SEVERN BANCORP INC - 10-Q Quarterly Report

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 June 30, 2004

o 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

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 r

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 July 27, 2004

SEVERN BANCORP, INC. AND SUBSIDIARIES

Table of Contents

PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Consolidated Statements of Financial Condition as of June 30, 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	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14

Item 4.	Controls and Procedures	14

PART II – OTHER INFORMATION		15
Item 1.	Legal Proceedings	15

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	15

Item 3.	Defaults Upon Senior Securities	15

Item 4.	Submission of Matters to a Vote of Security Holders	15

Item 5.	Other Information	15

Item 6.	Exhibits and Reports on Form 8-K	15

SIGNATURES		16

EXHIBIT 31.1 CERTIFICATION OF ALAN J. HYATT		17

EXHIBIT 31.2 CERTIFICATION OF CECELIA LOWMAN		18

EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER		19

EXHIBIT 32 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER		19

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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)

		June 30,		December 31,
		2004		2003
		(Unaudited)
ASSETS
Cash and due from banks	$	3,270	$	4,055
Interest bearing deposits in other banks		716		457
Federal funds		1,868		3,914
Investment securities held to maturity		5,000		6,000
Mortgage backed securities held to maturity		5,589		6,721
Loans held for sale		9,036		3,175
Loans receivable, net of allowance for loan losses of $5,197 and $4,832 respectively		579,848		502,851
Premises and equipment, net		5,436		5,327
Federal Home Loan Bank of Atlanta stock at cost		4,800		3,250
Accrued interest receivable and other assets		5,257		4,721

Total assets	$	620,820	$	540,471


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	462,470	$	419,726
Short-term borrowings		12,000		6,000
Long-term borrowings		84,000		59,000
Advance payments by borrowers for expenses		2,251		902
Accounts payable and accrued interest payable & other liabilities		1,705		1,873

Total liabilities		562,426		487,501

Minority interest – preferred securities of subsidiary		4,000		4,000

Stockholders’ Equity
Common stock, $0.01 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		42,836		37,412

Total stockholders' equity		54,394		48,970

Total liabilities and stockholders' equity	$	620,820	$	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)

(dollars in thousands, except per share data)

	For Three Months Ended June 30,				For Six Months Ended June 30,
	2004		2003		2004		2003
Interest Income
Interest on loans	$	10,537	$	8,936	$	20,402	$	17,618
Interest on securities, tax exempt		37		82		88		128
Interest on mortgage backed securities		65		84		141		142
Other interest income		63		70		103		148

Total interest income		10,702		9,172		20,734		18,036

Interest Expense
Interest on deposits		2,606		2,789		5,111		5,716
Interest on short term borrowings		29		--		64		--
Interest on long term borrowings		767		317		1,394		527

Total interest expense		3,402		3,106		6,569		6,243


Net interest income		7,300		6,066		14,165		11,793
Provision for loan losses		300		225		550		450

Net interest income after provision for loan losses		7,000		5,841		13,615		11,343

Other Income
Gain on sale of foreclosed real estate		--		--		--		169
Real estate commissions		385		551		728		654
Real estate management fees		103		100		196		182
Mortgage banking activities		482		543		687		1,219
All other income		145		124		258		258

Total other income		1,115		1,318		1,869		2.482

Non-Interest Expenses
Compensation and related expenses		2,107		1,934		3,856		3,483
Occupancy		142		126		292		255
Other		549		543		1,142		985

Total non-interest expenses		2,798		2,603		5,290		4,723


Income before income tax provision		5,317		4,556		10,194		9,102
Income tax provision		2,091		1,759		3,939		3,598


Net income	$	3,226	$	2,797	$	6,255	$	5,504

Basic earnings per common share	$	.78	$	.66	$	1.50	$	1.30

Diluted earnings per common share	$	.78	$	.66	$	1.50	$	1.30

Common stock dividends declared per share	$	0.10	$	0.08	$	0.20	$	0.16

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)

(dollars in thousands)

