as a
pooling of interests, was a tax-free reorganization for federal income tax
purposes. The merger was consummated on December 15, 1998. Bryan was merged into
the Company and Bryan Bank became a wholly-owned subsidiary of the Company on
the merger date.
The Savannah Bank, N.A. and Bryan Bank & Trust (the "Subsidiary Banks")
currently are the only operating subsidiaries of the Company. The Savannah Bank
received its charter from the Office of the Comptroller of the Currency ("OCC")
to commence business and opened for business on August 22, 1990. Bryan Bank &
Trust received its charter from the Georgia Department of Banking and Finance
(the "GDBF") in December 1989. The deposits at the Subsidiary Banks are insured
by the Federal Deposit Insurance Corporation (the "FDIC").
In October 2003, The Savannah Bank opened a mortgage loan production office on
Hilton Head Island, South Carolina. This office is approximately 30 miles from
downtown Savannah. This mortgage banking expansion includes the hiring of key
managers, lenders and support personnel from other financial institutions in the
market, some of whom have been impacted by regional bank acquisitions in the
market. In the aggregate, the lenders who have been hired have substantial
relationships with key customers and mortgage banking referral sources in the
Hilton Head market.
As of December 31, 2004, The Savannah Bank had five full service offices, one
loan production office, total assets of $468 million, total loans of $377
million, total deposits of $380 million, total shareholders' equity of $34.8
million and $4.0 million in 2004 net income. As of December 31, 2004, Bryan Bank
had one full service office, total assets of $147 million, total loans of $123
million, total deposits of $129 million, total shareholders' equity of $11.9
million and net income of $2.2 million for the year then ended.
(B) INFORMATION ABOUT INDUSTRY SEGMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise which engages in business activities
that generate revenues and incurs expenses, whose operating results are reviewed
by the chief operating decision makers in the determination of resource
allocation and performance, and for which discrete financial information is
available. The Company presently operates as two commercial banks offering
traditional banking services. Certain departmental revenues and asset and
liability volumes are considered by executive management for performance and
resource allocation purposes. The Company does not currently report financial
results by business segment. The Company tests all business segments on a
quarterly basis to determine whether any individual segment represents more than
10% of total assets of the Company or contributes more than 10% to the revenue
or net income of the Company.
5
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is authorized to engage in any corporate activity permitted by law,
subject to applicable Federal regulatory restrictions on the activities of bank
holding companies. The Company was formed for the purpose of becoming a holding
company to own 100 percent of the stock of the Subsidiary Banks. The holding
company structure provides the Company with greater flexibility than a bank
would otherwise have to expand and diversify its business activities through
newly formed subsidiaries or through acquisitions. The Company has no present
plans to engage actively in any nonbanking business activities.
BANKING SERVICES
The Subsidiary Banks have approximately 160 full-time and 20 part-time employees
and offer a full range of deposit services, including checking accounts, savings
accounts and various time deposits ranging from daily money market accounts to
long-term certificates of deposit. The transaction accounts and time
certificates are tailored to the principal market areas at rates competitive
with those offered in the area. In addition, retirement accounts such as IRA
(Individual Retirement Account) and SEP (Simplified Employee Pension) accounts
are offered. The FDIC insures all deposit accounts up to the maximum amount
(currently $100,000 per account). The Subsidiary Banks solicit these accounts
from individuals, businesses, foundations, organizations, and governmental
authorities.
The Subsidiary Banks offer a full range of short-term and medium-term
commercial, real estate, residential mortgage and personal loans. The Subsidiary
Banks' primary lending focus is business, real estate and consumer lending.
Commercial loans include both secured and a limited volume of unsecured loans.
Consumer loans include secured loans for financing automobiles, home
improvements, real estate and other personal investments. Unsecured consumer
loans are limited and generally made to our most creditworthy borrowers. The
Subsidiary Banks originate fixed and variable rate mortgage loans and offer real
estate construction and acquisition loans.
The Subsidiary Banks' lending policies provide each lending officer with written
guidance for lending activities as approved by the Banks' Boards of Directors.
Real estate loan-to-value guidelines generally conform to regulatory
loan-to-value limits. Additionally, the existence of a reliable source of
repayment/cash flow is usually required before making any loan, regardless of
the security. Appraisals are obtained as required. Lending officers or contract
inspectors make on-site inspections on construction loans. Lending authority is
delegated to each lending officer by the Credit Committee of each Subsidiary
Banks' Board of Directors. Loans in excess of the individual officer limits must
be approved by a senior officer with sufficient approval authority delegated by
these committees. Loans to borrowers whose aggregate exposure exceeds $1,000,000
at Savannah Bank and $500,000 at Bryan Bank require the approval of the Bank's
Credit Committee.
Both management and the directors are aware that environmental liabilities may
negatively impact the financial condition of borrowers, the value of real
property and the contingent environmental clean-up liabilities the Subsidiary
Banks could incur by having a lien on environmentally deficient property. The
Subsidiary Banks generally decline to make loans secured by property with
environmental deficiencies. Environmental surveys are required when there is
reason for concern about potential environmental liabilities.
Both Subsidiary Banks operate residential mortgage loan origination departments.
The departments take mortgage loan applications, obtain rate commitments and
complete various origination documentation and follow-up for an origination and
service release fee from third-party mortgage bankers. In addition to generating
fee income, the department also generates banking relationships from its
customers and real estate-related contacts. These loans are funded by other
mortgage investors and have not been warehoused on the Subsidiary Banks' books.
The 2004 expansion of activities in the mortgage banking area include the
expertise to process, underwrite, close, warehouse, sell and service mortgage
loans originated and sold into the secondary market or held in the Subsidiary
Banks' portfolios. Increased fee income at origination and servicing fee income
over the life of the loan, offset by additional costs associated with the
expanded services, provide an excellent long-term opportunity for increased net
earnings. Variations in mortgage origination volume, initial valuation of
mortgage servicing assets (MSAs) and the ongoing valuation of MSAs for
impairment result in the potential for both positive and negative earnings
volatility.
6
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES
The Subsidiary Banks have a multi-faceted program designed to control and
continually monitor the credit risks inherent in the loan portfolios. This
begins with a structured loan approval process in which the Board of Directors
delegates authority for various types and amounts of loans to loan officers on a
basis commensurate with seniority and lending experience. The Subsidiary Banks
use an asset classification system which is consistent with the regulatory
classification system. This system applies to all assets of an insured
institution and requires each institution to periodically classify its assets.
There are four risk grades of "criticized" assets: Special Mention, Substandard,
Doubtful and Loss. Assets designated as substandard, doubtful or loss are
considered "classified". The classification of assets is subject to regulatory
review and reclassification. The Subsidiary Banks include aggregate totals of
criticized assets, and general and specific valuation reserves in quarterly
reports to the Board of Directors, which approves the overall loan loss reserve
evaluation. The Subsidiary Banks' loan classification systems utilize both the
account officer and an independent loan review function to monitor the
classification of loans.
