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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-18560
THE SAVANNAH BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1861820
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Bull Street, Savannah, GA 31401
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(Address of principal executive offices) (Zip Code)
912-651-8200
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _ Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of July 30,
1999.
2,709,814 shares of Common Stock, $1.00 par value per share
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<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
JUNE 30, 1999
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999 and 1998
and December 31, 1998 2
Consolidated Statements of Income
For the Quarter Ended June 30, 1999 and 1998 3
For the Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity
For the Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998 6
Condensed Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
EXHIBITS
Financial Data Schedules EX-27
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
JUNE 30, December 31, June 30,
1999 1998 1998
------------ ------------ ------------
ASSETS (Unaudited) (Unaudited)
Cash and due from banks $ 11,395 $ 17,355 $ 8,702
Federal funds sold 11,157 10,178 15,448
Securities available for sale, at fair
value (amortized cost of $58,512 on
6/30/99, $61,864 on 12/31/98 and
$52,259 on 6/30/98) 57,827 62,703 52,503
Loans 190,271 170,858 158,756
Less allowance for loan losses (2,520) (2,323) (2,114)
------------ ------------ ------------
Net loans 187,751 168,535 156,642
Premises and equipment, net 4,885 4,827 4,091
Other assets 3,365 2,782 2,847
------------ ------------ ------------
TOTAL ASSETS $ 276,380 $ 266,380 $ 240,233
============ ============ ============
LIABILITIES
Deposits:
Non interest-bearing demand $ 37,858 $ 39,353 $ 30,108
Interest-bearing demand 55,936 44,269 40,561
Savings 12,513 11,632 12,478
Money market accounts 32,154 34,663 27,567
Time, $100,000 and over 36,526 41,723 37,282
Other time deposits 61,178 60,732 59,858
------------ ------------ ------------
Total deposits 236,165 232,372 207,854
Other short-term borrowings 10,602 3,211 3,927
Federal Home Loan Bank Advances 3,350 4,450 3,532
Other liabilities 1,496 1,872 1,426
------------ ------------ ------------
TOTAL LIABILITIES 251,613 241,905 216,739
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share:
authorized 20,000,000 shares; issued
2,719,614 shares 2,720 2,720 2,720
Preferred stock, par value $1 per share:
Authorized 10,000,000 shares, none issued - - -
Capital surplus 13,076 13,076 13,050
Retained earnings 9,500 8,438 7,952
Treasury stock, 9,800 shares at 6/30/99,
37,125 shares at 12/31/98, and 52,425
shares at 6/30/98 (107) (275) (379)
Accumulated other comprehensive income(loss) (422) 516 151
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 24,767 24,475 23,494
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 276,380 $ 266,380 $ 240,233
============ ============ ============
See the condensed notes to the consolidated financial statements.
2
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE QUARTER ENDED
JUNE 30,
--------------------------
($ in thousands, except share data) 1999 1998
------------ ------------
INTEREST INCOME
Loans $4,055 $3,728
Investment securities:
Taxable 731 660
Non-taxable 111 90
Deposits with banks 2 8
Federal funds sold 133 282
------------ ------------
Total interest income 5,032 4,768
------------ ------------
INTEREST EXPENSE
Deposits 1,916 2,068
Other borrowings 170 117
------------ ------------
Total interest expense 2,086 2,185
------------ ------------
NET INTEREST INCOME 2,946 2,583
Provision for loan losses 120 90
------------ ------------
Net interest income after
provision for loan losses 2,826 2,493
------------ ------------
OTHER INCOME
Service charges on deposit accounts 227 187
Mortgage origination fees 177 201
Other income 153 145
------------ ------------
Total other operating revenue 557 533
Gains on sales of securities 8 1
------------ ------------
Total other income 565 534
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 1,155 993
Occupancy expense 165 118
Equipment expense 142 141
Other operating expenses 649 497
------------ ------------
Total other expense 2,111 1,749
------------ ------------
Income before provision for income taxes 1,280 1,278
Provision for income taxes 415 447
------------ ------------
NET INCOME $ 865 $ 831
============ ============
NET INCOME PER SHARE:
Basic $ 0.32 $ 0.31
============ ============
Diluted $ 0.31 $ 0.30
============ ============
See the condensed notes to the consolidated financial statements.