	For The Six Months Ended June 30,
	2004			2003
Cash Flows from Operating Activities
Net income	$	6,255		$	5,504
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of deferred loan fees		(1,431	)		(1,145	)
Net amortization (accretion) of premiums and discounts		16			11
Provision for loan losses		550			450
Provision for depreciation		158			136
Gain on sale of loans		(365	)		(759	)
Gain on sale of foreclosed real estate		--			(169	)
Proceeds from loans sold to others		33,020			69,120
Loans originated for sale		(38,526	)		(69,457	)
Principal collected on loans originated for sale		10			29
(Increase) Decrease in accrued interest receivable and other assets		(537	)		204
Decrease in other liabilities		(166	)		(1,120	)

Net cash (used by) provided by operating activities		(1,016	)		2,804

Cash Flows from Investing Activities
Purchase of investment securities		--			(8,000	)
Proceeds from maturing investment securities		1,000			6,000
Purchase of mortgage backed securities		--			(3,461	)
Principal collected on mortgage backed securities		1,117			1,062
Net increase in loans		(76,115	)		(48,898	)
Proceeds from sale of foreclosed real estate		--			393
Investment in premises and equipment		(267	)		(380	)
Purchase of FHLB stock		(1,550	)		(100	)

Net cash used by investing activities		(75,815	)		(53,384	)

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SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

	For The Six Months Ended June 30,
	2004			2003
Cash Flows from Financing Activities
Net increase in demand deposits, money market, passbook accounts and advances
by borrowers for taxes and insurance		20,307			28,486
Net increase in certificates of deposit		23,784			9,068
Net increase in short term borrowings		6,000			--
Additional borrowed funds, long term		30,000			10,000
Repayment of borrowed funds, long term		(5,000	)		(4,000	)
Cash dividends paid		(832	)		(843	)

Net cash provided by financing activities		74,259			42,711

Decrease in cash and cash equivalents		(2,572	)		(7,869	)
Cash and cash equivalents at beginning of year		8,426			18,660


Cash and cash equivalents at end of period	$	5,854		$	10,791

The Following is a Summary of Cash and Cash Equivalents
Cash and due from banks	$	3,270		$	4,279
Interest bearing deposits in other banks		716			6,512
Federal funds		1,868			--

Cash and cash equivalents reflected on the statement of cash flows	$	5,854		$	10,791

Supplemental Disclosure of Cash Flows Information:
Cash Paid During Period For:
Interest	$	6,507		$	6,280

Income taxes	$	4,519		$	3,776

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

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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 six months ended June 30, 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 shou ld 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, 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.

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SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued

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 and six month periods ended June 30th, as follows:

	For The Three Months Ended June 30,
		2004		2003
	(in thousands)
Net income	$	3,226	$	2,797
Less – preferred stock dividends, net of tax		-		(55	)

Net income available to shareholders	$	3,226	$	2,742

Weighted average shares outstanding
Basic EPS		4,159		4,143
Effect of Dilutive Shares
Stock options		-		13

Adjusted weighted average shares
Used for Diluted EPS		4,159		4,156

	For The Six Months Ended June 30,
		2004		2003
	(in thousands)
Net income	$	6,255	$	5,504
Less – preferred stock dividends, net of tax		-		(110	)

Net income available to shareholders	$	6,255	$	5,394

Weighted average shares outstanding
Basic EPS		4,159		4,143
Effect of Dilutive Shares
Stock options		-		13

Adjusted weighted average shares
Used for Diluted EPS		4,159		4,156

6

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued

Note 4 - Reclassifications

Certain prior year’s amounts have been reclassified to conform to the current year’s method of presentation.

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 risks involved in issuing letters of credit are 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 $7,789,000 of standby letters of credit as of June 30, 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 o f the liability as of June 30, 2004 for guarantees under standby letters of credit issued is not material.

Note 6 – Regulatory Matters.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The following table presents the Bank’s capital position:

	Actual		Actual		To Be Well Capitalized Under Prompt
	at June 30, 2004		at December 31, 2003		Corrective Provisions
Tangible (1)	8.9	%	9.2	%	N/A
Tier I Capital (2)	11.5	%	12.0	%	6.0	%
Core (1)	8.9	%	9.2	%	5.0	%
Risk-weighted (2)	12.6	%	13.2	%	10.0	%

(1) To adjusted total assets

(2) To risk-weighted assets.

