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 by acquiring all of the common stock of The Savannah Bank, National Association, Savannah, Georgia (the "Savannah Bank"). 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% of the common stock of the Bank on August 22, 1990.
In February 1998, the Company entered into a plan of merger to exchange 1.85 shares of its stock for each share of the Bryan Bancorp of Georgia, Inc. ("Bryan"), the bank holding company for Bryan Bank & Trust ("Bryan Bank"). Based on the Company's closing stock price of $25.50 per share on February 10, 1998, 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.
As of December 31, 1998, Savannah Bank had five full service offices, total assets of $187 million, total deposits of $166 million, total stockholders' equity of $16.5 million and $1.9 million in 1998 earnings. As of December 31, 1998, Bryan Bank had one full service office, total assets of $80 million, total deposits of $67 million, total stockholders' equity of $8.1 million and $1.3 million in 1998 earnings.
Savannah Bank and Bryan Bank (the "Subsidiary Banks") currently are the sole operating subsidiaries of the Company. 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 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").
(B) INFORMATION ABOUT INDUSTRY SEGMENTS
In June, 1997, 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 that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker 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, asset and liability volumes are used by executive management for performance and resource allocation purposes; however, sufficient discrete financial information is not available for presentation of segmented line of business financial information to shareholders. These disclosure requirements had no impact on financial position or results of operations.
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is authorized to engage in any activity permitted by law to a corporation, 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% 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. While the Company has no present plans to engage actively in any nonbanking business activities, management anticipates studying the feasibility of establishing or acquiring subsidiaries to engage in other business activities to the extent permitted by law.
BANKING SERVICES
The Subsidiary Banks have approximately 100 full-time and 12 part-time employees and offers a full range of deposit services, including checking accounts, savings accounts and various time deposits ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to the principal market areas at rates competitive to those offered in the area. In addition, retirement accounts such as IRA (Individual Retirement Accounts) 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 and organizations, and governmental authorities.
The Subsidiary Banks offer a full range of short and medium-term commercial, real estate and personal loans. The Bank's 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 originates fixed and variable rate mortgage loans and offers real estate construction and acquisition loans.
The Subsidiary Bank's lending policies generally require an 80% loan to value ratio on secured term real estate lending. Additionally, the existence of a reliable source of repayment/cash flow is usually required before making any loans, regardless of the security. Appraisals are obtained as required and lending officers make on-site inspections. New loans over $25,000 are reported to the Credit/ALCO (Executive Committee of Bryan Bank) Committee, and this Committee approves loans over $750,000, prior to the loan being made. Generally, lending relationships over $100,000 are reported to the full Board of Directors.
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 Bank's books.
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 its loan portfolio. 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 that is consistent with regulatory classifications, which apply to all assets of an insured institution and require each institution to periodically classify its assets.
There are four categories of "criticized" assets: Special Mention, Substandard, Doubtful and Loss. Assets classified as substandard, doubtful or loss are considered "classified". The classification of assets is subject to regulatory review and re-classification. The Bank includes aggregate totals of criticized assets, and general and specific valuation reserves in quarterly reports to the Board of Directors, who approve the overall loan loss reserve evaluation. The Subsidiary Bank's loan classification systems utilize both the account officer and loan review function to monitor the classification of the Subsidiary Bank's loans.
The 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. Additionally, loan review performs a review of the Subsidiary Bank's loans to determine that the appropriate risk grade has been assigned to each borrowing relationship. Delinquencies are monitored on all loans as a basis for potential inclusion in general valuation reserves or, ultimately, for potential charge-off. Loans which 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 where uncertainty exists as to their collectibility. Real estate acquired through foreclosure is classified as substandard unless there is sufficient evidence to indicate such classification is not warranted.
Loan loss reserves are determined based on management's internal review of non performing loans, delinquency trends, the level of rated assets and charge-off trends. Additionally, management assesses general and specific economic trends both nationally and locally and regulatory information to determine the impact of those external factors on loan loss reserve levels. Based on the internal and external reviews, the Subsidiary Banks segregate their loan portfolio by type of loans and by loan classification within each loan type. Reserve percentages are applied (based on historical and anticipated loss rates) to each loan group to determine the required amount of allocated general loan loss reserves. Additionally, an amount is provided for unallocated general loan loss reserves, reflecting the potential for estimation errors in allocated reserves. This methodology has been applied consistently for all periods presented.
OTHER BANKING SERVICES
In November 1996, Savannah Bank applied for and received trust powers from the OCC. Savannah Bank hired a Trust Department Manager/Trust Officer and an assistant. The employee benefit administration and certain money management functions are being outsourced to third parties, at least for the early years of the department. Using these resources the Trust Department offers a full array of Trust Services including investment management, personal trusts, custodial accounts, estate administration, and employee benefit administration. In late 1998, the Trust department entered into a contract with Marshall & Ilsley Trust Company to outsource trust data processing, securities safekeeping and certain other operational functions for the Trust department.
The Subsidiary Banks also offer cash management services, 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 are members of the HONOR networks of automated teller machines that may be used by customers in our market area and other cities. Both Subsidiary Banks issue ATM and Debit cards and have nine automated teller machines in the area. The Bank also offers both VISA and MasterCard credit cards, on an agent bank basis, which have a pre-authorized line of credit for personal purchases and expenses.
LOCATION AND SERVICE AREA
The Primary Service Area of the Subsidiary Banks is the City of Savannah, certain contiguous areas of Chatham County and the Richmond Hill and Bryan County market, which is 20 miles south of downtown Savannah. Its secondary service area is the remainder of Chatham County and communities in Bryan, Effingham and Liberty Counties, Georgia and Beaufort and Jasper Counties, South Carolina. The Subsidiary Bank's target markets are individuals residing in the Primary Service Area, small to medium size businesses, including retail shops and professional service businesses in the community. The Subsidiary Banks are also targeting individuals who meet certain net worth and income requirements as potential customers for private banking services.
The Savannah Bank's main office, known as the Johnson Square Office, is located in the primary business district in downtown Savannah on Johnson Square where most of the commercial banks in the Primary Service Area have their main Savannah offices. In recent years, regional banks have acquired several of the banks in the Primary Service Area with headquarters outside of the state of Georgia. The Savannah Bank emphasizes that it is based in Savannah, and that its directors and the executive 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. Bryan Bank has limited competition in the Richmond Hill market. One other community bank and one grocery store branch office are located in Richmond Hill. Bryan Bank has approximately 70 percent of the commercial bank deposits in the Richmond Hill market. Richmond Hill is experiencing substantial residential growth due to its proximity to Savannah, its school system and affordable single family residences.
On October 1, 1992, Savannah Bank opened its second office at 400 Mall Boulevard. The Mall Boulevard Office competes in the area of Savannah that has the second largest concentration of deposits. This office is in the primary commercial and retail district in Savannah and includes a high concentration of professional and service-related businesses.
On November 20, 1995, Savannah Bank opened its third office, the West Chatham Office, at 100 Chatham Parkway. West Chatham is a full service office located in the most significant commercial and industrial growth area of Chatham County.
On October 1, 1997, the fourth office at 4741 Highway 80 East on Whitemarsh Island, six miles east of the main office location opened for business. Deposits, mortgage loan origination and consumer loans are the primary
opportunities for this location which will serve a large concentration of higher net worth individuals as well as a young adult population in apartments and first homes.
On October 8, 1998, Savannah Bank opened its fifth Savannah 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. The lease term began in July 1998.
The Subsidiary Bank's business plans rely principally upon local advertising and promotional activity and upon personal contacts by its directors, officers and stockholders to attract business and to acquaint potential customers with the Subsidiary Bank's personalized services. Both Subsidiary Banks emphasize a high degree of personalized customer service in order to be able to provide for each customer's banking needs. The marketing approach emphasizes the advantages of dealing with an independent, locally-owned and relationship-oriented bank to meet the particular needs of individuals, professionals and small to medium-size businesses in the community. All banking services are continually evaluated with regard to their profitability and efforts will be made to modify the business plan if the plan does not prove successful.
ASSET AND LIABILITY MANAGEMENT
Assets of the Subsidiary Banks consist primarily of loans and an investment portfolio. In an effort to maintain adequate levels of liquidity and minimize fluctuations in the net interest margin (the difference between interest income and interest expense), the rate sensitivity of the loan and investment portfolios are matched to the maturities and rate sensitivity of the liabilities.
The Subsidiary Banks invest the majority of its investment portfolio in highly marketable medium-term and short-term maturity assets, such as Federal Funds, U.S. Treasury securities, U.S. agency securities, marketable mortgage-backed securities and high quality bank-qualified tax-exempt securities. By pricing loans on a variable rate structure, or by keeping the maturity of the investment and loan portfolios relatively short-term, the Bank expects to be able to maintain loan interest, or to reinvest securities proceeds, at prevailing market rates. This will help to maintain a generally consistent spread over the interest rates paid by the Bank on the deposits which are used to fund the investment and loan portfolios.
Deposit accounts represent the majority of the liabilities of the Subsidiary Banks. These include noninterest-bearing checking accounts and interest bearing NOW accounts, savings accounts, money market accounts and certificates of deposit, including Individual Retirement Accounts (IRAs). Most time deposits have maturities of twelve months and less, but the maturities may be extended based on liquidity position, interest rate expectations and the rate sensitivity in the loan portfolio of the Subsidiary Banks. In managing its liabilities, both Subsidiary Banks attempt to attract deposits from customers who, assuming rates are competitive, are inclined to maintain an ongoing relationship with the Subsidiary Bank.
The Company has no investment risk in off-balance sheet derivative-related investments. The Subsidiary Banks own approximately $28.6 million in callable agency obligations which have normal interest rate and marketability risk. Of the callable obligations, $18.3 million have one time only calls. The call dates and the final maturities are laddered so that an excessive amount of cash flow from callable bonds will not be received in any one quarter or year. The remaining $10.3 million of callable obligations are callable quarterly or semi-annually.
INTEREST RATE RISK
Interest rate risk is a measure of exposure to changes in net interest income or the theoretical market value of portfolio equity due to changes in market interest rates. The differential (known as "gap") between interest rate sensitive assets and interest rate sensitive liabilities over a specified period of time 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.
The Subsidiary Banks operates under an interest rate risk policy through an Asset Liability Management Committee ("Credit/ALCO") at Savannah Bank and the Executive Committee at Bryan Bank. The policy outlines limits on interest rate risk in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a certain cash flow and repricing analyses which projects the impact of changes in interest rates on the Bank's assets and liabilities. Additionally, the committees may set other interest rate risk objectives. The policy also outlines responsibility for monitoring interest rate risk, the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Company's interest rate risk objectives.
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 subsidiary.
