UNITED STATES

SECURITES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

[ ]        TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                       to      

Commission file number    0-49731                                                                                                                    

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland		52-1726127
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1919 A West Street, Annapolis, Maryland		21401
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code		410-268-4554

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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                         

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by a court.

Yes                No                           

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share, 4,159,092 shares outstanding at October 6, 2003.

SEVERN BANCORP, INC.

Table of Contents

    

PART I– FINANCIAL INFORMATION

Item 1. Financial Statements

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

The accompanying notes to consolidated financial statements

are an integral part of these statements.

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

The accompanying notes to consolidated financial statements

are an integral part of these statements.

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes to consolidated financial statements

are an integral part of these statements.

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

are an integral part of these statements.

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the interim periods presented have been made. Such adjustments were of a normal recurring nature. The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year December 31, 2003 or any other interim period. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

Note 2 - Cash Flow Presentation

For purposes of the statements of cash flows, cash and cash equivalents include cash and amounts due from depository institutions, investments in federal funds, and certificates of deposit with original maturities of 90 days or less.

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3 - Earnings Per Share

Basic EPS is computed based upon income available to common shareholders and the weighted average number of common shares outstanding for the period. Diluted EPS is to reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Information relating to the calculations of net income per share of common stock is summarized for the three and nine month periods ended September 30th, as follows:

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3 - Earnings Per Share (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company

Severn Bancorp, Inc. ("Bancorp") is a savings and loan holding company chartered in the state of Maryland in 1990. It conducts business through three subsidiaries: Severn Savings Bank, FSB (the "Bank"), its principal subsidiary; Louis Hyatt, Inc. t/a Hyatt Real Estate, a real estate brokerage and property management company, which Bancorp acquired in June 2001; and SBI Mortgage Company, which engages in the origination of mortgages that do not meet the underwriting criteria of the Bank. The Bank has two branches in Anne Arundel County, Maryland which offer a full range of deposit products, and the Bank originates mortgages in its primary market of Anne Arundel County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware and Northern Virginia. In June 2002, the Company’s common stock was approved for listing on the Nasdaq Small Cap Market, and now trades under the symbol "SVBI".

Forward Looking Statements

In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Bancorp operations and actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences include, but are not limited to, changes in the economy and interest rates in the nation and Bancorp’s general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to management’s determination of the amount of loan loss allowance; the effect of changes in interest rates; and changes in deposit insurance premiums.

Results of Operations

Net income for the third quarter of 2003 was $3,087,000, or diluted earnings per share of $.73, as compared to net income of $2,234,000 in the third quarter of 2002, or diluted earnings per share of $.53. This represents an increase of $853,000 or 38.2% compared with the third quarter of 2002. Earnings per diluted share increased $.20, or 37.7%, compared with the third quarter of 2002. Year to date net income through the third quarter of 2003 was $8,591,000, or diluted earnings per share of $2.03, compared to $6,307,000, or diluted earnings per share of $1.49 for the same period in 2002. This represents an increase of $2,284,000, or 36.2%, compared to the nine months ended September 30, 2002, or an increase of $.54 per diluted share, which is an increase of 36.2%. Net income for the third quarter and nine months ended September 30, 2003 increased significantly above that for the sa me time period of 2002 as a result of the continuing low interest rate environment which continued to encourage a high volume of mortgage originations, coupled with the Bank’s ability to maintain low operating expenses. The Bank increased its interest rate spread to 4.74% as of September 30, 2003 from 4.53% as of September 30, 2002.

Net interest income, which is interest earned net of interest charges, totaled $6,395,000 for the third quarter of 2003, compared to $5,042,000 for the third quarter of 2002, representing an increase of $1,353,000, or 26.8%. Net interest income for the year through September 30, 2003 was $18,188,000 compared to $14,073,000 for the nine months ended September 30, 2002, representing an increase of $4,115,000, or 29.2%. This increase was a result of the growth of the Bank’s portfolio while maintaining a net yield on all of its interest earning assets of 4.97% compared to 4.81% for the comparable period of 2002. The growth in net interest income arose in part from the Bank’s continuing ability to attract lower cost liabilities, primarily in the form of money market deposits and Federal Home Loan Bank advances, while enjoying continuing strong loan demand.

