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 -
      2Report
      of Independent Registered Public Accounting Firm
                F -
      3Consolidated
      Balance SheetsDecember
      31, 2007 and 2006
                F
      - 4Consolidated
      Statements of Income for the YearsEnded
      December 31, 2007, 2006 and 2005
                F
      - 5Consolidated
      Statements of Changes in Shareholders'Equity
      for the Years Ended December 31, 2007, 2006 and 2005
                F
      - 6Consolidated
      Statements of Cash Flows for the YearsEnded December
      31, 2007, 2006 and 2005
                F
      - 7Notes to
      Consolidated Financial Statements
                F
      - 8Management's
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                F -
      26Selected
      Five-Year Financial Data -- 2003-2007Selected
      Financial Condition Highlights
                F -
      26Selected
      Operating Highlights
                F -
      27Selected
      Quarterly Data
                F -
      28Market
      for Registrant's Common Equity andRelated
      Shareholder Matters
                F -
      28Stock
      Performance Graph
                F -
      29Introduction
                F
      - 30Critical
      Accounting Estimate
                F
      - 31Results
      of Operations2007
      Compared with 2006
                F
      - 342006
      Compared with 2005
                F
      - 35Financial
      Condition and Capital Resources
                F -
      36Loan
      Concentrations
                F -
      36Liquidity
      and Interest Rate Sensitivity Management
                F -
      37Off-Balance
      Sheet Arrangements
                F -
      38Forward
      Looking Statements
                F -
      39Cash
      Flow/Maturity Gap and Repricing Data
                F
      - 40Average
      Balance Sheet and Rate/Volume Analysis -- 2007 and
    2006
                F
      - 41Average
      Balance Sheet and Rate/Volume Analysis -- 2006 and
    2005
                F
      - 42
 F - 1
 The
Savannah Bancorp, Inc. - 2007 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 sheet of The Savannah Bancorp,
Inc. and its subsidiaries as of December 31, 2007, and the related consolidated
statements of income, changes in shareholders’ equity and cash flows for the
year ended December 31, 2007.  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 audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  Our audit
of the financial statements included 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, and
evaluating the overall financial statement presentation.  We believe
that our audit provides 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, 2007, and the results of
its operations and its cash flows for the year ended December 31, 2007 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 Savannah Bancorp, Inc. and its subsidiaries’
internal control over financial reporting as of December 31, 2007, 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 10, 2008 expressed an unqualified opinion.








/s/
Mauldin & Jenkins, LLC





Albany,
Georgia


March 10,
2008




F
- 2
 The
Savannah Bancorp, Inc. - 2007 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 sheet of The Savannah Bancorp,
Inc. and its subsidiaries as of December 31, 2006 and the related consolidated
statements of income, changes in shareholders’ equity and cash flows for each of
the two 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 the results of
its operations and its cash flows for each of the two years in the period ended
December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America.










/s/ BDO
Seidman, LLP





Atlanta,
Georgia


March 8,
2007




F
- 3
 The
Savannah Bancorp, Inc. - 2007 Annual Report


The
Savannah Bancorp, Inc. and Subsidiaries


Consolidated
Balance Sheets


($ in
thousands, except share data)








December
      31,2007
            
            2006AssetsCash
      and due from banks
            $ 
      12,721
            
            $ 
      18,540Federal
      funds sold
            4,435
            
            18,363Interest-bearing
      deposits in banks
            20,148
            
            10,394Cash
      and cash equivalents
            37,304
            
            47,297Securities
      available for sale, at fair value (amortizedcost
      of $60,241 and $54,163 in 2007 and 2006)
            61,057
            
            53,917Loans
      held for sale
            180
            
            914Loans,
      net of allowance for loan losses of $12,864
              and
      $8,954 in 2007 and 2006
            795,787
            
            711,964Premises
      and equipment, net
            6,830
            
            6,365Other
      real estate owned
            2,112
            
            545Bank-owned
      life insurance
            5,985
            
            5,760Goodwill
      and other intangibles, net
            2,806
            
            -Other
      assets
            20,398
            
            16,752Total
      assets
            $ 932,459
            
            $ 843,514LiabilitiesDeposits:Noninterest-bearing
            $   88,503
            
            $
      101,156Interest-bearing
      demand
            127,902
            
            116,493Savings
            16,168
            
            18,615Money
      market
            176,615
            
            147,279Time
      deposits
            355,030
            
            323,281Total
      deposits
            764,218
            
            706,824Short-term
      borrowings
            70,599
            
            40,687Federal
      Home Loan Bank advances – long-term
            2,973
            
            13,309Subordinated
      debt to nonconsolidated subsidiaries
            10,310
            
            10,310Other
      liabilities
            8,087
            
            5,810Total
      liabilities
            856,187
            
            776,940Commitments
      and contingencies (Notes 14 and 17)Shareholders'
      equityPreferred
      stock, par value $1 per share:authorized
      10,000,000 shares, none issued
            -
            
            -Common
      stock, par value $1 per share:  authorized20,000,000
      shares; issued 5,923,797 and 5,781,381 sharesin
      2007 and 2006
            5,924
            
            5,781Additional
      paid-in capital
            38,279
            
            35,747Retained
      earnings
            30,512
            
            25,681Treasury
      stock, 318 shares in 2007 and 2006
            (4)
            
            (4)Accumulated
      other comprehensive income (loss), net
            1,561
            
            (631)Total
      shareholders' equity
            76,272
            
            66,574Total
      liabilities and shareholders' equity
            $ 932,459
            
            $ 843,514





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




F
- 4
 The
Savannah Bancorp, Inc. - 2007 Annual Report




The
Savannah Bancorp, Inc. and Subsidiaries


Consolidated
Statements of Income


($ in
thousands, except per share data)





For
      the Years Ended December 31,2007
            
            2006
            
            2005Interest
      and dividend incomeLoans,
      including fees
            $
      59,435
            
            $
      51,541
            
            $
      38,503Loans
      held for sale
            98
            
            558
            
            1,335Investment
      securities:Taxable
            2,594
            
            1,912
            
            1,325Tax-exempt
            95
            
            123
            
            218Dividends
            218
            
            205
            
            128Deposits
      with banks
            346
            
            293
            
            473Federal
      funds sold
            472
            
            557
            
            376Total
      interest and dividend income
            63,258
            
            55,189
            
            42,358Interest
      expenseDeposits
            26,415
            
            19,342
            
            12,373Short-term
      borrowings
            2,612
            
            1,802
            
            675Federal
      Home Loan Bank advances
            413
            
            778
            
            1,009Subordinated
      debt
            842
            
            815
            
            622Total
      interest expense
            30,282
            
            22,737
            
            14,679Net
      interest income
            32,976
            
            32,452
            
            27,679Provision
      for loan losses
            4,675
            
            1,585
            
            1,500Net
      interest income afterprovision
      for loan losses
            28,301
            
            30,867
            
            26,179Noninterest
      incomeService
      charges on deposit accounts
            1,383
            
            1,526
            
            1,622Mortgage
      related income, net
            615
            
            886
            
            1,292Trust
      and asset management fees
            1,513
            
            658
            
            501Other
      operating income
            1,242
            
            1,233
            
            979Losses
      on sales of other real estate owned
            (44)
            
            -
            
            (7)Total
      noninterest income
            4,709
            
            4,303
            
            4,387Noninterest
      expenseSalaries
      and employee benefits
            11,846
            
            10,852
            
            9,530Occupancy
      and equipment
            3,294
            
            2,920
            
            2,199Information
      technology
            1,616
            
            1,525
            
            1,244Other
      operating expense
            4,383
            
            4,656
            
            3,673Total
      noninterest expense
            21,139
            
            19,953
            
            16,646Income
      before income taxes
            11,871
            
            15,217
            
            13,920Income
      tax expense
            4,235
            
            5,215
            
            4,880Net
      income
            $   7,636
            
            $
      10,002
            
            $ 9,040Net
      income per share: (a)Basic
            $
      1.31
            
            $
      1.73
            
            $
      1.68Diluted
            $
      1.29
            
            $
      1.70
            
            $
      1.63Dividends
      per share
            $
      0.48
            
            $
      0.45
            
            $
      0.43Average
      basic shares (000s)
            5,850
            
            5,765
            
            5,396Average
      diluted shares (000s)
            5,922
            
            5,876
            
            5,531


(a)
      Share and 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
- 5
 The
Savannah Bancorp, Inc. - 2007 Annual Report




The
Savannah Bancorp, Inc. and Subsidiaries


Consolidated
Statements of Changes in Shareholders' Equity


($ inthousands, except share
data)





For
      the Years Ended December 31,2007
            2006
            2005Common
      shares issuedShares,
      beginning of year
            5,781,381
            4,591,339
            4,112,448Common
      stock issued
            78,000
            -
            397,273Stock
      split / dividend
            -
            1,155,564
            -Exercise
      of options
            64,416
            34,478
            81,618Shares,
      end of year
            5,923,797
            5,781,381
            4,591,339Treasury
      shares ownedShares,
      beginning of year
            318
            267
            282Stock
      split / dividend or issuance
            -
            63
            (15)Stock
      options exercised
            -
            (12)
            -Shares,
      end of year
            318
            318
            267Common
      stockBalance,
      beginning of year
            $   5,781
            $   4,591
            $   4,112Common
      stock issued
            78
            -
            397Stock
      split / dividend
            -
            1,156
            -Stock
      options exercised
            65
            34
            82Balance,
      end of year
            5,924
            5,781
            4,591Additional
      paid-in capitalBalance,
      beginning of year
            35,747
            36,257
            24,232Common
      stock issued, net of issuance costs
            1,702
            -
            11,191Stock
      split / dividend
            -
            (1,156)
            -Stock-based
      compensation expense, net
            147
            191
            -Stock
      options exercised
            683
            272
            494Tax benefit
      of option exercises and expense
            -
            183
            340Balance,
      end of year
            38,279
            35,747
            36,257Retained
      earningsBalance,
      beginning of year
            25,681
            18,272
            11,539Net
      income
            7,636
            10,002
            9,040Dividends
      paid
            (2,805)
            (2,593)
            (2,307)Balance,
      end of year
            30,512
            25,681
            18,272Treasury
      stockBalance,
      beginning of year
            (4)
            (4)
            (4)Stock
      options exercised
            -
            -
            -Balance,
      end of year
            (4)
            (4)
            (4)Accumulated
      other comprehensive income (loss), netBalance,
      beginning of year
            (631)
            (573)
            192Change
      in unrealized gains (losses) on securitiesavailable
      for sale, net of tax
            662
            178
            (522)Change
      in fair value of derivative instruments, net of tax
            1,530
            (236)
            (243)Balance,
      end of year
            1,561
            (631)
            (573)Total
      shareholders' equity
            $
      76,272
            $
      66,574
            $
      58,543




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




See Note
1 for other comprehensive income disclosures.






