SECTION 2 Companys Industry The Savannah Bancorp, Inc.

(SAVB) is a financial holding company headquartered in Savannah, Georgia that consists of two subsidiary banks, The Savannah Bank (TSB) and Bryan Bank & Trust (BBT), and a registered investment advisory firm, Minis & Co. The company operates within the financial services industry. Primary Products Through the subsidiaries, SAVB offers a full range of lending, deposit, residential mortgage originations, fiduciary, trust and investment advisory products. Its primary lending focus is on business, real estate and consumer lending. Raw Materials SAVB operates in a financial service industry. Therefore, no raw materials are used. Company Size As of December 31, 2010, SAVB reported employing approximately 188 full time employees. For the year ended December 31, 2010, SAVB had total assets of $1.07 billion, total loans of $827 million, total deposits of $924 million, total shareholders equity of $86 million and a net loss of $4 million. Company Location SAVB has eleven banking offices and thirteen ATMs located across southeast Georgia and coastal South Carolina. The branches in Georgia are located in Chatham and Bryan County while the branches in South Carolina are located in Beaufort County.

Companies Closely Associated SAVB currently owns 50% interest in Johnson Square Associates (JSA). Annual Report Analysis SAVBs annual report is distributed annually to the companys shareholders and provides information on the companys operations and financial conditions. The image that the report attempts to convey is an image of a small community bank serving the growing communities across Georgia and South Carolina. The core values listed on the inside cover of the annual report emphasizes SAVBs commitment in providing excellent customer service. It also highlights the companys dedication to the community through its philanthropic works within the area. The opening section of the annual report refers to the companys mission statement, which reiterates the companys commitment to the community. The second section consists of the consolidated financial highlights and financial trends of the company. The consolidated financial highlights provide the users with a summary of the companys balance sheet items and average balances for total assets, interest-earning assets, loans, deposits, earnings and performance data for the 2009 and 2010 year ends. The financial trend section of the report gives the users a five year look at the companys total assets, total loans, total deposits and net income (loss). Following the consolidated financial highlights and financial trends, a letter from the President and CEO, John C. Helmken II, is written to the shareholders. In the letter, Helmken shares the 2010 highlights and summarizes how SAVB has been managing the recent economic downturn. The next section of the annual report contains the consolidated financial statements of SAVB and the subsidiaries. In this section, the independent accountants auditing report given by Mauldin & Jenkins, LLC states the consolidated financial statements are presented fairly in all material respect for the years audited. This section is also comprised of the balance sheet,

statement of operations, changes in shareholders equity, statement of cash flows, and notes to the consolidated financial statements. These statements and notes give the users a clear understanding of the companys current financial position. Following the financial statements, the annual report lists contact information for the shareholders and includes annual reporting dates and corporate office information. There is also a list of SAVBs directors along with each of the subsidiaries directors. The final section of the annual report is a list of all the branch locations for SAVB, TSB, BBT, and Minis & Co. SECTION 3 10-K Differences and Supplemental Information Along with the annual report, SAVB also issues Form 10-K. This report contains the same information as the annual report but in a more comprehensive form. It is the official business and financial report that is required to be filed annually with the Securities and Exchange Commission (SEC). The presentation of the report is regulated by the SEC. The management spin and the attractive color pages in the annual report are removed, which allows the 10-K to take a straight-forward and unbiased approach in its reporting. As mentioned, the Form 10-K provides an in-depth analysis of the nature of the business. In this ninety-seven page report, there are four parts that discuss specific topics such as legal proceedings, risk factors, unresolved staff comments, controls and procedures, executive compensation, accountant fees, financial statements, supplementary data, exhibits and financial schedules. The form gives a detailed report on the development of the business from 1989 through 2010 and states that SAVB was formed as a business corporation on October 5, 1989 for the purpose of becoming a bank holding company in the financial services industry. The locations and service areas of its subsidiaries in Savannah, Georgia and the surrounding areas

