Attached files
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EX-32 - EXHIBIT32 - SEVERN BANCORP INC | exhibit32.htm |
EX-31.1 - EXHIBIT311 - SEVERN BANCORP INC | exhibi311.htm |
EX-31.2 - EXHIBIT312 - SEVERN BANCORP INC | exhibit312.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
or
o |
TRANSITION
REPORT PURSUANT 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.)
|
200
Westgate Circle, Suite 200
Annapolis,
Maryland
|
21401
|
(Address
of principal executive offices)
|
(Zip
Code)
|
410-260-2000
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and formal 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 þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
file). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non- accelerated filer o (Do not check if a smaller reporting
company) Smaller
reporting company þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Number of
shares of the registrant’s Common Stock, $0.01 par value, outstanding as of the
close of business on November 12, 2009: 10,066,679 shares.
SEVERN
BANCORP, INC. AND SUBSIDIARIES
Table
of Contents
PART
I – FINANCIAL INFORMATION
|
Page
|
|
Item
1.
|
Financial
Statements
|
|
Consolidated
Statements of Financial Condition (Unaudited) as of September 30, 2009 and
December 31, 2008
|
1
|
|
Consolidated
Statements of Operations (Unaudited) for the Three Months and Nine Months
Ended September 30, 2009 and 2008
|
2
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended September
30, 2009 and 2008
|
3
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
26
|
Item
4.
|
Controls
and Procedures
|
27
|
PART
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
27
|
Item
1A.
|
Risk
Factors
|
27
|
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
Item
3.
|
Defaults
Upon Senior Securities
|
27
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
28
|
Item
5.
|
Other
Information
|
28
|
Item
6.
|
Exhibits
|
28
|
SIGNATURES
|
29
|
i
PART
I– FINANCIAL INFORMATION
Item
1. Financial Statements
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION (UNAUDITED)
(dollars
in thousands, except per share amounts)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 29,837 | $ | 14,082 | ||||
Interest
bearing deposits in other banks
|
474 | 271 | ||||||
Federal
funds sold
|
40,000 | 17,952 | ||||||
Cash
and cash equivalents
|
70,311 | 32,305 | ||||||
Investment
securities held to maturity
|
9,229 | 1,345 | ||||||
Loans
held for sale
|
1,418 | 453 | ||||||
Loans
receivable, net of allowance for loan losses of
|
||||||||
$34,009
and $14,813, respectively
|
835,756 | 896,006 | ||||||
Premises
and equipment, net
|
29,411 | 30,267 | ||||||
Other
real estate owned
|
17,877 | 6,317 | ||||||
Federal
Home Loan Bank of Atlanta stock at cost
|
8,609 | 8,694 | ||||||
Accrued
interest receivable and other assets
|
23,293 | 12,264 | ||||||
Total
assets
|
$ | 995,904 | $ | 987,651 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities
|
||||||||
Deposits
|
$ | 725,040 | $ | 683,866 | ||||
Long-term
borrowings
|
135,000 | 153,000 | ||||||
Subordinated
debentures
|
24,119 | 24,119 | ||||||
Accrued
interest payable and other liabilities
|
2,533 | 2,999 | ||||||
Total
liabilities
|
886,692 | 863,984 | ||||||
Stockholders’ Equity
|
||||||||
Preferred
stock, $0.01 par value, 1,000,000 shares authorized;
|
||||||||
Preferred
stock series “A”, 437,500 shares issued and outstanding
|
4 | 4 | ||||||
Preferred
stock series “B”, 23,393 shares issued and
outstanding
|
- | - | ||||||
Common
stock, $0.01 par value, 20,000,000 shares authorized;
|
||||||||
10,066,679
shares issued and outstanding
|
101 | 101 | ||||||
Additional
paid-in capital
|
73,820 | 73,522 | ||||||
Retained
earnings
|
35,287 | 50,040 | ||||||
Total
stockholders' equity
|
109,212 | 123,667 | ||||||
Total
liabilities and stockholders' equity
|
$ | 995,904 | $ | 987,651 |
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
OPERATIONS (UNAUDITED)
(dollars
in thousands, except per share data)
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||
September
30,
|
September
30,
|
|||
2009
|
2008
|
2009
|
2008
|
|
Interest Income
|
||||
Loans,
including fees
|
$13,278
|
$14,910
|
$39,760
|
$47,271
|
Securities,
taxable
|
33
|
17
|
65
|
56
|
Other
|
36
|
121
|
11
|
613
|
Total
interest income
|
13,347
|
15,048
|
39,836
|
47,940
|
Interest Expense
|
||||
Deposits
|
4,727
|
6,133
|
15,551
|
19,800
|
Short-term
borrowings
|
-
|
25
|
12
|
62
|
Long-term
borrowings and subordinated debentures
|
1,569
|
1,766
|
4,821
|
5,659
|
Total
interest expense
|
6,296
|
7,924
|
20,384
|
25,521
|
Net
interest income
|
7,051
|
7,124
|
19,452
|
22,419
|
Provision
for loan losses
|
8,909
|
2,865
|
25,944
|
4,365
|
Net
interest income (loss) after provision for loan losses
|
(1,858)
|
4,259
|
(6,492)
|
18,054
|
Non-Interest Income
|
||||
Real
estate commissions
|
108
|
329
|
519
|
707
|
Real
estate management fees
|
231
|
159
|
551
|
506
|
Mortgage
banking activities
|
37
|
27
|
241
|
316
|
Other
|
194
|
222
|
604
|
580
|
Total
non-interest income
|
570
|
737
|
1,915
|
2,109
|
Non-Interest Expenses
|
||||
Compensation
and related expenses
|
2,408
|
2,076
|
7,072
|
6,829
|
Occupancy
|
343
|
437
|
985
|
1,253
|
Foreclosed
real estate expenses, net
|
1,339
|
32
|
3,005
|
426
|
Legal
fees
|
308
|
213
|
731
|
483
|
FDIC
assessments and regulatory expense
|
593
|
189
|
1,414
|
537
|
Other
|
989
|
1,041
|
3,027
|
3,280
|
Total
non-interest expenses
|
5,980
|
3,988
|
16,234
|
12,808
|
Income
(loss) before income tax provision (benefit)
|
(7,268)
|
1,008
|
(20,811)
|
7,355
|
Income
tax provision (benefit)
|
(2,909)
|
421
|
(8,234)
|
3,012
|
Net
income (loss)
|
($4,359)
|
$587
|
($12,577)
|
$4,343
|
Amortization
of discount on preferred stock
|
68
|
-
|
203
|
-
|
Dividends
on preferred stock
|
363
|
-
|
1,068
|
-
|
Net
income (loss) available to common stockholders
|
($4,790)
|
$587
|
($13,848)
|
$4,343
|
Basic
earnings (loss) per share
|
($.48)
|
$.06
|
($1.38)
|
$.43
|
Diluted
earnings (loss) per share
|
($.48)
|
$.06
|
($1.38)
|
$.43
|
Common
stock dividends declared per share
|
$.03
|
$.06
|
$.09
|
$.18
|
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
CASH FLOWS (UNAUDITED)
(dollars
in thousands)
For
the Nine Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash Flows from Operating
Activities
|
||||||||
Net
income (loss)
|
$ | (12,577 | ) | $ | 4,343 | |||
Adjustments
to reconcile net income (loss) to net
|
||||||||
cash
provided by operating activities:
|
||||||||
Amortization
of deferred loan fees
|
(1,602 | ) | (1,990 | ) | ||||
Net
amortization of premiums and
|
||||||||
discounts
|
2 | 3 | ||||||
Provision
for loan losses
|
25,944 | 4,365 | ||||||
Provision
for depreciation
|
959 | 1,011 | ||||||
Gain
on sale of loans
|
(241 | ) | (225 | ) | ||||
Loss
on sale of foreclosed real estate
|
83 | - | ||||||
Proceeds
from loans sold to others
|
24,660 | 16,903 | ||||||
Loans
originated for sale
|
(25,384 | ) | (15,577 | ) | ||||
Stock-based
compensation expense
|
96 | 96 | ||||||
Increase
in net deferred tax asset
|
(8,607 | ) | (81 | ) | ||||
Increase
in accrued interest receivable
|
||||||||
and
other assets
|
(294 | ) | (294 | ) | ||||
Decrease
in accrued interest payable and other
liabilities
|
(466 | ) | (471 | ) | ||||
Net
cash provided by operating activities
|
2,573 | 8,083 | ||||||
Cash Flows from Investing
Activities
|
||||||||
Purchase
of investment securities held to maturity
|
(7,999 | ) | - | |||||
Proceeds
from maturing investment securities
|
- | 1,000 | ||||||
Principal
collected on mortgage-backed securities
|
113 | 24 | ||||||
Net
(increase) decrease in loans
|
16,176 | (6,116 | ) | |||||
Proceeds
from sale of foreclosed real estate
|
5,961 | 4,922 | ||||||
Investment
in premises and equipment
|
(127 | ) | (285 | ) | ||||
Proceeds
from disposal of premises and equipment
|
24 | - | ||||||
Net
