Severn Bancorp (SVBI) 10-Q 2003 Q3 Quarterly report

UNITED STATES

SECURITES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2003

OR

[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                     to 

Commission file number   0-49731                                                                                                        

SEVERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-1726127
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1919 A West Street, Annapolis, Maryland	21401
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code	410-268-4554

(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                 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities under a plan confirmed by a court.

Yes           No                   

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share, 4,159,092 shares outstanding at October 6, 2003.

SEVERN BANCORP, INC.

Table of Contents

PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Consolidated Statements of Financial Condition as of September 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	16
Item 4.	Controls and Procedures	16
PART II – OTHER INFORMATION		16
Item 1.	Legal Proceedings	16
Item 2.	Changes in Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters of a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits and Reports on Form 8-K	16
SIGNATURES		17
EXHIBIT 99.1 CERTIFICATION OF ALAN J. HYATT		18
EXHIBIT 99.1 CERTIFICATION OF CECELIA LOWMAN		19
EXHIBIT 99.2CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER		20
EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER		20

i 

PART I– FINANCIAL INFORMATION

Item 1. Financial Statements

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30, 2003			December 30, 2003
ASSETS	(Unaudited)
Cash	$	2,369,845	$	3,756,640
Interest bearing deposits in other banks		633,167		4,190,768
Federal funds		17,807,053		10,712,827
Investment securities, held to maturity		6,000,000		4,000,000
Mortgage backed securities held to maturity		6,273,661		5,661,304
Loans held for sale		6,875,399		17,481,301
Loans receivable, net		477,408,388		401,343,360
Accrued interest receivable - loans		2,823,187		2,465,187
- mortgage backed securities		26,843		22,327
- investments		30,945		61,911
Foreclosed real estate, net		--		223,911
Premises and equipment, at cost, less
accumulated depreciation		5,270,146		4,737,936
Mortgage servicing rights		14,390		19,340
Federal Home Loan Bank of Atlanta stock
at cost		2,500,000		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		328,328		249,517
Total assets	$	529,785,277	$	458,414,509

The accompanying notes to consolidated financial statements

are an integral part of these statements.

1

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30,2003 (Unaudited)		December 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	424,463,898	$	377,925,041
Checks outstanding in excess of bank balance		1,791,595		--
Federal Home Loan Bank advances		50,000,000		34,000,000
Advance payments by borrowers for expenses		1,163,246		1,049,408
Income taxes payable		97,153		464,937
Accounts payable and accrued expenses		1,690,693		1,793,746
Total liabilities		479,206,585		415,233,132
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value,
Series A 500,000 shares authorized; 200,002 issued
and outstanding September 30, 2003 andDecember 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 4,144,092
September 30, 2003 and 4,142,592 December 31, 2002		41,441		41,426
Additional paid-in capital		11,434,145		11,425,910
Retained earnings (substantially restricted)		35,103,066		27,714,001
Total stockholders' equity		50,578,692		43,181,377
Total liabilities and stockholders' equity	$	529,785,277	$	458,414,509

The accompanying notes to consolidated financial statements

are an integral part of these statements.

2

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For Three Months Sept 30,				For Nine Months Sept 30,
	2003		2002		2003		2002
Interest Income
Interest on loans	$	9,349,540	$	8,343,204	$	26,967,130	$	23,963,003
Interest on securities held to maturity		63,718		90,987		191,609		305,789
Interest on mortgage backed securities		1,814		11,992		143,419		24,152
Other interest income		44,892		64,166		193,423		183,527
Total interest income		9,459,964		8,510,349		27,495,581		24,476,471
Interest Expense
Interest on deposits		2,676,412		3,112,027		8,391,801		9,166,638
Interest on short term borrowings		--		14,994		--		155,249
Interest on long term borrowings		388,070		341,154		915,543		1,081,468
Total interest expense		3,064,482		3,468,175		9,307,344		10,403,355
Net interest income		6,395,482		5,042,174		18,188,237		14,073,116
Provision for loan losses		225,000		205,000		675,000		445,000
Net interest income after provision for loan losses		6,170,482		4,837,174		17,513,237		13,628,116
Other Income
Gain on sale of foreclosed real estate		--		--		169,095		--
Gain on sale of loans		573,585		257,785		1,332,485		860,921
Real estate commissions		110,164		123,140		361,963		562,525
Real estate management fees		92,362		82,297		274,133		254,333
Mortgage processing and servicing fees		293,455		192,542		753,617		504,562
All other income		109,217		93,701		367,468		328,885
Net other income		1,178,783		749,465		3,258,761		2,511,226
Non-Interest Expenses
Compensation and related expenses		1,598,013		1,386,412		4,678,408		4,063,426
Occupancy		133,990		120,746		389,041		366,870
Net expense of foreclosed real estate		--		--		--		(410	)
Other		595,580		440,961		1,580,689		1,395,341
Total non-interest expenses		2,327,583		1,948,119		6,648,138		5,825,227
Income before income tax provision		5,021,682		3,638,520		14,123,860		10,314,115
Income tax provision		1,935,136		1,404,963		5,533,284		4,007,018
Net income	$	3,086,546	$	2,233,557	$	8,590,576	$	6,307,097
Basic earnings per common share	$	.73	$	.53	$	2.03	$	1.50
Diluted earnings per common share	$	.73	$	.53	$	2.03	$	1.49

