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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 September 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 October 29,
1999.
2,709,814 shares of Common Stock, $1.00 par value per share
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<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
SEPTEMBER 30, 1999
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 and 1998
and December 31, 1998 2
Consolidated Statements of Income
For the Quarter Ended September 30, 1999 and 1998 3
For the Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 6
Condensed Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
EXHIBITS
Financial Data Schedules EX-27
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
SEPTEMBER 30, December 31, September 30,
1999 1998 1998
------------ ----------- ------------
ASSETS (Unaudited) (Unaudited)
Cash and due from banks $ 12,667 $ 17,355 $ 9,829
Federal funds sold 6,376 10,178 18,742
Securities available for sale, at
fair value (amortized cost of $59,511
on 9/30/99, $61,864 on 12/31/98
and $58,233 on 9/30/98) 58,511 62,703 59,396
Loans 197,323 170,858 165,857
Less allowance for loan losses (2,682) (2,323) (2,189)
----------- ----------- ------------
Net loans 194,641 168,535 163,668
Premises and equipment, net 4,705 4,827 4,421
Other real estate owned 45 - -
Other assets 3,340 2,782 2,179
----------- ----------- ------------
TOTAL ASSETS $ 280,285 $ 266,380 $ 258,235
=========== =========== ============
LIABILITIES
Deposits:
Non interest-bearing demand $ 37,362 $ 39,353 $ 32,091
Interest-bearing demand 43,090 44,269 43,246
Savings 11,934 11,632 12,100
Money market accounts 35,391 34,663 37,386
Time, $100,000 and over 38,562 41,723 38,397
Other time deposits 61,046 60,732 61,703
----------- ----------- ------------
Total deposits 227,385 232,372 224,923
Other short-term borrowings 9,418 3,211 3,645
Federal Home Loan Bank Advances 16,309 4,450 3,501
Other liabilities 1,994 1,872 1,476
----------- ----------- ------------
TOTAL LIABILITIES 255,106 241,905 233,545
----------- ----------- ------------
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 10,106 8,438 8,535
Treasury stock, 9,800 shares at
9/30/99, 37,125 shares at 12/31/98,
and 45,800 shares at 9/30/98 (107) (275) (335)
Accumulated other comprehensive
income(loss) (616) 516 720
----------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY 25,179 24,475 24,690
----------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 280,285 $ 266,380 $ 258,235
=========== =========== ============
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
SEPTEMBER 30,
-------------------------
($ in thousands, except share data) 1999 1998
---------- ----------
INTEREST INCOME
Loans $4,336 $3,872
Investment securities:
Taxable 742 736
Non-taxable 104 92
Deposits with banks - 1
Federal funds sold 104 172
---------- ----------
Total interest income 5,286 4,873
---------- ----------
INTEREST EXPENSE
Deposits 1,931 2,082
Other borrowings 263 111
---------- ----------
Total interest expense 2,194 2,193
---------- ----------
NET INTEREST INCOME 3,092 2,680
Provision for loan losses 165 85
---------- ----------
Net interest income after
provision for loan losses 2,927 2,595
---------- ----------
OTHER INCOME
Service charges on deposit accounts 268 191
Mortgage origination fees 126 263
Other income 161 129
---------- ----------
Total other operating revenue 555 583
Gains on sales of securities - 1
---------- ----------
Total other income 555 584
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 1,124 1,060
Occupancy expense 171 144
Equipment expense 144 148
Other operating expenses 668 527
---------- ----------
Total other expense 2,107 1,879
---------- ----------
Income before provision for income taxes 1,375 1,300
Provision for income taxes 444 450
---------- ----------
NET INCOME $ 931 $ 850
========== ==========
NET INCOME PER SHARE:
Basic $ 0.34 $0.32
========== ==========
Diluted $ 0.34 $0.31
========== ==========
3
See the condensed notes to the consolidated financial statements.