redemption of Federal Home Loan Bank
|
||||||||
of
Atlanta stock
|
85 | 1,478 | ||||||
Net
cash provided by investing activities
|
14,233 | 1,023 |
3
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED) CONTINUED
(dollars
in thousands)
For
the Nine Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash Flows from Financing
Activities
|
||||||||
Net
increase in deposits
|
41,174 | 36,889 | ||||||
Decrease
in short-term borrowings
|
- | (15,000 | ) | |||||
Additional
borrowed funds, long term
|
- | 30,000 | ||||||
Repayment
of borrowed funds, long-term
|
(18,000 | ) | (52,000 | ) | ||||
Common
stock dividend paid
|
(906 | ) | (1,812 | ) | ||||
Series
A preferred stock dividend paid
|
(210 | ) | - | |||||
Series
B preferred stock dividend paid
|
(858 | ) | - | |||||
Net
cash provided by (used in) financing activities
|
21,200 | (1,923 | ) |
Increase
in cash and cash equivalents
|
38,006 | 7,183 | ||||||
Cash
and cash equivalents at beginning of year
|
32,305 | 11,266 | ||||||
Cash
and cash equivalents at end of period
|
$ | 70,311 | $ | 18,449 | ||||
Supplemental
disclosure of cash flows information:
|
||||||||
Cash
paid during period for:
|
||||||||
Interest
|
$ | 20,667 | $ | 25,916 | ||||
Income
taxes
|
$ | 2,458 | $ | 3,844 | ||||
Transfer
of loans to foreclosed real estate
|
$ | 19,649 | $ | 13,494 |
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
4
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Note 1 -
Principles of
Consolidation
The
unaudited consolidated financial statements include the accounts of Severn
Bancorp, Inc. (the “Company”), and its wholly owned subsidiary, SBI Mortgage
Company and SBI Mortgage Company’s subsidiary, Crownsville
Development Corporation, and its subsidiary, Crownsville Holdings I, LLC, and
Severn Savings Bank, FSB (the “Bank”), and the Bank’s subsidiaries, Louis Hyatt,
Inc., Homeowners Title and Escrow Corporation, Severn Financial Services
Corporation, SSB Realty Holdings, LLC, SSB Realty Holdings II, LLC, and HS West,
LLC. All intercompany accounts and transactions have been eliminated
in the accompanying financial statements.
During
the quarter ended September 30, 2009, the common stock of Louis Hyatt, Inc. was
contributed to the Bank from the Company.
Note 2 -
Basis of
Presentation
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”. The FASB sets generally
accepted accounting principles (“GAAP”) that the Company follows. References to
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. The
FASB finalized the Codification effective for periods ending on or after
September 15, 2009.
The
accompanying unaudited consolidated 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 and nine months ended September 30, 2009 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2009 or
any other interim period. In preparing the accompanying consolidated
financial statements, management has evaluated subsequent events through
November 12, 2009 (the financial statement issue date). The unaudited
consolidated financial statements for the three and nine months ended September
30, 2009 should be read in conjunction with the audited consolidated financial
statements and related notes, which were included in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2008.
Note 3 -
Cash Flow
Presentation
In the
statements of cash flows, cash and cash equivalents include cash on hand,
amounts due from banks, Federal Home Loan Bank of Atlanta (“FHLB Atlanta”)
overnight deposits, and federal funds sold. Generally, federal funds are sold
for one-day periods.
Note 4 –
Reclassifications
Certain
prior year’s amounts have been reclassified to conform to the current year’s
method of presentation.
5
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 5 –
Change in Accounting
Estimate
Beginning
in the three month period ending June 30, 2009, management changed the method it
used to estimate its allowance for loan losses based on a request of its primary
regulator. Prior to this change, management based its estimate on
reviewing individual impaired loans for any required specific reserves, plus
applying a general reserve on all other performing loans. The
specific reserve was based on current fair values less estimated selling and
disposal costs on loans where management felt appropriate. The
general reserve was calculated based on a weighted average of the prior three
calendar years’ historical performance for loan losses, plus qualitative factors
management deemed appropriate for the various loan portfolios.
Beginning
with the three month period ending June 30, 2009, management began deducting
selling and disposal costs from all fair values when estimating the need for a
specific reserve on impaired loans. In addition, the general reserve
is now calculated based on a weighted average of the loan losses for the most
recent rolling twelve months plus the prior two calendar years historical
performance without consideration of qualitative factors.
This
change in estimate resulted in an additional charge to the loan loss reserve of
approximately $5,000,000, or $0.50 per share for the three months ended June 30,
2009.
Note 6 -
Earnings (Loss) Per
Share
Basic earnings (loss) per share is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding for each
period. Diluted earnings (loss) per share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. Potential common shares that may be issued by the
Company relate to outstanding stock options, warrants, and convertible preferred
stock, and are determined using the treasury stock method.
Not
included in the diluted earnings per share calculation for the three and nine
month periods ended September 30, 2009, because they were anti-dilutive, were
113,740 outstanding stock options, a warrant to purchase 556,976 shares of
common stock and 437,500 shares of common stock issuable upon conversion of the
Company Series A Preferred Stock. For the three and nine month
periods ended September 30, 2008, all of the Company’s outstanding stock
options, which totaled 114,950, were not included in the diluted earnings per
share calculation because there were anti-dilutive.
Three
Months Ended
|
Nine
Months Ended
|
||||
September
30,
|
September
30,
|
||||
2009
|
2008
|
2009
|
2008
|
||
Common
shares – weighted average (basic)
|
10,066,679
|
10,066,679
|
10,066,679
|
10,066,679
|
|
Common
share equivalents – weighted average
|
-
|
-
|
-
|
-
|
|
Common
shares – diluted
|
10,066,679
|
10,066,679
|
10,066,679
|
10,066,679
|
6
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 7 -
Guarantees
The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally
all letters of credit, when issued, have expiration dates within one
year. The credit risks involved in issuing letters of credit are
similar to those that are involved in extending loan facilities to
customers. The Company generally holds collateral supporting these
commitments. The Company had $11,551,000 of standby letters of credit
outstanding as of September 30, 2009. Management believes that the
proceeds obtained through a liquidation of collateral would be sufficient to
cover the potential amount of future payments required under the corresponding
guarantees. The amount of the liability as of September 30, 2009 and
December 31, 2008 for guarantees under standby letters of credit issued was not
material.
Note 8 -
Regulatory
Matters
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank’s
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. The
following table presents the Bank’s capital position:
Actual
|
Actual
|
To
Be Well Capitalized Under
|
|
at September 30, 2009
|
at December 31, 2008
|
Prompt Corrective
Provisions
|
|
Tangible
(1)
|
12.2%
|
13.5%
|
N/A
|
Tier
I Capital (2)
|
15.5%
|
16.9%
|
6.0%
|
Core
(1)
|
12.2%
|
13.5%
|
5.0%
|
Total
Capital (2)
|
16.8%
|
18.1%
|
10.0%
|
(1)
To adjusted total assets.
(2) To risk-weighted assets.