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 regulator of each bank is responsible for overseeing the affairs of all banks and periodically examines banks to determine their compliance with laws and regulations. Banks must make quarterly call reports of their financial condition and results of operations to the FDIC, who reviews the call report information for accuracy, consistency and reasonableness. Quarterly Call Report financial information is made available to regulators and the public approximately 90 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 120 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 an unsafe or unsound practice in the conduct of their business. The regulator can order affirmative action to correct any harm resulting from a violation of 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 national banks. The Bank also is 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 adopted FDIC insurance assessment rates based on certain risk-based and equity capital ratios. The table in Note 13 of the notes to the consolidated financial statements in the 1998 Annual Report shows the capital ratios for the Company, and the regulatory minimum capital ratios at December 31, 1998. The capital ratios of the Company and each Subsidiary Bank exceeded the ratios required to be "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 Bank is 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, to issue a guarantee, acceptance or letter of credit (including an
endorsement or standby letter of credit) to its affiliates, or to invest in the stock or securities thereof or to take such stock or securities as collateral for loans to any borrower.
Stockholders 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 shall have become 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, changes in reserve requirements against bank deposits and limitations on interest rates that banks may pay on time and savings 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.
In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company and the Bank.
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 5% of the voting stock of such bank or banking subsidiary of a bank holding company. Furthermore, a bank holding company is 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 or 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 of the types of businesses which bank holding companies may own.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Act) has introduced a process that enables nationwide interstate banking through bank subsidiaries and interstate bank mergers. Separately, the 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 immediate 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.
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 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 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.
Both Subsidiary Banks are members of the Federal Home Loan Bank ("FHLB") System, which consists of 12 regional FHLB's subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLB's maintain central credit facilities primarily for member institutions. The Subsidiary Banks, as a member of the FHLB of Atlanta, is 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% 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) 5% of its advances (borrowings) from the FHLB of Atlanta, or (iii) $500 thousand. Additionally, during 1996, the FHLB of Atlanta imposed a maximum investment in its capital stock equal to $500 thousand over the required minimum. The Subsidiary Banks are in compliance with this requirement at December 1998.
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 Directors. The Subsidiary Banks, are authorized to borrow funds from the FHLB of Atlanta to meet demands for withdrawals of savings 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 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 Bank received an "satisfactory" rating on the most recent performance evaluation of its CRA efforts by the OCC.
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."
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 Bank may be affected thereby.
The FDIC approved a reduction in the rates charged for deposit insurance premiums. The reduction has significantly reduced the amount of premiums assessed on well-capitalized banks. In 1998, the assessment was 3.2 cents per one hundred dollars of total deposits.
In January 1996, Georgia law was amended to allow banks to establish up to three de novo branches anywhere in the State of Georgia. The three-branch limitation was effective from July 1, 1996, through June 30, 1998. Effective July 1, 1998, the number of branch banks that a bank may establish is no longer limited.
Various other legislative proposals are expected in Congress concerning the banking industry. Given the uncertainty of the legislative process, management cannot assess the effect any such legislation would have on the Company's financial condition or results of operations.
COMPETITION
The banking business is highly competitive. The Subsidiary Banks compete with other commercial banks and savings and loan associations in their Primary Service Areas.
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 encounter competition from most of the financial institutions in the Subsidiary Banks' Primary Service Areas. In the conduct of certain areas of its banking business, the Subsidiary Banks also compete with credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restrictions 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 our targeted customers. Management believes that competitive pricing, local ownership and personalized, relationship-oriented service provide the Subsidiary Banks with a method to compete effectively for prospective customers.
Both Subsidiary Banks offer the full range of deposit services that are typically available from financial institutions, including NOW accounts, demand, savings and other time deposits ranging from money market accounts to longer term certificates of deposit. In addition, retirement accounts such as Individual Retirement Accounts are available. All deposit accounts will be insured by the FDIC up to the maximum amount permitted by law.
SELECTED STATISTICAL INFORMATION OF THE COMPANY
The following statistical information is provided for the Company for the years ended December 31, 1998 and 1997. The data is presented using daily average balances. This data should be read in conjunction with the financial statements appearing elsewhere in this Report. The Company has no foreign operations and, accordingly, there are no assets or liabilities attributable to foreign operations.
TABLE 1 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - 1998 AND 1997
The following table presents average balances of the Company and the Bank on a consolidated basis, the taxable-equivalent interest earned and the rate paid thereon during 1998 and 1997.
TABLE 2 - AVERAGE BALANCE SHEET AND RATE/VOLUME ANALYSIS - 1997 AND 1996 The following table presents average balances of the Company and the Bank on a consolidated basis, the taxable-equivalent interest earned and the rate paid thereon during 1997 and 1996.
(a) This table shows the changes in interest income and interest expense for the comparative periods based on either changes in average volume or changes in average rates for interest-earning assets and interest-bearing liabilities. Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate. (b) The taxable equivalent adjustment results from tax exempt income less non-deductible TEFRA interest expense. (c) The loan classifications shown here are based on the primary source of repayment. There are loans secured by real estate in both the commercial and the consumer categories.
TABLE 3 - INVESTMENTS - SECURITIES AVAILABLE FOR SALE The aggregate amortized cost and fair value of securities available for sale as of December 31, 1998 and 1997 were as follows: ---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- --------- Investment securities: U. S. Treasury securities $ 7,066 $ 85 $ - $ 7,151 U. S. Government agencies 41,508 393 - 41,901 Mortgage-backed securities 3,380 - (6) 3,374 State and municipal 8,520 351 - 8,871 Other taxable securities 1,390 16 - 1,406 -------- ---------- ---------- --------- $61,864 $ 845 $ (6) $62,703 ======== ========== ========== =========
---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- --------- Investment securities: U. S. Treasury securities $12,141 $ 3 $ - $ 12,144 U. S. Government agencies 17,849 64 - 17,913 Mortgage-backed securities 4,163 - (39) 4,124 State and municipal 3,377 150 - 3,527 Other taxable securities 1,087 11 - 1,098 -------- ---------- ---------- --------- $8,617 $228 $ (39) $ 38,806 ======== ========== ========== =========
The aggregate amortized cost and fair value of securities held to maturity as of December 31, 1997 were as follows: ---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- --------- Investment securities: State and municipal $ 3,166 $121 $ - $3,287 Other taxable securities 180 - - 180 -------- ---------- ---------- --------- $ 3,346 $121 $ - $3,467 ======== ========== ========== =========
TABLE 4 - 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, 1998. Taxable Amortized Fair Equivalent Cost Value Yield (a) ---------- -------- ---------- SECURITIES AVAILABLE FOR SALE: U.S. Treasury, other U.S. Government Agencies and mortgage-backed: Within one year $ 4,627 $ 4,631 5.37% One year to five years 35,737 36,120 5.94 Five years to ten years 11,590 11,677 5.94 Over ten years - - - ------- ------- Total 51,954 52,428 5.89
Other interest-earning investments: Within one year 540 543 6.10 One year to five years 2,561 2,655 5.00 Five years to ten years 3,545 3,780 6.43 Over ten years 1,875 1,892 4.53 ------- ------- Total 8,521 8,870 5.57 ------- ------- Total available for sale interest-earning investments 60,475 61,298 5.87%
Federal Reserve Bank Stock and other investments 1,389 1,405 ------- -------
Total available-for-sale securities $61,864 $62,703 ======= =======
(a) The yield is calculated on the amortized cost of the securities.
LOANS
The following tables set forth certain information regarding the Bank's loan portfolio as of December 31, 1998 and 1997.
TABLE 5 - LOANS BY CATEGORY
The composition of the loan portfolio at December 31, 1998 and 1997 is presented in Note 5 to the consolidated financial statements.
Percent Percent 1998 of Total 1997 of Total -------- -------- ------- --------- Commercial $ 26,179 15.4% $25,360 16.4% Real estate - construction and development 19,861 11.6 16,244 10.5 Real estate - mortgage 107,330 62.8 97,081 63.0 Installment and consumer 17,489 10.2 15,533 10.1 -------- -------- -------- --------- Total Loans $170,858 100.0% $154,218 100.0% ======== ======== ======== =========
TABLE 6 - LOAN REPRICING OPPORTUNITIES
The following table sets forth certain loan maturity information as of December 31, 1998. 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 that have maturities of one to three years and longer amortization periods will renew at maturity. After One one year Over year through five Loan Category or less five years years Total - -------------- -------- ---------- ------- -------- Real estate - construction and development $18,030 $ 1,831 $ - $ 19,861 Commercial 16,668 9,300 211 26,179 -------- -------- ------- -------- Total $ 34,698 $ 11,131 $ 211 $ 46,040 ======== ======== ======= ========
Loans with floating and adjustable rates $ 12,690 $ 7,609 $ 147 $ 20,446 Loans with fixed rates 22,008 3,522 64 25,594 -------- -------- ------- -------- Total $ 34,698 $ 11,131 $ 211 $ 46,040 ======== ======== ======= ========
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
At December 31, 1998, nonperforming loans were $233 and $497, respectively. Management also maintains a "watch list" of special mention and classified loans that may not be past due, nonaccrual or restructured which included $347 of loans in addition to the nonaccrual and 90 days overdue balances. Interest income of $7 was recognized from nonaccrual loans in 1997 and none in 1998 or 1996. At December 31, 1996 the Subsidiary Banks had $210 nonaccrual loans and had $23 in loans past due over 90 days.
Except for consumer loans, the Company's policy is to place a loan 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 will be charged to the allowance for possible loan losses. Interest on loans that are classified as 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 Subsidiary Banks' business activity is with customers located within the Chatham and Bryan County area. As of December 31, 1998, the Bank had a concentration of credit risk aggregating $130.2 million on loans secured by real estate. The Bank has no exposure to highly leveraged transactions and has no foreign credits in its loan portfolio.
TABLE 7 - PROVISION FOR POSSIBLE LOAN LOSSES
Changes in the allowance for loan losses in 1998 and 1997 are summarized as follows:
1998 1997 ------ ------ Balance at the beginning of the year $2,063 $1,695 Charge-offs - Commercial (145) (96) Charge-offs - Consumer (84) (98) Charge-offs - Real estate (29) - ------ ------ Charge-offs - Total (258) (194) ------ ------ Recoveries - Commercial 4 37 Recoveries - Consumer 79 45 ------ ------ Total recoveries 83 82 ------ ------ Net charge-offs (175) (112) ------ ------ Provision for loan losses 435 480 ------ ------ Balance at the end of the year $2,323 $2,063 ====== ======
Ratio of net charge-offs to average loans .11% .08% ====== ======
TABLE 8 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE
The allowance for loan losses is allocated by loan category based on management's assessment of risk within the various categories of loans. The Company's allocation of the allowance for loan losses according to the amount deemed to be reasonably necessary to absorb potential losses within each loan category is presented in the following tables:
% of % of 1998 Total 1997 Total ------ ----- ------ ----- Commercial $ 450 .26 $ 376 .24 Real estate- construction and development 520 .30 443 .29 Real estate - mortgage 866 .51 783 .51 Installment and consumer 324 .19 317 .21 Unallocated 163 .10 144 .09 ------ ----- ------- ----- Total allowance for loan losses $2,323 1.36 $2,063 1.34 ====== ===== ======= =====
The allowance for loan losses is based on estimates and is maintained at a level considered adequate to provide for potential loan losses. The adequacy of the allowance is based on management's continuing evaluation of the loan portfolio under current economic conditions, underlying collateral value securing loans and such other factors, which deserve recognition in estimating loan losses. 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.
