Forward-Looking Statements

The Company may, from time to time, make written or oral "forward-looking statements," including statements contained in the Company's filings with the SEC (including this quarterly report on Form 10-Q) and 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.

This MD&A and other Company communications and statements may contain "forward-looking statements." These forward-looking statements may include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and which may change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "indicate," "plan" and similar words are intended to identify expressions of the future. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rates, market and monetary fluctuations; competitors' products and services; technological changes; 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 exhaustive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Overview

For a comprehensive presentation of the Company's financial condition at June 30, 2009 and 2008 and results of operations for the three and six month periods ended June 30, 2009 and 2008, the following analysis should be reviewed with other information including the Company's December 31, 2008 Annual Report on Form 10-K and the Company's Condensed Consolidated Financial Statements and the Notes thereto included in this report.

                  The Savannah Bancorp, Inc. and Subsidiaries
                      Second Quarter Financial Highlights
                       ($ in thousands, except share data)
                                  (Unaudited)

 Balance Sheet Data at June 30                       2009         2008     % Change
 Total assets                                 $ 1,019,557    $ 963,600       5.8
 Interest-earning assets                          936,927      901,643       3.9
 Loans                                            862,242      838,426       2.8
 Other real estate owned                            6,377        2,346       172
 Deposits                                         847,037      808,148       4.8
 Interest-bearing liabilities                     856,041      793,509       7.9
 Shareholders' equity                              78,980       78,463       0.7
 Loan to deposit ratio                             101.80  %    103.75  %   (1.9)
 Equity to assets                                    7.75  %      8.14  %   (4.8)
 Tier 1 capital to risk-weighted assets             10.30  %     10.50  %   (1.9)
 Total capital to risk-weighted assets              11.55  %     11.75  %   (1.7)
 Outstanding shares                                 5,932        5,931       0.0
 Book value per share                            $  13.31     $  13.23       0.6
 Tangible book value per share                   $  12.88     $  12.77       0.9
 Market value per share                          $   6.65     $  13.00       (49)

 Loan Quality Data
 Nonaccruing loans                               $ 24,994    $  16,991        47
 Loans past due 90 days - accruing                  2,374        1,693        40
 Net charge-offs                                    4,648        2,644        76
 Allowance for loan losses                         15,597       12,445        25
 Allowance for loan losses to total loans            1.81  %      1.48  %     22
 Nonperforming assets to total loans and OREO        3.88  %      2.50  %     55

 Performance Data for the Second Quarter
 Net income                                      $    106     $  1,886       (94)
 Return on average assets                            0.04  %      0.80   %   (95)
 Return on average equity                            0.53  %      9.65   %   (95)
 Net interest margin                                 3.52  %      3.77   %  (6.6)
 Efficiency ratio                                   67.46  %     60.44   %    12
 Per share data:
 Net income - basic                              $   0.02     $   0.32       (94)
 Net income - diluted                           $    0.02     $   0.32       (94)
 Dividends                                      $   0.020     $  0.125       (84)
 Average shares (000s):
 Basic                                              5,932        5,931       0.0
 Diluted                                            5,936        5,952      (0.3)

Performance Data for the First Six Months

      Net (loss) income                         $   (179)    $  3,590     (105)
      Return on average assets                     (0.04)  %     0.76   % (105)
      Return on average equity                     (0.45)  %     9.18   % (105)
      Net interest margin                            3.44  %     3.74   % (8.0)
      Efficiency ratio                              67.20  %    61.47   %  9.3
      Per share data:
      Net (loss) income - basic                 $  (0.03)    $   0.61     (105)
      Net (loss) income - diluted               $  (0.03)    $   0.60     (105)
      Dividends                                 $   0.145    $  0.250     (42)
      Average shares (000s):
      Basic                                         5,933       5,929      0.1
      Diluted                                       5,933       5,952     (0.3)

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides supplemental information, which sets forth the major factors that have affected the Company's financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled:

