Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The Company may, from time to time, make written or oral “forward-looking statements” within the meaning of federal securities laws, including statements contained in the Company’s filings with the Securities and Exchange Commission (“SEC”) (including this quarterly report on Form 10-Q) and in its reports to shareholders and in other communications by the Company.
These forward-looking statements may include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and which may change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “indicate,” “plan” and similar words are intended to identify expressions of the future. These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rates, market and monetary fluctuations; competitors’ products and services; technological changes; cyber security risks; changes in consumer spending and saving habits; deterioration in credit quality; continuing declines in the values of residential and commercial real estate or continuing weakness in the residential and commercial real estate environment generally; risk that our allowance for loan losses may prove to be inadequate or may be negatively affected by credit risk exposures; the concentration in our nonperforming assets by loan type, in certain geographic regions and with affiliated borrowing groups; future availability and cost of capital on favorable terms, if at all; changes in the cost and availability of funding from historical and alternative sources of liquidity; the potential for additional regulatory restrictions on our operations; changes to our reputation; future departures of key personnel; the cost and other affects of material contingencies, including litigation contingencies; changes to the availability of a deferred tax asset; the possibility that the proposed merger (the “Merger”) with SCBT Financial Corporation (“SCBT Financial”) does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis, or at all; the terms of the proposed Merger may need to be unfavorably modified to satisfy such approvals or conditions; the anticipated benefits from the proposed Merger are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which the companies operate; the potential inability to promptly and effectively integrate the businesses of the Company and SCBT Financial; reputational risks and the reaction of the companies’ customers to the proposed Merger; diversion of management time on Merger-related issues; the success of the Company at managing the risks involved in the foregoing; and other factors and other information contained in this Report and in other reports and filings that we make with the SEC, including, without limitation, the items described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The Company cautions that the foregoing list of important risk factors is not exhaustive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company, except as required by law.
Overview
For a comprehensive presentation of the Company’s financial condition at September 30, 2012 and December 31, 2011 and results of operations for the three and nine month periods ended September 30, 2012 and 2011, the following analysis should be reviewed with other information including the Company’s December 31, 2011 Annual Report on Form 10-K and the Company’s Condensed Consolidated Financial Statements and the Notes thereto included in this report.
The Savannah Bancorp, Inc. and Subsidiaries
Third Quarter Financial Highlights
($ in thousands, except share data)
(Unaudited)
Balance Sheet Data at September 30
|
|
2012
|
|
|
2011
|
|
% Change
|
Total assets
|
$
|
896,267
|
|
$
|
988,720
|
|
(9.4)
|
Interest-earning assets (a)
|
|
825,547
|
|
|
886,430
|
|
(6.9)
|
Loans
|
|
685,195
|
|
|
788,550
|
|
(13)
|
Other real estate owned
|
|
11,820
|
|
|
17,135
|
|
(31)
|
Deposits
|
|
778,127
|
|
|
846,073
|
|
(8.0)
|
Interest-bearing liabilities
|
|
700,678
|
|
|
801,932
|
|
(13)
|
Shareholders' equity
|
|
67,871
|
|
|
86,309
|
|
(21)
|
Loan to deposit ratio
|
|
88.06
|
%
|
|
93.20
|
%
|
(5.5)
|
Equity to assets
|
|
7.57
|
%
|
|
8.73
|
%
|
(13)
|
Tier 1 capital to risk-weighted assets
|
|
11.36
|
%
|
|
11.35
|
%
|
0.1
|
Total capital to risk-weighted assets
|
|
12.62
|
%
|
|
12.62
|
%
|
0.0
|
Outstanding shares
|
|
7,199
|
|
|
7,199
|
|
0.0
|
Book value per share
|
$
|
9.43
|
|
$
|
11.99
|
|
(21)
|
Tangible book value per share
|
$
|
8.96
|
|
$
|
11.49
|
|
(22)
|
Market value per share
|
$
|
10.00
|
|
$
|
6.00
|
|
67
|
|
|
|
|
|
|
|
|
Loan Quality Data
|
|
|
|
|
|
|
|
Nonaccruing loans
|
$
|
27,982
|
|
$
|
41,689
|
|
(33)
|
Loans past due 90 days - accruing
|
|
368
|
|
|
851
|
|
(57)
|
Net charge-offs
|
|
14,887
|
|
|
11,021
|
|
35
|
Allowance for loan losses
|
|
18,110
|
|
|
22,854
|
|
(21)
|
Allowance for loan losses to total loans
|
|
2.64
|
%
|
|
2.90
|
%
|
(9.0)
|
Nonperforming assets to total assets
|
|
4.48
|
%
|
|
6.04
|
%
|
(26)
|
|
|
|
|
|
|
|
|
Performance Data for the Third Quarter
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(15,976)
|
|
$
|
1,228
|
|
NM
|
Return on average assets
|
|
(6.80)
|
%
|
|
0.49
|
%
|
NM
|
Return on average equity
|
|
(76.64)
|
%
|
|
5.64
|
%
|
NM
|
Net interest margin
|
|
3.78
|
%
|
|
4.01
|
%
|
(6.0)
|
Efficiency ratio
|
|
93.01
|
%
|
|
59.26
|
%
|
57
|
Per share data:
|
|
|
|
|
|
|
|
Net income (loss) - basic
|
$
|
(2.22)
|
|
$
|
0.17
|
|
NM
|
Net income (loss) - diluted
|
$
|
(2.22)
|
|
$
|
0.17
|
|
NM
|
Average shares (000s):
|
|
|
|
|
|
|
|
Basic
|
|
7,199
|
|
|
7,199
|
|
0.0
|
Diluted
|
|
7,199
|
|
|
7,199
|
|
0.0
|
Performance Data for the First Nine Months
|
|
|
|
|
|
|
|
Net loss
|
$
|
(16,591)
|
|
$
|
(138)
|
|
NM
|
Return on average assets
|
|
(2.32)
|
%
|
|
(0.02)
|
%
|
NM
|
Return on average equity
|
|
(26.32)
|
%
|
|
(0.21)
|
%
|
NM
|
Net interest margin
|
|
3.88
|
%
|
|
3.88
|
%
|
0.0
|
Efficiency ratio
|
|
77.60
|
%
|
|
61.29
|
%
|
27
|
Per share data:
|
|
|
|
|
|
|
|
Net loss - basic
|
$
|
(2.30)
|
|
$
|
(0.02)
|
|
NM
|
Net loss - diluted
|
$
|
(2.30)
|
|
$
|
(0.02)
|
|
NM
|
Average shares (000s):
|
|
|
|
|
|
|
|
Basic
|
|
7,199
|
|
|
7,199
|
|
0.0
|
Diluted
|
|
7,199
|
|
|
7,199
|
|
0.0
|
(a)
|
Interest-earnings assets do not include the unrealized gain/loss on available for sale investment securities.
|
Introduction
Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides supplemental information, which sets forth the major factors that have affected the Company's financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled:
Introduction
Critical Accounting Estimates
Results of Operations
Financial Condition and Capital Resources
Liquidity and Interest Rate Sensitivity Management
Off-Balance Sheet Arrangements
These discussions should facilitate a better understanding of the major factors and trends that affect the Company's earnings performance and financial condition and how the Company's performance during the three and nine month periods ended September 30, 2012 compared with the same periods in 2011. Throughout this section, The Savannah Bancorp, Inc. and its subsidiaries, collectively, are referred to as “SAVB” or the “Company.” The Company’s wholly-owned subsidiaries include The Savannah Bank, N.A. (“Savannah”), Bryan Bank & Trust (“Bryan”), Minis & Co., Inc. (“Minis”) and SAVB Holdings, LLC (“SAVB Holdings”). Minis is a registered investment advisory firm and SAVB Holdings was formed for the purpose of holding certain problem loans and other real estate owned (“OREO”). The two bank subsidiaries, Savannah and Bryan, are collectively referred to as the “Subsidiary Banks.”
The averages used in this report are based on the sum of the daily balances for each respective period divided by the number of days in the reporting period.