are also listed. A complete guide to the various banking services are disclosed including "other banking services" such as trust services, cash management services, and internet banking. The 10-K also reports on the companys credit risk management, which has been implemented through a risk rating system designed to control and monitor credit risks in its loan portfolios. Furthermore, it gives a thorough explanation on its allowance for loan losses, risk factors, and the volatility of its stock price and market conditions. There is also information on the federal and state banking regulations, and the potential adverse effect on company earnings due to the policies of the Federal Reserve System. Similar to the annual report, the Form 10-K restates the total assets, total liabilities, and net loss for the year ended December 31, 2010. Unlike the annual report, the 10-K provides selected statistical information on the company in the form of tables that describe such topics as loan repricing opportunities, long-term obligations, and weighted average yields by maturity. The signature page consisting of the signatures of the directors is also included on the Form 10-K. The consolidated financial statements, exhibits and financial schedules in part four of the 10-K are also shown in the annual report. SECTION 4 Key Economic Factors The largest economic factor that has affected almost every individual in the United States is the subprime mortgage crisis. As the number of mortgages that face foreclose continue to grow, banks are making precaution by allocating large sum of money in to an Allocation for Loan Loss account. Banks are also placing more restriction and requirement on their loan for mortgages than before. This makes it harder for individuals to purchase a home in the furtue.

Another large economic factor that affects the banking industry would be the changes in interest rates. For instance, if interest rates continue to fall this negatively affects net income because a banks interest-bearing asset reprice faster than their interest-bearing liabilities. Changes in the level of interest rates also negatively affects the ability for banks to originate loans, the value of their assets and their ability to realize gains from the sales of the assets, all which ultimately affect the earning of the bank. Failures of financial institutions have an impact on other financial intuitions in the industry. Between January 2009 to February 2011, 52 of the 320 bank closed national were from Georgia. The increasing number of banks defaulting exposes the other to additional liquidity problems which could cause problems in the future. Companys Life Cycle SAVB is currently in a slow growth stage in the organization life cycle. On June 25, 2010, TSB, a subsidiary of SAVB entered into an agreement with the FDIC to purchase all deposits and certain liabilities and assets from First National Bank (FNB). This agreement allowed TSB to acquire approximately $42 million in assets and assume $216 million in liabilities, and receive a cash payment from the FDIC totaling $174 million. This acquisition was a direct result of the failing economy. Other banks that arent as financially stable as SAVB do not have the capabilities to expand their market share. When the economy starts to improve I expected there to be a significant growth, not only in SAVB, but in the entire banking industry. Factors for Success in Industry There are numerous factors for success in the banking industry such as: technology, rates, product innovation, customer service, brand recognition, and location and convenience. Technology advancements in the banking industry have reduced overhead cost and has improved convenience for their customer. Advancements such as online banking has given

consumer the capabilities to pay bill online, view account history and transaction from anywhere, and the ability to transfer money between accounts. Being able to provide your customer with low rates is also a key factor for success in the banking industry. Because of the growth of technology in the industry the virtual banks have become more competitive. Virtual banks have no physical existences of branches or ATMs so they have very little overhead cost. As a result, they have the capabilities of offering higher rates than a bank that has a physical branch. Most banks offer the similar products therefore product innovation is an ideal way to separate your bank from other banks in the industry. It is important to evaluate your consumers needs and attempt to create products that they will want to use. Customer service is something consumers find very important when searching for a bank. Small community banks offer a more personal relationship to their customer. Community banks also have the capability of resolving a customers problem in person unlike virtual banks were customers are forced to resolve their problems over the phone or via E-mail. Brand recognition also plays an important role for the consumers. The larger national banks usually have a larger brand recognition, which also leads to a larger market share. Community involvement also creates a positive brand image, which is helps strengthen your company. The location and convenience of your branches and ATMs have the ability to attract customers to your bank. Customers are usually interested in banks that have a wider network. This is because they usually provide more convenience for making routine transaction and are located in more locations. Companys Current Standing with Respect to Factors

