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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 September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number
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SEVERN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-172612
- --------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
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
-------------- --------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to distribution of securities under a plan
confirmed by a court.
Yes No
-------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share, 4,115,092 shares outstanding
at November 12, 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
Operation .............................................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .....................................................16
Item 4. Controls and Procedures ...............................................................................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 .......................................................................................................17
CERTIFICATION OF ALAN J. HYATT ..........................................................................................18
CERTIFICATION OF CECELIA LOWMAN .........................................................................................19
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2002 2001
---- -------
Unaudited
ASSETS
Cash $ 3,441,454 $ 1,030,867
Interest bearing deposits in other banks 864,988 1,058,692
Federal funds 2,154,370 3,948,900
Investment securities, held to maturity 6,999,969 7,000,958
Mortgage backed securities held to maturity 562,321 212,021
Loans held for sale, net of unrealized loss of
$-0- September 30, 2002 and December 31, 2001 11,301,086 7,498,934
Loans receivable, net 398,438,720 335,142,276
Accrued interest receivable - loans 2,373,527 2,094,588
- mortgage backed
securities 3,674 1,330
- investments 76,324 100,895
Foreclosed real estate, net 223,911 312,118
Premises and equipment, at cost, less
accumulated depreciation 4,679,345 4,642,481
Mortgage servicing rights 20,990 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 -- 950
Prepaid expenses and other assets 424,641 172,082
Goodwill 333,569 333,569
-------------- ---------------
Total assets $435,212,375 $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
September 30, December 31,
2002 2001
---- ----
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $358,959,815 $286,917,568
Outstanding checks in excess of bank balance -- 798,088
Federal Home Loan Bank advances 33,000,000 42,000,000
Advance payments by borrowers for expenses 1,120,522 1,007,068
Income taxes payable 73,955 174,529
Accounts payable and accrued expenses 1,495,009 1,161,952
------------- ----------------
Total liabilities 394,649,301 332,059,205
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value, Series A 500,000 shares
authorized; 200,002 issued and outstanding at September 30, 2002 and
December 31, 2001 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 4,115,092
September 30, 2002 and 1,352,364 December 31, 2001 41,151 13,524
Additional paid-in capital 11,145,207 10,816,887
Retained earnings (substantially restricted) 25,376,676 20,000,431
------------ -------------
Total stockholders' equity 40,563,074 34,830,882
------------ ------------
Total liabilities and stockholders' equity $435,212,375 $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 (UNAUDITED)
For Three Months Sept 30, For Nine Months Sept 30,
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest Income
Interest on loans $8,343,204 $7,312,881 $23,963,003 $21,069,983
Interest on securities available for sale -- 10,656 -- 33,152
Interest on securities held to maturity 90,987 96,387 305,789 318,311
Interest on mortgage backed securities 11,992 4,371 24,152 13,932
Other interest income 64,166 82,528 183,527 331,978
------------ --------- ------------ ------------
Total interest income 8,510,349 7,506,823 24,476,471 21,767,356
Interest Expense
Interest on deposits 3,112,027 3,445,728 9,166,638 10,160,636
Interest on short term borrowings 14,994 206,768 155,249 824,108
Interest on long term borrowings 341,154 377,858 1,081,468 1,167,163
---------- ---------- ----------- -----------
Total interest expense 3,468,175 4,030,354 10,403,355 12,151,907
--------- --------- ---------- ----------
Net interest income 5,042,174 3,476,469 14,073,116 9,615,449
Provision for loan losses 205,000 114,809 445,000 548,669