7
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 9 -
Stock-Based
Compensation
The
Company has a stock-based compensation plan for directors, officers, and other
key employees of the Company. The aggregate number of shares of
common stock that may be issued with respect to the awards granted under the
plan is 500,000 plus any shares forfeited under the Company’s old stock-based
compensation plan. Under the terms of the stock-based compensation
plan, the Company has the ability to grant various stock compensation
incentives, including stock options, stock appreciation rights, and restricted
stock. The stock-based compensation is granted under terms and
conditions determined by the Compensation Committee of the Board of
Directors. Under the stock-based compensation plan, stock options
generally have a maximum term of ten years, and are granted with an exercise
price at least equal to the fair market value of the common stock on the date
the options are granted. Generally, options granted to directors of
the Company vest immediately, and options granted to officers and employees vest
over a five-year period, although the Compensation Committee has the authority
to provide for different vesting schedules.
The
Company follows FASB ASC 718, Compensation – Stock Compensation, to account for
stock-based compensation. FASB ASC 718 requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as compensation expense in the statement of operations at fair
value. FASB ASC 718 requires an entity to recognize the expense of
employee services received in share-based payment transactions and measure the
expense based on the grant date fair value of the award. The expense
is recognized over the period during which an employee is required to provide
service in exchange for the award. Stock-based compensation expense for the
three and nine months ended September 30, 2009 and 2008 totaled $32,000 and
$96,000, respectively. There were no options granted or exercised
during the three and nine months ended September 30, 2009 and September 30,
2008.
Information
regarding the Company’s stock-based compensation plan as of and for the nine
months ended September 30, 2009 is as follows:
2009
|
|||
Weighted
Average
|
|||
Exercise
Price
|
|||
Shares
|
Per
Share
|
||
Outstanding
at beginning of year
|
114,950
|
$15.87
|
|
Options
granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
(1,210)
|
$15.62
|
|
Outstanding
at period end
|
113,740
|
$15.87
|
|
Exercisable
at period end
|
84,085
|
$15.86
|
The
aggregate intrinsic value of the options outstanding at both the beginning of
the year and the end of period and the options exercisable at the end of the
period are $0.
8
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The
following table summarizes the stock options outstanding and exercisable as of
September 30, 2009.
Options
Outstanding and Exercisable
Weighted
Average Remaining
|
Weighted
Average
|
||
Range
of Exercise Prices
|
Number
Outstanding
|
Contractual
Life
|
Exercise
Price
|
$15.62
|
71,077
|
1.39
|
$15.62
|
$17.18
|
13,008
|
1.39
|
$17.18
|
$15.62-$17.18
|
84,085
|
1.39
|
$15.86
|
As of
September 30, 2009, there was $178,000 of total unrecognized stock-based
compensation cost related to non-vested stock options, which is expected to be
recognized over a period of seventeen months.
Note 10 -
Investment
Securities
The
amortized cost and fair value of investment securities held to maturity are as
follows:
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
September 30, 2009:
|
||||||||||||||||
US
Treasury securities
|
$ | 7,999 | $ | 43 | $ | ( - | ) | $ | 8,042 | |||||||
Residential
mortgage backed securities
|
1,230 | 26 | (14 | ) | 1,242 | |||||||||||
Total
|
$ | 9,229 | $ | 69 | $ | (14 | ) | $ | 9,284 | |||||||
December 31, 2008:
|
||||||||||||||||
Residential
mortgage backed securities
|
$ | 1,345 | $ | 11 | $ | (27 | ) | $ | 1,329 |
The
estimated fair value of debt securities at September 30, 2009, by contractual
maturity are shown below. Expected maturities may differ from
contractual maturities, because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
After
|
After
|
||||
In
|
One
Year
|
Five
Years
|
|||
One
Year
|
Through
|
Through
|
After
|
||
(in
thousands)
|
Or
Less
|
Five
Years
|
Ten
Years
|
Ten
Years
|
Total
|
Securities
held-to-maturity
|
|||||
US
Treasury securities
|
$1,998
|
$6,044
|
$-
|
$-
|
$8,042
|
Residential
mortgage backed
|
-
|
-
|
-
|
$1,242
|
1,242
|
Total
securities
|
$1,998
|
$6,044
|
$-
|
$1,242
|
$9,284
|
9
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
On
September 30, 2009 and December 31, 2008, there were $947,000 and 0,
respectively, in mortgage-backed securities pledged as collateral.
The
following tables show fair value and unrealized losses, aggregated by investment
category and length of time that the individual securities have been in a
continuous unrealized loss position as of September 30, 2009 and December 31,
2008. Included in the table is one mortgage backed security for 2009 and two for
2008. Management believes that the unrealized losses are the result of interest
rate levels differing from those existing at the time of purchase of the
securities and actual and estimated prepayment speeds. These
unrealized losses are considered temporary as they reflect fair values on
September 30, 2009 and December 31, 2008 and are subject to change daily as
interest rates fluctuate.
Less
than 12 months
|
12
Months or More
|
Total
|
||||
Unrealized
|
Unrealized
|
Unrealized
|
||||
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
|
September 30, 2009:
|
(dollars
in thousands)
|
|||||
Mortgage
backed securities
|
$-
|
$-
|
$268
|
($14)
|
$268
|
($14)
|
December 31, 2008:
|
||||||
Mortgage
backed securities
|
$-
|
$-
|
$1,151
|
($27)
|
$1,151
|
($27)
|
Note 11 -
Fair Values of
Financial Instruments
FASB ASC
820 Fair Value Measurements and Disclosures establishes a fair value hierarchy
that prioritizes the inputs to valuation methods used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair market hierarchy under
FASB ASC 820 are as follows:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
Level
2: Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the full term of the
asset or liability.
Level
3: Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e. supported with
little or no market activity).
An asset
or liability’s level within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement.
10
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The
following table summarizes the valuation of assets re-measured at fair value on
a nonrecurring basis, by the above FASB ASC 820 pricing methodology as of
September 30, 2009 and December 31, 2008 (dollars in thousands):
Fair
Value Measurement at September 30, 2009 Using
|
||||
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Loans
accounted for under FASB ASC 310-10-35
|
$48,994
|
-
|
-
|
$48,994
|
Foreclosed
real estate
|
17,877
|
-
|
-
|
17,877
|
Fair
Value Measurement at December 31, 2008 Using
|
||||
Total
|
Level 1
|
Level 2
|
Level 3
|
|
Loans
accounted for under FASB ASC 310-10-35
|
$32,054
|
-
|
-
|
$32,054
|
Foreclosed
real estate
|
6,317
|
-
|
-
|
6,317
|
There
were no liabilities that were required to be re-measured on a nonrecurring basis
during the period ended September 30, 2009 or the year ended December 31,
2008.
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and
assumptions were used to estimate the fair values of the Bank’s financial
instruments at September 30, 2009 and December 31, 2008.
Cash
and cash equivalents:
The
carrying amount reported in the statement of financial condition for cash and
cash equivalents approximate those assets fair values.
Investment
Securities:
The
Company utilizes a third party source to determine the fair value of its fixed
income securities. The methodology consists of pricing models based
on asset class and includes available trade, bid, other market information,
broker quotes, proprietary models, various databases and trading desk quotes,
some of which are heavily influenced by unobservable inputs.
FHLB
stock:
The
carrying amount of FHLB stock approximates fair value based on the redemption
provisions of the FHLB. There have been no identified events or
changes in circumstances that may have a significant adverse effect on the FHLB
stock. Based on our evaluation, we have concluded that our FHLB stock
was not impaired at September 30, 2009.
Loans
held for sale:
The fair
value of loans held for sale is based primarily on investor quotes.
Loans
receivable:
The fair
values of loans receivable was estimated using discounted cash flow analyses,
using market interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
11
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
These
rates were used for each aggregated category of loans as reported on the Office
of Thrift Supervision Quarterly Report.
Impaired
loans are those that are accounted for under FASB ASC 310-10-35, in which the
Company has measured impairment generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent
third-party appraisals of the properties, or discounted cash flows based upon
the expected proceeds. These assets are included as Level 3 fair
values, based upon the lowest level of input that is significant to the fair
value measurements. The fair value consisted of the loan balances of $65,743,000
and $37,444,000 at September 30, 2009 and December 31, 2008, respectively, less
their valuation allowances of $16,749,000 and $5,390,000 at September 30, 2009
and December 31, 2008, respectively, as determined under FASB ASC
310-10-35.
