UNITED STATES
SECURITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-49731
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SEVERN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1726127
- --------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1919 A West Street, Annapolis, Maryland 21401
- -------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-268-4554
---------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share, 4,142,592 shares outstanding
at May 8, 2003.
SEVERN BANCORP, INC.
Table of Contents
PART I - FINANCIAL INFORMATION...................................................................................1
Item 1. Financial Statements ...................................................................................1
Consolidated Statements of Financial Condition as of March 31, 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 ..............................................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................15
Item 4. Controls and Procedures ................................................................................15
PART II - OTHER INFORMATION .....................................................................................15
Item 1. Legal Proceedings .....................................................................................15
Item 2. Changes in Securities and Use of Proceeds .............................................................15
Item 3. Defaults Upon Senior Securities .......................................................................15
Item 4. Submission of Matters to a Vote of Security Holders ...................................................15
Item 5. Other Information .....................................................................................15
Item 6. Exhibits and Reports on Form 8-K ......................................................................16
SIGNATURES.......................................................................................................16
CERTIFICATION OF ALAN J. HYATT ..................................................................................17
CERTIFICATION OF CECELIA LOWMAN .................................................................................18
EXHIBIT 99.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER........................................................19
EXHIBIT 99.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER........................................................20
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Cash $ 6,840,512 $ 3,756,640
Interest bearing deposits in other banks 1,875,895 4,190,768
Federal funds 26,524,622 10,712,827
Investment securities, held to maturity 8,000,000 4,000,000
Mortgage backed securities held to maturity 5,440,354 5,661,304
Loans held for sale 8,333,125 17,481,301
Loans receivable, net 423,484,660 401,343,360
Accrued interest receivable - loans 2,458,628 2,465,187
- mortgage backed
securities 21,577 22,327
- investments 20,808 61,911
Foreclosed real estate, net -- 223,911
Premises and equipment, at cost, less
accumulated depreciation 4,802,163 4,737,936
Mortgage servicing rights 17,690 19,340
Federal Home Loan Bank of Atlanta stock
at cost 1,900,000 1,900,000
Deferred income taxes 1,090,356 1,090,356
Income taxes receivable -- 164,255
Prepaid expenses and other assets 564,003 249,517
Goodwill 333,569 333,569
-------------- ---------------
Total assets $491,707,962 $458,414,509
============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
2003 2002
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $409,231,484 $377,925,041
Federal Home Loan Bank advances 32,000,000 34,000,000
Advance payments by borrowers for expenses 1,630,102 1,049,408
Income taxes payable 1,764,613 464,937
Accounts payable and accrued expenses 1,580,424 1,793,746
------------- ----------------
Total liabilities 446,206,623 415,233,132
Stockholders' Equity
Non-cumulative preferred stock $1.00 par value, Series A 500,000 shares
authorized; 200,002 issued
and outstanding March 31, 2003 and December 31, 2002 200,002 200,002
Additional paid-in capital 3,800,038 3,800,038
Common stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 4,142,592 March 31, 2003
and December 31, 2002 41,426 41,426
Additional paid-in capital 11,425,910 11,425,910
Retained earnings (substantially restricted) 30,033,963 27,714,001
------------ -------------
Total stockholders' equity 45,501,339 43,181,377
------------ ------------
Total liabilities and stockholders' equity $491,707,962 $458,414,509
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For Three Months Ended March 31,
