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                    SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, DC 20549
                                FORM 10-KSB

                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                         Commission file number 0-18560


                          The Savannah Bancorp, Inc.
         -------------------------------------------------------
             (Name of Small Business Issuer in Its Charter)

                     Georgia                       58-1861820
         --------------------------------         -------------
         (State or Other Jurisdiction of           (IRS Employer
          Incorporation or Organization)          Identification No.)

                        25 Bull Street, Savannah, GA 31401
         ------------------------------------------------------
          (Address of Principal Executive Offices)    (Zip Code)

                               912-651-8200
         ------------------------------------------------------
              (Issuer's Telephone Number, Including Area Code)

                 Securities registered under Section 12(b)
                        of the Exchange Act: None

                 Securities registered under Section 12(g)
                        of the Exchange Act:

                    Common Stock - $1.00 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange  Act during the  preceding 12
months (or for such shorter period that the registrant was required to file such
reports)  and (2) has been subject to such filing  requirements  for the past 90
days. Yes X No_

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. X

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<PAGE>

Issuer's revenues for its most recent fiscal year were $12,085,000.

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates,  based on the price of the last trade of $28.75 per share  times
1,302,082 non-affiliated shares, was $37,435,000.

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by Section  12, 13 or 15(d) of the  Exchange  Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes__ No__


                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

As of February 27, 1998,  the registrant  had issued and  outstanding  1,709,548
shares of common stock.

Traditional Small Business Disclosure Format (check one):
Yes_ No X

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<PAGE>

THE SAVANNAH BANCORP, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS


PART I                                                             PAGE

Item 1. Business                                                     5

Item 2. Properties                                                  26

Item 3. Legal Proceedings                                           27

Item 4. Submission of Matters To a Vote of Security Holders         27

PART II

Item 5. Market for the Registrant's Common Equity
          and Related Stockholder Matters                           27

Item 6. Management's Discussion and Analysis
          of Financial Condition and Results of Operations          28

Item 7. Financial Statements and Supplementary Data                 36

Item 8. Changes in and Disagreement with Accountants
          on Accounting and Financial Disclosure                    54

PART III

Item 9. Directors and Executive Officers of the Registrant          54

Item 10. Executive Compensation                                     57

Item 11. Security Ownership of Certain Beneficial
           Owners and Management                                    58

Item 12. Certain Relationships and Related Transactions             60

Item 13. Exhibits, Financial Statement Schedules
           and Reports on Form 8-K                                  61

         Signature pages                                            62


                                       3

<PAGE>

PART I

THE SAVANNAH  BANCORP,  INC. (THE COMPANY) MAY FROM TIME TO TIME MAKE WRITTEN OR
ORAL  "FORWARD-LOOKING  STATEMENTS",   INCLUDING  STATEMENTS  CONTAINED  IN  THE
COMPANY'S  FILINGS WITH THE SECURITIES AND EXCHANGE  COMMISSION  (INCLUDING THIS
ANNUAL  REPORT ON FORM  10-KSB  AND THE  EXHIBITS  THERETO),  IN ITS  REPORTS TO
SHAREHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY,  WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY  PURSUANT TO THE "SAFE  HARBOR"  PROVISIONS  OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

THESE  FORWARD-LOOKING  STATEMENTS  INVOLVE  RISKS  AND  UNCERTAINTIES,  SUCH AS
STATEMENTS  OF THE  COMPANY'S  PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND
INTENTIONS,  THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S  FINANCIAL  PERFORMANCE TO DIFFER  MATERIALLY FROM THE
PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND  INTENTIONS  EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND  THE  STRENGTH  OF  THE  LOCAL  ECONOMIES  IN  WHICH  THE  COMPANY  CONDUCTS
OPERATIONS;  THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS,  INCLUDING  INTEREST  RATE  POLICIES OF THE BOARD OF  GOVERNORS OF THE
FEDERAL  RESERVE  SYSTEM;   INFLATION,   INTEREST  RATE,   MARKET  AND  MONETARY
FLUCTUATIONS;  THE TIMELY  DEVELOPMENT  OF AND  ACCEPTANCE  OF NEW  PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED  OVERALL  VALUE OF THESE  PRODUCTS AND
SERVICES BY CUSTOMERS,  INCLUDING THE FEATURES,  PRICING AND QUALITY COMPARED TO
COMPETITORS'  PRODUCTS AND SERVICES;  THE WILLINGNESS OF CUSTOMERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES;  THE
SUCCESS OF THE  COMPANY IN  GAINING  REGULATORY  APPROVAL  OF ITS  PRODUCTS  AND
SERVICES,  WHEN REQUIRED;  THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS   (INCLUDING  LAWS  CONCERNING   TAXES,   BANKING,   SECURITIES  AND
INSURANCE);  TECHNOLOGICAL CHANGES;  ACQUISITIONS;  CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS INVOLVED
IN THE FOREGOING.

THE  COMPANY  CAUTIONS  THAT THE  FOREGOING  LIST OF  IMPORTANT  FACTORS  IS NOT
EXCLUSIVE.  THE  COMPANY  DOES  NOT  UNDERTAKE TO

                                       4

<PAGE>

UPDATE ANY FORWARD-LOOKING STATEMENT,  WHETHER WRITTEN OR ORAL, THAT MAY BE MADE
FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.

ITEM 1. BUSINESS

(a)      GENERAL DEVELOPMENT OF BUSINESS

General

The Company was  incorporated  as a Georgia  business  corporation on October 5,
1989, for the purpose of becoming a bank holding company by acquiring all of the
common stock of The Savannah Bank, National Association,  Savannah, Georgia (the
"Bank").  The Company  became a bank holding  company  within the meaning of the
Federal  Bank  Holding  Company  Act (the "Act") and the  Georgia  Bank  Holding
Company Act (the "Georgia Act") upon the acquisition of 100% of the common stock
of the Bank on August 22, 1990.

The Bank  currently is the sole  operating  subsidiary of the Company.  The Bank
received its charter from the Office of the Comptroller of the Currency (OCC) to
commence  business and opened for  business on August 22, 1990.  The deposits at
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC").

On February  10, 1998,  the Company  entered  into a binding  definitive  merger
agreement to acquire the  outstanding  stock of Bryan  Bancorp of Georgia,  Inc.
("Bryan"). Each share of Bryan common stock will be exchanged for 1.85 shares of
the Company's common stock. Based on the Company's closing stock price of $25.50
per share on February 10, 1998, the transaction would be valued at approximately
$24 million.  The merger,  which is anticipated to be accounted for as a pooling
of interests,  is expected to be consummated by mid-year 1998,  pending approval
of Bryan and Company  shareholders,  regulatory  authorities and other customary
conditions  of  closing.   The   transaction   is  expected  to  be  a  tax-free
reorganization for federal income tax purposes.

Bryan is a one-bank holding company for Bryan Bank & Trust Company. Bryan Bank &
Trust Company has one office in Richmond Hill,  Georgia and another  planned for
mid-year  1998. As of December 31, 1997,  Bryan had total assets of $66 million,
total deposits of $56 million,  total  stockholders'  equity of $7.4 million and
$1.2 million in 1997 earnings.


(b)      INFORMATION ABOUT INDUSTRY SEGMENTS

         Not Applicable

                                       5
<PAGE>

(c)      NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

The  Company  is  authorized  to engage in any  activity  permitted  by law to a
corporation,  subject  to  applicable  Federal  regulatory  restrictions  on the
activities of bank holding companies.  The Company was formed for the purpose of
becoming  a holding  company to own 100% of the stock of the Bank.  The  holding
company  structure  provides the Company with greater  flexibility than the Bank
would  otherwise have to expand and diversify its business  activities,  through
newly formed  subsidiaries,  or through  acquisitions.  While the Company has no
present  plans  to  engage  actively  in  any  nonbanking  business  activities,
management  anticipates  studying the  feasibility of  establishing or acquiring
subsidiaries to engage in other business  activities to the extent  permitted by
law.

BANKING SERVICES

The Bank has 49 full-time and 12 part-time  employees and offers a full range of
deposit services, including checking accounts, savings accounts and various time
deposits ranging from daily money market accounts to longer-term certificates of
deposit.  The  transaction  accounts and time  certificates  are tailored to the
principal  market areas at rates  competitive  to those  offered in the area. In
addition,  retirement accounts such as IRA (Individual  Retirement Accounts) and
SEP (Simplified  Employee  Pension)  accounts are offered.  The FDIC insures all
deposit accounts up to the maximum amount (currently $100,000 per account).  The
Bank solicits  these  accounts from  individuals,  businesses,  foundations  and
organizations, and governmental authorities.

The Bank offers a full range of short and  medium-term  commercial,  real estate
and personal loans.  The Bank's primary  lending focus is business,  real estate
and consumer lending. Commercial loans include both secured and a limited volume
of  unsecured  loans.   Consumer  loans  include  secured  loans  for  financing
automobiles,  home  improvements,  real estate and other  personal  investments.
Unsecured consumer loans are limited and generally made to our most creditworthy
borrowers. The Bank originates fixed and variable rate mortgage loans and offers
real estate construction and acquisition loans.

The Bank's  lending  policies  generally  require an 80% loan to value  ratio on
secured  term real estate  lending.  Additionally,  the  existence of a reliable
source of  repayment/cash  flow is  usually  required  before  making any loans,
regardless  of the  security.  Appraisals  are  obtained as required and lending
officers  make on-site  inspections.  New loans over

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<PAGE>

$10,000 are reported to the Credit/ALCO  Committee,  and this Committee approves
loans  over  $750,000,  prior  to  the  loan  being  made.  Generally,   lending
relationships over $100,000 are reported to the full Board of Directors.

Both management and the directors are aware that  environmental  liabilities may
negatively  impact  the  financial  condition  of  borrowers,  the value of real
property and the contingent  environmental  clean-up  liabilities the Bank could
incur by having a lien on environmentally deficient property. The Bank generally
declines to make loans  secured by  property  with  environmental  deficiencies.
Environmental  surveys  are  required  when  there is reason for  concern  about
potential environmental liabilities.

The Bank  operates a  residential  mortgage  loan  origination  department.  The
department  takes  mortgage  loan  applications,  obtains rate  commitments  and
completes various origination documentation and follow-up for an origination and
service release fee from third-party mortgage bankers. In addition to generating
fee  income,  the  department  also  generates  banking  relationships  from its
customers  and real  estate-related  contacts.  These  loans are funded by other
mortgage investors and have not been warehoused on the Bank's books.

CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES

 The Bank has a  multi-faceted  program  designed  to  control  and  continually
monitor  the credit  risks  inherent in its loan  portfolio.  This begins with a
structured  loan  approval  process  in which the Board of  Directors  delegates
authority  for various  types and  amounts of loans to loan  officers on a basis
commensurate  with  seniority  and  lending  experience.  The Bank uses an asset
classification  system that is consistent with OCC  regulations,  which apply to
all  assets  of  an  insured   institution  and  require  each   institution  to
periodically classify its assets.

There are four categories of "criticized" assets: Special Mention, Sub-Standard,
Doubtful  and Loss.  Assets  classified  as  substandard,  doubtful  or loss are
considered  "classified".  The classification of assets is subject to OCC review
and re-classification.  The Bank includes aggregate totals of criticized assets,
and general and specific valuation reserves in quarterly reports to the Board of
Directors, who approve the overall loan loss reserve evaluation. The Bank's loan
classification system utilizes both the account officer and loan review function
to monitor the classification of the Bank's loans.

The account officer is charged with the  responsibility of monitoring changes in
loan quality within his or her loan portfolio and reporting  changes directly to
loan review and senior management.  Additionally,  loan review performs a review
of the  Bank's  loans to  determine  that the  appropriate  risk  grade has been
assigned to each  borrowing  relationship.  Delinquencies  are  monitored on all
loans as a basis for  potential  inclusion  in general  valuation  reserves  or,
ultimately,  for potential charge-off.  Loans which are delinquent 90 days (four
payments)  or longer  generally  are  placed on  nonaccrual  status  unless  the
collectibility  of principal and accrued interest is assured beyond a reasonable

                                       7


<PAGE>

doubt. In certain cases, loans less than 90 days (four payments)  delinquent are
placed on nonaccrual where uncertainty exists as to their  collectibility.  Real
estate acquired through  foreclosure is classified as sub-standard  unless there
is sufficient evidence to indicate such classification is not warranted.

Loan loss reserves are determined  based on management's  internal review of non
per-forming loans,  delinquency trends, the level of rated assets and charge-off
trends.  Additionally,  management assesses general and specific economic trends
both  nationally and locally and regulatory  information to determine the impact
of those external factors on loan loss reserve levels. Based on the internal and
external reviews, the Bank segregates its loan portfolio by type of loans and by
loan  classification  within  each loan type.  Reserve  percentages  are applied
(based on historical and anticipated loss rates) to each loan group to determine
the required amount of allocated  general loan loss reserves.  Additionally,  an
amount is provided for  unallocated  general loan loss reserves,  reflecting the
potential for estimation errors in allocated reserves.

In November  1996,  the Bank applied for and received trust powers from the OCC.
The Bank hired a Trust Department  Manager/Trust  Officer and an assistant.  The
trust operations,  employee benefit  administration and certain money management
functions are being outsourced to third parties, at least for the early years of
the department.  Using these resources the Trust Department  offers a full array
of Trust Services including investment  management,  personal trusts,  custodial
accounts, estate administration, and employee benefit administration.

The Bank also  offers  cash  management  services,  a non-cash  deposit  courier
service,  safe deposit boxes,  travelers checks, direct deposit of payroll, U.S.
Savings  bonds,  official bank checks and money orders and automatic  drafts for
various  accounts.  The Bank is a member  of the HONOR and  CIRRUS  networks  of
automated  teller  machines  that may be used by Bank  customers in Savannah and
other cities. The Bank issues ATM cards and currently has six teller machines in
the area.  The Bank also offers both VISA and  MasterCard  credit  cards,  on an
agent bank  basis,  which  have a  pre-authorized  line of credit  for  personal
purchases and expenses.

LOCATION AND SERVICE AREA

The  Primary  Service  Area of the  Bank is the  City of  Savannah  and  certain
contiguous areas of Chatham County.  Its secondary service area is the remainder
of Chatham  County and  communities  in Bryan,  Effingham and Liberty  Counties,
Georgia and Beaufort and Jasper  Counties,  South  Carolina.  The Bank's  target
markets are individuals  residing in the Primary  Service Area,  small to medium
size businesses,  including retail shops and professional  service businesses in
the community. The Bank is also targeting individuals who meet certain net worth
and income requirements as potential customers for private banking services.

                                       8
<PAGE>

The Bank's main office,  known as the Johnson Square  Office,  is located in the
primary business  district in downtown  Savannah on Johnson Square where most of
the  commercial  banks in the  Primary  Service  Area have their  main  Savannah
offices.  In recent years,  regional banks have acquired several of the banks in
the Primary Service Area with headquarters  outside of the state of Georgia. The
Bank  emphasizes  that it is based in Savannah,  and that its  directors and the
executive  officers are  committed to the economic  development  of the Savannah
area.

On October 1, 1992, the Bank opened its second office at 400 Mall Boulevard. The
Mall  Boulevard  Office  competes  in the area of  Savannah  that has the second
largest concentration of deposits.  This office is in the primary commercial and
retail  district in Savannah and includes a high  concentration  of professional
and service-related businesses.

On November 20, 1995, the Bank opened its third office, the West Chatham Office,
at 100 Chatham  Parkway.  West Chatham is a full service  office  located in the
most significant commercial and industrial growth area of Chatham County.

On October 1, 1997,  the  fourth  office at 4741  Highway 80 East on  Whitemarsh
Island,  six  miles  east of the  main  office  location  opened  for  business.
Deposits,   mortgage  loan  origination  and  consumer  loans  are  the  primary
opportunities for this location which will serve a large concentration of higher
net worth  individuals  as well as a young adult  population in  apartments  and
first homes.

In  October  1997,  the Bank  signed a  long-term  lease for its fifth  Savannah
location  in space  presently  occupied  by a regional  bank  competitor  in the
Medical Arts  Shopping  Center.  This office is  strategically  located near two
major hospitals and numerous medical,  dental and professional  practices.  This
location is  approximately  four miles  southeast of the main office.  The lease
term  begins in June 1998.  The new office is  expected  to be open in the third
quarter, 1998.

The  Bank's  business  plan  relies   principally  upon  local  advertising  and
promotional  activity and upon personal contacts by its directors,  officers and
stockholders to attract  business and to acquaint  potential  customers with the
Bank's personalized  services. The Bank emphasizes a high degree of personalized
customer  service in order to be able to  provide  for each  customer's  banking
needs. The Bank's marketing  approach  emphasizes the advantages of dealing with
an  independent,  locally-owned  and  relationship-oriented  bank  to  meet  the
particular  needs  of  individuals,   professionals  and  small  to  medium-size
businesses in the community. All banking services are continually evaluated with
regard to their  profitability  and  efforts  will be made to modify  the Bank's
business plan if the plan does not prove successful.

                                       9


<PAGE>

ASSET AND LIABILITY MANAGEMENT

Assets of the Bank consist primarily of loans and an investment portfolio. In an
effort to maintain adequate levels of liquidity and minimize fluctuations in the
net  interest  margin  (the  difference  between  interest  income and  interest
expense), the rate sensitivity of the loan and investment portfolios are matched
to the maturities and rate sensitivity of the liabilities.

The Bank invests the majority of its investment  portfolio in highly  marketable
medium-term and short-term maturity assets, such as Federal Funds, U.S. Treasury
securities,  U.S. agency securities,  marketable  mortgage-backed securities and
high  quality  bank-qualified  tax-exempt  securities.  By  pricing  loans  on a
variable rate  structure,  or by keeping the maturity of the investment and loan
portfolios relatively  short-term,  the Bank expects to be able to maintain loan
interest,  or to reinvest securities proceeds,  at prevailing market rates. This
will help to maintain a generally consistent spread over the interest rates paid
by the Bank on the  deposits  which  are used to fund  the  investment  and loan
portfolios.

Deposit  accounts  represent the majority of the liabilities of the Bank.  These
include  non-  interest-bearing  checking  accounts  and  interest  bearing  NOW
accounts,  savings accounts,  money market accounts and certificates of deposit.
Most time deposits have maturities of twelve months and less, but the maturities
may be extended based on liquidity position,  interest rate expectations and the
rate sensitivity in the loan portfolio of the Bank. In managing its liabilities,
the Bank attempts to attract  deposits from  customers  who,  assuming rates are
competitive, are inclined to maintain an ongoing relationship with the Bank.

The  Bank  has  no  investment  risk  in  off-balance  sheet  derivative-related
investments. The Bank owns $12 million in callable agency obligations which have
normal interest rate and  marketability  risk. Of the callable  obligations,  $7
million have one time only calls.  The call dates and the final  maturities  are
laddered so that an excessive  amount of cash flow from callable  bonds will not
be  received in any one quarter or year.  The  remaining  $5 million of callable
obligations are callable quarterly or semiannually.

