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, 2003
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OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-49731
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SEVERN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1726127
- ----------------------------------------- ------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
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
----------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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
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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, 4,142,592 shares outstanding
at August 8 , 2003.
SEVERN BANCORP, INC.
Table of Contents
PART I - FINANCIAL INFORMATION............................................................................................1
Item 1. Financial Statements ...................................................................................1
Consolidated Statements of Financial Condition as of June 30, 2003
(Unaudited) and December 31, 2002.......................................................................1
Consolidated Statements of Operations (Unaudited).......................................................3
Consolidated Statements of Cash Flows (Unaudited).......................................................4
Notes to Consolidated Financial Statements (Unaudited) .................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operation .............................................................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .....................................................17
Item 4. Controls and Procedures ...............................................................................17
PART II - OTHER INFORMATION .............................................................................................17
Item 1. Legal Proceedings .....................................................................................17
Item 2. Changes in Securities and Use of Proceeds .............................................................17
Item 3. Defaults Upon Senior Securities .......................................................................17
Item 4. Submission of Matters to a Vote of Security Holders ...................................................17
Item 5. Other Information .....................................................................................18
Item 6. Exhibits and Reports on Form 8-K ......................................................................18
SIGNATURES .............................................................................................................18
EXHIBIT 99.1 CERTIFICATION OF ALAN J. HYATT .............................................................................19
EXHIBIT 99.1 CERTIFICATION OF CECELIA LOWMAN ............................................................................20
EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER................................................................21
EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER................................................................21
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Cash $ 4,278,800 $ 3,756,640
Interest bearing deposits in other banks 6,512,377 4,190,768
Federal funds -- 10,712,827
Investment securities, held to maturity 6,000,000 4,000,000
Mortgage backed securities held to maturity 8,045,810 5,661,304
Loans held for sale 18,548,403 17,481,301
Loans receivable, net 450,940,293 401,343,360
Accrued interest receivable - loans 2,490,092 2,465,187
- mortgage backed
securities 33,905 22,327
- investments 61,226 61,911
Foreclosed real estate, net -- 223,911
Premises and equipment, at cost, less
accumulated depreciation 4,981,221 4,737,936
Mortgage servicing rights 16,040 19,340
Federal Home Loan Bank of Atlanta stock
at cost 2,000,000 1,900,000
Deferred income taxes 1,090,356 1,090,356
Income taxes receivable -- 164,255
Goodwill 333,569 333,569
Prepaid expenses and other assets 177,136 249,517
-------------- ---------------
Total assets $505,509,228 $458,414,509
========== ==========
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,
2003 2002
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $414,373,751 $377,925,041
Federal Home Loan Bank advances 40,000,000 34,000,000
Advance payments by borrowers for expenses 2,142,680 1,049,408
Income taxes payable 47,739 464,937
Accounts payable and accrued expenses 1,032,951 1,793,746
------------- ----------------
Total liabilities 457,597,121 415,233,132
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value, Series A 500,000 shares
authorized; 200,002 issued
and outstanding June 30, 2003 and December 31, 2002 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 4,142,592 June 30, 2003
and December 31, 2002 41,426 41,426
Additional paid-in capital 11,425,910 11,425,910
Retained earnings (substantially restricted) 32,444,731 27,714,001
------------ -------------