The accompanying notes to consolidated financial statements

are an integral part of these statements.

3

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For The Nine Months Ended Sept. 30
	2003			2002
Operating Activities
Net income	$	8,590,576		$	6,307,097
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of deferred loan fees		(1,805,546	)		(1,494,391	)
Loan fees deferred		2,165,912			2,069,229
Accretion of discount on mortgages		(29,287	)		(6,717	)
Amortization of premium on investment securities		--			1,276
Accretion of discount on investment securities		--			(286	)
Amortization of premium on mortgage backed securities		99,461			345
Accretion of discount on mortgage backed securities		(121	)		(121	)
Provision for loan losses		675,000			445,000
Provision for depreciation		211,137			194,345
Gain on sale of loans		(1,332,485	)		(860,921	)
Gain on sale of foreclosed real estate		(169,095	)		--
Proceeds from loans sold to others		116,208,621			62,944,480
Loans originated for sale		(104,344,587	)		(65,907,770	)
Principal collected on loans originated for sale		74,353			22,059
Tax effect of preferred stock dividends		104,274			104,274
Increase in accrued interest on loans		(358,000	)		(278,939	)
Decrease in accrued interest on investments		30,966			24,571
Increase in accrued interest on mortgage backed securities		(4,516	)		(2,344	)
Decrease in mortgage servicing rights		4,950			4,950
Decrease in income taxes
receivable		164,255			950
Increase in prepaid expenses and other assets		(78,811	)		(252,559	)
Decrease (increase) in accrued interest payable		1,569			(13,145	)
(Decrease) increase in accounts payable and accrued expenses		(103,053	)		333,057
Decrease in income taxes payable		(367,784	)		(100,574	)
Net cash provided by operating activities		19,737,789			3,533,866

4

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For The Nine MonthsEnded Sept. 30,
	2003			2002
Cash Flows from Investing Activities
Purchase of investment securities	$	(10,000,000	)	$	(4,000,000	)
Proceeds from maturing investment securities		8,000,000			4,000,000
Purchase of mortgage backed securities		(3,463,567	)		(622,346	)
Principal collected on mortgage backed
securities		2,751,870			271,822
Longer term loans originated		(127,679,460	)		(151,443,190	)
Principal collected on longer term loans		50,886,343			86,975,742
Net (increase) decrease in short-term loans		(31,989	)		354,883
Loans purchased		(246,000	)		(197,000	)
Proceeds from sale of foreclosed real estate		393,006			88,207
Investment in premises and equipment		(743,347	)		(231,209	)
Purchase of Federal Home Loan Bank ofAtlanta stock		(600,000	)		--
Net cash used by investing activities		(80,733,144	)		(64,803,091	)
Cash Flows from Financing Activities
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance		26,216,747			61,158,616
Net increase in certificates of deposit		20,434,379			11,010,230
Increase (decrease) in checks outstanding
in excess of bank balance		1,791,595			(798,088	)
Additional borrowed funds		20,000,000			32,000,000
Repayment of borrowed funds		(4,000,000	)		(41,000,000	)
Cash dividends		(1,305,786	)		(1,008,080	)
Proceeds from exercise of options		8,250			328,900
Net cash provided by financing activities		63,145,185			61,691,578

5

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months Ended Sept 30,
	2003		2002
Increase in cash and cash equivalents	$	2,149,830	$	422,353
Cash and cash equivalents at beginning of year		18,660,235		6,038,459
Cash and cash equivalents at end of period	$	20,810,065	$	6,460,812
The Following is a Summary of Cash and
Cash Equivalents
Cash	$	2,369,845	$	3,441,454
Interest bearing deposits in other banks		633,167		864,988
Federal funds		17,807,053		2,154,370
Cash and cash equivalents reflected on the
statement of cash flows	$	20,810,065	$	6,460,812
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Period For:
Interest	$	9,341,058	$	10,423,822
Income taxes	$	5,626,613	$	3,988,978
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.