3
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THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
($ in thousands, except share data) 1999 1998
------------ ------------
INTEREST INCOME
Loans $7,890 $7,360
Investment securities:
Taxable 1,521 1,244
Non-taxable 210 174
Deposits with banks 3 18
Federal funds sold 272 540
------------ ------------
Total interest income 9,896 9,336
------------ ------------
INTEREST EXPENSE
Deposits 3,831 4,089
Other borrowings 370 207
------------ ------------
Total interest expense 4,201 4,296
------------ ------------
NET INTEREST INCOME 5,695 5,040
Provision for loan losses 225 190
------------ ------------
Net interest income after
provision for loan losses 5,470 4,850
------------ ------------
OTHER INCOME
Service charges on deposit accounts 458 367
Mortgage origination fees 371 388
Other income 280 283
------------ ------------
Total other operating revenue 1,109 1,038
Gains on sales of securities and land 13 58
------------ ------------
Total other income 1,122 1,096
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 2,294 1,974
Occupancy expense 320 230
Equipment expense 278 287
Other operating expenses 1,245 1,015
------------ ------------
Total other expense 4,137 3,506
------------ ------------
Income before provision for income taxes 2,455 2,440
Provision for income taxes 799 834
------------ ------------
NET INCOME $1, 656 $1,606
============ ============
NET INCOME PER SHARE:
Basic $ 0.61 $ 0.61
============ ============
Diluted $ 0.60 $ 0.58
============ ============
See the condensed notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Common Stock Capital Retained Treasury Comprehensive
($ in thousands, except share data) Shares Amount Surplus Earnings Stock Income Total
- ----------------------------------- --------- ------ ------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,713,148 $2,713 $12,977 $7,093 ($504) $118 $22,397
Comprehensive income:
Net income 1,606 1,606
Change in unrealized gains on
securities available for sale,
net of tax 33 33
-------
Total comprehensive income 1639
Cash dividends - $.14 per share (241) (241)
Cash dividends of acquired banks (506) (506)
Exercise of options 7,400 8 32 125 165
Tax benefit from exercise of options 53 53
Retirement of Bryan treasury stock (934) (1) (12) (13)
--------- ------ ------- -------- -------- ------------- -------
Balance, June 30, 1998 2,719,614 $2,720 $13,050 $7,952 ($379) $151 $23,494
--------- ------ ------- -------- -------- ------------- -------
Balance, December 31, 1998 2,719,614 $2,720 $13,076 $8,438 ($275) $516 $24,475
Comprehensive income:
Net income 1,656 1,656
Change in unrealized gains (losses)
on securities available for sale,
net of tax (938) (938)
-------
Total comprehensive income 718
Cash dividends - $.22 per share (594) (594)
Treasury stock issued to meet
stock option exercises 168 168
--------- ------ ------- -------- -------- ------------- -------
Balance, June 30, 1999 2,719,614 $2,720 $13,076 $9,500 ($107) ($422) $24,767
--------- ------ ------- -------- -------- ------------- -------
</TABLE>
See the condensed notes to the consolidated financial statements.