Foreclosed Real
Estate:
Real
estate acquired through or in the process of foreclosure is recorded and
included in the following disclosure at fair value less estimated disposal
costs. Management periodically evaluates the recoverability of the carrying
value of the real estate acquired through foreclosure using current estimates of
fair value. In the event of a subsequent decline, management provides an
allowance to reduce real estate acquired through foreclosure to fair value less
estimated disposal cost. Expenses incurred on foreclosed real estate prior to
disposition are charged to expense. Gains or losses on the sale of foreclosed
real estate are recognized upon disposition of the property.
Accrued
interest receivable and payable:
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Deposit
liabilities:
The fair
values disclosed for demand deposit accounts, savings accounts and money market
deposits are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies market interest rates currently being offered in the market on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
FHLB
advances:
Fair
values of long-term debt are estimated using discounted cash flow analysis,
based on rates currently available for advances from the FHLB with similar terms
and remaining maturities.
Subordinated
debentures:
Current
economic conditions have rendered the market for this liability
inactive. As such, the Company is unable to determine a good estimate
of fair value. Since the rate paid on the debentures held is lower
than what would be required to secure an interest in the same debt at year end
and we are unable to obtain a current fair value, the Company has disclosed that
the carrying value approximates the fair value.
12
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Off-balance
sheet financial instruments:
Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are
not significant and are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing.
The
following table summarizes the roll forward of level 3 assets for the nine
months ended September 30, 2009 (dollars in thousands):
Impaired Loans
|
Foreclosed Real Estate
|
|||||||
Balance
at December 31, 2008
|
$ | 32,054 | $ | 6,317 | ||||
Transfer
to foreclosed real estate
|
(10,755 | ) | 19,649 | |||||
Additions
|
57,507 | 213 | ||||||
Additional
allowances
|
(11,358 | ) | (2,258 | ) | ||||
Paid
off/sold
|
(18,454 | ) | (6,044 | ) | ||||
Balance
at September 30, 2009
|
$ | 48,994 | $ | 17,877 |
The
$11,358,000 in additional reserves recorded against impaired loans was included
in the provision for loan losses on the statement of operations for the nine
months ended September 30, 2009. The $2,258,000 of additional
reserves recorded against foreclosed real estate was included in non-interest
expenses on the statement of operations for the nine months ended September 30,
2009. Included in the $19,649,000 of loans transferred to foreclosed
real estate were 17 loans totaling $12,709,000 that were not considered impaired
per FASB ASC 310-10-35.
The
estimated fair values of the Company's financial instruments were as
follows:
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Financial Assets
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 70,311 | $ | 70,311 | $ | 32,305 | $ | 32,305 | ||||||||
Investment
securities
|
9,229 | 9,284 | 1,345 | 1,329 | ||||||||||||
FHLB
stock
|
8,609 | 8,609 | 8,694 | 8,694 | ||||||||||||
Loans
held for sale
|
1,418 | 1,418 | 453 | 453 | ||||||||||||
Loans
receivable, net
|
835,756 | 873,124 | 896,006 | 899,991 | ||||||||||||
Accrued
interest receivable
|
3,530 | 3,530 | 4,363 | 4,363 | ||||||||||||
Financial Liabilities
|
||||||||||||||||
Deposits
|
$ | 725,040 | $ | 728,475 | $ | 683,866 | $ | 687,067 | ||||||||
FHLB
advances
|
135,000 | 126,883 | 153,000 | 151,142 | ||||||||||||
Subordinated
debentures
|
24,119 | 24,119 | 24,119 | 24,119 | ||||||||||||
Accrued
interest payable
|
837 | 837 | 1,120 | 1,120 | ||||||||||||
Off Balance Sheet
Commitments
|
$ | - | $ | - | $ | - | $ | - |
13
SEVERN BANCORP, INC. AND
SUBSIDIARIES
Annapolis,
Maryland
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Note 12 -
Recent Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification TM and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards
Codification TM
(“Codification”) as the source of authoritative generally accepted
accounting principles (“GAAP”) for nongovernmental entities. The
Codification does not change GAAP. Instead, it takes the thousands of
individual pronouncements that currently comprise GAAP and reorganizes them into
approximately 90 accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is
the only level that contains substantive content. Citing particular
content in the Codification involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph
structure. FASB suggests that all citations begin with “FASB ASC,”
were ASC stands for Accounting
Standards Codification. Changes to the ASC subsequent to June
30, 2009 are referred to as Accounting Standards Updates (“ASU”).
In
conjunction with the issuance of SFAS 168, the FASB also issued its first
Accounting Standards Update No. 2009-1, “Topic 105 – Generally Accepted
Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as
a transition to the ASC. ASU 2009-1 is effective for interim and
annual periods ending after September 15, 2009 and did not have an impact on the
Company’s financial position or results of operations but changed the
referencing system for accounting standards.
In April
2009, the FASB issued FASB ASC 820-10-65-4, Fair Value Measurements and
Disclosures Overall
Transition. FASB ASC 820, Fair Value Measurements and
Disclosures, defines fair value as the price that would be received to
sell the asset or transfer the liability in an orderly transaction (that is, not
a forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. FASB ASC 820-10-65-4 provides
additional guidance on determining when the volume and level of activity for the
asset or liability has significantly decreased. It also includes guidance on
identifying circumstances when a transaction may not be considered
orderly.
FASB ASC
820-10-65-4 provides a list of factors that a reporting entity should evaluate
to determine whether there has been a significant decrease in the volume and
level of activity for the asset or liability in relation to normal market
activity for the asset or liability. When the reporting entity concludes there
has been a significant decrease in the volume and level of activity for the
asset or liability, further analysis of the information from that market is
needed and significant adjustments to the related prices may be necessary to
estimate fair value in accordance with FASB ASC 820.
This
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. This provides a list
of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value.
This was
effective for interim and annual reporting periods ending after June 15,
2009. The adoption of FASB ASC 820-10-65-4 did not have a material impact on the
consolidated financial statements.
14
In April
2009, the FASB issued FASB ASC 825-10-65-1, Financial Instruments Overall
Transition. FASB ASC 825-10-65-1 amends FASB ASC 825-10-50,
Financial Instruments Overall
Disclosure, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This also amends FASB ASC 270-10-05, Interim Reporting Overall
Background to require those disclosures in summarized financial
information at interim reporting periods.
This was
effective for interim and annual reporting periods ending after June 15,
2009. The adoption
of FASB ASC 825-10-65-1 did not have a material impact on the consolidated
financial statements.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
Company
The
Company is a savings and loan holding company chartered as a corporation in the
state of Maryland, and is headquartered in Annapolis, Maryland. It
conducts business primarily through three subsidiaries: the Bank, a
federal savings bank, which is the Company’s principal subsidiary; Louis Hyatt,
Inc., a subsidiary of the Bank, doing business as Hyatt Commercial, a
commercial real estate brokerage and property management company; and SBI
Mortgage Company, which holds mortgages that do not meet the underwriting
criteria of the Bank, and is the parent company of Crownsville Development
Corporation, doing business as Annapolis Equity Group, which acquires real
estate for syndication and investment purposes. The Bank has four
branches in Anne Arundel County, Maryland, which offer a full range of deposit
products. The Bank originates loans in its primary market of Anne Arundel
County, Maryland and, to a lesser extent, in other parts of Maryland, Delaware
and Virginia. The Company’s common stock trades under the symbol
“SVBI” on the Nasdaq Capital Market.
Bank
Competition
The
Annapolis, Maryland area has a high density of financial institutions, many of
which are significantly larger and have greater financial resources than the
Bank, and all of which are competitors of the Bank to varying
degrees. The Bank’s competition for loans comes primarily from
savings and loan associations, savings banks, mortgage banking companies,
insurance companies and commercial banks. Its most direct competition
for deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Bank faces additional
competition for deposits from money market mutual funds and corporate and
government securities funds and investments. The Bank also faces
increased competition for deposits from other financial institutions such as
brokerage firms and insurance companies. The Bank is a
community-oriented financial institution serving its market area with a wide
selection of mortgage loan products. Management considers the Bank’s
reputation for financial strength and customer service to be a major competitive
advantage in attracting and retaining customers in its market
area. The Bank also believes it benefits from its community
orientation.