6

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 nine months ended September 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.

7

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 nine month periods ended September 30th, as follows:

	For The Three Months Ended Sept. 30,
	2003			2002
Net income	$	3,086,546		$	2,233,557
Less – preferred stock dividends,
net of tax		(55,243	)		(55,244	)
Net income available to shareholders	$	3,031,303		$	2,178,313
Weighted average shares outstanding
Basic EPS		4,142,837			4,096,299
Effect of Dilutive Shares
Stock options		13,097			30,475
Adjusted weighted average shares
Used for dilutive EPS		4,155,934			4,126,774

8

SEVERN BANCORP, INC. AND SUBSIDIARIES

Annapolis, Maryland

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3 -Earnings Per Share (continued)

	For The Nine Months Ended Sept. 30,
	2003			2002
Net income	$	8,590,576		$	6,307,097
Less – preferred stock dividends,
net of tax		(165,729	)		(165,729	)
Net income available to shareholders	$	8,424,847		$	6,141,368
Weighted average shares outstanding
Basic EPS		4,142,674			4,081,447
Effect of Dilutive Shares
Stock options		12,511			28,041
Adjusted weighted average shares
Used for dilutive EPS		4,155,185			4,109,488

9

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 third quarter of 2003 was $3,087,000, or diluted earnings per share of $.73, as compared to net income of $2,234,000 in the third quarter of 2002, or diluted earnings per share of $.53. This represents an increase of $853,000 or 38.2% compared with the third quarter of 2002. Earnings per diluted share increased $.20, or 37.7%, compared with the third quarter of 2002. Year to date net income through the third quarter of 2003 was $8,591,000, or diluted earnings per share of $2.03, compared to $6,307,000, or diluted earnings per share of $1.49 for the same period in 2002. This represents an increase of $2,284,000, or 36.2%, compared to the nine months ended September 30, 2002, or an increase of $.54 per diluted share, which is an increase of 36.2%. Net income for the third quarter and nine months ended September 30, 2003 increased significantly above that for the sa me time period of 2002 as a result of the continuing low interest rate environment which continued to encourage a high volume of mortgage originations, coupled with the Bank’s ability to maintain low operating expenses. The Bank increased its interest rate spread to 4.74% as of September 30, 2003 from 4.53% as of September 30, 2002.

Net interest income, which is interest earned net of interest charges, totaled $6,395,000 for the third quarter of 2003, compared to $5,042,000 for the third quarter of 2002, representing an increase of $1,353,000, or 26.8%. Net interest income for the year through September 30, 2003 was $18,188,000 compared to $14,073,000 for the nine months ended September 30, 2002, representing an increase of $4,115,000, or 29.2%. 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 4.97% compared to 4.81% 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 third quarter of 2003 compared to $205,000 in the third quarter of 2002. This was an increase of $20,000, or 9.8%. Year to date loan loss provisions were $675,000 as of September 30, 2003, compared to $445,000 as of September 30, 2002, representing an increase of 51.7%. The increase in the loan loss provision was due to the Bank's evaluation of  inherent risk wihtin its total loan portfolio.