5
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
FOR THE SIX MONTHS ENDED YEAR ENDED
($ in thousands) JUNE 30, DECEMBER 31,
(Unaudited)
------------------------ ------------
1999 1998 1998
----------- ----------- ------------
OPERATING ACTIVITIES
Net income $ 1,656 $ 1,606 $ 2,626
Adjustments to reconcile net income to cash
Provided by operating activities:
Provision for loan losses 225 190 435
Depreciation of premises and equipment 277 229 471
Gains on sale of land - (57) (57)
Gains on sales or calls of investment
securities (13) - (3)
Amortization of investment securities
discount-net 59 43 326
Deferred taxes 1 (23) (60)
Decrease (increase) in accrued interest
receivable 21 (409) (446)
Increase in prepaid expenses and other
assets (142) (178) (209)
(Decrease) increase in accrued interest
payable (64) 25 114
(Decrease) increase in accrued expenses and
other liabilities (189) 93 336
----------- ----------- ------------
Net Cash provided by operating activities 1,831 1,519 3,533
----------- ----------- ------------
INVESTING ACTIVITIES
Net decrease in interest-bearing bank balances - 990 -
Purchases of investment securities (10,350) (16,329) (36,419)
Proceeds from sales or calls of investment
securities 2,377 1,108 2,002
Proceeds from maturities of investment
securities 11,279 4,881 14,192
Net increase in loans made to customers (19,441) (4,678) (16,815)
Capital expenditures (335) (196) (1,172)
Proceeds from sale of land - 359 356
----------- ----------- ------------
Net cash used in investing activities (16,470) (13,865) (37,856)
----------- ----------- ------------
FINANCING ACTIVITIES
Net increase in demand, savings and
money market accounts 8,545 3,666 22,868
Net (decrease) increase in certificates
of deposit (4,751) 3,744 9,060
Net increase in securities sold under
agreements to repurchase 7,172 552 382
Net increase (decrease) in federal
funds purchased 218 (5) (551)
Net (decrease) increase in FHLB advances (1,100) 1,942 2,860
Purchase of treasury stock 168 112 -
Dividend payments (594) (748) (1,281)
Exercise of options - 40 335
----------- ----------- ------------
Net cash provided by financing activities 9,658 9,303 33,673
----------- ----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (4,981) (3,043) (650)
Cash and cash equivalents at beginning
of period 27,533 27,193 28,183
----------- ----------- ------------
Cash and cash equivalents at end of period $22,552 $24,150 $ 27,533
=========== =========== ============
See the condensed notes to the consolidated financial statements.
6
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
NOTE 2 - SHARES USED IN COMPUTING NET INCOME PER SHARE
Net income per diluted share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the periods. The
diluted weighted average shares outstanding were 2,776,000 and 2,775,000 for the
second quarters of 1999 and 1998, respectively. They included 70,000 and 127,000
common equivalent shares in 1999 and 1998, respectively. The diluted weighted
average shares outstanding were 2,774,000 and 2,775,000 for the first six months
of 1999 and 1998, respectively. They included 76,000 and 127,000 common
equivalent shares in 1999 and 1998, respectively.
NOTE 3 - FORWARD LOOKING STATEMENTS
The Savannah Bancorp, Inc. (the Company) may from time to time make written or
oral "forward-looking statements," including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
quarterly report on form 10-Q and, in its reports to shareholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; the timely development
7
<PAGE>
NOTE 3 - FORWARD LOOKING STATEMENTS (CONTINUED)
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
behalf of the Company.
8
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For a comprehensive presentation of The Savannah Bancorp, Inc.'s financial
condition at June 30, 1999 and December 31, 1998 and results of operations for
the quarters and six month periods ended June 30, 1999 and 1998, the following
analysis should be reviewed along with other information including the Company's
December 31, 1998 Annual Report on Form 10-K.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
SECOND QUARTER FINANCIAL HIGHLIGHTS
JUNE 30, 1999 AND 1998
(Unaudited)
Percent
BALANCE SHEET DATA Increase
AT JUNE 30 1999 1998 (Decrease)
- --------------------------------------------------------------------------------
(thousands, except per share data)
Total assets $ 276,380 $ 240,233 15
Interest-earning assets 259,255 226,707 14
Loans 190,271 158,756 20
Allowance for loan losses 2,520 2,114 19
Nonperforming assets 197 379 (48)
Deposits 236,165 207,854 14
Interest-bearing liabilities 212,259 185,205 15
Shareholders' equity 24,767 23,494 5
Allowance for possible
loan losses to total loans 1.32% 1.33% -
Loan to deposit ratio 80.57% 76.38% -
Equity to assets 8.96% 9.78% -
Tier 1 capital to risk-
weighted assets 12.44% 14.06% -
Book value per share $ 9.14 $ 8.80 4
Outstanding shares 2,710 2,670 1
PERFORMANCE DATA
FOR THE SECOND QUARTER
NET INCOME $ 865 $ 831 4
Return on average assets 1.29% 1.38% -
Return on average equity 13.97% 14.66% -
Overhead ratio 60.26% 56.13% -
Net interest margin 4.75% 4.58% -
NET INCOME PER SHARE:
Basic $ .32 $ .31 3
Diluted $ .31 $ .30 3
AVERAGE SHARES:
Basic 2,706 2,648 2
Diluted 2,776 2,775 0
9
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PERFORMANCE DATA Percent
FOR THE SIX MONTHS Increase
ENDED JUNE 30 1999 1998 (Decrease)
- --------------------------------------------------------------------------------
NET INCOME $ 1,656 $ 1,606 * 3
Return on average assets 1.26% 1.37% -
Return on average equity 13.52% 14.30% -
Overhead ratio 60.80% 57.68% -
Net interest margin 4.60% 4.62% -
NET INCOME PER SHARE:
Basic $ .61 $ .61 -
Diluted $ .60 $ .58 3
AVERAGE SHARES:
Basic 2,698 2,648 2
Diluted 2,774 2,775 -
* - includes after-tax gain of $35 on sale of land
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The objectives of funds management include maintaining adequate liquidity and
reasonable harmony between the repricing of sources and uses of funds for
interest sensitive assets and liabilities. The goal of liquidity management is
to ensure the availability of adequate funds to meet the loan demand 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 funds in the money markets.