Account officers are charged with the responsibility of monitoring changes in
loan quality within his or her loan portfolio and reporting changes directly to
loan review and senior management. The internal credit administration function
monitors loans on a continuing basis for both documentation and credit related
exceptions. Additionally, the Subsidiary Banks have contracted with an external
loan review service which performs a review of the Subsidiary Banks' loans to
determine that the appropriate risk grade has been assigned to each borrowing
relationship and to evaluate other credit quality, documentation and compliance
factors. Delinquencies are monitored on all loans as a basis for potential
credit quality deterioration. Loans that are delinquent 90 days (four payments)
or longer generally are placed on nonaccrual status unless the collectibility of
principal and accrued interest is assured beyond a reasonable doubt. In certain
cases, loans less than 90 days (four payments) delinquent are placed on
nonaccrual status when uncertainty exists as to the loan's collectibility. Real
estate acquired through foreclosure is classified as substandard unless there is
sufficient evidence to indicate such classification is not warranted.
The allowance for credit losses is evaluated as described in the MD&A section of
the 2004 Annual Report on pages F-26 and 27.
OTHER BANKING SERVICES
Savannah Bank was granted trust powers from the OCC in 1996. The Trust
Department uses a state of the art accounting system which includes the
capability to provide clients and their advisors with Internet access to view
their accounts. Employee benefit administration and certain money management
functions are outsourced to third parties. Using these resources, the Trust
Department offers a full array of trust services, including investment
management, personal trusts, custodial accounts, estate administration and
retirement plan asset management. The Trust Department contracts with Marshall &
Ilsley Trust Company to outsource trust data processing, securities safekeeping
and certain other operational functions.
The Subsidiary Banks offer cash management services, Internet banking and bill
payment, a non-cash deposit courier service, safe deposit boxes, travelers
checks, direct deposit of payroll, U.S. Savings bonds, official bank checks and
money orders and automatic drafts for various accounts. The Subsidiary Banks
have seven automated teller machines in the area and are members of the STAR
networks of automated teller machines. The Subsidiary Banks issue ATM and debit
cards. They also offer VISA and MasterCard credit cards, which have a
pre-authorized credit limit for personal purchases and expenses, as an agent for
a correspondent bank.
LOCATION AND SERVICE AREA
The Subsidiary Bank's primary service areas include the city of Savannah,
Chatham County, the city of Richmond Hill, (which is 20 miles southwest of
downtown Savannah), Bryan County in Georgia and Hilton Head Island, the town of
Bluffton and Beaufort County in South Carolina. Its secondary service area is
Effingham and Liberty Counties, Georgia and Jasper County, South Carolina. The
Subsidiary Banks' target customers are individuals and small to medium sized
businesses, including wholesale, retail and professional service businesses in
the community. The Subsidiary Banks also target individuals who meet certain net
worth and income requirements as potential customers for private banking
services.
7
The Savannah Bank's main office, known as the Johnson Square Office, opened in
August 1990 and is located in the primary financial district in downtown
Savannah, where most of the commercial banks in the primary service area have
their main Savannah offices. In recent years, regional banks with headquarters
outside of the state of Georgia have acquired several of the banks in the
primary service area. The Savannah Bank emphasizes that it is based in Savannah
and that its directors and officers are committed to the economic development of
the Savannah area.
Bryan Bank's main office opened in December 1989 and is located in the primary
commercial area of the city of Richmond Hill. Two other community bank branch
offices and one grocery store branch office are located in Richmond Hill.
In October 1992, Savannah Bank opened its second office at 400 Mall Boulevard.
The Mall Boulevard Office is located in the primary commercial and retail
district in Savannah which includes a high concentration of professional and
service-related businesses.
In November 1995, Savannah Bank opened its third office, the West Chatham
Office, at 100 Chatham Parkway. West Chatham is a full service office located
six miles west of the main office in a significant commercial and industrial
growth area of Chatham County.
In October 1997, the fourth office at 4741 Highway 80 East on Whitemarsh Island,
six miles east of the main office, opened for business. Deposits, mortgage loans
and consumer loans are the primary opportunities for this location which serves
a large concentration of higher net worth individuals.
In October 1998, Savannah Bank opened its fifth location in the Medical Arts
Shopping Center. This office is strategically located near two major hospitals
and numerous medical, dental and professional practices. This location is
approximately four miles southeast of the main office.
In May 2002, the Company opened an operations center occupying 5,000 square
feet of office space at 450 Mall Boulevard, adjacent to Savannah Bank's existing
branch office at 400 Mall Boulevard. The imaged item processing, statement
rendering, information technology, deposit operations and branch operations
support functions are located at this center. These functions work closely
together and their relocation from different offices to one location provides an
environment and opportunity for significant service enhancements, efficiencies
and synergies.
In October 2003, Savannah Bank opened a mortgage loan production office on
Hilton Head Island, SC which operates as Harbourside Mortgage Company, a
division of The Savannah Bank, N.A. This office is located at 23C Shelter Cove
Lane in a commercial and retail area of the island. Management anticipates that
Harbourside will move into larger permanent space near its present location in
the fourth quarter 2005.
The Subsidiary Banks' business plans rely principally upon local advertising and
promotional activity and upon personal contacts by its directors, officers and
shareholders to attract business and to acquaint potential customers with the
Subsidiary Banks' personalized services. Both Subsidiary Banks emphasize a high
degree of personalized customer service. Advertising and marketing emphasize the
advantages of dealing with an independent, locally-owned, relationship-oriented
bank to meet the particular needs of individuals, professionals and small to
medium-size businesses in the community.
8
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The objective of asset-liability management is to provide adequate funding for
asset growth at the lowest cost within the interest rate risk parameters
approved by the Board. Assets of the Subsidiary Banks consist primarily of loans
and marketable securities. In an effort to maintain adequate liquidity and
minimize declines in the net interest margin, the maturity and rate sensitivity
of the loan and investment portfolios is compared to the maturity and rate
sensitivity of the liabilities used to fund these assets. Various short-term and
long-term strategies and actions to meet short-term and long-term objectives are
considered by the company's Executive Management Asset-Liability Committee
("ALCO Committee"). Actions and strategies are recommended by the ALCO Committee
to the subsidiary bank board committees responsible for oversight of the
asset-liability management of each bank.
Quantitative disclosures regarding liquidity management are included on pages
F-30 to F-33 of the Company's 2004 Annual Report to Shareholders (2004 Annual
Report).
Both banks have historically funded loan growth primarily with local deposits.
However, higher loan volumes in 2004, partially generated by the new Harbourside
loan production office created the need to issue time deposits outside the local
markets through brokers to fund some of the loan growth.
In the first quarter of 2004, Savannah Bank began purchasing time deposits
through brokers. The bank's asset size (over $300 million), well-capitalized
status and favorable industry rankings allow it to meet the minimum credit
quality standards for virtually all investors in brokered time deposits. This
position allows the bank to obtain brokered time deposit funding at the lower
end of the interest cost range for the various maturities. Approximately $85
million of brokered time deposits were acquired in 2004 by Savannah Bank.
Quarterly loan growth and funding projections for each bank are reviewed and
approved by the ALCO Committee and reported to the appropriate bank board
committees. Unexpected changes in market rates, competition, personnel and
customer responses to these changes may cause significant variances in volumes
and rates. Actual variances from quarterly plans are monitored by executive
management and reported quarterly or more frequently, when necessary, to the
bank board committees.