--------- ------- ------------ ------------
Net interest income after provision
for loan losses 4,837,174 3,361,660 13,628,116 9,066,780
Other Income
Gain on sale of loans 257,785 277,189 860,921 625,000
Real estate commissions 123,140 168,081 562,525 168,081
Real estate management fees 82,297 102,080 254,333 102,080
Gain on disposal of premises & equipment -- -- -- 5,656
Mortgage processing and servicing fees 192,542 157,613 504,562 445,193
All other income 93,701 102,083 328,885 295,196
-------- -------- ------------ -----------
Net other income 749,465 807,046 2,511,226 1,641,206
Non-Interest Expenses
Compensation and related expenses 1,386,412 1,140,695 4,063,426 3,110,911
Occupancy 120,746 112,608 366,870 333,002
Net expense of foreclosed real estate -- 1,167 (410) 6,707
Other 440,961 436,524 1,395,341 1,153,208
---------- --------- ----------- ------------
Total non-interest expenses 1,948,119 1,690,994 5,825,227 4,603,828
--------- --------- ----------- ------------
Income before income tax provision 3,638,520 2,477,712 10,314,115 6,104,158
Income tax provision 1,404,963 960,661 4,007,018 2,362,081
--------- --------- ----------- ------------
Net income $ 2,233,557 $ 1,517,051 $ 6,307,097 $ 3,742,077
========= ======== ========= =========
Basic earnings per common share $ .53 $ .36 $ 1.50 $ 1.01
========= ======== ========= =========
Diluted earnings per common share $ .53 $ .36 $ 1.49 $ 1.00
========= ======== ========= =========
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 (UNAUDITED)
For Three Months Ended Sept 30,
--------------------------------
2002 2001
---- ----
Net income $2,233,557 $1,517,051
Unrealized holding gain on
available for sale securities -- 19,734
---------- ----------
Other Comprehensive Income $2,233,557 $1,536,785
========= =========
For Nine Months Ended Sept 30,
--------------------------------
2002 2001
---- ----
Net income $6,307,097 $3,742,077
Unrealized holding gain on
available for sale securities -- 19,737
---------- ----------------------
Other Comprehensive Income $6,307,097 $3,761,814
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended Sept 30,
----------------------------------
2002 2001
---- ----
Operating Activities
Net income $ 6,307,097 $ 3,742,077
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of deferred loan fees (1,494,391) (1,060,757)
Loan fees deferred 2,069,229 1,178,852
Accretion of discount on mortgages (6,717) (7,325)
Amortization of premium on investment
securities 1,276 1,641
Accretion of discount on investment securities (286) (3,412)
Amortization of premium on mortgage backed
securities 345 --
Accretion of discount on mortgage backed
securities (121) (121)
Provision for loan losses 445,000 548,669
Provision for losses on foreclosed real estate -- 20,000
Provision for depreciation 194,345 153,102
Loss on sale of foreclosed real estate -- 9,999
Gain on sale of loans (860,921) (625,000)
Gain on disposal of premises and equipment -- (5,676)
Proceeds from loans sold to others 62,944,480 38,283,639
Loans originated for sale (65,907,770) (43,528,362)
Principal collected on loans originated
for sale 22,059 50,984
Tax effect of preferred stock dividends 104,274 104,273
Increase in accrued interest on loans (278,939) (49,087)
Decrease in accrued interest on investments 24,571 95,773
(Increase) decrease in accrued interest on mortgage
backed securities (2,344) 281
Decrease in mortgage servicing rights 4,950 4,950
Decrease (increase) in income taxes receivable 950 (15,108)
Increase in prepaid expenses and other assets (252,559) (24,408)
Decrease in accrued interest payable (13,145) (10,444)
Increase in accounts payable
and accrued expenses 333,057 601,162
Increase in income taxes payable (100,574) (22,733)
------------------ ---------------
Net cash provided by (used by)
operating activities 3,533,866 (557,031)
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended Sept 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 4,000,000 5,000,000
Purchase of mortgage backed securities (622,346) --
Principal collected on mortgage backed
securities 271,822 43,059
Longer term loans originated (151,443,190) (178,196,702)
Principal collected on longer term loans 86,975,742 135,515,008
Net decrease (increase) in short-term loans 354,883 (278,737)
Loans purchased (197,000) (2,494,000)
Proceeds from sale of foreclosed real estate 88,207 400,918
Investment in premises and equipment (231,209) (1,880,694)
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 (64,803,091) (44,607,439)
Cash Flows from Financing Activities