During the second quarter 1999, loans increased $12.7 million to 190.3 million,
or 7.1 percent. Deposits increased 3.9 million to $236.2 million, an increase of
1.7 percent. Average loans increased $10.8 million over the first quarter and
interest-bearing deposits increased $6.5 million during the same period.
Approximately $4 million of the average increase was seasonal public fund
balances. The loan to deposit ratio increased from 74 percent at the beginning
of the year to 80.6 percent at the end of the second quarter. Management
consistently emphasizes both loan and deposit growth and has targeted a loan to
deposit ratio between 80% and 85%. Core deposit growth should continue at a
slower growth rate through slightly less competitive time deposit rates and a
more convenient branch office network. Both subsidiary banks are members and
shareholders of the Federal Home Loan Bank of Atlanta. As a member of the FHLB,
the subsidiary banks have access to short-term and long-term borrowings at
favorable rates. These borrowings can be used for liquidity, asset-liability
management and matched loan funding purposes. The subsidiary banks also have $15
million of federal funds borrowing lines available from correspondent banks.
A continuing objective of asset liability management is to maintain a high level
of variable rate assets, including variable rate loans and shorter-maturity
investments, to balance increases in interest rate sensitive liabilities.
Interest sensitivity management and its effects on the net interest margin
10
<PAGE>
require analyses and actions that take into consideration volumes repriced and
the timing and magnitude of their change.
The Company's cash flow maturity and repricing gap at June 30, 1999, was $11.020
million within one year, or 4 percent of total interest-earning assets. Fixed
rate earning assets with maturities over five years totaled $15,964 million, or
6 percent of total interest-earning assets. See Table 1 for cash flow maturity
and repricing gap. The maturity and repricing gap between one and five years
will adjust significantly each year through normal loan and deposit activity.
Based on the presently expected principal cash flows and interest rates and the
policies and procedures in place to monitor interest rate risk, management
believes interest rate risk is being adequately managed within reasonable
earnings fluctuation tolerances.
The short-term asset sensitivity position of the Company indicates that net
interest income will be impacted negatively when the prime rate and deposit
rates decline. Soon after the rate declines cease, net interest income will be
impacted positively due to the continued time deposit repricing at lower rates.
The opposite is true in the event of rising rates.
The gap position after one year 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. However, fixed rate assets with maturities
over five years may include significant rate risk in the event of significant
market rate increases where the subsidiary banks have no opportunity to reprice
the earning asset.
The Company is a party to financial instruments with off-balance sheet risks in
the normal course of business to meet the financing needs of its customers. At
June 30, 1999, the Company had unfunded commitments to extend credit of $41.033
million and outstanding stand-by letters of credit of $1.222 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.
FINANCIAL CONDITION AND CAPITAL RESOURCES
The financial condition of the Company can be assessed by examining the changes
and relationships in the sources and uses of funds as shown in the consolidated
statements of cash flows. Maturing investment securities have been invested in
loans during the first six months of 1999. The Company increased its investment
in callable U.S. Government agency securities in 1998. Generally, expected
maturities of investments are less than five years. Tax-exempt bank qualified
municipals total $8.8 million, or approximately 15 percent of the investment
portfolio, and have weighted average maturities of approximately 5.1 years. At
June 30, 1999, the investment in bank premises and equipment totaled $4.885
million, or approximately 20 percent of equity capital.
