MARYLAND | 52-1726127 |
(State or other jurisdiction | (I.R.S. Employer Identification Number) |
of incorporation or organization) | |
21401 | |
(Address of principal executive offices) | (Zip Code) |
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, par value $.01 per share | The Nasdaq Stock Market, LLC |
Section | Page No. | |
PART I | 1 | |
Item | Business | 1 |
Item | ||
Item | ||
Item | Properties | 35 |
Item 3 | Legal Proceedings | 35 |
Item 4 | Submission of Matters to a Vote of Security Holders | 35 |
Executive Officers of the Registrant That Are Not Directors | ||
PART II | ||
Item | Market for Registrant’s Common Equity, | |
Item | Selected Financial Data | |
Item | Management’s Discussion and Analysis of Financial Condition | |
and Results of Operations | ||
Item | Quantitative and Qualitative Disclosures About Market Risk | |
Item | Financial Statements and Supplementary Data | |
Item | Changes in and Disagreements with Accountants on | |
Accounting and Financial | ||
Item | Controls and Procedures | |
Item 9B | Other Information | 54 |
PART III | ||
Item | Directors and Executive Officers of the Registrant and Corporate Governance | |
Item | Executive Compensation | |
Item | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item | Certain Relationships and Related Transactions, and Director Independence | |
Item | Principal Accountant Fees and Services | |
PART IV | ||
Item | Exhibits and Financial | |
56 | ||
SIGNATURES | ||
57 |
At the period ended: | December 31, | |||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
(dollars in thousands, except per share information) | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||
Total assets | $ | 540,471 | $ | 458,415 | $ | 366,890 | $ | 293,230 | $ | 233,724 | ||||||
Total loans, net | 506,026 | 418,825 | 342,641 | 274,652 | 214,066 | |||||||||||
Total nonperforming assets | 469 | 1,982 | 2,413 | 1,490 | 1,597 | |||||||||||
Deposits | 419,726 | 377,925 | 286,918 | 229,312 | 186,204 | |||||||||||
Short-term borrowings | 6,000 | - | 17,000 | 18,000 | 2,000 | |||||||||||
Notes payable | 59,000 | 34,000 | 25,000 | 16,000 | 22,000 | |||||||||||
Total liabilities | 487,501 | 415,233 | 332,059 | 268,009 | 211,743 | |||||||||||
Minority Interest – Preferred Securities of Subsidiary | 4,000 | 4,000 | 4,000 | 3,892 | 3,892 | |||||||||||
Stockholders' equity | 48,970 | 39,181 | 30,831 | 21,329 | 18,089 | |||||||||||
Book value per share | 11.77 | 9.46 | 7.60 | 6.58 | 5.59 |
For the period ended: | December 31, | |||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
Operations Data: | ||||||||||||||||
Net interest income | $ | 24,746 | $ | 19,603 | $ | 13,395 | $ | 10,884 | $ | 9,524 | ||||||
Net interest income after provision for loan losses | 23,846 | 18,933 | 12,687 | 10,293 | 9,020 | |||||||||||
Noninterest income | 4,674 | 4,133 | 2,570 | 1,439 | 1,586 | |||||||||||
Noninterest expense | 9,616 | 8,447 | 6,588 | 5,348 | 5,477 | |||||||||||
Net income | 11,329 | 8,948 | 5,256 | 3,945 | 3,127 | |||||||||||
Basic earnings per share * | 2.68 | 2.13 | 1.38 | 1.15 | 0.90 | |||||||||||
Diluted earnings per share * | 2.67 | 2.13 | 1.37 | 1.12 | 0.84 | |||||||||||
Common Stock Cash dividends declared per share* | 0.34 | 0.24 | 0.19 | 0.17 | 0.15 | |||||||||||
Common Stock dividends declared per share to | ||||||||||||||||
diluted earnings per share * | 12.73 | % | 11.27 | % | 13.87 | % | 15.18 | % | 17.86 | % | ||||||
Weighted number of shares outstanding basic * | 4,146,566 | 4,092,188 | 3,647,451 | 3,237,888 | 3,230,940 | |||||||||||
Weighted number of shares outstanding diluted * | 4,157,302 | 4,103,223 | 3,683,346 | 3,330,915 | 3,450,831 | |||||||||||
Performance Ratios: | ||||||||||||||||
Return on average assets | 2.23 | % | 2.14 | % | 1.55 | % | 1.47 | % | 1.38 | % | ||||||
Return on average equity | 25.22 | % | 25.58 | % | 20.22 | % | 20.04 | % | 18.31 | % | ||||||
Interest rate spread | 4.77 | % | 4.59 | % | 3.65 | % | 3.75 | % | 3.94 | % | ||||||
Net interest margin | 4.99 | % | 4.86 | % | 4.05 | % | 4.17 | % | 4.34 | % | ||||||
Noninterest expense to average assets | 1.76 | % | 2.02 | % | 1.95 | % | 2.00 | % | 2.43 | % | ||||||
Efficiency ratio | 30.33 | % | 35.59 | % | 41.27 | % | 43.40 | % | 49.30 | % | ||||||
* Retroactively adjusted to reflect three-for-one stock split declared February 19, 2002 and effective for shares outstanding | ||||||||||||||||
as of March 1, 2002. |
Residential, one to four family units | $220,165 | 36.20% | $180,397 | 36.58% | $151,250 | 36.90% | $137,498 | 41.95% | $ 101,640 | 39.89% | ||||
Residential, multifamily | 866 | 0.14% | 1,318 | 0.27% | 1,065 | 0.26% | 1,026 | 0.31% | 991 | 0.39% | ||||
Commercial and industrial real estate | 112,382 | 18.48% | 95,298 | 19.33% | 71,557 | 17.46% | 54,024 | 16.48% | 49,231 | 19.32% | ||||
Construction and land acquisition and | ||||||||||||||
development loans | 240,757 | 39.58% | 191,197 | 38.77% | 163,849 | 39.98% | 117,325 | 35.80% | 90,324 | 35.45% | ||||
Land | 25,820 | 4.25% | 20,109 | 4.08% | 16,895 | 4.12% | 11,390 | 3.48% | 7,018 | 2.76% | ||||
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Total real estate loans | 599,990 | 98.65% | 488,319 | 99.03% | 404,616 | 98.72% | 321,263 | 98.02% | 249,204 | 97.81% | ||||
Other loans: | ||||||||||||||
Business, commercial | 7,088 | 1.16% | 3,894 | 0.79% | 3.970 | 0.97% | 5,592 | 1.71% | 170 | 0.07% | ||||
Consumer | 1,144 | 0.19% | 870 | 0.18% | 1,257 | 0.31% | 885 | 0.27% | 5,406 | 2.12% | ||||
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Total other loans | 8,232 | 1.35% | 4,764 | 0.97% | 5,227 | 1.28% | 6,477 | 1.98% | 5,576 | 2.19% | ||||
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Total gross loans | 608,222 | 100.00% | 493,083 | 100.00% | 409,843 | 100.00% | 327,740 | 100.00% | 254,780 | 100.00% | ||||
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Unearned fees, premiums & discounts, net | (3,343) | (2,674) | (2,164) | (2,149) | (1,852) | |||||||||
Loans in process | (94,020) | (67,593) | (61,685) | (48,211) | (36,715) | |||||||||
Allowance for loan loss | (4,833) | (3,991) | (3,353) | (2,728) | (2,147) | |||||||||
Total Loans net | $506,026 | $418,825 | $342,641 | $274,652 | $214,066 | |||||||||
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2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||
(dollars in thousands) | ||||||||||||||
Residential mortgage | $249,448 | 26.15% | $219,988 | 23.71% | $215,767 | 27.30% | $187,498 | 30.83% | $142,342 | 28.87% | ||||
Construction, land acquisition and | ||||||||||||||
development | 339,122 | 35.55% | 390,376 | 42.07% | 343,101 | 43.42% | 240,757 | 39.58% | 191,196 | 38.77% | ||||
Land | 90,747 | 9.51% | 77,319 | 8.33% | 33,419 | 4.23% | 25,820 | 4.25% | 20,109 | 4.08% | ||||
Lines of credit | 40,733 | 4.27% | 35,491 | 3.82% | 29,096 | 3.68% | 19,581 | 3.22% | 12,472 | 2.53% | ||||
Commercial real estate | 193,299 | 20.26% | 163,449 | 17.61% | 127,768 | 16.17% | 106,823 | 17.56% | 90,862 | 18.43% | ||||
Commercial non-real estate | 3,348 | 0.35% | 3,412 | 0.37% | 3,859 | 0.49% | 3,813 | 0.63% | 3,445 | 0.70% | ||||
Home equity | 32,758 | 3.44% | 32,974 | 3.55% | 28,101 | 3.56% | 18,391 | 3.02% | 11,197 | 2.27% | ||||
Consumer | 1,537 | 0.16% | 1,768 | 0.19% | 2,489 | 0.31% | 2,364 | 0.39% | 3,979 | 0.81% | ||||
Loans held for sale | 2,970 | 0.31% | 3,216 | 0.35% | 6,654 | 0.84% | 3,175 | 0.52% | 17,481 | 3.54% | ||||
Total gross loans | 953,962 | 100.00% | 927,993 | 100.00% | 790,254 | 100.00% | 608,222 | 100.00% | 493,083 | 100.00% | ||||
Deferred loan origination fees and costs, net | (4,712) | (4,916) | (4,157) | �� | (3,344) | (2,674) | ||||||||
Loans in process | (104,747) | (136,239) | (123,195) | (94,020) | (67,593) | |||||||||
