PART
I - FINANCIAL INFORMATION
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Page
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Item
1.
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Financial
Statements
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Consolidated
Statements of Financial Condition as of September 30, 2006 (Unaudited)
and
December 31, 2005
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1
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Consolidated
Statements of Income (Unaudited) for the Three Months and Nine Months
Ended September 30, 2006 and 2005
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2
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Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended September
30, 2006 and 2005
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3
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Notes
to Consolidated Financial Statements (Unaudited)
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5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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11
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item
4.
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Controls
and Procedures
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19
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PART
II - OTHER INFORMATION
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||
Item
1.
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Legal
Proceedings
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20
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Item
1A.
Item
2.
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Risk
Factors
Unregistered
Sales of Equity Securities and Use of Proceeds
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20
20
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Item
3.
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Defaults
Upon Senior Securities
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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Item
5.
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Other
Information
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20
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Item
6.
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Exhibits
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20
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SIGNATURES
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21
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September
30,
|
December
31,
|
|||||
|
2006
|
2005
|
|||||
|
(Unaudited)
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||||||
ASSETS
|
|||||||
Cash
and due from banks
|
$
|
11,090
|
$
|
8,771
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|||
Interest
bearing deposits in other banks
|
472
|
301
|
|||||
Federal
funds sold
|
5,680
|
15,923
|
|||||
Cash
and cash equivalents
|
17,242
|
24,995
|
|||||
Investment
securities held to maturity
|
7,608
|
8,290
|
|||||
Loans
held for sale
|
2,111
|
3,216
|
|||||
Loans
receivable, net of allowance for loan losses of
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|||||||
$8,654
and $7,505, respectively
|
836,369
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776,117
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|||||
Premises
and equipment, net
|
27,137
|
19,963
|
|||||
Federal
Home Loan Bank of Atlanta stock at cost
|
9,558
|
8,513
|
|||||
Accrued
interest receivable and other assets
|
10,150
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8,680
|
|||||
Total
assets
|
$
|
910,175
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$
|
849,774
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|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Liabilities
|
|||||||
Deposits
|
$
|
627,110
|
$
|
594,893
|
|||
Short-term
borrowings
|
10,000
|
26,000
|
|||||
Long-term
borrowings
|
165,000
|
132,000
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|||||
Subordinated
debentures
|
20,619
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20,619
|
|||||
Accrued
interest payable and other liabilities
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4,169
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3,550
|
|||||
Total
liabilities
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826,898
|
777,062
|
|||||
Stockholders’
Equity
|
|||||||
Common
stock, $0.01 par value, 20,000,000 shares authorized;
|
|||||||
9,150,850
and 8,318,184 issued and outstanding, respectively