11
<PAGE>
During the second quarter, an increase in U.S. Treasury market rates of
approximately 50 to 75 basis points caused net unrealized gains of $839,000 at
December 31, 1998 on available for sale securities to decrease to net unrealized
losses of $685,000 at June 30, 1999. These losses and gains, net of tax are
included in shareholders' equity at June 30, 1999 and December 31, 1998,
respectively, in other accumulated comprehensive income.
The Company's lending and investment policies continue to emphasize high quality
growth. Management is not aware of any known trends, events or uncertainties
that will have or that are reasonably likely to have a material effect on the
liquidity, capital resources or operations of the Company.
The Office of the Comptroller of the Currency (OCC) has adopted capital
requirements that specify the minimum level for which no prompt corrective
action is required. In addition, the FDIC adopted insurance assessment
rates based on certain "well-capitalized" risk-based and equity capital ratios.
As of June 30, 1999, the Company and the subsidiary banks exceed the minimum
requirements necessary to be classified as "well-capitalized."
Total equity capital for the Company is $24.767 million, or 9.0 percent of total
assets. Management expects that capital ratios will continue above the
well-capitalized capital ratio level. The high capital ratio and expected future
earnings allows the bank to continue its aggressive growth objectives without
having to raise additional capital.
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
Net income for the second quarter, 1999 was $865,000, up 4 percent from $831,000
in the second quarter, 1998. This represented annualized returns of 13.97
percent on average equity and 1.29 percent on average assets for the second
quarter, 1999. Diluted earnings per share were $0.31 in the second quarter, 1999
compared to $0.30 for the same period in 1998, an increase of 3 percent.
Net interest income was $2,946,000 in 1999 compared to $2,583,000 in 1998, an
increase of $363,000, or 14%. Average interest-earning assets of $252.6 million
in the second quarter, 1999, were up $25.0 million, or 11 percent over the same
period in 1998. The prime rate increased 25 basis points to 8.00 percent on June
30, 1999 and time deposit rates decreased between 50 and 100 basis points during
the fourth quarter, 1998 and increased 25 to 50 basis points during the second
quarter, 1999. The net interest margin for the second quarter, 1999 increased to
4.75 from 4.58 percent during the second quarter, 1998.
The provision for loan losses was $120,000 in 1999 compared to $90,000 in 1998.
Net loan charge-offs totaled $29,000 for the second quarter 1999 and $117,000 in
1998. There was $197,000 in non-performing assets at June 30, 1999 and $379,000
at June 30, 1998. The allowance for possible loan losses was 1.32% of loans at
June 30, 1999 and 1.33% at June 30, 1998.
12
<PAGE>
Other operating income was $557,000 in 1999 compared to $533,000 in 1998. Other
income included mortgage origination fees of $177,000 and $201,000, in 1999 and
1998, respectively.
Other expenses were $2,111,000 in 1999 compared to $1,749,000 in 1998, an
increase of $362,000, or 21%. Other expenses were higher primarily from
increased personnel and occupancy costs at The Savannah Bank, N.A. These costs
included the Medical Arts Office opening in October 1998 and the leasing of
approximately 3,500 square feet of additional office space in the Main Office
and Mall Boulevard Office for the trust, mortgage, branch operations and
technology functions. The Company's facilities and staff are now positioned to
add significant loan and deposit growth with a lower overhead growth rate.
The provision for income taxes was $415,000 in 1999 and $447,000 in 1998. The
effective federal and state tax rates were 32.4 percent and 35.0 percent in 1999
and 1998, respectively. The decrease in the effective rate was due primarily to
higher levels of state tax exempt securities. 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.
FIRST SIX MONTHS, 1999 COMPARED WITH FIRST SIX MONTHS, 1998
Net income for the first six months, 1999 was $1,656,000, up 3 percent from
$1,606,000 in the first six months, 1998. This represented annualized returns of
13.52 percent on average equity and 1.26 percent on average assets for the first
six months, 1999. Diluted earnings per share were $0.60 in the first six months,
1999 compared to $0.58 for the same period in 1998, an increase of 3 percent.
The 1998 earnings included a after-tax, non-recurring gain on sale of land of
$35,000. Excluding the gain, net income for 1999 increased 5 percent over 1998.