Loan loss reserves are determined based on management's internal review of nonperforming loans, delinquency trends, the level of rated assets and charge-off trends. Additionally, management assesses general and specific economic trends both nationally and locally and regulatory information to determine the impact of those external factors on loan loss reserve levels. Based on the internal and external reviews, The Bank segregates its loan portfolio by type of loans and by loan classification within each loan type. The allowance for loan losses is allocated by different loan classifications based on management's assessment of risk inherent in the various types of loans. Reserve percentages are applied (based on historical and anticipated loss rates) to each loan group to determine the required amount of allocated general loan loss reserves. Additionally, an amount is provided for unallocated general loan loss reserves reflecting the potential for estimation errors in allocated reserves.
Although historically, there have been minimal losses in 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 during 1997 and 1998 in certain locations in our market area which may not be sustainable.
DEPOSITS
TABLE 9 - DEPOSIT AVERAGE BALANCES AND RATES PAID
The following table summarizes average balances of deposits of the Company and the Bank on a consolidated basis and the average rates paid on such deposits during 1998 and 1997. 1998 1997 ------------------ ------------------- Amount Rate Amount Rate ------- ----- -------- ----- Non-interest bearing demand $ 30,137 0.00% $ 26,550 0.00% Interest bearing savings 40,215 2.76 32,752 3.03 Savings deposits 11,850 3.24 10,531 3.41 Money Market deposits 31,946 4.00 20,247 3.88 Time Deposits 97,965 5.65 87,948 5.66 -------- -------- Total $212,113 $178,028 -------- --------
TABLE 10 - TIME DEPOSIT MATURITIES
The following table indicates the amount of the Bank's time certificates of deposit of $100,000 or more at December 31, 1998 by time remaining until maturity.
Maturity Period Amount --------------- ------- Three months or less $12,915 Over three through six months 11,208 Over six through twelve months 12,739 Over twelve months 4,861 ------- Total $41,723 =======
SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 and 1997 consist of securities sold under agreement to repurchase and federal funds purchased. The maximum amount outstanding at the end of any month was $5,121 and $5,493 during 1998 and 1997, respectively.
As of December 31, 1998 and 1997, Savannah Bank and Bryan Bank had short-term borrowings totaling $3,211 and $3,380, respectively. The average interest rates were 5.21% and 5.04% for the years ended 1998 and 1997, respectively.
TABLE 11 - RETURN ON ASSETS AND EQUITY
The following table shows return on assets (net income divided by average total assets), return on equity (net income divided by average shareholders' equity) and shareholders' equity to assets ratio (shareholders' equity divided by total assets) for the years ended December 31, 1998, 1997 and 1996. Dividends paid, adjusted for stock splits and stock dividends, were $.34 in 1998, $.14 in 1997, and $.08 in 1996.
Ratio 1998 1997 1996 ----- ---- ---- ---- Return on average assets 1.07% 1.42% 1.41% Return on average equity 11.20 13.84 13.29 Average equity to average assets 9.57 10.26 10.58 Dividend payout ratio 48.78 22.91 19.22
Excluding Nonrecurring Items ---------------------------- Return on average assets 1.30% 1.42% 1.41% Return on average equity 13.57 13.84 13.29 Dividend payout ratio 40.27 22.91 19.22
ITEM 2.
ITEM 2. PROPERTIES
The Bank's main office is located at 25 Bull Street, Savannah, Georgia 31401, on the ground floor and lower level of a seven story office building located on Johnson Square in downtown Savannah. The location is sometimes called the Financial Square because seven financial institutions surround the square (downtown park). The location is convenient to commercial customers and consumers who already use the services of the six other financial institution offices on Johnson Square.
The Company has leased approximately 4,710 square feet on the main floor of the building under a five-year lease with two optional five-year extensions in June 1999 and 2004. In November 1998, an additional 1,475 square feet of space was rented on the sixth floor. This lease is through June 2004 with one five year renewal option. The rental costs increase by 3% 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 increases in the cost of ad valorem taxes, insurance, utilities and janitorial services.
The Company also leases approximately 6,700 square feet on the first floor of a two-story building located at 400 Mall Boulevard, Savannah, Georgia. This space is being used for the Bank's first branch location, the Mortgage Loan Department and expansion space. 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 Bank has committed to exercise the next five-year lease option. There are four five-year renewal options included in the terms. The Company is also responsible for its pro-rata share of increases in the cost of ad valorem taxes, insurance and maintenance of common areas. The bank renovated the existing space, constructed a vault, drive-in teller area and six drive-in teller lanes adjacent to the building.
During 1995, the Bank entered into a five-year ground lease with nine five-year renewal options at 100 Chatham Parkway. The 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 Bank made land improvements and constructed a 2200 square-foot banking facility including four drive-in lanes and an ATM drive-through lane. The West Chatham Office opened for business on November 20, 1995.
In November 1997, the 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 Road. The property consists of 3,055 square feet of banking office space and a separate drive-through behind the shopping center. The space is presently occupied by a regional bank and will require minimal leasehold improvements prior to beginning operations.
ITEM 3.
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 Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 15, 1998 at a Special Meeting, the shareholders of the Company approved the merger with Bryan Bancorp of Georgia, Inc. at an exchange ratio of 1.85 shares of the Company for each share of Bryan. The shareholders also elected five new directors to the Board of Directors of the Company from the Board of Bryan.
Management held proxies representing 1,549,271 shares or 89.0 percent of the 1,736,798 shares outstanding and entitled to vote at the meeting. At the Special Meeting of Shareholders, 1,215,413 or 69.8 percent of the shares voted "FOR" the merger, 2,100 shares abstained and 331,758 proxies were not voted. For the second item on the ballot, all five directors, Messrs. Burnsed, Gill, Roberts, Royal and Thompson, each received 1,547,621 shares "FOR" their election and each had 1,650 shares withheld.
All of the existing directors continuing in office are as follows: J. Wiley Ellis, Chairman of the Board, Archie H. Davis, President & CEO, Russell W. Carpenter, Robert H. Demere, Jr.,Julius Edel, Robert W. Groves III, Jack M. Jones, Aaron M. Levy, J. Curtis Lewis III, M. Lane Morrison, Jack W. Shearouse, Penelope S. Wirth
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to sections entitled "Market For Registrant's Common Equity and Related Stockholder Matters" in the Registrant's MD&A on page 27 of this filing.
ITEM 6.
ITEM 6. - SELECTED FINANCIAL DATA
Incorporated herein by reference to sections "Table 1 - Selected Financial Condition Highlights - Five Year Comparison," "Table 2 - Selected Operating Highlights" and "Table 5 - Selected Quarterly Data" in the Registrant's Management and Analysis of Financial Condition and Results of Operations on pages 20 through 27 of this filing.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTs OF OPERATIONS ($ in thousands, except share data)
For a comprehensive presentation of the Company's financial condition and results of operations, the following selected financial data and analysis should be reviewed along with the consolidated financial statements and the accompanying notes included in ITEM 8. in this Form 10-K Annual Report. All dollar amounts, except per share amounts, are in thousands.
TABLE 1 - SELECTED FINANCIAL CONDITION HIGHLIGHTS - FIVE-YEAR COMPARISON
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- SELECTED AVERAGE BALANCES
Total assets $245,014 $205,032 $179,806 $151,577 $126,804 Loans - net of unearned income 160,262 139,772 120,232 104,180 85,383 Securities 52,448 40,556 37,801 29,328 24,283 Other interest-earning assets 18,509 12,795 10,048 8,272 9,474 Total interest-earning assets 231,219 193,123 168,081 141,780 119,140 Interest-bearing deposits 181,976 151,478 132,870 111,547 89,565 Short-term borrowed funds 7,683 4,241 1,748 2,417 912 Total interest-bearing liabilities 189,659 155,719 134,618 113,964 90,477 Noninterest-bearing deposits 30,137 26,550 24,416 19,761 19,562 Total deposits 212,113 178,028 157,286 131,308 109,127 Loan to deposit ratio - average 76% 79% 76% 79% 78% Shareholders' equity 23,445 21,040 19,020 17,448 15,688
CREDIT QUALITY DATA Nonperforming assets $ 233 $ 497 $ 82 $ 39 $ 2 Nonperforming loans 233 497 82 39 2 Net loan losses (recoveries) 175 111 79 20 (26) Allowance for loan losses 2,323 2,063 1,695 1,489 1,252 Nonperforming assets to total loans 0.14% 0.32% 0.06% 0.03% 0.00% Net loan losses (recoveries) to average loans 0.11% 0.08% 0.07% 0.02% (0.03%) Allowance for loan losses to total loans 1.36% 1.34% 1.29% 1.32% 1.33% Allowance for loan losses / net loan losses 13 19 21 74 NM
SELECTED FINANCIAL DATA AT PERIOD-END
Total assets $266,380 $229,172 $197,665 $166,885 $137,052 Interest-earning assets 242,669 209,920 177,618 156,089 128,476 Loans - net of unearned income 170,858 154,218 130,909 112,706 94,137 Deposits 232,372 200,444 174,005 143,044 118,877 Loan to deposit ratio 74% 77% 75% 79% 79% Interest-bearing liabilities 200,680 171,833 144,851 123,149 96,381 Shareholders' equity 24,475 22,397 20,056 18,537 16,342 Shareholders' equity to total assets 9.19% 9.77% 10.15% 11.11% 11.92% Risk-based capital ratios: Tier I capital to risk- based assets 13.12% 14.20% 15.72% 16.04% 18.16% Total capital to risk- based assets 14.36% 15.44% 16.90% 17.24% 19.50% Per share: Book value $ 9.12 $ 8.48 $ 7.61 $ 6.98 $ 6.04 Common stock closing price (Nasdaq) $ 26.00 $ 23.38 $ 16.33 $ 13.33 $ 6.67 Common shares outstanding(000s) 2,683 2,640 2,635 2,657 2,706
TABLE 2 - SELECTED OPERATING HIGHLIGHTS - FIVE-YEAR COMPARISON
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (thousands, except per share data)
Interest income-taxable equivalent $19,342 $16,803 $14,559 $12,802 $ 9,396 Interest expense 8,736 7,343 6,388 5,551 3,392 ------- ------- ------- ------- ------- Net interest income - taxable equivalent 10,606 9,460 8,171 7,251 6,004 Taxable equivalent adjustment (147) (136) (115) (86) (55) ------- ------- ------- ------- ------- Net interest income 10,459 9,324 8,056 7,165 5,949 Provision for loan losses 435 480 285 257 145 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 10,024 8,844 7,771 6,908 5,804 ------- ------- ------- ------- ------- Other operating revenue Service charges on deposit accounts 774 749 741 615 535 Mortgage origination fees 933 479 211 176 110 Other income (a) 594 441 250 189 107 Gains (losses) on sale of securities 3 4 - (90) (160) ------- ------- ------- ------- ------- Total other income 2,304 1,673 1,202 890 592 ------- ------- ------- ------- ------- Personnel expense 4,214 3,405 2,722 2,285 1,899 Occupancy and equipment expense 1,010 846 717 588 529 Nonrecurring merger expenses (b) 619 - - - - Other expense 2,223 1,843 1,692 1,649 1,486 ------- ------- ------- ------- ------- Total other expense 8,066 6,094 5,131 4,522 3,914 ------- ------- ------- ------- ------- Income before income taxes 4,262 4,423 3,842 3,276 2,482 Provision for income taxes 1,636 1,512 1,314 1,155 849 ------- ------- ------- ------- ------- Net income $ 2,626 $ 2,911 $ 2,528 $ 2,121 $ 1,633 ======= ======= ======= ======= ========