F
- 6
 The
Savannah Bancorp, Inc. - 2007 Annual Report


The
Savannah Bancorp, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows





For
      the Years Ended December 31,($
      in thousands)
            2007
            2006
            2005Operating
      activitiesNet
      income
            $   7,636
            $
      10,002
            $     9,040Adjustments
      to reconcile net income to cashprovided
      by operating activities:Provision
      for loan losses
            4,675
            1,585
            1,500Loans
      originated for sale
            (24,834)
            (34,195)
            (104,888)Proceeds
      from sale of loans originated for sale
            25,715
            44,067
            111,824Net
      (accretion) amortization of securities
            (122)
            29
            102Depreciation
      and amortization
            1,070
            976
            809Net
      amortization of client list
            48
            -
            -Non
      cash stock-based compensation expense
            184
            299
            -Decrease
      in deferred income taxes, net
            (677)
            (728)
            (860)Gain
      on sale of loans, net
            (147)
            (313)
            (760)Losses
      on sales of foreclosed assets
            44
            -
            7Equity
      in net income of nonconsolidated subsidiary
            (89)
            (109)
            -Increase
      in CSV of bank-owned life insurance policies
            (225)
            (209)
            (202)Change
      in other assets and other liabilities, net
            3,232
            (5,281)
            1,995Net
      cash provided by operating activities
            16,510
            16,123
            18,567Investing
      activitiesActivity
      in available for sale securitiesPurchases
            (29,356)
            (20,380)
            (19,396)Maturities
      and calls
            23,400
            11,161
            15,518Loan
      originations and principal collections, net
            (90,451)
            (110,040)
            (104,053)Proceeds
      from sale of foreclosed assets
            342
            1,800
            453Investment
      in low income housing tax credits
            (2,000)
            -
            (339)Distribution
      from (investment in) nonconsolidated subsidiary
            -
            1,300
            (2,709)Purchase
      of consolidated subsidiary
            (1,901)
            -
            -Additions
      to premises and equipment
            (1,450)
            (2,376)
            (1,044)Net
      cash used in investing activities
            (101,416)
            (118,535)
            (111,570)Financing
      activitiesNet
      (decrease) increase in noninterest-bearing deposits
            (12,653)
            8,074
            9,292Net
      increase in interest-bearing deposits
            70,047
            98,240
            85,098Net
      increase (decrease) in short-term borrowings
              to
      repurchase and federal funds purchased
            29,912
            20,785
            (15,167)Net
      decrease in FHLB advances – long-term
            (10,336)
            (7,167)
            (361)Payment
      on note payable
            -
            (479)
            (484)Dividends
      paid
            (2,805)
            (2,593)
            (2,307)Issuance
      of common stock
            -
            -
            11,588Exercise
      of options
            748
            381
            916Net
      cash provided by financing activities
            74,913
            117,241
            88,575(Decrease)
      increase in cash and cash equivalents
            (9,993)
            14,829
            (4,428)Cash
      and cash equivalents, beginning of year
            47,297
            32,468
            36,896Cash
      and cash equivalents, end of year
            $
      37,304
            $
      47,297
            $
      32,468





Supplemental
      disclosures of cash flow informationCash
      paid during the year for:Interest
      on deposits and other borrowings
            $
      29,865
            $
      22,115
            $
      14,199Income
      taxes
            5,560
            6,038
            4,559Non
      cash investing activity:Transfer
      to other real estate owned from loans
            (1,953)
            (2,735)
            -Increase
      (decrease) in unrealized gains/losses on investmentsecurities
      available for sale, net of tax
            662
            178
            (522)Increase
      (decrease) in unrealized gains/losses onderivatives,
      net of tax
            1,530
            (236)
            (243)


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




F -
7
 The
Savannah Bancorp, Inc. - 2007 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”), Harbourside Community Bank
(“Harbourside”) and Minis & Co., Inc. (“Minis”), a registered investment
advisory firm acquired on August 31, 2007.  The three bank
subsidiaries, together, are 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 holding company that owns three banks
and a registered investment advisory firm.  Through the subsidiaries,
the Company offers a full range of lending, deposit, residential mortgage
origination, fiduciary, trust and investment advisory 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.  Minis was
acquired on August 31, 2007 and additional information regarding the acquisition
is included in Note 2.





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 loan 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 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 loan 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 -
8
 The
Savannah Bancorp, Inc. - 2007 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
LoanLosses- The
allowance for loan 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 relevant qualitative and quantitative factors that deserve recognition in
estimating loan losses.  Actual future losses may be different from
estimates due to unforeseen events.  Loans that are determined to be
uncollectible are charged-off against the allowance.





The
adequacy of the allowance for loan 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 collectability 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 of these assets 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
accelerated methods 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 less estimated disposal costs 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 estimated
disposal costs.  Valuation allowances are established when subsequent
valuations are less than




F -
9
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




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





current
carrying amounts.  Expenses from operations and changes in the
valuation allowance and net expenses from holding these assets are included in
noninterest expense.





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.





Intangible
Assets-Intangible assets include goodwill and other identifiable assets, such as
customer lists, resulting from our acquisition of Minis.  Customer
list intangibles are amortized on a straight-line basis over an estimated useful
life of seven to ten years and evaluated for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
recoverable.  Goodwill is not amortized but tested annually for
impairment or at any time an event occurs or circumstances change that may
trigger a decline in the value of the reporting unit.  Examples of
such events or circumstances include adverse change in operations, legal
factors, business climate, unanticipated competition, change in regulatory
environment, or loss of key personnel.





We will
test for impairment in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” within twelve
months of the September 1, 2007 acquisition date of Minis.  Potential
impairment of goodwill exists when the carrying amount of a reporting unit
exceeds its fair value.  The fair value for each reporting unit is
computed using one or a combination of the following three methods: income,
market value, or cost method.  The income method uses a discounted
cash flow analysis to determine fair value by considering a reporting unit’s
capital structure and applying a risk-adjusted discount rate to forecast
earnings based on a capital asset pricing model.  The market value
method uses recent transaction analysis or publicly traded comparable analysis
for similar assets and liabilities to determine fair value.  The cost
method assumes the net assets of a recent business combination accounted for
under the purchase method of accounting will be recorded at fair value if no
event or circumstance has occurred triggering a decline in the value. To the
extent a reporting unit’s carrying amount exceeds its fair value, an indication
exists that the reporting unit’s goodwill may be impaired, and a second step of
impairment test will be performed.  In the second step, the implied
fair value of the reporting unit’s goodwill, determined by allocating the
reporting unit’s fair value to all of its assets (recognized and unrecognized)
and liabilities as if the reporting unit had been acquired in a business
combination at the date of the impairment test.  If the implied fair
value of reporting unit goodwill is lower than its carrying amount, goodwill is
impaired and is written down to the implied fair value.  The loss
recognized is limited to the carrying amount of goodwill.  Once an
impairment loss is recognized, future increases in fair value will not result in
the reversal of previously recognized losses.





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:





(amounts
      in thousands)Years
      Ended December 31,
            2007
            2006
            2005Average
      number of common shares outstanding - basic
            5,850
            5,765
            5,396Effect
      of dilutive options
            72
            111
            135Average
      number of common shares outstanding - diluted
            5,922
            5,876
            5,531






F -
10
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


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





Stock
option shares in the amount of 102,602 and 10,716 for the years ended 2007
and 2006 were excluded from the diluted earnings per share calculation due to
their anti-dilutive effect.  None were excluded in
2005.  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 - 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)
            2007
            2006
            2005Net
      income
            $
      7,636
            $
      10,002
            $
      9,040Change
      in unrealized gains (losses) onsecurities
      available for sale, net of tax
            662
            178
            (522)Change
      in fair value of derivativeinstruments,
      net of tax
            1,530
            (236)
            (243)Other
      comprehensive income
            $
      9,828
            $   9,944
            $
      8,275





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 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, 2007 under the 2005 Omnibus Plan
was 158,121 shares of common stock.  Options granted under both plans
have a term of ten years and generally become fully vested over periods ranging
from three to ten years.  Performance based options granted to
directors vest over three quarters from the date of grant.





In
accordance with the modified prospective method, the Company’s consolidated
financial statements for periods prior to 2006 have not been restated to
reflect, and do not include, the impact of SFAS 123R.






F -
11
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


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





The
following table summarizes compensation costs related to the Company’s
stock-based compensation plans for the years ended December 31, 2007 and
2006:





($
      in thousands)
            2007
            2006Salaries
      and employee benefits
            $
      143
            $  200Directors'
      stock-based compensation
            41
            99Pre-tax
      stock-based compensation expense
            184
            299Income
      tax benefit
            (37)
            (108)Total
      stock-based compensation expense, net of tax
            $
      147
            $  191





In 2007
and 2006, the Company realized $15,000 and $48,000, respectively in income tax
benefit associated with certain stock option exercises.  Stock-based
compensation expense, net of tax, for 2005 was $151,000.  Net income
per diluted share would have been approximately $0.03 less for
2005.





The
Company recognizes stock-based compensation expense using the graded vesting
attribution method.  The remaining unrecognized compensation cost
related to unvested incentive stock option and restricted share awards at
December 31, 2007 is approximately $285,000.  The weighted-average
period of time over which this cost will be recognized is approximately 2.9
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.





The
Company implemented an improved Black-Scholes methodology for calculating
stock-based compensation in 2006.  Certain assumptions in years prior
to 2006 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.





2007
            2006
            2005Weighted
      average fair value of options granted
            $
      7.71
            $
      8.89
            $
      6.06Expected
      volatility
            28.6%
            27.7%
            29.0%Dividend
      yield
            1.90%
            1.53%
            1.94%Risk-free
      interest rate
            4.92%
            4.90%
            3.82%Expected
      life
            6.0
      years
            6.0
      years
            6.0
      years





Risks and
Uncertainties-In the normal course of its business, we encounter two significant types
of risk: economic and regulatory.  There are three main components of
economic risk: interest rate risk, credit risk and market risk. We are subject
to interest rate risk to the degree that our interest-bearing liabilities mature
or reprice at different speeds, or on different indexes, than our
interest-earning assets.  Credit risk is the risk of default on our
loan portfolio that results from borrowers’ inability or unwillingness to make
contractually required payments.  Market risk reflects changes in the
value of collateral underlying loans receivable, the valuation of real estate we
hold, and the valuation of loans held for sale, investments and mortgage-backed
securities available for sale and mortgage servicing rights.





