UNITED STATES
SECURITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
SEVERN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1726127
- -------------------------------------------- ---------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) 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
---------------------------
Indicted 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
-------------- --------------
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, 4,096,092 shares outstanding
at August 9, 2002.
SEVERN BANCORP, INC.
Table of Contents
PART I - Financial Information..............................................1
Item 1. Financial Statements ..............................................1
Consolidated Statements of Financial Condition.....................1
Consolidated Statements of Operations .............................3
Consolidated Statements of Other Comprehensive Income .............4
Consolidated Statements of Cash Flows .............................5
Notes to Consolidated Financial Statements (Unaudited) ............8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........16
PART II - OTHER INFORMATION ................................................16
Item 1. Legal Proceedings ................................................16
Item 2. Changes in Securities and Use of Proceeds ........................16
Item 3. Defaults upon Senior Securities ..................................16
Item 4. Submission of Matters to a Vote of Security Holders ..............16
Item 5. Other Information ................................................16
Item 6. Exhibits and Reports on Form 8-K .................................16
SIGNATURES..................................................................16
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2002 2001
---- -------
Unaudited
ASSETS
Cash $ 2,965,746 $ 1,030,867
Interest bearing deposits in other banks 1,233,571 1,058,692
Federal funds 730,122 3,948,900
Investment securities, held to maturity 9,000,055 7,000,958
Mortgage backed securities held to maturity 781,395 212,021
Loans held for sale, net of unrealized loss of
$-0- June 30, 2002 and December 31, 2001 5,324,425 7,498,934
Loans receivable, net 375,386,269 335,142,276
Accrued interest receivable - loans 2,282,719 2,094,588
- mortgage backed
securities 4,600 1,330
- investments 132,500 100,895
Foreclosed real estate, net 223,911 312,118
Premises and equipment, at cost, less
accumulated depreciation 4,667,710 4,642,481
Mortgage servicing rights 22,640 25,940
Federal Home Loan Bank of Atlanta stock at cost 2,500,000 2,500,000
Deferred income taxes 813,486 813,486
Income taxes receivable 196,000 950
Prepaid expenses and other assets 147,287 172,082
Goodwill 333,569 333,569
-------------- ---------------
Total assets $406,746,005 $366,890,087
========== ==========
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
June 30, December 31,
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $330,069,581 $286,917,568
Outstanding checks in excess of bank balance -- 798,088
Federal Home Loan Bank advances 35,000,000 42,000,000
Advance payments by borrowers for expenses 1,843,218 1,007,068
Income taxes payable 114,641 174,529
Accounts payable and accrued expenses 1,191,400 1,161,952
------------- ----------------
Total liabilities 368,218,840 332,059,205
Commitments - (Notes 4 and 5)
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value, Series A 500,000 shares
authorized; 200,002 issued
and outstanding in 2001 and 2000 200,002 200,002
Additional paid-in capital 3,800,038 3,800,038
Common stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 4,096,092
June 30, 2002 and 1,352,364 December 31, 2001 40,961 13,524
Additional paid-in capital 11,040,897 10,816,887
Retained earnings (substantially restricted) 23,445,267 20,000,431
------------ -------------
Total stockholders' equity 38,527,165 34,830,882
------------ ------------
Total liabilities and stockholders' equity $406,746,005 $366,890,087
========== ==========
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
For Three Months June 30, For Six Months June 30,
------------------------- -----------------------
2002 2001 2002 2001
---- ----
Interest Income
Interest on loans $8,003,436 $7,045,149 $15,619,799 $13,757,102
Interest on securities available for sale -- 10,656 -- 22,496
Interest on securities held to maturity 108,483 98,481 214,802 221,924
Interest on mortgage backed securities 8,788 4,653 12,160 9,561
Other interest income 46,415 90,527 119,361 249,450
------------ --------- ------------ ------------
