**Exhibit
      13**


**The
      Savannah Bancorp, Inc. and Subsidiaries**


**Financial
      Statement Section**


**Index**


PageNumberIndex
                to Financial Statement Section
              F
                -
                1Report
                of Independent Registered Public Accounting Firm
              F
                -
                2Consolidated
                Balance SheetsDecember
                  31, 2006 and 2005
              F
                -
                3Consolidated
                Statements of Income for the YearsEnded
                  December 31, 2006, 2005 and 2004
              F
                -
                4Consolidated
                Statements of Changes in Shareholders'Equity
                  for the Years Ended December 31, 2006, 2005 and 2004
              F
                -
                5Consolidated
                Statements of Cash Flows for the YearsEnded December
                  31, 2006, 2005 and 2004
              F
                -
                6Notes to
                Consolidated Financial Statements
              F
                -
                7Management's
                Discussion and Analysis of FinancialCondition
                  and Results of Operations
              F
                -
                23Selected
                  Five-Year Financial Data -- 2002-2006Selected
                  Financial Condition Highlights
              F
                -
                23Selected
                  Operating Highlights
              F
                -
                24Selected
                  Quarterly Data
              F
                -
                25Market
                  for Registrant's Common Equity andRelated
                  Shareholder Matters
              F
                -
                25Stock
                  Performance Graph
              F
                -
                26Introduction
              F
                -
                27Critical
                  Accounting Estimate
              F
                -
                28Results
                  of Operations2006
                  Compared with 2005
              F
                -
                292005
                  Compared with 2004
              F
                -
                30Financial
                  Condition and Capital Resources
              F
                -
                31Loan
                  Concentrations
              F
                -
                31Liquidity
                  and Interest Rate Sensitivity Management
              F
                -
                32Off-Balance
                  Sheet Arrangements
              F
                -
                33Forward
                  Looking Statements
              F
                -
                34Cash
                  Flow/Maturity Gap and Repricing Data
              F
                -
                35Average
                  Balance Sheet and Rate/Volume Analysis -- 2006 and
                  2005
              F
                -
                36Average
                  Balance Sheet and Rate/Volume Analysis -- 2005 and
                  2004
              F
                -
                37


F
            - 1
 The
            Savannah Bancorp, Inc. - 2006 Annual Report


**Report
      of Independent Registered Public Accounting Firm**











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. and its subsidiaries as of December 31, 2006 and 2005, and the related
      consolidated statements of income, changes in shareholders’ equity and cash
      flows for each of the three years in the period ended December 31, 2006. These
      consolidated financial statements are the responsibility of The Savannah
      Bancorp, Inc.’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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, 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 provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of The Savannah
      Bancorp, Inc. and its subsidiaries as of December 31, 2006 and 2005, and the
      results of its operations and its cash flows for each of the three years in
      the
      period ended December 31, 2006 in conformity with accounting principles
      generally accepted in the United States of America.





We
      have
      also audited in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      controls over financial reporting as of December 31, 2006, based on criteria
      established in Internal Control Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission and our report dated March
      8, 2007 expressed an unqualified opinion thereon.








/s/
      BDO
      Seidman, LLP


Atlanta,
      Georgia


March
      8,
      2007




F
            - 2
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
  **The
      Savannah Bancorp, Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**


($
      in
      thousands, except share data)





**December
                31,****2006**
            
            2005**Assets**Cash
                and due from banks
            **$
                18,540**
            
            $
                14,736Federal
                funds sold
            **18,363**
            
            11,847Interest-bearing
                deposits in banks
            **10,394**
            
            5,885Cash
                and cash equivalents
            **47,297**
            
            32,468Securities
                available for sale, at fair value (amortizedcost
                of $54,163 in 2006 and $44,972 in 2005)
            **53,917**
            
            44,438Loans
                held for sale
            **914**
            
            10,473Loans,
                net of allowance for credit losses of $8,954
              in
                2006 and $7,813 in 2005
            **711,964**
            
            605,854Premises
                and equipment, net
            **6,365**
            
            5,020Other
                real estate owned
            **545**
            
            -Bank-owned
                life insurance
            **5,760**
            
            5,551Other
                assets
            **16,752**
            
            14,097**Total
                assets**
            **$
                843,514**
            
            $
                717,901**Liabilities**Deposits:Noninterest-bearing
            **$
                101,156**
            
            $
                93,082Interest-bearing
                demand
            **116,493**
            
            93,568Savings
            **18,615**
            
            19,319Money
                market
            **147,279**
            
            118,413Time
                deposits
            **323,281**
            
            276,128Total
                deposits
            **706,824**
            
            600,510Short-term
                borrowings
            **40,687**
            
            19,902Federal
                Home Loan Bank advances - long-term
            **13,309**
            
            20,476Subordinated
                debt to nonconsolidated subsidiaries
            **10,310**
            
            10,310Other
                liabilities
            **5,810**
            
            8,160**Total
                liabilities**
            **776,940**
            
            659,358Commitments
                and contingencies (Notes 13 and 16)**Shareholders'
                equity**Common
                stock, par value $1 per share: authorized20,000,000
                shares; issued 5,781,381 and 4,591,339 sharesin
                2006 and 2005 respectively
            **5,781**
            
            4,591Preferred
                stock, par value $1 per share:authorized
                10,000,000 shares, none issued
            -
            
            -Additional
                paid-in capital
            **35,747**
            
            36,257Retained
                earnings
            **25,681**
            
            18,272Treasury
                stock, 318 and 267 sharesin
                2006 and 2005, respectively
            **(4)**
            
            (4)Accumulated
                other comprehensive loss, net
            **(631)**
            
            (573)**Total
                shareholders' equity**
            **66,574**
            
            58,543**Total
                liabilities and shareholders' equity**
            **$
                843,514**
            
            $
                717,901





The
      accompanying notes are an integral part of these consolidated financial
      statements.


F
          - 3
 The
          Savannah Bancorp, Inc. - 2006 Annual Report


**The
      Savannah Bancorp, Inc. and Subsidiaries**


**Consolidated
      Statements of Income**


($
      in
      thousands, except per
      share
      data)





**For
                the Years Ended**
              **December
                31,****2006**
            2005
            2004**Interest
                and dividend income**Loans,
                including fees
            **$
                51,541**
            $
                38,503
            $
                25,298Loans
                held for sale
            **558**
            1,335
            1,432Investment
                securities:Taxable
            **1,912**
            1,325
            1,306Tax-exempt
            **123**
            218
            282Dividends
            **205**
            128
            87Deposits
                with banks
            **293**
            473
            201Federal
                funds sold
            **557**
            376
            101Total
                interest and dividend income
            **55,189**
            42,358
            28,707**Interest
                expense**Deposits
            **19,342**
            12,373
            6,462Short-term
                borrowings
            **1,802**
            675
            614Federal
                Home Loan Bank advances
            **778**
            1,009
            1,023Subordinated
                debt
            **815**
            622
            328Total
                interest expense
            **22,737**
            14,679
            8,427**Net
                interest income**
            **32,452**
            27,679
            20,280Provision
                for credit losses
            **1,585**
            1,500
            1,450Net
                interest income afterprovision
                for credit losses
            **30,867**
            26,179
            18,830**Noninterest
                income**Service
                charges on deposit accounts
            **1,526**
            1,622
            1,598Mortgage
                related income, net
            **886**
            1,292
            1,079Trust
                fees
            **658**
            501
            442Other
                operating income
            **1,233**
            979
            890Gains
                (losses) on sales of other real estate owned
            **-**
            (7)
            91Total
                noninterest income
            **4,303**
            4,387
            4,100**Noninterest
                expense**Salaries
                and employee benefits
            **10,852**
            9,530
            8,362Occupancy
                and equipment
            **2,920**
            2,199
            1,963Information
                technology
            **1,525**
            1,244
            1,049Other
                operating expense
            **4,656**
            3,673
            2,880Total
                noninterest expense
            **19,953**
            16,646
            14,254Income
                before income taxes
            **15,217**
            13,920
            8,676Income
                tax expense
            **5,215**
            4,880
            2,940**Net
                income**
            **$
                10,002**
            $
                9,040
            $
                5,736**Net
                income per share: (a)**Basic
            **$
                1.73**
            $
                1.68
            $
                1.12Diluted
            **$
                1.70**
            $
                1.63
            $
                1.09


(a)
      Per
      share amounts have been restated to reflect the effect of a 5-for-4 stock split
      in December 2006.


The
      accompanying notes are an integral part of these consolidated financial
      statements.


F
          - 4
 The
          Savannah Bancorp, Inc. - 2006 Annual Report


**The
      Savannah Bancorp, Inc. and Subsidiaries**


**Consolidated
      Statements of Changes in Shareholders' Equity**


**For
      the Years End** **ed
      December 31, 2006, 2005 and 2004**


( $
      in
      thousands, except share data)





**December
                31,****2006**
            2005
            2004**Common
                shares issued**Shares,
                beginning of year
            **4,591,339**
            4,112,448
            3,290,223Common
                stock issued
            **-**
            397,273
            -Stock
                split / dividend
            **1,155,564**
            -
            822,225Exercise
                of options
            **34,478**
            81,618
            -Shares,
                end of year
            **5,781,381**
            4,591,339
            4,112,448**Treasury
                shares owned**Shares,
                beginning of year
            **267**
            282
            8,246Stock
                split / dividend or issuance
            **63**
            (15)
            36Stock
                options exercised
            (**12)**
            -
            (8,000)Shares,
                end of year
            **318**
            267
            282**Common
                stock**Balance,
                beginning of year
            **$
                4,591**
            $
                4,112
            $
                3,290Common
                stock issued
            **-**
            397
            -Stock
                split / dividend
            **1,156**
            -
            822Stock
                options exercised
            **34**
            82
            -Balance,
                end of year
            **5,781**
            4,591
            4,112**Additional
                paid-in capital**Balance,
                beginning of year
            **36,257**
            24,232
            25,109Common
                stock issued, net of issuance costs
            **-**
            11,191
            -Stock
                split / dividend
            **(1,156)**
            -
            (822)Stock-based
                compensation expense
            **299**
            -
            -Stock
                options exercised
            **272**
            494
            (55)Tax-benefit
                of non-qualified option exercises
            **75**
            340
            -Balance,
                end of year
            **35,747**
            36,257
            24,232**Retained
                earnings**Balance,
                beginning of year
            **18,272**
            11,539
            7,965Net
                income
            **10,002**
            9,040
            5,736Dividends
                paid
            **(2,593)**
            (2,307)
            (2,162)Balance,
                end of year
            **25,681**
            18,272
            11,539**Treasury
                stock**Balance,
                beginning of year
            **(4)**
            (4)
            (147)Stock
                options exercised
            -
            -
            143Balance,
                end of year
            **(4)**
            (4)
            (4)**Accumulated
                other comprehensive income (loss), net**Balance,
                beginning of year
            **(573)**
            192
            554Change
                in net unrealized gains (losses) on securitiesavailable
                for sale, net of tax
            **178**
            (522)
            (362)Net
                change in fair value of derivativeinstruments,
                net of tax
            **(236)**
            (243)
            -Balance,
                end of year
            **(631)**
            (573)
            192**Total
                shareholders' equity**
            **$
                66,574**
            $
                58,543
            $
                40,071




The
      accompanying notes are an integral part of these consolidated financial
      statements. See Note 1 for other comprehensive income disclosures.


F
          - 5
 The
          Savannah Bancorp, Inc. - 2006 Annual Report


**The
      Savannah Bancorp, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**For
                the Years Ended December 31,**($
                in thousands)
            **2006**
            2005
            2004**Operating
                activities**Net
                income
            **$
                10,002**
            $
                9,040
            $
                5,736Adjustments
                to reconcile net income to cashprovided
                by operating activities:Provision
                for credit losses
            **1,585**
            1,500
            1,450Loans
                originated for sale
            **(34,195)**
            (104,888)
            (90,730)Proceeds
                from sale of loans originated for sale
            **44,067**
            111,824
            75,291Net
                amortization of securities
            **29**
            102
            171Depreciation
                and amortization
            **976**
            809
            743Non
                cash stock-based compensation expense
            **299**
            -
            -Decrease
                in deferred income taxes, net
            **(728)**
            (860)
            (513)Gain
                on sale of loans, net
            **(313)**
            (760)
            (639)Loss
                (gain) on sale of foreclosed assets
            **-**
            7
            (91)Equity
                in net income of nonconsolidated subsidiary
            **(109)**
            -
            -Increase
                in CSV of bank-owned life insurance policies
            **(209)**
            (202)
            (226)Change
                in other assets and other liabilities, net
            **(5,281)**
            1,995
            (36)Net
                cash provided by (used in) operating activities
            **16,123**
            18,567
            (8,844)**Investing
                activities**Activity
                in available for sale securitiesPurchases
            **(20,380)**
            (19,396)
            (29,707)Maturities
                and calls
            **11,161**
            15,518
            26,537Loan
                originations and principal collections, net
            **(107,305)**
            (104,053)
            (113,265)Purchase
                of other real estate owned
            **(2,735)**
            -
            -Proceeds
                from sale of foreclosed assets
            **1,800**
            453
            798Investment
                in low income housing tax credits
            **-**
            (339)
            (1,157)Distribution
                from (investment in) nonconsolidated subsidiary
            **1,300**
            (2,709)
            -Additions
                to premises and equipment
            **(2,376)**
            (1,044)
            (711)Net
                cash used in investing activities
            **(118,535)**
            (111,570)
            (117,505)**Financing
                activities**Net
                increase in noninterest-bearing deposits
            **8,074**
            9,292
            6,617Net
                increase in interest-bearing deposits
            **98,240**
            85,098
            110,357Net
                increase (decrease) in short-term borrowings
              to
                repurchase and federal funds purchased
            **20,785**
            (15,167)
            12,820Net
                (decrease) increase in FHLB advances
            **(7,167)**
            (361)
            428Proceeds
                from issuance of subordinated debt
            -
            -
            4,124Payment
                on note payable
            **(479)**
            (484)
            -Dividends
                paid
            **(2,593)**
            (2,307)
            (2,162)Issuance
                of common stock
            **-**
            11,588
            -Exercise
                of options
            **381**
            916
            88Net
                cash provided by financing activities
            **117,241**
            88,575
            132,272**Increase
                (decrease) in cash and cash equivalents**
            **14,829**
            (4,428)
            5,923Cash
                and cash equivalents, beginning of year
            **32,468**
            36,896
            30,973Cash
                and cash equivalents, end of year
            **$
                47,297**
            $
                32,468
            $
                36,896




**Supplemental
                disclosures of cash flow information**Cash
                paid during the year for:Interest
                on deposits and other borrowings
            **$
                22,115**
            $
                14,199
            $
                8,073Income
                taxes
            **6,038**
            4,559
            2,858Non
                cash investing activity:Increase
                (decrease) in net unrealized gain/loss on investmentsecurities
                available for sale, net of tax
            **178**
            (522)
            (362)Increase
                in net unrealized loss on derivatives, net of tax
            **(236)**
            (243)
            -


The
      accompanying notes are an integral part of these consolidated financial
      statements.