- ------------------------------------
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance 61,158,616 21,130,861
Net increase in certificates of
deposit 11,010,230 18,894,442
Decrease in checks outstanding
in excess of bank balance (798,088) (790,810)
Additional borrowed funds 32,000,000 39,000,000
Repayment of borrowed funds (41,000,000) (32,000,000)
Cash dividends (1,008,080) (799,491)
Proceeds from exercise of options 328,900 --
Proceeds from exercise of warrants -- 3,393,064
-------------- -------------
Net cash provided by financing activities 61,691,578 48,828,066
------------ -------------
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended Sept 30,
-----------------------------------
2002 2001
---- ----
Increase in cash and cash equivalents $ 422,353 $ 3,663,596
Cash and cash equivalents at beginning of year 6,038,459 1,007,087
------------- -------------
Cash and cash equivalents at end of period $ 6,460,812 $ 4,670,683
========== ==========
The Following is a Summary of Cash and
Cash Equivalents
Cash $ 3,441,454 $ 918,877
Interest bearing deposits in other banks 864,988 216,277
Federal funds 2,154,370 3,535,529
------------- --------------
Cash and cash equivalents reflected on the
statement of cash flows $ 6,460,812 $ 4,670,683
========== ==========
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Year For:
Interest $ 10,423,822 $ 12,179,501
========== ==========
Income taxes $ 3,988,978 $ 2,366,504
========== ==========
Transfer from loans to foreclosed real estate $ -- $ 480,935
========== ==========
Transfer from retained earnings to common
stock 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.
CORPORATION 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 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 nine months ended September 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.
CORPORATION AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share
Basic EPS is computed based upon income available to common
shareholders and the weighted average number of common shares
outstanding for the period. Diluted EPS is to reflect the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Information relating to the calculations of
net income per share of common stock is summarized for the three and
nine month periods ended September 30th, as follows:
Three Months Ended Three Months Ended
Sept 30, 2002 Sept 30, 2001
Net income $2,233,557 $1,517,051
Less - preferred stock dividends,
net of tax (55,244) (55,242)
-------- --------
Net income available to shareholders $2,178,313 $1,461,809
======== =========
Weighted average shares outstanding
Basic EPS 4,096,299 4,018,092
Effect of Dilutive Shares
Stock options 30,475 49,659
----------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,126,774 4,067,751
======== ========
CORPORATION AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share (continued)
Nine Months Ended Nine Months Ended
Sept 30, 2002 Sept 30, 2001
----------------------- ---------------------
Net income $6,307,097 $3,742,077
Less - preferred stock dividends,
net of tax (165,729) (165,730)
--------- ---------
Net income available to shareholders $6,141,368 $3,576,347
======== =========
Weighted average shares outstanding
Basic EPS 4,081,447 3,525,400
Effect of Dilutive Shares
Stock options 28,041 49,659
--------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,109,488 3,575,059
======== ========
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
approved 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 third quarter ended September 30, 2002 was
$2,233,557, or diluted earnings per share of $.53 as compared to $1,517,051 in
the third quarter of 2001, or diluted earnings per share of $.36. This
represents an increase of $716,506, or 47% compared to the third quarter of
2001. Earnings per share increased $.17, or 47% during that same period. The
current nine month year to date net income was $6,307,097, or $1.49 diluted
earnings per share, compared to $3,742,077, or $1.00 diluted earnings per share
for the nine month period that ended September 30, 2001. The increase was
$2,565,020, and the increase of diluted earnings per share was $.49. This
represents an increase in year to date net income between September 30, 2002 and
September 30, 2001 of 69% or a 49% increase in diluted earnings per share. The
substantial increase in net income resulted from the continuing low interest
rate environment, which increased the interest rate spread, along with the
continuation of a high volume of mortgage loan originations.