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE NINE MONTHS
SEPTEMBER 30,
-------------------------
($ in thousands, except share data) 1999 1998
---------- ----------
INTEREST INCOME
Loans $12,226 $11,233
Investment securities:
Taxable 2,263 1,980
Non-taxable 314 266
Deposits with banks 3 19
Federal funds sold 376 712
---------- ----------
Total interest income 15,182 14,210
---------- ----------
INTEREST EXPENSE
Deposits 5,762 6,171
Other borrowings 633 318
---------- ----------
Total interest expense 6,395 6,489
---------- ----------
NET INTEREST INCOME 8,787 7,721
Provision for loan losses 390 275
---------- ----------
Net interest income after
provision for loan losses 8,397 7,446
---------- ----------
OTHER INCOME
Service charges on deposit accounts 726 558
Mortgage origination fees 497 651
Other income 441 412
---------- ----------
Total other operating revenue 1,664 1,621
Gains on sales of securities and land 13 59
---------- ----------
Total other income 1,677 1,680
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 3,418 3,034
Occupancy expense 491 374
Equipment expense 422 435
Other operating expenses 1,913 1,543
---------- ----------
Total other expense 6,244 5,386
---------- ----------
Income before provision for income taxes 3,830 3,740
Provision for income taxes 1,243 1,284
---------- ----------
NET INCOME $2,587 $2,456
========== ==========
NET INCOME PER SHARE:
Basic $ 0.96 $0.93
========== ==========
Diluted $ 0.93 $0.89
========== ==========
See the condensed notes to the consolidated financial statements.
4
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
Accumulated
Other
($ in thousands, except share data) Common Stock Capital Retained Treasury Comprehensive
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 2,456 2,456
Change in unrealized gains on
securities available for sale,
net of tax 602 602
-------
Total comprehensive income 3,058
Cash dividends - $.24 per share (414) (414)
Cash dividends of acquired banks (600) (600)
Exercise of options 7,400 8 32 169 209
Tax benefit from exercise of options 53 53
Retirement of Bryan treasury stock (934) (1) (12) (13)
------------------------------------------------------------------------
Balance, September 30, 1998 2,719,614 $2,720 $13,050 $8,535 ($335) $720 $24,690
========= ====== ======= ====== ====== ===== =======
Balance, December 31, 1998 2,719,614 $2,720 $13,076 $8,438 ($275) $516 $24,475
Comprehensive income:
Net income 2,587 2,587
Change in unrealized losses on
securities available for sale,
net of tax (1,132) (1,132)
-------
Total comprehensive income 1,455
Cash dividends - $.34 per share (919) (919)
Exercise of options 168 168
------------------------------------------------------------------------
Balance, September 30, 1999 2,719,614 $2,720 $13,076 $10,106 ($107) ($616) $25,179
========= ====== ======= ======= ======= ====== =======
</TABLE>
5
See the condensed notes to the consolidated financial statements.
<PAGE>
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE
THE NINE MONTHS ENDED YEAR ENDED
($ in thousands) SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
OPERATING ACTIVITIES 1999 1998 1998
----------- ---------- ------------
Net income $ 2,587 $ 2,456 $ 2,626
Adjustments to reconcile net income
to cash Provided by operating activities:
Provision for loan losses 390 275 435
Depreciation of premises and equipment 417 344 471
Gains on sale of land - (57) (57)
Gains on sale or calls of investment
securities (13) (2) (3)
Amortization of investment securities
discount-net 77 151 326
Deferred taxes - (23) (60)
Increase in accrued interest receivable (6) (253) (446)
Increase in prepaid expenses and other assets (28) (291) (209)
(Decrease) increase in accrued interest payable (97) 38 114
Increase in accrued expenses and other
liabilities 357 405 336
----------- ---------- ------------
Net cash provided by operating activities 3,684 3,043 3,533
----------- ---------- ------------
INVESTING ACTIVITIES
Purchases of investment securities (12,952) (27,749) (36,419)
Proceeds from sales or calls of investment