2003 2002
---- ----
Interest Income
Interest on loans $8,681,893 $7,616,363
Interest on securities held to maturity 46,148 106,319
Interest on mortgage backed securities 56,921 3,372
Other interest income 78,252 72,946
------------ -----------
Total interest income 8,863,214 7,799,000
Interest Expense
Interest on deposits 2,926,412 3,090,333
Interest on short term borrowings -- 94,896
Interest on long term borrowings 210,744 400,268
--------- ---------
Total interest expense 3,137,156 3,585,497
--------- ---------
Net interest income 5,726,058 4,213,503
Provision for loan losses 225,000 105,000
------------ ------------
Net interest income after provision
for loan losses 5,501,058 4,108,503
Other Income
Gain on sale of foreclosed real estate 169,545 --
Gain on sale of loans 457,576 305,817
Real estate commissions 103,941 212,133
Real estate management fees 81,392 81,465
Mortgage processing and servicing fees 217,983 156,347
All other income 134,628 111,544
------------ ------------
Net other income 1,165,065 867,306
Non-Interest Expenses
Compensation and related expenses 1,549,768 1,325,410
Occupancy 129,404 122,181
Net expense of foreclosed real estate -- (63)
Other 441,675 434,785
--------- ----------
Total non-interest expenses 2,120,847 1,882,313
----------- ------------
Income before income tax provision 4,545,276 3,093,496
Income tax provision 1,838,664 1,197,497
----------- ------------
Net income $ 2,706,612 $1,895,999
========= =========
Basic earnings per common share $ .64 $ .45
========= =========
Diluted earnings per common share $ .64 $ .45
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Three Months Ended March 31,
----------------------------------------
2003 2002
---- ----
Operating Activities
Net income $ 2,706,612 $1,895,999
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of deferred loan fees (571,629) (508,938)
Loan fees deferred 537,310 560,647
Accretion of discount on mortgages (2,047) (2,067)
Amortization of premium on investment
securities -- 546
Accretion of discount on investment securities -- (94)
Amortization of premium on mortgage backed
securities 7,134 --
Accretion of discount on mortgage backed
securities (41) (41)
Provision for loan losses 225,000 105,000
Provision for depreciation 69,582 66,840
Gain on sale of loans (457,576) (305,817)
Gain on sale of foreclosed real estate (169,545) --
Proceeds from loans sold to others 40,022,214 20,028,148
Loans originated for sale (30,436,100) (22,957,631)
Principal collected on loans originated
for sale 19,638 8,169
Tax effect of preferred stock dividends 34,758 34,758
Decrease (increase) in accrued interest on loans 6,559 (142,266)
Decrease in accrued interest on
investments 41,103 6,829
Decrease in accrued interest on mortgage
backed securities 750 209
Decrease in mortgage servicing rights 1,650 1,650
Decrease in income taxes
receivable 164,255 950
Increase in prepaid expenses
and other assets (314,486) (15,282)
Decrease in accrued interest payable (5,706) (15,875)
(Decrease) increase in accounts payable
and accrued expenses (213,322) 184,983
Increase in income taxes payable 1,299,676 879,920
------------------ ---------------
Net cash provided by (used by) operating activities 12,965,789 (173,363)
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Three Months Ended March 31,
2003 2002
---- ----
Cash Flows from Investing Activities
Purchase of investment securities $(6,000,000) $(4,000,000)
Proceeds from maturing investment securities 2,000,000 2,000,000
Principal collected on mortgage backed
securities 213,857 28,645
Longer term loans originated (38,264,636) (43,111,563)
Principal collected on longer term loans 16,399,723 28,400,920
Net (increase) decrease in short-term loans (219,021) 239,318
Loans purchased (246,000) (197,000)
Proceeds from sale of foreclosed real estate 393,456 --
Investment in premises and equipment (133,809) (127,500)
--------- ---------
Net cash used by investing activities (25,856,430) (16,767,180)
Cash Flows from Financing Activities
- ------------------------------------
Net increase in demand deposits, money
market, passbook accounts and advances
by borrowers for taxes and insurance 25,180,559 18,829,200
Net increase (decrease) in certificates of
deposit 6,712,284 (3,081,653)
Increase in checks outstanding
in excess of bank balance -- 989,928
Additional borrowed funds -- 17,000,000
Repayment of borrowed funds (2,000,000) (15,000,000)
Cash dividends (421,408) (335,406)
Proceeds from exercise of options -- 191,400
Net cash provided by financing activities 29,471,435 18,593,469
------------ -------------
SEVERN BANCORP, INC.