INTEREST RATE RISK
Interest rate risk is a measure of exposure to changes in net interest income
and the theoretical market value of portfolio equity due to changes in market
interest rates. The differential between interest rate sensitive assets and
interest rate sensitive liabilities over a specified period of time (known as
"gap") represents a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of rate sensitive assets over
rate sensitive liabilities, while a negative gap indicates an excess of rate
sensitive liabilities over rate sensitive assets. Quantitative discussion of the
Company's interest rate risk is included on pages F-30 to F-34 in the 2004
Annual Report.
The Subsidiary Banks operate within parameters established by an interest rate
risk policy with oversight by the ALCO Committee, which makes quarterly reports
and recommendations to the Subsidiary Banks' board level committees. The policy
outlines limits on interest rate risk in terms of projected changes in net
interest income and the net market values of assets and liabilities resulting
from changes in the interest rate environment. These measurements are made
through cash flow and repricing analyses which project the impact of changes in
interest rates on the Subsidiary Banks' net interest income. The policy also
outlines responsibility for monitoring interest rate risk and the process for
the approval, implementation and monitoring of interest rate risk strategies to
achieve the Company's interest rate risk objectives.
The Company has no investment risk in off-balance sheet derivative investments.
FEDERAL AND STATE LAWS AND REGULATION OF BANKS AND BANK HOLDING COMPANIES
Bank holding companies and banks are extensively regulated under both federal
and state law. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable law or
regulation may have a material effect on the business of the Company and its
subsidiaries.
9
Savannah Bank is subject to extensive supervision and regulation by the OCC, and
Bryan Bank is subject to extensive supervision by the GBDF and the FDIC. The
regulators are responsible for overseeing the affairs of all banks and
periodically examining banks to determine their compliance with laws and
regulations. Banks must make quarterly reports of their financial condition and
results of operations to the FDIC. The FDIC reviews information for accuracy,
consistency and reasonableness. Quarterly financial information is made
available to regulators and the public approximately 45 days after each
quarter-end. Regulators use this data for quarterly offsite monitoring of the
financial condition of banks. Quarterly holding company reports are filed with
the Federal Reserve Bank of Atlanta (FRB) within 45 days of each quarter-end.
This financial information is reviewed by the FRB for accuracy, consistency and
reasonableness and is also made available to holding company database providers
within 75 days of the end of each quarter. Bank analysts, regulators and
consultants regularly use this information in analyzing historical and expected
performance of banks and bank holding companies.
In addition, the regulators have authority to issue cease and desist orders
against banks and bank holding companies which are about to engage, are engaging
or have engaged in unsafe or unsound practices in the conduct of their business.
The regulators can order affirmative action to correct any harm resulting from a
violation or practice, including, but not limited to, making restitution and
providing reimbursement or guarantees against loss in certain cases. Regulators
also administer several federal statutes, such as the Community Reinvestment Act
and the Depository Institution Management Interlocks Act, which apply to banks.
The Subsidiary Banks are subject to special examination by the FDIC and to
certain FDIC regulations.
Regulators have adopted risk-based capital requirements that specify the minimum
level for which no prompt corrective action is required. In addition, the FDIC
adopts FDIC insurance assessment rates based on certain risk-based and equity
capital ratios. The table in Note 12 to the Consolidated Financial Statements in
the 2004 Annual Report shows the capital ratios for the Company and the
regulatory minimum capital ratios at December 31, 2004. The capital ratios of
the Company and each Subsidiary Bank exceeded the ratios required to be
considered "well-capitalized" by the FDIC.
A national banking association is insured by the FDIC and must be a member of
the Federal Reserve System. Therefore, the Subsidiary Banks are subject to
applicable provisions of the Federal Reserve Act which restrict the ability of
any national bank to extend credit to its parent holding company. Additionally,
a national banking association cannot extend credit to any affiliate (including
its parent and non-bank subsidiaries of its parent) to purchase the assets
thereof, issue a guarantee, acceptance or letter of credit (including an
endorsement or standby letter of credit) on banking of its affiliates, invest in
the stock or securities thereof or, under certain circumstances, take such stock
or securities as collateral for loans to any borrower.
Shareholders of banks (including bank holding companies which own stock in
banks, such as the Company) may be compelled by bank regulatory authorities to
invest additional capital in the event their bank's capital becomes impaired by
losses or otherwise. Failure to pay such an assessment could cause a forced sale
of the holder's bank stock. In addition, the Company may also be required to
provide additional capital to any additional banks that it acquires as a
condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
The earnings of the Subsidiary Banks and, consequently, of the Company, are
affected significantly by the policies of the Federal Reserve Board, which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the rate
paid by banks on bank borrowings, and changes in reserve requirements against
bank deposits.. These techniques are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of commercial banks in the past and are expected to
continue to do so in the future.
The Company, as a bank holding company, is required to register as such with the
Federal Reserve Board and the Georgia Department of Banking and Finance. It is
required to file with both of these agencies quarterly and annual reports and
other information regarding its business operation and those of its
subsidiaries. It is also subject to examination by these two agencies and will
be required to obtain their approval before acquiring, directly or indirectly,
ownership or control of any voting shares of a bank or bank subsidiary of a bank
holding company if, after such acquisition, it would own or control, directly or
indirectly, more than five percent of the voting stock of such bank or banking
subsidiary of a bank holding company. Furthermore, a bank holding company is
10
prohibited from acquiring direct or indirect ownership or control of any voting
stock of any company which is not a bank or bank holding company, with limited
exceptions. It must engage only in the business of banking, managing or
controlling banks or furnishing services to or performing services for its
subsidiary banks. During 1996, the Federal Reserve Board enacted regulations
that are slightly less restrictive regarding the types of businesses which bank
holding companies may own.
Banking organizations are prohibited under the Act from participating in new
financial affiliations unless their depository institution subsidiaries are
well-capitalized and well-managed. Regulators are required to address any
failure to maintain safety and soundness standards in a prompt manner. In
addition, regulators must prohibit holding companies from participating in new
financial affiliations if, at the time of certification, any insured depository
affiliate had received a less than "satisfactory" Community Reinvestment Act
("CRA") rating at its most recent examination.
Affiliation Authority - The Act amended section 4 of the Bank Holding Company
Act ("BHCA") to provide a new framework for engaging in new financial
activities. Those bank holding companies ("BHCs") that qualify to engage in the
new financial activities are designated as FHCs. New provisions of the BHCA
permit BHCs that qualify as FHCs to engage in activities, and acquire companies
engaged in activities, that are financial in nature or incidental to such
financial activities. FHCs are also permitted to engage in activities that are
"complementary" to financial activities if the Board of Governors of the Federal
Reserve Bank ("FRB Board") determines that the activity does not pose a
substantial risk to the safety or soundness of the institution or the financial
system in general.
The FRB Board may act by either regulation or order in determining what
activities are financial in nature, incidental to financial in nature, or
complementary. In doing so, the FRB Board must notify the Treasury of requests
to engage in new financial activities and may not determine that an activity is
financial or incidental to a financial activity if Treasury objects.