The Company is headquartered in Savannah, Georgia and, as of September 30, 2012, had eleven banking offices and thirteen ATMs in Savannah, Garden City, Skidaway Island, Whitemarsh Island, Tybee Island, Pooler, and Richmond Hill, Georgia and Hilton Head Island and Bluffton, South Carolina. The Company also has mortgage lending offices in Savannah and Richmond Hill and an investment management office in Savannah.
Savannah and Bryan are located in the relatively diverse and growing Savannah Metropolitan Statistical Area (“Savannah MSA”). The diversity of major employers includes manufacturing, port related transportation, construction, military, healthcare, tourism, education, warehousing and the supporting services and products for each of these major employers. The real estate market is experiencing moderate government growth and very minimal commercial and residential growth. Coastal Georgia and South Carolina continue to be desired retiree residential destinations as well as travel destinations. The Savannah MSA and Coastal South Carolina markets have both experienced significant devaluation in real estate prices.
The primary strategic objectives of the Company are enhancing credit quality and capital ratios as well as growth in loans, deposits, assets under management, product lines and service quality in existing markets, which result in enhanced shareholder value.
Proposed Merger with SCBT Financial Corporation
On August 7, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SCBT Financial. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, the Company will merge with and into SCBT Financial, with SCBT Financial continuing as the surviving corporation. Immediately following the closing of the Merger (the “Closing”), Savannah and Bryan will merge with and into SCBT (the “Bank Merger”), a South Carolina banking corporation and wholly-owned subsidiary of SCBT Financial (the “Buyer Bank”), with Buyer Bank continuing as the surviving bank following the Bank Merger. The Merger Agreement was unanimously approved by the board of directors of each of the Company and SCBT Financial.
At the Closing of the Merger, each outstanding share of the Company’s common stock will be converted into the right to receive 0.2503 shares of common stock of SCBT Financial (“SCBT Common Stock”), subject to the payment of cash in lieu of fractional shares of SCBT Common Stock.
The Merger Agreement contains customary representations and warranties from the Company and SCBT Financial, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the Company’s businesses during the interim period between the execution of the Merger Agreement and the closing,
(2) each party’s obligations to facilitate its shareholders’ consideration of, and voting upon, the necessary approval in connection with the Merger, (3) the recommendation by the board of directors of each party in favor of the necessary approval by its shareholders, (4) the Company’s non-solicitation obligations relating to alternative business combination transactions, and (5) SCBT Financial’s obligation to establish an advisory board consisting of the current directors of the Company, and the obligation of such directors to enter into advisory board member agreements.
Completion of the Merger is subject to certain customary conditions, including (1) approval of the Merger Agreement by the Company’s shareholders and of the share issuance by SCBT Financial’s shareholders, (2) receipt of required regulatory approvals, (3) the absence of any law or order prohibiting the consummation of the Merger, and (4) approval of the listing on Nasdaq of the SCBT Common Stock to be issued in the Merger. The registration statement for the SCBT Common Stock to be issued in the Merger was declared effective on October 26, 2012. Each party’s obligation to complete the Merger is also subject to certain additional customary conditions.
The Merger Agreement provides certain termination rights for both the Company and SCBT Financial and further provides that upon termination of the Merger Agreement under certain circumstances, SCBT Financial or the Company will be obligated to pay the Company, or SCBT Financial, as applicable, a termination fee of $2,600,000.
For a further description of the Merger and the Merger Agreement, please see the Company’s Current Report on Form 8-K, filed with the SEC on August 10, 2012, the Merger Agreement, attached as Exhibit 2.1 to the Current Report, and the Company's Definitive Proxy Statement, filed with the SEC on October 26, 2012.
Deferred Tax Assets
The Company recorded a valuation allowance against its deferred tax assets through income tax expense in the amount of approximately $13.8 million during the quarter ending September 30, 2012. This impairment did not have a material effect on the regulatory capital ratios of the Company or its subsidiaries, because a significant portion of this deferred tax asset was already disallowed for regulatory capital purposes. See Note 9 to the financial statements for additional discussion about the deferred tax assets.
Critical Accounting Estimates
Allowance for Loan Losses
The Company considers its policies regarding the allowance for loan losses to be its most critical accounting estimate due to the significant degree of management judgment involved. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses based on management's continuous evaluation of the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the allowance reflects management's opinion of the adequate level needed to absorb probable losses inherent in the loan portfolio at September 30, 2012. The amount charged to the provision and the level of the allowance is based on management's judgment and is dependent upon growth in the loan portfolio, the total amount of past due loans and nonperforming loans, recent charge-off levels, known loan deteriorations and concentrations of credit. Other factors affecting the allowance include market interest rates, loan sizes, portfolio maturity and composition, collateral values and general economic conditions. Finally, management's assessment of probable losses, based upon internal credit grading of the loans and periodic reviews and assessments of credit risk associated with particular loans, is considered in establishing the amount of the allowance.
The Company has a comprehensive program designed to control and continually monitor the credit risks inherent in the loan portfolios. This program includes a structured loan approval process in which the boards of directors (“Boards”) of the Company and Subsidiary Banks delegate authority for various types and amounts of loans to loan officers on a basis commensurate with seniority and lending experience. There are four risk grades of "criticized" assets: Special Mention, Substandard, Doubtful and Loss. Assets designated as substandard, doubtful or loss are considered “classified”. The classification of assets is subject to regulatory review and reclassification. The Company and Subsidiary Banks include aggregate totals of criticized assets, and general and specific valuation reserves in quarterly reports to the Boards, which review and approve the overall allowance for loan losses evaluation.
The Subsidiary Banks use a risk rating system which is consistent with the regulatory risk rating system. This system applies to all assets of an insured institution and requires each institution to periodically evaluate the risk rating assigned to its assets. The Subsidiary Banks' loan risk rating systems utilize the account officer, credit administration and an
independent loan review function to monitor the risk rating of loans. Each loan officer is charged with the responsibility of monitoring changes in loan quality within his or her loan portfolio and reporting changes directly to credit administration and senior management. The internal credit administration function monitors loans on a continuing basis for both documentation and credit related exceptions. Additionally, the Subsidiary Banks have contracted with an external loan review service that performs a review of the Subsidiary Banks' loans on a periodic basis to determine that the appropriate risk grade has been assigned to each borrowing relationship and to evaluate other credit quality, documentation and compliance factors. Delinquencies are monitored on all loans as a basis for potential credit quality deterioration. Commercial and mortgage loans that are delinquent 90 days (four payments) or longer generally are placed on nonaccrual status unless the credit is well-secured and in the process of collection. Revolving credit loans and other personal loans are typically charged-off when payments have become 120 days past due. Loans are placed on nonaccrual status or charged-off at an earlier date if the collection of principal or interest in full becomes doubtful.
No assurance can be given that the Company will not sustain loan losses which would be sizable in relationship to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses by future charges or credits to earnings. The allowance for loan losses is also subject to review by various regulatory agencies through their periodic examinations of the Subsidiary Banks. Such examinations could result in required changes to the allowance for loan losses. No adjustment in the allowance or significant adjustments to the Subsidiary Banks’ internally classified loans were made as a result of their most recent regulatory examinations.
The allowance for loan losses totaled $18,110,000, or 2.64 percent of total loans, at September 30, 2012. This is compared to an allowance of $21,917,000, or 2.89 percent of total loans, at December 31, 2011. For the nine months ended September 30, 2012, the Company reported net charge-offs of $14,886,000, compared to net charge-offs of $11,021,000 for the same period in 2011. During the first nine months of 2012 and 2011, a provision for loan losses of $11,080,000 and $13,525,000, respectively, was added to the allowance for loan losses. The local real estate market continues to show weakness, and both net charge-offs and the provision for loan losses have remained elevated. However, the provision for loan losses declined in the first nine months of 2012 compared to the same period in 2011. This reduction in the provision for loan losses is mainly due to a reduction in the Company’s classified assets (substandard loans and OREO) over the past nine months. From December 31, 2011, classified assets have declined $28 million, or 30 percent, to $65 million from $93 million.