7

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 Commercial (formerly Hyatt Real Estate), a commercial real estate brokerage and property management company, which Bancorp acquired in June 2001; and SBI Mortgage Company, which has held mortgages that do not meet the underwriting criteria of the Bank, and is the parent company of Crownsville Development Corporation t/a Annapolis Equity Group, which acquires real estate for syndication and investment purposes. 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 July 2004, the Bank finalized an agreement to acquire a branch office from Branch Bank & Trust Company, in Edgewater, Maryland, which it expects to open in October 2004. The Company’s common stock trades under the symbol “SVBI” on the Nasdaq Small Cap Market.

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 were 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 futur e periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers that 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.

8

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.

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 second quarter of 2004 was $3,226,000, or diluted earnings per share of $0.78, as compared to net income of $2,797,000 in the second quarter of 2003, or diluted earnings per share of $0.66. This was an increase in earnings of $429,000 or 15.3% compared with the second quarter of 2003. Earnings per diluted share increased $0.12, or 18.2%, compared with the second quarter of 2003. Year to date net income through the second quarter of 2004 was $6,255,000, or diluted earnings per share of $1.50, compared to $5,504,000, or diluted earnings per share of $1.30 for the same period in 2003. This represents an increase of $751,000, or 13.6%, compared to the six months ended June 30, 2003, or an increase of $0.20 per diluted share, which is an increase of 15.4%. Net income for the second quarter increased above that for the same time period of 2003 as a r esult 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 has dropped slightly to 4.68% as of June 30, 2004 compared to 4.74% during the quarter ended June 30, 2003, however, its mortgage portfolio balance increased over that same period of time.

Net interest income, which is interest earned net of interest charges, totaled $7,300,000 for the second quarter of 2004, compared to $6,066,000 for the second quarter of 2003, representing an increase of $1,234,000, or 20.3%. Net interest income through June 30, 2004 was $14,165,000 compared to $11,793,000 for the six months ended June 30, 2003, representing an increase of $2,372,000 or 20.1%. 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 4.96% 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 and an increasing loan portfolio.

Loan loss provisions were $300,000 in the second quarter of 2004 compared to $225,000 in the second quarter of 2003. This was an increase of $75,000, or 33.3%. Year to date loan loss provisions were $550,000 as of June 30, 2004, compared to $450,000 as of June 30, 2003, increasing $100,000 or 22.2%. The increase in the loan loss provisions was due to the Bank’s determination that the increasing loan portfolio increased the level of inherent risk within its total loan portfolio, which warranted the increase.

Other income totaled $1,115,000 for the second quarter of 2004, as compared to $1,318,000 during the second quarter of 2003, which is a decrease of $203,000 or 15.4%. Year to date other income decreased $613,000 or 24.7%, to $1,869,000, compared to June 30, 2003 other income of $2,482,000. Real estate commissions were $385,000 in the second quarter of 2004 compared to $551,000 for the second quarter of 2003, which is a decrease of $166,000 or 30.1%. Year to date real estate commissions were $728,000, which is an increase of $74,000, or 11.3%, over the $654,000 in real estate commissions through the first six months of 2003. This increase was a result of an increase in transactions closed by Hyatt Commercial (formerly known as Hyatt Real Estate) during the first half of 2004. Real estate management fees remained relatively static, with $103,000 earned during the s econd quarter of 2004 compared to $100,000 earned in the second quarter of 2003, which is a $3,000, or 3.0% increase. Year to date real estate management fees were $196,000, an increase of $14,000 or 7.7%, over the $182,000 earned in real estate management fees for the first six months of 2003. Mortgage banking activities, which are fees generated from loan originations and gains on sales of loans, dropped $61,000, or 11.2%, to $482,000 for the second quarter of 2004 compared to $543,000 for the second quarter of 2003. Year to date, mortgage banking fees were $687,000, compared to $1,219,000 in the first six months of 2003, which is a reduction of $532,000 or 43.6%, as a result of less loan origination activity for secondary market sales.