Furthermore, Treasury may propose that the Board find a particular activity
financial in nature or incidental to a financial activity. The Act establishes a
similar procedure with regard to the Treasury's (acting through the OCC)
determination of financial activities and activities that are incidental to
financial activities for subsidiaries of national banks. Congress intends for
the Federal Reserve and Treasury to establish a consultative process that will
negate the need for either agency to veto a proposal of the other agency.
Federal Home Loan Bank Reform - The Act reformed the Federal Home Loan Bank
System, including expanding the collateral that a community bank can pledge
against FHLB System advances, thus giving smaller banks access to a substantial
new liquidity source. FHLB members can also pledge small business and
agricultural loans (or securities representing a whole interest in such loans)
as collateral for advances.
Privacy - The Act imposed a number of new restrictions on the ability of
financial institutions - read as any entity offering financial products,
including banks, insurance companies, securities houses, and credit unions - to
share nonpublic personal information with nonaffiliated third parties.
Specifically, the bill:
o requires financial institutions to establish privacy policies and disclose
them annually to all their customers, setting forth how the institutions
share nonpublic personal financial information with affiliates and third
parties
o directs regulators to establish regulatory standards that ensure the
security and confidentiality of customer information
o permits customers to prohibit ("opt out" of permitting) such institutions
from disclosing personal financial information to nonaffiliated third
parties
o prohibits transfer of credit card or other account numbers to
third-party marketers
o prohibits pretext calling (that is, makes it illegal for information
brokers to call banks to obtain customer information with the intent to
defraud the bank or customer)
o protects stronger state privacy laws, as well as those not
"inconsistent" with these Federal rules
o requires the Treasury and other Federal regulators to study the
appropriateness of sharing information with affiliates, including
considering both negative and positive aspects of such sharing for
consumers.
The bill also imposes an affirmative obligation on banks to respect their
customers' privacy interests. Language protects a community bank's ability to
share information with third parties selling financial products (for example,
insurance or securities) to bank customers. Community banks can thus continue
such sales practices without being subject to the opt-out provisions contained
elsewhere in the legislation.
11
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act) has introduced a process that enables nationwide interstate
banking through bank subsidiaries and interstate bank mergers. Separately, the
Riegle-Neal Act also permits bank subsidiaries to act as agents for each other
across state lines. Since September 29, 1995, adequately capitalized and managed
bank holding companies have been permitted to acquire control of a bank in any
state. Any acquisitions are subject to concentration limits. Beginning June 1,
1997, banks were permitted to merge with one another across state lines. The
Interstate Banking Act also permits de novo branching to the extent that a
particular state "opts into" the de novo branching provisions. The legislation
preserves the state laws which require that a bank must be in existence for a
minimum period of time before being acquired as long as the requirement is five
years or less. This legislation has relevance for the banking industry due to
increased competitive forces from institutions which may consolidate through
mergers and those which may move into new markets through enhanced opportunities
to branch across state lines. Georgia and South Carolina do not have reciprocal
provisions for de novo charters which means holding companies and banks may not
charter state banks across the state line. The available alternatives include
acquiring a financial institution or potentially moving the charter of a
national bank within 35 miles of its headquarters.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provision of any property or service. Thus, a bank may not extend credit, lease
or sell property or furnish any service or fix or vary the consideration for
such on the condition that (i) the customer should obtain or provide some
additional credit, property or service from or to such bank (other than a loan,
discount, deposit or trust service related to and usually provided in connection
with a loan, discount, deposit or trust service), its bank holding company or
any other subsidiary of its bank holding company or (ii) the customer may not
obtain some other credit, property or service from a competitor, except to the
extent reasonable conditions are imposed in a credit transaction to assure the
soundness of the credit extended.
The Federal Reserve Board has cease and desist powers over parent bank holding
companies and non-banking subsidiaries should their actions constitute a serious
threat to the safety, soundness or stability of a subsidiary bank. The Company
is also subject to certain restrictions with respect to engaging in the business
of issuing, underwriting and distributing securities.
Although the Company is not presently subject to any direct regulatory
restrictions on dividends (other than those of Georgia corporate law), the
Company's long-term ability to pay cash dividends will depend on the amount of
dividends paid by the Subsidiary Banks and any other subsequently acquired
entities. OCC regulations restrict the amount of dividends which the Savannah
Bank may pay without obtaining prior approval. Based on such regulatory
restrictions, the Savannah Bank is limited from paying dividends in a calendar
year, which exceeds the current year's net income combined with the retained net
profits of the preceding two years. Bryan Bank is limited to paying 50 percent
of the prior year net income without getting approval from the GDBF. Banks also
have a financial advantage in the form of lower FDIC assessments if they are
classified as "well-capitalized" by the FDIC. Dividend payout plans of the
Subsidiary Banks will always consider maintaining their "well-capitalized"
classification an important objective. The Company's dividend payout ratio is at
the higher end of peer comparisons. Asset growth rate expectations are
significantly higher than historical growth rates. Continued increases in per
share dividend rates for the long-term are dependent upon the Company's ability
to increase earnings growth rates sufficiently to maintain capital ratios which
meet the well-capitalized minimums over the long-term.
Both Subsidiary Banks are members of the Federal Home Loan Bank ("FHLB") System,
which consists of 12 regional FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs maintain central credit
facilities primarily for member institutions. The Subsidiary Banks, as a member
of the FHLB of Atlanta, are required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to the greater of: (i) 1
percent of the aggregate outstanding principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations as of the
beginning of each year, (ii) 4.5 percent of its advances (borrowings) from the
FHLB of Atlanta, or (iii) $500,000. Additionally, the FHLB of Atlanta imposed a
maximum investment in its capital stock equal to $100,000 over the required
minimum. The Subsidiary Banks are in compliance with this requirement at
December 31, 2004.
Each FHLB serves as a reserve or central bank for its member institutions within
its assigned regions. It is funded primarily from proceeds derived from the sale
of obligations of the FHLB System. The FHLB makes advances (i.e., loans) to
members in accordance with policies and procedures established by its Board of
12
Directors. The Subsidiary Banks are authorized to borrow funds from the FHLB of
Atlanta to meet demands for withdrawals of deposits, to meet seasonal
requirements and for the expansion of its loan portfolio. Advances may be made
on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and the amount of previously
existing advances. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the regional FHLB and the purpose of the
borrowing.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977 ("CRA") requires the federal bank
regulatory agencies to encourage financial institutions to meet the credit needs
of low- and moderate-income borrowers in their local communities. In May 1995,
the federal bank regulatory agencies published final amended regulations
promulgated pursuant to the CRA. The final regulations eliminate the 12
assessment factors under the former regulation and replace them with performance
tests. Institutions are no longer required to prepare CRA statements or
extensively document director participation, marketing efforts or the
ascertainment of community credit needs. Under the final rule, an institution's
size and business strategy determines the type of examination that it will
receive. Large, retail-oriented institutions will be examined using a
performance-based lending, investment and service test. Small institutions will
be examined using a streamlined approach. All institutions have the option of
being evaluated under a strategic plan formulated with community input and
pre-approved by the applicable bank regulatory agency.