Total stockholders' equity 47,912,107 43,181,377
------------ ------------
Total liabilities and stockholders' equity $505,509,228 $458,414,509
========== ==========
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,
------------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest Income
Interest on loans $8,935,697 $8,003,436 $17,617,590 $15,619,799
Interest on securities held to maturity 81,743 108,483 127,891 214,802
Interest on mortgage backed securities 84,684 8,788 141,605 12,160
Other interest income 70,279 46,415 148,531 119,361
------------ --------- ------------ ------------
Total interest income 9,172,403 8,167,122 18,035,617 15,966,122
Interest Expense
Interest on deposits 2,788,977 2,964,278 5,715,389 6,054,611
Interest on short term borrowings -- 45,359 -- 140,255
Interest on long term borrowings 316,729 340,046 527,473 740,314
---------- ---------- --------- ---------
Total interest expense 3,105,706 3,349,683 6,242,862 6,935,180
--------- --------- --------- ---------
Net interest income 6,066,697 4,817,439 11,792,755 9,030,942
Provision for loan losses 225,000 135,000 450,000 240,000
--------- ------- ------------ ------------
Net interest income after provision
for loan losses 5,841,697 4,682,439 11,342,755 8,790,942
Other Income
Gain on sale of foreclosed real estate (450) -- 169,095 --
Gain on sale of loans 301,324 297,319 758,900 603,136
Real estate commissions 147,858 227,252 251,799 439,385
Real estate management fees 100,379 90,571 181,771 172,036
Mortgage processing and servicing fees 242,179 155,673 460,162 312,020
All other income 123,623 123,640 258,251 235,184
--------- --------- ------------ -----------
Net other income 914,913 894,455 2,079,978 1,761,761
Non-Interest Expenses
Compensation and related expenses 1,530,627 1,351,604 3,080,395 2,677,014
Occupancy 125,647 123,943 255,051 246,124
Net expense of foreclosed real estate -- (347) -- (410)
Other 543,434 519,595 985,109 954,380
---------- --------- --------- ----------
Total non-interest expenses 2,199,708 1,994,795 4,320,555 3,877,108
--------- --------- ----------- ------------
Income before income tax provision 4,556,902 3,582,099 9,102,178 6,675,595
Income tax provision 1,759,484 1,404,558 3,598,148 2,602,055
--------- ----------- ----------- ------------
Net income $ 2,797,418 $ 2,177,541 $ 5,504,030 $ 4,073,540
========= ======== ========= =========
Basic earnings per common share $ .66 $ .52 $ 1.30 $ .97
========= ======== ========= =========
Diluted earnings per common share $ .66 $ .51 $ 1.30 $ .96
========= ======== ========= =========
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 Six Months Ended June 30,
------------------------------------------------------
2003 2002
---- ----
Operating Activities
Net income $ 5,504,030 $4,073,540
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities _
Amortization of deferred loan fees (1,145,179) (1,000,956)
Loan fees deferred 1,251,872 1,153,075
Accretion of discount on mortgages (3,425) (4,955)
Amortization of premium on investment
securities -- 1,094
Accretion of discount on investment securities -- (191)
Amortization of premium on mortgage backed
securities 14,765 86
Accretion of discount on mortgage backed
securities (81) (81)
Provision for loan losses 450,000 240,000
Provision for depreciation 136,289 130,616
Gain on sale of loans (758,900) (603,136)
Gain on sale of foreclosed real estate (169,095) --
Proceeds from loans sold to others 69,119,956 41,646,010
Loans originated for sale (69,457,008) (38,884,205)
Principal collected on loans originated
for sale 28,850 15,840
Tax effect of preferred stock dividends 69,516 69,516
Increase in accrued interest on loans (24,905) (188,131)
Decrease (increase) in accrued interest on
investments 685 (31,605)
Increase in accrued interest on mortgage
backed securities (11,578) (3,270)
Decrease in mortgage servicing rights 3,300 3,300
Decrease (increase) in income taxes
receivable 164,255 (195,050)
Decrease in prepaid expenses
and other assets 72,381 24,795
Decrease in accrued interest payable (11,733) (13,497)
(Decrease) increase in accounts payable
and accrued expenses (760,795) 29,448
Decrease in income taxes payable (417,198) (59,888)
------------------ ---------------
Net cash provided by operating activities 4,056,002 6,402,355
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Six Months Ended June 30,
2003 2002
---- ----
Cash Flows from Investing Activities
Purchase of investment securities $(8,000,000) $(4,000,000)
Proceeds from maturing investment securities 6,000,000 2,000,000
Purchase of mortgage backed securities (3,461,022) (622,346)
Principal collected on mortgage backed
securities 1,061,832 52,967
Longer term loans originated (81,892,615) (82,033,573)
Principal collected on longer term loans 32,289,405 41,172,196
Net (increase) decrease in short-term loans (300,990) 427,220
Loans purchased (246,000) (197,000)
Proceeds from sale of foreclosed real estate 393,006 88,207
Investment in premises and equipment (379,575) (155,845)
Purchase of Federal Home Loan Bank of