Allowance for loan losses | (9,026) | (7,505) | (5,935) | (4,832) | (3,991) | |||||||||
Total loans net | $835,477 | $779,333 | $656,967 | $506,026 | $418,825 |
For the year ended December 31, | |||||||||
2003 | 2002 | 2001 | |||||||
(dollars in thousands) | |||||||||
Available for Sale: | |||||||||
Beginning balance | $ | 17,481 | $ | 7,499 | $ | 4,169 | |||
Originations | 119,660 | 110,565 | 63,565 | ||||||
Repurchases | - | - | 41 | ||||||
Repayments | (95 | ) | (48 | ) | - | ||||
Deferred fees | - | - | 26 | ||||||
Net sales | (133,871 | ) | (100,535 | ) | (60,302 | ) | |||
Transfers (to) from available for sale | - | - | - | ||||||
Ending Balance | $ | 3,175 | $ | 17,481 | $ | 7,499 | |||
Held for investment | |||||||||
Beginning balance | $ | 475,602 | $ | 402,345 | $ | 323,571 | |||
Originations and purchases | 201,242 | 233,222 | 293,195 | ||||||
Repurchases | - | - | - | ||||||
Repayments/payoffs | (71,797 | ) | (159,965 | ) | (214,295 | ) | |||
Sales | - | - | - | ||||||
Transfers (to) from repossessed assets | - | - | (127 | ) | |||||
Ending balance | $ | 605,047 | $ | 475,602 | $ | 402,344 | |||
For the Years ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
(dollars in thousands) | ||||||||||
Held for Sale: | ||||||||||
Beginning balance | $ | 3,216 | $ | 6,654 | $ | 3,175 | ||||
Originations | 31,322 | 73,766 | 74,352 | |||||||
Net sales | (31,568 | ) | (77,204 | ) | (70,873 | ) | ||||
Ending balance | $ | 2,970 | $ | 3,216 | $ | 6,654 | ||||
Held for investment: | ||||||||||
Beginning balance | $ | 924,777 | $ | 783,600 | $ | 605,047 | ||||
Originations and purchases | 260,715 | 252,525 | 262,278 | |||||||
Repayments/payoffs | (234,500 | ) | (111,348 | ) | (83,725 | ) | ||||
Ending balance | $ | 950,922 | $ | 924,777 | $ | 783,600 |
Coupon range | Percentage ofPortfolio | |||
Less than 5.00% | 43.3 | % | ||
5.01 - 6.00% | 0.0 | % | ||
6.01 - 7.00% | 4.0 | % | ||
7.01 - 8.00% | 4.1 | % | ||
48.6 | % | |||
100.0 | ||||
% | ||||
Due | Due after | Due | Due after | |||||||||||||||||||||||
within | 1 through | Due after | Within | 1 through | Due after | |||||||||||||||||||||
one year | 5 years | Total | one year | 5 years | 5 years | Total | ||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
One to four family residential | $ | 13,578 | $ | 71,027 | $ | 135,560 | $ | 220,165 | $ | 39,120 | $ | 60,843 | $ | 207,229 | $ | 307,192 | ||||||||||
Multifamily | - | 283 | 583 | 866 | - | 3,041 | 2,358 | 5,399 | ||||||||||||||||||
Commercial and industrial real estate | 16,350 | 35,344 | 60,688 | 112,382 | 7,577 | 59,874 | 128,265 | 195,716 | ||||||||||||||||||
Construction and land acquisition | ||||||||||||||||||||||||||
and development loans | 201,490 | 39,267 | - | 240,757 | 283,871 | 55,251 | - | 339,122 | ||||||||||||||||||
Land | 7,117 | 18,374 | 329 | 25,820 | 32,108 | 56,451 | 8,080 | 96,639 | ||||||||||||||||||
Commercial, non-real estate | 3,124 | 1,303 | 2,661 | 7,088 | 4,705 | 1,654 | 1,998 | 8,357 | ||||||||||||||||||
Consumer | 282 | 364 | 498 | 1,144 | 219 | 1,039 | 279 | 1,537 | ||||||||||||||||||
Total | $ | 241,941 | $ | 165,962 | $ | 200,319 | $ | 608,222 | $ | 367,600 | $ | 238,153 | $ | 348,209 | $ | 953,962 | ||||||||||
Fixed | Floating | Total | ||||||||||||||||||
(dollars in thousands) | Fixed | Floating | Total | |||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
One to four family residential | $ | 155,288 | $ | 51,299 | $ | 206,587 | $ | 131,387 | $ | 136,686 | $ | 268,073 | ||||||||
Multifamily | 475 | 391 | 866 | 2,425 | 2,974 | 5,399 | ||||||||||||||
Commercial and industrial real estate | 63,445 | 32,587 | 96,032 | 75,961 | 112,178 | 188,139 | ||||||||||||||
Construction and land acquisition | ||||||||||||||||||||
and development loans | 21,961 | 17,306 | 39,267 | 12,320 | 42,930 | 55,250 | ||||||||||||||
Land | 18,703 | - | 18,703 | 39,217 | 25,313 | 64,530 | ||||||||||||||
Commercial, non-real estate | 1,658 | 2,306 | 3,964 | 1,845 | 1,807 | 3,652 | ||||||||||||||
Consumer | 862 | - | 862 | 1,319 | - | 1,319 | ||||||||||||||
Total | $ | 262,392 | $ | 103,889 | $ | 366,281 | $ | 264,474 | $ | 321,888 | $ | 586,362 | ||||||||
At December 31, | At December 31, | |||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Loans accounted for on a non-accrual basis: | ||||||||||||||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||||||||||
One-to-four family real estate | $ | 378 | $ | 1,366 | $ | 1,801 | $ | 872 | $ | 909 | $ | 3,487 | $ | 1,693 | $ | 915 | $ | 378 | $ | 1,366 | ||||||||||||
Home equity lines of credit | 50 | - | - | - | 16 | - | - | - | 50 | - | ||||||||||||||||||||||
Commercial | - | 253 | 300 | 292 | 98 | - | - | - | 253 | |||||||||||||||||||||||
Land | 24 | 139 | - | - | - | 2,342 | - | 24 | 24 | 139 | ||||||||||||||||||||||
Non-mortgage loans: | ||||||||||||||||||||||||||||||||
Consumer | 17 | - | - | 14 | - | - | - | - | 17 | - | ||||||||||||||||||||||
Commercial loans | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||
Total non-accrual loans | 469 | 1,758 | 2,101 | 1,178 | 925 | $ | 5,927 | $ | 1,693 | $ | 939 | $ | 469 | $ | 1,758 | |||||||||||||||||
Accruing loans which are contractually past due 90 days or more: | ||||||||||||||||||||||||||||||||
Mortgage loans: | ||||||||||||||||||||||||||||||||
Permanent loans secured by one-to-four family real estate | - | - | - | - | - | |||||||||||||||||||||||||||
Commercial | - | - | - | - | - | |||||||||||||||||||||||||||
Non-mortgage loans | ||||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||||||||||||||
Total accruing loans greater than 90 days past due | - | - | - | - | - | |||||||||||||||||||||||||||
Total non-performing loans | $ | 469 | $ | 1,758 | $ | 2,101 | $ | 1,178 | $ | 925 | ||||||||||||||||||||||
Accruing loans greater than 90 days past due | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||
Foreclosed real-estate | $ | - | $ | 224 | $ | 312 | $ | 312 | $ | 672 | $ | 970 | $ | - | $ | - | $ | - | $ | 224 | ||||||||||||
Total nonperforming assets | $ | 469 | $ | 1,982 | $ | 2,413 | $ | 1,490 | $ | 1,597 | ||||||||||||||||||||||
Total non-accrual and accrual loans to net loans | 0.09 | % | 0.42 | % | 0.61 | % | 0.43 | % | 0.43 | % | ||||||||||||||||||||||
Total non-performing assets | $ | 6,897 | $ | 1,693 | $ | 939 | $ | 469 | $ | 1,982 | ||||||||||||||||||||||
Total non-accrual loans to net loans | 0.7 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.4 | % | ||||||||||||||||||||||
Allowance for loan losses to total non-performing loans, | ||||||||||||||||||||||||||||||||
including loans contractually past due 90 days or more | 1030.49 | % | 227.02 | % | 159.59 | % | 231.58 | % | 232.11 | % | 152.3 | % | 443.3 | % | 632.1 | % | 1030.5 | % | 227.0 | % | ||||||||||||
Total non-accrual and accruing loans greater than | ||||||||||||||||||||||||||||||||
90 days past due to total assets | 0.09 | % | 0.38 | % | 0.57 | % | 0.40 | % | 0.40 | % | 0.7 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.4 | % | ||||||||||||
Total non-performing assets to total assets | 0.09 | % | 0.43 | % | 0.66 | % | 0.51 | % | 0.68 | % | 0.8 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.4 | % | ||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | Percentage of | Percentage of | Percentage of | Percentage of | Percentage of | |||||||||||||||||||||||||||||||||||
| | Loans in each | Loans in each | Loans in each | Loans in each | Loans in each | ||||||||||||||||||||||||||||||||||||||
AllowanceAmount | Percentage of Loans in each Category toTotal Loans | AllowanceAmount | Percentage of Loans in each Category toTotal Loans | AllowanceAmount | Percentage of Loans in each Category toTotal Loans | AllowanceAmount | Percentage of Loans in each Category toTotal Loans | AllowanceAmount | Percentage of Loans in each Category toTotal Loans | Allowance | Category to | Allowance | Category to | Allowance | Category to | Allowance | Category to | Allowance | Category to | |||||||||||||||||||||||||
