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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 March 31, 2004

OR

r       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   o     

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

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 May 14, 2004.


     

SEVERN BANCORP, INC.
Table of Contents


PART I – FINANCIAL INFORMATION
1
Item 1.
Financial Statements
1
 
Consolidated Statements of Financial Condition as of March 31, 2004
 
 
(Unaudited) and December 31, 2003
1
 
Consolidated Statements of Operations (Unaudited)
2
 
Consolidated Statements of Cash Flows (Unaudited)
3
 
Notes to Consolidated Financial Statements (Unaudited)
5
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14
 
 
 
Item 4.
Controls and Procedures
14
 
 
 
PART II – OTHER INFORMATION
14
Item 1.
Legal Proceedings
14
 
 
 
Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
14
 
 
 
Item 3.
Defaults Upon Senior Securities
14
 
 
 
Item 4.
Submission of Matters to a Vote of Security Holders
14
 
 
 
Item 5.
Other Information
14
 
 
 
Item 6.
Exhibits and Reports on Form 8-K
14
 
 
 
SIGNATURES
15
 
 
 
EXHIBIT 31.1 CERTIFICATION OF ALAN J. HYATT
16
 
 
 
EXHIBIT 31.2 CERTIFICATION OF CECELIA LOWMAN
17
 
 
 
EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
18
 
 
 
EXHIBIT 32 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
18
   
i
     

PART I– FINANCIAL INFORMATION

Item 1. Financial Statements
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
       (dollars in thousands, except per share amounts)

 
    
March 31,

 

 
December 31,

 

 

 

 
2004

 

 
2003

 

 

 

 
(Unaudited) 

 

 
 
  
ASSETS
  
 
Cash and due from banks
  
$
4,481
  
$
4,055
  
Interest bearing deposits in other banks
    
1,036
    
457
  
Federal funds
    
7,900
    
3,914
  
Investment securities held to maturity
    
6,000
    
6,000
  
Mortgage backed securities held to maturity
    
6,379
    
6,721
  
Loans held for sale, net of unrealized loss of $-0- in 2004 and 2003
    
5,137
    
3,175
  
Loans receivable, net of allowance for loan losses of
   
 
    
 
  
$5,082 and $4,832 respectively
    
553,486
    
502,851
  
Premises and equipment, at cost, less
    
 
    
 
  
accumulated depreciation
    
5,330
    
5,327
  
Federal Home Loan Bank of Atlanta stock at cost
    
4,100
    
3,250
  
Accrued interest receivable and other assets
    
4,943
    
4,721
  
   
 
 
Total assets
  
$
598,792
  
$
540,471
  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
    
 
    
 
  
Liabilities
    
 
    
 
  
Deposits
  
$
451,460
  
$
419,726
  
Outstanding checks in excess of bank balance
    
7,028
    
                    --
  
Federal Home Loan Bank of Atlanta advances
    
80,000
    
65,000
  
Advance payments by borrowers for expenses
    
1,616
    
902
  
Accounts payable and accrued expenses
    
3,105
    
1,873
  
   
 
 
Total liabilities
    
543,209
    
487,501
  
 
    
 
    
 
  
Minority interest – preferred securities of subsidiary
    
4,000
    
4,000
  
 
    
 
    
 
  
Stockholders’ Equity
    
 
    
 
  
Common stock, $.01 par value, 20,000,000 shares authorized;
   
 
    
 
  
4,159,092 issued and outstanding
   
42
    
42
  
Additional paid-in capital
    
11,516
    
11,516
  
Retained earnings
   
40,025
    
37,412
  
   
 
 
Total stockholders' equity
    
51,583
    
48,970
  
   
 
 
Total liabilities and stockholders' equity
  
$
598,792
  
$
540,471
  
   
 
 

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

 

  1  
 
 
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
  
For Three Months Ended March 31,
 
    
2004
    
2003
  
 
  
(dollars in thousands, except per share data)
Interest Income
    
 
    
 
  
Interest on loans
  
$
9,866
  
$
8,682
  
Interest on securities, tax exempt
    
50
    
46
  
Interest on mortgage backed securities
    
76
    
57
  
Other interest income
    
40
    
78
  
   
 