9

Total non-interest expense for the second quarter of 2004 was $2,798,000, as compared to $2,603,000 for the second quarter of 2003, an increase of $195,000 or 7.5%. Year to date through June 30, 2004 total non-interest expense was $5,290,000 as compared to $4,723,000 for the six months ended June 30, 2003, an increase of $567,000 or 12.0%. This increase was primarily in compensation and related expenses, which increased $173,000, or 9.0% during the second quarter 2004 compared to the second quarter ended June 30, 2003. Year to date compensation and related expenses increased $373,000 compared to June 30, 2003 year to date, or 10.7%, to $3,856,000 from $3,483,000. 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 in creases which went into effect January 1, 2004. Since the volume of mortgage loans increased during the second quarter of 2004 as compared to the second quarter of 2003, compensation in the form of commissions also increased. Other expenses increased $6,000, or 1.1%, from $543,000 for the second quarter of 2003 to $549,000 for the second quarter of 2004. For the six months ended June 30, 2004 other expenses were $1,142,000 compared to $985,000 for the same period in 2003, which is an increase of $157,000 or 15.9%. These expenses were primarily attributable to expenses related to increased loan originations and increased advertising.

Income Taxes

The income tax provision was $2,091,000 for the second quarter of 2004, as compared to $1,759,000 for the second quarter of 2003, an increase of $332,000, or 18.9%. The income tax provision for the year to date ended June 30, 2004 was $3,939,000 compared to $3,598,000 for the period ended June 30, 2003. This was an increase of $341,000 or 9.5%. The effective tax rates for the three months ended June 30, 2004 and 2003 were 39%, respectively. The effective tax rates for the six months ended June 30, 2004 and 2003 were 39% and 40%, respectively.

Analysis of Financial Condition

Total assets at June 30, 2004 increased to $620,820,000 from $540,471,000 at December 31, 2003, representing an increase of $80,349,000, or 14.9%. Cash and cash equivalents decreased $2,572,000 or 30.5% to $5,854,000 at June 30, 2004 from $8,426,000 at December 31, 2003, primarily as a result of a decrease in federal fund deposits. Loan demand continued to be strong during the second quarter of 2004, as net loans receivable increased to $579,848,000 as of June 30, 2004 from $502,851,000 as of December 31, 2003, which is an increase of $76,997,000, or 15.3%. Loans held for sale as of June 30, 2004 were $9,036,000 which is an increase of $5,861,000 or 184.6%, over the loans held for sale in the amount of $3,175,000 as of December 31, 2003. This increase was due to the timing of loans pending sale as of June 30, 2004. Total deposits as of June 30, 2004 increas ed to $462,470,000 from $419,726,000 as of December 31, 2003, representing an increase of $42,744,000, or 10.2%. This increase is primarily attributable to an ongoing campaign by the Bank to attract money market deposit accounts and a current promotion to obtain longer term certificates of deposit. Federal Home Loan Bank advances increased $31,000,000, or 47.7%, to $96,000,000 as of June 30, 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 need to fund its loan growth.

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Stockholders’ Equity

Total stockholders’ equity was $54,394,000 as of June 30, 2004 compared to $48,970,000 as of December 31, 2003, an increase of $5,424,000, or 11.1%. This increase resulted from net earnings, offset by dividends declared.

Asset Quality

Non-accrual loans (those loans 90 or more days in arrears) were $1,588,000 as of June 30, 2004 compared to $469,000 as of December 31, 2003. This increase of 238.6%, or $1,119,000 includes loans totaling $1,212,000 that have either been paid in full or otherwise resolved subsequent to June 30, 2004. At June 30, 2004 the total allowance for loan losses was $5,197,000, which is .90% of total loans, compared with $4,832,000, 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 June 30, 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 June 30, 2004. Additionally, loan payments, maturities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements.

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 June 30, 2004, totaled $98,355,000. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. At June 30, 2004, the Company had commitments to originate loans of $33,599,000, unused lines of credit of $26,103,000, and commitments under standby letters of credit of $7,789,000. 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 June 30, 2004, outstanding FHLB borrowings totaled $96,000,000, and the Bank had available to it up to an additional $89,783,000 in borrowing availability from the FHLB of Atlanta.