Net interest income, which is interest earned net of interest charges,
totaled $5,042,174 for the third quarter, and $14,073,116 for the nine month
period ended September 30, 2002, compared to $3,476,469 for the third quarter of
2001 and $9,615,449 for the nine month period ended September 30, 2001. This
represents an increase of $1,565,705, or 45%, compared to the third quarter of
2001, and an increase of $4,457,667 or 46% for September 30, 2002 year to date
compared to September 30, 2001. This increase resulted from the reduction of the
cost of deposits and borrowings, and the continuing growth of the Company's
mortgage loan portfolio, offset in part by a decline in yield of interest
earning assets, which continues to improve Bancorp's net interest margin.
Loan loss provisions were $205,000 in the third quarter, and $445,000
for the nine months ended September 30, 2002, as compared to $114,809 for the
third quarter of 2001, and $548,669 for the nine months ended September 30,
2001. The increase in the contribution to loan loss provisions was $90,191, or
79% in comparison with the third quarter of 2002 to the third quarter of 2001.
Comparing the nine month contribution to the previous for loan losses through
September 30, 2002 to September 30, 2001, there was a decrease of $103,669, or
19%. The year to date reduction of the contribution to the loan loss provision
compared to the same period last year resulted from management's analysis that
the contribution and the total loan loss provision were adequate in light of
Bancorp's portfolio, the analysis of the general economy and other factors that
Bancorp's management deemed appropriate. The increase in the loan loss provision
during the third quarter was due to management's concern that the status of the
general economy was worsening and that there was a greater risk of loan defaults
due to the uncertainty surrounding economic conditions.
Net other income was $749,465 for the third quarter, as compared to
$807,046 for the third quarter of 2002, with nine month year to date net other
income being $2,511,226, compared to $1,641,206 for the nine months ended
September 30, 2001. This represents a decrease of $57,581, or 7%, comparing each
third quarter, and an increase of $870,020, or 53%, comparing the nine month
periods ended September 30, 2002 to September 30, 2001. The year to date
increase in other income included year to date real estate commissions of
$562,525, and management fees of $254,233, earned by Hyatt Real Estate, a
subsidiary of Bancorp, that was acquired in June 2001. Gain on sale of loans
increased from $625,000 for the nine months ended September 30, 2001 to $860,921
for the nine months ended September 30, 2002, which is an increase of $235,921,
or 38%. This result was due to the high volume of loan originations that were
sold in the secondary market by the Bank. The decrease in net other income
during the third quarter was due to a reduction in real estate commissions and
management fees earned by the Company's subsidiary, Hyatt Real Estate, compared
to the third quarter of 2001, as a result of the weakness in commercial real
estate market, and that company's decision to withdraw from the residential
condominium association management business, and a reduction in the gain on sale
of loans by the Bank compared to the third quarter of 2001 because the Bank sold
fewer loans and retained more for its portfolio in the third quarter of 2002
than in the third quarter of 2001.
Total non-interest expenses for the nine months ended September 30,
2002 were $5,825,227 compared to $4,603,828 for the nine months ended September
30, 2001. Third quarter 2002 non-interest expense was $1,948,119 compared to
$1,690,994 for the third quarter of 2001. This was an increase in year to date
non-interest expense of $1,221,399, or 27%, and an increase between the third
quarter of 2002 and the third quarter of 2001 of $257,125, or 15%. The growth in
this expense resulted primarily from an increase in compensation and related
expenses, which increased $245,717 between the third quarter of 2002 and the
third quarter of 2001, and by $952,515, or 31%, for the nine month period ending
September 30, 2002 compared to the same period ended September 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 were $440,961 for the third quarter 2002
compared to $436,524 for the third quarter of 2001, and increased from
$1,153,208 to $1,395,341 for the nine months ended September 30, 2001 compared
to the nine months ended September 30, 2002. That was an increase of $242,133,
or 21%, compared to the nine months ended September 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, the year to date
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 $1,404,963 for the third quarter of 2002, and
$4,007,018 for the nine months ended September 30, 2002, as compared to $960,661
for the third quarter of 2001, and $2,362,081 for the nine months ended
September 30, 2001. This was an increase of $444,302, or 46% between the third
quarter of 2002 and the third quarter of 2001, and an increase of $1,644,937 or
70%, between the nine month periods ended September 30, 2002 and September 30,
2001. The effective tax rate for the third quarter of 2002 and 2001 was 38.6%
and 38.8%, respectively, and for the nine month year to date 2002 and 2001, it
was 38.8% and 38.7% respectively.