Introduction
Critical Accounting Estimates
Results of Operations
Financial Condition and Capital Resources Liquidity and Interest Rate Sensitivity Management Off-Balance Sheet Arrangements

These discussions should facilitate a better understanding of the major factors and trends that affect the Company's earnings performance and financial condition and how the Company's performance during the three and six month periods ended June 30, 2009 compared with the same period in 2008. Throughout this section, The Savannah Bancorp, Inc., and its subsidiaries, collectively, are referred to as "SAVB" or the "Company." The Savannah Bank, N.A. is referred to as "Savannah," Bryan Bank & Trust is referred to as "Bryan" and Harbourside Community Bank is referred to as "Harbourside." Minis & Co., Inc., a registered investment advisor and wholly-owned subsidiary, is referred to as "Minis." The Company formed a new subsidiary, SAVB Holdings, LLC ("SAVB Holdings"), in the third quarter 2008 for the purpose of holding problem loans and other real estate. Collectively, Savannah, Bryan and Harbourside are referred to as the "Subsidiary Banks."

The averages used in this report are based on the sum of the daily balances for each respective period divided by the number of days in the reporting period.

The Company is headquartered in Savannah, Georgia and, as of June 30, 2009, had ten banking offices and twelve ATMs in Savannah, Garden City, Skidaway Island, Whitemarsh Island, Pooler, and Richmond Hill, Georgia and Hilton Head Island and Bluffton, South Carolina. The Company also has mortgage lending offices in Savannah, Richmond Hill and Hilton Head Island and an investment management office in Savannah. In addition, the Company has a loan production office on St. Simons Island, Georgia.

Savannah and Bryan are in the relatively diverse and growing Savannah Metropolitan Statistical Area. The diversity of major employers includes manufacturing, port related transportation, construction, military, healthcare, tourism, education, warehousing and the supporting services and products for each of these major employers. The real estate market is experiencing moderate government growth and slower commercial and residential growth. Coastal Georgia and South Carolina continue to be desired retiree residential destinations.

Harbourside specifically targets real estate lending and related full service banking opportunities in the coastal South Carolina market. Harbourside's primary market has continued to show deterioration in real estate prices.

The primary risks to the Company include those disclosed in Item 1A in the Company's Annual Report on Form 10-K for December 31, 2008.

The primary strategic objectives of the Company are growth in loans, deposits, assets under management, product lines and service quality in existing markets, and quality expansion into new markets, within acceptable risk parameters, which result in enhanced shareholder value.

Critical Accounting Estimates

Allowance for Loan Losses

The Company considers its policies regarding the allowance for loan losses to be its most critical accounting estimate due to the significant degree of management judgment involved. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses based on management's continuous evaluation of the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the allowance reflects management's opinion of an adequate level to absorb probable losses inherent in the loan portfolio at June 30, 2009. The amount charged to the provision and the level of the allowance is based on management's judgment and is dependent upon growth in the loan portfolio, the total amount of past due loans and nonperforming loans, known loan deteriorations and concentrations of credit. Other factors affecting the allowance include market interest rates, loan sizes, portfolio maturity and composition, collateral values and general economic conditions. Finally, management's assessment of probable losses, based upon internal credit grading of the loans and periodic reviews and assessments of credit risk associated with particular loans, is considered in establishing the amount of the allowance.

No assurance can be given that the Company will not sustain loan losses which would be sizable in relationship to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses by future charges or credits to earnings. The allowance for loan losses is also subject to review by various regulatory agencies through their periodic examinations of the Subsidiary Banks. Such examinations could result in required changes to the allowance for loan losses.

The allowance for loan losses totaled $15,597,000, or 1.81 percent of total loans, at June 30, 2009. This is compared to an allowance of $13,300,000, or 1.54 percent of total loans, at December 31, 2008. For the six months ended June 30, 2009, the Company reported net charge-offs of $4,648,000 compared to net charge-offs of $2,644,000 for the same period in 2008.