Net interest income was $5,695,000 in 1999 compared to $5,040,000 in 1998, an
increase of $655,000, or 13 percent. Average interest-earning assets of $249.1
million in the first six months were up $26.1 million, or 12 percent in 1999
over the same period in 1998. The prime rate increased 25 basis points to 8.00
percent on June 30, 1999 after decreasing 75 basis points in the fourth quarter,
1998. Time deposit rates decreased between 50 and 100 basis points during the
fourth quarter, 1998. The net interest margin decreased to 4.60 percent in 1999
from 4.62 percent in 1998.
The provision for loan losses was $225,000 in 1999 compared to $190,000 in 1998.
Net loan charge-offs totaled $28,000 for the first six months 1999 and $139,000
in 1998.
Other income was $1,122,000 in 1999 compared to $1,096,000 in 1998. Other income
included mortgage origination fees of $371,000 and $388,000, in 1999 and 1998,
respectively.
Other expenses were $4,137,000 in 1999 compared to $3,506,000 in 1998, an
increase of $631,000, or 18%. Other expenses were higher primarily from
increased personnel and occupancy costs at The Savannah Bank, N.A. as explained
in the quarterly comparison.
The provision for income taxes was $799,000 in 1999 and $834,000 in 1998. The
effective federal and state tax rates were 32.5% and 34.2% in 1999 and 1998,
respectively. The decrease in the effective rate was due primarily to higher
levels of state tax exempt securities.
13
<PAGE>
YEAR 2000 READINESS DISCLOSURE
THE PARAGRAPHS OF THIS SECTION CONSTITUTE A "YEAR 2000 READINESS DISCLOSURE" AS
DEFINED IN THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. PLEASE NOTE
THAT THIS DISCLOSURE CONTAINS REPUBLISHED STATEMENTS BASED ON INFORMATION
SUPPLIED BY ANOTHER PERSON OR ENTITY. THE CONTENTS OF THESE STATEMENTS HAVE NOT
BEEN INDEPENDENTLY VERIFIED BY THE SAVANNAH BANCORP, INC. AND DO NOT CREATE ANY
CONTRACTUAL RIGHTS OR OBLIGATIONS BETWEEN THE SAVANNAH BANK, N.A., M&I DATA
SERVICES, INC. OR THEIR CUSTOMERS.
The subsidiaries of The Savannah Bancorp, Inc., The Savannah Bank, N.A.
("Savannah Bank") and Bryan Bank & Trust ("Bryan Bank"), have conducted reviews
of their business systems, including their computer systems, to identify ways in
which their systems could be affected by problems in correctly processing date
information. Both banks formed Year 2000 readiness teams and engaged Year 2000
consultants and developed a plan to ensure a smooth transition of the systems,
products and vendors that they rely on into the twenty-first century.
Additionally, Savannah Bank and Bryan Bank are working with their loan customers
to monitor potential credit exposure that might result from a lack of their
systems' readiness for the Year 2000. Any Year 2000-related impact on the
allowance for loan losses is determined through our normal risk rating process.
As of June 30, 1999, the company was substantially Year 2000 compliant and in
accord with the guidelines established by the Federal Financial Institutions
Examination Council (FFIEC). U.S. Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC) are the primary
regulators of our subsidiary institutions.
Savannah Bank's and Bryan Bank's primary software systems are licensed from an
outside vendor, M & I Data Services, Inc. ("M&I") in Milwaukee, Wisconsin. The
core customer information system ("CIS"), loan, deposit, general ledger,
automated teller machine ("ATM") and card-based systems are all maintained and
processed by M&I, the largest bank-owned data processor for banks in the United
States. For other operations related systems, Savannah Bank and Bryan Bank have
received commitments from vendors providing those services to provide the
required systems modifications to ensure compliance. Those commitments were
substantially met in advance of July 1, 1999.
In 1996, M&I senior management formed a Year 2000 project team. Plans were
developed and resources dedicated to assess risks and to inventory, renovate,
implement and test Year 2000 solutions for all computer hardware and software.
The plans included reviewing equipment such as security systems, building
systems, telecommunications, etc. Potential risks from non-compliant utilities,
governmental bodies and other industries were also being assessed. The risk
assessment and renovation phases for all mission critical systems were
completed. M&I Data Services received ITAA 2000 Certification (Information
Technology Association of America). Year 2000 ready, core-banking applications
were installed on October 4, 1998. Mission critical systems are Year 2000 ready.