AND SUBSIDIARIES
Annapolis, Maryland
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31,
2003 2002
---- ----
Increase in cash and cash
equivalents $ 16,580,794 $ 1,652,926
Cash and cash equivalents at beginning of year 18,660,235 6,038,459
-------------- -------------
Cash and cash equivalents at end of period $ 35,241,029 $ 7,691,385
========== ==========
The Following is a Summary of Cash and
Cash Equivalents
Cash $ 6,840,512 $ 1,512,767
Interest bearing deposits in other banks 1,875,895 595,455
Federal funds 26,524,622 5,583,163
-------------- --------------
Cash and cash equivalents reflected on the
statement of cash flows $ 35,241,029 $ 7,691,385
========== ==========
Supplemental Disclosure of Cash Flows Information:
Cash Paid During Period For:
Interest $ 3,161,608 $ 3,588,213
========== ==========
Income taxes $ 334,050 $ 285,940
========== ==========
Transfer from retained earnings to additional paid in capital for 3 for 1
stock split declared
in the form of a dividend $ -- $ 27,047
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and
in accordance with the instructions to Form 10-Q. Accordingly, they
do not include all of the disclosures required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation of the results of
operations for the interim periods presented have been made. Such
adjustments were of a normal recurring nature. The results of
operations for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the
fiscal year December 31, 2003 or any other interim period. The
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes which are
incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
On February 19, 2002, the Company's Board of Directors
declared a 3-for-1 stock split in the form of a 200% stock dividend,
which was effective for shares outstanding as of March 1, 2002 and
paid on March 15, 2002.
Note 2 - Cash Flow Presentation
For purposes of the statements of cash flows, cash and cash
equivalents include cash and amounts due from depository
institutions, investments in federal funds, and certificates of
deposit with original maturities of 90 days or less.
SEVERN BANCORP, INC. AND SUBSIDIARIES
Annapolis, Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3 - Earnings Per Share
Basic EPS is computed based upon income available to common
shareholders and the weighted average number of common shares
outstanding for the period. Diluted EPS is to reflect the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Information relating to the calculations of
net income per share of common stock is summarized for the three
month periods ended March 31, as follows:
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
----------------------------- ------------------------
Net income $ 2,706,612 $ 1,895,999
Less - preferred stock dividends,
net of tax (55,243) (55,242)
-------- -------
Net income available to shareholders $ 2,651,369 $ 1,840,757
========= =========
Weighted average shares outstanding
Basic EPS 4,142,592 4,057,092
Effect of Dilutive Shares
Stock warrants -- --
Stock options 12,700 30,224
---------- ---------
Adjusted weighted average shares
Used for dilutive EPS 4,155,292 4,087,316
======== ========
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 first quarter of 2003 was $2,707,000 or diluted
earnings per share of $.64 as compared to net income of $1,896,000 in the first
quarter of 2002, or diluted earnings per share of $.45. This represents an
increase of $811,000 or 42.8% compared with the first quarter of 2002. Earnings
per diluted share increased $.19 or 42.2% compared with the first quarter of
2002. Net income for the first quarter of 2003 increased significantly above
that for the first quarter of 2002 as a result of the continuing low interest
rate environment which increased the interest rate spread, along with the
continuation of a high volume of mortgage loan originations.
Net interest income, which is interest earned net of interest charges,
totaled $5,726,000 for the first quarter of 2003, compared to $4,214,000 for the
first quarter of 2002, representing an increase of $1,512,000 or 35.9%. This
increase is a result of both an increase in interest earned on mortgage loans
and a reduction in the cost of deposits and borrowings, resulting in an
improving net interest margin, which increased 43 basis points to 4.99% from
4.56%.
Loan loss provisions were $225,000 in the first quarter of 2003
compared to $105,000 in the first quarter of 2002. This was an increase of
$120,000 or 114.3%. The increase in the loan loss provision was due to
management's concern that the status of the general economy was worsening and
that there may be a greater risk of loan defaults due to the uncertainty
surrounding economic conditions.