CRA regulations provide for certain disclosure obligations. In accordance with
the CRA, each institution must post a CRA notice advising the public of the
right to comment to the institution and its regulator on the institution's CRA
performance and to review the CRA public file. Each lending institution must
maintain for public inspection a public file that includes a listing of branch
locations and services, a summary of lending activity, a map of its communities,
and any written comments from the public on its performance in meeting community
credit needs. Large institutions also are required to collect certain data,
including the amount and location of originated and purchased small business,
small farm, community development, and home mortgage loans, and to report this
data to their regulatory agencies.
Public disclosure of written CRA evaluations of financial institutions made by
regulatory agencies is required under the CRA. This promotes enforcement of CRA
requirements by providing the public with the status of a particular
institution's community reinvestment record. The Subsidiary Banks received a
"satisfactory" rating on the most recent performance evaluations of their CRA
efforts by their respective banking regulatory agencies.
Congress and various federal agencies responsible for implementing fair lending
laws have been increasingly concerned with discriminatory lending practices. In
1994, those federal agencies announced a Joint Policy Statement detailing
specific discriminatory practices prohibited under the Equal Opportunity Act and
the Fair Housing Act. In the Policy Statement, three methods of proving lending
discrimination were identified: (i) overt evidence of discrimination, where a
lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate
treatment, when a lender treats applicants differently based upon a prohibited
factor, even where there is no showing that the treatment was motivated by
intention to discriminate; and (iii) evidence of disparate impact, when a lender
applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral in appearance and
applied equally. Lenders are particularly uncertain about the application of the
"disparate impact" criteria by virtue of the vague nature of the Policy
Statement. The Policy Statement notes that "the precise contours of the law on
disparate impact as it applies to lending discrimination are under development."
Information-Sharing Between the Government and Financial Institutions and Among
Financial Institutions (U.S. PATRIOT ACT) - This federal legislation and the
resultant bank regulations require a financial institution to expeditiously
search its records to determine whether it maintains or has maintained accounts,
or engaged in transactions with individuals or entities listed in a database
maintained by the Financial Crimes Enforcement Network (FinCEN). The records
search must cover current accounts, accounts opened in the prior twelve months,
and transactions conducted in the prior six months. Its purpose is to identify
funds or transactions with individuals associated with terrorist activities.
Substantial penalties and /or criminal prosecution may result from
non-compliance.
RULES ADOPTED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC" OR
"COMMISSION")
Certification of Disclosure in Companies' Quarterly and Annual Reports - As
directed by Section 302(a) of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules to require an issuer's principal executive and financial officers each to
13
certify the financial and other information contained in the issuer's quarterly
and annual reports. The rules also require these officers to certify that: they
are responsible for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls; they have made certain
disclosures to the issuer's auditors and the audit committee of the board of
directors about the issuer's internal controls; and they have included
information in the issuer's quarterly and annual reports about their evaluation
and whether there have been significant changes in the issuer's internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation. In addition, the SEC has adopted rules which
require issuers to maintain and regularly evaluate the effectiveness of
disclosure controls and procedures designed to ensure that the information
required in reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported on a timely basis. The effective date of this
requirement was August 29, 2002. The Company has implemented procedures and
reporting tools to meet the requirements of the SEC certification rules.
Strengthening the SEC's Requirements Regarding Auditor Independence - The SEC
adopted amendments to its existing requirements regarding auditor independence
to enhance the independence of accountants that audit and review financial
statements and prepare attestation reports filed with the Commission. The final
rules recognize the critical role played by audit committees in the financial
reporting process and the unique position of audit committees in assuring
auditor independence. Consistent with the direction of Section 208(a) of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules to: revise the Commission's
regulations related to the non-audit services that, if provided to an audit
client, would impair an accounting firm's independence; require that an issuer's
audit committee pre-approve all audit and non-audit services provided to the
issuer by the auditor of an issuer's financial statements; prohibit certain
partners on the audit engagement team from providing audit services to the
issuer for more than five or seven consecutive years, depending on the partner's
involvement in the audit, except that certain small accounting firms may be
exempted from this requirement; prohibit an accounting firm from auditing an
issuer's financial statements if certain members of management of that issuer
had been members of the accounting firm's audit engagement team within the
one-year period preceding the commencement of audit procedures; require that the
auditor of an issuer's financial statements report certain matters to the
issuer's audit committee, including "critical" accounting policies used by the
issuer; and require disclosures to investors of information related to audit and
non-audit services provided by, and fees paid to, the auditor of the issuer's
financial statements. In addition, under the final rules, an accountant would
not be independent from an audit client if an audit partner received
compensation based on selling engagements to that client for services other than
audit, review and attest services. The rules are effective May 6, 2003.
Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 -
The SEC adopted rules and amendments requiring publicly traded companies to
include two new types of disclosures in their annual reports filed pursuant to
the Securities Exchange Act of 1934. First, the rules require a company to
disclose whether it has at least one "audit committee financial expert" serving
on its audit committee, and if so, the name of the expert and whether the expert
is independent of management. A company that does not have an audit committee
financial expert must disclose this fact and explain why it has no such expert.
Second, the rules require a company to disclose whether it has adopted a code of
ethics that applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. A company which has not adopted such a code must
disclose this fact and explain why it has not done so. A company also will be
required to promptly disclose amendments to, and waivers from, the code of
ethics relating to any of those officers. The Company posts its Corporate Code
of Business Ethics & Conduct, Audit Committee Charter and Nominating Committee
Charter on its Corporate Website located at www.savb.com.
Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (Sarbox) specifically
require public companies to establish, implement and evaluate their internal
controls for purposes of financial statement reporting (i.e. `disclosure
controls') and operational integrity. In establishing rules to implement both
sections 302 and 404, the Securities and Exchange Commission (SEC) makes
reference to existing auditing standards issued by the American Institute of
Certified Public Accountants (AICPA) regarding auditing and internal controls.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules on June 6, 2003 requiring companies subject to the reporting requirements
of the Securities Exchange Act of 1934 to include in their annual reports a
report of management on the company's internal control over financial reporting.
The internal control report must include: a statement of management's
responsibility for establishing and maintaining adequate internal control over
financial reporting for the company; management's assessment of the
effectiveness of the company's internal control over financial reporting as of
the end of the company's most recent fiscal year; a statement identifying the
framework used by management to evaluate the effectiveness of the company's
internal control over financial reporting; and a statement that the registered
public accounting firm that audited the company's financial statements included
14
in the annual report has issued an attestation report on management's assessment
of the company's internal control over financial reporting. Under the new rules,
a company is required to file the registered public accounting firm's
attestation report as part of the annual report. The SEC also added a
requirement that management evaluate and disclose any change in the company's
internal control over financial reporting that occurred during a fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
Required implementation dates of Sarbox 404 have changed since the original rule
was issued. The Company met the definition of a non-accelerated filer as of June
30, 2004. Under current rules and conditions the Company will be required to
comply with Sarbox 404 as of December 31, 2005 and subsequent periods.