The Company's nonperforming assets consist of loans on nonaccrual status, loans which are contractually past due 90 days or more on which interest is still being accrued, and OREO. Nonaccrual loans of $27,982,000 and loans past due 90 days or more of $368,000 totaled $28,350,000, or 4.14 percent of gross loans, at September 30, 2012. Nonaccrual loans of $34,668,000 and loans past due 90 days or more and still accruing interest of $213,000 totaled $34,881,000, or 4.59 percent of gross loans, at December 31, 2011. Generally, loans are placed on nonaccrual status when the ability to collect the principal or interest in full becomes doubtful. Management typically writes down a loan through a charge to the allowance when it determines the loan is impaired. Nonperforming assets also included $11,820,000 and $20,332,000 of OREO at September 30, 2012 and December 31, 2011, respectively. Management continues to aggressively price and market the OREO.
Impaired loans, which include loans modified in troubled debt restructurings (“TDRs”), totaled $43,995,000 and $51,711,000 at September 30, 2012 and December 31, 2011, respectively.
At September 30, 2012 impaired loans consisted primarily of $17.2 million of improved residential real estate-secured loans, $13.6 million of land, lot, and construction and development related loans and $10.0 million of non-owner occupied commercial real estate. Less than one percent of the impaired loans are unsecured. The largest impaired loan relationship is one loan for $2.0 million that is secured by a rental home in Bryan County, Georgia. This loan is a TDR that is performing as agreed. No specific reserves have been applied to the relationship but the Company does have approximately $43,000 allocated as a general reserve. The second largest impaired loan relationship consists of four loans totaling approximately $2.0 million that is secured by residential raw land and an improved commercial lot in Chatham County, Georgia. These loans are currently on nonaccrual status and the Company charged-off approximately $921,000 on this relationship during 2011 and 2012. The third largest impaired loan relationship consist of three loans for $1.9 million that is secured by a personal residence, a residential lot and a non-owner occupied commercial building located on Tybee Island in Chatham County, Georgia. These loans are TDRs that are currently performing as agreed. No specific reserves have been applied to the relationship, but the Company does have approximately $218,000 allocated as a general reserve.
The largest impaired loan relationship at June 30, 2012 consisted of four loans totaling $5.1 million to a residential developer in the Bluffton/Hilton Head Island, South Carolina market. This loan relationship declined to approximately $1.5 million as of September 30, 2012 due to the Company charging down an additional $2.8 million and receiving pay downs of approximately $800,000 through the sale of properties during the third quarter of 2012. Over the life of the relationship the Company has charged-off approximately $5.6 million. The second largest loan relationship at June 30, 2012 consisted of one loan totaling $2.8 million to a residential developer in the Oconee County, Georgia market, secured by 105 improved residential lots and 110 acres of unimproved residential land. The total loan balance was $10.6 million; however, $7.8 million was participated to other financial institutions. During the third quarter of 2012, the Company charged off the specific reserve of $1,250,000 that was placed on the loan at June 30, 2012, which reduced the current balance to approximately $1.6 million.
The Company continues to devote significant internal and external resources to managing the past due and classified loans. The Company has performed extensive internal and external loan review procedures and analyses on the loan portfolio. The Company charges-down loans as appropriate before the foreclosure process is complete and often before they are past due.
If the allowance for loan losses had changed by five percent, the effect on net income would have been approximately $560,000. If the allowance was increased by this amount, it would not have changed the Company’s or Savannah’s status as well-capitalized financial institutions. Bryan is considered adequately capitalized due to its Consent Order (“Order”) with its regulators and is currently below the 8.00 percent Tier 1 leverage ratio that it has agreed with the regulators to maintain.
Impairment of Loans
The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collection of all amounts due is expected. The Company maintains a valuation allowance or charges down the loan balance to the extent that the measure of value of an impaired loan is less than the recorded investment.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, length of time the properties have been held, and the Company’s ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other than temporary deterioration in market conditions.
Table 1 – Allowance for Loan Losses and Nonperforming Assets
|
2012
|
2011
|
|
Third
|
Second
|
First
|
Fourth
|
Third
|
($ in thousands)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
Balance at beginning of period
|
$ 22,776
|
$ 22,396
|
$ 21,917
|
$ 22,854
|
$ 23,523
|
Provision for loan losses
|
3,800
|
2,540
|
4,740
|
6,510
|
2,865
|
Net charge-offs
|
(8,466)
|
(2,160)
|
(4,261)
|
(7,447)
|
(3,534)
|
Balance at end of period
|
$ 18,110
|
$ 22,776
|
$ 22,396
|
$ 21,917
|
$ 22,854
|
|
|
|
|
|
|
As a % of loans
|
2.64%
|
3.14%
|
3.01%
|
2.89%
|
2.90%
|
As a % of nonperforming loans
|
63.88%
|
77.00%
|
68.66%
|
62.83%
|
53.72%
|
As a % of nonperforming assets
|
45.08%
|
49.61%
|
44.61%
|
39.70%
|
38.30%
|
|
|
|
|
|
|
Net charge-offs as a % of average loans (a)
|
4.97%
|
1.80%
|
2.27%
|
2.41%
|
1.84%
|
|
|
|
|
|
|
Nonperforming assets
|
|
|
|
|
|
Nonaccruing loans
|
$ 27,982
|
$ 29,417
|
$ 30,742
|
$ 34,668
|
$ 41,689
|
Loans past due 90 days – accruing
|
368
|
161
|
1,876
|
213
|
851
|
Total nonperforming loans
|
28,350
|
29,578
|
32,618
|
34,881
|
42,540
|
Other real estate owned
|
11,820
|
16,335
|
17,589
|
20,332
|
17,135
|
Total nonperforming assets
|
$ 40,170
|
$ 45,913
|
$ 50,207
|
$ 55,213
|
$ 59,675
|
|
|
|
|
|
|
Loans past due 30-89 days
|
$ 12,060
|
$ 5,364
|
$ 4,701
|
$ 15,132
|
$ 13,096
|
|
|
|
|
|
|
Nonperforming loans as a % of loans
|
4.14%
|
4.08%
|
4.39%
|
4.59%
|
5.39%
|
Nonperforming assets as a % of loans
|
|
|
|
|
|
and other real estate owned
|
5.76%
|
6.19%
|
6.60%
|
7.08%
|
7.41%
|
Nonperforming assets as a % of assets
|
4.48%
|
4.82%
|
5.17%
|
5.60%
|
6.04%
|
|
|
|
|
|
|
(a) Annualized
|
|
|
|
|
|
Results of Operations
Third Quarter, 2012 Compared to the Third Quarter, 2011
The Company reported a net loss for the third quarter 2012 of $15,976,000, compared to net income of $1,228,000 in the third quarter 2011. Net loss per diluted share was $2.22 in the third quarter 2012 compared to net income per diluted share of 17 cents in the third quarter 2011. The quarter over quarter decrease in earnings resulted primarily from an increase in income tax expense due to the Company having to record a valuation allowance against its deferred tax assets. The Company also experienced a decrease in net interest income and an increase in the provision for loan losses and noninterest expense. Return on average equity was (76.64) percent, return on average assets was (6.80) percent and the efficiency ratio was 93.01 percent in the third quarter 2012. Pre-tax core earnings decreased $1.0 million, or 22 percent, to $3,638,000 in the third quarter of 2012 compared to the third quarter of 2011. The schedule below reconciles the income (loss) before income taxes to the pre-tax core earnings.
|
For the
|
|
Three Months Ended
|
|
September 30,
|
($ in thousands)
|
2012
|
2011
|
Income (loss) before income taxes
|
$ (3,126)
|
$ 1,548
|
Add: Provision for loan losses
|
3,800
|
2,865
|
Add: Losses on foreclosed assets
|
1,488
|
577
|
Add: Expenses related to the merger and other
|
|
|
strategic initiatives
|
1,474
|
-
|
Add: (Gain) loss on sale of securities
|
2
|
(308)
|
Pre-tax core earnings
|
$ 3,638
|
$ 4,682
|
Third quarter average interest-earning assets decreased 4.7 percent to $851 million in 2012 from $893 million in 2011. Third quarter net interest income was $8,088,000 in 2012 compared to $9,014,000 in 2011, a 10 percent decrease. Third quarter average accruing loans were $676 million in 2012 compared to $762 million in 2011, an 11 percent decrease. Average deposits were $800 million in the third quarter of 2012 versus $845 million in 2011, a decrease of 5.4 percent. Shareholders' equity was $67.9 million at September 30, 2012 compared to $86.3 million at September 30, 2011. The Company's total capital to risk-weighted assets ratio was 12.62 percent at September 30, 2012, which exceeds the 10 percent required by the regulatory agencies to maintain well-capitalized status.