Atlanta stock (100,000) --
----------------- -----------------
Net cash used by investing activities (54,635,959) (43,268,174)
Cash Flows from Financing Activities
- ------------------------------------
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance 28,485,644 39,440,378
Net increase in certificates of deposit 9,068,071 4,561,282
Increase (decrease) in checks outstanding
in excess of bank balance -- (798,088)
Additional borrowed funds 10,000,000 27,000,000
Repayment of borrowed funds (4,000,000) (34,000,000)
Cash dividends (842,816) (671,173)
Proceeds from exercise of options -- 224,400
--------------------- ------------
Net cash provided by financing activities 42,710,899 35,756,799
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SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30,
2003 2002
---- ----
Decrease in cash and cash equivalents $ (7,869,058) $ (1,109,020)
Cash and cash equivalents at beginning of year 18,660,235 6,038,459
-------------- ---------------
Cash and cash equivalents at end of period $ 10,791,177 $ 4,929,439
========== ==========
The Following is a Summary of Cash and
Cash Equivalents
Cash $ 4,278,800 $ 2,965,746
Interest bearing deposits in other banks 6,512,377 1,233,571
Federal funds -- 730,122
------------ ------------
Cash and cash equivalents reflected on the
statement of cash flows $ 10,791,177 $ 4,929,439
========== ==========
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Period For:
Interest $ 6,280,169 $ 6,950,418
========== ==========
Income taxes $ 3,775,650 $ 2,787,478
========== ==========
Transfer from retained earnings to additional paid in capital for 3 for 1
stock split declared
in the form of a dividend $ -- $ 27,047
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and
in accordance with the instructions to Form 10-Q. Accordingly, they
do not include all of the disclosures required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation of the results of
operations for the interim periods presented have been made. Such
adjustments were of a normal recurring nature. The results of
operations for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year
December 31, 2003 or any other interim period. The consolidated
financial statements should be read in conjunction with the
consolidated financial statements and related notes which are
incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
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.
Note 2 - Cash Flow Presentation
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions, investments in federal funds, and certificates of
deposit with original maturities of 90 days or less.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share
Basic EPS is computed based upon income available to common
shareholders and the weighted average number of common shares
outstanding for the period. Diluted EPS is to reflect the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Information relating to the calculations of
net income per share of common stock is summarized for the three and
six month periods ended June 30th, as follows:
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
---------------------------- ---------------------------
Net income $ 2,797,418 $ 2,177,541
Less - preferred stock dividends,
net of tax (55,243) (55,244)
-------- -------
Net income available to shareholders $2,742,175 $ 2,122,297
========= =========
Weighted average shares outstanding
Basic EPS 4,142,592 4,090,158
Effect of Dilutive Shares
Stock options 13,736 39,538
---------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,156,328 4,129,696
======== ========
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share (continued)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
---------------------------- --------------------------
Net income $ 5,504,030 $ 4,073,540
Less - preferred stock dividends,
net of tax (110,486) (110,486)
--------- --------
Net income available to shareholders $5,393,544 $ 3,963,054
========= =========
Weighted average shares outstanding
Basic EPS 4,142,592 4,073,899
Effect of Dilutive Shares
Stock options 13,255 36,070
---------- ------
Adjusted weighted average shares
Used for dilutive EPS 4,155,847 4,109,969
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company
Severn Bancorp, Inc. ("Bancorp") is a savings and loan holding company
chartered in the state of Maryland in 1990. It conducts business through three
subsidiaries: Severn Savings Bank, FSB (the "Bank"), its principal subsidiary;
Louis Hyatt, Inc. t/a Hyatt Real Estate, a real estate brokerage and property
management company, which Bancorp acquired in June 2001; and SBI Mortgage
Company, which engages in the origination of mortgages that do not meet the
underwriting criteria of the Bank. The Bank has two branches in Anne Arundel
County, Maryland which offer a full range of deposit products, and the Bank
originates mortgages in its primary market of Anne Arundel County, Maryland and,
to a lesser extent, in other parts of Maryland, Delaware and Northern Virginia.