Total interest income 8,167,122 7,249,466 15,966,122 14,260,533
Interest Expense
Interest on deposits 2,964,278 3,349,067 6,054,611 6,714,908
Interest on short term borrowings 45,359 295,027 140,255 617,340
Interest on long term borrowings 340,046 429,517 740,314 789,305
---------- ---------- --------- ---------
Total interest expense 3,349,683 4,073,611 6,935,180 8,121,553
--------- --------- --------- ---------
Net interest income 4,817,439 3,175,855 9,030,942 6,138,980
Provision for loan losses 135,000 248,860 240,000 433,860
--------- ------- ------------ ------------
Net interest income after provision
for loan losses 4,682,439 2,926,995 8,790,942 5,705,120
Other Income
Gain on sale of loans 297,319 205,045 603,136 347,811
Real estate commissions 227,252 -- 439,385 --
Real estate management fees 90,571 -- 172,036 --
Gain on disposal of premises & equipment -- -- -- 5,656
Mortgage processing and servicing fees 155,673 177,655 312,020 287,580
All other income 123,640 99,782 235,184 193,113
--------- -------- ------------ -----------
Net other income 894,455 482,482 1,761,761 834,160
Non-Interest Expenses
Compensation and related expenses 1,351,604 991,796 2,677,014 1,970,216
Occupancy 123,943 109,667 246,124 220,394
Net expense of foreclosed real estate (347) 4,318 (410) 5,540
Other 519,595 384,232 954,380 716,684
---------- --------- --------- ----------
Total non-interest expenses 1,994,795 1,490,013 3,877,108 2,912,834
--------- -------- ----------- ------------
Income before income tax provision 3,582,099 1,919,464 6,675,595 3,626,446
Income tax provision 1,404,558 741,664 2,602,055 1,401,420
--------- --------- ----------- ------------
Net income $ 2,177,541 $ 1,177,800 $ 4,073,540 $ 2,225,026
========= ======== ========= =========
Basic earnings per common share $ .52$ .32 $ .97$ .65
========= ======== ========= =========
Diluted earnings per common share $ .51$ .32 $ .96 $ .64
========= ======== ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
For Three Months Ended June 30,
--------------------------------
2002 2001
---- ----
Net income $2,177,541 $1,117,800
Unrealized holding loss on
available for sale securities -- (12,824)
----------- ------------
Other Comprehensive Income $2,177,541 $1,104,976
========= =========
For Six Months Ended June 30,
-------------------------------
2002 2001
---- ----
Net income $4,073,540 $2,225,026
Unrealized holding gain on
available for sale securities, -- 3
---------- ----------
Other Comprehensive Income $4,073,540 $2,225,029
========= =========
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
For The Six Months Ended June 30,
---------------------------------
2002 2001
---- ----
Operating Activities
Net income $ 4,073,540 $ 2,225,026
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities _
Amortization of deferred loan fees (1,000,956) (624,989)
Loan fees deferred 1,153,075 770,936
Accretion of discount on mortgages (4,955) (4,610)
Amortization of premium on investment
securities 1,094 1,094
Accretion of discount on investment securities (191) (3,024)
Amortization of premium on mortgage backed
Securities 86 --
Accretion of discount on mortgage backed
securities (81) (80)
Provision for loan losses 240,000 433,860
Provision for losses on foreclosed real estate -- 20,000
Provision for depreciation 130,616 100,726
Gain on sale of loans (603,136) (347,811)
Gain on disposal of premises and equipment -- (5,676)
Proceeds from loans sold to others 41,646,010 20,492,846
Loans originated for sale (38,884,205) (25,285,132)
Principal collected on loans originated
for sale 15,840 19,944
Tax effect of preferred stock dividends 69,516 69,515
(Increase) decrease in accrued interest on loans (188,131) 9,086
(Increase) decrease in accrued interest on
investments (31,605) 75,771
(Increase) decrease in accrued interest on mortgage
backed securities (3,270) 175
Decrease in mortgage servicing rights 3,300 3,300
Increase in income taxes receivable (195,050) (163,131)
Decrease (increase) in prepaid expenses
and other assets 24,795 (1,123,249)
Decrease in accrued interest payable (13,497) (9,913)
Increase in accounts payable
and accrued expenses 29,448 826,105
Increase in income taxes payable (59,888) (94,812)
----------------- ---------------
Net cash provided by (used by)
operating activities 6,402,355 (2,614,043)
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30,
---------------------------------
2002 2001
---- ----
Cash Flows from Investing Activities
- ------------------------------------
Cash consideration Louis Hyatt, Inc.