During the third quarter of 2012, both net interest income and the net interest margin declined. Net interest income declined $926,000, or 10 percent, compared to the same period in 2011 primarily due to a lower level of interest-earning assets, particularly accruing loans. The $86 million decline in average accruing loans was due to normal pay downs, charge-offs and weakened demand for new loans. The net interest margin declined 23 basis points from 4.01 percent for the quarter ended September 30, 2011 to 3.78 percent for the quarter ended September 30, 2012. As shown in Table 3, the yield on earning assets declined 53 basis points to 4.48 percent during the third quarter of 2012 compared to the third quarter of 2011. This decline was mainly due to the Company holding, on average, $60 million more in lower yielding interest-bearing deposits and $86 million less in higher yielding accruing loans. The decline in the yield on interest-earning assets was offset somewhat by a 29 basis point decline in the cost of interest-bearing liabilities. This decline was primarily due to the re-pricing of local time deposits and money market accounts in the current low interest rate environment along with a reduction in the balance of higher cost time deposits. Average third quarter time deposits declined approximately $57 million, or 18 percent, from 2011 to 2012.
On a linked quarter basis, the net interest margin declined 13 basis points when compared to the second quarter of 2012. This decline was mainly due to the Company holding, on average, $11 million more in lower yielding interest-bearing deposits and $28 million less in higher yielding accruing loans in the third quarter of 2012 compared to the prior quarter.
Third quarter provision for loan losses were $3,800,000 for 2012 compared to $2,865,000 in 2011. Third quarter net charge-offs were $8,466,000 for 2012 compared to $3,534,000 in 2011. The increase in the provision for loan losses during the third quarter of 2012 compared to the same period in 2011 was due in part to an increase in real estate related charge-offs. Even though the Company continues to see weakness in its local real estate markets, the Company has seen a decline in its level of classified assets (substandard loans and OREO). Classified assets have declined $38 million, or 38 percent, to $65 million at September 30, 2012 from $104 million at September 30, 2011.
Noninterest income decreased $269,000, or 15 percent, to $1,548,000 in the third quarter of 2012 versus 2011. This decrease was primarily related to a decline in gain on sale of securities of $310,000 in 2012 compared to 2011 partially offset by an increase in other operating income. The Company did not sell any securities in the third quarter of 2012, but did have two securities called at a loss of $2,000. The increase in other operating income during the third quarter of 2012 compared to 2011 was due primarily to an increase in rental income from
OREO
.
Noninterest expense increased $2,544,000, or 40 percent, to $8,962,000 during the third quarter of 2012 as compared to the same period in 2011. This increase was mainly attributable to a $911,000, or 158 percent, increase in its losses related to foreclosed assets and a $1,595,000, or 178 percent, increase in other operating expense. The increase in the losses related to foreclosed assets was due to both an increase in sales activity and write-downs on OREO during the third quarter of 2012 compared to the same period in 2011. The increase in other operating expense during the third quarter 2012 was mainly attributable to $1,474,000 of expenses related to the Company’s proposed merger with SCBT Financial and costs incurred during the Company’s exploration of other strategic alternatives.
The third quarter income tax expense was $12,850,000 in 2012 compared to $320,000 in 2011. As a result of entering into the Merger Agreement with SCBT Financial, and thus contractually agreeing to forego certain other strategic initiatives that the Company had previously intended to pursue, the positive evidence considered in support of the Company’s use of forecasted future earnings as a source of realizing deferred tax assets became insufficient to overcome the negative evidence associated with its pre-tax cumulative loss position. Accordingly, the Company recorded a valuation allowance against its deferred tax assets through income tax expense in the amount of approximately $13.8 million during the quarter ending September 30, 2012. Excluding the deferred tax valuation allowance, the income tax benefit was $880,000 for the third quarter of 2012. The effective tax rates in the third quarters of 2012 and 2011, excluding the deferred tax valuation allowance, were 28 and 21 percent, respectively. The variance in the effective tax rates was due to the effect of income tax credits and other permanent differences.
First Nine Months of 2012 Compared to the First Nine Months of 2011
The Company reported a net loss for the first nine months of 2012 of $16,591,000, compared to a net loss of $138,000 for the first nine months of 2011. Net loss per diluted share was $2.30 in the first nine months of 2012 compared to a net loss per diluted share of 2 cents in the first nine months of 2011. The increase in the net loss in the first nine months of 2012 compared to the same period in 2011 resulted primarily from an increase in income tax expense due to the Company having to record a valuation allowance against its deferred tax assets. The Company also saw a decrease in net interest income, a decrease in noninterest income and an increase in noninterest expense. These factors were partially offset by a decrease in the provision for loan losses. Return on average equity was (26.32) percent, return on average assets was (2.32) percent and the efficiency ratio was 77.60 percent in the first nine months of 2012. Pre-tax core earnings decreased $1,879,000, or 14 percent, to $11,686,000 in the first nine months of 2012 compared to the same period in 2011. The schedule below reconciles the loss before income taxes to the pre-tax core earnings.
|
For the
|
|
Nine Months Ended
|
|
September 30,
|
($ in thousands)
|
2012
|
2011
|
Loss before income taxes
|
$ (4,426)
|
$ (1,123)
|
Add: Provision for loan losses
|
11,080
|
13,525
|
Add: Losses on foreclosed assets
|
3,578
|
1,925
|
Add: Expenses related to the merger and other
|
|
|
strategic initiatives
|
1,474
|
-
|
Less: Gain on sale of securities
|
(21)
|
(763)
|
Pre-tax core earnings
|
$ 11,685
|
$ 13,564
|
Average interest-earning assets in the first nine months decreased 6.7 percent to $865 million in 2012 from $928 million in 2011. Net interest income was $25,093,000 in the first nine months of 2012 compared to $26,893,000 in 2011, a 6.7 percent decrease. Average accruing loans were $699 million in first nine months of 2012 compared to $776 million in 2011, a 9.9 percent decrease. Average deposits were $818 million in the first nine months of 2012 versus $879 million in 2011, a decrease of 6.9 percent.
During the first nine months of 2012, net interest income declined $1,800,000, or 6.7 percent, compared to the same period in 2011. Net interest income decreased primarily due to a lower level of interest-earning assets, particularly accruing loans. The $77 million decline in average accruing loans was due to normal pay downs, charge-offs and
weakened demand for new loans. Although net interest income declined, the net interest margin remained stable at 3.88 percent in the first nine months of 2012 and 2011. As shown in Table 4, the yield on earning assets declined 30 basis points to 4.65 percent during 2012 compared to 4.95 percent during 2011. This decline was mainly due to the Company holding, on average, $49 million more in lower yielding interest-bearing deposits and $77 million less in higher yielding accruing loans. The decline in the yield on interest-earning assets was offset by a 30 basis point decline in the cost of interest-bearing liabilities. This decline was primarily due to the re-pricing of local time deposits and money market accounts in the current low interest rate environment along with a reduction in the balance of higher cost time deposits. Average time deposits declined approximately $65 million, or 19 percent, for the nine months ended September 30, 2012 compared to the same period in 2011.
The provision for loan losses was $11,080,000 during the first nine months of 2012, compared to $13,525,000 in 2011. Net charge-offs in the first nine months of 2012 were $14,886,000 compared to $11,021,000 in the first nine months of 2011. The decline in the provision for loan losses during the first nine months of 2012 compared to the same period in 2011 was primarily due to improvements in asset quality trends. Even though the Company has continued to see weakness in its local real estate markets, the Company has seen a decline in its level of classified assets (substandard loans and OREO). Classified assets have declined $39 million, or 38 percent, to $65 million at September 30, 2012 from $104 million at September 30, 2011.