(dollars in thousands) | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Residential, one to four family | $ | 1,938 | 36.20 | % | $ | 1,542 | 36.58 | % | $ | 1,081 | 36.90 | % | $ | 995 | 41.95 | % | $ | 776 | 39.89 | % | $2,202 | 32.41% | $1,706 | 29.74% | $2,000 | 30.20% | $1,938 | 36.20% | $1,542 | 36.58% | ||||||||||||||
Multifamily | 21 | 0.14 | % | 21 | 0.27 | % | 24 | 0.26 | % | 18 | 0.31 | % | 10 | 0.39 | % | 33 | 0.57% | 67 | 0.49% | 20 | 0.34% | 21 | 0.14% | 21 | 0.27% | |||||||||||||||||||
Commercial and industrial real estate | 1,154 | 18.48 | % | 881 | 19.33 | % | 850 | 17.46 | % | 658 | 16.48 | % | 567 | 19.32 | % | 2,512 | 20.45% | 1,965 | 17.73% | 1,009 | 16.17% | 1.154 | 18.48% | 881 | 19.33% | |||||||||||||||||||
Construction and land acquisition and | ||||||||||||||||||||||||||||||||||||||||||||
development loans | 1,173 | 39.58 | % | 1,202 | 38.77 | % | 917 | 39.98 | % | 662 | 35.80 | % | 428 | 35.45 | % | 2,253 | 35.44% | 2,684 | 42.07% | 2,577 | 43.42% | 1,173 | 39.58% | 1,202 | 38.77% | |||||||||||||||||||
Land | 476 | 4.25 | % | 300 | 4.08 | % | 413 | 4.12 | % | 308 | 3.48 | % | 292 | 2.76 | % | 1,731 | 10.10% | 882 | 8.78% | 251 | 8.54% | 476 | 4.25% | 300 | 4.08% | |||||||||||||||||||
Business, commercial | 59 | 1.16 | % | 33 | 0.79 | % | 52 | .97 | % | 75 | 1.71 | % | 4 | 0.07 | % | 288 | 0.87% | 193 | 1.00% | 70 | 1.18% | 59 | 1.16% | 33 | 0.79% | |||||||||||||||||||
Other | 12 | 0.19 | % | 12 | 0.18 | % | 16 | .31 | % | 12 | 0.27 | % | 70 | 2.12 | % | 7 | 0.16% | 8 | 0.19% | 8 | 0.15% | 11 | 0.19% | 12 | 0.18% | |||||||||||||||||||
Total | $ | 4,833 | 100.00 | % | $ | 3,991 | 100.00 | % | $ | 3,353 | 100.00 | % | $ | 2,728 | 100.00 | % | $ | 2,147 | 100.00 | % | $9,026 | 100.00% | $7,505 | 100.00% | $5,935 | 100.00% | $4,832 | 100.00% | $3,991 | 100.00% | ||||||||||||||
At or for the Year Ended | ||||||||||||||||
December 31 | ||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Average loans outstanding, net | $ | 819,038 | $ | 738,028 | $ | 600,030 | $ | 466,512 | $ | 384,537 | ||||||
Total gross loans outstanding at end of period | $ | 953,962 | $ | 927,993 | $ | 790,254 | $ | 608,222 | $ | 493,083 | ||||||
Total net loans outstanding at end of period | $ | 835,477 | $ | 779,333 | $ | 656,967 | $ | 506,026 | $ | 418,825 | ||||||
Allowance balance at beginning of period | $ | 7,505 | $ | 5,935 | $ | 4,832 | $ | 3,991 | $ | 3,353 | ||||||
Provision for loan losses | 1,561 | 1,570 | 1,200 | 900 | 670 | |||||||||||
Actual charge-offs | ||||||||||||||||
1-4 family residential real estate | - | - | 97 | 25 | - | |||||||||||
Other | 40 | - | - | 34 | 32 | |||||||||||
Total charge-offs | 40 | - | 97 | 59 | 32 | |||||||||||
Recoveries | ||||||||||||||||
Total recoveries | - | - | - | - | - | |||||||||||
Net charge offs | - | - | 97 | 59 | 32 | |||||||||||
Allowance balance at end of period | $ | 9,026 | $ | 7,505 | $ | 5,935 | $ | 4,832 | $ | 3,991 | ||||||
Net charge offs as a percent of average loans | 0.00 | % | 0.00 | % | 0.02 | % | 0.01 | % | 0.01 | % | ||||||
Allowance for loan losses to total gross loans at end of period | 0.95 | % | 0.81 | % | 0.75 | % | 0.79 | % | 0.81 | % | ||||||
Allowance for loan losses to net loans at end of period | 1.08 | % | 0.96 | % | 0.90 | % | 0.95 | % | 0.95 | % |
At or for the Year Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Average loans outstanding, net | $ | 466,512 | $ | 384,537 | $ | 313,798 | $ | 246,631 | $ | 203,237 | ||||||
Total gross loans outstanding at end of period | $ | 608,222 | $ | 493,083 | $ | 409,844 | $ | 327,740 | $ | 254,780 | ||||||
Allowance balance at beginning of period | $ | 3,991 | $ | 3,353 | $ | 2,728 | $ | 2,147 | $ | 1,984 | ||||||
Provision for loan losses | 900 | 670 | 709 | 591 | 504 | |||||||||||
Actual charge-offs | ||||||||||||||||
1-4 family residential real estate | 25 | - | 74 | 30 | 89 | |||||||||||
Other | 33 | 32 | 10 | - | 263 | |||||||||||
Total charge-offs | 58 | 32 | 84 | 30 | 352 | |||||||||||
Recoveries | ||||||||||||||||
Total recoveries | - | - | - | 20 | 11 | |||||||||||
Net chargeoffs | 58 | 32 | 84 | 10 | 341 | |||||||||||
Allowance balance at end of period | $ | 4,833 | $ | 3,991 | $ | 3,353 | $ | 2,728 | $ | 2,147 | ||||||
Net chargeoffs as a percent of average loans | 0.01 | % | 0.01 | % | 0.03 | % | 0.00 | % | 0.17 | % | ||||||
Allowance for loan losses to total gross loans at end of period | 0.79 | % | 0.81 | % | 0.82 | % | 0.83 | % | 0.84 | % | ||||||
At December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
(dollars in thousands) | ||||||||||
FHLB Notes | $ | 5,000 | $ | 5,000 | $ | 5,000 | ||||
Mortgage-backed securities | 2,271 | 3,290 | 4,955 | |||||||
Total Investment Securities Held to Maturity | $ | 7,271 | $ | 8,290 | $ | 9,955 |
at December 31, | |||||||||
2003 | 2002 | 2001 | |||||||
(dollars in thousands) | |||||||||
Investment Securities Held to Maturity | |||||||||
U.S. Treasury Notes | $ | - | $ | - | $ | 2,001 | |||
FHLB Notes | 6,000 | 4,000 | 5,000 | ||||||
Total Investment Securities Held to Maturity | 6,000 | 4,000 | 7,001 | ||||||
Interest-bearing deposits in other banks | $ | 458 | $ | 4,191 | $ | 1,059 | |||
Federal funds sold | 3,914 | 10,713 | 3,949 | ||||||
Mortgage-backed securities held to maturity | 6,721 | 5,661 | 212 | ||||||
FHLB stock | 3,250 | 1,900 | 2,500 | ||||||
14,343 | 22,465 | 7,720 | |||||||
$ | 20,343 | $ | 26,465 | $ | 14,721 | ||||
More than One to | More than Five to | ||||||||||||||
One Year or Less | Five Years | Ten Years | More than Ten Years | Total Investment Securities | |||||||||||
Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Market | |||||
Value | Yield | Value | Yield | Value | Yield | Value | Yield | Value | Yield | Value | |||||
(dollars in thousands) | |||||||||||||||
Investment Securities Held to Maturity | |||||||||||||||
FHLB Notes | - | $ 4,000 | 2.58% | $ 2,000 | 5.05% | - | $ 6,000 | 3.40% | $5,922 | ||||||
Interest-bearing deposits in other banks | $ 458 | 0.85% | - | - | - | 458 | 0.85% | 458 | |||||||
Federal funds sold | 3,914 | 0.88% | - | - | - | 3,914 | 0.88% | 3,914 | |||||||
Mortgage-backed securities held to maturity | - | 2,918 | 4.37% | - | $ 3,803 | 5.53% | 6,721 | 5.02% | 6,694 | ||||||
FHLB stock | - | - | - | 3,250 | 3.50% | 3,250 | 3.50% | 3,250 | |||||||
Total | $ 4,372 | 0.87 % | $ 6,918 | 2.58% | $ 2,000 | 5.05% | $ 7,053 | 4.59% | $ 20,343 | 3.41% | $20,238 | ||||
More than One to | More than Five to | ||||||||||||||
One Year or Less | Five Years | Ten Years | More than Ten Years | Total Investment Securities | |||||||||||
Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Carrying | Average | Fair | |||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Value | |||||
(dollars in thousands) | |||||||||||||||
FHLB Notes | 4,000 | 2.58% | - | - | $1,000 | 5.05% | - | - | $5,000 | 3.07% | $4,925 | ||||
Mortgage-backed securities | 796 | 4.50% | - | - | - | - | 1,475 | 5.47% | 2,271 | 5.13% | 2,192 | ||||
Total | $4,796 | 2.90% | $- | - | $1,000 | 5.05% | $1,475 | 5.47% | $7,271 | 3.62% | $7,117 |
2003 | 2002 | |||||||||||||
Amount | Percent | Amount | Percent | |||||||||||
Category | ||||||||||||||
NOW accounts | $ | 21,219,969 | 5.06 | % | $ | 15,980,589 | 4.23 | % | ||||||
Money market accounts | 152,412,884 | 36.31 | 132,767,052 | 35.13 | ||||||||||
Passbooks | 19,190,968 | 4.57 | 18,189,610 | 4.81 | ||||||||||
Certificates | 226,832,739 | 54.04 | 210,913,461 | 55.81 | ||||||||||
| ||||||||||||||
419,656,560 | 99.98 | 377,850,712 | 99.98 | |||||||||||
Accrued interest | 69,625 | .02 | 74,329 | .02 | ||||||||||
| ||||||||||||||
Total savings | $ | 419,726,185 | 100.00 | % | $ | 377,925,041 | 100.00 | % | ||||||