Net cash used by operating activities for the six months ended June 30, 2004 was $1,016,000 compared to net cash provided by operating activities for the six months ended June 30, 2003 of $2,804,000 which reflects a decrease in mortgage banking activities. Net cash used by investing activities for the six months ended June 30, 2004 was $75,815,000, an increase of $22,431,000 from $53,384,000 for the six months ended June 30, 2003 due to origination of portfolio loans. Net cash provided by financing activities was $74,259,000 for the six months ended June 30, 2004 compared to $42,711,000 for the period ended June 30, 2003. As a result, cash and cash equivalents were $5,854,000 as of June 30, 2004 compared to $10,791,000 as of June 30, 2003, a decrease of $4,937,000. Cash provided by increased deposits, loans sold and increased long-term borrowings was offset by ne t cash used for strong loan origination activity that outpaced principal repayments.

11

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	$	84,000	$	2,000	$	10,000	$	20,000	$	52,000

Operating lease obligations		670		308		228		104		30

Certificates of Deposit		250,763		98,355		127,846		24,521		41

Total	$	335,433	$	100,663	$	138,074	$	44,625	$	52,071

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.

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 six months of the year.

[see table on the following page]

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	Six months ended June 30, 2004			Six months ended June 30, 2003
	Average Balance	Interest	Rate Annualized	Average Balance	Interest	Rate Annualized

	(dollars in thousands)
ASSETS
Loans	$ 561,138	$ 20,402	7.27%	$ 440,510	$ 17,618	8.00%
Investments	5,500	88	3.20%	6,000	128	4.26%
Mortgage-backed securities	6,199	141	4.55%	6,654	142	4.26%
Other interest earning	9,163	103	2.24%	22,316	148	1.33%

Total interest-earning	582,000	20,734	7.13%	475,480	18,036	7.59%

Non-interest earning assets	13,417			13,666

Total Assets	$595,417			$489,146

LIABILITIES & STOCKHOLDERS' EQUITY
Savings & checking	203,069	1,393	1.37%	184,923	1,685	1.82%
Certificates of Deposit	243,820	3,718	3.05%	217,797	4,031	3.70%
Short-term borrowings	11,667	64	1.10%	--	--	--%
Long-term borrowings	78,000	1,394	3.58%	35,167	527	3.00%

Total interest-bearing liabilities	536,556	6,569	2.45%	437,887	6,243	2.85%

Non-interest bearing liabilities	6,795			4,338

Stockholders' equity	52,066			46,921

Total liabilities & stockholders’ equity	$ 595,417			$ 489,146

Net Interest Income		$14,165			$11,793

Interest Rate Spread			4.68%			4.74%
Net Yield on Interest-Earning Assets			4.87%			4.96%

Average interest-earning assets to average interest-bearing liabilities			108.47%			108.59%

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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 June 30, 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		June 30, 2004
		(dollars in thousands)
Standby letters of credit	$	7,789
Home equity loan commitments	$	14,585
Loan commitments	$	19,014
Lines of credit	$	26,103
Loans sold and serviced with limited repurchase provisions	$	34,892

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, 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.

14

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 June 30, 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. On April 28, 2004 an annual shareholders meeting of Bancorp was conducted.

At that meeting the shareholders voted on the election of 3 directors, S. Scott Kirkley, Melvin Hyatt and Albert W. Shields, all of whom were elected, and approved the ratification of Beard Miller Company LLP, as auditors for Bancorp for the year ending December 31, 2004. 3,512,317 votes were cast in favor of Melvin Hyatt and 11,670 votes were cast against Mr. Hyatt. 3,517,087 votes were cast in favor of S. Scott Kirkley and 6,900 votes were cast against Mr. Kirkley. 3,520,087 votes were cast in favor of Albert W. Shields and 3,900 votes were cast against Mr. Shields. 3,523,987 votes were cast in favor of the ratification of Beard Miller Company LLP with no votes cast against Beard Miller Company LLP. The following directors continued in office and did not stand for election at the April 28, 2004 annual meeting: Alan J. Hyatt, Melvin E. Meekins, Jr., Ronald P. Penni ngton, T. Theodore Schultz, Louis DiPasquale, Jr. and Keith Stock.

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 8-K. None.

15

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.

Registrant	SEVERN BANCORP, INC.


August 11, 2004	/s/
Date:	Alan J. Hyatt,	President, Chief Executive Officer
		and Chairman of the Board (Principal Executive Officer)

August 11, 2004	/s/
Date:	Cecelia Lowman,	Chief Financial Officer
		(Principal Financial and Accounting Officer)