Companies must comply with the code of ethics disclosure requirements
promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports
for fiscal years ending on or after July 15, 2003. They also must comply with
the requirements regarding disclosure of amendments to, and waivers from, their
ethics codes on or after the date on which they file their first annual report
in which the code of ethics disclosure is required. Companies similarly must
comply with the audit committee financial expert disclosure requirements
promulgated under Section 407 of the Sarbanes-Oxley Act in their annual reports
for fiscal years ending on or after July 15, 2003. Mr. Charles Izlar, was
elected to the Company's Board of Directors at the 2004 Annual Shareholder's
Meeting. Mr. Izlar was elected by the Board of Directors to serve on the Audit
Committee and designated as the "financial expert". Mr. Izlar is independent of
management.
RECENT BANKING LEGISLATION
Bills are presently pending before the United States Congress and certain state
legislatures, and additional bills may be introduced in the future in the
Congress and the state legislatures, which, if enacted, may alter the structure,
regulation and competitive relationships of the nation's financial institutions.
It cannot be predicted whether or in what form any of these proposals will be
adopted or the extent to which the business of the Company or the Subsidiary
Banks may be affected thereby.
COMPETITION
The banking business is highly competitive. Banks generally compete with other
financial institutions through the banking products and services offered, the
pricing of services, the level of service provided, the convenience and
availability of services, and the degree of expertise and the personal manner in
which services are offered. The Subsidiary Banks compete with other commercial
and savings banks in their primary service areas. The Subsidiary Banks also
compete with credit unions, consumer finance companies, insurance companies,
money market mutual funds, brokerage firms and other financial institutions,
some of which are not subject to the same degree of regulation and restriction
imposed upon the Subsidiary Banks. Many of these competitors have substantially
greater resources and lending limits than the Subsidiary Banks and offer certain
services, such as international banking services, that the Subsidiary Banks do
not provide currently.
Many of these competitors have more branch offices in the Savannah Bank's
primary service area. However, the Company's plan is to expand into the markets
which will best serve its targeted customers. Management believes that
competitive pricing, local ownership, local decisions, local control and
personalized, relationship-oriented service provide the Subsidiary Banks with a
method to compete effectively for prospective customers.
The Subsidiary Banks generally benefit from regional bank mergers in the local
market and experience the most competition from new local community bank
entrants into the market area. New banking offices, representing eight banks
have opened in the Savannah market since January 1, 2002. Other banks have
indicated interest in the coastal Georgia and South Carolina markets. These new
entrants have and will continue to increase the competition for existing and new
business.
Deposit growth is a substantial challenge facing the banking industry and the
Subsidiary Banks. It is likely that deposit growth in competitive markets will
require higher deposit interest rates. Higher costs of funds without
corresponding higher rates on earning assets will have a long-term negative
impact on net interest income. Higher market share growth in lower cost core
deposits, higher revenue growth from fee based services and lower overhead
growth rates are the key items required to accomplish the Company's earnings
growth objectives.
15
SELECTED STATISTICAL INFORMATION OF THE COMPANY
TABLE 1 - INVESTMENTS - WEIGHTED AVERAGE YIELDS BY MATURITY
The following table sets forth the amortized cost, fair value and tax-equivalent
yields by investment type and maturity category at December 31, 2004:
Taxable
Amortized Fair Equivalent
Cost Value Yield (a)
------- ------- -------
(Thousands) (%)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury, other U.S. Government
Agencies and mortgage-backed:
Within one year $ 7,650 $ 7,708 4.97
One year to five years 24,537 24,600 3.84
Five years to ten years 500 486 3.13
Over ten years 0 0 0.00
------- ------- -------
Total 32,687 32,794 4.09
------- ------- -------
Other interest-earning investments:
Within one year 625 635 7.39
One year to five years 3,598 3,738 6.29
Five years to ten years 504 514 7.04
Over ten years 3,782 3,824 4.62
------- ------- -------
Total 8,509 8,711 5.68
------- ------- -------
Total securities available-for-sale $41,196 $41,505 4.44
======= ======= =======
(a) the yield is calculated on the amortized cost of the securities.
LOANS
The following tables set forth certain information regarding the loan portfolio
as of December 31, 2004 on a consolidated basis.
TABLE 2 - LOAN REPRICING OPPORTUNITIES
The following table sets forth certain loan maturity and repricing information
as of December 31, 2004. Loan renewals generally reprice relative to the prime
rate in effect at the time of the renewal. Management expects that certain real
estate mortgage loans which have maturities of one to three years with longer
amortization periods will renew at maturity.
After
($ in thousands) One One year Over
year Through Five
Loan Category or less Five years Years Total
---------------------------- -------- -------- -------- --------
Real estate-construction and
development $ 86,362 $ 5,777 $ 4,915 $ 97,054
Commercial 26,557 9,697 323 36,577
-------- -------- -------- --------
Total $112,919 $ 15,474 $ 5,238 $133,631
======== ======== ======== ========
Loans with fixed rates $ 21,379 $ 10,604 $ 5,266 $ 37,249
Loans with floating and
adjustable rates 91,424 4,958 0 96,382
-------- -------- -------- --------
Total $112,803 $ 15,562 $ 5,266 $133,631
======== ======== ======== ========
16
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
At December 31, 2004 and 2004, nonperforming loans were $538,000 and $598,000,
respectively. Interest income of $7,000 was recognized from nonaccrual loans in
2004 and 2003. At December 31, 2004, the Subsidiary Banks had $205,000
nonaccrual loans and had $333,000 in loans past due over 90 days.
Except for consumer loans, the Company's policy is to place loans on nonaccrual
status when, in management's judgment, the collection of principal and interest
appears doubtful. Interest receivable accrued in prior years and subsequently
determined to have doubtful collectibility is charged to the allowance for
possible loan losses. Interest on loans that are placed on nonaccrual is
recognized when received. In some cases, where borrowers are experiencing
financial difficulties, loans may be restructured to provide terms significantly
different from the original contractual terms.
LOAN CONCENTRATIONS
Most of the Company's business activity is with customers located within the
Chatham, Bryan and Beaufort County area. As of December 31, 2004, the Company
had a concentration of credit risk aggregating $447 million on loans secured by
real estate in these areas. The Company has no loans that are considered to be
highly leveraged transactions or foreign credits.
TABLE 3 - ALLOWANCE FOR CREDIT LOAN LOSSES
Changes in the allowance for credit losses from 2000 through 2004 are summarized
as follows:
($ in thousands) 2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Balance at the beginning of the year $5,067 $4,373 $3,826 $3,369 $2,794
Charge-offs - Commercial (143) (161) (67) (5) (33)
Charge-offs - Consumer (112) (112) (191) (167) (168)
Charge-offs - Real estate - (122) (35) (98) (63)
------ ------ ------ ------ ------
Charge-offs - Total (255) (395) (293) (270) (264)
------ ------ ------ ------ ------
Recoveries - Commercial 26 7 11 29 2
Recoveries - Consumer 68 70 75 76 66
Recoveries - Real estate 33 12 4 17 7
------ ------ ------ ------ ------
Recoveries - Total 127 89 90 122 94
------ ------ ------ ------ ------
Net charge-offs (128) (306) (203) (148) (170)
------ ------ ------ ------ ------
Provision for loan losses 1,450 1,000 750 605 745
------ ------ ------ ------ ------
Balance at the end of the year $6,389 $5,067 $4,373 $3,826 $3,369
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans 0.09% 0.13% 0.09% 0.06% 0.07%
====== ====== ====== ====== ======
17
TABLE 4 - ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES BY LOAN TYPE The allowance
for credit losses is allocated by loan category based on management's assessment
of risk within the various categories of loans. Loans are segregated by category
and by credit risk grade within each category. The allowance for credit losses
is allocated to each category by applying reserve percentages to each category.