During the first six months of 2009 and 2008, a provision for loan losses of $6,945,000 and $2,225,000, respectively, was added to the allowance for loan losses. The higher provision for loans losses in 2009 was primarily due to charge-offs and continued weakness in the Company's local residential real estate markets. Approximately $1.6 million of the 2009 provision was related to deterioration in two significant residential relationships in the Hilton Head Island/Bluffton, South Carolina ("HHI/Bluffton") market.

The Company's nonperforming assets consist of loans on nonaccrual status, loans which are contractually past due 90 days or more on which interest is still being accrued, and other real estate owned,. Nonaccrual loans of $24,994,000 and loans past due 90 days or more of $2,374,000 totaled $27,368,000, or 3.17 percent of gross loans, at June 30, 2009. Nonaccrual loans of $26,277,000 and loans past due 90 days or more of $1,326,000 totaled $27,603,000, or 3.19 percent of gross loans, at December 31, 2008. Generally, loans are placed on nonaccrual status when the collection of the principal or interest in full becomes doubtful. Management writes down loans through a charge to the allowance when it determines they are impaired. In the first quarter 2009, the Company successfully settled its largest single nonperforming loan of approximately $4 million. The Company recovered the full principal and interest due on the loan. Nonperforming assets also included $6,377,000 and $8,100,000 of other real estate owned at June 30, 2009 and December 31, 2008, respectively. Management is aggressively pricing and marketing the other real estate owned.

At June 30, 2009 nonperforming loans consisted primarily of $14.5 million of improved real estate-secured loans and $12.7 million of land, lot and construction and development related loans. Less than one percent of the loans were unsecured. Nonperforming loans included one relationship consisting of four loans for $6.3 million to a residential developer in the HHI/Bluffton market. This relationship was performing until the second quarter 2009. The loans are secured by residential land and lots. $916,000 of the allowance was allocated to this relationship as a general reserve. The next largest nonperforming relationship included ten loans for $3.0 million to a residential homebuilder in the HHI/Bluffton market. The collateral is primarily completed or nearly completed 1-4 family properties and residential lots. The Company charged-off $767,000 during the second quarter and still has $171,000 specifically allocated in the allowance for this relationship.

If the allowance for loan losses had changed by five percent, the effect on net income would have been approximately $500,000. If the allowance had to be increased by this amount, it would not have changed the holding company or the Subsidiary Banks' status as well-capitalized financial institutions.

Impairment of Loans

The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collection of all amounts due is expected. The Company maintains a valuation allowance to the extent that the measure of value of an impaired loan is less than the recorded investment.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other than temporary deterioration in market conditions.

The following table provides historical information regarding the allowance for loan losses and nonperforming loans and assets for the most recent five quarters ended June 30, 2009.

                                        2009                 2008
                                 Second    First    Fourth     Third    Second
      ($ in thousands)          Quarter  Quarter   Quarter   Quarter   Quarter

      Allowance for loan
      losses
      Balance at beginning of
      period                   $ 15,309 $ 13,300  $ 12,390  $ 12,445  $ 12,128
      Provision for loan
      losses                      3,225    3,720     2,270     1,505     1,155
      Net charge-offs           (2,937)  (1,711)   (1,360)   (1,560)     (838)
      Balance at end of period $ 15,597 $ 15,309  $ 13,300  $ 12,390  $ 12,445

      As a % of loans             1.81%    1.77%     1.54%     1.45%     1.48%
      As a % of nonperforming
      loans                      56.99%   63.27%    48.18%    56.25%    66.61%
      As a % of nonperforming
      assets                     46.22%   47.05%    37.25%    43.94%    59.18%

      Net charge-offs as a %
      of average loans (a)        1.41%    0.82%     0.65%     0.75%     0.40%