F
          -
          6
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes to
      Consolidated Financial Statements


**Note
      1 - Organization and Summary of Significant Accounting
      Policies**





***Principles
      of Consolidation*** **** -
      The
      consolidated financial statements include the accounts of The Savannah Bancorp,
      Inc. (“the Company”) and its wholly-owned subsidiaries, The Savannah Bank, N.A.
      (“Savannah”), Bryan Bank & Trust (“Bryan”) and Harbourside Community Bank
      (“Harbourside”) or together referred to as the “Subsidiary Banks”. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. Certain prior year balances have been reclassified to conform
      to
      the current year presentation.





***Nature
      of Operations*** - The
      Company is a three-bank holding company that offers a full range of lending,
      deposit, residential mortgage origination and fiduciary trust products. In
      the
      fourth quarter 2003, Savannah opened Harbourside Mortgage Company, a mortgage
      loan production office on Hilton Head Island, South Carolina. In March 2006,
      Harbourside assumed the operations of Harbourside Mortgage Company and commenced
      operations in its new leased headquarters facility. 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
      and Hilton Head Island, South Carolina and
      southern Beaufort County. In 2005, the Company formed a nonconsolidated
      subsidiary, SAVB Properties, LLC, which purchased a 50 percent interest in
      two
      real estate partnerships that own the Company’s headquarters building and the
      adjacent parking lot. This investment is accounted for using the equity method
      of accounting.





***Segments*** - The
      Company has two segments, commercial banking and mortgage banking. In 2006,
      the
      Company discontinued the sale of loans on a servicing retained basis and reduced
      the related mortgage banking activities. Mortgage banking does not meet the
      criteria for segment reporting.





***Use
      of Estimates*** *-* In
      preparing consolidated financial statements in conformity with generally
      accepted accounting principles, management is required to make estimates and
      assumptions that affect the reported amounts of assets and liabilities as of
      the
      date of the balance sheet and reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those estimates. Material
      estimates that are particularly susceptible to significant change in the near
      term relate to the determination of the allowance for credit losses and the
      evaluation of the realization of deferred tax assets.





***Cash
      and Cash Equivalents*** - For
      purposes of the consolidated statements of cash flows, cash and cash equivalents
      include cash and balances due from banks, federal funds sold and
      interest-bearing deposits in banks, all of which mature within ninety
      days.





***Investment
      Securities Available for Sale*** ** - Management
      has classified the entire investment securities 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. Purchase premiums and discounts
      are
      recognized in interest income using the interest method over the life of the
      securities. Gains and losses on the sale of securities are recorded on the
      trade
      date and are determined using the specific identification method.





***Loans
      Held For Sale*** - Loans
      originated and intended for sale in the secondary market are carried at the
      lower of cost or estimated fair value in the aggregate. Net unrealized losses,
      if any, are recognized through a valuation allowance by charges to income.
      In
      estimating fair value, consideration is given to commitments from investors
      and
      prevailing market prices. Loan origination fees applicable to mortgage loans
      held for sale, net of certain direct origination costs, are deferred and
      recognized as an adjustment to the related gain or loss on subsequent sale
      of
      the loan.





***Loans
      and Loan Fees*** - The
      Company’s Subsidiary Banks underwrite mortgage, commercial and consumer loans to
      customers. A substantial portion of the loan portfolio consists of real estate
      secured loans throughout the coastal Georgia and South Carolina areas. Loans
      that management has the intent and ability to hold for the foreseeable future
      or
      until maturity or pay-off are generally reported at their outstanding unpaid
      principal balances adjusted for charge-offs, the allowance for credit losses,
      and any deferred fees or origination costs. Interest income is accrued on the
      unpaid principal balance. Loan origination fees, net of certain direct
      origination costs, are deferred and recognized as an adjustment of the related
      loan yield on a straight-line basis, which approximates the interest
      method.




F
          - 7
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes to
        Consolidated Financial Statements


**Note
      1 - Organization and Summary of Significant Accounting Policies
      (continued)**





The
      accrual of interest on mortgage and commercial loans is discontinued at the
      time
      the loan is 90 days past due unless the credit is well-secured and in process
      of
      collection. Revolving credit loans and other personal loans are typically
      charged-off when payments are 120 days past due. Past due status is based on
      the
      contractual terms of the loan. Loans are placed on nonaccrual status or
      charged-off at an earlier date if collection of principal or interest in full
      becomes doubtful.





All
      interest accrued in the current year but not collected for loans that are placed
      on nonaccrual status or charged-off is reversed against interest income. The
      interest on these loans is accounted for on the cash-basis or cost-recovery
      method until qualifying for return to accrual. Loans are returned to accrual
      status when all the principal and interest amounts contractually due are brought
      current and future payments are reasonably assured.





***Allowance
      for Credit Losses*** **** -
      The
      allowance for credit losses is based on estimates and maintained at a level
      considered adequate to provide for potential losses inherent in the portfolio
      based on the current environment. The adequacy of the allowance is based on
      management's continuing evaluation of the loan portfolio considering current
      economic conditions, underlying collateral value securing loans and other
      factors that deserve recognition in estimating credit losses. Actual future
      losses may be different from estimates due to unforeseen events. Loans that
      are
      determined to be uncollectible are charged-off against the
      allowance.





The
      adequacy of the allowance for credit losses is evaluated on a regular basis
      by
      management and reported quarterly to the Audit Committee of the Board of
      Directors (“Board”). The evaluation is based upon management’s periodic review
      of the collectibility of specific loans, adverse situations that may affect
      specific borrowers’ ability to repay, the estimated value of any underlying
      collateral, the composition and size of the loan portfolio and prevailing
      economic conditions. This evaluation is inherently subjective as it requires
      estimates that are susceptible to significant revision as more information
      becomes available.





The
      allowance consists of specific and general reserve components. The specific
      component relates to loans that are classified as doubtful or substandard.
      For
      such loans that are also classified as impaired, an allowance is established
      when the discounted cash flows (or value of related collateral or observable
      market price) of the impaired loan is lower than the carrying value of that
      loan. The general component covers non-classified loans and is based on
      historical loss experience adjusted for qualitative factors.





A
      loan is
      considered impaired when, based on current information and events, 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. Factors considered by management in determining impairment include
      payment status, collateral value, and the probability of collecting scheduled
      principal and interest payments when due. Loans that experience insignificant
      payment delays and payment shortfalls generally are not classified as impaired.
      Management determines the significance of payment delays and payment shortfalls
      on a case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay, the
      reasons for the delay, the borrower’s prior payment record, and the amount of
      the shortfall in relation to the principal and interest owed. Impairment is
      measured on a loan by loan basis by either 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.





***Premises
      and Equipment*** -
      Buildings, furniture, banking equipment and leasehold improvements are stated
      at
      cost less accumulated depreciation and amortization. Depreciation and
      amortization are 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.





***Other
      Real Estate Owned*** - Assets
      acquired through loan foreclosure are held for sale and are initially recorded
      at fair value at the date of foreclosure, establishing a new cost basis.
      Subsequent to foreclosure, valuations are periodically performed by management
      and the assets are carried at the lower of carrying amount or fair value less
      costs to sell. Revenue and expenses from operations and changes in the valuation
      allowance are included in other operating expense.




F
            - 8
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes to
          Consolidated Financial Statements


**Note
      1 - Organization and Summary of Significant Accounting Policies
      (continued)**





***Bank-Owned
      Life Insurance*** -
      Bank-owned life insurance policies are recorded at the net realizable value
      of
      the underlying insurance contracts. The change in contract value during the
      year
      represents the contract earnings during the period less the mortality costs
      and
      administrative costs of the underlying life insurance contracts. The increase
      in
      cash surrender value from bank-owned life insurance contracts is included as
      a
      component of other operating income and the mortality costs and administrative
      fees are recorded as noninterest expense.





***Income
      Taxes*** -
      Deferred income tax assets and liabilities are determined using the liability
      (or balance sheet) method. Deferred tax assets and liabilities arise from
      temporary differences between the carrying amounts of assets and liabilities
      for
      financial reporting and income tax 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 income tax expense.





***Earnings
      Per Share*** - Basic
      earnings per share represent net income divided by the weighted average number
      of common shares outstanding during the period. Diluted earnings per share
      reflect additional common shares that would have been outstanding if dilutive
      potential common shares had been issued, as well as any adjustment to income
      that would result from the assumed issuance. Potential common shares that may
      be
      issued by the Company relate solely to outstanding stock options, and are
      determined using the treasury stock method. Earnings per common share have
      been
      computed based on the following:





Year
                Ended December 31,
            2006
            2005
            2004Average
                number of common shares outstanding - basic
            5,765,000
            5,396,000
            5,136,000Effect
                of dilutive options
            111,000
            135,000
            125,000Average
                number of common shares outstanding - diluted
            5,876,000
            5,531,000
            5,261,000





Stock
      option shares in the amount of 10,716 for the year ended 2006 were excluded
      from
      the diluted earnings per share calculation due to their anti-dilutive effect.
      None were excluded in 2005 or 2004. All share amounts have been restated to
      reflect the effect of a 5-for-4 stock split in December 2006.





***Derivative
      Instruments and Hedging Activities*** -
      Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for
      Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended and
      interpreted, establishes accounting and reporting standards for derivatives
      and
      hedging activities. As required by SFAS 133, the Company records all derivatives
      at fair value on the balance sheet as either other assets or other liabilities.
      The Company uses derivative instruments including interest rate swaps, floors
      and collars as part of its overall asset and liability duration and interest
      rate risk management strategy. These instruments enable the Company to manage
      desired asset and liability duration and to reduce exposure to interest rate
      movements.





***Other
      Comprehensive Income (Loss)*** -
      Comprehensive income (loss) is the change in the Company’s equity during the
      period from transactions and other events and circumstances from non-owner
      sources.





($
                in thousands)
            2006
            2005
            2004Net
                income
            $
                10,002
            $
                9,040
            $
                5,736Change
                in net unrealized gains (losses) onsecurities
                available for sale, net of tax
            178
            (522)
            (362)Net
                change in fair value of derivativeinstruments,
                net of tax
            (236)
            (243)
            -Other
                comprehensive income
            $
                9,944
            $
                8,275
            $
                5,374


F
          - 9
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes to
        Consolidated Financial Statements


**Note
      1 - Organization and Summary of Significant Accounting Policies
      (continued)**





***Accounting
      for Stock-Based Compensation*** **-** On
      January 1, 2006, the Company adopted the revised SFAS No. 123,
“Share-Based Payment,” (“SFAS 123R”) using the modified prospective method. In
      accordance with SFAS 123R, the Company measures the cost of employee services
      received in exchange for an award of equity instruments based on the fair value
      of the award on the grant date. That cost is recognized over the period during
      which an employee is required to provide service in exchange for the award
      - the
      requisite service period. No compensation cost is recognized for equity
      instruments for which employees do not render the requisite service. The Company
      determines the fair value of employee stock options using the Black-Scholes
      option pricing model.





The
      1995
      Incentive Stock Option Plan (“1995 Plan”) authorized the Company to issue both
      incentive stock options and non-qualified stock options to certain key officers
      for the purchase of shares at the fair market value of the stock at the date
      of
      grant. In 2000, the shareholders authorized additional option shares under
      the
      1995 Plan. All authorized shares have been awarded from the 1995
      Plan.





In
      2005,
      shareholders approved the 2005 Omnibus Stock Ownership and Long-Term Incentive
      Plan (“2005 Omnibus Plan”) and authorized 250,000 option or restricted shares to
      be available for issuance. The total number of remaining options or awards
      available for issuance at December 31, 2006 under the 2005 Omnibus Plan was
      193,830 shares of common stock. Options granted under both plans have a term
      of
      ten years and generally become fully vested by the end of the fifth year.
      Performance based options granted to directors vest over four quarters from
      the
      date of grant.





In
      accordance with the modified prospective method, the Company’s consolidated
      financial statements for prior periods have not been restated to reflect, and
      do
      not include, the impact of SFAS 123R. The following table summarizes
      compensation costs related to the Company’s stock-based compensation plans for
      the year ended December 31:





($
                in thousands)
            2006Salaries
                and employee benefits
            $
                200Directors'
                stock-based compensation
            99Pre-tax
                stock-based compensation expense
            299Income
                tax benefit
            (108)Total
                stock-based compensation expense, net of tax
            $
                191





In
      the
      third quarter of 2006, the Company realized $48,000 in income tax benefit
      associated with certain stock option exercises. Stock-based compensation
      expense, net of tax, for 2005 and 2004 was $151,000 and $89,000, respectively.
      Net income per diluted share would have been approximately $0.03 less for 2005
      and $0.02 less for 2004.





The
      Company recognizes stock-based compensation expense using the graded vesting
      attribution method. The remaining unrecognized compensation cost related to
      unvested awards at December 31, 2006 is approximately $551,000 and the
      weighted-average period of time over which this cost will be recognized is
      approximately 3.2 years. This amount does not include the cost of any additional
      options that may be granted in future periods nor any reduction in cost for
      potential forfeitures.