Forward
Looking Statements
In
addition to the historical information contained herein, the discussion in this
report contains forward-looking statements that involve risks and uncertainties
and may be affected by various factors that may cause actual results to differ
materially from those in the forward-looking statements. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the Bank’s strategy; management’s determination of the
amount of the loan loss allowance; the effect of changes in interest
rates; changes in deposit insurance premiums; ability to meet
obligations; and legal proceedings. The words “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,”
“could,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,”
“confident,” and similar expressions are typically used to identify
forward-looking statements. The Company’s 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, the success of the Bank’s
strategy; changes in the economy and interest rates both in the nation and
Company’s general market area; federal and state regulation; and competition and
other factors detailed from time to time in the Company’s filings with the
Securities and Exchange Commission (the “SEC”), including “Item 1A. Risk
Factors” contained in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
15
Critical Accounting Policies
The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”. The FASB sets generally
accepted accounting principles (“GAAP”) that the Company follows. References to
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. The
FASB finalized the Codification effective for periods ending on or after
September 15, 2009.
The
Company’s significant accounting policies are set forth in Note 1 of the audited
consolidated financial statements as of December 31, 2008 which were included in
the Company’s Annual Report 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 on the provision for loan losses and results of
operations. The Company has developed 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. See Note 5 of the consolidated financial statements for
discussion of changes in the methods used by management to estimate the
allowance for loan losses. 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 is
not known to management at the time of the issuance of the consolidated
financial statements.
Overview
The
Company provides a wide range of retail and commercial banking services. Deposit
services include checking, individual retirement accounts, money market, savings
and time deposit accounts. Loan services include various types of commercial,
consumer, and real estate lending. The Company also provides ATMs, corporate
cash management services, debit cards, Internet banking including on-line bill
pay, mortgage lending, safe deposit boxes, and telephone banking, among other
products and services.
The
Company continues to experience challenges similarly faced by many financial
institutions resulting from the slowdown in the financial and real estate
markets, including increased loan delinquencies and a decrease in the demand for
certain loan products including mortgage, construction, development, and land
acquisition loans. Continued declines in real estate values, home sales volumes
and financial stress on borrowers as a result of the uncertain economic
environment, including job losses and other factors, have adversely affected our
borrowers. As a result, the Company has increased its provision for loan losses
to $25,944,000 for the nine months ended September 30, 2009,
compared to $4,365,000 for the same period in 2008. Also, strong
competition for new loans and deposits has caused the interest rate spread
between the Company’s cost of funds and what it earns on loans to decrease from
2008 levels. This was primarily due to an increase in non-accrual
loans, and to decreases in interest rates earned on loans outpacing the
decreases in interest paid on deposits and other borrowings. The
Company’s net loan portfolio has decreased $60,250,000, or 6.7%, to $835,756,000
at September 30, 2009, compared to $896,006,000 at December 31,
2008.
16
The
Company has experienced an increase in delinquent loans and has increased its
provision for loan losses from 2008 levels accordingly. The Company
believes that the allowance for loan losses was adequate at September 30,
2009.
The
Company will be challenged to grow its loan portfolio in the current economic
downturn. In addition to the challenges faced with the current
economy, the Company may also experience less loan demand if interest rates
rise. The Company will continue to manage loan and deposit pricing
against the risks of rising costs of its deposits and borrowings.
The
Company’s success continues to be dependent on the strength of the markets in
which it operates, including the Company’s ability to originate and grow its
mortgage loans, as well as its continuing ability to maintain comparatively low
overhead costs.
If the
volatility in the market and the economy continues or worsens, the Company’s
business, financial condition, results of operations, access to funds and the
price of our stock could be materially and adversely impacted.
Results of Operations
Net
income decreased by $4,946,000, or 842.6%, to a net loss of $4,359,000 for the
third quarter of 2009, compared to net income of $587,000 for the third quarter
of 2008. Basic and diluted earnings (loss) per share decreased by
$.54, or 900.0%, to ($.48) for the third quarter of 2009 compared to $.06 for
the third quarter of 2008. Net income decreased by $16,920,000, or
389.6%, to a net loss of $12,577,000 for the nine months ended September 30,
2009, compared to net income of $4,343,000 for the same period in
2008. Basic and diluted earnings (loss) per share decreased by $1.81,
or 420.9% to ($1.38) for the nine months ended September 30, 2009 compared to
$.43 for the same period in 2008. The decrease in net income (loss) and basic
and diluted earnings (loss) per share over last year was primarily the result of
management’s decision to increase the allowance for loan loss by approximately
$26,000,000 for the nine months ended September 30, 2009 compared to
approximately $4,400,000 for the nine months ended September 30,
2008. In addition, the Company’s interest rate spread decreased by
0.44%, to 2.51% for the nine months ended September 30, 2009, compared to 2.95%
for the same period in 2008. The interest rate spread is the
difference between the Company’s cost of funds and yield on earning
assets.
Net
interest income, which is interest earned net of interest expense, decreased by
$73,000, or 1.0%, to $7,051,000 for the third quarter of 2009, compared to
$7,124,000 for the third quarter of 2008. Net interest income decreased by
$2,967,000, or 13.2%, to $19,452,000 for the nine months ended September 30,
2009, compared to $22,419,000 for the same period in 2008. The primary reasons
for the decrease in net interest income was an increase in non-accrual loans,
and that the interest rates earned on the Company’s loan portfolio have
decreased faster than the interest rates paid on the Company’s interest bearing
liabilities. Net interest margin for the nine months ended September
30, 2009 was 2.81%, compared to 3.27% for the same period in 2008.
The
provision for loan losses increased by $6,044,000, or 211.0%, to $8,909,000 for
the third quarter of 2009, compared to $2,865,000 for the third quarter of
2008. The provision for loan losses for the nine months ended September 30,
2009 increased by $21,579,000, or 494.4%, to $25,944,000, compared to $4,365,000
for the same period in 2008. The provision for loan losses and allowance for
loan losses are based on management’s judgment and evaluation of the loan
portfolio. Management assesses the adequacy of the allowance for loan losses and
the need for any addition thereto, by considering the nature and size of the
loan portfolio, overall portfolio quality, review of specific problem loans,
economic conditions that may affect the borrowers’ ability to pay or the value
of property securing loans, and other relevant
factors. While management believes the current allowance for
loan losses is adequate, changing economic and other conditions may require
future adjustments to the allowance for loan losses. For additional
discussion, see “Asset Quality” below.
17
Total
non-interest income decreased by $167,000, or 22.7%, to $570,000 for the third
quarter of 2009, compared to $737,000 for the third quarter of 2008. The
primary reason for the decrease in non-interest income was a decrease in real
estate commissions partially offset by an increase in management fees by Hyatt
Commercial. Real estate commissions decreased $221,000, or 67.2%, to $108,000
for the third quarter of 2009, compared to $329,000 for the third quarter of
2008, while real estate management fees increased $72,000, or 45.3%, to $231,000
for the third quarter of 2009, compared to $159,000 for the third quarter of
2008. Total non-interest income decreased by $194,000, or 9.2%, to $1,915,000
for the nine months ended September 30, 2009, compared to $2,109,000 for the
same period in 2008. The primary reason for the decrease during the first
nine months of 2009, compared to the first nine months of 2008 was a decrease in
real estate commissions. Real estate commissions decreased $188,000, or 26.6%,
to $519,000 for the nine months ended September 30, 2009, compared to $707,000
for the same period in 2008. The primary reason for this decline was the
economic downturn which resulted in less activity in the sale and lease of
commercial property.