NET INCOME PER SHARE: Basic $ .99 $1.10 $ .96 $ .80 $ .64 Diluted $ .95 $1.06 $ .93 $ .78 $ .64 Cash dividends paid per share (d) $ .34 $ .14 $ .08 $ .07 $ .03 Average basic shares outstanding 2,661 2,640 2,641 2,667 2,552 Average diluted shares outstanding 2,760 2,757 2,716 2,718 2,565
PERFORMANCE RATIOS (AVERAGES) Net yield on interest-earning assets 4.59% 4.90% 4.86% 5.11% 5.04% Return on assets 1.07% 1.42% 1.41% 1.40% 1.29% Return on equity 11.20% 13.84% 13.29% 12.16% 10.41% Overhead ratio 63.21% 55.44% 55.42% 55.52% 58.41%
OPERATING PERFORMANCE RATIOS (AVERAGES) EXCLUDING NONRECURRING ITEMS (c) Operating net income $ 3,181 $ 2,911 $ 2,528 $ 2,121 $ 1,633 Operating net income per diluted share $ 1.15 $ 1.06 $ 0.93 $ 0.78 $ 0.64 Return on assets 1.30% 1.42% 1.41% 1.40% 1.29% Return on equity 13.57% 13.84% 13.29% 12.16% 10.41% Overhead ratio 58.62% 55.44% 55.42% 55.52% 58.41%
(a) 1998 includes $57 first quarter Bryan gain on the sale of land purchased for a new Bryan office in Savannah. (b) 1998 includes $75 non-recurring data processing buyout expense incurred in the fourth quarter. (c) Excludes the effects of after-tax merger expenses of $544 and after-tax non-recurring items described in (a) and (b) of $11 in net charges. (d) Cash dividends per common share are those of The Savannah Bancorp, Inc. (historical)
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 or 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 the Bank's 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 1998, loans increased $16.6 million, or 11%, and deposits increased $31.9 million, or 16% resulting in an decrease in the loan to deposit ratio from 77% at the beginning of the year to 74% at year-end. During 1999, management plans to emphasize both loan and deposit growth and to target a loan to deposit ratio in the 80% to 85% range. Core deposit growth will be accomplished through marketing strategies, competitive interest rates and through the opportunities at our new Medical Arts Office which opened in September 1998. Both subsidiary banks are members and shareholders of the Federal Home Loan Bank of Atlanta. As a member of the FHLB, the Bank has 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 the Bank's 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 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 December 31, 1998, was $23.5 million within one year, or 10 percent of total interest-earning assets. Fixed rate earning assets with maturities over five years totaled $14, or 6 percent of total interest-earning assets. 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 stop, 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 December 31, 1998, the Company had unfunded commitments to extend credit of $42,613 and outstanding stand-by letters of credit of $1,129. 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.
TABLE 3 - LONG-TERM MATURITY GAP AND REPRICING DATA
The following is the long-term maturity and repricing data for the Company as of December 31, 1998.
(a) Estimated cash flow runoff of 10% per year has been assumed.
The Company's cash flow gap is $23,499 within one year, or ten percent of total interest-earning assets. Fixed rate earning assets with maturities over five years total $12,671 or five 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.
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. Good loan and core deposit growth resulted in an increase of $1,135, or 12 percent, in net interest income. The Company increased its investment in callable U.S. Government agency securities in 1998. In general, investments have expected maturities of less than five years. Tax-exempt bank qualified municipals total $8.9 million, or approximately 14 percent of the investment portfolio, and have weighted average maturities of approximately 5.7 years. At December 31, 1998, approximately 19.7 percent of equity capital, or $4,827, was invested in bank premises and equipment.
The Savannah Bank, N.A. has classified all investment securities as available for sale since January 1, 1994. Bryan Bank & Trust classified their municipal bonds as held to maturity until their merger with the Company in December, 1998. In 1998, a decrease in U.S. Treasury market rates of approximately 100 to 125 basis points caused net unrealized gains on available for sale securities to increase to $516 from $118 at December 31, 1997. These amounts are included in shareholders' equity at December 31, 1998 in other accumulated comprehensive income.
The Company's lending and investment policies continue to emphasize high quality growth. These policies do translate in to lower net interest margins; however, management believes these policies are in the best interests of the shareholders and customers in the long-term, as they lessen the negative impact of a recessionary business cycle. 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 FDIC insurance assessment rates based on certain "well-capitalized" risk-based and equity capital ratios. As of December 31, 1998, the Company and the Bank exceed the minimum requirements necessary to be classified as "well-capitalized."
Total equity capital for the Company is $24,475, or 9.2% of total assets. Management expects that the Company's and the Bank's capital ratios will continue to remain above the well-capitalized capital ratio level, even in the event of future substantial increases in market rates. The high capital ratio and expected future earnings will allow the bank to continue its aggressive growth objectives without having to raise additional capital in the near future.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
For 1998, the Company had operating net income of $3,181, up 9 percent from $2,911 in 1997. This represented annualized returns of 13.57 percent on average equity and 1.30 percent on average assets for 1998. Operating earnings were $1.15 per diluted share in 1998 compared to $1.06 in 1997, an increase of 8 percent.
Operating earnings exclude $555 in special after-tax, nonrecurring merger items taken during 1998 as Bryan Bancorp of Georgia was merged into The Savannah Bancorp on December 15, 1998. Special charges include legal, accounting, advisory and data processing contract buyout costs totaling $619,000 associated with the merger. A first quarter gain on sale of land of $57 has also been excluded as a non-recurring item. Including the nonrecurring items, net income per diluted share was 95 cents for the year with net income totaling $2,626. The merger with Bryan Bancorp of Georgia has been accounted for under the pooling-of-interests accounting method. The financial results for all periods presented have been restated to show the results of the two companies as if they had been one. Operating net interest income growth was moderated by a lower net yield on interest-earning assets (net interest margin) caused by falling rates and very competitive loan pricing. Overhead expenses were higher due to two full-service offices opening in October 1997 and September 1998 and the addition of five new officers. Year 2000 expenses consisting of consulting, education and implementation costs were also incurred. The Company's facilities and people are now well-positioned to add significant asset growth with a much lower overhead growth.
Net interest income was $10,459 in 1998 compared to $9,324 in 1996, an increase of $1,135, or 12%. Average interest-earning assets were up $38.1 million, or 20% in 1998 over 1997. The prime rate decreased 75 basis points to 7.75% during September through November 1997 and time deposit rates decreased between 50 and 100 basis points during 1998. The net yield on interest earning assets decreased
to 4.59% in 1998 from 4.90% in 1997.
The provision for loan losses was $435 in 1998 compared to $480 in 1997. Net loan charge-offs totaled $175 in 1998 and $111 in 1997. There was $233 in non-performing assets at December 31, 1998 and $497 at December 31, 1997. The allowance for possible loan losses was 1.36% of loans at December 31, 1998 and 1.34% at December 31, 1997.
Other income was $2,304 in 1998 compared to $1,673 in 1997. Other income included mortgage origination fees of $933 in 1998 and $479 in 1997. Lower mortgage rates during 1998 stimulated the growth in mortgage origination fee income during 1998. A trust department was started in December, 1996 and trust fee income was $60 in 1998 and $30 in 1997. Other income in 1998 also included the $57 gain from the sale of land by Bryan.
Other expenses were $8,066 in 1998 compared to $6,094 in 1997, an increase of $1,972. The increase included $619 of expenses related to the merger with Bryan Bancorp of Georgia, Inc. Salary and employee benefit expense increased to $4,214 in 1998 from $3,405 in 1997 due to new positions being added in late 1997 and 1998 for two branches, a credit administration officer, a technology position and an expanded mortgage staff. Other operating expenses increased $2,223 or 21% for increases in data processing related to check imaging, Year 2000 and upgrading our communications network. Other increases such as postage, supplies and other related to the increasing volume of loan and deposit accounts and the costs necessary to acquire and service them. Occupancy expense and equipment increased primarily because of the Islands Towne Center Office that opened in October 1997 and the Medical Arts lease which was assumed in July 1998.
The provision for income taxes was $1,636 in 1998 and $1,512 in 1997. The effective federal and state tax rates were 38.4% and 34.2% in 1998 and 1997, respectively. The increase in the effective rate was primarily due to certain non-deductible merger expenses. 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.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
For 1997, the Company had a net income of $2,911 compared to 1996 net income of $2,528 an increase of 15%. Diluted earnings per share were $1.06 in 1997 and $0.93 in 1996, an increase of 14%. Basic earnings per share were $1.10 in 1997 and $0.96 in 1996. Per share earnings have been restated for a three-for-two stock split paid on February 24, 1997. The following discussion and analysis summarizes the more significant factors affecting operating results in 1997 compared with 1996.
Net interest income was $9,324 in 1997 compared to $8,056 in 1996, an increase of $1,268 or 16%. Average interest-earning assets were up $25.0 million, or 15% in 1997 over 1996. The prime rate increased 25 basis points to 8.50% and time deposit rates increased between 10 and 25 basis points during 1997. The net yield on interest earning assets increased to 4.90% in 1997 from 4.86% in 1996. This ratio increased slightly with the increasing prime rate.
The provision for loan losses was $480 in 1997 compared to $280 in 1996. Net loan charge-offs totaled $111 in 1997 and $79 in 1996. There was $497 in non-performing assets at December 31, 1997 and $82 at December 31, 1996. The increase in the provision for loan losses primarily resulted from the $19.5 million in loan growth plus an increase in the allowance for loan losses to 1.34% from 1.29% at December 31, 1997 and 1996, respectively.
Other income was $1,673 in 1997 compared to $1,202 in 1996. Other income also included mortgage origination fees of $479 in 1997 and $211 in 1996. Slightly lower mortgage rates during 1997 and an expanded mortgage staff contributed to the growth in mortgage origination fee income during 1997. Other income also included service charges on deposit accounts of $749 and $741 in 1997 and 1996, respectively.
Other expenses were $6,094 in 1997 compared to $5,131 in 1996, an increase of $963. Salary and employee benefit expense increased to $3,405 in 1997 from $2,722 in 1996, an increase of $683. The trust department was started in December, 1996, two lending officers were added in the third quarter, 1997 and a credit administration officer and a new branch were added in October, 1997. Other operating expenses increased $151 or 9% as increases in data processing, postage and supplies related to the increasing volume of loan and deposit accounts and the costs necessary to acquire and service them.
The provision for income taxes was $1,512 in 1997 and $1,314 in 1996. The effective federal and state tax rates were 34.2% in 1997 and 1996. 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.