14
Testing for the Company has included, but was not limited to, current system
updates before, during and after the start of Year 2000 including Leap Year. A
variety of testing was performed both before and after the implementation of
solutions. Internal and external interfaces have been tested to the extent M&I
can control the process. Contingency plans and business resumption plans are in
place. Customer balance and other information are backed up on paper, CD-rom,
film and fiche. Copies are kept at multiple locations. Specific contingency
plans relating to Year 2000 issues will be substantially completed to meet
regulatory requirements.
M&I systems are deemed "Year 2000 Compliant" when they are able to process,
calculate and recognize dates after the start of year 2000, as defined in the
processes and guidelines established by the Federal Financial Institutions
Examination Council (FFIEC). If an M&I product or service is not Year 2000
compliant, our exclusive remedy is to have M&I make the product or service
compliant.
Indirect concerns related to Year 2000 include some possible unusual customer
behavior as it relates to their banking, motivated by adverse media coverage of
the Y2K issue. The desire by customers for higher than customary amounts of cash
and the desire to manage their deposit balances in certain financial
institutions could cause the need for additional liquidity in the banking system
and in Savannah Bank and Bryan Bank. Customer communications through print,
media and officer calls as well as additional back-up liquidity sources through
the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank discount
window are planned to provide adequate liquidity for Savannah Bank and Bryan
Bank.
Management of The Savannah Bancorp, Inc. believes M&I, Savannah Bank and Bryan
Bank will be successful in the achievement of their Year 2000 readiness plans
and does not believe that the execution of the plan will have a material adverse
effect on future operating results. However, management of the Company and M&I
cannot be assured that factors outside of its ability to test and control, such
as telecommunications lines and electric power, will work properly in the year
2000. Short-term contingency plans, in the event of temporary loss of power and
communications, were developed during the second quarter, 1999. The total cost
for The Savannah Bancorp, Inc. for Year 2000 compliance is estimated to be
between $200,000 and $300,000. However, this includes $150,000 to $200,000 in
normal upgrades and salaries of existing personnel.
Although the Company has taken many actions aimed at the reduction of our Year
2000 exposure, there can be no assurance that these actions will fully mitigate
the impact of Year 2000 issues. It is foreseeable that one or more events may
disrupt the Company's normal business operations. In the event the Company fails
to identify or correct a material Year 2000 problem, there could be disruptions
in normal business operations. Such disruptions could have a material adverse
effect on the Corporation's operations, liquidity or financial condition. In
addition, there may be some parties, such as utilities, telecommunication
companies, governmental agencies, and other providers, for which alternative
arrangements or resources are not available. The Company is subject to various
other risk, including: credit risk should our borrowers fail to adequately
address Year 2000 issues; fiduciary risk, to the extent fiduciary assets fail to
adequately address Year 2000 issues; and liquidity risk to the extent of deposit
withdrawals and the extent our funds providers are unable to provide funds due
to Year 2000 issues. It is not possible to quantify the potential impact of
15
<PAGE>
these risks at this time. However, there may be increases in future years in
problem loans, credit losses, losses in the fiduciary business and liquidity
problems, as well as the risk of litigation and potential losses from litigation
related to the aforementioned items. Forward-looking statements contained in
this "Year 2000 Readiness Disclosure" section should be evaluated in conjunction
with the cautionary statements included in the introductory paragraphs under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".
16
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING DATA
The following is the Company's long-term maturity and repricing data for the
Company as of June 30, 1999.