We are
subject to the regulations of various government agencies.  These
regulations can and do change significantly from period to period.  We
also undergo periodic examinations by the regulatory agencies, which may subject
us to further changes with respect to asset valuations, amounts of required loss
allowances and operating restrictions resulting from the regulators’ judgments
on information available to them at the time of their examination.




F -
12
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


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





Recent
Accounting Pronouncements





On
January 1, 2007, the Company adopted the Securities and Exchange Commission’s
(“SEC”) Staff Accounting Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”).  SAB 108 provides guidance on how
the effects of prior year uncorrected financial statement misstatements should
be considered in quantifying a current year misstatement.  SAB 108
requires public companies to quantify misstatements using both an income
statement (rollover) and balance sheet (iron curtain) approach and evaluate
whether either approach results in a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material.  If
prior year errors that had been previously considered immaterial but now are
considered material based on either approach, no restatement is required so long
as management properly applied its previous approach and all relevant facts and
circumstances were considered. Adjustments considered immaterial in prior years
under the method previously used, but now considered material under the dual
approach required by SAB 108, are to be recorded upon initial adoption of SAB
108.  No adjustments were recorded upon the initial adoption of SAB
108 or during the current year.





In
June 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  FIN 48 is effective for fiscal
years beginning after December 15, 2006.  The Company adopted FIN
48 as of January 1, 2007, and the adoption had no significant impact on the
Company’s consolidated financial statements.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”).  SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements.  This statement applies
under other accounting pronouncements that require or permit fair value
measurements; accordingly, this statement does not require any new fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  The Company has determined that the impact of
implementing the statement will not have a material effect on its financial
assets and liabilities, including its derivative financial
instruments.





On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
Opinion for Financial Assets and Financial Liabilities” (“SFAS 159”) which
permits companies to report selected financial assets and liabilities at fair
value.  SFAS 159 also requires entities to display the fair value of
those assets and liabilities for which the entity has chosen to use fair value
on the face of the balance sheet.  SFAS 159 does not eliminate
disclosure requirements included in other accounting standards.  SFAS
159 is effective for fiscal years beginning after November 15,
2007.  Management anticipates continuing to use fair value reporting
primarily for the items in which other accounting standards require fair value
accounting and disclosures.




Note
2 - Acquisitions
 
 The
Company acquired all of the net assets of Minis as of August 31,
2007.  The net assets of Minis were incorporated into a new,
wholly-owned subsidiary of the Company which will continue to operate under the
name of Minis & Co., Inc.  The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of Minis’
operations have been included in the consolidated financial statements beginning
September 1, 2007.  Minis is a registered investment advisor based in
Savannah, Georgia, offering a full line of investment management
services.  Minis’ assets under management at September 1, 2007
were approximately $500 million.





F -
13
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




Note 2 - Acquisitions
(continued)





The
aggregate purchase price was $3.80 million, consisting of 71,000 shares of
the Company’s common stock valued at $1.78 million, $1.853 million in
cash, net of $118,000 in cash received at closing, and approximately
$48,000 in direct acquisition costs, primarily consisting of external legal and
accounting fees.  The value of the common shares issued was determined
based on the average market price of the Company’s common stock on the day
before and the day on which the terms of the acquisition were publicly
announced.





The terms
of the asset purchase agreement provide for contingent earn-out
consideration to the former Minis shareholders.  Such consideration
will be based on actual revenue earned from existing clients at August 31, 2007
as compared to a target level of revenues through June 30,
2010.  Based on the assumptions at the time the asset
purchase agreement was executed, the Company expected that the aggregate
contingent consideration, including interest, would be approximately
$2.2 million payable as near as practicable to the June 30, 2010
determination date.  However, Minis’ failure to generate revenue at
the agreed upon targeted level or above will result in lower contingent
consideration paid to the former Minis shareholders.





The
preliminary purchase price allocation relating to the Minis acquisition was as
follows:





($
      in thousands)
            September
      1, 2007Assets
      acquiredCash
            $    118Accounts
      receivable
            53Premises
      and equipment
            85Prepaid
      expense
            4Deferred
      income tax benefits
            876Intangible
      assets
            1,400Goodwill,
      net of tax benefits
            1,435Total
      assets acquired
            3,971Liabilities
      assumedUnearned
      revenue
            171Total
      liabilities assumed
            171Net
      assets acquired
            $
      3,800





The above
amounts are based on the best information currently
available.  Additional valuation services will be engaged to provide a
fully documented basis for the valuation and other factors related to the
customer contracts.  Of the $2.835 million of acquired intangible
assets, $1.435 million was allocated to goodwill and $1.4 million to
identifiable intangible assets (customer contracts).  The customer
contracts have an estimated weighted-average useful life of 10 years.  The
goodwill and the customer contracts intangible assets will be deductible for tax
purposes over a 15-year period.  Any additional earn-out consideration to
be paid will be accounted for as additional purchase price under the terms of
the agreement and will be added to goodwill when determined to be
payable.





Russell
W. Carpenter, a shareholder of Minis who owned 40 percent of its shares, has
served as a director of the Company since 1989 and expects to continue in such
role until April 2010.






Note
3 - 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 $469,000 and $1,841,000 were required as
of December 31, 2007 and 2006, respectively.  The Company has pledged
interest-bearing cash balances at the Federal Home Loan Bank of Atlanta (“FHLB”)
in addition to investment securities to secure public fund deposits and
securities sold under repurchase agreements.  Pledged cash balances
were $18,500,000 and $7,500,000 at December 31, 2007 and 2006,
respectively.




F -
14
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
4 - Securities Available for Sale





The
aggregate amortized cost and fair value of securities available for sale as of
December 31, 2007 and 2006 were as follows:





2007($
      in thousands)
            Amortized
            Unrealized
            Unrealized
            FairCost
            Gains
            Losses
            ValueInvestment
      securities:U.
      S. government-sponsored agencies
            $
      28,227
            $
      700
            $     (4)
            $
      28,923Mortgage-backed
      securities
            24,624
            156
            (122)
            24,658State
      and municipal
            2,926
            86
            -
            3,012Restricted
      equity securities
            4,464
            -
            -
            4,464Total
      investment securities
            $
      60,241
            $
      942
            $
      (126)
            $
      61,0572006($
      in thousands)
            Amortized
            Unrealized
            Unrealized
            FairCost
            Gains
            Losses
            ValueInvestment
      securities:U.
      S. government-sponsored agencies
            $
      33,643
            $   73
            $
      (193)
            $
      33,523Mortgage-backed
      securities
            14,681
            10
            (188)
            14,503State
      and municipal
            2,104
            52
            -
            2,156Restricted
      equity securities
            3,735
            -
            -
            3,735Total
      investment securities
            $
      54,163
            $
      135
            $
      (381)
            $
      53,917





The
distribution of securities by maturity or expected call date at December 31,
2007 is shown below:





($
      in thousands)
            Amortized
              Cost
            Fair
      ValueSecurities
      available for sale:Due
      in one year or less
            $
      15,255
            $
      15,462Due
      after one year through five years
            28,758
            29,148Due
      after five years through ten years
            12,980
            13,156Due
      after ten years
            3,248
            3,291Total
      investment securities
            $
      60,241
            $
      61,057





At
December 31, 2007 and 2006, investment securities with a carrying value of
$48,621,000 and $44,190,000, respectively, were pledged as collateral to secure
public funds, securities sold under repurchase agreements and FHLB
borrowings.




Note
5 - Loans
 
 The
composition of the loan portfolio at December 31, 2007 and 2006 is presented
below:
 
 ($
      in thousands)
              
              Percent
              
              
              Percent2007
              of
      Total
              
              2006
              of
      TotalCommercial
              $   71,370
              8.8
              %
              $   57,737
              8.0
              %Real
      estate - construction and development
              134,110
              16.6
              
              166,172
              23.1Real
      estate - mortgage
              584,477
              72.3
              
              480,381
              66.6Installment
      and other consumer
              18,694
              2.3
              
              16,628
              2.3Gross
      loans
              808,651
              100.00
              %
              720,918
              100.0
              %Allowance
      for loan losses
              (12,864)
              
              
              (8,954)Net
      loans
              $
      795,787
              
              
              $
      711,964




F -
15
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




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





($
      in thousands)
            2007
            2006
            2005Balance,
      beginning of year
            $   8,954
            $
      7,813
            $
      6,389Provision
      for loan losses
            4,675
            1,585
            1,500Charge-offs
            (874)
            (506)
            (152)Recoveries
            109
            62
            76Balance,
      end of year
            $
      12,864
            $
      8,954
            $ 7,813




The
following is a summary of information pertaining to impaired loans as of and for
the years ended December 31, 2007 and 2006:


($
      in thousands)
              2007
              2006Impaired
      loans without a valuation allowance
              $      193
              $    825Impaired
      loans with a valuation allowance
              14,470
              -Total
      impaired loans
              $
      14,663
              $    825Valuation
      allowance related to impaired loans
              $   2,241
              $                -Average
      investment in impaired loans
              $   7,744
              $
      1,069Interest
      income recognized on impaired loans
              $      731
              $      23
 
 At
December 31, 2007 and 2006, loans on nonaccrual status amounted to approximately
$14,663,000 and $825,000, respectively, and loans past due 90 days or more and
still accruing interest were $2,761,000 and $1,406,000.
  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 $32,253,000 and $16,332,000 at December 31, 2007 and 2006,
respectively.  During 2007, new loans of $36,972,000 were made and
repayments of $21,051,000 were received.  Unfunded commitments of
credit available to related parties aggregated $3,385,000 and $7,554,000 at
December 31, 2007 and 2006, 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 collection.








Note
6 - Premises and Equipment





Premises
and equipment at December 31, 2007 and 2006 are summarized as
follows:





($
      in thousands)
            Depreciable
      Lives
            2007
            2006Land
            -
            $     698
            $     698Buildings
      and improvements
            39
      - 50
            2,980
            2,665Furniture
      and banking equipment
            3 -
      15
            7,404
            6,571Leasehold
      improvements
            10
      - 39
            2,286
            2,069Total
      cost
            
            13,368
            12,003Less
      accumulated depreciation and
              amortization
            
            6,538
            5,638Premises
      and equipment, net
            
            $  6,830
            $  6,365





Buildings
and improvements in 2007 include approximately $332,000 of construction in
progress costs for a Bryan banking office and additional space for an operations
center.  The total building cost is estimated at
$2,000,000.




F -
16
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




Note
7 - Deposits





Total
time deposits mature as follows: 2008 - $317,540,000; 2009 - $17,927,000; 2010 -
$11,700,000; 2011 - $4,016,000 and 2012 - $3,605,000 and thereafter -
$242,000.  Brokered time deposits mature as follows: 2008 -
$79,112,000; 2009 - $133,000; 2010 - $342,000; 2011 - $76,000 and 2012 -
$75,000.  Additionally, $47,360,000 of non-maturity institutional
money market accounts are considered brokered deposits because the deposits are
from customers of brokerage firms up to a maximum of $100,000 per
depositor.  A fee is paid for these deposits in addition to the
interest.