F
          - 10
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes to
        Consolidated Financial Statements


**Note
      1 - Organization and Summary of Significant Accounting Policies
      (continued)**





The
      Company implemented an improved Black-Scholes methodology for calculating
      stock-based compensation in 2006. Certain prior year assumptions and amounts
      have been restated to conform to the current year methodology. 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. The values
      have been restated to reflect the effect of a 5-for-4 stock split in December
      2006.





2006
            2005
            2004Weighted
                average fair value of options granted
            $
                8.89
            $
                6.06
            $
                5.81Expected
                volatility
            27.7%
            29.0%
            32.0%Dividend
                yield
            1.53%
            1.94%
            2.30%Risk-free
                interest rate
            4.90%
            3.82%
            3.39%Expected
                life
            6.0
                years
            6.0
                years
            7.0
                years







***Recent
      Accounting Pronouncements***





In
      Ju ne 2006,
      the Financial Accounting Standards Board (“FASB”) issued Interpretation 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
      uncertainty in income taxes by establishing minimum standards for the
      recognition and measurement of income tax positions taken, or expected to be
      taken, in an income tax return. FIN 48 represents a significant change in
      accounting for income taxes, and for disclosures related to income taxes, and
      becomes effective for the Company in 2007. The Company is currently
      evaluating FIN 48 but believes the adoption of this Interpretation will have
      no
      material impact on its consolidated financial position or results of
      operations.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among
      registrants, SAB 108 expresses SEC staff views regarding the process by which
      misstatements in financial statements are evaluated for purposes of determining
      whether financial statement restatement is necessary. SAB 108 is effective
      for
      fiscal years ending after November 15, 2006, and early application is
      encouraged. The Company does not believe SAB 108 will have a material impact
      on
      the consolidated financial statements.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” ** (“SFAS
      159”) that provides companies with an option to report selected financial assets
      and liabilities at fair value.  SFAS 159’s objective is to reduce both
      complexity in accounting for financial instruments and the volatility in
      earnings caused by measuring related assets and liabilities differently. SFAS
      159 also establishes presentation and disclosure requirements designed to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities.  SFAS 159 does not
      eliminate disclosure requirements included in other accounting standards,
      including requirements for disclosures about fair value measurements included
      in
      FASB Statements No. 157, “Fair Value Measurements,” and No. 107, “Disclosures
      about Fair Value of Financial Instruments.” SFAS 159 is effective as of the
      beginning of an entity’s first fiscal year that begins after November 15,
      2007.  The Company will evaluate the impact of this optional
      Statement.





Various
      proposals have been issued by the SEC related to changes in filing requirements,
      accountability of executive management and directors regarding accounting
      policies, internal controls and audit issues. The Company does not believe
      the eventual
      outcome of these proposals will have a material impact on the consolidated
      financial statements.




F
          - 11
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      2 - Restrictions on Cash and Demand Balances Due from Banks and Interest-Bearing
      Bank Balances**




The
      Subsidiary Banks are required by the Federal Reserve Bank to maintain minimum
      cash reserves based upon reserve requirements calculated on their deposit
      balances. Cash reserves of $1,841,000 and $1,912,000 were required as of
      December 31, 2006 and 2005, respectively. The Company has pledged
      interest-bearing cash balances at the Federal Home Loan Bank of Atlanta (“FHLB”)
      in lieu of investment securities to secure public fund deposits and securities
      sold under repurchase agreements. Pledged cash balances were $7,500,000 and
      $1,200,000 at December 31, 2006 and 2005, respectively.








**Note
      3 - Securities Available for Sale**





The
      aggregate amortized cost and fair value of securities available for sale as
      of
      December 31, 2006 and 2005 were as follows:





2006($
                in thousands)
            Amortized
            Unrealized
            Unrealized
            FairCost
            Gains
            Losses
            ValueInvestment
                securities:U.
                S. government agencies
            $
                33,643
            $
                73
            $
                (193)
            $33,523Mortgage-backed
                securities
            14,681
            10
            (188)
            14,503State
                and municipal
            2,104
            52
            -
            2,156Other
                taxable securities
            3,735
            -
            -
            3,735Total
                investment securities
            $
                54,163
            $
                135
            $
                (381)
            $53,9172005($
                in thousands)
            Amortized
            Unrealized
            Unrealized
            FairCost
            Gains
            Losses
            ValueInvestment
                securities:U.
                S. government agencies
            $
                28,170
            $
                3
            $
                (380)
            $27,793Mortgage-backed
                securities
            10,137
            8
            (256)
            9,889State
                and municipal
            3,769
            91
            -
            3,860Other
                taxable securities
            2,896
            -
            -
            2,896Total
                investment securities
            $
                44,972
            $
                102
            $
                (636)
            $44,438





The
      distribution of securities by maturity or expected call date at December 31,
      2006 is shown below:




($
                in thousands)
            Amortized
              Cost
            Fair
                ValueSecurities
                available for sale:Due
                in one year or less
            $
                16,298
            $
                16,224Due
                after one year through five years
            33,913
            33,759Due
                after five years through ten years
            3,198
            3,183Due
                after ten years
            754
            751Total
                investment securities
            $
                54,163
            $
                53,917





At
      December 31, 2006 and 2005, investment securities with a carrying value of
      $44,190,000 and $36,292,000, respectively, were pledged as collateral to secure
      public funds, securities sold under repurchase agreements and FHLB
      borrowings.


F
          - 12
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**N** **ote
      4 - Loans**





The
      composition of the loan portfolio at December 31, 2006 and 2005 is presented
      below:





($
                in thousands)
            
            Percent
            
            Percent2006
            of
                Total
            2005
            of
                TotalCommercial
            $
                57,737
            8.0%
            $
                45,934
            7.4%Real
                estate - construction and development
            166,172
            23.1
            144,732
            23.6Real
                estate - mortgage
            480,381
            66.6
            408,845
            66.7Installment
                and other consumer
            16,628
            2.3
            14,156
            2.3Gross
                loans
            720,918
            100.0%
            613,667
            100.0%Allowance
                for credit losses
            (8,954)
            
            (7,813)Net
                loans
            $
                711,964
            
            $
                605,854





Nonperforming
      loans included nonaccruing loans and loans which are contractually past due
      90
      days or more of $2,231,000 and $1,357,000 at December 31, 2006 and 2005,
      respectively. Nonaccruing loans of $825,000 and $1,313,000 at December 31,
      2006
      and 2005, respectively, were also considered impaired. Interest income of
      $23,000 was recognized on nonaccrual loans in 2006.





Changes
      in the allowance for credit losses are summarized as follows:





($
                in thousands)
            2006
            2005
            2004Balance,
                beginning of year
            $
                7,813
            $
                6,389
            $
                5,067Provision
                forcredit
                losses
            1,585
            1,500
            1,450Charge-offs
            (506)
            (152)
            (256)Recoveries
            62
            76
            128Balance,
                end of year
            $
                8,954
            $
                7,813
            $
                6,389





The
      Company has granted loans to certain directors and executive officers of the
      Company and to their related interests. The aggregate amounts of loans were
      $16,332,000 and $18,910,000 at December 31, 2006 and 2005, respectively. During
      2006, $14,005,000 of new loans were made and repayments of $16,583,000 were
      received. Unfunded commitments of credit available to related parties aggregated
      $7,554,000 and $8,840,000 at December 31, 2006 and 2005, 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
      5 - Premises and Equipment**





Premises
      and equipment at December 31, 2006 and 2005 are summarized as
      follows:








($
                in thousands)
            Depreciable
                Lives
            2006
            2005Land
            -
            $
                698
            $
                698Buildings
                and improvements
            39
                - 50
            2,665
            2,548Furniture
                and banking equipment
            3
                -
                15
            6,571
            5,130Leasehold
                improvements
            10
                - 39
            2,069
            1,423Total
                cost
            
            12,003
            9,799Less
                accumulated depreciation and
              amortization
            
            5,638
            4,779Premises
                and equipment, net
            
            $
                6,365
            $
                5,020




F
            - 13
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
          to Consolidated Financial Statements
  **Note
      6 - Deposits**





Total
      time deposits mature as follows: 2007 - $269,121,000; 2008 - $39,919,000; 2009
      -
      $3,469,000; 2010 - $6,006,000; and 2011 and thereafter -
      $4,766,000.





The
      following table indicates the amount of the Company's time deposits of $100,000
      or more at December 31, 2006 by time remaining until maturity.





Maturity
                Period
            AmountThree
                months or less
            $
                35,606,000Over
                three through six months
            34,689,000Over
                six through twelve months
            63,560,000Over
                twelve months
            30,365,000Total
            $
                164,220,000





**Note
      7 - Short-Term Borrowings**





Short-term
      borrowings include the
      following:





($
                in thousands)
            Federal
              Funds
              Purchased
            Securities
              Sold
                Under
              Repurchase
                Agreements
            FHLB
              Short-Term
              Advances
            Notes
              Payable2006Balance
                at December 31
            $
                1,003
            $
                15,684
            $
                24,000
            $
                -Maximum
                indebtedness at any month end
            2,502
            19,073
            40,000
            2,100Daily
                average indebtedness outstanding
            1,616
            15,724
            17,977
            858Average
                rate paid for the year
            5.02%
            4.48%
            5.28%
            7.69%Average
                rate paid on period-end borrowings
            5.08%
            4.75%
            5.36%
            N/A2005Balance
                at December 31
            $
                884
            $
                13,018
            $
                4,000
            $
                2,000Maximum
                indebtedness at any month end
            6,056
            16,980
            30,000
            2,000Daily
                average indebtedness outstanding
            1,593
            15,462
            6,800
            421Average
                rate paid for the year
            3.20%
            2.60%
            2.83%
            6.99%Average
                rate paid on period-end borrowings
            4.05%
            3.75%
            4.44%
            7.25%





Short-term
      borrowings at December 31, 2006 and 2005 consist of federal funds purchased,
      securities sold under agreements to repurchase, FHLB short-term advances and
      notes payable. As of December 31, 2006 and 2005, the Company had short-term
      borrowings totaling $40,687,000 and $19,902,000, respectively. The average
      interest rates were 4.98 percent and 2.78 percent during the years ended 2006
      and 2005, respectively. The interest rates on short-term borrowings ranged
      from
      4.75 percent to 5.36 percent at December 31, 2006 and from 3.75 percent to
      7.25
      percent at December 31, 2005. **** The
      maximum amount outstanding at the end of any month was $56,683,000 and
      $45,823,000 during 2006 and 2005, respectively. At
      December 31, 2006 federal funds borrowing **** arrangements
      aggregating $----40.8 million were available to the Subsidiary Banks from
      correspondent banking institutions. There are no commitment fees and no
      requirements for compensating balances. 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. Savannah is a member
      and
      shareholder of the Federal Reserve Bank of Atlanta (“FRB”) and has access to
      borrowings at the FRB discount window. Bryan has also been approved to access
      the FRB discount window.





The
      Company has a $5,000,000 line of credit through a correspondent bank, of which
      none was advanced at December 31, 2006. The primary purpose of the line is
      to
      provide access to funds that can be used for short-term corporate needs. The
      borrowing facility is available through June 6, 2007 at which time any
      outstanding indebtedness is due and payable in full. Advances




F
          - 14
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      7 - Short-Term Borrowings (continued)**





on
      the
      line are subject to the Company certifying compliance with covenants and
      conditions specified in the agreement. The covenants include customary
      performance items and a negative pledge agreement on the stock of Savannah.
      The
      Company may not pledge the stock of Savannah for any other indebtedness or
      other
      purpose without the express written consent of the lender.








**Note
      8 - Federal Home Loan Bank Advances - Long-Term**





*Convertible
      Advances* - The
      Company has convertible fixed rate advances from the FHLB of $11,000,000,
      including advances of $1,000,000 with an interest rate of 6.39 percent maturing
      in August 2009 and $10,000,000 with an interest rate of 4.82 percent maturing
      in
      December 2010. The advances are convertible each quarter at the option of the
      FHLB to advances with rates equal to the current three-month LIBOR.





*Long-term
      Advances* -
      Long-term advances from the FHLB totaled $2,309 ,000 and
      $2,476 ,000 at
      December 31, 2006 and 2005, respectively. The weighted-average interest rates
      on
      the long-term advances were 4.64 and 4.87 percent at December 31, 2006 and
      2005,
      respectively. Aggregate maturities are $340 ,000 in 2007,
      $1,591 ,000 in 2008,
      $217 ,000 in 2009
      and $161,000 in 2010 and thereafter. Interest is generally payable monthly
      and
      scheduled principal reductions are made quarterly, semi-annually or at maturity.
      The long-term advances include prepayment penalties for each
      advance.





*FHLB
      Advance Borrowing Capacity -* The
      Subsidiary Banks are shareholders of the FHLB and have access to secured
      borrowings from the FHLB under Blanket Floating Lien Agreements. Under these
      agreements, Savannah and Bryan have credit lines up to 80 percent of the FHLB
      qualifying collateral value of their 1-4 family first mortgage loans and up
      to
      50 percent of the FHLB qualifying collateral value of their home equity lines
      of
      credit and second mortgage loans, with a limit of 20 percent of assets for
      Savannah and 16 percent of assets for Bryan. Harbourside has an approved
      borrowing capacity of $2.2 million at December 31, 2006. In aggregate, the
      Subsidiary Banks had secured borrowing capacity of approximately $106.8 million
      of which $37.3 million was advanced at December 31, 2006. These credit
      arrangements serve as a core funding source as well as liquidity backup for
      the
      Subsidiary Banks. Additional advances are subject to review and approval by
      the
      FHLB.