SAVB is aware of the constant technological changes in the industry. TSB and BBT offer online banking, ATM access, free debit card usage, and Office Teller Remote Capture. The Office Teller Remote Capture allows their customer to make deposit to their own account with out leaving their office. The stress on the economy has also put stress on the rates that are offered by the banking industry. There has be a large decrease in rates over the past three year, but both TSB and BBT offer competitive CD, MMA, and mortgage rates to their customers. Being able to differentiate your products from another competitor is very important, thats why TSB offers an account called Bank of Savannah. This account allows individuals that would not under normal circumstances quality for a checking account to obtain one with their intuition. TSB also offers financial literacy classes for those individual to educate and to improve their financial standings. SAVB has developed core values of We LISTEN this acronym stands for Loyalty, Integrity, Stability, Teamwork, Efficiency, and Never Settle. Its because of these core values SAVB employees offers their customers personal one on one relationships with every customer. SAVB takes great pride in their involvement in the local community. One of their mottos is Local Bank Local Decisions. This reiterates the fact that SAVB is a small local community and they understand how decisions they make effect our community. SAVB also sponsors many community non-profit charitable events such as Leukemia & Lymphoma Society, Second Harvest Food Banks, and Meals on Wheels. As stated in other sections SAVB has eleven banking offices and thirteen ATMs located across southeast Georgia and coastal South Carolina. The branches in Georgia are located in Chatham and Bryan County while the branches in South Carolina are located in Beaufort

County. These locations make it convenient for their customer to make daily transactions at any branch. Key Business Risks SAVB is subject to a number of risks. The first risk noted is credit risk, which is the risk that the customers will be unable to perform their contractual obligations. Another risk is market risk, which is the risk that changes in interest rates could negatively affect the financial position and operational results of the company. A third risk is liquidity risk. This type of risk is caused by insufficient access to cash needed to meet operating demands. A fourth business risk is operational risk, which is the risk that operations will be impaired when key personnel depart from the company. Notable Accounting Considerations Notable accounting considerations should be given to large fluctuations in deposits or loans. Consideration should also be given as to whether or not the company is required to recognize impairment losses due to loan defaults. The increase in bankruptcies is a cause for concern that needs to be examined closely. Therefore, a continuous evaluation of bad debt reserves should be taken. Also, observation of current capital resources is necessary along with changes in accounting policies and practices adopted by regulatory agencies. Legal or Regulatory Matters SAVB and its subsidiaries are subject to extensive government regulations by federal and state laws. Various agencies such as OCC, FDIC, GDBF, SEC, and FRB oversee these rules and regulations. The regulators have the authority to impose certain requirements on operations such as mandating an increase in capital levels and issuing cease and desist orders if unsound

business practices are evident. As a result of government intervention, these restrictions may cause significant expenses, curb profitable ventures, and limit the ability to raise capital. Social Matters In the last few years, banks have tightened their lending policies causing a terrible ripple effect in local communities. Because of this change in policy, customers are no longer able to obtain financing needed to continue operating their businesses. Many businesses have discontinued operations, and jobs have been lost due to these restrictive practices. In turn, banking customers are unable to meet their loan obligations. As of today, it is quite evident that financial institutions have lost popularity with the public. Great strides need to be taken to regain the public's trust and rebuild relationships with the small businesses in the community. SECTION 5 Financial Strengths of the Savannah Bancorp, Inc. For the years ended December 31, 2009 and 2010, there was only a small fluctuation in total assets, total liabilities, and total stockholders equity. The companys current ratio for the year 2010, which measures a companys short-term debt paying ability, was 1.068. It decreased from 1.096 in 2009. The companys tier 1 capital to average assets ratio, which measures the percentage of a banks capital to its average assets, was 8.12%. In 2009, the ratio was 8.25%. This ratio is greater than the ratio for a well-capitalized bank, which is 5% with the industry minimum being 4%. This means that SAVB has a sufficient amount of equity, capital support or assets that can protect the bank from unexpected events such as losses from loans. There is only a small likelihood that the bank may become insolvent, which would result in an FDIC payoff of insured depositors.