The
following table indicates the amount of the Company's time deposits of $100,000
or more at December 31, 2007 by time remaining until maturity.





Maturity
      Period ($ in thousands)
            TotalThree
      months or less
            $   62,258Over
      three through six months
            37,794Over
      six through twelve months
            53,276Over
      twelve months
            21,817Total
            $
      175,145








Note
8 - Short-Term Borrowings





Short-term
borrowings at December 31, 2007 and 2006 consist of federal funds purchased,
securities sold under agreements to repurchase and FHLB short-term
advances:





($
      in thousands)
            Federal
      Funds Purchased
            Securities
      Sold Under Repurchase Agreements
            FHLB
              Short-Term
      Advances
            Notes
              Payable2007Balance
      at December 31
            $
      1,857
            $
      18,742
            $
      50,000
            $         -Maximum
      indebtedness at any month end
            2,347
            25,402
            50,000
            -Daily
      average indebtedness outstanding
            1,565
            20,434
            30,797
            -Average
      rate paid for the year
            5.18%
            4.58%
            5.17%
            -Average
      rate paid on period-end borrowings
            4.05%
            3.75%
            4.44%
            N/A2006Balance
      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/A





As of
December 31, 2007 and 2006, the Company had short-term borrowings totaling
$70,599,000 and $40,687,000, respectively.  The average interest rates
were 4.94 percent and 4.98 percent during the years ended 2007 and 2006,
respectively.  The interest rates on short-term borrowings ranged from
3.75 percent to 4.44 percent at December 31, 2007 and from 4.75 percent to 5.36
percent at December 31, 2006.The maximum amount
outstanding at the end of any month was $70,599,000 and $56,683,000 during 2007
and 2006, respectively.  At December 31, 2007 federal funds
borrowingarrangements aggregating
$­51,800,000 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.




F -
17
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
8 - Short-Term Borrowings (continued)





The
Company has a $5,000,000 line of credit through a correspondent bank, of which
none was advanced at December 31, 2007.  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 September 20, 2008
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 other purpose
without the express written consent of the lender.








Note
9 - Federal Home Loan Bank Advances – Long-Term





Convertible Advances - At
December 31, 2007 and 2006, the Company had a convertible fixed rate advance of
$1,000,000 with an interest rate of 6.39 percent maturing in August
2009.  The advance is convertible each quarter at the option of the
FHLB to an advance with a rate equal to the current three-month
LIBOR.  During 2007, the Company had a $10,000,000 convertible advance
with an interest rate of 4.82 percent converted by the FHLB.





Long-term Advances -
Long-term advances from the FHLB totaled $1,973,000 and $2,309,000 at December
31, 2007 and 2006, respectively.  The weighted-average interest rates
on the long-term advances were 4.76 and 4.64 percent at December 31, 2007 and
2006, respectively.  Aggregate maturities are $1,750,000 in 2008,
$50,000 in 2009 and $173,000 in 2013 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, the Subsidiary Banks 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
residential loans.  The Subsidiary Banks’ individual borrowing limits
range from 10 to 25 percent of assets.  In aggregate, the Subsidiary
Banks had secured borrowing capacity of approximately $131.5 million of which
$53.0 million was advanced at December 31, 2007.  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
10 - 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”), 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, 2007, the interest rates on
the securities were 8.09 and 7.19 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 -
18
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
11 - Income Taxes





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





($
      in thousands)
            2007
            2006
            2005Current
      federal
            $
      5,355
            $
      5,537
            $
      5,227Current
      state
            418
            411
            513Total
      current
            5,773
            5,948
            5,740Deferred
      federal
            (1,364)
            (629)
            (755)Deferred
      state
            (174)
            (104)
            (105)Total
      deferred
            (1,538)
            (733)
            (860)Income
      tax expense
            $
      4,235
            $
      5,215
            $ 4,880





Investments
in federal and state low-income housing tax credit partnerships reduced federal
and state income tax expense approximately $265,000, $227,000 and $226,000 in
2007, 2006 and 2005, respectively.





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)
            2007
            2006
            2005Tax
      provision at 34%
            $
      4,036
            $
      5,173
            $
      4,733State
      tax, net of federal tax benefit
            212
            199
            226Benefit
      of tax-exempt income, net
            (121)
            (129)
            (157)Other
            108
            (28)
            78Income
      tax expense
            $
      4,235
            $
      5,215
            $ 4,880





Deferred
income tax assets and liabilities are comprised of the following at December 31,
2007 and 2006:





($
      in thousands)
            2007
            2006Deferred
      tax assets:Allowance
      for loan losses
            $
      4,748
            $
      3,285Tax-deductible
      goodwill
            856
            -Unrealized
      losses on securities
            -
            93Unamortized
      loan fees
            269
            361Unamortized
      non-compete costs
            34
            39Unrealized
      losses on derivatives
            -
            293Deferred
      compensation expense
            311
            232Stock-compensation
      expense
            31
            60Other
            378
            165Total
      deferred tax assets
            6,627
            4,528Deferred
      tax liabilities:Depreciation
            408
            395Deferred
      costs on loans and deposits
            93
            101Unrealized
      gains on securities
            285
            -Unrealized
      gains on derivatives
            644
            -Other
            165
            79Total
      deferred tax liabilities
            1,595
            575Net
      deferred tax assets
            $
      5,032
            $
      3,953





The net deferred tax assets are
included in the consolidated balance sheetsin other assets.  The Company
files a consolidated Federal tax return and a consolidated Georgia return for
the Georgia-based parent and subsidiaries.




F -
19
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




Note 12 - Stock Option and Employee
Benefit Plans





As
discussed in Note 1, the Company has two stock option plans.  All
authorized shares have been awarded from the 1995 Plan.  There are
158,121 authorized option shares remaining under the 2005 Omnibus Plan at
December 31, 2007.  The options granted in the chart below generally
vest 20 percent each year over five years and are exercisable over ten years
except for 22,729 option shares granted to directors in 2007, 2006 and 2005
which vest within one year and 18,310 restricted share awards which vest from
three to 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, 2007, 2006
and 2005 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.





2007
            2006
            2005Shares
            Weighted
              Average
              Exercise
              Price
            Shares
            Weighted
              Average
              Exercise
              Price
            Shares
            Weighted
              Average
              Exercise
              PriceOutstanding
      at beginningof
      year
            271,230
            $
      15.58
            304,046
            $
      14.49
            369,190
            $
      11.26Granted
            24,733
            25.39
            10,716
            28.56
            36,878
            22.31Exercised
            (64,410)
            11.63
            (35,976)
            10.28
            (102,022)
            5.64Forfeited
            (21,069)
            5.52
            (7,556)
            15.99
            -
            -Outstanding
      at end of year
            210,484
            $
      17.76
            271,230
            $
      15.58
            304,046
            $
      14.49Exercisable
      at end of year
            148,013
            $
      16.30
            182,254
            $
      14.12
            176,199
            $
      12.30





At
December 31, 2007, the aggregate intrinsic value of outstanding and exercisable
stock options was $402,000 and $391,000, respectively.





Options
outstanding at December 31, 2007 were as follows:





Outstanding
            
            ExercisableOutstanding
      Common Options
            Remaining
      Contractual Number
            Weighted
              Average
              Life
            Weighted
              Average
              Price
            
            Number
            Weighted
              Average
              PriceRange
      of exercise prices$9.98
      - $12.00
            24,578
            2.84
            $
      10.12
            
            24,578
            $
      10.12$12.01
      - $15.00
            45,027
            2.77
            13.21
            
            45,027
            13.21$15.01
      - $20.00
            69,525
            6.05
            16.70
            
            44,679
            16.42$20.01
      - $25.00
            35,905
            7.14
            22.31
            
            18,280
            22.42$25.00
      - $28.56
            35,449
            9.16
            26.31
            
            15,449
            27.60Total
      outstanding
            210,484
            5.68
            $
      17.76
            
            148,013
            $ 16.30





Restricted Stock - In 2007
and 2006, the Board granted 18,310 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 three and ten year vesting
periods.  Unrecognized compensation cost for restricted stock awards
was $207,000 at December 31, 2007.





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 $354,000, $356,000 and $276,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.




F -
20
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
13 - 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, 2007.  The
following tables show the capital ratios for the Company and the Subsidiary
Banks at December 31, 2007 and 2006:





($
      in thousands)
            Company
            
            Savannah
            
            Bryan
            
            Harbourside2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006
            
            2007
            
            2006QualifyingCapitalTier
      1 capital
            $81,049
            
            $77,205
            
            $50,433
            
            $48,718
            
            $18,045
            
            $16,833
            
            $
      8,681
            
            $
      8,687Total
      capital
            90,748
            
            85,910
            
            56,864
            
            54,712
            
            20,328
            
            18,874
            
            9,612
            
            9,207Leverage
      RatiosTier
      1 capital to average assets
            8.93%
            
            9.57%
            
            8.29%
            
            8.58%
            
            8.62%
            
            9.23%
            
            10.11%
            
            15.55%Risk-based
      RatiosTier
      1 capital to risk-weighted assets
            10.49%
            
            11.09%
            
            9.84%
            
            10.17%
            
            9.88%
            
            10.31%
            
            11.86%
            
            16.98%Total
      capital to risk-weighted assets
            11.74%
            
            12.34%
            
            11.09%
            
            11.42%
            
            11.13%
            
            11.56%
            
            13.13%
            
            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, 2007, 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.  Harbourside must maintain a minimum 8.0 percent tangible
equity to asset ratio through March 2009 under the terms of its de novo charter
which became effective in March 2006.  The tangible equity to capital
ratio was 9.70 percent at December 31, 2007.





Banking
regulations restrict the amount of cash dividends that banks may pay without
obtaining regulatory approval.  At December 31, 2007, $15,716,000 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
14 - 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: 2008
-  $1,092,000; 2009 - $845,000; 2010 - $713,000; 2011 - $718,000; 2012
- $617,000; 2013 and thereafter is $8,102,000.  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.  During 2007, the Company
renegotiated its long-term data processing contract.  Future minimum
payments are as follows: 2008 - $1,152,000; 2009 - $1,186,500; 2010 -
$1,222,000; 2011 - $1,259,000; 2012 - $216,000.  The contract contains
customary escalation and buyout clauses.