These percentages are based upon management's assessment of risk inherent within
each category and the historical and anticipated loss rates within each
category. The Company's allocation of the allowance for credit losses based upon
the amount deemed to be reasonably necessary to absorb potential losses within
each loan category is presented in the following tables:
($ in thousands) % of % of % of % of % of
Total Total Total Total Total
Loan Categories 2004 Loans 2003 Loans 2002 Loans 2001 Loans 2000 Loans
- --------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial $ 650 .13 $ 600 .16 $ 650 .19 $ 800 .28 $ 695 .28
Real estate - construction
and development 2,750 .55 1,650 .43 1,450 .43 1,100 .39 825 .33
Real estate - mortgage 1,750 .35 1,300 .34 1,300 .39 1,100 .39 1,090 .44
Installment and consumer 400 .08 400 .10 500 .15 650 .22 550 .22
Unallocated 859 .17 1,117 .29 473 .14 176 .06 209 .08
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses $6,389 1.28 $5,067 1.31 $4,373 1.30 $3,826 1.34 $3,369 1.35
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The allowance for credit losses is based on estimates and is maintained at a
level considered adequate to provide for potential credit losses. The adequacy
of the allowance is based on management's continuing evaluation of the loan
portfolio considering current economic conditions, underlying collateral value
securing loans and other factors. Actual future losses may be different from
estimates due to unforeseen events. Loans, or portions thereof, which are deemed
to be uncollectible, will be charged against the allowance.
Credit loss reserves are determined based upon management's review of
nonperforming loans, delinquency trends, the level of classified loans and
historical loss trends. Additionally, management assesses national and local
economic trends and regulatory information to determine the impact of such
external factors on loan loss reserve levels. Although historically, there have
been minimal losses on loans secured by real estate, management has allocated
additional reserves to these categories based upon the large concentration of
real estate loans, larger individual loan amounts, a very competitive market for
loan growth and rapidly rising property valuations in recent years in certain
segments of the market which may not be sustainable.
DEPOSITS
TABLE 5 - DEPOSIT AVERAGE BALANCES AND RATES PAID
The following table summarizes average balances of the Company's deposits and
the average rates paid on such deposits during 2004, 2003 and 2002.
2004 2003 2002
-------------- -------------- --------------
($ in thousands) Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
Non-interest-bearing demand $ 76,593 0.00% $ 65,403 0.00% $ 55,250 0.00%
Interest-bearing demand 85,824 0.36% 75,952 0.37% 59,075 0.55%
Savings deposits 18,828 0.50% 15,626 0.61% 13,404 0.96%
Money market deposits 76,478 1.15% 66,472 1.16% 54,750 1.68%
Time Deposits, $100M or more 64,278 2.76% 63,246 3.00% 61,997 3.97%
Time Deposits - Broker 48,798 2.83% - - - -
Other Time deposits 77,401 2.62% 79,059 2.91% 82,337 3.97%
-------- ---- -------- ---- -------- ----
Total $448,470 1.44% $365,758 1.46% $326,813 2.17%
======== ==== ======== ==== ======== ====
18
ITEM 2. PROPERTIES
See Note 5 and Note 13 of Notes to Consolidated Financial Statements on page
F-13 and page F-18 of the Registrant's 2004 Annual Report to Shareholders, which
is specifically incorporated herein by reference.
The Savannah Bank's main office is located at 25 Bull Street, Savannah, Georgia,
on the ground floor and lower level of a seven story office building located on
Johnson Square in downtown Savannah. The Savannah Bank has leased approximately
4,700 square feet on the main floor and 2,000 square feet on the lower level of
the building under a five-year lease expiring in June 2009. In November 1998, an
additional 1,475 square feet of space on the sixth floor was added to the
lease. The lease expires in June 2009. The rental costs increase by 3 percent of
the gross rental amount each year during the initial five-year term and
thereafter in accordance with the Consumer Price Index. The Company is also
responsible for its pro rata share of utilities and janitorial services and
increases in the cost of ad volorem taxes and insurance.
In 1989, Bryan Bank constructed its 8,500 square foot, two-story main office in
Richmond Hill, Georgia, on land owned by Bryan Bank. The building has a walk-up
ATM, a drive-up ATM and 4 drive-through lanes. All bank personnel are housed in
this location.
Savannah Bank leases approximately 6,500 square feet on the first floor of a
two-story building located at 400 Mall Boulevard, Savannah, Georgia. This space
is used for the Savannah Bank's branch location and the Mortgage and
Construction lending departments. The building is located near the corner of
Mall Boulevard and Hodgson Memorial Drive, a location that is convenient to a
significant concentration of commercial, service, and retail entities. The lease
rate increases with the Consumer Price Index. The initial lease term was for
five years and ended March 31, 1997. The Savannah Bank committed to exercise the
second five-year lease option in February 2002. There are two additional
five-year renewal options included in the terms. The Company is also responsible
for its prorata share of increases in the cost of ad volorem taxes, insurance
and maintenance of common areas. The bank renovated the space, constructed a
vault, and added a five lane drive-through teller facility adjacent to the
building.
During 1995, Savannah Bank entered into a five-year ground lease with seven
five-year renewal options on land located at 100 Chatham Parkway. The Savannah
Bank also has a right of first refusal to buy the property at appraised value
should the owner ever decide to sell the property. The location is at the
intersection of Chatham Parkway and U.S. Highway 80, a major commercial and
industrial intersection in west Chatham County. The Savannah Bank made land
improvements and constructed a 2,200 square-foot banking facility including four
drive-through lanes and an ATM drive-through lane. The West Chatham Office
opened for business on November 20, 1995.
In 1997, The Savannah Bank constructed a 2,300 square foot office on an out lot
owned in the Island Towne Centre Shopping Plaza, six miles east of downtown
Savannah. This office includes a four lane drive-through facility.
In November 1997, The Savannah Bank entered into a ten-year lease beginning June
1, 1998 with four five-year renewal options in the Medical Arts Shopping Center
at 4809 Waters Avenue. The property consists of 3,055 square feet of banking
office space and a separate drive-through facility behind the shopping center.
In March 2002, The Savannah Bank entered into a lease agreement, effective May
1, 2002, for approximately 5,000 square feet of office space at 450 Mall
Boulevard, adjacent to our existing branch office at 400 Mall Boulevard. This
lease is an addition to an existing lease for space at 400 Mall Boulevard that
contains renewal options through 2017. The operations center is located in this
space.