 
Total interest income
    
10,032
    
8,863
  
 
    
 
    
 
  
Interest Expense
    
 
    
 
  
Interest on deposits
    
2,505
    
2,926
  
Interest on short term borrowings
    
35
    
                    --
  
Interest on long term borrowings
    
627
    
211
  
   
 
 
Total interest expense
    
3,167
    
3,137
  
   
 
 
Net interest income
    
6,865
    
5,726
  
Provision for loan losses
    
250
    
225
  
   
 
 
Net interest income after provision for loan losses
    
6,615
    
5,501
  
 
    
 
    
 
  
Other Income
    
 
    
 
  
Gain on sale of foreclosed real estate
    
                     --
    
169
  
Real estate commissions
    
343
    
104
  
Real estate management fees
    
93
    
81
  
Mortgage banking activities
    
206
    
676
  
All other income
    
112
    
135
  
   
 
 
Net other income
    
754
    
1,165
  
 
    
 
    
 
  
Non-Interest Expenses
    
 
    
 
  
Compensation and related expenses
    
1,749
    
1,550
  
Occupancy
    
151
    
129
  
Other
    
592
    
442
  
   
 
 
Total non-interest expenses
    
2,492
    
2,121
  
   
 
 
Income before income tax provision
    
4,877
    
4,545
  
Income tax provision
    
1,848
    
1,838
  
   
 
 
Net income
  
$
3,029
  
$
2,707
  
   
 
 
Basic earnings per common share
  
$
.73
  
$
.64
  
   
 
 
Diluted earnings per common share
  
$
.73
  
$
.64
  
   
 
 
Common stock dividends declared per share
  
$
.10
  
$
.08
  
   
 
 

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

 
  2  
 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
  
For The Three Months Ended March 31,
 
    
2004
    
2003
  
 
  
(dollars in thousands) 
Cash Flows from Operating Activities
    
 
    
 
  
Net income
  
$
3,029
  
$
2,707
  
Adjustments to Reconcile Net Income to Net
    
 
    
 
  
Cash Provided by Operating Activities
   
 
    
 
  
Amortization of deferred loan fees
    
(617
)
  
(572
)
Net amortization (accretion) of premiums and discounts
    
8
    
5
  
Provision for loan losses
    
250
    
225
  
Provision for depreciation
    
78
    
70
  
Gain on sale of loans
    
(79
)
  
(458
)
Gain on sale of foreclosed real estate
    
                     --
    
(169
)
Proceeds from loans sold to others
    
8,808
    
40,022
  
Loans originated for sale
    
(10,692
)
  
(30,436
)
Principal collected on loans originated for sale
    
                     --
    
20
  
Increase in accrued interest receivable and other assets
    
(223
 )   
(100
 ) 
Increase in other liabilities
    
1,226
    
1,116
  
   
 
 
Net cash provided by operating activities
    
1,788
    
12,430
  
 
    
 
    
 
  
Cash Flows from Investing Activities
    
 
    
 
  
Purchase of investment securities
    

                     --

    
(6,000
)
Proceeds from maturing investment securities
    
                     --
    
2,000
  
Principal collected on mortgage backed securities
    
335
    
214
  
Net increase in loans
    
(50,267
)
  
(21,793
)
Proceeds from sale of foreclosed real estate
    
                     --
    
393
  
Investment in premises and equipment
    
(81
)
  
(134
)
Purchase of FHLB stock
    
(850
)
  
                     -- 
  
   
 
 
Net cash used by investing activities
    
(50,863
)
  
(25,320
)
 
    
 
    
 
  
 
 
 
  3  
 
 
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

For The Three Months Ended March 31,

 
  
2004
    
2003
  
 
(dollars in thousands) 
Cash Flows from Financing Activities
  
 
    
 
  
Net increase in demand deposits, money
  
 
    
 
  
market, passbook accounts and advances
  
 
    
 
  
by borrowers for taxes and insurance
  
12,000
    
25,180
  
Net increase in certificates of deposit
  
20,454
    
6,712
  
Increase in checks outstanding in excess
 
 
    