Noninterest income decreased $539,000, or 10 percent, to $4,610,000 in the first nine months of 2012 versus 2011. This decrease was primarily related to a decline in gain on sale of securities of $742,000 in the first nine months of 2012 compared to the same period in 2011. This decline was partially offset by an increase in other operating income of $196,000 or 17 percent. The increase in other operating income during the first nine months of 2012 compared to 2011 was due primarily to increases in rental income from
OREO
of approximately $97,000 and from fees related to ATMs and debit cards of approximately $64,000.
Noninterest expense increased $3,409,000, or 17 percent, to $23,049,000 during the first nine months of 2012 as compared to the same period in 2011. This increase was mainly attributable to a $1,653,000, or 86 percent increase in its losses related to sales and write-downs on foreclosed assets and a $1,517,000 or 53 percent increase in other operating expense. The increase in the losses related to foreclosed assets was due to both an increase in sales activity and write-downs on OREO during the first nine months of 2012 compared to the same period in 2011. The increase in other operating expense was mainly attributable to $1,474,000 of expenses related to the Company’s proposed merger with SCBT Financial and costs incurred during the Company’s exploration of other strategic alternatives.
Income tax expense for the first nine months of 2012 was $12,165,000 compared to an income tax benefit of $985,000 in 2011. The Company recorded a valuation allowance against its deferred tax assets through income tax expense in the amount of approximately $13.8 million during the quarter ending September 30, 2012. Excluding the deferred tax valuation allowance, the income tax benefit was $1,565,000 for the first nine months of 2012. The effective tax rates for the first nine months of 2012 and 2011, excluding the deferred tax valuation allowance, were 35 and 88 percent, respectively. The variance in the effective tax rates was due to the effect of income tax credits and other permanent differences.
Financial Condition and Capital Resources
Balance Sheet Activity
The changes in the Company’s assets and liabilities for the current and prior period are shown in the consolidated statements of cash flows. Total assets were $896 million and $985 million at September 30, 2012 and December 31, 2011, respectively, a decrease of $89 million or 9.0 percent. Loans decreased $75 million, or 9.8 percent and OREO decreased $8.5 million, or 42 percent during the first nine months of 2012. The Company experienced normal pay downs and significant charge-offs on loans during the first nine months of 2012 while demand for new loans was weak causing the decline in loan balances. The Company has also been aggressive in resolving its OREO properties in 2012 and has seen a decline in the migration of loans to OREO compared to prior years. The decline in total assets from December 31, 2011 was also due to the Company recording a valuation allowance against the entire balance of its deferred tax assets during the third quarter of 2012, which was approximately $12 million at the previous year end.
Average total assets decreased approximately $67 million, or 6.5 percent, during the first nine months of 2012 compared to the same period in 2011. The Company held $77 million less in average accruing loans in the first nine months of 2012 compared to the same period in 2011. The decline in loans during 2012 compared to 2011 was due to normal pay downs, charge-offs and weak demand for new loans.
The Company has classified all investment securities as available for sale. Lower short-term and long-term interest rates resulted in an overall net unrealized gain of $2.4 million in the investment portfolio at September 30, 2012. The unrealized gain or loss amounts are included in shareholders’ equity as accumulated other comprehensive income, net of tax. The Company’s investment portfolio was essentially flat at September 30, 2012 compared to December 31, 2011. The Company purchased $24 million in investment securities during the first nine months of 2012 to replace $12 million in securities sold and $15 million in maturities and principal collections from its portfolio.
Deposits were down $69 million during the first nine months of 2012 to $778 million at September 30, 2012. The Company decided not to renew certain higher cost time deposits and internet/brokered deposits in order to reduce excess liquidity and improve the Company’s net interest margin with the weakened loan demand. Time deposits declined $63 million, or 20 percent, during the first nine months of 2012. At September 30, 2012, the Company had $69 million in brokered and internet deposits which included $20 million in institutional money market accounts. This was down approximately $47 million, or 41 percent, from December 31, 2011 when the Company had $116 million in brokered and internet deposits. At September 30, 2012 and December 31, 2011, brokered time deposits included $13 million and $22 million, respectively, of reciprocal deposits from the Company’s local customers that are classified as brokered because they are placed in the CDARS network for deposit insurance purposes. As of September 30, 2012, the Subsidiary Banks are under agreements with their respective primary regulators that restrict their availability of brokered deposits. Savannah is allowed to maintain up to $35 million in institutional money market accounts and $40 million in reciprocal deposits through the CDARS network but all other brokered deposits cannot be renewed. Bryan cannot issue or renew any brokered deposits.
Capital Resources
The Subsidiary Banks’ primary regulators have adopted capital requirements that specify the minimum capital 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 Subsidiary Banks’ financial statements and condition. As of September 30, 2012, the Company and Savannah were categorized as “well-capitalized” under the regulatory framework for prompt corrective action in the most recent notification from the FDIC. In the first quarter of 2012, Bryan entered into an Order with its regulator which includes a capital provision requiring Bryan to maintain a Tier 1 Leverage Ratio of not less than 8.00 percent and a Total Risk-based Capital Ratio of not less than 10.00 percent. As a result of this capital provision, Bryan is automatically classified as “adequately capitalized” for regulatory purposes. As of September 30, 2012, Bryan has a Tier 1 Leverage Ratio of 7.83 percent which is below the requirement set by the Order. Savannah has agreed with its primary regulator to maintain a Tier 1 Leverage Ratio of not less than 8.00 percent and a Total Risk-based Capital Ratio of not less than 12.00 percent and is currently in compliance with that agreement.
Total tangible equity capital for the Company was $64.5 million, or 7.22 percent of total tangible assets at September 30, 2012. The table below shows the regulatory capital amounts and ratios for the Company and each Subsidiary Bank along with the minimum capital ratio and the ratio required to maintain a well-capitalized regulatory status.
|
|
|
|
|
Well-
|
($ in thousands)
|
Company
|
Savannah
|
Bryan
|
Minimum
|
Capitalized
|
|
|
|
|
|
|
Qualifying Capital
|
|
|
|
|
|
Tier 1 capital
|
$ 72,999
|
$55,714
|
$ 17,633
|
-
|
-
|
Total capital
|
81,159
|
61,755
|
19,660
|
-
|
-
|
|
|
|
|
|
|
Leverage Ratios
|
|
|
|
|
|
Tier 1 capital to average assets
|
7.86%
|
8.04%
|
7.83%
|
4.00%
|
5.00%
|
|
|
|
|
|
|
Risk-based Ratios
|
|
|
|
|
|
Tier 1 capital to risk-weighted assets
|
11.36%
|
11.69%
|
11.08%
|
4.00%
|
6.00%
|
Total capital to risk-weighted assets
|
12.62%
|
12.96%
|
12.36%
|
8.00%
|
10.00%
|
Tier 1 and total capital at the Company level includes $10 million of subordinated debt issued to the Company’s nonconsolidated subsidiaries. Total capital also includes the allowance for loan losses up to 1.25 percent of risk-weighted assets.
Liquidity and Interest Rate Sensitivity Management
The objectives of balance sheet management include maintaining adequate liquidity and preserving reasonable balance between the repricing of interest sensitive assets and liabilities at favorable interest rate spreads. The objective of liquidity management is to ensure the availability of adequate funds to meet the loan demands and the deposit withdrawal needs of customers. This is achieved through maintaining a combination of sufficient liquid assets, core deposit growth and unused capacity to purchase and borrow funds in the money markets.
During the first nine months of 2012, portfolio loans decreased $75 million to $685 million while deposits decreased $69 million to $778 million. The loan to deposit ratio was 88 percent at September 30, 2012, which is down slightly from 90 percent at December 31, 2011. Cash and cash equivalents and investment securities increased $3.5 million, or 1.9 percent, during the first nine months of 2012 to $183 million. During the first nine months of 2012, the Company allowed some of its brokered and higher cost time deposits to run-off in order to reduce excess liquidity and improve the net interest margin with the weakened loan demand.