**Note
      9 - Subordinated Debt to Nonconsolidated Subsidiaries**





During
      the third quarters 2003 and 2004, the Company formed SAVB Capital Trust I and
      SAVB Capital Trust II (the “Trusts”), respectively, nonconsolidated subsidiaries
      whose sole purpose was to issue $6,000,000 and $4,000,000, respectively, in
      Trust Preferred Securities through investment pools sponsored by two national
      brokerage firms. The Trust Preferred Securities have maturities of 30 years
      and
      are redeemable at the Company’s option on any quarterly interest payment date
      after five years. There are certain events (as defined in the Trust agreements)
      in which the securities may be redeemed within the first five years at the
      Company’s option. At December 31, 2006, the interest rates on the securities
      were 8.22 and 7.59 percent, respectively, with quarterly resets at the
      three-month LIBOR plus 2.85 and 2.20 percent, respectively. The Company’s
      liabilities to the nonconsolidated Trusts are recorded as liabilities of $6.186
      million and $4.124 million and investments of $186,000 and $124,000,
      respectively, in the consolidated balance sheet. Subject to certain limitations,
      the securities qualify as Tier 1 capital for regulatory capital purposes under
      Federal Reserve Bank regulations.




F
          - 15
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      10 - Income Taxes**





Income
      tax expense is composed of the following for each of the years ended December
      31:





($
                in thousands)
            2006
            2005
            2004Current
                federal
            $
                5,537
            $
                5,227
            $
                3,171Current
                state
            411
            513
            282Total
                current
            5,948
            5,740
            3,453Deferred
                federal
            (629)
            (755)
            (464)Deferred
                state
            (104)
            (105)
            (49)Total
                deferred
            (733)
            (860)
            (513)Income
                tax expense
            $
                5,215
            $
                4,880
            $
                2,940





Investments
      in federal and state low-income housing tax credit partnerships yielded
      approximately $227,000 in reduced federal and state income tax expense in 2006,
      $226,000 in 2005 and $105,000 in 2004.





A
      reconciliation between income tax expense and the amounts computed by applying
      the U.S. federal tax rate of 34 percent to income before income taxes is as
      follows:


($
                in thousands)
            2006
            2005
            2004Tax
                provision at 34%
            $
                5,173
            $
                4,733
            $
                2,950State
                tax, net of federal tax benefit
            199
            226
            126Benefit
                of tax-exempt income,
                net
            (129)
            (157)
            (97)Other
            (28)
            78
            (39)Income
                tax expense
            $
                5,215
            $
                4,880
            $
                2,940





Deferred
      income tax assets and liabilities are comprised of the following at December
      31,
      200 6
      and
      2005:





($
                in thousands)
            2006
            2005Deferred
                tax assets:Allowance
                for credit losses
            $
                3,285
            $
                2,868Unrealized
                losses on securities
            93
            204Unamortized
                loan fees
            361
            430Unamortized
                non-compete costs
            39
            45Unrealized
                losses on derivatives
            293
            149Deferred
                compensation expense
            232
            142Stock-compensation
                expense
            60
            -Other
            165
            198Total
                deferred tax assets
            4,528
            4,036Deferred
                tax liabilities:Depreciation
            395
            471Deferred
                costs on loans and deposits
            101
            141Other
            79
            237Total
                deferred tax liabilities
            575
            849Net
                deferred tax assets
            $
                3,953
            $
                3,187





The
      net
      deferred tax assets are included in the consolidated balance sheets in other
      assets.


F
          - 16
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      11 - Stock Option Plans and Benefit Plan**





As
      discussed in Note 1, the Company has two stock option plans. All authorized
      shares have been awarded from the 1995 Plan. There are 193,830 remaining option
      shares authorized under the 2005 Omnibus Plan at December 31, 2006. The options
      granted in the chart below generally vest 20 percent each year over five years
      and are exercisable over ten years except for 18,250 option shares granted
      to
      directors in 2006 and 2005 which vest within one year and 8,310 restricted
      share
      grants which vest over ten years. Some of the executive officer option shares
      also include minimum performance triggers as a condition of
      vesting.





Changes
      in stock options outstanding for the three years ended December 31, 2006, 2005
      and 2004 are as follows. All share and per share amounts have been restated
      to
      reflect the effect of a 5-for-4 stock split in December 2006.





2006
            2005
            2004Shares
            Weighted
              Average
              Exercise
              Price
            Shares
            Weighted
              Average
              Exercise
              Price
            Shares
            Weighted
              Average
              Exercise
              PriceOutstanding
                at beginningof
                year
            304,046
            $
                14.49
            369,190
            $
                11.26
            327,003
            $
                10.00Granted
            10,716
            28.56
            36,878
            22.31
            54,687
            17.85Exercised
            (35,976)
            10.28
            (102,022)
            5.64
            (12,500)
            7.06Forfeited
            (7,556)
            15.99
            -
            -
            -
            -Outstanding
                at end of year
            271,230
            $
                15.58
            304,046
            $
                14.49
            369,190
            $
                11.26Exercisable
                at end of year
            182,254
            $
                14.12
            176,199
            $
                12.30
            232,052
            $
                8.64





Options
      outstanding at December 31, 2006 were as follows:





Outstanding
            ExercisableOutstandingCommon
                Options
            Remaining
                Contractual
              Number
            Weighted
              Average
              Life
            Weighted
              Average
              Price
            Number
            Weighted
              Average
              PriceRange
                of exercise prices$5.43
            8,895
            0.01
            $
                5.43
            8,895
            $
                5.43$9.98
                - $11.37
            52,957
            3.20
            10.33
            52,957
            10.33$12.63
                - $13.56
            64,088
            3.81
            13.22
            57,557
            13.24$15.76
                - $17.85
            97,656
            7.10
            16.93
            41,404
            16.55$22.20
                - $28.56
            47,634
            8.41
            23.72
            21,441
            24.78Total
                outstanding
            271,230
            5.56
            $
                15.58
            182,254
            $
                14.12





*Restricted
      Stock* - In
      2006, the Board granted 8,310 shares of restricted stock under the 2005 Omnibus
      Plan which awards certain officers common shares of the Company. The cost of
      these shares is being amortized against earnings using the vesting schedule
      over
      the ten year vesting period. Unrecognized compensation cost for restricted
      stock
      grants was $183,000 at December 31, 2006.





The
      Company sponsors a 401(k) employee savings and profit sharing plan in which
      substantially all full-time employees are eligible to participate. The plan
      allows eligible employees to save a portion of their salary on a pre-tax basis.
      Contributions by the Company to the plan are discretionary. Contributions and
      administrative expenses related to the plan aggregated $356,000, $276,000 and
      $252,000 for the years ended December 31, 2006, 2005 and 2004,
      respectively.


F
          - 17
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      12 - Capital Ratios and Dividend Restrictions**





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. Management believes that the Company and
      the Subsidiary Banks meet all capital adequacy requirements to which they are
      subject as of December 31, 2006. The following tables show the capital ratios
      for the Company and the Subsidiary Banks at December 31, 2006 and
      2005:





($
                in thousands)
            Company
            
            Savannah
            
            Bryan
            
            Harbourside2006
            2005
            
            2006
            
            2005
            
            2006
            
            2005
            
            2006
            
            2005**Qualifying
                Capital**Tier
                1 capital
            $77,205
            $69,116
            
            $48,718
            
            $43,047
            
            $16,833
            
            $13,962
            
            $
                8,687
            
            $
                -Total
                capital
            85,910
            76,617
            
            54,712
            
            48,656
            
            18,874
            
            15,798
            
            9,207
            
            -**Leverage
                Ratios**Tier
                1 capital to average assets
            9.57%
            9.60%
            
            8.58%
            
            7.93%
            
            9.23%
            
            8.08%
            
            15.55%
            
            -
                %**Risk-based
                Ratios**Tier
                1 capital to risk-weighted assets
            11.09%
            11.52%
            
            10.17%
            
            9.60%
            
            10.31%
            
            9.51%
            
            16.98%
            
            -
                %Total
                capital to risk-weighted assets
            12.34%
            12.77%
            
            11.42%
            
            10.85%
            
            11.56%
            
            10.76%
            
            18.00%
            
            -
                %





Well-Required
                Regulatory Capital Ratios:
            Minimum
            CapitalizedTier
                1 capital to average assets
            4.00%
            5.00%Tier
                1 capital to risk-weighted assets
            4.00%
            6.00%Total
                capital to risk-weighted assets
            8.00%
            10.00%








As
      of
      December 31, 2006, the Subsidiary Banks were categorized as well-capitalized
      under the regulatory framework for prompt corrective action in the
      most recent notification from the FDIC. There are no conditions or events since
      the notification that management believes have changed the institutions’
categories.





Banking
      regulations restrict the amount of cash dividends that banks may pay without
      obtaining regulatory approval. At December 31, 2006, $14,081,000 in retained
      earnings of the Subsidiary Banks
      was available for the payment of dividends, subject to maintaining adequate
      capital ratios in the Subsidiary Banks.
      The Company is not subject to any regulatory restrictions on the payment of
      dividends to its shareholders.








**Note
      13 - Leases and Commitments**





Future
      minimum payments under non-cancelable land and office space operating leases
      with remaining terms in excess of one year are presented as follows: 2007 -
      $699,000; 2008 - $939,000; 2009 - $706,000; 2009 - $582,000; 2010 - $600,000;
      2011 and thereafter is $7,985,000. The land and office space leases contain
      customary escalation clauses. The Company or the Subsidiary Banks are
      responsible for taxes, insurance and maintenance during the lease term under
      certain leases. At December 31, 2006, the Company was in the process of
      renegotiating its long-term data processing contract. The Company is operating
      temporarily on a month-to-month extension until the new terms can be agreed
      upon.





The
      net
      rental expense for all office space operating leases amounted to $1,006,000
      in
      2006, $653,000 in 2005 and $602,000 in 2004. The leases on the office space
      have
      five to twenty-year renewal options and require increased rental payments under
      consumer price index escalation clauses.




F
          - 18
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      14 - Other Operating Expense**





The
      components of other operating expense for the years ended December 31, 2006,
      2005 and 2004 were as follows:




($
                in thousands)
            2006
            2005
            2004Professional
                and directors fees
            $
                959
            $
                748
            $
                581Regulatory
                exams,
                FDIC and audit fees
            832
            694
            528Advertising
                and sales promotion
            463
            294
            180Stationery
                and supplies
            301
            239
            228Postage
                and courier
            265
            243
            231Taxes
                and licenses
            204
            154
            99Loancosts
            185
            170
            258Telephone
            173
            150
            148Correspondent
                bank charges
            155
            137
            121Dues
                and subscriptions
            110
            97
            74Insurance
            90
            76
            59Pre-opening
                expenses
            263
            129
            -Other
                expense
            656
            542
            373Total
                other operating expense
            $
                4,656
            $
                3,673
            $
                2,880








**Note
      15** **- On-Balance Sheet Derivative Instruments and Hedging
      Activities**





SFAS
      133,
      as amended and interpreted, establishes accounting and reporting standards
      for
      derivative instruments, including certain derivative instruments embedded in
      other contracts, and for hedging activities. As required by SFAS 133, the
      Company records all derivatives on the balance sheet at fair value.  The
      accounting for changes in the fair value of derivatives depends on the intended
      use of the derivative and the resulting designation. Derivatives used to hedge
      the exposure to variability in expected future cash flows, or other types of
      forecasted transactions, are considered cash flow hedges.





For
      derivatives designated as cash flow hedges, the effective portion of changes
      in
      the fair value of the derivative is initially reported in other comprehensive
      income (outside of earnings) and subsequently reclassified to earnings when
      the
      hedged transaction affects earnings. The ineffective portion of changes in
      the
      fair value of the derivative is recognized directly in earnings. The Company
      assesses the effectiveness of each hedging relationship by comparing the changes
      in cash flows of the derivative hedging instrument with the changes in cash
      flows of the designated hedged item or transaction. For derivatives not
      designated as hedges, changes in fair value are recognized in earnings. The
      Company does not currently have any derivatives that are not designated as
      hedges.





The
      Company’s objective in using derivatives is to add stability to interest income
      and to manage its exposure to interest rate movements or other identified risks.
      To accomplish this objective, the Company primarily uses interest rate floors,
      collars or swaps as part of its cash flow hedging strategy. Interest rate floors
      and collars designated as cash flow hedges involve the receipt of variable-rate
      cash flows above or below the applicable strike rates over the life of the
      agreements without exchange of the underlying principal amount. Interest rate
      swap agreements designated as cash flow hedges involve the receipt of fixed
      rate
      amounts in exchange for variable rate payments over the life of the agreements
      without exchange of the underlying principal amount. During 2006, such
      derivatives were used to hedge the variable cash flows associated with existing
      variable rate assets. The Company does not use derivatives for trading or
      speculative purposes.





Exposure
      to credit risk arises from the possibility of nonperformance by counterparties.
      These counterparties consist of financial institutions that are well established
      and well capitalized. The Company controls this credit risk through limits
      and
      monitoring procedures. No losses on derivative instruments have resulted as
      a
      result of counterparty nonperformance. Nevertheless, the related credit risk
      is
      considered and measured when and where appropriate.


F
          - 19
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      15 - On-Balance Sheet Derivative Instruments and Hedging Activities
      (continued)**





Selected
      information with respect to notional amounts, recorded fair values, and maturity
      dates of derivative instruments is summarized as follows.





December
                31, 2006
            
            December
                31, 2005Notional
            Fair
                Value
            
            Fair
                Value($
                in thousands)
            Maturity
            Amount
            Asset
            Liability
            
            Asset
            LiabilityCash
                flow hedges:Interest
                rate swap
            Nov
                2010
            $
                50,000
            $
                -
            $
                332
            
            $
                70
            $
                -6%/9%
                Interest rate collar
            June
                2010
            40,000
            -
            29
            
            -
            1046%
                Interest rate floor
            June
                2010
            35,000
            49
            -
            
            128
            -Total
            
            $
                125,000
            $
                49
            $
                361
            
            $
                198
            $
                104





The
      change in net unrealized losses of $236,000 and $243,000 in 2006 and 2005,
      respectively, for derivatives designated as cash flow hedges is separately
      disclosed in the statements of changes in shareholders’ equity. No hedge
      ineffectiveness on cash flow hedges was recognized during 2006 or
      2005.