securities 2,762 2,002 2,002
Proceeds from maturities of investment
securities 12,479 9,236 14,192
Net increase in loans made to customers (26,496) (11,788) (16,815)
Capital expenditures (295) (642) (1,172)
Proceeds from sale of land - 359 356
----------- ---------- -----------
Net cash used in investing activities (24,502) (28,582) (37,856)
----------- ---------- -----------
FINANCING ACTIVITIES
Net (decrease) increase in demand, savings
and money market accounts (2,140) 17,765 22,868
Net (decrease) increase in certificates
of deposit (2,846) 6,804 9,060
Net increase in securities sold under
agreements to repurchase 6,183 736 382
Net increase (decrease) in federal funds
purchased 23 (471) (551)
Net increase in FHLB advances 11,859 1,911 2,860
Purchase of treasury stock - (13) -
Dividend payments (919) (1,014) (1,281)
Exercise of options 168 209 335
---------- ----------- -----------
Net cash provided by financing activities 12,328 25,927 33,673
---------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,490) 388 (650)
Cash and cash equivalents at beginning
of period 27,533 28,183 28,183
---------- ----------- -----------
Cash and cash equivalents at end of period $19,043 $28,571 $ 27,533
========== =========== ===========
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 nine month period ended September 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 2,772,000 and 2,769,000 for the
third quarters of 1999 and 1998, respectively. They included 62,000 and 104,000
common equivalent shares in 1999 and 1998, respectively. The diluted weighted
average shares outstanding were 2,773,000 and 2,767,000 for the first nine
months of 1999 and 1998, respectively.
They included 71,000 and 118,000 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
7
<PAGE>
NOTE 3 - FORWARD LOOKING STATEMENTS (CONTINUED)
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
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 September 30, 1999 and December 31, 1998 and results of operations
for the quarters and nine month periods ended September 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
SEPTEMBER 30, 1999 AND 1998
(Unaudited)
Percent
BALANCE SHEET DATA Increase
AT SEPTEMBER 30 1999 1998 (Decrease)
- -------------------------------------------------------------------------------
( thousands, except per share data)
Total assets $ 280,285 $ 258,235 9
Interest-earning assets 263,280 242,665 8
Loans 197,323 165,857 19
Allowance for loan losses 2,682 2,189 23
Nonperforming assets 133 203 (34)
Deposits 227,385 224,923 1
Interest-bearing liabilities 215,750 199,978 8
Shareholders' equity 25,179 24,690 2
Allowance for possible
loan losses to total loans 1.36% 1.32% -
Loan to deposit ratio 86.78% 73.74% -
Equity to assets 8.98% 9.56% -
Tier 1 capital to risk-
weighted assets 12.42% 14.34% -
Book value per share $ 9.29 $ 9.23 1
Outstanding shares 2,710 2,674 1
PERFORMANCE DATA
FOR THE THIRD QUARTER
NET INCOME $ 931 $ 850 10
Return on average assets 1.34% 1.38% -
Return on average equity 14.81% 14.15% -
Efficiency ratio 57.77% 57.59% -
Net interest margin 4.78% 4.66% -
NET INCOME PER SHARE:
Basic $ .34 $ .32 6
Diluted $ .34 $ .31 10
AVERAGE SHARES:
Basic 2,710 2,665 2
Diluted 2,772 2,769 0
9
<PAGE>
PERFORMANCE DATA Percent
FOR THE NINE MONTHS Increase
ENDED SEPTEMBER 30 1999 1998 (Decrease)
- -------------------------------------------------------------------------------
NET INCOME $ 2,587 $ 2,456 * 5
Return on average assets 1.29% 1.37% -
Return on average equity 13.95% 14.25% -
Efficiency ratio 59.75% 57.65% -
Net interest margin 4.71% 4.63% -
NET INCOME PER SHARE:
Basic $ .96 $ .93 3
Diluted $ .93 $ .89 4
AVERAGE SHARES:
Basic 2,702 2,649 2
Diluted 2,773 2,767 0
* - 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 third quarter 1999, loans increased $7.1 million, or 3.7 percent to
$197.3 million. Deposits decreased $8.8 million to $227.4 million, a decrease of
3.7 percent. Average loans increased $10.7 million over the second quarter and
interest-bearing deposits decreased $1.1 million during the same period.