In addition to local deposit growth, primary funding and liquidity sources include borrowing capacity with the Federal Home Loan Bank of Atlanta (“FHLB”), temporary federal funds purchased lines with correspondent banks and non-local institutional and internet deposits. Contingency funding and liquidity sources include the ability to sell loans, or participations in certain loans, to investors and borrowings from the Federal Reserve Bank (“FRB”) discount window. As of September 30, 2012, the Subsidiary Banks are under agreements with their respective primary regulators that restrict their availability of brokered deposits.
The Subsidiary Banks have Blanket Floating Lien Agreements with the FHLB. Under these agreements, the Subsidiary Banks have pledged certain 1-4 family first mortgage loans, commercial real estate loans, home equity lines of credit and second mortgage residential loans. The Subsidiary Banks’ individual borrowing limits range from 20 to 25 percent of assets. In the aggregate, the Subsidiary Banks had secured borrowing capacity of approximately $96 million with the FHLB of which $13.1 million was advanced and $16.0 million was used as collateral for FHLB Letters of Credit at September 30, 2012. These credit arrangements serve as a core funding source as well as liquidity backup for the Subsidiary Banks. The Subsidiary Banks also have conditional federal funds borrowing lines available from correspondent banks that management believes can provide approximately $20 million of funding needs for 30-60 days. Savannah has been approved to access the FRB discount window to borrow on a secured basis at 50 basis points over the Federal Funds Target Rate. Bryan is eligible for the Secondary Credit program at 100 basis points over the Federal Funds Target Rate. The amount of credit available is subject to the amounts
and types of collateral available when borrowings are requested. The Subsidiary Banks have also been approved by the FRB to use the borrower-in-custody of collateral arrangement. This temporary liquidity arrangement allows collateral to be maintained at the Subsidiary Banks rather than being delivered to the FRB or a third-party custodian. At September 30, 2012, the Company had secured borrowing capacity of $91 million with the FRB and no amount outstanding.
In addition, SAVB Holdings has a loan with a principal balance of $7,169,000 as of September 30, 2012 in favor of Lewis Broadcasting Corporation (“LBC”), as evidenced by an Amended and Restated Promissory Note dated June 13, 2012 (the “Promissory Note”). Effective as of September 29, 2012, SAVB Holdings and LBC (i) extended the term and maturity date of the Promissory Note until September 29, 2013; (ii) waived any and all covenant defaults for the quarter ended September 30, 2012; and (iii) agreed to the payment of any accrued and unpaid interest on the Promissory Note by December 31, 2012. Each of the above (i)-(iii) is evidenced by the First Modification to Amended and Restated Promissory Note dated October 24, 2012. Pursuant to the Merger Agreement, upon the effectiveness of the Merger, SCBT Financial will repay all outstanding principal and accrued but unpaid interest owed to LBC pursuant to the Promissory Note, as modified.
A continuing objective of interest rate sensitivity management is to maintain appropriate levels of variable rate assets, including variable rate loans and shorter maturity investments, relative to interest rate sensitive liabilities, in order to control potential negative impacts upon earnings due to changes in interest rates. Interest rate sensitivity management requires analyses and actions that take into consideration volumes of assets and liabilities repricing and the timing and magnitude of their price changes to determine the effect upon net interest income. The Company utilizes various balance sheet and hedging strategies to reduce interest rate risk as noted below.
The Company’s cash flow, maturity and repricing gap at September 30, 2012 was $195 million at one year, or 23.5 percent of total interest-earning assets. At December 31, 2011 the gap at one year was $166 million, or 16.8 percent of total interest-earning assets. Interest-earning assets with maturities over five years totaled approximately $37 million, or 4.5 percent of total interest-earning assets at September 30, 2012. See Table 2 for cash flow, maturity and repricing gap. The gap position between one and five years is of less concern because management has time to respond to changing financial conditions and interest rates with actions that reduce the impact of the longer-term gap positions on net interest income. However, interest-earning assets with maturities and/or repricing dates over five years may expose the Company to significant interest rate risk, a component of which is the effect changes in interest rates may have on the market value of the assets.
The Company continues to be asset-sensitive within the 90 day and one year time frame which usually means that if rates increase then net interest income and the net interest margin increase and if rates decrease then net interest income and the net interest margin decrease. However, over the past twelve months, interest rates have basically remained flat if not declined slightly, and the net interest margin has remained flat over the first nine months of 2012 compared to the same period in 2011. During the first nine months of 2012 compared to the same period in 2011 the Company’s cost of interest-bearing deposits has declined 30 basis points which has offset the 30 basis point decline in the yield on interest-earning assets.
The Company has implemented various strategies to reduce its asset-sensitive position, primarily through the increased use of fixed rate loans, interest rate floors on variable rate loans and short maturity funding sources. In the past, the Company also utilized hedging strategies such as interest rate floors, collars and swaps. These actions have reduced the Company’s exposure to falling interest rates.
Management monitors interest rate risk quarterly using rate-sensitivity forecasting models and other balance sheet analytical reports. If and when projected interest rate risk exposures are outside of policy tolerances or desired positions, specific strategies to return interest rate risk exposures to desired levels are developed by management, approved by the Asset-Liability Committee and reported to the Boards.
Table 2 – Cash Flow/Maturity Gap and Repricing Data
The following is the cash flow/maturity and repricing data for the Company as of September 30, 2012:
|
|
0-3
|
3-12
|
1-3
|
3-5
|
Over 5
|
|
($ in thousands)
|
Immediate
|
months
|
Months
|
Years
|
Years
|
Years
|
Total
|
Interest-earning assets
|
|
|
|
|
|
|
|
Investment securities
|
$ -
|
$ 6,637
|
$ 17,207
|
$ 26,233
|
$ 11,317
|
$ 18,252
|
$ 79,646
|
Federal funds sold
|
670
|
-
|
-
|
-
|
-
|
-
|
670
|
Interest-bearing deposits
|
86,784
|
-
|
1,941
|
1,675
|
-
|
-
|
90,400
|
Loans - fixed rates
|
-
|
115,449
|
150,924
|
144,421
|
29,686
|
18,838
|
459,318
|
Loans - variable rates
|
-
|
188,286
|
8,391
|
342
|
876
|
-
|
197,895
|
Total interest-earnings assets
|
87,454
|
310,372
|
178,463
|
172,671
|
41,879
|
37,090
|
827,929
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
NOW and savings
|
-
|
8,313
|
16,625
|
41,563
|
49,875
|
49,875
|
166,251
|
Money market accounts
|
-
|
52,422
|
75,584
|
43,191
|
64,787
|
-
|
235,984
|
Time deposits
|
-
|
68,664
|
125,406
|
47,269
|
12,270
|
-
|
253,609
|
Short-term borrowings
|
14,206
|
-
|
-
|
-
|
-
|
-
|
14,206
|
Other borrowings
|
-
|
-
|
7,169
|
-
|
-
|
-
|
7,169
|
FHLB advances
|
-
|
-
|
3,004
|
11
|
11
|
10,123
|
13,149
|
Subordinated debt
|
-
|
10,310
|
-
|
-
|
-
|
-
|
10,310
|
Total interest-bearing liabilities
|
14,206
|
139,709
|
227,788
|
132,034
|
126,943
|
59,998
|
700,678
|
Gap-Excess assets (liabilities)
|
73,248
|
170,663
|
(49,325)
|
40,637
|
(85,064)
|
(22,908)
|
127,251
|
Gap-Cumulative
|
$ 73,248
|
$ 243,911
|
$ 194,586
|
$ 235,223
|
$ 150,159
|
$ 127,251
|
$ 127,251
|
Cumulative sensitivity ratio *
|
6.16
|
2.58
|
1.51
|
1.46
|
1.23
|
1.18
|
1.18
|
* Cumulative interest-earning assets / cumulative interest-bearing liabilities
Table 3 – Average Balance Sheet and Rate/Volume Analysis – Third Quarter, 2012 and 2011
The following table presents consolidated average balances of the Company, the taxable-equivalent interest earned and the interest paid during the third quarter of 2012 and 2011.