Amounts
      reported in accumulated other comprehensive income related to derivatives will
      be reclassified to interest income as interest payments are received on the
      Company’s variable-rate assets. The change in net unrealized gains (losses) on
      cash flow hedges reflects a reclassification of ($184,000) and $48,000 of net
      unrealized gains (losses) from accumulated other comprehensive income to
      interest income during 2006 and 2005, respectively. During 2007, the Company
      estimates that an additional ($303,000) will be reclassified.








**Note
      16 - Financial Instruments with Off-Balance Sheet Risk**





The
      Company is a party to financial instruments with off-balance sheet risk in
      the
      normal course of business in order 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.





The
      Company'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 credit risk involved is essentially the same as that involved
      in extending loan facilities to customers. The Company uses the same credit
      policies in making commitments and conditional obligations as it does for
      on-balance sheet instruments. The Company evaluates each customer's credit
      worthiness on a case-by-case basis. The amount of collateral obtained by the
      Company upon extension of credit, if deemed necessary, is based on management's
      credit evaluation of the borrower. Collateral may include cash, securities,
      accounts receivable, inventory, equipment, and real estate.





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, 2006 and 2005 unfunded commitments to extend credit
      and unfunded lines of credit were $156,323,000 and $172,854,000, of which some
      were subject to interest rate lock commitments. Since many of these commitments
      are expected to expire without being drawn upon, these amounts do not
      necessarily represent future cash requirements.





Letters
      of credit are conditional commitments issued by the Company to guarantee payment
      or performance by a customer to a third party. At December 31, 2006 and 2005,
      commitments under letters of credit aggregated approximately $10,204,000 and
      $7,205,000, respectively.




F
          - 20
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      17 - Fair Value of Financial Instruments**





As
      with
      most financial institutions, the majority of the Company’s 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 estimates and present value calculations are used for the purpose
      of
      this disclosure. Such estimates involve judgments 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
      for
      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 current interest rates charged by the Subsidiary Banks on
      loans 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 Subsidiary Banks'
      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, 2006
            
            December
                31, 2005($
                in thousands)
            
            Estimated
            
            
            EstimatedCarrying
            Fair
            
            Carrying
            FairValue
            Value
            
            Value
            ValueFinancial
                assets:Cash
                and federal funds sold
            $
                36,903
            $
                36,903
            
            $
                26,583
            $
                26,583Interest-bearing
                deposits
            10,394
            10,394
            
            5,885
            5,885Securities
                available for sale
            53,917
            53,917
            
            44,438
            44,438Loans
                held for sale
            914
            917
            
            10,473
            10,538Loans,
                net of allowance for credit losses
            711,964
            709,133
            
            605,854
            603,613Financial
                liabilities:Deposits
            706,824
            705,986
            
            600,510
            598,776Short-term
                borrowings
            40,687
            40,687
            
            19,902
            19,902FHLBadvances - long-term
            13,309
            13,410
            
            20,476
            20,808Subordinated
                debt to nonconsolidated subsidiaries
            10,310
            10,310
            
            10,310
            10,310





F
          - 21
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
        to Consolidated Financial Statements


**Note
      18 - The Savannah Bancorp, Inc. (Parent Company Only) Financial
      Information** ($ in
      thousands)





The
      following are condensed balance sheets of the Parent Company at December 31,
      2006 and 2005:





**2006**
            2005**Assets**Cash
                on deposit
            **$
                35**
            $
                14Interest-bearing
                deposits
            **652**
            10,307Investment
                in subsidiaries
            **73,607**
            56,436Premises
                and equipment
            **1,005**
            958Investment
                in nonconsolidatedsubsidiary
            **1,518**
            2,709Other
                assets
            **1,189**
            1,161Total
                assets
            **$
                78,006**
            $
                71,585**Liabilities**Note
                payable
            **$
                -**
            $
                2,000Subordinated
                debt
            **10,310**
            10,310Other
                liabilities
            **1,122**
            732Total
                liabilities
            **11,432**
            13,042**Shareholders'
                equity**Common
                stock
            **5,781**
            4,591Capital
                surplus
            **35,738**
            36,257Retained
                earnings
            **25,690**
            18,272Treasury
                stock
            **(4)**
            (4)Accumulated
                othercomprehensive
                loss
            **(631)**
            (573)Total
                shareholders’ equity
            **66,574**
            58,543Total
                liabilities and equity
            **$
                78,006**
            $
                71,585




F
            - 22
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
          to Consolidated Financial Statements




The
      operating results of the Parent Company are shown below for the three years
      ended December 31:




**2006**
            2005
            2004Dividends
                from subsidiaries
            **$
                3,700**
            $
                1,250
            $
                1,850Interest
                income
            **59**
            146
            63Interest
                expense
            **881**
            652
            328Net
                interest and dividend income
            **2,878**
            744
            1,585Other
                income
            **30**
            58
            2Processing
                / management fees
            **4,352**
            3,827
            3,117Total
                income
            **7,260**
            4,629
            4,704Corporate
                expenses
            **721**
            663
            304Processing
                / management costs
            **4,427**
            3,891
            3,172Other
                expenses
            **5,148**
            4,554
            3,476Income
                before income taxesand
                equity in undistributednet
                income of subsidiaries
            **2,112**
            75
            1,228Credit
                for income taxes
            **550**
            440
            231Income
                before equity inundistributed
                net incomeof
                subsidiaries
            **2,662**
            515
            1,459Equity
                in undistributed netincome
                of subsidiaries
            **7,340**
            8,525
            4,277Net
                income
            **$
                10,002**
            $
                9,040
            $
                5,736




F
            - 22a
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
 
 Notes
          to Consolidated Financial Statements




The
      cash
      flows of the Parent Company are shown below for the three years ended December
      31:




**2006**
            2005
            2004**Operating
                activities**Net
                income
            **$
                10,002**
            $
                9,040
            $
                5,736Adjustments
                to reconcile netincome
                to cash provided byoperating
                activities:Equity
                in undistributed netincome
                of subsidiaries
            **(7,340)**
            (8,525)
            (4,277)Depreciation
                of equipment
            **306**
            259
            200Non
                cash stock-basedcompensation
                expense
            **299**
            -
            -Change
                in other assets andliabilities,
                net
            **364**
            (436)
            (52)Net
                cash provided byoperating
                activities
            **3,631**
            338
            1,607**Investing
                activities**Distribution
                from (investmentin)
                nonconsolidated subsidiary
            **1,300**
            (2,709)
            -Purchase
                of equipment andsoftware
            **(353)**
            (626)
            (234)Capital
                contribution toconsolidated
                subsidiaries
            **(10,000)**
            (2,000)
            (6,500)Net
                cash used ininvesting
                activities
            **(9,053)**
            (5,335)
            (6,734)**Financing
                activities**Net
                (decrease) increase inshort-term
                borrowings
            **(2,000)**
            2,000
            -Proceeds
                from issuance of
              subordinated
                debt
            **-**
            -
            4,124Dividends
                paid
            **(2,593)**
            (2,307)
            (2,162)Issuance
                of common stock
            **-**
            11,588
            -Exercise
                of options
            **381**
            916
            88Net
                cash (used in) provided byfinancing
                activities
            **(4,212)**
            12,197
            2,050**(Decrease)
                increase in cash****and
                cash equivalents**
            **(9,634)**
            7,200
            (3,077)Cash,
                beginning of year
            **10,321**
            3,121
            6,198Cash,
                end of year
            **$
                687**
            $
                10,321
            $
                3,121




The
      Parent Company financial statements include the following intercompany items:
      interest-bearing deposits on the balance sheet s;
      dividend income, interest income and processing / management fees on the
      statements of income.


F
          - 22b
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


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 to the consolidated financial statements.





**Table
      1 - Selected Financial Condition Highlights - Five-Year
      Comparison**


($
                in thousands, except share data)
            **2006**
            2005
            2004
            2003
            2002**Selected
                Average Balances**Assets
            **$
                769,917**
            $
                685,163
            $
                557,474
            $
                443,502
            $
                396,836Loans
                held for sale
            **7,842**
            23,033
            27,209
            939
            -Loans
                - net of unearned fees
            **658,750**
            565,131
            441,421
            356,006
            307,285Securities
            **50,600**
            41,300
            40,703
            44,015
            55,692Other
                interest-earning assets
            **17,278**
            26,168
            22,383
            21,198
            13,426Total
                interest-earning assets
            **734,470**
            655,632
            531,716
            422,158
            376,403Interest-bearing
                deposits
            **542,375**
            487,493
            371,877
            300,045
            271,563Borrowed
                funds
            **62,255**
            55,255
            67,353
            40,158
            34,341Total
                interest-bearing liabilities
            **604,630**
            542,748
            439,230
            340,203
            305,904Noninterest-bearing
                deposits
            **96,113**
            89,386
            76,593
            65,403
            55,250Total
                deposits
            **638,488**
            576,879
            448,470
            365,448
            326,813Shareholders'
                equity
            **61,766**
            47,428
            38,126
            35,740
            33,398Loan
                to deposit ratio - average
            **103%**
            98%
            98%
            97%
            94%**Selected
                Financial Data at Year-End**Assets
            **$
                843,514**
            $
                717,901
            $
                617,341
            $
                476,865
            $
                437,598Interest-earning
                assets
            **803,927**
            685,531
            593,035
            449,025
            394,756Loans
                held for sale
            **914**
            10,473
            26,471
            10,393
            -Loans
                - net of unearned fees
            **720,918**
            613,667
            499,868
            386,731
            336,775Deposits
            **706,824**
            600,510
            506,120
            389,146
            363,044Loan
                to deposit ratio
            **102%**
            102%
            99%
            99%
            93%Interest-bearing
                liabilities
            **669,974**
            558,116
            488,546
            360,817
            337,213Shareholders'
                equity
            **66,574**
            58,543
            40,071
            36,771
            34,756Shareholders'
                equity to total assets
            **7.89%**
            8.15%
            6.49%
            7.71%
            7.94%Dividend
                payout ratio
            **25.92%**
            25.53%
            37.69%
            45.00%
            44.32%Risk-based
                capital ratios:Tier
                1 capital to risk-weighted assets
            **11.09%**
            11.52%
            9.95%
            10.60%
            9.99%Total
                capital to risk-weighted assets
            **12.34%**
            12.77%
            11.20%
            11.85%
            11.24%**Credit
                Quality Data**Nonperforming
                assets
            **$
                2,776**
            $
                1,357
            $
                998
            $
                1,525
            $
                2,114Nonperforming
                loans
            **2,231**
            1,357
            538
            598
            1,997Net
                credit losses
            **444**
            76
            128
            306
            203Allowance
                for credit losses
            **8,954**
            7,813
            6,389
            5,067
            4,373Nonperforming
                loans to loans
            **0.31%**
            0.22%
            0.11%
            0.15%
            0.59%Nonperforming
                assets to loansand
                other real estate owned
            **0.39%**
            0.22%
            0.20%
            0.39%
            0.63%Net
                credit losses to average loans
            **0.07%**
            0.01%
            0.03%
            0.09%
            0.07%Allowance
                for credit losses to total loans
            **1.24%**
            1.27%
            1.28%
            1.31%
            1.30%**Per
                Share Data at Year-End****(a)**Book
                value
            **$
                11.52**
            $
                10.20
            $
                7.80
            $
                7.17
            $
                6.78Common
                stock closing price (NASDAQ)
            **$
                27.25**
            $
                28.38
            $
                21.64
            $
                18.56
            $
                12.20Common
                shares outstanding (000s)
            **5,781**
            5,739
            5,140
            5,129
            5,126




(a)
      Share
      and per share amounts have been restated to reflect the effect of a 5-for-4
      stock split in December 2006 and December 2004 and a ten percent stock dividend
      in February 2003.


F
          - 23
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      2 - Selected Operating Highlights - Five-Year Comparison**





($
                in thousands, except share data)
            **2006**
            2005
            2004
            2003
            2002**Summary
                of operations**Interest
                income - taxable equivalent
            **$
                55,347**
            $
                42,544
            $
                28,947
            $
                23,221
            $
                23,824Interest
                expense
            **22,737**
            14,679
            8,427
            6,695
            8,402Net
                interest income - taxable equivalent
            **32,610**
            27,865
            20,520
            16,526
            15,422Taxable
                equivalent adjustment
            **(158)**
            (186)
            (240)
            (284)
            (312)Net
                interest income
            **32,452**
            27,679
            20,280
            16,242
            15,110Provision
                for credit losses
            **1,585**
            1,500
            1,450
            1,000
            750Net
                interest income after
              provision
                for credit losses
            **30,867**
            26,179
            18,830
            15,242
            14,360Noninterest
                incomeService
                charges on deposits accounts
            **1,526**
            1,622
            1,598
            1,572
            1,576Mortgage
                related income, net
            **886**
            1,292
            1,079
            776
            612Trust
                fees
            **658**
            501
            442
            398
            353Other
                operating income
            **1,233**
            972
            981
            635
            469Total
                noninterest income
            **4,303**
            4,387
            4,100
            3,381
            3,010Noninterest
                expenseSalaries
                and employee benefits
            **10,852**
            9,530
            8,362
            6,693
            6,008Occupancy
                and equipment
            **2,920**
            2,199
            1,963
            1,767
            1,678Information
                technology
            **1,525**
            1,244
            1,049
            908
            805Other
                operating expense
            **4,656**
            3,673
            2,880
            2,287
            2,231Total
                noninterest expense
            **19,953**
            16,646
            14,254
            11,655
            10,722Income
                before income taxes
            **15,217**
            13,920
            8,676
            6,968
            6,648Income
                tax expense
            **5,215**
            4,880
            2,940
            2,324
            2,140****Net
                income
            **$
                10,002**
            $
                9,040
            $
                5,736
            $
                4,644
            $
                4,508**Net
                income per share:**(a)Basic
            **$
                1.73**
            $
                1.68
            $
                1.12
            $
                0.91
            $
                0.88Diluted
            **$
                1.70**
            $
                1.63
            $
                1.09
            $
                0.89
            $
                0.87Cash
                dividends paid per share
            **$
                0.45**
            $
                0.43
            $
                0.42
            $
                0.41
            $
                0.39Average
                basic shares outstanding (000s)
            **5,765**
            5,396
            5,136
            5,129
            5,125Average
                diluted shares outstanding (000s)
            **5,876**
            5,531
            5,261
            5,226
            5,200**Performance
                ratios (averages)**Net
                interest margin
            **4.44%**
            4.25%
            3.86%
            3.91%
            4.10%Return
                on average assets
            **1.30%**
            1.32%
            1.03%
            1.05%
            1.14%Return
                on average equity
            **16.19%**
            19.06%
            15.04%
            12.99%
            13.50%Efficiency
                ratio
            **54.29%**
            51.91%
            58.47%
            59.40%
            59.17%




(a) Share
      and per share amounts have been restated to reflect the effect of a 5-for-4
      stock split in December 2006 and December 2004 and a ten percent stock dividend
      in February 2003.