In June 2002, the Company's common stock was approved for listing on the Nasdaq
Small Cap Market, and now trades under the symbol "SVBI".
Forward Looking Statements
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Bancorp operations and actual results could differ significantly
from those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences include, but are not limited to,
changes in the economy and interest rates in the nation and Bancorp's general
market area. The forward-looking statements contained herein include, but are
not limited to, those with respect to management's determination of the amount
of loan loss allowance; the effect of changes in interest rates; and changes in
deposit insurance premiums.
Results of Operations
Net income for the second quarter of 2003 was $2,797,000, or diluted
earnings per share of $.66, as compared to net income of $2,178,000 in the
second quarter of 2002, or diluted earnings per share of $.51. This represents
an increase of $619,000 or 28.4% compared with the second quarter of 2002.
Earnings per diluted share increased $.15, or 29.4%, compared with the second
quarter of 2002. Year to date net income through the second quarter of 2003 was
$5,504,000, or diluted earnings per share of $1.30, compared to $4,074,000, or
diluted earnings per share of $.96 for the same period in 2002. This represents
an increase of $1,430,000, or 35.1%, compared to the six months ended June 30,
2002, or an increase of $.34 per diluted share, which is an increase of 35.4%.
Net income for the second quarter and six months ended June 30, 2003 increased
significantly above that for the same time period of 2002 as a result of the
continuing low interest rate environment which continued to encourage a high
volume of mortgage originations. The Bank increased its interest rate spread to
4.73% as of June 30, 2003 from 4.49% as of June 30, 2002.
Net interest income, which is interest earned net of interest charges,
totaled $6,067,000 for the second quarter of 2003, compared to $4,817,000 for
the second quarter of 2002, representing an increase of $1,250,000, or 25.9%.
Net interest income for the year through June 30, 2003 was $11,793,000 compared
to $9,031,000 for the six months ended June 30, 2002, representing an increase
of $2,762,000, or 30.6%. 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
4.96% compared to 4.77% for the comparable period of 2002. The growth in net
interest income arose in part from the Bank's continuing ability to attract
lower cost liabilities, primarily in the form of money market deposits and
Federal Home Loan Bank advances, while enjoying continuing strong loan demand.
Loan loss provisions were $225,000 in the second quarter of 2003
compared to $135,000 in the second quarter of 2002. This was an increase of
$90,000, or 67%. Year to date loan loss provisions were $450,000 as of June 30,
2003, compared to $240,000 as of June 30, 2002, representing an increase of
87.5%. The increase in the loan loss provision was due to management's
continuing concern that the status of the general economy was worsening and that
there continued to be a greater risk of loan defaults due to the uncertainty
surrounding economic conditions.