|
|
|
|
|
|
|
Taxable-Equivalent
|
|
(a) Variance
|
Average Balance
|
Average Rate
|
|
|
Interest (b)
|
|
Attributable to
|
QTD
|
|
QTD
|
QTD
|
QTD
|
|
|
QTD
|
QTD
|
Vari-
|
|
|
09/30/12
|
|
09/30/11
|
09/30/12
|
09/30/11
|
|
|
09/30/12
|
09/30/11
|
ance
|
Rate
|
Volume
|
($ in thousands)
|
|
(%)
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
$ 94,244
|
|
$ 33,869
|
0.26
|
0.29
|
|
Interest-bearing deposits
|
$ 61
|
$ 25
|
$ 36
|
$ (3)
|
$ 39
|
75,168
|
|
91,151
|
2.42
|
2.79
|
|
Investments - taxable (d)
|
457
|
640
|
(183)
|
(85)
|
(98)
|
5,556
|
|
5,631
|
4.44
|
4.51
|
|
Investments - non-taxable (d)
|
62
|
64
|
(2)
|
(1)
|
(1)
|
540
|
|
351
|
0.00
|
1.13
|
|
Federal funds sold
|
-
|
1
|
(1)
|
(1)
|
-
|
675,880
|
|
762,186
|
5.30
|
5.49
|
|
Loans (c)
|
9,012
|
10,539
|
(1,527)
|
(364)
|
(1,163)
|
851,388
|
|
893,188
|
4.48
|
5.01
|
|
Total interest-earning assets
|
9,592
|
11,269
|
(1,677)
|
(453)
|
(1,224)
|
80,979
|
|
97,115
|
|
|
|
Noninterest-earning assets
|
|
|
|
|
|
$ 932,367
|
|
$ 990,303
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
$ 142,394
|
|
$ 135,292
|
0.15
|
0.27
|
|
NOW accounts
|
54
|
93
|
(39)
|
(41)
|
2
|
22,852
|
|
20,883
|
0.07
|
0.09
|
|
Savings accounts
|
4
|
5
|
(1)
|
(1)
|
-
|
217,826
|
|
228,755
|
0.76
|
1.12
|
|
Money market accounts
|
415
|
648
|
(233)
|
(207)
|
(26)
|
25,734
|
|
40,539
|
0.29
|
0.32
|
|
MMA – institutional
|
19
|
33
|
(14)
|
(3)
|
(11)
|
118,914
|
|
147,156
|
1.10
|
1.52
|
|
Time deposits, $100M or more
|
330
|
563
|
(233)
|
(155)
|
(78)
|
38,420
|
|
46,141
|
0.74
|
0.66
|
|
Time deposits, broker
|
71
|
77
|
(6)
|
9
|
(15)
|
109,376
|
|
130,369
|
1.08
|
1.39
|
|
Other time deposits
|
297
|
458
|
(161)
|
(102)
|
(59)
|
675,516
|
|
749,135
|
0.70
|
0.99
|
|
Total interest-bearing deposits
|
1,190
|
1,877
|
(687)
|
(500)
|
(187)
|
22,792
|
|
24,465
|
2.78
|
3.37
|
|
Short-term/other borrowings
|
159
|
208
|
(49)
|
(36)
|
(13)
|
13,149
|
|
20,047
|
2.03
|
1.72
|
|
FHLB advances
|
67
|
87
|
(20)
|
16
|
(36)
|
10,310
|
|
10,310
|
3.09
|
2.89
|
|
Subordinated debt
|
80
|
75
|
5
|
5
|
-
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
|
|
|
721,767
|
|
803,957
|
0.82
|
1.11
|
|
liabilities
|
1,496
|
2,247
|
(751)
|
(515)
|
(236)
|
124,043
|
|
96,065
|
|
|
|
Noninterest-bearing deposits
|
|
|
|
|
|
3,860
|
|
3,961
|
|
|
|
Other liabilities
|
|
|
|
|
|
82,697
|
|
86,320
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
$ 932,367
|
|
$ 990,303
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
3.66
|
3.90
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
3.78
|
4.01
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$ 8,096
|
$ 9,022
|
$ (926)
|
$ 62
|
$ (988)
|
$ 129,621
|
|
$ 89,231
|
|
|
|
Net earning assets
|
|
|
|
|
|
$ 799,559
|
|
$ 845,200
|
|
|
|
Average deposits
|
|
|
|
|
|
|
|
|
0.59
|
0.88
|
|
Average cost of deposits
|
|
|
|
|
|
85%
|
|
90%
|
|
|
|
Average loan to deposit ratio (c)
|
|
|
|
|
|
(a)
|
|
This table shows the changes in interest income and interest expense for the comparative periods based on either changes in average
|
|
|
volume or changes in average rates for interest-earning assets and interest-bearing liabilities. Changes which are not solely due to rate changes or solely due to volume changes are attributed to volume.
|
(b)
|
|
The taxable equivalent adjustment of $8 in the third quarter of 2012 and 2011 results from tax exempt income less
|
|
|
non-deductible TEFRA interest expense.
|
(c)
|
|
Average nonaccruing loans have been excluded from total average loans and categorized in noninterest-earning assets.
|
(d)
|
|
Average investment securities do not include the unrealized gain/loss on available for sale investment securities.
|
Table 4 – Average Balance Sheet and Rate/Volume Analysis – First Nine Months, 2012 and 2011
The following table presents consolidated average balances of the Company, the taxable-equivalent interest earned and the interest paid during the first nine months of 2012 and 2011.
|
|
|
|
|
|
|
Taxable-Equivalent
|
|
(a) Variance
|
Average Balance
|
Average Rate
|
|
|
Interest (b)
|
|
Attributable to
|
YTD
|
|
YTD
|
YTD
|
YTD
|
|
|
YTD
|
YTD
|
Vari-
|
|
|
09/30/12
|
|
09/30/11
|
09/30/12
|
09/30/11
|
|
|
09/30/12
|
09/30/11
|
ance
|
Rate
|
Volume
|
($ in thousands)
|
|
(%)
|
|
|
($ in thousands)
|
|
($ in thousands)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
$ 85,612
|
|
$ 37,057
|
0.26
|
0.30
|
|
Interest-bearing deposits
|
$ 168
|
$ 84
|
$ 84
|
$ (11)
|
$ 95
|
74,908
|
|
108,229
|
2.51
|
2.74
|
|
Investments - taxable (d)
|
1,407
|
2,217
|
(810)
|
(186)
|
(624)
|
5,724
|
|
6,291
|
4.43
|
4.44
|
|
Investments - non-taxable (d)
|
190
|
209
|
(19)
|
-
|
(19)
|
570
|
|
548
|
0.23
|
0.73
|
|
Federal funds sold
|
1
|
3
|
(2)
|
(2)
|
-
|
698,643
|
|
775,568
|
5.42
|
5.49
|
|
Loans (c)
|
28,350
|
31,861
|
(3,511)
|
(406)
|
(3,105)
|
865,457
|
|
927,693
|
4.65
|
4.95
|
|
Total interest-earning assets
|
30,116
|
34,374
|
(4,258)
|
(606)
|
(3,652)
|
88,646
|
|
93,036
|
|
|
|
Noninterest-earning assets
|
|
|
|
|
|
$ 954,103
|
|
$1,020,729
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
$ 143,309
|
|
$138,384
|
0.16
|
0.29
|
|
NOW accounts
|
174
|
305
|
(131)
|
(135)
|
4
|
22,120
|
|
20,802
|
0.07
|
0.15
|
|
Savings accounts
|
12
|
24
|
(12)
|
(12)
|
-
|
219,583
|
|
233,121
|
0.85
|
1.17
|
|
Money market accounts
|
1,400
|
2,036
|
(636)
|
(558)
|
(78)
|
28,452
|
|
41,054
|
0.30
|
0.46
|
|
MMA - institutional
|
64
|
142
|
(78)
|
(49)
|
(29)
|
128,244
|
|
162,920
|
1.16
|
1.62
|
|
Time deposits, $100M or more
|
1,118
|
1,971
|
(853)
|
(561)
|
(292)
|
42,555
|
|
46,412
|
0.78
|
0.78
|
|
Time deposits, broker
|
250
|
271
|
(21)
|
-
|
(21)
|
115,785
|
|
142,343
|
1.16
|
1.50
|
|
Other time deposits
|
1,006
|
1,593
|
(587)
|
(362)
|
(225)
|
700,048
|
|
785,036
|
0.77
|
1.08
|
|
Total interest-bearing deposits
|
4,024
|
6,342
|
(2,318)
|
(1,678)
|
(640)
|
23,237
|
|
24,471
|
2.93
|
3.43
|
|
Short-term/other borrowings
|
509
|
628
|
(119)
|
(92)
|
(27)
|
14,684
|
|
16,862
|
2.04
|
2.08
|
|
FHLB advances
|
224
|
262
|
(38)
|
(5)
|
(33)
|
10,310
|
|
10,310
|
3.14
|
2.92
|
|
Subordinated debt
|
242
|
225
|
17
|
17
|
-
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
|
|
|
748,279
|
|
836,679
|
0.89
|
1.19
|
|
liabilities
|
4,999
|
7,457
|
(2,458)
|
(1,758)
|
(700)
|
118,125
|
|
93,612
|
|
|
|
Noninterest-bearing deposits
|
|
|
|
|
|
3,728
|
|
3,849
|
|
|
|
Other liabilities
|
|
|
|
|
|
83,971
|
|
86,589
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
$ 954,103
|
|
$1,020,729
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
3.76
|
3.76
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
3.88
|
3.88
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$ 25,117
|
$ 26,917
|
$(1,800)
|
$ 1,152
|
$(2,952)
|
$ 117,178
|
|
$ 91,014
|
|
|
|
Net earning assets
|
|
|
|
|
|
$ 818,173
|
|
$ 878,648
|
|
|
|
Average deposits
|
|
|
|
|
|
|
|
|
0.66
|
0.97
|
|
Average cost of deposits
|
|
|
|
|
|
85%
|
|
88%
|
|
|
|
Average loan to deposit ratio (c)
|
|
|
|
|
|
(a)
|
|
This table shows the changes in interest income and interest expense for the comparative periods based on either changes in average
|
|
|
volume or changes in average rates for interest-earning assets and interest-bearing liabilities. Changes which are not solely due to rate changes or solely due to volume changes are attributed to volume.