|
92
|
83
|
|||||
Additional
paid-in capital
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28,240
|
11,516
|
|||||
Retained
earnings
|
54,945
|
61,113
|
|||||
Total
stockholders' equity
|
83,277
|
72,712
|
|||||
Total
liabilities and stockholders' equity
|
$
|
910,175
|
$
|
849,774
|
For
Three Months Ended
|
For
Nine Months Ended
|
||||||||||||
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|
September
30,
|
September
30,
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||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Interest
Income
|
|||||||||||||
Loans
|
$
|
17,804
|
$
|
14,562
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$
|
50,809
|
$
|
40,337
|
|||||
Securities,
taxable
|
65
|
79
|
204
|
253
|
|||||||||
Other
|
305
|
187
|
961
|
480
|
|||||||||
Total
interest income
|
18,174
|
14,828
|
51,974
|
41,070
|
|||||||||
Interest
Expense
|
|||||||||||||
Deposits
|
6,340
|
4,262
|
16,954
|
11,472
|
|||||||||
Short-term
borrowings
|
49
|
269
|
294
|
650
|
|||||||||
Long-term
borrowings
|
2,101
|
1,329
|
5,851
|
3,468
|
|||||||||
Total
interest expense
|
8,490
|
5,860
|
23,099
|
15,590
|
|||||||||
Net
interest income
|
9,684
|
8,968
|
28,875
|
25,480
|
|||||||||
Provision
for loan losses
|
392
|
450
|
1,149
|
1,145
|
|||||||||
Net
interest income after provision for loan losses
|
9,292
|
8,518
|
27,726
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24,335
|
|||||||||
Other
Income
|
|||||||||||||
Real
estate commissions
|
340
|
77
|
1,409
|
368
|
|||||||||
Real
estate management fees
|
162
|
108
|
409
|
317
|
|||||||||
Mortgage
banking activities
|
166
|
391
|
610
|
1,101
|
|||||||||
Other
|
133
|
151
|
364
|
444
|
|||||||||
Total
other income
|
801
|
727
|
2,792
|
2,230
|
|||||||||
Non-Interest
Expenses
|
|||||||||||||
Compensation
and related expenses
|
2,371
|
2,169
|
7,704
|
6,692
|
|||||||||
Occupancy
|
174
|
181
|
545
|
534
|
|||||||||
Other
|
810
|
729
|
2,150
|
2,389
|
|||||||||
Total
non-interest expenses
|
3,355
|
3,079
|
10,399
|
9,615
|
|||||||||
Income
before income tax provision
|
6,738
|
6,166
|
20,119
|
16,950
|
|||||||||
Income
tax provision
|
2,740
|
2,270
|
8,052
|
6,368
|
|||||||||
Net
income
|
$
|
3,998
|
$
|
3,896
|
$
|
12,067
|
$
|
10,582
|
|||||
Basic
earnings per share
|
$
|
.44
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$
|
.43
|
$
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1.32
|
$
|
1.16
|
|||||
Diluted
earnings per share
|
$
|
.44
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$
|
.43
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$
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1.32
|
$
|
1.16
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|||||
Cash
dividends declared per share
|
$
|
.06
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$
|
.05
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$
|
.18
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$
|
.16
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For
The Nine Months Ended September 30,
|
|||||||
2006
|
2005
|
||||||
Cash
Flows from Operating Activities
|
|||||||
Net
income
|
$
|
12,067
|
$
|
10,582
|
|||
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|||||||
Amortization
of deferred loan fees
|
(3,199
|
)
|
(2,843
|
)
|
|||
Net
amortization of premiums and discounts
|
23
|
23
|
|||||
Provision
for loan losses
|
1,149
|
1,145
|
|||||
Provision
for depreciation
|
245
|
281
|
|||||
Gain
on sale of loans
|
(257
|
)
|
(647
|
)
|
|||
Proceeds
from loans sold to others
|
24,906
|
60,773
|
|||||
Loans
originated for sale
|
(23,544
|
)
|
(57,477
|
)
|
|||
Stock-based
compensation expense
|
131
|
-
|
|||||
Increase
in accrued interest receivable
|
|||||||
and
other assets
|
(500
|
)
|
(1,610
|
)
|
|||
Increase
in accrued interest payable and other liabilities
|
619
|
1,601
|
|||||
Net
cash provided by operating activities
|
11,640
|
11,828
|
|||||
Cash
Flows from Investing Activities
|
|||||||
Principal
collected on investment securities
|
659
|
1,266
|
|||||
Net
increase in loans
|
(59,172
|
)
|
(114,074
|
)
|
|||
Investment
in premises and equipment
|
(7,461
|
)
|
(10,083
|
)
|
|||
Proceeds
from disposal of premises and equipment
|
42
|
-
|
|||||
Purchase
of Federal Home Loan Bank
|
|
|
|||||
of
Atlanta stock
|
(1,045
|
)
|
(2,305
|
)
|
|||
Net
cash used in investing activities
|
(66,977
|
)
|
(125,196
|
)
|
For
The Nine Months Ended
September
30,
|
|||||||
2006
|
2005
|
||||||
Cash
Flows from Financing Activities
|
|||||||
Net
increase in deposits
|
32,217
|
69,150
|
|||||
Net
increase (decrease) in short-term borrowings