Acquisition, net $ -- $ (31,340)
Purchase of investment securities (4,000,000) (2,000,000)
Proceeds from maturing investment securities 2,000,000 4,892,858
Purchase of mortgage backed securities (622,346) --
Principal collected on mortgage backed
securities 52,967 24,021
Longer term loans originated (82,033,573) (110,294,487)
Principal collected on longer term loans 41,172,196 76,712,726
Net decrease (increase) in short-term loans 427,220 (331,564)
Loans purchased (197,000) (679,000)
Proceeds from sale of foreclosed real estate 88,207 107,350
Investment in premises and equipment (155,845) (65,398)
Proceeds from disposal of premises
and equipment -- 15,049
Purchase of Federal Home Loan Bank of
Atlanta stock -- (700,000)
---------------------- ---------
Net cash used by investing activities (43,268,174) (32,349,785)
Cash Flows from Financing Activities
- ------------------------------------
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance 39,440,378 14,840,070
Net increase in certificates of
deposit 4,561,282 17,264,395
Decrease in checks outstanding
in excess of bank balance (798,088) (3,298,358)
Additional borrowed funds 27,000,000 33,000,000
Repayment of borrowed funds (34,000,000) (17,000,000)
Cash dividends (671,173) (521,977)
Proceeds from exercise of options 224,400 --
Proceeds from exercise of warrants -- 3,393,064
---------------------- -------------
Net cash provided by financing activities 35,756,799 47,677,194
------------ -------------
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
----------------------------------
2002 2001
---- ----
Increase (decrease) in cash and cash
equivalents $ (1,109,020) $ 12,713,366
Cash and cash equivalents at beginning of year 6,038,459 1,007,087
------------- -------------
Cash and cash equivalents at end of period $ 4,929,439 $ 13,720,453
========== ==========
The Following is a Summary of Cash and
Cash Equivalents
Cash $ 2,965,746 $ 5,172,207
Interest bearing deposits in other banks 1,233,571 448,696
Federal funds 730,122 8,099,550
----------- --------------
Cash and cash equivalents reflected on the
statement of cash flows $ 4,929,439 $ 13,720,453
========== ==========
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Year For:
Interest $ 6,950,418 $ 8,090,272
========== ==========
Income taxes $ 2,787,478 $ 1,631,179
========== ==========
Transfer from loans to foreclosed real estate $ -- $ 436,642
========== ==========
Transfer from retained earnings to additional
paid in capital for 3 for 1
stock split declared
as a dividend $ 27,047 $ --
========== ==========
Common stock issued for acquired company $ -- $ 1,600,000
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles
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 generally accepted accounting principles
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, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year
December 31, 2002 or any other interim period. The consolidated
financial statements should be read in conjunction with the
consolidated financial statements and related notes which are
contained in the Company's Form 10 Registration Statement as filed
with the Securities and Exchange Commission (file number 00-49731).
On February 19, 2002, the Company's Board of Directors
declared a 3-for-1 stock split in the form of a 200% stock dividend,
which was effective for shares outstanding as of March 1, 2002 and
paid on March 15, 2002. All per share data in the accompanying
financial statements and all share and per share data in the
footnotes have been adjusted to give retroactive effect to this
transaction.
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.