 
  
of bank balance
  
7,028
    
                         --
  
Additional borrowed funds, long term
  
20,000
    
                         --
  
Repayment of borrowed funds, long term
  
(5,000
)
  
(2,000
)
Cash dividends paid
  
(416
)
  
(421
)
 
 
 
Net cash provided by financing activities
  
54,066
    
29,471
  
 
 
 
Increase in cash and cash equivalents
  
4,991
    
16,581
  
Cash and cash equivalents at beginning of year
  
8,426
    
18,660
  
 
 
 
Cash and cash equivalents at end of period
$
13,417
  
$
35,241
  
 
 
 
The Following is a Summary of Cash and
  
 
    
 
  
Cash Equivalents
  
 
    
 
  
Cash and due from banks
$
4,481
  
$
6,840
  
Interest bearing deposits in other banks
  
1,036
    
1,876
  
Federal funds
  
7,900
    
26,525
  
 
 
 
Cash and cash equivalents reflected on the
  
 
    
 
  
statement of cash flows
$
13,417
  
$
35,241
  
 
 
 
Supplemental Disclosure of Cash Flows Information:
  
 
    
 
  
Cash Paid During Period For:
  
 
    
 
  
 
  
 
    
 
  
Interest
$
3,154
  
$
3,162
  
 
 
 
Income taxes
$
545
  
$
334
  
 
 
 

The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
 
  4  
 

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 three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004 or any other interim period. The consolidated financial statements should be read in conjunction with the consolidated fi nancial 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, 2003.


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.
 
 
 
  5  
 

SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3 - Earnings Per Share

Basic EPS is computed based upon net income 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 month period ended March 31st, as follows:

 
For The Three Months Ended March 31,
 
  
2004
    
2003
  
 
(in thousands) 
Net income
$
3,029
  
$
2,707
  
Less – preferred stock dividends, net of tax
  
                          -- 
    
(55
)
 
 
 
Net income available to shareholders
$
3,029
  
$
2,652
  
 
 
 
Weighted average shares outstanding
  
 
    
 
  
Basic EPS
  
4,159
    
4,142
  
Effect of Dilutive Shares
  
 
    
 
  
Stock options
  
                          -- 
    
13
  
 
 
 
Adjusted weighted average shares
  
 
    
 
  
Used for dilutive EPS
  
4,159
    
4,155
  

Note 4 - Reclassifications

Certain prior year’s amounts have been reclassified to conform to the current year’s method of presentation. These reclassifications had no effect on net income.

Note 5 – Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments. The Company had $8,191,000 of standby letters of credit as of March 31, 2004. Management believes that the proceeds obtained through a liquidation of collateral would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of March 31, 2004 for guarantees un der standby letters of credit issued is not material.
 
 
 
  6  
 
 
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.

Critical Accounting Policies

The Company’s significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2003 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 change s 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.

Overview

The primary business of Bancorp continues to be mortgage lending. Although interest rates remain historically low, which has caused the continuing demand in construction lending and purchase money mortgage lending, refinancing activity has dropped off significantly. The result of the reduction in refinance activity is that Bancorp is selling fewer loans and is earning less income from the sale of loans. However, loan growth in its portfolio has been strong and Bancorp continues to earn a good “spread” which is the difference between Bancorp’s cost of funds and what it earns on mortgage loans.

It is generally anticipated that interest rates will be increasing. Bancorp expects to be challenged as it seeks to grow assets in the form of mortgage loans in an environment where its cost of borrowing and interest rates on deposits are likely to increase. Bancorp will continue to balance its pricing and duration of its loan portfolio against the risks of rising costs of its deposits and borrowings.
 
 
 
  7  
 
 
The continued success and attraction of the markets in which Bancorp operates will also be important to Bancorp’s ability to originate and grow its mortgage loans, as will Bancorp’s continuing ability to maintain low overhead.   

Results of Operations

Net income for the first quarter of 2004 was $3,029,000, or diluted earnings per share of $.73, as compared to net income of $2,707,000 in the first quarter of 2003, or diluted earnings per share of $.64. This was an increase of $322,000 or 11.9% compared with the first quarter of 2003. Earnings per diluted share increased $.09, or 14.1%, compared with the first quarter of 2003. Net income for the first quarter increased above that for the same time period of 2003 as a result of continued growth in the Bank’s mortgage portfolio coupled with the Bank’s continuing ability to maintain low operating expenses. The Bank’s interest rate spread was 4.67% as of March 31, 2004 compared to 4.80% during the quarter ended March 31, 2003.