The companys tier 1 capital to risk weighted assets ratio, which measures the percentage of a banks capital to its risk weighted assets, was 11.13%. It increased from 10.30% in 2009. This ratio is greater than the ratio for a well-capitalized bank, which is 6% with the industry threshold being 4%. As a result, the company has enough capital than that of the industry norm to cover its assets that have high risk levels. SAVBs total capital to risk weighted assets ratio, which measures the percentage of a banks total capital to its risk weighted assets, was 12.40%. It increased from 11.56% in 2009. This percentage is greater than the amount for a well capitalized bank, which is 10% with the industry minimum requirement being 8%. SAVB can absorb a reasonable amount of loss and comply with its requirements. The bank has the ability to meet time liabilities and other risks. Financial Strengths Likely to Change Taking into consideration the comparisons from 2009 and 2010, the financial strengths are not likely to change drastically within the next year or so unless new restrictive regulations or an increase in nonperforming assets occurs. The companys ratios should continue to be higher than that of a well-capitalized bank. There should only be a slight increase or decrease in the ratios just as there was from 2009 to 2010. Sources of Capital Capital supports all aspects of the operations of an institution, and minimum levels of capital are mandated by laws and regulations. Capital is considered vital to the operation of a financial institution. Raising capital is a key step in the ultimate success of a bank. SAVB obtains a large amount of its capital from loans that are paid back over a period of time from customers. The loan repayments include interest payments that assist in the ability to raise capital. The company has also obtained a large amount of capital from its acquisition of FNB. In addition to local deposit growth, primary funding and liquidity sources include borrowing capacity with the

FHLB, temporary federal funds, purchased lines with correspondent banks and non-local institutional and brokered deposits. Contingency funding and liquidity sources include the ability to sell loans to investors and borrow from the Federal Reserve Bank. The value of the companys capital is $94,824. Tier 1 and total capital at the company level includes $10 million of subordinated debt issued to the company's subsidiaries. Total capital also includes the allowance for loan losses up to 1.25 percent of risk-weighted assets. Capital Markets The amount, type and cost of funding in the capital markets directly impact the companys costs in operating its business and growing assets. These factors can positively or negatively affect its financial results. Disruptions in the capital markets could make funding more difficult, more expensive or unavailable. The trading price of the companys common stock has been and may continue to be volatile and subject to wide fluctuations in price. The stock market and specifically the markets for commercial banks and other financial services companies have experienced significant price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of SAVBs common stock, regardless of the companys operating performance. This may cause the value of clients investments to decline, and these clients may be unable to sell their shares of common stock at or above the offering price. Quality of Earnings Since the company shows a strong cash flow due to an increase in cash over the last two years of approximately $18 million in 2010 and $12 million in 2009, the earnings are considered high quality. The loss reported in 2010 was due to provisions in loan losses, which should stabilize in future years due to changes in lending practices.

Industry Comparison SAVB ROAA (%) ROAE (%) Efficiency Ratio (%) Loans/Deposits (%) Tier 1 Capital (%) Total Equity/Total Assets (%) SECTION 6 Audit Plan - Material Transactions and Transaction Cycles Materiality according to FASB Concept Statement 2 is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. Since materiality is relative to the type of entity, a base is necessary to establish whether misstatements are material. For the balance sheet of SAVB, a combined misstatement of 6% will be considered material. Therefore, material transactions for assets will be cash and cash equivalents, securities available for sale, and loans since their cumulative values represent 94% of total assets, and these are represented in the sales and collection transaction cycles. For liabilities, we will consider deposits to be a material transaction since its value represents 94% of total liabilities. Since this is a fairly small bank, balance sheet items are directly related to income statement items and will be inspected with the same base. Savannah Bancorp makes most of its revenue from interest and dividend (.19) (2.32) 56.14 93.2 11.35 8.73 Peer Median .63 7.87 69.14 69.39 17.14 9.61 Peer Average .58 6.64 71.52 68.88 16.86 9.26