F
          - 24
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      3 - Selected Quarterly Data**





The
      following is a summary of unaudited quarterly results for 2006 and
      2005:





**2006**
            
            2005Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstNet
                interest income
            $8,260
            $8,119
            $8,156
            $7,917
            
            $7,718
            $7,149
            $6,671
            $6,141Provision
                for credit losses
            450
            360
            360
            415
            
            305
            375
            315
            505Net
                interest income after
              provision
                for credit losses
            7,810
            7,759
            7,796
            7,502
            
            7,413
            6,774
            6,356
            5,636Noninterest
              income
            1,090
            1,056
            1,086
            1,071
            
            1,252
            1,093
            1,048
            994Noninterest
                expense
            5,137
            4,945
            4,976
            4,895
            
            4,432
            4,239
            4,032
            3,943Income
                before income taxes
            3,763
            3,870
            3,906
            3,678
            
            4,233
            3,628
            3,372
            2,687Income
                tax expense
            1,240
            1,280
            1,368
            1,327
            
            1,512
            1,274
            1,188
            906Net
                income
            $2,523
            $2,590
            $2,538
            $2,351
            
            $2,721
            $2,354
            $2,184
            $1,781**Per
                share:**(a)Net
                income - Basic
            $
                .437
            $
                .450
            $
                .441
            $
                .408
            
            $
                .474
            $
                .433
            $
                .418
            $
                .343Net
                income - Diluted
            $
                .429
            $
                .441
            $
                .432
            $
                .401
            
            $
                .462
            $
                .422
            $
                .409
            $
                .335Dividends
            $
                .112
            $
                .112
            $
                .112
            $
                .112
            
            $
                .108
            $
                .108
            $
                .108
            $
                .108**Average
                shares (000s)**Basic
            5,779
            5,761
            5,759
            5,759
            
            5,739
            5,433
            5,221
            5,191Diluted
            5,884
            5,886
            5,894
            5,886
            
            5,886
            5,584
            5,344
            5,324




(a)
      Share
      and per share amounts have been restated to reflect the effect of a 5-for-4
      stock split in December 2006. The summation of quarterly earnings per share
      may
      not agree with annual earnings per share.








**Table
      4 - Market for Registrant's Common Equity and Related Shareholder
      Matters**





The
      Company's common stock is traded on NASDAQ under the symbol SAVB. The quarterly
      high, low and closing stock trading prices for 2006 and 2005 are listed below.
      There were approximately 720 holders of record of Company common stock and,
      according to information provided to the Company, approximately 740 additional
      shareholders in street name through brokerage accounts at December 31, 2006.
      The
      per share amounts have been restated to reflect the effect of a 5-for-4 stock
      split in December 2006.





**2006**
            
            2005Closing
                Market Prices
            Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstHigh
            $
                28.14
            $
                30.31
            $
                30.40
            $
                29.58
            
            $
                30.00
            $
                27.63
            $
                24.76
            $
                23.08Low
            26.60
            26.58
            27.26
            27.12
            
            27.40
            24.22
            22.24
            21.20Close
            27.25
            26.64
            30.26
            28.06
            
            28.38
            27.60
            24.76
            23.08








F
          - 25
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      5 - Stock Performance Graph**





The
      following table provides a graphic comparison of the cumulative total
      shareholder return on the common stock of The Savannah Bancorp, Inc. for the
      five year period from December 31, 2001 through December 31, 2006. It includes
      the cumulative total return on the NASDAQ Market Index, the SNL $500M-$1B Bank
      Index and assumes the re-investment of all dividends over the same period.
      All
      cumulative returns assume an initial investment of $100.













For
                the Years Ended December 31,**Index**
            2001
            2002
            2003
            2004
            2005
            2006The
                Savannah Bancorp, Inc.
            100.00
            106.08
            165.79
            197.80
            263.92
            257.36NASDAQ
                Composite
            100.00
            68.76
            103.67
            113.16
            115.57
            127.58SNL
                $500M-$1B Bank Index
            100.00
            127.67
            184.09
            208.62
            217.57
            247.44Source
                : SNL Financial LC, Charlottesville, VA©
                2007


F
          - 26
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Introduction**





Management's
      Discussion and A nalysis
      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. These discussions
      should be read in conjunction with the Consolidated Financial Statements and
      related notes. The MD & A is divided into subsections entitled:





Selected
      Financial Data Tables 1 - 5 (preceding pages)


Introduction


Critical
      Accounting Estimate


Results
      of Operations


Financial
      Condition and Capital Resources


Liquidity
      and Interest Rate Sensitivity Management


Off-Balance
      Sheet Arrangements


Forward
      Looking Statements





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 2006 compared with prior years.
      Throughout this section, The Savannah Bancorp, Inc. and its subsidiaries,
      collectively, are referred to as "SAVB" or the "Company." The Savannah Bank,
      N.A. is referred to as "Savannah," Bryan Bank & Trust is referred to as
“Bryan” and Harbourside Community Bank is referred to as “Harbourside”.
      Collectively, Savannah, Bryan and Harbourside are referred to as the “Subsidiary
      Banks.”





The
      averages used in this report are the averages of daily balances for each
      respective period. See Tables 8 and 9 for average balances and interest rates
      presented on an annual basis. All share and per share amounts have been restated
      to reflect the effect of a 5-for-4 stock split in December 2006 and December
      2004 and a ten percent stock dividend in February 2003. Certain prior year
      balances have been reclassified to conform to the current year
      presentation.





The
      Company is headquartered in Savannah, Georgia and, as of December 31, 2006
      had 8
      banking offices and 9 ATMs in Savannah and surrounding Chatham County, Richmond
      Hill, Georgia and Hilton Head Island, South Carolina. In March 2006, Harbourside
      opened on Hilton Head Island as a separately chartered federal savings bank.
      In
      September 2006, Savannah opened a new office adjacent to the Landings community
      in Savannah.





Savannah
      and Bryan are located in the relatively diverse and growing Savannah
      Metropolitan Statistical Area. 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 good
      commercial and residential growth driven in part by coastal Georgia’s and South
      Carolina’s growing reputation as a desired retiree residential
      destination.





Harbourside
      specifically targets real estate lending and related opportunities in the fast
      growing coastal South Carolina market. During 2006 the business strategy changed
      resulting in a significant reduction in the sale of loans on a servicing
      retained basis. The change was due to the lower profit opportunity on a
      relatively low volume of residential mortgage loans.





The
      primary risks to the Company include trends or events that would cause or result
      in a significant decline in local employment, real estate values, loans or
      core
      deposits. The Company operates in very competitive markets with the related
      challenges of competitive pricing on loans, deposits and other banking services.
      Competition for the best talent is also a strategic challenge faced in
      competitive markets.





The
      primary strategic objectives of the Company are growth in loans, deposits,
      product lines and service quality in existing markets, and quality expansion
      into new markets, within acceptable risk parameters, which results in enhanced
      shareholder value. The Company believes that the management team and the
      operational and internal control infrastructure are largely in place to execute
      the Board of Directors’ (“Board”) objectives over the long term.




F
          - 27
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Critical
      Accounting Estimate - Allowance for Credit Losses**





The
      Company considers its policies regarding the allowance for credit losses to
      be
      its most critical accounting estimate due to the significant degree of
      management judgment involved. The allowance for credit losses is established
      through charges to earnings in the form of a provision for credit losses based
      on management's continuous evaluation of the loan portfolio. Credit losses
      and
      recoveries are charged or credited directly to the allowance. The amount of
      the
      allowance reflects management's opinion of an adequate level to absorb probable
      losses inherent in the loan portfolio at December 31, 2006. 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, 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 allowance amount.





No
      assurance can be given that the Company will not sustain credit 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 credit
      losses by future charges or credits to earnings. The allowance for credit 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 credit losses. No adjustment in the allowance
      or
      significant adjustments to the Bank's internally classified loans were made
      as a
      result of Savannah and Bryan’s most recent examinations performed by the Office
      of the Comptroller of the Currency (“OCC”) as of December 31, 2005 or the
      Georgia Department of Banking and Finance as of March 31, 2006. Harbourside
      has
      not yet had its first safety and soundness exam by the Office of Thrift
      Supervision (“OTS”).





The
      allowance for credit losses totaled $8,954,000 or 1.24 percent of total loans
      at
      December 31, 2006. This is compared to an allowance of $7,813,000 or 1.27
      percent of total loans at December 31, 2005. For 2006, the Company reported
      net
      credit losses of $444,000 or 0.07 percent of average loans. This is compared
      to
      net credit losses of $76,000 or 0.01 percent of average loans for 2005. During
      2006 and 2005, provisions for credit losses of $1,585,000 and $1,500,000 were
      added to the allowance for credit losses. Significant growth in the loan
      portfolio in both years, larger credit exposures in a new market and the
      increase in net credit losses in 2006 provide the primary basis for the
      provision for credit losses.





If
      the
      allowance for credit losses had changed by five percent, the effect on net
      income would have been approximately $278,000. If the allowance had to be
      increased by this amount, it would not have changed the Subsidiary Banks’ status
      as well-capitalized financial institutions.





The
      Company's nonperforming assets consist of other real estate owned, loans on
      nonaccrual status and loans which are contractually past due 90 days or more
      on
      which interest is still being accrued. Nonaccrual loans of $825,000 and loans
      past due 90 days or more of $1,406,000 totaled $2,231,000, or 0.31 percent
      of
      gross loans, at December 31, 2006. Nonaccrual loans of $1,313,000 and loans
      past
      due 90 days or more of $44,000 totaled $1,357,000, or 0.22 percent of gross
      loans, at December 31, 2005. The increase in nonperforming loans primarily
      relates to specific isolated circumstances impacting a few borrowers and is
      not
      indicative of overall portfolio concerns. No significant losses are anticipated
      on these loans. Generally, loans are placed on nonaccrual status when the
      collection of the principal or interest in full becomes doubtful. Nonperforming
      assets at December 31, 2006 also included $545,000 of other real estate owned.
      There was no other real estate owned at December 31, 2005.





Impaired
      loans under Statement of Financial Accounting Standards (“SFAS”) No. 114 were
      all on nonaccrual status and totaled $825,000 and $1,313,000 at December 31,
      2006 and 2005, respectively.




F
          - 28
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Results
      of Operations**





**2006
      Compared with 2005**





Net
      income in 2006 was $10,002,000, up 11 percent from $9,040,000 in 2005. Net
      income per diluted share was $1.70 in 2006 compared to $1.63 per share in 2005,
      an increase of 4.3 percent. The earnings increase is primarily attributable
      to
      growth in interest-earning assets and a higher net interest margin partially
      offset by higher expenses and lower noninterest income. Net income for 2006
      includes after tax stock-based compensation expense of $191,000 or $0.03 per
      diluted share in 2006 and none in 2005. Average outstanding diluted shares
      increased 345,000, or 6.2 percent, in 2006 compared with 2005. The increase
      in
      average shares outstanding resulted from the private placement sale of 397,000
      shares in August 2005 and additional shares being issued upon exercise of stock
      options. Return on average equity was 16.19 percent and return on average assets
      was 1.30 percent. The efficiency ratio was 54.29 percent in 2006.





Average
      interest-earning assets for 2006 increased 12 percent to $734 million in 2006
      from $656 million in 2005. Net interest income was $32,452,000 in 2006 compared
      to $27,679,000 in 2005, an increase of $4,773,000 or 17 percent. Average loans
      were $659 million in 2006, 17 percent higher when compared to $565 million
      in
      2005. The net interest margin increased to 4.44 percent in 2006 from 4.25
      percent in 2005. As shown in Table 8, the increase in the net interest margin
      was primarily due to the rise in loan rates and increases in equity and
      noninterest-bearing deposits. As shown in Table 7, the Company’s balance sheet
      is asset-sensitive, which means that interest-earning assets reprice faster
      than
      interest-bearing liabilities. Rising interest rates favorably impact the net
      interest margin of an asset-sensitive balance sheet and falling rates adversely
      impact the net interest margin.





The
      provision for credit losses was $1,585,000 for 2006, compared to $1,500,000
      in
      2005. Changes in the provision are impacted as discussed under the "Allowance
      for Credit Losses" section above. Loan growth was $107 million in 2006,
      primarily in real estate-secured loans, compared to $114 million in loan growth
      in 2005. Net credit losses of $444,000 in 2006 as compared to $76,000 in 2005
      are the primary reason for the higher provision for credit losses in
      2006.





Noninterest
      income was $4,303,000 in 2006 compared to $4,387,000 in 2005, a decrease of
      $84,000 or 1.9 percent. The decrease was a result of lower mortgage related
      income and service charges on deposit accounts offset by higher trust fees
      and
      other operating income. Noninterest income included mortgage banking related
      income, net of direct production costs, of $886,000 in 2006 compared to
      $1,292,000 in 2005, a decrease of $406,000 or 31 percent. Net mortgage related
      income declined because of lower mortgage origination volume due to higher
      interest rates, personnel turnover at Harbourside and a decline in residential
      real estate market activity. No market valuation adjustments were required
      for
      loans held for sale during 2006. Service charges on deposit accounts declined
      5.9 percent or $96,000, primarily because of higher earnings credits on
      commercial checking accounts due to increases in the 90-day Treasury interest
      rate.