|
(16,000
|
)
|
11,000
|
||||
Additional
borrowed funds, long-term
|
40,000
|
40,000
|
|||||
Repayment
of borrowed funds, long term
|
(7,000
|
)
|
(7,000
|
)
|
|||
Redemption
of preferred securities of subsidiary
|
-
|
(4,000
|
)
|
||||
Cash
dividends paid
|
(1,648
|
)
|
(1,497
|
)
|
|||
Proceeds
from exercise of options
|
15
|
-
|
|||||
Net
cash provided by financing activities
|
47,584
|
107,653
|
Decrease
in cash and cash equivalents
|
(7,753
|
)
|
(5,715
|
)
|
|||
Cash
and cash equivalents at beginning of year
|
24,995
|
18,038
|
|||||
Cash
and cash equivalents at end of period
|
$
|
17,242
|
$
|
12,323
|
|||
Supplemental
disclosure of cash flows information:
|
|||||||
Cash
paid during period for:
|
|||||||
Interest
paid
|
$
|
23,281
|
$
|
15,268
|
|||
Income
taxes paid
|
$
|
8,445
|
$
|
6,635
|
|||
Transfer
of loans to foreclosed real estate
|
$
|
970
|
$
|
-
|
Three
Months Ended
|
Nine
Months Ended
|
|||
September
30,
|
September
30,
|
|||
2006
|
2005
|
2006
|
2005
|
|
Common
shares - weighted average (basic)
|
9,150,292
|
9,149,950
|
9,150,065
|
9,149,950
|
Common
share equivalents - weighted average
|
11,431
|
-
|
4,217
|
-
|
Common
shares - diluted
|
9,161,723
|
9,149,950
|
9,154,282
|
9,149,950
|
Actual
|
Actual
|
To
Be Well Capitalized Under
|
|
at
September 30, 2006
|
at
December 31, 2005
|
Prompt
Corrective Provisions
|
|
Tangible
(1)
|
10.7%
|
10.3%
|
N/A
|
Tier
I Capital (2)
|
12.6%
|
12.2%
|
6.0%
|
Core
(1)
|
10.7%
|
10.3%
|
5.0%
|
Total
Capital (2)
|
13.8%
|
13.3%
|
10.0%
|
2006
|
|
Expected
life (in years)
|
4.83
|
Risk-free
interest rate
|
4.59%
|
Expected
volatility
|
53.66%
|
Expected
dividend yield
|
4.54%
|
Weighted
|
|
|||||
|
|
Weighted
|
Average
|
Aggregate
|
||
|
|
Average
|
Remaining
|
Intrinsic
|
||
|
Shares
|
Price
|
Life
|
Value
|
||
Options
outstanding, beginning of year
|
-
|
$
-
|
||||
Options
granted
|
113,300
|
17.43
|
||||
Options
exercised
|
(900)
|
17.18
|
||||
Options
outstanding, end of period
|
112,400
|
$17.28
|
4.22
|
$214,000
|
||
Options
exercisable, end of period
|
9,000
|
$17.18
|
2.39
|
$
19,000
|
||
Option
price range at end of period
|
$17.18
to $18.90
|
Nine
Months Ended September 30, 2006
|
Nine
Months Ended September 30, 2005
|
|||||||||||
Average
Balance
|
Interest
|
Rate
Annualized
|
Average
Balance
|
Interest
|
Rate
Annualized
|
|||||||
(dollars
in thousands)
|
||||||||||||
ASSETS
|
||||||||||||
Loans
(1)
|
$814,873
|
$50,809
|
8.31%
|
$723,830
|
$40,337
|
7.43%
|
||||||
Investments
(2)
|
5,000
|
115
|
3.07%
|
5,000
|
116
|
3.09%
|
||||||
Mortgage-backed
securities
|
2,960
|
89
|
4.01%
|
4,277
|
137
|
4.27%
|
||||||
Other
interest-earning assets (3)
|
19,815
|
961
|
6.47%
|
14,152
|
480
|
4.52%
|
||||||
Total
interest-earning assets
|
842,648
|
51,974
|
8.22%
|
747,259
|
41,070
|
7.33%
|
||||||
Non-interest
earning assets
|
41,812
|
26,033
|
||||||||||
Total
assets
|
$884,460
|
$773,292
|
||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
Savings
and checking deposits
|
$139,410
|
1,961
|
1.88%
|
$157,169
|
1,729
|
1.47%
|
||||||
Certificates
of deposit
|
479,565
|
14,993
|
4.17%
|
398,075
|
9,743
|
3.26%
|
||||||
Short-term
borrowings
|
7,889
|
294
|
4.97%
|
25,778
|
650
|
3.36%
|
||||||
Long-term
borrowings
|
152,222
|
5,851
|
5.12%
|
101,333
|
3,468
|
4.56%
|
||||||
Total
interest-bearing liabilities
|
779,086
|
23,099
|
3.95%
|
682,355
|
15,590
|
3.05%
|
||||||
Non-interest
bearing liabilities
|
26,707
|
26,009
|
||||||||||
Stockholders'
equity
|
78,667
|
64,928
|
||||||||||
Total
liabilities and stockholders’ equity
|
$884,460
|
$773,292
|
||||||||||
Net
interest income and interest rate spread
|
$28,875
|
4.27%
|
$25,480
|
4.28%
|
||||||||
Net
interest margin
|
4.57%
|
4.55%
|
||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
108.16%
|
109.51%
|
(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.
|
Financial
Instruments Whose Contract
|
Contract
Amount At
|
|
Amounts
Represent Credit Risk
|
September
30, 2006
|
|
(dollars
in thousands)
|
||
Standby
letters of credit
|
$6,522
|
|
Home
equity lines of credit
|
$24,406
|
|
Unadvanced
construction commitments
|
$113,677
|
|
Loan
commitments
|
$13,753
|
|
Lines
of credit
|
$38,128
|
|
Loans
sold with limited repurchase
|
||
provisions
|
$10,486
|
SEVERN
BANCORP, INC.
|
||
November
9, 2006
|
Alan
J. Hyatt
|
|
Alan
J. Hyatt, Chairman of the Board, President and Chief Executive
Officer
|
||
(Principal
Executive Officer)
|
||
November
9, 2006
|
Thomas
G. Bevivino
|
|
Thomas
G. Bevivino, Chief Financial Officer
|
||
(Principal
Financial and Accounting Officer)
|