Other income totaled $915,000 for the second quarter of 2003, as
compared to $894,000 during the second quarter of 2002, which is an increase of
$21,000, or 2.3%. Year to date other income was $2,080,000 as of June 30, 2003,
compared to $1,762,000 through June 30, 2002, which is an increase of $318,000,
or 18%. The increase in other income was primarily the result of an increase in
mortgage processing and servicing fees of $86,000, or 55%, to $242,000 in the
second quarter of 2003, from $156,000 in the second quarter of 2002. Year to
date through June 30, 2003 mortgage processing and servicing fees were $460,000
compared to $312,000 for the period ended June 30, 2002, or an increase of
$148,000, or 47.4%. The increase in mortgage processing and servicing fees was
partially offset by a decrease in real estate commissions from $227,000 in the
second quarter of 2002 to $148,000 for the second quarter of 2003, which was a
drop of $79,000, or 34.8%. For the six months ended June 30, 2003 real estate
commissions were $252,000 compared to $439,000 for the six months ended June 30,
2002, which is a decrease of $187,000, or 42.6%. Real estate commission revenue
is generated from the lease and sale of all types of properties, by Hyatt Real
Estate, with the bulk of its transactions coming from commercial leasing and
sale transactions. The volume of such transactions have been significantly less
in 2003 as compared to 2002. Real estate management fees remained relatively
static with year to date through June 30, 2003 management fees being $182,000
compared to $172,000 for the same period ended June 30, 2002, which is an
increase of $10,000, or 5.8%. Comparing quarters, real estate management fees
were $100,000 for the quarter ended June 30, 2003 compared to $91,000 for the
quarter ended June 30, 2002, for an increase of $9,000, or 9.9%. Real estate
management fees increased slightly as a result of an increase of properties
under management by Hyatt Real Estate. Gain on sale of loans was $301,000 for
the quarter ended June 30, 2003 compared to $297,000 for the quarter ended June
30, 2002, which is an increase of $4,000, or 1.3%. Gain on sale of loans through
June 30, 2003 was $759,000 compared to $603,000 for the gain on sale of loans
through June 30, 2002, representing a 25.9% increase of $156,000. Gain on sale
of loans resulted from an increase in loans sold in the secondary market. As a
result of the sale of a parcel of land acquired by one of Bancorp's subsidiaries
in lieu of foreclosure, gain on sale of foreclosed real estate was $169,000 for
the six months ended June 30, 2003. Bancorp had no gain (or loss) on foreclosed
real estate for the six months ended June 30, 2002.
Total non-interest expense for the second quarter of 2003 was
$2,200,000, as compared to $1,995,000 for the second quarter of 2002, an
increase of $205,000 or 10.3%. Year to date through June 30, 2003 total
non-interest expense was $4,321,000 as compared to $3,877,000 for the six months
ended June 30, 2002, an increase of $444,000, or 11.4%. This increase was
primarily in compensation and related expenses, which increased $179,000, or
13.2% during the second quarter and increased $403,000 or 15.1% for the six
month period ended June 30, 2003 compared to the six month period ended June 30,
2002. This increase was primarily because of the increase in compensation to
commissioned mortgage loan officers who are paid in the form of commissions
based upon mortgage loans originated. Since the volume of mortgage loans
increased during the first half of 2003 as compared to 2002, compensation in the
form of commissions also increased.
Income Taxes
Income tax expense was $1,759,000 for the second quarter of 2003, as
compared to $1,405,000 for the second quarter of 2002, an increase of $354,000,
or 25.2%. Income tax expense for the year to date ended June 30, 2003 was
$3,598,000 compared to $2,602,000 for the period ended June 30, 2002. This was
an increase of $996,000, or 38.3%. The effective tax rate for the three months
ended June 30, 2003 and 2002 was 38.61% and 39.21%, respectively. The effective
tax rate for the six months ended June 30, 2003 and 2002 was 39.53% and 38.98%
respectively.
Analysis of Financial Condition
Total assets at June 30, 2003 increased to $505,509,000 from
$458,415,000 at December 31, 2002, representing an increase of $47,094,000, or
10.3%. Cash and cash equivalents decreased $7,869,000 or 42.2% to $10,791,000 at
June 30, 2003 from $18,660,000 at December 31, 2002, primarily as a result of an
increase in loans. Investment securities increased $2,000,000, or 50.0%, to
$6,000,000 at June 30, 2003 from $4,000,000 at December 31, 2002 as a result of
investing excess cash. Loan demand continued to be strong during the second
quarter of 2003, as net loans receivable increased to $450,940,000 as of June
30, 2003 from $401,343,000 as of December 31, 2002, which is an increase of
$49,597,000, or 12.4%. Loans held for sale as of June 30, 2003 was $18,548,000
which is an increase of $1,067,000, or 6.1%, greater than loans held for sale in
the amount of $17,481,000 as of December 31, 2002. This increase was due to a
large volume of loans pending sale as of June 30, 2003. Total deposits as of
June 30, 2003 increased to $414,374,000 from $377,925,000 as of December 31,
2002, representing an increase of $36,449,000, or 9.6%. This increase is
primarily attributable to an ongoing campaign by the Bank to attract money
market deposit accounts. Federal Home Loan Bank advances increased $6,000,000,
or 17.6%, to $40,000,000 as of June 30, 2003 as compared to $34,000,000 as of
December 31, 2002, as a result of attractive pricing of Federal Home Loan Bank
advances as compared to the cost of obtaining retail deposits.
