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 September 30, 2008 and 2007 and results of operations for the three and nine month periods ended September, 2008 and 2007, the following analysis should be reviewed with other information including the Company's December 31, 2007 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
                       Third Quarter Financial Highlights
                       ($ in thousands, except share data)
                                  (Unaudited)

Balance Sheet Data at September 30                 2008           2007      % Change
Total assets                                 $ 981,341       $ 889,196         10
Interest-earning assets                        914,010         844,287        8.3
Loans                                          854,447         778,262        9.8
Allowance for loan losses                       12,390           9,842         26
Nonaccruing loans                               17,753           5,028         NM
Loans past due 90 days - accruing                4,274           1,728         NM
Other real estate owned                          6,168           1,152         NM
Net charge-offs                                  4,204             642         NM
Deposits                                       803,483         745,878        7.7
Interest-bearing liabilities                   807,041         717,357         13
Shareholders' equity                            79,595          75,164        5.9
Allowance for loan losses to total loans          1.45   %        1.26   %     15
Nonperforming assets to total loans and OREO      3.28   %        1.02   %     NM
Loan to deposit ratio                           106.34   %      104.34   %    1.9
Equity to assets                                  8.11   %        8.45   %   (4.0)
Tier 1 capital to risk-weighted assets           10.32   %       11.04   %   (6.5)
Total capital to risk-weighted assets            11.58   %       12.29   %   (5.8)
Outstanding shares                               5,934           5,917        0.3
Book value per share                          $  13.41        $  12.70        5.6
Tangible book value per share                 $  12.96        $  12.23        6.0
Market value per share                        $  13.25        $  24.69        (46)

Performance Data for the Third Quarter

Net income                                    $  1,638        $  2,381        (31)
Return on average assets                          0.68   %        1.08   %    (37)
Return on average equity                          8.24   %       13.04   %    (37)
Net interest margin                               3.63   %        3.95   %   (8.1)
Efficiency ratio                                 60.69   %       54.65   %     11
Per share data:
Net income - basic                            $   0.28        $   0.41        (32)
Net income - diluted                          $   0.28        $   0.40        (30)
Dividends                                     $  0.125        $  0.120        4.2
Average shares (000s):
Basic                                            5,930           5,862        1.2
Diluted                                          5,943           5,928        0.3

      Performance Data for the First Nine Months

      Net income                                 $  5,228    $  7,283     (28)
      Return on average assets                       0.74  %     1.14   % (35)
      Return on average equity                       8.88  %    13.94   % (36)
      Net interest margin                            3.70  %     4.08   % (9.3)
      Efficiency ratio                              61.21  %    54.60   %  12
      Per share data:
      Net income - basic                         $   0.88    $   1.25     (30)
      Net income - diluted                       $   0.88    $   1.23     (28)
      Dividends                                  $  0.375    $  0.360      4.2
      Average shares (000s):
      Basic                                         5,929       5,823      1.8
      Diluted                                       5,949       5,905      0.7

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 Estimate
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 nine month periods ended September 30, 2008 compared with the same periods in 2007.
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. is referred to as "Minis." The operations of Minis, a registered investment advisor and wholly-owned subsidiary, are included beginning September 1, 2007.
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 September 30, 2008, had ten banking offices and twelve ATMs in Savannah and surrounding Chatham County, Georgia, Richmond Hill, Georgia and Hilton Head Island and Bluffton, South Carolina. In the third quarter 2008 Bryan opened its second office in Richmond Hill. The Company also relocated its regional banking operations center to this facility from previously leased space. 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 hired lenders in the Brunswick/St. Simons Island, Georgia market and opened a loan production office during the third quarter 2008.

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

Harbourside specifically targets real estate lending and related full service banking opportunities in the coastal South Carolina market. During 2006 and 2007, the business strategy changed resulting in a significant reduction in the sale of loans on a servicing retained basis.

The primary risks to the Company include those disclosed in Item 1A in the Company's Annual Report on Form 10-K for December 31, 2007.