Total
non-interest expenses increased by $1,992,000, or 49.9%, to $5,980,000 for the
third quarter of 2009, compared to $3,988,000 for the third quarter of
2008. Total non-interest expenses increased by $3,426,000, or 26.7%,
to $16,234,000 for the nine months ended September 30, 2009, compared to
$12,808,000 for the same period in 2008. Compensation and related expenses
increased by $332,000, or 16.0%, to $2,408,000 for the third quarter of 2009,
compared to $2,076,000 for the same period in 2008. Total compensation and
related expenses increased by $243,000, or 3.6%, to $7,072,000 for the nine
months ended September 30, 2009 compared to $6,829,000 for the same period in
2008. This increase was primarily because of an increase in salary expense and
health insurance from newly hired employees, partially offset by lower
commissions. Net occupancy costs decreased by $94,000, or 21.5%, to
$343,000 for the third quarter of 2009, compared to $437,000 for the third
quarter of 2008. Net occupancy costs decreased by $268,000, or 21.4%, to
$985,000 for the nine months ended September 30, 2009, compared to $1,253,000
for the same period in 2008. This decrease was the result of a decrease in net
rents, utilities and depreciation expenses at its
headquarters. Foreclosed real estate expenses, net increased by
$1,307,000, or 4,084.4%, to $1,339,000 for the third quarter of 2009, compared
to $32,000 for the same period in 2008. Foreclosed real estate expenses, net
increased by $2,579,000, or 605.4%, to $3,005,000 for the nine months ended
September 30, 2009, compared to $426,000 for the same period in 2008. This
increase was the result of additional foreclosure expenses incurred due to the
economic environment and the increase in loan foreclosures experienced by the
Company. Legal fees increased by $95,000, or 44.6%, to $308,000 for
the third quarter of 2009, compared to $213,000 for the same period in
2008. Legal fees increased by $248,000, or 51.3%, to $731,000 for the
nine months ended September 30, 2009, compared to $483,000 for the same period
in 2008. This increase is the result of increased legal activity relating to
loan delinquencies. FDIC assessments and regulatory expense increased
by $404,000, or 213.8%, to $593,000 for the third quarter of 2009, compared to
$189,000 for the same period in 2008. FDIC assessments and regulatory
expense increased by $877,000, or 163.3%, to $1,414,000 for the nine months
ended September 30, 2009, compared to $537,000 for the same period in 2008. This
increase is due to a one time FDIC special assessment that occurred in the
second quarter of 2009, and higher assessment rates in 2009 compared to
2008.
Income
Taxes
The
income tax provision decreased by $3,330,000, or 791.0%, to a tax benefit of
$2,909,000 for the third quarter of 2009, compared to a tax expense of $421,000
for the third quarter of 2008. The income tax provision for the first
nine months of 2009 decreased by $11,246,000, or 373.4%, to a tax benefit of
$8,234,000, compared to a tax expense of $3,012,000 for the first nine months of
2008. The decrease is consistent with the decrease in pretax income (loss). The
effective tax rate for the nine months ended September 30, 2009 was (39.6%)
compared to 41.0% for the same period in 2008. During the nine months
ended September 30, 2009, the Company’s net deferred tax asset increased by
$8,607,000 primarily relating to the tax effect of the additional $25,944,000
increase in its loan loss reserve. The change in the effective tax rate was
primarily due to a valuation allowance placed on a portion of the deferred tax
asset resulting from current state operating loss
carryforwards. There was no valuation allowance on the federal
operating loss carryforwards because of the two year carryback and twenty year
carryforward period.
18
Analysis
of Financial Condition
Total
assets increased $8,253,000, or 0.8%, to $995,904,000 at September 30, 2009,
compared to $987,651,000 at December 31, 2008. Cash and cash
equivalents increased by $38,006,000, or 117.6%, to $70,311,000 at September 30,
2009, compared to $32,305,000 at December 31, 2008. This increase was
primarily in federal funds sold and correspondent bank balances. The loan
portfolio decreased, as net loans receivable decreased $60,250,000, or 6.7%, to
$835,756,000 at September 30, 2009, compared to $896,006,000 at December 31,
2008. This decrease was the result of the continued general slowdown
in loan demand during the first nine months of 2009 as well as the increase in
the allowance for loan losses. Loans held for sale increased
$965,000, or 213.0%, to $1,418,000 at September 30, 2009, compared to $453,000
at December 31, 2008. This increase was primarily due to the timing
of loans pending sale as of September 30, 2009. Other real estate
owned increased $11,560,000, or 183.0% to $17,877,000 at September 30, 2009
compared to $6,317,000 at December 31, 2008. Total deposits increased
$41,174,000, or 6.0%, to $725,040,000 at September 30, 2009 compared to
$683,866,000 at December 31, 2008. This increase was primarily
attributable to the popularity of Safe Harbor savings accounts. FHLB
Atlanta borrowings decreased $18,000,000, or 11.8%, to $135,000,000 at September
30, 2009, compared to $153,000,000 as of December 31, 2008. This was a result of
paying off long-term FHLB Atlanta advances at maturity with proceeds received
from increased deposits and loan payoffs.
Stockholders’
Equity
Total
stockholders’ equity decreased $14,455,000, or 11.7%, to $109,212,000 at
September 30, 2009 compared to $123,667,000 as of December 31,
2008. This decrease was primarily a result of the net loss for the
first nine months, and the dividends paid to its common and preferred
stockholders.
Asset
Quality
Non-performing
assets consist of non-accrual loans, restructured loans, and other real estate
owned (foreclosed properties). Loans are placed in non-accrual
status, when in the opinion of management, the collection of additional interest
is unlikely or a specific loan meets the criteria for non-accrual status
established by regulatory authorities (those loans 90 or more days in
arrears). No interest is taken into income on non-accrual
loans. A loan remains on non-accrual status until the loan is
current as to both principal and interest and collectability is reasonably
assured.
Foreclosed
real estate includes properties that have been repossessed or acquired in
complete or partial satisfaction of debt. Such properties, which are
held for resale, are carried at fair value, less a reduction for the estimated
selling expenses.
The
following table presents the Company’s non-performing assets as of September 30,
2009 and December 31, 2008 (dollars in thousands):
19
September
30,
2009
|
Number
of loans
|
December
31, 2008
|
Number
of loans
|
|||||||||||||
|
|
|||||||||||||||
Loans
accounted for on a non-accrual basis:
|
||||||||||||||||
Mortgage
loans:
|
||||||||||||||||
Residential
- consumer
|
$ | 45,249 | 86 | $ | 30,769 | 73 | ||||||||||
Residential
- builder
|
17,417 | 48 | 20,970 | 45 | ||||||||||||
Commercial
|
4,741 | 12 | 3,047 | 11 | ||||||||||||
Non-mortgage
loans:
|
||||||||||||||||
Consumer
|
11 | 2 | 9 | 2 | ||||||||||||
Commercial
loans
|
1,383 | 3 | - | - | ||||||||||||
Total
non-accrual loans
|
$ | 68,801 | 151 | $ | 54,795 | 131 | ||||||||||
Accruing
loans greater than 90 days past due
|
$ | - | $ | - | ||||||||||||
Foreclosed
real-estate
|
$ | 17,877 | $ | 6,317 | ||||||||||||
Total
non-performing assets
|
$ | 86,678 | $ | 61,112 | ||||||||||||
Total
troubled debt restructurings
|
$ | 22,552 | 32 | $ | 2,142 | 3 | ||||||||||
Total
non-accrual loans to net loans
|
8.2 | % | 6.1 | % | ||||||||||||
Allowance
for loan losses
|
$ | 34,009 | $ | 14,813 | ||||||||||||
Allowance
to total loans
|
3.9 | % | 1.6 | % | ||||||||||||
Allowance
for loan losses to total non-performing loans,
|
||||||||||||||||
including
loans contractually past due 90 days or more
|
49.4 | % | 27.0 | % | ||||||||||||
Total
non-accrual and accruing loans greater than
|
||||||||||||||||
90
days past due to total assets
|
6.9 | % | 5.5 | % | ||||||||||||
Total
non-performing assets to total assets
|
8.7 | % | 6.2 | % |
The
allowance for loan losses is based on management’s judgment and evaluation of
the loan portfolio. Management assesses the adequacy of the allowance
for loan losses and the need for any addition thereto, by considering the nature
and size of the loan portfolio, overall portfolio quality, review of specific
problem loans, economic conditions that may affect the borrowers’ ability to pay
or the value of property securing loans, and other relevant
factors. While management believes the current allowance is adequate,
changing economic and market conditions may require future adjustments to the
allowance for loan losses.