Stockholders' Equity
Total stockholders' equity was $47,912,000 as of June 30, 2003 compared
to $43,181,000 as of December 31, 2002, an increase of $4,731,000, or 11%. This
increase resulted primarily from an increase in net earnings, offset by
dividends paid.
Asset Quality
Non-accrual loans (those loans 90 or more days in arrears) were
$1,172,000 as of June 30, 2003 compared to $1,758,000 as of December 31, 2002.
At June 30, 2003 the total allowance for loan losses was $4,382,000, which is
..97% of total loans, compared with $3,991,000, which was .99% of total loans, as
of December 31, 2002. The adequacy of the allowance is monitored monthly.
Bancorp's management believes the allowance is adequate as of June 30, 2003.
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, 2003. 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, 2003, totaled $138,515,000. Based on past
experience, management believes that a significant portion of such deposits will
remain with the Bank. At June 30, 2003, the Company had commitments to originate
loans of $26,664,000, unused lines of credit of $19,247,000, and commitments
under standby letters of credit of $7,429,000. 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, 2003,
outstanding FHLB borrowings totaled $40,000,000, and the Bank had available to
it up to an additional $86,000,000 in borrowing availability from the FHLB of
Atlanta.
Net cash provided by operating activities for the six months ended June
30, 2003 was $4,056,000 compared to net cash provided by operating activities
for the six months ended June 30, 2002 of $6,402,000. Net cash used by investing
activities for the six months ended June 30, 2003 was $54,636,000, an increase
of $11,368,000 from $43,268,000 for the six months ended June 30, 2002. Net cash
provided by financing activities was $42,711,000 for the six months ended June
30, 2003 compared to $35,757,000 for the period ended June 30, 2002. As a
result, cash and cash equivalents were $10,791,000 as of June 30, 2003 compared
to $4,929,000 as of June 30, 2002, an increase of $5,862,000. Cash provided by
increased deposits and loans sold was partially offset by net cash used for
strong loan origination activity that outpaced principal repayments.
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.
Recent Accounting Pronouncements
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement improves
financial reporting by requiring that contracts with comparable characteristics
be accounted for similarly. In particular, this Statement (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. Those changes will result in more
consistent reporting on contracts as either derivatives or hybrid instruments.
This Statement is effective for contracts and hedging relationships entered into
or modified after June 30, 2003.
In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003.
The above accounting pronouncements will not have a material impact on
the consolidated financial statements.
Average Balance Sheet
The following table presents the distribution of the average
consolidated balance sheets, interest income/expense, and annualized yields
earned and rates paid through the first three months of the year.
[see table on the following page]
Severn Bancorp and Subsidiaries
Average Balance Sheet
Six months ended June 30, 2003 Six months Ended June 30, 2002
Average Rate Average Rate
ASSETS Volume Interest Annualized Volume Interest Annualized
------ -------- ---------- --------------- ----------- -----------
Loans $ 440,510,236 $ 17,617,590 8.00% $ 362,848,683 $ 15,619,799 8.61%
Investments 6,000,000 127,891 4.26% 8,998,568 214,802 4.77%
Mortgage-backed securities 6,654,236 141,605 4.26% 389,314 12,160 6.25%
Other interest earning 22,315,650 148,531 1.33% 6,095,483 119,361 3.92%
--------------------------------- ---------- ------------------------------- -----------
Total interest-earning 475,480,122 18,035,617 7.59% 378,332,048 15,966,122 8.44%
Non-interest earning assets 13,665,653 13,980,141
----------------- ----------------
Total Assets 489,145,775 $ 392,312,189
================ =================
LIABILITIES & STOCKHOLDERS' EQUITY
Savings & checking 184,923,031 1,685,087 1.82% 118,411,694 1,541,993 2.60%
Certificates of Deposit 217,797,066 4,030,302 3.70% 192,787,644 4,512,618 4.68%
Short-term borrowings -- -- % 9,166,667 140,255 3.06%
Long-term borrowings 35,166,667 527,473 3.00% 30,666,667 740,314 4.83%
------------------ --------------- --------- ------------- --------------