INTEREST RATE RISK

Interest rate risk is a measure of exposure to changes in net interest income or
the  theoretical  market  value of  portfolio  equity  due to  changes in market
interest  rates.  The  differential  (known  as  "gap")  between  interest  rate
sensitive assets and interest rate sensitive liabilities over a specified period
of time represents a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of rate sensitive assets over
rate  sensitive  liabilities,  while a negative gap  indicates an excess of rate
sensitive liabilities over rate sensitive assets.

The Bank operates under an interest rate risk policy through an Asset  Liability
Management  Committee  ("Credit/ALCO").  The policy  outlines limits on interest
rate risk

                                       10
<PAGE>

in terms of changes in net interest  income and changes in the net market values
of assets and liabilities  over certain  changes in interest rate  environments.
These  measurements are made through a cash flow simulation model which projects
the impact of changes in interest  rates on the Bank's  assets and  liabilities.
Additionally,  the committee may set other  interest rate risk  objectives.  The
policy also outlines  responsibility  for  monitoring  interest  rate risk,  the
process for the approval,  implementation  and  monitoring of interest rate risk
strategies to achieve The Bank's interest rate risk objectives.

FEDERAL AND STATE LAWS AND REGULATION OF BANKS AND BANK HOLDING COMPANIES

Bank holding  companies and banks are  extensively  regulated under both federal
and state law. To the extent that the following  information describes statutory
and regulatory  provisions,  it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.  Any change in applicable law or
regulation  may have a material  effect on the  business  of the Company and its
subsidiary.

The Bank is subject to extensive supervision and regulation by the OCC and, to a
lesser extent, the Federal Deposit Insurance  Corporation (FDIC) and the Federal
Reserve Board. The OCC is responsible for overseeing the affairs of all national
banks and  periodically  examines  national banks to determine their  compliance
with laws and  regulations.  National banks must make periodic  reports of their
condition to the OCC.

In  addition,  the OCC has  authority to issue cease and desist  orders  against
national  banks which are about to engage,  are  engaging or have  engaged in an
unsafe or unsound  practice in the conduct of their business.  The OCC can order
affirmative  action to correct any harm  resulting from a violation of practice,
including, but not limited to, making restitution and providing reimbursement or
guarantees  against  loss in certain  cases.  The OCC also  administers  several
federal  statutes  such as the  Community  Reinvestment  Act and the  Depository
Institution  Management  Interlocks Act, which apply to national banks. The Bank
also  is  subject  to  special  examination  by the  FDIC  and to  certain  FDIC
regulations.

The OCC has adopted  risk-based  capital  requirements  that specify the minimum
level for which no prompt corrective action is required.  In addition,  the FDIC
adopted FDIC insurance  assessment rates based on certain  risk-based and equity
capital ratios. The table in Note 10 of the notes to the consolidated  financial
statements in the 1997 Annual  Report shows the capital  ratios for the Company,
the Bank,  and the regulatory  minimum  capital ratios at December 31, 1997. The
capital  ratios of the  Company  and Bank  exceeded  the ratios  required  to be
"well-capitalized" by the FDIC.

A national  banking  association  is insured by the FDIC and must be a member of
the  Federal  Reserve  System.  Therefore,  the Bank is  subject  to  applicable
provisions  of the  Federal  Reserve  Act,  which  restrict  the  ability of any
national bank to extend credit to its

                                       11


<PAGE>

parent holding  company.  Additionally,  a national banking  association  cannot
extend credit to any affiliate  (including its parent and non-bank  subsidiaries
of its parent) to purchase the assets thereof, to issue a guarantee,  acceptance
or letter of credit  (including an  endorsement  or standby letter of credit) to
its affiliates,  or to invest in the stock or securities thereof or to take such
stock or securities as collateral for loans to any borrower.

Stockholders  of banks  (including  bank  holding  companies  which own stock in
banks,  such as the Company) may be compelled by bank regulatory  authorities to
invest  additional  capital in the event their bank's  capital shall have become
impaired by losses or otherwise. Failure to pay such an assessment could cause a
forced sale of the holder's  bank stock.  In  addition,  the Company may also be
required to provide  additional capital to any additional banks that it acquires
as a condition to obtaining the approvals and consents of regulatory authorities
in connection with such acquisitions.

The  earnings  of the  Bank  and,  consequently  of the  Company,  are  affected
significantly by the policies of the Federal Reserve Board,  which regulates the
money supply in order to mitigate recessionary and inflationary pressures. Among
the techniques used to implement these objectives are open market  operations in
United States Government  securities,  changes in the rate paid by banks on bank
borrowings,   changes  in  reserve   requirements   against  bank  deposits  and
limitations on interest  rates that banks may pay on time and savings  deposits.
These  techniques are used in varying  combinations to influence  overall growth
and distribution of bank loans, investments and deposits, and their use may also
affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect
on the  operating  results of  commercial  banks in the past and are expected to
continue to do so in the future.

In view of changing  conditions in the national  economy and money  markets,  as
well as the effect of actions by monetary and fiscal authorities,  no prediction
can be made as to possible  future changes in interest  rates,  deposit  levels,
loan demand or the business and earnings of the Company and the Bank.

The Company, as a bank holding company, is required to register as such with the
Federal Reserve Board and the Georgia  Department of Banking and Finance.  It is
required  to  file  with  both  of  these  agencies  annual  reports  and  other
information regarding its business operation and those of its subsidiary.  It is
also subject to examination by these two agencies and will be required to obtain
their approval before acquiring directly or indirectly,  ownership or control of
any voting  shares of a bank or bank  subsidiary  of a bank holding  company if,
after such  acquisition,  it would own or control  directly or indirectly,  more
than 5% of the voting stock of such bank or banking subsidiary of a bank holding
company. Furthermore, a bank holding company is prohibited from acquiring direct
or indirect ownership or control of any voting stock of any company which is not
a bank or bank holding company, with limited exceptions.  It

                                       12


<PAGE>

must engage only in the business of banking or managing or controlling  banks or
furnishing  services to or performing  services for its subsidiary banks. During
1996,  the Federal  Reserve  Board  enacted  regulations  that are slightly less
restrictive of the types of businesses which bank holding companies may own.

The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
Act) has introduced a process that enables nationwide interstate banking through
bank subsidiaries and interstate bank mergers.  Separately, the Act also permits
bank  subsidiaries  to act as agents for each other across  state  lines.  Since
September 29, 1995,  adequately  capitalized and managed bank holding  companies
have been permitted to acquire control of a bank in any state.  Any acquisitions
are  subject  to  concentration  limits.  Beginning  June 1,  1997,  banks  were
permitted to merge with one another across state lines.  The Interstate  Banking
Act also permits de novo  branching to the extent that a particular  state "opts
into" the de novo branching provisions. The legislation preserves the state laws
which  require  that a bank must be in  existence  for a minimum  period of time
before being  acquired as long as the  requirement  is five years or less.  This
legislation  has immediate  relevance for the banking  industry due to increased
competitive forces from institutions  which may consolidate  through mergers and
those which may move into new markets through  enhanced  opportunities to branch
across state lines.

A bank holding  company and its  subsidiaries  are  prohibited  from engaging in
certain  tie-in  arrangements  in  connection  with the  extension  of credit or
provision of any property or service.  Thus, a bank may not extend credit, lease
or sell  property or furnish any  service or fix or vary the  consideration  for
such on the condition  that (i) the customer  obtain or provide some  additional
credit,  property or service from or to such bank (other than a loan,  discount,
deposit or trust service  related to and usually  provided in connection  with a
loan, discount, deposit or trust service), its bank holding company or any other
subsidiary  of its bank  holding  company or (ii) the  customer  not obtain some
other  credit,  property  or  service  from a  competitor,  except to the extent
reasonable  conditions  are  imposed  in a  credit  transaction  to  assure  the
soundness of the credit extended.

The Federal  Reserve  Board has cease and desist powers over parent bank holding
companies and non-banking subsidiaries should their actions constitute a serious
threat to the safety,  soundness or stability of a subsidiary  bank. The Company
is also subject to certain restrictions with respect to engaging in the business
of issuing, underwriting and distributing securities.

Although  the  Company  is  not  presently  subject  to  any  direct  regulatory
restrictions  on  dividends  (other than those of Georgia  corporate  law),  the
Company's  long-term  ability to pay cash dividends will depend on the amount of
dividends paid by the Bank, and any other subsequently  acquired  entities.  OCC
regulations  restrict  the amount of  dividends,  which the Bank may pay without
obtaining prior approval.  Based on such  regulatory  restrictions,  the Bank is
limited from paying  dividends  in a calendar  year,  which  exceeds the current
year's net income  combined  with the retained net profits of the  preceding two

                                       13


<PAGE>

years.  The Bank may pay no  dividends  to the Company in excess of the retained
earnings of the Bank of $4.031 million plus future earnings of the bank.

The Bank is a member  of the  Federal  Home  Loan Bank  ("FHLB")  System,  which
consists of 12 regional  FHLB's  subject to  supervision  and  regulation by the
Federal  Housing  Finance Board  ("FHFB").  The FHLB's  maintain  central credit
facilities primarily for member institutions.  The Bank, as a member of the FHLB
of Atlanta,  is required to acquire and hold shares of capital stock in the FHLB
of  Atlanta  in an  amount  at least  equal  to the  greater  of:  (i) 1% of the
aggregate outstanding principal amount of its unpaid residential mortgage loans,
home  purchase  contracts  and similar  obligations  as of the beginning of each
year, (ii) 5% of its advances  (borrowings)  from the FHLB of Atlanta,  or (iii)
$500 thousand.  Additionally,  during 1996 the FHLB of Atlanta imposed a maximum
investment  in its  capital  stock  equal to $500  thousand  over  the  required
minimum.  The Bank is in compliance with this  requirement with an investment of
$412 thousand in FHLB of Atlanta stock at December 1997.

Each FHLB serves as a reserve or central bank for its member institutions within
its assigned regions. It is funded primarily from proceeds derived from the sale
of obligations  of the FHLB System.  The FHLB makes  advances  (i.e.,  loans) to
members in accordance  with policies and procedures  established by its Board of
Directors.  The Bank,  is authorized to borrow funds from the FHLB of Atlanta to
meet demands for withdrawals of savings deposits,  to meet seasonal requirements
and for the expansion of its loan  portfolio.  Advances may be made on a secured
or unsecured basis depending upon a number of factors, including the purpose for
which the funds are being borrowed and existing advances. Interest rates charged
for advances vary  depending  upon  maturity,  the cost of funds to the regional
FHLB and the purpose of the borrowing.

COMMUNITY REINVESTMENT ACT

 The  Community  Reinvestment  Act of 1977  ("CRA")  requires  the federal  bank
regulatory agencies to encourage financial institutions to meet the credit needs
of low-  and  moderate-income  borrowers  in  their  local  communities.  In May
1995,the federal bank regulatory  agencies  published final amended  regulations
promulgated  pursuant  to  the  CRA.  The  final  regulations  eliminate  the 12
assessment factors under the former regulation and replace them with performance
tests.  Institutions  are no  longer  required  to  prepare  CRA  Statements  or
extensively   document   director   participation,   marketing  efforts  or  the
ascertainment of community credit needs.  Under the final rule, an institution's
size and  business  strategy  determines  the type of  examination  that it will
receive.   Large,   retail-oriented   institutions  will  be  examined  using  a
performance-based lending,  investment and service test. Small institutions will
be examined using a streamlined  approach.  All institutions  have the option of
being  evaluated  under a strategic plan  formulated  with  community  input and
pre-approved by the applicable bank regulatory agency.

                                       14


<PAGE>

CRA regulations provide for certain disclosure  obligations.  In accordance with
the CRA,  each  institution  must post a CRA notice  advising  the public of the
right to comment to the institution and its regulator on the  institution's  CRA
performance  and to review the CRA public file.  Each lending  institution  must
maintain for public  inspection a public file that  includes a listing of branch
locations and services, a summary of lending activity, a map of its communities,
and any written comments from the public on its performance in meeting community
credit  needs.  Large  institutions  also are  required to collect  certain data
including the amount and location of,  originated and purchased  small business,
small farm, community  development,  and home mortgage loans, and to report this
data to their regulatory agencies.

Public  disclosure of written CRA evaluations of financial  institutions made by
regulatory agencies is required under the CRA. This promotes  enforcement of CRA
requirements   by  providing   the  public  with  the  status  of  a  particular
institution's community reinvestment record. The Bank received an "satisfactory"
rating on the most recent performance evaluation of its CRA efforts by the OCC.

Congress and various federal agencies  responsible for implementing fair lending
laws have been increasingly concerned with discriminatory lending practices.  In
1994,  those  federal  agencies  announced a Joint  Policy  Statement  detailing
specific discriminatory practices prohibited under the Equal Opportunity Act and
the Fair Housing Act. In the Policy Statement,  three methods of proving lending
discrimination  were identified:  (i) overt evidence of discrimination,  where a
lender blatantly  discriminates on a prohibited basis;(ii) evidence of disparate
treatment,  when a lender treats applicants  differently based upon a prohibited
factor,  even where there is no showing  that the  treatment  was  motivated  by
intention to discriminate; and (iii) evidence of disparate impact, when a lender
applies  a  practice  uniformly  to  all  applicants,  but  the  practice  has a
discriminatory  effect,  even where such practices are neutral in appearance and
applied equally. Lenders are particularly uncertain about the application of the
"disparate  impact"  criteria  by  virtue  of the  vague  nature  of the  Policy
Statement.  The Policy  Statement notes that "the precise contours of the law on
disparate impact as it applies to lending discrimination are under development."

RECENT BANKING LEGISLATION

Bills are presently  pending before the United States Congress and certain state
legislatures,  and  additional  bills  may be  introduced  in the  future in the
Congress and the state legislatures, which, if enacted, may alter the structure,
regulation and competitive relationships of the nation's financial institutions.
It cannot be predicted  whether or in what form any of these  proposals  will be
adopted or the extent to which the  business  of the  Company or the Bank may be
affected thereby.

The Federal  Deposit  Insurance  Corporation  (FDIC) approved a reduction in the
rates charged for deposit  insurance  premiums.  The reduction has significantly
reduced the amount of premiums  assessed on  well-capitalized  banks. The Bank's
assessment  rate

                                       15


<PAGE>

decreased to 4 cents per one hundred dollars of total  deposits,  effective June
1, 1995. It was further  reduced to a minimum charge of $2 thousand  dollars for
1996. In 1997, the assessment was increased to 3.2 cents per one hundred dollars
of  total  deposits,  which  approximated  $14  thousand  dollars  in 1997  FDIC
assessment expense. This significant decline in FDIC insurance premium rates has
had a positive impact on the Company's and banking industry earnings.

In January 1996, Georgia law was amended to allow banks to establish up to three
de novo branches anywhere in the State of Georgia.  The three-branch  limitation
is effective  from July 1, 1996,  through June 30,  1998.  On July 1, 1998,  the
number of branch banks that a bank may establish is no longer limited.

Various  other  legislative  proposals are expected in Congress  concerning  the
banking industry.  Given the uncertainty of the legislative process,  management
cannot  assess  the  effect any such  legislation  would  have on the  Company's
financial condition or results of operations.


COMPETITION

The  banking  business  is highly  competitive.  The Bank  competes  with  other
commercial banks and savings and loan  associations in its Primary Service Area,
the city of Savannah and parts of Chatham County.  The surrounding  counties and
communities  of Hilton Head and Beaufort  also have banks and savings and loans,
many of which have local ownership.

Banks generally  compete with other financial  institutions  through the banking
products  and  services  offered the pricing of  services,  the level of service
provided  the  convenience  and  availability  of  services,  and the  degree of
expertise  and the  personal  manner in which  services  are  offered.  The Bank
encounters  competition  from most of the financial  institutions  in the Bank's
Primary  Service Area. In the conduct of certain areas of its banking  business,
the Bank also competes with credit unions, consumer finance companies, insurance
companies,  money market mutual funds and other financial institutions,  some of
which are not subject to the same degree of regulation and restrictions  imposed
upon the Bank. Many of these  competitors have  substantially  greater resources
and  lending  limits  than  the  Bank  and  offer  certain  services,   such  as
international banking services, that the Bank does not provide currently.

Many of these  competitors  have more branch  offices in the  Company's  Primary
Service Area.  However,  the Company's  plan is to expand into the markets which
will best serve our targeted  customers.  Management  believes that  competitive
pricing, local ownership and personalized, relationship-oriented service provide
the Bank with a method to compete effectively for prospective customers.

                                       16


<PAGE>

The Bank offers the full range of deposit services that are typically  available
from financial institutions,  including NOW accounts,  demand, savings and other
time deposits ranging from money market accounts to longer term  certificates of
deposit. In addition, retirement accounts such as Individual Retirement Accounts
are  available.  All  deposit  accounts  will be  insured  by the FDIC up to the
maximum amount permitted by law.









                REMAINDER OF PAGE INTENTIONALLY LEFT BLANK









                                       17

<PAGE>

SELECTED STATISTICAL INFORMATION OF THE COMPANY

The following statistical  information is provided for the Company for the years
ended  December 31, 1997,  and 1996.  The data is presented  using daily average
balances.  This data should be read in conjunction with the financial statements
appearing  elsewhere in this Report.  The Company has no foreign operations and,
accordingly,  there  are  no  assets  or  liabilities  attributable  to  foreign
operations.


Table 1 - Average  Balance  Sheet and  Rate/Volume  Analysis - 1997 and 1996

The following table presents  average  balances of the Company and the Bank on a
consolidated  basis,  the  taxable-equivalent  interest earned and the rate paid
thereon during 1997 and 1996.