Analysis of Financial Condition
Total assets at September 30, 2002 increased to $435,212,375 from
$366,890,087 at December 2001 representing an increase of $68,322,288 or 19%.
Continued mortgage origination activity resulted in net loans receivable
increasing to $398,438,720 as of September 30, 2002 from $335,142,276 as of
December 31, 2001 representing an increase of $63,296,444 or 19%. Total deposits
as of September 30, 2002 increased to $358,959,815 from $286,917,568 as of
December 31, 2001 which represents an increase of $72,042,247 or 25%. 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 continue to reduce FHLB borrowings. Federal Home Loan Bank (FHLB)
advances decreased by $9,000,000, or 21%, from $42,000,000 as of December 31,
2001 to $33,000,000 as of September 30, 2002. This decrease is a result of the
ability to rely upon retail deposits during this period.
Stockholders Equity
Total stockholders equity was $40,563,074 as of September 30, 2002
compared to $34,830,882 as of December 31, 2001, or an increase of $5,732,192 or
16%. This increase resulted from the current nine 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
$1,159,411 as of September 30, 2002 compared to $2,101,072 as of December 31,
2001. At September 30, 2002 the total allowance for loan losses was $3,798,374,
which is .94% 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 September
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
September 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 sufficient cash flow and liquidity to meet
its current commitments. Certificates of deposit, which are scheduled to mature
in less than one year at September 30, 2002 totaled $115,248,377. Based on past
experience, management believes that a significant portion of such deposits will
remain with the Bank. At September 30, 2002, Bancorp had commitments to
originate loans of $787,738, unused lines of credit of $24,865,000, and
commitments under standby letters of credit of $5,437,000. The Bank has the
ability to reduce its commitments for new loan originations, adjust other cash
outflows, and borrow from the FHLB of Atlanta should the need arise. As of
September 30, 2002, outstanding FHLB borrowings totaled $33,000,000, and the
Bank had available up to an additional $75,000,000 in borrowing availability
from the FHLB of Atlanta.
Net cash provided by operating activities was $3,533,866 for the nine
months ended September 30, 2002 compared to net cash used by operating
activities of ($557,031) for the nine months ended September 30, 2001. Net cash
used by investing activities for the nine months ended September 30, 2002 was
$64,803,091 compared to $44,607,439 for the nine months ended September 30,
2001, which is an increase of $20,195,652. Net cash provided by financing
activities was $61,691,578 for the nine months ended September 30, 2002 as
compared to $48,828,066 for the nine months ended September 30, 2001, which is
an increase of $12,863,512. As a result, cash and cash equivalents were
$6,460,812 as of September 30, 2002 which was an increase of $1,790,129 as
compared to $4,670,683 as of September 30, 2001 . During the current nine month
period cash provided by increased deposits was offset by cash used for strong
loan origination activity and repayment of $9,000,000 in borrowed funds.
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 nine months of the year.