income. These items found on the income statement will also fall under sales and collections transaction cycles as well as the provision for loan losses. Interest expense owing to customer deposits will be classified under acquisition and payment transaction cycles. Interest expense attributable to short-term and other borrowings will be classified as capital acquisitions and repayment. For payroll and personnel transaction cycles, we will inspect salaries and employee benefits, which represents 44% of noninterest expense for Savannah Bancorp. Audit Plan - High Risk Areas SAVB spent over two million dollars in 2010 on information technology. This is not surprising for a small bank considering how detrimental it is for a bank to keep consumer information confidential in todays technologically advanced society. Every effort should be made to safeguard consumers personal information from outside attacks as well as inside the company. That is why one high-risk area would be its controls of confidential information. Another area to be considered is careful evaluation of its loan portfolio and consumer deposits. Since a substantial amount of SAVBs revenue is derived from the interest generated from loans and the deposits used to fund these loans, this is a crucial area to ensure no misstatements have been made. As an auditor, one needs to ensure that accurate procedures are in place to ensure the collectability of loans, and that these procedures are maintained and updated regularly. Loan defaults for a small bank such as SAVB can have substantial impact on its ability to continue as a going concern. The cash account for a bank is another high-risk area for potential misstatements. Since multiple employees, including tellers and service managers, interact with cash on a daily basis substantiation should be apportioned to the cash account. Audit Plan - Low Risk Areas The Federal Deposit Insurance Corporation (FDIC) has a significant influence over the policies and procedures of banks. The FDIC conducts periodic audits of banks to test for operational

safety and soundness. Therefore, the FDIC scrutinizes key critical areas and transactions such as supervisory issues, trust, compliance, information technology, and the Community Reinvestment Act that allows an independent auditor to perform less stringent tests and decrease the sample size. Areas covered by the FDIC will be considered low risk areas since they have been verified by an objective source, which reduces the likelihood that misstatements exist. However, it should be noted that an audit performed by the FDIC does not diminish the expectations of an independent auditor to perform his or her work thoroughly. Audit Plan - Management Opportunities to Engage in Fraudulent Financial Reports Within a banking environment, management can alter the financial statements by circumventing policies and procedures. By not following outlined procedures for bank loans or opening new deposit accounts, a bank can improve its reserves as well as improve balance sheet figures. For example, a manager can override warnings for a loan or a new line of credit, which can result in an increase in the bank-loan ratio. However, by sidestepping bank procedures, the manager exposes the bank to future loses and lawsuits. Management also has access to documents and critical information that can make the falsifying of material transaction seem legitimate. Audit Plan - Reducing Assessed Control Risk For an entity such as SAVB, it would be fairly easy and appropriate to reduce assessed control risk. Given that there are only a few revenue and expense items, it is vital that substantive procedures be performed to ensure material accuracy among the financial statements. These substantive tests along with the strict regulations by the FDIC will allow an auditor to reach a more informed decision at the conclusion of the audit. Audit Plan - Audit Allocation among Geographical Areas

Currently, SAVB and its subsidiaries are located in the southeast. TSB has locations in Bluffton and Hilton Head, South Carolina, as well as Savannah, Georgia. BBT is located in Richmond Hill, Georgia and Minis & Co., Inc. is located in Savannah. Since these locations are in the same geographical area, audit effort will be distributed according to the size of the company. TSB is substantially larger and most of its branches are located in Savannah. Therefore, they will garner more attention. Onsite sample collection will be used to audit branches in South Carolina as well as Richmond Hill that houses BBT. Form of Auditors Report An unqualified opinion would be issued. This type of report indicates that the consolidated financial statements of Savannah Bancorp are presented fairly in all material aspects. It also indicates that the financial statements represented are in accordance with generally accepted accounting principles (GAAP) of the United States of America. SECTION 7 Appendix The group members were Jeffrey Croslen, Julia Gould, Elizabeth Hagans, and Suzanne Joyner. The company we chose to report on was The Savannah Bancorp, Inc. Each member picked a section of his or her choice to research and analyze. We corresponded through emails and chat room to notify one another of our progress. Additional attention was given by the group members if one member was in need of guidance. After each section was completed, the group members would review and revise the analysis where necessary. Communication was key during this project, and each member worked very diligently to complete this report.