<TABLE>
<CAPTION>

    Average Balance  Average Rate                         Interest              (a) Variance
   ---------------- -------------                      ---------------   Vari-  Attributable to
    1997     1996    1997   1996                         1997    1996    ance   Rate   Volume
   -------  ------- ------ ------                      -------  ------  ------  ----- --------
    <C>       <C>     <C>   <C>        <S>                <C>     <C>     <C>    <C>    <C>

     (Thousands)         (%)      Taxable-Equivalent        (Thousands)           (Thousands)
                                  Interest Income and
                                  fees(b)
 $ 27,067 $ 26,871   6.25  6.28   Investment - taxable $ 1,692 $ 1,687 $   5  $ (7)    $  12
    3,206    2,461   6.86  6.91   Investments -            220     170    50    (1)       51
                                   non-taxable
   10,473    7,197   5.47  5.29   Federal funds sold       573     381   192    19       173
                                  Loans (c)
   39,032   34,258   9.15  9.10    Commercial            3,570   3,118   452    17       435
   15,819   11,594   9.24  9.33    Real estate           1,461   1,082   379   (15)      394
   39,506   34,802   9.29  9.24    Consumer              3,669   3,217   452    17       435
  -------  -------                                      ------  ------  ----
   94,357   80,654   9.22  9.20   Total loans            8,700   7,417 1,283    23     1,260
  -------  -------                                      ------  ------ -----

  135,103  117,183   8.28  8.24   Total interest-       11,185   9,655 1,530    54     1,476
  -------  -------  ----- -----   earning assets        ------  ------ -----  ----    ------

                                  Interest Expense
                                  Deposits
 $ 22,828 $ 21,075   2.69  2.66    NOW accounts            614     561    53     6        47
    3,690    3,125   3.25  3.30    Savings accounts        120     103    17    (2)       19
   18,104   14,758   3.88  3.86    Money market accounts   703     570   133     4       129
   23,575   20,935   5.67  5.78    CD's, $100M or more   1,336   1,210   126   (27)      153
   38,064   33,585   5.66  5.84    Other time deposits   2,154   1,963   191   (70)      261
  -------  -------                                      ------   -----  ----

                                  Total interest-bearing
  106,261   93,478   4.64  4.71    deposits              4,927   4,407   520   (82)      602
                                  Federal funds
                                   purchased and secur-
                                   ities sold under
    3,112    1,307   5.04  5.13    repurchase agreements   157      66    91    (3)       94
  -------  -------                                       ------  ------ ----
                                  Total interest-bearing
 $109,373 $ 94,785   4.65  4.72    liabilities           5,084   4,473   611   (78)      689
 --------  -------  ----- -----                          ------ ------ -----  ------   -----
                     3.78  3.52   Interest rate spread
                                   Net yield on interest-
                                   earning assets and
                     4.52% 4.42%   net interest income $ 6,101 $ 5,182 $ 919 $  131   $  788
                    -----  -----                         -----  ------ -----   ----    -----
</TABLE>

(a) This table shows the changes in interest income and interest expense for the
comparative  periods  based on either  changes in  average  volume or changes in
average  rates for  interest-earning  assets and  interest-bearing  liabilities.
Changes which are not solely due to volume changes or solely due to rate changes
have been attributed to rate.
(b) The  taxable  equivalent  adjustment  results  from tax exempt  income  less
non-deductible  TEFRA  interest  expense.  There was $96 in average  non-accrual
loans in 1997 and $0 in 1996.  Interest  was  accrued  until the date  placed on
non-accrual status.
(c) The loan  classifications  shown  here are  based on the  primary  source of
repayment. There are loans secured by real estate in both the commercial and the
consumer categories.

                                       18
<PAGE>

Table 2 - Average Balance Sheet and Rate/Volume Analysis - 1996 and 1995

The following table presents  average  balances of the Company and the Bank on a
consolidated  basis,  the  taxable-equivalent  interest earned and the rate paid
thereon during 1996 and 1995.

<TABLE>
<CAPTION>

    Average Balance  Average Rate                         Interest              (a) Variance
   ---------------- -------------                      ----------------  Vari-  Attributable to
     1996    1995    1996   1995                         1996    1995    ance   Rate   Volume
   -------  ------  ------ ------                      -------  ------- ------  ----- ---------
     <C>     <C>     <C>   <C>         <S>                <C>     <C>    <C>    <C>     <C>
      (Thousands)        (%)      Taxable-Equivalent       (Thousands)          (Thousands)
                                  Interest Income and
                                  fees (b)
 $ 26,871 $ 19,030   6.28  6.53   Investment - taxable $ 1,687 $ 1,243 $ 444  $(68)    $ 512
    2,461    1,325   6.91  7.09   Investments -            170      94    76    (5)       81
                                   non-taxable
    7,197    7,235   5.29  5.96   Federal funds sold       381     431   (50)  (48)       (2)
                                  Loans (c)
   34,258   26,244   9.10  9.61    Commercial            3,118   2,521   597  (173)      770
   11,594    9,361   9.33  9.67    Real estate           1,082     905   177   (39)      216
   34,802   33,292   9.24  9.38    Consumer              3,217   3,123    94   (48)      142
   -------  ------                                      ------  ------  ----
   80,654   68,897   9.20  9.51   Total loans            7,417   6,549   868  (250)    1,118
   -------  ------                                      ------  ------  ----

  117,183   96,487   8.24  8.62   Total interest-        9,655   8,317 1,338  (446)    1,784
  -------  -------  -----  ----   earning assets        ------  ------ -----  -----    -----

                                  Deposits
   21,075   17,214   2.66  2.99    NOW accounts            561     514    47   (68)      115
    3,125    2,959   3.30  3.51    Savings accounts        103     104    (1)   (7)        6
   14,758   12,140   3.86  3.84    Money market accounts   570     466   104     4       100
   20,935   16,828   5.78  5.95    CD's, $100M or more   1,210   1,001   209   (35)      244
   33,585   27,599   5.84  5.99    Other time deposits   1,963   1,652   311   (47)      358
   -------  ------                                       -----  ------  ----

                                   Total interest-bearing
   93,478   76,740   4.71  4.87     deposits             4,407   3,737   670  (145)      815
                                   Federal funds
                                    purchased and secur-
                                    ities sold under
    1,307      731   5.13  5.61     repurchase agreements   66      41    25    (6)       31
   ------- -------                                       -----  ------  ----
                                   Total interest-bearing
 $ 94,785 $ 77,471   4.72  4.88     liabilities          4,473   3,778   695  (148)      843
   -------  ------  ----- -----                          -----  ------  ----  -----    -----
                     3.52  3.73    Interest rate spread
                                   Net yield on interest-
                                   earning assets and
                     4.42% 4.70%   net interest income $ 5,182 $ 4,539 $ 643 $(298)  $   941
                    ------ -----                         ------  ------ ----  -----   ------
</TABLE>

(a) This table shows the changes in interest income and interest expense for the
comparative  periods  based on either  changes in  average  volume or changes in
average  rates for  interest-earning  assets and  interest-bearing  liabilities.
Changes which are not solely due to volume changes or solely due to rate changes
have been attributed to rate.
(b) The  taxable  equivalent  adjustment  results  from tax exempt  income  less
non-deductible TEFRA interest expense. There were no non-accrual loans in 1996
or 1995.
(c) The loan  classifications  shown  here are  based on the  primary  source of
repayment. There are loans secured by real estate in both the
commercial and the consumer categories.


                                       19
<PAGE>

Table 3 - Long-Term Maturity Gap and Repricing Data

The following table is the Company's long-term maturity and repricing data for
the Company as of December 31, 1997.
   ($ in 000's)

<TABLE>
<CAPTION>
                                                                                      Fair
Interest-bearing assets     1998    1999    2000    2001    2002   Beyond    Total    Value
<S>                          <C>     <C>     <C>     <C>    <C>     <C>        <C>     <C>
                           ------ ------- ------- -------  ------- -------  -------  -------
Investment securities       9,016  10,215   6,094     386     -      3,789   29,500   29,500
                            6.43%   5.82%   6.30%   8.95%     -      6.73%    6.26%     -
Federal funds sold         13,187     -       -       -       -       -      13,187   13,187
                            5.45%     -       -       -       -       -       5.45%     -
Loans - fixed rates        22,060  12,193  10,351   3,779   4,707    2,777   55,867   55,772
                            8.80%   8.73%   8.92%   8.96%   8.89%    8.78%    8.82%     -
Loans - variable rates     25,141   7,047   9,514   3,127   4,430      895   50,154   50,154
                            9.05%   9.10%   9.19%   9.04%   8.80%    8.74%    9.06%     -
                           ------  ------  ------  ------  -------  -------  ------  --------
Total earning assets       69,404  29,455  25,959   7,292   9,137    7,461  148,708  148,613
                            7.95%   7.81%   8.40%   8.99%   8.85%    7.73%    8.10%     -

Interest bearing deposits:
NOW and savings (a)         3,307   3,307   3,307   3,307   3,307   16,539   33,074   33,074
                            2.75%   2.75%   2.75%   2.75%   2.75%    2.75%    2.75%     -
Money market (a)            2,020   2,020   2,020   2,020   2,020   10,103   20,203   20,203
                            3.85%   3.85%   3.85%   3.85%   3.85%    3.85%    3.85%     -
Time,  $100M and over      21,207   1,098   1,422     923     -       -      24,650   24,728
                            5.67%   5.90%   6.55%   6.15%     -       -       5.75%     -
Other Time                 30,214   4,156   3,991   1,122   1,158     -      40,641   40,742
                            5.45%   5.80%   6.31%   5.68%   6.05%     -       5.59%     -
                          -------  ------  ------  ------  ------  --------  ------
Total interest bearing
deposits                   56,748  10,581  10,740   7,372   6,485   26,642  118,568  118,747
                            5.32%   4.48%   4.78%   3.92%   3.68%    3.17%    4.54%     -
Funds purchased             3,250     -       -       -       -       -       3,250    3,250
                            5.05%     -       -       -       -       -       5.05%     -
                          ------- -------  ------  ------  -------  -------  ------

Total interest bearing
liabilities                59,998  10,581  10,740   7,372   6,485   26,642  121,818  121,997
                            5.30%   4.48%   4.78%   3.92%   3.68%    3.17%    4.55%
GAP-Excess Assets           9,406  18,874  15,219     (80)  2,652  (19,181)  26,890     -
                          ------- -------  ------  ------- ------ --------  -------
GAP-Cumulative-12/31/97                                                                 -
                            9,406  28,280  43,499  43,419  46,071   26,890   26,890
                          ------- -------  ------  ------  ------  -------  -------
</TABLE>

(a) - estimated cash flow runoff of 10% per year has been assumed.

The  Company's  cash flow gap is $9,406 within one year, or six percent of total
interest-earning  assets.  Fixed rate earning assets with  maturities  over five
years total $6,417, or four percent of total  interest-earning  assets. The cash
flow gaps between one and five years will adjust significantly each year through
normal loan and deposit activity. Based on the principal cash flows and interest
rates  presented  above,  and the  policies and  procedures  in place to monitor
interest rate risk,  management  believes interest rate risk is being adequately
managed within reasonable earnings fluctuation tolerances.

                                       20
<PAGE>

Table 4 - Investments - Securities Available for Sale

The aggregate amortized cost and fair value of securities  available for sale as
of December 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                     1997
                               ------------------------------------------------
                                Amortized   Unrealized   Unrealized    Fair
                                  Cost         Gains       Losses      Value
                               -----------  ----------   ----------  ---------
<S>                                <C>         <C>           <C>        <C>
Investment securities:
  U. S. Treasury securities      $ 12,141   $        3   $     -     $  12,144
  U. S. Government agencies        11,700           43         -        11,743
  Mortgage-backed securities          995           -           (7)        988
  State and municipal               3,377          150         -         3,527
  Other taxable securities          1,087           11         -         1,098
                               ----------  -----------   ----------   ---------
                                 $ 29,300   $      207   $      (7)  $  29,500
                               ==========  ===========   ==========   =========
</TABLE>

<TABLE>
<CAPTION>                                            1996
                               -------------------------------------------------
                                Amortized   Unrealized   Unrealized    Fair
                                  Cost         Gains       Losses      Value
                               ----------  -----------   ----------   ---------
<S>                                <C>          <C>          <C>          <C>
Investment securities:
   U. S. Treasury securities     $ 16,236   $       -    $     (26)  $  16,210
   U. S. Government agencies        6,988           -          (42)      6,946
   Mortgage-backed securities       1,927           -          (15)      1,912
   State and municipal              3,125           61         -         3,186
   Other taxable securities         1,020           17         -         1,037
                               ----------  -----------   ----------   ---------
                                 $ 29,296   $       78   $    (83)   $  29,291
                               ==========  ===========   ==========   =========
</TABLE>
Table 5 - Investments - Weighted Average Yields by Maturity

The following table sets forth the amortized cost, fair value and tax-equivalent
yields by investment type and maturity category at December 31, 1997.

<TABLE>
<CAPTION>

                                         Amortized    Fair     Tax-Equivalent
                                            Cost      Value       Yield (a)
                                        ----------  ---------  --------------
<S>                                         <C>        <C>          <C>
Securities available for sale:
U. S. Treasury, other U. S. government
  Agencies and Mortgaged-backed:
    Within one year                       $  8,995   $  9,016       6.43%
    One year to five years                  15,840     15,859       5.99
    Five years to ten years                    -          -          -
    Over ten years                             -          -          -
                                        ----------  ---------  --------------
Total                                       24,835     24,875       6.15

Other interest-earning investments:
     Within one year                           450        450       6.38
     One year to five years                    -          -          -
     Five years to ten years                 2,928      3,077       6.76
     Over ten years                            -          -          -
                                        ----------  ---------  --------------
          Total                              3,378      3,527       6.71
                                        ----------  ---------  --------------
Total available for sale interest-
earning investments                         28,213     28,402       6.22%
</TABLE>

                                       21

<PAGE>
<TABLE>
<CAPTION>
                                         Amortized    Fair
                                            Cost      Value
                                        ----------  ---------
<S>                                         <C>        <C>
Federal Reserve Bank Stock
and other investments                        1,087      1,098
                                        ----------  ---------
  Total available-for-sale securities    $  29,300  $  29,500
                                        ==========  =========
</TABLE>

(a) the yield is calculated on the amortized cost of the securities.

LOANS
The  following  tables set forth certain  information  regarding the Bank's loan
portfolio as of December 31, 1997 and 1996.

Table 6 - Loans by Category

The composition of the loan portfolio at December 31, 1997 and 1996 is presented
in Note 3 to the consolidated financial statements.

<TABLE>
<CAPTION>

                                                Percent               Percent
                                       1997     of Total     1996      of Total
                                     ---------  ---------  ---------  ---------
      <S>                                <C>       <C>        <C>        <C>

     Commercial                       $ 18,754      17.7%   $ 14,904      16.8%
     Real estate - rental, constr-
     uction and development             20,100      19.0      13,535      15.3
     Real estate -  mortgage            56,022      52.8      50,067      56.5
     Installment and consumer           11,145      10.5      10,143      11.4
                                     ---------  ---------  ---------  ---------
     Total Loans                      $106,021     100.0%   $ 88,649     100.0%
                                     =========  =========  =========  =========
</TABLE>

Table 7 - Loan Repricing Opportunities

The following table sets forth certain loan maturity  information as of December
31, 1997. Loan renewals  generally  reprice relative to the prime rate in effect
at the time of the renewal. Management expects that certain real estate mortgage
loans that have maturities of one to three years and longer amortization periods
will renew at maturity.

<TABLE>
<CAPTION>

                                        After one year
                             One year       through        Over
Loan Category:               or less      five years    five years    Total
                            ---------  ---------------  ----------  ---------
<S>                            <C>           <C>            <C>        <C>
Real estate-construction
  & development            $  11,979      $    8,115     $       6  $  20,100
Real estate-mortgage          17,538          35,077         3,407     56,022
Commercial, financial
 and agricultural             13,732           4,897           125     18,754
Loans to individuals           3,951           7,059           135     11,145
                            ---------  ---------------  ----------  ---------
  Total                    $  47,200      $   55,148     $   3,673  $ 106,021
                            =========  ===============  ==========  =========

Loans with floating and
  adjustable rates         $  25,140      $   24,118     $     896  $  50,154
Loans with fixed rates        22,060          31,030         2,777     55,867
                            ---------  ---------------  ----------  ---------
    Total                  $  47,200      $   55,148     $   3,673  $ 106,021
                            =========  ===============  ==========  =========
</TABLE>

                                       22
<PAGE>

Nonaccrual, Past Due and Restructured Loans

At December 31, 1997 the Bank had nonaccrual  loans of $153 and had $32 in loans
past due over 90 days.  Management  also  maintains  a "watch  list" of  special
mention  and  classified  loans  that  may  not  be  past  due,   nonaccrual  or
restructured  which  included $347 of loans in addition to the nonaccrual and 90
days overdue  balances.  Interest  income of $7 was recognized  from  nonaccrual
loans in 1997. At December 31, 1996 the Bank had no nonaccrual loans and had $23
in loans  past due over 90 days.  No  interest  income on  nonaccrual  loans was
recognized in 1996.

Except for consumer  loans,  the Bank's  policy is to place a loan on nonaccrual
status when, in management's  judgment, the collection of principal and interest
appears doubtful.  Interest  receivable  accrued in prior years and subsequently
determined to have doubtful  collectibility will be charged to the allowance for
possible  loan losses.  Interest on loans that are  classified  as nonaccrual is
recognized  when  received.  In some cases,  where  borrowers  are  experiencing
financial difficulties, loans may be restructured to provide terms significantly
different from the original contractual terms.

Loan Concentrations

Most of the  Bank's  business  activity  is with  customers  located  within the
Chatham  County area. As of December 31, 1997, the Bank had a  concentration  of
credit risk aggregating $76,122 on loans secured by real estate. This amount was
comprised  of  $56,022  of real  estate in which  the  source  of  repayment  is
primarily  cash flow from  commercial  businesses  and  consumers and $20,100 to
finance  investment real estate in which the primary source of repayment is cash
flow from sales proceeds and lease payments of income producing real estate. The
Bank has no exposure to highly leveraged transactions and has no foreign credits
in its loan portfolio.

Table 8 - Provision for Possible Loan Losses

Changes in the  allowance  for loan  losses in 1997 and 1996 are  summarized  as
follows:

<TABLE>
<CAPTION>

                                                     1997           1996
                                                   -------        -------
   <S>                                                <C>            <C>
    Balance at the beginning of the year           $ 1,240        $ 1,061
    Charge-offs - Commercial                           (43)           -
    Charge-offs - Consumer                             (28)           (23)
                                                   -------        -------
    Charge-offs - Total                                (71)           (23)
    Recoveries - Consumer                               11              7
                                                   -------        -------
    Net charge-offs                                    (60)           (16)
    Provision for loan losses                          300            195
                                                   -------        -------
    Balance at the end of the year                  $1,480         $1,240
                                                   =======        =======

    Ratio of net charge-offs to average loans        .06%            .01%
                                                   =======        =======
</TABLE>

                                       23
<PAGE>

Table 9 - Allocation of Allowance for Loan Losses by Loan Type

The  allowance  for  loan  losses  is  allocated  by  loan  category   based  on
management's  assessment  of risk within the various  categories  of loans.  The
Company's  allocation of the  allowance for loan losses  according to the amount
deemed to be reasonably  necessary to absorb  potential  losses within each loan
category is presented in the following tables:

<TABLE>
<CAPTION>

                                                    % of             % of
                                          1997      Total    1996    Total
                                        -------   -------  -------  -------
  <S>                                     <C>       <C>      <C>       <C>
   Commercial                           $   217      .21   $   148      .17
   Real estate - rental, construction
     and development                        287      .27       245      .28
   Real estate -  mortgage                  100      .09        80      .09
   Installment and other consumer           160      .15       133      .15
   Unallocated                              716      .68       634      .71
                                        -------             -------
     Total Allowance for Loan Losses    $1 ,480     1.40   $ 1,240     1.40
                                        =======            =======
</TABLE>

The allowance for loan losses is based on estimates and is maintained at a level
considered  adequate to provide for potential  loan losses.  The adequacy of the
allowance is based on management's  continuing  evaluation of the loan portfolio
under current economic  conditions,  underlying  collateral value securing loans
and such other factors,  which deserve  recognition  in estimating  loan losses.
Actual future losses may be different from  estimates due to unforeseen  events.
Loans, or portions thereof, which are deemed to be uncollectible will be charged
against the allowance.