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
six month periods ended June 30th, as follows:
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
Net income $2,177,541 $1,117,800
Less - preferred stock dividends,
net of tax (55,244) (55,244)
-------- --------
Net income available to shareholders $2,122,297 $1,062,556
======== =========
Weighted average shares outstanding
Basic EPS 4,090,158 3,309,550
Effect of Dilutive Shares
Stock options 39,538 49,659
----------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,129,696 3,359,209
======== ========
CORPORATION AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share (continued)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Net income $4,073,540 $2,225,026
Less - preferred stock dividends,
net of tax (110,486) (110,486)
--------- ---------
Net income available to shareholders $3,963,054 $2,114,540
======== =========
Weighted average shares outstanding
Basic EPS 4,073,899 3,274,971
Effect of Dilutive Shares
Stock options 36,070 49,659
--------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,109,969 3,324,630
======== ========
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
charted 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 not suitable to 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 was
accepted for listing on The Nasdaq SmallCap 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 second quarter ended June 30, 2002 was $2,177,541,
or diluted earnings per share of $.51 as compared to $1,177,800 in the second
quarter of 2001, or diluted earnings per share of $.32. This represents an
increase of $999,741, or 85% compared to the second quarter of 2001. Earnings
per share increased $.19, or 59% during that same period. The six month year to
date net income was $4,073,540, or $.96 diluted earnings per share, compared to
$2,225,026, or $.64 diluted earnings per share for the six month period that
ended June 30, 2001. The increase was $1,848,514, and the increase of diluted
earnings per share was $.32. This represents an increase in year to date net
income between June 30, 2002 and June 30, 2001 of 83% or a 50% increase in
diluted earnings per share. The substantial increase in net income resulted from
the continuing low interest rate environment, which has reduced Bancorp's cost
of funds, along with the continuation of a high volume of mortgage loan
origination.
Net interest income, which is interest earned net of interest charges,
totaled $4,817,439 for the second quarter, and $9,030,042 for the six month
period ended June 30, 2002, compared to $3,175,855 for the second quarter of
2001 and $6,138,980 for the six month period ended June 30, 2001. This
represents an increase of $1,641,584, or 52%, compared to the second quarter of
2001, and an increase of $2,891,062 or 47% for June 30, 2002 year to date
compared to June 30, 2001. This increase resulted from the continuing growth of
the Company's mortgage loan portfolio, and the reduction of the cost of deposits
and borrowings, continuing to improve Bancorp's net interest margin.
Loan loss provisions were $135,000 in the second quarter, and $240,000
for the six months ended June 30, 2002, as compared to $248,860 for the second
quarter of 2001, and $433,860 for the six months ended June 30, 2001. The
reduction in the contribution to loan loss provisions was $113,860, or 46% in
comparison with the second quarter of 2002 to the second quarter of 2001, and
$193,860, or 45%, comparing the six months ended June 30, 2002 to the six months
ended June 30, 2001. The reduction of the contribution to the loan loss
provision resulted in management's analysis that the contribution and the total
loan loss provision was adequate in light of Bancorp's portfolio, the analysis
of the general economy and other factors that Bancorp's management deemed
appropriate.
Net other income was $894,455 for the second quarter, as compared to
$482,482 for the second quarter of 2001, with six month year to date net other
income being $1,761,761, compared to $834,160 for the six months ended June 30,
2001. This represents increases of $411,973, or 85%, comparing each second
quarter, and $927,601, or 111%, comparing the six month periods ended June 30,
2002 to June 30, 2001. The increase in other income included year to date real
estate commissions of $439,385, and management fees of $172,036, earned by Hyatt
Real Estate, a subsidiary of Bancorp, that was acquired in June 2001. Gain on
sale of loans increased from $347,811 for the six months ended June 30, 2001 to
$603,136 for the six months ended June 30, 2002, which is an increase of
$255,325, or 73%. This result was due to a significant increase in the volume of
loan originations that were sold in the secondary market by the Bank.