Other income totaled $1,165,000 for the first quarter of 2003, as
compared to $867,000 during the first quarter of 2002, an increase of $298,000
or 34.4%. The increase in other income was primarily the result of gain on sale
of foreclosed real estate of $170,000 in the first quarter of 2003 and an
increase in gain on sale of loans of $152,000 to $458,000 for the first quarter
of 2003 compared to $306,000 for the comparable quarter of 2002, an increase of
49.7%, due to a higher volume of loans sold in the first quarter of 2003. Also,
mortgage processing and servicing fees increased $62,000 or 39.7% to $218,000
for the first quarter of 2003, compared to $156,000 for the first quarter of
2002 due to increased loan volume. These increases were partially offset by a
decrease in real estate commissions of $108,000 or 50.9% to $104,000 for the
quarter ended March 31, 2003 from $212,000 for the quarter ended March 31, 2002.
The receipt of real estate commissions is affected by the volume and size of
transactions closed in a particular period, and during the first quarter of
2003, less transactions were closed than in the first quarter of 2002. Hyatt
Real Estate relies upon the sale and lease of commercial properties for a
significant portion of its commission revenues. It is difficult to determine
whether this reduction in commission revenues is the beginning of a trend or
whether it is a result of the timing of the closing of commercial transactions.
Total non-interest expense for the first quarter of 2003 was
$2,121,000, as compared to $1,882,000 for the first quarter of 2002, an increase
of $239,000 or 12.7%. This increase was primarily in compensation and related
expenses, which increased $225,000, or 17.0%, which was the result of the
increase in mortgage loan originations between the first quarter of 2002 and the
first quarter of 2003. Mortgage loan officers are compensated, in the form of
commissions, based upon loans originated and as a result, as mortgage
originations increase the commissions earned by loan officers also increase.
Income Taxes
Income tax expense was $1,839,000 for the first quarter of 2003, as
compared to $1,197,000 for the first quarter of 2002, an increase of $642,000 or
53.6%. The effective tax rate for the three months ended March 31, 2003 and 2002
was 40.45% and 38.71%, respectively.
Analysis of Financial Condition
Total assets at March 31, 2003 increased to $491,708,000 from
$458,415,000 at December 31, 2002, representing an increase of $33,293,000 or
7.3%. Cash and cash equivalents increased $16,581,000 or 88.9% to $35,241,000 at
March 31, 2003 from $18,660,000 at December 31, 2002 primarily as a result of
proceeds from loans sold and an increase in deposits. Investment securities
increased $4,000,000 or 100.0% to $8,000,000 at March 31, 2003 from $4,000,000
at December 31, 2002 as a result of investing excess cash. Loan demand continued
to be strong during the first quarter of 2003, as net loans receivable increased
to $423,485,000 as of March 31, 2003 from $401,343,000 as of December 31, 2002,
which is an increase of $22,142,000 or 5.5%. Loans held for sale as of March 31,
2003 was $8,333,000 which is a decrease of $9,148,000 or 52.3%, less than loans
held for sale in the amount of $17,481,000 as of December 31, 2002. This
decrease was due primarily to a higher than normal volume of loans held for sale
at December 31, 2002, most of which were sold during the quarter ended March 31,
2003. Total deposits as of March 31, 2003 increased to $409,231,000 from
$377,925,000 as of December 31, 2002, representing an increase of $31,306,000 or
8.3%. This increase is primarily attributable to an ongoing campaign by the Bank
to attract money market deposit accounts. Federal Home Loan Bank advances
decreased $2,000,000, or 5.9%, to $32,000,000 as of March 31, 2003 as compared
to $34,000,000 as of December 31, 2002, as a result of repayments.
Stockholders' Equity
Total stockholders' equity was $45,501,000 as of March 31, 2003
compared to $43,181,000 as of December 31, 2002, an increase of $2,320,000 or
5.4%. This increase resulted primarily from an increase in net earnings, offset
by dividends paid.
Asset Quality
Non-accrual loans (those loans 90 or more days in arrears) were
$1,263,000 as of March 31, 2003 compared to $1,758,000 as of December 31, 2002.