|
(b)
|
|
The taxable equivalent adjustment of $24 in the first nine months of 2012 and 2011 results from tax exempt income less
|
|
|
non-deductible TEFRA interest expense.
|
(c)
|
|
Average nonaccruing loans have been excluded from total average loans and categorized in noninterest-earning assets.
|
(d)
|
|
Average investment securities do not include the unrealized gain/loss on available for sale investment securities.
|
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. At September 30, 2012, the Company had unfunded commitments to extend credit of $67 million and outstanding letters of credit of $3 million. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments and conditional obligations 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 5 – Payment Obligations under Long-term Contracts
The following table includes a breakdown of short-term and long-term payment obligations due under long-term contracts:
|
Payments due by period
|
|
|
Less than
|
1-3
|
3-5
|
More than
|
Contractual obligations
|
Total
|
1 year
|
years
|
years
|
5 years
|
FHLB advances
|
$ 13,149
|
$ -
|
$ 3,000
|
$ -
|
$ 10,149
|
Subordinated debt
|
10,310
|
-
|
-
|
-
|
10,310
|
Operating leases – buildings
|
4,902
|
817
|
1,474
|
1,004
|
1,607
|
Information technology contracts
|
4,019
|
1,242
|
2,479
|
298
|
-
|
Total
|
$ 32,380
|
$ 2,059
|
$ 6,953
|
$ 1,302
|
$ 22,066
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See “Liquidity and Interest Rate Sensitivity Management” on pages 33-37 in the MD&A section for quantitative and qualitative disclosures about market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
-
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15 of the Securities Exchange Act of 1934. This evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on this evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in our periodic SEC filings.
Changes in Internal Control over Financial Reporting
- No change in our internal control over financial reporting occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – Other Information
Item 1. Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries are subject to various legal proceedings, claims, regulatory examinations, information gathering requests, inquiries and investigations. Additionally, on October 11, 2012, a purported shareholder of the Company filed a lawsuit in the Supreme Court of the State of New York captioned
Rational Strategies Fund v. Robert H. Demere, Jr. et al.,
No. 653566/2012, naming the Company, members of the Company’s board of directors and SCBT as defendants. This lawsuit is purportedly brought on behalf of a putative class of the Company’s common shareholders and seeks a declaration that it is properly maintainable as a class action with the
Plaintiff as the proper class representative. The lawsuit alleges that the Company, the Company’s directors and SCBT breached duties and/or aided and abetted such breaches by failing to disclose certain material information about the Merger. Among other relief, the complaint seeks to enjoin the Merger. Each of the Company and SCBT believes that the claims asserted are without merit.
In addition to the other information set forth in this Quarterly Report on Form 10-Q and the risks set forth below, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K, Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, and in this Quarterly Report on Form 10-Q are not the only risks that the Company faces. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Pending litigation against the Company and members of the Company’s Board of Directors could result in an injunction preventing completion of the Merger with SCBT or the payment of damages in the event the Merger is completed.
On October 11, 2012, a putative shareholder class action lawsuit,
Rational Strategies Fund v. Robert H. Demere, Jr. et al.,
No. 653566/2012, was filed in the Supreme Court of the State of New York against the Company, members of the Company’s board of directors and SCBT, asserting that the Company, the Company’s directors and SCBT breached duties and/or aided and abetted such breaches by failing to disclose certain material information about the Merger. Among other relief, the plaintiff seeks to enjoin the Merger.
One of the conditions to the closing of the Merger is that no order, injunction, decree or judgment by any court of competent jurisdiction preventing the consummation of the Merger is in effect that prohibits the completion of the Merger. If the plaintiff is successful in obtaining an injunction prohibiting the defendants from completing the Merger, then such injunction may prevent the Merger from becoming effective, or from becoming effective within the expected time frame. If completion of the Merger is prevented or delayed, it could result in substantial costs to the Company. In addition, the Company could incur costs associated with the indemnification of its directors and officers.
Item 6. Exhibits.
Exhibit Number
|
Description
|
2.1
|
Agreement and Plan of Merger, dated as of August 7, 2012, by and between SCBT Financial Corporation and The Savannah Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K as filed with the SEC on August 10, 2012)
|
3.1
|
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (No. 33-33405) as filed with the SEC on February 8, 1990)
|
3.2
|
By-laws as amended and restated July 20, 2004 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (No. 333-128724) as filed with the SEC on September 30, 2005)
|
10.1
|
First Modification to Amended and Restated Promissory Note, dated as of October 24, 2012, by and among SAVB Holdings, LLC and Lewis Broadcasting Corporation *
|
10.2
|
Amendment to Change in Control Agreement, dated as of August 8, 2012, by and between The Savannah Bancorp, Inc. and E. James Burnsed *
|
10.3
|
Amendment to Change in Control Agreement, dated as of August 8, 2012, by and between The Savannah Bancorp, Inc. and John C. Helmken II *
|
10.4
|
Amendment to Change in Control Agreement, dated as of August 8, 2012, by and between The Savannah Bancorp, Inc. and Jerry O’Dell Keith *
|
10.5
|
Amendment to Change in Control Agreement, dated as of August 8, 2012, by and between The Savannah Bancorp, Inc. and R. Stephen Stramm *
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
|
101
|
The following materials from the Company’s 10-Q for the period ended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Operations; (c) Consolidated Statements of Other Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Condensed Notes to Consolidated Financial Statements **
|
|
|
|
*
|
Filed herewith
|
**
|
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
The Savannah Bancorp, Inc.
(Registrant)
|
|
|
Date:
11/14/12
|
/s/ John C. Helmken II
John C. Helmken II
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
Date:
11/14/12
|
/s/
Michael W. Harden, Jr.
Michael W. Harden, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
|