2006 | 2005 | 2004 | ||||||||
(dollars in thousands) | ||||||||||
NOW accounts | $ | 9,314 | $ | 7,683 | $ | 4,872 | ||||
Money market accounts | 89,120 | 99,911 | 131,014 | |||||||
Passbooks | 18,526 | 17,505 | 18,198 | |||||||
Certificates of deposit | 490,865 | 445,592 | 356,447 | |||||||
Non-interest bearing accounts | 18,699 | 24,202 | 16,882 | |||||||
Total deposits | $ | 626,524 | $ | 594,893 | $ | 527,413 |
2003 | |||||||
Amount | Percent | ||||||
One year or less | $ | 125,650,800 | 55.39 | % | |||
More than 1 year to 2 years | 30,261,890 | 13.34 | |||||
More than 2 years to 3 years | 39,724,600 | 17.51 | |||||
More than 3 years to 4 years | 19,889,201 | 8.77 | |||||
More than 4 years to 5 years | 11,306,248 | 4.99 | |||||
More than 5 years | - | .00 | |||||
$ | 226,832,739 | 100.00 | % | ||||
Jumbo Certificate | ||||
of Deposits | ||||
Time Remaining Until Maturity | (dollars inthousands | ) | ||
Less than three months | $ | 10,046 | ||
3 months to 6 months | 7,852 | |||
6 months to 12 months | 8,739 | |||
Greater than 12 months | 31,242 | |||
Total | $ | 57,879 | ||
Jumbo Certificate | ||
of Deposits | ||
Time Remaining Until Maturity | (dollars in thousands) | |
Less than three months | $52,452 | |
3 months to 6 months | 38,567 | |
6 months to 12 months | 67,112 | |
Greater than 12 months | 42,464 | |
Total | $200,595 |
Year ended December 31, | Years ended December 31, | |||||||||||||||||||
2003 | 2002 | 2001 | 2006 | 2005 | 2004 | |||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||
Short term borrowings and notes payable | ||||||||||||||||||||
Average balance outstanding during the period | $ | 1,500 | $ | 4,917 | $ | 21,917 | $ | 8,250 | $ | 25,833 | $ | 15,567 | ||||||||
Maximum amount outstanding at any month-end during | ||||||||||||||||||||
the period | 8,000 | 14,000 | 27,000 | 26,000 | 41,000 | 41,000 | ||||||||||||||
Weighted Average interest rate during the period | 0.62 | % | 3.16 | % | 5.38 | % | 5.31 | % | 3.30 | % | 1.67 | % | ||||||||
Total short term borrowings at period end | 6,000 | - | 17,000 | 18,000 | 26,000 | - | ||||||||||||||
Weighted average interest rate at period end | 1.15 | % | 0.00 | % | 4.40 | % | 5.41 | % | 3.33 | % | 0.00 | % |
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | Actual | Required For Capital Adequacy Purposes | Required To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||
Amount | % | Amount |
| % |
|
| Amount |
| % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||
December 31, 2003 | ||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
December 31, 2006 | ||||||||||||||||||||||||||||||||||||||
Tangible (1) | $ | 49,568,918 | 9.2 | % | $ | 8,095,323 | 1.50 | % | N/A | N/A | $ | 99,445 | 11.0 | % | $ | 13,513 | 1.50 | % | N/A | N/A | ||||||||||||||||||
Tier I capital (2) | 49,568,918 | 12.0 | % | N/A | N/A | $ | 24,692,400 | 6.00 | % | 99,445 | 13.1 | % | N/A | N/A | $ | 45,582 | 6.00 | % | ||||||||||||||||||||
Core (1) | 49,568,918 | 9.2 | % | 21,587,529 | 4.00 | % | 26,984,411 | 5.00 | % | 99,445 | 11.0 | % | 36,034 | 4.00 | % | 45,043 | 5.00 | % | ||||||||||||||||||||
Risk-weighted (2) | 54,313,918 | 13.2 | % | 32,923,200 | 8.00 | % | 41,154,000 | 10.00 | % | |||||||||||||||||||||||||||||
Total (2) | 108,452 | 14.3 | % | 60,776 | 8.00 | % | 75,971 | 10.00 | % | |||||||||||||||||||||||||||||
December 31, 2002 | ||||||||||||||||||||||||||||||||||||||
December 31, 2005 | ||||||||||||||||||||||||||||||||||||||
Tangible (1) | $ | 39,898,384 | 8.8 | % | $ | 6,837,788 | 1.50 | % | N/A | N/A | $ | 86,354 | 10.3 | % | $ | 12,619 | 1.50 | % | N/A | N/A | ||||||||||||||||||
Tier I capital (2) | 39,898,384 | 12.1 | % | N/A | N/A | $ | 19,768,800 | 6.00 | % | 86,354 | 12.2 | % | N/A | N/A | $ | 42,395 | 6.00 | % | ||||||||||||||||||||
Core (1) | 39,898,384 | 8.8 | % | 18,234,100 | 4.00 | % | 22,792,625 | 5.00 | % | 86,354 | 10.3 | % | 33,651 | 4.00 | % | 42,064 | 5.00 | % | ||||||||||||||||||||
Risk-weighted (2) | 43,781,865 | 13.3 | % | 26,358,400 | 8.00 | % | 32,948,000 | 10.00 | % | |||||||||||||||||||||||||||||
Total (2) | 93,851 | 13.3 | % | 56,527 | 8.00 | % | 70,659 | 10.00 | % |
· | “well capitalized”; |
· | “adequately capitalized”; |
· | “undercapitalized”; |
· | “significantly undercapitalized”; and |
· | “critically undercapitalized”. |
· | initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; |
· | annual notices of their privacy policies to current customers; and |
· | a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. |
· | interprets section 501(b) of the GLB Act and previously issued interagency customer information security guidelines that require financial institutions to implement information security programs designed to protect their customer’s information; and |
· | describe the components of a response program and sets a standard for providing notice to customers affected by unauthorized access to or use of customer information that could result in substantial harm or inconvenience to those customers, thereby reducing the risk of losses due to fraud or identify theft. |
· | Among other security measures, requires financial institutions to notify law enforcement authorities and their primary federal regulator when such institutions become aware of an incident involving unauthorized access to or use of sensitive customer information |
· | making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”) |
· | inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”) |
· | engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower. |
· | interest rates for first lien mortgage loans in excess of 8 percentage points above the comparable U.S. Treasury securities, |
· | subordinate-lien loans of 10 percentage points above U.S. Treasury securities; and |
· | fees such as optimal insurance and similar debt protection costs paid in connection with the credit transaction, when combined with points and fees if deemed excessive. |
· | the purchase price of each single-family dwelling in the development does not exceed $500,000; |
· |
· | the loans comply with applicable loan-to-value requirements; and |
· |
the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. |
· | to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate; and |
· | to an amount equal to 20% of the association's capital and surplus, in the case of covered transactions with all affiliates. |
· | a loan or extension of credit to an affiliate; |
· | a purchase of investment securities issued by an affiliate; |
· | a purchase of assets from an affiliate, with some exceptions; |
· | the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or |
· | the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. |
· | a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies;
Regulations generally exclude all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except for:
The regulations also require savings associations to make and retain records that reflect affiliate transactions in reasonable detail and Some of the entities included in the definition of an affiliate are parent companies, sister banks, sponsored and advised companies, investment companies whereby the bank its affiliate serves as investment advisor, and financial subsidiaries of the bank. Additional restrictions on transactions with affiliates may be imposed on us under the prompt corrective action provisions of federal law. See 27 Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, The OTS regulations require a savings association to file an application if:
In addition, a savings association must give the OTS notice of a capital distribution if the savings association is not required to file an application, but:
If neither the savings association nor the proposed capital distribution meets any of the above listed criteria, the OTS does not require the savings association to submit an application or give notice when making the proposed capital distribution. The OTS may prohibit a proposed capital distribution that would otherwise be permitted if the OTS determines that the distribution would constitute an unsafe or unsound practice. Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies as well as the Department of Justice taking enforcement actions. Based on an examination conducted July 28 Effective January 1, 2002, the OTS raised the dollar amount limit in the definition of small business loans from $500,000 to $2.0 million, if used for commercial, corporate, business or agricultural purposes. Furthermore, the rule raises the aggregate level that a thrift can invest directly in community development funds, community centers and economic development initiatives in its communities from the greater of a quarter of one percent of total capital or $100,000 to one percent of total capital or $250,000. Anti-Money Laundering and Customer Identification. The Bank is subject to the OTS Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act, as amended by the USA Patriot Act of 2001. The USA Patriot Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA Patriot Act takes measures intended to encourage information sharing among banks, regulatory agencies and law enforcements bodies. Certain provisions of the USA Patriot Act impose affirmative obligations on a broad range of financial institutions, including savings banks like the Bank. The USA Patriot Act and the related OTS regulations impose the following requirements with respect to financial institutions:
Federal Home Loan Bank System. The Bank is a member of the
At December 31,
Federal Reserve System. The Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices. 30 Item 1A. Risk Factors Unless the context indicates otherwise, all references to “we,” “us,” “our” in this subsection “Risk Factors” refer to the Bancorp and its subsidiaries. You should carefully consider the risks described below as well as elsewhere in this Annual Report on Form 10-K. If any of the risks actually occur, our business, financial condition or results of future operations could be materially adversely affected. This Annual Report on Form 10-K contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this Annual Report on Form 10-K. We may be adversely affected by changes in economic and political conditions and by governmental monetary and fiscal policies. The thrift industry is affected, directly and indirectly, by local, domestic, and international economic and political conditions, and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values, international conflicts and other factors beyond our control may adversely affect our potential profitability. Any future rises in interest rates, while increasing the income yield on our earning assets, may adversely affect loan demand and the cost of funds and, consequently, our profitability. Any future decreases in interest rates may adversely affect our profitability because such decreases may reduce the amounts that we may earn on our assets. Economic downturns could result in the delinquency of outstanding loans. We do not expect any one particular factor to materially affect our results of operations. However, downtrends in several areas, including real estate, construction and consumer spending, could have a material adverse impact on our ability to remain profitable. Changes in interest rates could adversely affect our financial condition and results of operations. The operations of financial institutions, such as us, are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Our net interest income is significantly affected by market rates of interest that in turn are affected by prevailing economic conditions, by the fiscal and monetary policies of the federal government and by the policies of various regulatory agencies. Like all financial institutions, our balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as US Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions. Most of our loans are secured by real estate located in our market area. If there is a downturn in our real estate market, these borrowers may default on their loans and we may not be able to fully recover our loans. A downturn in the real estate market could hurt our business because most of our loans are secured by real estate. Substantially all of our real property collateral is located in the states of Maryland, Virginia and Delaware. As of December 31, 2006, approximately 95% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. If real estate prices decline, the value of real estate collateral securing our loans could be reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. Any such downturn could have a material adverse effect on our business, financial condition and results of operations. In addition, approximately 65% of the book value of our loans consisted of construction, land acquisition and development loans, commercial real estate loans and land loans, which present additional risks described in “Item 1. Business”. 31 We are exposed to risk of environmental liabilities with respect to properties to which we take title. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows could be materially adversely affected. Our operations are located in Anne Arundel County, Maryland, which makes our business highly susceptible to local economic conditions, and an economic downturn or recession in that area may adversely affect our ability to operate profitably. Unlike larger banking organizations that are more geographically diversified, our operations are currently concentrated in Anne Arundel County, Maryland. In addition, almost all of our loans have been made to borrowers in the states of Maryland, Virginia and Delaware. As a result of this geographic concentration, our financial results depend largely upon economic conditions in this market area. A deterioration or recession in economic conditions in this market could result in one or more of the following:
Any of the foregoing factors may adversely affect our ability to operate profitably. We are subject to federal and state regulationand the monetary policies of the Federal Reserve Board. Such regulation and policies can have a material adverse effect on our earnings and prospects. Our operations are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past, and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are changes in the discount rate charged on bank borrowings and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to the monetary polices of the Federal Reserve Board or to existing federal and state legislation or the effect that such changes may have on our future business and earnings prospects We have established an allowance for loan losses based on our management's estimate. Actual losses could differ significantly from those estimates.If the allowance is not adequate, it could have a material adverse effect on our earnings and the price of our stock. We have established an allowance for loan losses which management believes to be adequate to offset probable losses on our existing loans. However, there is no precise method of estimating loan losses and our ongoing analysis may cause this estimate to change in the future and actual losses may differ materially from this estimate. In addition, there can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses. Any increase in the allowance for loan losses will reduce our earnings and may adversely affect the price of our common stock. 