Net interest income, which is interest earned net of interest charges, totaled $6,865,000 for the first quarter of 2004, compared to $5,726,000 for the first quarter of 2003, representing an increase of $1,139,000, or 19.97%. 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 4.87% compared to 4.99% for the comparable period of 2003. 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, certificates of deposit and Federal Home Loan Bank advances, while enjoying continuing strong loan demand.

Loan loss provisions were $250,000 in the first quarter of 2004 compared to $225,000 in the first quarter of 2003. This was an increase of $25,000, or 11.1%. The increase in the loan loss provisions was due to the Bank’s determination that the level of inherent risk within its total loan portfolio warranted the increase.

Other income totaled $754,000 for the first quarter of 2004, as compared to $1,165,000 during the first quarter of 2003, which is a decrease of $411,000, or 35.3%. The decrease in other income was in part the result of a decrease in the income from mortgage banking activities of $470,000, or 69.5% from March 31, 2003 to March 31, 2004. This substantial reduction in revenue was due to the reduced amount of loans the Bank sold in the secondary market because of rapidly slowing refinancing activities. Real estate commissions increased by $239,000, or 229.8%, from $104,000 in the first quarter of 2003 to $343,000 in the first quarter of 2004. The volume of real estate transactions through Bancorp’s real estate brokerage subsidiary is a volatile number and may be inconsistent quarter to quarter. Real estate management fees, which are typically a steadier source of revenue than the more volatile commission revenues, were $93,000 during the first quarter of 2004, which was an increase of $12,000 over the $81,000 earned in real estate management fees during the first quarter of 2003, or 14.8%. 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 first quarter of 2003. There was no foreclosed real estate sold in the first quarter of 2004.

Total non-interest expense for the first quarter of 2004 was $2,492,000, as compared to $2,121,000 for the first quarter of 2003, an increase of $371,000 or 17.5%. This increase was primarily in compensation and related expenses, which increased $199,000, or 12.8% during the first quarter 2004 compared to the first quarter ended March 31, 2003. 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 and annual/merit increases which went into effect January 1, 2004. Since the volume of mortgage loans increased during the first quarter of 2004 as compared to 2003, compensation in the form of commissions also increased. Other expenses increased $150,000, or 33.9%, from $442,000 for the first quarter of 2003 to $592,000 for the first quarter of 2004. These ex penses were primarily attributable to expenses related to increased loan originations and increased advertising.
 
 
 
  8  
 
 
Income Taxes

Income tax provision was $1,848,000 for the first quarter of 2004, as compared to $1,838,000 for the first quarter of 2003, an increase of $10,000, or .5%. The effective tax rate for the three months ended March 31, 2004 and 2003 was 37.89% and 40.44%, respectively.

Analysis of Financial Condition

Total assets at March 31, 2004 increased to $598,792,000 from $540,471,000 at December 31, 2003, representing an increase of $58,321,000, or 10.8%. Cash and cash equivalents increased $4,990,000 or 59.2% to $13,417,000 at March 31, 2004 from $8,426,000 at December 31, 2003, primarily as a result of an increase in federal fund deposits. Investment securities remained at $6,000,000 at March 31, 2004 which is the same amount of investment securities as of December 31, 2003. Loan demand continued to be strong during the first quarter of 2004, as net loans receivable increased to $553,486,000 as of March 31, 2004 from $502,851,000 as of December 31, 2003, which is an increase of $50,635,000, or 10.1%. Loans held for sale as of March 31, 2004 was $5,137,000 which is an increase of $1,962,000 or 61.8%, more than loans held for sale in the amount of $3,175,000 as of December 31, 2003. Thi s increase was due to the timing of loans pending sale as of March 31, 2004. Total deposits as of March 31, 2004 increased to $451,460,000 from $419,726,000 as of December 31, 2003, representing an increase of $31,734,000, or 7.6%. This increase is primarily attributable to an ongoing campaign by the Bank to attract money market deposit accounts and to obtain longer term certificates of deposit. Federal Home Loan Bank advances increased $15,000,000, or 23.1%, to $80,000,000 as of March 31, 2004 as compared to $65,000,000 as of December 31, 2003, as a result of attractive pricing of Federal Home Loan Bank advances as compared to the cost of obtaining retail deposits and the Bank’s desire to lengthen its maturity on a portion of its liabilities and the need for the Bank to fund its loan growth.