Loan loss  reserves are  determined  based on  management's  internal  review of
nonperforming  loans,   delinquency  trends,  the  level  of  rated  assets  and
charge-off  trends.  Additionally,  management  assesses  general  and  specific
economic  trends  both  nationally  and locally and  regulatory  information  to
determine  the impact of those  external  factors on loan loss  reserve  levels.
Based  on the  internal  and  external  reviews,  The Bank  segregates  its loan
portfolio by type of loans and by loan classification within each loan type. The
allowance for loan losses is allocated by different loan  classifications  based
on  management's  assessment  of risk  inherent in the  various  types of loans.
Reserve percentages are applied (based on historical and anticipated loss rates)
to each loan group to determine  the required  amount of allocated  general loan
loss reserves.  Additionally, an amount is provided for unallocated general loan
loss  reserves  reflecting  the  potential  for  estimation  errors in allocated
reserves.

                                       24
<PAGE>

DEPOSITS

Table 10 - Deposit Average Balances and Rates Paid

The following table  summarizes  average balances of deposits of the Company and
the Bank on a  consolidated  basis and the average  rates paid on such  deposits
during 1997 and 1996.

<TABLE>
<CAPTION>

                                          1997                  1996
                                 ------------------   -------------------
                                    Amount    Rate      Amount      Rate
                                 ---------    ----    ---------     ----
<S>                                   <C>      <C>        <C>        <C>
Non-interest bearing demand      $  18,904    0.00%   $  16,577     0.00%
Interest bearing demand             22,828    2.69       21,075     2.66
Saving deposits                      3,690    3.25        3,125     3.30
Money market deposits               18,104    3.88       14,758     3.86
Time deposits                       61,639    5.67       54,520     5.82
                                 ---------             ---------
   Total                         $ 125,165             $ 110,055
                                 =========             =========
</TABLE>

Table 11 - Time Deposit Maturities

The  following  table  indicates the amount of the Bank's time  certificates  of
deposit  of  $100,000  or more at  December  31,  1997 by time  remaining  until
maturity.

<TABLE>
<CAPTION>

         Maturity Period                          Amount
         ---------------                         --------
      <S>                                           <C>
      Three months or less                       $  7,639
      Over three through six months                 6,571
      Over six through twelve months                6,996
      Over twelve months                            3,444
                                                 --------
          Total                                  $ 24,650
                                                 ========
</TABLE>

SHORT-TERM BORROWINGS

Short-term  borrowings at December 31, 1997 and 1996 consist of securities  sold
under  agreement to repurchase and federal funds  purchased.  The maximum amount
outstanding  at the end of any month was $3,543 and $1,911 during 1997 and 1996,
respectively.

As of December 31, 1997 and 1996,  the Bank had short-term  borrowings  totaling
$3,250 and $1,850, respectively. The average interest rates were 5.04% and 5.13%
for the years ended 1997 and 1996.

Table 12 - Return on Assets and Equity

The following  table shows return on assets (net income divided by average total
assets),  return on equity (net income divided by average  shareholders' equity)
and shareholders' equity to assets ratio (shareholders'  equity divided by total
assets) for the years ended

                                       25
<PAGE>

December 31, 1997, 1996 and 1995.  Dividends paid, adjusted for stock splits and
stock dividends, were $.14 in 1997, $.08 in 1996, and $.07 in 1995.

<TABLE>
<CAPTION>

              Ratio                           1997      1996     1995
     -----------------------                 ------    ------   ------
     <S>                                       <C>       <C>       <C>
     Return on Average Assets                 1.22%     1.20%     1.18%
     Return on Average Equity                12.48%    12.01%    10.53%
     Average Equity to Average Assets         9.79%    10.03%    11.20%
     Dividend Payout Ratio                   13.63%     8.69%     9.47%

</TABLE>

ITEM 2. PROPERTIES

The Bank's main office is located at 25 Bull Street, Savannah, Georgia 31401, on
the ground  floor and lower level of a seven story  office  building  located on
Johnson  Square in  downtown  Savannah.  The  location is  sometimes  called the
Financial  Square  because  seven  financial  institutions  surround  the square
(downtown  park).  The  location  is  convenient  to  commercial  customers  and
consumers  who already use the services of the six other  financial  institution
offices on Johnson Square.

The Company has leased  approximately 4,710 square feet on the main floor of the
building under a five-year lease with two optional five-year  extensions in June
1999 and 2004.  The rental costs  increase by 3% of the gross rental amount each
year during the initial  five-year  term and  thereafter in accordance  with the
Consumer Price Index.  The Company is also responsible for its pro rata share of
increases in the cost of ad valorem taxes,  insurance,  utilities and janitorial
services.

The Company also leases  approximately 4,210 square feet on the first floor of a
two-story building located at 400 Mall Boulevard,  Savannah, Georgia. This space
is being used for the Bank's first branch location. The building is located near
the corner of Mall  Boulevard  and Hodgson  Memorial  Drive,  a location that is
convenient to a significant  concentration  of commercial,  service,  and retail
entities.  The lease rate increases  with the consumer price index.  The initial
lease term was for five years and ended March 31, 1997.  The Bank has  committed
to exercise the next five-year  lease option.  There are four five-year  renewal
options  included in the terms. The Company is also responsible for its pro-rata
share of increases in the cost of ad valorem taxes, insurance and maintenance of
common  areas.  The bank  renovated  the existing  space,  constructed  a vault,
drive-in teller area and six drive-in teller lanes adjacent to the building.

During 1995, the Bank entered into a five-year  ground lease with nine five-year
renewal  options  at 100  Chatham  Parkway.  The Bank  also has a right of first
refusal to buy the property at  appraised  value should the owner ever decide to
sell the property.  The location is at the  intersection  of Chatham Parkway and
U.S. Highway 80, a major commercial and industrial  intersection in west Chatham
County.  The Bank made land  improvements  and  constructed  a 2200  square-foot
banking facility  including four drive-in

                                     26
<PAGE>

lanes and an ATM drive-through lane. The West Chatham Office opened for business
on November 20, 1995.

In November 1997, the Bank entered into a ten-year lease  beginning June 1, 1998
with four five-year  renewal options in the Medical Arts Shopping Center at 4809
Waters Road.  The property  consists of 3055 square feet of banking office space
and a separate  drive-through behind the shopping center. The space is presently
occupied by a regional  bank and will  require  minimal  leasehold  improvements
prior to beginning operations.

ITEM 3. LEGAL PROCEEDINGS

The  Company is not a party to, nor is any of its  property  the subject of, any
material pending legal proceedings  incidental to the business of the Company or
the Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security  holders  during the quarter ended
December 31, 1997.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's  common stock was sold in an initial public  offering on April 10,
1990.  It is traded in the  over-the-counter  market and is quoted on the NASDAQ
National  Market System under the symbol SAVB.  Information  as to the quarterly
high  and low  stock  prices  for  1997 and 1996 is  listed  below.  The  prices
represent  high and low bid prices and they have been  adjusted  to reflect  the
two-for-one  stock split  distributed  in July 1995 and a three-for two split in
the form of a 50% stock dividend  declared in January 1997 and paid in February,
1997.  There were  approximately  220 holders of record of Company  Common Stock
and,  according  to  information  available to the  Company,  approximately  530
additional shareholders through brokerage accounts at February 27, 1998.

Table 13 - Market Price per Common Share

<TABLE>
<CAPTION>

                   Fourth           Third         Second          First
1997               Quarter         Quarter        Quarter        Quarter
----               -------         -------        -------        -------
<S>                 <C>             <C>            <C>            <C>
High                $24.00          $23.25         $23.00         $19.25
Low                  21.50           20.00          18.63          15.00

1996
----
High                $16.33          $13.83         $14.00         $14.00
Low                  12.67           12.67          12.67          12.67

</TABLE>
                                       27
<PAGE>

ITEM 6. 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 included in Item 7. in this Form 10-KSB Annual  Report.  All
dollar amounts except per share amounts are in thousands.


SELECTED FINANCIAL DATA - FIVE YEAR COMPARISON - 1993 - 1997

Selected Year-End Balances

<TABLE>
<CAPTION>
        ($ in thousands)         1997      1996      1995       1994      1993
                               --------  --------  --------   --------  --------
<S>                            <C>       <C>       <C>        <C>       <C>
Total Assets                   $163,659  $137,452  $115,088   $ 90,434  $ 71,834
Loans                           106,021    88,649    75,827     61,219    52,037
Deposits                        144,464   121,401    99,547     78,378    59,296
Interest-earning assets         148,708   128,755   108,005     85,743    68,155
Interest-bearing liabilities    121,818   101,438    85,866     63,045    52,513
Shareholders' equity             14,976    13,285    12,163     10,858    10,528

</TABLE>

Selected Average Balances

<TABLE>
<CAPTION>

        ($ in thousands)         1997      1996      1995       1994      1993
                               --------  --------  --------   --------  --------
<S>                            <C>       <C>       <C>        <C>       <C>
Total assets                   $143,543  $125,154  $102,142   $83,370   $ 66,280
Loans                            94,357    80,654    68,897    57,261     46,235
Investment securities            30,273    29,332    20,355    15,159     10,319
Other interest-earning assets    10,473     7,197     7,235     6,634      5,564
Interest-earning assets         135,103   117,183    96,487    79,054     62,118
Interest-bearing deposits       106,261    93,478    76,740    57,657     45,781
Other borrowings                  3,112     1,307       731       688      1,134
Interest-bearing liabilities    109,373    94,785    77,471    58,345     46,915
Non-interest bearing deposits    18,904    16,577    13,226    13,571      8,652
Deposits                        125,165   110,055    89,966    71,228     54,433
Shareholders' equity             14,050    12,549    11,436    10,749     10,262

</TABLE>


                                       28
<PAGE>

Selected Income Statement Data

<TABLE>
<CAPTION>


                                 1997      1996      1995       1994      1993
<S>                            <C>        <C>       <C>       <C>      <C>
Summary of Operations          --------  --------  --------   --------  --------
Interest income                 $11,132    $9,617    $8,297     $5,898   $4,269
Interest expense                  5,084     4,473     3,778      2,143    1,647
                               --------  --------  --------   --------  --------
Net interest income               6,048     5,144     4,519      3,755    2,622
Provision for loan losses          (300)     (195)     (172)      (125)    (257)
                               --------  --------  --------   --------  --------
Net interest income after
  provision for loan losses       5,748     4,949     4,347      3,630    2,365
Other income                        953       654       470        201      235
Personnel expense                 2,192     1,719     1,487      1,167      981
Other expense                     1,824     1,571     1,427      1,240    1,022
                               --------  --------  --------   --------  --------
Income before provision for
  income taxes and accounting
  change                          2,685     2,313     1,903      1,424      597
Provision for income taxes         (932)     (806)     (699)      (518)    (183)
                               --------  --------  --------   --------  --------
Income before accounting
  change and extraordinary item   1,753     1,507     1,204        906      414
Effect of tax accounting change     -         -         -          -        115
                               --------  --------  --------   --------  --------
Net income                     $  1,753  $  1,507    $1,204    $   906  $   529
                               ========  ========  ========   ========  ========
Earnings per share - basic        $1.03      $.89      $.70       $.51     $.29
                               ========  ========  ========   ========  ========
Earnings per share before
accounting change-diluted          $.97      $.85      $.69       $.51     $.23
                               ========  ========  ========   ========  ========
Earnings per share - diluted       $.97      $.85      $.69       $.51     $.29
                               ========  ========  ========   ========  ========
Average basic common
 shares outstanding               1,708     1,701     1,711      1,762    1,783
                               ========  ========  ========   ========  ========
Average diluted common and
common equivalent shares          1,802     1,763     1,747      1,762    1,783
                               ========  ========  ========   ========  ========

Dividends per share                $.14      $.08      $.07       $.03      -
                               ========  ========  ========   ========  ========
</TABLE>

All per share data and average shares have been restated for a ten percent stock
dividend in May,  1994 and a two-for-one  stock split in July,  1995 and a three
for two split in the form of a 50% stock dividend in February, 1997.

                                       29
<PAGE>

Liquidity and Interest Rate Sensitivity Management

The objectives of funds management  include  maintaining  adequate liquidity and
reasonable  harmony  between  the  repricing  of  sources  and  uses of funds or
interest sensitive assets and liabilities.  The goal of liquidity  management is
to ensure the  availability  of  adequate  funds to meet the loan demand and the
deposit  withdrawal  needs of the Bank's  customers.  This is  achieved  through
maintaining a combination of sufficient  liquid assets,  core deposit growth and
unused capacity to purchase funds in the money markets.

During 1997, loans increased $17.4 million, or 20%, and deposits increased $23.1
million, or 19% resulting in an increase in the loan to deposit ratio from 73.0%
at the beginning of the year to 73.4% at year-end. During 1998, management plans
to emphasize  both loan and deposit growth and to target a loan to deposit ratio
in the 75% to 80%  range.  Core  deposit  growth  will be  accomplished  through
marketing,  competitive  interest rates and through the opportunities at our new
Island  Towne Center  Office  which opened in October,  1997 and our new Medical
Arts Office  scheduled to open in the fall of 1998.  The Bank became a member of
the FHLB in 1992. As a member of the FHLB, the Bank has access to short-term and
long-term  borrowings  at  favorable  rates.  These  borrowings  can be used for
liquidity,  asset-liability  management and matched loan funding  purposes.  The
Bank also has $6.5  million of federal  funds  borrowing  lines  available  from
correspondent banks.

A continuing objective of the Bank's asset liability management is to maintain a
high  level  of  variable  rate  assets,   including  variable  rate  loans  and
shorter-maturity  investments,  to balance  increases in interest rate sensitive
liabilities. Interest sensitivity management and its effects on the net interest
margin  require  analyses  and  actions  that  take into  consideration  volumes
repriced and the timing and magnitude of their change.

The Company's maturity and repricing gap at December 31, 1997, was $9,406 within
one year, or six percent of total  interest-earning  assets.  Fixed rate earning
assets with maturities over five years totaled $6,566,  or four percent of total
interest-earning  assets.  The maturity and  repricing  gap between one and five
years will  adjust  significantly  each year  through  normal  loan and  deposit
activity.  Based on the  presently  expected  principal  cash flows and interest
rates and the policies and  procedures  in place to monitor  interest rate risk,
management  believes  interest  rate  risk is being  adequately  managed  within
reasonable earnings fluctuation tolerances.

The  short-term  asset  sensitivity  position of the Company  indicates that net
interest  income  will be  impacted  negatively  when the prime rate and deposit
rates decline.  Soon after the rate declines  stop, net interest  income will be
impacted positively due to the continued time deposit repricing at lower rates.
The opposite is true in the event of rising rates.

                                       30
<PAGE>

The gap position after one year is of less concern  because  management has time
to respond to changing financial  conditions with actions that reduce the impact
of the longer term gap positions.

The Company is a party to financial  instruments with off-balance sheet risks in
the normal course of business to meet the financing  needs of its customers.  At
December 31,  1997,  the Company had unfunded  commitments  to extend  credit of
$18,991 and outstanding  stand-by  letters of credit of $289.  Since many of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment amounts do not necessarily  represent future cash  requirements.  The
Company uses the same credit  policies in  establishing  commitments and issuing
letters of credit as it does for on-balance sheet  instruments.  Management does
not anticipate that funding obligations arising from these financial instruments
will  adversely  impact  its  ability  to fund  future  loan  growth or  deposit
withdrawals.

FINANCIAL CONDITION AND CAPITAL RESOURCES

The financial  condition of the Company can be assessed by examining the changes
and  relationships in the sources and uses of funds as shown in the consolidated
statements of cash flows.  Excellent loan and core deposit growth resulted in an
increase of $904,  or 18%, in net interest  income.  The Company  increased  its
investment in callable U.S.  Government  agency  securities in 1997. In general,
investments  have expected  maturities of less than four years.  Tax-exempt bank
qualified  municipals total $3.5 million, or approximately 12% of the investment
portfolio, and have weighted average maturities of approximately eight years. At
December 31, 1997,  approximately 19.6 percent of equity capital, or $2,931, was
invested in bank premises and equipment.  The Medical Arts Office  scheduled for
opening in the third  quarter 1998 is an existing  bank  facility  which will be
leased. Bank premise and equipment additions will be minor.

Management has classified all investment  securities as available for sale since
January  1,  1994.  In  1997,  a  decrease  in U.S.  Treasury  market  rates  of
approximately 50 to 75 basis points caused net unrealized gains on available for
sale securities to increase to $124, which is included in  shareholders'  equity
at December 31, 1997.  Increases in U.S.  Treasury market rates of approximately
75 to 125 basis points in 1996 caused the equity  valuation  account to decrease
to a $3 net reduction of shareholders' equity at December 31, 1996.

The Company's lending and investment policies continue to emphasize high quality
growth.  These policies do translate in to lower net interest margins;  however,
management believes these policies are in the best interests of the shareholders
and  customers  in the  long-term,  as they  lessen  the  negative  impact  of a
recessionary business cycle. Management is not aware of any known trends, events
or uncertainties that will have or that are reasonably likely to have a material
effect on the liquidity, capital resources or operations of the Company.

                                       31
<PAGE>

The  Office  of the  Comptroller  of the  Currency  (OCC)  has  adopted  capital
requirements  that  specify  the  minimum  level for which no prompt  corrective
action is required.  In addition,  the FDIC  adopted FDIC  insurance  assessment
rates based on certain "well-capitalized"  risk-based and equity capital ratios.
As  of  December  31,  1997,  the  Company  and  the  Bank  exceed  the  minimum
requirements necessary to be classified as "well-capitalized."

Total  equity  capital  for the  Company is  $14,976,  or 9.2% of total  assets.
Management  expects  that the  Company's  and the  Bank's  capital  ratios  will
continue to remain above the  well-capitalized  capital ratio level, even in the
event of future  substantial  increases in market rates.  The high capital ratio
and expected  future  earnings  will allow the bank to continue  its  aggressive
growth objectives without having to raise additional capital in the near future.