Approximately $4 million of the average decrease in deposits was from seasonal
public fund balances. The loan to deposit ratio increased from 74 percent at the
beginning of the year to 87 percent at the end of the third quarter.
Core deposit growth is being emphasized through more competitive time deposit
rates and targeted business development efforts through the 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 temporary 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
10
<PAGE>
investments, to balance increases in interest rate sensitive liabilities.
Interest sensitivity management and its effects on the net interest margin
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 September 30, 1999, was a
negative $10.7 million within one year, or 4 percent of total interest-earning
assets. Fixed rate earning assets with maturities over five years totaled $20.4
million, or 8 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 interest sensitivity position of the Company is nearly balanced.
The Company's interest-sensitivity is positioned well for a neutral interest
rate environment in which the next direction for interest rate movement is
uncertain.
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
earning assets.
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
September 30, 1999, the Company had unfunded commitments to extend credit of
$41.059 million and outstanding stand-by letters of credit of $1.332 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. Approximately $2 million of maturing investment
securities have been invested in loans during the first nine months of 1999. The
Company increased its investment in callable U.S. Government agency securities
in 1998. Approximately 75% of the investment maturities are less than five
years. Tax-exempt bank qualified municipals total $8.4 million, or approximately
14 percent of the investment portfolio, and have weighted average maturities of
approximately 4.8 years. At September 30, 1999, the investment in bank premises
and equipment totaled $4.7 million, or approximately 19 percent of equity
capital.
11
<PAGE>
During the first nine months of 1999, increases in U.S. Treasury market rates of
approximately 75 to 100 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 $1,000,000 at September 30, 1999. These losses and gains, net of tax,
are included in shareholders' equity at September 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. However, special
backup liquidity plans have been made for some expected deposit runoff
associated with Y2K concerns of depositors.
The Office of the Comptroller of the Currency (OCC) has adopted capital
requirements that specify the minimum level for which no prompt corrective
action is required. In addition, the FDIC adopted insurance assessment rates
based on certain "well-capitalized" risk-based and equity capital ratios. As of
September 30, 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 $25.179 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
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
Net income for the third quarter, 1999 was $931,000, up 10 percent from $850,000
in the third quarter, 1998. This represented annualized returns of 14.81 percent
on average equity and 1.34 percent on average assets for the third quarter,
1999. Diluted earnings per share were $0.34 in the third quarter, 1999 compared
to $0.31 for the same period in 1998, an increase of 10 percent.
Net interest income was $3,092,000 in 1999 compared to $2,680,000 in 1998, an
increase of $412,000, or 15%. Average interest-earning assets of $260.4 million
in the third quarter, 1999, were up $29.7 million, or 13 percent over the same
period in 1998. The prime rate increased 50 basis points to 8.25 percent between
June 30, 1999 and early September, 1999. Time deposit rates decreased between 50
and 100 basis points during the fourth quarter, 1998, and increased 50 to 75
basis points during the second and third quarters, 1999. The net interest margin
for the third quarter, 1999 increased to 4.78 percent from 4.66 percent during
the third quarter, 1998.
The provision for loan losses was $165,000 in 1999 compared to $85,000 in 1998.
Net loan charge-offs totaled $3,000 in the third quarter, 1999 and $6,000 in
1998. There was $133,000 in non-performing assets at September 30, 1999 and
$203,000 at September 30, 1998. The allowance for possible loan losses was 1.36%
of loans at September 30, 1999 and 1.32% at September 30, 1998.
12
<PAGE>
Other operating income was $555,000 in 1999 compared to $584,000 in 1998. Other
income included mortgage origination fees of $126,000 and $263,000, in 1999 and
1998, respectively. The decrease in mortgage fees is attributable to higher
market interest rates that cause lower volumes of new mortgage loans and
refinances.