The net
rental expense for all office space operating leases amounted to $1,169,000 in
2007, $1,006,000 in 2006 and $653,000 in 2005.  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 -
21
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




Note
15 - Other Operating Expense





The
components of other operating expense for the years ended December 31, 2007,
2006 and 2005 were as follows:





($
      in thousands)
            2007
            2006
            2005Regulatory
      assessments and audit fees
            $   876
            $   832
            $   694Professional
      and directors fees
            854
            959
            748Advertising
      and sales promotion
            433
            463
            294Stationery
      and supplies
            300
            301
            239Postage
      and courier
            277
            265
            243Loan
      costs
            209
            185
            170Taxes
      and licenses
            203
            204
            154Telephone
            203
            173
            150Correspondent
      bank charges
            123
            155
            137Dues
      and subscriptions
            116
            110
            97Insurance
            77
            90
            76Pre-opening
      expenses
            -
            263
            129Other
      expense
            712
            656
            542Total
      other operating expense
            $
      4,383
            $
      4,656
            $ 3,673








Note
16 - 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 2007, 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 -
22
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
16 - 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 as of December
31.





2007
            
            2006Notional
            Fair
      Value
            
            Fair
      Value($
      in thousands)
            Maturity
            Amount
            Asset
            Liability
            
            Asset
            LiabilityCash
      flow hedges:Interest
      rate swap
            Nov
      2010
            $   50,000
            $
      1,514
            $
      -
            
            $    -
            $
      3326%/9%
      Interest rate collar
            June
      2010
            40,000
            284
            -
            
            -
            296%
      Interest rate floor
            June
      2010
            35,000
            264
            -
            
            49
            -Total
            
            $
      125,000
            $
      2,062
            $
      -
            
            $
      49
            $
      361





The net
change in fair value of derivative instruments of $1,530,000 and ($236,000) in
2007 and 2006, 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
2007 or 2006.





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 ($299,000) and
($184,000) of net unrealized gains (losses) from accumulated other comprehensive
income to interest income during 2007 and 2006, respectively.  During
2008, the Company estimates that $429,000 will be reclassified.





In
January, 2008 the Company terminated $25 million of their interest rate swap
position for a gain of $966,000.  This amount will be amortized into
interest income on a straight-line basis over the remaining life of the
swap.








Note
17 - 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 loan 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, 2007 and 2006 unfunded
commitments to extend credit and unfunded lines of credit were $136,480,000 and
$156,323,000, 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, 2007
and 2006, commitments under letters of credit aggregated approximately
$7,916,000 and $10,204,000, respectively.




F -
23
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note
18 - 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, all non-maturity deposits, 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 loans is estimated for portfolios of loans with similar financial
characteristics.  Loans are segregated by type, such as commercial,
mortgage, and consumer loans.  The fair value of the loan portfolio is
calculated by discounting contractual cash flows using estimated market discount
rates which reflect the credit and interest rate risk inherent in the
loan.  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.




Derivative instruments: The
fair value of derivative instruments, consisting of interest rate contracts, is
equal to the estimated amount that the Company would receive or pay to terminate
the derivative instruments at the reporting date, taking into account current
interest rates and the credit-worthiness of the counterparties.




Deposit liabilities:The fair
value of time deposits is based on the discounted value of contractual cash
flows.  The discount rate is based on the LIBOR swap
curve.




The
carrying amounts and estimated fair values of the Company’s financial
instruments are as follows as of December 31:





2007
            
            2006($
      in thousands)
            
            Estimated
            
            
            EstimatedCarrying
            Fair
            
            Carrying
            FairValue
            Value
            
            Value
            ValueFinancial
      assets:Cash
      and federal funds sold
            $   17,156
            $   17,156
            
            $   36,903
            $   36,903Interest-bearing
      deposits
            20,148
            20,148
            
            10,394
            10,394Securities
      available for sale
            61,057
            61,057
            
            53,917
            53,917Loans
      held for sale
            180
            180
            
            914
            917Loans,
      net of allowance for loan losses
            795,787
            803,012
            
            711,964
            709,133Derivative
      asset positions
            2,062
            2,062
            
            49
            49Financial
      liabilities:Deposits
            764,218
            766,102
            
            706,824
            705,986Short-term
      borrowings
            70,599
            70,503
            
            40,687
            40,687FHLB
      advances – long-term
            2,973
            2,942
            
            13,309
            13,410Subordinated
      debt to nonconsolidated subsidiaries
            10,310
            10,310
            
            10,310
            10,310Derivative
      liability positions
            -
            -
            
            361
            361






F -
24
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


Note 19 - The Savannah Bancorp, Inc.
(Parent Company Only) Financial Information ($ in
thousands)





The
following are condensed balance sheets of the Parent Company at December 31,
2007 and 2006:





2007
            2006AssetsCash
      on deposit
            $        40
            $
             35Interest-bearing
      deposits
            1,040
            652Investment
      in subsidiaries
            82,652
            73,607Premises
      and equipment
            1,072
            1,005Investment
      in nonconsolidatedsubsidiary
            1,607
            1,518Other
      assets
            1,483
            1,189Total
      assets
            $
      87,894
            $ 78,006LiabilitiesSubordinated
      debt
            $
      10,310
            $
      10,310Other
      liabilities
            1,312
            1,122Total
      liabilities
            11,622
            11,432Shareholders'
      equityCommon
      stock
            5,924
            5,781Capital
      surplus
            38,279
            35,747Retained
      earnings
            30,512
            25,681Treasury
      stock
            (4)
            (4)Accumulated
      othercomprehensive
      income (loss)
            1,561
            (631)Total
      shareholders’ equity
            76,272
            66,574Total
      liabilities and equity
            $
      87,894
            $ 78,006




F -
25
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements




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





2007
            2006
            2005Dividends
      from subsidiaries
            $
      7,500
            $ 
      3,700
            $ 1,250Interest
      income
            27
            59
            146Interest
      expense
            842
            881
            652Net
      interest and dividend income
            6,685
            2,878
            744Other
      income
            38
            30
            58Processing
      / management fees
            5,090
            4,352
            3,827Total
      income
            11,813
            7,260
            4,629Corporate
      expenses
            618
            721
            663Processing
      / management costs
            5,165
            4,427
            3,891Other
      expenses
            5,783
            5,148
            4,554Income
      before income taxesand
      equity in undistributednet
      income of subsidiaries
            6,030
            2,112
            75Income
      tax benefits
            415
            550
            440Income
      before equity inundistributed
      net incomeof
      subsidiaries
            6,445
            2,662
            515Equity
      in undistributed netincome
      of subsidiaries
            1,191
            7,340
            8,525Net
      income
            $
      7,636
            $ 10,002
            $
      9,040







F -
25a
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 
 Notes to Consolidated Financial
Statements


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





2007
            2006
            2005Operating
      activitiesNet
      income
            $
      7,636
            $
      10,002
            $ 9,040Adjustments
      to reconcile netincome
      to cash provided byoperating
      activities:Equity
      in undistributed netincome
      of subsidiaries
            (1,191)
            (7,340)
            (8,525)Depreciation
      of equipment
            369
            306
            259Non
      cash stock-basedcompensation
      expense
            147
            299
            -Change
      in other assets andliabilities,
      net
            (104)
            364
            (436)Net
      cash provided byoperating
      activities
            6,857
            3,631
            338Investing
      activitiesDistribution
      from (investmentin)
      nonconsolidated subsidiary
            -
            1,300
            (2,709)Investment
      in consolidatedsubsidiary
            (1,970)
            -
            -Purchase
      of equipment andsoftware
            (437)
            (353)
            (626)Capital
      contribution toconsolidated subsidiaries
            (2,000)
            (10,000)
            (2,000)Net
      cash used ininvesting
      activities
            (4,407)
            (9,053)
            (5,335)Financing
      activitiesNet
      (decrease) increase inshort-term
      borrowings
            -
            (2,000)
            2,000Dividends
      paid
            (2,805)
            (2,593)
            (2,307)Issuance
      of common stock
            -
            -
            11,588Exercise
      of options
            748
            381
            916Net
      cash (used in) provided byfinancing
      activities
            (2,057)
            (4,212)
            12,197Increase
      (decrease) in cashand
      cash equivalents
            393
            (9,634)
            7,200Cash,
      beginning of year
            687
            10,321
            3,121Cash,
      end of year
            $  1,080
            $    687
            $ 10,321





The
Parent Company financial statements include the following intercompany items:
interest-bearing deposits on the balance sheets; dividend income, interest
income and processing / management fees on the statements of income.  The
investment in the nonconsolidated subsidiary on the balance sheet represents 50
percent ownership in two limited partnerships which own the headquarters
building at 25 Bull Street, Savannah, GA and the associated parking
lot.




F
- 25b
 The
Savannah Bancorp, Inc. - 2007 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)
            2007
            2006
            2005
            2004
            2003SelectedAverage
      BalancesAssets
            $
      869,026
            $
      769,917
            $ 685,163
            $ 557,474
            $ 443,502Loans
      held for sale
            1,299
            7,842
            23,033
            27,209
            939Loans
      - net of unearned fees
            754,490
            658,750
            565,131
            441,421
            356,006Securities
            58,910
            50,600
            41,300
            40,703
            44,015Other
      interest-earning assets
            16,201
            17,278
            26,168
            22,383
            21,198Total
      interest-earning assets
            830,900
            734,470
            655,632
            531,716
            422,158Interest-bearing
      deposits
            628,310
            542,375
            487,493
            371,877
            300,045Borrowed
      funds
            70,939
            62,255
            55,255
            67,353
            40,158Total
      interest-bearing liabilities
            699,249
            604,630
            542,748
            439,230
            340,203Noninterest-bearing
      deposits
            91,367
            96,113
            89,386
            76,593
            65,403Total
      deposits
            719,677
            638,488
            576,879
            448,470
            365,448Shareholders'
      equity
            71,516
            61,766
            47,428
            38,126
            35,740Loan
      to deposit ratio – average
            105%
            103%
            98%
            98%
            97%Selected Financial
      Data at Year-EndAssets
            $
      932,459
            $
      843,514
            $ 717,901
            $ 617,341
            $ 476,865Interest-earning
      assets
            878,992
            803,927
            685,531
            593,035
            449,025Loans
      held for sale
            180
            914
            10,473
            26,471
            10,393Loans
      - net of unearned fees
            808,651
            720,918
            613,667
            499,868
            386,731Deposits
            764,218
            706,824
            600,510
            506,120
            389,146Interest-bearing
      liabilities
            759,597
            669,974
            558,116
            488,546
            360,817Shareholders'
      equity
            76,272
            66,574
            58,543
            40,071
            36,771Loan
      to deposit ratio
            106%
            102%
            102%
            99%
            99%Shareholders'
      equity to total assets
            8.18%
            7.89%
            8.15%
            6.49%
            7.71%Dividend
      payout ratio
            36.73%
            25.92%
            25.53%
            37.69%
            45.00%Risk-based
      capital ratios:Tier
      1 capital to risk-weighted assets
            10.49%
            11.09%
            11.52%
            9.95%
            10.60%Total
      capital to risk-weighted assets
            11.74%
            12.34%
            12.77%
            11.20%
            11.85%LoanQuality
      DataNonperforming
      assets
            $
      19,535
            $
      2,776
            $
      1,357
            $   998
            $
      1,525Nonperforming
      loans
            17,424
            2,231
            1,357
            538
            598Nonaccruing
      loans
            14,663
            825
            1,313
            210
            574Loans
      past due 90 days - accruing
            2,761
            1,406
            44
            328
            24Net
      charge-offs
            765
            444
            76
            128
            306Allowance
      for loan losses
            12,864
            8,954
            7,813
            6,389
            5,067Nonperforming
      loans to loans
            2.15%
            0.31%
            0.22%
            0.11%
            0.15%Nonperforming
      assets to loans
              and
      other real estate owned
            2.41%
            0.39%
            0.22%
            0.20%
            0.39%Net
      charge-offs to average loans
            0.10%
            0.07%
            0.01%
            0.03%
            0.09%Allowance
      for loan losses to total loans
            1.59%
            1.24%
            1.27%
            1.28%
            1.31%Per Share Data at
      Year-End  (a)Book
      value
            $
      12.88
            $
      11.52
            $
      10.20
            $   7.80
            $   7.17Common
      stock closing price (NASDAQ)
            $
      17.14
            $
      27.25
            $
      28.38
            $
      21.64
            $
      18.56Common
      shares outstanding (000s)
            5,924
            5,781
            5,739
            5,140
            5,129