At March 31, 2003 the total allowance for loan losses was $4,157,000, which is
..98% 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 March 31, 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 March
31, 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 March 31, 2003 totaled $136,563,000. Based on past
experience, management believes that a significant portion of such deposits will
remain with the Bank. At March 31, 2003, the Company had commitments to
originate loans of $31,023,000, unused lines of credit of $30,453,000, and
commitments under standby letters of credit of $7,334,000. 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 March
31, 2003, outstanding FHLB borrowings totaled $32,000,000, and the Bank had
available to it up to an additional $90,000,000 in borrowing availability from
the FHLB of Atlanta.
Net cash provided by operating activities for the quarter ended March
31, 2003 was $12,966,000 compared to net cash used for the quarter ended March
31, 2002 of ($173,000). Net cash used by investing activities for the quarter
ended March 31, 2003 was $25,856,000, an increase of $9,089,000 from $16,767,000
for the quarter ended March 31, 2002. Net cash provided by financing activities
was $29,471,000 and $18,593,000 for the current and prior year's quarters,
respectively. As a result cash and cash equivalents were $35,241,000 as of March
31, 2003 which was an increase of $27,550,000 as compared to March 31, 2002.
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 November, 2002, FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" an Interpretation of FASB Statements No.
5, 57 and 107 and rescission of FASB Interpretation No. 34. This interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The provisions for this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
The provisions for this interpretation were implemented, and did not
have a material impact on the consolidated financial statements.
Average Balance Sheet
The following table presents the distribution of the average
consolidated balance sheets, interest income/expense, and annualized yields
earned and rates paid through the first three months of the year.
[see table on the following page]
Severn Bancorp and Subsidiaries
Average Balance Sheet
3 Months Ended March 31, 2003 3 Months Ended March 31, 2002
----------------------------- -----------------------------
Average Rate Average Rate
ASSETS Volume Interest Annualized Volume Interest Annualized
Loans $ 426,490,275 $ 8,681,893 8.14% $ 352,817,982 $ 7,616,363 8.63%
Investments 4,666,667 46,148 3.96% 8,998,148 106,319 4.73%
Mortgage-backed securities 5,523,807 56,921 4.12% 191,578 3,372 7.04%
Other interest earning assets 22,705,055 78,252 1.38% 7,763,043 72,946 3.76%
----------------------------- ------------ ----------------------------- ------------
Total interest-earning assets 459,385,804 8,863,214 7.72% 369,770,751 7,799,000 8.44%
Non-interest earning assets 20,123,254 13,796,320
--------------- ---------------
Total Assets $479,509,058 $383,567,071
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Savings & checking 181,462,505 875,075 1.93% 108,726,377 740,062 2.72%
Certificates of Deposit 216,983,281 2,051,337 3.78% 191,959,352 2,350,271 4.90%
Short-term borrowings -- -- -- 12,000,000 94,896 3.16%
Long-term borrowings 32,000,000 210,744 2.63% 31,333,333 400,268 5.11%
----------------------------- ------------ ----------------------------- ------------
Total interest-bearing liabilities 430,445,786 3,137,156 2.92% 344,019,062 3,585,497 4.17%
Non-interest bearing liabilities 4,455,300 3,561,480
Stockholders' equity 44,607,972 35,986,529
Total liabilities &
--------------- ---------------
stockholders' equity $ 479,509,058 $ 383,567,071
=============== ===============
Net Interest Income $ 5,726,058 $ 4,213,503
============ ===========
Interest Rate Spread 4.80% 4.27%
Net Interest Margin 4.99% 4.56%
Average interest-earning assets to average interest-bearing
liabilities 106.72% 107.49%
Commitments, Contingencies and Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk including commitments to extend credit under existing lines of credit and
commitments to sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
Off-balance sheet financial instruments whose contract amounts
represent credit and interest rate risk are summarized as follows:
Financial Instruments Whose Contract Contract Amount At
Amounts Represent Credit Risk March 31, 2003 December 31, 2002
----------------------------- -------------- -----------------
Standby letters of credit $ 7,334,000 $ 6,694,000
Home equity loan commitments $ 8,691,000 $ 8,014,000
Loan commitments $ 31,023,000 $ 24,772,000
Lines of credit $ 21,762,000 $ 22,368,000
Loans sold and serviced with limited
repurchase provisions $ 19,799,000 $ 10,163,000
Critical Accounting Policies
The Company's significant accounting policies are set forth in note 1
of the consolidated financial statements as of December 31, 2002 which was filed
on Form 10-K. Of these significant accounting policies, the Company considers
its policy regarding the allowance for loan losses to be its most critical
accounting policy, because it requires management's most subjective and complex
judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan
losses and results of operations. The Company has developed appropriate policies
and procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers that it
is not known to management at the time of the issuance of the consolidated
financial statements.