10

Other income totaled $1,179,000 for the third quarter of 2003, as compared to $749,000 during the third quarter of 2002, which is an increase of $430,000, or 57.4%. Year to date other income was $3,259,000 as of September 30, 2003, compared to $2,511,000 through September 30, 2002, which is an increase of $748,000, or 29.8%. The increase in other income was in part the result of an increase in the gain on the sale of loans of $316,000 or 122.5% to $574,000 in the third quarter of 2003, from $258,000 in the third quarter of 2002. Year to date through September 30, 2003 gain on sale of loans was $1,332,000 compared to $861,000 for the period ended September 30, 2002, or an increase of $471,000, or 54.7%. Mortgage processing and servicing fees were $293,000 in the third quarter of 2003, compared to $193,000 for the third quarter of 2002, representing an increase of $100,000 or 51.8%. Year to date mortgage processing and servicing fees through September 30, 2003 were $754,000 compared to $505,000 for the same period last year, which was an increase of $249,000 or 49.3%. Those increases resulted from increases in mortgage originations arising out of the continuing strong real estate market and low interest rate environment. Real estate commissions dropped $13,000, or 10.6%, from $123,000 in the third quarter of 2002 to $110,000 in the third quarter of 2003. Year to date real estate commissions through September 30, 2003 were $362,000 compared to $563,000 for the period ended September 30, 2002, representing a decrease of $201,000 or 35.7%. The volume of real estate transactions through Bancorp’s subsidiary, year to date, has been less than in the prior year. Real estate management fees, which are typically a steadier source of revenue than the more volatile commission revenues, were $92,000 during the third quarter of 2003, which was an increase of $10,000 over the $82,000 earned in r eal estate management fees during the third quarter of 2002, or 12.2%. Through September 30, 2003 real estate management fees were $274,000, compared to $254,000 for the same period ended September 30, 2002, which is an increase of 7.9%. 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 nine months ended September 30, 2003. Bancorp had no gain (or loss) on foreclosed real estate for the nine months ended September 30, 2002.

Total non-interest expense for the third quarter of 2003 was $2,328,000, as compared to $1,948,000 for the third quarter of 2002, an increase of $380,000 or 19.5%. Year to date through September 30, 2003 total non-interest expense was $6,648,000 as compared to $5,825,000 for the nine months ended September 30, 2002, an increase of $823,000, or 14.1%. This increase was primarily in compensation and related expenses, which increased $212,000, or 15.3% during the third quarter and increased $615,000 or 15.1% for the nine month period ended September 30, 2003 compared to the nine month period ended September 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 nine months o f 2003 as compared to 2002, compensation in the form of commissions also increased. Other expenses increased $155,000 or 35.1%, from $441,000 for the third quarter of 2002 to $596,000, for the third quarter of 2003.  These expenses were primarily attributable to expenses related to increased loan originations.  Year to date, other expenses through September 30, 2003, was $1,581,000 compared to $1,395,000 for the same period in 2002, which was an increase of $186,000 or 13.3%.

Income Taxes

Income tax expense was $1,935,000 for the third quarter of 2003, as compared to $1,405,000 for the third quarter of 2002, an increase of $530,000, or 37.7%. Income tax expense for the year to date ended September 30, 2003 was $5,533,000 compared to $4,007,000 for the period ended September 30, 2002. This was an increase of $1,526,000, or 38.1%. The effective tax rate for the nine months ended September 30, 2003 and 2002 was 39.17% and 38.84%, respectively. The effective tax rate for the three months ended September 30, 2003 and 2002 was 38.54% and 38.61% respectively.

11

Analysis of Financial Condition

Total assets at September 30, 2003 increased to $529,785,000 from $458,415,000 at December 31, 2002, representing an increase of $71,370,000, or 15.6%. Cash and cash equivalents increased $2,150,000 or 11.5% to $20,810,000 at September 30, 2003 from $18,660,000 at December 31, 2002, primarily as a result of an increase in federal fund deposits. Investment securities increased $2,000,000, or 50.0%, to $6,000,000 at September 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 third quarter of 2003, as net loans receivable increased to $477,408,000 as of September 30, 2003 from $401,343,000 as of December 31, 2002, which is an increase of $76,065,000, or 19.0%. Loans held for sale as of September 30, 2003 was $6,875,000 which is a decrease of $10,606,000, or 60.7%, less than loans held for sale in the amoun t of $17,481,000 as of December 31, 2002. This decrease was due to a smaller volume of loans pending sale as of September 30, 2003. Total deposits as of September 30, 2003 increased to $424,464,000 from $377,925,000 as of December 31, 2002, representing an increase of $46,539,000, or 12.3%. This increase is primarily attributable to an ongoing campaign by the Bank to attract money market deposit accounts and to obtain longer term certificates of deposit. Federal Home Loan Bank advances increased $16,000,000, or 47.1%, to $50,000,000 as of September 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 and the Bank’s desire to lengthen its maturity on a portion of its liabilities.