RESULTS OF OPERATIONS

1997 COMPARED WITH 1996

For 1997, the Company had a net income of $1,753  compared to 1996 net income of
$1,507,  an increase of 16%.  Diluted  earnings  per share were $.97 in 1997 and
$.85 in 1996 an increase of 14%. Basic earnings per share were $1.03 in 1997 and
$.89 in 1996.  Prior years  earnings per share has been restated for a three for
two stock split declared  January 27, 1997 and distributed on February 24, 1997.
The following  discussion and analysis  summarizes the more significant  factors
affecting operating results in 1997 compared with 1996.

Net interest  income was $6,048 in 1997  compared to $5,144 in 1996, an increase
of $904, or 18%. Average  interest-earning  assets were up $17.9 million, or 15%
in 1997 over 1996. The prime rate increased 25 basis points to 8.50% during 1997
and time deposit rates decreased  between 5 and 10 basis points during 1997. The
net yield on interest  earning  assets  increased to 4.52% in 1997 from 4.42% in
1996.


The  provision  for loan losses was $300 in 1997  compared to $195 in 1996.  Net
loan  charge-offs  totaled  $60 in  1997  and $16 in  1996.  There  was  $185 in
non-performing assets at December 31, 1997 and $23 at December 31, 1996. Because
of the  growth  of the  Bank  since  its  inception  in  1990,  much of the loan
portfolio  has not been  through a weak  economic  cycle and the Company has not
developed  loss  experience  over  a  complete   business  cycle.   Accordingly,
management believes it continues to take a conservative  posture with respect to
additions to the allowance for possible loan losses.  The allowance for possible
loan losses was 1.40% of loans at December 31, 1997 and 1996.

                                       32
<PAGE>

Other income was $953 in 1997  compared to $654 in 1996.  Other income  included
mortgage origination fees of $356 in 1997 and $200 in 1996. Lower mortgage rates
during 1997  stimulated  the growth in mortgage  origination  fee income  during
1997. Other income also included service charges on deposit accounts of $404 and
$373 in 1997  and  1996,  respectively.  The  increase  in  service  charges  is
primarily due to the  increased  number of accounts.  The Bank also  implemented
charges for  non-customers  using our ATMs in early 1997. A trust department was
started in December, 1996 and trust fee income was $30 in 1997.

Other  expenses  were $4,016 in 1997  compared to $3,290 in 1996, an increase of
$726.  Salary and employee  benefit  expense  increased due to three officer and
five  non-officer  positions being added during the year and increased  employee
incentives  and benefits.  Other  operating  expenses  increased  $135 or 13% as
increases in data  processing,  postage and supplies  related to the  increasing
volume of loan and  deposit  accounts  and the costs  necessary  to acquire  and
service them. Occupancy expense and equipment increased primarily because of new
space leased for the Mortgage  Department  in January 1997 and the Islands Towne
Center Office that opened in October 1997.

The provision for income taxes was $932 in 1997 and $806 in 1996.  The effective
federal and state tax rates were 34.7% and 34.9% in 1997 and 1996, respectively.
The  Company has never  recorded a  valuation  allowance  against  deferred  tax
assets.  All deferred tax assets are considered to be realizable due to expected
future taxable income.

RESULTS OF OPERATIONS
1996 COMPARED WITH 1995

For 1996, the Company had a net income of $1,507  compared to 1995 net income of
$1,204 an increase of 25%. Diluted earnings per share were $.85 in 1996 and $.69
in 1995, an increase of 23%. Basic earnings per share were $.89 in 1996 and $.70
in 1995.  Earnings per share have been restated for a three-for-two  stock split
declared  January  27,  1997 and payable on February  24,  1997.  The  following
discussion  and  analysis  summarizes  the more  significant  factors  affecting
operating results in 1996 compared with 1995.

Net interest  income was $5,144 in 1996  compared to $4,519 in 1995, an increase
of $625 or 14%. Average interest-earning assets were up $20.7 million, or 21% in
1996 over 1995.  The prime rate  decreased  25 basis points to 8.25% during 1996
and time deposit rates decreased between 10 and 25 basis points during 1996. The
net yield on interest  earning  assets  decreased to 4.42% in 1996 from 4.70% in
1995.  This ratio was declining at year-end 1995 with the decreasing  prime rate
and was still  declining  slightly at year-end  1996 due to the level prime rate
and significant asset growth during 1996.

The  provision  for loan losses was $195 in 1996  compared to $172 in 1995.  Net
loan  charge-offs  totaled  $16 in  1996  and  $10 in  1995.  There  was  $23 in
non-performing  assets

                                       33
<PAGE>

at December 31, 1996 and $7 at December 31, 1995. Because
of the growth of the Bank since its inception in 1990, much of the loan
portfolio has not been through a weak economic cycle and the Company has not
developed loss experience over a complete business cycle. Accordingly,
management believes it continues to take a conservative posture with respect to
additions to the allowance for possible loan losses. The allowance for possible
loan losses was 1.40% at December 31, 1996 and 1995.

Other income was $654 in 1996 compared to $470 in 1995. Other income in 1996 had
no  securities  gains or losses  compared to  securities  losses of $90 in 1995.
Other income also included mortgage origination fees of $200 in 1996 and $176 in
1995.  Higher  mortgage rates during  mid-1996  moderated the growth in mortgage
origination fee income during 1996.  Other income also included  service charges
on  deposit  accounts  of $373  and  $339 in 1996 and  1995,  respectively.  The
increase  in  service  charges  is  primarily  due to the  increased  number  of
accounts.  The Bank also  implemented  charges for customers  using other bank's
ATM's during  mid-1996.  A trust  department  was started in December,  1996. No
trust fee income was earned in 1996.

Other  expenses  were $3,290 in 1996  compared to $2,914 in 1995, an increase of
$376.  Salary and employee benefit expense  increased due to two officer and one
non-officer  positions  being  added  during  the  year and  increased  employee
incentives  and  benefits.  The Company  also began The Savannah  Bancorp,  Inc.
Employee  Savings  and  Profit-sharing   Plan,   effective  December  31,  1994.
Contributions and administrative expenses related to the plan were approximately
$58 and $45 in 1996 and 1995,  respectively.  Other operating expenses increased
$34 or 3% as increases in data  processing,  postage and supplies related to the
rapidly  increasing  volume of loan and deposit accounts and the costs necessary
to acquire and service them was largely  offset by  decreases in FDIC  insurance
assessments.  The FDIC dropped the insurance assessments for banks classified as
"well-capitalized" to 4 cents from 23 cents per $100 in deposits, effective June
1, 1995 and then to a flat $2,000  minimum in 1996.  Approximately  $22 of trust
department expense was incurred in 1996.

The provision for income taxes was $806 in 1996 and $699 in 1995.  The effective
federal and state tax rates were 34.8% and 36.7% in 1996 and 1995, respectively.
The effective tax rate declined due to increased  tax-exempt income. The Company
has never  recorded a valuation  allowance  against  deferred  tax  assets.  All
deferred  tax assets are  considered  to be  realizable  due to expected  future
taxable income.

YEAR 2000

The  Company  has  engaged  Year  2000  consultants  and  is in the  process  of
developing a plan to ensure a smooth  transition  of the  systems,  products and
vendors that The Company relies on into the twenty-first century.  Additionally,
The Bank will work with its loan customers to monitor  potential credit exposure
that might result from a lack of their systems' readiness for the Year 2000.

                                       34
<PAGE>

Substantially  all of the Company's  software  systems are licensed from outside
vendors.  The core customer  information  system (CIS), loan,  deposit,  general
ledger,  ATM and card-based  systems are all maintained and processed by a third
party, M & I Data Services, Inc., the largest bank-owned data processor of banks
in the United States. The Company expects to receive  commitments from its major
vendors to provide the  required  systems  modifications  to ensure  compliance.
Management believes those commitments will be met in advance of July 1, 1999.

Some  software  programs and some  hardware will need to be modified or replaced
for  Year  2000  compliance.  To the  extent  possible,  those  changes  will be
incorporated in the normal replacement or upgrade of hardware and systems.

Management  believes it will be successful in the  achievement  of its plans and
does not believe  that the  execution  of the plan will have a material  adverse
effect on future operating results.








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                                       35
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)      1.  Financial Statements

The financial  statements,  together with the  applicable  report of independent
accountants,  are  included on pages  38-50 in this 1997  Annual  Report on Form
10-KSB as show in the following index.
                                                                   Page Number

     (i)    Consolidated Financial Highlights for 1997 and 1996        37
     (i)    Report of Independent Certified Public Accountants         38
    (ii)    Consolidated Balance Sheets
              December 31, 1997 and 1996                               39
   (iii)    Consolidated Statements of Income For the Years
              Ended December 31, 1997, 1996 and 1995                   40
    (iv)    Consolidated Statements of Changes in Stockholders'
              Equity For the Years Ended December 31, 1997,
              1996 and 1995                                            41
     (v)    Consolidated Statements of Cash Flows For the Years
              Ended December 31, 1997, 1996 and 1995                   42
    (vi)    Notes to Consolidated Financial Statements                43-53


         2.  Financial Statement Schedules
             Report of Predecessor Independent Accountants       Exhibit 23.1
             The report of Price Waterhouse LLP for the year
             ended December 31, 1995 is included as a financial
             schedule exhibit in this Form 10-KSB.








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                                       36
<PAGE>

The Savannah Bancorp, Inc. and Subsidiary
Consolidated Financial Highlights
December 31, 1997 and 1996

<TABLE>
<CAPTION>                                                             Percent
                                                                      Increase
Balance Sheet at December 31                    1997         1996    (Decrease)
--------------------------------------------------------------------------------
<S>                                             <C>          <C>      <C>

(Amounts in thousands, except per share data)
Total assets                                  $163,659     $137,452       19%
Interest-earning assets                        148,708      128,755       16
Loans                                          106,021       88,649       20
Allowance for loan losses                        1,480        1,240       19
Non-performing assets                              185           23      704
Deposits                                       144,464      121,401       19
Interest-bearing liabilities                   121,818      101,438       20
Shareholders' equity                            14,976       13,285       13
Allowance for possible
   loan losses to total loans                    1.40%        1.40%
Equity to assets                                 9.15%        9.67%
Tier 1 capital to risk
   weighted assets                              13.63%       14.85%
Book value per share (1)                        $ 8.76       $ 7.81       12
Outstanding shares (1)                           1,710        1,701        1

</TABLE>

<TABLE>
<CAPTION>

Earnings and Performance Data
For the Years Ended December 31,                1997         1996
-------------------------------------------------------------------------------
<S>                                            <C>           <C>          <C>

Net income                                    $  1,753     $  1,507       16%
Return on average assets                         1.22%        1.20%        2
Return on average equity                        12.48%       12.01%        4

Earnings per share: (1)
Basic                                           $ 1.03        $ .89       16
Diluted                                         $  .97        $ .85       14
Average shares: (1)
Basic                                            1,708        1,701        0
Diluted                                          1,802        1,763        2
</TABLE>

 (1)  1996  restated  for 3 for 2 stock  split  on  February  24,  1997  and for
restatement of basic per share amounts.

                                       37
<PAGE>

Management's Responsibility for Financial Reporting

The management of The Savannah Bancorp,  Inc. is responsible for the preparation
of  the  financial  statements,  related  financial  data  and  other  financial
information  in this annual  report.  The financial  statements  are prepared in
accordance  with generally  accepted  accounting  principles and include amounts
based on  management's  estimates  and  judgment  where  appropriate.  Financial
information  appearing in this annual  report is  consistent  with the financial
statements.

In meeting  its  responsibility  both for the  integrity  and  fairness of these
statements and  information,  management  depends on the  accounting  system and
related  internal  control  structures  that are designed to provide  reasonable
assurance  that  transactions  are  authorized  and recorded in accordance  with
established procedures,  and that assets are safeguarded and proper and reliable
records are maintained.

The Audit Committee of The Savannah Bancorp, Inc.'s Board of Directors, composed
solely of outside  directors,  meets  regularly  with the Company's  management,
independent  certified  public  accountants  and regulatory  examiners to review
matters  relating to financial  reporting,  internal  control  structure and the
nature, extent and results of the audit effort. The independent certified public
accountants have direct access to the Audit Committee with or without management
present.

The 1997  financial  statements  have  been  audited  by  Arthur  Andersen  LLP,
independent  certified public accountants.  Their appointment was recommended by
the Audit Committee and approved by the Board of Directors. Their audit provides
an objective  assessment of the degree to which the Company's  management  meets
its  responsibility  for  financial  reporting.  Their  opinion on the financial
statements  is based on auditing  procedures  which include  reviewing  internal
control  structure and performing  selected tests of transactions and records as
indicated in their report.  These auditing  procedures are designed to provide a
reasonable level of assurance that the financial statements are fairly presented
in all material respects.

--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants

                     (Arthur Andersen LLP Letterhead)

To the Board of Directors and Shareholders
of The Savannah Bancorp, Inc.:

We have audited the  accompanying  consolidated  balance  sheets of The Savannah
Bancorp, Inc. (a Georgia Corporation) and its subsidiary as of December 31, 1997
and 1996,  and the  related  consolidated  statements  of income,  shareholders'
equity and cash flows for the years then ended.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these  financial  statements  based on our audits.  The  financial
statements of The Savannah  Bancorp,  Inc. and its subsidiary as of December 31,
1995 were  audited by other  auditors  whose  report  dated  January  17,  1996,
expressed an unqualified opinion on those statements.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of The Savannah Bancorp, Inc. and
its  subsidiary  as of  December  31,  1997 and 1996,  and the  results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.

/s/ Arthur Andersen LLP

Jacksonville, Florida
January 21, 1998 (except with respect
to Note 15, as to which the date is
February 10, 1998)

                                       38
<PAGE>

The Savannah Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                               December 31,
($ in thousands, except per share data)                     1997         1996
                                                         ---------     --------
<S>                                                      <C>           <C>
Assets
 Cash and due from banks                                 $  11,929     $  6,015
 Federal funds sold                                         13,187       10,810
 Securities available for sale, at fair value (amortized
   cost of $29,300 in 1997 and $29,296 in 1996)             29,500       29,291
 Loans                                                     106,021       88,649
 Less allowance for loan losses                             (1,480)      (1,240)
                                                         ---------     --------
     Net loans                                             104,541       87,409
 Premises and equipment, net                                 2,931        2,368
 Other assets                                                1,571        1,559
                                                         ---------     --------
       Total assets                                      $ 163,659    $ 137,452
                                                         =========     ========

 Liabilities
  Deposits:
    Non interest-bearing demand                          $  25,896    $  21,813
    Interest-bearing demand                                 29,121       22,611
    Savings                                                  3,953        3,232
    Money market accounts                                   20,203       14,656
    Time, $100,000 and over                                 24,650       23,106
    Other time deposits                                     40,641       35,983
                                                         ---------     --------
       Total deposits                                      144,464      121,401
  Securities sold under repurchase agreements                2,292        1,415
  Federal funds purchased                                      958          435
  Other liabilities                                            969          916
                                                         ---------     --------
       Total liabilities                                   148,683      124,167
                                                         ---------     --------
  Commitments and contingencies (Notes 11 and 13)

  Shareholders' Equity
    Common stock, par value $1 per share:  authorized
      20,000,000 shares; issued 1,782,598 and
      1,188,408 shares in 1997 and 1996                      1,783        1,188
    Preferred stock, par value $1 per share:
       authorized 10,000,000 shares, none issued               -            -
    Contributed Capital                                      8,924        9,519
    Retained earnings                                        4,649        3,135
    Treasury stock, 73,050 and 54,200 shares
       in 1997 and 1996, respectively                         (504)        (554)
    Unrealized gains (losses) on
      securities available for sale, net of tax                124           (3)

       Total shareholders' equity                           14,976       13,285
                                                         ---------     --------
       Total liabilities and shareholders' equity         $163,659     $137,452
                                                         =========     ========
</TABLE>

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

                                       39
<PAGE>

The Savannah Bancorp, Inc. and Subsidiary
Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                    Year Ended December 31,
($ in thousands, except for per share data)      1997        1996        1995
                                               -------     -------     -------
<S>                                            <C>         <C>         <C>
Interest Income
  Loans                                        $ 8,700     $ 7,417     $ 6,549
  Investment securities:
    Taxable                                      1,692       1,687       1,243
    Non-taxable                                    167         132          74
  Federal funds sold                               573         381         431
                                               -------     -------     -------
    Total  interest income                      11,132       9,617       8,297
                                               -------     -------     -------
Interest Expense
  Deposits                                       4,927       4,407       3,737
  Securities sold under repurchase agreement       115          37          16
  Federal funds purchased                           42          29          25
                                               -------     -------     -------
    Total interest expense                       5,084       4,473       3,778
                                               -------     -------     -------
Net Interest Income                              6,048       5,144       4,519
  Provision for loan losses                       (300)       (195)       (172)
                                               -------     -------     -------
Net interest income after
Provision for loan losses                        5,748       4,949       4,347
                                               -------     -------     -------
Other Income
  Service charges on deposit accounts              404         373         339
  Mortgage origination fees                        356         200         176
  Other income                                     191          81          45
                                               -------     -------     -------
     Total other operating revenue                 951         654         560
Gains (losses) on sales of securities                2          -          (90)
                                               -------     -------     -------
Total other income                                 953         654         470
                                               -------     -------     -------
Other Expense
  Salaries and employee benefits                 2,192       1,719       1,487
  Occupancy expense                                334         296         239
  Equipment expense                                318         238         185
  Other operating expenses                       1,172       1,037       1,003
                                               -------     -------     -------
    Total other expense                          4,016       3,290       2,914
                                               -------     -------     -------
Income before provision for income taxes         2,685       2,313       1,903
Provision for income taxes                        (932)       (806)       (699)
                                               -------     -------     -------
Net income                                      $1,753      $1,507      $1,204
                                               =======     =======     =======
Earnings per share (1)
  Basic                                         $ 1.03       $ .89       $ .70
  Diluted                                       $  .97       $ .85       $ .69

</TABLE>

    (1)  adjusted  for a three for two stock  split  declared in January,
         1997, distributed in February, 1997 and a two for one stock split
         declared in June, 1995, distributed in July, 1995.