Other expenses were $2,107,000 in 1999 compared to $1,879,000 in 1998, an
increase of $228,000, or 12%. 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 $444,000 in 1999 and $450,000 in 1998. The
effective federal and state tax rates were 32.3 percent and 34.6 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 NINE MONTHS, 1999 COMPARED WITH FIRST NINE MONTHS, 1998
Net income for the first nine months, 1999 was $2,587,000, up 5 percent from
$2,456,000 in the first nine months, 1998. This represented annualized returns
of 13.95 percent on average equity and 1.29 percent on average assets for the
first nine months, 1999. Diluted earnings per share were $0.93 in the first nine
months, 1999 compared to $0.89 for the same period in 1998, an increase of 4
percent. The 1998 earnings included an after-tax, non-recurring gain on sale of
land of $35,000. Excluding the gain, net income for 1999 increased 7 percent
over 1998.
Net interest income was $8,787,000 in 1999 compared to $7,721,000 in 1998, an
increase of $1,066,000, or 14 percent. Average interest-earning assets of $253.0
million were up $27.5 million, or 12 percent in 1999 over 1998. The net interest
margin increased to 4.71 percent in 1999 from 4.63 percent in 1998.
The provision for loan losses was $390,000 in 1999 compared to $275,000 in 1998.
Net loan charge-offs totaled $31,000 for the first nine months 1999 and $165,000
in 1998.
Other income was $1,677,000 in 1999 compared to $1,680,000 in 1998. Other income
included mortgage origination fees of $497,000 and $651,000, in 1999 and 1998,
respectively. The decrease in mortgage fees is attributable to higher market
interest rates that cause lower volumes of new mortgage loans and refinances.
Other expenses were $6,244,000 in 1999 compared to $5,386,000 in 1998, an
increase of $858,000, or 16%. 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 $1,243,000 in 1999 and $1,284,000 in 1998.
The effective federal and state tax rates were 32.5% and 34.3% in 1999 and 1998,
13
<PAGE>
respectively. The decrease in the effective rate was due primarily to higher
levels of state tax exempt securities.
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 September 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
14
<PAGE>
were installed on October 4, 1998. Mission critical systems are Year 2000 ready.
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 $200,000 in
normal upgrades and salaries of existing personnel.
Although the Company has taken many actions aimed at the reduction of our Year
2000 exposure, there can be no assurance that these actions will fully mitigate
the impact of Year 2000 issues. It is foreseeable that one or more events may
disrupt the Company's normal business operations. In the event the Company fails
to identify or correct a material Year 2000 problem, there could be disruptions
in normal business operations. Such disruptions could have a material adverse
effect on the Corporation's operations, liquidity or financial condition. In
addition, there may be some parties, such as utilities, telecommunication
companies, governmental agencies, and other providers, for which alternative
arrangements or resources are not available. The Company is subject to various
other risk, including: credit risk should our borrowers fail to adequately
15
<PAGE>
address Year 2000 issues; fiduciary risk, to the extent fiduciary assets fail to
adequately address Year 2000 issues; and liquidity risk to the extent of deposit
withdrawals and the extent our funds providers are unable to provide funds due
to Year 2000 issues. It is not possible to quantify the potential impact of
these risks at this time. However, there may be increases in future years in
problem loans, credit losses, losses in the fiduciary business and liquidity
problems, as well as the risk of litigation and potential losses from litigation
related to the aforementioned items. Forward-looking statements contained in
this "Year 2000 Readiness Disclosure" section should be evaluated in conjunction
with the cautionary statements included in the introductory paragraphs under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".
16
<PAGE>
<TABLE>
TABLE 1 - LONG-TERM MATURITY GAP AND REPRICING DATA
The following is the Company's long-term maturity and repricing data for the
Company as of September 30, 1999.