Noninterest
      expense was $19,953,000 in 2006 compared to $16,646,000 in 2005, an increase
      of
      $3,307,000, or 20 percent. The increase in overall noninterest expense included
      normal operating cost increases, approximately $263,000 non-recurring startup
      costs at Harbourside, approximately $1,000,000 of increased operating costs
      for
      the Harbourside expansion and $299,000 of stock-based compensation expense
      resulting from adopting SFAS No. 123R effective January 1, 2006. Salaries and
      benefits increased $1,322,000 or 14 percent, and included $200,000 of
      stock-based compensation expense. In addition to normal salary increases, the
      personnel cost increases included additional staff in credit administration,
      accounting, internal audit and at Harbourside. Occupancy, equipment and
      information technology expenses increased approximately $1,002,000, or 29
      percent, primarily due to the Harbourside expansion, enhancements to systems
      capabilities and account / transaction volume increases. Other operating expense
      increased $983,000 or 27 percent and included additional costs related to the
      Harbourside expansion, higher audit, advertising and professional fees, $99,000
      in stock-based compensation expense for directors and various other
      expenses.





Income
      tax expense was $5,215,000 in 2006 and $4,880,000 in 2005. The combined
      effective federal and state tax rates were 34.3 percent and 35.1 percent in
      2006
      and 2005, respectively. The decline is primarily due to additional low income
      housing tax credits added in mid-2005. 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.


F
          - 29
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**2005
      Compared with 2004**





Net
      income in 2005 was $9,040,000, up 58 percent from $5,736,000 in 2004. This
      represents returns of 19.06 percent on average equity and 1.32 percent on
      average assets. The efficiency ratio was 51.91 percent in 2005. Diluted earnings
      per share were $1.63 in 2005, an increase of 50 percent compared to $1.09 in
      2004. Average
      outstanding diluted shares increased 270,000, or 5.1 percent, in 2005 compared
      to 2004. The increase is due to the August 2005 private placement offering
      of
      397,000 shares (496,000 split-adjusted shares), the exercise of stock options
      and increases in common stock equivalents. Share and per share amounts have
      been
      restated to reflect the effect of 5-for-4 stock split in December
      2006.





Average
      total assets for 2005 increased 23 percent to $685 million from $557 million
      in
      2004. Total assets were $718 million and $617 million at December 31, 2005
      and
      2004, respectively, an increase of 16 percent. At December 31, 2005, Harbourside
      Mortgage Company, a division of Savannah, had total loans, excluding loans
      held
      for sale, of $99 million, an increase of $39 million over 2004.





Net
      interest income was $27,679,000 in 2005 compared to $20,280,000 in 2004, an
      increase of $7,399,000, or 36 percent. Average loans, excluding loans held
      for
      sale, were $565 million in 2005, 28 percent higher when compared to $441 million
      in 2004. As shown in Table 9, net interest margin increased to 4.25 percent
      in
      2005 from 3.86 percent in 2004, primarily due to higher interest rates on
      loans.





The
      provision for credit losses for 2005 and 2004 was $1,500,000 and $1,450,000,
      respectively. Loan growth was $114 million in 2005 and $113 million in 2004.
      Net
      credit losses were $76,000 in 2005 compared with $128,000 in 2004. Uncertain
      economic conditions, significant loan growth in a new market and borrower
      sensitivity to rising rates were the primary reasons for the relatively high
      provisions for credit losses compared to net charge-offs in 2005 and
      2004.





Noninterest
      income was $4,387,000 in 2005 compared to $4,100,000 in 2004, an increase of
      $287,000 or 7.0 percent. Noninterest income in 2005 included mortgage banking
      related income, net of direct production costs, of $1,292,000 in 2005 compared
      to $1,079,000 in 2004, an increase of $213,000 or 20 percent. The sale of other
      real estate owned resulted in a loss of $7,000 in 2005 and a gain of $91,000
      in
      2004. Service charges on deposit accounts were $1,622,000, up 1.5 percent from
      $1,598,000 in 2004. Growth in service charges was impacted by a decrease in
      analysis charges on commercial checking accounts resulting from higher earnings
      credits due to increases in the 90-day Treasury interest rate.





Noninterest
      expense was $16,646,000 in 2005 compared to $14,254,000 in 2004, an increase
      of
      $2,392,000 or 17 percent. Salaries and employee benefits expense increased
      $1,168,000, or 14 percent in 2005 primarily due to increased staff, higher
      incentive accruals and normal salary increases. Equipment and technology
      expenses increased significantly in 2005 over the prior year related to new
      and
      enhanced technology systems and consulting/installation costs related to credit
      administration, mortgage banking, interest rate risk management, Check 21 and
      other systems. Other operating expense increases, as detailed in Note 14 to
      the
      consolidated financial statements, included significant increases in overtime
      costs, professional fees, regulatory, audit and consulting fees associated
      with
      the Company’s first year costs to comply with Section 404 of the Sarbanes-Oxley
      Act of 2002 relating to the Company’s internal controls.





Income
      tax expense was $4,880,000 in 2005 and $2,940,000 in 2004. The combined
      effective federal and state tax rates were 35.1 percent and 33.9 percent in
      2005
      and 2004, respectively. The increase in the effective rate was due primarily
      to
      lower tax-exempt income on investments and higher taxable income in 2005. The
      portion of taxable income in excess of $10 million is taxed at a higher federal
      rate. 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.





F
          - 30
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Financial
      Condition and Capital Resources**





**Balance
      Sheet Activity**





The
      major
      changes in the Company’s assets and liabilities for the current and prior period
      are shown in the consolidated statements of cash flows. Average total assets
      increased 12 percent to $770 million in 2006 from $685 million in 2005. Total
      assets were $844 million and $718 million at December 31, 2006 and 2005,
      respectively, an increase of 18 percent. The increase in loans of $107 million
      in 2006 was funded by $106 million in deposit growth.





The
      Company has classified all investment securities as available for sale. Higher
      short-term interest rates resulted in an overall net unrealized loss in the
      investment portfolio. The unrealized gain or loss amounts are recorded in
      shareholders’ equity as accumulated other comprehensive income (loss), net of
      tax.





The
      Harbourside expansion impacts the funding sources, capital requirements and
      liquidity of the Company. Historically, deposits at the Subsidiary Banks have
      been obtained from local customers. Since 2004, funding sources have been
      expanded to include non-local deposits and more frequent use of short-term
      advances from the FHLB. Total deposits included brokered time deposits and
      institutional money markets of $111 million at December 31, 2006 and $95 million
      at December 31, 2005.





*Loans*





The
      following table shows the composition of the loan portfolio at December 31,
      2006
      and 2005, including a more detailed breakdown of real estate secured loans
      by
      collateral type and purpose. Certain prior year balances have been reclassified
      to conform to the current year presentation.





**Table
      6** **- Loan Concentrations**





($
                in thousands)
            **2006**
            %
                of
              Total
            2005
            %
                of
              Total
            %
                Change
              ($)Non-residential
                real estateOwner-occupied
            **$
                90,848**
            *13*
            $
                93,714
            *15*
            *(3)*Non
                owner-occupied
            **98,032**
            *14*
            80,799
            *13*
            *21*Construction
            **22,128**
            *3*
            14,601
            *2*
            *52*Commercial
                land and lot development
            **35,610**
            *5*
            44,276
            *7*
            *(20)*Total
                non-residential real estate
            **246,618**
            *35*
            233,390
            *37*
            *6*Residential
                real estateOwner-occupied
                - 1-4 family
            **87,965**
            *12*
            71,582
            *12*
            *23*Non
                owner-occupied - 1-4 family
            **68,397**
            *10*
            58,142
            *10*
            *18*Construction
            **110,412**
            *15*
            90,855
            *15*
            *22*Residential
                land and lot development
            **93,060**
            *12*
            61,149
            *10*
            *52*Home
                equity lines
            **40,794**
            *6*
            39,230
            *6*
            *4*Total
                residential real estate
            **400,628**
            *55*
            320,958
            *53*
            *25*Total
                real estate loans
            **647,246**
            *90*
            554,348
            *90*
            *17*Commercial
            **57,737**
            *8*
            45,934
            *8*
            *26*Consumer
            **16,628**
            *2*
            14,156
            *2*
            *17*Unearned
                fees, net
            **(693)**
            *-*
            (771)
            *-*
            *(10)*Total
                loans, net of unearned fees
            **$
                720,918**
            *100*
            $
                613,667
            *100*
            *17*


F
          - 31
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Capital
      Resources**





The
      OCC
      and OTS have adopted capital requirements that specify the minimum capital
      level
      for which no prompt corrective action is required. In addition, the FDIC
      assesses FDIC insurance premiums based on certain “well-capitalized” risk-based
      and equity capital ratios. As of December 31, 2006, the Subsidiary Banks and
      the
      Company exceeded the minimum requirements necessary to be classified as
“well-capitalized.”





Total
      equity capital for the Company was $66.6 million, or 7.89 percent of total
      assets, at December 31, 2006. Tier 1 capital was 11.09 percent of risk-weighted
      assets at the same date. Tier 1 capital at December 31, 2006 includes $10.0
      million of trust preferred debt issued by the Company’s nonconsolidated
      subsidiaries.





Under
      Federal Reserve Bank holding company capital regulations, trust preferred debt
      qualifies for Tier 1 capital treatment up to a limit of 25 percent of equity
      capital plus trust preferred debt. All of the Company’s trust preferred debt
      qualifies as Tier 1 capital. At December 31, 2006, the Company has the capacity
      to issue approximately $12 million in additional qualifying trust preferred
      debt
      which would qualify as Tier 1 capital.





The
      Company has a $5,000,000 line of credit through a correspondent bank, of which
      none was advanced at December 31, 2006. The primary purpose of the line is
      to
      provide access to funds that can be used for short-term corporate needs. The
      borrowing facility is available through June 6, 2007 at which time any
      outstanding indebtedness is due and payable in full. Advances on the line are
      subject to the Company certifying compliance with covenants and conditions
      specified in the agreement. The covenants include customary performance items
      and a negative pledge agreement on the stock of Savannah. The Company may not
      pledge the stock of Savannah for any other indebtedness or purpose without
      the
      express written consent of the lender.








**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
      2006, portfolio loans increased $107 million to $721 million and deposits
      increased $106 million to $707 million. The loan to deposit ratio was 102
      percent at December 31, 2006 and 2005. Average loan growth in 2006 was 17
      percent. Average deposit growth in 2006 was 11 percent.





In
      addition to local deposit growth, primary funding and liquidity sources include
      borrowing capacity with the FHLB, temporary federal funds purchased lines with
      correspondent banks and non-local institutional and brokered 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 of Atlanta (“FRB”) discount window.





The
      Subsidiary Banks have Blanket Floating Lien Agreements with the FHLB. Under
      these agreements, Savannah and Bryan have credit lines up to 80 percent of
      the
      FHLB qualifying collateral value of their 1-4 family first mortgage loans plus
      up to 50 percent of the FHLB qualifying collateral value of their home equity
      lines of credit and second mortgage residential loans. Total borrowings are
      limited to 20 percent and 16 percent of assets of Savannah and Bryan,
      respectively. Harbourside has an approved borrowing capacity of $2.2 million
      at
      December 31, 2006. In aggregate, the Subsidiary Banks had secured borrowing
      capacity of approximately $106.8 million of which $37.3 million was advanced
      at
      December 31, 2006. 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 up to $20 million of funding needs
      for 30-60 days. Savannah and Bryan have been approved to access the FRB discount
      window to borrow on a secured basis 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.


F
            - 32
 The
            Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
          Condition and Results of Operations


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 hedging strategies to reduce interest
      rate risk as noted below.





The
      Company’s cash flow, maturity and repricing gap at December 31, 2006 was $81
      million at one year, or 10 percent of total interest-earning assets. At December
      31, 2005 the gap at one year was $154 million, or 22 percent of total
      interest-earning assets. Interest-earning assets with maturities over five
      years
      totaled approximately $17.5 million, or 2.2 percent of total interest-earning
      assets. See Table 7 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 include significant rate risk and market value of equity concerns
      in the event of significant interest rate increases.





The
      Company is asset-sensitive within one year. The increases in the prime rate
      from
      7.25 percent to 8.25 percent during 2006 have positively impacted net interest
      income and net interest margin. However, increased funding costs in the latter
      part of 2006 more than offset the increases in interest-earning assets resulting
      in net interest margin compression in the fourth quarter.





Since
      June 2005, the Company has implemented various strategies to reduce the
      Company’s asset-sensitive position, primarily through the use of short maturity
      funding sources and hedging strategies such as interest rate floors, collars
      and
      swaps. During 2005, Savannah entered into a five year prime rate-based floor
      transaction with a notional amount of $35 million and a 6 percent strike rate.
      Also in 2005, Savannah and Bryan entered into a five year prime rate-based
      collar with a notional amount of $40 million that includes a 6 percent floor
      and
      9 percent cap rate and a $50 million interest rate swap, fully hedged by
      floating rate loans, in which they receive 7.645 percent fixed rate and pay
      a
      variable rate at the prime rate. 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 Board. Management upgraded its interest rate risk reporting systems
      by
      engaging outside balance sheet consultants during the second quarter of 2005.
      Better forecasting models are especially valuable during periods of volatile
      interest rates, rapid growth and changing interest rate yield
      curves.








**Off-Balance
      Sheet Arrangements**





In
      order
      to meet the financing needs of its customers, the Company is a party to
      financial instruments with off-balance sheet risks in the normal course of
      business. At December 31, 2006, the Company had unfunded commitments to extend
      credit of $156 million and outstanding stand-by letters of credit of $10.2
      million. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Company uses the same credit policies in establishing
      commitments and issuing letters of credit as it does for on-balance sheet
      instruments. Management does not anticipate that funding obligations arising
      from these financial instruments will adversely impact its ability to fund
      future loan growth or deposit withdrawals.