Stockholders’ Equity

Total stockholders’ equity was $51,583,000 as of March 31, 2004 compared to $48,970,000 as of December 31, 2003, an increase of $2,613,000, or 5.3%. This increase resulted primarily from an increase in net earnings, offset by dividends declared.

Asset Quality

Non-accrual loans (those loans 90 or more days in arrears) were $1,592,000 as of March 31, 2004 compared to $469,000 as of December 31, 2003. This increase of 239.4%, or $1,123,000 includes loans totaling $865,733 which have either been paid in full or otherwise resolved subsequent to March 31, 2004 and includes $368,000 of recently foreclosed real estate that is now under contract of sale. At March 31, 2004 the total allowance for loan losses was $4,995,000, which is .89% of total loans, compared with $4,833,000, which was .96% of total loans, as of December 31, 2003. The adequacy of the allowance is monitored monthly. Bancorp’s management believes the allowance is adequate as of March 31, 2004.

Liquidity

Bancorp’s liquidity is determined by its ability to raise funds through loan payments, maturing investments, deposits, borrowed funds, capital, and the sale of loans. Based on the internal and external sources available, Bancorp’s liquidity position exceeded anticipated short-term and long-term needs at March 31, 2004. Additionally, loan payments, maturities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements.

 
 
  9  
 
 
In assessing its liquidity the management of Bancorp considers operating requirements, anticipated deposit flows, expected funding of loans, deposit maturities and borrowing availability, so that sufficient funds may be available on short notice to meet obligations as they arise so that Bancorp may take advantage of business opportunities.

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 March 31, 2004, totaled $110,666,000. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. At March 31, 2004, the Company had commitments to originate loans of $33,349,000, unused lines of credit of $34,971,000, and commitments under standby letters of credit of $8,191,000. 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 March 31, 2004, outstanding FHLB borrowings totaled $80,000,000, and the Bank had available to it up to an additional $81,625,000 in borrowing availability from the FHLB of Atlanta.

Net cash provided by operating activities for the three months ended March 31, 2004 was $1,788,000 compared to net cash provided by operating activities for the three months ended March 31, 2003 of $12,430,000 which reflects a decrease in mortgage banking activities. Net cash used by investing activities for the three months ended March 31, 2004 was $50,863,000, an increase of $25,543,000 from $25,320,000 for the three months ended March 31, 2003 due to origination of portfolio loans. Net cash provided by financing activities was $54,066,000 for the three months ended March 31, 2004 compared to $29,471,000 for the period ended March 31, 2003. As a result, cash and cash equivalents were $13,417,000 as of March 31, 2004 compared to $35,241,000 as of March 31, 2003, a decrease of $21,824,000. Cash provided by increased deposits and loans sold was partially offset by net cash used for strong loan origination activity that outpaced principal repayments.

The following table contains for the periods indicated information regarding the financial obligations owing by the Company.

Contractual Obligations
  
Payments due by period
(dollars in thousands)
 
    
Total 

 

 
Less than 1 year

 

 
1-3
years

 

 
3-5
years

 

 
More than 5 years
  
 
    
 
    
 
    
 
    
 
    
 
  
Long term debt
  
$
80,000
  
$
                       --
  
$
12,000
  
$
20,000
  
$
42,000
  
 
    
 
    
 
    
 
    
 
    
 
  
Operating lease obligations
    
30
    
28
    
2
    
                       --
    
                       --
  
 
    
 
    
 
    
 
    
 
    
 
  
Certificates of Deposit
    
247,433
    
110,666
    
108,785
    
27,943
    
                       --
  
   
 
 
 
 
 
Total
  
$
321,433
  
$
110,666
  
$
120,785
  
$
46,195
  
$
27,000
  
   
 
 
 
 
 


Effects of Inflation

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
 
 
 
   10  
 
 
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 three months of the year.