 

 

	10

 

Other income totaled $1,179,000 for the third quarter of 2003, as compared to $749,000 during the third quarter of 2002, which is an increase of $430,000, or 57.4%. Year to date other income was $3,259,000 as of September 30, 2003, compared to $2,511,000 through September 30, 2002, which is an increase of $748,000, or 29.8%. The increase in other income was in part the result of an increase in the gain on the sale of loans of $316,000 or 122.5% to $574,000 in the third quarter of 2003, from $258,000 in the third quarter of 2002. Year to date through September 30, 2003 gain on sale of loans was $1,332,000 compared to $861,000 for the period ended September 30, 2002, or an increase of $471,000, or 54.7%. Mortgage processing and servicing fees were $293,000 in the third quarter of 2003, compared to $193,000 for the third quarter of 2002, representing an increase of $100,000 or 51.8%. Year to date mortgage processing and servicing fees through September 30, 2003 were $754,000 compared to $505,000 for the same period last year, which was an increase of $249,000 or 49.3%. Those increases resulted from increases in mortgage originations arising out of the continuing strong real estate market and low interest rate environment. Real estate commissions dropped $13,000, or 10.6%, from $123,000 in the third quarter of 2002 to $110,000 in the third quarter of 2003. Year to date real estate commissions through September 30, 2003 were $362,000 compared to $563,000 for the period ended September 30, 2002, representing a decrease of $201,000 or 35.7%. The volume of real estate transactions through Bancorp’s subsidiary, year to date, has been less than in the prior year. Real estate management fees, which are typically a steadier source of revenue than the more volatile commission revenues, were $92,000 during the third quarter of 2003, which was an increase of $10,000 over the $82,000 earned in r eal estate management fees during the third quarter of 2002, or 12.2%. Through September 30, 2003 real estate management fees were $274,000, compared to $254,000 for the same period ended September 30, 2002, which is an increase of 7.9%. As a result of the sale of a parcel of land acquired by one of Bancorp’s subsidiaries in lieu of foreclosure, gain on sale of foreclosed real estate was $169,000 for the nine months ended September 30, 2003. Bancorp had no gain (or loss) on foreclosed real estate for the nine months ended September 30, 2002.

Total non-interest expense for the third quarter of 2003 was $2,328,000, as compared to $1,948,000 for the third quarter of 2002, an increase of $380,000 or 19.5%. Year to date through September 30, 2003 total non-interest expense was $6,648,000 as compared to $5,825,000 for the nine months ended September 30, 2002, an increase of $823,000, or 14.1%. This increase was primarily in compensation and related expenses, which increased $212,000, or 15.3% during the third quarter and increased $615,000 or 15.1% for the nine month period ended September 30, 2003 compared to the nine month period ended September 30, 2002.   This increase was primarily because of the increase in compensation to commissioned mortgage loan officers who are paid in the form of commissions based upon mortgage loans originated. Since the volume of mortgage loans increased during the first nine months o f 2003 as compared to 2002, compensation in the form of commissions also increased. Other expenses increased $155,000 or 35.1%, from $441,000 for the third quarter of 2002 to $596,000, for the third quarter of 2003.  These expenses were primarily attributable to expenses related to increased loan originations.  Year to date, other expenses through September 30, 2003, was $1,581,000 compared to $1,395,000 for the same period in 2002, which was an increase of $186,000 or 13.3%.

Income Taxes

Income tax expense was $1,935,000 for the third quarter of 2003, as compared to $1,405,000 for the third quarter of 2002, an increase of $530,000, or 37.7%. Income tax expense for the year to date ended September 30, 2003 was $5,533,000 compared to $4,007,000 for the period ended September 30, 2002. This was an increase of $1,526,000, or 38.1%. The effective tax rate for the nine months ended September 30, 2003 and 2002 was 39.17% and 38.84%, respectively. The effective tax rate for the three months ended September 30, 2003 and 2002 was 38.54% and 38.61% respectively.

Analysis of Financial Condition

Stockholders’ Equity

Total stockholders’ equity was $50,579,000 as of September 30, 2003 compared to $43,181,000 as of December 31, 2002, an increase of $7,398,000, or 17.1%. This increase resulted primarily from an increase in net earnings, offset by dividends paid.

Asset Quality

Non-accrual loans (those loans 90 or more days in arrears) were $2,540,000 as of September 30, 2003 compared to $1,758,000 as of December 31, 2002. At September 30, 2003 the total allowance for loan losses was $4,520,000, which is .95% of total loans, compared with $3,991,000, which was .99% of total loans, as of December 31, 2002. The adequacy of the allowance is monitored monthly. Bancorp’s management believes the allowance is adequate as of September 30, 2003.