YEAR 2000 READINESS DISCLOSURE (made under the Year 2000 Information and Readiness Act)
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 engaged 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.
Savannah Bank's and Bryan Bank's primary software systems are licensed from an outside vendor, M & I Data Systems, 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 of banks in the United States. Savannah Bank and Bryan Bank have received commitments from other vendors to provide the required systems modifications to ensure compliance. Management believes those commitments will be 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, ATM's, 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. Most mission critical systems are Year 2000 ready.
Testing for the Company includes, but is not limited to, current system dates before, during and after the start of year 2000 including Leap Year. A variety of testing is performed both before and after the implementation of solutions. Internal and external interfaces are being 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, tape, film and fiche. Copies are kept at multiple locations. Specific contingency plans relating to Year 2000 issues have been or are being developed.
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. 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. The incremental Year 2000 expense is estimated to be between $60,000 and $100,000, for 1998 and 1999 combined, for Savannah Bank and Bryan Bank.
TABLE 4 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was sold in an initial public offering on April 10, 1990. It is traded in the over-the-counter market and is quoted on the Nasdaq National Market under the symbol SAVB. The quarterly high, low and closing stock trading prices for 1998 and 1997 are listed below. On December 15, 1998 approximately 937,000 additional shares were issued to shareholders of Bryan Bancorp of Georgia, Inc. in exchange for all of the outstanding stock in Bryan Bancorp of Georgia, Inc. There were approximately 650 holders of record of Company Common Stock and, according to information available to the Company, approximately 650 additional shareholders through brokerage accounts at February 26, 1999.
Market Price per Common Share ----------------------------------------------------- Fourth Third Second First 1998 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- High $26.00 $27.00 $28.25 $31.00 Low 21.00 21.50 25.50 23.38 Close 26.00 21.50 26.00 27.50
---- High $24.00 $23.25 $23.00 $19.25 Low 21.00 20.00 19.00 15.00 Close 23.38 21.00 21.50 19.25
TABLE 5 - SELECTED QUARTERLY DATA
The following is a summary of unaudited quarterly results for 1998 and 1997 that has been restated for the merger with Bryan Bancorp of Georgia on December 15, 1998, using the pooling of interests accounting method.
ITEM 7A
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 3 - Long-term Maturity Gap and Repricing Data" in the Registrant's Managements Discusssion and Analysis of Financial Condition and Results of Operations on pages 22 and 23 of this filing.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) 1. Financial Statements The financial statements, together with the applicable report of independent accountants, are included on pages 31-47 in this 1998 Annual Report on Form 10-K as show in the following index. Page Number (i) Consolidated Financial Highlights for 1998 and 1997 29 (ii) Management's Responsibility for Financial Reporting 30 (iii) Report of Independent Certified Public Accountants 31 (iv) Consolidated Balance Sheets- December 31, 1998 and 1997 32 (v) Consolidated Statements of Income For the Years Ended December 31, 1998, 1997 and 1996 33 (vi) Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996 34 (vii) Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 35 (vi) Notes to Consolidated Financial Statements 36-47
2. Financial Statement Schedules
Computation of Earnings Per Share Exhibit 11
Report of Predecessor Independent Accountants Exhibit 23.1 The report of Moore, Stephens, Tiller for the year ended December 31, 1997 and 1996 is included as a financial schedule exhibit in this Form 10-K.
Consent of Arthur Andersen LLP Exhibit 23.2
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
DECEMBER 31, 1998 AND 1997
PERCENT INCREASE BALANCE SHEET AT DECEMBER 31 1998 1997 (DECREASE) - -------------------------------------------------------------------------------- (Amounts in thousands, except per share data) Total assets $ 266,380 $ 229,172 16 Interest-earning assets 242,669 209,920 16 Loans 170,858 154,218 11 Allowance for loan losses 2,323 2,063 13 Non-performing assets 233 497 (53) Deposits 232,372 200,444 16 Loan to deposit ratio 74% 77% (4) Interest-bearing liabilities 200,680 171,833 17 Shareholder's equity 24,475 22,397 9 Allowance for possible loan losses to total loans 1.36% 1.34% Equity to assets 9.19% 9.77% Tier 1 capital to risk-weighted assets 13.12% 14.20% Book value per share $ 9.12 $ 8.48 8 Outstanding shares 2,683 2,640 2
EARNINGS AND PERFORMANCE DATA FOR THE YEARS ENDED DECEMBER 31, 1998 1997 - -------------------------------------------------------------------------------- NET INCOME $ 2,626 $ 2,911 (10) Return on average assets 1.07% 1.42% (25) Return on average equity 11.20% 13.84% (19)
EARNINGS PER SHARE: Basic $ .99 $ 1.10 (10) Diluted $ .95 $ 1.06 (10)
AVERAGE OUTSTANDING SHARES: Basic 2,661 2,640 1 Diluted 2,760 2,757 0
OPERATING EARNINGS AND PERFORMANCE DATA (A) - -------------------------------------------------------------------------------- OPERATING NET INCOME $ 3,181 $ 2,911 9 Return on average assets 1.30% 1.42% (8) Return on average equity 13.57% 13.84% (2)
OPERATING EARNINGS PER SHARE: Basic $ 1.20 $ 1.10 9 Diluted $ 1.15 $ 1.06 8
(a) - excludes nonrecurring merger and data processing costs of $619 and a nonrecurring gain on sale of land of $57.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Savannah Bancorp, Inc. is responsible for the preparation of the financial statements, related financial data and other financial information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing in this annual report is consistent with the financial statements.
In meeting its responsibility both for the integrity and fairness of these statements and information, management depends on the accounting system and related internal control structures that are designed to provide reasonable assurance that transactions are authorized and recorded in accordance with established procedures, and that assets are safeguarded and proper and reliable records are maintained.
The Audit Committee of The Savannah Bancorp, Inc.'s Board of Directors, composed solely of outside directors, meets regularly with the Company's management, independent certified public accountants and regulatory examiners to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent certified public accountants have direct access to the Audit Committee with or without management present.
The 1998, 1997 and 1996 financial statements have been audited by Arthur Andersen LLP, independent certified public accountants. Their appointment was recommended by the Audit Committee and approved by the Board of Directors. Their audit provides an objective assessment of the degree to which the Company's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing internal control structure and performing selected tests of transactions and records as indicated in their report. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects.
/s/ ARCHIE H. DAVIS /s/ ROBERT B. BRISCOE
Archie H. Davis Robert B. Briscoe President and Chief Chief Financial Executive Officer Officer January 25, 1999 January 25, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of The Savannah Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of The Savannah Bancorp, Inc. (a Georgia Corporation) and its subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Bryan Bancorp of Georgia, Inc. for the years ended December 31, 1997 and 1996, a company acquired during 1998 in a transaction accounted for as a pooling of interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of The Savannah Bancorp, Inc. and reflect total assets of 30% and 29% as of December 31, 1998 and 1997, respectively, and total revenues of 33%, 34% and 34% for each of the three years in the period ended December 31, 1998 of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Bryan Bancorp of Georgia, Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of The Savannah Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Jacksonville, Florida January 25, 1999
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - -------------------------------------------------------------------------------- ($ in thousands, except share data) 1998 1997 - -------------------------------------------------------------------------------- ASSETS
Cash and due from banks $ 17,355 $ 13,968 Interest-bearing deposits in bank - 990 Federal funds sold 10,178 13,225 Securities available for sale, at fair value (amortized cost of $61,864 in 1998 and $38,617 in 1997) 62,703 38,806 Securities held to maturity (estimated market of $3,467 in 1997) - 3,346 Loans 170,858 154,218 Less allowance for loan losses (2,323) (2,063) - -------------------------------------------------------------------------------- Net loans 168,535 152,155 Premises and equipment, net 4,827 4,425 Other assets 2,782 2,257 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 266,380 $ 229,172 - --------------------------------------------------------------------------------
LIABILITIES Deposits: Non interest-bearing demand $ 39,353 $ 33,581 Interest-bearing demand 44,269 40,192 Savings 11,632 11,014 Money market accounts 34,663 22,262 Time, $100,000 and over 41,723 34,911 Other time deposits 60,732 58,484 - -------------------------------------------------------------------------------- Total deposits 232,372 200,444 Securities sold under repurchase agreements 2,674 2,292 Federal funds purchased 537 1,088 Federal Home Loan Bank Advances 4,450 1,590 Other liabilities 1,872 1,361 - -------------------------------------------------------------------------------- TOTAL LIABILITIES 241,905 206,775 - -------------------------------------------------------------------------------- Commitments and contingencies (Notes 14 and 16)
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share: authorized 20,000,000 shares; issued 2,719,614 and 2,713,148 shares in 1998 and 1997 2,720 2,713 Preferred stock, par value $1 per share: authorized 10,000,000 shares, none issued - - Contributed capital 13,076 12,977 Retained earnings 8,438 7,093 Treasury stock, 37,050 and 73,050 shares in 1998 and 1997, respectively (275) (504) Accumulated other comprehensive income 516 118 - -------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 24,475 22,397 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 266,380 $ 229,172 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ($ in thousands, except share data) 1998 1997 1996 - -------------------------------------------------------------------------------- INTEREST INCOME Loans $ 15,120 $ 13,481 $ 11,605 Investment securities: Taxable 2,739 2,159 2,010 Non-taxable 362 326 297 Deposits with banks 20 11 142 Federal funds sold 954 690 390 - -------------------------------------------------------------------------------- Total interest income 19,195 16,667 14,444 - -------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 8,304 7,113 6,295 Other borrowings 227 162 89 Federal Home Loan Bank advances 205 68 4 - -------------------------------------------------------------------------------- Total interest expense 8,736 7,343 6,388 - -------------------------------------------------------------------------------- NET INTEREST INCOME 10,459 9,324 8,056 Provision for loan losses 435 480 285 - -------------------------------------------------------------------------------- Net interest income after Provision for loan losses 10,024 8,844 7,771 - -------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 774 749 742 Mortgage origination fees 933 479 211 Other income 594 441 249 - -------------------------------------------------------------------------------- Total other operating revenue 2,301 1,669 1,202 Gains on sales of securities 3 4 0 - -------------------------------------------------------------------------------- Total other income 2,304 1,673 1,202 - -------------------------------------------------------------------------------- OTHER EXPENSE Salaries and employee benefits 4,214 3,405 2,722 Occupancy expense 530 430 396 Equipment expense 480 416 321 Other operating expenses 2,223 1,843 1,692 Merger expenses 619 - - - -------------------------------------------------------------------------------- Total other expense 8,066 6,094 5,131 - -------------------------------------------------------------------------------- Income before provision for income taxes 4,262 4,423 3,842 Provision for income taxes 1,636 1,512 1,314 - --------------------------------------------------------------------------------
NET INCOME $2,626 $2,911 $2,528 ================================================================================
NET INCOME PER SHARE: Basic $ .99 $1.10 $ .96 ================================================================================ Diluted $ .95 $1.06 $ .93 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
THE SAVANNAH BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands) FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- OPERATING ACTIVITIES 1998 1997 1996 ----------------------------------------------------------------------------- Net income $ 2,626 $ 2,911 $ 2,528 Adjustments to reconcile net income to cash Provided by operating activities: Provision for loan losses 435 480 285 Depreciation of premises and equipment 471 392 345 Gains on sale of land (57) 0 0 Gains on sales of securities (3) (4) 0 Amortization of investment securities discount-net 326 428 140 Deferred tax benefit (60) (73) (46) Increase in accrued interest receivable (446) (173) (228) (Decrease) increase in prepaid expenses and other assets (209) 86 (9) Increase in accrued interest payable 114 46 16 Increase (decrease) in accrued expenses and other liabilities 336 29 (501) ----------------------------------------------------------------------------- Net cash provided by operating activities 3,533 4,122 2,530 ----------------------------------------------------------------------------- INVESTING ACTIVITIES
Purchases of investment securities (36,419) (14,948) (14,486) Proceeds from sale of investment securities 2,002 1,810 992 Proceeds from maturities of investment securities 14,192 8,579 9,706 Net increase in loans made to customers (16,815) (23,410) (18,296) Capital expenditures (1,172) (992) (1,074) Proceeds from sale of land 356 0 0 ----------------------------------------------------------------------------- Net cash used in investing activities (37,856) (28,961) (23,158) ----------------------------------------------------------------------------- FINANCING ACTIVITIES
Net increase in demand, savings and money market accounts 22,868 17,269 16,092 Net increase in certificates of deposit 9,060 9,170 14,867 Net increase (decrease) in securities sold under agreements to repurchase 382 954 (413) Net decrease in federal funds purchased (551) 523 274 Net increase (decrease) in FHLB advances 2,860 1,210 (920) Purchase of treasury stock 0 (150) (251) Dividend payments (1,281) (668) (486) Exercise of options 335 63 0 ----------------------------------------------------------------------------- Net cash provided by financing activities 33,673 28,371 29,163 ----------------------------------------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS (650) 3,532 8,535 Cash and cash equivalents at beginning of year 28,183 24,651 16,116 -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 27,533 $ 28,183 $ 24,651 =============================================================================
----------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest on deposits and other borrowings $8,622 $7,296 $6,372 Income taxes 1,703 1,644 1,760 -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Savannah Bancorp, Inc. ("the Company") was incorporated in Georgia on October 5, 1989, for the purpose of becoming a bank holding company for The Savannah Bank, N.A. ("Savannah Bank"). In 1990, 540,200 shares of common stock were sold in two public offerings at $20 per share ($6.06 per share, adjusted for the effect of stock splits and dividend). The Company capitalized Savannah Bank on August 22, 1990, by contributing $10 million of net assets in exchange for the Bank's common stock. Savannah Bank began operations on August 22, 1990.