Total interest-bearing liabilities 437,886,764 6,242,862 2.85% 351,032,672 6,935,180 3.95%
================ =================
Non-interest bearing liabilities 4,337,897 4,340,485
Stockholders' equity 46,921,114 36,939,032
Total liabilities &
-----------------
----------------
stockholders' equity $ 489,145,775 $ 392,312,189
================ =================
Net Interest Income $ 11,792,755 $ 9,030,942
Interest Rate Spread 4.74% 4.49%
Net Yield on Interest-Earning Assets 4.96% 4.77%
Average interest-earning assets to average interest-bearing liabilities
108.59% 107.78%
Commitments, Contingencies and Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk including commitments to extend credit under existing lines of credit and
commitments to sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
Off-balance sheet financial instruments whose contract amounts
represent credit and interest rate risk are summarized as follows:
Financial Instruments Whose Contract Contract Amount At
Amounts Represent Credit Risk June 30, 2003 December 31, 2002
- ----------------------------- -------------- -----------------
Standby letters of credit $ 7,429,300 $ 6,694,000
Home equity loan commitments $ 9,604,331 $ 8,014,000
Loan commitments $ 26,664,465 $ 24,772,000
Lines of credit $ 19,247,448 $ 22,368,000
Loans sold and serviced with limited
repurchase provisions $ 15,515,174 $ 10,163,000
Critical Accounting Policies
The Company's significant accounting policies are set forth in note 1
of the consolidated financial statements as of December 31, 2002 which was filed
on Form 10-K. Of these significant accounting policies, the Company considers
its policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers that it
is not known to management at the time of the issuance of the consolidated
financial statements.
Legal Proceedings
There are various claims pending involving the Bank, arising in the
normal course of business. Management believes, based upon consultation with
legal counsel, that liabilities arising from these proceedings, if any, will not
be material to Bancorp's financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since December 31,
2002, as reported in Bancorp's Form 10-K filed with the United States Securities
and Exchange Commission on or about March 20, 2003.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officers and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officers and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports filed with Securities and Exchange Commission. In addition, we reviewed
our internal controls, and there have been no significant changes in our
internal controls or in other factors that could significantly affect those
internal controls subsequent to the date we carried out our last evaluation.
Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. On April 30,
2002 an annual shareholders meeting of Bancorp was conducted.
At that meeting the shareholders voted on the election of 4 directors, Alan
J. Hyatt, Melvin E. Meekins, Jr., Louis DiPasquale, Jr. and Keith Stock, all of
whom were elected, and approved the ratification of Anderson Associates, LLP, as
auditors for Bancorp for the year ending December 31, 2003. 3,470,434 votes were
cast in favor of the election of directors Alan J. Hyatt, Melvin E. Meekins,
Jr., Louis DiPasquale, Jr. and Keith Stock with 18,270 votes cast against.
3,421,682 votes were cast in favor of the ratification of Anderson Associates,
LLP with 23,147 votes cast against. The following directors continued in office
and did not stand for election at the April 30, 2003 annual meeting: S. Scott
Kirkley, Melvin Hyatt, Ronald P. Pennington, T. Theodore Schultz, and Dimitri
Sfakiyanudis. Mr. Sfakiyanudis resigned as a director effective May 12, 2003.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
(b) Reports - On May 14, 2003 Bancorp filed a Current Report on Form
8-K to report the issuance of a press release commenting on resignation of
Dimitri Sfakiyanudis.
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEVERN BANCORP, INC.
Registrant
August 12, 2003 /s/ ALAN J. HYATT
- ----------------- -----------------------------------------------------
Date: Alan J. Hyatt, President, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
August 12, 2003 /s/ CECELIA LOWMAN
- ----------------- -----------------------------------------------------
Date: Cecelia Lowman, Chief Financial Officer
(Principal Financial and Accounting Officer)