32 We compete with a number of local, regional and national financial institutions for customers. We face strong competition from other thrifts, banks, savings institutions and other financial institutions that have branch offices or otherwise operate in our market area, as well as many other companies now offering a range of financial services. Many of these competitors have substantially greater financial resources and larger branch systems than we do. In addition, many of our competitors have higher legal lending limits than we do. Particularly intense competition exists for sources of funds including savings and retail time deposits and for loans, deposits and other services that we offer. During the past several years, significant legislative attention has been focused on the regulation and deregulation of the financial services industry. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have been permitted to engage in activities that compete directly with traditional bank business. Competition with various financial institutions could hinder our ability to maintain profitable operations and grow our business. Our information systems may experience an interruption or breach in security, which could result in a loss of business. We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. We depend on third-party providers for many of our systems and if these providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we would be able to negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. We continually encounter technological change, and, if we are unable to develop and implement efficient and customer friendly technology, we could lose business. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. There can be no assurance that we will continue to pay dividends in the future. Although we expect to continue our policy of regular quarterly dividend payments, this dividend policy will be reviewed periodically in light of future earnings, regulatory restrictions and other considerations. No assurance can be given, therefore, that cash dividends on common stock will be paid in the future at the same rate or at all. 33 An investment in our common stock is not insured against loss. Investments in the shares of our common stock are not deposits insured against loss by the FDIC or any other entity. As a result, you may lose some or all of your investment. Our success depends on our senior management team and if we are not able to retain them, it could have a materially adverse effect on us. We are highly dependent upon the continued services and experience of our senior management team, including Alan J. Hyatt, our President and Chief Executive Officer. We depend on the services of Mr. Hyatt and the other members of our senior management team to, among other things, continue the development and implementation of our strategies, and maintain and develop our client relationships. We do not have an employment agreement with members of our senior management nor do we maintain “key-man” life insurance on our senior management. “Anti-takeover” provisions may make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders. Our charter presently contains certain provisions which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that such provisions may deter, discourage or make more difficult the assumption of control of us by another corporation or person through a tender offer, merger, proxy contest or similar transaction or series of transactions. For example, our charter provides that our board of directors may issue up to 1,000,000 shares of preferred stock without shareholder approval. In addition, our charter provides for a classified board, with each board member serving a staggered three-year term. Directors may be removed only for cause and only with the approval of the holders of at least 75 percent of our common stock. The overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to discourage, make more costly or more difficult, or prevent a future takeover offer, prevent shareholders from receiving a premium for their securities in a takeover offer, and enhance the possibility that a future bidder for control of us will be required to act through arms-length negotiation with the our board of directors. If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to accurately report our financial results and comply with the reporting requirements under the Securities Exchange Act of 1934. As a result, current and potential shareholders may lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business and we could be subject to regulatory scrutiny. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting and our registered public accounting firm’s attestation report on our management’s assessment of our internal control over financial reporting. While we have reported no or “material weaknesses in this Form 10-K, we cannot guarantee that we will not have any “significant deficiencies” or “material weaknesses” reported by our independent registered public accounting firm in the future. Compliance with the requirements of Section 404 is expensive and time-consuming. If in the future we fail to complete this evaluation in a timely manner, or if our independent registered public accounting firm cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Securities Exchange Act of 1934, which could adversely affect our business. 34 Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways. Recent terrorist attacks in the United States and abroad, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions, may impact our operations. Any of these events could cause consumer confidence and savings to decrease or result in increased volatility in the United States and worldwide financial markets and economy. Any of these occurrences could have an adverse impact on our operating results, revenues and costs and may result in the volatility of the market price for our common stock and on the future price of our common stock. Item 1B. Unresolved Staff Comments None Item 2. Properties Bancorp HS West Item 3. Legal Proceedings There are no material pending legal proceedings to which Bancorp, the Bank or any subsidiary is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant that are not Directors. Thomas G. Bevivino, age 51, has served as the Chief Financial Officer of Bancorp since July 1, 2005. He serves in the same capacity for the Bank. Mr. Bevivino was a financial consultant from 2002 until 2004, and served as Chief Financial Officer of Luminant Worldwide Corporation from 1999 until 2002. 35 PART II Item 5. Market for Registrant's Common Equity, The graph below sets forth comparative information regarding the Company’s cumulative shareholder return on its Common Stock over the last five years. Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. Severn Bancorp, Inc.'s cumulative shareholder return is based on an investment of $100 on December 31, 2001, and is compared to the cumulative total return of the NASDAQ Composite Index and the SNL Securities LC Thrift Index for thrifts with total assets between $500 million and $1.0 billion (the "SNL Thrift ($500M to $1.0B) Index") Comparison of Cumulative Total Return Among Severn, NASDAQ Composite Index and SNL Thrift ($500M to $1.0B) Index from December 31, 2001 to December 31, 2006 ![]()
36 Quarterly Stock Information*
* Registrar and Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016-3572, serves as the Transfer Agent and Registrar for Bancorp. Item 6. Selected Financial Data For information concerning quarterly financial data for Bancorp, see note 17 to the consolidated financial statements. The following financial information is
38
Summary of Operations
Key Operating Ratios
40 Average Balance Sheet Average Balance Sheet. The following table contains for the periods indicated information regarding the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amount of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, and the net yield on interest-earning assets.