Stockholders’ Equity

Total stockholders’ equity was $50,579,000 as of September 30, 2003 compared to $43,181,000 as of December 31, 2002, an increase of $7,398,000, or 17.1%. 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 $2,540,000 as of September 30, 2003 compared to $1,758,000 as of December 31, 2002. At September 30, 2003 the total allowance for loan losses was $4,520,000, which is .95% 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 September 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 September 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 September 30, 2003, totaled $147,201,000. Based on past experience, management believes that a significant portion of such deposits will remain with the Bank. At September 30, 2003, the Company had commitments to originate loans of $29,450,000, unused lines of credit of $14,101,000, and commitments under standby letters of credit of $7,871,000. The Bank has the ability to reduce its commitments for new loan originations, adjust other cash outflows, and borrow from the FHLB of Atlanta should the need arise. As of September 30, 2003, outstanding FHLB borrowings totaled $50,000,000, and the Bank had available to it up to an additional $131,530,000 in borrowing availability from the FHLB of Atlanta.

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Net cash provided by operating activities for the nine months ended September 30, 2003 was $19,738,000 compared to net cash provided by operating activities for the nine months ended September 30, 2002 of $3,534,000. Net cash used by investing activities for the nine months ended September 30, 2003 was $80,733,000, an increase of $15,930,000 from $64,803,000 for the nine months ended September 30, 2002. Net cash provided by financing activities was $63,145,000 for the nine months ended September 30, 2003 compared to $61,692,000 for the period ended September 30, 2002. As a result, cash and cash equivalents were $20,810,000 as of September 30, 2003 compared to $6,461,000 as of September 30, 2002, an increase of $14,349,000. 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 nine months of the year.

[see table on the following page]

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	Nine months ended September 30, 2003						Nine months Ended September 30, 2002
		Average			Rate			Average			Rate
ASSETS		Volume		Interest	Annualized			Volume		Interest	Annualized
Loans	$	454,326,794	$	26,967,130	7.91	%	$	374,345,405	$	23,963,003	8.54	%
Investments		6,222,222		191,609	4.11	%		8,340,781		305,789	4.89	%
Mortgage-backed securities		6,730,249		143,419	2.84	%		472,357		24,152	6.82	%
Other interest earning		20,783,997		193,423	1.24	%		7,323,582		183,527	3.34	%
Total interest-earning		488,063,262		27,495,581	7.51	%		390,482,125		24,476,471	8.36	%
Non-interest earning assets		12,298,129						13,934,005
Total Assets		500,361,391					$	404,416,130
LIABILITIES & STOCKHOLDERS' EQUITY
Savings & checking		187,334,988		2,374,348	1.69	%		129,747,829		2,509,827	2.58	%
Certificates of Deposit		221,210,954		6,017,453	3.63	%		195,020,394		6,656,811	4.55	%
Short-term borrowings		--		--	--	%		6,555,556		155,249	3.16	%
Long-term borrowings		39,555,556		915,543	3.09	%		30,777,778		1,081,468	4.69	%
Total interest-bearing liabilities		448,101,498		9,307,344	2.77	%		362,101,557		10,403,355	3.83	%
Non-interest bearing liabilities		4,421,111						4,406,903
Stockholders' equity		47,838,782						37,907,670
Total liabilities &
stockholders' equity	$	500,361,391					$	404,416,130
Net Interest Income			$	18,188,237					$	14,073,116
Interest Rate Spread					4.74	%					4.53	%
Net Yield on Interest-Earning Assets					4.97	%					4.81	%
Average interest-earning assets to average interest-bearing liabilities					108.92	%					107.84	%

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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:

	Contract Amount At
Financial Instruments Whose Contract Amounts Represent Credit Risk		September 30, 2003		December 31, 2002
Standby letters of credit	$	7,870,711	$	6,694,000
Home equity loan commitments	$	10,767,329	$	8,014,000
Loan commitments	$	29,450,176	$	24,772,000
Lines of credit	$	14,101,387	$	22,368,000
Loans sold and serviced with limited
repurchase provisions	$	34,850,540	$	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.

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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.None.

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 – Form 8K - None

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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
November 14, 2003	/s/
Date:	Alan J. Hyatt,	President, Chief Executive Officer
		and Chairman of the Board
		(Principal Executive Officer)
November 14, 2003	/s/
Date:	Cecelia Lowman,	Chief Financial Officer
		(Principal Financial and Accounting Officer)

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