Legal Proceedings
There are various claims pending involving the Bank, arising in the
normal course of business. Management believes, based upon consultation with
legal counsel, that liabilities arising from these proceedings, if any, will not
be material to Bancorp's financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since December 31,
2002, as reported in Bancorp's Form 10-K filed with the United States Securities
and Exchange Commission on or about March 20, 2003.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officers and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officers and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports filed with Securities and Exchange Commission. In addition, we reviewed
our internal controls, and there have been no significant changes in our
internal controls or in other factors that could significantly affect those
internal controls subsequent to the date we carried out our last evaluation.
Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. 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 - On April 10, 2003 Bancorp filed a Current Report on Form
8-K to report the issuance of a press release commenting on 2003 first quarter
earnings.
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
May 8, 2003 /s/
- ----------------- -------------------------------------------
Date: Alan J. Hyatt,
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
May 8, 2003 /s/
- ----------------- -------------------------------------------
Date: Cecelia Lowman, Chief Financial Officer
(Principal Financial and Accounting Officer)
I, Alan J. Hyatt, President, CEO and Chairman of the Board, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (this "Report") of Severn
Bancorp, Inc. (the "Company");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared.
(b) designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed our supervision, to provide reasonable assurances that
the Company's financial statements are fairly presented in conformity with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report (the "Evaluation Date");
(d) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
(e) disclosed to the Company's auditors and the audit committee of
the board of directors:
(i) all significant deficiencies and material weaknesses in
the design or operation of internal controls and procedures for financial
reporting which could adversely affect the Company's ability to record, process,
summarize and report financial information required to be disclosed by the
Company in the reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls and procedures for financial reporting; and
(f) Indicated in this Report any significant changes in the Company's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this Report, including any actions
taken to correct significant deficiencies and material weaknesses in the
Company's internal controls and procedures for financial reporting.
Date: May 8, 2003 /s/
------------ -------------------------------------------------
By: Alan J. Hyatt, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
I, Cecelia Lowman, Chief Financial Officer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (this "Report") of Severn
Bancorp, Inc. (the "Company");
2. Based on my knowledge, this Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this Report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared.
(b) designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for financial
reporting to be designed our supervision, to provide reasonable assurances that
the Company's financial statements are fairly presented in conformity with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting as
of the end of the period covered by this report (the "Evaluation Date");
(d) presented in this Report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and procedures for
financial reporting based on our evaluation as of the Evaluation Date;
(e) disclosed to the Company's auditors and the audit committee of
the board of directors:
(i) all significant deficiencies and material weaknesses in
the design or operation of internal controls and procedures for financial
reporting which could adversely affect the Company's ability to record, process,
summarize and report financial information required to be disclosed by the
Company in the reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls and procedures for financial reporting; and
(f) Indicated in this Report any significant changes in the Company's
internal controls and procedures for financial reporting or in other factors
that could significantly affect internal controls and procedures for financial
reporting made during the period covered by this Report, including any actions
taken to correct significant deficiencies and material weaknesses in the
Company's internal controls and procedures for financial reporting.
Date: May 8, 2003 /s/
------------- ----------------------------------------------------
Cecelia Lowman, Chief Financial Officer
(Principal Financial and Accounting Officer)