Merger - The Savannah Bancorp, Inc. merged with Bryan Bancorp of Georgia, Inc., a bank holding company for Bryan Bank & Trust ("Bryan Bank") in Richmond Hill, Georgia on December 15, 1998. The merger was accounted for as a pooling-of-interests transaction.
Business Combinations - In business combinations accounted for as pooling-of-interests, the financial position and results of operations and cash flows of the respective companies are restated as though the companies were combined for all historical periods.
Nature of Operations - The Company is a two-bank holding company that offers a full range of lending, deposit residential mortgage origination and fiduciary trust products. The primary service area of the Company is the city of Savannah, Georgia, surrounding Chatham County, Richmond Hill, Georgia (20 miles south of downtown Savannah) and Bryan County.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company, Savannah Bank and Bryan Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the previous years have been reclassified to conform to the current year's presentation.
Use of Estimates - The preparation of these financial statements in conformity with generally accepted accounting principles requires the use of certain estimates by management. These estimates include primarily the estimation of the allowance for loan losses. Actual results could differ from these estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand , amounts due from banks, federal funds sold and interest-bearing deposits with other banks.
Investment Securities Available for Sale --Management has classified the entire December 31, 1998 investment security portfolio as available for sale. Securities available for sale are carried at estimated fair value with unrealized gains and losses, net of deferred income taxes, recorded as a separate component of shareholders' equity.
Investment Securities Held to Maturity - Investment securities classified as held to maturity at December 31, 1997 are stated at cost, adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments to interest income. At the time of the merger, the Company reclassified the held to maturity securities to available for sale under the safe-harbor provisions of the generally accepted accounting principles for investment securities. The net unrealized gains were added to fair value of investments, deferred income taxes were recorded and shareholders' equity was increased by the difference of the two.
Loans and Loan Fees - Loans are stated at principal amounts outstanding reduced by an allowance for loan losses. Interest income on loans is recognized to reflect a constant rate of return on net funds outstanding. Accrual of interest income is discontinued when management believes the collection of interest or principal is doubtful. Accrued interest is reversed and charged against current income when management believes, after considering economic and business conditions and collection efforts, that the ultimate collection of interest is doubtful.
Generally, the Company recognizes loan fees to the extent costs are incurred in the origination of the loans. For certain loans, fees in excess of origination costs are deferred and amortized over the life of the loan. The methodology applied by the Company does not differ materially from generally accepted accounting principles.
Non-Performing and Impaired Loans - The accrual of interest is generally discontinued on all loans, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Generally loans past due 180 days or more are placed on nonaccrual status regardless of security. A loan is also considered impaired if its terms are modified in a
troubled debt restructuring or it in a nonaccruing status. For accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Impaired loans are disclosed in Note 5.
Allowance for Loan Losses - The allowance for loan losses is based on estimates and maintained at a level considered adequate to provide for potential loan losses. The adequacy of the allowance is based on management's continuing evaluation of the loan portfolio under current economic conditions, underlying collateral value securing loans and such other factors that deserve recognition in estimating loan losses. Actual future losses may be different from estimates due to unforeseen events. Loans that are determined to be uncollectible are charged against the allowance.
Premises and Equipment - Building, furniture, banking equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives or estimated lease terms including expected lease renewals, ranging from three to fifty years, of the respective assets for financial reporting purposes and using an accelerated method for income tax purposes. Additions and major improvements are capitalized, while routine maintenance and repairs and gain or loss on dispositions are recognized currently.
Mortgage Origination Fees - The Company originates mortgage loans on behalf of third parties. Such loans are originated pursuant to commitments from third parties to acquire the loans that are in place prior to extension of a commitment to make the loan. In connection therewith, the Company generally charges certain origination fees to borrowers and may be paid amounts by purchasers that exceed the Company's basis in the loan (for example, a servicing release premium). Net cash gains from those activities are reported as mortgage origination fees in the accompanying consolidated statements of income when the loans are closed.
Income Taxes - Deferred tax assets and liabilities arise from timing differences in the recognition of revenues and expenses for income tax and financial reporting purposes. They are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Stock Splits and Dividends - The Company declared a three-for-two stock split in the form of a 50% stock dividend effective February 24, 1997. The 1996 per share data and weighted average share and stock option information has been restated for the effect of the stock split. The 1996 statement of changes in shareholders' equity has not been restated for the stock split.
Earnings Per Share - In February, 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standard ("SFAS") No. 128 "Earnings Per Share". SFAS No. 128 replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share. The Company adopted SFAS No. 128 as of the year ended December 31, 1997. Basic earnings per share are calculated based on weighted-average number of shares of common stock outstanding. Diluted earnings per share is calculated based on the weighted average number of shares of common stock outstanding and common stock equivalents, consisting of outstanding stock options (See Note 12). Common stock equivalents are determined using the treasury method for diluted shares outstanding adjusted for the stock splits and stock dividend, referred to above. The weighted average common shares outstanding used in the computation of basic earnings per share were 2,661,000, 2,640,000, and 2,641,000 in 1998, 1997 and 1996, respectively. The weighted average common and common equivalent diluted shares outstanding used in the computation of diluted earnings per share were 2,760,000, 2,757,000, and 2,716,000 in 1998, 1997 and 1996, respectively. The difference between diluted and basic shares outstanding are common stock equivalents from stock options outstanding in the years ended December 31, 1998, 1997 and 1996.
Reporting Comprehensive Income - In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting the components of comprehensive income and requires that certain transactions and other economic events that bypass the income statement be included in a financial statement that is displayed with the same prominence as the other financial statements. The Company's comprehensive income consists of net income and changes in unrealized gains and (losses) on securities available-for-sale, net of income taxes. The Company adopted the provisions of this statement in 1998 by reporting comprehensive income in the consolidated statement of shareholders' equity. These disclosure requirements had no impact on financial position or results of
operations. Disclosures About Segments of an Enterprise and Related Information - - In June, 1997, 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 that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker 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, asset and liability volumes are used by executive management for performance and resource allocation purposes, however, sufficient discrete financial information is not available for presentation of segmented line of business financial information to shareholders. These disclosure requirements had no impact on financial position or results of operations.
Accounting for Derivative Instruments and Hedging Activities - In June, 1998 the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet along with various other related accounting treatments. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000. The Company presently has no derivative or hedging instruments applicable to the provisions of this statement and therefore it has no impact on financial position or results of operations.
NOTE 2 - BUSINESS COMBINATIONS
On December 15, 1998, the Company merged with Bryan Bancorp, headquartered in Richmond Hill, Georgia. Each outstanding share of the Bryan Bancorp's common stock was converted into and exchanged for 1.85 shares of the Company's common stock, resulting in the issuance of approximately 937,000 shares. The acquisition was accounted for as a pooling-of-interests, and accordingly, all historical financial information for the Company has been restated to include Bryan Bancorp's historical information for all periods presented herein. Intercompany transactions prior to the merger have been eliminated, and certain reclassifications were made to Bryan Bancorp's financial statements to conform to the Company's presentations. No material adjustments were recorded to conform Bryan Bancorp's accounting policies. In connection with the merger, the Corporation recorded net nonrecurring charges of $555,000 for direct and other merger-related items. The net after-tax charges include $544,000 for legal, accounting, investment advisor and printing charges. Other nonrecurring items include a $75,000 deductible expense for a data processing contract buyout and a $57,000 taxable gain on sale of land.
The following table shows the revenues and net income for the individual and combined companies prior to the merger for the periods presented. Merger expenses have been excluded for comparative purposes.