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

Critical Accounting Estimate - Allowance for Loan Losses

The Company considers its policies regarding the allowance for loan losses to be its most critical accounting estimate due to the significant degree of management judgment involved. The allowance for loan losses is established through charges 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 loan losses inherent in the loan portfolio at September 30, 2008. 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 are market interest rates, average loan size, portfolio maturity and composition, collateral values and general economic conditions. Finally, management's assessment of probable losses, based upon internal credit grading of the loans and periodic reviews and assessments of credit risk associated with particular loans, is considered in establishing the allowance amount.

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

The allowance for loan losses totaled $12,390,000, or 1.45 percent of total loans, at September 30, 2008. This is compared to an allowance of $12,864,000, or 1.59 percent of total loans, at December 31, 2007. For the nine months ended September 30, 2008, the Company reported net charge-offs of $4,204,000 compared to net charge-offs of $642,000 for the same period in 2007. The significantly higher level of charge-offs resulted primarily from nonperforming residential real estate-related loans in the Hilton Head Island / Bluffton, South Carolina area. In addition when SAVB Holdings was formed the loans sold to the new entity were marked to market through a charge to the allowance for loan losses.

During the first nine months of 2008 and 2007, a provision for loan losses of $3,730,000 and $1,530,000, respectively, was added to the allowance for loan losses. Growth in the loan portfolio, loan losses, a continued weak residential real estate market, level or declining real estate values and tighter credit markets provide the primary basis for the higher provision for loan losses.

If the allowance for loan losses had changed by five percent, the effect on net income would have been approximately $405,000. 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.

The following table provides historical information regarding the allowance for loan losses and nonperforming loans and assets for the most recent five quarters ended September 30, 2008.

                    The Savannah Bancorp, Inc. and Subsidiaries
                 Allowance for Loan Losses and Nonperforming Loans
                                    (Unaudited)

                                         2008                      2007
                               Third    Second     First    Fourth            Third
 ($ in thousands)            Quarter   Quarter   Quarter   Quarter          Quarter

 Allowance for loan losses
 Balance at beginning of
 period                     $ 12,445  $ 12,128  $ 12,864  $  9,842          $ 9,517
 Provision for loan losses     1,505     1,155     1,070     3,145              635
 Net charge-offs             (1,560)     (838)   (1,806)     (123)            (310)
 Balance at end of period   $ 12,390  $ 12,445  $ 12,128  $ 12,864          $ 9,842

 As a % of loans               1.45%     1.48%     1.45%     1.59%            1.26%
 As a % of nonperforming
 loans                        56.25%    66.61%    69.26%    73.83%          145.68%
 As a % of nonperforming
 assets                       43.94%    59.18%    62.08%    65.85%          124.46%

 Net charge-offs as a % of
 average loans (a)             0.75%     0.40%     0.90%     0.07%            0.17%

 Risk element assets
 Nonaccruing loans          $ 17,753  $ 16,991  $ 16,915  $ 14,663          $ 5,028
 Loans past due 90 days -
 accruing                      4,274     1,693       596     2,761            1,728
 Total nonperforming loans    22,027    18,684    17,511    17,424            6,756
 Other real estate owned       6,168     2,346     2,025     2,112            1,152
   Total nonperforming
 assets                     $ 28,195  $ 21,030  $ 19,536  $ 19,536          $ 7,908

 Loans past due 30-89 days   $ 8,841   $ 6,528  $ 11,014   $ 4,723          $ 5,302

 Nonperforming loans as a
 % of loans                    2.58%     2.22%     2.10%     2.24%            0.87%
 Nonperforming assets as a
 % of loans
   and other real estate
 owned                         3.28%     2.50%     2.33%     2.51%            1.01%
 Nonperforming assets as a
 % of capital (b)             30.65%    23.13%    21.47%    21.92%            9.30%

(a) Annualized
(b) Capital includes the allowance for loan losses

Impaired loans under Statement of Financial Accounting Standards No. 114 were all on nonaccrual status and totaled $17,753,000 and $14,663,000 at September 30, 2008 and December 31, 2007, respectively.