41 Rate Volume Table
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Critical Accounting Policies 42 Overview The primary business of Bancorp is Even though the interest rate Bancorp’s asset quality has remained Going forward, Bancorp’s challenge will be to continue to grow assets in the form of mortgage loans, while earning a profitable spread, and continuing to maintain good asset quality. In addition, Bancorp will be challenged to keep overhead low as costs of its new headquarters are realized starting in 2007. Interest rates are outside the control of Bancorp, so it must attempt to balance its pricing and duration of its loan portfolio against the risks of rising costs of its deposits and borrowings. The continued success and attraction of Anne Arundel County, Maryland, and vicinity, will also be important to Bancorp’s ability to originate and grow its mortgage loans, as will Bancorp’s continued focus on maintaining a low overhead. Financial Condition Loans Loans Held For Sale. Loans Receivable.Total net portfolio loans receivable 43 Deposits. money market accounts. The
FHLB Advances. FHLB advances increased $15,000,000, or 9.5% at December 31, 2006 to $173,000,000, compared to $158,000,000 at December 31, 2005. This increase was the Subordinated Debentures. Bancorp has a non-consolidated subsidiary trust, Severn Capital Trust I, of which 100% of the common equity is owned by Bancorp. The trust was formed for The subordinated debentures from Bancorp to the trust consist of a $20,619,000 note, which is at a floating rate of interest of LIBOR (5.37% at December 31, 2006) plus 200 basis points, and matures in 2035. Off-Balance Sheet Arrangements. Standby letters of credit, which are obligations of Home equity Loan commitments decreased $4,700,000, or 24.1%, as of December 31, Lines of credit, which are obligations of 44 Loans sold and serviced with limited repurchase provisions Comparison of Results of General.Bancorp’s net income for the year ended December 31, Net Interest Income.Net interest income (interest earned net of interest charges) Provision for Loan Losses. Other Income and Non Interest 45 Real estate commissions increased $1,473,000, or 270.3% to $2,018,000 for the year ended December 31, Other non-interest income increased $93,000, or 25.8% to $454,000 for the year ended December 31, 2006, compared to $361,000 for the year ended December 31, 2005. This increase was primarily a result of an increase in rents collected and savings charges. Compensation and related expenses increased $1,254,000, or 13.8% to $10,334,000 for the year ended December 31, 2006, compared to $9,080,000 for the year ended December 31, 2005. This increase was the result of additional Bank employees hired, higher commissions paid on loan growth, and salary rate increases. As of December 31, 2006, Bancorp had 121 full-time equivalent employees compared to 111 at December 31, 2005. Occupancy decreased $13,000, or 1.8% to $706,000 for the year ended December 31, 2006, compared to $719,000 for the year ended December 31, 2005. Beginning in 2007, the Bank and Bancorp’s administrative offices will move to its new headquarters in a building owned by HS West, LLC. It is not expected that this move will have a material impact on occupancy costs. Other non-interest expense decreased $54,000, or 1.8% to $3,025,000 for the year ended December 31, 2006, compared to $3,079,000 for the year ended December 31, 2005. This decrease was primarily a result of a one-time cash reconciliation charge off of $135,000 in 2005 and a decrease in miscellaneous expenses of approximately $67,000, partially offset by increases in professional fees of approximately $68,000 and an increase in advertising expenses of approximately $97,000. Income Taxes. Income taxes increased $1,682,000, or 18.8% to $10,608,000 for the year ended December 31, 2006, compared to $8,926,000 for the year ended December 31, 2005. The effective tax rate for the years ended December 31, 2006 and 2005 was 40.2% and 38.0%, respectively. Comparison of Operating Results for the Years Ended December 31, 2005 and 2004 General. Bancorp’s net income for the year ended December 31, 2005 was $14,554,000, or $1.59 per share diluted. This is compared to $12,931,000, or $1.42 per share diluted for the year ended December 31, 2004. This increase of Provision for Loan Losses. As of December 31, 2005, the total allowance for loan losses was $7,505,000 as compared to $5,935,000 as of December 31, 2004, which was an increase of $1,570,000, or 26.5%. The increase was a result of the 2005 addition to the allowance and no charge offs being incurred. During the year ended December 31, 2005, the provision for loan losses was $1,570,000 compared to $1,200,000 for the year ended December 31, 46 Other Income and Non Interest Expenses. Mortgage banking activities decreased $19,000, or 1.3% to $1,416,000 for the year ended December 31, 2005, compared to $1,435,000 for the year ended December 31, 2004. This decrease was primarily the result of a $32,000 decrease in mortgage processing and servicing fees partially offset by a $13,000 increase in the gain on sale of loans for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase in the gain on sale of loans was attributable to increased amount of loans sold on the secondary market during 2005. The decrease in mortgage processing and servicing fees related to a slowdown during 2005 of residential mortgages being refinanced. Real estate commissions totaled $545,000 for the year ended December 31, 2005, compared to $1,234,000 for the year ended December 31, 2004, a decrease of $689,000 or 55.8%. This decrease was primarily due to a slowdown in commercial property sales and leasing. Real estate management fees totaled $426,000 for the year ended December 31, 2005, compared to $404,000 for the year ended December 31, 2004, an increase of Other non-interest income totaled $361,000 for the year ended December 31, 2005, compared to $329,000 for the year ended December 31, 2004, an increase of $32,000, or 9.7%. This increase was primarily a result of an increase in fees collected on loans. Compensation and related expenses totaled $9,080,000 for the year ended December 31, 2005, compared to $8,167,000 for the year ended December 31, 2004, an increase of $913,000 or 11.2%. This increase was the result of hiring additional Bank employees, higher commissions paid on loan growth, and salary rate increases. As of December 31, 2005, Bancorp had 111 full-time equivalent employees compared to 95 at December 31, 2004. Other non-interest expense Income taxes. Income taxes for the year ended December 31, Liquidity and Capital Resources. 