($ in 000's) One Two Three Four Five
INTEREST-BEARING ASSETS Year Years Years Years Years Beyond Total
- ----------------------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities $13,912 $8,424 $4,329 $10,979 9,331 11,537 58,512
5.82% 6.17% 6.25% 5.80% 5.93% 6.04% 5.96%
Federal funds sold 11,157 - - - - - 11,157
5.00% - - - - - 5.00%
Loans - fixed rates 49,264 20,746 24,719 7,452 10,776 4,427 *117,384
8.37% 8.95% 8.61% 8.55% 8.06% 8.30% 8.50%
Loans - variable rates 39,814 11,189 9,342 5,426 4,140 2,976 72,887
8.62% 8.73% 8.62% 8.19% 8.05% 8.62% 8.57%
------- ------- ------- ------- ------- ------- -------
Total earning assets 114,147 40,359 38,390 23,857 24,247 18,940 259,940
7.82% 8.31% 8.35% 7.20% 7.24% 6.98% 7.80%
------- ------- ------- ------- ------- ------- -------
INTEREST BEARING DEPOSITS:
NOW and savings 6,845 6,845 6,845 6,845 6,845 34,224 68,449
2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27%
Money market accts 3,215 3,215 3,215 3,215 3,215 16,079 32,154
3.83% 3.83% 3.83% 3.83% 3.83% 3.83% 3.82%
Time, $100 and over 32,679 1,977 536 992 342 - 36,526
5.05% 5.73% 5.69% 6.13% 5.51% - 5.13%
Other Time 49,521 6,207 1,624 2,736 1,090 - 61,178
4.90% 5.33% 5.58% 5.97% 5.49% - 5.02%
------- ------- ------- ------- ------- ------- -------
Total interest bearing
Deposits 92,260 18,244 12,220 13,788 11,492 50,303 198,307
4.72% 3.96% 3.27% 3.64% 3.11% 2.77% 3.90%
Funds Purchased 10,602 - - - - - 10,602
4.85% - - - - - 4.85%
Federal Home Loan Bank Advances 265 265 265 265 265 2,025 3,350
6.00% 6.09% 6.09% 6.09% 6.09% 5.77% 5.89%
------- ------- ------- ------- ------- ------- -------
Total interest bearing liabilities 103,127 18,509 12,485 14,053 11,757 52,328 212,259
4.74% 3.99% 3.33% 3.69% 3.17% 2.88% 3.98%
GAP-EXCESS ASSETS 11,020 21,850 25,905 9,804 12,490 (33,388) 47,681
------- ------- ------- ------- ------- ------- -------
GAP-CUMULATIVE-6/30/99 $11,020 $32,870 $58,775 $68,579 $81,069 $47,681 $47,681
------- ------- ------- ------- ------- ------- -------
</TABLE>
(a)- estimated cash flow runoff of 10% per year has been assumed.
The Company's cash flow gap is $11,020 within one year, or four percent of total
interest-earning assets. Fixed rate earning assets with maturities over five
years total $15,964 or six percent of total interest-earning assets. The cash
flow gaps between one and five years will adjust significantly each year through
normal loan and deposit activity. Based on the principal cash flows and interest
rates presented above, and the policies and procedures in place to monitor
interest rate risk, management believes interest rate risk is being adequately
managed within reasonable earnings fluctuation tolerances of 5 percent of the
net interest income.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings. None
Item 2. Changes in securities. 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 or reports on Form 8-K. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Savannah Bancorp, Inc.
-------------------------------
(Registrant)
Date 8/11/99 /s/ Archie H. Davis
----------------------------------
Archie H. Davis - President & CEO
Date 8/11/99 /s/ Robert B. Briscoe
----------------------------------
Robert B. Briscoe - Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1999 Form 10-Q and is qualified in its entirety by reference to such
information.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 11395
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11157
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 58512
<INVESTMENTS-MARKET> 57827
<LOANS> 190271
<ALLOWANCE> (2520)
<TOTAL-ASSETS> 276380
<DEPOSITS> 236165
<SHORT-TERM> 10602
<LIABILITIES-OTHER> 1496
<LONG-TERM> 3350
<COMMON> 2720
0
0
<OTHER-SE> 22047
<TOTAL-LIABILITIES-AND-EQUITY> 276380
<INTEREST-LOAN> 7890
<INTEREST-INVEST> 1731
<INTEREST-OTHER> 275
<INTEREST-TOTAL> 9896
<INTEREST-DEPOSIT> 3831
<INTEREST-EXPENSE> 4201
<INTEREST-INCOME-NET> 5695
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 4137
<INCOME-PRETAX> 2455
<INCOME-PRE-EXTRAORDINARY> 2455
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1656
<EPS-BASIC> .61
<EPS-DILUTED> .60
<YIELD-ACTUAL> 4.60
<LOANS-NON> 132
<LOANS-PAST> 65
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 197
<ALLOWANCE-OPEN> 2323
<CHARGE-OFFS> 86
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 2520
<ALLOWANCE-DOMESTIC> 2520
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