Nonperforming assets include a single residential property of approximately $4.0 million that was added in the third quarter 2008. The Company does not expect any loss on this property. In addition, the Company had approximately $2.2 million of other real estate that was under contract at September 30, 2008 and sold subsequent to quarter-end without significant loss.

Results of Operations

Third Quarter, 2008 Compared to the Third Quarter, 2007

Net income for the third quarter 2008 was $1,638,000, down from $2,381,000 in the third quarter 2007, a decrease of 31 percent. Net income per diluted share was 28 cents in the third quarter 2008 compared to 40 cents per share in the third quarter 2007, a decrease of 30 percent. The decline in third quarter earnings results primarily from a higher provision for loan losses. Return on average equity was 8.24 percent, return on average assets was 0.68 percent and the efficiency ratio was 60.69 percent in the third quarter 2008. Third quarter 2008 earnings include the net income derived from the previously announced acquisition of Minis on August 31, 2007.

Third quarter average interest-earning assets increased 7.6 percent to $902 million in 2008 from $838 million in 2007. Third quarter net interest income was $8,251,000 in 2008 compared to $8,308,000 in 2007, a decrease of $57,000. Third quarter average loans were $830 million in 2008, 9.2 percent higher when compared to $760 million in 2007. Third quarter net interest margin decreased to 3.63 percent in 2008 from 3.95 percent in the same period in 2007. The prime rate decreased from 7.75 percent to 5.00 percent during the twelve month period ended September 30, 2008. As shown in Table 2, the decline in net interest margin was primarily due to the decline in noninterest-bearing deposits over the last 12 months and higher levels of noninterest-earning assets.

As shown in Table 1, the Company's balance sheet is asset-sensitive since the interest-earning assets reprice faster than interest-bearing liabilities. Deposit pricing in the Savannah and Bryan markets has also been impacted by new entrants into the market paying special deposit rates that are significantly higher than market deposit rates. Additionally, as a new entrant in its market, Harbourside continues to incur higher than market deposit rates.

Third quarter provision for loan losses was $1,505,000 for 2008, compared to $635,000 for the comparable period in 2007. Third quarter net charge-offs were $1,560,000 for 2008 compared to $310,000 in the same quarter in 2007. Third quarter loan growth was $16 million in 2008 compared to $26 million in loan growth in the third quarter 2007. The significantly higher level of charge-offs resulted primarily from nonperforming residential real estate-related loans in the Hilton Head Island / Bluffton, South Carolina market.

Noninterest income increased $857,000, or 74 percent in the third quarter of 2008 versus the same period in 2007. The increase was due to higher trust and asset management fees of $334,000, all of which was from Minis, higher service charges of $174,000 and a non-operating hedging related gain of $430,000 partially offset by $55,000 in lower mortgage related income. The higher service charges were primarily due to a new payment optimization program started in the first quarter 2008.

Noninterest expense increased to $6,234,000, up $1,058,000 or 20 percent in the third quarter 2008 compared to the third quarter 2007. Third quarter 2008 noninterest expense included $338,000 of expenses related to Minis. Noninterest expense also included $121,000 of higher FDIC insurance premiums and approximately $63,000 of higher expense related to other real estate and loan costs. A new banking office in Bluffton, South Carolina which opened in December 2007 also comprised approximately $135,000 of the third quarter increase in costs. The remainder of the increase was due to higher personnel, occupancy and equipment and other expense in existing offices and departments.

The third quarter income tax expense was $895,000 in 2008 and $1,280,000 in 2007. The combined effective federal and state tax rates were 35.3 percent and 35.0 percent in the third quarter of 2008 and 2007, respectively. 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 Nine Months, 2008 Compared to the First Nine Months, 2007

Net income in the first nine months 2008 was $5,228,000, down from $7,283,000 in the first nine months 2007, a decrease of 28 percent. Net income per diluted share was 88 cents in the first nine months 2008 and $1.23 in the same period in 2007, a decrease of 28 percent. While the Company experienced growth in interest-earning assets it was offset by a higher provision for loan losses and higher noninterest expenses. Return on average equity was 8.88 percent, return on average assets was 0.74 percent and the efficiency ratio was 61.21 percent in the first nine months 2008. Earnings for the first nine months of 2008 include the net income derived from the previously announced acquisition of Minis.