(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.




F
- 26
 The
Savannah Bancorp, Inc. - 2007 Annual Report




Table
2 - Selected Operating Highlights – Five-Year Comparison





($
      in thousands, except share data)
            2007
            2006
            2005
            2004
            2003Summary
      of operationsInterest
      income - taxable equivalent
            $
      63,414
            $
      55,347
            $ 42,544
            $
      28,947
            $ 23,221Interest
      expense
            30,282
            22,737
            14,679
            8,427
            6,695Net
      interest income - taxable equivalent
            33,132
            32,610
            27,865
            20,520
            16,526Taxable
      equivalent adjustment
            (156)
            (158)
            (186)
            (240)
            (284)Net
      interest income
            32,976
            32,452
            27,679
            20,280
            16,242Provision
      for loan losses
            4,675
            1,585
            1,500
            1,450
            1,000Net
      interest income after
              provision
      for loan losses
            28,301
            30,867
            26,179
            18,830
            15,242Noninterest
      incomeService
      charges on deposits accounts
            1,383
            1,526
            1,622
            1,598
            1,572Mortgage
      related income, net
            615
            886
            1,292
            1,079
            776Trust
      fees
            1,513
            658
            501
            442
            398Other
      operating income
            1,242
            1,233
            979
            981
            635Losses
      on sales of other real estate
            (44)
            -
            (7)
            -
            -Total
      noninterest income
            4,709
            4,303
            4,387
            4,100
            3,381Noninterest
      expenseSalaries
      and employee benefits
            11,846
            10,852
            9,530
            8,362
            6,693Occupancy
      and equipment
            3,294
            2,920
            2,199
            1,963
            1,767Information
      technology
            1,616
            1,525
            1,244
            1,049
            908Other
      operating expense
            4,383
            4,656
            3,673
            2,880
            2,287Total
      noninterest expense
            21,139
            19,953
            16,646
            14,254
            11,655Income
      before income taxes
            11,871
            15,217
            13,920
            8,676
            6,968Income
      tax expense
            4,235
            5,215
            4,880
            2,940
            2,324Net
      income
            $
       7,636
            $
      10,002
            $ 
      9,040
            $ 
      5,736
            $ 4,644Net income per share:(a)Basic
            $
      1.31
            $
      1.73
            $
      1.68
            $
      1.12
            $
      0.91Diluted
            $
      1.29
            $
      1.70
            $
      1.63
            $
      1.09
            $
      0.89Cash
      dividends paid per share
            $
      0.48
            $
      0.45
            $
      0.43
            $
      0.42
            $
      0.41Average
      basic shares outstanding (000s)
            5,850
            5,765
            5,396
            5,136
            5,129Average
      diluted shares outstanding (000s)
            5,922
            5,876
            5,531
            5,261
            5,226Performance
      ratios (averages)Net
      interest margin
            3.99%
            4.44%
            4.25%
            3.86%
            3.91%Return
      on average assets
            0.88%
            1.30%
            1.32%
            1.03%
            1.05%Return
      on average equity
            10.68%
            16.19%
            19.06%
            15.04%
            12.99%Efficiency
      ratio
            56.09%
            54.29%
            51.91%
            58.47%
            59.40%







(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.




F
- 27
 The
Savannah Bancorp, Inc. - 2007 Annual Report




Table
      3 - Selected Quarterly Data





The
following is a summary of unaudited quarterly results for 2007 and
2006:





2007
            
            2006Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstNet
      interest income
            $8,080
            $8,308
            $8,412
            $8,176
            
            $8,260
            $8,119
            $8,156
            $7,917Provision
      for loan losses
            3,145
            635
            395
            500
            
            450
            360
            360
            415Net
      interest income afterprovision for loan losses
            4,935
            7,673
            8,017
            7,676
            
            7,810
            7,759
            7,796
            7,502Noninterest
      income
            1,493
            1,164
            1,000
            1,052
            
            1,090
            1,056
            1,086
            1,071Noninterest
      expense
            5,790
            5,176
            5,026
            5,147
            
            5,137
            4,945
            4,976
            4,895Income
      before income taxes
            638
            3,661
            3,991
            3,581
            
            3,763
            3,870
            3,906
            3,678Income
      tax expense
            285
            1,280
            1,400
            1,270
            
            1,240
            1,280
            1,368
            1,327Net
      income
            $  353
            $2,381
            $2,591
            $2,311
            
            $2,523
            $2,590
            $2,538
            $2,351Per share:(a)Net
      income – basic
            $
      .060
            $
      .406
            $
      .445
            $
      .400
            
            $
      .437
            $
      .450
            $
      .441
            $
      .408Net
      income – diluted
            $
      .059
            $
      .402
            $
      .439
            $
      .392
            
            $
      .429
            $
      .441
            $
      .432
            $
      .401Dividends
            $
      .120
            $
      .120
            $
      .120
            $
      .120
            
            $
      .112
            $
      .112
            $
      .112
            $
      .112Average
      shares (000s)Basic
            5,923
            5,862
            5,824
            5,782
            
            5,779
            5,761
            5,759
            5,759Diluted
            5,968
            5,928
            5,899
            5,890
            
            5,884
            5,886
            5,894
            5,886




(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 2007 and 2006 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, 2007.  The per share amounts have been
restated to reflect the effect of a 5-for-4 stock split in December
2006.





2007
            
            2006Closing
      Market Prices
            Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstHigh
            $ 24.69
            $ 25.97
            $ 27.20
            $ 28.07
            
            $
      28.14
            $ 30.31
            $ 30.40
            $ 29.58Low
            17.10
            23.00
            24.71
            27.00
            
            26.60
            26.58
            27.26
            27.12Close
            17.14
            24.69
            25.10
            27.00
            
            27.25
            26.64
            30.26
            28.06





F
- 28
 The
Savannah Bancorp, Inc. - 2007 Annual Report


Table
5 - Stock Performance Graph





The
following table provides a graphic comparison of the cumulative total
shareholder return on the common stock of the Company for the five year period
from December 31, 2002 through December 31, 2007.  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
            2002
            2003
            2004
            2005
            2006
            2007The
      Savannah Bancorp, Inc.
            100.00
            156.28
            186.46
            248.79
            242.60
            155.59NASDAQ
      Composite
            100.00
            150.01
            162.89
            165.13
            180.85
            198.60SNL
      $500M-$1B Bank Index
            100.00
            144.19
            163.41
            170.41
            193.81
            155.31




Source:  SNL
      Financial LC, Charlottesville,
      VA         ©2008






F
- 29
 The
Savannah Bancorp, Inc. - 2007 Annual Report


Introduction





Management's
Discussion and Analysis of Financial Condition and Results of Operations (“MD
& A”) provides supplemental information which sets forth the major factors
that have affected the Company's financial condition and results of
operations.  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 2007 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”.  Harbourside opened and began offering full service
banking activities on March 1, 2006.  Minis & Co., Inc. is
referred to as “Minis.”  The operations of Minis, a registered
investment advisor and wholly-owned subsidiary, are included beginning September
1, 2007.  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.  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, 2007, had
nine banking offices and ten ATMs in Savannah and surrounding Chatham County,
Richmond Hill, Georgia, Hilton Head Island and Bluffton, 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.  In December 2007, Harbourside opened its Bluffton Parkway
Office in Bluffton, South Carolina.





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 moderate government and commercial growth and slower
residential growth. Coastal Georgia and South Carolina continue to be desired
retiree residential destinations.





Harbourside
specifically targets real estate lending and related full service banking
opportunities in the coastal South Carolina market.  During 2006 and
2007, 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 significantly lower 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




F
- 30
 The
Savannah Bancorp, Inc. - 2007 Annual Report




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.





Critical
Accounting Estimate - Allowance for Loan Losses





The
Company considers its policies regarding the allowance for loan losses to be its
most critical accounting estimate due to the significant degree of management
judgment involved.  The allowance for loan losses is established through
charges to earnings in the form of a provision for loan losses based on
management's continuous evaluation of the loan portfolio.  Loan losses
and recoveries are charged or credited directly to the allowance.  The
amount of the allowance reflects management's opinion of an adequate level to
absorb probable losses inherent in the loan portfolio at December 31, 2007.
 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 loan losses which would
be sizable in relationship to the amount reserved or that subsequent evaluation
of the loan portfolio, in light of conditions and factors then prevailing, will
not require significant changes in the allowance for loan losses by future
charges or credits to earnings.  The allowance for loan losses is also
subject to review by various regulatory agencies through their periodic
examinations of the Subsidiary Banks.  Such examinations could result in
required changes to the allowance for loan losses.  No adjustment in the
allowance or significant adjustments to the Subsidiary Bank's internally
classified loans were made as a result of the most recent regulatory
examinations.





The
allowance for loan losses totaled $12,864,000 or 1.59 percent of total loans at
December 31, 2007.  This is compared to an allowance of $8,954,000 or 1.24
percent of total loans at December 31, 2006.  For 2007, the Company
reported net charge-offs of $765,000 or 0.10 percent of average loans for
2007.  This is compared to net charge-offs of $444,000 or 0.07 percent
of average loans for 2006.  During 2007 and 2006, provisions for loan
losses of $4,675,000 and $1,585,000, respectively, were added to the allowance
for loan losses.  The fourth quarter 2007 provision for loan losses
was $3,145,000 which included approximately $2,600,000 of additional provision
due to significantly higher nonperforming loans as discussed below.