      Risk element assets
      Nonaccruing loans        $ 24,994 $ 23,927  $ 26,277  $ 17,753  $ 16,991
      Loans past due 90 days -
      accruing                    2,374      268     1,326     4,274     1,693
      Total nonperforming
      loans                      27,368   24,195    27,603    22,027    18,684
      Other real estate owned     6,377    8,342     8,100     6,168     2,346
        Total nonperforming
      assets                   $ 33,745 $ 32,537  $ 35,703  $ 28,195  $ 21,030

      Loans past due 30-89
      days                     $  6,670 $ 16,906  $  8,269  $  8,841  $  6,528

      Nonperforming loans as a
      % of loans                  3.17%    2.80%     3.19%     2.58%     2.22%
      Nonperforming assets as
      a % of loans
        and other real estate
      owned                       3.88%    3.73%     4.09%     3.28%     2.50%
      Nonperforming assets as
      a % of assets               3.31%    3.25%     3.54%     2.87%     2.18%

Impaired loans under Statement of Financial Accounting Standards No. 114 totaled $27,896,000 and $37,730,000 at June 30, 2009 and December 31, 2008, respectively.

Results of Operations

Second Quarter, 2009 Compared to the Second Quarter, 2008

Net income for the second quarter 2009 was $106,000, compared to net income of $1,886,000 in the second quarter 2008. Net income per diluted share was 2 cents in the second quarter 2009 compared to 32 cents per diluted share in the second quarter 2008, a decrease of 94 percent. The decline in second quarter earnings results primarily from a higher provision for loan losses, higher loss on sale of OREO and higher FDIC insurance premiums. Return on average equity was 0.53 percent, return on average assets was 0.04 percent and the efficiency ratio was 67.46 percent in the second quarter 2009.

Second quarter average interest-earning assets increased 3.4 percent to $922 million in 2009 from $892 million in 2008. Second quarter net interest income was $8,084,000 in 2009 compared to $8,386,000 in 2008, a decrease of $302,000 or 3.6 percent. Second quarter average loans were $836 million in 2009, 2.1 percent higher when compared to $819 million in 2008. Shareholders' equity increased to $79 million at June 30, 2009 from $78 million at June 30, 2008. The Company's total capital to risk-weighted assets ratio was 11.55 percent at June 30, 2009, which exceeds the 10 percent required by the regulatory agencies to maintain well-capitalized status. Second quarter net interest margin decreased to 3.52 percent in 2009 from 3.77 percent in the same period in 2008. The prime rate decreased from 5.00 percent to 3.25 percent during the twelve month period ended June 30, 2009. As shown in Table 2, the decline in net interest margin was primarily due to higher levels of noninterest-earning assets. On a linked quarter basis, the net interest margin increased 16 basis points over the first quarter 2009.

As shown in Table 1, the Company's balance sheet is asset-sensitive since the interest-earning assets reprice faster than interest-bearing liabilities. Rising interest rates favorably impact the net interest margin of an asset-sensitive balance sheet and falling rates adversely impact the net interest margin. However, when the prime rate stops decreasing, the interest rates on time deposits, certain non-maturity deposits and other funding sources will continue to decline due to the re-pricing lag associated with those liabilities.

Second quarter provision for loan losses was $3,225,000 for 2009, compared to $1,155,000 for the comparable period in 2008. Second quarter net charge-offs were $2,937,000 for 2009 compared to $838,000 in the same quarter in 2008. Loans decreased $2.7 million in the second quarter 2009 compared to $3.7 million in loan growth in the second quarter 2008. The significantly higher provision for loan losses was primarily related to charge-offs and continued weakness in residential real estate-related loans in the HHI/Bluffton market.

Noninterest income increased $132,000, or 7.4 percent in the second quarter 2009 versus the same period in 2008. The increase was due to higher mortgage related income, a gain on hedges of $245,000 and a higher gain on the sale of securities partially offset by lower trust and asset management fees and lower service charges on deposits.