F
          - 33
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Forward
      Looking Statements**





This
      MD
& A and other Company communications and statements may contain
      "forward-looking statements." 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," "believe,"
      "anticipate," "estimate," "expect," "intend," "plan" and similar expressions
      are
      intended to identify forward-looking statements. The following factors, among
      others, could cause our financial performance to differ materially from what
      is
      contemplated in those forward-looking statements:





*
      The
      strength of the United States economy in general and the strength of the local
      economies in which we conduct operations may be different than expected
      resulting in, among other things, a deterioration in credit quality or reduced
      demand for credit, including the resultant effect on our loan portfolio and
      allowance for credit losses;


*
      The
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Board of Governors of the Federal
      Reserve System;


*
      Inflation, interest rate, market and monetary fluctuations;


*
      Adverse
      conditions in the stock market and other capital markets and the impact of
      those
      conditions on our capital markets and capital management activities, including
      our investment and wealth management advisory businesses;


*
      Changes
      in U.S. foreign or military policy;


*
      The
      timely development of competitive new products and services by us and the
      acceptance of those products and services by new and existing customers;


*
      The
      willingness of customers to accept third-party products marketed by us;


*
      The
      willingness of customers to substitute competitors' products and services for
      our products and services and vice versa;


*
      The
      impact of changes in financial services laws and regulations (including laws
      concerning taxes, banking, securities and insurance);


*
      Technological changes;


*
      Changes
      in consumer spending and saving habits;


*
      The
      effect of corporate restructuring, acquisitions or dispositions, including
      the
      actual restructuring and other related charges and the failure to achieve the
      expected gains, revenue growth or expense savings from such corporate
      restructuring, acquisitions or dispositions;


*
      The
      growth and profitability of our noninterest or fee income being less than
      expected;


*
      Unanticipated regulatory or judicial proceedings;


*
      The
      impact of changes in accounting policies by the SEC or the Financial Accounting
      Standards Board;


*
      Adverse
      changes in the financial performance and/or condition of our borrowers, which
      could impact the repayment of those borrowers' outstanding loans; and


*
      Our
      success at managing the risks involved in the foregoing.




We
      caution that the foregoing list of important factors is not exhaustive. Also,
      we
      do not undertake to update any forward-looking statements, whether written
      or
      oral, that may be made from time to time by us or on our behalf except as may
      be
      required by our disclosure obligations in filings we make with the SEC under
      federal securities laws .


F
          - 34
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      7** **- Cash Flow/Maturity Gap and Repricing Data**





The
      following is the cash flow/maturity and repricing data for the Company as of
      December 31, 2006:





($
                in thousands)
            
            0
                -
                3
            3
                -
                12
            1
                -
                3
            3
                -
                5
            Over
                5Immediate
            Months
            Months
            Years
            Years
            Years
            Total**Interest-earning
                assets**Investment
                securities
            $
                -
            $
                8,148
            $
                8,150
            $
                16,861
            $
                17,052
            $
                3,952
            $
                54,163Interest-bearing
                deposits
            10,394
            -
            -
            -
            -
            -
            10,394Federal
                funds sold
            18,363
            -
            -
            -
            -
            -
            18,363Loans
                held for sale
            -
            914
            -
            -
            -
            -
            914Loans
                - fixed rates
            -
            33,393
            108,346
            164,647
            34,807
            12,949
            354,142Loans
                - variable rates
            -
            309,395
            15,987
            13,174
            26,837
            558
            365,951Total
                interest-earning assets
            28,757
            351,850
            132,483
            194,682
            78,696
            17,459
            803,927**Interest-bearing
                liabilities**NOW
                and savings **
            -
            6,756
            13,511
            33,777
            40,532
            40,532
            135,108Money
                market accounts **
            -
            36,774
            45,502
            26,001
            39,002
            -
            147,279Time
                deposits
            -
            93,982
            183,777
            34,968
            10,398
            156
            323,281Short-term
                borrowings
            25,003
            15,684
            -
            -
            -
            -
            40,687FHLB
                advances - long-term
            -
            84
            256
            2,807
            10,011
            151
            13,309Subordinated
                debt
            -
            10,310
            -
            -
            -
            -
            10,310Total
                interest-bearing liabilities
            25,003
            163,590
            243,046
            97,553
            99,943
            40,839
            669,974**GAP-Excess
                assets (liabilities)**
            3,754
            188,260
            (110,563)
            97,129
            (21,247)
            (23,380)
            133,953**GAP-Cumulative**
            $
                3,754
            $
                192,014
            $
                81,451
            $
                178,580
            $
                157,333
            $
                133,953
            $
                133,953**Cumulative
                sensitivity ratio ***
            1.15
            2.02
            1.19
            1.34
            1.25
            1.20
            1.20




*
      Cumulative interest-earning assets / cumulative interest-bearing
      liabilities




**
      Repricing of NOW, savings and money market accounts based on estimated
      percentages of market interest rate changes.




Note
      - At
      December 31, 2006 the Company had unfunded loan commitments and unfunded lines
      of credit totaling $156 million. The
      Company believes the likelihood of these commitments either needing to be
      totally funded or funded at the same time is low. However, should a significant
      funding requirement occur, the Company has available borrowing capacity from
      the
      FHLB of $69 million. Additionally, further sources of funding include brokered
      time deposits and certain other non-local deposits.




F
          - 35
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      8 - Average Balance Sheet and Rate/Volume Analysis - 2006 and
      2005**


The
      following table presents average balances of the Company and the Subsidiary
      Banks on a consolidated basis, the taxable-equivalent interest earned and
      t he
      rate
      paid thereon during 2006 and 2005.





Taxable-Equivalent
            
            (a)
                VarianceAverage
                Balance
            Average
                Rate
            
            
            Interest
                (b)
            Vari-
            Attributable
                to2006
            2005
            2006
            2005
            
            
            2006
            2005
            ance
            Rate
            Volume($
                in thousands)
            (%)
            
            
            ($
                in thousands)
            
            ($
                in thousands)**Assets**$
                5,969
            $
                14,747
            4.91
            3.21
            
            Interest-bearing
                deposits
            $
                293
            $
                473
            $
                (180)
            $
                251
            $
                (431)48,190
            36,999
            4.47
            4.02
            
            Investments
                - taxable
            2,153
            1,489
            664
            166
            4982,410
            4,301
            7.47
            6.93
            
            Investments
                - non-taxable
            180
            298
            (118)
            23
            (141)11,309
            11,421
            4.93
            3.29
            
            Federal
                funds sold
            557
            376
            181
            187
            (6)7,842
            23,033
            7.12
            5.80
            
            Loans
                held for sale
            558
            1,335
            (777)
            304
            (1,081)658,750
            565,131
            7.83
            6.83
            
            Loans
                (c)
            51,606
            38,573
            13,033
            5,651
            7,382734,470
            655,632
            7.54
            6.49
            
            Total
                interest-earning assets
            55,347
            42,544
            12,803
            6,884
            5,91935,447
            29,531
            
            
            
            Noninterest-earning
                assets$769,917
            $685,163
            
            
            
            Total
                assets**Liabilities
                and equity**Deposits$
                95,138
            $
                89,963
            1.32
            0.77
            
            NOW
                accounts
            1,254
            697
            557
            495
            6219,104
            20,020
            0.99
            0.93
            
            Savings
                accounts
            190
            187
            3
            12
            (9)135,736
            104,023
            3.75
            2.35
            
            Money
                market accounts
            5,093
            2,443
            2,650
            1,456
            1,194105,220
            76,661
            4.68
            3.45
            
            CDs,
                $100M or more
            4,927
            2,642
            2,285
            943
            1,34281,084
            112,347
            3.98
            3.24
            
            CDs,
                broker
            3,225
            3,640
            (415)
            831
            (1,246)106,093
            84,479
            4.39
            3.27
            
            Other
                time deposits
            4,653
            2,764
            1,889
            946
            943542,375
            487,493
            3.57
            2.54
            
            Total
                interest-bearing deposits
            19,342
            12,373
            6,969
            5,021
            1,94815,770
            20,669
            4.93
            4.88
            
            FHLB
                advances - long-term
            778
            1,009
            (231)
            10
            (241)36,175
            24,276
            4.98
            2.78
            
            Short-term
                borrowings
            1,802
            675
            1,127
            534
            59310,310
            10,310
            7.90
            6.03
            
            Subordinated
                debt
            815
            622
            193
            193
            -Total
                interest-bearing604,630
            542,748
            3.76
            2.70
            
            liabilities
            22,737
            14,679
            8,058
            5,753
            2,30596,113
            89,386
            
            
            
            Noninterest-bearing
                deposits7,408
            5,601
            
            
            
            Other
                liabilities61,766
            47,428
            
            
            
            Shareholders'
                equity$769,917
            $685,163
            
            
            
            Liabilities
                and equity3.78
            3.79
            
            Interest
                rate spread4.44
            4.25
            
            Net
                interest marginNet
                interest income
            $
                32,610
            $
                27,865
            $
                4,745
            $1,131
            $
                3,614$129,840
            $112,884
            
            
            
            Net
                earning assets$638,488
            $576,879
            
            
            
            Average
                deposits3.03
            2.14
            
            Average
                cost of deposits103%
            98%
            
            
            
            Average
                loan to deposit ratio


(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 $158 in 2006 and $186 in 2005 results from
      tax
      exempt income less non-deductible TEFRA interest expense.


(c)
      Average nonaccruing loans have been excluded from total average loans and
      included in noninterest-earning assets.


F
          - 36
 The
          Savannah Bancorp, Inc. - 2006 Annual Report
 
 Management's Discussion and Analysis of Financial
        Condition and Results of Operations


**Table
      9 - Average Balance Sheet and Rate/Volume Analysis - 2005 and
      2004**





The
      following table presents average balances of the Company and the Subsidiary
      Banks on a consolidated basis, the taxable-equivalent interest earned and the
      rate paid thereon during 2005 and 2004.





Taxable-Equivalent
            
            (a)
                VarianceAverage
                Balance
            Average
                Rate
            
            
            Interest
                (b)
            Vari-
            Attributable
                to2005
            2004
            2005
            2004
            
            
            2005
            2004
            ance
            Rate
            Volume($
                in thousands)
            (%)
            
            
            ($
                in thousands)
            
            ($
                in thousands)**Assets**$
                14,747
            $
                14,418
            3.21
            1.39
            
            Interest-bearing
                deposits
            $
                473
            $
                201
            $
                272
            $
                263
            $
                936,999
            35,010
            4.02
            3.98
            
            Investments
                - taxable
            1,489
            1,393
            96
            18
            784,301
            5,693
            6.93
            9.17
            
            Investments
                - non-taxable
            298
            522
            (224)
            (93)
            (131)11,421
            7,965
            3.29
            1.27
            
            Federal
                funds sold
            376
            101
            275
            159
            11623,033
            27,209
            5.80
            5.26
            
            Loans
                held for sale
            1,335
            1,432
            (97)
            147
            (244)565,131
            441,421
            6.83
            5.73
            
            Loans
                (c)
            38,573
            25,298
            13,275
            4,837
            8,438655,632
            531,716
            6.49
            5.44
            
            Total
                interest-earning assets
            42,544
            28,947
            13,597
            5,331
            8,26629,531
            25,758
            
            
            
            Noninterest-earning
                assets$685,163
            $557,474
            
            
            
            Total
                assets**Liabilities
                and equity**Deposits$
                89,963
            $
                85,824
            0.77
            0.36
            
            NOW
                accounts
            697
            306
            391
            352
            3920,020
            18,828
            0.93
            0.50
            
            Savings
                accounts
            187
            94
            93
            81
            12104,023
            76,748
            2.35
            1.15
            
            Money
                market accounts
            2,443
            879
            1,564
            921
            64376,661
            64,278
            3.45
            2.76
            
            CDs,
                $100M or more
            2,642
            1,775
            867
            444
            423112,347
            48,798
            3.24
            2.83
            
            CDs,
                broker
            3,640
            1,381
            2,259
            200
            2,05984,479
            77,401
            3.27
            2.62
            
            Other
                time deposits
            2,764
            2,027
            737
            503
            234487,493
            371,877
            2.54
            1.74
            
            Total
                interest-bearing deposits
            12,373
            6,462
            5,911
            2,501
            3,41020,669
            20,837
            4.88
            4.91
            
            FHLB
                advances - long-term
            1,009
            1,023
            (14)
            (6)
            (8)24,276
            39,061
            2.78
            1.57
            
            Short-term
                borrowings
            675
            614
            61
            473
            (412)10,310
            7,455
            6.03
            4.40
            
            Subordinated
                debt
            622
            328
            294
            122
            172Total
                interest-bearing542,748
            439,230
            2.70
            1.92
            
            liabilities
            14,679
            8,427
            6,252
            3,090
            3,16289,386
            76,593
            
            
            
            Noninterest-bearing
                deposits5,601
            3,525
            
            
            
            Other
                liabilities47,428
            38,126
            
            
            
            Shareholders'
                equity$685,163
            $557,474
            
            
            
            Liabilities
                and equity3.79
            3.52
            
            Interest
                rate spread4.25
            3.86
            
            Net
                interest marginNet
                interest income
            $
                27,865
            $
                20,520
            $
                7,345
            $
                2,241
            $
                5,104$112,884
            $
                92,486
            
            
            
            Net
                earning assets$576,879
            $448,470
            
            
            
            Average
                deposits2.14
            1.44
            
            Average
                cost of deposits98%
            98%
            
            
            
            Average
                loan to deposit ratio


(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 $186 in 2005 and $240 in 2004 results from
      tax
      exempt income less non-deductible TEFRA interest expense.


(c)
      Average nonaccruing loans have been excluded from total average loans and
      included in noninterest-earning assets.





F
          - 37
 The
          Savannah Bancorp, Inc. - 2006 Annual Report