For the 11.5 Months For the Years Ended December 15, Ended December 31, ------------------- ------------------- 1998 1997 1996 ------- ------- ------- Total revenues (net interest income & other income)
Savannah Bancorp $ 7,787 $ 7,001 $ 5,798 Bryan Bancorp 4,391 3,996 3,459 ------- ------- ------- Combined $12,178 $10,997 $ 9,257 ======= ======= ======= Net income
Savannah Bancorp $ 1,865 $ 1,753 $ 1,507 Bryan Bancorp 1,268 1,158 1,021 ------- ------- ------- Combined $ 3,133 $ 2,911 $ 2,528 ======= ======= ========
NOTE 3 - CASH AND DEMAND BALANCES DUE FROM BANKS
The Companies subsidiary banks are required by the Federal Reserve Bank to maintain minimum cash reserves based on reserve requirements calculated on their deposit balances. Cash reserves of $3,320 and $1,871 were required as of December 31, 1998 and 1997, respectively.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The aggregate amortized cost and fair value of securities available for sale as of December 31, 1998 and 1997 were as follows:
---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Investment securities: U. S. Treasury securities $ 7,066 $ 85 $ - $ 7,151 U. S. Government agencies 41,508 393 $ - 41,901 Mortgage-backed securities 3,380 - (6) 3,374 State and municipal 8,520 351 - 8,871 Other taxable securities 1,390 16 - 1,406 --------- ---------- ---------- -------- $ 61,864 $ 845 $ (6) $62,703 ========= ========== ========== ========
---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Investment securities: U. S. Treasury securities $ 12,141 $ 3 $ - $12,144 U. S. Government agencies 17,849 64 - 17,913 Mortgage-backed securities 4,163 - (39) 4,124 State and municipal 3,377 150 - 3,527 Other taxable securities 1,087 11 - 1,098 --------- ---------- ---------- -------- $ 38,617 $ 228 $ (39) $38,806 ========= ========== ========== ========
The aggregate amortized cost and fair value of securities held to maturity as of December 31, 1997 were as follows:
---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Investment securities: State and municipal $ 3,166 $ 121 $ - $ 3,287 Other taxable securities 180 - - 180 --------- ---------- ---------- -------- $ 3,346 $ 121 $ - $ 3,467 ========= ========== ========== ========
Proceeds from the sale of investment securities were $2,002, $1,810 and $992 in 1998, 1997 and 1996, respectively. There was a gain of $3 and $4 in 1998 and 1997, respectively, and no gain or loss in 1996.
The distribution of securities by maturity at December 31, 1998 is shown below.
Amortized Cost Fair Value --------- ---------- Securities available for sale: Due in one year or less $ 5,167 $ 5,174 Due after one year through five years 38,673 39,165 Due after five years through ten years 15,135 15,457 Due after ten years 2,889 2,907 --------- ---------- Total investment securities $ 61,864 $ 62,703 ========= ==========
At December 31, 1998 and 1997, investment securities with a carrying value of $26,719 and $23,939 respectively, were pledged as collateral to secure public funds and securities sold under repurchase agreements.
NOTE 5 - LOANS
The composition of the loan portfolio at December 31, 1998 and 1997 is presented below.
Percent Percent 1998 of Total 1997 of Total -------- -------- -------- -------- Commercial $ 26,179 15.4% $ 25,360 16.4% Real estate - construction and development 19,861 11.6 16,244 10.5 Real estate - mortgage 107,330 62.8 97,081 63.0 Installment and other consumer 17,489 10.2 15,533 10.1 -------- -------- -------- -------- Total Loans $170,858 100.0% $154,218 100.0% ======== ======== ======== ========
At December 31, 1998 and 1997, there were $233 and $497 in non-performing assets.
The allowance for loan losses is allocated by loan category based on management's assessment of risk within the various categories of loans. Changes in the allowance for loan losses are summarized as follows:
1998 1997 1996 ------ ------ ------ Balance at the beginning of the year $2,063 $1,695 $1,489 Provision for loan losses 435 480 285 Charge-offs (258) (194) (113) Recoveries 83 82 34 ------ ------ ------- Balance at the end of the year $2,323 $2,063 $1,695 ====== ====== =======
At December 31, 1998 and 1997, nonaccruing loans were $233 and $497, respectively. These loans were impaired due to their nonaccruing status. The Bank has granted loans to certain directors of the Bank and to their associates. The aggregate amounts of loans were $6,701 and $6,065 at December 31, 1998 and 1997, respectively. During 1998, $3,944 of new loans were made, and repayments totaled $4,580. Unused lines of credit available to related parties aggregated $682 and $998 at December 31, 1998 and 1997, respectively. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility.
NOTE 6 - PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1998 and 1997, are summarized as follows:
Depreciable Lives 1998 1997 ----------------- ------ ------ Land - $ 429 $ 732 Buildings 39 - 50 2,284 2,200 Furniture and banking equipment 5 - 15 2,902 2,207 Leasehold improvements 10 - 39 1,110 874 ------ ------ 6,725 6,013 Less accumulated depreciation 1,898 1,588 ------ ------ Premises and equipment, net $4,827 $4,425 ====== ======
Depreciation of premises and equipment was $471, $392 and $345 in 1998, 1997 and 1996, respectively.
NOTE 7 - CREDIT ARRANGEMENTS
At December 31, 1998 federal funds borrowing arrangements aggregating $12 million were available to the Savannah Bank and Bryan Bank from correspondent banking institutions. There are no commitment fees, and compensating balances are not required. These unused lines principally serve as temporary liquidity back-up lines and are subject to availability of funds and other specific limitations of the correspondent banks. The Savannah Bank and Bryan Bank are also a shareholders of the Federal Home Loan Bank of Atlanta ("FHLB") and have access to borrowings from the FHLB. Savannah Bank is a member and shareholder of the Federal Reserve Bank of Atlanta and has access to borrowings at the Federal Reserve Bank discount window. Bryan Bank also has a Blanket Floating Lien Agreement with the FHLB. Under this agreement, Bryan Bank has a credit line up to 75 percent of the book value of its 1-4 family first mortgage loans. These credit arrangements principally serve as liquidity backup for the bank and are subject to review and approval by FHLB for purpose and reasons for the borrowings prior to receiving advances.
NOTE 8 - DEPOSITS
Total time deposits maturing in one to five years are as follow: 1999 - $83,952; 2000 - $10,648;2001 - $2,244; 2002 - $2,170; and 2003 and thereafter - $3,441.
The following table indicates the amount of the Bank's time certificates of deposit of $100,000 or more at December 31, 1998 by time remaining until maturity.
Maturity Period Amount --------------- -------- Three months or less $ 12,915 Over three through six months 11,208 Over six through twelve months 12,739 Over twelve months 4,861 -------- Total $ 41,723 ========
NOTE 9 - SHORT-TERM BORROWINGS
As of December 31, 1998 and 1997, Savannah Bank and Bryan Bank had short-term borrowings totaling $3,211 and $3,380, respectively. The average interest rates were 5.21% and 5.04% for the years ended 1998 and 1997. Short-term borrowings at December 31, 1998 and 1997 consists of securities sold under agreement to repurchase, federal funds purchased and a treasury tax and loan note option. The maximum amount outstanding at the end of any month was $5,121 and $5,493 during 1998 and 1997, respectively.
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES - LONG-TERM DEBT
Long-term advances from the FHLB with maturities from 1999 to 2008 totaled $4,450 and $1,590 at December 31, 1998 and 1997, respectively. The weighted-average interest rates were 5.99% and 6.60% at December 31, 1998 and 1997, respectively. Aggregate maturities are $1,265 in 1999, $265 in 2000, $265 in 2001, $265 in 2002, $265 in 2003 and $2,125 thereafter. Interest is generally payable monthly and scheduled principal reductions are made quarterly, semi-annually or at maturity. The advances are secured by a blanket floating lien agreement which provides a security interest in all unencumbered first mortgage residential loans and by stock in the FHLB.
NOTE 11 - INCOME TAXES
The provision for income taxes is composed of the following for each of the years ended December 31:
1998 1997 1996 ------ ------ ------ Current federal $1,541 $1,425 $1,232 Current state 155 160 128 ------ ------ ------ Total current 1,696 1,585 1,360 ------ ------ ------ Deferred federal (53) (60) (40) Deferred state (7) (13) (6) ------ ------ ------ Total deferred (60) (73) (46) ------ ------ ------ Provision for income taxes $1,636 $1,512 $1,314 ====== ====== ======
A deferred tax liability of $260 in 1998 and $72 in 1997 have been recognized for the tax effect of the change in the valuation account for unrealized gains and losses on available for sale securities which are recorded net of tax in the equity section in accordance with SFAS No. 115.
NOTE 11 - INCOME TAXES (CONTINUED)
A reconciliation between the amount computed by applying the U.S. federal tax rate of 34% to income before income taxes is as follows:
1998 1997 1996 ------ ------ ------ Tax provision at 34% $1,449 $1,504 $1,306 State tax, net of federal tax benefit 103 108 88 Tax-exempt interest, net (113) (114) (95) Nondeductible merger expenses 185 - - Other 12 14 15 ------ ------ ------ Provision for income taxes $1,636 $1,512 $1,314 ====== ====== ======
Deferred income tax assets and liabilities are comprised of the following at December 31, 1998 and 1997:
Deferred tax assets: 1998 1997 ------ ------ Allowance for loan losses $ 784 $ 681 Other 50 61 ------ ------ Total deferred tax assets 834 742 ------ ------
Deferred tax liabilities: Unrealized gains on securities 260 72 Depreciation 282 224 Other - 26 ------ ------
Total deferred tax liabilities 542 322 ------ ------ Net deferred tax assets $ 292 $ 420 ====== ======
NOTE 12 - STOCK OPTION PLAN AND BENEFIT PLANS
In 1990, the Company granted options to the organizers permitting each organizer to purchase up to 4,125 shares of Common Stock (74,250 shares in the aggregate) at an option price of $6.06 per share. They may be exercised after the third year and before the end of the tenth year following the date the options were granted (April 10, 1990). In the event that the Company is required to raise additional capital for the Bank, the options must be either forfeited or exercised immediately for a price per share equal to the lesser of $6.06 or the then book value per share of the Common Stock. Bryan Bancorp of Georgia, Inc. granted two officers a total of 9,250 non-qualified options per year from 1990 to 1994 at exercise prices between $5.14 and $6.35. The unexercised options were all converted at the exchange ratio and assumed by the Company as a part of the merger agreement.
The Company also has an Incentive Stock Option Plan that provides for the granting of incentive stock options (ISOs) to certain key officers for the purchase of shares at the fair market value of the stock at the date of the grant. There are 6,500 remaining ISOs authorized under this plan at December 31, 1998. Under this plan in April 1995, 44,550 ISOs were granted with an exercise price of $7.50 for a period of ten years commencing April 18, 1995. In January 1996, another 44,550 ISOs were granted under this plan with an exercise price of $13.33 for a period of ten years commencing January 2, 1996. In April 1996, 9,000 additional ISOs were granted to other key officers at an exercise price of $13.33 per share. The April 1996 ISOs vest over five years and are exercisable over ten years. In January, July and August 1997, 9,250 (assumed in merger), 9,000 and 3,000 ISOs were granted to key officers at an exercise price of $10.27, $21.50 and $21.63 per share, respectively. The 1997 ISOs vest over five years and are exercisable over ten years. In February 1998, 4,625 ISOs (assumed in merger) were granted at an exercise price of $25.50 per share and 10,000 ISOs were granted upon consummation of the merger at an exercise price of $25.63 per share. The 1998 ISOs vest over five years and are exercisable over ten years.