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

                                       40
<PAGE>

The Savannah Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity

<TABLE>
<CAPTION>

                                                                                      Unrealized
(Amounts in thousands, except                                                         Securities
for per share data)                                                                    (Losses)
                                    Common    Stock  Contributed  Retained  Treasury    Gains,
                                    Shares    Amount   Capital    Earnings    Stock   Net of Tax    Total
                                   -------   ------- -----------  --------  --------  ----------  --------
<S>                                <C>       <C>     <C>          <C>       <C>        <C>       <C>
Balance, December 31, 1994         594,204     $594     $10,113       $669    ($206)      ($312)   $10,858


Cash dividends - $.10 per share                                       (114)                           (114)


Two-for-one stock split            594,204      594        (594)                                        -


Change in unrealized gains on
  securities available for sale,                                                            563        563
  net of tax

Treasury stock purchases                                                       (348)                  (348)

Net income                                                           1,204                           1,204
                                  ---------  ------  -----------  --------  --------  ---------  ---------
Balance, December 31, 1995        1,188,408   1,188       9,519      1,759     (554)        251     12,163
                                  ---------  ------  -----------  --------  --------  ---------  ---------
Cash dividends - $.115 per share                                      (131)                           (131)

Change in unrealized losses on
  securities available for sale,
  net of tax                                                                               (254)      (254)

Net income                                                           1,507                           1,507
                                  ---------  ------  -----------  --------  --------  ---------  ---------
Balance, December 31, 1996        1,188,408   1,188       9,519      3,135     (554)         (3)    13,285
                                  ---------  ------  -----------  --------  --------  ---------  ---------

Cash dividends - $.14 per share                                       (239)                           (239)

Three-for-two stock split           594,190     595        (595)                                        -

Change in unrealized gains on
  securities available for sale,                                                            127        127
  net of tax

Reissuance of treasury stock                                                     50                     50

Net income                                                           1,753                           1,753

                                  ---------  ------  -----------  --------  --------  ---------  ---------
Balance, December 31, 1997        1,782,598  $1,783       $8,924    $4,649    ($504)       $124    $14,976
                                  ---------  ------  -----------  --------  --------  ---------  ---------
</TABLE>

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

                                       41

<PAGE>

The Savannah Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                        Year Ended December 31,
($ in thousands)                                        1997     1996     1995
                                                       ------   ------   ------
<S>                                                    <C>      <C>      <C>
Operating Activities:
Net income                                             $1,753   $1,507   $1,204
Adjustments to reconcile net income to cash
Provided by operations:
   Provision for loan losses                              300      195      172
   Depreciation of premises and equipment                 269      237      188
   (Gains) losses on sales of securities                   (2)      -        90
   Amortization of securities - net                       424      139       52
   Deferred tax benefit                                   (32)     (44)    (144)
   Increase in accrued interest receivable                (94)    (222)    (275)
   Decrease (increase) in prepaid expenses and other       36      (17)     (76)
   Increase in accrued interest payable                    64        9      193
   (Decrease) increase in accrued expenses and other
     liabilities                                          (13)    (323)     163
                                                       ------   ------   ------
     Net cash provided by operating activities          2,705    1,481    1,567
                                                       ------   ------   ------
Investing Activities:
Net increase in federal funds sold                     (2,377)  (4,031)  (1,658)
Purchases of available for sale securities             (7,027) (13,804) (13,979)
Proceeds from sales of available for sale securities      603      992    2,405
Proceeds from  maturities of available for sale
  securities                                            6,000    8,775    5,437
Net increase in loans made to customers               (17,432) (12,838) (14,618)
Capital expenditures                                     (832)    (598)  (1,025)
                                                       ------   ------   ------
     Net cash used in investing activities            (21,065) (21,504) (23,438)
                                                       ------   ------   ------
Financing Activities:
Net increase in demand, savings and money
  market accounts                                      16,861   12,645    8,447
Net increase in time deposits                           6,202    9,207   12,722
Net  increase (decrease) in securities sold under
  repurchase agreements                                   877     (416)   1,832
Net increase (decrease) in federal funds purchased        523      274     (161)
Re-issuance (purchase) of treasury stock                   50      -       (348)
Dividend payments                                        (239)    (131)    (114)
                                                       ------   ------   ------
     Net cash provided by financing activities         24,274   21,579   22,378
                                                       ------   ------   ------
Increase in Cash and Cash Equivalents:                  5,914    1,556      507
     Cash and cash equivalents - beginning of year      6,015    4,459    3,952
                                                       ------   ------   ------
     Cash and cash equivalents - end of year          $11,929  $ 6,015  $ 4,459
                                                      =======  =======  =======
</TABLE>

Supplemental  disclosures  of cash flow  information:

Cash paid during the year for:
     Interest on deposits and other borrowings        $ 5,020  $ 4,464  $ 3,585
     Income taxes                                       1,011    1,075      815

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

                                       42
<PAGE>

                    The Savannah Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements
                (All amounts in thousands, except per share data)

Note 1 - Organization and Summary of Significant Accounting Policies

Organization  - The Savannah  Bancorp,  Inc. (the Company) was  incorporated  in
Georgia on October 5, 1989,  for the purpose of becoming a bank holding  company
for The Savannah Bank, N.A. (the Bank). In 1990,  540,200 shares of common stock
were sold in two public  offerings at $20 per share  ($6.06 per share,  adjusted
for the effect of stock splits and dividend).  The Company  capitalized the Bank
on August 22, 1990,  by  contributing  $10 million of net assets in exchange for
the Bank's common stock. The Bank began operations on August 22, 1990.

Nature of Operations - The Company is a one-bank  holding  company that offers a
full range of lending and deposit products. The primary service area of the Bank
is the city of Savannah, Georgia and surrounding Chatham County.

Basis of  Presentation  - The  consolidated  financial  statements  include  the
accounts of the Company and the Bank. All intercompany accounts and transactions
have been  eliminated  in  consolidation.  The  preparation  of these  financial
statements in conformity with generally accepted accounting  principles requires
the use of certain  estimates by management.  These estimates  include primarily
the  estimation of the allowance  for loan losses.  Actual  results could differ
from  these  estimates.   Certain  amounts  in  the  previous  years  have  been
reclassified to conform to the current year's presentation.

Cash and Cash Equivalents - For purposes of reporting cash flows,  cash and cash
equivalents include cash on hand and amounts due from banks.

Securities  Available for Sale --Management has classified its entire investment
security  portfolio as available  for sale.  Securities  available  for sale are
carried at  estimated  fair  value  with  unrealized  gains and  losses,  net of
deferred income taxes, recorded as a separate component of shareholders' equity.

Loans and Loan Fees - Loans are stated at principal amounts  outstanding reduced
by an  allowance  for loan losses.  Interest  income on loans is  recognized  to
reflect a constant rate of return on net funds outstanding.  Accrual of interest
income is discontinued  when  management  believes the collection of interest or
principal is doubtful.  Accrued interest is reversed and charged against current
income  when  management  believes,  after  considering  economic  and  business
conditions and collection  efforts,  that the ultimate collection of interest is
doubtful.

Generally,  the Company recognizes loan fees to the extent costs are incurred in
the origination of the loans.  For certain loans,  fees in excess of origination
costs are  deferred and  amortized  over the life of the loan.  The  methodology
applied  by the  Company  does not differ  materially  from  generally  accepted
accounting principles.

Non-Performing  and  Impaired  Loans - The  accrual  of  interest  is  generally
discontinued on all loans,  except consumer loans,  that become 90 days past due
as to principal or interest unless  collection of both principal and interest is
assured by way of  collateralization,  guarantees or other  security.  Generally
loans past due 180 days or more are placed on  nonaccrual  status  regardless of
security.  A loan is also  considered  impaired  if its terms are  modified in a
troubled debt  restructuring  after January 1, 1995. For these accruing impaired
loans, cash receipts are typically applied to principal and interest  receivable
in accordance with the terms of the restructured loan agreement.  As of December
31, 1997 and 1996 there were no accruing impaired loans.

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

Premises and Equipment - Building,  furniture,  banking  equipment and leasehold
improvements are stated at cost less accumulated  depreciation and amortization.
Depreciation  and amortization is computed using the  straight-line  method over
the estimated  useful lives or estimated  lease terms  including  expected lease
renewals,  ranging  from  three to fifty  years,  of the  respective  assets for
financial  reporting  purposes  and using an  accelerated

                                       43
<PAGE>

method  for  income  tax  purposes.   Additions  and  major   improvements   are
capitalized,  while  routine  maintenance  and  repairs  and  gain  or  loss  on
dispositions are recognized currently.

Mortgage  Origination Fees - The Company originates  mortgage loans on behalf of
third  parties.  Such loans are originated  pursuant to  commitments  from third
parties  to  acquire  the  loans  that are in  place  prior  to  extension  of a
commitment  to make the loan.  In connection  therewith,  the Company  generally
charges  certain  origination  fees to  borrowers  and may be  paid  amounts  by
purchasers that exceed the Company's basis in the loan (for example, a servicing
release premium).  Net cash gains from those activities are reported as mortgage
origination fees in the accompanying  consolidated statements of income when the
loans are closed.

Income Taxes - Deferred tax assets and liabilities arise from timing differences
in the  recognition  of  revenues  and  expenses  for income  tax and  financial
reporting  purposes.  They are reflected at currently  enacted  income tax rates
applicable  to the period in which the  deferred tax assets or  liabilities  are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and  liabilities  are  adjusted  through the  provision  for
income taxes.

Stock Splits and Dividends - The company  declared a ten percent stock  dividend
in 1994,  a  two-for-one  stock split in July,  1995 in the form of a 100% stock
dividend  and a  three-for-two  stock split in the form of a 50% stock  dividend
effective  February  24,  1997.  All 1996 and 1995 per share  data and  weighted
average share and stock option  information  has been restated for the effect of
these stock dividends and splits. The 1996 and 1995 consolidated  balance sheets
and statements of changes in shareholders' equity have not been restated for the
stock splits.

Earnings Per Share - In February, 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Accounting  Standard ("SFAS") No. 128 "Earnings Per
Share".  SFAS No. 128 replaces  the  presentation  of primary and fully  diluted
earnings per share with a presentation of basic and diluted  earnings per share.
The Company  adopted SFAS No. 128 as of the year ended December 31, 1997.  Basic
earnings per share are calculated based on weighted average  number of shares of
common stock outstanding.  Diluted earnings per share is calculated based on the
weighted  average number of shares of common stock  outstanding and common stock
equivalents,  consisting of outstanding stock options (See Note 9). Common stock
equivalents  are  determined  using  the  treasury  method  for  diluted  shares
outstanding adjusted for the stock splits and stock dividend, referred to above.
The weighted average common shares  outstanding used in the computation of basic
earnings per share were  1,708,000,  1,701,000,  and 1,711,000 in 1997, 1996 and
1995,  respectively.  The weighted average common and common equivalent  diluted
shares  outstanding  used in the computation of diluted  earnings per share were
1,802,000,  1,763,000, and 1,747,000 in 1997, 1996 and 1995,  respectively.  The
difference  between  diluted  and basic  shares  outstanding  are  common  stock
equivalents from stock options outstanding in the years ended December 31, 1997,
1996 and 1995.

Note 2 - Securities Available for Sale

The aggregate amortized cost and fair value of securities  available for sale as
of December 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                     1997
                               ------------------------------------------------
                                Amortized   Unrealized   Unrealized    Fair
                                  Cost         Gains       Losses      Value
                               -----------  ----------   ----------  ---------
<S>                                <C>         <C>           <C>        <C>
Investment securities:
  U. S. Treasury securities      $ 12,141   $        3   $     -     $  12,144
  U. S. Government agencies        11,700           43         -        11,743
  Mortgage-backed securities          995           -           (7)        988
  State and municipal               3,377          150         -         3,527
  Other taxable securities          1,087           11         -         1,098
                               ----------  -----------   ----------   ---------
                                 $ 29,300   $      207   $      (7)  $  29,500
                               ==========  ===========   ==========   =========
</TABLE>


                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                    1996
                               -------------------------------------------------
                                Amortized   Unrealized   Unrealized    Fair
                                  Cost         Gains       Losses      Value
                               ----------  -----------   ----------   ---------
<S>                                <C>          <C>          <C>          <C>
Investment securities:
   U. S. Treasury securities     $ 16,236   $       -    $     (26)  $  16,210
   U. S. Government agencies        6,988           -          (42)      6,946
   Mortgage-backed securities       1,927           -          (15)      1,912
   State and municipal              3,125           61         -         3,186
   Other taxable securities         1,020           17         -         1,037
                               ----------  -----------   ----------   ---------
                                 $ 29,296   $       78   $    (83)   $  29,291
                               ==========  ===========   ==========   =========
</TABLE>

Proceeds from the sale of investment  securities  were $603,  $992 and $2,405 in
1997, 1996 and 1995, respectively. There was no gain or loss in 1997 or 1996 and
a loss of $90 in 1995.

The distribution of securities by maturity at December 31, 1997 is shown below.

                                                   Amortized
                                                     Cost       Fair Value
Securities available for sale:                     ---------    ----------
    Due in one year or less                          $ 8,995       $ 9,016
    Due after one year through five years             16,665        16,695
    Due after five years through ten years             2,928         3,077
    Due after ten years                                  712           712
                                                   ---------    ----------
Total investment securities                          $29,300       $29,500
                                                   =========    ==========

At December 31, 1997 and 1996,  investment  securities  with a carrying value of
$19,803 and $20,827  respectively,  were pledged as  collateral to secure public
funds and securities sold under repurchase agreements.

Note 3 - Loans

The composition of the loan portfolio at December 31, 1997 and 1996 is presented
below.

<TABLE>
<CAPTION>
                                                Percent               Percent
                                       1997     of Total     1996      of Total
                                     ---------  ---------  ---------  ---------
      <S>                                <C>       <C>        <C>        <C>

     Commercial                       $ 18,754      17.7%   $ 14,904      16.8%
     Real estate - rental, constr-
     uction and development             20,100      19.0      13,535      15.3
     Real estate -  mortgage            56,022      52.8      50,067      56.5
     Installment and consumer           11,145      10.5      10,143      11.4
                                     ---------  ---------  ---------  ---------
     Total Loans                      $106,021     100.0%   $ 88,649     100.0%
                                     =========  =========  =========  =========
</TABLE>

At December 31, 1997 and 1996, there were $185 and $23 in non-performing assets.

The  allowance  for  loan  losses  is  allocated  by  loan  category   based  on
management's  assessment of risk within the various categories of loans. Changes
in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
                                                1997          1996        1995
                                               ------        ------      ------
<S>                                            <C>           <C>         <C>
     Balance at the beginning of the year      $1,240        $1,061      $  899
     Provision for loan losses                    300           195         172
     Charge-offs                                  (71)          (23)        (10)
     Recoveries                                    11             7          -
                                               ------        ------      ------
     Balance at the end of the year            $1,480        $1,240      $1,061
                                               ======        ======      ======
</TABLE>
The  Bank  has  granted  loans  to  certain  directors  of the Bank and to their
associates.  The  aggregate  amounts of loans were $4,663 and $3,158 at December
31, 1997 and 1996, respectively. During 1997, $4,396 of new loans were made, and
repayments  totaled $2,891.  Unused lines of credit available to related parties
aggregated  $998 and $595 at December 31, 1997 and 1996,  respectively.  Related
party loans are made on substantially the same terms,  including  interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.

                                       45
<PAGE>

Note 4 - Premises and Equipment

Bank  premises and  equipment at December 31, 1997 and 1996,  are  summarized as
follows:

                                        Depreciable       1997         1996
                                           Lives         ------       ------
     Land                                    -           $  327       $  327
     Buildings                            39 - 50         1,134          618
     Furniture and banking equipment       5 - 15         1,718        1,401
     Leasehold improvements               10 - 39           874          875
                                                         ------       ------
                                                          4,053        3,221
     Less accumulated depreciation                        1,122          853
                                                         ------       ------
     Premises  and  equipment, net                       $2,931       $2,368
                                                         ======       ======

Depreciation of premises and equipment was $269, $237 and $188 in 1997, 1996 and
1995, respectively.

Note 5 - Credit Arrangements

At December 31, 1997 federal funds line of credit arrangements  aggregating $6.5
million were  available  to the Bank from  correspondent  banking  institutions.
There are no commitment fees, and compensating balances are not required.  These
unused lines  principally  serve as liquidity  back-up lines. The Bank is also a
shareholder  of the Federal  Home Loan Bank of Atlanta  (FHLB) and has access to
borrowings from the FHLB.

Note 6 - Deposits

Total time deposits maturing in one to five years are as follow: 1998 - $51,421;
1999 - $5,255; 2000 - $5,413; 2001 - $1,121; and 2002 - $2,081.

The  following  table  indicates the amount of the Bank's time  certificates  of
deposit  of  $100,000  or more at  December  31,  1997 by time  remaining  until
maturity.

                  Maturity Period                        Amount
            ----------------------------                -------
            Three months or less                        $ 7,639
            Over three through six months                 6,571
            Over six through twelve months                6,996
            Over twelve months                            3,444
                                                        -------
                Total                                   $24,650
                                                        =======

Note 7 - Short-Term Borrowings

As of December 31, 1997 and 1996,  the Bank had short-term  borrowings  totaling
$3,250 and $1,850, respectively. The average interest rates were 5.04% and 5.13%
for the years ended 1997 and 1996.  Short-term  borrowings  at December 31, 1997
and 1996 consists of securities  sold under  agreement to repurchase and federal
funds  purchased.  The maximum  amount  outstanding  at the end of any month was
$3,543 and $1,911 during 1997 and 1996, respectively.


Note 8 - Income Taxes

The  provision  for income  taxes is composed of the  following  for each of the
years ended December 31:

<TABLE>
<CAPTION>
                                         1997       1996      1995
                                         ----       ----      ----
<S>                                      <C>        <C>       <C>
     Current federal                     $864       $768      $763
     Current state                        100         82        80
                                         ----       ----      ----
       Total current                      964        850       843
                                         ----       ----      ----
     Deferred federal                     (26)       (38)     (122)
     Deferred state                        (6)        (6)      (22)
                                         ----       ----      ----
       Total deferred                     (32)       (44)     (144)
                                         ----       ----      ----
     Provision for income taxes          $932       $806      $699
                                         ====       ====      ====
</TABLE>

                                       46

<PAGE>

A deferred  tax  liability of $76 in 1997 and a deferred tax asset of $2 in 1996
have been  recognized for the tax effect of the change in the valuation  account
for  unrealized  gains and losses on  available  for sale  securities  which are
recorded net of tax in the equity section in accordance with SFAS No. 115.

A  reconciliation  between the amount computed by applying the U.S.  federal tax
rate of 34% to income before income taxes is as follows:
<TABLE>
<CAPTION>
                                                  1997       1996      1995
                                                  ----       ----      ----
     <S>                                          <C>        <C>       <C>
     Tax provision at 34%                         $913       $786      $647
     State tax,  net of federal tax benefit         66         50        39
     Tax-exempt interest, net                      (57)       (43)      (22)
     Other                                          10         13        35
                                                  ----       ----      ----
     Provision for income taxes                   $932       $806      $699
                                                  ====       ====      ====
</TABLE>

Deferred  income tax assets  (liabilities)  are  comprised  of the  following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
           Deferred tax assets:                        1997        1996
                                                      -----       -----
            <S>                                        <C>          <C>
             Allowance for loan losses                $470         $379
             Deferred compensation                      19           13
             Unrealized losses on securities            -             2
                                                      -----       -----
               Total deferred tax assets               489          394
                                                      -----       -----
           Deferred tax liabilities:
             Unrealized gains on securities            (76)          -
             Depreciation                             (145)         (68)
             Market discount on bonds                  (11)         (23)
                                                      -----       -----
               Total deferred tax liabilities         (232)         (91)
                                                      -----       -----
             Net deferred tax assets                  $257         $303
                                                      =====       =====
</TABLE>
Note 9 - Stock Option Plan and Benefit Plans

In 1990, the Company granted options to the organizers permitting each organizer
to purchase up to 4,125 shares of Common Stock (74,250  shares in the aggregate)
at an option  price of $6.06 per share.  They may be  exercised  after the third
year and before the end of the tenth year  following  the date the options  were
granted  (April 10,  1990).  In the event that the  Company is required to raise
additional  capital  for the  Bank,  the  options  must be either  forfeited  or
exercised  immediately for a price per share equal to the lesser of $6.06 or the
then book value per share of the Common Stock.