The
following table summarizes the change in impaired loans for the nine months
ended September 30, 2009 (dollars in thousands):
Impaired
loans at December 31, 2008
|
$ | 69,836 | ||
Added
to impaired loans
|
102,507 | |||
Gross
loans transferred to foreclosed real estate
|
(23,464 | ) | ||
Paid
off prior to foreclosure
|
(20,346 | ) | ||
Impaired
loans at September 30, 2009
|
$ | 128,533 |
Included
in the above impaired loans amount at September 30, 2009 was $59,732,000 of
loans that were not in non-accrual status. In addition, there was a total
of $77,837,000 of residential real estate loans included in impaired loans at
September 30, 2009, of which $60,795,000 were to consumers and $17,042,000 were
to builders. Impaired loans are individually reviewed by management to
determine their estimated fair value, and a specific reserve is established, if
necessary, for the difference between the original carrying value of any loan
and its estimated fair value.
20
As of
September 30, 2009, the Company had foreclosed real estate consisting of 43
residential properties with a carrying value of $17,877,000. During
the nine month period ended September 30, 2009, the Company sold 19 properties
previously included in foreclosed real estate. The following table
summarizes the changes in foreclosed real estate for the nine months ended
September 30, 2009 (dollars in thousands):
Foreclosed
real estate at December 31, 2008
|
$ | 6,317 | ||
Transferred
from loans, net of charge-offs of $3,815
|
19,649 | |||
Property
improvements
|
213 | |||
Property
sold
|
(6,044 | ) | ||
Additional
allowances
|
(2,258 | ) | ||
Foreclosed
real estate at September 30, 2009
|
$ | 17,877 |
Liquidity
The
Company’s liquidity is determined by its ability to raise funds through several
sources including borrowed funds, capital, deposits, loan repayments, maturing
investments, and the sale of loans. Based on the internal and
external sources available, the Company’s liquidity position exceeded
anticipated short-term and long-term needs as of September 30,
2009. 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 the Company 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 the Company may take
advantage of business opportunities.
Management
believes it has sufficient cash flow and liquidity to meet its current
commitments through the next 12 months. Certificates of deposit,
which are scheduled to mature in less than one year, totaled $372,463,000 at
September 30, 2009. Based on past experience, management believes
that a significant portion of such deposits will remain with the Company. At
September 30, 2009, the Company had commitments to originate mortgage loans of
$9,485,000, unadvanced home equity lines of credit of $19,871,000, unadvanced
construction commitments of $48,335,000, unused lines of credit of $27,422,000,
and commitments under standby letters of credit of $11,551,000. The
Company has the ability to reduce its commitments for new loan originations,
adjust other cash outflows, and borrow from FHLB Atlanta should the need
arise. As of September 30, 2009, outstanding FHLB Atlanta borrowings
totaled $135,000,000, and the Company had available to it an additional
$163,490,000 in borrowing availability from FHLB Atlanta.
Net cash
provided by operating activities decreased $5,510,000 to $2,573,000 for the nine
months ended September 30, 2009, compared to $8,083,000 for the same period in
2008. This decrease was primarily the result of a net loss, higher loans
originated for sale to others and an increase in deferred tax assets, partially
offset by the increase in the provision for loan losses in 2009. Net
cash provided by investing activities increased $13,210,000 to $14,233,000 for
the nine months ended September 30, 2009, compared to $1,023,000 for the same
period in 2008. This increase was primarily due to higher cash proceeds
from the decrease in loans during the nine months ended September 30, 2009,
compared to the same period in 2008. In financing activities, net cash
increased by $23,123,000 to $21,200,000 provided by financing activities for the
nine months ended September 30, 2009, compared to $1,923,000 used in financing
activity for the same period in 2008. This increase was primarily due
to lower repayments of FHLB Atlanta borrowings in 2009 and an increase in
deposits during the nine months ended September 30, 2009, compared to the same
period in 2008.
21
Federal
Home Loan Bank of Atlanta Line of Credit
The Bank
has an available line of credit, secured by various loans in its portfolio, in
the amount of thirty percent (30%) of its total assets, with the FHLB
Atlanta. As of September 30, 2009, the total available line of credit
with the FHLB Atlanta was approximately $298,000,000, of which $135,000,000 was
outstanding. The Bank, from time to time, utilizes the line of credit
when interest rates are more favorable than obtaining deposits from the public.
The following table sets forth information concerning the interest rates and
maturity dates of the advances from the FHLB Atlanta as of September 30, 2009
(dollars in thousands):
Principal
Amount
|
Rate
|
Maturity
|
|
$ 10,000
|
3.083%
|
2009
|
|
10,000
|
5.000%
|
2010
|
|
-
|
-
|
2011
|
|
-
|
-
|
2012
|
|
-
|
-
|
2013
|
|
115,000
|
2.579%
to 4.340%
|
Thereafter
|
|
$
135,000
|
Subordinated Debentures
As of
September 30, 2009, the Company had outstanding $20,619,000 principal amount of
Junior Subordinated Debt Securities Due 2035 (the “2035
Debentures”). The 2035 Debentures were issued pursuant to an
Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the
Company and Wells Fargo Bank, National Association, as Trustee. The
2035 Debentures pay interest quarterly at a floating rate of interest of LIBOR
(0.05094% as of September 30, 2009) plus 200 basis points, and mature on January
7, 2035. Payments of principal, interest, premium and other amounts
under the 2035 Debentures are subordinated and junior in right of payment to the
prior payment in full of all senior indebtedness of the Company, as defined in
the 2035 Indenture. The 2035 Debentures are first redeemable, in
whole or in part, by the Company on January 7, 2010.
The 2035
Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of
which 100% of the common equity is owned by the Company. The Trust
was formed for the purpose of issuing corporation-obligated mandatorily
redeemable Capital Securities (“Capital Securities”) to third-party investors
and using the proceeds from the sale of such Capital Securities to purchase the
2035 Debentures. The 2035 Debentures held by the Trust are the sole
assets of the Trust. Distributions on the Capital Securities issued
by the Trust are payable quarterly at a rate per annum equal to the interest
rate being earned by the Trust on the 2035 Debentures. The Capital
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the 2035 Debentures. The Company has entered into an
agreement which, taken collectively, fully and unconditionally guarantees the
Capital Securities subject to the terms of the guarantee.
On
November 15, 2008, the Company completed a private placement offering consisting
of a total of 70 units, at an offering price of $100,000 per unit, for gross
proceeds of $7.0 million. Each unit consists of 6,250 shares of the Company's
Series A 8.0% Non-Cumulative Convertible Preferred Stock and the Company's
Subordinated Note in the original principal amount of $50,000.
22
The
Subordinated Notes earn interest at an annual rate of 8.0%, payable quarterly in
arrears on the last day of March, June, September and December commencing
December 31, 2008. The Subordinated Notes are redeemable in whole or
in part at the option of the Company at any time beginning on December 31, 2009
until maturity, which is December 31, 2018. Debt issuance costs
totaled $245,000 and are being amortized over 10 years.
Preferred
Stock
The
Company issued a total of 437,500 shares of its Series A 8.0% Non-Cumulative
Convertible Preferred Stock (“Series A Preferred Stock”) as part of the private
placement offering completed on November 15, 2008. The liquidation
preference is $8.00 per share. Each share of Series A Preferred Stock
is convertible at the option of the holder into one share of the Company’s
common stock, subject to adjustment upon certain corporate events. The initial
conversion rate is equivalent to an initial conversion price of $8.00 per share
of the Company’s common stock. At the option of the Company, on and after
December 31, 2013, at any time and from time to time, some or all of the Series
A Preferred Stock may be converted into shares of the Company’s common stock at
the then-applicable conversion rate. Costs related to the issuance of
the preferred stock totaled $247,000 and were netted against the
proceeds.
If
declared by the Company's board of directors, cash dividends at an annual rate
of 8.0% will be paid quarterly in arrears on the last day of March, June,
September and December commencing December 31, 2008. Dividends will not be paid
on the Company’s common stock in any quarter until the dividend on the Series A
Preferred Stock has been paid for such quarter; however, there is no requirement
that the Company's board of directors declare any dividends on the Series A
Preferred Stock and any unpaid dividends shall not be cumulative.