Total non-interest expenses for the six months ended June 30, 2002 were
$3,877,108 compared to $2,912,834 for the six months ended June 30, 2001. Second
quarter 2002 non-interest expense were $1,994,705 compared to $1,490,013 for the
second quarter of 2001. This was an increase in year to date non-interest
expense of $964,274, or 33%, and an increase between the second quarter of 2002
and the second quarter of 2001 of $504,692, or 34%. The growth in this expense
resulted primarily from increase in compensation and related expenses, which
increased $359,808 between the second quarter of 2002 and the second quarter of
2001, and by $706,798, or 36%, for the six month period ending June 30, 2002
compared to the same period ended June 30, 2001. The increase in compensation
and related expenses is directly related to the high volume of mortgage loan
originations during this period. Mortgage loan officers are compensated in the
form of commissions, based upon loans originated, and as a result, as mortgage
originations increase the commissions earned by loan officers also increase.
Other expenses also increased from $384,232 to $519,595 from second quarter 2001
to second quarter of 2002, and from $716,684 to $954,380 for the six months
ended June 30, 2001 compared to the six months ended June 30, 2002. That was an
increase of $135,363, or 35%, during the second quarter, and a six month year to
date increase of $237,696 or 33%, compared to the six months ended June 30,
2001. The increase in other expenses was related to increased mortgage
origination activity as well as the operating expenses of Hyatt Real Estate.
Additionally, this increase includes expenses of the preparation and filing of
Bancorp's Form 10 Registration Statement filed with the United States Securities
and Exchange Commission on or about April 15, 2002. Such expenses include, but
are not limited to, legal and accounting fees.
Income Taxes
Income tax expense was $1,404,558 for the second quarter of 2002, and
$2,602,555 for the six months ended June 30, 2002, as compared to $741,664 for
the second quarter of 2001, and $1,401,420 for the six months ended June 30,
2001. This was an increase of $662,894, or 89% between the second quarter of
2002 and the second quarter of 2001, and an increase of $1,201,135 or 86%,
between the six month periods ended June 30, 2002 and June 30, 2001. The
effective tax rate for the second quarter of 2002 and 2001 was 39.21% and
38.64%, respectively, and for the six month year to date 2002 and 2001, it was
38.98% and 38.64%, respectively.
Analysis of Financial Condition
Total assets at June 30, 2002 increased to $406,746,005 from
$366,890,087 at December 2001. representing an increase of $39,855,918 or 11%.
Continued mortgage origination activity resulted in net loans receivable
increasing to $375,386,269 as of June 30, 2002 from $335,142,276 as of December
31, 2001 representing an increase of $40,243,993 or 12%. Total deposits as of
June 30, 2002 increased to $330,069,581 from $286,917,568 as of December 31,
2001 which represents an increase of $43,152,013 or 15%. This increase is
primarily attributable to an ongoing campaign by the Bank to attract money
market deposit accounts. The influx of retail deposits fulfilled the Bank's
liquidity needs to fund this period's loan originations and allowed the Bank to
reduce FHLB borrowings. Federal Home Loan Bank (FHLB) advances decreased by
$7,000,000, or 17%, from $42,000,000 as of December 31, 2001 to $35,000,000 as
of June 30, 2002. This decrease is a result of the ability to rely upon retail
deposits during this period.
Stockholders Equity
Total stockholders equity was $38,527,165 as of June 30, 2002 compared
to $34,830,882 as of December 31, 2001, or an increase of $3,696,283 or 11%.
This increase resulted from the current six month period net earnings, offset
slightly by common and preferred stock dividends.
Asset Quality
Non-accrual loans (those loans 90 or more days in arrears) were
$382,395 as of June 30, 2002 compared to $2,101,072 as of December 31, 2001. At
June 30, 2002 the total allowance for loan losses was $3,593,374, which is .96%
of total loans, compared with $3,353,375, which was .99% of total loans as of
December 31, 2001. The adequacy of the allowance is monitored monthly. Bancorp's
management believes the allowance is adequate as of June 30, 2002.
Liquidity
Bancorp's liquidity is determined by its ability to raise funds through
loan payments, maturing investments, deposits, borrowed funds, capital, or 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, 2002. 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 ample 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, 2002 totaled $114,146,807. Based on past
experience, management believes that a significant portion of such deposits will
remain with the Bank. At June 30, 2002, Bancorp had commitments to originate
loans of $787,738, unused lines of credit of $21,209,893, and commitments under
standby letters of credit of $4,487,881. 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, 2002, outstanding
FHLB borrowings totaled $35,000,000, and the Bank had available to it up to an
additional $66,000,000 in borrowing availability from the FHLB of Atlanta.