Liquidity

Management believes it has sufficient cash flow and liquidity to meet its current commitments. Certificates of deposit, which are scheduled to mature in less than one year at September 30, 2003, totaled $147,201,000. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. At September 30, 2003, the Company had commitments to originate loans of $29,450,000, unused lines of credit of $14,101,000, and commitments under standby letters of credit of $7,871,000. The Bank has the ability to reduce its commitments for new loan originations, adjust other cash outflows, and borrow from the FHLB of Atlanta should the need arise. As of September 30, 2003, outstanding FHLB borrowings totaled $50,000,000, and the Bank had available to it up to an additional $131,530,000 in borrowing availability from the FHLB of Atlanta.

 

	12

 

Effects of Inflation

Recent Accounting Pronouncements

In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement improves financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting on contracts as either derivatives or hybrid instruments. This Statement is effective for contracts and hedging relationships entered into or modified after June 30, 2003.

In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003.

The above accounting pronouncements will not have a material impact on the consolidated financial statements.

Average Balance Sheet

The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid through the first nine months of the year.

[see table on the following page]

	Nine months ended September 30, 2003										Nine months Ended September 30, 2002
		Average						Rate				Average						Rate
ASSETS		Volume			Interest			Annualized				Volume			Interest			Annualized
Loans	$	454,326,794		$	26,967,130			7.91	%		$	374,345,405		$	23,963,003			8.54	%
Investments		6,222,222			191,609			4.11	%			8,340,781			305,789			4.89	%
Mortgage-backed securities		6,730,249			143,419			2.84	%			472,357			24,152			6.82	%
Other interest earning		20,783,997			193,423			1.24	%			7,323,582			183,527			3.34	%
Total interest-earning		488,063,262			27,495,581			7.51	%			390,482,125			24,476,471			8.36	%
Non-interest earning assets		12,298,129										13,934,005
Total Assets		500,361,391									$	404,416,130
LIABILITIES & STOCKHOLDERS' EQUITY
Savings & checking		187,334,988			2,374,348			1.69	%			129,747,829			2,509,827			2.58	%
Certificates of Deposit		221,210,954			6,017,453			3.63	%			195,020,394			6,656,811			4.55	%
Short-term borrowings		--			--			--	%			6,555,556			155,249			3.16	%
Long-term borrowings		39,555,556			915,543			3.09	%			30,777,778			1,081,468			4.69	%
Total interest-bearing liabilities		448,101,498			9,307,344			2.77	%			362,101,557			10,403,355			3.83	%
Non-interest bearing liabilities		4,421,111										4,406,903
Stockholders' equity		47,838,782										37,907,670
Total liabilities &
stockholders' equity	$	500,361,391									$	404,416,130
Net Interest Income				$	18,188,237									$	14,073,116
Interest Rate Spread								4.74	%									4.53	%
Net Yield on Interest-Earning Assets								4.97	%									4.81	%
Average interest-earning assets to average interest-bearing liabilities								108.92	%									107.84	%

 

 

Commitments, Contingencies and Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk including commitments to extend credit under existing lines of credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Off-balance sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:

		Contract Amount At
Financial Instruments Whose Contract Amounts Represent Credit Risk			September 30, 2003			December 31, 2002
Standby letters of credit		$	7,870,711		$	6,694,000
Home equity loan commitments		$	10,767,329		$	8,014,000
Loan commitments		$	29,450,176		$	24,772,000
Lines of credit		$	14,101,387		$	22,368,000
Loans sold and serviced with limited
repurchase provisions		$	34,850,540		$	10,163,000

Critical Accounting Policies

The Company’s significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2002 which was filed on Form 10-K. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that it is not known to management at the time of the issuance of the consolidated financial statements.

Legal Proceedings

There are various claims pending involving the Bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to Bancorp’s financial condition.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in market risk since December 31, 2002, as reported in Bancorp’s Form 10-K filed with the United States Securities and Exchange Commission on or about March 20, 2003.

Item 4. Controls and Procedures

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officers and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports filed with Securities and Exchange Commission. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date we carried out our last evaluation.

Based on their evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of the filing of this Report, the Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation.

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings. None.

Item 2. Changes in Securities and Use of Proceeds. None.

Item 3. Defaults Upon Senior Securities. None.

Item 4.     Submission of Matters to a Vote of Security Holders. None.

Item 5. Other Information. None.

 

(a)     Exhibits 
    99.1 Certification of Principal Executive Officer

    99.2 Certification of Principal Financial Officer

(b)     Reports – Form 8K - None

 

SIGNATURES