NOTE 12 - STOCK OPTION PLAN AND BENEFIT PLANS (CONTINUED)
1998 1997 1996 ---------------- ---------------- --------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- -------- ------ -------- ------ -------- Outstanding at the beginning of year 219,575 $9.11 218,600 $ 8.05 165,050 $7.45 Granted 14,625 21.53 21,250 16.63 53,550 13.33 Exercised (43,400) 6.06 20,275 5.56 - - ------- ------- ------- Outstanding at end of year 176,175 9.69 219,575 9.11 218,600 8.05 ------- ------- ------- Exercisable at end of year 153,775 8.62 191,125 8.12 209,600 7.83 ======= ======= =======
During 1998, 1997 and 1996, the weighted average fair value of options granted was $10.46, $11.60 and $5.08 per option, respectively.
The Company has chosen to continue to account for its options under the provisions of Accounting Principles Board Statement No. 25, "Accounting for Stock Issued to Employees" and thus has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the options granted in 1997, 1996 and 1995 been determined based on fair value at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the Corporation's net income and net income per share would have been reduced to the pro forma amounts as shown in the following table:
1998 1997 1996 ------ ------ ------ Net Income - as reported $2,626 $2,911 $2,528 Net Income - pro forma $2,552 $2,858 $2,298
Net Income per share - basic - as reported $0.99 $1.10 $0.96 Net Income per share - pro forma $0.96 $1.08 $0.87
Net Income per share - diluted - as reported $0.95 $1.06 $0.93 Net Income per share - diluted - pro forma $0.92 $1.04 $0.85
The assumptions regarding the stock options issued to executives in 1998 and 1997 are that the options shares vest equally between 1999-2003 and 1998-2002, respectively. The assumptions regarding the stock options issued to executives in 1996 are that 100% of such options vested on grant date, except for the 9,000 granted in April, 1996 shares which vest equally between 1997-2001. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions. In 1998: dividend yield of 1.4%; expected volatility of 0.19%; risk-free interest rate of 5.50% and expected life of options of 8 years. In 1997: dividend yield of .64%; expected volatility of 0.19%; risk free interest rate of 6.37% and expected life of options of 8 years. In 1996: dividend yield of .5%; expected volatility of 0.19%; risk free interest rate of 5.59% and expected life of options of 8 years.
The Company sponsors a 401(k) employee savings and profit-sharing plan in which substantially all full-time employees are eligible to participate. This plan allows eligible employees to save a portion of their salary on a pre-tax basis. Contributions to the plan are discretionary. Contributions and administrative expenses related to the plan aggregated $137 and $125 for the years ended December 31, 1998 and 1997, respectively.
NOTE 13 - CAPITAL RATIOS AND DIVIDEND RESTRICTIONS
The subsidiary banks' primary regulators have adopted capital requirements that specify the minimum level for which no prompt corrective action is required. In addition, the Federal Deposit Insurance Corporation (FDIC) has adopted FDIC insurance assessment rates based on certain "well-capitalized" risk-based and equity capital ratios. Failure to meet minimum capital requirements can result in the initiation of certain actions by the regulators that, if undertaken, could have a material effect on the Company's and the Bank's financial statements. Management believes as of December 31, 1998, that the Company and the Bank meet all capital adequacy requirements to which they are subject. The following table shows these capital ratios for the Company, the regulatory minimum and the well-capitalized capital ratios at December 31, 1998 and 1997:
Capital Ratios 1998 1997 - -------------- -------- -------- Qualifying Capital - ------------------ Tier 1 capital $ 23,956 $ 22,279 Total capital 26,225 24,223
Average assets for the year 245,014 205,032 Adjusted risk-weighted assets 182,559 156,847
Well- 1998 1997 Minimum Capitalized --------- -------- --------- ----------- Leverage Ratios - --------------- Tier 1 capital to average assets 9.78% 10.87% 4.0% 5.0%
Risk-based Ratios - ----------------- Tier 1 capital to risk-weighted assets 13.12% 14.20% 4.0% 6.0% Total capital to risk-weighted assets 14.36% 15.44% 8.0% 10.0%
The most recent notification from the subsidiary banks' primary regulators was December 31, 1998 and it categorized the Savannah Bank and Bryan Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, a Bank must maintain minimum total risk based, Tier 1 risk-based, Tier 1 leverage ratios of 6.0%, 10.0% and 5.0%, respectively. There are no conditions or events since that notification that management believes have changed the institution's category.
Bank regulators restrict the amount of dividends that banks may pay without obtaining prior approval. Based on such regulatory restrictions, the the subsidiary banks are limited from paying dividends in a calendar year which exceed the current year's book net income combined with the retained net profits of the preceding two years. At December 31, 1998, $4,339 in retained earnings of the Banks was available for the payment of dividends, subject to maintaining adequate capital ratios in the Bank. The Company is not subject to any regulatory restrictions on the payment of dividends to its shareholders.
NOTE 14 - LEASES AND COMMITMENTS
Future minimum payments under noncancelable land and office space operating leases with remaining terms in excess of one year are presented as follows: 1999 - - $211; 2000 - $165; 2001 - $170; 2002 - $130; 2003 - $103 and $396 thereafter. The land and office space leases contain customary escalation clauses. Additionally, the Bank has entered into a non-cancelable data processing servicing agreement which provides for minimum payments as follows: 1999 - $120; 2000 - $124; 2001 - $127; 2002 - $66. The agreement includes a termination clause where the Company can buyout the remainder of the contract for 60% of the current monthly contract times the remaining months.
The net rental expense for all office space operating leases amounted to $272 in 1998, $210 in 1997and $183 in 1996. The leases on the office space have five or ten-year renewal options and require increased rentals under cost of living escalation clauses.
NOTE 15 - OTHER OPERATING EXPENSES
The components of other operating expenses for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ------ ------ ------ Outside data processing $ 535 $ 430 $ 392 Professional and directors fees 253 221 205 Advertising and sales promotion 243 205 192 Stationery and supplies 197 172 160 Postage and courier 197 181 168 Regulatory exams and audit fees 171 163 147 Taxes and licenses 111 104 90 Telephone 101 75 59 Loan costs 70 40 51 Correspondent bank charges 55 37 29 Dues and subscriptions 54 49 36 Insurance 39 45 46 Other expense 197 121 117 ------ ------ ------ Total other operating $2,223 $1,843 $1,692 ====== ====== ====== expenses
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Company is not a party to any off-balance sheet derivative financial instruments.
The Bank's exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 1998 unfunded commitments to extend credit were $42,613. None of these commitments to extend credit exceeded one year in duration. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the borrower. Collateral varies, but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. At December 31, 1998 and 1997, commitments under letters of credit aggregated approximately $1,129 and $380, respectively. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.
Most of the Company's business activity is with customers located within the Chatham and Bryan County areas. As of December 31, 1998, the Bank had a concentration of credit risk aggregating $130,188 on loans secured by real estate. The Bank has no exposure to highly leveraged transactions and has no foreign credits in its loan portfolio.
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company, as with most financial institutions, the majority of its assets and liabilities are considered financial instruments. Many of the financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations are used for the purpose of this disclosure. Such estimations involve judgements as to economic conditions, risk characteristics and future expected loss experience of various financial instruments and other factors that cannot be determined with precision.
Cash and due from banks, federal funds sold, variable rate loans, all deposits except time deposits with remaining maturities over six months and other borrowings have carrying amounts which approximate fair value primarily because of the short repricing opportunities of these instruments.
Following is a description of the methods and assumptions used by the Company to estimate the fair value of its financial instruments:
Investment Securities: Fair value is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans: The fair value for various types of fixed rate loans is estimated by discounting the expected future cash flows using the Bank's current interest rates at which loans would be made to borrowers with similar credit risk. As the discount rates are based on current loan rates, as well as management estimates, the fair values presented may not necessarily be indicative of the value negotiated in an actual sale. The estimated fair value of the Bank's off-balance-sheet commitments is nominal since the committed rates approximate current rates offered for commitments with similar rate and maturity characteristics and since the estimated credit risk associated with such commitments is not significant.
Deposit liabilities: The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
The carrying amounts and estimated fair values of the Company's financial instruments are as follows: December 31, 1998 ----------------------- Estimated Carrying Fair Value Value Financial assets: -------- --------- Cash and federal funds sold $ 27,533 $ 27,533 Securities available for sale 62,703 62,703 Loans 170,858 171,571
Financial liabilities: Deposits $232,372 $233,200 Securities sold under repurchase agreements 2,674 2,674 Federal funds purchased 537 537 Federal Home Loan Bank advances 4,450 4,444
NOTE 18 - THE SAVANNAH BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to the sections entitled "Election of Directors" and "Executive Officers" in the Registrant's Proxy Statement dated and filed on March 19, 1999. All reports required pursuant to the insider trading regulations were filed timely with the exception of the new directors Burnsed, Gill, Roberts, Royal and Thompson who were approximately one week late in filing their Form 3 - Initial Statement of Beneficial Ownership.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the sections entitled "Executive Compensation" in the Registrant's Proxy Statement dated March 24, 1999 and filed on March 19, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the sections entitled "Election of Directors" and "Ownership of Equity Securities" in the Registrant's Proxy Statement dated March 24, 1999 and filed on March 19, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in Note 5 to the Consolidated Financial Statements on page 39 of this Form 10-K, and under the caption "Certain Transactions" in the Registrant's Proxy Statement dated and filed on March 19, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 21 Subsidiaries of Registrant 23.1 Report of Predecessor Independent Accountants - Moore, Stephens, Tiller LLC 27 Financial Data Schedule
*Items 3.1, 3.2, 10.1, 10.5 and 21 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.
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the fourth quarter of the year ended December 31, 1998.
DECEMBER 15, 1998 - Filed the press release announcing the completion of the merger with Bryan Bancorp of Georgia, Inc. andprovided proforma condensed financial information as of and for the nine months ended September 30, 1998.
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 23, 1998 by the undersigned, thereunto duly authorized.
THE SAVANNAH BANCORP, INC.
By: /s/ ARCHIE H. DAVIS Archie H. Davis, President and Chief Executive Officer (Principal Executive Officer)
/s/ ROBERT B. BRISCOE Robert B. Briscoe, Chief Financial Officer (Principal Financial and Accounting Officer)
Directors:
/s/ J. WILEY ELLIS J. Wiley Ellis Chairman of the Board
/s/ E. JAMES BURNSED E. James Burnsed Vice Chairman
/s/ RUSSELL W. CARPENTER Russell W. Carpenter
/s/ ARCHIE H. DAVIS Archie H. Davis
/s/ Robert H. Demere, Jr.
/s/ JULIUS EDEL Julius Edel
/s/ L. CARLTON GILL L. Carlton Gill
/s/ ROBERT W. GROVES III Robert W. Groves III
/s/ JACK M. JONES Jack M. Jones
/s/ AARON M. LEVY Aaron M. Levy
/s/ J. CURTIS LEWIS III J. Curtis Lewis III
/s/ M. LANE MORRISON M. Lane Morrison
/s/ J. TOBY ROBERTS J. Toby Roberts, Sr.
/s/ JAMES W. ROYAL James W. Royal
/s/ JACK W. SHEAROUSE Jack W. Shearouse
/s/ ROBERT T. THOMPSON, JR. Robert T. Thompson, Jr.
/s/ Penelope S. Wirth