Net cash provided by operating activities was $6,402,355 for the six
months ended June 30, 2002 compared to net cash used by operating activities of
$2,614,043 for the six months ended June 30, 2001. Net cash used by investing
activities for the six months ended June 30, 2002 was $43,268,174 compared to
$32,349,785 for the six months ended June 30, 2001, which is an increase of
$10,918,389. Net cash provided by financing activities was $35,756,799 for the
six months ended June 30, 2002 as compared to $47,677,194 for the six months
ended June 30, 2001, which is a decrease of $11,920,395. As a result, cash and
cash equivalents were $4,929,439 as of June 30, 2002 which was a decrease of
$8,791,014 as compared to $13,720,453 as of June 30, 2001 . During the current
six month period cash provided by increased deposits was offset by cash used for
strong loan origination activity and repayment of $7,000,000 in borrowed funds.
During the six month period ended June 30, 2001, the Bank supplemented the cash
provided by incoming deposits by borrowing 16,000,000 from the FHLB. The
proceeds from those sources were invested by the bank primarily in loan
originations.
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.
Six months ended June 30, 2002 Six months ended June 30, 2001
------------------------------------------ ------------------------------------------
Average Rate Average Rate
Volume Interest Annualized Volume Interest Annualized
ASSETS
Loans $ 362,848,683 $ 15,619,799 8.61% $ 297,587,763 $ 13,757,102 9.25%
Investments 8,998,568 214,802 4.77% 7,855,286 244,420 6.22%
Mortgage-backed securities 389,314 12,160 6.25% 271,876 9,561 7.03%
Other interest-earning assets 6,095,483 119,361 3.92% 10,130,355 249,450 4.92%
------------------------------------------ ------------------------------------------
Total interest-earning assets 378,332,048 15,966,122 8.44% 315,845,280 14,260,533 9.03%
Non-interest earning assets 13,980,141 7,134,739
---------------- ----------------
Total Assets $ 392,312,189 $ 322,980,019
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings and checking deposits $ 118,411,694 $ 1,541,993 2.60% 59,686,999 1,108,372 3.71%
Certificates of deposits 192,787,644 4,512,618 4.68% 186,153,878 5,606,536 6.02%
Short-term borrowings 9,166,667 140,255 3.06% 24,333,333 617,340 5.07%
Long-term borrowings 30,666,667 740,314 4.83% 23,333,333 789,305 6.77%
------------------------------------------ ------------------------------------------
Total interest-bearing liabilities 351,032,672 6,935,180 3.95% 293,507,543 8,121,553 5.53%
Non-interest bearing liabilities 4,340,485 2,470,616
Stockholders' equity 36,939,032 27,001,860
---------------- ----------------
Total liabilities and stockholders' equity $ 392,312,189 $ 322,980,019
================ ================
Net Interest Income $ 9,030,942 $6,138,980
=============== ===============
Interest Rate Spread 4.49% 3.50%
Net Yield on Interest-Earning Assets 4.77% 3.89%
Average interest-earning assets to average interest-bearing liabilities 107.78% 107.61%
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, are not
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,
2001, as reported in Bancorp's Form 10 Registration Statement filed with the
United States Securities and Exchange Commission on or about April 15, 2002.
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.
Item 6. Exhibits and Reports on Form 8-K. None.
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. Each of the undersigned signatures
certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) This Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this Report fairly presents, in all
material respects, the financial condition and result of operations of the
Registrant.
SEVERN BANCORP, INC.
Registrant
/s/ ALAN J. HYATT
Date: Alan J. Hyatt
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ CECELIA LOWMAN
Date: Cecelia Lowman
Chief Financial Officer
(Principal Financial and Accounting Officer)