($ 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 8,819 3,390 3,112 13,466 14,829 15,895 59,511
6.23% 6.50% 6.28% 6.03% 6.04% 6.17% 6.14%
Federal funds sold 6,376 - - - - - 6,376
5.23% - - - - - 5.23%
Loans - fixed rates 49,116 24,988 26,032 8,978 11,159 4,514 124,787 *
8.40% 8.85% 8.59% 8.33% 7.94% 8.34% 8.48%
Loans - variable rates 36,395 15,780 8,929 3,495 4,836 3,101 72,536
8.92% 8.89% 9.07% 8.66% 8.58% 8.97% 8.90%
------- ------- ------- ------- ------- -------- -------
Total earning assets 100,706 44,158 38,073 25,939 30,824 23,510 263,210
8.20% 8.68% 8.52% 7.18% 7.13% 6.95% 7.99%
INTEREST BEARING DEPOSITS:
NOW and savings 5,504 5,502 5,502 5,502 5,502 27,512 55,024
2.40% 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%
Money market accts 3,540 3,539 3,539 3,539 3,539 17,695 35,391
3.82% 3.82% 3.82% 3.82% 3.82% 3.82% 3.82%
Time, $100 and over 32,704 3,083 1,750 795 230 - 38,562
4.98% 5.48% 5.88% 5.99% 5.00% - 5.08%
Other Time 47,974 7,269 2,172 2,811 820 - 61,046
4.88% 5.30% 5.76% 5.92% 5.08% - 5.01%
------- ------- ------- ------- ------- -------- -------
Total interest bearing
Deposits 89,722 19,393 12,963 12,647 10,091 45,207 190,023
4.72% 4.24% 3.82% 3.81% 3.18% 2.96% 4.05%
Funds Purchased 9,418 - - - - - 9,418
5.25% - - - - - 5.25%
Federal Home Loan Bank Advances 12,265 265 265 265 265 2,984 16,309
5.27% 6.00% 6.00% 6.00% 6.00% 6.00% 5.41%
------- ------- ------- ------- ------- -------- -------
Total interest bearing liabilities 111,405 19,658 13,228 12,912 10,356 48,191 215,750
4.83% 4.26% 3.87% 3.85% 3.25% 3.15% 4.21%
GAP-EXCESS ASSETS (10,699) 24,500 24,845 13,027 20,468 (24,681) 47,460
------- ------- ------- ------- ------- -------- -------
GAP-CUMULATIVE-9/30/99 (10,699) 13,801 38,646 51,673 72,141 47,460 47,460
------- ------- ------- ------- ------- -------- -------
</TABLE>
(a)- estimated cash flow runoff of 10% per year has been assumed.
The Company's cash flow gap is ($10,699) within one year, or four percent of
total interest-earning assets. Fixed rate earning assets with maturities over
five years total $20,409 or eight 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 __11/12/99___ ___/s/_Archie H. Davis______________
Archie H. Davis - President & CEO
Date __11/12/99___ ___/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
September 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 12267
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6376
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 59511
<INVESTMENTS-MARKET> 58511
<LOANS> 197323
<ALLOWANCE> (2682)
<TOTAL-ASSETS> 280285
<DEPOSITS> 227385
<SHORT-TERM> 21418
<LONG-TERM> 4309
<LIABILITIES-OTHER> 1994
<COMMON> 2720
0
0
<OTHER-SE> 22459
<TOTAL-LIABILITIES-AND-EQUITY> 280285
<INTEREST-LOAN> 12226
<INTEREST-INVEST> 2577
<INTEREST-OTHER> 379
<INTEREST-TOTAL> 15182
<INTEREST-DEPOSIT> 5762
<INTEREST-EXPENSE> 6395
<INTEREST-INCOME-NET> 8787
<LOAN-LOSSES> 390
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 6244
<INCOME-PRETAX> 3830
<INCOME-PRE-EXTRAORDINARY> 3830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2587
<EPS-BASIC> .96
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.71
<LOANS-NON> 89
<LOANS-PAST> 44
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 133
<ALLOWANCE-OPEN> 2323
<CHARGE-OFFS> 114
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 2682
<ALLOWANCE-DOMESTIC> 2682
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