Nine months ended Sept 30, 2002 Nine months ended Sept 30, 2001
------------------------------------------ ------------------------------------------
Average Rate Average Rate
Volume Interest Annualized Volume Interest Annualized
ASSETS
Loans $ 374,345,405 $ 23,963,003 8.54% $ 305,471,077 $ 21,069,983 9.20%
Investments 8,340,781 305,789 4.89% 7,701,512 351,463 6.08%
Mortgage-backed securities 472,357 24,152 6.82% 263,646 13,932 7.05%
Other interest-earning assets 7,323,582 183,527 3.34% 8,565,847 331,978 5.17%
------------------------------------------ ------------------------------------------
Total interest-earning assets 390,482,125 24,476,471 8.36% 322,002,082 21,767,356 9.01%
Non-interest earning assets 13,934,005 7,651,240
---------------- ----------------
Total Assets $ 404,416,130 $ 329,653,322
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings and checking deposits $ 129,747,829 $ 2,509,827 2.58% $ 62,432,601 $ 1,769,047 3.78%
Certificates of deposits 195,020,394 6,656,811 4.55% 189,725,447 8,391,589 5.90%
Short-term borrowings 6,555,556 155,249 3.16% 23,111,111 824,108 4.75%
Long-term borrowings 30,777,778 1,081,468 4.69% 22,777,778 1,167,163 6.83%
------------------------------------------ ------------------------------------------
Total interest-bearing liabilities 362,101,557 10,403,355 3.83% 298,046,937 12,151,907 5.44%
Non-interest bearing liabilities 4,406,903 2,777,501
Stockholders' equity 37,907,670 28,828,884
---------------- ----------------
Total liabilities and stockholders' equity $ 404,416,130 $ 329,653,322
================ ================
Net Interest Income $ 14,073,116 $ 9,615,449
=============== ===============
Interest Rate Spread 4.53% 3.57%
Net Yield on Interest-Earning Assets 4.81% 3.98%
Average interest-earning assets to average interest-bearing liabilities 107.84% 108.04%
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.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officers and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officers and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports filed with the Securities and Exchange Commission. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
internal controls subsequent to the date we carried out our last evaluation.
Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 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
November 12, 2002 /s/ ALAN J. HYATT
- ------------------ ------------------------------------
Date: Alan J. Hyatt
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
November 12, 2002 /s/ CECELIA LOWMAN
- ----------------- -------------------------------------
Date: Cecelia Lowman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
I, Alan J. Hyatt, President, CEO and Chairman of the Board, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (this "Report") of Severn
Bancorp, Inc. (the "Company");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared.
(b) designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed our supervision, to provide reasonable assurances that
the Company's financial statements are fairly presented in conformity with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report (the "Evaluation Date");
(d) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
(e) disclosed to the Company's auditors and the audit committee of the
board of directors:
(i) all significant deficiencies and material weaknesses in
the design or operation of internal controls and procedures for financial
reporting which could adversely affect the Company's ability to record, process,
summarize and report financial information required to be disclosed by the
Company in the reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls and procedures for financial reporting; and
(f) Indicated in this Report any significant changes in the Company's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this Report, including any actions
taken to correct significant deficiencies and material weaknesses in the
Company's internal controls and procedures for financial reporting.
Date: November 12, 2002 /s/ ALAN J. HYATT
------------------- -------------------------------------
By: Alan J. Hyatt, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
I, Cecelia Lowman, Chief Financial Officer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (this "Report") of Severn
Bancorp, Inc. (the "Company");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared.
(b) designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed our supervision, to provide reasonable assurances that
the Company's financial statements are fairly presented in conformity with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report (the "Evaluation Date");
(d) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
(e) disclosed to the Company's auditors and the audit committee of the
board of directors:
(i) all significant deficiencies and material weaknesses in
the design or operation of internal controls and procedures for financial
reporting which could adversely affect the Company's ability to record, process,
summarize and report financial information required to be disclosed by the
Company in the reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls and procedures for financial reporting; and
(f) Indicated in this Report any significant changes in the Company's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this Report, including any actions
taken to correct significant deficiencies and material weaknesses in the
Company's internal controls and procedures for financial reporting.
Date: November 12, 2002 /s/ CECELIA LOWMAN
----------------- -------------------------------------
Cecelia Lowman, Chief Financial Officer
(Principal Financial and Accounting Officer)