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
$14,663,000 and loans past due 90 days or more of $2,761,000 totaled
$17,424,000, or 2.15 percent of gross loans, at December 31,
2007.  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. Generally, loans are placed on nonaccrual status when the
collection of the principal or interest in full becomes
doubtful.  Nonperforming assets also included $2,112,000 and $545,000
of other real estate owned at December 31, 2007 and 2006,
respectively.





Impaired
loans under Statement of Financial Accounting Standards (“SFAS”) No. 114 were
all on nonaccrual status and totaled $14,663,000 and $825,000 at December 31,
2007 and 2006, respectively.





The $17.4
million in nonperforming loans was primarily loans made in or related to the
Bluffton/Hilton Head Island, South Carolina (“Bluffton/HHI”) market and includes
49 loans.  The loans consist of $1.9 million in one nearly complete
residential property, $10.8 million in 28 completed residential properties, $2.0
million in 10 residential lots and $2.7 million in 10 nonresidential
loans.  A number of borrowers whose primary repayment sources are
directly related to real estate activities have been negatively impacted by the
downturn in the local real estate market, especially during the last six months
of 2007.





During
the fourth quarter 2007, the Company expected to successfully resolve several
larger nonperforming and performing but weaker credits based on our discussions
with the borrowers and other involved parties.  However,
the




F
- 31
 The
Savannah Bancorp, Inc. - 2007 Annual Report




Bluffton/HHI
real estate market continued to slow during November and December and several of
the larger loans moved from a current, or slightly past due status, to
nonperforming status during this period.  Experienced internal risk
management and special asset personnel and resources were identified and given
the responsibility to minimize losses during the workout and resolution of these
loans.





During
November and December, extensive internal loan review procedures and analyses
were performed on approximately $135 million of portfolio loans that were nearly
all secured by real estate and originated in the Bluffton/HHI
market.  These loans include approximately $60 million of loans in
Savannah’s loan portfolio. The additional fourth quarter loan loss provision of
$2.6 million was divided equally between the allowance for loan losses for
Savannah and Harbourside.  Fourth quarter charge-offs remained
relatively low as the loans had not made it through the workout or foreclosure
process.





Higher
risk characteristics were identified, primarily in the speculative and non-owner
occupied Bluffton/HHI residential real estate loans that were originated in
2004-2006 in a much stronger real estate market.  Many of the loans
are not currently delinquent or past due but are now properly graded so that the
appropriate attention can be provided.  Management believes that
adequate provisions and allowances for loan losses have been recorded in
accordance with recently expanded regulatory guidance that became effective in
2007.





If the
allowance for loan losses had changed by five percent, the effect on net income
would have been approximately $396,000.  If the allowance had to be
increased by this amount, it would not have changed the Subsidiary Banks’ status
as well-capitalized financial institutions.





Changes
in the allowance for loan losses from 2003 through 2007 are summarized as
follows:





($
      in thousands)
            2007
            2006
            2005
            2004
            2003Balance
      at the beginning of the year
            $  8,954
            $
      7,813
            $
      6,389
            $
      5,067
            $
      4,373Charge-offs
      – commercial
            (150)
            -
            (22)
            (143)
            (161)Charge-offs
      – consumer
            (103)
            (125)
            (82)
            (112)
            (112)Charge-offs
      – real estate
            (621)
            (381)
            (48)
            -
            (122)Charge-offs
      – total
            (874)
            (506)
            (152)
            (255)
            (395)Recoveries
      – commercial
            6
            6
            7
            26
            7Recoveries
      – consumer
            43
            54
            53
            68
            70Recoveries
      – real estate
            60
            2
            16
            33
            12Recoveries
      – total
            109
            62
            76
            127
            89Net
      charge-offs
            (765)
            (444)
            (76)
            (128)
            (306)Provision
      for loan losses
            4,675
            1,585
            1,500
            1,450
            1,000Balance
      at the end of the year
            $
      12,864
            $
      8,954
            $
      7,813
            $
      6,389
            $
      5,067Ratio
      of net charge-offs to average loans
            0.10%
            0.07%
            0.01%
            0.03%
            0.09%





The
allowance for loan losses is allocated by loan category based on management's
assessment of risk within the various categories of loans.  Loans are
segregated by category and by credit risk rating within each
category.  The allowance for loan losses is allocated to each category
by applying reserve percentages to each category.  These percentages
are based upon management's assessment of risk inherent within each category and
the historical and anticipated loss rates within each category.




F
- 32
 The
Savannah Bancorp, Inc. - 2007 Annual Report


The
Company’s allocation of the allowance for loan losses is presented in the
following table:





($
      in thousands)
            2007
            2006
            2005
            2004
            2003Commercial
            $    750
            $   900
            $   700
            $   650
            $   600Real
      estate-constructionand
      development
            4,150
            4,350
            3,750
            2,750
            1,650Real
      estate-mortgage
            6,750
            2,350
            1,900
            1,750
            1,300Consumer
            200
            400
            350
            400
            400Unallocated
            1,014
            954
            1,113
            839
            1,117Total
      allowance forloan
      losses
            $
      12,864
            $
      8,954
            $
      7,813
            $
      6,389
            $
      5,067





The
composition of the loan portfolio as a percentage of total loans is presented
below:





Loan
      Categories
            2007
            2006
            2005
            2004
            2003Commercial
            8.8%
            8.0%
            7.4%
            7.3%
            11.1%Real
      estate-constructionand
      development
            16.6
            23.1
            23.6
            19.4
            13.4Real
      estate-mortgage
            72.3
            66.6
            66.7
            69.9
            71.1Consumer
            2.3
            2.3
            2.3
            3.4
            4.4Total
      loans
            100.0%
            100.0%
            100.0%
            100.0%
            100.0%





























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F
- 33
 The
Savannah Bancorp, Inc. - 2007 Annual Report


Results
of Operations





2007
Compared with 2006





Net
income for 2007 was $7,636,000, a decrease of 24 percent from $10,002,000
in 2006.  Net income per diluted share was $1.29 and $1.70 in 2007 and
2006, respectively.  Higher interest income resulting from solid
growth in interest-earning assets was offset by higher interest expense on
interest-bearing liabilities and a much higher provision for loan losses as
discussed in the previous section.  Return on average equity was 10.68
percent, return on average assets was 0.88 percent and the efficiency ratio was
56.09 percent in 2007.





Average interest-earning
assets increased 13 percent to $831 million in 2007 from $734 million in
2006.  Net interest income was $32,976,000 in 2007 compared to
$32,452,000 in 2006, an increase of $524,000 or 1.6 percent.  Average
loans were $754 million for 2007, 14 percent higher when compared to $659
million in 2006.  The net interest margin decreased to 3.99 percent in
2007 from 4.44 percent in 2006.  As shown in Table 8, the decline in net
interest margin was primarily due to the rise in deposit and other borrowing
costs over the prior 12 months and changes in the deposit mix.  The
increase in the yield on interest-earning assets was more than offset by
increasing costs of interest-bearing liabilities.  As shown in Table
7, the Company’s balance sheet is asset-sensitive since the 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.  However, when the prime rate stops decreasing, the interest
rates on time deposits, certain non-maturity deposits and other funding sources
will continue to decline due to the re-pricing lag associated with those
liabilities.





The
provision for loan losses was $4,675,000 for 2007, compared to $1,585,000 for
2006.  Changes in the provision are impacted as discussed in detail
under the "Allowance for Loan Losses" section above.  Loan growth was
$88 million in 2007, primarily in real estate-secured loans, compared to
$107 million in 2006.  The higher provision for loan losses in
2007 as compared to 2006 is attributable to significantly higher nonperforming
loans resulting from a weaker overall real estate market, higher interest rates
and much tighter availability of funding for larger residential real estate
loans.





Noninterest
income was $4,709,000 in 2007 compared to $4,303,000 in 2006, an increase of
$406,000, or 9.4 percent.  Trust and investment management fees were
$855,000 higher, but were offset by lower mortgage related income and
service charges on deposit accounts.  Mortgage banking related income,
net of direct origination costs, was $615,000 in 2007 compared to $886,000 for
the same period in 2006, a decrease of $271,000 or 31
percent.  The mortgage related income was impacted negatively
by lower mortgage origination volumes resulting from slowing residential
real estate sales, higher credit standards in the secondary market for borrowers
and higher mortgage loan rates, particularly on larger loans.





Noninterest
expense was $21,139,000 in 2007 compared to $19,953,000 in 2006, an increase of
$1,186,000, or 5.9 percent.  The increase included four months of
Minis & Co., Inc. expenses of $455,000 in 2007.  Salaries and
employee benefits increased $994,000 or 9.2 percent.  Occupancy,
equipment and information technology expenses increased approximately $465,000,
or 11 percent.  Other operating expense decreased $273,000, or 5.9
percent, primarily due to nonrecurring pre-opening expenses related to the
opening of Harbourside in 2006 and nonrecurring first year Sarbanes-Oxley costs
incurred in the first quarter 2006.





Income
tax expense was $4,235,000 in 2007 and $5,215,000 in 2006.  The
combined effective federal and state tax rates were 35.7 percent and 34.3
percent in 2007 and 2006, respectively.  The increase was primarily
due to lower tax-exempt income for state tax purposes in 2007 and tax benefits
related to the exercise and sale of incentive stock options in
2006.  The Company has never recorded a valuation allowance against
deferred tax assets.  All significant deferred tax assets are
considered to be realizable due to expected future taxable income.




F
- 34
 The
Savannah Bancorp, Inc. - 2007 Annual Report


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.  Prior period per share amounts have been restated to reflect the
effect of a 5-for-4 stock split in December 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 9, the increase in the net
interest margin was primarily due to the rise in loan rates and increases in
equity and noninterest-bearing deposits.





The
provision for loan losses was $1,585,000 for 2006, compared to $1,500,000 in
2005. Loan growth was $107 million in 2006, primarily in real
estate-secured loans, compared to $114 million in loan growth in
2005.  Net charge-offs of $444,000 in 2006 as compared to $76,000 in
2005 are the primary reason for the higher provision for loan 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
- 35
 The
Savannah Bancorp, Inc. - 2007 Annual Report





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 13 percent to $869 million in 2007 from $770 million in
2006.  Total assets were $932 million and $844 million at December 31,
2007 and 2006, respectively, an increase of 10 percent.  The increase
in loans of $88 million in 2007 was funded primarily by $57 million in deposit
growth and $30 million in additional short-term borrowings.