In September 2003, The Savannah Bank entered into a lease agreement for
approximately 3,500 sq. ft. of office space at 23C Shelter Cove Lane, Hilton
Head Island, South Carolina. This lease is for one year with two one-year
renewal options. In April 2004, The Savannah Bank entered into a lease agreement
for approximately 1,500 sq. ft. of office space in Suite 200 of 23C Shelter Cove
Lane, Hilton Head Island, South Carolina on a month to month basis. Harbourside
Mortgage Company is located in this space.
19
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings incidental to the business of the Company or
the Subsidiary Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Incorporated herein by reference to sections entitled "Table 4 - Market for
Registrant's Common Equity and Related Shareholder Matters" on page F-24 of the
Financial Statement Section of the 2004 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to sections entitled "Table 1- Selected
Financial Condition Highlights - Five-Year Comparison," "Table 2 - Selected
Operating Highlights" and "Table 3 - Selected Quarterly Data," "Table 6 -
Average Balance Sheet and Rate/Volume Analysis" and "Table 7 - Average Balance
Sheet and Rate/Volume Analysis" in the Registrant's Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages F-22 through
F-35 of the Financial Statement Section of the 2004 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference to the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages F-22 through F-35 of the Financial Statement Section of the 2004 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference to the sections entitled "Liquidity and
Interest Rate Sensitivity Management" and "Table 5 - Cash Flow/Maturity Gap and
Repricing Data" in the Registrant's Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages F-30 and F-33 of the
Financial Statement Section of the 2004 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)
1. Financial Statements - See listing in Item 15
2. Financial Statement Schedules - See Item 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
20
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION ABOUT THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of disclosure
controls and procedures as of the end of the period covered by this annual
report as required by Rule 13a-15 of the Securities Exchange Act of 1934, as
amended. This evaluation was carried out under the supervision and with the
participation of management, including the chief executive officer, president
and chief financial officer.
Based on this evaluation, the chief executive officer, president and chief
financial officer have concluded that 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 periodic SEC filings. No changes occurred during the quarter ended
December 31, 2004 that materially affected, or is reasonably likely to
materially affect, internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the sections entitled "Election of
Directors" and "Executive Compensation and Benefits" in the Registrant's Proxy
Statement dated March 22, 2005 and filed on March 25, 2005. All transactions
required pursuant to the insider trading regulations were filed on either Form 4
or Form 5 of the U.S. Securities and Exchange Commission except as disclosed in
the Proxy Statement on page 4. The required Code of Ethics disclosures are also
incorporated by reference to the section entitled "Code of Business Conduct and
Ethics" in the Registrant's Proxy Statement dated March 22, 2005.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the sections entitled "Executive
Compensation and Benefits" in the Registrant's Proxy Statement dated March 22,
2005 and filed on March 25, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Incorporated herein by reference to the sections entitled "Election of
Directors" and "Ownership of Equity Securities" in the Registrant's Proxy
Statement dated March 22, 2005 and filed on March 25, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference, the information contained in Note 4 to the
Consolidated Financial Statements and under the caption "Certain Transactions"
in the Registrant's Proxy Statement dated March 22, 2005 and filed on March 25,
2005.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the sections entitled "Principal Accountant
Fees and Services" in the Registrant's Proxy Statement dated March 22, 2005 and
filed on March 25, 2005.
21
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial statements
Incorporated herein by reference to the financial statements, together with the
applicable report of independent accountants, are included on pages F-3 through
F-21 of the Financial Statement Section of the 2004 Annual Report to
Shareholders. The index for the financial statements is as follows:
Page Number
(i) Consolidated Financial Highlights for 2004 and 2003 1
(ii) Management's Responsibility for Financial Reporting F-2
(iii) Report of Independent Registered Public Accounting Firm F-3
(ii) Consolidated Balance Sheets
December 31, 2004 and 2003 F-4
(iii) Consolidated Statements of Income for the Years
Ended December 31, 2004, 2003 and 2002 F-5
(iv) Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2004,
2003 and 2002 F-6
(v) Consolidated Statements of Cash Flows for the Years
Ended December 31, 2004, 2003 and 2002 F-7
(vi) Notes to Consolidated Financial Statements F-8
2. Required financial statement schedules
Other schedules and exhibits are not required information or are inapplicable
and, therefore, have been omitted.
3. The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Form 10-K.
22
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 * Articles of Incorporation
3.2 * By-laws as amended
10.1 * Lease for Bank Site at 25 Bull Street and Assumption of Lease
10.5 * Form of Organizers' Stock Option Agreement
10.6 * Lease for Mall Boulevard Office dated February 14, 1992
10.7 * The Savannah Bancorp, Inc. Incentive Stock Option Plan
approved by shareholders on April 18, 1995.
10.8 * Amendment to The Savannah Bancorp, Inc. Incentive Stock
Option Plan approved by shareholders on April 16, 1996.
11 Computation of Earnings Per Share **
** Data required by Statement of Financial Accounting Standards
No. 128, Earnings per Share, is provided in Note 1 to the
consolidated financial statements in this report.
14 Code of Corporate Ethics and Conduct
21 Subsidiaries of Registrant
22 Proxy Statement for Annual Meeting
23.1 Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Items 3.1, 3.2, 10.1, 10.5, 10.7 and 10.8 were previously filed by the
Company as Exhibits (with the same respective Exhibit Numbers as indicated
herein) to the Company's Registration Statement (Registration No. 33-33405)
filed in February 1990 and such documents are incorporated herein by reference.
Item 10.6 was filed as an exhibit with the 1992 Annual Report on Form 10-K in
March 1993.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on March
2-22, 2005 by the undersigned, thereunto duly authorized.
THE SAVANNAH BANCORP, INC.
By: /s/ G. MIKE ODOM, JR. /s/ JOHN C. HELMKEN II
G. Mike Odom, Jr. John C. Helmken II
Chief Executive Officer President
(Principal Executive Officer)
/s/ ROBERT B. BRISCOE
Robert B. Briscoe
Chief Financial Officer
(Principal Financial and Accounting Officer)
Directors:
/s/ J. WILEY ELLIS /s/ JACK M. JONES
J. Wiley Ellis Jack M. Jones
Chairman of the Board
/s/ E. JAMES BURNSED /s/ AARON M. LEVY
E. James Burnsed Aaron M. Levy
Vice Chairman
/s/ RUSSELL W. CARPENTER /s/ J. CURTIS LEWIS III
Russell W. Carpenter J. Curtis Lewis III
/s/ ARCHIE H. DAVIS /s/ M. LANE MORRISON
Archie H. Davis M. Lane Morrison
/s/ ROBERT H. DEMERE, JR. /s/ G. MIKE ODOM, JR.
Robert H. Demere, Jr. G. Mike Odom, Jr.
/s/ L. CARLTON GILL /s/ J. TOBY ROBERTS, SR.
L. Carlton Gill J. Toby Roberts, Sr.
/s/ JOHN C. HELMKEN II /s/ JAMES W. ROYAL, SR.
John C. Helmken II James W. Royal, Sr.
/s/ CHARLES E. IZLAR /s/ ROBERT T. THOMPSON, JR.
Charles E. Izlar Robert T. Thompson, Jr.
24