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 December 31, In addition to its ability to generate deposits, Bancorp has external sources of funds, which may be drawn upon when desired. The primary source of external liquidity is an available line of credit equal to 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 and business opportunities as they 47 In addition to the foregoing, the payment of dividends is a use of cash, but is not expected to have a material effect on liquidity. Contractual Obligations The following table contains for the periods indicated information regarding the financial obligations owing by Bancorp under contractual obligations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Qualitative Information About Market Risk.The principal objective of Bancorp’s interest rate risk management is to evaluate the interest rate risk included in balance sheet accounts, determine the level of risks appropriate given Bancorp’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Bancorp’s interest rate risk management policy. Through this management, Bancorp seeks to reduce the vulnerability of its operations to changes in interest rates. The Board of Directors of Bancorp is responsible for reviewing assets/liability policies and interest rate risk position. The Board of Directors reviews the interest rate risk position on a quarterly 48 Bancorp’s primary strategy to control interest rate risk is to sell substantially all Quantitative Information About Market Risk.The primary market risk facing Bancorp is interest rate risk. From an enterprise prospective, Bancorp manages this risk by striving to balance its loan origination activities with the interest rate market. Bancorp attempts to maintain a substantial portion of its loan portfolio in short-term loans such as construction loans. This has proven to be an effective hedge against rapid increases in interest rates as the construction loan portfolio reprices rapidly. The matching of maturity or repricing of interest earning assets and interest bearing liabilities may be analyzed by examining the extent to which these assets and liabilities are interest rate sensitive and by monitoring the Bank’s interest rate sensitivity gap. An interest earning asset or interest bearing liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The difference between rate sensitive assets and rate sensitive liabilities represents the Bank’s interest sensitivity gap. Exposure to interest rate risk is actively monitored by Bancorp’s management. Its objective is to maintain a consistent level of profitability within acceptable risk tolerances across a board range of potential interest rate environments. Bancorp uses the OTS Net Portfolio Value INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Item 8. Financial Statements and Supplementary Data Financial statements and supplementary data are included herein at pages F1 through Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 49 Item 9A. Controls and Procedures Bancorp’s management, with the participation of its Chief Executive Officer and A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Bancorp have been detected. 50 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Severn Bancorp, Inc. (“Bancorp”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principals, and as such, include some amounts that are based on management’s best estimates and judgments. Bancorp’s management is responsible for establishing and maintaining effective internal control over financial reporting. The system of internal control over financial reporting, as it relates to the financial statements, is evaluated for effectiveness by management and tested for reliability through a program of internal audits and management testing and review. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Bancorp’s independent registered public accounting firm, Beard Miller Company LLP, has issued as attestation report on management’s assessment of Bancorp’s internal control over financial reporting. This report appears on pages 50 and 51.
51 ![]() Report of Independent Registered Public Accounting Firm To the Stockholders of We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Severn Bancorp, Inc. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 52 In our opinion, management’s assessment that Severn Bancorp, Inc. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Severn Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Severn Bancorp, Inc. and Subsidiaries as of and for the year ended December 31, 2006 and our report dated March 6, 2007 expressed an unqualified opinion on those financial statements. ![]() Beard Miller Company LLP Baltimore, Maryland March 6, 2007 53 Item 9B. Other Information Bancorp does not have any employees. The executive officers of Bancorp are employees at-will of the Bank. The Board of Directors of the Bank has a Compensation Committee, which determines the compensation of the executive officers of Bancorp. Annually, the Compensation Committee of the Bank’s Board of Directors evaluates profiles of comparable financial institutions to assure that the compensation to its executive officers is comparable to its peer group. Other factors used by the Compensation Committee in determining compensation for its executive officers include an assessment of the overall financial condition of the Bank, including an analysis of the Bank’s asset quality, interest rate risk exposure, capital position, net income and consistency of earnings. The Bank’s return on average assets and return on equity is considered and compared to its peer group. The complexity of the activities of the executive officers are considered, and intangible items are considered such as the reputation and general standing of the Bank within the community and the likelihood of continuing successful and profitable results. Based on the considerations set forth above, at its meeting on November 21, 2006, the Compensation Committee approved bonuses for the Bank’s executive officers for fiscal year 2006 as follows: Alan J. Hyatt, $191,000; Melvin E. Meekins, Jr., $135,300; S. Scott Kirkley, $82,500; and Thomas G. Bevivino, $50,000. In addition, the Compensation Committee, at its meeting on November 21, 2006, approved the annual base salaries of the Bank’s executive officers for fiscal year 2007 as follows: Alan J. Hyatt, $278,000; Melvin E. Meekins, Jr., $330,000; S. Scott Kirkley, $236,000; and Thomas G. Bevivino, $167,000. PART III Item 10. Directors and Executive Officers of the Registrant and Corporate Governance Reference is made to the section captioned “Proposal 1: Election of Directors” in Bancorp's Proxy Statement dated March Reference is made to the section captioned “Stock Ownership” in Bancorp’s Proxy Statement dated March Reference is made to the section captioned Item 11. Executive Compensation Reference is made to the section captioned “Director and Executive Officer Compensation” in Bancorp's Proxy Statement dated March 54 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Reference is made to the
Item 13. Certain Relationships and Related Transactions, and Director Independence Reference is made to the Reference is made to the section captioned “Director Independence” in Bancorp’s Proxy Statement dated March 21, 2007 for the information required by this Item, which is hereby incorporated by reference. Item 14. Principal Reference is made to the section captioned “Relationship with Independent Auditors” in Bancorp's Proxy Statement dated March 55 PART IV Item 15. Exhibits and Financial (a) The following consolidated financial statements of Bancorp and its wholly owned 1. Financial Statements ·REPORTS OF BEARD MILLER COMPANY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. · CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31, · CONSOLIDATED STATEMENTS OF · CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, · CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, · NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2.Financial Statement Schedules All financial statement schedules have been omitted, as required information is either inapplicable or included in the consolidated financial statements or related notes. 3. Exhibits The following exhibits are filed as part of this report: Exhibit No.Description of Exhibit
+ Denotes management contract, compensatory plan or arrangement. (1) Incorporated by reference (2) Incorporated by reference from Bancorp's 2003 Form 10-K filed with the Securities and Exchange Commission on March 25, 2004. (4) Incorporated by reference from Bancorp’s Current Report on Form 8-K filed 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.
57 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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