Average interest-earning assets for the first nine months increased 8.5 percent to $890 million in 2008 from $820 million in 2007. First nine months net interest income was $24,708,000 in 2008 compared to $24,896,000 in 2007, a decrease of $188,000. Average loans were $817 million for the first nine months of 2008, 10 percent higher when compared to $743 million in 2007. The net interest margin decreased to 3.70 percent in the first nine months of 2008 from 4.08 percent in the same period in 2007. As shown in Table 3, the decline in net interest margin was primarily due to the decline in noninterest-bearing deposits over the last 12 months and higher levels of noninterest-earning assets.

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.

First nine months provision for loan losses was $3,730,000 for 2008, compared to $1,530,000 for 2007. Net charge-offs for the first nine months were $4,204,000 for 2008 compared to $642,000 in the same period in 2007. Changes in the provision are impacted as discussed under the "Allowance for Loan Losses" section above. First nine months loan growth was $46 million in 2008, primarily in real estate secured loans, compared to $57 million in the first nine months 2007. The significantly higher level of charge-offs resulted primarily from nonperforming residential real estate-related loans in the Hilton Head Island / Bluffton, South Carolina market.

Noninterest income was $5,575,000 in the first nine months 2008 compared to $3,217,000 in the first nine months 2007, an increase of $2,358,000 or 73 percent. The increase was due to higher trust and asset management fees of $1,413,000, all of which was from Minis, and non-operating hedging related gains of $714,000 partially offset by lower mortgage related income. Customer service charges increased 39 percent, or $400,000, primarily due to a new payment optimization program. No market valuation adjustments were required for loans held for sale during the first nine months of 2008 or 2007.

Noninterest expense was $18,535,000 in the first nine months of 2008 compared to $15,350,000 in 2007, an increase of $3,185,000, or 21 percent. In 2008 noninterest expense included $1,034,000 of expenses related to Minis. A new banking office in Bluffton, South Carolina which opened in December 2007 also comprised approximately $410,000 of the increase in costs. Salaries and benefits increased $1,720,000, or 20 percent. Occupancy and equipment expenses increased approximately $430,000, or 18 percent. Other operating expense increased $1,017,000 or 33 percent and included $396,000 of higher FDIC insurance premiums and approximately $323,000 of higher expense related to other real estate and loan costs.

The first nine months income tax expense was $2,790,000 in 2008 and $3,950,000 in 2007. The combined effective federal and state tax rates were 34.8 percent and 35.2 percent in the first nine months of 2008 and 2007, respectively. Lower taxable income at the higher 35 percent tax bracket and higher low income housing tax credits are the primary contributors to the lower effective tax rate in 2008. 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. The $46 million increase in loans in the first nine months of 2008 was funded primarily by $39 million in net deposit growth. Short and long-term borrowings increased approximately $6 million.

Average total assets increased 11 percent to $950 million in the first nine months of 2008 from $855 million in the same period in 2007. Total assets were $981 million and $889 million at September 30, 2008 and 2007, respectively, an increase of 10 percent.

The Company has classified all investment securities as available for sale. The unrealized gain/loss on investment securities and the net change in the fair value of derivative instruments are included in shareholders' equity at September 30, 2008 and 2007 as accumulated other comprehensive income (loss), net of tax.

Brokered time deposits and institutional money market accounts totaled $182 million at September 30, 2008 compared to $127 million at December 31, 2007.

Short-term borrowings include a $12.5 million note payable to a related party, the proceeds of which were used to fund SAVB Holdings. The note bears interest at prime plus two percent with a floor of six percent. Principal payments are due monthly based on repayments, sales or other activity in the assets held by SAVB Holdings. Interest is due monthly. The note requires a cumulative principal pay down of $2.5 million by September 30, 2009, with all indebtedness due and payable by September 30, 2010. The agreement includes customary performance covenants and a guarantee of the Company.

Loans
. . .