Noninterest expense increased to $6,739,000, up $605,000 or 10 percent, in the second quarter 2009 compared to the second quarter 2008. Second quarter 2009 noninterest expense included $651,000 of higher FDIC insurance premiums, of which approximately $465,000 was a special assessment applicable to all FDIC-insured depository institutions, and a loss on sale of foreclosed assets of $885,000. The remainder of the increase was due to higher information technology expense offset by a $491,000 decrease in salaries and employee benefits and a $458,000 decrease in occupancy and equipment. In the second quarter 2009, the Company purchased its previously leased Hilton Head Island branch from an outside party and reversed approximately $527,000 in accrued rent expense that was recorded during the 18-month rent free period in accordance with U.S. generally accepted accounting principles.

The second quarter income tax benefit was $80,000 in 2009 and income tax expense was $985,000 in 2008. The income tax benefit in the second quarter 2009 was due to the impact of tax credits on lower taxable income. The Company has never recorded a valuation allowance against deferred tax assets. All significant deferred tax assets are considered to be realizable due to expected future taxable income.

First Six Months, 2009 Compared to the First Six Months, 2008

Net loss in the first six months 2009 was $179,000, versus net income of $3,590,000 in the first six months 2008, a decrease of 105 percent. Net loss per share was 3 cents in the first six months 2009 compared to net income of 60 cents per diluted share in the same period in 2008. The decline in earnings results primarily from a higher provision for loan losses, higher loss on sale of OREO and higher FDIC insurance premiums. Return on average equity was (0.45) percent, return on average assets was (0.04) percent and the efficiency ratio was 67.20 percent in the first six months 2009.

Average interest-earning assets for the first six months increased 4.5 percent to $924 million in 2009 from $884 million in 2008. First six months net interest income was $15,750,000 in 2009 compared to $16,457,000 in 2008 a decrease of $707,000 or 4.3 percent. Average loans were $838 million for the first six months of 2009, 3.5 percent higher when compared to $810 million in 2008. The net interest margin decreased to 3.44 percent in the first half of 2009 from 3.74 percent in the same period in 2008. As shown in Table 3, the decline in net interest margin was primarily due to higher levels of noninterest-earning assets. In addition, the majority of our deposit growth was in higher cost deposits and our earning assets repriced faster than our deposits over the last 12 months.

First six months provision for loan losses was $6,945,000 for 2009, compared to $2,225,000 for 2008. Net charge-offs for the first six months were $4,648,000 for 2009 compared to $2,644,000 in the same period in 2008. Changes in the provision are impacted as discussed under the "Allowance for Loan Losses" section above. Loans decreased $2.7 million in the first six months 2009, compared to loan growth of $29.8 million in the first six months 2008. The significantly higher provision for loan losses was primarily related to charge-offs and continued weakness in residential real estate-related loans in the HHI/Bluffton market.

Noninterest income was $3,915,000 in the first six months 2009 compared to $3,538,000 in the first six months 2008, an increase of $377,000 or 11 percent. The increase was due to higher mortgage related income, a $357,000 higher gain on hedges, a $240,000 higher gain on sale of securities partially offset by lower trust and asset management fees.

Noninterest expense was $13,214,000 in the first six months of 2009 compared to $12,285,000 in 2008, an increase of $929,000, or 7.6 percent. The increase was primarily due to a loss on sale of foreclosed assets of $1,049,000 and higher FDIC insurance premiums of $789,000. Salaries and benefits decreased $613,000, or 8.8 percent. Occupancy and equipment expenses decreased $339,000, or 19 percent.

The first six months income tax benefit was $315,000 in 2009 and income tax expense was $1,895,000 in 2008. The income tax benefit in 2009 was due to the impact of tax credits on lower taxable 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.

Financial Condition and Capital Resources

Balance Sheet Activity

The changes in the Company's assets and liabilities for the current and prior period are shown in the consolidated statements of cash flows. Loans decreased $3 million the first six months of 2009. The $15 million increase in deposits . . .