On
November 21, 2008, the Company entered into an agreement with the United States
Department of the Treasury (“Treasury”), pursuant to which the Company issued
and sold (i) 23,393 shares of its Series B Fixed Rate Cumulative Perpetual
Preferred Stock, par value $0.01 per share and liquidation preference $1,000 per
share, (the “Series B Preferred Stock”) and (ii) a warrant (the “Warrant”) to
purchase 556,976 shares of the Company’s common stock, par value $0.01 per
share, for an aggregate purchase price of $23,393,000. Costs related
to the issuance of the preferred stock and warrants totaled $45,000 and were
netted against the proceeds. The Series B Preferred Stock qualifies
as Tier 1 capital and will pay cumulative compounding dividends at a rate of 5%
per annum for the first five years, and 9% per annum thereafter.
The Series B Preferred Stock has no
maturity date and ranks pari passu with the Company’s existing Series A
Preferred Stock, in terms of dividend payments and distributions upon
liquidation, dissolution and winding up of the Company.
The
Series B Preferred Stock is non-voting, other than class voting rights on
certain matters that could adversely affect the Series B Preferred Stock. If
dividends on the Series B Preferred Stock have not been paid for an aggregate of
six quarterly dividend periods or more, whether consecutive or not, the
Company’s authorized number of directors will be automatically increased by two
and the holders of the Series B Preferred Stock, voting together with holders of
any then outstanding voting parity stock, will have the right to elect those
directors at the Company’s next annual meeting of stockholders or at a special
meeting of stockholders called for that purpose. These preferred share directors
will be elected annually and serve until all accrued and unpaid dividends on the
Series B Preferred Stock have been paid.
23
The
Warrant has a 10-year term and is immediately exercisable at an exercise price
of $6.30 per share of Common Stock. The exercise price and
number of shares subject to the Warrant are both subject to anti-dilution
adjustments. If the Company receives aggregate gross cash proceeds of
not less than $23,393,000 from Qualified Equity Offerings on or prior to
December 31, 2009, the number of shares of common stock issuable pursuant to
Treasury’s exercise of the Warrant will be reduced by one half of the original
number of shares, taking into account all adjustments, underlying the Warrant.
Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting
power with respect to any shares of Common Stock issued upon exercise of the
Warrant.
The
Company’s ability to declare dividends on its common stock are limited by the
terms of the Company’s Series A preferred stock and Series B preferred
stock. The Company may not declare or pay any dividend on, make any
distributions relating to, or redeem, purchase, acquire or make a liquidation
payment relating to, or make any guarantee payment with respect to its common
stock in any quarter until the dividend on the Series A Preferred Stock has been
declared and paid for such quarter, subject to certain minor
exceptions. Additionally, prior to November 21, 2011, unless the
Company has redeemed the Series B preferred stock or the Treasury Department has
transferred the Series B preferred stock to a third party, the
Company may not, without the consent of the Treasury (1) declare or pay any
dividend or make any distribution on its common stock (other than regular
quarterly cash dividends of not more than $0.06 per share) or (2) redeem,
purchase or acquire any shares of our common stock or other equity or capital
securities, other than in connection with benefit plans consistent with past
practice and certain other circumstances specified in the Letter Agreement with
the Treasury Department.
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 industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution’s performance than the effects of general levels of
inflation.
Average Balance Sheet
The
following table presents the Company’s distribution of the average consolidated
balance sheets and net interest analysis for the nine months ended September 30,
2009 and September 30, 2008:
24
Nine
Months Ended September 30, 2009
|
Nine
Months Ended September 30, 2008
|
|||||||||||
Average
Volume
|
Interest
|
Yield/Cost
|
Average
Volume
|
Interest
|
Yield/Cost
|
|||||||
(dollars
in thousands)
|
||||||||||||
ASSETS
|
||||||||||||
Loans
(1)
|
$888,331
|
$39,760
|
5.97%
|
$891,045
|
$47,271
|
7.07%
|
||||||
Held
to maturity securities(2)
|
3,132
|
65
|
2.77%
|
1,368
|
56
|
5.46%
|
||||||
Other
interest-earning assets (3)
|
31,748
|
11
|
0.05%
|
20,682
|
613
|
3.95%
|
||||||
Total
interest-earning assets
|
923,211
|
39,836
|
5.75%
|
913,095
|
47,940
|
7.00%
|
||||||
Non-interest
earning assets
|
63,301
|
49,567
|
||||||||||
Total
assets
|
$986,512
|
$962,662
|
||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
Savings
and checking deposits
|
$178,616
|
2,749
|
2.05%
|
$119,170
|
1,495
|
1.67%
|
||||||
Certificates
of deposit
|
514,098
|
12,802
|
3.32%
|
550,233
|
18,305
|
4.44%
|
||||||
Borrowings
|
145,249
|
4,833
|
4.44%
|
170,666
|
5,721
|
4.47%
|
||||||
Total
interest-bearing liabilities
|
837,963
|
20,384
|
3.24%
|
840,069
|
25,521
|
4.05%
|
||||||
Non-interest
bearing liabilities
|
29,740
|
25,077
|
||||||||||
Stockholders'
equity
|
118,809
|
97,516
|
||||||||||
Total
liabilities and stockholders’ equity
|
$986,512
|
$962,662
|
||||||||||
Net
interest income and interest rate spread
|
$19,452
|
2.51%
|
$22,419
|
2.95%
|
||||||||
Net
interest margin
|
2.81%
|
3.27%
|
||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
110.17%
|
108.69%
|
(1)
|
Non-accrual
loans are included in the average balances and in the computation of
yields.
|
(2)
|
The
Company does not have any tax-exempt
securities.
|
(3)
|
Other
interest-earning assets includes interest-bearing deposits in other banks,
federal funds sold and FHLB stock
investments.
|
25
Off-Balance Sheet
Arrangements
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit, which involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the statement of
financial position. The contract amounts of these instruments express
the extent of involvement the Company has in each class of financial
instruments.
The
Company’s exposure to credit loss from non-performance by the other party to the
above mentioned financial instruments is represented by the contractual amount
of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
The
credit risk involved in these financial instruments is essentially the same as
that involved in extending loan facilities to customers. No amount
has been recognized in the statement of financial condition at September 30,
2009 as a liability for credit loss.
Off-balance
sheet financial instruments whose contract amounts represent credit and interest
rate risk are summarized as follows (dollars in thousands):
Financial
Instruments Whose Contract
|
Contract
Amount At
|
|
Amounts
Represent Credit Risk
|
September
30, 2009
|
|
Standby
letters of credit
|
$11,551
|
|
Home
equity lines of credit
|
19,871
|
|
Unadvanced
construction commitments
|
48,335
|
|
Mortgage
loan commitments
|
9,485
|
|
Lines
of credit
|
27,422
|
|
Loans
sold with limited repurchase
|
||
provisions
|
12,027
|
Recent
Accounting Pronouncements
For
information concerning recent accounting pronouncements, see Note 12 to the
Consolidated Financial Statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
There has
been no material change in market risk since December 31, 2008, as reported in
the Company’s Form 10-K filed with the SEC on March 11, 2009.
Item
4. Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of September 30, 2009. Based upon this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of September 30, 2009, the Company’s disclosure controls
and procedures were effective in reaching a reasonable level of assurance that
(i) information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and (ii) information required to be disclosed by
the Company in its reports that it files or submits under the Exchange Act is
accumulated and communicated to its management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
26
There
have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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 the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
There are
various claims pending involving the Company, 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 the Company’s financial condition and results of
operations.
Item
1A. Risk Factors
The
following risk factor should be considered in addition to the other information
set forth in this report, and the risk factors discussed in Part I, “Item 1A.
Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008. If any of the risks actually occur, the Company’s business,
financial condition or results of operations could be materially and adversely
affected. The risk factors in our Annual Report on Form 10-K have not
materially changed. The following risk and the risks described in our
Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or results of operations. This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The Company’s actual results could differ
materially from those anticipated in the forward-looking statements as a result
of many factors, including the risks faced by the Company described in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
27
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
No. Description
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
28
SIGNATURES
Pursuant
to 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.
|
||
November 12, 2009
|
Alan
J. Hyatt___________________________
|
|
Alan
J. Hyatt, Chairman of the Board, President and Chief Executive
Officer
|
||
(Principal
Executive Officer)
|
||
November 12, 2009
|
Thomas
G. Bevivino______________________
|
|
Thomas
G. Bevivino, Executive Vice President and Chief Financial
Officer
|
||
(Principal
Financial Officer)
|
29
Exhibit
Index
Exhibit
No. Description
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
30