[see table on the following page]

 
  11  
 

 
 
Three months ended March 31, 2004
 
Three months ended March 31, 2003
 
 
Average
Volume
 
 
Interest
 
Rate
Annualized
 
Average
Volume
 
 
Interest
 
Rate
Annualized
 
 
(dollars in thousands)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$ 541,241
 
$  9,866
 
7.29%
 
$ 426,490
 
$  8,682
 
8.14%
Investments
 
6,000
 
50
 
3.37%
 
4,667
 
46
 
3.96%
Mortgage-backed securities
 
6,527
 
76
 
4.64%
 
5,524
 
57
 
4.12%
Other interest earning
 
9,851
 
40
 
1.63%
 
22,705
 
78
 
1.38%
Total interest-earning
 
563,619
 
10,032
 
7.12%
 
459,386
 
8,863
 
7.72%
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest earning assets
 
11,665
 
 
 
 
 
20,123
 
 
 
 
Total Assets
 
$ 575,284
 
 
 
 
 
$ 479,509
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Savings & checking
 
196,196
 
675
 
1.38%
 
181,463
 
875
 
1.93%
Certificates of Deposit
 
235,633
 
1,830
 
3.11%
 
216,983
 
2,051
 
3.78%
Short-term borrowings
 
13,333
 
35
 
1.06%
 
                -- 
 
                 -- 
 
-- %
Long-term borrowings
 
71,333
 
627
 
3.52%
 
32,000
 
211
 
2.63%
Total interest-bearing liabilities
 
516,495
 
3,167
 
2.45%
 
430,446
 
3,137
 
2.92%
Non-interest bearing liabilities
 
8,078
 
 
 
 
 
8,455
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
50,711
 
 
 
 
 
40,608
 
 
 
 
Total liabilities & stockholders’ equity
 
$ 575,284
 
 
 
 
 
$ 479,509 
 
 
 
 
Net Interest Income
 
 
 
$  6,865
 
 
 
 
 
$  5,726
 
 
Interest Rate Spread
 
 
 
 
 
4.67%
 
 
 
 
 
4.80%
Net Yield on Interest-Earning Assets
 
 
 
 
 
4.87%
 
 
 
 
 
4.99%
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets to average interest-bearing liabilities
 
 
 
109.12%
 
 
 
 
 
106.72%


  12  


Off-Balance Sheet Arrangements

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments express the extent of involvement the Bank has in each class of financial instruments.

The Bank’s exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the statement of financial condition at March 31, 2004, as a liability for credit loss.

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

Financial Instruments Whose Contract
  
Contract Amount At

 

Amounts Represent Credit Risk

 
March 31, 2004
  
 
(dollars in thousands) 
Standby letters of credit
$
8,191
  
Home equity loan commitments
$
13,368
  
Loan commitments
$
33,349
  
Lines of credit
$
21,603
  
Loans sold and serviced with limited
  
 
  
repurchase provisions
$
17,193
  

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.
 
 
 
  13  
 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in market risk since December 31, 2003, as reported in Bancorp’s Form 10-K filed with the United States Securities and Exchange Commission on or about March 25, 2004.

Item 4. Controls and Procedures

As of the end of the period covered by 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 the end of the period covered by 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 during the quarter ended March 31, 2004.

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings. None.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. 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.

Item 6. Exhibits and Reports on Form 8-K.
(a)   Exhibits

31.1    Certification of Principal Executive Officer
31.2    Certification of Principal Financial Officer
32       Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)   Reports – Form 8K

    Form 8-K dated January 2, 2004 Reporting the Change in Registrant’s Certifying Accountant.

 
 
  14  
 
 
SIGNATURES

Under the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
SEVERN BANCORP, INC.
 
Registrant
 
 
 
 
 
May 14, 2004
     /s/
 
Date:
Alan J. Hyatt,
President, Chief Executive Officer
 
 
and Chairman of the Board
 
 
(Principal Executive Officer)
 
 
 
May 14, 2004
     /s/
 
Date:
Cecelia Lowman,
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 
15