The  Company  also has an  Incentive  Stock  Option Plan that  provides  for the
granting of stock  options to certain key officers for the purchase of shares at
the fair  market  value of the stock at the date of the grant.  There are 16,500
remaining  options  authorized  under this plan at December 31, 1997. Under this
plan in April 1995,  44,550 options were granted with an exercise price of $7.50
for a period of ten years  commencing  April 18, 1995. In January 1996,  another
44,550 options were granted under this plan with an exercise price of $13.33 for
a  period  of ten  years  commencing  January  2,  1996.  In April  1996,  9,000
additional  options were  granted to other key officers at an exercise  price of
$13.33  per  share.  The  April  1996  options  vest  over  five  years  and are
exercisable  over ten years.  In July and August 1997,  9,000 and 3,000  options
were granted to key officers at an exercise price of $21.50 and 21.63 per share,
respectively. The July and August 1997 options also vest over five years and are
exercisable over ten years.
<TABLE>
<CAPTION>
                                   1997            1996             1995
                             ----------------- ---------------- ---------------
                                      Weighted         Weighted        Weighted
                                      Average          Average         Average
                                      Exercise         Exercise        Exercise
                              Shares   Price   Shares   Price   Shares  Price
                             -------  -------  ------  -------- ------ --------
<S>                          <C>       <C>     <C>     <C>      <C>    <C>
Outstanding at the
   beginning of year         172,350   $8.69   118,800  $ 6.60   74,250 $ 6.06
Granted                       12,000   21.53    53,550   13.33   44,550   7.50
Exercised                     (8,250)   6.06      -        -       -       -
                             -------           -------          -------
Outstanding at end of year   176,100    9.69   172,350    8.69  118,800   6.60
                             -------           -------          -------
Exercisable at end of year   156,900    8.62   163,350    8.43  118,800   6.60
                             =======           =======          =======
</TABLE>
                                       47
<PAGE>

During 1997,  1996 and 1995, the weighted  average fair value of options granted
was $8.84, $5.08 and $3.01 per option, respectively.

The  Company  has  chosen to  continue  to  account  for its  options  under the
provisions of Accounting  Principles  Board  Statement No. 25,  "Accounting  for
Stock Issued to Employees" and thus has adopted the  disclosure-only  provisions
of SFAS No. 123,  "Accounting for  Stock-Based  Compensation."  Accordingly,  no
compensation   cost  has  been  recognized  for  the  stock  option  plans.  Had
compensation cost for the options granted in 1997, 1996 and 1995 been determined
based  on fair  value  at the  grant  date for  awards  in  1997,  1996 and 1995
consistent with the provisions of SFAS No. 123, the Corporation's net income and
net income per share would have been  reduced to the pro forma  amounts as shown
in the following table:

<TABLE>
<CAPTION>


                                                     1997      1996      1995
                                                    ------    ------    ------
<S>                                                 <C>       <C>       <C>
     Net Income - as reported                       $1,753    $1,507    $1,204
     Net Income - pro forma                         $1,733    $1,277    $1,070

     Net Income per share - basic - as reported      $1.03      $.89      $.70
     Net Income per share - pro forma                $1.02      $.76      $.63

     Net Income per share - diluted - as reported     $.97      $.85      $.69
     Net Income per share - diluted - pro forma       $.96      $.72      $.63

</TABLE>

The  assumptions  regarding the stock  options  issued to executives in 1997 are
that  the  options  shares  vest  equally  between  1998-2002.  The  assumptions
regarding the stock  options  issued to executives in 1996 are that 100% of such
options vested on grant date, except for the 9,000 granted in April, 1996 shares
which vest  equally  between  1997-2001.  The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions.  In 1997: dividend yield of .64%; expected volatility
of 0.19%;  risk free  interest  rate of 6.37% and expected  life of options of 8
years. In 1996:  dividend yield of .5%; expected  volatility of 0.19%; risk free
interest  rate of 5.59%  and  expected  life of  options  of 8  years.  In 1995:
dividend yield of .89%; expected volatility of 0.19%; risk free interest rate of
7.1% and expected life of options of 8 years.

The Company sponsors a 401(k) employee savings and profit-sharing  plan in which
substantially  all full-time  employees are eligible to  participate.  This plan
allows eligible  employees to save a portion of their salary on a pre-tax basis.
Contributions to the plan are  discretionary.  Contributions and  administrative
expenses related to the plan aggregated $68 and $58 for the years ended December
31, 1997 and 1996, respectively.

Note 10 - Capital Ratios and Dividend Restrictions

The Office of Comptroller of the Currency (OCC) has adopted capital requirements
that  specify  the  minimum  level  for  which no  prompt  corrective  action is
required.  In addition,  the Federal Deposit  Insurance  Corporation  (FDIC) has
adopted  FDIC  insurance  assessment  rates based on certain  "well-capitalized"
risk-based  and  equity  capital   ratios.   Failure  to  meet  minimum  capital
requirements  can result in the initiation of certain  actions by the regulators
that,  if  undertaken,  could have a material  effect on the  Company's  and the
Bank's financial  statements.  Management believes as of December 31, 1997, that
the Company and the Bank meet all capital  adequacy  requirements  to which they
are subject. The following table shows these capital ratios for the Company, the
Bank,  the  regulatory  minimum  and the  "well-capitalized"  capital  ratios at
December 31, 1997 and 1996:

<TABLE>
<CAPTION>

                                         1997                     1996
                                  -------------------     -------------------
Capital Ratios:                    Company     Bank        Company     Bank
Qualifying Capital
<S>                                <C>        <C>          <C>        <C>
Tier 1 capital                    $ 14,852   $ 14,831     $ 13,289   $ 13,225
Total capital                     $ 16,212   $ 16,191     $ 14,408   $ 14,344

Average assets for the year       $143,543   $143,548     $125,154   $125,159
Adjusted risk-weighted assets     $109,005   $109,005     $ 89,489   $ 89,489
</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>

                                         1997                     1996
                                  -------------------     -------------------
                                                                                 Mini-     Well
Leverage Ratios:                                                                 Mum    Capitalized
<S>                               <C>           <C>        <C>         <C>       <C>     <C>
Tier 1 capital to average
  assets                             10.35%     10.33%      10.62%     10.57%     4.0%      5.0%

Risk-based Ratios
Tier 1 capital to risk-weighted
  assets                             13.63%     13.61%      14.85%     14.78%     4.0%      6.0%
Total capital to risk-weighted
  assets                             14.87%     14.85%      16.10%      6.03%     8.0%     10.0%
</TABLE>

As of December 31, 1997, the most recent  notification  from the Federal Deposit
Insurance  Corporation  categorized  the  Bank as  well  capitalized  under  the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk based, Tier 1 risk-based,
Tier  1  leverage  ratios.   There  are  no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

OCC  regulations  restrict the amount of dividends that the Bank may pay without
obtaining prior approval.  Based on such  regulatory  restrictions,  the Bank is
limited from paying dividends in a calendar year which exceed the current year's
book net income  combined  with the  retained net profits of the  preceding  two
years.  At  December  31,  1997,  $4,031 in  retained  earnings  of the Bank was
available for the payment of dividends,  subject to maintaining adequate capital
ratios in the Bank. The Company is not subject to any regulatory restrictions on
the payment of dividends to its shareholders.

Note 11 - Leases and Commitments

Future minimum  payments  under  noncancelable  land and office space  operating
leases with remaining terms in excess of one year are presented as follows: 1998
- $234; 1999 - $180;  2000 - $132; 2001 - $137; 2002 - $94 and $477  thereafter.
The  land  and  office  space  leases  contain  customary   escalation  clauses.
Additionally,  the  Bank  has  entered  into a  non-cancelable  data  processing
servicing agreement which provides for minimum payments as follows:  1998 - $96;
1999 - $98;  2000 - $102;  2001 - $105;  2002 - $54.  The  agreement  includes a
termination  clause  where the Company can buyout the  remainder of the contract
for 60% of the current monthly contract times the remaining months.

The net rental expense for all office space operating leases amounted to $210 in
1997,  $183 in 1996,  and $167 in 1995. The leases on the office space have five
or ten year renewal options and require  increased  rentals under cost of living
escalation clauses.

Note 12  - Other Operating Expenses

The  components  of other  operating  expenses for the years ended  December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>

                                               1997         1996         1995
                                             ------       ------       ------
<S>                                          <C>          <C>          <C>
     Outside data processing                 $  258       $  218       $  151
     Advertising and sales promotion            164          148          170
     Professional and directors fees            134          133          128
     Stationery and supplies                    112          100           76
     Regulatory exams and audit fees            106           90           91
     Postage and courier                        103           95           65
     Taxes and licenses                          75           65           63
     Telephone                                   56           41           33
     Dues and subscriptions                      41           29           27
     Insurance                                   32           32           35
     Correspondent bank charges                  20           16           16
     FDIC insurance                              14            2           90
     Other expense                               57           68           58
                                             ------       ------       ------
     Total other operating expenses          $1,172       $1,037       $1,003
                                             ======       ======       ======
</TABLE>
                                       49

<PAGE>

Note 13 - Financial Instruments with Off-Balance Sheet Risk

The Bank is a party to financial  instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments  include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
contract amounts of these instruments reflect the extent of involvement the Bank
has in particular classes of financial  instruments.  The Company is not a party
to any off-balance sheet derivative financial instruments.

The Bank's exposure to credit losses in the event of nonperformance by the other
party to the financial  instrument for  commitments to extend credit and standby
letters  of  credit  is  represented  by  the   contractual   amounts  of  those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on-balance sheet instruments.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require payment of a fee. At December 31, 1997,  unfunded  commitments to extend
credit were $18,991.  None of these  commitments  to extend credit  exceeded one
year in duration.  The Bank evaluates  each  customer's  credit  worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Bank upon extension of credit is based on management's  credit evaluation of the
borrower.  Collateral  varies, but may include accounts  receivable,  inventory,
property, plant and equipment and income-producing commercial properties.

Letters of credit are  conditional  commitments  issued by the Bank to guarantee
the  performance of a customer to a third party.  At December 31, 1997 and 1996,
commitments  under  letters  of credit  aggregated  approximately  $289 and $30,
respectively.  The  credit  risk  involved  in  issuing  letters  of  credit  is
essentially the same as that involved in extending loan facilities to customers.
Collateral  varies but may include accounts  receivable,  inventory,  equipment,
marketable  securities  and  property.  Since most of the  letters of credit are
expected to expire without being drawn upon, they do not  necessarily  represent
future cash requirements.

Most of the  Bank's  business  activity  is with  customers  located  within the
Chatham  County area. As of December 31, 1997, the Bank had a  concentration  of
credit risk aggregating $76,122 on loans secured by real estate. This amount was
comprised  of  $56,022  of real  estate in which  the  source  of  repayment  is
primarily cash flow from  commercial  businesses  and  consumers.  The remaining
$20,100 is to finance  investment  real  estate in which the  primary  source of
repayment  is cash  flow  from  sales  proceeds  and  lease  payments  of income
producing real estate. The Bank has no exposure to highly leveraged transactions
and has no foreign credits in its loan portfolio.

Note 14 - Fair Value of Financial Instruments
For the Company, as with most financial institutions, the majority of its assets
and  liabilities  are considered  financial  instruments.  Many of the financial
instruments,  however,  lack an available  trading market as  characterized by a
willing buyer and willing seller engaging in an exchange transaction. Therefore,
significant  estimations and present value calculations are used for the purpose
of  this  disclosure.   Such  estimations  involve  judgements  as  to  economic
conditions,  risk characteristics and future expected loss experience of various
financial   instruments  and  other  factors  that  cannot  be  determined  with
precision.

Cash and due from banks,  federal funds sold,  variable rate loans, all deposits
except  time  deposits  with  remaining  maturities  over six  months  and other
borrowings have carrying amounts which  approximate fair value primarily because
of the short repricing opportunities of these instruments.

Following is a description of the methods and assumptions used by the Company to
estimate the fair value of its financial instruments:

Investment  Securities:  Fair  value is based  upon  quoted  market  prices,  if
available.  If a quoted market price is not  available,  fair value is estimated
using quoted market prices for similar securities.

Loans:  The fair value for  various  types of fixed rate loans is  estimated  by
discounting  the expected  future cash flows using the Bank's  current  interest
rates at which loans would be made to borrowers with similar credit risk. As the
discount rates are based on current loan rates, as well as management estimates,
the fair  values  presented  may not  necessarily  be  indicative  of the  value
negotiated  in  an  actual  sale.   The  estimated  fair  value  of  the  Bank's
off-balance-sheet  commitments is nominal since the committed rates  approximate
current   rates  offered  for

                                       50
<PAGE>

commitments  with  similar  rate and  maturity  characteristics  and  since  the
estimated credit risk associated with such commitments is not significant.

Deposit liabilities: The fair value of fixed-maturity time deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.

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

<TABLE>
<CAPTION>

                                                       December 31, 1997
                                                   -------------------------
                                                                   Estimated
                                                    Carrying          Fair
                                                      Value           Value
                                                    ----------      ---------
     <S>                                            <C>             <C>
     Financial assets:
       Cash and federal funds sold                 $ 25,116         $ 25,116
       Securities available for sale                 29,500           29,500
       Loans                                        106,021          105,926

 Financial liabilities:
        Deposits                                   $144,464         $144,643
        Securities sold under repurchase
          agreements                                  2,292            2,292
        Federal funds purchased                         958              958
</TABLE>


Note 15 - Subsequent Event

On February 10, 1998,  the Company  signed a definitive  agreement to merge with
Bryan Bancorp of Georgia, Inc. ("Bryan"),  a bank holding company for Bryan Bank
&  Trust   Company.   Bryan  is  located  in  Richmond  Hill  and  Bryan  County
approximately  twenty  miles south of Savannah.  The Company  intends to acquire
Bryan in a tax-free  stock-for-stock merger, to be accounted for as a pooling of
interests by issuing shares of common stock of the Company. The merger agreement
specifies  that each share of Bryan stock will be  exchanged  for 1.85 shares of
the Company's stock.  The value of the stock to be issued is  approximately  $24
million  based on the  $25.50  per  share  market  value on the day prior to the
announcement.  The consummation of the merger is contingent upon the transaction
qualifying  for  pooling of  interests  accounting  treatment  and is subject to
customary closing conditions, including regulatory and shareholder approvals.



















                                       51

<PAGE>

Note 16 - The Savannah Bancorp, Inc. (Parent Company Only) Financial Information

The  following is a condensed  statement of condition of the Parent  Company at
December 31, 1997 and 1996:

<TABLE>
<CAPTION>

Assets                                        1997          1996
                                            ---------     ---------
<S>                                           <C>           <C>
Cash on deposit                               $     3       $     3
Interest-bearing deposits in bank                  36            79
Investment in subsidiary                       14,955        13,221
Other assets                                     -                3
                                            ---------     ---------
  Total assets                                $14,994       $13,306
                                            =========     =========


Liabilities
Other liabilities                             $    18       $    21
                                            ---------     ---------
Shareholders' Equity
Common stock                                    1,783         1,188
Capital surplus                                 8,924         9,519
Treasury stock                                   (504)         (554)
Unrealized gains (losses) on available
  for sale securities, net of tax                 124            (3)
Retained earnings                               4,649         3,135
                                            ---------     ---------
    Total liabilities and
      shareholders' equity                    $14,994       $13,306
                                            =========     =========
</TABLE>

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

<TABLE>
<CAPTION>

                                          1997       1996       1995
                                        --------   --------   --------
<S>                                       <C>        <C>       <C>
Dividend income                           $  190     $  150    $   400
Interest income                                1          2          3
Interest expense                              -          -           1
                                        --------   --------   --------
Net interest & dividend income               191        152        402
Total expenses                                69         56         63
                                        --------   --------   --------
Income before income taxes and
  equity in undistributed net
  income of subsidiary                       122         96        339
Credit for income taxes                       24         19         22
                                        --------   --------   --------
Income before equity in
  undistributed net income of
  subsidiary                                 146        115        361
Equity in undistributed net
   income of subsidiary                    1,607      1,392        843
                                        --------   --------   --------

Net income                                $1,753     $1,507     $1,204
                                        ========   ========   ========
</TABLE>


                                       52


<PAGE>

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

                                          1997       1996        1995
                                       ---------   --------   ---------
Operating Activities
Net income                                $1,753     $1,507      $1,204
Adjustments to reconcile net
  income to cash used
  for operations:
    Equity in undistributed net
      income of subsidiary                (1,607)    (1,392)       (843)
    Decrease  in other
      assets                                   3          6           1
    (Decrease) increase in
      accrued expenses                        (3)        (3)          7
                                       ---------   --------   ---------
   Net cash provided by
      operating activities                   146        118         369
                                       ---------   --------   ---------
Investing Activities
Decrease in interest-
   bearing bank balances                      43          2         100
                                       ---------   --------   ---------
   Net cash provided by
      investing activities                    43          2         100
                                       ---------   --------   ---------
Financing Activities
Re-issuance (purchase)
of treasury stock                             50          -        (348)
Dividends paid                              (239)      (131)       (114)
                                       ---------   --------   ---------
   Net cash used in
      financing activities                  (189)      (131)       (462)
                                       ---------   --------   ---------
Increase (decrease) in cash
     and cash equivalents                      -        (11)          7

   Cash at January 1                           3         14           7
                                       ---------   --------   ---------

   Cash at December 31                  $      3    $     3     $    14
                                       =========   ========   =========

The Parent  Company  financial  statements  include the following  inter-company
items: interest-bearing deposits on the balance sheet; dividend income, interest
income  and $14 of fees  paid  each  year to the Bank in other  expenses  on the
income statement.








                                       53



<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

On March 27, 1996, the Company's  Board of Directors made the decision to change
the Company's  independent auditors from Price Waterhouse LLP to Arthur Andersen
LLP. Arthur Andersen LLP was formally engaged in April 1996.  During the periods
in which Price Waterhouse LLP audited the books and records of the Company, none
of the reports  issued by such firm on the  financial  statements of the Company
contained  an adverse  opinion or  disclaimer  of opinion,  or was  qualified or
modified as to uncertainty,  audit scope or accounting  principles.  The Company
has never had any disagreements with Price Waterhouse LLP or Arthur Andersen LLP
on any  matter  of  accounting  principles  or  practices,  financial  statement
disclosure or auditing  scope or procedure that would have caused either firm to
make reference to the subject  matter of such  disagreement  in connection  with
their reports.


PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

The  following  table  sets  forth the name of each  nominee  and each  director
continuing in office; a description of his or her positions and offices with the
Company  (other than as a director),  if any; a brief  description of his or her
principal  occupation  and  business  experience  during  at least the last five
years;  directorships  presently  held  by him or her in  other  companies  with
registered  securities;  and certain other information  including his or her and
how long she or he has served as a director.

The Company entered into a definitive merger agreement on February 10, 1998 with
Bryan  Bancorp of Georgia,  Inc.  ("Bryan").  The agreement  specifies  that the
Company's  Board of Directors shall be expanded to add five directors from Bryan
at the time the merger is  consummated.  The 1998 Annual Meeting will be delayed
for  approximately  two  months  until June  1998,  at which  time two  director
nominations  will be added  to each of the  first  and  second  classes  and one
director will be added to the third class.

All reports  required  pursuant to the insider  trading  regulations  were filed
timely with the  exception of shares issued to all directors and officers in the
February,  1997 three-for-two  stock split. Also,  Director Wirth had beneficial
shares  owned  by  an  adult  child  and  a  former  spouse  that  ceased  to be
beneficially owned shares during the year. The cessation of beneficial ownership
was not timely  reported.  The  three-for-two  stock split shares were  properly
reported in the 1997 Proxy for the Annual Meeting of Shareholders,  however, the
Form 5's were filed  delinquent,  just prior to the filing of this Form  10-KSB.


                                       54
<PAGE>

NAME, AGE AND YEAR FIRST ELECTED A DIRECTOR OF THE COMPANY AND INFORMATION ABOUT
THE DIRECTOR

ROBERT H.  DEMERE,  JR.,  49,  has been a director  since  1989.  Mr.  Demere is
President of Colonial Group,  Inc., a petroleum  marketing  company in Savannah,
Georgia. He has been employed by Colonial since 1974.

ROBERT W. GROVES III, 48, has been a director since 1989. Mr. Groves is Chairman
of the Board of Strachan Shipping Company, Savannah,  Georgia, a stevedoring and
ship agency. He has been employed by Strachan Shipping Company since 1973.

J. CURTIS LEWIS III, 45, has been a director  since 1989. Mr. Lewis is Secretary
of the Company and the Bank.  Since 1980 Mr. Lewis has been a partner in the law
firm of Hunter,  Lewis & Brannon LLP in Savannah,  Georgia. He is also President
of LP Media, Inc.

M. LANE MORRISON,  52, has been a director since 1989. Mr. Morrison is a partner
in the law firm of Hunter,  Maclean,  Exley & Dunn PC. From 1993 through 1995 he
was a partner in the law firm of Miller, Simpson and Tatum.

RUSSELL W. CARPENTER,  57, has been a director since 1989. Mr.  Carpenter is the
President of Minis & Co., an investment advisory firm in Savannah,  Georgia. Mr.
Carpenter has been with this firm since 1972.

J. WILEY ELLIS, 57, has been a director since 1989. Mr. Ellis is the Chairman of
the  Board of  Directors  of the  Company  and the Bank and also  serves  as its
general  counsel.  He has  been a  partner  in the law firm of  Ellis,  Painter,
Ratteree & Bart LLP since  March 1, 1996.  He was  President  of the law firm of
Adams & Ellis, P.C., Savannah, Georgia, from 1982 through February, 1996.

AARON M. LEVY, 57, has been a director since 1989. Mr. Levy is President of Levy
Jewelers,  a chain of four  jewelry  stores in Savannah,  Georgia,  and has been
employed by Levy Jewelers since 1962.

PENELOPE S. WIRTH,  55, has been a director since 1989.  Mrs. Wirth has been the
owner and principal broker of Investment Real Estate Company, Savannah, Georgia,
since 1978. The company deals with commercial and investment properties.

ARCHIE H. DAVIS,  56, has been a director since 1989. Mr. Davis is President and
Chief  Executive  Officer  of the  Bank  and the  Company.  Mr.  Davis is also a
director of Thomaston Mills, Inc., an integrated  textile company  headquartered
in Thomaston,  Georgia and the Savannah Electric and Power Company, a subsidiary
of the Southern Company.

JULIUS EDEL,  68, has been a director since 1989. Mr. Edel has been President of
Alexander   Brothers  Co.,   Savannah,   Georgia,   previously  a  work  clothes
manufacturing company and since 1985 a holding company for various investments.

                                       55
<PAGE>

JACK M. JONES,  61, has been a director  since 1989.  Mr.  Jones is  presently a
private investor.

JACK W.  SHEAROUSE,  67, has been a director  since 1989.  Mr.  Shearouse is the
President of Shearouse Lumber Company,  a wholesale and retail lumber company in
Pooler, Georgia.

INFORMATION  ABOUT THE BOARD OF DIRECTORS  AND CERTAIN  COMMITTEES  The Board of
Directors of the Company held four meetings during 1997. All directors  attended
at least 75%. All of the directors  attended at least 75% of the aggregate total
number of meetings of committees of the Board on which they served.

AUDIT  COMMITTEE.  The Audit Committee  serves as a liaison between the Board of
Directors and the independent accountants of the Company. The Committee approves
the overall scope of the audit, reviews the results of the audit and reviews the
systems of  internal  control  of the  Company.  During  the  fiscal  year ended
December  31,  1997,  the Audit  Committee  met three  times.  The  Committee is
composed of Messrs. J. Curtis Lewis III, Chairman, Robert H. Demere, Jr., Julius
Edel,  Robert W. Groves III, Jack M. Jones, M. Lane Morrison,  Jack W. Shearouse
and Penelope S. Wirth.

COMPENSATION COMMITTEE. The Compensation Committee reviews and approves proposed
direct  compensation of officers;  reviews and recommends to the Board incentive
plans and benefit plans; and reviews generally compensation and benefits policy.
The members of the Compensation  Committee are Messrs. Jack M. Jones,  Chairman,
Russell W.  Carpenter,  Julius  Edel,  Robert W. Groves III, J. Curtis Lewis and
Jack W. Shearouse. The Compensation Committee held four meetings in 1997.

The following  contains  certain  information  about  executive  officers of the
Company and the Bank who are not directors.


NAME AND YEAR FIRST
ELECTED AN OFFICER OF THE                        POSITIONS HELD AND PRINCIPAL
COMPANY AND THE BANK               AGE            OCCUPATION LAST FIVE YEARS

R. Stephen Stramm                  48              Executive Vice President -
1990                                               Lending of the Bank

Robert B. Briscoe                  46              Chief Financial Officer of
1990                                               the Company and Executive
                                                   Vice President and Chief
                                                   Financial Officer of the
                                                   Bank.

There are no family relationships between directors and / or executive officers.

                                       56
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

The tables below set forth certain information  concerning  compensation paid to
the most highly compensated  executive officers whose cash compensation exceeded
$100,000  for  services in all  capacities  during the years ended  December 31,
1997, 1996 and 1995. There were no options or stock appreciation  rights granted
in 1997.

<TABLE>
<CAPTION>
                                       SUMMARY COMPENSATION TABLE

                                                           Long Term          Compensation
                        Annual Compensation (1)              Awards             Payouts
                   ----------------------------------  ------------------  -------------------
    (a)             (b)     (c)      (d)      (e)        (f)       (g)       (h)       (i)
                                             Other
Name and                                     Annual   Restricted                     All Other
Principal                                    Compen-    Stock    Options   LTIP (5)   Compen-
Position (2)       Year   Salary    Bonus   sation)(3)  Awards    SARs(4)  Payouts   sation(6)
----------------   ----  --------  -------  ---------  --------- -------   --------  ---------
<S>                <C>   <C>       <C>        <C>          <C>       <C>        <C>    <C>
Archie H. Davis    1997  $145,000  $21,048    $8,253       0         0          0      $5,600
President & CEO    1996  $135,000  $19,900    $7,527       0       24,750       0      $4,650
                   1995  $135,000  $20,250    $3,908       0       24,750       0      $4,500

R. Stephen Stramm  1997  $ 97,500  $14,124    $2,475       0         0          0      $5,309
Executive Vice     1996  $ 90,000  $13,300    $2,324       0       12,375       0      $4,902
President          1995  $ 85,000  $12,750    $2,299       0       12,375       0      $4,612

</TABLE>

(1) No compensation has been deferred.
(2) Only two executive officers have compensation that exceeds $100,000.
(3) Includes  club  dues,  directors'  fees and excess  premiums  on group life
    insurance.
(4) Amounts shown represent the number of shares underlying stock options
    granted each year.
(5) LTIP is the abbreviation for "long-term incentive plan."
(6) The Company  contributed these amounts on behalf of Mssrs.  Davis and Stramm
    for the Company's Savings and Profit Sharing Plan.

The Company entered into Change in Control agreements in February 1996 with each
of Mr. Davis, Mr. Stramm and Mr. Briscoe.  Each of said agreements provides that
the  employee  shall  continue to receive the same level of  compensation  for a
period of one (1) year after a "Change in  Control"  occurs,  and if  terminated
without cause during the one (1) year period immediately  following a "Change in
Control",  shall continue to receive the same level of compensation for a period
of one year after such  termination  without  cause.  A "Change in Control" is a
sale of all, or a  substantial  portion of, the  Company's  assets,  a merger or
other  reorganization  whereby the  Company is not the  surviving  entity,  or a
change in control as defined by the Office of the  Comptroller  of the Currency.
The Company does not have a written employment agreement with any officer.

                                       57
<PAGE>

The Company also has an incentive  compensation  arrangement with Messrs. Davis,
Stramm and Briscoe in which they can earn a performance bonus up to 15% of their
annual compensation if the Company achieves certain specified  earnings,  growth
and expense control objectives set forth by the Board of Directors.


                        AGGREGATED YEAR-END OPTION VALUES

Shown  below is  information  with  respect to  unexercised  options to purchase
Common Stock held by the Named Executive Officers at December 31, 1997.

<TABLE>
<CAPTION>
                                       Number of Securities        Value of Unexercised
                                      Underlying Unexercised           In-the-Money
            # of Shares                   Options / SARs              Options / SARs
             Acquired      Value         at Year - End (#)            at Year-End ($)
Name        on Exercise  Realized($) Exercisable  Unexercisable  Exercisable(1) Unexercisable
----------  -----------  ----------  -----------  -------------  -------------  -------------
<S>              <C>         <C>          <C>           <C>          <C>              <C>
Mr. Davis        0           0            53,625        0            $ 712,944        0
Mr. Stramm       0           0            24,750        0            $ 320,760        0

</TABLE>
(1) the value is based on the December 31, 1997 closing  market value of $23.375
    per share.

Directors  were paid $500 per month as director fees and no committee  fees. The
Chairman  of the  Board  received  an extra  $500 per  month  and the  Secretary
received an extra $250 per month for their additional responsibilities.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of February 27, 1998, with
respect to ownership of the  outstanding  common stock of the Company by (i) all
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock of the Company,  (ii) each  director of the Company,  and
(iii) all executive officers and directors of the Company as a group.

                                       58
<PAGE>


NAME AND ADDRESS             AMOUNT AND NATURE OF
OF BENEFICIAL OWNER          BENEFICIAL OWNERSHIP(1)       PERCENT OF CLASS (2)
-------------------          -----------------------     --------------------
Russell W. Carpenter                 20,625                       1.20%

Archie H. Davis (12)                102,473  (3)                  5.81%

Robert H. Demere, Jr.                29,199  (4)                  1.70%

Julius Edel                          34,995  (5)                  2.04%

J. Wiley Ellis                       23,265  (6)                  1.36%

Robert W. Groves III                 20,625                       1.20%

Jack M. Jones                        16,425  (7)                  0.96%

Aaron M. Levy                        21,450  (8)                  1.25%

J. Curtis Lewis III                  39,165  (9)                  2.29%

M. Lane Morrison                     25,575  (10)                 1.49%

Jack W. Shearouse                    32,725                       1.91%

Penelope S. Wirth                    28,875                       1.68%

R. Stephen Stramm                    31,377  (11)                 1.81%

All directors and executive
 officers as a group (14 persons)   447,381                      24.21%

All  shareholders  received  a  three-for-two  stock  split  in the form of a 50
percent stock dividend that was paid on February 24, 1997. The new shares issued
to each director are reflected in the table above.


(1)  Information  relating to  beneficial  ownership  by directors is based upon
information furnished by each director using beneficial "ownership" concepts set
forth in rules  promulgated  by the  Securities  and Exchange  Commission  under
Section 13(d) of the Securities and Exchange Act of 1934. If not footnoted,  the
shares are owned with  voting and  dispositive  rights.  Each  directors  shares
include 4,125 option shares granted in April 1990 and exercisable  through April
10, 2000 in conjunction with the initial public offering.

(2) The percent of class is calculated on the assumption that a person's options
have been exercised and that the total number of issued and  outstanding  shares
of the Company have been increased correspondingly.

(3) Includes 4,125 options and 49,500 incentive stock options.  Of the remaining
shares beneficially owned by Mr. Davis,  24,750 are owned  individually,  16,410
are in his IRA,  5,250  are owned by  children,  1,305 are owned by his wife and
1,133 shares are in his 401K balance.

(4) Of the 29,199  shares  beneficially  owned by Mr.  Demere,  18,150 are owned
individually,  1,650 shares are in his IRA,  5,274 are owned by his children and
4,125 shares represent the options.

                                       59
<PAGE>

(5) Of the  34,995  shares  beneficially  owned by Mr.  Edel,  21,300  are owned
individually,  9,570  shares  are in his IRA,  and 4,125  shares  represent  the
options.

(6) Of the  23,265  shares  beneficially  owned by Mr.  Ellis,  6,765  are owned
individually,  12,375  shares are in his IRA,  and 4,125  shares  represent  the
options.

(7) Of the 16,425 shares  beneficially owned by Mr. Jones,  12,300 shares are in
his IRA,  and 4,125  shares  represent  the  options.

(8) Of the  21,450  shares  beneficially  owned by Mr.  Levy,  4,125  are  owned
individually, 12,375 shares are in his company, 825 shares are owned by his wife
and 4,125 shares  represent the options.

(9) Of the  39,165  shares  beneficially  owned by Mr.  Lewis,  20,460 are owned
individually,  9,750 shares are in his IRA and money purchase  retirement  plan,
4,830 are owned by his children and 4,125 shares represent the options.

(10) Of the 25,575 shares  beneficially owned by Mr. Morrison,  10,725 are owned
individually, 4,125 shares are in his IRA, 6,600 share in a income trust for his
benefit and 4,125 shares represent the options.

(11)  Includes  24,750   incentive  stock  options.   Of  the  remaining  shares
beneficially  owned by Mr. Stramm, 15 are owned  individually,  4,455 are in his
IRA and 2,157 shares are in his 401K balance.

(12) Mr. Davis' address is PO Box 188, Savannah, GA 31402.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  Bank  has  granted  loans  to  certain  directors  of the Bank and to their
associates.  The  aggregate  amounts of loans  were  $4.663  million  and $3.158
million at December 31, 1997 and 1996, respectively. During 1997, $4.396 million
of new loans were made, and repayments  totaled $2.891 million.  Unused lines of
credit  available to related parties  aggregated $.998 million and $.595 million
at December  31, 1997 and 1996,  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
does not involve more than normal risk of collectibility. No other related party
transactions or services rendered to the Company or the Bank exceeded $60,000.
during 1997.

                                       60
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ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS


         Exhibit
         Number      Description
         -------     --------------
           2.1       Agreement and Plan of Merger with Bryan Bancorp
                       of  Georgia, Inc. as of February 10, 1998
           3.1 *     Articles of Incorporation
           3.2 *     By-laws as amended
          10.1 *     Lease for Bank Site at 25 Bull Street and Assumption of
                       Lease
          10.2       Change in Control Agreement with Archie H. Davis dated
                       February 20, 1996
          10.3       Change in Control Agreement with R. Stephen Stramm dated
                       February 20, 1996
          10.4       Change in Control Agreement with Robert B. Briscoe  dated
                       February 20, 1996
          10.5 *     Form of Organizers' Stock Option Agreement
          10.6 *     Lease for Mall Boulevard Office dated February 14, 1992
          10.7       The Savannah Bancorp, Inc.  Incentive Stock Option Plan
                     approved by   shareholders on April 18, 1995.
          10.8       Amendment to The Savannah Bancorp, Inc.  Incentive Stock
                     Option Plan approved by shareholders on April 16, 1996.
          11         Computation of Per Share Earnings
          21   *     Subsidiaries of Registrant
          23.1       Report of Predecessor Independent Accountants -
                     Price Waterhouse LLP
          27         Financial Data Schedule

*Items 3.1, 3.2, 10.1, 10.5, 10.6 and 21 were previously filed by the Company as
Exhibits (with the same respective  Exhibit Numbers as indicated  herein) to the
Company's Registration Statement  (Registration No. 33-33405) filed in February,
1990 and such  documents are  incorporated  herein by  reference.  Item 10.6 was
filed as an exhibit with the 1992 Annual Report on Form 10-K in March, 1993.

(b)  REPORTS ON FORM 8-K

The Company  filed no reports on Form 8-K during the fourth  quarter of the year
ended December 31, 1997.

                                          61

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly caused this report to be signed on March
16, 1998 by the undersigned, thereunto duly authorized.

THE SAVANNAH BANCORP, INC.

By:  /s/ Archie H. Davis
         Archie H. Davis, President and
         Chief Executive Officer
         (Principal Executive Officer)

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the following persons in the capacities  indicated have signed this
report on March 16, 1998.

By:  /s/ Archie H. Davis
         Archie H. Davis, President and
         Chief Executive Officer
         (Principal Executive Officer)

     /s/ Robert B. Briscoe
         Robert B. Briscoe, Chief
         Financial Officer
         (Principal Financial and Accounting Officer)


Directors:

/s/ J. Wiley Ellis
J. Wiley Ellis
Chairman of the Board

/s/ Russell W. Carpenter
Russell W. Carpenter

Robert H. Demere, Jr.

/s/ Julius Edel
Julius Edel

(continued)

                                       62
<PAGE>

Page Two of the Signature Page.


/s/ Robert W. Groves III
Robert W. Groves III


/s/ Jack M. Jones
Jack M. Jones


/s/ Aaron M. Levy
Aaron M. Levy


/s/ J. Curtis Lewis
J. Curtis Lewis


/s/ M. Lane Morrison
M. Lane Morrison


/s/ Jack W. Shearouse
Jack W. Shearouse


Penelope S. Wirth

                                       63

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