The
Company has classified all investment securities as available for
sale.  Lower short-term interest rates resulted in an overall net
unrealized gain 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, but 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 market accounts of $127 million at December 31,
2007 and $111 million at December 31, 2006.





Loans





The
following table shows the composition of the loan portfolio at December 31, 2007
and 2006, 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)
            2007
            %
      of Total
            2006
            %
      of Total
            %
      Change ($)Non-residential
      real estateOwner-occupied
            $
      118,714
            15
            $   90,848
            13
            31Non
      owner-occupied
            118,904
            15
            98,032
            14
            21Construction
            33,923
            4
            22,128
            3
            53Commercial
      land and lot development
            38,127
            5
            35,610
            5
            7Total
      non-residential real estate
            309,668
            39
            246,618
            35
            26Residential
      real estateOwner-occupied
      – 1-4 family
            83,828
            10
            87,965
            12
            5Non
      owner-occupied – 1-4 family
            114,992
            14
            68,397
            10
            68Construction
            57,541
            7
            110,412
            15
            (48)Residential
      land and lot development
            109,718
            14
            93,060
            12
            18Home
      equity lines
            43,322
            5
            40,794
            6
            6Total
      residential real estate
            409,401
            50
            400,628
            55
            2Total
      real estate loans
            719,069
            89
            647,246
            90
            11Commercial
            71,370
            9
            57,737
            8
            24Consumer
            18,692
            2
            16,628
            2
            12Unearned
      fees, net
            (480)
            -
            (693)
            -
            (31)Total
      loans, net of unearned fees
            $
      808,651
            100
            $
      720,918
            100
            12




F
- 36
 The
Savannah Bancorp, Inc. - 2007 Annual Report


Capital
Resources





The
Office of the Comptroller of the Currency and Office of Thrift Supervision
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, 2007, the Subsidiary
Banks and the Company exceeded the minimum requirements necessary to be
classified as “well-capitalized.”





Total
equity capital for the Company was $76.3 million, or 8.18 percent of total
assets, at December 31, 2007.  Tier 1 capital was 10.49 percent of
risk-weighted assets at the same date.  Tier 1 capital at December 31,
2007 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 tangible
equity capital plus trust preferred debt.  All of the Company’s trust
preferred debt qualifies as Tier 1 capital.  At December 31, 2007, the
Company has the capacity to issue approximately $14 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, 2007.  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 September 20, 2008
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
2007, portfolio loans increased $88 million to $809 million and deposits
increased $57 million to $764 million.  The loan to deposit ratio was
106 and 102 percent at December 31, 2007 and 2006,
respectively.  Average loan growth in 2007 was 15
percent.  Average deposit growth in 2007 was 13 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, the Subsidiary Banks 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 residential loans.  The
Subsidiary Banks individual borrowing limits range from 10 to 25 percent of
assets.  In aggregate, the Subsidiary Banks had secured borrowing
capacity of approximately $131.5 million of which $53.0 million was advanced at
December 31, 2007.  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
- 37
 The
Savannah Bancorp, Inc. - 2007 Annual Report




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, 2007 was $61
million at one year, or 6.9 percent of total interest-earning
assets.  At December 31, 2006 the gap at one year was $81 million, or
10 percent of total interest-earning assets.  Interest-earning assets
with maturities over five years totaled approximately $49.9 million, or 5.7
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 decreases in the
prime rate from 8.25 percent to 7.25 percent during the latter part of
2007 and the level of nonaccrual loans have negatively impacted net
interest income and net interest margin.  Increased funding costs more
than offset the overall increases in interest-earning assets resulting in net
interest margin compression in 2007.





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.  In 2008
the Company terminated $25 million of their interest rate swap position for a
gain of $966,000 which will be amortized into interest income on a straight-line
basis over the remaining life of the swap.  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, 2007, the Company had unfunded commitments
to extend credit of $­­­­136 million and outstanding stand-by
letters of credit of $7.9 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
- 38
 The
Savannah Bancorp, Inc. - 2007 Annual Report
 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 a reduced demand for credit, including the resultant effect on
      our loan portfolio and allowance for loan
  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 the cost and availability of funding due to changes in the
      deposit market and credit market, or the way in which the Company is
      perceived in such markets;




*
      The effects of harsh weather conditions, including
    hurricanes;




*
      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;




*
      The limited trading activity or our common
  stock;




*
      The effects of our lack of a diversified loan portfolio, including the
      risks of geographic concentrations;




*
      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
- 39
 The
Savannah Bancorp, Inc. - 2007 Annual Report


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, 2007:





($
      in thousands)
            
            0 -
      3
            3 -
      12
            1 -
      3
            3 -
      5
            Over
      5Immediate
            Months
            Months
            Years
            Years
            Years
            TotalInterest-earning
      assetsInvestment
      securities
            $           -
            $    6,957
            $   8,500
            $   20,090
            $   9,047
            $   15,647
            $   60,241Interest-bearing
      deposits
            20,148
            -
            -
            -
            -
            -
            20,148Federal
      funds sold
            4,435
            -
            -
            -
            -
            -
            4,435Loans
      held for sale
            -
            180
            -
            -
            -
            -
            180Loans
      - fixed rates
            -
            51,274
            134,338
            152,902
            35,659
            32,525
            406,698Loans
      - variable rates
            -
            358,679
            12,744
            5,447
            8,723
            1,697
            387,290Total
      interest-earning assets
            24,583
            417,090
            155,582
            178,439
            53,429
            49,869
            878,992Interest-bearing
      liabilitiesNOW
      and savings **
            -
            7,203
            14,407
            36,018
            43,221
            43,221
            144,070Money
      market accounts **
            -
            66,749
            45,240
            25,851
            38,775
            -
            176,615Time
      deposits
            -
            138,894
            180,798
            27,642
            7,461
            235
            355,030Short-term
      borrowings
            51,857
            18,742
            -
            -
            -
            -
            70,599FHLB
      advances - long-term
            -
            1,078
            676
            1,062
            11
            146
            2,973Subordinated
      debt
            -
            10,310
            -
            -
            -
            -
            10,310Total
      interest-bearing liabilities
            51,857
            242,976
            241,121
            90,573
            89,468
            43,602
            759,597GAP-Excess
      assets (liabilities)
            (27,274)
            174,114
            (85,539)
            87,866
            (36,039)
            6,267
            119,395GAP-Cumulative
            $
      (27,274)
            $
      146,840
            $   61,301
            $
      149,167
            $
      113,128
            $
      119,395
            $
      119,395Cumulative
      sensitivity ratio *
            0.47
            1.50
            1.11
            1.24
            1.16
            1.16
            1.16




*  
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, 2007 the Company had unfunded loan commitments and unfunded lines
of credit totaling $136 million.  The Company believes the likelihood
of these commitments either being 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 $78
million.  Additionally, further sources of funding include brokered
time deposits and certain other non-local deposits.




F
- 40
 The
Savannah Bancorp, Inc. - 2007 Annual Report


Table
8 - Average Balance Sheet and Rate/Volume Analysis - 2007 and 2006


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 2007 and 2006.





Taxable-Equivalent
            
            (a)
      VarianceAverage
      Balance
            Average
      Rate
            
            Interest
      (b)
            Vari-
            Attributable
      to2007
            2006
            2007
            2006
            
            2007
            2006
            ance
            Rate
            Volume($
      in thousands)
            (%)
            
            ($
      in thousands)
            
            ($
      in thousands)Assets$   6,958
            $ 
      5,969
            4.97
            4.91
            Interest-bearing deposits
            $   346
            $   293
            $   53
            $     4
            $    4956,851
            48,190
            5.01
            4.47
            Investments - taxable
            2,848
            2,153
            695
            260
            4352,059
            2,410
            7.33
            7.47
            Investments - non-taxable
            151
            180
            (29)
            (3)
            (26)9,243
            11,309
            5.11
            4.93
            Federal funds sold
            472
            557
            (85)
            20
            (105)1,299
            7,842
            7.54
            7.12
            Loans held for sale
            98
            558
            (460)
            33
            (493)754,490
            658,750
            7.89
            7.83
            Loans (c)
            59,499
            51,606
            7,893
            395
            7,498830,900
            734,470
            7.63
            7.54
            Total interest-earning assets
            63,414
            55,347
            8,067
            661
            7,40638,126
            35,447
            
            
            Noninterest-earning assets$869,026
            $769,917
            
            
            Total assetsLiabilities and equityDeposits$114,053
            $
      95,138
            2.00
            1.32
            NOW accounts
            2,279
            1,254
            1,025
            647
            37817,831
            19,104
            0.99
            0.99
            Savings accounts
            176
            190
            (14)
            -
            (14)167,887
            135,736
            4.27
            3.75
            Money market accounts
            7,164
            5,093
            2,071
            706
            1,365131,553
            105,220
            5.35
            4.68
            CDs, $100M or more
            7,020
            4,927
            2,093
            694
            1,39974,234
            81,084
            4.83
            3.98
            CDs, broker
            3,605
            3,225
            380
            714
            (334)122,752
            106,093
            5.03
            4.39
            Other time deposits
            6,171
            4,653
            1,518
            679
            839628,310
            542,375
            4.20
            3.57
            Total interest-bearing deposits
            26,415
            19,342
            7,073
            3,417
            3,6567,833
            15,770
            5.27
            4.93
            FHLB advances – long-term
            413
            778
            (365)
            54
            (419)52,796
            36,175
            4.95
            4.98
            Short-term borrowings
            2,612
            1,802
            810
            (11)
            82110,310
            10,310
            8.17
            7.90
            Subordinated debt
            842
            815
            27
            28
            (1)Total interest-bearing699,249
            604,630
            4.33
            3.76
            liabilities
            30,282
            22,737
            7,545
            3,446
            4,09991,367
            96,113
            
            
            Noninterest-bearing deposits6,894
            7,408
            
            
            Other liabilities71,516
            61,766
            
            
            Shareholders' equity$869,026
            $769,917
            
            
            Liabilities and equity3.30
            3.78
            Interest rate spread3.99
            4.44
            Net interest marginNet interest income
            $ 33,132
            $ 32,610
            $    522
            $(2,785)
            $
      3,307$131,651
            $129,840
            
            
            Net earning assets$719,677
            $638,488
            
            
            Average deposits3.67
            3.03
            Average cost of deposits105%
            103%
            
            
            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 $156 in 2007 and $158 in 2006 results
      from tax exempt income less non-deductible TEFRA interest
      expense.


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




F - 41
 The
Savannah Bancorp, Inc. - 2007 Annual Report




Table
9 - 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 the
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 assetsLiabilities and equityDeposits$
      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.






The Savannah
Bancorp, Inc. - 2007 Annual Report